CRESO EXPLORATION INC. NOTICE OF MEETING

CRESO EXPLORATION INC.
NOTICE OF MEETING
-and-
MANAGEMENT INFORMATION CIRCULAR
IN RESPECT OF SPECIAL MEETING OF SHAREHOLDERS OF CRESO
EXPLORATION INC. TO BE HELD ON FEBRUARY 28, 2014
TO APPROVE, AMONG OTHER MATTERS, THE AMALGAMATION WITH
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
(Formerly “Nichromet Extraction Inc.”)
Dated as of January 31st, 2014
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that a special meeting (the “Meeting”) of the shareholders (the “Creso
Shareholders”) of Creso Exploration Inc. (the “Corporation”) will be held at 600 de Maisonneuve Blvd.
West, Suite 2750, Montreal, Québec, on February 28, 2014 at 10:00 a.m. (Montreal time), for the following
purposes:
1.
to consider and, if deemed advisable, to pass, with or without variation, a resolution (the
“Amalgamation Resolution”) in the form attached as Appendix A to the Management
Information Circular accompanying this Notice of Meeting (the “Information Circular”)
approving by at least two-thirds (2/3) of all the votes cast by the Creso Shareholders present in
person or represented by proxy at the Meeting, as well as by the “Majority of the Minority”, the
proposed three-concerned amalgamation (the “Amalgamation”) pursuant to the Canada Business
Corporations Act (the “CBCA”) involving the Corporation, Dundee Sustainable Technologies
Inc. (formerly “Nichromet Extraction Inc.”) (“Nichromet”) and 8704996 Canada Inc. (“Subco”),
a wholly-owned subsidiary of Nichromet, substantially on the terms and conditions of the
Amalgamation Agreement, the whole as more fully described in the Information Circular; and
2.
to transact such other business as may properly come before the Meeting or any adjournments or
postponements thereof.
THIS IS A VERY IMPORTANT MEETING FOR THE CORPORATION AND THE CRESO
SHAREHOLDERS. YOU ARE URGED TO VOTE.
A “Majority of the Minority” approval is a resolution which must be approved by more than 50% of all
votes cast by the Creso Shareholders present in person or represented by proxy at the Meeting in order to
become effective, other than interested parties to the Amalgamation and their related parties and joint
actors, as such terms are defined in Multilateral Instrument 61-101.
Accompanying this Notice of Meeting is the Information Circular of the Corporation dated January 31,
2014, and a form of proxy with notes thereto and a Letter of Transmittal. The nature of the business to be
transacted at the Meeting and the specific details regarding the Amalgamation are described in further
detail in the Information Circular. Capitalized terms used but not otherwise defined in this Notice of
Meeting have the meaning ascribed to such terms in the Information Circular.
The record date for the determination of the Creso Shareholders entitled to receive notice of, and to vote at,
the Meeting or any adjournments or postponements thereof is January 6, 2014 (the “Record Date”). Creso
Shareholders whose names have been entered in the register of shareholders at the close of business on the
Record Date will be entitled to receive notice of, and to vote, at the Meeting or any adjournments or
postponements thereof.
A Creso Shareholder may attend the Meeting in person or may be represented by proxy. Creso
Shareholders who are unable to attend the Meeting or any adjournments or postponements thereof
in person are requested to complete, date, sign and return the accompanying form of proxy for use at
the Meeting or any adjournments or postponements thereof. To be effective, the enclosed form of
proxy must be completed and returned to the Corporation’s Registrar and Transfer Agent within the time
and the location set out in the notes to the form of proxy. The enclosed proxy is solicited by Management
and you may amend it, if you so desire, by striking out the names listed therein and inserting in the space
provided the name of the person you wish to represent you at the Meeting.
2
For registered Creso Shareholders, the Letter of Transmittal accompanying the Information
Circular must be completed and returned to the office of Computershare Trust Company of Canada,
100 University Avenue, 8th Floor, Toronto, Ontario M5J 2Y1, with the certificates(s) representing
your Creso Shares, in order to receive the Nichromet Subordinate Voting Shares which are to be
exchanged for your Creso Shares.
If you are a non-registered Creso Shareholder and receive these materials through your broker or
through another intermediary, you should carefully follow any instructions provided to you by that
intermediary with respect to the voting of your Creso Shares.
Registered Creso Shareholders have the right to dissent with respect to the Amalgamation
Resolution, as a whole, and, if the Amalgamation Resolution becomes effective, to be paid the fair
value of their Creso Shares in accordance with the provisions of section 190 of the CBCA. A Creso
Shareholder’s right to dissent is more particularly described in the Information Circular and the text
of section 190 of the CBCA is set forth in Appendix C to the Information Circular.
It is strongly recommended that Creso Shareholders desiring to exercise rights of dissent seek
independent legal advice as the failure to strictly comply with the requirements set forth in
section 190 of the CBCA may result in the loss of any right to dissent. Persons who are beneficial
owners of Creso Shares registered in the name of a broker, custodian, nominee or another
intermediary who wish to dissent should be aware that only registered Creso Shareholders are
entitled to dissent. Accordingly, a beneficial owner of Creso Shares desiring to exercise the right to
dissent must make arrangements for such Creso Shares beneficially owned by such owner to be
registered in such owner’s name prior to the time the written objection to the Amalgamation
Resolution is required to be received by the Corporation or, alternatively, make arrangements for
the registered Creso Shareholder to dissent on behalf of such owner.
The enclosed form of proxy confers discretionary authority in respect of amendments or variations to the
matters of business to be considered at the Meeting and with respect to other matters which may properly
come before the Meeting or any adjournment thereof. As of the date hereof, Management of the
Corporation knows of no amendments, variations or other matters to come before the Meeting. It is the
intention of the persons named in the enclosed form of proxy, if not expressly directed otherwise in
such form of proxy, to vote in favour of the Amalgamation Resolution.
DATED at the City of Montreal, in the Province of Québec, this 31st day of January, 2014.
BY ORDER OF THE BOARD OF DIRECTORS OF
CRESO EXPLORATION INC.
(s) “Luce L. Saint-Pierre”
Luce L. Saint-Pierre
Secretary
3
MANAGEMENT INFORMATION CIRCULAR
TABLE OF CONTENTS
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS ......................................................................... 2
GLOSSARY OF TERMS............................................................................................................................... 9
NOTICE TO NON-RESIDENT CRESO SHAREHOLDERS ......................................................................19
FORWARD-LOOKING INFORMATION ...................................................................................................20
SUMMARY ..................................................................................................................................................22
The Parties .................................................................................................................................................23
The Meeting ..............................................................................................................................................24
Summary of the Amalgamation .................................................................................................................24
Right to Dissent .........................................................................................................................................25
Listings ......................................................................................................................................................25
Effect of the Amalgamation upon Holders of Creso Convertible Securities .............................................25
Effects of the Amalgamation .....................................................................................................................25
Benefits of the Amalgamation ...................................................................................................................27
Conditions to the Amalgamation ...............................................................................................................27
Termination of the Amalgamation Agreement ..........................................................................................28
Summary of the Financing ........................................................................................................................29
Recommendation of the Board of Directors ..............................................................................................29
Procedure for the Amalgamation Becoming Effective ..............................................................................29
Timing .......................................................................................................................................................32
Interests of Insiders, Promoters or Control Persons ..................................................................................32
Related Party Transaction..........................................................................................................................34
Available Funds and Principal Purposes ...................................................................................................34
Public Market ............................................................................................................................................36
Details of Any Conflict of Interest ............................................................................................................36
Interests of Experts ....................................................................................................................................37
Risk Factors ...............................................................................................................................................37
Accompanying Documents .......................................................................................................................37
PROXY RELATED INFORMATION..........................................................................................................38
Management Solicitation of Proxies..............................................................................................................38
APPOINTMENT OF PROXY HOLDER .....................................................................................................38
VOTING BY PROXY AND EXERCISE OF DISCRETION ......................................................................38
REVOCATION OF PROXY.........................................................................................................................39
NON-REGISTERED SHAREHOLDERS ....................................................................................................39
INTEREST OF CERTAIN PERSONS IN THE MATTERS TO BE ACTED UPON ..................................40
Ownership of Creso Shares and Creso Options .........................................................................................40
VOTING SECURITIES AND PRINCIPAL HOLDER THEREOF .............................................................41
Voting Shares and Record Date.................................................................................................................41
Creso Shares ..............................................................................................................................................41
Voting of Creso Shares ..............................................................................................................................41
PARTICULARS OF MATTERS TO BE ACTED ON .................................................................................42
The Amalgamation ....................................................................................................................................42
Effect of the Amalgamation upon Holders of Creso Convertible Securities .............................................43
Approval of the Amalgamation by a Special Resolution...........................................................................43
DIRECTORS .................................................................................................................................................45
INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS ............................................45
OTHER MATTERS WHICH MAY COME BEFORE MEETING ..............................................................45
RISK FACTORS ...........................................................................................................................................46
4
Risks Associated with the Amalgamation ..................................................................................................46
The Amalgamation May Not be Completed ..............................................................................................46
Possible Failure to Realize Anticipated Benefits of the Amalgamation ....................................................46
Significant Costs Associated with the Amalgamation ...............................................................................46
Dissent Rights............................................................................................................................................47
Risks Associated with the Resulting Issuer ................................................................................................47
New Business Model .................................................................................................................................47
Management of growth..............................................................................................................................48
No Independent Evaluation of the Process ................................................................................................48
Dilution Caused by the Resulting Issuer Capital Structure .......................................................................48
Liquidity ....................................................................................................................................................48
Global Financial and Economic Conditions ..............................................................................................48
Significant Future Capital Requirements, Future Financing Risk and Dilution ........................................49
Indebtedness ..............................................................................................................................................49
Share Price Volatility ................................................................................................................................50
Competition in the Technology Sector in the Mining Industry .................................................................50
Key Personnel............................................................................................................................................50
Operational Risks of the Resulting Issuer .................................................................................................51
Intellectual Property ..................................................................................................................................51
Changes in Technology .............................................................................................................................52
Reliance on Industry Partners ....................................................................................................................52
Laws and Regulations................................................................................................................................52
Failure of the Business Plan ......................................................................................................................52
No Anticipated Dividends .........................................................................................................................53
Dundee Corporation will have significant influence .................................................................................53
Future Equity Sales by Insiders .................................................................................................................53
Limitation on Takeovers............................................................................................................................54
Conflicts of Interest ...................................................................................................................................54
Litigation Risk ...........................................................................................................................................54
Employee Recruitment ..............................................................................................................................54
Operating Hazards and Risks ....................................................................................................................54
Limited Operating History, Lack of Cash Flow and going concern ..........................................................55
Regulatory Requirements Relating to Environmental Law .......................................................................55
Permits and Licences .................................................................................................................................56
No Assurances of Title ..............................................................................................................................56
INFORMATION REGARDING THE AMALGAMATION ........................................................................57
Background to the Amalgamation .............................................................................................................57
Anticipated Benefits of the Amalgamation ...............................................................................................57
Description of the Amalgamation..............................................................................................................58
Effect of the Amalgamation upon Holders of Creso Convertible Securities .............................................59
Fractional Shares .......................................................................................................................................59
Effects of the Amalgamation .....................................................................................................................59
Amalgamation Agreement .........................................................................................................................60
Financing ...................................................................................................................................................65
Exchange Listings .....................................................................................................................................65
Securities Matters ......................................................................................................................................65
Exemption from Formal Valuation Requirement and Multilateral Instrument 61-101 .............................65
Procedure for the Amalgamation to Become Effective .............................................................................66
Subco Shareholder Approval .....................................................................................................................66
Creso Shareholder Approval .....................................................................................................................67
Exchange Approval ...................................................................................................................................67
Timing .......................................................................................................................................................67
Expenses of the Amalgamation .................................................................................................................67
5
Exchange of Securities ..............................................................................................................................67
Letter of Transmittal ..................................................................................................................................68
Information for Non-Resident Creso Shareholders ...................................................................................68
Dissenting Creso Shareholder Rights ........................................................................................................70
Canadian Federal Tax Considerations .......................................................................................................71
Holders, Warrant Holders and Option Holders Resident in Canada..........................................................72
Holders, Warrant Holders and Option Holders Not Resident in Canada ...................................................74
Eligibility for Investment ..........................................................................................................................76
INFORMATION REGARDING THE CORPORATION .............................................................................77
Corporate Structure ...................................................................................................................................77
General Development of the Business .......................................................................................................77
Mineral Properties .....................................................................................................................................80
Selected Financial Information and Management Discussion and Analysis .............................................80
Description of Securities ...........................................................................................................................81
Stock Option Plan ......................................................................................................................................81
Prior Sales..................................................................................................................................................82
Stock Exchange Price ................................................................................................................................82
Executive Compensation ...........................................................................................................................83
Directors’ Compensation ...........................................................................................................................86
Details of Any Conflict of Interest ............................................................................................................87
Related Party Transaction..........................................................................................................................87
Legal Proceedings .....................................................................................................................................88
Auditors, Transfer Agent and Registrar.....................................................................................................88
Material Contracts .....................................................................................................................................88
INFORMATION REGARDING NICHROMET AND SUBCO ..................................................................90
Corporate Structure ...................................................................................................................................90
Intercorporate Relationships ......................................................................................................................90
General Development of the Business .......................................................................................................90
Selected Consolidated Financial Information and MD&A ........................................................................94
Description of Securities ...........................................................................................................................95
Authorized capital .....................................................................................................................................95
Consolidated Capitalization .......................................................................................................................97
Prior Sales..................................................................................................................................................97
Executive Compensation ...........................................................................................................................98
Overview ...................................................................................................................................................98
Compensation Discussion and Analysis ....................................................................................................98
Summary Compensation Table ...............................................................................................................100
Incentive Plan Awards .............................................................................................................................101
Legal Proceedings ...................................................................................................................................103
Material Contracts ...................................................................................................................................103
Escrowed Securities.................................................................................................................................104
Principal Security Holders .......................................................................................................................104
Directors and Executive Officers ............................................................................................................104
Biographies ..............................................................................................................................................106
Corporate Cease Trade Orders ................................................................................................................108
Corporate and Shareholder Bankruptcies ................................................................................................108
Penalties or Sanctions ..............................................................................................................................108
Conflicts of Interest .................................................................................................................................108
Indebtedness of Directors and Officers ...................................................................................................109
Interest of management and others in material transactions ....................................................................109
Non-Arm’s Length Transactions .............................................................................................................109
INFORMATION REGARDING THE RESULTING ISSUER ..................................................................110
Corporate Structure .................................................................................................................................110
6
Intercorporate Relationships ....................................................................................................................110
Narrative Description of Business ...........................................................................................................110
Exploration and Development .................................................................................................................111
Description of Securities .........................................................................................................................111
Pro Forma Consolidated Capitalization ...................................................................................................112
Fully Diluted Share Capital .....................................................................................................................112
Available Funds and Principal Purposes .................................................................................................113
Dividends ................................................................................................................................................113
Principal Securityholders.........................................................................................................................114
Directors, Executive Officers and Promoters ..........................................................................................114
Management ............................................................................................................................................114
Cease Trade Orders .................................................................................................................................115
Penalties or Sanctions ..............................................................................................................................115
Corporate and Shareholder Bankruptcies ................................................................................................115
Conflicts of Interest .................................................................................................................................115
Other Reporting Issuer Experience..........................................................................................................116
Executive Compensation .........................................................................................................................119
Indebtedness of Directors and Officers ...................................................................................................120
Corporate Governance .............................................................................................................................120
Pre-approval of Non-audit Services.........................................................................................................121
Investor Relations Arrangements ............................................................................................................121
Options to Purchase Securities ................................................................................................................122
Escrowed Securities.................................................................................................................................123
Auditor, Transfer Agent and Registrar ....................................................................................................125
GENERAL MATTERS ...............................................................................................................................126
Experts .....................................................................................................................................................126
Other Material Facts ................................................................................................................................126
Financial Statement Requirements ..........................................................................................................126
ADDITIONAL INFORMATION ...............................................................................................................127
BOARD APPROVAL .................................................................................................................................127
CERTIFICATE OF CRESO EXPLORATION INC. ..................................................................................128
CERTIFICATE OF NICHROMET EXTRACTION INC. ..........................................................................129
APPENDIX “A” - Amalgamation Resolution .............................................................................................130
APPENDIX “B” - Amalgamation Agreement ............................................................................................131
APPENDIX “C” - Right to dissent / Section 190 of the CBCA ..................................................................132
APPENDIX “D”- Financial Statement of the Corporation..........................................................................136
APPENDIX “E” - MD&A of the Corporation ............................................................................................137
APPENDIX “F” - Financial Statement of Nichromet .................................................................................138
APPENDIX “G” - MD&A of Nichromet ....................................................................................................139
APPENDIX “H” - Pro Forma Financial Statement of the Reporting Issuer ...............................................140
APPENDIX “I” – Resulting Issuer Share Terms.........................................................................................141
APPENDIX “J” – Audit Committee Charter ...............................................................................................142
7
GLOSSARY OF TERMS
“Affiliate” means a Company that is affiliated with another Company as described below.
A Company is an “Affiliate” of another Company if:
(a)
one of them is the subsidiary of the other, or
(b)
each of them is controlled by the same Person.
A Company is “controlled” by a Person if:
(a)
voting securities of the Company are held, other than by way of security only, by or for
the benefit of that Person, and
(b)
the voting securities, if voted, entitle the Person to elect a majority of the directors of the
Company.
A Person beneficially owns securities that are beneficially owned by:
(a)
a Company controlled by that Person, or
(b)
an Affiliate of that Person or an Affiliate of any Company controlled by that Person.
“allowable capital loss” has the meaning given thereto under “Information Regarding the Amalgamation –
Holders, Warrant Holders and Option Holders Resident in Canada”.
“Amalco” means the new corporate entity formed from the amalgamation of the Corporation and Subco in
accordance with the terms of the Amalgamation Agreement.
“Amalgamation” means the amalgamation of the Corporation and Subco pursuant to the CBCA on the
terms and conditions set out in the Amalgamation Agreement.
“Amalgamation Agreement” means the merger agreement dated November 22, 2013 entered into by the
Corporation, Nichromet and Subco and attached to the Information Circular as Appendix B.
“Amalgamation Date” means the effective date of the Amalgamation as set forth in and indicated on the
certificate of amalgamation issued by the Director and giving effect to the Amalgamation.
“Amalgamation Resolution” means the resolution of the Creso Shareholders concerning the
Amalgamation to be considered at the Meeting, substantially in the form set forth in Appendix A to the
Information Circular.
“AMF” means the Autorité des marchés financiers.
“Appendices” means the appendices attached to the Information Circular.
9
“Articles of Amalgamation” means the articles of amalgamation to be filed on the Amalgamation Date in
order to effect the Amalgamation.
“Associate” when used to indicate a relationship with a Person, means
(a)
(b)
(c)
(d)
an issuer of which the Person beneficially owns or controls, directly or indirectly, voting
securities entitling him to more than 10% of the voting rights attached to outstanding
securities of the issuer,
any partner of the Person,
any trust or estate in which the Person has a substantial beneficial interest or in respect of
which a Person serves as trustee or in a similar capacity,
in the case of a Person, who is an individual:
(i)
(ii)
that Person’s spouse or child, or
any relative of the Person or of his spouse who has the same residence as that
Person.
“Available Funds” means the available funds of the Resulting Issuer immediately after effecting the
Amalgamation described in this Information Circular under “Summary - Available Funds and Principal
Purposes”.
“Bridge Loan” means the three million dollars ($3,000,000) secured loan facility entered into on
January 7, 2014 by and between Nichromet and Dundee Corporation which was disbursed on January 31st,
2014.
“Business Day” means any day other than a Saturday or Sunday on which chartered banks in the city of
Montreal (Québec) are open for business.
“Canadian security” has the meaning given thereto under “Information Regarding the Amalgamation Canadian Federal Tax Considerations”.
“CBCA” means the Canada Business Corporation Act, as amended, including the regulations promulgated
thereunder.
“CDS” means CDS & Co., the nominee of CDS Clearing and Depository Services Inc., a clearing agency
of which security brokers or dealers are participants.
“CD&A” means a compensation discussion and analysis.
“CEO” means Chief Executive Officer.
“CFO” means Chief Financial Officer.
“Change of Control” includes situations where after giving effect to the contemplated transaction and as a
result of such transaction:
(a)
any one Person holds a sufficient number of the voting shares of the Resulting Issuer to
affect materially the control of the Issuer or Resulting Issuer, or
10
(b)
any combination of Persons, acting in concert by virtue of an agreement, arrangement,
commitment or understanding hold in total a sufficient number of the Voting Shares of
the Issuer or Resulting Issuer to affect materially the control of the Issuer or Resulting
Issuer;
where such Person or combination of Persons did not previously hold a sufficient number of Voting Shares
to affect materially the control of the Issuer or Resulting Issuer. In the absence of evidence to the contrary,
any Person or combination of Persons acting in concert by virtue of an agreement, arrangement,
commitment or understanding, that holds more than 20% of the Voting Shares of the Issuer or Resulting
Issuer is deemed to materially affect the control of the Issuer or Resulting Issuer.
“Company” unless specifically indicated otherwise, means a corporation, incorporated association or
organization, body corporate, partnership, trust, association or other entity other than an individual.
“Compensation Committee” has the meaning given thereto under “Information Regarding the
Corporation – Executive Compensation”.
“Control Person” means any Person that holds or is one of a combination of Persons that holds a sufficient
number of any of the securities of an issuer so as to affect materially the control of that issuer, or that holds
more than 20% of the outstanding voting securities of an issuer except where there is evidence showing that
the holder of those securities does not materially affect the control of the issuer.
“Coattail Agreement” has the meaning given thereto under “Information Regarding Nichromet and Subco
– Description of Securities”.
“Corporation” means Creso Exploration Inc.
“CPC” means a company eligible to the Capital Pool Company (CPC) program, a listing vehicle offered
by the TSXV, as defined in TSXV Policy 2.4 – Capital Pool Companies.
“CRA” means the Canada Revenue Agency.
“Creso Board” means the Corporation’s board of directors.
“Creso Convertible Securities” means, collectively the Creso Options and the Creso Warrants.
“Creso Options” means the existing options granted by the Corporation pursuant to the Creso Option Plan
or otherwise.
“Creso Option Plan” has the meaning given thereto under “Information Regarding the Corporation –
Stock Option Plan”.
“Creso Qualifying Transaction” has the meaning given thereto under “Information Regarding the
Corporation – General Development of the Business”.
“Creso Resources Share” has the meaning given thereto under “Information Regarding the Corporation –
General Development of the Business”.
11
“Creso Shares” means the common shares of the Corporation.
“Creso Shareholders” means, collectively, the holders of Creso Shares.
“Creso Warrants” means existing warrants granted by the Corporation to acquire Creso Shares.
“Depositary” means Computershare Trust Company of Canada, the depositary appointed by the
Corporation in order to, among other things, exchange the Creso Shares for Nichromet Subordinate Voting
Shares.
“Director” means the Director appointed pursuant to Section 260 of the CBCA.
“Dissent Notice” has the meaning given thereto under “Information Regarding the Amalgamation –
Dissenting Creso Shareholder Rights”.
“Dissent Rights” has the meaning given thereto under “Information Regarding the Amalgamation –
Dissenting Creso Shareholder Rights”.
“Dissenting Creso Shareholders” has the meaning given thereto under “Information Regarding the
Amalgamation - Dissenting Creso Shareholder Rights”.
“Dissenting Holder” has the meaning given thereto under “Information Regarding Amalgamation –
Holders, Warrant Holders and Option Holders Not Resident in Canada”.
“Dissenting Non-Resident Holder” has the meaning given thereto under “Information Regarding
Amalgamation – Holders, Warrant Holders and Option Holders Not Resident in Canada”.
“Dundee Precious Metals” means Dundee Precious Metals Inc.
“Effective Date” means the date that the Exchange issues the Final Exchange Bulletin, which is expected
to be on the Amalgamation Date, provided that all required documentation is filed with the Exchange.
“Effective Time” means 12:01 a.m. (Toronto time) on the Amalgamation Date or such other time as the
Corporation and Nichromet, each acting reasonably, may agree to in writing with such agreement to be
evidenced by the filing of Articles of Amalgamation with such other Effective Time.
“Escrow Agent” means Computershare Trust Company of Canada.
“Escrow Agreement” means, if applicable, the escrow agreement to be entered into among licensed a third
party trustee, as escrow agent, Nichromet and certain shareholders of Nichromet who are required to have
their Nichromet Shares placed into escrow in compliance with the requirements of the Exchange or
applicable securities Law.
“Exchange” means the Canadian Securities Exchange.
“Exchange Ratio” means half a Nichromet Subordinate Voting Share for every one (1) Creso Share,
which Creso Shareholders will be entitled to receive in connection with the Amalgamation.
12
“Final Exchange Bulletin” means the bulletin issued by the Exchange following closing of the
Amalgamation.
“Franco” has the meaning given thereto under “Information Regarding the Corporation – General
Development of Business”.
“Glossary” means this glossary of terms to the Information Circular.
“Governmental Authority” means any foreign national provincial local or state government any political
subdivision or any governmental judicial public or statutory instrumentality court tribunal agency including
those pertaining to health safety or the environment authority body or entity or other regulatory bureau
authority body or entity having legal jurisdiction over the activity or Person in question and for greater
certainty includes the Exchange.
“Holder” has the meaning given thereto under “Information Regarding the Amalgamation – Canadian
Federal Tax Considerations”.
“Information Circular” means this Management Information Circular, including all appendices,
schedules and certificates attached hereto.
“Insider” if used in relation to an issuer, means:
(a)
a director or senior officer of the issuer;
(b)
a director or senior officer of the Company that is an insider or subsidiary of the issuer;
(c)
a Person that beneficially owns or controls, directly or indirectly, voting shares carrying
more than 10% of the voting rights attached to all outstanding voting shares of the issuer;
or
(d)
the issuer itself if it holds any of its own securities.
“Intermediary” has the meaning given thereto under “Proxy Related Information – Non-Registered
Shareholders”.
“IFRS” means the International Financial Reporting Standards.
“ITA” means the Income Tax Act (Canada) and the regulations thereunder, as amended from time to time.
“Law” means any federal, provincial, local, municipal, state, foreign or other administrative statute, law,
order, constitution, ordinance, principle of common law, regulation, rule or treaty.
“Letter of Transmittal” means the letter of transmittal accompanying this Information Circular which
must be completed and returned to the office of the Depositary, with the certificates(s) representing the
Creso Shares held by a Creso Shareholder, in order to receive (i) that number of Nichromet Subordinate
Voting Shares which Creso Shareholders that are not Non-Resident Creso Shareholders are entitled to
receive upon completion of the Amalgamation, or (ii) a pro-rata portion of the cash proceeds (net of fees)
of the sale of Nichromet Subordinate Voting Shares sold on behalf of Non-Resident Creso Shareholders by
the Depositary, in the case of Non-Resident Creso Shareholders.
13
“Majority of the Minority” means more than 50% of all votes cast by the Creso Shareholders present in
person or represented by proxy at the Meeting other than interested parties to the Amalgamation and their
related parties and joint actors, (as such terms are defined in Multilateral Instrument 61-101).
“Management” means, collectively, the executive officers of a Company.
“Meeting” means the special meeting of the Creso Shareholders to be held at 600 de Maisonneuve Blvd.
West, Suite 2750, Montreal, Québec, on February 28, 2014 at 10:00 a.m. (Montreal time) for the purpose of
considering and, if deemed advisable, approving the Amalgamation Resolution and other matters, if any,
related thereto.
“Meeting Materials” has the meaning given thereto under “Proxy Related Information – Non-Registered
Shareholders”.
“Material Adverse Change” means any change (or any condition, event or development involving a
prospective change) in the business, operations, affairs, assets, liabilities (including any contingent
liabilities that may arise through outstanding, pending or threatened litigation or otherwise) capitalization,
financial condition, prospects, licenses, permits, rights or privileges, of a corporation or any of its
subsidiaries which could reasonably be expected to materially and adversely affect such corporation and its
subsidiaries taken as a whole.
“MD&A” means management’s discussions and analysis, as such term is defined in National
Instrument 51-102 – Continuous Disclosure Obligations of the Canadian Securities Administrators.
“Multilateral Instrument 61-101” means Multilateral Instrument 61-101 – Protection of Minority
Security Holders in Special Transactions, adopted by the OSC and the AMF.
“Named Executive Officers” or “NEO” means, in relation to each of the Corporation and Nichromet,
each of the following individuals:
(a)
a CEO;
(b)
a CFO;
(c)
each of the three most highly compensated executive officers, or three most highly
compensated individuals acting in a similar capacity, other than the chief executive
officer and chief financial officer, at the end of the most recently completed financial
year; and
(d)
each individual who would be a Named Executive Officer under paragraph (c) but for the
fact that the individual was neither an executive officer of the company, nor acting in a
similar capacity, at the end of that financial year.
“NI-54-101” has the meaning given thereto under “Proxy Related Information – Non-Registered
Shareholders”.
“Nichromet” means Dundee Sustainable Technologies Inc., previously known as “Nichromet Extraction
Inc.”, and where the context requires, following the Amalgamation, the Resulting Issuer.
14
“Nichromet Board” means the board of directors of Nichromet.
“Nichromet Multiple Voting Shares” means the multiple voting shares of Nichromet after effecting the
Nichromet Share Reorganization.
“Nichromet Options” means options granted by Nichromet to acquire Nichromet Subordinate Voting
Shares.
“Nichromet Shares” means, collectively, the Nichromet Multiple Voting Shares and the Nichromet
Subordinate Voting Shares together;
“Nichromet Share Reorganization” means:
(a)
the creation and authorization of the issuance of an unlimited number of “Nichromet
Multiple Voting Shares”, each “Nichromet Multiple Voting Share” having 10 votes; and
(c)
the change to the designation of the common shares in the capital of Nichromet to
Nichromet Subordinate Voting Shares and including the change to the rights, privileges,
restrictions and conditions attaching thereto.
“Nichromet Shareholders” means, collectively, all of the holders of the Nichromet Subordinate Voting
Shares and all of the holders of the Nichromet Multiple Voting Shares, in each case, prior to the
Amalgamation Date.
“Nichromet Stock Option Plan” has the meaning given thereto under “Information Regarding Nichromet
and Subco – Compensation Discussion and Analysis”.
“Nichromet Subordinate Voting Shares” means the common shares of Nichromet redesignated as
“subordinated voting shares”, after effecting the Nichromet Share Reorganization.
“Nichromet Warrants” means warrants granted by Nichromet to acquire Nichromet Subordinate Voting
Shares.
“Non-Registered Holder” has the meaning given thereto under “Proxy Related Information – NonRegistered Shareholders”.
“Non-Resident Holder” has the meaning given thereto under “Information Regarding the Amalgamation –
Holders, Warrant Holders and Option Holders Not Resident in Canada”.
“Non-Resident Creso Shareholder” means a Creso Shareholder resident in any Non-Qualifying
Jurisdiction, including, but not limited to, a U.S. Securityholder.
“Non-Qualifying Jurisdictions” means all jurisdictions other than Qualifying Jurisdictions.
“Notice of Meeting” means the notice of the Meeting accompanying this Information Circular.
“NSR” has the meaning given thereto under “Information Regarding the Corporation – General
Development of Business”.
15
“Optionholders” means the holders of Creso Options.
“OSC” means the Ontario Securities Commission.
“Outside Date” means April 30, 2014, or such later date as may be agreed upon in writing by the
Corporation and Nichromet.
“Person” means a Company or individual.
“Plan Holder” has the meaning given thereto under “Information Regarding the Amalgamation –
Eligibility For Investment”.
“Principal” has the meaning under National Policy 46-201 - Escrow for Initial Public Offerings.
“Process” has the meaning ascribed to it under “Information Regarding Nichromet and Subco - General
Development of the Business”.
“Promoter” has the meaning under the Securities Act (Ontario).
“Proposed Amendments” has the meaning given thereto under “Information Regarding the
Amalgamation – Canadian Federal Tax Considerations”.
“Qualifying Jurisdictions” means all provinces of Canada and such other jurisdictions in which the
Nichromet Shares may be distributed in connection with the Amalgamation without the requirement of
Nichromet to prepare a prospectus or registration statement or obtain regulatory approval in respect of such
distribution and which Nichromet chooses to make such distributions.
“Qualifying Transaction” means a transaction where a CPC acquires Significant Assets, other than cash,
by way of purchase, amalgamation, merger or arrangement with another Company or by other means.
“Québec Court” means the Québec Superior Court.
“Record Date” means January 6, 2014, the record date for determining the Creso Shareholders entitled to
receive notice of and vote at the Meeting.
“Registered Creso Shareholder” has the meaning given thereto under “Information Regarding the
Amalgamation – Dissenting Creso Shareholder Rights”.
“Regulation S” means Regulation S promulgamted by the SEC under the Securities Act of 1933.
“Related Party Transaction” has the meaning ascribed to that term under Multilateral Instrument 61-101.
“RESP” means a registered education savings plan within the meaning of the ITA.
“Resident Holder” has the meaning given thereto under “Information Regarding the Amalgamation –
Holders, Warrant Holders and Option Holders Resident in Canada”.
16
“Resulting Issuer” means Nichromet following the Amalgamation.
“Resulting Issuer Audit Committee” has the meaning given thereto under “Information about the
Resulting Issuer – Corporate Governance”.
“Resulting Issuer Options” means Nichromet Options.
“Resulting Issuer Shares” means the Nichromet Shares.
“Resulting Issuer Warrants” means Nichromet Warrants.
“RRIF” means a registered retirement income fund within the meaning of the ITA.
“RRSP” means a registered retirement savings plan within the meaning of the ITA.
“Significant Assets” means one or more assets or businesses which, when purchased, optioned or
otherwise acquired by a CPC, together with any other concurrent transactions, would result in a CPC
meeting the minimum listing requirements of the TSXV.
“SEC” means the United States Securities and Exchange Commission.
“Securities Act of 1933” means the Securities Act of 1933, as amended.
“Service Company” has the meaning given thereto under “Proxy Related Information – Non-Registered
Shareholders”.
“Shareholder Demand” has the meaning given thereto under “Information Regarding the Amalgamation Dissenting Creso Shareholder Rights”.
“Shining Tree Properties” means the Corporation’s principal mining exploration holdings which are
located in the Shining Tree mining camp of Northern Ontario, within 100 km south and southwest,
respectively, of the Timmins and Kirkland Lake mining camps.
“Special Committee” has the meaning given thereto under “Information Regarding the Amalgamation Background to the Amalgamation”.
“Subsidiary” has the meaning ascribed to it under the CBCA.
“Subco” means 8704996 Canada Inc., a wholly-owned subsidiary of Nichromet.
“Subco Shares” means the common shares of Subco.
“Takatu” has the meaning given thereto under “Information Regarding the Corporation – General
Development of the Business”.
“Taxable capital gain” has the meaning given thereto under “Information Regarding the Amalgamation –
Holders, Warrant Holders and Options Holders Resident in Canada”.
17
“Thetford Mines Leases” has the meaning given thereto under “Information Regarding Nichromet and
Subco – Material Contracts”.
“TFSA” means a tax-free savings account within the meaning of the ITA.
“TSX” means the Toronto Stock Exchange.
“TSXV” means the TSX Venture Exchange.
“United States” means the United States of America.
“U.S. Person” means a “U.S. Person” as defined under Regulation S.
“U.S. Securityholder” means means a Creso Shareholder who is in the United States, is a U.S. Person or is
holding Creso Shares for the account or benefit of a U.S. Person or person in the United States.
“Warrantholders” mean the holders of Creso Warrants.
Words importing the masculine shall be interpreted to include the feminine or neutral and the singular to
include the plural and vice versa where the context so requires.
Currency
In this Information Circular, except where otherwise indicated, all dollar amounts are expressed in
Canadian dollars, and all references to “$” and “dollars” are to Canadian dollars.
18
NOTICE TO NON-RESIDENT CRESO SHAREHOLDERS
THE AMALGAMATION AND THE NICHROMET SUBORDINATE VOTING SHARES
ISSUABLE IN CONNECTION WITH THE AMALGAMATION HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
OR SECURITIES REGULATORY AUTHORITIES IN ANY STATE, NOR HAS THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
REGULATORY AUTHORITIES OR ANY STATE PASSED ON THE ADEQUACY OR
ACCURACY OF THIS INFORMATION CIRCULAR. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENCE.
THE NICHROMET SUBORDINATE VOTING SHARES TO BE ISSUED PURSUANT TO THE
AMALGAMATION HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAW OF
ANY STATE OF THE UNITED STATES.
Due to securities law considerations, Nichromet will not distribute Nichromet Subordinate Voting
Shares into any Non-Qualifying Jurisdiction, including the United States, or to a Creso Shareholder
resident or located in any Non-Qualifying Jurisdiction, including, but not limited to, a U.S.
Securityholder (a “Non-Resident Creso Shareholder”). While this Information Circular is being
distributed to Non-Resident Creso Shareholders as part of the notice and voting requirements for the
Meeting on the Amalgamation and Non-Resident Creso Shareholders may vote on the
Amalgamation, this Information Circular does not constitute an offer to sell or the solicitation of an
offer to buy any of the Nichromet Shares in any Non-Qualifying Jurisdiction or to, or for the account
or benefit of persons in any Non-Qualifying Jurisdiction, including the Unites States.
No Non-Resident Creso Shareholder will be entitled to receive Nichromet Shares. All Nichromet
Subordinate Voting Shares that a Non-Resident Creso Shareholder would have been entitled to
receive under the Amalgamation will instead be issued and delivered to the Depositary, and the
Depositary shall use its best efforts to sell such Nichromet Subordinate Voting Shares through the
facilities of the Exchange as soon as practicable after the Amalgamation Date, on such dates and at
such prices as the Depositary determines in its sole discretion, through one or more brokers with
whom the Depositary transacts business. Non-Resident Creso Shareholders will not be permitted to
direct or provide instructions to the Depositary regarding the sale or other disposition of such
securities held by the Depositary in any way. Each such Non-Resident Creso Shareholder will
receive, following receipt by the Depositary of a completed Letter of Transmittal, the certificates
representing the applicable Creso Shares and other required documents at the address specified in
such Letter of Transmittal, a pro rata share of the cash proceeds (net of fees) from the sale of such
Nichromet Subordinate Voting Shares sold by the Depositary. Such Non-Resident Creso
Shareholders will bear the costs or fees of the Depositary and brokers in connection with such sales,
as such amounts will be deducted from the amount available for distribution to Non-Resident Creso
Shareholders. For greater certainty, the Depositary shall not be liable to any party if it is unable to
effect the sale of any such Nichromet Subordinate Voting Shares at a particular price or at all. See
“Information Regarding the Amalgamation - Information for Non-Resident Creso Shareholders”.
The solicitation of proxies is being made and the transactions contemplated herein are being undertaken by
Canadian issuers in accordance with Canadian corporate and securities laws. Non-Resident Creso
Shareholders should be aware that disclosure requirements under such Canadian laws are different from
requirements under foreign corporate and securities laws, and this Information Circular has not been filed
with or approved by foreign securities regulatory authority, including the SEC or the securities regulatory
authority of any state within the United States. Likewise, information concerning the operations of
Nichromet, the Corporation and the Resulting Issuer has been prepared in accordance with Canadian
19
standards, and may not be comparable to similar information for issuers subject to foreign corporate and
securities laws, including United States corporate and securities laws.
This Information Circular does not address any tax consequences of the Amalgamation to Non-Resident
Creso Shareholders in foreign jurisdictions, including United States federal or state income tax
consequences. Non-Resident Creso Shareholders should also be aware that the receipt of cash by the
Depositary upon disposition of Nichromet Subordinate Voting Shares by the Depositary on their behalf
may have tax consequences both in Canada and in foreign jurisdictions. Such consequences under
Canadian or foreign tax laws for Creso Shareholders who are resident in, or citizens of, a foreign
jurisdiction, including the United States, are not described in this Information Circular. Accordingly, NonResident Creso Shareholders should consult their own tax advisors with respect to their particular
circumstances and the tax considerations applicable to them.
The financial statements of each of the Corporation and Nichromet and the pro forma consolidated
financial statements of the Resulting Issuer included in this Information Circular have been prepared
respectively in accordance with and based on IFRS and are subject to Canadian auditing and auditor
independence standards, and thus may not be comparable to financial statements prepared in accordance
with United States generally accepted accounting principles. Non-Resident Creso Shareholders are advised
to consult their tax advisors to determine any particular tax consequences to them of the transactions to be
effected in connection with the Amalgamation.
The enforcement by investors of civil liabilities under foreign securities law, including under the United
States federal securities laws, may be affected adversely by the fact that the Corporation and Nichromet are
incorporated under the CBCA, that some or all of their officers and directors are residents of countries other
than the jurisdiction in which such investor resides, that the experts named in this Information Circular may
be residents of countries other than the jurisdiction in which such investor resides, and that all or a
substantial portion of the assets of the Corporation and Nichromet and said persons may be located outside
the jurisdiction in which such investor resides.
NON-RESIDENT CRESO SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX, LEGAL
AND FINANCIAL ADVISORS REGARDING THE PARTICULAR CONSEQUENCES TO THEM
OF THE AMALGAMATION.
FORWARD-LOOKING INFORMATION
The information provided in this Information Circular, including information incorporated herein by
reference, may contain “forward-looking statements” about the Corporation and/or Nichromet and/or the
Resulting Issuer. In addition, the Corporation and Nichromet may make or approve certain statements in
future filings with Canadian securities regulatory authorities, in press releases, or in oral or written
statements by representatives of the Corporation or Nichromet in connection with the proposed
Amalgamation that are not statements of historical fact and may also constitute forward-looking statements.
All statements in this Information Circular, other than statements of historical fact made by the Corporation
or Nichromet, that address future events or developments that the Corporation and Nichromet expect to
occur, are forward-looking statements. Although the Corporation and Nichromet believe the expectations
expressed in such forward-looking statements are based on reasonable assumptions, such statements are not
guarantees of future performance and actual results or developments may differ materially from those in the
forward-looking statements. Factors that could cause actual results to differ materially from those in
forward-looking statements include results of exploration activities, industry-related risks, regulatory
approvals, and continued availability of capital and financing and general economic, market or business
conditions.
20
Certain statements in this Information Circular and the appendices attached hereto are forward-looking
statements which may include, but are not limited to, statements with respect to the future financial or
operating performance of the Resulting Issuer, the market conditions, business strategy, corporate plans,
objectives and goals, the estimates of the timing, cost, the estimated costs of the Amalgamation, nature and
results of corporate plans, the completion, timing and expected effects of the Amalgamation and the
benefits anticipated to be received by the Corporation, Nichromet and/or the Resulting Issuer from such
transactions, the number of Resulting Issuer securities, including Resulting Issuer Shares, Resulting Issuer
Options and Resulting Issuer Warrants, the funds available in 2014, the completion of the rights offering,
and regulatory matters. Often, but not always, forward-looking statements can be identified by the use of
words such as “plans”, “expects”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”,
“anticipates”, or “believes” or variations (including negative variations) of such words and phrases, or
statements that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur
or be achieved. Forward-looking statements involve known and unknown risks, uncertainties, assumptions
and other factors that may cause the actual results, performance or achievements of the Corporation,
Nichromet or the Resulting Issuer, as applicable, to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking statements. Such factors
include, but are not limited to, the factors discussed in the section entitled “Risk Factors” in this
Information Circular. Although the Corporation and Nichromet have attempted to identify important factors
that could cause actual actions, events or results to differ materially from those described in forwardlooking statements, there may be other factors that cause actions, events or results to differ from those
anticipated, estimated or intended. Forward-looking statements contained herein are made as of the date of
this Information Circular and, other than as required by law, the Corporation disclaims any obligation to
update any forward-looking statements, whether as a result of new information, future events or results or
otherwise. There can be no assurance that forward-looking statements will prove to be accurate, as actual
results and future events could differ materially from those anticipated in such statements. Investors should
not place undue reliance on forward-looking statements, as the plans, intentions or expectations upon which
they are base might not occur. Readers are cautioned that the foregoing factors are not exhaustive. The
forward-looking statements contained in this Information Circular are expressly qualified by this cautionary
statement. See “Risk Factors”.
21
SUMMARY
The following is a summary of information relating to the Corporation, Nichromet and, assuming
completion of the Amalgamation set out hereunder, the Resulting Issuer, and should be read together
with the more detailed information and financial data and statements contained elsewhere in this
Information Circular, including the Appendices, which are incorporated into and form part of this
Information Circular.
Capitalized terms used in this summary have the meaning provided in the Glossary or elsewhere in this
Information Circular. No Person is authorized to give any information or to make any representation not
contained in this Information Circular and, if given or made, such information or representation should not
be relied upon as having been authorized. This Information Circular does not constitute an offer to sell, or a
solicitation of an offer to purchase, any securities, by any Person in any jurisdiction in which such an offer
or solicitation is not authorized or in which the Person making such offer or solicitation is not qualified to
do so or to any Person to whom it is unlawful to make such an offer or solicitation. Neither delivery of
this Information Circular nor any distribution of the securities referred to in this Information
Circular shall, under any circumstances, create an implication that there has been no change in the
information set forth herein since the date of this Information Circular.
Any material change reports (excluding confidential reports), comparative interim financial statements,
comparative annual financial statements and the auditors’ report thereon, information circulars, annual
information forms and business acquisition reports filed by the Corporation with the securities commissions
or similar authorities in the provinces of British Columbia, Alberta, Ontario and Québec subsequent to the
date of this Information Circular and prior to the Amalgamation Date, shall be deemed to be incorporated
by reference in this Information Circular.
Any statement contained in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for the purposes of this Information Circular to the extent
that a statement contained herein or in any other subsequently filed document which also is, or is deemed to
be, incorporated by reference herein modifies or supersedes such statement. The modifying or superseding
statement need not state that it has modified or superseded a prior statement or include any other
information set forth in the document that it modifies or supersedes. The making of a modifying or
superseding statement shall not be deemed an admission for any purposes that the modified or superseded
statement, when made, constituted a misrepresentation, an untrue statement of a material fact or an
omission to state a material fact that is required to be stated or that is necessary to make a statement not
misleading in light of the circumstances in which it was made. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part of this Information Circular.
Information Contained in this Information Circular
The information contained in this Information Circular is given as at January 31st, 2014, except where
otherwise noted. The information contained in this Information Circular concerning Nichromet is based
solely upon information provided to the Corporation by Nichromet or upon publicly available information.
With respect to this information, the Creso Board has relied exclusively upon Nichromet, and no
independent verification has been undertaken by the Creso Board. The Corporation assumes no
responsibility for the accuracy or completeness of such information, nor for the failure by Nichromet
to disclose facts or events which may have occurred or which may affect the completeness or
accuracy of such information but which are unknown to the Corporation.
22
General
This Information Circular is prepared in accordance with applicable corporate and securities law in
connection with the Meeting being held to approve the Amalgamation Resolution.
The Parties
The Corporation
The Corporation is a public company organized under the CBCA. The registered and corporate head office
of the Corporation is located at 600 de Maisonneuve Blvd. West, Suite 2750, Montreal, Québec, H3A 3J2.
The listing of the Creso Shares on the Exchange under the trading symbol “CXT” was conditionally
approved by the Exchange on January 30, 2014. The Corporation is a reporting issuer in Ontario, British
Columbia, Alberta and Québec.
The Corporation is an exploration stage mining company with a primary focus on gold and silver, as well
as copper and zinc. At present, the Corporation’s principal mining exploration holdings are located in the
Shining Tree mining camp of Northern Ontario situated within 100 km of the Timmins and Kirkland Lake
mining camps.
See “Information Regarding the Corporation – Corporate Structure”.
Nichromet
Nichromet is a private company organized under the CBCA. Dundee Corporation is the principal
shareholder of Nichromet. Nichromet’s registered and records office, as well as its head office, are located
at 600 de Maisonneuve Blvd. West, Suite 2750, Montreal, Québec, H3A 3J2.
Nichromet has developed patented precious and base metal extraction processes that are environmentally
friendly in that the residues of mining operations are totally void of contaminants such as sulfur and
arsenic. These new processes are based on chlorination and are particularly efficient for the treatment of
polymetallic ores either in the form of sulfides, oxides, or arsenides. These chloride based patented
processes are a substitute to cyanidation which is commonly used in the mining industry.
See “Information Regarding Nichromet and Subco – Corporate Structure”, and “Information Regarding
Nichromet and Subco – General Development of the Business”.
Subco
Subco is a private company incorporated pursuant to the CBCA for the purpose of the Amalgamation. All
of the issued and outstanding Subco Shares are held by Nichromet. Subco has no material assets or
liabilities and to date has not conducted any operations. See “Information Regarding Nichromet and Subco”
and “Information Regarding the Amalgamation – Description of the Amalgamation”.
