rusoro mining ltd. consolidated financial statements for … · 2013-08-20 · ($44,313) ($780,137)...

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RUSORO MINING LTD. Consolidated Financial Statements

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (Expressed in thousands of US dollars, except per share amounts)

Grant Thornton LLP Suite 1600, Grant Thornton Place 333 Seymour Street Vancouver, BC V6B 0A4

T +1 604 687 2711 F +1 604 685 6569 www.GrantThornton.ca

Audit • Tax • Advisory Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd

Independent auditor’s report

To: The Shareholders of Rusoro Mining Ltd.

We have audited the accompanying consolidated financial statements of Rusoro Mining Ltd., which comprise the consolidated statements of financial position as at December 31, 2012 and December 31, 2011, and the consolidated statements of comprehensive loss, consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.

Management’s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates

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Audit • Tax • Advisory Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd

made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Rusoro Mining Ltd. as at December 31, 2012 and December 31, 2011, and its financial performance and its cash flows for the years ended December 31, 2012 and December 31, 2011 in accordance with International Financial Reporting Standards.

Emphasis of matter Without modifying our opinion, we draw attention to Note 1 to the consolidated financial statements which indicates that on March 14, 2012 all of the Company’s mining concessions expired by force of law and all of its assets and operations reverted to the Venezuelan government. This condition, along with other matters as set forth in Note 1, indicate the existence of a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Vancouver, Canada August 16, 2013 Chartered accountants

RUSORO MINING LTD. Contents of the Consolidated Financial Statements (Expressed in thousands of US dollars, except per share amounts)

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CONTENTS Primary Financial Statements Consolidated Statements of Financial Position Consolidated Statements of Comprehensive Loss Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows Notes to the Consolidated Financial Statements Corporate Information and Basis of Accounting Note 1 Nature of Operations Note 2 Basis of Presentation and Going Concern Assumption Note 3 Summary of Significant Accounting Policies Note 4 Recent Accounting Pronouncements Notes to the Consolidated Statements of Financial Position Note 5 Receivables Note 6 Inventories Note 7 Property, Plant and Equipment Note 8 Mineral Properties Note 9 Accounts Payables and Accrued Liabilities Note 10 Gold Sale Contract Note 11 Decommissioning and Restoration Provision Note 12 Convertible Loan Note 13 Derivative Financial Liabilities Note 14 Equity Notes to the Consolidated Statements of Comprehensive Loss Note 15 Mining Operating Expenses Note 16 Recoveries from Litigation Funding Additional Disclosures Note 17 Related Party Transactions Note 18 Capital Management Disclosures Note 19 Supplemental Cash Flow Information Note 20 Income Taxes Note 21 Segmented Information Note 22 Joint Venture Interest Note 23 Commitments and Contingencies Note 24 Financial Instruments Note 25 Loss Per Share Note 26 Events After The Reporting Period

RUSORO MINING LTD. Consolidated Statements of Financial Position (Expressed in thousands of US dollars, except per share amounts)

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December 31,

2012 December 31,

2011 ASSETS Current Assets

Cash $380 $3,382 Receivables (Notes 5 and 16) 1,265 5,554 Inventories (Note 6) - 6,241 Prepaid expenses and deposits 9 11,700 1,654 26,877 Property, plant and equipment (Note 7) - 98

$1,654 $26,975 LIABILITIES Current Liabilities

Accounts payable and accrued liabilities (Notes 9 and 16) $91,752 $79,156 Decommissioning and restoration provision (Note 11) 23,136 18,285 Derivative financial liability (Note 10b) 12,220 10,169 Income taxes payable (Note 20) 3,878 3,689 Convertible loan (Note 12) 30,000 30,000 Other current provisions 3,193 4,817 164,179 146,116 SHAREHOLDERS’ DEFICIENCY Issued capital (Note 14) 736,385 736,283 Contributed surplus 65,009 64,182 Deficit (943,009) (899,284) (141,615) (98,819) Non-controlling interests (20,910) (20,322) (162,525) (119,141) $1,654 $26,975 Nature of operations – Note 1 Basis of presentation and going concern assumption – Note 2 Commitments and contingencies – Note 23 Events after the reporting period – Note 26 APPROVED BY THE BOARD OF DIRECTORS ON AUGUST 16, 2013.

“Andre Agapov” “Gordon Keep” Andre Agapov, Director Gordon Keep, Director

See accompanying notes to the consolidated financial statements.

RUSORO MINING LTD. Consolidated Statements of Comprehensive Loss (Expressed in thousands of US dollars, except per share amounts)

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Year Ended

December 31,

2012 December 31,

2011 REVENUES FROM MINING OPERATIONS $4,926 $107,333 COSTS OF MINING OPERATIONS Mining operating expenses (Notes 15 and 17) 25,256 147,935 Depreciation and depletion - 13,380

25,256 161,315 LOSS FROM MINING OPERATIONS (20,330) (53,982)

Share-based compensation expense 827 14 General and administrative, net of recoveries (Note 16) 5,883 6,603 Foreign exchange gain (loss) 1,023 (398) 7,733 6,219 LOSS FROM OPERATIONS (28,063) (60,201) Interest on convertible loan 3,753 4,594 Interest on gold sale contract (Note 10b) 1,211 - Loss (gain) on revaluation of derivative financial liabilities - (4,103) Loss on revaluation of gold sale contract (Note 10b) 840 4,237 Loss on repatriation of monetary assets 534 - Impairment loss on write-down of property plant and equipment and mineral properties (Notes 7 and 8) 4,019

924,349

Increase in rehabilitation provision 5,016 - Litigation costs, net of recoveries (Note 16) 306 - Settlement of Gold Reserve litigation (Note 23) 358 - Other (income) expenses 213 (3,141) 16,250 925,936 LOSS BEFORE INCOME TAXES (44,313) (986,137)

Current tax expense (Note 20) - 21 Deferred tax recovery (Note 20) - (206,021) - (206,000) NET LOSS AND COMPREHENSIVE LOSS ($44,313) ($780,137) Attributable to: Non-controlling interests (588) (22,343) Equity shareholders of the Company (43,725) (757,794) ($44,313) ($780,137) LOSS PER SHARE Basic and diluted (Note 25) ($0.08) ($1.43) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING Basic 530,675 530,113 Diluted 530,675 530,113 See accompanying notes to the consolidated financial statements.

RUSORO MINING LTD. Consolidated Statements of Changes in Equity (Expressed in thousands of US dollars, except per share amounts)

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Issued capital

Equity component of

convertible loan

Contributed

surplus

Deficit

Non-controlling interests

Equity

Shares Amount Balance, January 1, 2011 530,021 $736,238 $1,223 $62,970 ($141,490) $2,021 $660,962 Extinguishment of convertible option to shares (Note 12) - - (1,223) 1,223 - - - Share-based compensation expense (Note 14(c)) - - - 14 - - 14 Shares issued pursuant to exercise of share options (Note 14(b)) 100 20 - - - - 20 Fair value of share options exercised (Note 14(b)) - 25 - (25) - - - Comprehensive loss - - - - (757,794) (22,343) (780,137) Balance, December 31, 2011 530,121 $736,283 $- $64,182 ($899,284) ($20,322) ($119,141) Share-based compensation expense (Note 14(c)) - - - 827 - - 827 Shares issued (Note 14(b)) 2,500 102 - - - - 102 Comprehensive loss - - - - (43,725) (588) (44,313) Balance, December 31, 2012 532,621 $736,385 $- $65,009 ($943,009) ($20,910) ($162,525) See accompanying notes to the consolidated financial statements.

RUSORO MINING LTD. Consolidated Statements of Cash Flows (Expressed in thousands of US dollars, except per share amounts)

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Year Ended

December 31,

2012 December 31,

2011 CASH DERIVED FROM (USED IN) OPERATING ACTIVITIES Net loss for the year ($44,313) ($780,137) Adjustments for items not involving cash:

Depreciation and depletion 98 13,380 Share-based compensation expense 827 14 Accretion of interest on convertible loan - 1,369 Unrealized foreign exchange loss (gain) - 781 Impairment of inventories 2,437 21,373 Impairment loss on property, plant and equipment and mineral properties 4,019 924,349 Increase in rehabilitation provision 5,016 - Impairment of receivables, prepaid expenses, and deposits (Note 15) 11,774 10,711 Accretion of decommissioning and restoration provision (Note 11) - 2,394 Interest on gold sale contract 1,211 - Gain on revaluation of derivative financial liabilities - (4,103) Loss on revaluation of gold sale contract 840 4,237 Deferred tax recovery - (206,021)

(18,091) (11,653)

Receivables non-current - 8,610 Accrual for termination benefits non-current 1,711 (3,492) Changes in non-cash working capital items (Note 19) 15,856 36,987 (524) 30,452

INVESTING ACTIVITIES Expenditures on property, plant and equipment - (13,533) Expenditures on mineral properties (13,218) (33,522) Proceeds from sale of pre-commercial gold production of mining and mineral properties 10,740

15,911

(2,478) (31,144) FINANCING ACTIVITIES Cash received from exercise of share options - 20 - 20 DECREASE IN CASH (3,002) (672) Cash – beginning of year 3,382 4,054 Cash – end of year $380 $3,382 Supplemental cash flow information – Note 19 See accompanying notes to the consolidated financial statements.

RUSORO MINING LTD. Notes to the Consolidated Financial Statements For the Years Ended December 31, 2012 and 2011 (Expressed in thousands of US dollars, except per share amounts)

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1. NATURE OF OPERATIONS Rusoro Mining Ltd. (“the Company”) was incorporated under the laws of the Province of British Columbia on March 1, 2000. The registered office of the Company is 1600-609 Granville Street, Vancouver, British Columbia, Canada and the corporate headquarters is located at 3123-595 Burrard Street, Vancouver, British Columbia, Canada. The principal business activities of the Company are the operation, acquisition, exploration and development of gold mining and mineral properties. The Company received mining concessions in Venezuela for the exploration, development and exploitation of alluvial and vein gold. The concessions were granted by the Venezuelan Ministry of Mines and Basic Industries (“MIBAM”) or by Corporacion Venezolana de Guayana (“CVG”), maturing in 20 to 25 years from initial grant date, with some concessions extendable for two additional subsequent periods of 10 years each. Until March 14, 2012, the Company owned two producing gold mines in Venezuela. It held a 95% ownership interest in the Choco 10 mine (“the Choco Mine”) which was acquired on November 30, 2007 and a 50% ownership interest in the Isidora mine (“the Isidora Mine”) which was acquired on December 23, 2008. The Company operated the Isidora Mine under a joint venture agreement with the Venezuelan government (Note 22). The Company also held various exploration projects and one development project in Venezuela called San Rafael El Placer. On September 16, 2011, the Venezuelan government, through publication in the Official Gazette of Venezuela, enacted a law-decree ("the Decree") reserving the government of Venezuela exclusive rights over the extraction of gold in Venezuela (“the Nationalization”). The Decree mandated the expiration of all mining concessions held by the Company and their reversal to the Venezuelan government except for those in which the Company and the Venezuelan government agree to continue operating jointly in the form of a mixed-interest enterprise (“the Mixed Enterprise’’) and in which the Company could not own more than a 45% share participation. The Decree provided for a 90-day period starting September 16, 2011 for the government of Venezuela and the Company to negotiate the terms and conditions of the migration of its mining assets to the Mixed Enterprise, including the compensation to the Company for the loss of ownership of its assets as a result of the Nationalization. This 90-day negotiation period was subsequently extended to March 14, 2012 by the Venezuelan government through decree No. 8683. The Company was unable to agree with the Venezuelan government upon the terms and conditions of the migration of its mining assets to the Mixed Enterprise within the designated time periods therefore effective March 14, 2012, in accordance with the procedures outlined in the Decree, all of the Company’s mining concessions expired by force of the Decree and all of its assets and operations reverted to the Venezuelan government who took possession and control of the assets and operations in accordance with Venezuelan law becoming the new operator and employer. Management determined the Company’s sole recourse was to file a Request for Arbitration under the Additional Facility Rules of the International Centre for Settlement of Investment Disputes (“ICSID”) against the government of Venezuela alleging violations of the provisions of the Bilateral Treaty for the Protection of Investments entered between the governments of Canada and Venezuela (the “Treaty”). This request was filed on July 17, 2012. The Treaty provides that the Venezuelan government must pay a fair, prompt, and timely compensation to the Company as a result of the Nationalization. In parallel the Company continues to seek an amicable resolution with the Venezuelan government. The Company’s cash balance of $380 as at December 31, 2012 is held in bank accounts in which the Company retained full control after the Nationalization. On June 14, 2012, the Company entered into a Creditors and Shareholders Agreement (the “CSA”) with significant equity holders and creditors, including the gold buyer (Note 10) and the convertible debt lender (Note 12), who agreed not to take any steps or actions to exercise their rights and remedies against the Company until the expiration of a standstill period which is expected to span the duration of the arbitration proceedings, subject to various clauses.