Amalco
Amalco is the company that will be formed upon the completion of the Amalgamation on the
Amalgamation Date. All of the issued and outstanding shares of Amalco will be held by Nichromet. See
“Information Regarding Nichromet and Subco” and “Information Regarding the Amalgamation –
Description of the Amalgamation”.
Resulting Issuer
The Corporation and Nichromet have agreed to combine their respective business, assets and operations
through the implementation of the Amalgamation. Following the completion of the Amalgamation, Amalco
23
will be a wholly-owned subsidiary of Nichromet carrying on the business currently conducted by the
Corporation, and the Resulting Issuer will continue its business of research and development of metal
extraction technologies. See “Information Regarding the Resulting Issuer”.
The Meeting
Date, Time and Place of the Meeting
The Meeting will take place at 600 de Maisonneuve Blvd. West, Suite 2750, Montreal, Québec, on
February 28, 2014 at 10:00 a.m. (Montreal time), for the purposes outlined below.
Record Date and Creso Shares Entitled to Vote
The Record Date for determining the Creso Shareholders entitled to receive notice of, to attend and to vote
at the Meeting is as of the close of business on January 6, 2014.
Purpose of the Meeting
The purpose of the Meeting is for the Creso Shareholders to consider and if deemed advisable, to pass, with
or without variation, a resolution in the form attached as Appendix A to the Information Circular approving
by at least two-thirds (2/3) of all votes cast by the Creso Shareholders present in person or represented by
proxy at the Meeting, as well as by the Majority of the Minority, the Amalgamation substantially on the
terms and conditions set forth in the Amalgamation Agreement.
For the purposes of “Majority of the Minority” approval, Creso Shares beneficially held by Pierre Gauthier,
his Associate and his Affiliates and Creso Shares owned by Nichromet will be excluded from the vote.
Summary of the Amalgamation
On November 22, 2013, the Corporation, Nichromet and Subco entered into the Amalgamation Agreement
pursuant to which the Creso Shareholders (other than Subco and Dissenting Creso Shareholders) will
exchange all of the issued and outstanding Creso Shares for the issuance of Nichromet Subordinate Voting
Shares, in accordance with the Exchange Ratio. As a result, Creso Shareholders will be receiving, subject
to rounding, 62,516,478 Nichromet Subordinate Voting Shares. On the Amalgamation Date, the
Corporation and Subco will be amalgamated to form Amalco, a wholly-owned subsidiary of Nichromet.
Following the Amalgamation Dundee Corporation will continue to control the Resulting Issuer. The
Resulting Issuer will continue to carry on the businesses theretofore carried on by Nichromet and will
indirectly carry on the businesses theretofore carried on by the Corporation. See “Information Regarding
the Amalgamation”.
No fractional Nichromet Subordinate Voting Shares will be issued. Any fractions resulting will be rounded
down to the next whole number without any compensation therefor.
Due to securities law considerations, Nichromet will not distribute Nichromet Subordinate Voting Shares
into any Non-Qualifying Jurisdiction, including the United States, or to Non-Resident Creso Shareholders.
No Non-Resident Creso Shareholder will be entitled to receive Nichromet Subordinate Voting Shares. All
Nichromet Subordinate Voting Shares that a Non-Resident Creso Shareholder would have been entitled to
receive under the Amalgamation will instead be issued and delivered to the Depositary, and the Depositary
shall use its best efforts to sell such Nichromet Subordinate Voting Shares through the facilities of the
Exchange as soon as practicable after the Amalgamation Date, on such dates and at such price as the
Depositary determines in its sole discretion, through one or more brokers with whom the Depositary
transacts business.
Each such Non-Resident Creso Shareholder will receive a pro rata share of the cash proceeds (net of fees)
from the sale of such Nichromet Subordinate Voting Shares sold by the Depositary following receipt by the
24
Depositary of a completed Letter of Transmittal, the certificates representing the applicable Creso Shares
and other required documents at the address specified in such Letter of Transmittal. For further
information, see “Information Regarding the Amalgamation – Information for Non-Resident Creso
Shareholders”.
On completion of the Amalgamation, it is anticipated that Nichromet’s management team will become the
management team of the Resulting Issuer, other than Mr. Vatché Tchakmakian, the current Chief Financial
Officer of the Corporation, who will become the Chief Financial Officer of the Resulting Issuer. For more
detailed information, see “Information Regarding the Amalgamation”.
Right to Dissent
Registered Creso Shareholders are entitled as a consequence of the Amalgamation to dissent and be paid
the fair value of their Creso Shares in accordance with Section 190 of the CBCA, if such Dissenting Creso
Shareholders give notice that they object to the Amalgamation and the Corporation proceeds to make the
Amalgamation effective. See Appendix C attached hereto for the full text of Section 190 of the CBCA.
THE NOTICE AND DISSENT PROCEDURE REQUIREMENTS MUST BE STRICTLY
OBSERVED. One of the conditions to the parties’ obligations to complete the Amalgamation is that
holders of not more than 5.0% of the issued and outstanding Creso Shares shall have exercised Dissent
Rights in connection with the Amalgamation. See “Information Regarding the Amalgamation – Dissenting
Creso Shareholder Rights” for further information.
Listings
In accordance with the rules of the Exchange, Nichromet has applied for the listing of the Nichromet
Subordinate Voting Shares on the Exchange. On January 30, 2014, the Exchange conditionally approved
the listing of the Nichromet Subordinate Voting Shares on the Exchange. Listing will be subject to
Nichromet fulfilling all of the requirements of the Exchange.
In addition, an application will be made to the securities regulatory authorities to have Amalco cease to be a
reporting issuer.
Effect of the Amalgamation upon Holders of Creso Convertible Securities
The Amalgamation Agreement provides that the Creso Options and the Creso Warrants will be exchanged
for Nichromet Options and Nichromet Warrants on the basis of the Exchange Ratio, as applicable. As for
the strike price, once converted, such Nichromet Options and Nichromet Warrants will have a strike price
equal to the double (200%) of the original strike price of the corresponding Creso Option or Creso Warrant,
as the case may be.
Effects of the Amalgamation
Following completion of the Amalgamation, it is expected that:
(a)
Except as otherwise provided, Creso Shareholders will have exchanged all of the issued
and outstanding Creso Shares pursuant to the terms of the Amalgamation Agreement on
the basis of the Exchange Ratio, being half of a Nichromet Subordinate Voting Share for
every Creso Share;
(b)
Each Creso Share held by Subco will be cancelled for no consideration;
(c)
The Creso Options and Creso Warrants will be exchanged for Nichromet Options and
Nichromet Warrants, as applicable;
25
(d)
Amalco will be a wholly-owned subsidiary of the Resulting Issuer and Amalco will carry
on the business of the Corporation;
(e)
the Resulting Issuer will continue to carry on the businesses theretofore carried on by
Nichromet and will indirectly carry on the businesses theretofore carried on by the
Corporation;
(f)
there will be an aggregate of 277,445,202 Resulting Issuer Shares issued and outstanding,
such Resulting Issuer Shares being comprised of an aggregate of 227,445,202 Nichromet
Subordinate Voting Shares and 50,000,000 Nichromet Multiple Voting Shares,
representing 31.3% and 68.7% of the voting power attached to all of the Resulting Issuer
Shares, respectively;
(g)
the following convertible securities will be issued and outstanding: (i) 23,970,000
Resulting Issuer Options, each exercisable to acquire one Nichromet Subordinate Voting
Share at $0.10 to $1.74 per Nichromet Subordinate Voting Share and (ii) 63,555,566
Resulting Issuer Warrants, each exercisable to acquire one Nichromet Subordinate
Voting Share at $0.10 to $0.30 per Nichromet Subordinate Voting Share;
(h)
the Nichromet Shareholders (including Dundee Corporation) will hold an aggregate of
164,928,724 Nichromet Subordinate Voting Shares representing approximately 72.5% of
the outstanding Nichromet Subordinate Voting Shares (on a non-diluted basis) and
representing 22.7% of the voting power attached to all of the Resulting Issuer Shares;
(i)
the Creso Shareholders (excluding Nichromet) will hold an aggregate of 62,516,478
Nichromet Subordinate Voting Shares representing approximately 27.5% of the
outstanding Nichromet Subordinate Voting Shares (on a non-diluted basis) and 8.6% of
the voting power attached to all Resulting Issuer Shares;
(j)
Dundee Corporation will hold an aggregate of 50,000,000 Nichromet Multiple Voting
Shares, representing 100% of the outstanding Nichromet Multiple Voting Shares and
representing 68.7% of the voting power attached to all of the Resulting Issuer Shares;
Dundee Corporation will also hold an aggregate of 128,068,497 Nichromet Subordinate
Voting Shares representing 56.3% of the outstanding Nichromet Subordinate Voting
Shares and representing 17.6% of the voting power attached to all of the Resulting Issuer
Shares. Accordingly, Dundee Corporation’s aggregate holdings in the Resulting Issuer
will represent 86.3% of the voting power attached to all of the Resulting Issuer Shares;
(k)
Ned Goodman, the controlling shareholder of Dundee Corporation, will hold directly
1,666,667 Nichromet Subordinate Voting Shares and therefore, when included with
Dundee Corporation’s holdings in the Resulting Issuer, which, under applicable securities
law, Mr. Goodman is deemed to beneficially own, his holdings will represent 100% of
the outstanding Nichromet Multiple Voting Shares and 129,735,164 or 57.0% of the
outstanding Nichromet Subordinate Voting Shares, which securities represent in the
aggregate 86.6% of the voting power attached to all Resulting Issuer Shares;
(l)
the board of directors of the Resulting Issuer shall be comprised of: Ned Goodman, Pierre
Gauthier, Brahm Gelfand, Jean-Marc Lalancette, Hubert Marleau and Mark Goodman.
Creso considers that Hubert Marleau and Brahm Gelfand are independent directors and
that Ned Goodman, Pierre Gauthier, Mark Goodman and Jean-Marc Lalancette are not
independent. In addition, it is expected that Pierre Gauthier will serve as Chief Executive
Officer, Vatché Tchakmakian will serve as Chief Financial Officer and Luce Saint-Pierre
will serve as Corporate Secretary of the Resulting Issuer;
(m)
the Nichromet Subordinate Voting Shares will be listed and posted for trading on the
26
Exchange; and
(n)
the Creso Shares will be de-listed from trading on the Exchange and the Corporation will
cease to be a reporting issuer.
See “Information Regarding the Amalgamation – Effects of the Amalgamation”.
Benefits of the Amalgamation
After considering number of substantive factors and benefits associated with the Amalgamation, including
(a) the prospects and potential for growth of the Resulting Issuer; (b) the experience and expertise of the
proposed directors and officers of the Resulting Issuer; and (c) the Bridge Loan, the Creso Board and
Management of the Corporation, with Pierre Gauthier abstaining, believe that the Amalgamation is in the
best interests of the Corporation and the Creso Shareholders and that the Amalgamation provides a number
of benefits for the Creso Shareholders, including the following:
(a)
Nichromet, as the combined entity, will be a larger company than either the Corporation
and Nichromet alone and will have a larger asset base and anticipated greater access to
services to develop the Corporation and Nichromet’s assets;
(b)
the Creso Shareholders (other than Subco and Non-Resident Creso Shareholders) are
being provided with an opportunity to receive Nichromet Subordinate Voting Shares for
their Creso Shares and thereby maintain their holdings in the Corporation’s resource
properties through Nichromet as well as participation in the assets of Nichromet; and
(c)
Nichromet, as a larger company, may have greater access to capital markets.
While the Management team expects that the Creso Shareholders will receive the benefits noted above, the
Amalgamation does expose the Creso Shareholders to additional risks, including the risk that the
Corporation may fail to complete the Amalgamation or fail to realize the anticipated benefits of the
Amalgamation. See “Risk Factors” and “Information Regarding the Amalgamation – Anticipated Benefits
of the Amalgamation” for further information.
Conditions to the Amalgamation
The obligations of the Corporation, Nichromet and Subco to complete the Amalgamation under the
Amalgamation Agreement are subject to the satisfaction or waiver of certain conditions, including, among
others:
(a)
all necessary corporate or similar action shall have been taken by the Corporation and
Nichromet to authorize the execution and delivery of the Amalgamation and the
consummation of the Amalgamation;
(b)
the Amalgamation shall have been approved by the requisite majorities of the Creso
Shareholders at the Meeting in compliance with the applicable Laws including applicable
securities Laws;
(c)
all authorizations or consents and all regulatory authorizations and receipt of all
necessary approvals from, the Exchange for the listing of the Nichromet Subordinate
Voting Shares to be issued upon completion of Amalgamation (subject to Nichromet’s
fulfilling the Exchange’s usual and ordinary listing requirements) shall have been
obtained;
(d)
the Special Committee and the Creso Board shall have adopted all necessary resolutions
and all other necessary corporate actions shall have been taken by the Corporation to
permit the consummation of the Amalgamation;
(e)
the representations and warranties of the Corporation set forth in the Amalgamation
27
Agreement qualified by materiality or knowledge of the Corporation (or Material
Adverse Change to the Corporation or similar materiality qualifications) shall be true and
correct at the Effective Time and all representations and warranties of the Corporation
contained in this Agreement not so qualified shall be true and correct in all material
respects as at the Effective Time, except to the extent that any such representation or
warranty is made as of a specified date, in which case such representation or warranty
shall have been true and correct as of such date;
(f)
the Corporation shall have no options, warrants or other rights to purchase Shares issued
or outstanding other than as disclosed in the Amalgamation Agreement;
(g)
no judgment or order shall have been issued by any Governmental Authority, no action,
suit or proceeding shall have been threatened or taken by any Person (other than a party
hereto or any of their respective affiliates), and no Law or policy shall have been
proposed, enacted, or promulgated or applied, which could reasonably be expected to
have the effect to cease trade, enjoin, prohibit or impose material limitations or
conditions on the completion of the Amalgamation, or that, if the Amalgamation were
completed, could reasonably be expected to result in a Material Adverse Change for
either Nichromet and its subsidiaries taken as whole or the Corporation;
(h)
Nichromet shall have received a legal opinion with respect to the corporate power and
status and share capital of the Corporation and the authorization of the entering into of
the Amalgamation Agreement and the effecting of the Amalgamation by all necessary
corporate action of the Corporation;
(i)
the Escrow Agreement shall have been entered into with all shareholders concerned and
the other parties thereto;
(j)
the Corporation shall have met its obligations as a listed issuer on the TSXV or the
Exchange, as the case may be, and as a “reporting issuer” in British Columbia, Alberta,
Ontario and Quebec;
(k)
the issuance of Nichromet Subordinate Voting Shares shall have been accepted for listing
by the Exchange, subject to Nichromet fulfilling the Exchange’s usual and ordinary
listing requirements, and Nichromet shall be satisfied, acting reasonably, that the
conditions set forth in the Exchange’s conditional approval will be met as of or within a
reasonable period of time after the Amalgamation Date;
(l)
no Law shall be in effect that makes the consummation of the Amalgamation illegal or
otherwise prohibits or enjoins the Corporation or Nichromet from consummating the
Amalgamation;
(m)
Dissent Rights shall not have been exercised with respect to more than 5.0% of the issued
and outstanding Creso Shares; and
(n)
there shall have not occurred or arisen one or more events, circumstances or changes that,
individually or in the aggregate, has or would be reasonably likely to result in a Material
Adverse Change to the Corporation or Nichromet.
Termination of the Amalgamation Agreement
Nichromet may, when not in default in the performance of any of its obligations under the Amalgamation
Agreement terminate the Amalgamation Agreement by written notice to the Corporation if:
(a)
not all of the conditions precedent in favor of Nichromet have been satisfied or waived by
Nichromet on or prior to the Outside Date;
(b)
the Special Committee or the Creso Board adversely modify in any way or withdraw the
recommendation that Creso Shareholders approve the Amalgamation;
28
(c)
the Amalgamation cannot be completed because the Corporation is in default under any
of its covenants under the Amalgamation Agreement; or
(d)
the Corporation breaches the Amalgamation Agreement in any material respect.
The Corporation, when not in default in the performance of any of its obligations under the Amalgamation
Agreement, may terminate the Amalgamation Agreement by written notice to Nichromet if:
(a)
not all of the conditions precedent in favour of the Corporation shall be or have been
satisfied or waived by the Corporation on or prior to the Outside Date;
(b)
the Amalgamation cannot be completed because Nichromet is in default under any of its
covenants contained in the Amalgamation Agreement; or
(c)
Nichromet breaches the Amalgamation Agreement in any material respect.
Financing
In connection with the Amalgamation, Dundee Corporation has loaned $3,000,000 to Nichromet. The funds
from the Bridge Loan were disbursed on January 31, 2014. The Bridge Loan bears interest at the rate of
12.68% per annum and matures on April 30, 2014. Nichromet has the option to repay the Bridge Loan at
any time but must use the proceeds from the sale of any assets in excess of $250,000 or any financing in
excess of $3,000,000 to repay the Bridge loan. The use of the cash received pursuant to the Bridge Loan is
restricted. The Bridge Loan shall only be used to fund (i) the building of a demonstration plant and (ii) for
general corporate purposes.
On December 20, 2013, Nichromet loaned $200,000 to the Corporation, which loan has been made upon
the same terms and conditions as under the loan agreement in the amount of $500,000 dated July 10, 2013,
entered into between the Corporation and Nichromet, namely that the loan bears interest at a rate of 6% per
annum payable on July 10, 2014. See “Information Regarding the Amalgamation – Financing”.
Recommendation of the Board of Directors
The Creso Board, on the recommendation of the Special Committee, has determined that it would be in the
best interests of the Corporation to complete the Amalgamation as Creso Shareholders (other than Subco
and Non-Resident Creso Shareholders) are being provided with an opportunity to receive Nichromet
Subordinated Voting Shares for their Creso Shares, and thereby maintain their holdings in the
Corporation’s resource properties through Nichromet, as well as acquire an interest in the business of
Nichromet. Following the Amalgamation, the Resulting Issuer as a larger company, may have greater
access to capital markets which should add value to and be in the best interests of Creso Shareholders.
The Creso Board has considered the proposed Amalgamation on the terms and conditions as provided in
the Amalgamation Agreement and has unanimously, with Pierre Gauthier abstaining, determined that the
Amalgamation is in the best interests of the Corporation. The Creso Board recommends, with
Pierre Gauthier abstaining, that the Creso Shareholders vote in favour of the Amalgamation Resolution.
See “Information Regarding the Amalgamation – Recommendation of the Creso Board”.
Procedure for the Amalgamation Becoming Effective
Procedural Steps
The Amalgamation shall be carried out pursuant to the CBCA. Under the CBCA, the following procedural
steps must be taken in order for the Amalgamation to be effective:
(a)
the Amalgamation must be approved by the Creso Shareholders and Nichromet, as the
sole shareholder of Subco; and
29
(b)
assuming all conditions precedent to the Amalgamation, as set forth in the Amalgamation
Agreement, are satisfied or waived by the appropriate party, articles of amalgamation
must be filed with the Director, following which the Director will issue a certificate of
amalgamation.
See “Information Regarding the Amalgamation – Procedure for the Amalgamation to Become Effective”
for additional information.
Shareholder Approvals
Pursuant to the CBCA, the Amalgamation Resolution must be passed, with or without variation, by 2/3 of
all votes cast with respect to the Amalgamation Resolution by the Creso Shareholders, present in person or
represented by proxy at the Meeting. In addition, the Amalgamation must be approved by Nichromet, as the
sole shareholder of Subco.
Notwithstanding the foregoing, the Amalgamation Resolution authorizes the Creso Board or Nichromet,
without further notice to or the approval of the Creso Shareholders, subject to the terms of the
Amalgamation Agreement, to decide not to proceed with the Amalgamation and to revoke such
Amalgamation Resolution at any time prior to the Amalgamation becoming effective pursuant to the
provisions of the CBCA.
Majority of the Minority
The Amalgamation may be considered a “business combination” under Multilateral Instrument 61-101
because, as a consequence of the Amalgamation, the interests of Creso Shareholders may be terminated
without their consent and the payments to and benefits to be received by certain executive officers and
directors of the Corporation, who are “related parties” for the purposes of Multilateral Instrument 61-101,
may be considered a “collateral benefit” for the purposes of Multilateral Instrument 61-101. For the
purposes of Multilateral Instrument 61-101, directors and executive officers of the Corporation receive a
collateral benefit if they are entitled to receive, subject to certain exceptions, directly or indirectly and
without limitation, as a consequence of the Amalgamation, an increase in salary, a lump sum payment, a
payment for surrendering securities, or other enhancement in benefits related to past or future services as an
employee, director or consultant of the Corporation or of another person, regardless of the existence of any
offsetting costs to the related party or whether the benefit is provided, or agreed to, by the Corporation or
another party to the Amalgamation.
Pierre Gauthier, director, Chairman of the Board, President and Chief Executive Officer of the Corporation
is also a director and the President and Chief Executive Officer of Nichromet. It is expected that Mr.
Gauthier will become President and Chief Executive Officer of the Resulting Issuer, as a result, he may be
deemed to be an “interested party” pursuant to Multilateral Instrument 61-101 because his expected
appointment as President and Chief Executive Officer of the Resulting Issuer may be considered to receive
a “collateral benefit” which he will receive as a consequence of the Amalgamation. Accordingly, the
Amalgamation Resolution requires approval by a majority of the votes cast by Creso Shareholders at the
Meeting, excluding the votes cast by holders of Creso Shares that are required to be excluded in order to
obtain “minority approval” pursuant to Multilateral Instrument 61-101. As each of Mr. Gauthier and
Nichromet may be deemed an “interested party” in the Amalgamation, they would be excluded from voting
for minority approval.
Creso Shares beneficially held by Pierre Gauthier, Nichromet and their respective Associates and Affiliates
will be excluded in determining whether Majority of the Minority approval for the Amalgamation
Resolution has been obtained. To the knowledge of the Corporation after reasonable inquiry, at the date
hereof Pierre Gauthier, his Associates and his Affiliates beneficially hold 2,008,334 Creso Shares
(representing approximately 1.39% of the issued and outstanding Creso Shares) and Nichromet and its
Associates and Affiliates beneficially held 19,779,000 Creso Shares (representing approximately 13.66% of
the issued and outstanding Creso Shares).
30
See “Information Regarding the Amalgamation – Requisite Shareholders Approval”.
Approval of the Exchange
In addition to shareholder approvals, it is a condition to the implementation of the Amalgamation that all
the requisite regulatory approvals be obtained.
In accordance with the rules of the Exchange, Nichromet has applied for the listing of the Nichromet
Subordinate Voting Shares on the Exchange. Listing will be subject to Nichromet fulfilling all of the
requirements of the Exchange. See “Information Regarding the Amalgamation – Exchange Approval”.
Information for Non-Resident Creso Shareholders
Due to securities law considerations, Nichromet will not distribute Nichromet Subordinate Voting Shares
into any Non-Qualifying Jurisdiction, including the United States, or to Non-Resident Creso Shareholders.
No Non-Resident Creso Shareholder will be entitled to receive Nichromet Subordinate Voting Shares. All
Nichromet Subordinate Voting Shares that a Non-Resident Creso Shareholder would have been entitled to
receive under the Amalgamation will instead be issued and delivered to the Depositary, and the Depositary
shall use its best efforts to sell such Nichromet Subordinate Voting Shares through the facilities of the
Exchange as soon as practicable after the Amalgamation Date, on such dates and at such price as the
Depositary determines in its sole discretion, through one or more brokers with whom the Depositary
transacts business.
Each such Non-Resident Creso Shareholder will receive a pro rata share of the cash proceeds (net of fees)
from the sale of such Nichromet Subordinate Voting Shares sold by the Depositary following receipt by the
Depositary of a completed Letter of Transmittal, the certificates representing the applicable Creso Shares
and other required documents at the address specified in such Letter of Transmittal. For further
information, see “Information Regarding the Amalgamation – Information for Non-Resident Creso
Shareholders”.
Exchange of Share Certificates and Letter of Transmittal – Registered Creso Shareholders
Included with this Information Circular is a Letter of Transmittal to be used by the registered Creso
Shareholders for the surrender of certificates which formerly represented the Creso Shares. Registered
Creso Shareholders should read and follow these instructions. The Letter of Transmittal, when
properly completed and delivered together with certificates representing the applicable shares and
all other required documents, will enable former registered Creso Shareholders to obtain the
certificates for Nichromet Subordinate Voting Shares or cash, in case of Non-Resident Creso
Shareholders (subject to completion of the sale of the Nichromet Subordinate Voting Shares by the
Depositary), as the case may be, to which they are entitled pursuant to the Amalgamation.
The holders of certificates formerly representing Creso Shares are required to surrender such certificates
pursuant to the Letter of Transmittal and upon such surrender, will be entitled to receive (i) certificates
representing the number of Nichromet Subordinate Voting Shares to which they are so entitled pursuant to
the Amalgamation Agreement, in the case of holders who are not Non-Resident Creso Shareholders, or (ii)
a pro-rata portion of the cash proceeds (net of fees) of the sale of Nichromet Subordinate Voting Shares
sold on behalf of Non-Resident Creso Shareholders by the Depositary, in the case of Creso Shareholders
that are Non-Resident Creso Shareholders (subject to completion of the sale of such Nichromet Subordinate
Voting Shares by the Depositary as described under “Information Regarding the Amalgamation Information for Non-Resident Creso Shareholders” in this Information Circular), as the case may be.
The Letter of Transmittal will set out the details for the surrender of the certificates formerly representing
Creso Shares and the address of the Depositary and instructions as to the procedure required for registered
Creso Shareholders to exchange their certificates formerly representing Creso Shares for certificates
representing Nichromet Shares (or cash, in the case of Non-Resident Creso Shareholders). Provided that a
31
Creso Shareholder has delivered and surrendered to the Depositary all certificates formerly representing
such shareholder’s Creso Shares, together with a Letter of Transmittal, duly completed and executed in
accordance with the instructions thereon or in an otherwise acceptable form and such other documents as
may be required by the Depositary, the Depositary will be required to forward (i) the certificates
representing the Nichromet Shares that the Shareholder is entitled to receive, in the case of a Creso
Shareholder that is not a Non-Resident Creso Shareholder, or (ii) cash equal to a pro-rata portion of the
cash proceeds (net of fees) of the sale of Nichromet Shares sold on behalf of Non-Resident Creso
Shareholders by the Depositary, in the case of a Creso Shareholder that is a Non-Resident Creso
Shareholder (as described in more detail below under “Information Regarding the Amalgamation –
Shareholders Not Resident in Canada”), to such address or addresses as the Creso Shareholder may direct
in the Letter of Transmittal, or in the absence of any direction, to the address of the Creso Shareholder as
shown on the register of shareholders maintained for the Corporation by the Depositary. See “Information
Regarding the Amalgamation – Shareholders Not Resident in Canada” below for more information on the
distribution of cash proceeds to any Creso Shareholder that is a Non-Resident Creso Shareholder.
Please see “Information Regarding the Amalgamation – Exchange of Securities” and “Information
Regarding the Amalgamation – Letter of Transmittal” for more information.
Canadian Federal Income Tax Considerations
Please refer to the summary of Canadian federal income tax considerations contained in this Information
Circular set forth under “Information Regarding the Amalgamation - Canadian Federal Tax
Considerations”. All Creso Shareholders should consult their own tax advisers for advice with respect to
their own particular circumstances.
This Information Circular does not contain a summary of income tax considerations of the Amalgamation
under foreign laws for Creso Shareholders who are subject to income tax outside of Canada. In particular,
this Information Circular does not address any United States federal or state income tax consequences of
the Amalgamation to Creso Shareholders located in the United States. Such Creso Shareholders should
consult their own tax advisors with respect to their particular circumstances and the tax considerations
applicable to them. See “Information Regarding the Amalgamation - Canadian Federal Tax
Considerations”.
Timing
It is anticipated that the Amalgamation will become effective after the requisite approval of the Creso
Shareholders and regulatory approvals have been obtained and all other conditions to the Amalgamation
have been satisfied or waived. It is currently anticipated that the Amalgamation will become effective on or
before March 31, 2014.
Interests of Insiders, Promoters or Control Persons
The directors and officers of the Corporation may have interest in the Amalgamation that are, or may be,
different from, or in addition to, the interest of other Creso Shareholders. These interests include those
described below. The Creso Board was aware of these interests and considered them, among other matters
when recommending approval of the Amalgamation by the Creso Shareholders.
The following is a summary of the interests of any Insider, Promoter or Control Person of the Corporation
and their respective Associates and Affiliates (before and after giving effect to the Amalgamation),
including any consideration that such individual may receive if the Amalgamation proceeds.
32
Number of Corporation
and/or Nichromet Shares
as at the Date of the
Information Circular(1)
Insiders,
Promoter,
Control
Person
Nichromet Shares upon
Completion of the
Amalgamation(2)
Consideration
if the
Amalgamation
Proceeds
Nichromet
Shares(3)
Nichromet
Subordinate
Voting
Shares
Nichromet
Multiple
Voting
Shares
2,008,334(4)
(1.39%)
2,167,615(4)
(1.3%)
3,171,782
(1.39%)
-
-
-
19,779,000(6)
(13.66%)
-
-
-
-
Director of
the
Corporation
220,000
(0.15%)
-
110,000
(0.02%)
-
-
Vatché
Tchakmakian
Montreal,
Québec
Chief
Financial
Officer of
the
Corporation
870,000
(0.60%)
-
435,000
(0.06%)
-
-
Luce SaintPierre
Montreal,
Québec
Corporate
Secretary
of the
Corporation
540,000(5)
(0.37%)
500,000(5)
(0.08%)
770,000
(0.11%)
-
-
Pierre
Gauthier
Montreal,
Québec
Position
Director,
Chairman
of
the
Board,
President
and Chief
Executive
Officer of
the
Corporation
Shares of
the
Corporation
and
Director of
Nichromet
Nichromet
Extraction
Inc.
Jean-Guy
Lambert
Montreal,
Québec
Notes:
1. As of the date hereof, there are 144,811,956 Creso Shares, 164,928,724 Nichromet Subordinate Voting Shares and 50,000,000
Nichromet Multiple Voting Shares issued and outstanding.
2. Upon completion of the Amalgamation, it is expected there will be 227,445,202 Nichromet Subordinate Voting Shares and
50,000,000 Nichromet Multiple Voting Shares issued and outstanding; the percentage relates to the voting power attached to the
Insiders, Promoter or Control Person’s holdings.
3. As of the date hereof, there are 164,928,724 Nichromet Subordinate Voting Shares and 50,000,000 Nichromet Multiple Voting
Shares (each Nichromet Multiple Voting Shares entitling the holder thereof to 10 votes; the percentage relates to the voting
power attached to the Insiders, Promoter or Control Person’s holdings.
4. Of which 1,498,334 are held by a related party.
5. Such Creso Shares are held by a related party.
6. Due to Dundee Corporation’s holdings in Nichromet (See “Information Regarding Nichromet and Subco – Principal Security
Holders”), Dundee is considered the indirect beneficial holder of these Creso Shares.
33
Related Party Transactions
On July 15, 2013, the Corporation announced an agreement with Nichromet to develop the Minto gold
deposit by extracting a 30,000 tonne bulk sample. Operations are scheduled to begin once the permitting
process is completed, and are anticipated to last for approximately 8 months. The Corporation also
borrowed $500,000 from Nichromet. The loan is unsecured and bears interest at a rate of 6% per annum
payable on July 10, 2014. In addition, on December 20, 2013, Nichromet loaned an additional $200,000 to
the Corporation on the same terms and conditions. See “Information Regarding the Corporation – Related
Party Transaction”.
The Amalgamation is a “business combination” in accordance with the Multilateral Instrument 61-101.
The Amalgamation, as a business combination, must be approved by a majority of the votes cast by Creso
Shareholders, excluding those votes cast by interested parties (as defined in Multilateral Instrument 61101), certain related parties to the interested parties, and joint actors to such Persons.
The Corporation is not aware of any prior valuations in respect of the Corporation or Nichromet that
requires disclosure under Multilateral Instrument 61-101.
Multilateral Instrument 61-101 requires that a formal valuation be obtained in respect of any business
combination, if, as a consequence of the transaction, an “interested party” acquires the issuer or business,
unless an exemption to the formal valuation requirement is otherwise available under Multilateral
Instrument 61-101. If an exemption were not available, the Amalgamation would require a formal valuation
as Nichromet, an “interested party” pursuant to Multilateral Instrument 61-101, would, as a consequence of
the Amalgamation, acquire the Corporation. The Corporation is relying upon the exemption to the formal
valuation requirement set forth in section 4.4(a) of Multilateral Instrument 61-101 which provides that an
issuer is exempt from the formal valuation requirement if no securities of the issuer are listed or quoted on
the Toronto Stock Exchange, the New York Stock Exchange, the American Stock Exchange, the NASDAQ
Stock Market, or a stock exchange outside of Canada and the United States other than the Alternative
Investment Market of the London Stock Exchange or the PLUS markets operated by PLUS Markets Group
plc. The Corporation, as a result of having the Creso Shares listed on the Exchange, is exempt from formal
valuation requirements of Multilateral Instrument 61-101.
Available Funds and Principal Purposes
Funds Available
Management of the Corporation anticipates that the estimated total funds for 2014 of the Resulting Issuer
will be as follows:
Description
Working Capital of the Resulting Issuer as
at December 31, 2013
Amount
($ million)
1.5
Bridge Loan
3.0 (1)
Rights offering
10.0 (2)
Repayment of bridge loan
(3.0)
Private placement
5.2 (3)
Grant: Canada Foundation for Sustainable
Development Technology
2.2
TOTAL
18.9
Notes:
1. The Resulting Issuer has $3,000,000 available pursuant to the Bridge Loan (disbursed on January 31, 2014) for working capital
purposes.
34
2.
3
As of the date of this Information Circular, it is contemplated that once the Resulting Issuer completes the Amalgamation, it will
undertake a rights offering for approximately $10 million. Dundee Corporation confirmed its intention to exercise its basic
subscription privilege under the proposed rights offering.
As of the date of this Information Circular, it is contemplated that during the second-half of 2014, the Resulting Issuer completes
a private placement financing of $6 million with net proceeds to the Resulting Issuer of $5.2 million.
Principal Purposes of Funds
The principal purposes of the Available Funds for the 12 months following the Closing will be as follows:
Principal Use of Funds
Amount
($ million)
Demonstration plant
Construction
Operation
Research and development
Administration
13.7
1.3
0.5
2.1
Minto bulk sample
0.5
Estimated costs relating to the closing of the Amalgamation
0.3
Estimated costs relating to the rights offering
0.5
TOTAL
18.9
There may be circumstances where, for sound business reasons, the reallocation of funds may be necessary
in order for the Resulting Issuer to achieve its stated business objectives. See “Information Regarding the
Resulting Issuer – Available Funds and Principal Purposes”.
Selected Pro Forma Consolidated Financial Information
The following table sets out certain financial information for each of the Corporation as at September 30,
2013, and Nichromet as at September 30, 2013, as well as pro forma financial information for the Resulting
Issuer, after giving effect to the Amalgamation and the Bridge Loan as at September 30, 2013, and should
be read in conjunction with the pro forma financial statements of the Resulting Issuer attached hereto as
Appendix H.
Statement of Financial Position Data
Corporation as at
September 30,
2013
(unaudited)
Nichromet as at
September 30,
2013
(audited)
Resulting Issuer Pro
Forma as at September
30, 2013
(unaudited)
85,003
4,556,072
7,241,075
Total Assets
13,340,205
11,213,355
31,314,985
Total
Liabilities
1,038,829
726,155
3,810,509
Total
Shareholders’
Equity
12,301,376
10,487,200
27,504,476
Pro Forma
Financial
Position
($)
Cash
35
Statement of Loss Data
Pro Forma
Loss
($)
Revenue
Total Expenses
Net Loss
Corporation for
the 9-month
period ended
September 30,
2013
(unaudited)
Nichromet for the
9-month period
ended September
30, 2013
(audited)
Resulting Issuer Pro
Forma for the 9-month
period ended
September 30, 2013
(unaudited)
-
-
-
1,028,602
3,194,770
4,223,372
(1,028,697)
(2,815,260)
(4,189,442)
Basic and
Diluted Net
Loss Per Share
Pro Forma
Loss
($)
Revenue
Total Expenses
Net loss
(0.02)
Corporation for
the year ended
December 31,
2012
(audited)
Nichromet for the
year ended
December 31,
2012
(audited)
Resulting Issuer Pro
Forma for the year
ended December 31,
2012
(unaudited)
-
-
-
2,439,353
3,795,091
6,234,444
(2,383,958)
(3,802,431)
(6,186,389)
Basic and
Diluted Net
Loss Per Share
(0.03)
Public Market
The Creso Shares are listed and posted for trading on the TSXV under the symbol “CXT” and the
Corporation voluntarily applied for de-listing on January 31st, 2014. Following completion of the
Amalgamation, it is expected that the Nichromet Subordinate Voting Shares will be listed and posted for
trading on the Exchange. The listing of the Creso Shares on the Exchange under the trading symbol “CXT”
was conditionally approved by the Exchange on January 30, 2014. On the same day, the Exchange
conditionally approved the listing of the Nichromet Subordinate Voting Shares on the Exchange.
Trading of the Creso Shares on the TSXV was halted on November 14, 2013. The closing price of the
Creso Shares on November 13, 2013, being the last day on which the Creso Shares traded prior to the
announcement of the Amalgamation, was $0.115 per Creso Share.
The Nichromet Shares are not traded publicly and there is no public market for the Nichromet Shares.
Details of Any Conflict of Interest
The directors and officers of the Corporation are aware of the existence of Laws governing accountability
of directors and officers for corporate opportunity and the Laws requiring disclosure by directors and
officers of conflicts of interest. The Corporation will rely upon such Laws in respect of any such conflict of
interest or in respect of any breach of duty by any of the Corporation’s directors or officers. All such
conflicts are required to be disclosed by such directors or officers in accordance with the CBCA and the
directors of the Corporation are required to govern themselves in respect thereof to the best of their ability
36
in accordance with the obligations imposed upon them by Law.
See “Information Regarding the Resulting Issuer – Conflicts of Interest” and “Information Regarding the
Corporation – Related Party Transaction”.
Experts
Except as disclosed in the Information Circular, no Person, whose profession or business gives authority to
a statement made by the Person and who is named as having prepared or certified a part of this Information
Circular or as having prepared or certified a report or valuation described or included in this Information
Circular, holds any beneficial interest, directly or indirectly, in any securities or property of the
Corporation, Nichromet or the Resulting Issuer or of an Associate or Affiliate of the Corporation,
Nichromet or the Resulting Issuer and no such Person is expected to be elected, appointed or employed as a
director, senior officer or employee of the Corporation, Nichromet or the Resulting Issuer or of an
Associate or Affiliate of the Corporation, Nichromet or the Resulting Issuer and no such Person is a
Promoter of the Corporation, Nichromet or the Resulting Issuer or an Associate or Affiliate of the
Corporation, Nichromet or the Resulting Issuer.
Risk Factors
An investment in the securities of the Resulting Issuer is highly speculative and involves a high degree of
risk. Material risk factors affecting the Resulting Issuer include the following: risks related to global
financial and economic conditions; financing risk; dilution; share price and sale volatility; the dependence
of revenue on the generation of fees; competition in the technology sector; the dependence of the Resulting
Issuer on key personnel; operations risk; intellectual property risk; the Resulting Issuer’s inability to adjust
to changes in technology; systems interruptions; the failure of the business plan; no anticipated dividends;
reputational risk; governmental regulation; litigation risk; significant influence of Dundee Corporation;
future equity sales by Insiders; limitation on takeovers; conflicts of interest; failure to attract necessary
personnel; failure to achieve growth strategy or manage growth of Resulting Issuer; significant future
capital requirements; the risks associated with implementing a new business model; risks of not an
independent evaluation of the Process; reliance industry partners; risks of failing to comply with applicable
laws and regulations; the requirement to obtain licenses and permits; the inability to ensure title to property
remains secured; the risks associated with the operations of the Resulting Issuer and the potential for
substantial indebtedness. For a further description of material risk factors affecting the Resulting Issuer, see
“Risk Factors”.
Accompanying Documents
This Information Circular is accompanied by several Appendices which are incorporated by reference into,
form an integral part of, and should be read in conjunction with this Information Circular. It is
recommended that Creso Shareholders read this Information Circular, the attached Appendices and the
Letter of Transmittal in their entirety. Creso Shareholders must also review and complete the form of proxy
accompanying this Information Circular. Registered Creso Shareholders must also review and complete the
Letter of Transmittal.
37
PROXY RELATED INFORMATION
MANAGEMENT SOLICITATION OF PROXIES
This Information Circular is provided in connection with the solicitation of proxies by the
Management of the Corporation for use at the Meeting to be held at the time and place and for the
purposes set forth in the accompanying Notice of Meeting. Solicitation of proxies will be primarily by
mail; however, proxies may also be solicited by directors, officers and certain employees of the
Corporation by telephone, facsimile or in person but such persons will not receive additional compensation
for doing so. Costs associated with the solicitation of proxies will be borne by the Corporation.
The Corporation will pay the reasonable costs incurred by Persons who are the Non-Registered Holders but
not beneficial owners of shares (such as brokers, dealers and other registrants under applicable securities
law and nominees and custodians) in sending or delivering copies of the Notice of Meeting, the Information
Circular and the form of proxy to the Non-Registered Holders. Payments will be made upon receipt of an
appropriate invoice. The Corporation will furnish to such persons, upon request to the Secretary of the
Corporation, 600 de Maisonneuve Blvd. West, Suite 2750, Montreal, Québec, H3A 3J2 (Facsimile: 514866-6193) and without additional cost, additional copies of the Notice of Meeting, Information Circular
and form of proxy.
APPOINTMENT OF PROXY HOLDER
Accompanying this Information Circular is a form of proxy for use at the Meeting. Creso Shareholders who
are unable to attend the Meeting in person and wish to be represented by proxy are required to date and
sign the enclosed form of proxy and return it in the enclosed return envelope. All properly executed forms
of proxy for Creso Shareholders must be mailed so as to reach or be deposited at the offices of
Computershare Trust Company of Canada, 100 University Avenue, 8th Floor, Toronto, Ontario M5J
2Y1 not later than 48 hours (excluding Saturdays, Sundays and statutory holidays in the Province of
Québec) prior to the time set for the Meeting or any adjournment or postponement thereof.
The persons designated in the form of proxy are officers and/or directors of the Corporation. A Creso
Shareholder has the right to appoint a Person (who need not be a shareholder) other than the
Persons designated in the accompanying form of proxy, to attend at and represent the Creso
Shareholder at the Meeting. To exercise this right, a Creso Shareholder should insert the name of the
designated representative in the blank space provided on the form of proxy and strike out the names of
Management’s nominees. Alternatively, a Creso Shareholder may complete another appropriate form of
proxy.
VOTING BY PROXY AND EXERCISE OF DISCRETION
The form of proxy must be signed by the Creso Shareholder or the Creso Shareholder’s duly appointed
attorney authorized in writing or, if the Creso Shareholder is a corporation, under its corporate seal or by a
duly authorized officer or attorney of the corporation. A form of proxy signed by a Person acting as
attorney or in some other representative capacity (including a representative of a corporate shareholder)
should indicate that Person’s capacity (following his or her signature) and should be accompanied by the
appropriate instrument evidencing qualification and authority to act (unless such form has previously been
filed with the Corporation).
All Creso Shares represented at the Meeting by properly executed proxies will be voted on any ballot that
may be called for and, where a choice with respect to any matter to be acted upon has been specified in the
form of proxy, the Creso Shares represented by the form of proxy will be voted in accordance with such
instructions. The Management designees named in the accompanying form of proxy will vote or withhold
from voting the Creso Shares in respect of which they are appointed in accordance with the direction of the
Creso Shareholder appointing him or her on any ballot that may be called for at the Meeting. In the
absence of such direction, such Creso Shares will be voted “FOR” the proposed resolutions at the
Meeting. The accompanying form of proxy confers discretionary authority upon the persons named
38
therein with respect to amendments of or variations to the matters identified in the accompanying
Notice of Meeting and with respect to other matters that may properly be brought before the
Meeting. In the event that amendments or variations to matters identified in the Notice of Meeting are
properly brought before the Meeting or any further or other business is properly brought before the
Meeting, it is the intention of the Management designees to vote in accordance with their best judgment on
such matters or business. At the time of printing this Information Circular, the Management of the
Corporation knows of no such amendment, variation or other matter to come before the Meeting other than
the matters referred to in the accompanying Notice of Meeting.
REVOCATION OF PROXY
A Creso Shareholder who has submitted a form of proxy may revoke it at any time prior to the exercise
thereof. In addition to any manner permitted by Law, a proxy may be revoked by instrument in writing
executed by the Creso Shareholder or by his or her duly authorized attorney or, if the Creso Shareholder is
a corporation, under its corporate seal or executed by a duly authorized officer or attorney of the
corporation and deposited either: (i) at the registered office of the Corporation at any time up to and
including the last Business Day preceding the day of the Meeting, or any adjournments thereof, at which
the form of proxy is to be used; or (ii) with the Chairman of the Meeting on the day of the Meeting, or any
adjournment thereof. In addition, a form of proxy may be revoked: (i) by the Creso Shareholder personally
attending the Meeting and voting the securities represented thereby or, if the Creso Shareholder is a
corporation, by a duly authorized representative of the corporation attending at the Meeting and voting such
securities; or (ii) in any other manner permitted by Law. Only registered Creso Shareholders have the
right to revoke a proxy. Non-Registered Holders who wish to change their vote must arrange for
their respective intermediaries to revoke the proxy on their behalf.
NON-REGISTERED SHAREHOLDERS
Only registered Creso Shareholders, or the persons they appoint as their proxies, are permitted to attend and
vote at the Meeting. However, in many cases, Creso Shares beneficially owned by a holder (a “NonRegistered Holder”) are registered either:
(a)
in the name of an intermediary (an “Intermediary”) that the Non-Registered Holder
deals with in respect of the Creso Shares. Intermediaries include banks, trust companies,
securities dealers or brokers, and trustees or administrators of self-administered RRSPs,
RRIFs, RESPs, TFSAs and similar plans; or
(b)
in the name of a clearing agency (such as CDS, Clearing and Depository Services Inc.
“CDS”).
In accordance with the requirements of National Instrument 54-101 – Communication with Beneficial
Owners of Securities of a Reporting Issuer (“NI-54-101”) of the Canadian Securities Administrators, the
Corporation has distributed copies of the Notice of Meeting, this Information Circular and the form of
proxy (collectively, the “Meeting Materials”) to the clearing agencies and Intermediaries for onward
distribution to Non-Registered Holders. The Corporation will not be relying on the notice and access
delivery procedure outlined in NI 54-101.
Intermediaries are required to forward Meeting Materials to Non-Registered Holders unless a NonRegistered Holder has waived the right to receive them. Typically, Intermediaries will use a service
company (“Service Company”) to forward Meeting Materials to Non-Registered Holders.
Generally, Non-Registered Holders who have not waived the right to receive Meeting Materials will:
(a)
have received as part of the Meeting Materials a voting instruction form which must be
completed, signed and delivered by the Non-Registered Holder in accordance with the
directions on the voting instruction form; voting instruction forms sent by the Service
39
Company may permit the completion of the voting instruction form by telephone or
through the Internet; or
(b)
less typically, be given a proxy which has already been signed by the Intermediary
(typically by a facsimile, stamped signature) which is restricted as to the number of Creso
Shares beneficially owned by the Non-Registered Holder but which is otherwise
uncompleted. This form of proxy need not be signed by the Non-Registered Holder. In
this case, the Non-Registered Holder who wishes to submit a proxy should properly
complete the form of proxy and deposit it with Computershare Trust Company of
Canada, 100 University Avenue, 8th Floor, Toronto, Ontario M5J 2Y1.
In either case, the purpose of these procedures is to permit Non-Registered Holders to direct the voting of
the Creso Shares which they beneficially own.
Should a Non-Registered Holder who receives a voting instruction form wish to vote at the Meeting in
person (or have another Person attend and vote on behalf of the Non-Registered Holder), the NonRegistered Holder should print his, her or its own name, or that of such other Person, on the voting
instruction form and return it to the Intermediary or its Service Company. Should a Non-Registered Holder
who receives a proxy form wish to vote at the Meeting in person (or have another Person attend and vote
on behalf of the Non-Registered Holder), the Non-Registered Holder should strike out the names of the
Persons set out in the proxy form and insert the name of the Non-Registered Holder or such other Person in
the blank space provided and submit it to Computershare Trust Company of Canada, 100 University
Avenue, 8th Floor, Toronto, Ontario M5J 2Y1.
In all cases, Non-Registered Holders should carefully follow the instructions of their Intermediary,
including those regarding when, where and by what means the voting instruction form or proxy form
must be delivered.
A Non-Registered Holder may revoke voting instructions which have been given to an Intermediary at any
time by written notice to the Intermediary.
INTEREST OF CERTAIN PERSONS IN THE MATTERS TO BE ACTED UPON
The directors and officers of the Corporation may have interest in the Amalgamation that are, or may be,
different from, or in addition to, the interest of other Creso Shareholders. These interests include those
described below. The Creso Board was aware of these interests and considered them, among other matters,
when recommending approval of the Amalgamation by the Creso Shareholders.
Ownership of Creso Shares and Creso Options
The chart below sets forth the Creso Shares and Creso Options which directors and executive officers of the
Corporation beneficially own, directly or indirectly, or exercise control over, as of the Record Date. All of
the Creso Shares held by the directors and executive officers of the Corporation will be treated in the same
fashion under the Amalgamation as Creso Shares held by any other Creso Shareholder:
40
Name and Position
Creso Options Held
Creso Warrants Held
Pierre
Gauthier,
president and CEO
Creso Shares
Held(1)
2,008,334(2)
(1.39%)
2,450,000
950,000
Vatché
Tchakmakian, CFO
870,000
(0.6%)
450,000
700,000
Jean-Guy Lambert,
director
220,000
(0.2%)
420,000
-
André
director
Thibault,
(0.0%)
325,000
-
Jacques Bouchard,
director
(0.0%)
325,000
-
Rejean
director
(0.0%)
200,000
-
540,000(3)
(0.4%)
200,000
540,000(3)
Gosselin,
Luce Saint-Pierre,
Secretary
Notes:
1. 1. Percentages based on 144,811,956 Creso Shares outstanding as of January 31st, 2014.
2. 2. Of which 1,498,334 are held by a related party.
3. 3. These Creso Shares and Creso Warrants are held by a related party.
4.
See “Information Regarding the Amalgamation – Effect of the Amalgamation upon Holders of Creso
Convertible Securities” and “Information Regarding the Corporation – Related Party Transaction”.
For the purposes of Majority of the Minority approval, Creso Shares beneficially held by Pierre Gauthier,
his Associates and his Affiliates as of the Record Date and Creso Shares owned by Nichromet and its
Associates and Affiliates as of the Record Date will be excluded from the vote.
VOTING SECURITIES AND PRINCIPAL HOLDER THEREOF
Voting Shares and Record Date
The authorized share capital of the Corporation consists of an unlimited number of Creso Shares. As at the
Record Date, there were 144,811,956 Creso Shares issued and outstanding.
Creso Shares
The holders of Creso Shares are entitled to receive notice of and to vote at all annual and special meetings
of shareholders of the Corporation on the basis of one vote per Creso Share. The holders of Creso Shares
are entitled to receive such dividends as the Creso Board may declare and, upon dissolution, to receive such
assets of the Corporation as are distributable to holders of Creso Shares.
Voting of Creso Shares
The Creso Board has fixed the close of business of January 6, 2014 as the record date for the purpose of
determining the Creso Shareholders entitled to receive Notice of the Meeting. In accordance with the
CBCA, the Corporation has prepared a list of Creso Shareholders on the Record Date. Each Creso
Shareholder named in the list at the close of business on the Record Date will be entitled to vote the Creso
Shares shown opposite his, her or its name on the list at the Meeting.
41
To the knowledge of the directors and officers of the Corporation, there are no Persons, firms or
corporations who own, as of the Record Date, or exercise control or direction over, directly or indirectly,
voting securities of the Corporation carrying more than 10% of the voting rights attached to any class of
voting securities of the Corporation except as follows:
Shareholder Name
Nichromet Extraction Inc.(1)
Sheldon Inwentash
Number of Creso
Shares
19,779,000(2)
15,172,000(3)
Percentage of Outstanding Creso
Shares
13.66%
10.48%
Notes:
1. It is expected that prior to the Amalgamation Nichromet will transfer all of its Creso Shares to Subco and that such shares will,
upon the Amalgamation, be cancelled for no consideration.
2.
Due to Dundee Corporation’s holdings in Nichromet (See “Information Regarding Nichromet and Subco – Principal Security
Holders”), Dundee is considered the indirect beneficial holder of these Creso Shares.
3.
8,400,000 Creso Shares are held by Pinetree Capital Ltd.
PARTICULARS OF MATTERS TO BE ACTED ON
The Amalgamation
On November 22, 2013, the Corporation, Nichromet and Subco entered into the Amalgamation Agreement,
pursuant to which the Creso Shareholders (other than Subco and Dissenting Creso Shareholders) will
exchange all of their issued and outstanding Creso Shares for the issuance of Nichromet Subordinate
Voting Shares, in accordance with the Exchange Ratio. As a result, the Creso Shareholders will be
receiving 0.5 Nichromet Subordinate Voting Shares for each Creso Share. As more particularly described
herein, Non-Resident Creso Shareholders shall not be entitled to receive Nichromet Subordinated Voting
Shares in connection with the Amalgamation, see “Information Regarding the Amalgamation - Information
for Non-Resident Creso Shareholders”. On the Amalgamation Date, the Corporation and Subco will be
amalgamated to form Amalco, a wholly-owned subsidiary of Nichromet. Following the Amalgamation,
Dundee Corporation will continue to control the Resulting Issuer. The Resulting Issuer will continue to
carry on the businesses theretofore carried on by Nichromet and will indirectly carry on the businesses
theretofore carried on by the Corporation.
In accordance with the rules of the Exchange, Nichromet has applied for the listing of the Nichromet
Subordinate Voting Shares on the Exchange. On January 30, 2014, the Exchange conditionally approved
the listing of the Nichromet Subordinate Voting Shares on the Exchange. Listing will be subject to
Nichromet fulfilling all of the requirements of the Exchange.
In addition, an application will be made to the securities regulatory authorities to have Amalco cease to be a
reporting issuer.
The completion of the Amalgamation contemplated by the Amalgamation Agreement is subject to certain
conditions, including obtaining all necessary corporate and regulatory approvals, including the Exchange’s
approval of the Amalgamation and other customary conditions.
See “Information Regarding the Amalgamation” and “Information Regarding the Resulting Issuer”.
42
Effect of the Amalgamation upon Holders of Creso Convertible Securities
The Amalgamation Agreement provides that the Creso Options and the Creso Warrants will be exchanged
for Nichromet Options and Nichromet Warrants on the basis of the Exchange Ratio, as applicable. As for
the strike price, once converted, such Nichromet Options and Nichromet Warrants will have a strike price
equal to the double (200%) of the original strike price of the corresponding Creso Option or Creso Warrant,
as the case may be.
For additional information, see “Information Regarding the Amalgamation”.
Approval of the Amalgamation by a Special Resolution
At the Meeting, the Creso Shareholders will be asked to consider and, if deemed advisable, to approve the
Amalgamation Resolution.
Creso Shareholders should review the Information Circular in its entirety, in particular the disclosure under
the headings “Information Regarding the Amalgamation” and “Information Regarding the Resulting
Issuer” for a more complete understanding of the particulars of the Amalgamation and its expecting effect
on the Corporation.
Reasons for the Amalgamation
The Creso Board, on the recommendation of the Special Committee, has determined that it would be in the
best interests of the Corporation to complete the Amalgamation as Creso Shareholders (other than Subco
and Non-Resident Creso Shareholders) are being provided with an opportunity to receive Nichromet
Subordinated Voting Shares for their Creso Shares, and thereby maintain their holdings in the
Corporation’s resource properties through Nichromet, as well as acquire an interest in the business of
Nichromet. Following the Amalgamation, the Resulting Issuer as a larger company, may have greater
access to capital markets which should add value to and be in the best interests of Creso Shareholders. See
“Information Regarding the Amalgamation - Anticipated Benefits of the Amalgamation”.
Recommendation of the Creso Board
THE CRESO BOARD (WITH PIERRE GAUTHIER ABSTAINING) RECOMMENDS THAT THE
CRESO SHAREHOLDERS VOTE TO APPROVE THE AMALGAMATION RESOLUTION.
UNLESS OTHERWISE DIRECTED, IT IS THE INTENTION OF THE MANAGEMENT
DESIGNEES TO VOTE PROXIES IN THE ACCOMPANYING FORM FOR THE
AMALGAMATION RESOLUTION.
The complete text of the Amalgamation Resolution which Management intends to place before the Meeting
for approval, confirmation and adoption, with or without modification, ratifying, confirming and approving
the Amalgamation, is attached as Appendix A to the Information Circular.
Requisite Shareholder Approval(s)
The Amalgamation Resolution must be approved by at least 2/3 of all votes cast by the Creso Shareholders
present in person or represented by proxy at the Meeting in order to become effective, as required by the
CBCA. The Amalgamation Resolution must also be approved by more than 50% of all votes cast by the
Majority of the Minority of the Creso Shareholders present in person or represented by proxy at the
Meeting in order to become effective, as required by Multilateral Instrument 61-101.
The Corporation is a reporting issuer in Ontario, British Columbia, Alberta and Québec and, accordingly, is
subject to applicable securities Laws of such provinces that have adopted Multilateral Instrument 61-101,
namely Ontario and Québec. Multilateral Instrument 61-101 is intended to regulate certain transactions to
43
ensure equality of treatment among shareholders, generally requiring enhanced disclosure, approval by a
majority of shareholders excluding interested or related parties, independent valuations and, in certain
instances, approval and oversight of the transaction by a special committee of independent directors.
Subject to certain exemptions, the protections of Multilateral Instrument 61-101 generally applies to
“business combinations” that terminate the interests of shareholders without their consent. The proposed
Amalgamation may be deemed to constitute a “business combination” pursuant to Multilateral Instrument
61-101 and the requirements set out thereunder that are applicable to “business combinations” will apply to
the Amalgamation.
The Amalgamation may be considered a “business combination” under Multilateral Instrument 61-101
because, as a consequence of the Amalgamation, the interests of Creso Shareholders may be terminated
without their consent and (i) Nichromet, a “related party” for the purposes of Multilateral Instrument 61101, would directly or indirectly acquire the business of Creso, (ii) Dundee Corporation, a “related party”
for the purposes of Multilateral Instrument 61-101, may be a party to a “connected transaction”, the Bridge
Loan, and (iii) the payments to and benefits to be received by certain executive officers and directors of the
Corporation, who are “related parties” for the purposes of Multilateral Instrument 61-101, may be
considered a “collateral benefit” for the purposes of Multilateral Instrument 61-101. For the purposes of
Multilateral Instrument 61-101, related parties, including directors and executive officers of the
Corporation, receive a collateral benefit if they are entitled to receive, subject to certain exceptions, directly
or indirectly and without limitation, as a consequence of the Amalgamation, an increase in salary, a lump
sum payment, a payment for surrendering securities, or other enhancement in benefits related to past or
future services as an employee, director or consultant of the Corporation or of another person, regardless of
the existence of any offsetting costs to the related party or whether the benefit is provided, or agreed to, by
the Corporation or another party to the Amalgamation.
Accordingly, the Amalgamation Resolution requires approval by a majority of the votes cast by Creso
Shareholders at the Meeting, excluding the votes cast by holders of Creso Shares that is a “interested
party”, a related party of an interested party (subject to certain exceptions) or joint actors therewith, which
votes are required to be excluded in order to obtain “minority approval” pursuant to Multilateral Instrument
61-101.
As each of Nichromet, Pierre Gauthier, Vatché Tchakmakian, Luce Saint-Pierre and Ned Goodman may be
deemed an “interested party” or an related party of an interested party in respect of the Amalgamation, their
share will be excluded in determining whether Majority of the Minority approval for the Amalgamation
Resolution has been obtained. To the knowledge of the Corporation after reasonable inquiry, at the date
hereof:
•
Nichromet and its Associates and Affiliates beneficially held 19,779,000 Creso Shares
(representing approximately 13.66% of the issued and outstanding Creso Shares),
•
Pierre Gauthier and his Associates and Affiliates beneficially hold 2,008,334 Creso Shares
(representing approximately 1.39% of the issued and outstanding Creso Shares),
•
Vatché Tchakmakian and his Associates and Affiliates beneficially hold 870,000 Creso Shares
(representing approximately 0.60% of the issued and outstanding Creso Shares),
•
Luce Saint-Pierre and her Associates and Affiliates beneficially hold 540,000 Creso Shares
(representing approximately 0.37% of the issued and outstanding Creso Shares), and
•
Ned Goodman and his Associates and Affiliates beneficially hold 3,333,334 Creso Shares
(representing approximately 2.30% of the issued and outstanding Creso Shares).
44
Consequences if Amalgamation Does Not Close
If the Amalgamation Resolution does not receive the requisite shareholder approval, the Corporation will
not complete the Amalgamation and the Corporation will continue to be a company listed on the Exchange
with its current assets and liabilities as more particularly set out in this Information Circular under the
heading “Information Concerning the Corporation”.
Dissent Rights
Registered Creso Shareholders have the right to dissent to the Amalgamation Resolution pursuant to
Section 190 of the CBCA. See heading “Information Regarding the Amalgamation – Dissenting Creso
Shareholder Rights”.
DIRECTORS
Upon completion of the Amalgamation, there is expected to be a change of directors of the Corporation as
set out under “Information Regarding the Resulting Issuer – Director Executive Officers and Promoters”.
INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS
Pierre Gauthier, director, Chairman of the Board, President and Chief Executive Officer of the Corporation
is also a director and President and Chief Executive Officer of Nichromet. To the knowledge of the
Corporation after reasonable inquiry, there are 2,008,334 Creso Shares beneficially held by Pierre Gauthier,
his Associate and his Affiliates, representing approximately 1.39% of the issued and outstanding Creso
Shares. Mr. Gauthier also owns Creso Options exercisable for 2,450,000 Creso Shares and Creso Warrants
exercisable for 950,000 Creso Shares. In addition, Mr. Gauthier owns 2,167,615 Nichromet Subordinate
Voting Shares and 5,000,000 Nichromet Options.
Nichromet and its Associates and Affiliates own 19,779,000 Creso Shares, representing approximately
13.66% of the issued and outstanding Creso Shares. Due to Dundee Corporation’s indirect beneficial
holdings in Nichromet, Dundee Corporation is considered, for securities law purposes, the owner of these
Creso Shares. It is expected that these Creso Shares will be transferred to Subco prior to the Amalgamation
and will be cancelled for no consideration.
On July 15, 2013, the Corporation announced an agreement with Nichromet to develop the Minto gold
deposit by extracting a 30,000 ton bulk sample. On July 10, 2013, the Corporation also borrowed $500,000
from Nichromet. The loan is unsecured and bears interest at a rate of 6% per annum payable on July 10,
2014. In addition, on December 20, 2013, Nichromet loaned an additional $200,000 to the Corporation on
the same terms and conditions.
OTHER MATTERS WHICH MAY COME BEFORE MEETING
The Management of the Corporation knows of no other matters to come before Meeting other than
as referred to in the Notice of Meeting. However, if other matters which are not known to the
Management should properly come before the Meeting, the accompanying proxy will be voted on
such matters in accordance with the best judgment of the Persons voting the proxy.
45
RISK FACTORS
Creso Shareholders should consider the investment risks set forth below and those described elsewhere in
this document, which are in addition to the usual risks associated with an investment in a business at an
early stage of development. The Creso Board consider the risks set forth below to be the most significant,
but do not consider them to be all of the risks associated with an investment in securities of the Corporation
or the Resulting Issuer. If any of these risks materialize into actual events or circumstances or other
possible additional risks and uncertainties of which the directors are currently unaware or which they
consider not to be material in connection with the Resulting Issuer’s business, actually occur, the Resulting
Issuer’s assets, liabilities, financial condition, results of operations (including future results of operations),
business and business prospects, are likely to be materially and adversely affected. In such circumstances,
the price of the Resulting Issuer’s securities could decline and investors may lose all or part of their
investment.
Risks Associated with the Amalgamation
The Amalgamation May Not be Completed
The completion of the Amalgamation contemplated by the Amalgamation Agreement is subject to certain
conditions, some of which are outside the control of the Corporation, including obtaining all necessary
corporate and regulatory approvals, including the Exchange’s approval of the Amalgamation and any other
transactions comprising part of the proposed Amalgamation, and other customary conditions. There can be
no assurance that all of the necessary regulatory and corporate approvals will be obtained. See “Information
Regarding the Amalgamation – Amalgamation Agreement”.
In addition, each of the Corporation and Nichromet has the right to terminate the Amalgamation Agreement
in certain circumstances. See “Information Regarding the Amalgamation – Amalgamation Agreement”.
Accordingly, there is no certainty, nor can the parties provide assurance, that the Amalgamation Agreement
will not be terminated before the completion of the Amalgamation. If the Amalgamation contemplated by
the Amalgamation Agreement is not completed for these reasons or for any other reasons, the Corporation
will have incurred significant costs associated with the failed implementation of the Amalgamation and the
market price of the Creso Shares may be adversely affected.
Possible Failure to Realize Anticipated Benefits of the Amalgamation
The ability to realize the benefits of the Amalgamation will depend in part on successfully consolidating
functions and integrating operations, procedures and personnel in a timely and efficient manner, as well as
on the Resulting Issuer’s ability to realize the anticipated growth opportunities from integrating the
Corporation’s assets to the business of Nichromet following the completion of the Amalgamation. This
integration will require the dedication of Management’s effort, time and resources which may divert
Management’s focus and resources from other strategic opportunities available to the Resulting Issuer
following the completion of the Amalgamation, and from operational matters during this process.
Significant Costs Associated with the Amalgamation
The Corporation and Nichromet will incur significant direct transaction costs in connection with the
Amalgamation. Actual direct transaction costs incurred in connection with the Amalgamation may be
higher than expected. Moreover, certain of the Corporation’s costs related to the Amalgamation, including
legal, financial advisory services, accounting, printing and mailing costs, must be paid even if the
Amalgamation is not completed.
Dissenting Creso shareholders may be paid consideration that is different in value from the
consideration paid to Creso shareholders.
Creso Shareholders have the right to dissent and demand payment of the fair value of their Creso Shares
46
which could lead to judicial determination of the fair value required to be paid to Dissenting Creso
Shareholders, which could be different from the value attached to the Nichromet Subordinate Voting
Shares issued to Creso Shareholders pursuant to the Amalgamation.
Dissent Rights
Creso Shareholders have the right to exercise certain Dissent Rights and demand payment of the fair value
of their Creso Shares in cash in connection with the Amalgamation in according with the CBCA. It is a
condition to completion of the Amalgamation for the benefit of Nichromet that Creso Shareholders holding
more than 5.0% of the outstanding Creso Shares shall not have exercised Dissent Rights in respect of the
Amalgamation and, as such, the Amalgamation may not be completed if a sufficient number of Creso
Shareholders exercise Dissent Rights. If there are a number of Creso Dissenting Shareholders and
Nichromet does not waive the considerations relating to Dissenting Rights in the Amalgamation
Agreement, a substantial cash payment may be required to be made to Creso Dissenting Shareholders that
could have an adverse effect on the Resulting Issuer’s financial condition and cash resources if the
Amalgamation is completed.
Risks Associated with the Resulting Issuer
New Business Model
The business model of the Resulting Issuer will be fundamentally different from the mineral exploration
industry the Corporation has been operating within. While Nichromet has expertise and experience in the
clean technology industry, no assurances can be made that the Resulting Issuer’s business model after
completion of the Amalgamation will be successful.
Nichromet has a limited history of operations that, to date, have consisted primarily of research and
development. Nichromet has generated no revenue from the Process and does not have experience in
Marketing or selling the Process. The Resulting Issuer will be subject to all of the business risks and
uncertainties associated with any new business enterprise, including the risk that it will not achieve its
growth objectives. There is no assurance that any part of the Resulting Issuer’s business will ever be
brought to a stage where it can be profitable or commercialized. Whether Nichromet’s business model, as
carried out through the Resulting Issuer, will generate profit is dependent on a variety of factors, some of
which are outside of the Corporation’s control, including the demonstration on a commercial basis of the
efficiency of the technologies of Nichromet, the ability of Management of the Resulting Issuer to
adequately market the services of the Resulting Issuer and spread awareness of its brand; the applicability
of the business plan of the Resulting Issuer; and the ability of Management of the Resulting Issuer to attract
clients. There can be no assurance that significant losses will not occur in the near future or that the
Resulting Issuer will produce revenue, operate profitably or provide a return on investment in the future.
The Resulting Issuer’s operating expenses and capital expenditures may increase. The Resulting Issuer
expects to continue to incur losses for the foreseeable future.
The Process has not gained significant market exposure or demonstrable market acceptance as yet.
Whether the Resulting Issuer can successfully manage the transition to a commercial enterprise will depend
upon a number of factors, including expanding the Resulting Issuer’s sales and marketing capabilities, as
well as establishing relationships with strategic partners. Given the absence of clear market acceptance
with respect to the Process, there can be no assurance as to the achievability of projected market
penetration rates and associated sales revenues.
The Corporation’s current business will be incorporated to the Resulting Issuer’s business upon completion
of the Amalgamation. The risk factors associated with the principal business of the Resulting Issuer are
discussed below. Briefly, these relate to the capital structure of the Resulting Issuer, risks related to capital
requirements, competition, reliance on key personnel due to the nature of Nichromet’s business, the
Resulting Issuer may be subject to significant risks. Readers should carefully consider all such risks set out
in the discussion below. The Resulting Issuer’s actual results may be very different from those expected as
47
at the date of this Information Circular. If the Resulting Issuer is unable to achieve profitability and have
sustainable positive cash flows, prospective investors could experience a decrease in the value of their
investment.
Management of growth
The Resulting Issuer may be subject to growth-related risks including capacity constraints and pressure on
its internal systems and controls. The expansion of the Resulting Issuer’s operations may place a significant
strain on its managerial, operational and financial resources. The ability to manage future growth will
depend on the Resulting Issuer’s ability to continue to implement and improve operational, financial and
management information systems on a timely basis and to train, motivate and manage an enlarged
workforce and its ability to integrate its existing workforce with that of any business that the Resulting
Issuer may acquire. The inability of the Resulting Issuer to deal with this growth may have a material
adverse effect on the Resulting Issuer’s business, financial condition, results of operations and prospects.
The Resulting Issuer will also need to strengthen its internal controls as it continues to expand its business.
Should it fail to take the above-noted measures, the Resulting Issuer may not be able to implement its
strategies or to manage its growth effectively, and the business, financial condition and results of operations
could be materially and adversely affected.
In order to manage growth the Resulting Issuer will have to continue to: (a) expand research and
development, sales and marketing, distribution capabilities and administrative functions, (b) expand the
skills and capabilities of its current management team, (c) add experienced senior level managers and (d)
attract and retain qualified employees. While it intends to focus on managing its costs and expenses over
the long term, it may not be able to expand quickly enough to exploit potential market opportunities.
No Independent Evaluation of the Process
While Nichromet’s research with respect to the Process has, in the opinion of management, validated the
technology in various applications and while various third parties (without limitation Dundee Precious
Metals and the Corporation) have carried out due diligence procedures to their satisfaction, there has been
no independent evaluation of the Process. There can be no assurance that the Resulting Issuer will be able
to achieve growth strategy and bring the Process to commercialization. The Resulting Issuer’s inability to
bring the Process to commercialization will have a material adverse effect on its operations.
Dilution Caused by the Resulting Issuer Capital Structure
The Resulting Issuer will have Nichromet Multiple Voting Shares outstanding and this will result in
dilution to the Creso Shareholders who will receive Nichromet Subordinate Voting Shares pursuant to the
Amalgamation Agreement, which dilution will be significant. The Nichromet Multiple Voting Shares will
also result in the dilution of the votes of Creso Shareholders who will receive Nichromet Subordinate
Voting Shares.
Liquidity
There can be no assurance that an active and liquid market for the Nichromet Subordinate Voting Shares
will develop and an investor may find it difficult to resell the Nichromet Subordinate Voting Shares.
Global Financial and Economic Conditions
Current global financial and economic conditions, while improving, remain extremely volatile. Several
major international financial institutions and other large, international enterprises have either filed for
bankruptcy or have had to be actively rescued by governmental intervention. Access to public and private
capital and financing continues to be negatively impacted by many factors as a result of the recent global
financial crisis and global recession. Such factors may impact the Resulting Issuer’s ability to obtain
financing in the future on favorable terms or obtain any financing at all. Additionally, global economic
48
conditions may cause a long term decrease in asset values. If such global volatility, market turmoil and the
global recession continue, the Resulting Issuer’s operations and financial condition could be adversely
impacted.
Significant Future Capital Requirements, Future Financing Risk and Dilution
The Resulting Issuer will have limited financial resources and will require significant capital and operating
expenditures in connection with the exploration and development of its business. No assurances can be
provided that the Resulting Issuer’s financial resources will be sufficient for its future needs. The Resulting
Issuer’s future capital commitments on its existing assets will likely exceed its cash resources, as a result,
the Resulting Issuer may be required to undertake future financings which may be in the form of a sale of
equity, debt secured by assets or forward purchase payments. No assurances can be made that the
Resulting Issuer will be able to complete any of these financing arrangements or that the Resulting Issuer
will be able to obtain the capital that it requires. In addition, the Resulting Issuer cannot provide any
assurances that any future financings will be obtained on terms that are commercially favorable to the
Resulting Issuer.
Any such sale of Resulting Issuer Shares or other securities will lead to further dilution of the equity
ownership of existing shareholders, moreover control of the Resulting Issuer may change and shareholders
may suffer additional dilution. Additionally, options and warrants or other conversion rights issued or
granted by the Resulting Issuer may adversely affect future equity offerings, and the exercise of those
options and warrants may have an adverse effect on the value of the Resulting Issuer Shares. If any such
options, warrants or conversion rights are exercised at a price below the then current market price, then (i)
the market price of the Resulting Issuer Shares could decrease, and (ii) shareholders may experience
dilution of their investments. The issuance of Resulting Issuer Shares in the future will result in a reduction
of the book value and market price of the then outstanding Resulting Issuer Shares. A prolonged decline in
the price of the Resulting Issuer Shares could result in a reduction in the liquidity of the Resulting Issuer
Shares and a reduction in the Resulting Issuer’s ability to raise capital. As a significant portion of the
Resulting Issuer’s operations will probably be financed through the sale of equity securities, a decline in the
price of the Resulting Issuer Shares could be especially detrimental to liquidity.
The ability of the Resulting Issuer to arrange financing in the future will depend in part upon the prevailing
capital market conditions as well as the business performance of the Resulting Issuer. There is a risk that
interest rates will increase given the current historical low level of interest rates. An increase in interest
rates could result in a significant increase in the amount that the Resulting Issuer pays to service debt and
affect the Resulting Issuer’s ability to fund ongoing operations.
There can be no assurance that the Resulting Issuer will be successful in obtaining required financing as
and when needed. This may be further complicated by the limited market liquidity for shares of smaller
companies, restricting access to some institutional investors. Failure to obtain additional financing on a
timely basis could result in delay or indefinite postponement of further exploration and development of its
potash projects and may cause the Resulting Issuer to forfeit rights in some or all of its properties or reduce
or terminate some or all of its activities. If exploration or the development of any mine is delayed, such
delay would have a material and adverse effect on the Resulting Issuer’s business, financial condition and
results of operation.
Indebtedness
The Resulting Issuer may incur substantial additional indebtedness in the future. Although current credit
facilities contain restrictions on the incurrence of additional indebtedness, such restrictions are subject to a
number of qualifications and exceptions, and under certain circumstances, incurrence of indebtedness in
accordance with such restrictions could be substantial. Under current credit facilities and debt instruments
we have the flexibility to incur indebtedness in the future. If current debt levels are increased, the related
risks that the Resulting Issuer will face could intensify.
49
Share Price Volatility
The market price for shares of the Resulting Issuer cannot be assured. Securities markets have recently
experienced an extreme level of price and volume volatility, and the market price of securities of many
companies has experienced wide fluctuations which have not necessarily been related to the operating
performance, underlying asset values or prospects of such companies. The trading price of the Nichromet
Subordinated Voting Shares may increase or decrease in response to a number of events and factors, both
known and unknown.
In addition, the Nichromet Subordinate Voting Shares will be affected by many variables not directly
related to the Resulting Issuer’s success and will therefore not be within the Resulting Issuer’s control,
including other developments that affect the market for all resource sector securities, the breadth of the
public market for the common shares, and the attractiveness of alternative investments.
In the past, following periods of volatility in the market price of a company’s securities, shareholders have
instituted class action securities litigation against those companies. Such litigation, if instituted, could result
in substantial costs and diversion of Management’s attention and resources, which could significantly harm
the Resulting Issuer’s profitability and reputation.
The market price for the Resulting Issuer’s securities convertible into, or exchangeable for, Nichromet
Subordinate Voting Shares may also be affected by the Resulting Issuer’s ability to meet or exceed the
expectations of analysts or investors. Any failure to meet these expectations, even if minor, may have a
material adverse effect on the market price of the Nichromet Subordinate Voting Shares.
Competition in the Technology Sector in the Mining Industry
The technology sector in the mining industry is competitive. The Resulting Issuer will face competition
from other companies to develop products and services designed to extract precious and base metals. Many
companies have greater personnel and financial resources than the Resulting Issuer will have. Such
companies are typically able to commit greater research to developing and implementing technological
innovations, and may have a greater number and variety of distribution outlets for their products and
services.
Key Personnel
The Resulting Issuer’s business will involve a certain degree of risk, for which even a combination of
experience, knowledge and careful evaluation may not be able to overcome. Management believes the
continued success and the execution of the Resulting Issuer’s growth strategy will depend, in part, on the
continued service of its Management team. As such, the Resulting Issuer’s success is dependent on the
services of its senior Management.
The Resulting Issuer’s Management team will be comprised of seasoned and committed industry veterans
who have achieved success in developing the business of Nichromet. Since the Resulting Issuer will be
managed by a relatively small group of senior executive officers, the loss of the technical knowledge,
management expertise and knowledge of its operations of one or more members of its team could result in
a diversion of management resources, as the remaining members of Management would need to cover the
duties of any senior executive who leaves the Resulting Issuer and Management of the Resulting Issuer
would need to spend time usually reserved for managing the Resulting Issuer to search for, hire and train
new members of Management. The loss of some or all of the Resulting Issuer’s team could negatively
affect its ability to develop and pursue its growth strategy, which could adversely effect on the Resulting
Issuer’s operations and business prospects.
In addition, the Resulting Issuer’s future success depends on its ability to attract and retain skilled
technical, Management, sales and marketing personnel. There can be no assurance that the Resulting Issuer
will be successful in attracting and retaining such personnel and the failure to do so could have a material
50
adverse effect on the Resulting Issuer’s business, its operating results as well its overall financial condition.
Operational Risks of the Resulting Issuer
Although Nichromet has designed its processes to operate under mild conditions, such as atmospheric
pressure and low temperature, unprocessed mineralized materials very often contain toxic components such
as arsenic and lead. If the technology is not properly applied, there might be instances of exposure to
harmful dusts or materials that are dangerous, with negative health effects. Nichromet’s training of
operators of the plant is well supervised, however human errors and their corresponding negative
consequences cannot be ruled out. Also, Nichromet believes the technology is environment-friendly but
some reactants, such as sulfuric acid, sodium hydroxide or lime are aggressive and, if not handled properly,
can generate significant accidents. Finally, the desirable aspects of Nichromet technologies can be lost if
recommended procedures are not followed as specified, such as, for example the handling of the starting
ores, the scrubbing of the gaseous effluent or the recycling of the liquids after reaction. Mistakes by
inattentive operators are always possible with corresponding infringements on environmental rules.
The Resulting Issuer’s operations will involve the use, handling, generation, processing, storage,
transportation, recycling and disposal of hazardous materials and are subject to extensive environmental
Laws and regulations at the national, provincial, local and international level. These environmental Laws
and regulations include those governing the discharge of pollutants into the air and water, the use,
management and disposal of hazardous materials and wastes, the clean‐up of contaminated sites and
occupational health and safety. Nichromet has incurred and the Resulting Issuer will continue to incur
capital expenditures in order to comply with these environmental Laws and regulations. In addition,
violations of, or liabilities under, environmental Laws or permits may result in restrictions being imposed
on the Resulting Issuer’s operating activities or the Resulting Issuer being subject to substantial fines,
penalties, criminal proceedings, third party property damage or personal injury claims, clean‐up costs or
other costs. While Nichromet believes that it is currently in compliance with applicable environmental
requirements, future developments such as more aggressive enforcement policies, the implementation of
new, more stringent Laws and regulations, or the discovery of currently unknown environmental conditions
may require expenditures that could have a material adverse effect on the Resulting Issuer’s business,
results of operations and financial condition.
Intellectual Property
Nichromet relies on patent, trade secret, and copyright Laws to protect its intellectual property. However,
Nichromet’s present or future-issued patents may not protect Nichromet’s technological leadership, and
Nichromet’s patent portfolio may not continue to grow at the same rate as it has in the past. Moreover,
Nichromet’s patent position is subject to complex factual and legal issues that may give rise to uncertainty
as to the validity, scope and enforceability of a particular patent. Accordingly, there is no assurance that: (a)
any of the patents owned by Nichromet will not be invalidated, circumvented, challenged, rendered
unenforceable; or (b) any of Nichromet’s pending or future patent applications will be issued with the
breadth of claim coverage sought by Nichromet, if issued at all. In addition, effective patent, trade secret,
trademark and copyright protection may be unavailable, limited or not applied for in certain countries.
Nichromet also seeks to protect its proprietary intellectual property, including intellectual property that may
not be patented or patentable, in part by confidentiality agreements and, if applicable, inventors’ rights
agreements with strategic partners and employees. Nichromet can provide no assurance that these
agreements will not be breached, that Nichromet will have adequate remedies for any breach, or that such
persons or institutions will not assert rights to intellectual property arising out of these relationships.
Management does not believe the Process infringes on the proprietary rights of any third parties. There can
be no assurance, however, that third parties will not claim such infringement by Nichromet with respect to
current or future products or processes. Dealing with any such claims, with or without merit, could be time
consuming, result in costly litigation, or require Nichromet to enter into further royalty or licensing
agreements, which may or may not be available on terms acceptable to Nichromet. The failure to do any of
51
the foregoing may have a material adverse effect on Nichromet.
Changes in Technology
New technologies are rapidly emerging in the mining service segment. The development of new and
advanced technologies, the continuous, timely and cost-effective incorporation of such technologies into
products and services and the effective marketing of such products and services are indispensable to
remaining competitive. The Resulting Issuer depends on the ability to successfully treat precious metals
using various technological processes. Failure to adequately research and develop such processes, or to
continuously incorporate advanced technologies into products and services in a timely manner, may
negatively affect the Resulting Issuer’s business, financial condition and results of operations.
Reliance on Industry Partners
The Resulting Issuer will rely on industry partners including suppliers, contractors and joint venture parties
in executing its business strategy and operations. As a result, the Resulting Issuer may be exposed to third
party credit risk through its contractual arrangements with its current or future suppliers, contractors and
joint venture parties. In the event that such entities fail to meet their contractual obligations to the Resulting
Issuer, such failures could have a material adverse effect on the Resulting Issuer and its ability to
implement its business strategy and operations.
The Resulting Issuer will rely upon consultants, engineers and others and intends to rely on these parties for
development, construction and operating expertise. Substantial expenditures are required to develop
Nichromet’s business. If such parties’ work is deficient or negligent or is not completed in a timely manner,
it could have a material adverse effect on the Resulting Issuer.
Laws and Regulations
The Resulting Issuer’s activities will be subject to various Laws governing mining, development, taxes,
labour standards and occupational health, toxic substances and other matters and require permits and
approvals from various government authorities. Although Nichromet believes its research and development
activities are currently carried out in accordance with all applicable Laws and regulations, no assurance can
be given that new Laws and regulations will not be enacted or that existing Laws and regulations will not
be applied in a manner which could limit or curtail its activities. Operations may be affected from time to
time in varying degrees by political and ecological developments. In addition, the Resulting Issuer may be
required to compensate those suffering loss or damage by reason of its activities.
Failure to comply with applicable Laws, regulations and permitting requirements may result in enforcement
actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease
or be curtailed.
The Resulting Issuer’s activities will be subject to extensive federal, provincial state and local Laws and
regulations governing environmental protection and employee health and safety. These Laws and
regulations set various standards regulating certain aspects of health and environmental quality provide for
penalties and other liabilities for the violation of such standards and establish obligations in certain
circumstances to remediate current and former facilities and locations where operations are or were
conducted. There can be no assurance that the Resulting Issuer will not incur substantial financial
obligation in connection with environmental compliance. There is no assurance that future changes in
environmental regulation, if any, will not adversely affect the Resulting Issuer’s operations.
Failure of the Business Plan
There is no assurance that the Resulting Issuer’s business plan will succeed in whole or in part. The success
of the Resulting Issuer’s development strategy will depend on a number of factors. There is no assurance
that the Resulting Issuer will be able to achieve planned growth, that modifications to its strategy will not
be required or that the Resulting Issuer will be able to effectively market or manage expanded operations
52
and enhance profitability.
In addition, growth could place a significant strain on the Resulting Issuer’s Management, operational,
financial and other resources. The Resulting Issuer’s ability to manage growth effectively will require the
development of management information systems capabilities and improvement of operational and
financial systems. Moreover, the Resulting Issuer will need to train, motivate, and manage its employees
and attract senior managers and technical professionals. Any failure to expand these areas and implement
and improve such systems, procedures, and controls in an efficient manner at a pace consistent with the
Resulting Issuer’s business could have a material adverse effect on the Resulting Issuer’s business,
financial condition, and results of operations.
No Anticipated Dividends
The Resulting Issuer does not expect to pay dividends on its issued and outstanding Resulting Issuer Shares
upon completion of the Amalgamation or in the foreseeable future. If the Resulting Issuer generates any
future earnings such cash resources will be retained to finance further growth and current operations. The
board of directors of the Resulting Issuer will determine if and when dividends should be declared and paid
in the future based on the financial position of the Resulting Issuer and other factors relevant at the
particular time. Until the Resulting Issuer pays dividends, which it may never do, a shareholder will not be
able to receive a return on his, her or its investment in the Resulting Issuer Shares unless such Resulting
Issuer Shares are sold. In such an event, a shareholder may only be able to sell his, her or its Resulting
Issuer Shares at a price less than the price such shareholder originally paid for them, which could result in a
significant loss of such shareholder’s investment.
Dundee Corporation will have significant influence
After this Amalgamation, it is anticipated that Dundee Corporation will own 56.3% of the Nichromet
Subordinated Voting Shares and 100% of the Nichromet Multiple Voting Shares (representing 86.3% of the
voting power attached to all of the Nichromet Shares). See “Information Regarding the Amalgamation –
Effects of the Amalgamation”. As a result, Dundee Corporation will have significant influence with respect
to all matters submitted to the Resulting Issuer’s shareholders for approval, including without limitation the
election and removal of directors, amendments to the Resulting Issuer’s articles of incorporation and bylaws and the approval of any business combination. While the articles include limitations on Dundee
Corporation’s ability to make certain changes, this may nonetheless delay or prevent an acquisition of
Resulting Issuer or cause the market price of the Nichromet Subordinated Voting Shares to decline. The
interests of Dundee Corporation may not in all cases be aligned with interests of the Resulting Issuer’s
other shareholders. In addition, Dundee Corporation may have an interest in pursuing acquisitions,
divestitures and other transactions that, in the judgment of its management, could enhance its equity
investment, even though such transactions might involve risks to the Resulting Issuer’s shareholders and
may ultimately affect the market price of the Nichromet Subordinated Voting Shares.
Future Equity Sales by Insiders
After the Amalgamation, it is anticipated that Dundee Corporation will own 56.3% of the Nichromet
Subordinated Voting Shares and 100% of the Nichromet Multiple Voting Shares (representing 86.3% of the
voting power attached to all of the Nichromet Shares). See “Information Regarding the Amalgamation –
Effects of the Amalgamation”. Subject to compliance with applicable securities Laws, the Resulting Issuer’s
officers, directors, principal shareholders and their affiliates may sell some or all of their securities in the
Resulting Issuer in the future. No prediction can be made as to the effect, if any, such future sales of such
securities will have on the market price of the Nichromet Subordinated Voting Shares prevailing from time
to time. However, the future sale of a substantial number of equity securities by the Resulting Issuer’s
officers, directors, principal shareholders and their affiliates, or the perception that such sales could occur,
could adversely affect prevailing market prices for the Nichromet Subordinated Voting Share.
53
Limitation on Takeovers
Certain provisions of the Resulting Issuer’s articles and other constating documents may make it more
difficult or impossible for a third party to acquire control over the Resulting Issuer or effect a change in its
board of directors and management. These provisions include the existence of the Nichromet Multiple
Voting Shares, an advance notice by-law and the possible requirement to enter into a “coattail agreement”
with Dundee Corporation.
These provisions could delay, defer or prevent the Resulting Issuer from experiencing a Change of Control
and management and may adversely affect the Resulting Issuer’s shareholders’ voting and other rights. Any
delay or prevention of a Change of Control transaction and management could deter potential acquirers or
prevent the completion of a transaction in which the Resulting Issuer’s shareholders’ could receive a
substantial premium over the then current market price for their Nichromet Shares.
Conflicts of Interest
As set forth herein, certain senior officers and directors of the Resulting Issuer will own or control
substantial percentage of the outstanding Resulting Issuer Shares upon completion of the Amalgamation.
Certain conflicts may arise between such individuals’ interests as members of the Management and their
interests as shareholders. Such conflicts could arise, for example, with respect to the payment of salaries
and bonuses and other similar matters. The Resulting Issuer’s directors and officers are subject to fiduciary
obligations to act in the best interest of the Resulting Issuer. Conflicts, if any, will be subject to the
procedures and remedies of the CBCA.
Litigation Risk
All industries, including the clean technology industry, are subject to legal claims, with and without merit.
Defence and settlement costs can be substantial, even with respect to claims that have no merit. Due to the
inherent uncertainty of the litigation process, the resolution of any particular legal proceeding could have a
material adverse effect on the Resulting Issuer’s business, prospects, financial condition and results of
operations.
Employee Recruitment
Recruiting and retaining qualified personnel is critical to the success of the Resulting Issuer. As the
Resulting Issuer’s business activity grows, the Resulting Issuer will require additional key executive,
financial, operational, technical and administrative personnel. There can be no assurance that the Resulting
Issuer will be successful in attracting, training and retaining qualified personnel. If the Resulting Issuer is
not successful in attracting and training qualified personnel, the efficiency of its operations could be
affected, which could have a material adverse effect on the Resulting Issuer’s results of operations and
profitability.
If the Resulting Issuer is unable to hire, train and retain employees capable of developing the Process, the
Resulting Issuer may not be able to maintain its competitive strength and not realize on its growth strategy.
The Resulting Issuer may be unable to commercialize the metallurgical processes.
The Resulting Issuer’s ability to meet its labour needs while controlling the costs associated with hiring and
training new employees is subject to external factors such as unemployment levels, prevailing wage rates,
minimum wage legislation and changing demographics. Changes that adversely impact its ability to attract
and retain quality employees could adversely affect the Resulting Issuer’s business.
Operating Hazards and Risks
Resource exploration involves many risks, which even a combination of experience, knowledge and careful
evaluation may not be able to overcome. Operations in which Amalco will have a direct or indirect interest
54
will be subject to all of the hazards and risks normally incidental to exploration, development and
production of natural resources including, but not limited to, drilling, trenching and surveying all of which
could result in personal injuries, loss of life and damage to the property of Amalco or others, unusual or
unexpected formations, cave-ins, pollution, equipment breakdown, rugged terrain, wildlife hazards and
harsh weather conditions, all of which could result in work stoppages, damage to property, and possible
environmental damage. The nature of the risks associated with Amalco’s activities is such that potential
liabilities and hazards might not be insurable against, or Amalco might not elect to insure itself against such
liabilities due to high premium costs or other reasons, in which event the Resulting Issuer could incur
significant costs that could have a materially adverse effect upon the Resulting Issuer’s financial condition.
The Resulting Issuer, through Amalco, will conduct, among other things, the activities of the Corporation.
All of the resource properties in which the Corporation has an interest are in the exploration and evaluation
stages. Development of the Corporation’s resource properties will only follow upon obtaining satisfactory
results from exploration activities. Exploration and evaluation for and the development of natural resources
involve a high degree of risk and few properties that are explored are ultimately developed into producing
properties. There is no assurance that the Corporation’s exploration and evaluation activities will result in
any discoveries of commercial bodies of mineral deposits. The long term profitability of the Resulting
Issuer’s operations will be in part directly related to the cost and success of Amalco’s exploration
programs, which may be affected by a number of factors.
Substantial expenditures are required to establish mineral reserves, to develop processes to extract the
resources and, in the case of new properties, to develop the extraction and processing facilities and
infrastructure at any site chosen for extraction. Although substantial benefits may be derived from the
discovery of gold and base metals, no assurance can be given that resources will be discovered in sufficient
quantities to justify commercial operations or that the funds required for development will be obtained on a
timely basis.
Limited Operating History, Lack of Cash Flow and going concern
The Corporation does not have an operating history. None of its properties have commenced commercial
production. The only source of funds available to Amalco will be through advances from the Resulting
Issuer. Even if the results of exploration are encouraging, the Resulting Issuer may not have sufficient
funds to conduct the further exploration that may be necessary to determine whether or not commercially
feasible reserves exist on any property and may not realize a return on its investment. There is no assurance
that any such funds will be available for operations. Failure to obtain such additional funds, if needed,
would have a material adverse effect on the Resulting Issuer’s operations.
Since the business of the Resulting Issuer will be focused on the development of its metallurgical
processes, there can be no assurance that Resulting Issuer will be able to execute on its plans and there are
no guarantees that measures taken by Management will be successful. Without new funding being
available, Resulting Issuer may be unable to continue its operations, and amounts realized for assets may be
less than amounts reflected in the consolidated financial statements of the Corporation. The consolidated
financial statements do not reflect the adjustments to the carrying values of assets and liabilities, the
reported amounts of revenues and expenses, and the classification of financial position items where the
going concern assumption is inappropriate, and these adjustments could be material.
Regulatory Requirements Relating to Environmental Law
Amalco’s operations may be regulated under a number of Laws that govern, among other things, the
handling of waste materials, some of which are classified as hazardous materials, and the discharge of
hazardous materials into the environment. Amalco’s operations will be subject to stringent regulations
relating to the protection of the environment and waste handling. In addition to liability for Amalco’s own
non-compliance, these Laws may expose Resulting Issuer to liability for the non-compliance of other
parties, without regard to whether Amalco was negligent. Sanctions for non-compliance with applicable
environmental Laws and regulations may include administrative, civil and criminal penalties, revocation of
permits and corrective action orders. Furthermore, Amalco may be liable for costs for environmental clean-
55
up at currently or previously owned or operated properties or off-site locations.
Compliance with Laws, the adoption of Laws or regulations or the more vigorous enforcement of
environmental Laws or regulations could seriously harm the Resulting Issuer’s business by increasing
Amalco’s expenses and limiting Amalco’s future opportunities.
Permits and Licences
The operations of the Resulting Issuer may require licences and permits from various Governmental
Authorities. The Corporation believes that it holds all necessary licences and permits required to carry on
with activities that each is currently conducting under applicable Laws and believes that it is presently
complying in all material respects with the terms of such Laws. However, such Laws are subject to change.
There can be no assurance that the Resulting Issuer will be able to obtain all necessary licences and permits
required to carry out exploration, development and mining operations at its projects, or that existing permits
will remain in good standing and in full force and effect at all times.
No Assurances of Title
The acquisition of title to mineral properties is a very detailed and time-consuming process. Although
precautions will be taken by the Resulting Issuer to ensure that legal title to its property interests is properly
recorded where possible, there can be no assurance that such title will ultimately be secured. Furthermore,
there is no assurance that the interests of the Resulting Issuer in any of its properties may not be challenged
or impugned by competitors, aboriginal groups or otherwise.
Mineral exploration properties are sometimes subject to land claims by aboriginal peoples. There is no
assurance that such claims, if asserted, can be satisfactorily resolved on an economic or timely basis.
56
INFORMATION REGARDING THE AMALGAMATION
Background to the Amalgamation
The provisions of the Amalgamation Agreement are the result of negotiations conducted among
representatives of the Corporation and Nichromet and their respective legal advisors.
On August 22, 2013, Pierre Gauthier, who is President and CEO of the Corporation and President and CEO
of Nichromet, informed the Creso Board that he had discussions with the principal shareholder of
Nichromet, Dundee Corporation, and the Nichromet Board about a potential offer from Nichromet to
acquire the Corporation, setting out the principal terms and conditions of a business combination between
the Corporation and Nichromet.