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1. NATURE OF OPERATIONS (Continued) On June 15, 2012, the Company entered into a litigation funding agreement (the “Litigation Funding Agreement”) with a subsidiary (the "Funder"), of the Calunius Litigation Risk Fund LP (the "Fund"). Calunius Capital LLP is the exclusive investment advisor to the Fund, which specializes in funding commercial litigation and arbitration claims. Under the terms of the Litigation Funding Agreement, the Funder has agreed to assist in the funding of Rusoro's legal costs in relation to the international arbitration proceedings against the Republic of Venezuela (the "Respondent" or “Venezuela”) on a non-recourse basis. Rusoro will continue to have complete control over the conduct of the international arbitration proceedings, insofar as the proceedings relate to the Company's claims, and continues to have the right to settle with the Respondent, discontinue proceedings, pursue the proceedings to trial and take any action Rusoro considers appropriate to enforce judgment. The Litigation Funding Agreement provides contingent consideration to the Funder and other select parties as described in Note 23 and resulted in an amendment to the terms of the Gold Sale Contract adding an annual interest rate of 11% (Note 10). On July 17, 2012, the Company filed a Request for Arbitration before the Additional Facility of the World Bank's ICSID against Venezuela pursuant to the Treaty. The arbitration commenced following the passing by the Venezuelan government of a series of measures that dismantled the legal regime for the marketing of gold in Venezuela and culminated in the outright nationalization and control of Rusoro’s investments in Venezuela without compensation. The claim is for breach of the Treaty's protections against expropriation, unfair and inequitable treatment and discrimination, and for breach of the guarantees of full protection and security and free transfer of investments. 2. BASIS OF PRESENTATION AND GOING CONCERN ASSUMPTION These annual consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The date that the Board of Directors approved these financial statements for issuance was August 16, 2013. These annual consolidated financial statements have been prepared based upon accounting principles applicable to a going concern, which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period. Management is aware in making its assessment, of material uncertainties related to events or conditions, such as those described above and herein, that may cast significant doubt upon the Company’s ability to continue as a going concern. On March 14, 2012, in accordance with the procedures outlined in the Decree, 100% of the Company’s Venezuelan mining concessions expired by force of the Decree and the Company’s assets and operations reverted to the Venezuelan government.


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2. BASIS OF PRESENTATION AND GOING CONCERN ASSUMPTION (Continued) Under these circumstances, the Company maintains the position that the application of the going concern assumption is still appropriate, as courses of action have been identified and acted upon which will increase the likelihood of the Company’s ability to repay its loan and its other liabilities as follows:

1) The Company continues to negotiate with the Venezuelan government to reach mutually agreed-upon terms, including fair compensation paid to the Company which will be sufficient for the Company to repay all its outstanding liabilities;

2) On June 15, 2012 the Company entered into the Litigation Funding Agreement whereby the Funder agreed to assist in the funding of Rusoro's legal costs in relation to the international arbitration proceedings against Venezuela on a non-recourse basis and funding of the Company’s expected operating expenditures;

3) Related to the Litigation Funding Agreement, on June 14, 2012 the Company entered into the CSA with significant equityholders and creditors who agreed not to take any steps or actions to exercise their rights and remedies against the Company until the expiration of a standstill period, subject to various clauses; and

4) On July 17, 2012, the Company filed a Request for Arbitration before the Additional Facility of the World Bank's ICSID against Venezuela pursuant to the Treaty.

Management is making efforts to work with vendors and potential creditors not covered by the CSA to have them forbear on demanding currently due amounts while it pursues the above-mentioned courses of action. There is, however, no assurance that the sufficient sources of funding described above will be available to the Company, or that they will be available on terms and timely basis that are acceptable to the Company. Accordingly, these consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities, the reported expenses and the statement of financial position classifications used that would be necessary should the Company be unable to continue as a going concern. These adjustments could be material. There are material uncertainties surrounding the Nationalization (Note 1), including, but not limited to the likelihood of reaching an amicable compensation with the Venezuelan government, the success in the arbitration proceedings against the Venezuelan government and the amount, timing and/or form of any compensation or arbitration award. As at December 31, 2012, the Company had a net working capital deficiency (current assets minus current liabilities) of $162,525. The Company did not perform the repayment of the convertible loan for $30,000 (included in current liabilities) when it became due in June 2011 and on June 14, 2012 the convertible loan lenders signed the CSA which granted a standstill period, subject to various clauses.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basis of Consolidation These consolidated financial statements include the financial statements of the Company, its subsidiaries, and jointly controlled entities. Intercompany balances and transactions, including any unrealized income and expenses arising from intercompany transactions, are eliminated in preparing the consolidated financial statements. The principal subsidiaries, jointly controlled entities, and the Company’s ownership interests therein, are as follows:

Company Location Ownership

interest Status Promotora Minera de Guayana, P.M.G., S.A. Venezuela 95% Consolidated Minera Venrus C.A. Venezuela 50% Proportionately ConsolidatedMinera Rusoro Venezolana C.A. Venezuela 50% Proportionately ConsolidatedEl Callao Gold Mining Company de Venezuela S.C.S. Venezuela 50% Proportionately ConsolidatedProyectos Mineros del Sur, PROMINSUR, C.A. Venezuela 100% Consolidated Corporacion Aurifera de El Callo, C.A. Venezuela 100% Consolidated Corporacion Minera Choco 9 C.A. Venezuela 100% Consolidated Corporacion 80.000 C.A. Venezuela 100% Consolidated Lamin Laboreos Mineros C.A. Venezuela 100% Consolidated Mineria MS C.A. Venezuela 100% Consolidated General Mining de Guayana C.A. Venezuela 100% Consolidated Krysos Mining S.A. Venezuela 100% Consolidated Inversiones Yuruan C.A. Venezuela 100% Consolidated Venezuela Holdings (BVI) Ltd British Virgin

Islands 100% Consolidated

Non‐controlling interests in the net assets of consolidated subsidiaries are identified separately from the Company’s equity therein. Similarly, non-controlling interests in the components of comprehensive income (loss) are identified separately. Non‐controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling interests’ share of changes in equity since the date of the combination. A 5% non-controlling interest exists in Promotora Minera de Guayana, P.M.G., S.A. (“PMG”), which represents the outside interest’s share of the carrying value of PMG, which owns the Choco Mine. b. Basis of Measurement

These consolidated financial statements have been prepared using the measurement basis specified by IFRS for each type of asset, liability, income and expenses as set out in the accounting policies below. Certain items, including derivative financial instruments, are stated at fair value.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) c. Significant Judgments, Estimates and Assumptions The preparation of the Company’s consolidated financial statements using accounting policies consistent with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results could differ from these estimates. The areas that require management to make significant judgments, estimates and assumptions in determining carrying values include, but are not limited to, the following: i. Interpretation of the Nationalization Decree The Company made assumptions about the extent of application of the Decree. Those assumptions include that the Company’s receivables, prepaid expenses and deposits and all of the Company’s liabilities will continue with the Company after the expiration, forced by the Decree, of its mining concessions.

ii. Impairment of Mineral Properties and Property, Plant and Equipment

The carrying values of mineral properties and property, plant and equipment are reviewed each reporting period to determine whether there is any indication of impairment. If the carrying amount of an asset exceeds its recoverable amount, the asset is impaired and an impairment loss is recognized in profit or loss. The assessment of recoverable amounts may include, and is not limited to, the use of estimates and assumptions for recoverable production, relevant subsequent events, long-term commodity prices, discount rates, foreign exchange rates, future capital requirements and operating performance. Changes in any of the assumptions or estimates used in determining the fair value of assets could impact the impairment analysis. iii. Mineral Reserves Proven and probable reserves are the economically mineable parts of the Company’s measured and indicated mineral resources demonstrated by at least a preliminary feasibility study. The Company estimates its proven and probable reserves and measured, indicated and inferred mineral resources based on information compiled by appropriately qualified persons. The information relating to the geological data on the size, depth and shape of the ore body requires complex geological judgments to interpret the data. The estimation of future cash flows related to proven and probable reserves is based upon factors such as estimates of foreign exchange rates, commodity prices, future capital requirements and production costs along with geological assumptions and judgments made in estimating the size and grade of the ore body. Changes in the proven and probable reserves or measured, indicated and inferred mineral resources estimates may impact the carrying value of property, plant and equipment, decommissioning and restoration provisions, recognition of deferred tax amounts and depreciation, depletion and amortization. iv. Litigation, Possible Recovery and Related Success Fee Contingencies The Company made assumptions about the likelihood of litigation success, the possible recovery from litigation award, and the related impact on contingent success fees. Changes in these assumptions and related estimates may materially impact the carrying value of accounts payable and accrued liabilities and accounts receivable.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) d. Significant Judgments, Estimates and Assumptions (Continued) v. Depreciation, Depletion and Amortization Mining properties are depreciated using the units-of-production (“UOP”) method over a period not to exceed the estimated life of the ore body based on recoverable ounces to be mined from proven and probable reserves. Property, plant and equipment other than mining properties are depreciated, net of residual value, on a straight-line basis, over the useful life of the related asset to the extent that the useful life does not exceed the related estimated life of the mine based on proven and probable reserves. The calculation of the UOP rate, and therefore the annual depreciation, depletion and amortization expense, could be materially affected by changes in the underlying estimates. Changes in estimates can be the result of actual future production differing from current forecasts of future production, expansion of mineral reserves through exploration activities, differences between estimated and actual costs of mining and differences in gold price used in the estimation of mineral reserves. Significant judgment is involved in the determination of useful life and residual values for the computation of depreciation, depletion and amortization and no assurance can be given that actual useful lives and residual values will not differ significantly from current assumptions. vi. Inventories

Expenditures incurred, and depreciation, depletion and amortization of assets used in mining and processing activities are deferred and accumulated as the cost of ore in stockpiles, gold in process and finished gold inventories. These deferred amounts are carried at the lower of average production cost and net realizable value (“NRV”). Write-downs of ore in stockpiles, gold in process and finished gold inventories resulting from NRV impairments are reported as a component of mining operating expenses. The primary factors that influence the need to record write-downs include prevailing metal prices and prevailing costs for production inputs such as labour, energy, materials and supplies, as well as realized ore grades and actual production levels. vii. Decommissioning and Restoration Provision (See also Note 11)