On October 16, 2013, the Special Committee was formed to review the business combination. The Special
Committee is composed of all the independent directors of the Creso Board, namely Jacques Bouchard,
Réjean Gosselin, Jean-Guy Lambert and André Thibault.
On October 21, 2013, the Special Committee met and consulted with legal counsel who described the
structure of the Amalgamation. The Special Committee required that a legal due diligence review of
Nichromet be performed.
On October 28, 2013, the Special Committee completed its due diligence investigations and consulted with
legal counsel to obtain corporate, securities and tax advice. After such investigation, the Special Committee
determined that the Amalgamation was in the best interest of the Corporation and the Creso Shareholders
and therefore recommended that the Creso Board authorizes the Amalgamation.
On November 12, 2013, the Creso Board met to review the opportunity it had developed to that time and
reviewed the draft Amalgamation Agreement. After considering various factors related to the
Amalgamation and the entering into of the Amalgamation Agreement by the Corporation, the Creso Board
unanimously determined, with Pierre Gauthier abstaining, that the Amalgamation was in the best interests
of the Corporation. The Creso Board then authorized the Corporation to enter into the Amalgamation
Agreement substantially in the form submitted to the Creso Board’s review, subject to the changes
discussed at this meeting of the Creso Board.
On November 22, 2013, the Corporation, Nichromet and Subco executed the definitive Amalgamation
Agreement.
Anticipated Benefits of the Amalgamation
The Special Committee, the Creso Board and Management of the Corporation, with Pierre Gauthier
abstaining, believe that the Amalgamation is in the best interests of the Corporation and the Creso
Shareholders and that the Amalgamation provides a number of benefits for the Creso Shareholders,
including the following:
(a)
Nichromet, as the combined entity, will be a larger company than either the Corporation
and Nichromet alone and will have a larger asset base and anticipated greater access to
services to develop the Corporation and Nichromet’s assets;
(b)
the Creso Shareholders (other than Subco and Non-Resident Creso Shareholders) are
being provided with an opportunity to receive Nichromet Subordinate Voting Shares for
their Creso Shares and thereby maintain their holdings in the Corporation’s resource
properties through Nichromet as well as participation in the assets of Nichromet; and
(c)
Nichromet, as a larger company, may have greater access to capital markets.
57
On the recommendation of the Special Committee, the Creso Board has unanimously (with Pierre Gauthier
abstaining) determined that the Amalgamation is in the best interests of the Corporation and is fair to the
Creso Shareholders. Accordingly, the Creso Board unanimously (with Pierre Gauthier abstaining) approved
the Amalgamation and recommends that the Creso Shareholders vote in favour of the Amalgamation
Resolution.
In making its determinations, the Creso Board considered a number of substantive factors and benefits
associated with the Amalgamation:
(a)
the prospects and potential for growth of the Resulting Issuer;
(b)
the experience and expertise of the proposed directors and officers of the Resulting
Issuer; and
(c)
the Bridge Loan.
In making its determinations, the Creso Board also observed that a number of procedural safeguards were
and are present to permit the Creso Board to represent effectively the interests of the Corporation, the Creso
Shareholders and other stakeholders, including the following:
(a)
the constitution of the Special Committee;
(b)
the evaluation and negotiation process was conducted under the oversight of directors
who have no financial interest in the Amalgamation that is different from that of the
Creso Shareholders or otherwise disclosed in this Information Circular;
(c)
the directors met formally on numerous occasions, and the directors had additional
informal conferences among themselves, and with their advisors;
(d)
the directors received legal advice from Heenan Blaikie LLP, including conducting legal
due diligence in respect of Nichromet;
In making its determinations, the Creso Board also considered a variety of uncertainties, risks and other
factors concerning the Amalgamation and the Amalgamation Agreement, which the Creso Board concluded
were outweighed by the potential benefits described above. See the heading “Risk Factors”.
Description of the Amalgamation
The Amalgamation
On November 22, 2013, the Corporation, Nichromet and Subco entered into the Amalgamation Agreement
pursuant to which the Creso Shareholders (other than Subco and Dissenting Creso Shareholders) will
exchange all of the issued and outstanding Creso Shares for the issuance of Nichromet Subordinate Voting
Shares, in accordance with the Exchange Ratio. As a result, Creso Shareholders will be receiving, subject
to rounding, 62,516,478 Nichromet Subordinate Voting Shares. As more particularly described under
“Information Regarding the Amalgamation - Information for Non-Resident Creso Shareholders”, NonResident Creso Shareholders shall not be entitled to receive Nichromet Subordinated Voting Shares.
On the Amalgamation Date, the Corporation and Subco will be amalgamated to form Amalco, a whollyowned subsidiary of Nichromet. Following the Amalgamation Dundee Corporation will continue to
control the Resulting Issuer. The Resulting Issuer will continue to carry on the businesses theretofore
carried on by Nichromet and will indirectly carry on the businesses theretofore carried on by the
Corporation. See “Information Regarding the Resulting Issuer”.
The Amalgamation will result in Amalco becoming a wholly-owned subsidiary of Nichromet. Upon
58
completion of the Amalgamation, the current business of Nichromet will be the principal business of the
Resulting Issuer. See “Information Regarding Nichromet and Subco – General Development of the
Business”.
The completion of the Amalgamation contemplated by the Amalgamation Agreement is subject to certain
conditions, including obtaining shareholder approval, all necessary corporate and regulatory approvals,
including the Exchange approval of the Amalgamation and other customary conditions. See “Information
Regarding the Amalgamation – Amalgamation Agreement”.
An aggregate of 228,068,497 (on a fully-dilluted basis) Resulting Issuer Shares to be issued to the
Principals of the Resulting Issuer pursuant to the Amalgamation will be placed in escrow and will be
released on terms to be set by the Exchange and agreed to between the Resulting Issuer, the Escrow Agent
and such shareholders in a Form 46-201F1 – Escrow Agreement. For information pertaining to the terms of
the escrow, see “Information Regarding the Resulting Issuer – Escrowed Securities”.
Effect of the Amalgamation upon Holders of Creso Convertible Securities
The Amalgamation Agreement provides that Creso Options and the Creso Warrants will be exchanged for
Nichromet Options and Nichromet Warrants on the basis of the Exchange Ratio, as applicable. As for the
strike price, once converted, such Nichromet Options and Nichromet Warrants will have a strike price
equal to the double (200%) of the original strike price of the corresponding Creso Option or Creso Warrant,
as the case may be.
Fractional Shares
No fractional Nichromet Subordinate Voting Shares will be issued to Creso Shareholders in connection
with the Amalgamation. No cash will be paid in lieu of fractional shares. Any fractions resulting will be
rounded down to the nearest whole number.
Effects of the Amalgamation
Following completion of the Amalgamation, it is expected that:
(a)
Except as otherwise provided, Creso Shareholders will have exchanged all of the issued
and outstanding Creso Shares pursuant to the terms of the Amalgamation Agreement on
the basis of the Exchange Ratio, being half of a Nichromet Subordinate Voting Share for
every Creso Share
(b)
Each Creso Share held by Subco will be cancelled for no consideration;
(c)
The Creso Options and Creso Warrants will be exchanged for Nichromet Options and
Nichromet Warrants, as applicable;
(d)
Amalco will be a wholly-owned subsidiary of the Resulting Issuer and Amalco will carry
on the business of the Corporation;
(e)
the Resulting Issuer will continue to carry on the businesses theretofore carried on by
Nichromet and will indirectly carry on the businesses theretofore carried on by the
Corporation;
(f)
there will be an aggregate of 277,445,202 Resulting Issuer Shares issued and outstanding,
such Resulting Issuer Shares being comprised of an aggregate of 227,445,202 Nichromet
Subordinate Voting Shares and 50,000,000 Nichromet Multiple Voting Shares,
representing 31.3% and 68.7% of the voting power attached to all of the Resulting Issuer
59
Shares, respectively;
(g)
the following convertible securities will (subject to rounding) be issued and outstanding:
(i) 23,970,000 Resulting Issuer Options, each exercisable to acquire one Nichromet
Subordinate Voting Share at $0.10 to $1.74 per Nichromet Subordinate Voting Share and
(ii) 63,555,566 Resulting Issuer Warrants, each exercisable to acquire one Nichromet
Subordinate Voting Share at $0.10 to $0.30 per Nichromet Subordinate Voting Share;
(h)
the Nichromet Shareholders (including Dundee Corporation) will hold an aggregate of
164,928,724 Nichromet Subordinate Voting Shares representing approximately 72.5% of
the outstanding Nichromet Subordinate Voting Shares (on a non-diluted basis) and
representing 22.7% of the voting power attached to all of the Resulting Issuer Shares;
(i)
the Creso Shareholders (excluding Nichromet) will hold (subject to rounding) an
aggregate of 62,516,478 Nichromet Subordinate Voting Shares representing
approximately 27.5% of the outstanding Nichromet Subordinate Voting Shares (on a nondiluted basis) and 8.6% of the voting power attached to all Resulting Issuer Shares;
(j)
Dundee Corporation will hold an aggregate of 50,000,000 Nichromet Multiple Voting
Shares, representing 100% of the outstanding Nichromet Multiple Voting Shares and
representing 68.7% of the voting power attached to all of the Resulting Issuer Shares;
Dundee Corporation will also hold an aggregate of 128,068,497 Nichromet Subordinate
Voting Shares representing 56.3% of the outstanding Nichromet Subordinate Voting
Shares and representing 17.6% of the voting power attached to all of the Resulting Issuer
Shares. Accordingly, Dundee Corporation’s aggregate holdings in the Resulting Issuer
will represent 86.3% of the voting power attached to all of the Resulting Issuer Shares;
(k)
Ned Goodman, the controlling shareholder of Dundee Corporation, will hold directly
1,666,667 Nichromet Subordinate Voting Shares and therefore, when included with
Dundee Corporation’s holdings in the Resulting Issuer, which, under applicable securities
law, Mr. Goodman is deemed to beneficially own, his holdings will represent 100% of
the outstanding Nichromet Multiple Voting Shares and 129,735,164 or 57.0% of the
outstanding Nichromet Subordinate Voting Shares, which securities represent in the
aggregate 86.6% of the voting power attached to all Resulting Issuer Shares
(l)
the board of directors of the Resulting Issuer shall be comprised of: Ned Goodman, Pierre
Gauthier, Brahm Gelfand, Jean-Marc Lalancette, Hubert Marleau and Mark Goodman.
Creso considers that Hubert Marleau and Brahm Gelfand are independent directors and
that Ned Goodman, Pierre Gauthier, Mark Goodman and Jean-Marc Lalancette are not
independent. In addition, it is expected that Pierre Gauthier will serve as Chief Executive
Officer, Vatché Tchakmakian will serve as Chief Financial Officer and Luce Saint-Pierre
will serve as Corporate Secretary of the Resulting Issuer;
(m)
the Nichromet Subordinate Voting Shares will be listed and posted for trading on the
Exchange; and
(n)
the Creso Shares will be de-listed from trading on the Exchange and the Corporation will
cease to be a reporting issuer.
Amalgamation Agreement
The Amalgamation Agreement provides for the exchange by Creso Shareholders (other than Subco and
Dissenting Creso Shareholders) of all of the issued and outstanding Creso Shares for Nichromet
Subordinate Voting Shares. It is further provided that the Corporation and Subco will be amalgamated
under the CBCA to form Amalco. The following is a summary only of the Amalgamation Agreement and is
60
qualified in its entirety by the full text of the Amalgamation Agreement attached as Appendix B to this
Information Circular.
Pursuant to the Amalgamation Agreement, each Creso Shareholder (other than Subco and the Dissenting
Creso Shareholders) shall exchange, transfer and assign all of the Creso Shares held by each such Creso
Shareholder to Nichromet in consideration for Nichromet’s issuance to such Creso Shareholder of
Nichromet Subordinate Voting Shares in accordance with the Exchange Ratio.
Representations, Warranties and Covenants
The Amalgamation Agreement contains certain customary representations and warranties of each of the
Corporation, Nichromet and Subco relating to, among other things, their respective organization,
capitalization, qualification, operations, compliance with laws and regulations and other matters, including
their authority to enter into the Amalgamation Agreement and to consummate the Amalgamation. Pursuant
to the Amalgamation Agreement, the parties have agreed to advise each other of material changes. Further,
the parties have agreed to use their commercially reasonable efforts to obtain all regulatory and other
consents, waivers and approvals required for the consummation of the Amalgamation.
In addition, pursuant to the Amalgamation Agreement, each of the parties has covenanted, among other
things, until the completion of the Amalgamation, to maintain their respective businesses (other than the
halt imposed by the Exchange on the Creso Shares) and not take certain actions outside the ordinary course.
Conditions of the Amalgamation
The Amalgamation Agreement contains a number of conditions precedent to the obligations of the
Corporation and Nichromet thereunder. Unless all such conditions are satisfied or waived by the party or
parties for whose benefit such conditions exist, to the extent they may be capable of waiver, the
Amalgamation will not proceed. There is no assurance that the conditions will be satisfied or waived on a
timely basis, or at all. The conditions to the Amalgamation becoming effective are set out in the
Amalgamation Agreement and are summarized below.
Conditions to Obligations of the Corporation
The obligations of the Corporation to complete the Amalgamation are subject to Nichromet’s fulfilment of
the following conditions at or prior to the Amalgamation Date:
(a)
all necessary corporate or similar action shall have been taken by Nichromet to authorize
the execution and delivery of the Amalgamation Agreement and the consummation of the
Amalgamation;
(b)
the Amalgamation shall have been approved by the requisite majorities of the Creso
Shareholders at the Meeting in compliance with applicable laws including securities
laws;
(c)
all regulatory authorizations and receipt of all necessary approvals from the Exchange for
the listing of the Nichromet Subordinate Voting Shares to be issued upon completion of
Amalgamation (subject to Nichromet’s fulfilling the Exchange’s usual and ordinary
listing requirements) shall have been obtained on terms satisfactory to the Corporation;
(d)
the representations and warranties of Nichromet set forth in the Amalgamation
Agreement qualified by materiality or knowledge of the Corporation (or “Material
Adverse Change” to Nichromet or similar materiality qualifications) shall be true and
correct at the Effective Time and all representations and warranties of Nichromet
contained in the Amalgamation Agreement not so qualified shall be true and correct in all
material respects as at the Effective Time, except to the extent that any such
61
representation or warranty is made as of a specified date, in which case such
representation or warranty shall have been true and correct as of such date;
(e)
Nichromet and Subco shall have performed each covenant or obligation to be performed
by them under the Amalgamation Agreement in all material respects in favour of the
Corporation on or prior to the Amalgamation Date, or as otherwise specified in the
Amalgamation Agreement;
(f)
no Law shall be in effect that makes the consummation of the Amalgamation illegal or
otherwise prohibits or enjoins the Corporation or Nichromet from consummating the
Amalgamation;
(g)
Nichromet shall have received all closing documents required to be delivered to it under
the Amalgamation Agreement;
(h)
no judgment or order shall have been issued by any Governmental Authority, no action,
suit or proceeding shall have been threatened or taken by any Person (other than a party
to the Amalgamation Agreement or any of their respective affiliates), and no Law or
policy shall have been proposed, enacted, or promulgated or applied, which could
reasonably be expected to have the effect to cease trade, enjoin, prohibit or impose
material limitations or conditions on the completion of the Amalgamation, provided,
however, that the Corporation shall not be required to complete the Amalgamation as a
result of any act, action, suit or proceeding taken by a Person only if such act, action, suit
or proceeding shall have been resolved in favour of such Person as evidenced by an
order, ruling or decision by any Governmental Authority having jurisdiction in respect of
the Amalgamation, or if, in the reasonable opinion of the Corporation acting on the
advice of counsel, there is a reasonable risk that such act, action, suit or proceeding (other
than an act, action, suit or proceeding disclosed in writing to the other parties hereto) will
be so resolved in favour of such Person;
(i)
the Corporation shall have received an opinion with respect to the creation and corporate
power and status and share capital of Nichromet and the authorization of the entering into
of this Agreement and the effecting of the Amalgamation by all necessary corporate
action of Nichromet, in form and substance acceptable to the Corporation and its legal
counsel, acting reasonably;
(j)
the amalgamation agreement attached to the Amalgamation Agreement shall have been
duly executed and delivered by all of the parties thereto;
(k)
the issuance of Nichromet Subordinate Voting Shares (to be issued pursuant to the
Amalgamation Agreement) shall have been accepted for listing by the Exchange, subject
to Nichromet fulfilling the Exchange’s usual and ordinary listing requirements; and
(l)
there shall have not occurred or arisen one or more events, circumstances or changes that,
individually or in the aggregate, has or would be reasonably likely to result in a Material
Adverse Change to Nichromet.
Conditions to Obligations of Nichromet
The obligations of Nichromet to complete the Amalgamation are subject to the Corporation’s fulfilment of
the following conditions at or prior to the Amalgamation Date:
(a)
all necessary corporate or similar action shall have been taken by the Corporation to
authorize the execution and delivery of the Amalgamation Agreement and the
62
consummation of the Amalgamation;
(b)
the Amalgamation shall have been approved by the requisite majorities of the Creso
Shareholders at the Meeting in compliance with the applicable Laws including applicable
securities Laws;
(c)
all authorizations or consents and all regulatory authorizations and receipt of all
necessary approvals from, the Exchange for the listing of the Nichromet Subordinate
Voting Shares to be issued upon completion of Amalgamation (subject to Nichromet’s
fulfilling the Exchange’s usual and ordinary listing requirements) shall have been
obtained on terms satisfactory to Nichromet or the Corporation, as applicable;
(d)
the Special Committee and the Creso Board shall have adopted all necessary resolutions
and all other necessary corporate actions shall have been taken by the Corporation to
permit the consummation of the Amalgamation;
(e)
the Corporation shall have performed each covenant or obligation to be performed by it
under the Amalgamation Agreement in all material respects in favour of Nichromet on or
prior to the Amalgamation Date, or as otherwise specified under the Amalgamation
Agreement;
(f)
the representations and warranties of the Corporation set forth in the Amalgamation
Agreement qualified by materiality or knowledge of the Corporation (or Material
Adverse Change to the Corporation or similar materiality qualifications) shall be true and
correct at the Effective Time and all representations and warranties of the Corporation
contained in this Agreement not so qualified shall be true and correct in all material
respects as at the Effective Time, except to the extent that any such representation or
warranty is made as of a specified date, in which case such representation or warranty
shall have been true and correct as of such date;
(g)
the Corporation shall have no options, warrants or other rights to purchase Creso Shares
issued or outstanding other than as disclosed in the Amalgamation Agreement;
(h)
no judgment or order shall have been issued by any Governmental Authority, no action,
suit or proceeding shall have been threatened or taken by any Person (other than a party
hereto or any of their respective affiliates), and no Law or policy shall have been
proposed, enacted, or promulgated or applied, which could reasonably be expected to
have the effect to cease trade, enjoin, prohibit or impose material limitations or
conditions on the completion of the Amalgamation, or that, if the Amalgamation were
completed, could reasonably be expected to result in a Material Adverse Change for
either Nichromet and its subsidiaries taken as whole or the Corporation;
(i)
Nichromet shall have received an opinion with respect to the creation by amalgamation
and corporate power and status and share capital of the Corporation and the authorization
of the entering into of this Agreement and the effecting of the Amalgamation by all
necessary corporate action of the Corporation, in form and substance acceptable to
Nichromet and its legal counsel, acting reasonably;
(j)
the Escrow Agreement shall have been entered into with all shareholders concerned and
the other parties thereto;
(k)
the Corporation shall have met its obligations as a listed issuer on the TSXV or the
Exchange, as the case may be, and as a “reporting issuer” in British Columbia, Alberta,
Ontario and Quebec;
63
(l)
no Law shall be in effect that makes the consummation of the Amalgamation illegal or
otherwise prohibits or enjoins the Corporation or Nichromet from consummating the
Amalgamation;
(m)
dissent rights shall not have been exercised with respect to more than 5% of the issued
and outstanding Creso Shares;
(n)
the amalgamation agreement attached to the Amalgamation Agreement shall have been
duly executed and delivered by all of the parties thereto; and
(o)
there shall have not occurred or arisen one or more events, circumstances or changes that,
individually or in the aggregate, has or would be reasonably likely to result in a Material
Adverse Change to the Corporation.
Cure Provisions
Each of the Corporation, on the one hand, and Nichromet and Subco, on the other hand, shall give prompt
notice to the other of the occurrence, or failure to occur, at any time from the date hereof until the
Amalgamation Date, of any event or state of facts which occurrence or failure would, or would reasonably
be likely to: (i) constitute a material breach of any of its representations or warranties contained herein or
which would cause such representations and warranties to be untrue or incorrect in any material respect on
the Amalgamation Date; or (ii) result in the failure to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by the other hereunder prior to the Amalgamation Date.
Neither the Corporation, on the one hand, nor Nichromet and Subco, on the other hand, may elect not to
complete the Amalgamation or the other transactions contemplated under the Amalgamation Agreement
pursuant or exercise any termination right arising therefrom, unless forthwith and in any event prior to the
filing of the Articles of Amalgamation with the Director, the Corporation or Nichromet, as the case may be,
has delivered a written notice to the other specifying in reasonable detail all breaches of covenants,
representations and warranties or other matters which the Corporation or Nichromet, as the case may be, is
asserting as the basis for the non-fulfillment of the applicable condition precedent or the exercise of the
termination right, as the case may be.
Termination of the Amalgamation Agreement
Nichromet may, when not in default in the performance of any of its obligations under the Amalgamation
Agreement terminate the Amalgamation Agreement by written notice to the Corporation if:
(a)
not all of the conditions precedent in favour of Nichromet have been satisfied or waived
by Nichromet on or prior to the Outside Date;
(b)
the Special Committee or the Creso Board adversely modify in any way or withdraw the
recommendation that Creso Shareholders approve the Amalgamation;
(c)
the Amalgamation cannot be completed because the Corporation is in default under any
of its covenants under the Amalgamation Agreement; or
(d)
the Corporation breaches the Amalgamation Agreement in any material respect.
The Corporation, when not in default in the performance of any of its obligations under the Amalgamation
Agreement, may terminate the Amalgamation Agreement by written notice to Nichromet if:
(a)
not all of the conditions precedent in favour of the Corporation shall be or have been
satisfied or waived by the Corporation on or prior to the Outside Date;
64
(b)
the Amalgamation cannot be completed because Nichromet is in default under any of its
covenants contained in the Amalgamation Agreement; or
(c)
Nichromet breaches the Amalgamation Agreement in any material respect.
Financing
In connection with the Amalgamation, Dundee Corporation has loaned $3,000,000 to Nichromet. The funds
from the Bridge Loan were disbursed on January 31, 2014. The Bridge Loan bears interest at the rate of
12.68% per annum and matures on April 30, 2014. Nichromet has the option to repay the Bridge Loan at
any time but must use the proceeds from the sale of any assets in excess of $250,000 or any financing in
excess of $3,000,000 to repay the Bridge Loan. The use of the cash received pursuant to the Bridge Loan is
restricted. The Bridge Loan shall only be used to fund (i) the building of a demonstration plant and (ii) for
general corporate purposes.
On December 20, 2013, Nichromet loaned additional $200,000 to the Corporation which loan has been
made upon the same terms and conditions under the loan agreement in the amount of $500,000 dated July
10, 2013, entered into between the Corporation and Nichromet, namely that the loan bears interest at a rate
of 6% per annum payable on July 10, 2014.
Exchange Listings
The Creso Shares are listed and posted for trading on the TSXV under the symbol “CXT” and the
Corporation voluntarily applied for de-listing on January 31st, 2014. The listing of the Creso Shares on the
Exchange under the trading symbol “CXT” was conditionally approved by the Exchange on January 30,
2014. On the same day, the Exchange conditionally approved the listing of the Nichromet Subordinate
Voting Shares on the Exchange. Following completion of the Amalgamation, it is expected that the
Nichromet Subordinate Voting Shares will be listed and posted for trading on the Exchange.
Trading of the Creso Shares on the TSXV was halted on November 14, 2013. The closing price of the
Creso Shares on November 13, 2013, being the last day on which the Creso Shares traded prior to the
announcement of the Amalgamation, was $0.115 per Creso Share.
The Nichromet Shares are not traded publicly and there is no public market for the Nichromet Shares.
Securities Matters
The issuance of Nichromet Multiple Voting Shares necessitates compliance with OSC Rule 56-501 –
Restricted Shares.
Pursuant to Policy 8 Fundamental Changes of the Exchange and National Policy 46-201 Escrow for Initial
Public Offerings, all Resulting Issuer Shares held by “Principals” will be placed into escrow on
consummation of the Amalgamation. Refer to “Information Regarding the Resulting Issuer – Escrowed
Securities”.
Exemption from Formal Valuation Requirement and Multilateral Instrument 61-101
The Amalgamation may be considered a “business combination” under Multilateral Instrument 61-101 for
a variety of reasons, see “Particulars of Matters to be Acted On - Approval of the Amalgamation by a
Special Resolution”.
Multilateral Instrument 61-101 requires that a formal valuation be obtained in respect of any business
combination, if, as a consequence of the transaction, an “interested party” acquires the issuer or business or
is a party to any connected transactions, unless an exemption to the formal valuation requirement is
otherwise available under Multilateral Instrument 61-101. If an exemption where not available, the
65
Amalgamation would require a formal valuation as Nichromet, an “interested party” pursuant to
Multilateral Instrument 61-101, would, as a consequence of the Amalgamation, acquire with the
Corporation. The Corporation is relying upon the exemption to the formal valuation requirement set forth
in section 4.4(a) of Multilateral Instrument 61-101 which provides that an issuer is exempt from the formal
valuation requirement if no securities of the issuer are listed or quoted on the Toronto Stock Exchange, the
New York Stock Exchange, the American Stock Exchange, the NASDAQ Stock Market, or a stock
exchange outside of Canada and the United States other than the Alternative Investment Market of the
London Stock Exchange or the PLUS markets operated by PLUS Markets Group plc. The Corporation, as a
result of having the Creso Shares listed on the Exchange, is exempt from formal valuation requirements of
Multilateral Instrument 61-101.
In addition, Multilateral Instrument 61-101 requires the Corporation to disclose any “prior valuations” (as
defined in Multilateral Instrument 61-101) of the Corporation or its material assets or securities made
within the 24-month period preceding the date of this Information Circular. The Corporation is not aware of
any prior valuations in respect of the Corporation or Nichromet that requires disclosure under Multilateral
Instrument 61-101.
Pursuant to Multilateral Instrument 61-101, the Corporation will not be permitted to carry out the
Amalgamation unless a “Majority of the Minority” approval is obtained. See “Particular of Matters to be
Acted On - Approval of the Amalgamation by a Special Resolution”.
Procedure for the Amalgamation to Become Effective
Procedural Steps
The Amalgamation shall be carried out pursuant to the CBCA. Under the CBCA, the following procedural
steps must be taken in order for the Amalgamation to be effective:
(a)
the Amalgamation must be approved by the Creso Shareholders and Nichromet, as the
sole shareholder of Subco; and
(b)
assuming all conditions precedent to the Amalgamation, as set forth in the Amalgamation
Agreement, are satisfied or waived by the appropriate party, articles of amalgamation
must be filed with the Director, following which the Director will issue a certificate of
amalgamation.
Shareholder Approvals
Pursuant to the CBCA, the Amalgamation Resolution must be passed, with or without variation, by 2/3 of
all votes cast with respect to the Amalgamation Resolution by the Creso Shareholders, present in person or
represented by proxy at the Meeting. In addition, the Amalgamation must be approved by Nichromet, as the
sole shareholder of Subco.
Notwithstanding the foregoing, the Amalgamation Resolution authorizes the Creso Board, without further
notice to or the approval of the Creso Shareholders, subject to the terms of the Amalgamation Agreement,
to decide not to proceed with the Amalgamation and to revoke such Amalgamation Resolution at any time
prior to the Amalgamation becoming effective pursuant to the provisions of the CBCA.
Subco Shareholder Approval
Nichromet will provide, by written resolution its approval for the Amalgamation as sole shareholder of
Subco.
66
Creso Shareholder Approval
See “Summary – The Meeting” and “Particular of Matters to be Acted On - Approval of the Amalgamation
by a Special Resolution”.
Exchange Approval
In accordance with the rules of the Exchange, Nichromet has applied for the listing of the Nichromet
Subordinate Voting Shares on the Exchange. On January 30, 2014, the Exchange conditionally approved
the listing of the Nichromet Subordinate Voting Shares on the Exchange. Listing will be subject to
Nichromet fulfilling all of the requirements of the Exchange.
The Resulting Issuer will be considered to have completed the Amalgamation on the Amalgamation Date,
that is the date of the filing of Articles of Amalgamation. Trading of the shares of the Resulting Issuer will
not commence until the Effective Date, that is the date that the Exchange issues the Final Exchange
Bulletin, which is expected to be on the Amalgamation Date, provided that all required documentation is
filed with the Exchange.
Timing
It is anticipated that the Amalgamation will become effective after the requisite approval of the Creso
Shareholders and regulatory approvals have been obtained and all other conditions to the Amalgamation
have been satisfied or waived. It is currently anticipated that the Amalgamation will become effective on or
before March 31, 2014. However, both Nichromet and the Corporation may, when not in default in the
performance of any of its obligations under the Amalgamation Agreement terminate the Amalgamation
Agreement by written notice to the Corporation if not all of the conditions precedent in favour of
Nichromet have been satisfied or waived by the Corporation (in the case of a termination by Nichromet) or
Nichromet (in the case of a termination by the Corporation) on or prior to the Outside Date.
Expenses of the Amalgamation
The aggregate costs to be incurred relating to the Amalgamation by the Corporation, including, without
limitation, accounting, legal, and financial advisory fees, the preparation and printing of this Information
Circular and other out-of-pocket costs associated with the Meeting, are estimated to be approximately
$150,000. Each of Nichromet and the Corporation will bear its own costs and expenses in connection with
the transactions contemplated by the Amalgamation Agreement.
Exchange of Securities
Following the Amalgamation, the former registered Creso Shareholders, other than Subco, the Dissenting
Creso Shareholders and Non-Resident Creso Shareholders, shall be deemed to be holders of Nichromet
Subordinate Voting Shares. Until surrendered, each certificate which immediately prior to the
Amalgamation Date represented Creso Shares will be deemed, at any time after the Amalgamation Date, to
represent only the right to receive upon such surrender (i) the certificate representing Nichromet
Subordinate Voting Shares, in the case of Creso Shareholders that are not Non-Resident Creso
Shareholders, or (ii) a pro-rata portion of the cash proceeds (net of fees) of the sale of Nichromet
Subordinate Voting Shares sold on behalf of Non-Resident Creso Shareholders by the Depositary that the
holder thereof has the right to receive in respect of such share certificate pursuant to the Amalgamation, in
the case of Creso Shareholders that are Non-Resident Creso Shareholders.
The holders of certificates representing the Creso Warrants or Creso Options are not required to surrender
such certificates to the Corporation or Nichromet until such time as they wish to exercise the Creso
Warrants or Creso Options. Warrantholders and Optionholders shall receive written confirmation from the
Resulting Issuer indicating the number of Nichromet Subordinate Voting Shares such former Creso
Warrants or Creso Options, as applicable, may be exercised into and the applicable exercise price in
67
accordance with the terms of the Amalgamation Agreement and the certificates representing the former
Creso Warrants or Creso Options shall, as applicable, represent the reconstituted options or warrants of the
Resulting Issuer.
Letter of Transmittal
Included with this Information Circular is a Letter of Transmittal to be used by the registered Creso
Shareholders for the surrender of certificates which formerly represented the Creso Shares. The holders of
certificates formerly representing Creso Shares are required to surrender such certificates pursuant to the
Letter of Transmittal and upon such surrender, will be entitled to receive (i) certificates representing the
number of Nichromet Subordinate Voting Shares to which they are so entitled pursuant to the
Amalgamation Agreement, in the case of holders who are not Non-Resident Creso Shareholders, or (ii) a
pro-rata portion of the cash proceeds (net of fees) of the sale of Nichromet Subordinate Voting Shares sold
on behalf of Non-Resident Creso Shareholders by the Depositary, in the case of Creso Shareholders that are
Non-Resident Creso Shareholders (subject to completion of the sale of such Nichromet Subordinate Voting
Shares by the Depositary as described under “Information Regarding the Amalgamation - Information for
Non-Resident Creso Shareholders” in this Information Circular), as the case may be.
The Letter of Transmittal will set out the details for the surrender of the certificates formerly representing
Creso Shares and the address of the Depositary and instructions as to the procedure required for registered
Creso Shareholders to exchange their certificates formerly representing Creso Shares for certificates
representing Nichromet Shares (or cash, in the case of Non-Resident Creso Shareholders). Provided that a
Creso Shareholder has delivered and surrendered to the Depositary all certificates formerly representing
such shareholder’s Creso Shares, together with a Letter of Transmittal, duly completed and executed in
accordance with the instructions thereon or in an otherwise acceptable form and such other documents as
may be required by the Depositary, the Depositary will be required to forward (i) the certificates
representing the Nichromet Shares that the Shareholder is entitled to receive, in the case of a Creso
Shareholder that is not a Non-Resident Creso Shareholder, or (ii) cash equal to a pro-rata portion of the
cash proceeds (net of fees) of the sale of Nichromet Shares sold on behalf of Non-Resident Creso
Shareholders by the Depositary, in the case of a Creso Shareholder that is a Non-Resident Creso
Shareholder (as described in more detail below under “Information Regarding the Amalgamation –Not
Holders, Warrants Holders and Options Holders Resident in Canada”), to such address or addresses as the
Creso Shareholder may direct in the Letter of Transmittal, or in the absence of any direction, to the address
of the Creso Shareholder as shown on the register of shareholders maintained for the Corporation by the
Depositary. See “Information Regarding the Amalgamation – Holders, Warrants Holders and Options
Holders Not Resident in Canada” below for more information on the distribution of cash proceeds to any
Creso Shareholder that is a Non-Resident Creso Shareholder.
Creso Shareholders whose Creso Shares are registered in the name of a broker, dealer, bank, trust
company or other nominee should contact their nominee holder to arrange for the exchange of their
Creso Shares.
Information for Non-Resident Creso Shareholders
THE AMALGAMATION AND THE NICHROMET SUBORDINATE VOTING SHARES
ISSUABLE IN CONNECTION WITH THE AMALGAMATION HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
OR SECURITIES REGULATORY AUTHORITIES IN ANY STATE, NOR HAS THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
REGULATORY AUTHORITIES OR ANY STATE PASSED ON THE ADEQUACY OR
ACCURACY OF THIS INFORMATION CIRCULAR. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENCE.
THE NICHROMET SUBORDINATE VOTING SHARES TO BE ISSUED PURSUANT TO THE
AMALGAMATION HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAW OF
68
ANY STATE OF THE UNITED STATES.
Due to securities law considerations, Nichromet will not distribute Nichromet Subordinate Voting
Shares into any Non-Qualifying Jurisdiction, including the United States or to a Creso Shareholder
resident or located in any Non-Qualifying Jurisdiction, including, but not limited to, a U.S.
Securityholder (a “Non-Resident Creso Shareholder”). While this Information Circular is being
distributed to Non-Resident Creso Shareholders as part of the notice and voting requirements for the
Meeting on the Amalgamation and Non-Resident Creso Shareholders may vote on the
Amalgamation, this Information Circular does not constitute an offer to sell or the solicitation of an
offer to buy any of the Nichromet Shares in any Non-Qualifying Jurisdiction or to, or for the account
or benefit of persons in any Non-Qualifying Jurisdiction, including the Unites States.
No Non-Resident Creso Shareholder will be entitled to receive Nichromet Subordinate Voting
Shares. All Nichromet Subordinate Voting Shares that a Non-Resident Creso Shareholder would have been
entitled to receive under the Amalgamation will instead be issued and delivered to the Depositary, and the
Depositary shall use its best efforts to sell such Nichromet Shares through the facilities of the Exchange as
soon as practicable after the Amalgamation Date, on such dates and at such prices as the Depositary
determines in its sole discretion, through one or more brokers with whom the Depositary transacts business.
Non-Resident Creso Shareholders will not be permitted to direct or provide instructions to the Depositary
regarding the sale or other disposition of such securities held by the Depositary in any way. See
“Information Regarding the Amalgamation - Exchange of Securities” Above. Such Non-Resident Creso
Shareholders shall bear the costs or fees of the Depositary and brokers in connection with such sales, as
such amounts will be deducted from the amount available for distribution to Non-Resident Creso
Shareholders. For greater certainty, the Depositary shall not be liable to any party if it is unable to effect the
sale of any such Nichromet Subordinate Voting Shares at a particular price or at all.
Each Non-Resident Creso Shareholder whose Creso Shares are deposited with the Depositary pursuant to
the Amalgamation Agreement will, following receipt by the Depositary of a completed Letter of
Transmittal, the certificates representing the applicable Creso Shares and other required documents at the
address specified in such Letter of Transmittal and subject to completion of the sale of the Nichromet
Subordinate Voting Shares by the Depositary, be entitled to receive, in lieu of Nichromet Subordinate
Voting Shares, its pro-rata share of the cash proceeds (net of fees) from the sale of the Nichromet
Subordinate Voting Shares sold by the Depositary on behalf of Non-Resident Creso Shareholders. In the
event that the Nichromet Subordinate Voting Shares are sold by the Depositary prior to receiving a
completed Letter of Transmittal and the other required documents from such a Non-Resident Creso
Shareholder, the cash proceeds will be held by the Depositary for such Non-Resident Creso Shareholder
pending receipt by the Depositary of a completed Letter of Transmittal, the certificates representing the
applicable Creso Shares and other required documents at the address specified in such Letter of
Transmittal.
No payments of the cash proceeds from the sale of the Nichromet Subordinate Voting Shares will be
made until all such Nichromet Subordinate Voting Shares to be sold on behalf of Non-Resident Creso
Shareholders have been sold by the Depositary. The sale of such Nichromet Subordinate Voting
Shares may not be completed on a timely basis and, accordingly, Non-Resident Creso Shareholders
may experience a delay in receiving their pro-rata share of the cash proceeds from such sale.
The sales of Nichromet Subordinate Voting Shares by the Depositary will be completed in Canadian
dollars. Accordingly, all payments to Non-Resident Creso Shareholders described above will be
denominated in Canadian dollars.
Payments will be made to Non-Resident Creso Shareholders by cheque.
Under no circumstances will interest be paid by the Corporation, Nichromet, the Resulting Issuer,
Subco, Amalco or the Depositary on the cash proceeds from the sale of Nichromet Subordinate
Voting Shares to be paid to Non-Resident Creso Shareholders, regardless of any delay in making any
payment.
69
Dissenting Creso Shareholder Rights
The statutory provisions dealing with the Dissent Rights are technical and complex. Any Creso
Shareholders who wishes to exercise their Dissent Rights should seek independent legal advice, as
failure to comply strictly with the provisions of Section 190 of the CBCA and the Amalgamation
Agreement may result in the loss of the Dissent Rights.
Registered Creso Shareholders have the right to dissent to the Amalgamation Resolution pursuant to
Section 190 of the CBCA (“Dissent Rights”). This summary is expressly subject to Section 190 of the
CBCA, to the text of which is reproduced in its entirety in Appendix C hereto. None of the Corporation,
Nichromet or any of their Affiliates or successors is required to notify, and will not notify, their
shareholders of the time period within which action must be taken in order for such shareholders to perfect
their Dissent Rights. It is recommended that shareholders wishing to avail themselves of their Dissent
Rights seek legal advice, as failure to comply strictly with the provision of Section 190 of the CBCA may
prejudice any such rights. A “Registered Creso Shareholder” is a Creso Shareholder whose shares are
registered in his, her or its name on the shareholder register of the Corporation. If a Creso Shareholder
holds his, her or its Creso Shares through an investment dealer, broker or market intermediary, he, she or it
will not be a Registered Creso Shareholder. Any holder of Creso Shares who wishes to invoke his, her or its
Dissent Rights should register his, her or its shares in his, her or its name or arrange for the Registered
Creso Shareholder to dissent. Any shareholder who wishes to register his, her or its shares in his, her or its
name is urged to consult with his, her or its legal or investment advisor or the registrar and transfer agent of
the Corporation at the following address: 600 de Maisonneuve Blvd. West, Suite 2750, Montreal, Québec,
H3A 3J2.
In the event that the Amalgamation Resolution is adopted and becomes effective, any Creso Shareholder
who dissents in respect of such special resolution in compliance with Section 190 of the CBCA (a
“Dissenting Creso Shareholder”) will be entitled to be paid by the Corporation a sum representing the fair
value of his, her or its Creso Shares determined as of the close of business on the day before the
Amalgamation Resolution was adopted. No right of dissent or appraisal is available to holders of Creso
Shares with respect to any other matter to be considered at the Meeting.
A Dissenting Creso Shareholder must send to the Corporation at or before the Meeting a written objection
to the Amalgamation Resolution (a “Dissent Notice”). A vote against the Amalgamation Resolution does
not constitute a Dissent Notice. The CBCA does not provide for partial dissent and, accordingly, a
shareholder may only dissent with respect to all of the shares held by such shareholder or on behalf of any
one beneficiary owner whose shares are registered in his, her or its name.
Under the CBCA, the Corporation is required, within ten days after its shareholders adopt the
Amalgamation Resolution, to send notice that the Amalgamation Resolution has been adopted to each
Dissenting Creso Shareholder who has not withdrawn his, her or its objection or voted for such resolution.
Such a Dissenting Creso Shareholder shall, within twenty (20) days of receiving such notice (or if such
notice is not received, within twenty (20) days of learning that the Amalgamation Resolution has been
adopted), send to the Corporation a written notice in prescribed form demanding payment of fair value for
his, her or its shares (a “Shareholder Demand”). Not later than the thirtieth (30) day after sending a
Shareholder Demand to the Corporation, a Dissenting Creso Shareholder must send the certificates
representing the shares in respect of which he or she dissents to Creso or its transfer agent, who is required
to endorse thereon a notice that the shareholder is a Dissenting Creso Shareholder and return the certificates
to the Dissenting Creso Shareholder. Not later than seven (7) days after the later of (i) the day the
Corporation received the Shareholder Demand, or (ii) the day on which the Amalgamation is effective or
the day the Corporation received a Shareholder Demand, the Corporation (unless it fails to meet certain
solvency criteria) must send to each Dissenting Creso Shareholder who has sent a Shareholder Demand a
written offer to pay for the Dissenting Creso Shareholder’s shares in an amount considered by the Creso
Board to be the fair value of the shares accompanied by a statement showing how the fair value was
determined. If the Corporation fails to make such an offer, or a Dissenting Creso Shareholder does not
accept such an offer, the Corporation may, within fifty (50) days after the Amalgamation is effective or
such further period as the Québec Court may allow, apply to the Québec Court to fix a fair value for the
70
shares of any Dissenting Creso Shareholder. If the Corporation fails to apply to the Québec Court, a
Dissenting Creso Shareholder may do so for the same purpose within a further period of twenty (20) days
or such further period as the Québec Court may allow.
Under the CBCA, upon the sending of a Shareholder Demand, a Dissenting Creso Shareholder ceases to
have any rights as a Creso Shareholder, other than the right to be paid the fair value of his, her or its shares
in the amount agreed to between the Corporation and the Dissenting Creso Shareholder or in the amount
fixed by the Québec Court, as the case may be. Until one of these events occurs, the Dissenting Creso
Shareholder may withdraw his, her or its Dissent Notice or the Corporation may rescind the Amalgamation
Resolution, and in either event, the dissent and appraisal proceedings in respect of such Dissenting Creso
Shareholder will be discontinued and the Dissenting Creso Shareholder’s rights as a Creso Shareholder
shall be reinstated as of the time the Dissent Notice was sent.
Dissenting Creso Shareholders will not have any right, other than those granted under the CBCA, to have
their shares appraised or to receive the fair value thereof.
Strict Compliance with Dissent Provisions Required
The foregoing summary does not purport to be a comprehensive statement of the procedures to be followed
by a Dissenting Creso Shareholder who seeks payment of the fair value of such Dissenting Creso
Shareholder’s shares, and is qualified in its entirety by reference to Section 190 of the CBCA, the full text
of which is attached to this Information Circular as Appendix C. The Dissent Rights in the provisions of
Section 190 of the CBCA require strict adherence to the procedures established therein and failure to do so
may result in the loss of Dissent Rights. Accordingly, each Creso Shareholder who might desire to exercise
Dissent Rights should carefully consider and comply with the provisions of those sections and should
consult a legal advisor.
The Amalgamation Agreement provides, as a condition to the parties’ obligations to complete the
Amalgamation, that holders of not more than 5.0% of the issued and outstanding Creso Shares shall have
exercised Dissent Rights in connection with the Amalgamation.
Canadian Federal Tax Considerations
In the opinion of Heenan Blaikie LLP, counsel to the Corporation (“Counsel”), the following is, as of the
date hereof, a general summary of the principal Canadian federal income tax considerations of the
Amalgamation generally applicable under the ITA to a Creso Shareholder who, for the purposes of the ITA
and at all relevant times, (a) deals at arm’s length with the Corporation and Nichromet; (b) is not affiliated
with the Corporation and Nichromet; (c) holds all Creso Shares as capital property; and (d) will hold the
Nichromet Subordinate Voting Shares as capital property. Each such Creso Shareholder is hereinafter
referred to in this summary as a “Holder”. This general summary of the principal Canadian federal income
tax considerations of the Amalgamation is also applicable, as of the date hereof, to a Person who holds
Creso Warrants and who, for the purposes of the ITA and at all relevant times, (a) deals at arm’s length
with the Corporation and Nichromet; (b) is not affiliated with the Corporation and Nichromet; (c) holds all
Creso Warrants as capital property; (d) will hold the Nichromet Warrants as capital property; (e) was not
granted the Creso Warrants by virtue of being a director, officer or employee of the Corporation; and (f)
receives no consideration other than Nichromet Warrants as a result of the disposition of the Creso
Warrants upon the Amalgamation. Each such holder of Creso Warrants is hereinafter referred to in this
summary as a “Warrant Holder”. This general summary of the principal Canadian federal income tax
considerations of the Amalgamation is also applicable, as of the date hereof, to a Person who holds Creso
Options and who, for the purposes of the ITA and at all relevant times, (a) is, or is deemed to be resident in
Canada, (b) deals at arm’s length with the Corporation and Nichromet; (c) is not affiliated with the
Corporation and Nichromet; (d) was granted the Creso Options by virtue of being a director, officer or
employee of the Corporation; and (e) receives no consideration other than Nichromet Options as a result of
the disposition of the Creso Options upon the Amalgamation. Each such holder of Creso Options is
71
hereinafter referred to in this summary as an “Option Holder”.
A Creso Share or Creso Warrant generally will be considered to be capital property of the Holder or
Warrant Holder, unless such Holder or Warrant Holder is a trader or dealer in securities or such Creso
Shares or Creso Warrants are held in the course of carrying on a business of buying and selling securities or
were acquired in a transaction or transactions considered to be an adventure or concern in the nature of
trade. Certain Holders who are resident in Canada for the purposes of the ITA and whose Creso Shares
might not otherwise be capital property may, in certain circumstances, be entitled to make an irrevocable
election under subsection 39(4) of the ITA to have such Creso Shares and every other “Canadian
security” (as defined in the ITA) owned by such Holder deemed to be capital property in the taxation year
in which the election is made and in all subsequent taxation years. Such Holders should consult their own
tax advisors regarding whether an election under subsection 39(4) of the ITA is available and advisable in
their particular circumstances.
This summary is based on the current provisions of the ITA, the regulations thereunder and Counsel’s
understanding of the current published administrative practices and policies of the Canada Revenue Agency
(“CRA”). This summary also takes into account all specific proposals to amend the ITA and the regulations
publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof
(“Proposed Amendments”), and assumes that Proposed Amendments will be enacted in the form
proposed, although no assurances can be given in this regard. Except for the Proposed Amendments, this
summary does not take into account or anticipate any changes in law, whether by legislative, governmental,
regulatory or judicial action or decision, or changes in the administrative practices of the CRA, nor does it
take into account provincial, territorial or foreign income tax considerations, which may differ from the
Canadian federal income tax considerations contained in this summary. This summary assumes the
Nichromet Subordinate Voting Shares will be listed on the Exchange on the Amalgamation Date. No
advance income tax ruling has been sought or obtained from the CRA with respect to any of the
transactions forming part of the Amalgamation.