The Company assesses its provision for decommissioning and restoration on an annual basis or when new material information becomes available. Mining and exploration activities are subject to various laws and regulations governing the protection of the environment. In general, these laws and regulations are continually changing and the Company has made, and intends to make in the future, expenditures to comply with such laws and regulations. Accounting for decommissioning and restoration provisions requires management to make estimates of the future costs the Company will incur to complete the reclamation and remediation work required to comply with existing laws and regulations at each mining operation. Actual costs incurred may differ from those amounts estimated. In addition, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work required to be performed by the Company. Increases in future costs could materially impact the amounts charged to operations for reclamation and remediation. The provision represents management’s best estimate of the present value of the future decommissioning and restoration provision. The actual future expenditures may differ from the amounts currently provided. viii. Deferred Taxes The Company recognizes the deferred tax benefit related to deferred tax assets to the extent recovery is probable. Assessing the recoverability of deferred tax assets requires management to make significant estimates of future taxable profit. In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions in future periods from deferred tax assets.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) e. Functional and Presentation Currency and Foreign Currency Translation As at January 1, 2010, the Company’s functional and presentation currency of all of its operations is the US dollar, as this is the principal currency of the economic environments in which they operate. Prior to this date, the functional currency of the Company’s Venezuelan subsidiaries, which hold its Choco Mine and Isidora Mine operations, was determined to be the Venezuelan Bolivar Fuerte. However, due to various changes in Venezuelan foreign exchange controls and increased restrictions on gold sales, the Company’s business model and customer base were changed in January 2010, thus triggering a change in functional currency to US dollars. Foreign currency transactions are initially recorded using the foreign currency rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the foreign currency rate of exchange prevailing at the reporting date. In 2003, the Venezuelan government implemented foreign exchange controls, which fixed the rate of exchange between the Venezuelan Bolivar (“Bs”) and the US dollar. In March 2005, the rate was fixed at Bs 2,150/$1.00. Effective January 1, 2008, the Venezuelan government changed the name of the currency to the Venezuelan Bolivar Fuerte (“BsF”) and modified the currency by fixing the official rate at BsF 2.15/$1.00. On January 11, 2010, the Venezuelan government modified the currency by fixing the official exchange rate at BsF 4.30/$1.00 for most goods and services and BsF 2.60/$1.00 for certain priority items, such as basic foods, medicines and industrial equipment. On January 13, 2011, the rate of BsF 2.60/$1.00 was eliminated. In October 2005, the government enacted the Criminal Exchange Law, which imposes sanctions on the exchange of BsF with a foreign currency unless the exchange is made by officially designated methods. The exchange regulations did not apply to transactions with certain securities denominated in BsF, which could be swapped for securities denominated in another currency effectively resulting in a swap market (“Swap Market”), which provided an implicit value for the exchange rate for the BsF/US dollar (“the Implicit Exchange Rate”). The Company used the Implicit Exchange Rate to translate BsF transactions and balances of the Company’s subsidiaries up to May 17, 2010. However, effective May 17, 2010, the Venezuelan government enacted the Reform of the Criminal Exchange Law which aimed to regulate the Swap Market. The Reform of the Criminal Exchange Law effectively closed the Swap Market and therefore the Company is no longer able to use the Implicit Exchange Rate to translate BsF transactions and balances. On June 9, 2010, the Venezuelan government enacted additional reforms to its exchange control regulations and introduced Sistema de Transacciones con Titulos en Moneda Extranjera (“SITME”), a newly regulated foreign exchange system controlled by the Central Bank of Venezuela (“CBV”). The SITME imposes volume restrictions on the conversion of BsF to US dollars of $350 per month per Venezuelan entity that meets the SITME requirements; Promotora Minera de Guayana, P.M.G., S.A. (“PMG”) is registered with SITME. Due to SITME volume restrictions and the fact the Company settles the majority of sales of finished gold at the official exchange rate specified by the CBV of BsF 4.30/$1.00, the Company translated BsF transactions and balances subsequent to May 17, 2010 at the official exchange rate of BsF 4.30/$1.00. On February 8, 2013, Venezuela devalued its currency, the bolivar, to 6.3 bolivars per U.S. dollar, from 4.3 bolivars per U.S. dollar (Note 26).


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) f. Cash and Cash Equivalents Cash and cash equivalents comprise cash at banks and on hand, and highly liquid investments with an original maturity of three months or less, which are readily convertible into a known amount of cash. g. Inventories Finished gold (doré form), gold in process and gold in stockpile are valued at the lower of average production cost and NRV. Doré represents a bar containing predominantly gold by value which must be refined offsite to return saleable form. NRV is calculated as the estimated selling price to be obtained from sale of the inventory in the normal course of business, less estimated future production costs to convert inventories into saleable form. Production costs of inventories are determined on a weighted average basis and include all direct and indirect costs, including depletion and depreciation of mining properties and mining plant and equipment. Materials and supplies are valued at the lower of average cost and NRV. Write-down of inventory is recognized as an expense in profit or loss in the period the write-down occurs. Reversal of any write-down of inventory, arising from an increase in NRV, is recognized in profit or loss as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs. h. Mineral Exploration, Evaluation and Development Expenditures

Mineral properties are comprised of the expenditures incurred on the Company’s pre-production assets, namely exploration and evaluation properties and development-stage assets. Mineral properties arise from activities involving the search for and development of mineral resources, the determination of technical feasibility and the assessment of commercial viability for an identified resource. Mineral properties include:

• Researching and analyzing historical exploration data; • Gathering exploration data through topographical, geochemical and geophysical studies; • Exploratory drilling, trenching and sampling; • Determining and examining the volume and grade of the resources; • Surveying transportation and infrastructure requirements; and • Conducting market and finance studies.

Administration costs that are not directly attributable to a specific exploration area or development are recorded as an expense in profit or loss. All direct costs related to the acquisition, exploration, and development of mineral resources are capitalized when future benefit is probable and the cost is reliably estimated. No depletion or depreciation is charged on mineral properties until the assets are ready for their intended use. If economically recoverable reserves are developed, the capitalized costs of the mineral property are reclassified as a mining property, which is included in property, plant and equipment, following the commencement of commercial production.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) i. Property, Plant and Equipment

i. Mining Properties Once a mineral property has been brought into commercial production and becomes a mining property, costs of any additional work on that property are expensed as incurred, with the exception of large development programs, which will be deferred and depleted over the remaining useful life of the related assets. Mine properties include deferred stripping costs and environmental rehabilitation and decommissioning and restoration costs related to the reclamation and remediation of mining properties. Mining properties, net of residual value, are depreciated using the UOP method based on proven and probable reserves. Exploration and development expenditures incurred at mining properties are expensed as incurred, unless the purpose of the expenditures is to convert mineral resources into mineral reserves, or in the absence of a mineral resource estimate, is to define areas to be included in the mine plan. Any amounts deferred in this regard are depreciated through the UOP method based upon the resulting mineral reserves. Also included in mining properties is the Choco 4 property. This is included in mining properties as it was acquired along with the Choco 10 property, and due to its location adjacent to the Choco 10 property, is considered to be included within this group. As this section of the mining properties is not considered to be ready for its intended use, depletion or depreciation has not yet been charged to Choco 4. ii. Other Assets Other items of property, plant and equipment, such as mining facilities and machinery, are recorded at cost, and carried net of accumulated depreciation and depletion and accumulated impairment charges. The cost of an item of property, plant and equipment consists of the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use and the estimated future cost of site reclamation and remediation, when applicable. Where an item of plant and equipment comprises major components with significantly different useful lives, the components are accounted for as separate items of plant and equipment. An item of plant and equipment is derecognized upon disposal, or when no future economic benefits are expected to arise from continued use of the asset. Any gain or loss on disposal of the asset, determined as the difference between the proceeds and the carrying amount of the asset is recognized in profit or loss. Major overhaul expenditures, including replacement spares and labour costs, are capitalized and depreciated over the average expected life between major overhauls. All other replacement spares and other costs relating to maintenance are recorded as an expense in profit or loss as incurred if it is not probable that future economic benefit will flow to the Company. Property, plant and equipment other than mining properties are depreciated on a straight-line basis, net of residual value, over the estimated useful life of the asset as follows:

Mining plant and equipment 2 - 30 years Office and computer equipment 2 - 4 years

The estimated useful life, residual values and depreciation methods are reviewed annually, with the effect of any changes in estimate accounted for on a prospective basis.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) j. Property, Plant and Equipment (Continued) No depreciation is charged on property, plant and equipment until the assets are ready for their intended use. k. Impairment of Non-financial Assets The Company’s mineral properties and property, plant and equipment are reviewed for indicators of impairment at each reporting date. If indication of impairment exists, an estimate of the asset’s recoverable amount is calculated, being the higher of fair value less costs to sell and value in use. If the carrying value of an asset exceeds its recoverable amount, the asset is impaired and an impairment loss is recorded in profit or loss to reduce the asset’s carrying amount to its recoverable amount. Value in use is determined as the present value of the estimated future pre-tax cash flows expected to arise from the continued use of the asset in its present form and its eventual disposal, discounted by an appropriate pre-tax discount rate. In regards to an asset’s fair value less costs to sell, when there is no binding sales agreement or active market for the asset, the Company determines the fair value less costs to sell based on the best information available to reflect the amount that the Company could obtain, at the end of the reporting period, from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs of disposal. Estimated cash flows are based on factors such as expected future production, metal selling prices, operating costs and capital costs. In testing for indications of impairment and performing impairment calculations, if it is not possible to estimate the recoverable amount of an asset, the Company determines the recoverable amount of the cash-generating unit to which the asset belongs. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. When the impairment assessment is performed at the level of a cash-generating unit, the allocation of an impairment loss, if any, to a particular cash-generating unit is made on a pro-rata basis on the carrying amounts of the assets of the cash-generating unit at the reporting date. An impairment loss is reversed if there is an indication that the impairment loss recognized in prior periods may no longer exist or may have decreased, which may be caused by a change in the estimates used in determining the recoverable amount. When an impairment loss reverses in a subsequent period, the carrying amount of the related asset is increased to the revised estimate of recoverable amount to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset. Reversals of impairment losses are recognized in profit or loss in the period the reversals occur. l. Borrowing Costs The Company capitalizes borrowing costs that are directly attributable to the acquisition, construction or production of an asset that takes a substantial period of time to get ready for its intended use. Capitalization begins when interest is incurred, expenditures are incurred and activities are undertaken to prepare the asset for its intended use. The amount of borrowing costs capitalized cannot exceed the actual amount of borrowing costs incurred during the period. All other borrowing costs are expensed as incurred. Capitalization of borrowing costs ceases when substantially all the activities necessary to prepare the asset for its intended use or sale are complete. Capitalized borrowing costs are amortized over the useful life of the related asset.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) m. Stripping Costs Stripping costs associated with the removal of overburden and other mine waste materials that are incurred in the production phase of mining operations are included in the cost of inventories produced in the period in which they are incurred, except when the charges represent a betterment to the mining property. Charges represent a betterment to the mining property when the stripping activity provides access to reserves that will be produced in future periods that would not have been accessible without the stripping activity. When charges are deferred in relation to a betterment, the charges are depleted over the proven and probable reserves accessed by the stripping activity using the UOP method. n. Accrual for Termination Benefits The Company’s Venezuelan subsidiaries accrue liabilities for their workers’ termination benefits, which are payable when the working relationship between the employer and an employee comes to a close. Termination benefits are an acquired right of the worker based on the provisions of the Organic Labour Law (“OLL”) and the collective bargaining agreements currently in effect. The OLL and the collective bargaining agreements also call for additional benefits that are applicable under certain circumstances and the Company has recorded an additional accrual for such liabilities. o. Provisions Liabilities are recognized when the Company has a present obligation (legal or constructive) that has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation. A provision is a liability of uncertain timing or amount. Provisions are measured as the expenditure expected to be required to settle the obligation at the reporting date. In cases where it is determined that the effects of the time value of money are significant, the provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects the current market assessment of the time value of money and the risks specific to the obligation. The increase of the provision due to the passage of time is recognized as a financing expense included within other expenses. i. Decommissioning and Restoration Provision The Company records a provision and corresponding asset for the present value of the estimated costs of legal and constructive obligations for future site reclamation, remediation and closure where the outflow of resources is probable and a reliable estimate can be made of the obligation. Over time, the provision is increased to reflect an interest element in the estimated future cash flows (accretion expense) considered in the initial measurement. The capitalized cost in the asset is amortized using either the UOP method or the straight-line basis, as appropriate. The estimated present value of the obligation is reassessed on an annual basis or when new material information becomes available. Increases or decreases to the obligation usually arise due to changes in legal or regulatory requirements, the extent of environmental remediation required, methods of reclamation, cost estimates, or discount rates. Changes to the decommissioning and restoration provision are recorded with an offsetting charge to the related asset.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