This summary is not applicable to a Holder, Warrant Holder or Option Holder: (a) that is a “financial
institution” as defined in the ITA that is subject to the “mark-to-market” rules contained in the ITA; (b) that
is a “specified financial institution” as defined in the ITA; (c) an interest in which is a “tax shelter
investment” as defined in the ITA; (d) to whom the “functional currency reporting rules” in the ITA apply;
or (e) that has entered into a derivative forward agreement (as that term is defined in the ITA) with respect
to a Creso Share, a Creso Warrant or a Creso Option. Such Holders, Warrant Holders or Option Holders
should consult their own tax advisors with respect to the tax consequences of the Amalgamation.
This summary is of a general nature only and is not exhaustive of all possible Canadian federal
income tax considerations. This summary is not, nor should it be construed to be, legal or tax advice
to any particular Holder, Warrant Holder or Option Holder and no representations with respect to
the tax consequences of the Amalgamation to any particular Holder, Warrant Holder or Option
Holder are made. Accordingly, all Holders, Warrant Holders or Option Holders should consult their
own tax advisors regarding the Canadian federal income tax consequences of the Amalgamation
applicable to their particular circumstances.
Holders, Warrant Holders and Option Holders Resident in Canada
This part of the summary is generally applicable to a Holder, a Warrant Holder or an Option Holder who,
at all relevant times, is or is deemed to be resident in Canada for the purposes of the ITA (collectively, a
“Resident Holder”).
72
Disposition of the Creso Shares on the Amalgamation
A Resident Holder will generally be deemed to have disposed of his Creso Shares for proceeds of
disposition equal to the aggregate adjusted cost base of those Creso Shares to the Resident Holder
immediately before the Amalgamation, and will be deemed to have acquired the Nichromet Subordinate
Voting Shares at an aggregate cost equal to such proceeds of disposition. The cost of such Nichromet
Subordinate Voting Shares will be averaged with the adjusted cost base of all other Nichromet Subordinate
Voting Shares held by such Resident Holder as capital property at a particular time for the purpose of
determining the adjusted cost base of each Nichromet Subordinate Voting Shares held by the Resident
Holder at that time.
Disposition of the Creso Warrants on the Amalgamation
A Resident Holder will generally be deemed to have disposed of his Creso Warrants for proceeds of
disposition equal to the aggregate adjusted cost base of the Creso Warrants to the Resident Holder
immediately before the Amalgamation and to have acquired the Nichromet Warrants at an aggregate cost
equal to such proceeds of disposition.
Exchange of Creso Options for Nichromet Options on the Amalgamation
For the purposes of determining the employment income of a Resident Holder, (a) a Resident Holder will
generally be deemed not to have disposed of the Creso Options and not to have acquired the Nichromet
Options, (b) the Nichromet Options will generally be deemed to be the same option as, and a continuation
of, the Creso Options and (c) Nichromet will generally be deemed to be the same Person as, and a
continuation of, the Corporation; provided that the amount, if any, by which (i) the total value of the
Nichromet Options immediately after the exchange exceeds (ii) the total amount payable by the Resident
Holder to acquire Nichromet Subordinate Voting Shares under the Nichromet Options, does not exceed the
amount, if any, by which (iii) the total value of the Creso Options immediately before the exchange exceeds
(vi) the total amount payable by the Resident Holder to acquire Creso Shares under the Creso Options.
Dissenting Holders
If a Resident Holder exercises dissent rights (a “Dissenting Holder”) and receives the fair value of such
Dissenting Holder’s Creso Shares from Amalco, such Dissenting Holder will be considered to have
disposed of such Creso Shares for proceeds of disposition equal to the amount received by the Dissenting
Holder less any interest awarded by the court. A Dissenting Holder will realize a capital gain or capital loss
to the extent such exceeds of disposition exceed (or are exceeded by) the aggregate of the adjusted cost
base of the Creso Shares to the Holder and any reasonable cost of disposition. The treatment of capital
gains and capital losses is discussed below under “Disposition of Nichromet Subordinate Voting Shares and
Nichromet Warrants” and “Taxation of Capital Gains and Capital Losses”. Any interest awarded to a
Dissenting Holder by the court will be included in the Dissenting Holder’s income for the purposes of the
ITA. Dissenting Holders should consult their own tax advisors concerning the tax consequences of an
exercise of dissent rights.
Disposition of Nichromet Subordinate Voting Shares and Nichromet Warrants
A disposition or deemed disposition by a Resident Holder of Nichromet Subordinate Voting Shares (other
than a disposition to Nichromet) or Nichromet Warrants (other than on an exercise of such Nichromet
Warrants), as applicable, will generally give rise to a capital gain (or capital loss) equal to the amount by
which the proceeds of disposition, net of any reasonable costs of disposition, are greater (or less) than such
Resident Holder’s adjusted cost base of such Nichromet Subordinate Voting Shares or Nichromet
Warrants, as the case may be, immediately prior to the disposition. The tax treatment of capital gains and
losses is discussed below under the subheading “Taxation of Capital Gains and Capital Losses”.
73
Taxation of Capital Gains and Capital Losses
A Resident Holder will be required to include in computing its income for a taxation year one-half of the
amount of any capital gain (a “taxable capital gain”) realized by a Resident Holder in that year. A
Resident Holder will generally be entitled to deduct one-half of the amount of any capital loss (an
“allowable capital loss”) realized in a taxation year from taxable capital gains realized by the Resident
Holder in that year. Allowable capital losses in excess of taxable capital gains in a particular year may be
carried back to any of the three preceding taxation years or carried forward to any subsequent taxation year
and deducted against net taxable capital gains realized in such years, to the extent and under the
circumstances specified in the ITA.
In general, a capital loss realized on the disposition of shares by a Resident Holder that is a corporation
may, to the extent and under the circumstances specified in the ITA, be reduced by the amount of dividends
received (or deemed to have been received) by the corporation on such shares. Similar rules may apply
where shares are owned by a partnership or trust of which a corporation, trust or partnership is a member or
beneficiary. Resident Holders to whom these rules may be relevant should consult their own tax advisors.
A Resident Holder that is throughout the taxation year a “Canadian-controlled private corporation” (as
defined in the ITA) may be required to pay an additional 6⅔% refundable tax on certain investment
income, which includes taxable capital gains.
The realization of a capital gain by an individual (including certain trusts) may increase the individual
liability to pay alternative minimum tax under the ITA. Resident Holders should consult their own tax
advisors with respect to alternative minimum tax.
The reporting rules in the ITA are complex and this summary does not purport to explain all
circumstances in which reporting may be required by any Resident Holder. Accordingly, Resident
Holders should consult their own tax advisors regarding compliance with these rules.
Holders, Warrant Holders and Option Holders Not Resident in Canada
This part of the summary is generally applicable to a Holder or a Warrant Holder who, for purposes of the
ITA and any applicable income tax convention and at all relevant times, is not resident or deemed to be
resident in Canada and does not use or hold, and is not deemed to use or hold, Creso Shares or Creso
Warrants in, or in the course of, carrying on a business in Canada (collectively, a “Non-Resident Holder”).
Special rules, which are not discussed in this summary, may apply to a Non-Resident Holder that is an
insurer carrying on an insurance business in Canada or elsewhere.
Disposition of the Creso Shares on the Amalgamation
A Non-Resident Holder who receives Nichromet Subordinate Voting Shares pursuant to the Amalgamation
will generally be deemed to have disposed of his Creso Shares for proceeds of disposition equal to the
aggregate adjusted cost base of those Creso Shares immediately before the Amalgamation, and will be
deemed to have acquired the Nichromet Subordinate Voting Shares at a cost equal to such proceeds of
disposition. The cost of such Nichromet Subordinate Voting Shares will be averaged with the adjusted cost
base of all other Nichromet Subordinate Voting Shares held by such Non-Resident Holder as capital
property at a particular time for the purpose of determining the adjusted cost base of each Nichromet
Subordinate Voting Shares held by the Non-Resident Holder at that time.
Disposition of the Creso Warrants on the Amalgamation
A Non-Resident Holder who receives Nichromet Warrants on the Amalgamation will generally be deemed
to have disposed of his Creso Warrants for proceeds of disposition equal to the aggregate adjusted cost base
of the Creso Warrants to the Non-Resident Holder immediately before the Amalgamation and to have
acquired the Nichromet Warrants at an aggregate cost equal to such proceeds of disposition.
74
Non-Resident Creso Shareholder
A Non-Resident Creso Shareholder will be considered to have disposed of his Creso Shares for proceeds of
disposition equal to the cash proceeds of the sale of Nichromet Subordinate Voting Shares sold on behalf of
the Non-Resident Creso Shareholder by the Depositary. Such Non-Resident Creso Shareholder will realize
a capital gain (or capital loss) to the extent such proceeds of disposition exceeds (or is less than) the
aggregate of the adjusted cost base of the Creso Shares to the Non-Resident Creso Shareholder and
reasonable costs of the disposition. A Non-Resident Creso Shareholder will be liable for tax under the ITA
in respect of any such capital gain if the Creso Shares constitute "taxable Canadian property" unless the
Non-Resident Creso Shareholder is entitled to relief under an applicable income tax convention between
Canada and the country in which the Non-Resident Creso Shareholder is resident provided that they are
listed on a designated stock exchange at the time of such disposition. Creso Shares will generally not
constitute taxable Canadian property to a Non-Resident Creso Shareholder, unless, at any time during the
60-month period immediately preceding the disposition, (a) 25% or more of the issued shares of any class
of the capital stock of the Corporation were owned by or belonged to one or any combination of (A) the
Non-Resident Holder, (B) persons with whom the Non-Resident Holder did not deal at arm’s length, and
(C) partnerships in which the Non-Resident Holder or a person with whom the Non-Resident Holder did
not deal at arm’s length holds a membership interest directly or indirectly through one or more partnerships
and (b) more than 50% of the fair market value of the Creso Shares was derived directly or indirectly from
one or any combination of real or immovable property situated in Canada, Canadian resource properties (as
defined in the ITA), timber resources properties (as defined in the ITA) or an option in respect of, or an
interest in, or civil law rights in such properties. It is Counsel’s understanding that more than 50% of the
fair market value of the Creso Shares is derived directly or indirectly from Canadian resource properties.
Non-Resident Creso Shareholders who dispose of Creso Shares that are taxable Canadian property should
consult their own tax advisors with respect to their particular circumstances and with respect to section 116
of the ITA.
Dissenting Holders
Under the current administrative practice of the CRA, a Non-Resident Holder who exercises the right of
dissent in respect of the Amalgamation (a “Dissenting Non-Resident Holder”) and receives the fair value
of such Dissenting Non-Resident Holder's Creso Shares from Amalco will be considered to have disposed
of such Creso Shares for proceeds of disposition equal to the amount received by the Dissenting Holder less
any interest awarded by the court. Such Dissenting Non-Resident Holder will realize a capital gain (or
capital loss) to the extent such proceeds of disposition exceeds (or is less than) the aggregate of the adjusted
cost base of the Creso Shares to the Dissenting Non-Resident Holder and reasonable costs of the
disposition. A Dissenting Non-Resident Holder will be liable for tax under the ITA in respect of any such
capital gain if the Creso Shares constitute "taxable Canadian property" unless the Dissenting Non-Resident
Holder is entitled to relief under an applicable income tax convention between Canada and the country in
which the Dissenting Non-Resident Holder is resident. Creso Shares will generally not constitute taxable
Canadian property to a Dissenting Non-Resident Holder, unless, at any time during the 60-month period
immediately preceding the disposition, (a) 25% or more of the issued shares of any class of the capital
stock of the Corporation were owned by or belonged to one or any combination of (A) the Non-Resident
Holder, (B) persons with whom the Non-Resident Holder did not deal at arm’s length, and (C) partnerships
in which the Non-Resident Holder or a person with whom the Non-Resident Holder did not deal at arm’s
length holds a membership interest directly or indirectly through one or more partnerships and (b) more
than 50% of the fair market value of the Creso Shares was derived directly or indirectly from one or any
combination of real or immovable property situated in Canada, Canadian resource properties (as defined in
the ITA), timber resources properties (as defined in the ITA) or an option in respect of, or an interest in, or
civil law rights in such properties. It is Counsel’s understanding that more than 50% of the fair market
value of the Creso Shares is derived directly or indirectly from Canadian resource properties. Dissenting
Non-Resident Holders who dispose of Creso Shares that are taxable Canadian property should consult their
own tax advisors with respect to their particular circumstances.
A dissenting Non-Resident Holder who receives interest awarded by a court will not be subject to Canadian
withholding tax.
75
Non-Canadian Income Tax Considerations
This Information Circular does not contain a summary of income tax considerations of the Amalgamation
under foreign laws for Holders who are subject to income tax outside of Canada. Such Holders should
consult their own tax advisors with respect to the tax implications of the Amalgamation, including any
associated tax reporting and filing requirements, in such jurisdictions, with regard for their own particular
circumstances.
Eligibility for Investment
If, as and when the Nichromet Subordinate Voting Shares are listed on a “designated stock exchange” for
the purposes of the ITA (which currently includes the Exchange), the Nichromet Subordinate Voting
Shares would, at such time, be a “qualified investment” under the ITA for trusts governed by RRSPs,
RRIFs and TFSAs. The Nichromet Subordinate Voting Shares are not presently listed on a designated stock
exchange for the purposes of the ITA and there is no guarantee that such shares will be listed at any
particular time. Tax considerations relevant if the Nichromet Subordinate Voting Shares are acquired by a
trust governed by RRSPs, RRIFs and TFSAs as a non-qualified investment are not discussed in this
summary.
Notwithstanding that the Nichromet Subordinate Voting Shares may be a qualified investment for a RRSP,
RRIF or TFSA, if, as and when they are listed on a “designated stock exchange” for the purposes of the
ITA, an annuitant of a RRSP, RRIF or a holder of a TFSA (collectively, a “Plan Holder”) will be subject
to a penalty tax with respect to Nichromet Subordinate Voting Shares held in the RRSP, RRIF or TFSA if
such shares are a “prohibited investment” for a RRSP, RRIF or TFSA. Nichromet Subordinate Voting
Shares will not be a “prohibited investment” for a RRSP, RRIF or TFSA provided the Plan Holder deals at
arm’s length with Nichromet for purposes of the ITA and does not have a “significant interest” (within the
meaning of the ITA) in Nichromet. Plan Holders should consult their own tax advisors as to whether the
Nichromet Subordinate Voting Shares would be a “prohibited investment” in their particular circumstances.
Additional Canadian tax considerations that are not disclosed above may be applicable to RRSPs, RRIFs,
and TFSAs that receive Nichromet Subordinate Voting Shares on the Amalgamation. The holders,
annuitants and beneficiaries under such RRSPs, RRIFs and TFSAs are urged to pay immediate
attention to this matter and are urged to consult with their own tax advisors as to the consequences
of receiving Nichromet Subordinate Voting Shares on the Amalgamation.
76
INFORMATION REGARDING THE CORPORATION
Corporate Structure
Name and Incorporation
Creso Exploration Inc. was incorporated under the Ontario Business Corporations Act under the name
“Willowstar Capital Inc.” on August 25, 2004 and was continued under the CBCA as of September 29,
2010. Prior to June 1, 2010 the Corporation was a CPC as defined in Policy 2.4 of the TSXV. On June 1,
2010, the Corporation completed its “Qualifying Transaction” by acquiring Creso Resources Inc. (“Creso
Resources”) and evolved into a junior natural resource exploration company. As part of this Qualifying
Transaction, the Corporation changed its name to Creso Exploration Inc. This transaction has been
accounted for as a reverse takeover of the Corporation by Creso Resources.
The registered and corporate head office of the Corporation is located at 600 de Maisonneuve Blvd. West,
Suite 2750, Montreal, Québec, H3A 3J2. The Creso Shares are trading on the TSXV under the symbol
“CXT” and the Corporation voluntarily applied for de-listing on January 31st, 2014. The listing of the Creso
Shares on the Exchange under the trading symbol “CXT” was conditionally approved by the Exchange on
January 30, 2014. The Corporation’s financial year ends on December 31.
The principal business of the Corporation has been to acquire and explore mineral resource properties in
Canada. The Corporation has interests in mineral properties located in Canada which are presently at the
exploration and evaluation stage. Until it is determined that these mineral properties contain mineral
reserves or resources that can be economically mined, they are classified as exploration and evaluation
assets.
The Corporation’s objective is to acquire and explore high grade mineral properties primarily in gold and
silver, as well as copper and zinc. The Corporation’s principal mining exploration holdings are located at
the Shining Tree Properties.
The directors and officers of the Corporation are: Pierre Gauthier (Director, Chairman of the Board,
President and Chief Executive Officer), André Thibault (Director), Jacques Bouchard Jr. (Director), JeanGuy Lambert (Director), Réjean Gosselin (Director), Vatché Tchakmakian (Chief Financial Officer) and
Luce Saint-Pierre (Corporate Secretary).
Inter-Corporate Relationships
The Corporation has a wholly-owned subsidiary, Guatemela Copper S.A., incorporated under the laws of
Guatemala, which is inactive and does not have any assets or liabilities.
General Development of the Business
History
The Corporation as a CPC
On September 15, 2006, the Corporation, then a CPC, completed its initial public offering of 4,000,000
Creso Shares at a price of $0.15 per Creso Share for gross proceeds of $600,000 and the Creso Shares were
listed and posted for trading on the Exchange on September 20, 2006.
The Corporation entered into an agreement dated as of May 20, 2008 for the acquisition of Takatu Minerals
Ltd. (“Takatu”), a company existing under the laws of British Columbia. Takatu, through its wholly owned
subsidiaries, was a mineral resource company holding five projects in the country of Guyana which are
77
prospective for gold and uranium mineralization. The Corporation intended that this acquisition constitute
its Qualifying Transaction under Policy 2.4 of the TSXV.
On September 25, 2008, the trading in the Creso Shares had been suspended in accordance with TSXV
policies for failure to complete a Qualifying Transaction within 24 months of listing on the TSXV.
The Corporation signed an arm’s length binding letter agreement dated June 10, 2009 pursuant to which it
agreed to acquire, directly or indirectly, all of the issued and outstanding securities of Creso Resources. The
acquisition of Creso Resources was the Corporation’s Qualifying Transaction pursuant to the rules and
policies of the TSXV. The Corporation agreed to acquire all of the issued and outstanding common shares
of Creso Resources in exchange for Creso Shares, having a deemed value of $0.15 per Creso Share, to the
shareholders of Creso Resources in exchange for all of their common shares in the capital of Creso
Resources (each, a “Creso Resources Share”). Each shareholder of Creso Resources would be entitled to
receive one Creso Share for each Creso Resource Share.
On June 29, 2009, in accordance with the rules governing CPCs, the Corporation, having failed to complete
a Qualifying Transaction, agreed to retract and cancel 999,999 founders’ shares and the Corporation’s
listing was transferred to the NEX, a separate board of the TSXV. On December 23, 2009, the Corporation
entered into an amended and restated binding letter agreement in connection with its previously announced
proposed acquisition of all of the issued and outstanding securities of Creso Resources.
The Corporation as “Creso Exploration Inc.”
On June 1, 2010, the Corporation completed the Creso Qualifying Transaction, consisting of the acquisition
of all of the issued and outstanding securities of Creso Resources, and the completion of a concurrent
brokered private placement of 9.2 million units of Creso Resources at a price of $0.50 per unit, for
aggregate gross proceeds of $4.6 million (the “Creso Qualifying Transaction”). Each unit was comprised
of one share of Creso Resources and one common share purchase warrant of Creso Resources, each warrant
entitling the holder to acquire one additional share of Creso Resources at a price of $0.65 over a two-year
period.
In connection with the completion of the Creso Qualifying Transaction, the Corporation completed its
three-cornered amalgamation among Creso Exploration Inc. (formerly Willowstar Capital Inc.), 7339470
Canada Ltd., a wholly-owned subsidiary of the Corporation, and Creso Resources and complete the
concurrent private placement described above, resulting in the issuance of an aggregate of: (i) 62,794,481
Creso Shares; (ii) 26,264,467 Creso Warrants; (iii) 300,000 broker’s warrants; (iv) 736,000 agent’s
warrants; (v) 4,000,000 Creso Options; and (vi) a debenture in the principal amount of $1,900,000 that was
convertible into Creso Shares at a conversion price of $0.50 per Creso Share. The Corporation also issued
1,500,000 Creso Shares in payment of finder’s fees upon completion of the Creso Qualifying Transaction.
The exchange ratio employed for the purposes of calculating the number of the Corporation’s securities
issuable to former holders of Creso Resources securities was one (1) for one (1).
Since the Creso Qualifying Transaction, the Corporation has engaged in various activities relating to the
exploration of mineral properties. The Corporation primarily explores for gold and silver, as well as copper
and zinc. Below is a chronological summary of some of the Corporation’s major events in its history:
•
On September 21, 2010, the Corporation signed an agreement to complete a private placement
with Franco-Nevada Corporation (“Franco”). Franco purchased 1,415,094 Creso Shares at a price
of $1.06 per Creso Share in a non-brokered private placement for an amount of $1,500,000. The
private placement closed on September 28, 2010. As part of the private placement, Franco was
granted a net smelter return (“NSR”) option to purchase a perpetual 2% NSR royalty on gold and
other minerals produced from the Shining Tree property.
•
On October 8, 2010, the Corporation closed a non-brokered private placement of 3,822,222 units
of the Corporation at $0.90 per unit for gross proceeds of $3,440,000. Each unit consisted of one
78
common share and one-half common share purchase warrant, each whole warrant entitling the
holder to acquire one additional Creso Share at a price of $1.25 over a two-year period.
•
In 2010, the Corporation completed a total of 8,563 meters of diamond drilling and conducted a
detailed airborne and surface/down-hole geophysics, Electromagnetic/Induced polarization,
magnetic, and radiometric surveys on the Shining Tree Properties.
•
On September 16, 2011, the Corporation issued an aggregate of 6,673,334 units, including
5,173,334 units issued on a flow-through basis, at $0.15 each for total consideration of $1,001,000
pursuant to non-brokered private placements. Each unit was comprised of one Creso Share and
one-half of a common share purchase warrant, each whole warrant entitling the holder to acquire
one additional Creso Share at a price of $0.20 over a two-year period.
•
On November 9, 2011, the Corporation issued 7,750,000 Creso Shares at $0.12 per Creso Share
for total consideration of $930,000 pursuant to non-brokered private placements.
•
On November 24, 2011, the Corporation issued 5,304,000 Creso Shares at $0.12 per Creso Share
and 3,333,334 units on a flow-through basis at $0.15 per unit for total consideration of $1,136,480
pursuant to non-brokered private placements. Each unit was comprised of one Creso Share and
one-half of a common share purchase warrant, each whole warrant entitling the holder to acquire
one additional Creso Share at a price of $0.20 over a two-year period.
•
In 2011, the Corporation completed a total of 6,097 meters of diamond drilling on the Shining
Tree Properties.
•
During 2012, the Corporation issued 16,400,000 units at $0.05 per unit for total consideration of
$820,000. Each unit was comprised of one Creso Share and one common share purchase warrant,
each warrant entitling the holder to acquire one additional Creso Share at a price of $0.10 over a
two-year period. In addition, the Corporation issued, on a flow-through basis, 14,000,000 units at
$0.05 per unit for total consideration of $700,000. Each unit was comprised of one Creso Share
and one-half of a common share purchase warrant, each whole warrant entitling the holder to
acquire one additional Creso Share at a price of $0.10 over a two-year period. The foregoing were
completed on a non-brokered private placement basis. See “Information Regarding the
Corporation - Prior Sales”.
•
In 2012, the Corporation completed a total of 1,585 meters of diamond drilling on the Shining
Tree Properties.
•
On March 1, 2013, the Corporation completed the closing of a non-brokered private placement for
total consideration of $277,000 consisting of the issuance of 5,540,000 units at $0.05 per unit.
Each unit was comprised of one Creso Share and one common share purchase warrant, each
warrant entitling the holder to acquire one additional Creso Share at a price of $0.10 over a twoyear period.
•
On July 15, 2013, the Corporation announced an agreement with Nichromet to develop the Minto
gold deposit by extracting a 30,000 ton bulk sample. Operations are scheduled to begin once the
permitting process is completed and are anticipated to last for approximately 8 months. The
Corporation also borrowed $500,000 from Nichromet on July 10, 2013. The loan is unsecured and
bears interest at a rate of 6% per annum payable on July 10, 2014.
•
During the 9-month period ended September 30, 2013, the Corporation completed a total of 1,053
meters of diamond drilling on the Shining Tree Properties.
•
On August 22, 2013, the Corporation began discussions with Nichromet about the possibility of a
79
transaction that would see the Corporation and Nichromet (or a subsidiary thereof) combine.
•
On November 22, 2013, the Corporation, Nichromet and Subco entered into the definitive
Amalgamation Agreement. Pursuant to the Amalgamation Agreement and subject to receipt of all
requisite approvals, the Creso Shareholders (other than Creso Shares held by Subco and
Dissenting Creso Shareholders) will exchange all of the issued and outstanding Creso Shares for
the issuance of Nichromet Subordinate Voting Shares, in accordance with the Exchange Ratio.
See “Information Regarding the Amalgamation – Amalgamation Agreement”.
•
In connection with the Amalgamation, Dundee Corporation has loaned $3,000,000 to Nichromet.
The funds from the Bridge Loan were disbursed on January 31, 2014. The Bridge Loan bears
interest at the rate of 12.68% per annum and matures on April 30, 2014. Nichromet has the option
to repay the Bridge Loan at any time but must use the proceeds from the sale of any assets in
excess of $250,000 or any financing in excess of $3,000,000 to repay the Bridge Loan. The use of
the cash received pursuant to the Bridge Loan is restricted. The Bridge Loan shall only be used to
fund (i) the building of a demonstration plant and (ii) for general corporate purposes.
•
On December 20, 2013, Nichromet loaned $200,000 to the Corporation which loan has been made
upon the same terms and conditions under the loan agreement in the amount of $500,000 dated
July 10, 2013, entered into between the Corporation and Nichromet, namely that the loan bears
interest at a rate of 6% per annum payable on July 10, 2014. See “Information Regarding the
Amalgamation – Financing”.
Mineral Properties
Shining Tree Properties, Ontario
The Corporation’s principal mining exploration holdings are located at the Shining Tree Properties in the
Shining Tree mining camp of Northern Ontario, located within 100 km south and southwest, respectively,
of the Timmins and Kirkland Lake mining camps. The Corporation assembled a land package of ground
adjacent to its Minto, Tyranite, Duggan and Mann properties, all totalling approximately 124 square km.
The Corporation has been conducting major geophysical surveys, diamond drilling and geological
programs on the Shining Tree Properties since 2007. For a detailed description of exploration activities
conducted since 2011, please refer to the 2012 Consolidated Financial Statements for the years ended
December 31, 2012 and 2011, the related management discussion and analysis, and the Unaudited
Condensed Interim Consolidated Financial Statements for the three-month and nine-month periods ended
September 30, 2011 and the related management discussion and analysis.
Outlook for 2014-2015
The Minto property bulk sampling is scheduled to begin once the permitting process is completed, and is
anticipated to last for approximately eight months, during which time, the site will be prepared, a
concentrator will be built and the bulk sample will be mined and processed by the Resulting Issuer.
Funding for the bulk sampling is expected to be provided by the Resulting Issuer. The Amalgamation will
allow the Resulting Issuer to have a larger asset base and greater access to capital markets.
Selected Financial Information and Management Discussion and Analysis
Selected Financial Information
Since incorporation, the Corporation has incurred costs in evaluating and acquiring interests in mineral
properties and in meeting the disclosure obligations imposed upon it as a reporting issuer listed for trading
on the Exchange.
80
The following table sets forth selected historical financial information for the Corporation for the years
ended December 31, 2012, 2011 and 2010, and for the nine-month period ended September 30, 2013. Such
information is derived from the Corporation’s financial statements and should be read in conjunction with
such financial statements included elsewhere in this Information Circular including those financial
statements attached hereto as Appendix D.
Nine months
ended September
30, 2013(1)
(unaudited)
($)
Revenue .................................
Total Expenses .......................
1,028,842
Net Loss ................................. (1,028,697)
Cash .......................................
85,003(2)
Liabilities…………………
1,038,829(2)
Year Ended
December 31,
2012(1)
(audited)
($)
2,440,073
(2,383,958)
643,281(3)
514,492(3)
Year Ended
December 31,
2011(1)
(audited)
($)
1,981,289
(1,933,050)
1,471,492(3)
1,048,249(3)
Year Ended December
31, 2010(1)
(audited)
($)
2,810,281
(5,713,938)
3,907,028(3)
1,444,626(3)
Notes:
1.
2.
3.
This information has been derived from the audited consolidated financial statements of the Corporation for the years ended
December 31, 2012, 2011 and 2010, and the unaudited consolidated financial statements of the Corporation for the nine-month
period ended September 30, 2013.
This information is as at September 30, 2013.
This information is as at December 31, 2012, 2011 and 2010, respectively.
Management’s Discussion and Analysis
The Corporation’s management’s discussion and analysis (“MD&A”) for the fiscal years ended December
31, 2012, 2011 and 2010, as well as for the nine-month period ended September 30, 2013 are attached
hereto as Appendix E.
The MD&A of the Corporation should be read in conjunction with the Corporation’s audited financial
statements and the related notes for the fiscal year ended December 31, 2012 and 2011 and the audited
financial statements and the related notes for the fiscal year ended December 31, 2011 and 2010. The
financial statements are attached as Appendix D.
Description of Securities
The authorized capital of the Corporation includes an unlimited number of Creso Shares without nominal
or par value, of which, as at the date hereof, 144,811,956 Creso Shares are issued and outstanding as fully
paid and non-assessable.
In addition, 5,090,000 Creso Shares are reserved for issuance under the Creso Options at an average
exercise price of $0.25 per Creso Share, which expire between September 30, 2014 and July 23, 2017.
There are 36,611,133 Creso Warrants outstanding at an average exercise price of $0.11, which expire
between July 9, 2014 and February 27, 2015.
The holders of Creso Shares are entitled to dividends, if, as and when declared by the Creso Board, to
receive notice of, and one vote per Creso Share at meetings of the Creso Shareholders and, upon
liquidation, to share equally in such assets of the Corporation as are distributable to the Creso Shareholders.
Stock Option Plan
The Corporation has a rolling stock option plan, adopted on July 31, 2006 (the “Creso Option Plan”),
which complies with TSXV Policy 4.4 Incentive Stock Options. The purpose of the Creso Option Plan is to
develop the interest of and provide an incentive to eligible directors, officers, key employees and others
who are in a position to contribute to the future success and growth of the Corporation in the Corporation’s
81
growth and development by granting to such eligible persons, from time to time, options to purchase Creso
Shares, thereby advancing the interests of the Corporation and Creso Shareholders. The Creso Option Plan
was last approved by the Creso Shareholders on May 23, 2013.
The following is a summary of the terms of the Creso Option Plan and is qualified in its entirety by the full
text of the Creso Option Plan, a copy of which is available under the Corporation’s issuer profile on
SEDAR.com:
•
The number of Creso Shares to be reserved and authorized for issuance pursuant to Creso Options
granted under the Creso Option Plan shall not exceed ten percent (10%) of the total number of
issued and outstanding Creso Shares of the Corporation;
•
Under the Creso Option Plan, the aggregate number of optioned Creso Shares granted to any one
optionee in a 12-month period must not exceed 5% of the Corporation’s issued and outstanding
Creso Shares. The number of Creso Options granted to any one consultant in a 12-month period
must not exceed 2% of the Corporation’s issued and outstanding Creso Shares. The aggregate
number of Creso Options granted to persons employed to provide investor relations services must
not exceed 2% of the Corporation’s issued and outstanding Creso Shares in any 12-month period;
•
The exercise price for Creso Options granted under the Creso Option Plan shall not be less than
the market price of the Corporation’s Creso Shares at the time of the grant, less applicable
discounts permitted by the policies of the Exchange;
•
Creso Options may be exercisable for a term of up to a maximum of five years, subject to earlier
termination in the event of the optionee’s death or the cessation of the optionee’s services to the
Corporation; and
•
Creso Options granted under the Creso Option Plan are non-assignable, except by will or by the
laws of descent and distribution.
Prior Sales
Since January 1, 2013, the Corporation issued the following securities:
•
In February 2013, the Corporation completed the closing of a non-brokered private placement for
total consideration of $277,000 consisting of the issuance of 5,540,000 units at $0.05 per unit.
Each unit was comprised of one Creso Share and one common share purchase warrant, each
warrant entitling the holder to acquire one additional Creso Share at a price of $0.10 over a twoyear period.
Stock Exchange Price
The Creso Shares are traded on the TSXV under the symbol “CXT” and the Corporation voluntarily
applied for de-listing on January 31st, 2014. Trading in the Creso Shares on the TSXV was halted on
November 14, 2013. The listing of the Creso Shares on the Exchange under the trading symbol “CXT” was
conditionally approved by the Exchange on January 30, 2014.
The closing price of the Creso Shares on November 13, 2013, being the last day on which the Creso Shares
traded on the TSXV prior to the announcement of the Amalgamation on November 14, 2013, was $0.115
per Creso Share. The following table sets forth the high and low daily closing prices (on the TSXV until
November 13, 2013) and the volumes of trading of the Creso Shares for the periods indicated.
82
Price Range
Period
2013
High ($)
Low ($)
Volume
January
0.085
0.055
5,434,765
February
0.07
0.04
2,441,210
March
0.07
0.04
4,349,502
April
0.05
0.03
3,878,254
May
0.045
0.035
2,000,458
June
0.045
0.03
1,223,090
July
0.045
0.02
2,320,833
August
0.045
0.02
3,406,800
0.05
0.03
2,474,510
October
0.115
0.04
6,667,749
November
0.125
0.075
3,679,748
December
N/A
N/A
N/A
N/A
N/A
N/A
September
2014
January
Executive Compensation
The purpose of this Compensation Discussion and Analysis (“CD&A”) is to provide information about the
Corporation’s executive compensation objectives and processes and to discuss compensation decisions
relating to the Corporation’s senior officers, being the three identified named executive officers (the
“NEOs”) for the financial year ended December 31, 2013. The NEOs who are the focus of the CD&A and
who appear in the compensation tables of this Information Circular are:
(i) Pierre Gauthier, Executive Chairman (“Chairman”) since June 1, 2010 and Interim President and
Chief Executive Officer from January 1, to February 29, 2012 and after November 1, 2012, and
President since May 27, 2013;
(ii) Vernon Drylie who was President and Chief Executive Officer from March 1, to October 31,
2012; and
(iii) Vatché Tchakmakian, Chief Financial Officer (“CFO”) since June 1, 2010.
Compensation Committee
In order to assist the Creso Board in fulfilling its oversight responsibilities with respect to compensation
matters, the Creso Board has established a Compensation Committee (the “Compensation Committee”).
During the most recently completed fiscal year, the Compensation Committee was comprised of three
directors, namely André Thibault, Jean-Guy Lambert and Réjean Gosselin. Messrs. Thibault and Lambert
are independent within the meaning of National Instrument 58-101 – Disclosure of Corporate Governance
Practices. Mr. Gosselin is not independent since he receives consulting fees from the Corporation. André
83
Thibault is a former partner of PricewaterhouseCoopers LLP where he was responsible for companies in
the mining industry. Mr. Lambert has long term experience in analysis of venture capital corporations
which includes the revision of executive compensation. Réjean Gosselin has over thirty years of experience
in the mining industry. The experience of all members qualifies them to make recommendations concerning
the compensation policies of the Corporation.
The Compensation Committee’s purpose is to: (i) establish the objectives that will govern the
Corporation’s compensation program; (ii) oversee and approve the compensation and benefits paid to the
CEO and other senior officers; (iii) recommend to the Creso Board for approval executive compensation;
(iv) oversee the Creso Option Plan; and (iv) promote the clear and complete disclosure to shareholders of
material information regarding executive compensation.
Compensation Process
The Compensation Committee relies on the knowledge and experience of its members to set appropriate
levels of compensation for NEOs. Neither the Corporation nor the Compensation Committee currently has
any contractual arrangement with any executive compensation consultant.
The Compensation Committee reviews and makes determinations with respect to senior officer
compensation on an annual basis. When determining senior officer compensation, the Compensation
Committee evaluates the achievements of the Chairman and the CEO during the preceding year and
reviews the performance of other senior officers (as evaluated by the Chairman) based on their
achievements during the preceding year.
The Compensation Committee reviews the elements of the NEOs’ compensation in the context of the total
compensation package (including base salary, long-term equity incentive awards, prior awards under the
Creso Option Plan, and non-equity incentive awards) and recommends compensation packages for the
NEOs. The Compensation Committee’s recommendations regarding NEOs’ compensation are presented to
the independent members of the Creso Board for their consideration and approval.
Compensation Program
Principles/Objectives of the Compensation Program
The primary goal of the Corporation’s executive compensation program is to attract, motivate and retain
top quality individuals at the executive level. The program is designed to ensure that the compensation
provided to the Corporation’s senior officers is determined with regard to the Corporation’s business
strategy and objectives, such that the financial interests of the senior officers are matched with the financial
interests of the shareholders.
Compensation Program Design and Analysis of Compensation Decisions
Standard compensation arrangements for the Corporation’s senior officers are composed of base salary or
consultant fees and stock options in view of attracting and retaining experienced persons and rewarding
their performance as well as motivating them and aligning their interests with those of the shareholders and
bonus.
The Corporation is an exploratory stage mining company and may not be generating revenues from
operations for a significant period of time. As a result, the use of traditional performance standards, such as
corporate profitability, is not considered by the Compensation Committee to be appropriate in the
evaluation of corporate or NEOs performance. The compensation of the NEOs is based, in substantial part,
on industry compensation practices as well as the Corporation’s financial resources.
84
Base Salaries and Consultant Fees
The main element of the compensation package of the NEOs is the base salaries or consulting fees which
represent their minimum compensation for services rendered during the fiscal year and depend on the scope
of their experience, responsibilities, leadership skills, and performance. Base salaries and consulting fees
are reviewed annually by the Compensation Committee. Decisions regarding salary and consulting fees
increases are impacted by the Corporation’s financial resources. The basic 2013 annual compensation was
the same as 2012. The additional compensation to Mr. Gauthier is related to his acting as Interim President
and CEO during January and February 2012, and after November 1, 2012, as well as to his acting as
President since May 27, 2013. His additional responsibilities included the management of the exploration
program together with Réjean Gosselin, a director of the Corporation. As for the CFO, his compensation is
determined on an hourly basis and therefore varies with the time spent.
Except for the realization of the exploration program and its financing, the compensation of the NEOs is
not based on objective, identifiable measures. It is not linked to the price of the shares on the market and
given the nature of the operations (exploration) it cannot be linked to the results of these operations. During
2013, the Corporation realized several exploration programs.
Stock Options
The grant of Creso Options pursuant to the Creso Option Plan is the second component of the
compensation packages of the NEOs that may serve as complement. The Compensation Committee
believes that the grant of Creso Options to NEOs and common share ownership by NEOs serve to motivate
achievement of the Corporation’s long-term strategic objectives and the result will benefit all Creso
Shareholders. Creso Options are awarded by the Creso Board based upon the recommendation of the
Compensation Committee, which bases its decisions upon the level of responsibility and contribution of the
individuals toward the Corporation’s goal and objectives. The Compensation Committee considers the
overall number of Creso Options that are outstanding relative to the number of outstanding Creso Shares in
determining whether to make any new grants of Creso Options and the size of such grants. The
Compensation Committee’s decisions with respect to the granting of Creso Options are reviewed by the
Creso Board and are subject to its final approval. The purpose of this component is to ensure that NEOs are
rewarded for corporate performance with a focus on longer term growth. The grant of Creso Options
complements the compensation in cash. See heading “Information Regarding the Corporation – Stock
Option Plan”. No options were awarded in 2013.
Non-equity incentive awards
In addition to the above compensation elements, the Compensation Committee may recommend cash
bonuses to reward exceptional performance. No cash bonuses were awarded for 2013.
In its determination of the NEOs’ compensation package, the Compensation Committee did not analyze
specific risks since the executive compensation is not linked to the market price of the common shares,
neither to the profitability of the Corporation.
85
Non-equity incentive
plan compensation
Name and
position
Gauthier(1)
Pierre
President and
CEO
Vernon
Drylie(2)
Vatché
Tchakmakian(3)
CFO
Salary/
Share OptionConsulting based
based
fees ($) awards awards(4)
Period
($)
($)
($)
Annual
incentive
plans
Long-term
incentive
plans
Pension
Value
All other
compensation
($)
($)
Total
compensation
($)
2013
240,000
-
-
-
-
-
240,000
2012
210,000
-
70,000
-
-
-
280,000
2011
180,000
-
-
-
-
-
180,000
2012
66,000
-
24,000
-
-
-
90,000
2013
66,763
-
-
-
-
-
66,763
2012
86,668
-
7,000
-
-
-
93,668
2011
136,236
-
-
-
-
-
136,236
Notes:
1.
2.
3.
4.
Mr. Gauthier has been Executive Chairman since June 1, 2010 and was Interim President and Chief Executive Officer from
January 1 to February 29, 2012 and after November 1, 2012, and is President since May 27, 2013.
Mr. Drylie was President and Chief Executive Officer from March 1, 2012 to October 31, 2012.
Mr. Tchakmakian has been CFO since June 1, 2010. The compensation is paid to Gestions Vatche Tchakmakian Inc., a company
controlled by Mr. Tchakmakian, and includes amounts for accounting and tax services provided to the Corporation by this
company. These amounts do not include the fees paid to Gestions Vatche Tchakmakian Inc. for its support staff of $71,843 for
2013 ($101,842 in 2012 and $109,300 in 2011).
Represents the aggregate fair value on the dates of grant of the options under the Creso Option Plan which was calculated using
the Black and Scholes model as shown in the consolidated financial statements of the Corporation for the years ended December
31, 2012 and 2011. The key weighted average assumptions and estimates used for the calculation of the grant date fair value for
2012 are: (i) dividend yield of Nil; (ii) risk-free interest rate of 1.47%; (iii) average projected volatility of 93.7%; and (iv)
expected life of the options of 5 years (for 2011: (i) dividend yield of Nil; (ii) risk-free interest rate of 2.4%; (iii) average
projected volatility of 80%; and (iv) expected life of the options of 5 years).
Option Grants During The Most Recently Completed Financial Year
No options were granted in 2013.
Aggregated Option Exercises During The Most Recently Completed Financial Year And Financial YearEnd Option
There were no options exercised during the most recently completed financial year.
Directors’ Compensation
The Compensation Committee is responsible for developing the directors’ compensation plan which is
approved by the Board. The objectives of the directors’ compensation plan are to compensate the directors
in a manner that is cost effective for the Corporation and competitive with other comparable companies and
to align the interests of the directors with the shareholders.
86
Summary Compensation Table
The following table summarizes the compensation paid or payable to the directors of the Corporation for
the financial year 2013.
Name
Fees earned
J. Bouchard
-
Option-based
awards
($)
-
All other
compensation
($)
-
Total
Réjean Gosselin
-
-
4,074
4,074
Jean-Guy Lambert
-
-
-
-
A. Thibault
-
-
-
-
-
Outstanding option-based awards
The following table sets forth all awards outstanding as at the date of this Information Circular.
Number of
securities
underlying
unexercised
options
Option exercise
price
Jacques
Bouchard Jr
100,000
100,000
125,000
$0.15
$0.40
$0.10
2014-09-30
2015-07-09
2017-02-20
1,875
-
Réjean Gosselin
Jean-Guy
Lambert
200,000
200,000
220,000
$0.10
$0.87
$0.10
2017-07-23
2015-09-29
2017-02-20
3,300
-
André Thibault
100,000
100,000
125,000
$0.15
$0.40
$0.10
2014-09-30
2015-07-09
2017-02-20
1,875
-
Name
Option
expiration date
Value of
unexercised inthe-money
options(1)
Number of
shares or units
of shares that
have not vested(2)
($)
Notes:
1.
2.
Based on the closing price on November 13, 2013 - $0.0115
All options vested on the day of the grant.
Details of Any Conflict of Interest
The directors and officers of the Corporation are aware of the existence of Laws governing accountability
of directors and officers for corporate opportunity and the Laws requiring disclosure by directors and
officers of conflicts of interest. The Corporation will rely upon such Laws in respect of any such conflict of
interest or in respect of any breach of duty by any of the Corporation’s directors or officers. All such
conflicts are required to be disclosed by such directors or officers in accordance with the CBCA and the
directors of the Corporation are required to govern themselves in respect thereof to the best of their ability
in accordance with the obligations imposed upon them by Law.
Related Party Transactions
On July 15, 2013, the Corporation announced an agreement with Nichromet to develop the Minto gold
deposit by extracting a 30,000 tonne bulk sample. Operations are scheduled to begin once the permitting
87
process is completed, and are anticipated to last for approximately 8 months. The Corporation also
borrowed $500,000 from Nichromet. The loan is unsecured and bears interest at a rate of 6% per annum
payable on July 10, 2014. In addition, on December 20, 2013, Nichromet loaned an additional $200,000 to
the Corporation on the same terms and conditions.
Also, in connection with the Amalgamation, Dundee Corporation entered into the Bridge Loan with the
Resulting Issuer, for which the funds were disbursed on January 31st, 2014. See “Information Regarding
the Amalgamation - Financing”.
Moreover, the Corporation completed the following private placements with Dundee Corporation:
•
On December 21, 2012, the Corporation issued to Dundee Corporation 3,000,000 units at $0.05
per unit for total consideration of $150,000 pursuant to a non-brokered private placement. Each
unit consisted of one Creso Share and one Creso Warrant, with each Creso Warrant entitling its
holder to purchase a Creso Share at $0.10 over a two-year period;
•
On December 21, 2012, the Corporation issued to Dundee Corporation 3,000,000 units at $0.05
per unit, on a flow-through basis, for total consideration of $150,000 pursuant to a non-brokered
private placement. Each unit consisted of one flow-through Creso Share and one-half of a Creso
Warrant, with each Creso Warrant entitling its holder to purchase a Creso Share at $0.10 over a
two-year period; and
•
On July 9, 2012, the Corporation issued to Dundee Corporation 10,000,000 units at $0.05 per unit,
on a flow-through basis, for total consideration of $500,000 pursuant to a non-brokered private
placement. Each unit consisted of one flow-through Creso Share and one-half of a Creso Warrant,
with each Creso Warrant entitling its holder to purchase a Creso Share at $0.10 over a two-year
period.
As announced in a press release dated November 25, 2013, the Corporation, Nichromet and Subco entered
into the Amalgamation Agreement, which supersedes the previous letter of intent. The proposed
Amalgamation is a Related Party Transaction.
See “Particulars of Matters to Be Acted On – The Amalgamation”.
Legal Proceedings
There are no material pending legal proceedings to which the Corporation is a party or of which any of its
property is the subject matter nor are any such proceedings known to the Corporation to be contemplated.
Auditors, Transfer Agent and Registrar
The auditors of the Corporation are PricewaterhouseCoopers LLP whose principal office is located at
located at 1250 René-Levesque Boulevard West, Suite 2800, Montreal, Québec, H3B 2G4. The transfer
agent and registrar for the Creso Shares is Computershare Trust Company of Canada, 100 University
Avenue, 8th Floor, Toronto, Ontario M5J 2Y1.
Material Contracts
Since incorporation the only material contracts which the Corporation is currently subject, other than
contracts entered into in the ordinary course of business, are as follows:
•
a promissory note in favour of Nichromet dated July 10, 2013 in the amount of $500,000 bearing
interest at a rate of 6% per annum payable on maturity, payable on July 10, 2014;
•
a promissory note in favour of Nichromet dated December 20, 2013 in the amount of $200,000
88
bearing interest at a rate of 6% per annum payable on maturity, payable on July 10, 2014; and
•
the Amalgamation Agreement.
A copy of these agreements will be available for inspection at the office of the Corporation, 600 de
Maisonneuve Blvd. West, Suite 2750, Montreal, Québec, H3A 3J2, during ordinary business hours until the
Amalgamation Date and for a period of thirty days thereafter.
As of the date of this Information Circular, the Corporation had 144,811,956 Creso Shares, 5,090,000
Creso Options and 36,611,132 Creso Warrants issued and outstanding. Each Creso Share and each Creso
Warrant are exercisable for one Creso Share. The Corporation has not adopted a dividend policy.
89
INFORMATION REGARDING NICHROMET AND SUBCO
Corporate Structure
Nichromet was incorporated on July 22, 1997 under the CBCA. On January 8, 2014, Nichromet changed its
corporate name from “Nichromet Extraction Inc.” to “Dundee Sustainable Technologies Inc.” Its head
office and registered office is located at 600 de Maisonneuve Blvd. West, Suite 2750, Montreal (Québec)
H3A 3J2, Canada.
Intercorporate Relationships
The following organization chart indicates the intercorporate relationships of Nichromet and its subsidiaries
together with the jurisdiction of incorporation or constitution of each such entity:
Dundee Sustainable Technologies Inc.
(Canada)
(“Nichromet”)
99.99%
Nichromet
Guatemala, S.A.
(Guatemala)
(“NG”)
99.99%
99.99%
Rio Nickel, S.A.
(Guatemala)
(“RN”)
Nichromet
Dominicana, S.A.
(Dominican
Republic)
(“ND”)
100%
Subco
(Canada)
NG was incorporated under the laws of the Republic of Guatemala on July 9, 2004. RN was incorporated
under the laws of the Republic of Guatemala on June 6, 2007. ND was incorporated under the laws of the
Dominican Republic on April 9, 2003. Subco was incorporated under the federal laws of Canada on
November 22, 2013.
General Development of the Business
2011-2013
As more particularly described below, Nichromet’s activity is the development of a patented chloride leach
extraction process. During this period, Nichromet implemented its program of research and development
oriented towards the valuation of sulfide ores via chlorination. At laboratory scale, the sulfide ores from a
variety of sources have been oxidized in order to remove the sulfur and then submitted to chlorination
under different conditions in order to obtain optimal recoveries of metallic values, mainly gold and silver
and in some instances base metal such as copper. Concomitantly, the design of a pilot plant on a scale of
one tonne of ore per day was prepared for the demonstration of the process developed at laboratory scale.
This pilot incorporated the oxidation of the sulfide ores, the leaching of the metallic values, base (Cu) and
precious (Au, Ag) metals and their recovery by appropriate methods. This circuit was a closed loop
configuration with the recycling of halogens in the form of hypo (NaOCl, NaOBr) by electrolysis along
with recirculation of process water and halogens (Cl2, Br2).
Specifically for each of the years, the main activities have been the following.
90
2011
The main activities were centered on the fine tuning and operation of the pilot. Four different ores were
piloted batch wise during 2011. In the course of these operations, the feeding of the halogens to the reactor
was changed from chlorine gas to hypochlorite thus allowing a much faster rate of addition of halogen and
a simplification of halogen recycling.
The piloting operations confirmed the results obtained at laboratory scale: high gold recovery (95%) along
with inert and stable residual materials and recycling of reagents.
At laboratory scale, several samples of ores and concentrates were received for evaluation of the
performances of the technology. These materials rich in gold, silver and base metals were treated very
efficiently and gold and silver recovery averaged 95% and 85% respectively.
In the course of treatment of an arsenical concentrate rich in copper, a new approach was developed
whereby iron and arsenic are precipitated while base metals of interest are kept in solution. This situation
being of frequent occurrence, a patent has been filed. A patent was also filed for the production of
potassium sulfate from potassium chloride. This project resulted from the fertilizer piloting conducted in
2006-2008.
2012
The piloting operations proceeded through the year until the end of the piloting program with the
optimization of various elements of the circuit. In order to facilitate the treatment of bulky ores, a grinding
circuit was built around an existing ball mill, a flotation line installed along with a Knelson concentrator.
This equipment allowed Nichromet to adjust the particle size of the ore to desired values and obtain
concentrates on site.
In the course of the oxidation of arsenical sulfide, the volatilization of arsenious oxide can be important. In
order to stabilize this toxic material of frequent occurrence in gold concentrates Nichromet developed a
new technique for the incorporation of this arsenic oxide in glass and a patent was filed to protect the
ownership of this technique.
The Nichromet method for nickel recovery from laterite was reviewed and demonstrated to a Cuban
delegation. This led to the accreditation of the technique for an eventual implementation in Cuba.
2013
The concept of a demonstration plant with a capacity of 15T/day to be built beside the existing pilot and
laboratory facilities was developed and evaluated for implementation in the course of years 2013-2015.
Selection of the ores that will feed this projected demonstration plant have been undertaken. An application
for a $5M grant from Sustainable Development Technology Canada was filed and granted.
Narrative Description of the Business
Nichromet is engaged in the development of a process called Chlorination Extraction of Precious Metals
(the “Process”) whereby precious metals such as gold and silver are extracted by chlorination. Nichromet
believes that the Process is an environmentally friendly alternative to cyanidation, the conventional process
used by the mining industry that presents many disadvantages and creates environmental hazards.
The Process is the result of a continuous effort of laboratory development and on pilot scale over a period
of approximately 10 years. During that period, the technology was successfully demonstrated on over 50
samples provided from various mines. The performances obtained at a laboratory scale led to the
construction of a pilot installation in order to pursue the development of the technology on pre-industrial
scale. This pilot stage being successfully demonstrated, Nichromet is now proceeding to the next phase of
91
technology development which is the construction of a demonstration plant.
Moreover, the technology developed by Nichromet may also permit the exploitation of new deposits. In
addition, some ores are refractory which mean that they are not amenable to the standard technology such
as cyanidation. For example, the Nichromet method can extract gold from deposits containing carbon,
tellurium, base metals or arsenopyrite. A pre-treatment by oxidation is then required in order to remove
sulphides and other contaminants such as arsenic.
The Process also presents an environmental advantage over cyanidation. The solid residues produced by the
Nichromet method are sulphide free which is not the case with cyanidation. The cyanide does not attack the
sulphides present in the ore. This situation produces solid residues which are generators of acid lixiviates.
Research and Development
Nichromet has developed a chlorination approach for the recovery of base and precious metals from two
broad categories of ores namely the oxides (metals combined with oxygen) and the sulfides (metals
combined with sulfur).
In the period 2006-2008, the technique related to the oxides (serpentinic ores, laterites) was piloted for the
extraction of nickel from laterites successfully as established by independent engineering studies and
accepted by Cuba.
The piloting of the oxide ores has been a fruitful exercise for the valuation of the sulfide ores which started
in 2009. The Process applied to the sulfide ores includes an oxidation stage at the beginning in order to
remove the sulfur and other impurities such as arsenic in the starting sulfide ore. The completion of this
oxidative step transforms the sulfide into an oxide with the removal of the sulfur from the metal and its
replacement by oxygen. When this transformation is completed, the new oxide is submitted to the
Nichromet treatment, using acid leaching to collect base metals (Cu, Zn, Ni) and hypochloride to collect the
precious metals (Au, Ag). The piloting of the sulfides (batch size of 1 ton) was completed in 2012.
The next step for the development of the technology is the completion of the demonstration plant and the
exploratory operations at laboratory scale of various ores. Work on the demonstration plant started on June
1, 2013. Design of a demonstration plant is completed and the installation of the demonstration facilities
with a capacity of 15 tons per day is scheduled for completion by the end of 2014. The budget for the
demonstration plant is of $27 million, of which $3.4 million had been incurred at the end of December
2013.
Research and development activities at both lab and pilot level are carried out in parallel with the
construction of the demonstration plant. These activities are all done in-house except for the verification of
certain results which are referred to an independent laboratory.
Intellectual Property
Nichromet’s technology is currently protected by the following patents:
Country
Title
Number
Status
Expiration
USA
Gold and silver recovery from
polymetallic sulfides by treatment
with halogens
US 7,537,741
B2
Granted
2023
Peru
Gold and silver recovery from
polymetallic sulfides by treatment
with halogens
4399
Granted
2023
92
Country
Title
Number
Status
Expiration
Mexico
Gold and silver recovery from
polymetallic sulfides by treatment
with halogens
271831
Granted
2023
Chile
Gold and silver recovery from
polymetallic sulfides by treatment
with halogens
45,579
Granted
2024
Cuba
Gold and silver recovery from
polymetallic sulfides by treatment
with halogens
23361
Granted
2026
Canada
Gold and silver recovery from
polymetallic sulfides by treatment
with halogens
24,448,999
Granted
2023
Dominican
Republic
Gold and silver recovery from
polymetallic sulfides by treatment
with halogens
P2003/25/11/02
Pending
USA
A method and a system for gold
extraction with halogens
13/418,863
Pending
Canada
A method and a system or gold
extraction with halogens
CA2012050253
Guatemala
Recovery of base and precious
metals by extractive chlorination
5052
Filed, April
2012
Granted
2022
The “gold and silver recovery from polymetallic sulfides by treatment with halogens” patent relates to the
chemistry of halogens for the extraction of precious metals in the presence of a catalytic amount of sodium
bromide. The “method and system for gold extraction with halogens” patent relates to the chemistry used
for the recycling of the halogens and their introduction in the reactor for the precious metals extraction
reactions. The Process is centered on the chemistry involved and does not require new machinery but rather
a new arrangement of existing mechanical equipment.
New patents are filed during the development of the technology to reinforce the level of protection.
Confidentiality agreements must be signed by all partners involved in the project as well as by employees
who have access to details of the technology. These agreements add to the general protection provided by
patents by protecting more precisely what information is shared.
Employees
Nichromet has a solid technical team with a dozen professionals (chemists, chemical engineers,
metallurgists and technicians). Many members of the team have industrial experience in large industries,
major projects and scale-up method. At September 30, 2013, there were 22 employees, 17 of them working
in Thetford Mines in the Province of Québec and five at the head office.
Facility
Two distinct parts constitute the demonstration project: the concentrator and the demonstration plant itself.
The demonstration plant will have a capacity of 15 tonnes per day and operate in continuum. The scale-up
factor is in the order of 15:1 when related to the pilot installation. The pilot installation was used in a batch
mode rather than a continuous mode. The demonstration plant will be operated continuously (24 hours per
day). This plant, of modest size, will be the first facility operating under industrial conditions. The
demonstration phase will allow the calibration and modification of the process to a scale and the integration
93
of all steps of the process.
The concentrator will be installed on the site of the Minto property and the demonstration plant will be
located in the existing Nichromet facilities in Thetford Mines in the Province of Québec under lease. The
lease has ten year term ending June 1, 2023 with an option for two additional five year terms. The lease
covers 98,843 square feet.
All the equipment of the demonstration plant will be owned by the Resulting Issuer. The engineering of the
demonstration plant was done by employees of Nichromet. The main pieces of equipment, namely the
fluidized bed, the evaporator/crystallizer, the filter press, are ordered from specialized companies following
solicitation of tenders.
Two companies, the Corporation and Dundee Precious Metals have entered into an agreement with
Nichromet to provide mineral ores for treatment at the demonstration plant.
Strategy
The objective is to finalise the development of the technology at a pre-commercial stage. This can only be
accomplished by the construction of a demonstration plant that will operate on a continuous mode. The
complex chemistry involved in the process is induced by the great amount of chemical species involved.
The efficiency of the Process must be proven under a close-to-industrial reality project, i.e. in the
demonstration plant, before its commercialization.
The technology could be an alternative to cyanide leaching in the development of gold deposits since
cyanide has been banned in some jurisdictions in Latin America (Ecuador, Costa Rica, Argentina), Europe
and Montana in the United States. The development of promising gold deposits has been halted because of
the governmental ban or opposition of communities.
Other companies have also tried to develop alternatives to cyanide leaching but until now, none have
proved economical because of their high operating costs.
There is no guarantee that the Process will prove economical at the industrial level but the results obtained
at the pilot level are sufficiently encouraging to construct a demonstration plant. Should the demonstration
phase be successful, the technology could be licensed to companies with deposits in jurisdictions where
cyanide use is banned.
Although Nichromet’s strategy is not based on any agreement on which it would be economically
dependent, Nichromet will need to finance the demonstration plant.
Nichromet has not adopted any social or environmental policies.
Selected Consolidated Financial Information and MD&A
Since incorporation, Nichromet has incurred costs in developing environmentally friendly metallurgical
processes for the mining industry.
The following table sets forth selected historical financial information for the nine-month period ended
September 30, 2013 and the years ended December 31, 2012 and 2011. Such information is derived from
Nichromet’s audited financial statements and should be read in conjunction with such financial statements
included elsewhere in this Information Circular including those financial statements attached hereto as
Appendix F.
94
Revenue
Total Expenses
Net Loss
Cash and Cash Equivalents
Total Assets
Liabilities
Nine-Month Period
Ended September
30, 2013
(audited)
($)
Nil
3,194,770
2,815,260
4,556,072(1)
11,213,355(1)
726,155(1)
Year Ended
December 31, 2012
(audited)
($)
Year Ended
December 31, 2011
(audited)
($)
Nil
3,795,091
3,802,431
1,376,903(2)
6,287,825(2)
189,424(2)
Nil
3,114,139
3,117,749
1,055,140(2)
6,655,277(2)
108,147(2)
Notes:
1.
2.
This information is as at September 30, 2013.
This information is as at December 31, 2012 and 2011, respectively.
Management’s Discussion and Analysis
Nichromet’s MD&A for the nine-month period ended September 30, 2013 and fiscal years ended
December 31, 2012 and 2011 is attached hereto as Appendix G.
Nichromet’s MD&A should be read in conjunction with Nichromet’s audited financial statements and the
related notes for the nine-month period ended September 30, 2013 and fiscal years ended December 31,
2012 and 2011 (prepared respectively in accordance with and based on IFRS), where necessary.
Certain information included in the Nichromet’s MD&A is forward-looking and based upon assumptions
and anticipated results that are subject to uncertainties. Should one or more of these uncertainties
materialize or should the underlying assumptions prove incorrect, actual results may vary significantly
from those expected. See “Forward-Looking Information” for further details.
As at September 2013, the Corporation had firm purchasing commitments for $1,388,653 towards
equipment and services relating to the demonstration plant. Nichromet is building the demonstration plant
to prove its technology. As mentioned above, the use of cyanide leaching is opposed by governments and
communities to protect the environment. There is no guarantee that the technology will prove economical
at the industrial level.
Description of Securities
Authorized capital
As at the date of this Information Circular, Nichromet’s authorized share capital consists of an unlimited
number of Nichromet Subordinate Voting Shares and Nichromet Multiple Voting Shares of which
164,928,724 Nichromet Subordinate Voting Shares and 50,000,000 Nichromet Multiple Voting Shares are
issued and outstanding. Appendix I contains the share terms of the Nichromet Subordinate Voting Shares
and Nichromet Multiple Voting Shares.
Voting Rights
The holders of the Nichromet Subordinate Voting Shares and the Nichromet Multiple Voting Shares
shall be entitled to receive notice of and to attend (in person or by proxy) and be heard at all meetings
of the shareholders of Nichromet (other than separate meetings of the holders of shares of any other
class of shares of Nichromet or any other series of shares of such other class of shares as the same
may come into existence) and to vote at all such meetings with each holder of Nichromet Subordinate
Voting Shares being entitled to one vote per Nichromet Subordinate Voting Share held and each
holder of Nichromet Multiple Voting Shares being entitled to 10 votes per Nichromet Multiple Voting
Share at all such meetings.
95
Priority
Subject to the prior rights, privileges, restrictions and conditions attaching to the shares of any other class
ranking senior to the Nichromet Subordinate Voting Shares and Nichromet Multiple Voting Shares, if any,
the holders of Nichromet Subordinate Voting Shares and Nichromet Multiple Voting Shares are entitled to
receive and to participate equally as to dividends, share for share, as and when declared by the directors of
Nichromet and all such dividends will be declared and paid at the same time in an equal amount on all
Nichromet Subordinate Voting Shares and Nichromet Multiple Voting Shares.
In the event of the liquidation, dissolution or winding-up of Nichromet or other distribution of the assets of
Nichromet for the purpose of winding up its affairs, holders of Nichromet Subordinate Voting Shares and
Nichromet Multiple Voting Shares are, after payment of the amount payable to the holders of shares of any
other class ranking senior to the Nichromet Subordinate Voting Shares and Nichromet Multiple Voting
Shares, if any, entitled to receive the remaining property and assets of Nichromet without preference or
distinction share for share.
Anti-Dilution
The rights, privileges, restrictions and conditions attached to the Nichromet Subordinate Voting Shares or
the Nichromet Multiple Voting Shares may not be deleted or varied (including by the creation of any shares
ranking in priority to or on a parity with either the Nichromet Subordinate Voting Shares or the Nichromet
Multiple Voting Shares) and neither the Nichromet Subordinate Voting Shares nor the Nichromet Multiple
Voting Shares may be subdivided, consolidated, reclassified or changed unless such action is approved by
at least two-thirds of the votes cast at a meeting of the holders of Nichromet Subordinate Voting Shares or
Nichromet Multiple Voting Shares, as the case may be.
The rights, privileges, restrictions and conditions attached to either the Nichromet Subordinate Voting
Shares or the Nichromet Multiple Voting Shares may not be changed in any manner whatsoever unless the
other class of such shares is changed in the same manner and in the same proportion or unless holders of
Nichromet Subordinate Voting Shares and Nichromet Multiple Voting Shares approve such action by at
least a majority of the votes cast at meetings of the holders of Nichromet Subordinate Voting Shares and
Nichromet Multiple Voting Shares called for that purpose.
Conversion of Nichromet Multiple Voting Shares
A holder of Nichromet Multiple Voting Shares shall be entitled at any time and from time to time to have
any or all of the Nichromet Multiple Voting Shares held by him converted into Nichromet Subordinate
Voting Shares on the basis of one Subordinate Voting Share for each one Multiple Voting Share so
converted (subject to adjustments). A holder may so convert his Nichromet Multiple Voting Shares into
Nichromet Subordinate Voting Shares by delivering the certificate(s) representing the Nichromet Multiple
Voting Shares together with a written notice exercising the right of conversion to Nichromet (or its transfer
agent). On any conversion of Nichromet Multiple Voting Shares into Nichromet Subordinate Voting Shares
the certificate(s) representing the Nichromet Subordinate Voting Shares (and representing any Nichromet
Multiple Voting Shares not converted) resulting therefrom shall be issued at the expense of the Company in
the name(s) indicated in the conversion notice, however, the holder shall pay any applicable security
transfer taxes or charges if such certificate(s) or certificates are to be issued in a name or names other than
the name of the holder.
Coattail Provisions
If required by a stock exchange upon which any securities of Nichromet may be listed, it is expected that
the Company, a trustee, as trustee for the benefit of holders of the Nichromet Subordinate Voting Shares,
and certain persons with direct and indirect interests in Nichromet Multiple Voting Shares will enter into a
coattail agreement (the “Coattail Agreement”). It is expected that the Coattail Agreement will contain
provisions having the effect of preventing transactions that otherwise would deprive the holders of
96
Nichromet Subordinate Voting Shares of rights under applicable provincial take-over bid legislation to
which they would have been entitled if the Nichromet Multiple Voting Shares had been Nichromet
Subordinate Voting Shares. Appendix I contains the share terms of the Nichromet Subordinate Voting
Shares and Nichromet Multiple Voting Shares.
Consolidated Capitalization
The following table sets forth the material changes in Nichromet’s capitalization since September 30, 2013,
the date of its most recently completed financial period included in this Information Circular. This table
should be read in conjunction with the MD&A and the audited consolidated financial statements in
Appendix F and Appendix G.
Designation of Security
Amount
Authorized
Nichromet Subordinate
Voting Shares(4)
Unlimited
Nichromet Multiple Voting
Shares(4)
Unlimited
Amount Outstanding
as of September 30,
2013
214,928,724
Nichromet Options
Nichromet Warrants(3)
-
Amount outstanding as of
January 31, 2014
164,928,724
N/A
50,000,000
9,025,000(1)
21,425,000(2)
50,000,000
50,000,000
Notes:
(1)
(2)
(3)
(4)
The Nichromet Options are exercisable at prices from $0.10 to $0.20 and they expire at different dates from November 7,
2014 to November 27, 2022.
After September 30, 2013, 150,000 expired and on December 12, 2013, an additional 12,550,000 options were granted
with an exercise price of $0.10 and an expiry date of December 12, 2018.
Nichromet Warrants exercisable at $0.10 until July 9, 2015.
On January 8, 2014, the Nichromet Multiple Voting Shares were created. Prior to such date, Nichromet had outstanding
214,928,724 common shares which, pursuant to articles of amendment dated January 8, 2014, were redesigned as
Subordinated Voting Shares. Dundee Corporation exchanged 50,000,000 of its Nichromet Subordinate Voting Shares for
50,000,000 Nichromet Multiple Voting Shares effective as of January 29, 2014.
As at September 30, 2013, the deficit amounted to $25,802,926.
Prior Sales
On December 5, 2013, the shareholders of Nichromet approved a capital reorganization whereby the
common shares of Nichromet were re-designated as Nichromet Subordinate Voting Shares and a new class
of Nichromet Multiple Voting Shares was created. Articles of amendment giving effect to the new
designation where filed on January 8, 2014. The sales reported below all occurred before the capital
reorganization and accordingly refer to common shares.
97
Number of
Shares
Issue Price Per
Nichromet
Share/Unit ($)
Aggregate Issue
Price ($)
Consideration
Received
July 9, 2013
50,000,000(1)
$0.10
$5,000,000
Cash
July 9, 2013
9,889,510(1)
-
-
Creso Shares
May 24, 2013
2,250,000(2)
$0.20
$450,000
Cash
March 28, 2013
2,425,000(2)
$0.20
$485,000
Cash
March 15, 2013
300,000(3)
$0.10
$30,000
Cash
February 8, 2013
2,450,000(2)
$0.20
$490,000
Cash
TOTAL
67,314,510
Date
Notes:
1.
2.
3.
Private placement of units to Dundee Corporation, a related party, each being composed of one Nichromet Share and one
Nichromet Warrant. The 50,000,000 common shares were redesignated as Nichromet Subordinate Voting Shares and were
exchanged into Nichromet Multiple Voting Shares.
Exercise of Nichromet Warrants by Dundee Corporation.
Exercise of Nichromet Options.
Executive Compensation
The following discussion describes the significant elements of Nichromet’s executive compensation
program, with particular emphasis on the process for determining compensation payable to NEOs. The
NEOs who appear in the compensation tables for the nine-month period ended September 30, 2013 and the
years ended December 31, 2012 and 2011 below are: Pierre Gauthier, President and Chief Executive
Officer November 2007, Jean-Marc Lalancette, Vice-President, Research and Development since October
2005 and David Lemieux Executive Vice-President since April 2013.
Overview
The Nichromet Board has not appointed a compensation committee. Nichromet’s Board makes decisions
regarding all forms of compensation, including salaries, bonuses and equity incentive compensation for the
executive officers. Nichromet’s Board also administers the Nichromet Stock Option Plan.
Compensation Discussion and Analysis
Compensation Objectives
The objective of executive compensation is to retain, motivate and reward the executive officers for their
performance and contribution to Nichromet’s long term success, and align their interests with those of
Nichromet Shareholders.
Elements of Compensation Program
The following sections describe the different compensation components, which together define the
executive compensation program. Nichromet’s compensation consists primarily of three main elements:
base salary or fee, a bonus plan and long-term incentive plans.
Base Salary/Fees
A primary element of the Nichromet’s compensation program is base salary or fees which represent the
minimum compensation for services rendered during the fiscal year and depend on the scope of the NEOs’
experience, responsibilities, leadership skills, and performance.
Base salaries or fees are not reviewed annually but adjusted to reflect promotions or other changes in the
98
scope or breadth of an executive’s role or responsibilities, as well as for market competitiveness.
Bonus Plan
There is no bonus plan. Rather, Nichromet’s board of directors grants bonuses on an ad hoc basis to reflect
special accomplishment.
Stock Option Plan
General
Equity-based awards are a variable element of compensation that allows Nichromet to reward the executive
officers for their sustained contributions. Equity awards reward performance and continued employment
by an executive officer. Nichromet’s board of directors believes that stock options provide management
with a strong link to long-term corporate performance and the creation of shareholder value.
Option-based awards (“Nichromet Options”) are issued, pursuant to the stock option plan of Nichromet
last approved by the Board on October 3, 2013 (the “Nichromet Stock Option Plan”), to executive
officers, directors, employees and consultants. The purpose of the Stock Option Plan is to provide an
increased incentive to participants to contribute to the future success and prosperity of Nichromet through a
proprietary interest.
The Nichromet Board of directors administers the Nichromet Stock Option Plan and determines, among
other things, names of the individuals receiving the Nichromet Options, vesting periods, exercise price and
other attributes of the Nichromet Options, in each case pursuant to the Nichromet Stock Option Plan, and
applicable securities legislation.
Nichromet Options are granted in consideration of the level of responsibility of the executive, historic and
recent performance as well as his or her impact and/or contribution to the longer-term operating
performance of Nichromet. In determining the number of Nichromet Options to be granted to the executive
officers, Nichromet’s board of directors takes into account the value of Nichromet Options, if any,
previously granted to each executive officer and the exercise price of any outstanding Nichromet Options to
ensure that such grants closely align the interests of the executive officers with the interests of Nichromet’s
shareholders.
Eligible participants under the Nichromet Stock Option Plan
Persons eligible to participate under the Nichromet Stock Option Plan are directors, officers, employees
and consultants of Nichromet and persons employed by an entity providing Management services to
Nichromet (except for investor relations activities).
Maximum number of Nichromet Shares issuable under the Nichromet Stock Option Plan
The Nichromet Stock Option Plan is a 10% rolling plan and the maximum aggregate number of Nichromet
Options which are reserved for issuance under the Nichromet Stock Option Plan is 21,492,872.
The maximum percentage of Nichromet Shares that any one Person is entitled to receive under the
Nichromet Stock Option Plan
The number of Nichromet Shares reserved for issuance to any one Person pursuant to options granted under
the Nichromet Stock Option Plan may not exceed 5% of the issued and outstanding Nichromet Shares (on a
non-diluted basis less the aggregate number of Nichromet Shares reserved for issuance to such Person
under any other outstanding options). There are no restrictions on the number of Nichromet Shares which
may be issued to insiders of the Company under the Nichromet Stock Option Plan.
99
The method of determining the exercise price for Nichromet Shares under the Nichromet Stock Option Plan
The exercise price of an option is determined by Nichromet’s board of directors when the option is granted
but shall not be less than the price of the last private placement preceding the grant.
Vesting of Nichromet Options
Nichromet Options vest as Nichromet’s board of directors determines, in its discretion.
Term of Nichromet Options
Nichromet Options expire on the expiration date set forth in the option certificate, as determined by
Nichromet’s board of directors, and must be exercised, if at all, on or before the expiration date. Subject to
an extension during a blackout or restricted period as described in the paragraph below, in no event will the
expiration date be more than 10 years after the date of grant.
Amendment or Termination of the Nichromet Stock Option Plan
Nichromet’s board of directors may at any time amend, suspend or terminate the Nichromet Stock Option
Plan or any option granted under the Nichromet Stock Option Plan, including, changes of a clerical or
grammatical nature, changes regarding the persons eligible to participate in the Nichromet Stock Option
Plan, changes regarding the person’s right to exercise options after he or she ceases to be an eligible
participant and changes regarding the vesting of options; provided however that such amendment,
suspension or termination is in accordance with applicable laws provided that no such amendment,
suspension or termination shall be made at any time to the extent such action would materially adversely
affect the existing rights of a Person with respect to any then outstanding options, as determined by
Nichromet’s board of directors acting in good faith, without his or her consent in writing.
Compensation Risk
While there has been no formal consideration by Nichromet’s board of directors of the implications of risks
associated with the Nichromet’s compensation policies and practices, the current structure of Nichromet’s
executive compensation arrangements are inherently designed not to encourage executive officers to
expose Nichromet to inappropriate or excessive risks. The following elements of Nichromet’s executive
compensation arrangements correlate to the long-term performance of Nichromet: compensation with a
well-balanced mix of base salary, bonus and long-term incentive plan; and policies and practices that are
generally applied on a consistent basis to all executive officers.
Summary Compensation Table
The following table sets out information concerning the compensation paid by Nichromet to the NEOs
effective as of closing of the Amalgamation:
100
Non-Equity
Incentive Plan
Compensation
($)
Name and Principal
Position
ShareBased
Period/ Fees/Salary Awards
Year
($)
($)
OptionBased
Awards
($)
LongAnnual
Term
Pension
Incentive Incentive Value
Plan
Plan
($)
All Other
Compensation
($)
Total
Compensation
($)
Pierre Gauthier(1)
President, CEO and
Chairman
2013
2012
2011
180,000
180,000
129,000
-
186,992
90,000
140,000
50,000(4)
-
-
-
-
366,992
320,000
269,000
Jean-Marc Lalancette(2)
Vice-President, Research
& Development
2013
2012
2011
181,674
149,940
125,400
-
186,992
72,000
28,000
-
-
-
-
368,666
221,940
153,400
David Lemieux(3)
Executive Vice-President
2013
140,000
-
216,910
-
-
-
-
356,910
________________
Notes:
(1)
Fees paid to Seed Capital Inc., a private investment company owned by Mr. Gauthier and his family.
(2)
Fees paid to Inotel Inc., a company wholly-owned by Jean-Marc Lalancette.
(3)
Mr. Lemieux was appointed Executive Vice-President in April 2013.
(4)
Bonus granted for the special services provided by Mr. Gauthier in Guatemala, Mexico, Honduras and El Salvador, namely the
search of local projects of interest for the Corporation, parties interested in the Nichromet technology.
Incentive Plan Awards
Outstanding Share-Based Awards and Option-Based Awards Table
The following table sets out information concerning all the Nichromet Options outstanding as of December
31, 2013 held by the NEOs.
Option-Based Awards
Value of
Unexercised
In-TheMoney
Options
($)
Number of
Shares
that have
not Vested
(#)
Market or
Payout Value
of ShareBased
Awards that
have not
Vested
($)
12-06-2018
06-08-2016
11-28-2017
Nil
$-
$-
$-
0.10
0.10
0.20
12-06-2018
06-08-2016
11-28-2017
Nil
$-
$-
$-
0.10
0.10
0.10
0.20
0.20
12-06-2018
06-08-2016
10-18-2015
02-06-2018
11-28-2017
Nil
$-
$-
$-
Number of
Securities(1)
Underlying
Unexercised
Options
(#)
Option
Exercise
Price
($)
Option
Expiration
Date
Pierre Gauthier
President, CEO and
Chairman
2,500,000
2,000,000
500,000
0.10
0.10
0.20
Jean-Marc Lalancette
Vice-President,
Research &
Development
2,500,000
400,000
400,000
David Lemieux
Executive VicePresident
2,900,000
150,000
100,000
300,000
150,000
Name
Share-Based Awards
________________
Notes:
(1)
The Nichromet Shares are not listed for trading on an exchange.
101
Market or
Payout
Value of
Share-Based
Awards not
Paid Out or
Distributed
Incentive Plan Awards – value vested or earned during the year 2013
Option-based awards – Value
Vested during the year
($)
Share-based awards – Value
Vested during the year
($)
Non-equity Incentive Plan
Compensation – Value earned
during the year
($)
Pierre Gauthier
President, CEO and Chairman
186,992
-
-
Jean-Marc Lalancette
Vice-President, Research &
Development
186,992
-
-
David Lemieux
Executive Vice-President
216,910
-
-
Name
Pension Plan Benefits
Nichromet has no defined benefit plan and no defined contribution plan.
Fees
Mr. Gauthier’s monthly fees are paid to Seed Capital Inc. at his request.
Mr. Lalancette’s daily fees are paid to Inotel Inc. at his request.
Directors’ Compensation
Summary Compensation Table
The following table summarizes the compensation paid or payable to the directors of the Corporation for
the financial year 2013 except for the directors who are NEOs.
Name
Salvador Brouwer
Brahm Gelfand
Mark Goodman
Ned Goodman
Hubert Marleau
Fees earned
100,468(1)
-
Option-based
awards
($)
3,740
18,699
52,358
186,992
18,699
All other
compensation
Total
-
104,208
18,699
52,358
186,992
18,699
______________
Notes:
1.
Fees paid for services as President of Nichromet Dominicana S.A. and Nichromet Guatemala S.A.
102
Outstanding option-based awards
The following table sets forth all awards outstanding as at the date of this Information Circular.
Name
Number of
securities(1)
underlying
unexercised
options
Option exercise
price
Option
expiration date
Salvador Brouwer
500,000
150,000
50,000
0.10
0.20
0.10
06-08-2016
11-27-2022
12-12-2018
Brahm Gelfand
250,000
200,000
250,000
0.10
0.20
0.10
06-08-2016
11-27-2022
12-12-2018
Mark Goodman
700,000
0.10
12-12-2018
2,500,000
0.10
12-12-2018
300,000
150,000
250,000
0.10
0.20
0.10
06-08-2016
11-27-2022
12-12-2018
Ned Goodman
Hubert Marleau
Value of
unexercised inthe-money
options (1)
Number of
shares or units
of shares that
have not
vested(2)
-
-
-
-
-
-
-
-
________________
Notes:
(1)
The Nichromet Shares are not listed for trading on an exchange.
Legal Proceedings
There are no material pending legal proceedings to which the Corporation is a party or of which any of its
property is the subject matter nor are any such proceedings known to the Corporation to be contemplated.
Material Contracts
The following are Nichromet’s material contracts:
1.
Lease agreement for the pilot plant in Thetford Mines entered into on September 9, 2013
by Nichromet and Société Asbestos Limitée;
2.
Contribution agreement entered into on June 21, 2013 by Nichromet and Canada
Foundation for Sustainable Development Technology;
3.
Financial assistance agreement entered into on December 21, 2011 by Nichromet and the
Ministre du Dévelopement économique, de l’innovation et de l’exportation;
4.
Unsecured loan of $500,000 to the Corporation bearing 6% interest and payable on
July 10, 2014;
5.
The Bridge Loan agreement;
6.
The unsecured loan of $200,000 to the Corporation bearing 6% interest and payable on
July 10, 2014; and
7.
The Amalgamation Agreement.
103
Escrowed Securities
There are no escrowed securities.
Principal Security Holders
The following table sets forth the names of each of the persons who, to Nichromet management’s
knowledge, as at the date of this Information Circular, beneficially owns, directly or indirectly, securities
carrying 10% or more of the voting rights attaching to any class of voting securities of Nichromet.
Before the Amalgamation
Name
Dundee Corporation(1)
Notes:
(1)
After the Amalgamation
Number and Type of
Securities Owned
Percentage of
Securities
Number and Type of
Securities Owned
Percentage(2) of
Resulting Issuer Shares
128,068,497 Nichromet
Subordinate Voting Shares
50,000,000 Nichromet
Multiple Voting Shares
77.6%
128,068,497 Nichromet
Subordinate Voting Shares
50,000,000 Nichromet
Multiple Voting Shares
57%
100%
100%
Includes 7,381,577 Nichromet Subordinate Voting Shares held by Dundee Resources and 500,000 Nichromet Subordinate
Voting Shares held by 0764704 B.C. Ltd, both wholly-owned subsidiaries of Dundee Corporation. In addition Dundee
Corporation holds 50,000,000 Nichromet Subordinate Voting Share purchase warrants of Nichromet and therefore will
hold 62.49% of the vote attached to the Nichromet Subordinate Voting Shares and Nichromet Multiple Voting Shares on a
fully-diluted basis after the Amalgamation. Dundee will hold 100% of the Nichromet Multiple Voting shares. The
Nichromet Multiple Voting Shares carry ten votes each. Dundee Corporation holds 94.5% of the votes attached to all
securities of Nichromet and will hold after the Amalgamation, 86.3% of the voting power attached to all of the Resulting
Issuer Shares.
Directors and Executive Officers
The following table sets out, for each of the directors and executive officers of Nichromet, the person’s
name, province or state, and country of residence, position(s) with Nichromet, principal occupation for the
past five years, ownership of Nichromet Subordinate Voting Shares and if applicable, the date of initial
appointment as a director of Nichromet. The directors are expected to hold office until the next annual
general meeting of shareholders. The directors are elected annually and, unless re-elected, retire from office
at the end of the next annual general meeting of shareholders. As a group, the directors and executive
officers will beneficially own, or control or direct, directly or indirectly, a total of 140,859,009 Nichromet
Subordinate Voting Shares and 50,000,000 Nichromet Multiple Voting Shares representing in aggregate
88.1% of the voting power attached to the Resulting Issuer Shares outstanding immediately following
completion of the Amalgamation.
104
Name and
Municipality of
Residence(1)
Position
Director or
Officer Since
Principal Occupation
for Past Five Years
Number of Creso
Resulting Issuer
Shares and/or
Shares upon
Nichromet Shares as at
Completion of
the Date of the
the
Information Circular(2) Amalgamation(3)
SALVADOR
BROUWER
Santo Domingo,
Dominican
Republic
Director
May 25, 2006
President, Nichromet
Dominicana, a subsidiary
of the Company
President and CEO of
the Nichromet from
September 17, 2007 until
February 28, 2011
1,000,000 Nichromet
Subordinate Voting
Shares (0.15%)
1,000,000
Nichromet
Subordinate
Voting Shares
(0.14%)
PIERRE GAUTHIER
Québec, Canada
President, Chief
Executive
Officer,
Chairman and
Director
December 5,
1999
President, Seed Capital
Inc., a private investment
company
2,167,615 Nichromet
Subordinate Voting
Shares (4) (0.33%)
and 2,008,334 Creso
Shares (1.39%)
3,171,782
Nichromet
Subordinate
Voting Shares
(0.44%)
BRAHM
GELFAND(7)
Québec, Canada
Director
May 15, 2006
Counsel at Lapointe
Rosenstein, Marchand
Melancon, L.L.P.
Nil
Nil
NED GOODMAN
Ontario, Canada
Director
June 8, 2012
Chief Executive Officer,
Dundee Corporation, a
holding company
focused on real estate,
resources and asset
management
128,068,497 Nichromet
Subordinate Voting
and 50,000,000 Multiple
Voting Shares (5)
(94.46%)
and 3,333,334 Creso
Shares (2.30%)
129,735,164
Nichromet
Subordinate
Voting and
50,000,000
Multiple Voting
Shares
(86.57%)
JEAN-MARC
LALANCETTE
Québec, Canada
Director VicePresident,
Research and
Development
and Director
December 5,
1999
President, Inotel Inc., a
company involved in
research
6,952,063 Nichromet
Subordinate Voting
Shares(6)
(1.05%)
6,952,063
Subordinate
Voting Shares
(0.96%)
HUBERT
MARLEAU(7)
Ontario, Canada
Director
June 7, 2011
Chairman
Palos Capital
Corporation until 2012
Nil
Nil
MARK E.
GOODMAN
Ontario, Canada
Director
May 23, 2013
Vice-President, Dundee
Corporation, a holding
company focused on real
estate, resources and
asset management
Nil
Nil
DAVID LEMIEUX
Québec, Canada
Executive VicePresident
April 15, 2013
General Manager until
April 15, 2013 of
Nichromet
Nil
Nil
Notes:
1.
2.
3.
4.
The information as to country of residence, principal occupation and number of shares beneficially owned by the nominees
(directly or indirectly or over which control or direction is exercised) was provided by the respective nominees.
Percentages represent the percentage of vote attached to the Nichromet Shares or Creso Shares, as the case may be.
Percentages represent the percentage of vote attached to the resulting Issuer Shares.
Held by Seed Capital Inc. (1,467,615 Nichromet Subordinate Voting Shares).
105
5.
6.
7.
Held by Affiliates of Ned Goodman (128,068,497 Nichromet Subordinate Voting Shares and 50,000,000 Nichromet Multiple
Voting Shares), namely Dundee Corporation, Dundee Resources and 0764704 B.C. Ltd..
Held by Inotel Inc., a company wholly-owned by Mr. Lalancette.
Member of the Audit Committee.
Biographies
The following are brief profiles of the directors and executive officers of Nichromet.
Salvador Brouwer, Director (age – 70)
Mr. Brouwer is a graduate from the University of Waterloo, Ontario. He holds a Bachelor of Science in
Geology from the University of Puerto Rico. From 1963 to 1999 he occupied various functions with
Falconbridge Ltd. He was Regional Exploration Manager for Latin American when he retired in 1999. Mr.
Brouwer is now an independent consultant in geology. He is President of Nichromet Dominicana, S.A. and
Nichromet Guatemala. He was President of Nichromet Extraction Inc. from 2007 to 2011.
Pierre Gauthier, Director, President, Chief Executive Officer and Chairman (age – 67)
Mr. Gauthier, president and CEO has a BA in Economics, obtained in 1967 from the University of
Montreal and a Bachelor of Commerce obtained in 1969 from the University of Ottawa. He also holds an
MBA from Concordia University and has over 35 years’ experience in the world of finance. From 1970 to
1986 he worked in banking where he helped fund several companies. He then worked for several brokerage
firms such as Dominion Securities, Burns Fry and Geoffrion Leclerc.
He is also co-founder of Nichromet. Mr. Gauthier has extensive experience in the field of finance and
corporate environment. He participated in the course of his career to finance dozens of companies many of
which are now public companies. As founding President of Nichromet, his role is to coordinate discussions
among Nichromet and Dundee Corporation to carry out the proposed demonstration plant and to see the
financing of the project. During his career, Mr. Gauthier has participated in or led several rounds of
financing totalling more than $300 million. As President of Nichromet, Mr. Gauthier assumed the
leadership of the coordinated national funding phases of the project. He also leads Nichromet’s corporate
guidance on the developments of technology and its implementation. Mr. Pierre Gauthier will allocate 80%
of his time to the Resulting Issuer.
Brahm Gelfand, Director (age – 76)
Mr. Gelfand is a graduate in law from McGill University in Montreal, Quebec and has been engaged in the
practice of law for close to 50 years. His practice has focused mainly on domestic and cross-border
business transactions and commercial dealings. Brahm is a member of the Board of Governors of Dynamic
Mutual Funds and Chairman of its Independent Review Committee. He is also associated with a number of
private and public corporations and is actively involved with numerous non-profit organizations and
foundations, including as Director and former President of the Sir Mortimer B. Davis Jewish General
Hospital and its Foundation in Montreal. He is currently Counsel to the Montreal law firm Lapointe
Rosenstein Marchand Melancon, L.L.P.
Ned Goodman, Director (age – 76)
Mr. Goodman, B.Sc., MBA, CFA, serves as Chief Executive Officer and President of Dundee Corporation
(also known as Dundee BanCorp., Inc.) and Dundee Capital Markets Inc. Mr. Goodman served as the Chief
Executive Officer and President of DundeeWealth Inc. (formerly Dundee Wealth Management Inc.) until
June 20, 2007. He is a Co-Founder of Dundee Precious Metals Inc. In 1967, he co-founded Beutel,
Goodman & Company Ltd., investment counsel. He serves as Vice President of Dynamic Mutual Funds of
Dundee Realty Corp. He serves as the Chairman and Portfolio Manager of GCIC Ltd (formerly Dynamic
Mutual Funds Ltd.) He serves as the Chief Executive Officer, President and Lead Portfolio Manager of Ned
Goodman Investment Counsel Limited. He serves as President and Lead Portfolio Manager at Dynamic
Focus+ Resource Fund. Mr. Goodman serves as Chairman and Lead Portfolio Manager of Goodman &
106
Company, Investment Counsel Ltd. He serves as Chairman of the Board of Directors and Portfolio
Manager at Dynamic Investment Fund - Dynamic Strategic Resource Fund. He was Founder of various
Dynamic funds and served as their Portfolio Manager. In 1997, he was awarded a Doctorate of Laws,
honoris causa, by Concordia University. Mr. Goodman has a Bachelor of Science degree from McGill
University and a Master of Business Administration from the University of Toronto in 1962.
Jean-Marc Lalancette, Director, Vice-President, Research and Development (age – 79)
Mr. Lalancette is a chemist (PhD) with 35 years’ experience in industrial research. He participated in the
design and transfer of technologies on an industrial scale. He is also cofounder of Nichromet and has held
the following positions: Vice-Rector, R & D, U de Sherbrooke Vice President, R & D, National Asbestos
Corp. He is the author of 40 papers and holds over 100 patents.
Mr. Lalancette has extensive experience in industrial research and process development. He has held
several senior positions during his career. As a professor at the University of Sherbrooke, where he worked
for 20 years, he participated in founding the Department of Chemistry. He was a Professor, Dean of the
Faculty of Sciences and Vice-Rector, Research. Subsequently, he spent six years as Vice President R & D
of the National Society of Asbestos in Thetford Mines, where he led a team of 60 people and an annual
budget of $6 million. He then founded his own private laboratory, lnotel Inc., a company that still exists
after more than 25 years. During the ‘80s and ‘90s, Mr. Lalancette participated in the development and
commercialization of several technologies on an industrial scale many of which are still in operation today.
In 1997, he founded Nichromet with Mr. Pierre Gauthier. His extensive experience in the world of mining
and metallurgy, as well as his experience in technology transfer on an industrial scale, will be major assets
in this project. Mr. Lalancette will allocate 80% of his time to the Resulting Issuer,
Hubert Marleau, Director (age – 70)
Mr. Marleau is co-founder of Palos Management. With over 30 years of experience in the business and
financial community, Mr. Marleau has raised funds privately and publicly for emerging and mature
companies, structured mergers and acquisitions as well as designed and created numerous financial deals in
Canada. Mr. Marleau has worked at the senior executive level of several large investment banks notably,
Nesbitt Thomson Inc., Levesque Beaubien Inc. and Marleau, Lemire Inc. During his career, Mr. Marleau
was a governor of the TSX, the Montreal Stock Exchange, and the Vancouver Stock Exchange, a director
of the Investment Dealer Association of Canada and board member of publicly traded companies. Mr.
Marleau graduated from the University of Ottawa with an Honours Bachelor of Science in Economics.
Mark E. Goodman, Director (age – 45)
Mr. Goodman has been actively engaged in the financial services and mining industry since 1992. He is
currently Executive Vice President and a director of Dundee Corporation and has held numerous positions
within the organization. In addition, Mr. Goodman is the founder and Executive Chairman of Cogitore
Resources Inc., a publicly listed company focused on base metals exploration in Northern Quebec. Mr.
Goodman has also served as President and CEO of both Valdez Gold Inc. and Cogitore Resources Inc. Mr.
Goodman sits on the Board of Directors of several publicly and privately held companies including,
Cogitore Resources Inc., Corona Gold Corp., Ryan Gold Corp., Energy Fuels Inc., and Odyssey Resources
Inc. He obtained his Bachelor of Arts from York University in 1992.
Executive Officer
David Lemieux, Executive Vice-President (age – 35)
Mr. Lemieux is a chemical engineer, graduated from the University of Sherbrooke and he is currently
pursuing a Master in Business Administration at the University Laval. He has accumulated over 12 years
experiences in the mining industry mostly oriented toward process development. He is the co-author of six
patents and has been working for Nichromet since 2006 when he joined as an Operation Manager. Mr.
Lemieux is now the Executive Vice-President of the company. As such, he is leading the process
development group of the company and supervising the implementation of the demonstration plant. David
Lemieux is a full time employee.
107
Corporate Cease Trade Orders
None of the directors or executive officers of Nichromet has, within the 10 years prior to the date of this
Circular, been a director, chief executive officer or chief financial officer of any company (including
Nichromet) that, while such Person was acting in that capacity (or after such Person ceased to act in that
capacity but resulting from an event that occurred while that Person was acting in such capacity) was the
subject of a cease trade order, an order similar to a cease trade order, or an order that denied the company
access to any exemption under securities legislation for a period of more than 30 consecutive days.
Corporate and Shareholder Bankruptcies
No director or executive officer of Nichromet or a shareholder holding a sufficient number of securities to
affect materially the control of Nichromet has, within the 10 years prior to the date of this Circular,
become, or been a director or executive officer of any company (including Nichromet), that, while such
Person was acting in that capacity, or within a year of that Person ceasing to act in that capacity, became
bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or
instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager
or trustee appointed to hold its assets, other than Jonathan Goodman, a director of Dundee Corporation,
who was a director of Tahera Diamond Corporation (“Tahera”) from August 2003 to September 2008.
Tahera filed for protection under the Companies’ Creditors Arrangement Act on January 16, 2008, and as a
result of its financial difficulties, Tahera failed to file financial statements for the year ended December 31,
2007 and subsequent financial periods. As a result, cease trade orders were issued in 2010 by the OSC, as
well as by the securities regulatory authorities in Québec, Alberta and British Columbia, which orders have
not been revoked.
None of the directors or executive officers of Nichromet, or a Nichromet Shareholder holding a sufficient
number of securities of Nichromet to affect materially the control of Nichromet has, within the last 10
years, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or
become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a
receiver, receiver manager or trustee appointed to hold the assets of the director, executive officer or
Nichromet Shareholder, state the fact.
Penalties or Sanctions
Except as disclosed below, no director or executive officer of Nichromet or shareholder holding sufficient
number of securities of Nichromet to affect materially the control of the Nichromet has been subject to:
•
any penalties or sanctions imposed by a court relating to securities legislation or by a
securities regulatory authority or has entered into a settlement agreement with a securities
regulatory authority; or
•
any other penalties or sanctions imposed by a court or regulatory body that would likely be
considered important to a reasonable investor making an investment decision.