p. Interest in Joint Ventures The Company conducted a portion of its business through joint venture arrangements whereby the joint venture participants are bound by contractual agreements establishing joint control. Joint control exists when unanimous consent of the joint venture participants is required regarding strategic financial and operating policies of the joint venture. The Company’s interest in joint ventures takes the form of jointly controlled entities. A jointly controlled entity is a corporation or other entity in which each joint venture participant holds an interest. A jointly controlled entity controls the assets of the joint venture, earns its own income, and incurs its own liabilities and expenses. The Company has chosen to account for its interest in joint ventures using the proportionate consolidation method, whereby the Company’s proportionate interest in the assets, liabilities, revenues and expenses of the jointly controlled entities are recognized within each applicable line of its consolidated financial statements. Proportionate consolidation of the jointly controlled entities’ results has been recognized in the Company’s consolidated financial statements from the date the Company obtained joint control and will cease when the Company loses joint control. Intercompany transactions between the Company and the jointly controlled entities are eliminated upon consolidation to the extent of the Company’s interest. q. Convertible Loan The convertible loan was initially recorded at fair value and subsequently measured at amortized cost. The convertible loan is allocated between the debt and equity components based on their respective fair values at the date of issuance and is recorded net of transaction costs. The equity component is estimated using the residual method and the debt component is accreted to the face value using the effective interest method, with the resulting charge recorded as accretion on convertible loan, which is included in interest on convertible loan in profit or loss. In instances where the Company issues equity instruments to settle all or a part of the outstanding debt, the equity instruments are treated as consideration paid and are measured initially at fair value of the equity instruments issued, or when not reliably measurable, at the fair value of the financial liability extinguished. Any difference between the carrying amount of the financial liability extinguished and the consideration paid is recognized in profit or loss. If the financial liability is not fully extinguished, and terms related to the remaining portion have been modified, the Company allocates the consideration paid between the extinguished portion and the modified portion. r. Income Tax The tax expense or benefit for the period consists of two components: current and deferred. Tax expense is recognized in profit or loss except to the extent it relates to a business combination or items recognized directly in equity or other comprehensive income (loss), in which case it is recognized in equity or in other comprehensive income (loss), respectively. Current tax assets and liabilities comprise those obligations to, or claims from, tax authorities relating to the current or prior reporting periods, that are unpaid at the reporting date. Current tax is payable on taxable profit which differs from profit or loss in the consolidated financial statements. Calculation of current tax is based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) r. Income Tax (Continued) Deferred taxes are calculated using the liability method on temporary differences between the carrying amounts of assets and liabilities and their tax bases, unused tax credits and unused tax losses. Deferred tax is not provided on the initial recognition of goodwill or on the initial recognition of an asset or liability unless the related transaction is a business combination or affects taxable profit or accounting profit. Deferred tax on temporary differences associated with shares in subsidiaries and joint ventures is not provided if reversal of these temporary differences can be controlled by the Company and it is probable that reversal will not occur in the foreseeable future. Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their respective period of realization, provided they are enacted or substantively enacted by the end of the reporting period. Deferred tax assets are recognized to the extent that it is probable that they will be able to be utilized against future taxable income. Deferred tax assets and liabilities are offset only when the Company has a right and intention to offset current tax assets and liabilities from the same taxation authority and the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same entity or different entities which intend to settle current tax assets and liabilities on a net basis or simultaneously in each future period in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled. Changes in deferred tax assets or liabilities are recognized as a component of deferred tax recovery or expense in profit or loss, except where they relate to items that are recognized in other comprehensive income (loss) or directly in equity, in which case the related deferred tax is also recognized in other comprehensive income (loss) or equity, respectively. s. Share Capital Share capital issued for other than cash is valued at the price at which the stock trades at the time the risks and rewards of ownership of the asset are transferred to the Company or the Company’s liability is extinguished. Share issuance costs, such as commissions, facilitation payments, professional fees and regulatory fees are charged directly to share capital. t. Revenue Recognition Revenue from the sale of finished gold is recognized when all of the following conditions are satisfied:

• Shipment of finished gold, when the title and the risks and rewards of ownership have been passed to the buyer;

• The Company does not retain continuing managerial involvement to the degree usually associated with ownership or effective control over the finished gold sold;

• The selling price can be reliably measured; • It is probable that economic benefits associated with the transaction will flow to the Company; and • The costs incurred or to be incurred in respect of the transaction can be reliably measured.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) u. Share-based Payments Share-based payment arrangements in which the Company receives goods or services as consideration for its own equity instruments are accounted for as equity-settled transactions and, when determinable, are recorded at the value of the goods and services received. If the value of the goods and services received are not determinable, then the fair value of the share-based payment is used. The Company uses a fair value based method (Black-Scholes Option-Pricing model) for all share options granted to directors, employees and certain non-employees. In this model, expected volatility is determined from historical volatility, adjusted for normalizing factors. For directors and employees, the fair value of the share options is measured at the date of grant. For grants to non-employees where the fair value of the goods or services is not determinable, the fair value of the share options is measured on the date the services are received. The fair value of share-based payments is charged either to profit or loss or the related asset as applicable, such as mineral properties or property, plant and equipment, with the offsetting credit to contributed surplus. For directors and employees, the share options are recognized over the vesting period based on the best available estimate of the number of share options expected to vest. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognized in the current period. No adjustment is made to any expense recognized in prior periods where vested. For non-employees, the share options are recognized over the related service period. When share options are exercised, the amounts previously recognized in contributed surplus are transferred to share capital. In the event share options are forfeited prior to vesting, the associated fair value recorded to date is reversed. The fair value of any vested share options that expire remain in contributed surplus. v. Earnings (Loss) Per Share Basic earnings (loss) per share is calculated by dividing the net earnings (loss) for the period attributable to the equity shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated using the treasury stock method which, for purposes of determining the weighted average number of shares outstanding, assumes that the proceeds to be received on the exercise of the share options and warrants are applied to repurchase common shares at the average market price for the period. Outstanding options, warrants and the equity component of the convertible loan are excluded from the calculation of diluted loss per share, as they are anti-dilutive.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) w. Financial Instruments The Company’s financial instruments consist of cash, receivables, accounts payable and accrued liabilities, convertible loan, and derivative financial liabilities. Cash and receivables are classified as loans and receivables and measured at amortized cost using the effective interest method. Accounts payable and accrued liabilities and convertible loan are classified as other financial liabilities and measured at amortized cost using the effective interest method. Share purchase warrants with an exercise price denoted in a foreign currency (other than US dollars) are considered derivative financial liabilities, and are revalued at each reporting period end. Upon exercise into common shares, the carrying amounts of warrants included in derivative financial liabilities are reclassified to issued capital. Financial assets are assessed for indicators of impairment at each reporting period end. Financial assets are impaired and impairment losses are incurred if, and only if, there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial asset have been negatively impacted, and this impact can be reliably estimated. A financial asset is derecognized when:

• The contractual right to the asset’s cash flows expires; or • The Company transfers the financial asset and all risks and rewards of ownership to another entity.

Borrowings and other financial liabilities, other than derivative financial liabilities, are recognized initially at fair value, net of transactions costs incurred and are subsequently stated at amortized cost. Any difference between amounts originally received (net of transaction costs) and the redemption value is recognized in profit or loss over the period to maturity using the effective interest method. Borrowings and accounts payable and accrued liabilities are classified as current liabilities unless the Company has an unconditional right to defer settlement for at least twelve months after the reporting date. According to the substance of the related contractual arrangements, the instruments arising from transactions involving financial liabilities and/or equity instruments are either accounted for as debt or equity. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis and charged to profit or loss using the effective interest method. x. Segment Reporting In identifying its operating segments, management generally follows the Company’s activities. An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Company’s other components. The activities are undertaken by the mine operating segments, the Choco Mine and Isidora Mine, and the exploration and development segment, which are supported by the corporate segment. Each segment is managed separately. The operating results of the segments are reviewed regularly by the Company’s senior management (who is comprised of the key strategic leaders of the Company) to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.


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4. RECENT ACCOUNTING PRONOUNCEMENTS The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective. The Company has not yet early adopted any of these standards and is currently evaluating the impact, if any, that these standards might have on its consolidated financial statements. The Company is considering whether to early adopt these standards, in permitted, or to adopt them on the dates they come into effect. The impact is not yet known.

Accounting standards effective January 1, 2013

Financial Instrument Disclosures In December 2011, the IASB issued amendments to IFRS 7 – Financial Instrument: Disclosures (“IFRS 7”), which require entities to disclose information about rights of offset and related arrangements (such as collateral posting requirements) for financial instruments under an enforceable master netting agreement or similar arrangement.

Consolidation In May 2011, the IASB issued IFRS 10 - Consolidated Financial Statements (“IFRS 10”), which supersedes SIC 12 -Consolidation - special purpose entities and the requirements relating to consolidated financial statements in IAS 27 - Consolidated and Separate Financial Statements. IFRS 10 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. IFRS 10 establishes control as the basis for an investor to consolidate its investees and defines control as an investor’s power over an investee with exposure, or rights, to variable returns from the investee and the ability to affect the investor’s returns through its power over the investee

In addition, the IASB issued IFRS 12 - Disclosure of Interests in Other Entities (“IFRS 12”) which combines and enhances the disclosure requirements for the Company’s subsidiaries, joint arrangements, associates and unconsolidated structured entities.

The requirements of IFRS 12 include enhanced reporting of the nature of risks associated with the Company’s interests in other entities, and the effects of those interests on the Company’s consolidated financial statements.

Joint Arrangements In May 2011, the IASB issued IFRS 11 - Joint Arrangements (“IFRS 11”), which supersedes IAS 31 - Interests in Joint Ventures and SIC 13 - Jointly Controlled Entities - Non-Monetary Contributions by Venturers. IFRS 11 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. Under IFRS 11, joint arrangements are classified as joint operations or joint ventures based on the rights and obligations of the parties to the joint arrangements. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (“joint operators”) have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement (“joint venturers”) have rights to the net assets of the arrangement. IFRS 11 requires that a joint operator recognize its portion of assets, liabilities, revenues and expenses of a joint arrangement, while a joint venturer recognizes its investment in a joint arrangement using the equity method


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4. RECENT ACCOUNTING PRONOUNCEMENTS (Continued) Fair Value Measurement In May 2011, as a result of the convergence project undertaken by the IASB with the US Financial Accounting Standards Board to develop common requirements for measuring fair value and for disclosing information about fair value measurements, the IASB issued IFRS 13 – Fair Value Measurements (“IFRS 13”). IFRS 13 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. IFRS 13 defines fair value and sets out a single framework for measuring fair value which is applicable to all IFRSs that require or permit fair value measurements or disclosures about fair value measurements. IFRS 13 requires that when using a valuation technique to measure fair value, the use of relevant observable inputs should be maximized while unobservable inputs should be minimized. The Company does not anticipate the application of IFRS 13 to have a significant impact on its consolidated financial statements. Financial Statement Presentation In June 2011, the IASB issued amendments to IAS 1 – Presentation of Financial Statements (“IAS 1”) that require an entity to group items presented in the statement of other comprehensive income on the basis of whether they may be reclassified to profit or loss subsequent to initial recognition. For those items presented before tax, the amendments to IAS 1 also require that the tax related to the two separate groups be presented separately. The amendments to IAS 1 are effective for annual periods beginning on or after July 1, 2012, with earlier application permitted. Separate Financial Statements IAS 27 - Separate Financial Statements (“IAS 27”) was reissued in May 2011 to outline the accounting and disclosure requirements for 'separate financial statements', which are financial statements prepared by a parent, or an investor in a joint venture or associate, where those investments are accounted for either at cost or in accordance with IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments. The standard also outlines the accounting requirements for dividends and contains numerous disclosure requirements. The previous standard was titled IAS 27 Consolidated and Separate Financial Statements. Investments in Associates and Joint Ventures IAS 28 – Investments in Associates and Joint Ventures (“IAS 28”) was reissued in May 2011 which outlines how to apply, with certain limited exceptions, the equity method to investments in associates and joint ventures. The standard also defines an associate by reference to the concept of "significant influence", which requires power to participate in financial and operating policy decisions of an investee (but not joint control or control of those polices). The previous standard was titled IAS 28 Investment in Associates.


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4. RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

Stripping Costs in the Production Phase of a Surface Mine In October 2011, the IASB issued IFRIC 20 – Stripping Costs in the Production Phase of a Surface Mine (“IFRIC 20”). IFRIC 20 clarifies the requirements for accounting for the costs of stripping activity in the production phase when two benefits accrue: (i) usable ore that can be used to produce inventory; and (ii) improved access to further quantities of material that will be mined in future periods. IFRIC 20 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted and includes guidance on transition for pre-existing stripping assets.

Accounting standards effective January 1, 2014

IAS 32 Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32). On 16 December 2011 the IASB published amendments to IAS 32 Financial Instruments: Presentation to clarify the application of the offsetting requirements. The amendments are effective for annual periods beginning on or after 1 January 2014, with earlier application permitted

Accounting standards effective January 1, 2015 Financial Instruments: Disclosures In December 2011, the IASB issued amendments to IFRS 7 Financial Instruments: Disclosures (“IFRS 7”) to outline the disclosures required when initially applying IFRS 9 – Financial Instruments for annual periods beginning on or after January 1, 2015

Financial Instruments The IASB intends to replace IAS 39 – Financial Instruments: Recognition and Measurement (“IAS 39”) in its entirety with IFRS 9 – Financial Instruments (“IFRS 9”) in three main phases. IFRS 9 will be the new standard for the financial reporting of financial instruments that is principles-based and less complex than IAS 39. In November 2009 and October 2010, phase 1 of IFRS 9 was issued and amended, respectively, which addressed the classification and measurement of financial assets and financial liabilities. IFRS 9 requires that all financial assets be classified as subsequently measured at amortized cost or at fair value based on the Company’s business model for managing financial assets and the contractual cash flow characteristics of the financial assets. Financial liabilities are classified as subsequently measured at amortized cost except for financial liabilities classified as at FVTPL, financial guarantees and certain other exceptions. In response to delays to the completion of the remaining phases of the project, on December 16, 2011, the IASB issued amendments to IFRS 9 which deferred the mandatory effective date of IFRS 9 from January 1, 2013 to annual periods beginning on or after January 1, 2015. The amendments also provided relief from the requirement to restate comparative financial statements for the effects of applying IFRS 9.


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5. RECEIVABLES

December 31,

2012 December 31,

2011 Non-financial assets VAT receivable (a) $- $3,283 Financial assets Trade receivable - 808 Other receivables (b) 1,265 1,463 1,265 2,271 Total current receivables $1,265 $5,554

a) VAT receivable relates to value added tax (“VAT”) paid in Venezuela that is recoverable from the requisite

authorities. VAT receivable was impaired in 2012 while at December 31, 2011 was net of an allowance for doubtful recovery of $13,845.

b) Other receivables includes amounts from the Funder (Note 23) of $1,253 (December 31, 2011: $nil) that were approved and receivable at year end. The full amount receivable from the Funder was received subsequent to year end.

6. INVENTORIES

December 31,

2012 December 31,

2011

Finished gold $- $1,894 Gold in process - 1,041 Gold in stockpile - 3,306

$- $6,241 On March 14, 2012 finished gold inventories, gold in process inventories and stockpile inventories, and materials and supplies were written-off as a result of the Nationalization (Note 1). On December 31, 2011 write-down adjustments of $10,103 and $3,400 were made to materials and supplies inventories and gold stockpile inventories respectively due to the Nationalization, while finished gold inventories, gold in process inventories and a portion of stockpile inventories were not written down as the Company believed they would be recovered through their sale in 2012 before their expropriation by the Venezuelan Government. As at December 31, 2012 and December 31, 2011, all inventories were recorded at the lower of average cost and NRV.


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7. PROPERTY, PLANT AND EQUIPMENT

Mining

Properties

Mining Plant and

Equipment

Office and Computer Equipment

Construction in Progress Total

Cost Balance, December 31, 2011 $14,398 $39,142 $381 $- $53,921 Disposal (a) (14,398) (39,142) (381) - (53,921)Balance, December 31, 2012 - - - - - Accumulated depreciation, depletion and impairment Balance, December 31, 2011 $14,398 $39,142 $283 $- $53,823 Depreciation and depletion - - 98 - 98 Disposal (a) (14,398) (39,142) (381) - (53,921)Balance, December 31, 2012 - - - - - Carrying Amount Balance, December 31, 2012 $- $- $- $- $-

a) Due to their expropriation by the Venezuelan Government on March 14, 2012 as a result of the Nationalization (Note1).

Mining Properties

Mining Plant and

Equipment

Office and Computer Equipment

Construction in Progress Total

Cost Balance, January 1, 2011 $564,597 $99,442 $381 $5,710 $670,130 Additions 14,912 2,989 - 3,064 20,965 Proceeds from the sale of pre-commercial gold production (b) (6,910) - - - (6,910) Impairments (c) (558,201) (63,289) - (8,774) (630,264) Balance, December 31, 2011 14,398 39,142 381 - 53,921 Accumulated depreciation, depletion and impairment Balance, January 1, 2011 12,442 28,675 221 - 41,338 Depreciation and depletion 1,956 10,467 62 - 12,485 Balance, December 31, 2011 14,398 39,142 283 - 53,823 Carrying Amount Balance, December 31, 2011 $- $- $98 $- $98

b) During the year ended December 31, 2011, incidental proceeds of $6,910 were generated through the sale of gold extracted from mining properties in pre-commercial production.

c) Write-down adjustment as at December 31, 2011, due to the expropriation subsequent to year-end on March 14, 2012 of all of the Company’s Venezuelan mining concessions, property, plant, and equipment and mineral properties. Management’s write down was based on estimates of value-in-use of the written down assets.


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8. MINERAL PROPERTIES San Rafael

El Placer Increible 6 El Callao Valle HondoOther

Properties Total Balance, January 1, 2011 50,215 51,929 137,382 17,366 9,263 266,155Exploration and development costs 30,087 6,262 - 264 378 36,991Proceeds from sale of pre-commercial gold production (a) (9,001) - - - - (9,001)Disposition - - - - (60) (60)Impairments (b) (71,301) (58,191) (137,382) (17,630) (9,581) (294,085)Balance, December 31, 2011 $- $- $- $- $- $-Balance, December 31, 2012 (c) $- $- $- $- $- $- a) During the year ended December 31, 2011, incidental proceeds of $9,001 were generated through the sale of gold extracted from mineral properties in pre-commercial production. b) Write-down adjustment as at December 31, 2011, due to the expropriation subsequent to year end (Note 26) of all of the Company’s Venezuelan mining concessions, property, plant, and equipment and mineral properties. Management’s write down was based on estimates of value-in-use of the written down assets. c) During the year ended December 31, 2012, incidental proceeds of $10,740 were generated through the sale of gold extracted from mineral properties in pre-commercial production which were applied directly against $13,218 of expenditures on mineral properties in the period. Due to the Nationalization capital amounts were immediately impaired.

9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

December 31,

2012 December 31,

2011 Financial liabilities (a)

Accounts payable $30,151 $34,111 Accrued liabilities 38,579 29,103 Accrual for termination benefits 14,592 12,881 Accrual for interest on convertible loan (Note 12) 6,403 2,650 Due to related parties (Note 16) 2,027 411 91,752 $79,156 a) No account payable or accrued liability is identified as a non-financial liability.

10. GOLD SALE CONTRACT a. Deferred Revenue In 2010 the Company received $6,973 from a gold buyer, Vicolven Enterprises Inc. (“Vicolven”), which operates from Curacao, Netherlands Antilles. This payment represented full payment for the future delivery of six thousand five hundred ounces of finished gold and the commitment to issue 12.4 million share-purchase warrants (Note 13). The Company was originally required to deliver the finished gold prior to January 11, 2011. During the year ended December 31, 2010, the transaction was amended for future delivery of six thousand five hundred ounces of finished gold to occur over the six months ended June 2011. In exchange, the Company committed to deliver an additional eight hundred ounces of finished gold in July 2011. No gold has been delivered with respect to this contract. In February 2011, the Company paid Vicolven a portion of the amount owing in US dollars in lieu of delivery of seven hundred ounces (as permitted by Vicolven) for a total of $711. In relation to the Company’s commitment to issuing 12.4 million share-purchase warrants (Note 14), the $330 value associated with these committed share-purchase warrants has been deducted from the $6,973, resulting in a net amount of $6,643.


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10. GOLD SALE CONTRACT (Continued) b. Derivative Financial Liability On September 20, 2011, as a result of the Decree and proposed nationalization of the Company’s Venezuelan gold mining assets by the government of Venezuela, a letter was written to the gold buyer, Vicolven Enterprises Inc., indicating that management no longer expects to settle the obligation with the delivery of finished gold as stated in the agreement. Instead, the Company will settle the outstanding, undelivered ounces of finished gold owing to Vicolven Enterprises Inc. in cash as permitted under the agreement with Vicolven. On June 1, 2012, in relation to the Litigation Funding Agreement and the CSA, the Company signed an amendment with Vicolven whereby the Company agrees to pay interest of 11%, compounded annually, on the amount outstanding of 6,642 gold ounces. Interest will ultimately be payable in cash on the same terms as the original balance. Per the agreement, the interest payable was enacted retroactively to January 1, 2012. Since the contract will be paid in cash in lieu of gold, and will no longer qualify for the own use exemption, it has been reclassified from deferred revenue to a derivative financial instrument. As of December 31, 2012, 7,373 (December 31, 2011 – 6,642) ounces of finished gold were still outstanding and valued at fair market value using the spot price of gold on December 31, 2012 of $1,658 (December 31, 2011 - $1,531) per ounce. Included in this amount is the principal amount of 6,642 gold ounces plus accrued interest of 731 (December 31, 2011 – nil) gold ounces for the period January 1, 2012 through December 31, 2012.

December 31,

2012 December 31,

2011

Balance, beginning of year $10,169 $- Value of undelivered gold ounces transferred from deferred revenue - 5,932 Change in fair value 840 4,237 Fair value of interest expense 1,211 - Balance, end of year $12,220 $10,169 11. DECOMMISSIONING AND RESTORATION PROVISION Decommissioning and restoration provisions are comprised of costs associated with environmental rehabilitation. These costs have been estimated based on the Company’s interpretation of current regulatory requirements and have been measured at the net present value of future cash expenditures upon reclamation and closure using the information currently available. Costs associated with decommissioning and restoration are capitalized depending on the nature of the asset related to the obligation and depreciated over the life of the asset. The decommissioning and restoration provision relates to reclamation and closure costs of the Company’s operating Choco Mine and Isidora Mine, as well as to some of the exploration and development activities undertaken on the Company’s mineral properties. In view of the uncertainties concerning decommissioning and restoration, the ultimate cost of reclamation, remediation and closure activities could differ materially from the estimated amount recorded. The estimate of the Company’s decommissioning and restoration provision is subject to change based on amendments to laws and regulations and as new information regarding the Company’s operations becomes available.


30

11. DECOMMISSIONING AND RESTORATION PROVISION (Continued) Future changes, if any, to the provision as a result of amended requirements, laws, regulations, operating assumptions, estimated timing and amount of obligations may be significant and would be recognized prospectively as a change in accounting estimate. Any such change would result in an increase or decrease to the provision and a corresponding increase or decrease to the mineral property and/or property, plant and equipment balance(s).

December 31,

2012 December 31,

2011

Balance, beginning of year $18,285 $5,281 Change in estimate of future cash flows 4,851 9,053 Accretion expense - 2,394 Incurred in year - 1,557 Balance, end of year $23,136 $18,285 Due to the expiry by force of the Decree and reversal to the Venezuelan government of all of the Company’s mining concessions on March 14, 2012, the Company’s decommissioning and restoration provision became an on-demand liability on that date as opposed to be payable in accordance with the Company’s long-term closure plan. Consequently as at December 31, 2012 and 2011 decommissioning and restoration provision was classified as a current liability. The acceleration in the timing of the expected settlement of the closure costs and continued high inflation rates significantly increased the Company’s liability at both December 31, 2012 and 2011. 12. CONVERTIBLE LOAN On June 10, 2008, the Company entered into a Convertible Loan (“Loan”) to fund the acquisition of El Callao Gold Mining Ltd. and Drake-Bering Holdings B.V. including their wholly-owned subsidiaries Minera Rusoro Venezolana C.A. (“Minera Rusoro”) and El Callao Gold Mining Company de Venezuela S.C.S. (“El Callao Gold Mining”) from Hecla Mining Company and for general corporate purposes. Under the original terms, the Loan had a two-year term, a contractual rate of interest of 10% per annum and was secured by share pledges over the Company’s principal assets including the Choco Mine and the San Rafael El Placer and Increible 6 mineral properties (Note 8) but excluded the Isidora Mine. Under the original terms, the lenders had the option, at any time and at their sole discretion, to convert all or part of the outstanding principal of the Loan to common shares of the Company at a conversion price of $1.07 (subject to adjustment depending on future equity financings and other transactions entered into by the Company). In addition, the Company has granted to the lenders pro-rata participation in any future equity offerings for the term of the Loan. For accounting purposes, the Loan contains both a liability component and an equity component, being the lenders’ conversion option to shares, which have been separately presented on the consolidated statement of financial position. The Company allocated the original $80,000 principal of the Loan to the liability and equity components by establishing the fair value of the liability component at the date of issue and then allocating the remaining balance of the net proceeds to the equity component. The fair value of the liability component was determined by discounting the stream of future payments of interest and principal amounts at the estimated prevailing market rate at the date of issuance of 15% for a debt instrument of similar maturity and credit quality but without any share conversion option for the lenders. Including the impact of the costs of issuance, applying the effective interest method, the liability component of the Loan bore an effective annual interest rate of 18.5%.