Conflicts of Interest
To the best knowledge of Nichromet, other than Pierre Gauthier being a director, Chairman of the Board,
President and Chief Executive Officer of Nichromet and a director, Chairman of the Board, President and
Chief Executive Officer of the Corporation, there are no known existing or potential conflicts of interest
among Nichroment and its directors, officers or other members of management as a result of their outside
business interests except that certain of Nichromet’s directors and officers serve as directors and officers of
other companies, and therefore it is possible that a conflict may arise between their duties to us and their
duties as a director or officer of such other companies. See “Information Regarding Nichromet and Subco Interest of Management and Others in Material Transactions” and “Information Regarding Nichromet and
Subco - Management – Directors and Executive Officers”.
108
Indebtedness of Directors and Officers
No Person who is, or who was within the 30 days prior to the date of this Information Circular, a director,
or officer, employee or any former director or officer of Nichromet or a subsidiary thereof, and no
associate of such persons is, or was as of the date of this Information Circular indebted to Nichromet or
any of its subsidiaries or indebted to any other entity where such indebtedness is subject to a guarantee,
support agreement, letter of credit or other similar arrangement or understanding provided by Nichromet or
any of its subsidiaries.
During the nine-month period ended September 30, 2013, none of the directors or officers of Nichromet, or any
associate of the foregoing was indebted to Nichromet or any of its subsidiaries.
Interest of Management and Others in Material Transactions
Pierre Gauthier, director, Chairman of the Board, President and Chief Executive Officer of Nichromet is
also a director and President and Chief Executive Officer of the Corporation. Mr. Gauthier, his Associate
and his Affiliates, own 2,167,615 Nichromet Subordinate Voting Shares, representing approximately 1.0 %
of the issued and outstanding Nichromet Subordinate Voting Shares. In addition, there are 2,008,334 Creso
Shares beneficially held by Pierre Gauthier, his Associate and his Affiliates, representing approximately
1.39% of the issued and outstanding Creso Shares. Mr. Gauthier also owns Creso Options exercisable for
2,450,000 Creso Shares and Creso Warrants exercisable for 950,000 Creso Shares.
In July 2013, Nichromet acquired 19,779,000 Creso Shares, representing approximately 13.66% of the
issued and outstanding Creso Shares. Due to Dundee Corporation’s indirect beneficial holdings in
Nichromet, Dundee Corporation is considered, for securities law purposes, the owner of these Creso
Shares.
Nichromet is party to an agreement to develop Creso’s Minto gold deposit by extracting a 30,000 tonne
bulk sample. In July 2013, Nichromet made a $500,000 loan to Creso. The loan is unsecured and bears
interest at a rate of 6% per annum payable on July 10, 2014. In December 2013, Nichromet made an
additional loan of $200,000 to Creso. The loan is unsecured and bears interest at a rate of 6% per annum
payable on July 10, 2014.
Non-Arm’s Length Transactions
There are no conflicts of interest with respect to the Amalgamation of which the Corporation is aware,
other than: (i) Pierre Gauthier being a director, Chairman of the Board, President and Chief Executive
Officer of Nichromet and a director, Chairman of the Board, President and Chief Executive Officer of the
Corporation; and (ii) Nichromet being a shareholder of the Corporation.
Nichromet is party to an agreement to develop Creso’s Minto gold deposit by extracting a 30,000 ton bulk
sample. Operations are scheduled to begin once the permitting process is completed, and are anticipated to
last for approximately eight months.
109
INFORMATION REGARDING THE RESULTING ISSUER
Corporate Structure
The Resulting Issuer will have its head office and registered office located at 600 de Maisonneuve Blvd.
West, Suite 2750, Montreal (Québec) H3A 3J2, Canada.
The Resulting Issuer will be incorporated under the CBCA. On December 5, 2013 shareholders of
Nichromet approved certain amendments to Nichromet’s articles, these amendment approved, among other
things, the redesignation of Nichromet’s common shares as Nichromet Subordinate Voting Shares and the
creation of the Nichromet Multiple Voting Shares, having the rights privileges and restrictions set out under
“Information Regarding Nichromet and Subco – Description of Securities”. Additionally, the removal of
certain restrictions on the transfer of Nichromet’s shares, typical for a private company, was approved.
Articles of amendment giving effect to the share reorganization were filed on January 8, 2014 and the
amendments became effective. At the same time Nichromet changed its name from Nichromet Extraction
Inc. to “Dundee Sustainable Technologies Inc.” in the English language and “Dundee Technologies
Durables Inc.” in the French language.
Intercorporate Relationships
Following the completion of the Amalgamation, the Resulting Issuer will own, directly or indirectly, all of
the issued and outstanding common shares of Amalco. As a result of the Amalgamation, the previous Creso
Shareholders will become shareholders of the Resulting Issuer, along with the current Nichromet
Shareholders.
The following organizational chart demonstrates the intended corporate structure of the Resulting Issuer:
Nichromet Extraction Inc.
(Canada)
(“Nichromet”)
100%
Amalco
99.99%
99.99%
NG
RN
99.99%
ND
NG was incorporated under the laws of the Republic of Guatemala on July 9, 2004. RN was incorporated
under the laws of the Republic of Guatemala on June 6, 2007. ND was incorporated under the laws of the
Dominican Republic on April 9, 2003. Amalco will be existing under the laws of Canada.
Narrative Description of Business
Stated Business Objectives
The Resulting Issuer will continue to carry on the businesses theretofore carried on by Nichromet and will
indirectly carry on the businesses theretofore carried on by the Corporation. Nichromet is engaged in the
development metallurgical processes. In the next 24 months, Nichromet will construct a demonstration
plant designed to a large enough scale and equipped with the level of automation required by this type of
installation in order to demonstrate the yields and low cost performance of the Process on a continuous
basis.
110
The principal business of the Corporation has been to acquire and explore mineral resource properties in
Canada. The Corporation has interest in mineral properties located in Canada which are presently at the
exploration and evaluation stage. The Corporation’s Minto deposit will provide a 30,000 ton bulk sampling
for treatment at Nichromet’s demonstration plant. Please refer to “Information Regarding Nichromet and
Subco – General Development of the Business”.
Exploration and Development
Shining Tree Properties, Ontario
The Corporation’s principal mining exploration holdings are located at the Shining Tree Properties. The
Corporation assembled a land package of ground adjacent to its Minto, Tyranite, Duggan and Mann
properties, all totalling approximately 124 square km.
The Corporation has been conducting major geophysical surveys, diamond drilling and geological
programs on the Shining Tree Properties since 2007.
Outlook for 2014-2015
The Minto property bulk sampling is scheduled to begin once the permitting process is completed, and is
anticipated to last for approximately eight months, during which time, site will be prepared, a concentrator
will be built and the bulk sample will be mined and processed by the Resulting Issuer. Funding for the bulk
sampling is expected to be provided by the Resulting Issuer. The Amalgamation will allow the Resulting
Issuer to have a larger asset base than the Corporation and greater access to capital markets.
The contemplated exploration and development activities relating to the Minto property bulk sampling is as
follows:
Activities
Permitting
Data validation and site preparation
Mining
Site rehabilitation cost
Project management
TOTAL
2014
($)
265,000
23,000
132,000
53,000
473,000
2015
($)
60,000
96,000
1,320,000
198,000
53,000
1,727,000
Description of Securities
Upon completion of the Amalgamation, the Nichromet Shares will be the Resulting Issuer Shares. Please
refer to “Information Regarding Nichromet and Subco – Description of Securities”.
111
Pro Forma Consolidated Capitalization
Designation of Security
Amount authorized or to
be authorized
Amount outstanding after giving
effect to the Amalgamation(1)(2)
Nichromet Subordinate Voting Shares
unlimited
227,445,202
Nichromet Multiple Voting Shares
unlimited
50,000,000
Notes:
(1) In addition to the number of issued and outstanding Resulting Issuer Shares, there will be Resulting Issuer Options exercisable to
acquire 23,970,000 Resulting Issuer Shares and Resulting Issuer Warrants to acquire 63,555,566 Resulting Issuer Shares. Please
refer to “Information Regarding the Resulting Issuer – Fully Diluted Share Capital.”
(2) The actual number of outstanding securities may differ for a number of reasons, including rounding.
Fully Diluted Share Capital
The following tables outline the expected number and percentage of securities (subject to rounding) of the
Resulting Issuer to be outstanding on a non-diluted and fully-diluted basis after giving effect to the
Amalgamation:
Designation of Security
Number of Shares
Resulting Issuer Shares
Shares Issued
Nichromet Subordinate Voting Shares
Nichromet Multiple Voting Shares
Creso Shares (1)
Subtotal
Reserved for issuance under the:
Nichromet Options
Nichromet Warrants
Total (fully-diluted)
Percentage(2)
(undiluted)
Percentage(2) (full
diluted)
227,445,202
50,000,000
277,445,202
31.27%
68.73%
-
27.75%
61.00%
-
23,970,000
68,305,566
369,585,768
n/a
n/a
100.00%
2.92%
8.33%
100.00%
Notes:
1. All outstanding securities of the Corporation other than those held by Subco will be exchanged for Nichromet Subordinate
Voting Shares in accordance with the Exchange Ratio.
2. Percentages refer to the voting power attached to such securities.
112
Available Funds and Principal Purposes
Funds Available
Management of the Corporation anticipates that the estimated total funds for 2014 of the Resulting Issuer
will be as follows:
Description
Working Capital of the Resulting
Issuer as at December 31, 2013
Bridge Loan
Rights offering
Repayment of bridge loan
Private placement
Grant: Canada Foundation for
Sustainable Development
Technology
TOTAL
Amount
($ million)
1.5
3.0 (1)
10.0 (2)
(3.0)
5.2 (3)
2.2
18.9
Notes:
1.
1. The Resulting Issuer has $3,000,000 available pursuant to the Bridge Loan (disbured on January 31st, 2014) for working capital
purposes.
2. As of the date of this Information Circular, it is contemplated that once the Resulting Issuer completes the Amalgamation, it will
undertake a rights offering for approximately $10 million. Dundee Corporation confirmed its intention to exercise its basic
subscription privilege under the proposed rights offering.
3
It is contemplated that during the second-half of 2014, the Resulting Issuer completes a private placement financing of $6
million with net proceeds to the Resulting Issuer of $5.2 million.
Principal Purposes of Funds
It is expected that the principal purposes of the Available Funds for the 12 months following the closing
will be as follows:
Principal Use of Funds
Amount
($ million)
Demonstration plant
Construction
Operation
Research and development
Administration
Minto bulk sample
Estimated costs relating to the closing of the Amalgamation
Estimated costs relating to the rights offering
TOTAL
13.7
1.3
0.5
2.1
0.5
0.3
0.5
18.9
There may be circumstances where, for sound business reasons, the reallocation of funds may be necessary
in order for the Resulting Issuer to achieve its stated business objectives. See “Information Regarding the
Resulting Issuer – Available Funds and Principal Purposes”.
Dividends
The proposed directors of the Resulting Issuer anticipate that the Resulting Issuer will retain all future
earnings and other cash resources for the future operation and development of its business, and accordingly,
do not intend to declare or pay any cash dividends in the foreseeable future. Payment of any future
dividends will be at the discretion of the board of the directors of the Resulting Issuer after taking into
113
account many factors including the Resulting Issuer’s operating results, financial condition and current and
anticipated cash assets.
Principal Securityholders
The following table sets forth the names of each of the persons who, to the knowledge of the Corporation
or Nichromet, as at the date of this Information Circular, will beneficially own, directly or indirectly,
securities carrying 10% or more of the voting rights attaching to any class of voting securities of the
Resulting Issuer as a result of the Amalgamation.
Name
Dundee Corporation
Number of Resulting Issuer Shares Owned
Percentage of Resulting Issuer Shares(1)
129,735,164 Nichromet Subordinate voting Shares(2)
17.83%
(3)
50,000,000 Nichromet Multiple Voting Shares
68.73%
Notes:
(1)
(2)
(3)
Percentages indicate the voting power attached to such securities (on a non-diluted basis).
Includes 7,381,577 Nichromet Subordinate Voting Shares held by Dundee Resources Ltd. and 500,000 Nichromet Subordinate
Voting Shares held by 0764704 B.C. Ltd, both wholly-owned subsidiaries of Dundee Corporation. In addition Dundee
Corporation holds 50,000,000 subordinate voting share purchase warrants of Nichromet and therefore will hold 62.49% of the
vote attached to the Nichromet Subordinate Voting Shares and Nichromet Multiple Voting Shares on a fully-diluted basis after
the Amalgamation. Dundee Corporation will hold 100% of the Nichromet Multiple-Voting Shares.
The Nichromet Multiple Voting Shares carry ten (10) vote each. Dundee Corporation will hold after the Amalgamation 86.6% of
the voting power attached to all of the Resulting Issuer securities.
Directors, Executive Officers and Promoters
The proposed directors and officers of the Resulting Issuer are: Pierre Gauthier (Director, Chairman of the
Board and President and Executive Officer), Ned Goodman (Director), Brahm Gelfand (Director), JeanMarc Lalancette (Director and Vice-President, Research and Development), Hubert Marleau (Director),
Mark Goodman (Director), David Lemieux (Executive Vice-President) and Vatché Tchakmakian (Chief
Financial Officer). Refer to “Information Regarding Nichromet and Subco – Directors and Executive
Officers”.
Management
For a biography of each proposed director and officer of the Resulting Issuer other than Mr. Tchakmakian,
please refer to “Information Regarding Nichromet and Subco – Directors and Executive Officers”.
Vatche Tchakmakian, Chief Financial Officer (age – 52)
Mr. Tchakmakian is a Chartered Professional Accountant (CPA, CA) with over 20 years of experience in
the minerals industry. He is specialized in the field of public companies and securities regulations in
Canada. He has served as CFO of the Corporation since 2010. He is also CFO and Secretary of Beaufield
Resources Inc., a TSXV listed mining exploration company, since January 2005. Mr. Tchakmakian was the
CFO and Secretary of Dacha Capital Inc. a TSXV listed venture capital company, from 2002 until 2009.
Prior to 2009, he has been an officer of several public companies in the mineral sector having operations in
Canada, South and Central America and Africa.
From 1988 to 1993, he managed audit assignments at one of the predecessors of PricewaterhouseCoopers
LLP, a national accounting firm, for a number of large private and public companies. Mr. Tchakmakian
received his B.S. in Public Accounting from École des Hautes Études Commerciales, Université de
Montréal in 1988. He is a member of the TSXV National Advisory Committee.
Mr. Tchakmakian will allocate 50% of his time to the Resulting Issuer
114
Cease Trade Orders
No proposed director or executive officer of the Resulting Issuer or any Person who following the
Amalgamation will hold a sufficient number of securities to affect materially the control of the Resulting
Issuer has, within the 10 years prior to the date of this Information Circular, become, or been a director or
executive officer of any company (including Nichromet), that, while such Person was acting in that
capacity, or within a year of that Person ceasing to act in that capacity, became bankrupt, made a proposal
under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings,
arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold
its assets.
Penalties or Sanctions
Except as disclosed under “Information Regarding Nichromet and Subco – Penalties or Sanctions”, as at
the date of this Information Circular, no proposed director or executive officer of the Resulting Issuer nor
any Person who would following the Amalgamation, hold a sufficient number of Resulting Issuer Shares to
affect materially the control of the Resulting Issuer has been subject to:
(a)
any penalties or sanctions imposed by a court relating to securities legislation or by a
securities regulatory authority or has entered into a settlement agreement with a securities
regulatory authority; or
(b)
any other penalties or sanctions imposed by a court or regulatory body that would likely
be considered important to a reasonable shareholder in deciding whether to vote for a
proposed director or to make an investment decision.
Corporate and Shareholder Bankruptcies
No proposed director or executive officer of the Resulting Issuer or any Person who following the
Amalgamation will hold a sufficient number of securities to affect materially the control of the Resulting
Issuer has, within the 10 years prior to the date of this Information Circular, become, or been a director or
executive officer of any company (including Nichromet), that, while such Person was acting in that
capacity, or within a year of that Person ceasing to act in that capacity, became bankrupt, made a proposal
under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings,
arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold
its assets, other than Jonathan Goodman, a director of Dundee Corporation, who was a director of Tahera
from August 2003 to September 2008. Tahera filed for protection under the Companies’ Creditors
Arrangement Act on January 16, 2008, and as a result of its financial difficulties, Tahera failed to file
financial statements for the year ended December 31, 2007 and subsequent financial periods. As a result,
cease trade orders were issued in 2010 by the OSC, as well as by the securities regulatory authorities in
Québec, Alberta and British Columbia, which orders have not been revoked.
No proposed director or executive officer of the Resulting Issuer or any Person who following the
Amalgamation will hold a sufficient number of securities to affect materially the control of the Resulting
Issuer has, within the 10 years prior to the date of this Information Circular, become bankrupt, made a
proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any
proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee
appointed to hold the assets of the director, executive officer or Nichromet Shareholder, state the fact.
Conflicts of Interest
Directors and officers of the Resulting Issuer may also serve as directors and/or officers of other companies
engaged in mineral exploration, development and mining situations or opportunities which give rise to
apparent conflicts of interest which cannot be resolved by arm’s length negotiations but only through
exercise by the officers and directors of such judgment as is consistent with their fiduciary duties to the
Resulting Issuer which arise under applicable corporate Law, especially insofar as taking advantage,
115
directly or indirectly, of information or opportunities acquired in their capacities as directors or officers of
the Resulting Issuer. It is expected that all conflicts of interest will be resolved in accordance with the
CBCA. It is expected that any transactions with officers and directors will be on terms consistent with
industry standards and sound business practice in accordance with the fiduciary duties of those Persons to
the Resulting Issuer, and, depending upon the magnitude of the transactions and the absence of any
disinterested board members, may be submitted to the shareholders for their approval.
Other Reporting Issuer Experience
The following table sets out the proposed directors and officers of the Resulting Issuer that are, or have
been within the last five years, directors or officers of other reporting issuers:
Name
Brahm Gelfand
Name of Reporting
Issuer
Exchange or
Market
Position
From
To
TSXV
Director
04/10
Present
Tel Aviv Stock
Exchange Ltd.
Director
12/10
Present
TSXV
CEO
06/13
Present
Corona Gold
Corporation
TSX
Director
06/03
Present
Dundee Energy Limited
TSX
Director
04/12
Present
Dundee Corporation
TSX
Director since November
2013;
Executive Vice President
since May 2013; and
Vice President between
June 2012 and May 2013
06/12
Present
Dundee Corporation
TSX
Executive Vice President
05/13
Present
Dundee Corporation
TSX
Director
11/13
Present
Dynamic Venture
Opportunities Fund
LSIF Reporting
Issuer
Director
11/96
Present
TSX
Director
07/10
Present
CEO/President
07/10
Present
Focused Capital II Corp.
TSXV
TSXV
CEO/President
07/11
Present
Night Hawk Gold Corp.
TSXV
Director
03/11
Present
Odysey Resources
Limited
TSXV
Director
01/08
Present
Ryan Gold Corp.
(Formerly Valdez Gold)
TSXV
Director
11/10
Present
Cogitore Resources Inc.
TSXV
Executive Chairman /
Director
02/07
06/13
360 VOX Corporation
Tefron Ltd.
Mark Goodman
Cogitore Resources Inc.
Energy Fuels Inc.
Focused Capital Corp.
116
Name
Vatché Tchakmakian
Hubert Marleau
Name of Reporting
Issuer
Exchange or
Market
Position
From
To
Dia Bras Exploration
(now known as Sierra
Metals)
TSXV
Director
06/08
06/09
Valdez Gold Inc.
TSXV
Director / Chairman
04/08
11/10
Beaufield Resources
Inc.
TSXV
CFO
01/05
Present
Dacha Strategic Metals
Inc.
TSXV
CFO and Secretary
08/02
08/09
Woulfe Mining Corp.
TSXV
Director
Interim President and CEO
since March 2013
04/10
Present
FRV Media Inc.
Formerly on the
TSXV
Director, Chairman and
CEO (from 08/30/10)
02/10
01/12
A.I.S. Resources
Limited
TSXV
Director
06/09
Present
FRV Media Inc.
Formerly on the
TSXV
Director
09/05
Present
GobiMin Inc.
TSXV
Director
10/04
06/11
Maudore Minerals Ltd.
TSXV
Director
09/04
12/11
Buzz
Telecommunication
Services Inc.
TSXV
Director
07/04
06/13
Huntington Exploration
Inc.
TSXV
Director
06/99
Present
Niocan Inc.
TSX
Director since June 1999
and Interim Chairman,
President and CEO (from
01/13/11); on October 29,
2012, President and CEO
position became permanent
06/96
06/12
Mitec Telecom Inc.
(now known as Mitec
Technologies Inc.)
TSX
Director
CanAlaska Uranium
Ltd.
(CanAlaska Ventures
Inc.)
TSXV
Director
04/97
01/13
TSX
Director
02/94
Present
MCO Capital Inc.
TSXV
Director
10/05
02/11
Spider Resources Inc.
TSXV
Director
05/10
08/10
Warnex Inc.
TSXV
Director
06/00
04/10
Sofame
Inc.
Technologies
TSXV
Director
02/09
10/09
Global
Development
Resources Inc. (now
known
as
GDV
Resources inc.)
TSXV
Director
10/04
05/09
Uni-Select Inc.
117
Name
Ned Goodman
Name of Reporting
Issuer
Exchange or
Market
Position
From
To
Freegold Ventures
Limited (Int’l Freegold
Mineral Development
Inc.)
TSX
Director
04/96
05/09
Breakwater Resources
Ltd.
Formerly on TSX
Director
11/04
08/11
-
Director of the General
Partner
Chair of the General Partner
10/12
Present
TSX
Director
05/13
Present
Formerly listed
on TSX
Ceased to be a
Reporting Issuer
Director
12/10
02/12
Dundee Corporation
TSX
Director
President and CEO
10/91
06/99
Present
Present
Dundee Precious Metals
Inc.
TSX
Director
09/83
11/12
Dundee International
Real Estate Investment
Trust
TSX
Trustee
05/11
Present
Dundee Real Estate
Investment Trust
TSX
Trustee
Chairman
06/03
Present
Dundee Energy Limited
TSX
Vice Chairman
Director
Chairman
02/98
02/96
05/06
Present
Present
Present
Formerly on TSX
Director
Chairman
11/98
06/07
09/12
09/12
Exchange
Director
02/96
Present
Ryan Gold Corp.
TSXV
Director
06/08
Present
360 VOX Corporation
TSXV
Director
11/13
Present
Urban Barns Foods Inc
TSXV
Director
11/13
Present
Woulfe Mining Corp.
TSXV
Director
08/13
Present
CMP 2013
Resource Limited
Partnership
DREAM Unlimited
Corp.
Dundee Capital Markets
Inc.
DundeeWealth Inc.
Eurogas International
Inc.
118
Name
Name of Reporting
Issuer
Exchange or
Market
Position
From
To
-
Director of the General
Partner
Chair of the General Partner
11/13
Prsent
CMP 2014 Resource
Limited Partnership
Executive Compensation
The anticipated compensation, if known, for each of the Resulting Issuer’s Chief Executive Officer, Chief
Financial Officer and the three most highly compensated executive officers for the 12 month period after
giving effect to the Amalgamation prepared in accordance with the requirements of Form 51-102F6 is
required to be included in this Information Circular. Form 51-102F6 prescribes the disclosure requirements
in respect of the compensation of certain executive officers and directors of reporting issuers. The
following addresses the items identified in Form 51-102F6 which are applicable to the Resulting Issuer.
Compensation Discussion and Analysis
Following completion of the Amalgamation, the Resulting Issuer will have an executive compensation
structure and philosophy in respect of executive compensation which will be consistent with that of other
capital market services and professional services small and mid-cap companies listed on the Exchange. It is
anticipated that such executive compensation structure and philosophy will comply in all material respects
with the applicable policies and guidelines of the Exchange and of the Canadian Securities Administrators,
including National Policy 58-201 – Corporate Governance Guidelines.
It is anticipated that the Resulting Issuer will provide compensation to its NEOs that is consistent with the
past compensation paid by Nichromet. The following table sets out information concerning the anticipated
compensation to be paid by Nichromet to the NEOs effective as of closing:
Non-Equity
Incentive Plan
Compensation
($)(4)
Name and Principal
Position
Pierre Gauthier(1)
President, CEO and
Chairman
Jean-Marc Lalancette(2)
Vice-President, Research
& Development
David Lemieux
Executive Vice-President
Vatché Tchakmakian,
Chief Financial Officer(3)
ShareBased
Period/ Fees/Salary Awards
Year
($)
($)
2014
250,000
-
2014
182,000
-
2014
140,000
-
90,000
-
2014
OptionBased
Awards
($)
-
-
LongAnnual
Term
Pension
Incentive Incentive Value
Plan
Plan
($)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
________________
Notes:
(1)
Fees paid to Seed Capital Inc., a private investment company owned by Mr. Gauthier and his family.
(2)
Fees paid to Inotel Inc., a company wholly-owned by Jean-Marc Lalancette.
(3)
Mr. Tchakmakian will allocate 50% of his time to the Resulting Issuer.
(4)
As of the date of this Information Circular, future option-based awards have not been determined.
119
All Other
Compensation
($)
Total
Compensation
($)
250,000
182,000
140,000
90,000
Summary Compensation Table – Proposed Compensation
Upon completion of the Amalgamation, the Resulting Issuer will have the same executive officers as
Nichromet. The compensation of such executives will be determined by the board of directors of the
Resulting Issuer following the completion of the Amalgamation based on the recommendation of a
compensation committee.
Incentive Plans Awards
Share-based awards
During the 12 month period following completion of the Amalgamation, the Resulting Issuer may grant
any share-based awards, being awards granted under an equity incentive plan of equity-based instruments
that do not have option-like features, including, for greater certainty, common shares, restricted shares,
restricted share units, deferred share units, phantom shares, phantom share units, common share equivalent
units, and stock.
Option-based awards
The Resulting Issuer intends to grant option-based awards, being awards under an equity incentive plan of
options, including, for greater certainty, share options, share appreciation rights, and similar instruments
that have option-like features by granting stock options to its directors, officers and employees, however,
the timing, amounts, exercise price and the recipients of such issuances have not yet been determined. Such
stock options are expected to be granted under the Nichromet Stock Option Plan which will be assumed by
the Resulting Issuer. For an overview of the Nichromet Stock Option Plan, please see the discussion under
the heading “Information Regarding Nichromet and Subco – Compensation Discussion and Analysis Stock Option Plan”.
Pension Plan Benefits
During the 12 month period following completion of the Amalgamation, the Resulting Issuer may provide
for defined benefit plans or defined contribution plans, being plans that provide for payments or benefits at,
following, or in connection with retirement, or provide for deferred compensation plans.
Compensation of Directors
It is anticipated that the directors of the Resulting Issuer will be paid fees for their services; however, the
amounts of such fees will be determined in the discretion of the board of directors of the Resulting Issuer
following completion of the Amalgamation. The Resulting Issuer may also grant stock options to directors
in recognition of the time and effort that such directors devote to the Resulting Issuer.
Indebtedness of Directors and Officers
No Person who is, or who was within the 30 days prior to the date of the Information Circular, a director, or
officer, employee or any former director or officer of Nichromet or a Subsidiary thereof or the Corporation,
and no associate of such persons will be immediately after Amalgamation, indebted to the Resulting Issuer
or any of its Subsidiaries or indebted to any other entity where such indebtedness is subject to a guarantee,
support agreement, letter of credit or other similar arrangement or understanding provided by Nichromet or
any of its Subsidiaries or the Corporation.
Corporate Governance
Attached as Appendix J to this Information Circular is the Audit Committee Charter.
120
Composition of the Audit Committee
It is expected that the audit committee of the Resulting Issuer (the “Resulting Issuer Audit Committee”)
will be composed of Brahm Gelfand, Hubert Marleau and Mark Goodman. Under Multilateral Instrument
52-110 – Audit Committees, a director of an audit committee is considered independent if he or she has no
direct or indirect material relationship with the issuer, that is, a relationship which could, in the view of the
board of directors, reasonably be expected to interfere with the exercise of the member’s independent
judgment. Both members of the Resulting Issuer Audit Committee would be independent.
The board of directors has determined that each of the three proposed members of the Resulting Issuer
Audit Committee are “financially literate” within the meaning of section 1.6 of Multilateral Instrument 52110 – Audit Committees, that is, each member has the ability to read and understand a set of financial
statements that present a breadth and level of complexity of accounting issues that are generally
comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the
Corporation’s financial statements.
Education and Relevant Experience
The education and related experience of each of the proposed members of the Resulting Issuer Audit
Committee that is relevant to the performance of his responsibilities as a member of the Resulting Issuer
Audit Committee is set out below.
Brahm Gelfand has been engaged in the practice of law for close to 50 years. His practice has focused
mainly on domestic and cross-border business transactions and commercial dealings.
Hubert Marleau is co-founder of Palos Management. With over 30 years of experience in the business and
financial community, Mr. Marleau has raised funds privately and publicly for emerging and mature
companies, structured mergers and acquisitions as well as designed and created numerous financial deals in
Canada. Mr. Marleau has worked at the senior executive level of several large investment banks notably,
Nesbitt Thomson Inc., Levesque Beaubien Inc. and Marleau, Lemire Inc. During his career, Mr. Marleau
was a governor of the TSX, the Montreal Stock Exchange, and the Vancouver Stock Exchange, a director
of the Investment Dealer Association of Canada and board member of publicly traded companies.
Mark E. Goodman began his career at Dundee Corporation and has held numerous positions within the
organization. He serves as Vice President of Dundee Corporation. He has been actively engaged in the
financial services and mining industry since 1992. He serves as the Chief Executive Officer of Bellotti
Goodman Inc. He serves as the Chairman and Chief Executive Officer of Woodruff Capital Management
Inc. He serves as the Chief Executive Officer and Corporate Secretary of Focused Capital II Corp. He is the
founder of Cogitore Resources, Inc. and has been its Executive Chairman since February 2007. He is a
member of the board of various companies. He obtained his Bachelor of Arts from York University in 1992
Reliance on Exemption
The Resulting Issuer shall rely on the exemption set out in section 6.1 of Multilateral Instrument 52-110 Audit Committees with respect to certain reporting obligations.
Pre-approval of Non-audit Services
The Audit Committee must pre-approve all non-audit services to be provided by the external auditor.
Investor Relations Arrangements
There is no written or oral agreement or understanding that has been reached with any Person to provide
any promotional or investor relations services for the Resulting Issuer.
121
Options to Purchase Securities
The following table sets out information, as of the date of this Information Circular, on Resulting Issuer
Options that will be held upon completion of the Amalgamation assuming the Amalgamation was
completed on the date hereof:
Class of Optionee
Executive officers and past executive officers
of Nichromet as a group(1)
Subtotal
After Amalgamation
Number of Resulting
Exercise price
Issuer Options
($)
100,000
0.10
2,550,000
0.10
1,050,000
0.20
300,000
0.20
7,900,000
0.10
11,900,000
Directors and past directors of Nichromet who
are not also executive officers(2)
Expiry date
10-18-15
06-08-16
11-28-22
02-06-18
12-12-18
0.10
0.20
0.10
06-08-16
11-28-22
12-12-18
Subtotal
1,050,000
500,000
3,750,000
5,300,000
0.10
0.10
0.10
0.20
0.20
0.20
0.10
07-02-14
10-18-15
06-08-16
11-28-22
02-06-18
03-22-18
12-12-18
Subtotal
100,000
200,000
700,000
675,000
300,000
100,000
650,000
2,725,000
0.10
0.20
0.10
06-08-16
11-28-22
12-12-18
Subtotal
1,050,000
200,000
250,000
1,500,000
325,000
475,000
100,000
550,000
1,450,000
$0.30
$0.80
$1.74
$0.20
09-30-14
07-09-15
09-29-15
02-20-17
100,000
100,000
100,000
235,000
100,000
635,000
$0.30
$0.80
$1.74
$0.20
$0.20
09-30-14
07-09-15
09-29-15
02-20-17
07-23-17
$0.30
$0.20
09-30-14
02-20-17
Subtotal
20,000
12,500
32,500
$0.20
$0.30
$0.80
$0.20
09-03-14
09-30-14
07-09-15
02-20-17
Subtotal
Total
50,000
75,000
125,000
177,500
427,500
23,970,000
Employees of Nichromet
Consultants of Nichromet
Executive officers and past executive officers
of the Corporation as a group(3)
Subtotal
Directors and past directors of the Corporation
who are not also executive officers(4)
Subtotal
Employees of the Corporation
Consultants of the Corporation
122
Notes:
(1) This class consists of: Pierre Gauthier, Jean-Marc Lalancette and David Lemieux.
(2) All directors of Nichromet who are not also officers are: Salvador Brouwer, Brahm Gelfand, Mark Goodman, Ned Goodman,
Hubert Marleau.
(3) This class consists of: Pierre Gauthier and Vatche Tchakmakian.
(4) All directors of the Corporation who are not also officers are: André Thibault, Rejean Gosselin, Jacques Bouchard and Jean-Guy
Lambert.
Stock Option Plan
Upon completion of the Amalgamation, the Resulting Issuer will retain the Nichromet Stock Option Plan
adopted by Nichromet. The maximum aggregate number of Nichromet Options which are reserved for
issuance under the Nichromet Stock Option Plan is 21,492,872. See “Information Regarding the Resulting
Issuer – Incentive Plan Awards – Optio-Based Awards”.
Escrowed Securities
Escrowed Shares and Warrants
Pursuant to Policy 8 – Fundamental Change of the Exchange, all Nichromet Shares of the Resulting Issuer
which are held immediately prior to the Amalgamation by “principals” (as such term is defined in National
Instrument 46-201 - Escrow for Initial Public Offerings), other than principals who hold Nichromet Shares
carrying less than 1% of the voting rights attached to the Resulting Issuer’s securities immediately after the
Amalgamation, will be held in escrow by the Escrow Agent.
The following table sets out, as of the date of this Information Circular and to the knowledge of the
Corporation and Nichromet, the name of the Resulting Issuer Shareholders whose Resulting Issuer Shares
and Warrants (collectively, the “Resulting Issuer Escrowed Shares”) will be subject to an escrow
agreement:
Escrowed Securities(1)
Prior to the Amalgamation
Nichromet
Nichromet Shares
Dundee
Corporation
128,068,497
Nichromet
Subordinate Voting
Shares
(77.65%)
Corporation
Nichromet
Warrants
Nichromet
Options
Creso Shares
50,000,000
-
-
Creso
Warrants
Creso
Options
-
-
50,000,000
Nichromet Multiple
Voting Shares
(100%)
Total
Total
Outstanding
Securities
Resulting Issuer
Shares(1)
Resulting
Issuer Shares(1)
(on a nondiluted Basis)
(on a fully
diluted Basis)
128,068,497
Nichromet
Subordinate
Voting Shares
(77.65%)
178,068,497
Nichromet
Subordinate
Voting Shares
(56.53%)
50,000,000
Nichromet
Multiple Voting
Shares
(100%)
50,000,000
Nichromet
Multiple Voting
Shares
(100%)
178,068,497
50,000,000
-
-
-
-
178,068,497
228,068,497
214,928,724(2)
50,000,000
21,425,000
144,811,956
27,111,112
5,090,000
277,445,202(3)
364,970,758(4)
123
Notes:
(1)
(2)
(3)
(4)
The escrow agent of these Resulting Issuer Shares will be Computershare Trust Company of Canada (or such other escrow
agent as Resulting Issuer may appoint).
This number represents 164,928,724 Nichromet Subordinate Voting Shares and 50,000,000 Nichromet Multiple Voting
Shares.
This number represents 227,445,202 Nichromet Subordinate Voting Shares and 50,000,000 Nichromet Multiple Voting
Shares on a non-diluted basis.
This number represents 314,970,497 Nichromet Subordinate Voting Shares and 50,000,000 Nichromet Multiple Voting
Shares on a fully diluted basis.
Escrowed Options
In addition, pursuant to Policy 2 – Qualification for Listing of the Exchange, where convertible securities
(such as stock options, common share purchase warrants, special warrants, convertible debentures or notes)
are issued less than 18 months before listing and exercisable or convertible into listed shares at a price that
is less than the issuance price per security under an acquisition made contemporaneously with the listing
application then the underlying security will be subject to escrow with releases scheduled at periods
specified under National Policy 46-201.
The following table sets out, as of the date of this Information Circular and to the knowledge of the
Corporation and Nichromet, the name of the Resulting Issuer Shareholders whose Resulting Options
(collectively, the “Resulting Issuer Escrowed Options”) will be subject to an escrow agreement:
Escrowed Options
Pierre Gauthier
Québec, Canada
3,000,000
Jean-Marc Lalancette
Québec, Canada
1,900,000
Ned Goodman
Ontario, Canada
2,500,000
Gelfand, Brahm
Québec, Canada
450,000
Hubert Marleau
Ontario, Canada
400,000
Mark Goodman
Ontario, Canada
700,000
Luce Saint-Pierre
Québec, Canada
112,500
Vatché Tchakmakian
Québec, Canada
62,500
Total
12,475,000
Release Terms of the Escrow for the Escrowed Securities
The Resulting Issuer Escrowed Shares and the Resulting Issuer Escrowed Options (the “Resulting Issuer
Escrowed Securities”) listed above are expected to be subject to a security escrow agreement (“Resulting
Issuer Escrow Agreement”). The Resulting Issuer Escrow Agreement will provide for a three year escrow
release mechanism with 10% of the Resulting Issuer Escrowed Securities being releasable at the time of the
124
Final Exchange Bulletin, and 15% of the Resulting Issuer Escrowed Securities being released every 6
months thereafter until the date which is 36 months after the Final Exchange Bulletin.
Where the Resulting Issuer Escrowed Securities are held by a private company (a “holding company”),
each holding company pursuant to the applicable escrow agreement has agreed, or will agree, not to
participate in a transaction that results in a Change of Control or a change in the economic exposure of the
principal to the risk of holding Escrowed Securities.
The Resulting Issuer Escrowed Securities may not be transferred within escrow without the approval of the
Exchange for release or transfer other than in specified circumstances set out in the applicable escrow
agreement.
Auditor, Transfer Agent and Registrar
It is anticipated that the auditors of the Resulting Issuer will be PricewaterhouseCoopers LLP whose
principal office is located at located at 1250 René-Levesque Boulevard West, Suite 2800, Montreal,
Québec, H3B 2G4 and that the transfer agent and registrar for the Resulting Issuer Shares will be
Computershare Trust Company of Canada, 100 University Avenue, 8th Floor, Toronto, Ontario M5J 2Y1.
125
GENERAL MATTERS
Experts
Except as disclosed in this Information Circular, no Person or Company whose profession or business gives
authority to a statement made by the Person and who is named is having prepared or certified a part of this
Information Circular or as having prepared or certified a report or valuation described or include in this
Information Circular holds any beneficial interest, direct or indirect, in any securities or property of the
Corporation or Nichromet or of an Associate or Affiliate of the Corporation or Nichromet and no such
Person is expected to be elected, appointed or employed as a director, senior officer or employee of the
Corporation, Nichromet or of an Associate or Affiliate of the Corporation or Nichromet and no such Person
is a Promoter of the Corporation, Nichromet or of an Associate or Affiliate of the Corporation or
Nichromet.
The auditors of the Corporation and Nichromet are PricewaterhouseCoopers LLP, who have prepared
independent auditor’s reports in respect of the following consolidated financial statements of the
Corporation:
•
the 2012 consolidated financial statements which comprise the consolidated statements of
financial position as at December 31, 2012 and 2011 and the consolidated statements of
comprehensive loss, cash flows and changes in equity for the years then ended and related notes,
which comprise a summary of significant accounting policies and other explanatory information.
The report on these consolidated financial statements is dated March 22, 2013; and
•
the 2011 consolidated financial statements which comprise the consolidated statements of
financial position as at December 31, 2011 and 2010 and January 1, 2010 and the consolidated
statements of comprehensive loss, cash flows and changes in equity for the years ended December
31, 2011 and 2010 and related notes, which comprise a summary of significant accounting policies
and other explanatory information. The report on these consolidated financial statements is dated
March 29, 2012.
PricewaterhouseCoopers LLP has prepared an independent auditor’s report in respect of Nichromet’s
consolidated statement of financial position as at September 30, 2013 and December 31, 2012 and the
consolidated statements of comprehensive loss, changes in equity and cash flows for the nine-month period
ended September 30, 2013 and the years ended December 31, 2012 and 2011, and related notes, which
comprise a summary of significant accounting policies and other explanatory information. The report on
these financial statements is dated November 28, 2013.
PricewaterhouseCoopers LLP has advised that they are independent with respect to the Corporation and
Nichromet within the meaning of the Code of Ethics of the Ordre des comptables professionnels agréés du
Québec.
Other Material Facts
Management of the Corporation knows of no other matters to come before the Meeting other than those
referred to in the Notice of Meeting. Should any other matters properly come before the Meeting, the Creso
Shares represented by the proxy solicited hereby will be voted on such matter in accordance with the best
judgment of the persons voting by proxy. To the knowledge of the Corporation, there are no material facts
about the Corporation, Nichromet, the Resulting Issuer or the Amalgamation which are not otherwise
disclosed in this Information Circular.
Financial Statement Requirements
Financial statements for each of the Corporation, Nichromet and the Resulting Issuer (and related MD&A,
where applicable) may be found attached hereto at Appendix D through Appendix H, respectively.
126
ADDITIONAL INFORMATION
Additional information about the Corporation is located on SEDAR at www.sedar.com. Additional
financial information is provided in the Corporation’s comparative annual financial statements and MD&A
for its most recently completed financial year. Creso Shareholders may contact the Corporation to request
copies of the applicable financial statements and MD&A at the following address:
By phone: 514-866-6001
By fax: 514-866-6193
By e-mail: [email protected]
By mail: CRESO EXPLORATION INC.
Suite 2750 - 600 de Maisonneuve Boulevard. West
DATED at the City of Montreal, in the Province of Québec, this 31st day of January, 2014.
BY ORDER OF THE BOARD OF DIRECTORS OF
CRESO EXPLORATION INC.
(s) “Luce L. Saint-Pierre”
Luce L. Saint-Pierre
Secretary
Montreal, Québec H3A 3J2
BOARD APPROVAL
The Creso Board has approved the delivery of this Information Circular to the Creso Shareholders.
Nichromet has provided the information contained in this Information Circular concerning Nichromet and
its business, including its financial information and financial statements and the Corporation assumes no
responsibility for the adequacy or accuracy of such information.
127
CERTIFICATE OF CRESO EXPLORATION INC.
The foregoing document constitutes full, true and plain disclosure of all material facts relating to the
securities of Creso Exploration Inc. assuming the completion of the Amalgamation described in this
Information Circular.
By the board of directors of Creso Exploration Inc.
DATED at Montreal, Québec, this 31st day of January, 2014.
(signed) Pierre Gauthier
Name: Pierre Gauthier
Title:
President and Chief Executive Officer
(signed) Vatche Tchakmakian
Name: Vatche Tchakmakian
Title:
Chief Financial Officer
ON BEHALF OF THE BOARD OF DIRECTORS OF CRESO EXPLORATION INC.
(signed) André Thibault
Name: André Thibault
Title:
Director
(signed) Jacques Bouchard Jr.
Name: Jacques Bouchard Jr.
Title:
Director
128
CERTIFICATE OF NICHROMET EXTRACTION INC.
The foregoing document constitutes full, true and plain disclosure of all material facts relating to the
securities of Nichromet Extraction Inc. assuming the completion of the Amalgamation described in this
Information Circular.
By the board of directors of Nichromet Extraction Inc.
DATED at Montreal, Québec, this 31st day of January, 2014.
(signed) Pierre Gauthier
Name: Pierre Gauthier
Title:
President and Chief Executive Officer
(signed) David Lemieux
Name: David Lemieux
Title:
Executive Vice-President
ON BEHALF OF THE BOARD OF DIRECTORS OF NICHROMET EXTRACTION INC.
(signed) Jean-Marc Lalancette
Name: Jean-Marc Lalancette
Title:
Director and Vice-President, Research
and Development
(signed) Hubert Marleau
Name: Hubert Marleau
Title:
Director
129
APPENDIX “A” - AMALGAMATION RESOLUTION
CRESO EXPLORATION INC.
(the “Corporation”)
SPECIAL RESOLUTION OF THE COMMON SHAREHOLDERS
AMALGAMATION
BE IT RESOLVED, AS A SPECIAL RESOLUTION, AS WELL AS A “MAJORITY OF THE
MINORITY” RESOLUTION THAT:
The amalgamation (the “Amalgamation”) under the Canada Business Corporations Act (the “CBCA”)
substantially as set forth in the amalgamation agreement entered into between the Corporation, Nichromet
Extraction Inc. (“Nichromet”) and 8704996 Canada Inc., a wholly-owned subsidiary of Nichromet
(“Subco”), dated as of November 22, 2013 (the “Amalgamation Agreement”) and as described in the
management information circular dated January 31st, 2014 (the “Information Circular”), pursuant to
which the shareholders of the Corporation (the “Creso Shareholders”) exchange all of the issued and
outstanding shares of the Corporation for subordinate voting shares of Nichromet (“Nichromet
Subordinate Voting Shares”) in accordance with the following exchange ratio: two (2) shares of the
Corporation for one (1) Nichromet Subordinate Voting Share, is hereby approved and authorized.
The Amalgamation Agreement between the Corporation, Nichromet and Subco is hereby confirmed,
ratified and approved and the board of directors of the Corporation (the “Board”) is hereby authorized to
amend or revise the Amalgamation Agreement in its discretion to the extent permitted therein without
further approval of the Creso Shareholders.
Notwithstanding that the Amalgamation has received the approval of the Creso Shareholders, the Board
may, subject to the terms of the Amalgamation Agreement, amend or decide not to proceed with the
Amalgamation or revoke this resolution at any time prior to the filing of documents giving effect to the
Amalgamation without further notice to or approval of Creso Shareholders, optionholders or
warrantholders of the Corporation; and
Any director or officer of the Corporation is hereby authorized and directed, for and on behalf of the
Corporation, to execute and deliver all such documents and to do all such other acts or things as he or she
may determine to be necessary or advisable in connection with the Amalgamation Agreement or
Amalgamation or to give effect to this resolution (including, without limitation, the filing of any documents
required in the prescribes form under the CBCA).
130
APPENDIX “B” - AMALGAMATION AGREEMENT
131
AMALGAMATION AGREEMENT
THIS AGREEMENT entered into on, and effective as of, November 22, 2013
AMONG:
NICHROMET EXTRACTION INC., a corporation governed by the
Canada Business Corporations Act;
(Nichromet)
8704996 CANADA INC., a corporation governed by the Canada
Business Corporations Act;
AND:
(Nichromet Acquisitionco)
CRESO EXPLORATION INC., a corporation governed by the Canada
Business Corporations Act;
AND:
(Creso)
WHEREAS:
A.
Each of the parties hereto is also a party to a merger agreement dated as of the date
hereof (as the same may be amended from time to time, the Merger Agreement) which
contemplates the Amalgamation (as herein defined), subject to certain conditions.
B.
Nichromet Acquisitionco and Creso wish, subject to the satisfaction or waiver of the
conditions set forth in Article VIII of the Merger Agreement, to amalgamate and continue
as one corporation under the provisions the Act (as defined herein) and in accordance
with the terms hereof (the Amalgamation);
C.
The parties have entered into this Agreement to provide for the matters referred to in the
foregoing recitals and for other matters relating to the Amalgamation.
D.
Capitalized terms used in this Agreement without definition have the meanings specified
in the Merger Agreement.
NOW THEREFORE IN CONSIDERATION OF THE COVENANTS AND AGREEMENTS CONTAINED IN
THIS AGREEMENT THE PARTIES HERETO AGREE AS FOLLOWS:
1.
Definitions. In this Agreement (including the recitals hereto) and each Schedule hereto:
(a)
Act means the Canada Business Corporation Act.
(b)
Acquisitionco Share means a common shares in the capital of Nichromet Acquisitionco.
(c)
Agreement means this amalgamation agreement.
(d)
Amalco means the continuing corporation constituted upon the amalgamation of the
Amalgamating Parties pursuant to this Agreement.
(e)
Amalco Shares means the common shares in the capital of Amalco.
(f)
Amalgamation has the meaning ascribed thereto in recitals hereof.
A-1
(g)
Amalgamating Parties means Nichromet Acquisitionco and Creso; and Amalgamating
Party means either of the Amalgamating Parties.
(h)
Amalgamation Resolution means the special resolution of Creso in respect of the
Amalgamation to be considered at the Special Meeting, to be substantially in the form
and content attached to the circular prepared in connection with the Special Meeting.
(i)
Articles of Amalgamation means the articles of amalgamation to be sent to the Director
under Section 185 of the Act to give effect to the Amalgamation.
(j)
Business Day means any day other than a Saturday or Sunday or a statutory or civic
holiday in the City of Toronto, Ontario or the City of Montreal, Québec.
(k)
Certificate means the certificate of amalgamation to be issued by the Director and giving
effect to the Amalgamation.