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12. CONVERTIBLE LOAN (Continued) On November 12, 2009, the Company purchased $20,000 of the principal amount of the Loan and related accrued interest of $847 for $17,754, including professional fees. The Company recorded a gain on repurchase of convertible loan in profit or loss of $2,206. This gain was calculated as the difference between the amortized cost and the fair value of the liability component of the portion of the Loan which was repurchased. The $1,577 equity component relating to the 25% principal portion of the Loan which was repurchased was transferred to deficit in the consolidated statement of financial position. The $60,000 remaining principal portion of the Loan was due in June 2010. On June 10, 2010, the original due date of the Loan, the Company made a $17,000 principal payment and restructured the remaining $43,000 principal portion of the Loan. The restructured terms required the Company to make a second principal payment of $13,000 including accrued interest at a contractual rate of 10% per annum on or before July 10, 2010 (paid on June 22, 2010) and a final principal payment of $30,000 (“the Reduced Principal”) on or before June 10, 2011. The Reduced Principal bore interest at a contractual rate of 10% per annum (effective annual interest rate of 21.1% including costs of restructuring) and interest was payable quarterly. Based on the restructured terms, the conversion price of the Reduced Principal was adjusted to $0.40 (subject to adjustment depending on future equity financings and other transactions entered into by the Company), the Company issued 30 million warrants (Note 13) to the lenders and the Company could repay the Loan at any time by repaying the outstanding principal in full, plus interest accrued to the repayment date. All other terms of the Loan remain unchanged. Loan restructuring costs include the $873 fair value of the 30 million warrants issued (Note 13) and other cash costs of $842. As a result of the restructuring, the carrying value of the equity component of the convertible loan of $4,733 was eliminated against contributed surplus to recognize the modification of the Loan. To recognize the modified fair value of the conversion option to shares of the convertible loan after restructuring, the liability component of the Loan was reduced by $1,223, with a corresponding increase in the equity component of the convertible loan. As at June 7, 2011, the conversion option of the Loan expired, and the related balance of $1,223, as carried as an equity component of the convertible loan was extinguished, with a corresponding increase to contributed surplus. On June 10, 2011, the Company defaulted of the Loan, as the required repayments of $30,000 of principal and $750 of accrued interest were not made on that date. These defaulted, scheduled repayments, in addition to interest accrued on the total balance owing at the contractual rate of 11% per annum, were still outstanding as at December 31, 2011. On June 14, 2012, the lenders signed the CSA whereby they agreed not to take any steps or actions to exercise their rights and remedies against the Company until the expiration of a standstill period, subject to various clauses. In consideration for the CSA the lenders were provided a contingent success fee in addition to amounts due and payable to the lenders under the Loan of 20% of the Loan value (Note 23).


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12. CONVERTIBLE LOAN (Continued)

December 31,

2012 December 31,

2011

Equity component, beginning of year $ - $1,223 Extinguishment of conversion option to shares - (1,223) Equity component, end of year $ - $ - Liability component, beginning of year $ 30,000 $ 28,631 Accretion of interest - 1,369 Liability component, end of year $30,000 $30,000 As at December 31, 2012, the loan was still in default and outstanding and carried an amount owing of $6,403 (December 31, 2011 - $3,801) in accrued interest. 13. DERIVATIVE FINANCIAL LIABILITIES The share purchase warrants issued with foreign currency exercise prices (all being denominated in the Canadian dollar (C$)) as at December 31, 2012 and December 31, 2011 were as follows:

Warrants

(000)

Weighted Average Exercise Price

(C$)

Financial Liability

Balance, January 1, 2011 145,322 3.03 $4,001 Reversal of warrants previously committed (12,355) (0.40) - Warrants issued 12,355 0.40 - Warrants expired (12,355) 0.40 - Change in fair value - - (4,001) Balance, December 31, 2011 132,967 3.03 - Warrants expired (102,967) (4.11) - Balance, December 31, 2012 30,000 0.40 $- On August 13, 2010, the Company issued 30 million share-purchase warrants to the lenders as a result of restructuring the Loan (Note 12). On March 17, 2011, the Company issued 12.4 million share-purchase warrants to a gold buyer (Note 10a). These share purchase warrants were committed to the gold buyer during the year ended December 31, 2010, as an inducement related to an advance for the delivery of finished gold ounces. The following share purchase warrants with foreign currency exercise prices were outstanding as at December 31, 2012:

Number of Share Purchase WarrantsOutstanding and Exercisable Exercise Price Expiry Date

(000) 30,000 C$0.40 January 10, 2013

During the year ended December 31, 2012, the 30,000 share-purchase warrants were extended for 12 months to January 10, 2013 as their new expiry date. The company attributed $nil to the value of the share purchase warrants on the extension to the new expiry date, due to the significant difference in exercise price relative to the market price.


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14. EQUITY a. Authorized Share Capital of the Company Unlimited number of common shares without par value. b. Issued Capital

Number of

Shares (000)

Amount

Balance, January 1, 2011 530,021 $736,238 Shares issued pursuant to exercise of share options 100 20 Fair value of share options exercised - 25 Balance, December 31, 2011 530,121 736,283 Shares issued (Note 14(c)) 2,500 102 Balance, December 31, 2012 532,621 $736,385 c. Share-based Payments

The Company has a share option plan available to its directors, officers, consultants and key employees under which the Company may grant options to acquire a maximum number of common shares equal to up to 10% of the total issued and outstanding common shares of the Company. Options are non-transferable and may have a term of up to 10 years from the date of issue. Amount of options, vesting terms, conditions and exercise price are determined by the board of directors at the time of grant. The following share options were outstanding and exercisable at December 31, 2012:

Options Outstanding Options Exercisable

Exercise Prices

Number of Options

Outstanding

Weighted Average Exercise

Price

Weighted Average

Remaining Contractual

Life (years)

Options Outstanding

and Exercisable

Weighted Average Exercise

Price (000) (000)

C$0.14 10,800 C$0.14 4.07 10,800 C$0.14 C$0.20 – C$0.27 5,990 C$0.20 7.30 5,990 C$0.20 C$0.60 13,200 C$0.60 6.31 13,200 C$0.60 C$1.31 – C$1.55 12,525 C$1.31 5.48 12,525 C$1.31 C$2.12 – C$2.30 4,900 C$2.22 4.77 4,900 C$2.22 $3.00 1,500 $3.00 3.85 1,500 $3.00

48,915 $0.87 5.49 48,915 $0.87


34

14. EQUITY (Continued) Share option transactions are summarized as follows:

Number of Options

(000)

Weighted AverageExercise Price

Outstanding, January 1, 2011 49,532 $1.05 Forfeited (7,092) 1.32 Exercised (100) 0.20

Outstanding, December 31, 2011 42,340 0.99 Granted 11,000 0.14 Forfeited (4,425) 0.41

Outstanding, December 31, 2012 48,915 $0.87 No share options were exercised during the year ended December 31, 2012. On January 19, 2012, the Company issued 11 million share options with an exercise price of C$0.14 and an expiry date of January 18, 2017. The fair value of the share options granted was $827 and was estimated on the date of grant using the Black-Scholes Option-Pricing model with the following weighted average assumptions: 2012 2011 Assumptions Dividend yield 0% - Annualized volatility 63.4% - Risk-free interest rate 1.31% - Expected life (years) 5 -

Weighted average fair value per option $0.08 - d. Share Purchase Warrants Issued

The share purchase warrants (denominated in US$) as at December 31, 2012 and December 31, 2011 were as follows:

December 31, 2012 December 31, 2011

Number of warrants

Weighted Average

Exercise Price Number of warrants

Weighted Average

Exercise Price (000) (000)

Balance outstanding, beginning of year - $- 5,833 $3.35

Warrants issued - - - - Warrants expired - - (5,833) $3.35

Balance outstanding, end of year - $- - $-

In addition, there were 30,000 share purchase warrants outstanding and exercisable denominated in a foreign currency at December 31, 2012 (Note 13).


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15. MINING OPERATING EXPENSES Year ended December 31,

2012 December 31,

2011 Raw materials $1,066 $10,111 Salaries and employee benefits 3,389 40,819 Administrative expenses 675 12,021 Royalties and production taxes 297 8,638 Rental of machinery 1,184 20,379 Consulting fees 267 4,660 Tools and spare parts 324 6,346 Change in inventories 3,804 12,016 Write-off / Impairment of inventories 2,437 21,373 Impairment of prepaid expenses and deposits and receivables 11,774 10,711 Other 39 861

$25,256 $147,935 16. RECOVERIES FROM LITIGATION FUNDING

Year ended December 31,

2012 December 31,

2011 Litigation costs $2,262 $- Recoveries (Note 23 (iv)) (1,956) - $306 $- General and administrative expense $6,186 $6,603 Recoveries (Note 23 (iv)) (303) - $5,883 $6,603 17. RELATED PARTY TRANSACTIONS a. Subsidiaries As at December 31, 2012, the Company’s subsidiaries were as follows:

Name of Subsidiary Location Ownership Asterville International Corporation AVV Aruba 100% Balandria Limited British Virgin Islands 100% Carisma Corporation AVV Aruba 100% Cerenex Financial AVV Aruba 100% Corporacion 80.000 C.A. Venezuela 100% Corporacion Aurifera de El Callao C.A. Venezuela 100% Corporacion Cabello Galvez C.A. Venezuela 100% Corporacion Minera 11-90 C.A. Venezuela 100% Corporacion Minera 410879 C.A. Venezuela 100% Corporacion Minera 6560433 C.A. Venezuela 100% Corporacion Minera Choco 9 C.A. Venezuela 100%


36

17. RELATED PARTY TRANSACTIONS (Continued)

Name of Subsidiary Location Ownership Corporacion Minera ECH1 C.A. Venezuela 100% Corporacion Minera ECH2 C.A. Venezuela 100% Corporacion Minera ECH3 C.A. Venezuela 100% Corporacion Minera ECH4 C.A. Venezuela 100% Corporacion Minera ECH5 C.A. Venezuela 100% Corporacion Minera Sor Teresita C.A. Venezuela 100% Cradock United Inc. Panama 100% Dotley Financial Corp. Panama 100% Drake-Bering Holdings BV Netherlands 100% El Callao Gold Mining Company Delaware 100% El Callao Gold Mining Company de Venezuela S.C.S. Venezuela 50% El Callao Holdings AVV Aruba 100% El Callao Holdings C.A. Venezuela 100% General Mining de Guayana C.A. Venezuela 100% Helvetia Corporation AVV Aruba 100% International Gold & Silver BV Netherlands 100% Inversiones Anseg C.A. Venezuela 100% Inversiones Fitzcarraldo C.A. Venezuela 100% Inversiones Goldwana C.A. Venezuela 100% Inversiones Mineras El Dorado SA Panama 100% Inversiones Vipago C.A. Venezuela 100% Inversiones Yuruan C.A. Venezuela 100% Inversora Maryate C.A. Venezuela 100% Inversora Tecnica de Minas C.A. Venezuela 100% Krysos Mining S.A. Venezuela 100% Lamin Laboreos Mineros C.A. Venezuela 100% Mena Resources Inc. Canada 100% Minera Rusoro Venezolana C.A. Venezuela 50% Minera Tapaya C.A. Venezuela 100% Minera Venrus C.A. Venezuela 50% Mineral Ecological Technology de Venzuela MET C.A Venezuela 100% Mineria MS C.A. Venezuela 100% Minoro Aruba AVV Aruba 100% Minplata Aruba AVV Aruba 100% Promotora Minera de Guayana, P.M.G., S.A. Venezuela 95% Promotora Minera de Venezuela S.A. Venezuela 100% Prospecciones Mineras Prominca C.A. Venezuela 100% Proyectos Mineros del Sur, (PROMINSUR), C.A. Venezuela 100% Racal Investments AVV Aruba 100% Representaciones Carson Gold Int C.A. Venezuela 100% Right Angle Corporation AVV Aruba 100% Rusoro MH Acquisition Canada 100% Rusoro Mining de Venezuela C.A. Venezuela 100% Rusoro Mining (Panama) Inc. Panama 100% Tombstone Aruba AVV Aruba 100% Tombstone Exploracion de Mexico Mexico 100% Tombstone Nevada Inc. Nevada 100% Triway Corporation AVV Aruba 100% Valet Corporation AVVV Aruba 100% Venezuela Holdings (BVI) Ltd British Virgin Islands 100% Vicenza Corporation AVV Aruba 100%


37

17. RELATED PARTY TRANSACTIONS (Continued) Balances and transactions between the Company and its subsidiaries have been eliminated on consolidation and are not disclosed in this note. Details of the transactions between the Company (including its subsidiaries) and other related parties are disclosed below. b. Related Party Transactions The nature of transactions undertaken and the relationships with related parties of the Company are as follows: Relationship with the Company Nature of Transactions Company A An officer/director of the Company and a director of the

Company are also an officer and director, respectively, of Company A.

Machinery and facilities rental and provision of general mining-related services.

Company B A director of the Company is also a partner of Company B. Provision of legal services. The Company incurred the following fees and expenses in the normal course of operations in connection with companies owned by key management and directors. Expenses and transactions with related parties have been measured at the price agreed between the parties, which are determined on a cost recovery basis. Notes 2012 2011 Machinery rental and provision of general mining-related services (a) $-

$233

Facilities rental (b) - 110 Provision of legal services (c) 79 322 $79 $665 a) Included in mining operating expenses is $nil (year ended December 31, 2011: $215) and included in amounts

capitalized as mineral properties is $nil (year ended December 31, 2011: $18) related to rental of machinery from, and the provision of general mining-related services by, Company A.

b) Included in general and administrative expenses is $nil (year ended December 31, 2011: $110) related to the rental of the Company’s Caracas, Venezuela office from Company A.

c) Included in general and administrative expenses are professional fees incurred to Company B for $nil (year ended December 31, 2011: $322) in relation to legal fees.

Included in prepaids expenses and deposits are amounts owed from Company A for $nil (December 31, 2011: $905). Included in accounts payable and accrued liabilities (Note 9) are amounts due to Company A , B, and C for $522 (December 31, 2011: $411). These amounts are unsecured, due on demand and non-interest bearing. Included in accounts payable and accrued liabilities (Note 9) is $355 owed to the CEO of the Company for a non-interest bearing loan with no fixed maturity date. The loan is to be repaid with a contingent success fee upon successful completion of the litigation. As at December 31, 2012, litigation success is deemed to be indeterminable and $nil has been accrued for the contingent success fee.


38

17. RELATED PARTY TRANSACTIONS (Continued) c. Compensation of Management and Directors The remuneration of the directors and key management personnel during the year was as follows: Notes 2012 2011 Salary (a) $1,271 $1,508 Share-based payments 811 - $2,082 $1,508

(a) Of the total, $1,150 remains accrued and unpaid at December 31, 2012 (December 31, 2011: $nil).

18. CAPITAL MANAGEMENT DISCLOSURES The Company’s capital management objectives are to safeguard the Company’s ability to support its normal business requirements which mainly consist of its efforts to reach a compensation agreement with the Venezuelan government or an arbitration award before ICSID for the expropriation of its assets in Venezuela as a result of the Nationalization. In the management of capital, the Company includes the components of shareholders’ equity (deficiency) excluding non-controlling interests, its convertible loan, as well as the cash and short-term investments. Capital, as defined above, is summarized as follows:

December 31,

2012 December 31,

2011 Shareholders’ deficiency ($141,615) ($98,819) Convertible loan 30,000 30,000 (111,615) (68,819) Less: Cash (380) (3,382) ($111,995) ($72,201) The Company manages its capital structure and makes adjustments to it in light of changes in its economic environment and the risk characteristics of the Company’s assets. To effectively manage its capital requirements, the Company plans its funding needs in advance to ensure the Company has liquidity to meet its objectives.


39

19. SUPPLEMENTAL CASH FLOW INFORMATION 2012 2011 CHANGES IN NON-CASH WORKING CAPITAL ITEMS Receivables $1,884 $2,471 Inventories 3,804 8,380 Prepaid expenses and deposits 718 1,073 Accounts payable and accrued liabilities 10,885 7,778 Decommissioning and restoration provision - 17,495 Other current provision (1,435) 503 Deferred revenue - (6,643) Derivative financial liability - 5,932 Income taxes payable - (2) $15,856 $36,987 CHANGES IN NON-CASH INVESTING AND FINANCING ACTIVITIES

Accounts payable and accrued liabilities – Expenditures on mineral properties - $670 Accounts payable and accrued liabilities – Expenditures on property, plant and equipment - $498 Depreciation capitalized – Mineral properties - $1,023 Share portion of Gold Reserve Settlement (Note 18b) $102 - Loss capitalized in mineral properties for impairment of receivables and prepaid expenses and deposits

$1,541 -

OPERATING ACTIVITIES INCLUDED THE FOLLOWING CASH PAYMENTS

Interest paid - $750


40

20. INCOME TAXES The current and deferred tax expense (recovery) reflected in the consolidated statements of comprehensive loss is as follows:

2012

2011

Current income tax expense $- $21 Deferred income tax recovery - (206,021) $- ($206,000)

Income taxes differ from the amount that would be determined by applying the combined Canadian federal and provincial statutory income tax rate of 25% in the year ended December 31, 2012 to loss before income taxes. The differences are the result of:

2012

2011

Loss before income taxes ($44,313) ($986,137)Statutory tax rate 25.0% 26.5%Expected income tax recovery (11,078) (261,327)Rate difference in foreign jurisdictions (2,801) (73,960)Foreign exchange and other permanent differences 2,016 52,148 Impact of reduction in enacted rates - (1,609)Change in unrecognized deductible temporary items 11,863 78,748 Income tax expense (recovery) $- ($206,000)

As at December 31, 2012, the Company’s tax liability includes income taxes payable of $3,878 (2011 - $3,689).

As at December 31, 2012, the Company’s unrecognized deferred tax assets has been substantially reallocated to non-capital loss carried forward as a result of the Nationalization on March 14, 2012 (Note 1). The significant components of deferred tax assets not recognized are as follows:

2012

2011

Deferred tax assets not recognized: Non-capital loss carried forward $109,392 $15,296 Property, plant and equipment 207 27,914 Mineral properties - 30,585 Share issuance costs 211 354 Other 325 24,267

$110,135 $98,416 As at December 31, 2012, the Company had for deduction against future taxable income in Canada non-capital losses of approximately C$73,635 (December 31, 2011: C$69,733). These losses expire between 2014 to 2032.


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21. SEGMENTED INFORMATION

The Company’s reportable operating segments are the operating Choco Mine and Isidora Mine, the aggregate of mineral properties, which are comprised of exploration and evaluation assets as well as development stage properties, and Corporate. All operating segment assets, liabilities, revenue and expenses relate to Venezuela except for Corporate operating segment assets and expenses, which relate to Canada. The following amounts are presented net of intercompany transactions where applicable. Year ended December 31, 2012

Choco Mine Isidora Mine

Exploration, Evaluation and Development Corporate Total

Revenues $3,578 $1,348 $- $- $4,926

Mining operating expenses (16,059) (9,197) - - (25,256)

Share-based compensation expense - - - (827) (827)

General and administrative - - - (5,883) (5,883)

Foreign exchange (loss) gain (1,445) 302 196 (76) (1,023)

Interest on convertible debt - - - (3,753) (3,753)

Interest on gold sale contract - - - (1,211) (1,211)

Loss on revaluation of gold sale contract - - - (840) (840)

Loss on repatriation of monetary assets - - - (534) (534)

Litigation costs, net of recoveries - - - (306) (306)

Impairment loss - - (4,019) - (4,019)

Increase in rehabilitation provision (5,016) - - - (5,016)

Settlement of Gold Reserve litigation - - - (358) (358)

Other expenses - - (213) - (213)

Net and Comprehensive Loss ($18,942) ($7,547) ($4,036) ($13,788) ($44,313)Capital asset expenditures $- $- $13,218 $-

$13,218


42

21. SEGMENTED INFORMATION (Continued) Year ended December 31, 2011


Exploration, Evaluation and Development Corporate Total

Revenues $89,152 $18,181 $- $- $107,333

Mining operating expenses (117,286) (30,649) - -

(147,935)

Depreciation and depletion (13,090) (290) - -

(13,380)

Share-based compensation expense - - - (14)

(14)

General and administrative (16) - (942) (5,645)

(6,603)

Foreign exchange (loss) gain 858 (370) (93) 3

398

Interest on convertible loan - - - (4,594)

(4,594)

Gain on revaluation of derivative financial liabilities - - - 4,103

4,103

Loss on revaluation of gold sale contract - - - (4,237)

(4,237)

Impairment loss (622,520) (4,205) (297,624) - (924,349)

Other income (expenses) 3,354 1,391 (1,604) -

3,141

Current tax expense (21) - - -

(21)

Deferred tax recovery (expense) 212,407 (6,386) - -

$206,021

Loss from operations ($447,162) ($22,328) ($300,263) ($10,384) ($780,137)Capital asset expenditures $11,018 $1,531 $34,506 $-

$47,055

During the years ended December 31, 2012 and December 31, 2011, all revenue was generated in Venezuela.


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21. SEGMENTED INFORMATION (Continued) The customers with significant sales are included in the Choco Mine and Isidora Mine operating segments and are as follows:

Year ended

December 31,

2012December 31,

2011 ($) ($)

Customer A 4,926 69,481 Customer B - 37,852

The Company’s geographic segment information is as follows: December 31, 2012


Exploration, Evaluation and Development

Corporate Total

Assets Current assets $- $- $- $1,654 $1,654 Liabilities Current liabilities $86,419 $24,151 $23,136 $30,473 $164,179 December 31, 2011


Exploration, Evaluation and Development

Corporate Total

Assets Current assets $12,487 $6,348 $6,766 $1,276 $26,877 Property, plant and equipment - - - 98 98 $12,487 $6,348 $6,766 $1,374 $26,975 Liabilities Current liabilities $84,308 $20,602 $19,409 $21,797 $146,116


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22. JOINT VENTURE INTEREST On July 4, 2008, the Company entered into an agreement (“the Mixed Enterprise Agreement”) with MIBAM to create a mixed enterprise. Pursuant to the Mixed Enterprise Agreement, Minera Venrus C.A. (“Venrus C.A.”), a Venezuelan corporation was incorporated on December 23, 2008, and is 50% owned by the Company and 50% owned by Empresa de Producción Social Minera Nacional, C.A. (a Venezuelan government entity). Up to March 14, 2012, the Company conducted a portion of its business through this joint venture under which the joint venture participants are bound by the articles of incorporation of Venrus C.A. The Company recorded its 50% proportionate share of assets, liabilities, revenues, and operating costs of the joint venture. Due to the Nationalization on March 14, 2012 the Company lost its mining concessions operated by the joint venture hence the Company lost any control or influence over the management of the operations of Venrus C.A. The following details the Company’s share of its investment in the joint venture that has been proportionately consolidated: December 31,

2012 December 31,

2011 Assets Current assets $- $6,348 $- $6,348 Liabilities Current liabilities $24,151 $20,602 $24,151 $20,602 Year ended December 31,

2012 December 31,

2011

Revenues $1,348 $18,181 Expenses (9,197) (36,961) Foreign exchange loss 302 (370) Net loss $(7,547) ($19,150) 23. COMMITMENTS AND CONTINGENCIES a. Commitments

At December 31, 2012, the Company is committed to payments under operating leases for premises as follows:

December 31,

2012 2013 $21 2014 24 2015 24 2016 24 Total $93


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23. COMMITMENTS AND CONTINGENCIES (Continued) b. Contingencies

i. Gold Reserve Lawsuit On December 15, 2008, the Company launched an unsolicited take-over bid (“the Gold Reserve Bid”) for Gold Reserve Inc. (“Gold Reserve”). On February 18, 2009, the Company’s offer for Gold Reserve expired and because the conditions of the Company’s offer were not met, the Company did not take up any securities under the offer. The Company recorded the costs related to the Gold Reserve Bid and the resulting litigation as an other expense in profit or loss. In December 2008, Gold Reserve commenced a claim against the Company and an advisor of the Company (“the Advisor”) seeking an injunction to restrain the Company’s unsolicited take-over bid for Gold Reserve as well as general damages of $500,000 and punitive damages of $50,000 on the basis that the Advisor improperly used Gold Reserve’s confidential information in advising the Company on the take-over bid. In February 2009, Gold Reserve obtained an interlocutory injunction to restrain the take-over bid. The Company subsequently served its defense and counterclaim in which it denied the allegations against it and sought damages of $102,500 in respect of losses it has sustained as a result of the injunction’s issuance. In June 2010, Gold Reserve amended its claim. The amended claim now seeks from the Company general damages of $150,000 for trespass, conversion, and interference with contractual and economic relations, as well as punitive damages of $50,000. The claim against the Advisor has also been reduced to a total of $200,000. On September 18, 2012, the Company settled all legal proceedings involving Gold Reserve. In consideration of the Settlement the Company agreed:

• To pay Gold Reserve C$250 cash and, • To issue Gold Reserve 2,500,000 common shares of the Company and, • To issue Gold Reserve a conditional promissory note in the amount of C$1,000. The promissory

note will only become due and payable in the event that the Company is successful in the litigation it has commenced against the Venezuelan government seeking compensation for the Nationalization. The promissory note and any payment due under it shall be subordinate and postponed in right of payment to (a) the rights of the Funder (as defined in the Creditors and Shareholders Agreement dated June 14, 2012, and a Litigation Funding Agreement dated May 8, 2012, and (b) the rights of the Funder and Freshfields Bruckhaus Deringer US LLP under a Priorities Agreement dated June 14, 2012.

On September 25, 2012, the Company obtained an order from the Ontario Superior Court of Justice dismissing the legal action brought by Gold Reserve against the Company, and the counterclaim brought by the Company against Gold Reserve. Under the Settlement, the Company had 15 days to meet its obligations under the settlement. On October 11, 2012 the CEO of the Company paid $256 (C$250) cash to Gold Reserve and the Company issued common shares with a value of $102 (C$100) (2,500,000 common shares at fair value of $0.04 per share (Note 10(e))). The terms of repayment with the CEO were not finalized at December 31, 2012, and the amount was included in accounts payable.


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23. COMMITMENTS AND CONTINGENCIES (Continued) ii. Non-compliance During June 2010, the Company entered into transactions in the normal course of operations that were not in compliance with certain Venezuelan laws and regulations. As a result of this non-compliance, the Company may be subject to fines to a maximum of $19,600 and/or denial of the Company’s ability to generate revenues. No amount has been accrued in these consolidated financial statements in connection with this matter since the outcome cannot be determined at this time. Also, based on the information currently available, an estimate of financial impact cannot be reasonably made. iii. Other Matters The Company is involved in various claims and litigation arising in the normal course of business. While the outcome of these matters is uncertain and there can be no assurance that such matters will be resolved in the Company’s favor, the Company does not currently believe that the outcome of adverse decisions in any pending or threatened proceedings related to these and other matters or any amount which it may be required to pay by reason thereof would have a material impact on its consolidated statement of financial position, statement of comprehensive income (loss) or statement of cash flows. Based on the information currently available, estimates of financial impact cannot be reasonably made. iv. Litigation Funding Agreement Under the terms of the privileged Litigation Funding Agreement, the Company has given certain warranties and covenants to the Funder. In consideration for the provision of arbitration financing, Rusoro has agreed to pay to the Funder a portion of any final settlement of the arbitration claim against the Respondent (the "Funder's Fee") (see Note 23(v)). The Funder's Fee shall only become payable upon a final settlement of the arbitration claim and the value of the Funder's Fee is dependent upon a number of variables including the value of any settlement and the length of time taken to reach a settlement. The agreement also provides that the amount of the Funder's Fee shall not exceed the amount of the aggregate proceeds of the arbitration claim under any circumstances. For the year ended December 31, 2012, the Funder had approved $2,259 in payments to the Company and its vendors which are net against the respective expenses on the Statements of Comprehensive Loss (see Note 16 for details of funding recoveries). Of this balance, $1,265 was receivable at the end of the year and was subsequently collected in early 2013. In addition, the Funder incurred $293 in outlays on legal and brokerage expenses that fall under the provision of funding under the Litigation Funding Agreement. These outlays are not recorded as expenses by the Company. As at December 31, 2012 litigation success is deemed to be indeterminable and $nil has been accrued for the Funder’s Fee. v. Contingent Success Fees In addition to the Litigation Funding Agreement the Company has also provided contingent success fees to select stakeholders, including the lenders of the Convertible Loan and the board of directors and management of the Company, in consideration for their discounted services or forgivement of select obligations. The terms, clauses, and priority of the contingent fee agreements are varied, but generally provide each party a contingent success fee based on successful outcome of the litigation. Management estimates the aggregate potential exposure related to these contingent success fees will not exceed 15% of the potential award. As of December 31, 2012, litigation success is deemed to be indeterminable and $nil has been accrued for the contingent success fees.


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23. COMMITMENTS AND CONTINGENCIES (Continued) vi. Trust and Contribution Agreements The Company is a party to a trust agreement and a contribution agreement whereby it has agreed to pay to a trust established for members of management and the executive committee of the board of directors, a success fee upon the completion of a transaction or series of transactions. For the purposes of the contribution agreement, a "Transaction" is defined as: (a) any merger, consolidation, reorganization, recapitalization, restructuring, leveraged buyout, business combination, or any transaction pursuant to which the Company is acquired by or combined with a third party; or (b) the acquisition by a third party of any assets or operations of the Company, or any outstanding shares of the Company; or (c) a sale or spin-off of any material assets, of 5% or more of the capital stock of any subsidiary of the Company, or any transaction which has the effect of altering the capitalization of the Company. Where a change in control accompanies the Transaction, the success fee will be equal to 1% of the aggregate transaction value as defined in the contribution agreement. If the Transaction involves the acquisition of less than 50% of the voting power of the then outstanding Company's shares, then the success fee will be equal to 0.5% of the aggregate transaction value. As at December 31, 2012 none of the Transaction criteria had been met and $nil had been paid to the Trust. On October 9, 2012, the Company entered into a trust agreement and a contribution agreement whereby it has agreed to pay to a trust established for the board of directors and management of the Company a success fee if the Company is successful in legal proceedings (the "Proceedings") it has commenced against the Venezuelan Government to obtain compensation for the nationalization of the Company's gold assets in Venezuela. If the Company is successful in the Proceedings, the success fee will be equal to 2% of the proceeds received by the Company in respect of the Proceedings. The trustees (the "Trustees") for the trust are independent directors and members of the compensation committee of the board of directors. The Trustees are empowered to allocate the success fee amongst the board of directors and management of the Company as they deem appropriate. As at December 31, 2012 none of the Proceedings criteria had been met and $nil had been paid to the Trust. 24. FINANCIAL INSTRUMENTS a. Financial Assets and Liabilities The Company’s financial instruments consist of the following: cash, receivables, accounts payable and accrued liabilities, a convertible loan, and derivative financial liabilities in the form of share purchase warrants (as issued by the Company) with exercise prices denoted in a foreign currency (Note 13) and a gold delivery contract (Note 10). The carrying amounts of cash, receivables and accounts payable and accrued liabilities are considered to be reasonable approximations of their fair values due to the short-term nature of these instruments. The gold delivery contract is marked to market at each reporting period based on the current spot price of gold and the number of gold ounces owing to the gold buyer (Note 10), and as such, is a reasonable approximation of the fair value. The share purchase warrants with exercise prices denoted in a foreign currency are carried at fair value on the consolidated financial statements. Management reviewed all significant financial instruments held by the Company and determined that no significant differences between fair value and carrying value existed as at December 31, 2012, except for the liability component of the convertible loan which has a fair value (as determined by the net present value method) of $30,000 (December 31, 2011: $30,000).


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24. FINANCIAL INSTRUMENTS (Continued) Financial instruments that are measured subsequent to initial recognition at fair value are grouped into a hierarchy based on the degree to which the fair value is observable. Level 1 fair value measurements are derived from unadjusted, quoted prices in active markets for identical assets or liabilities. Level 2 fair value measurements are derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability directly or indirectly. Level 3 fair value measurements are derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data. Financial liabilities at fair value as at December 31, 2012:

Level 1 Level 2 Level 3 Total Derivative financial liability – Gold contract $- $(12,220) $- $(12,220) Share purchase warrants in foreign currency - - - - Balance, December 31, 2012 $- $(12,220) $- $(12,220) Financial liabilities at fair value as at December 31, 2011:

Level 1 Level 2 Level 3 Total Derivative financial liability – Gold contract $- ($10,169) $- ($10,169) Share purchase warrants in foreign currency - - - - Balance, December 31, 2011 $- ($10,169) $- ($10,169) b. Financial Instrument Risk Exposure The Company thoroughly examines the various financial instrument risks to which it is exposed, and assesses the impact and likelihood of those risks. Where material, these risks are reviewed and monitored by management. There have not been any significant changes from the previous period as to how these risks are reviewed and monitored by management. The types of financial instrument risk exposures and the objectives and policies for managing these risks exposures are described below.

i. Credit Risk Credit risk is the risk that the counterparty to a financial instrument will cause a financial loss for the Company by failing to discharge its obligations. Management does not believe the Company is exposed to any significant concentration of credit risk. Management determines concentration by the percentage of cash and receivables owed by a single party. The Company’s exposure to credit risk on its C$ and US dollar cash is limited by maintaining these assets with high credit quality financial institutions and investing in highly rated corporations and government issuances in accordance with its investment policy as approved by the board of directors. The Company is exposed to the credit risk of Venezuelan banks, which hold cash for the Company’s Venezuelan operations. The Company limits its exposure to this risk by maintaining BsF cash balances to fund only the short-term needs of its Venezuelan subsidiaries.


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24. FINANCIAL INSTRUMENTS (Continued) The company’s maximum exposure to credit risk is as follows: December 31,

2012 December 31,

2011 Cash and cash equivalents $380 $3,382 Accounts receivable 1,265 5,554 $1,645 $8,936 Accounts receivable is net of an allowance for doubtful accounts and impairments of $2,672 (December 31, 2011: $14,830) ii. Liquidity Risk Liquidity risk is the risk that the Company will be unable to meet its obligations associated with financial liabilities as they fall due. The Company manages liquidity risk by monitoring cash and other financial resources available to meet its maturing obligations. The table below provides a summary of the contractual obligations and payments related to financial liabilities included in the consolidated statement of financial position as at December 31, 2012. The amounts disclosed are the contractual undiscounted cash flows.

2012 2013-2014 Total

Accounts payable and accrued liabilities $70,757 $- $70,757 Interest on convertible loan 6,403 - 6,403 Convertible loan 30,000 - 30,000 Accrual for termination benefits Derivative financial liability

14,592 12,220

- -

14,592 12,220

$133,972 $- $133,972 iii. Market Risk (a) Interest Rate Risk Interest rate risk is the risk that the future cash flows and fair values of the Company’s financial instruments will fluctuate because of changes in market interest rates. The Company monitors its fair value exposure to interest rates and is comfortable with its exposure given the relatively short term of its convertible loan. As at December 31, 2012, a 1% increase in interest rates would decrease the fair value of convertible loan by $nil and a 1% decrease in interest rates would increase the fair value of the convertible loan by $nil, as the convertible loan is in default and is due immediately. In addition, a 1% increase in interest rates would decrease the fair value of the share purchase warrants with foreign currency exercise prices by $nil and a 1% decrease in interest rates would increase the fair value of the share purchase warrants with foreign currency exercise prices by $nil. (b) Currency Risk Currency risk is the risk that the value of the Company’s financial instruments will fluctuate due to changes in foreign exchange rates. The Company is exposed to currency risk as the Company’s financial assets and liabilities include items denominated in BsF and C$. Changes in the applicable exchange rate may result in a decrease or increase in foreign exchange gains or losses recognized in profit or loss. The Company does not use derivative instruments to reduce its exposure to foreign currency risk.


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24. FINANCIAL INSTRUMENTS (Continued)

The Company’s Venezuelan operations and cash holdings are currently subject to currency and exchange controls. These government-imposed controls may adversely affect the Company as such controls limit the Company’s ability to flow US dollars out of the country for US dollar operating and capital expenditures. As at December 31, 2012, the Company holds cash of $263 (December 31, 2011: $2,268) in BsF.

December 31, 2012 25% Increase in the

BsF 25% Decrease in the

BsF

Net (loss) profit ($26,048) $20,838

December 31, 2012 10% Increase in the

C$ 10% Decrease in the

C$

Net (loss) profit (43) 43 25. LOSS PER SHARE The computation and reconciliation of basic and diluted loss per share for the years ended December 31, 2012 and 2011 are as follows: Year ended December 31,

2012 December 31,

2011 Net loss used for basic and diluted EPS ($43,725) ($757,794) Weighted average number of shares outstanding 530,675 530,113 Adjustment for assumed conversion of warrants and options

-

Weighted average number of shares for diluted EPS 530,675 530,113 Basic loss per share ($0.08) ($1.43) Fully diluted loss per share ($0.08) ($1.43) For purposes of computing diluted loss per share, convertible debt and stock options that would have an anti-dilutive effect on the calculation of diluted loss per share are excluded from the calculation. In 2012, 48,915 stock options were excluded from the diluted loss per share calculation (2011: 42,340 stock options were excluded). Convertible debt was excluded from the calculation in 2012 and 2011.


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26. EVENTS AFTER THE REPORTING PERIOD On January 10, 2013, the 30 million share purchase warrants with an exercise price of C$0.40 expired. On February 8, 2013, Venezuela devalued its currency, the bolivar, to 6.3 bolivars per U.S. dollar, from 4.3 bolivars per U.S. dollar. The impact of this devaluation to the Company is estimated to be $33.1 million impact on foreign exchange translation of bolivar based accounts payable and accrued liabilities. On March 21, 2013, the Company filed a Statement of Claim in its arbitration against Venezuela before the World Bank’s ICSID, in accordance with the provisions of the Canada-Venezuela Bilateral Investment Treaty. Based on a March 15, 2013, valuation performed by an independent expert, the Company is seeking fair-value compensation of $3.03 billion for all its losses caused by the Nationalization. On May 16, 2013 and July 2, 2013, the CEO of the Company provided $170 and $30 respectively, to the Company as part of a non-interest bearing loan with no fixed maturity date. The terms of the loan will include a contingent success fee in lieu of interest.

rusoro mining ltd. consolidated financial statements for … · 2013-08-20 · ($44,313) ($780,137)...

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