(l)
Creso Common Shares means the common shares in the share capital of Creso.
(m)
Creso Shareholder means a registered holder of Creso Common Shares immediately
prior to the Effective Time.
(n)
Depository means Computershare Investor Services Inc., in its capacity as depository,
in connection with the Amalgamation;
(o)
Director means the Director appointed under Section 260 of the Act.
(p)
Dissenting Creso Common Shares means the Creso Common Shares of a Dissenting
Shareholder.
(q)
Dissenting Shareholder means a Creso Shareholder who validly exercises the right of
dissent available to such holder under Section 190 of the Act in respect of the special
resolution considered and passed by the Creso Shareholders at the Special Meeting
pursuant to which, amongst other things, this Agreement and the Amalgamation were
approved by the Creso Shareholders, and becomes entitled to receive, if the
Amalgamation is completed, the fair value of his, her or its Creso Common Shares,
provided such Creso Shareholder has not withdrawn or been deemed to have withdrawn
such exercise of dissent rights or otherwise failed to comply with the requirements of the
Act.
(r)
Effective Date means the effective date of the Amalgamation as set forth in and
indicated on the Certificate.
(s)
Effective Time means 12:01 a.m. (Toronto time) on the Effective Date.
(t)
“Escrow Agent” means any trust company, bank, or other financial institution as may be
agreed to in writing by Nichromet and Creso for the purposes of, among other things,
selling the Nichromet SVS to which Creso Shareholders, but for the application of Section
22, would be entitled to receive upon Amalgamation.
(u)
ITA means the Income Tax Act (Canada), as amended.
(v)
Letter of Transmittal means the letter of transmittal to be delivered to Creso
Shareholders with the circular prepared in connection with the Special Meeting.
(w)
Merger Agreement has the meaning ascribed thereto in recitals hereof.
A-2
2.
3.
(x)
Nichromet SVS means the subordinated voting shares to be created in the capital of
Nichromet.
(y)
Special Meeting means the special meeting of the Creso Shareholders to be held to
consider and, if deemed advisable, to adopt the Amalgamation Resolution and approve
the Amalgamation Agreement as required under the Act, including any postponement
thereto or adjournment thereof.
Amalgamation. Provided that each of the conditions set forth in Article VIII of the Merger
Agreement have been satisfied or waived (by the party entitled to waive such condition) in
accordance with the terms of the Merger Agreement (which Article VIII is hereby incorporated by
reference in this Agreement) the Amalgamating Parties hereby agree to:
(a)
amalgamate and continue as one corporation under the provisions of the Act upon the
terms and conditions hereinafter set out; and
(b)
execute and file the Articles of Amalgamation with the Director.
Effect of Amalgamation. On the Effective Date, subject to the Act:
(a)
the Amalgamation of Amalgamating Parties and their continuance as one corporation
shall become effective;
(b)
the property of each of the Amalgamating Parties shall continue to be the property of
Amalco;
(c)
Amalco shall continue to be liable for the obligations of each of the Amalgamating
Parties;
(d)
any existing cause of action, claim or liability to prosecution with respect to either or both
of the Amalgamating Parties shall be unaffected;
(e)
any civil, criminal or administrative action or proceeding pending by or against any of the
Amalgamating Parties may be continued to be prosecuted by or against Amalco;
(f)
any conviction against, or ruling, order or judgment in favour of or against, any of the
Amalgamating Parties may be enforced by or against Amalco; and
(g)
the Articles of Amalgamation shall be deemed to be the articles of incorporation of
Amalco and the Certificate shall be deemed to be the certificate of incorporation of
Amalco.
4.
Termination. The board of directors of any of the Amalgamating Parties may terminate the
Amalgamation and this Agreement at any time prior to the issue of the Certificate notwithstanding
the approval by either, or both of, the Creso Shareholders and Nichromet as sole shareholder of
Nichromet Acquisitionco.
5.
Name. The name of Amalco shall be “Creso Exploration Inc.”.
6.
Registered Office. The registered office of Amalco shall be situated in Quebec and, until
changed in accordance with the Act, the place in Quebec where the registered office of Amalco is
to be situated is 600 de Maisonneuve Blvd. West, Suite 2750, Montreal, Quebec, H3A 3J2.
A-3
7.
Authorized Share Capital. Amalco shall be authorized to issue an unlimited number of Amalco
Shares, and such shares shall have the rights, privileges, restrictions and conditions as set forth
in the Articles of Amalgamation.
8.
Restrictions on Transfer. The restrictions on the right to transfer any shares of Amalco shall be
as set forth in the Articles.
9.
By-laws. The by-laws of Amalco shall be the by-laws of Nichromet Aquisitionco until such bylaws are duly repealed, amended or altered.
10.
Restrictions on Business. There shall be no restrictions on the business which Amalco is
authorized to carry on.
11.
Number of Directors. The minimum number of directors of Amalco shall be one (1) and the
maximum number of directors of Amalco shall be fifteen (15).
12.
First Directors. The first directors of Amalco shall be the following persons who shall hold office
until the first annual meeting of shareholders of Amalco or until their successors are duly elected
or appointed and whose full names and addresses are set out below:
13.
14.
Full Name
Address
Pierre Gauthier
7 D-6150 Ave. du Boisé
Montréal, Québec, H3S 2V2
Jean-Marc Lalancette
470, Rue Irène Couture
Sherbrooke, Québec, J1L 1J4
Brahm Gelfand
3 Grove Park
Westmount, Québec, H3Y 3E6
Treatment of Issued Capital. Subject to Section 17, at the Effective Time:
(a)
each issued and outstanding Acquisitionco Share shall be cancelled and replaced with
one (1) issued, fully paid and non-assessable Amalco Share;
(b)
all Creso Common Shares held by or on behalf of Nichromet Acqusitionco shall be
cancelled without any repayment of capital in respect thereof;
(c)
Subject to Section 22, Creso Shareholders (other than Dissenting Shareholders and
Nichromet Acqusitionco) shall receive 0.5 fully paid and non-assessable Nichromet SVS
for each Creso Common Share held and thereafter all Creso Common Shares shall be
cancelled; and
(d)
as consideration for the issuance of the Nichromet SVS, Amalco will issue to Nichromet
100 AmaIco Shares.
Share Certificates. At the Effective Time:
(a)
Nichromet shall be deemed to be the registered holder of all of the outstanding Amalco
Shares to which it is entitled under Section 13(a) and 13(d) and shall be entitled to
receive a share certificate representing such Amalco Shares;
A-4
(b)
15.
share certificates evidencing the Creso Common Shares shall cease to represent any
claim upon or interest in Creso or Amalco other than:
(i)
in respect of a Creso Shareholder (other than Nichromet Acquisitionco) ) who is
not a Dissenting Shareholder, the right to receive Nichromet SVS in accordance
with Section 13(c), and
(ii)
in respect of Dissenting Shareholders, the right to receive the fair value,
determined in accordance with the Act, of the Creso Common Shares held by
them.
Stated Capital. The amount of the stated capital account at the Effective Time maintained in
respect of:
(a)
The Nichromet SVS shall, to the extent permitted by law, be equal to the sum of the paidup capital (as defined in the ITA) of each of the issued and outstanding: (i) Creso
Common Shares (excluding Dissenting Creso Common Shares) immediately prior to the
Amalgamation; and (ii) Nichromet SVS immediately prior to the Amalgamation.
(b)
Amalco Shares shall, to the extent permitted by law, be equal to the sum of the paid-up
capital of each of the issued and outstanding (i) Acquisitionco Shares and (ii) Creso
Common Shares (excluding Dissenting Creso Common Shares) immediately prior to the
Amalgamation.
16.
Fractional Shares. No fractional Amalco Shares shall be issued by Amalco pursuant to this
Agreement. Any exchange or replacement contemplated in Section 13 that results in less than a
whole number shall be rounded down to the nearest whole number without any payment in lieu of
any fractional share.
17.
Lost Certificates. In the event any certificate, which immediately prior to the Effective Time
represented one or more outstanding Creso Common Shares that were exchanged pursuant to
this Agreement, shall have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming such certificate to be lost, stolen or destroyed, and upon complying
with, and subject to, any additional requirements set forth in the Letter of Transmittal, the
Depository will issue in exchange for such lost, stolen or destroyed certificate, the Nichromet SVS
deliverable in accordance with the terms herein.
18.
Withholding Rights. Nichromet, Amalco and the Depository shall be entitled to deduct and
withhold from any consideration otherwise payable to any Creso Shareholder such amounts as
Nichromet, Amalco or the Depository determines are required or permitted to be deducted and
withheld with respect to such payment under the ITA, or any provision of any other applicable tax
law. To the extent that amounts are so withheld, such withheld amounts shall be treated for all
purposes hereof as having been paid to the Creso Shareholder in respect of which such
deduction and withholding was made, provided that such withheld amounts are actually remitted
to the appropriate taxing authority.
19.
No Liens. Any exchange or transfer of securities pursuant to this Agreement shall be free and
clear of all liens or other claims of third parties of any kind.
20.
Covenants. Nichromet Acquisitionco and Creso will, on or prior to the Effective Date, jointly file
with the Director the Articles of Amalgamation and such other documents as may be required to
give effect to the Amalgamation at the Effective Time upon and subject to the terms and
conditions of this Agreement and the Merger Agreement.
A-5
21.
Dissenting Shareholders. Dissenting Creso Common Shares shall not be exchanged for
Nichromet SVS at the Effective Time in accordance with Section 13(b). Instead, on the Effective
Date, each Dissenting Shareholder shall cease to have any rights as a Creso Shareholder other
than the right to be paid the fair value in respect of the Dissenting Creso Common Shares in
accordance with the provisions of Section 190 of the Act. However, if a Dissenting Shareholder
withdraws or is deemed to have withdrawn the exercise of its dissent rights or otherwise failed to
comply with the requirements of the Act or if such Dissenting Shareholder’s rights as a Creso
Shareholder are otherwise reinstated, each Dissenting Creso Common Share held by that
Dissenting Shareholder shall thereupon be deemed to have been exchanged for Nichromet
Shares at the Effective Time in accordance with Section 13(b).
22.
Non-Resident Shareholders. Without limiting anything in this Agreement, Nichromet shall not
be required to issue any share in connection with the Amalgamation to any shareholder resident
in a jurisdiction other than Canada where the local securities laws of such jurisdiction would make
such issuance illegal or require the preparation and filing of a prospectus, the registration of such
securities or other applicable requirements and, instead of the consideration to which such
shareholder is otherwise entitled under Section 13, all Nichromet SVS that such shareholder
would have otherwise been entitled to receive at the Effective Date in respect of its Creso
Common Shares will instead be delivered to the Escrow Agent. The Escrow Agent shall use its
best efforts to sell such Nichromet SVS as soon as practicable after the Effective Date, on such
dates and at such prices as the Escrow Agent may determine in its sole discretion, through one
or more brokers with whom the Escrow Agent transacts business. Each such Creso Shareholder
will receive a pro rata share of the cash proceeds from the sale of such Nichromet SVS sold by
the Escrow Agent. Creso agrees to bear all costs and fees of the Escrow Agent and brokers in
connection with such sales. For greater certainty, the Escrow Agent shall not be liable to any
party if it is unable to effect the sale of any such Nichromet SVS at a particular price or at all.
23.
Notice. Any notice, request, consent, agreement or approval which may or is required to be
given pursuant to this Agreement shall be in writing and shall be sufficiently given or made if
delivered, telecopied or emailed by PDF, in the case of:
(a)
Nichromet and Nichromet Acquisitionco, addressed as follows:
NICHROMET EXTRACTION INC.
600 de Maisonneuve Blvd. West
Suite 2750
Montreal, Quebec H3A 3J2
Attention: Luce Saint-Pierre
Fax:
(514) 866-6193
Email:
[email protected]
with a copy (which shall not constitute notice) to:
NORTON ROSE FULBRIGHT CANADA LLP
Suite 3800, Royal Bank Plaza, South Tower
200 Bay Street, P.O. Box 84
Toronto, Ontario M5J 2Z4
Attention: Cathy Singer
Fax:
(416) 216-3930
Email:
[email protected]
A-6
(b)
Creso, addressed as follows:
CRESO EXPLORATION INC.
600 de Maisonneuve Blvd. West
Suite 2750
Montreal, Quebec H3A 3J2
Attention: Vatché Tchakmakian
Fax:
(514) 842-3306
Email:
[email protected]
with a copy (which shall not constitute notice) to:
HEENAN BLAIKIE LLP
1250 René-Lévesque Blvd. West, Suite 2500,
Montreal, Quebec H3B 4Y1
Attention: Kosta Kostic
Fax:
(514) 921-1395
Email:
[email protected]
or to such other address as the relevant party may from time to time advise by notice in writing given
pursuant to this section. The date of receipt of any such notice, request, consent, agreement or approval
shall be deemed to be the date of delivery or telecopy (if during normal business hours in the place or
receipt or, if not, the next Business Day).
24.
Assignment. No party to this Agreement may assign any of its rights or obligations under this
Agreement without the prior written consent of each of the other parties.
25.
Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns (including, for greater certainty,
Amalco).
26.
Time of the Essence. For the purposes of this Agreement time shall be of the essence.
27.
Governing Law. This Agreement shall be governed by and construed in accordance with the
laws of the province of Ontario and the federal laws of Canada applicable therein.
28.
Entire Agreement. This Agreement (including, for greater certainty, the Merger Agreement),
constitutes the entire agreement and understanding between and among the parties hereto with
respect to the subject matter hereof and the Amalgamation and supersedes any prior agreement,
representation or understanding with respect thereto.
29.
Amendment or Waiver. Subject to any requirements imposed by Law or by any court having
jurisdiction, this Agreement may be amended, modified or superseded, and any of the terms,
covenants, representations, warranties or conditions hereof may be waived, but only by written
instrument executed by all the parties hereto. No waiver of any nature, in any one or more
instances, shall be deemed or construed as a further or continued waiver of any condition or
breach of any other term, representation or warranty in this Agreement.
30.
Severability. Whenever possible, each provision of this Agreement shall be interpreted in such
manner as to be effective and valid under applicable Law, but if any provision of this Agreement
is determined to be void or unenforceable in whole or in part, it shall be deemed not to affect or
impair the validity of any other provision of this Agreement and such void or unenforceable
provision shall be severable from this Agreement.
A-7
31.
Counterparts and Delivery. This Agreement may be executed in any number of counterparts,
each of which shall be considered the original and all of which, together, shall constitute one and
the same instrument. This Agreement may also be executed in original or by signature sent and
received by facsimile or other electronic transmission and the reproduction of such signature sent
and received by way of facsimile or other electronic transmission will be deemed as though such
reproduction was an executed original thereof.
32.
Language. The parties expressly acknowledge that they have requested that this Agreement
and all ancillary and related documents thereto be drafted in the English language only. Les
parties aux présentes reconnaissent avoir exigé que la présente entente et tous les documents
qui y sont accessoires soient rédigés en anglais seulement.
33.
Further Assurances. Each of the parties hereto agrees that each will promptly furnish to the
other such further documents and take or cause to be taken such further actions as may
reasonably be required in order to effect this Agreement and the Amalgamation. Each party
hereto agrees to execute and deliver such instruments and documents as the other parties hereto
may reasonably require in order to carry out the intent of this Agreement.
(Signature page follows)
A-8
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed as of the
date first above written.
NICHROMET EXTRACTION INC.
By:
Name: Pierre Gauthier
Title: President and Chief Executive
Officer
8704996 CANADA INC.
By:
Name: Pierre Gauthier
Title: President and Chief Executive
Officer
CRESO EXPLORATION INC.
By:
Name: Vatché Tchakmakian
Title:
Chief Financial Officer
Signature Page to Amalgamation Agreement
A-9
Schedule B
Amalgamation Resolution
Creso Exploration Inc.
(the Corporation)
SPECIAL RESOLUTION OF THE COMMON SHAREHOLDERS
AMALGAMATION
BE IT RESOLVED, AS A SPECIAL RESOLUTION, AS WELL AS A “MAJORITY OF THE MINORITY”
RESOLUTION THAT:
1. The amalgamation (the “Amalgamation”) under the Canada Business Corporations Act (the
“CBCA”) substantially as set forth in the amalgamation agreement entered into between the
Corporation, Nichromet Extraction Inc. (“Nichromet”) and 8704996 Canada Inc., a wholly-owned
subsidiary of Nichromet (“Subco”), dated as of November 22, 2013 (the “Amalgamation
Agreement”) and as described in the management information circular dated [●], 2013, pursuant
to which the shareholders of the Corporation (the “Creso Shareholders”) exchange all of the
issued and outstanding shares of the Corporation for subordinate voting shares of Nichromet
(“Nichromet Subordinate Voting Shares”) in accordance with the following exchange ratio: two
(2) shares of the Corporation for one (1) Nichromet Subordinate Voting Share, is hereby
approved and authorized.
2. The Amalgamation Agreement between the Corporation, Nichromet and Subco is hereby
confirmed, ratified and approved and the board of directors of the Corporation (the “Board”) is
hereby authorized to amend or revise the Amalgamation Agreement in its discretion to the extent
permitted therein without further approval of the Creso Shareholders.
3. Notwithstanding that the Amalgamation has received the approval of the Creso Shareholders, the
Board may, subject to the terms of the Amalgamation Agreement, amend or decide not to
proceed with the Amalgamation or revoke this resolution at any time prior to the filing of
documents giving effect to the Amalgamation without further notice to or approval of Creso
Shareholders, optionholders or warrantholders of the Corporation; and
4. Any director or officer of the Corporation is hereby authorized and directed, for and on behalf of
the Corporation, to execute and deliver all such documents and to do all such other acts or things
as he or she may determine to be necessary or advisable in connection with the Amalgamation
Agreement or Amalgamation or to give effect to this resolution (including, without limitation, the
filing of any documents required in the prescribes form under the CBCA).
APPENDIX “C” - RIGHT TO DISSENT / SECTION 190 OF THE CBCA
190. (1) Subject to sections 191 and 241, a holder of shares of any class of a corporation may dissent if the
corporation is subject to an order under paragraph 192(4)(d) that affects the holder or if the corporation
resolves to
(a) amend its articles under section 173 or 174 to add, change or remove any provisions restricting
or constraining the issue, transfer or ownership of shares of that class;
(b) amend its articles under section 173 to add, change or remove any restriction on the business or
businesses that the corporation may carry on;
(c) amalgamate otherwise than under section 184;
(d) be continued under section 188;
(e) sell, lease or exchange all or substantially all its property under subsection 189(3); or
(f) carry out a going-private transaction or a squeeze-out transaction.
Further right
(2) A holder of shares of any class or series of shares entitled to vote under section 176 may dissent if the
corporation resolves to amend its articles in a manner described in that section.
If one class of shares
(2.1) The right to dissent described in subsection (2) applies even if there is only one class of shares.
Payment for shares
(3) In addition to any other right the shareholder may have, but subject to subsection (26), a shareholder
who complies with this section is entitled, when the action approved by the resolution from which the
shareholder dissents or an order made under subsection 192(4) becomes effective, to be paid by the
corporation the fair value of the shares in respect of which the shareholder dissents, determined as of the
close of business on the day before the resolution was adopted or the order was made.
No partial dissent
(4) A dissenting shareholder may only claim under this section with respect to all the shares of a class held
on behalf of any one beneficial owner and registered in the name of the dissenting shareholder.
Objection
(5) A dissenting shareholder shall send to the corporation, at or before any meeting of shareholders at
which a resolution referred to in subsection (1) or (2) is to be voted on, a written objection to the resolution,
unless the corporation did not give notice to the shareholder of the purpose of the meeting and of their right
to dissent.
Notice of resolution
(6) The corporation shall, within ten days after the shareholders adopt the resolution, send to each
shareholder who has filed the objection referred to in subsection (5) notice that the resolution has been
adopted, but such notice is not required to be sent to any shareholder who voted for the resolution or who
133
has withdrawn their objection.
Demand for payment
(7) A dissenting shareholder shall, within twenty days after receiving a notice under subsection (6) or, if the
shareholder does not receive such notice, within twenty days after learning that the resolution has been
adopted, send to the corporation a written notice containing
(a) the shareholder’s name and address;
(b) the number and class of shares in respect of which the shareholder dissents; and
(c) a demand for payment of the fair value of such shares.
Share certificate
(8) A dissenting shareholder shall, within thirty days after sending a notice under subsection (7), send the
certificates representing the shares in respect of which the shareholder dissents to the corporation or its
transfer agent.
Forfeiture
(9) A dissenting shareholder who fails to comply with subsection (8) has no right to make a claim under
this section.
Endorsing certificate
(10) A corporation or its transfer agent shall endorse on any share certificate received under subsection (8)
a notice that the holder is a dissenting shareholder under this section and shall forthwith return the share
certificates to the dissenting shareholder.
Suspension of rights
(11) On sending a notice under subsection (7), a dissenting shareholder ceases to have any rights as a
shareholder other than to be paid the fair value of their shares as determined under this section except
where
(a) the shareholder withdraws that notice before the corporation makes an offer under subsection
(12),
(b) the corporation fails to make an offer in accordance with subsection (12) and the shareholder
withdraws the notice, or
(c) the directors revoke a resolution to amend the articles under subsection 173(2) or 174(5),
terminate an amalgamation agreement under subsection 183(6) or an application for continuance
under subsection 188(6), or abandon a sale, lease or exchange under subsection 189(9),
in which case the shareholder’s rights are reinstated as of the date the notice was sent.
Offer to pay
(12) A corporation shall, not later than seven days after the later of the day on which the action approved by
the resolution is effective or the day the corporation received the notice referred to in subsection (7), send
to each dissenting shareholder who has sent such notice
134
(a) a written offer to pay for their shares in an amount considered by the directors of the
corporation to be the fair value, accompanied by a statement showing how the fair value was
determined; or
(b) if subsection (26) applies, a notification that it is unable lawfully to pay dissenting
shareholders for their shares.
Same terms
(13) Every offer made under subsection (12) for shares of the same class or series shall be on the same
terms.
Payment
(14) Subject to subsection (26), a corporation shall pay for the shares of a dissenting shareholder within ten
days after an offer made under subsection (12) has been accepted, but any such offer lapses if the
corporation does not receive an acceptance thereof within thirty days after the offer has been made.
Corporation may apply to court
(15) Where a corporation fails to make an offer under subsection (12), or if a dissenting shareholder fails to
accept an offer, the corporation may, within fifty days after the action approved by the resolution is
effective or within such further period as a court may allow, apply to a court to fix a fair value for the
shares of any dissenting shareholder.
Shareholder application to court
(16) If a corporation fails to apply to a court under subsection (15), a dissenting shareholder may apply to a
court for the same purpose within a further period of twenty days or within such further period as a court
may allow.
Venue
(17) An application under subsection (15) or (16) shall be made to a court having jurisdiction in the place
where the corporation has its registered office or in the province where the dissenting shareholder resides if
the corporation carries on business in that province.
No security for costs
(18) A dissenting shareholder is not required to give security for costs in an application made under
subsection (15) or (16).
Parties
(19) On an application to a court under subsection (15) or (16),
(a) all dissenting shareholders whose shares have not been purchased by the corporation shall be
joined as parties and are bound by the decision of the court; and
(b) the corporation shall notify each affected dissenting shareholder of the date, place and
consequences of the application and of their right to appear and be heard in person or by counsel.
Powers of court
(20) On an application to a court under subsection (15) or (16), the court may determine whether any other
135
person is a dissenting shareholder who should be joined as a party, and the court shall then fix a fair value
for the shares of all dissenting shareholders.
Appraisers
(21) A court may in its discretion appoint one or more appraisers to assist the court to fix a fair value for
the shares of the dissenting shareholders.
Final order
(22) The final order of a court shall be rendered against the corporation in favour of each dissenting
shareholder and for the amount of the shares as fixed by the court.
Interest
(23) A court may in its discretion allow a reasonable rate of interest on the amount payable to each
dissenting shareholder from the date the action approved by the resolution is effective until the date of
payment.
Notice that subsection (26) applies
(24) If subsection (26) applies, the corporation shall, within ten days after the pronouncement of an order
under subsection (22), notify each dissenting shareholder that it is unable lawfully to pay dissenting
shareholders for their shares.
Effect where subsection (26) applies
(25) If subsection (26) applies, a dissenting shareholder, by written notice delivered to the corporation
within thirty days after receiving a notice under subsection (24), may
(a) withdraw their notice of dissent, in which case the corporation is deemed to consent to the
withdrawal and the shareholder is reinstated to their full rights as a shareholder; or
(b) retain a status as a claimant against the corporation, to be paid as soon as the corporation is
lawfully able to do so or, in a liquidation, to be ranked subordinate to the rights of creditors of the
corporation but in priority to its shareholders.
Limitation
(26) A corporation shall not make a payment to a dissenting shareholder under this section if there are
reasonable grounds for believing that
(a) the corporation is or would after the payment be unable to pay its liabilities as they become
due; or
(b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its
liabilities.
136
APPENDIX “D”- FINANCIAL STATEMENT OF THE CORPORATION
CRESO EXPLORATION INC.
Unaudited Condensed Interim Consolidated
Financial Statements
For the three-month and nine-month periods ended September 30, 2013
Creso Exploration Inc.
600 de Maisonneuve Blvd. West, Suite 2750
Montréal, Quebec, H3A 3J2
Tel: (514) 866-6001 # 239 / Fax: (514) 866-6193
Website: www.creso.ca
TSX Venture Exchange: CXT / OTCQX: CRXEF / Frankfurt Exchange: C3X
Creso Exploration Inc.
Consolidated Interim Statements of Financial Position
(Presented in Canadian dollars)
(Unaudited)
Assets
Current assets
Cash (Note 5)
Sales taxes receivable
Prepaid expenses and advances to suppliers
Non-current assets
Property, plant and equipment (Note 6)
Exploration and evaluation assets (Note 7)
Total assets
Liabilities
Current liabilities
Accounts payable and accrued liabilities
Short-term loan (Note 8)
Non-current liabilities
Deferred proceeds on sale of exploration and evaluation assets
Other liabilities
Total liabilities
Equity
Share capital (Note 9)
Warrants and compensation options (Note 10)
Contributed surplus
Deficit
Total equity
Total liabilities and equity
As at
September 30,
2013
$
As at
December 31,
2012
$
85,003
43,873
17,996
146,872
643,281
69,992
17,843
731,116
135,125
13,058,208
13,193,333
13,340,205
203,360
12,663,197
12,866,557
13,597,673
170,829
500,000
670,829
139,692
139,692
368,000
368,000
1,038,829
368,000
6,800
374,800
514,492
29,155,488
664,499
4,725,648
(22,244,259)
12,301,376
13,340,205
Going concern (Note 1)
Commitments (Note 15)
Subsequent event at the closing date (Note 16)
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
-2-
28,911,728
711,339
4,645,568
(21,185,454)
13,083,181
13,597,673
Creso Exploration Inc.
Consolidated Interim Statements of Comprehensive Loss
(Presented in Canadian dollars)
(Unaudited)
For the three-month period
ended September 30,
2013
2012
$
$
Expenses
Professional and consulting fees
Salaries
Travel
Rent, insurance and other
Trustee and registration fees
Investor relation and promotion
Share-based compensation costs (Note 11)
Impairment of exploration and evaluation
assets (Note 7)
Depreciation of property, plant and equipment
Foreign exchange loss (gain)
Operating loss
Other gains and losses
Interest expense on short-term loan (Note 8)
Interest income
Net loss before income taxes
110,974
14,924
394
30,003
3,401
11,361
-
92,589
24,867
3,526
26,953
10,233
38,701
6,000
290,000
3,348
4
464,409
(464,409)
(6,833)
(471,242)
Recovery of deferred income taxes
Net loss and comprehensive loss
Loss per share (basic and diluted)
Weighted average number of basic and diluted
outstanding common shares
For the nine-month period
ended September 30,
2013
2012
$
$
(471,242)
(0.00)
144,811,956
452,806
45,882
2,598
122,734
46,624
57,910
-
383,173
81,300
13,630
112,738
50,463
81,783
159,500
711,000
3,349
(548)
916,670
290,000
10,048
240
1,028,842
1,181,000
10,047
657
2,074,291
(916,670)
(1,028,842)
(2,074,291)
5
(916,665)
9,200
(907,465)
(0.01)
119,053,695
(6,833)
178
(1,035,497)
6,800
(1,028,697)
(0.01)
143,725,435
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
-3-
115
(2,074,176)
32,000
(2,042,176)
(0.02)
112,251,227
Creso Exploration Inc.
Consolidated Interim Statements of Changes in Equity
For the nine-month period ended September 30, 2013 and 2012
(Presented in Canadian dollars)
(Unaudited)
Number of
common
shares
outstanding
Balance - January 1, 2013
Private placement of units (Note 9)
Proceeds from units issuance
Less: Value attributed to warrants
Warrants expired (Note 10)
Share and warrant issue expenses
Loss and comprehensive loss
Balance - September 30, 2013
139,271,956
5,540,000
144,811,956
Number of
common
shares
outstanding
Balance - January 1, 2012
Private placement of units (Note 9)
Proceeds from units issuance
Less: Value attributed to warrants
Less: Flow-through share premium
Share
capital
$
28,911,728
Warrants
$
711,339
277,000
(33,240)
-
Contributed
surplus
$
4,645,568
Deficit
$
(21,185,454)
80,080
-
(30,108)
(1,028,697)
4,725,648
(22,244,259)
33,240
(80,080)
-
29,155,488
664,499
Conversion
options
$
108,000
Warrants
and
compensation options
$
2,330,507
Contributed
surplus
$
2,492,500
700,000
(84,000)
(40,000)
-
84,000
-
-
450,000
-
45,000
-
-
122,871,956
28,190,128
108,000
108,421,956
14,000,000
-
Share
capital
$
27,569,128
Total equity
$
13,083,181
277,000
(30,108)
(1,028,697)
12,301,376
Deficit
$
(18,712,265)
-
Total equity
$
13,787,870
700,000
(40,000)
Warrants and compensation options (Note 10)
Warrants expired
Compensation options expired
Share-based compensation (Note 11)
Mineral properties payment (Note 7)
Share and warrant issue expenses
Loss and comprehensive loss
Balance - September 30, 2012
(1,054,940)
(137,077)
-
1,054,940
137,077
173,500
-
(13,856)
(2,042,176)
1,222,490
3,858,017
(20,768,297)
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
-4-
173,500
45,000
(13,856)
(2,042,176)
12,610,338
Creso Exploration Inc.
Consolidated Interim Statements of Cash Flows
(Presented in Canadian dollars)
(Unaudited)
For the mine-month period
ended September 30,
2013
2012
$
$
Cash flows from operating activities
Net loss
Items not affecting cash:
Impairment of exploration and evaluation assets (Note7)
Depreciation of property, plant and equipment
Share-based compensation costs (Note 11)
Deferred income taxes recovery
Changes in non-cash working capital items:
Sales taxes receivable
Prepaid expenses and advances to suppliers
Accounts payable and accrued liabilities
Cash flows from financing activities
Issuance of units (Note 9)
Share and warrant issue expenses (Note 9)
Short-term loan (Note 8)
Cash flows from investing activities
Additions to exploration and evaluation assets
Net change in cash
Cash at beginning of period
Cash at end of period
(1,028,697)
(2,042,176)
290,000
10,048
(6,800)
(735,449)
1,181,000
10,047
159,500
(32,000)
(723,629)
26,119
(153)
(10,136)
15,830
(719,619)
116,831
(39,833)
9,124
86,122
(637,507)
277,000
(30,108)
500,000
746,892
700,000
(13,856)
686,144
(585,551)
(585,551)
(558,278)
643,281
85,003
(1,051,062)
(1,051,062)
(1,002,425)
1,471,492
469,067
Additional cash flow information (Note 14)
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
-5-
Creso Exploration Inc.
Notes to Condensed Interim Consolidated Financial Statements
For the three-month and nine-month periods ended September 30, 2013 and 2012
(Presented in Canadian dollars)
(Unaudited)
1. General information, nature of operations and going concern assumption
Creso Exploration Inc. (“Creso Exploration” or the “Corporation”) was incorporated under the provisions of the Business
Corporations Act (Ontario) on August 25, 2004 and continued under the Canada Business Corporations Act on
September 29, 2010. The address of its registered office is 600 de Maisonneuve Blvd. West, Suite 2750, Montréal,
Quebec, Canada, H3A 3J2. Its common shares are listed on the TSX Venture Exchange (“the Exchange”) under the
symbol CXT and on the OTCQX (CRXEF) and the Frankfurt Exchange (C3X). The Corporation's financial year ends on
December 31. These unaudited condensed interim consolidated financial statements were approved and authorized for
issue by the Board of Directors on November 26, 2013.
The Corporation has interest in mineral properties located in Canada which are presently at the exploration and
evaluation stage. Until it is determined that properties contain mineral reserves or resources that can be economically
mined, they are classified as exploration and evaluation assets.
For the nine-month period ended September 30, 2013, the Corporation incurred a net loss of $1,028,697 (for the year
ended December 31, 2012 - $2,383,958). The deficit as at September 30, 2013 amounted to $22,244,259 ($21,185,454
as at December 31, 2012) and negative cash flow from operations amounted to $719,619 ($916,426 as at December
31, 2012).
Management estimates that the funds available as at September 30, 2013 will not be sufficient to meet the Corporation’s
obligations and budgeted expenditures through September 30, 2014. The Corporation will have to raise additional funds
to continue operations. The Corporation is pursuing financing alternatives to fund its operations and to continue its
activities as a going concern. Although there is no assurance that the Corporation will be successful in these actions,
management is confident that it will be able to secure the necessary financing through the issuance of new equity. While
it has been successful in doing so in the past, there can be no assurance it will be able to do so in the future.
Although these condensed interim consolidated financial statements have been prepared using International Financial
Reporting Standards (“IFRS”) applicable to a going concern, the above-noted facts and circumstances cast significant
doubt on the Corporation’s ability to continue as a going concern.
These condensed interim consolidated financial statements do not reflect the adjustments to the carrying values of
assets and liabilities, to the reported revenues and expenses and to the financial position classifications that would be
necessary if the going concern assumption was inappropriate. These adjustments could be material.
2. Basis of preparation
The accompanying condensed interim consolidated financial statements have been prepared in accordance with IFRS
(International Accounting Standard 34, Interim Financial Reporting) issued by the International Accounting Standards
Board (“IASB”) and interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”).
Accordingly, they do not include all of the information required for full annual financial statements and should be read
in conjunction with the Corporation’s consolidated financial statements for the year ended December 31, 2012.
3. Summary of significant accounting policies and accounting standard issued but not yet applied
The accounting policies applied in these condensed interim consolidated financial statements are the same as those
presented in the most recent annual financial statements for the year ended December 31, 2012.
Furthermore the information on accounting standards effective in future periods and not yet adopted remains unchanged
from that disclosed in the Corporation’s consolidated financial statements as at and for the year ended December 31,
2012, except for amendments to IAS 1, IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements and
IFRS 13, Fair Value Measurement, as described below:
-6-
Creso Exploration Inc.
Notes to Condensed Interim Consolidated Financial Statements
For the three-month and nine-month periods ended September 30, 2013 and 2012
(Presented in Canadian dollars)
(Unaudited)
3. Summary of significant accounting policies and accounting standard issued but not yet applied (Cont’d)
IAS 1 amendments required the Corporation to group other comprehensive income items by those that will be
reclassified subsequently to profit or loss and those that will not be reclassified. These changes did not result in any
adjustments.
IFRS 10 requires an entity to consolidate an investee when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over the investee. Under
existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of
an entity so as to obtain benefits from its activities. IFRS 10 replaces SIC-12 Consolidation—Special Purpose Entities
and parts of IAS 27 Consolidated and Separate Financial Statements. The Corporation adopted IFRS 10 on January 1,
2013 and it had no impact on the Corporation’s financial statements.
IFRS 11 reduces the types of joint arrangements to two: joint ventures and joint operations. IFRS 11 requires the use
of equity accounting for interest in joint ventures, eliminating the existing policy choice of proportionate consolidation for
jointly controlled entities under IAS 31, Interest in Joint Ventures. Entities that participate in joint operations will follow
accounting much like that for jointly controlled assets and jointly controlled operations under IAS 31. The Corporation
adopted IFRS 11 on January 1, 2013 and it had no impact on the Corporation’s financial statements.
IFRS 13 is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS
standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to
transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes
disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is
dispersed among the specific standards requiring fair value measurements and in many cases does not reflect a clear
measurement basis or consistent disclosures. The Corporation adopted IFRS 13 in January 1, 2013 and it had no
impact on the Corporation’s financial statements.
4. Critical accounting estimates, judgements and assumptions
Many of the amounts included in the condensed interim financial statements require management to make judgments
and/or estimates. These judgments and estimates are continuously evaluated and are based on management’s
experience and knowledge of the relevant facts and circumstances. Actual results may differ from the amounts included
in the financial statements.
Management’s opinions and estimates that could have an appreciable impact on the amounts reported in the condensed
consolidated interim financial statements with respect to the following items, have changed significantly since the
audited annual consolidated financial statements for the year ended December 31, 2012:
Impairment of exploration and evaluation assets
Pursuant to the Corporation’s significant accounting policies, after the legal right to undertake exploration and evaluation
activities on a project is acquired, the cost of acquiring mining rights, expenditures, directly related to the exploration
and evaluation of mining properties are capitalized to exploration and evaluation assets. After capitalization, exploration
and evaluation (“E&E”) assets are reviewed for impairment on an ongoing basis and if there is any indication that the
carrying amount may not be recoverable.
Determining if there are any facts and circumstances indicating impairment loss or reversal of impairment losses is a
subjective process involving judgment and a number of estimates and interpretations in many cases. Determining
whether to test for impairment E&E assets requires management’s judgment, among others, regarding the following:
a) The period for which the entity has the right to explore in the specific area has expired during the period or will
expire in the near future, and is not expected to be renewed;
b) Substantive expenditure on further exploration and evaluation of mineral resources in a specific area is neither
budgeted nor planned;
c) Exploration for and evaluation of mineral resources in a specific area have not led to the discovery of commercially
viable quantities of mineral resources and the entity has decided to discontinue such activities in the specific area;
or
-7-
Creso Exploration Inc.
Notes to Condensed Interim Consolidated Financial Statements
For the three-month and nine-month periods ended September 30, 2013 and 2012
(Presented in Canadian dollars)
(Unaudited)
4. Critical accounting estimates, judgements and assumptions (Cont’d)
d) Sufficient data exists to indicate that, although a development in a specific area is likely to proceed, the carrying
amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or
by sale.
Additional external factors which could trigger an impairment review include, but are not limited to, significant negative
industry or economic trend and significant drop in ore prices.
When an indication of impairment loss or a reversal of an impairment loss exists, the recoverable amount of the
individual asset must be estimated. If it is not possible to estimate the recoverable amount of the individual asset, the
recoverable amount of the cash generating unit to which the asset belongs must be determined. Identifying the cash
generating units requires considerable management judgment. In testing an individual asset or cash generating unit for
impairment and identifying a reversal of impairment losses, management estimates the recoverable amount of the asset
or the cash-generating unit. This requires management to make several assumptions as to future events or
circumstances. These assumptions and estimates are subject to change if new information becomes available. Actual
results with respect to impairment losses or reversals of impairment losses could differ in such a situation and significant
adjustments to the Corporation’s assets and losses may occur during the next period.
The total impairment charge of the E&E assets recognized in the condensed interim consolidated statement of
comprehensive loss for the nine-month period ended September 30. 2013 amounts to $290,000 ($1,181,000 for the
nine-month period ended September 30, 2012). No reversal of impairment losses has been recognized for the reporting
periods.
5. Cash
On December 31, 2012, exploration funds of $282,793 were included in cash and represented cash pursuant to flowthrough financings. The Corporation has dedicated these funds for exploration on Canadian mineral properties during
the first quarter of 2013.
6. Property, plant and equipment
Gross carrying amount
Balance - January 1, 2013
Additions
Balance – September 30, 2013
Accumulated depreciation
Balance - January 1, 2013
Depreciation
Balance – September 30, 2013
Net carrying amount - September 30, 2013
Net carrying amount - December 31, 2012
Camp and
infrastructure
$
291,061
291,061
116,424
43,659
160,083
130,978
174,637
Exploration
equipment
$
73,975
73,975
(1)
58,606
14,528
73,134
841
15,369
(1)
Office and
computer
equipment
$
58,043
58,043
Total
$
423,079
423,079
44,689
10,048
54,737
3,306
13,354
219,719
68,235
287,954
135,125
203,360
(1) Depreciation charges related to specific exploration projects are capitalized as exploration and evaluation assets.
-8-
Creso Exploration Inc.
Notes to Condensed Interim Consolidated Financial Statements
For the three-month and nine-month periods ended September 30, 2013 and 2012
(Presented in Canadian dollars)
(Unaudited)
7. Exploration and evaluation assets
As at
December 31,
2012
$
Mineral properties
Ontario, Canada
Shining Tree
E&E expenditures
Shining Tree
Additions
$
Impairment
$
As at
September 30,
2013
$
1,531,241
2,846
(290,000)
1,244,087
11,131,956
12,663,197
682,165
685,011
(290,000)
11,814,121
13,058,208
a) Acquisition of properties
Since 2007, the Corporation acquired a land package by acquisition through staking or optioning large areas of
ground adjacent to its 100% interests in the Tyranite, Minto, Duggan and Mann properties in the Shining Tree camp
of northern Ontario.
The Corporation abandoned some claims during the nine-month period ended September 30, 2013 and therefore
partially impaired its mineral properties for $290,000.
b) Option agreements
The Corporation entered into several options agreements since 2009 whereby it acquired options to acquire 100 %
interests in exploration properties located in the Shining Tree area in Ontario by making cash payments, issuing
share capital and performing exploration work.
The fair value of the 450,000 common shares issued, during the nine-month period ended September 30, 2012,
relating to an option agreement at an amount of $45,000 has been determined based on the quoted price on the
date the common shares were issued.
For the nine-month period ended September 30, 2012, the Corporation recorded an impairment charge of
$1,181,000 for some of its properties still under option following the termination of these option agreements.
c) Net Smelter Royalties
In September 2010, Franco-Nevada Corporation (“Franco-Nevada”) was granted an option (“NSR Option”) to
purchase a perpetual 2% NSR royalty on gold and other minerals produced from the Shining Tree property within
one of three defined sectors. The NSR Option may be exercised within sixty days following the date on which (i) a
decision is made to construct a mine by the Corporation and (ii) the planned mine is fully financed either with cash
on hand or a firm commitment of bank financing.
The NSR Option may be exercised at a purchase price equal to the after-tax net present value of the royalty revenue
calculated using a 6.5% discount rate applied to the base case model assumptions in the feasibility study used to
make the decision to construct and finance the mine.
The estimated fair value of the NSR option of $368,000 was recorded as deferred proceeds on sale of exploration
and evaluation assets under non-current liabilities. The deferred proceeds on sale will be recorded against the
exploration and evaluation assets if and when Franco-Nevada exercises its option.
In addition, some of the exploration properties are subject to NSR royalty agreements with other parties, between
1.5% and 3% once mine production commences subject to partial buy-back by the Corporation under certain
conditions.
-9-
Creso Exploration Inc.
Notes to Condensed Interim Consolidated Financial Statements
For the three-month and nine-month periods ended September 30, 2013 and 2012
(Presented in Canadian dollars)
(Unaudited)
8. Short-term loan
On July 10, 2013, the Corporation borrowed $500,000 from Nichromet Extraction Inc. (“Nichromet”). The loan is
unsecured and bears interest at a rate of 6% per annum payable on maturity. The principal amount of the loan together
with interest thereon is due and payable July 10, 2014.
9. Share capital
Authorized
An unlimited number of common shares, voting, without par value.
Issuance following private placements
In February 2013, the Corporation issued 5,540,000 units at $0.05 per unit for total consideration of $277,000 pursuant
to non-brokered private placements. A unit consists of one common share and one common share purchase warrant,
with each warrant entitling its holder to purchase a common share at $0.10 over a two-year period.
The fair value of the 5,540,000 warrants was estimated using the Black-Scholes option pricing model based on the
following weighted average assumptions: risk-free interest rate of 1%, average expected volatility of 103%, expected
dividend per share nil and expected life of warrants of two years. As a result the fair value of the purchase warrants was
estimated at $33,240 after a pro-rata allocation of the fair value of the units’ components. This amount was allocated to
warrants and the balance of $243,760 to share capital.
10. Warrants
A summary of changes in the Corporation’s outstanding warrants is presented below:
Number of
warrants
Balance – Beginning of period
Issued (Note 9)
Expired
Balance – End of period
36,074,467
5,540,000
(3,336,667)
38,277,800
For the nine-month period ended September 30,
2013
2012
Weighted
Weighted
average
average
Carrying
Number of exercise
exercise
price
amount
warrants
price
$
$
$
0.12
711,339
28,797,245
0.39
0.10
33,240
9,000,000
0.10
0.20
(80,080)
(11,555,000) 0.50
0.11
664,499
26,242,245
0.25
Carrying
amount
$
2,166,170
84,000
(1,054,940)
1,195,230
A summary of outstanding warrants entitling their holders to subscribe for an equivalent number of common shares, as
at September 30, 2013, is as follows:
Number of
warrants
1,666,667
9,000,000
7,671,133
14,400,000
5,540,000
38,277,800
Exercise
price
$
0.20
0.10
0.15
0.10
0.10
Expiry date
November 24, 2013
Between July 9 and September 17, 2014
Between September 25 and December 8, 2014
Between October 31 and December 31, 2014
Between February 22 and 27, 2015
- 10 -
Creso Exploration Inc.
Notes to Condensed Interim Consolidated Financial Statements
For the three-month and nine-month periods ended September 30, 2013 and 2012
(Presented in Canadian dollars)
(Unaudited)
11. Share based compensation costs
A summary of changes of the Corporation’s common share purchase options is presented below:
Balance – Beginning of period
Granted
Expired
Balance – End of period
For the nine-month period ended September 30,
2013
2012
Weighted
Weighted
Number
average
Number
average
of options
exercise price
of options
exercise price
$
$
6,915,000
0.26
6,015,000
0.32
2,650,000
0.10
(1,425,000)
0.33
(1,750,000)
0.19
5,490,000
0.24
6,915,000
0.26
A summary of outstanding and exercisable options, entitling their holders to subscribe for an equivalent number of
common shares is as follows:
Number of
options
400,000
1,040,000
1,400,000
400,000
2,050,000
200,000
5,490,000
Exercise
price
$
0.10
0.15
0.40
0.87
0.10
0.10
Expiry date
November 1, 2013
September 30, 2014
July 9, 2015
September 29, 2015
February 20, 2017
July 23, 2017
During the nine-month period ended September 30, 2013, the Corporation has not granted stock options. During the
nine-month period ended September 30, 2012, 2,650,000 options were granted and vested. Share based compensation
cost amounted to $173,500 of which $14,000 was capitalized to exploration and evaluation assets as part of the Shining
Tree project cost on the basis that options were granted to consultants involved exclusively in the exploration program.
The balance of $159,500 was expensed in the consolidated statements of comprehensive loss.
The exercise price of the options compared to the weighted market price on grant date and their estimated weighted
fair values were as follows:
Weighted
Weighted
fair
Exercise
market
value
price
price
600,000 options granted to an officer which exercise price exceeds the
market price
$0.05
$0.10
$0.08
2,050,000 options granted, including 1,670,000 options granted to
directors and officers, which exercise price equal the market price
$0.07
$0.10
$0.10
The weighted average of the fair value of an option, on the grant date of the options during the nine-month period ended
September 30, 2012, is $0.07 and was estimated using the Black-Scholes model based on the following weighted
average assumptions:
Dividend yield
Average projected volatility
Risk-free interest rate
Expected life of options
-%
92.76%
1.44%
5 years
- 11 -
Creso Exploration Inc.
Notes to Condensed Interim Consolidated Financial Statements
For the three-month and nine-month periods ended September 30, 2013 and 2012
(Presented in Canadian dollars)
(Unaudited)
12. Financial instruments – Fair value
The Corporation has determined the estimated fair value of its financial instruments based on estimates and
assumptions. Actual results may differ from those estimates, and the use of different assumptions or methodologies
may have material effects on the estimated fair value amounts. The fair value of cash, accounts payable and accrued
liabilities and the short-term loan (financial liability at amortized cost) are comparable to their carrying values due to the
relatively short period to maturity of the instruments.
13. Key management personnel
Key management personnel are those persons having authority and responsibility for planning, directing and controlling
the activities of the Corporation, including any director of the Corporation. Key management of the personnel of the
Corporation includes President & Chief Executive Officer (“CEO”), the Chief Financial Officer (“CFO”) and any Director
of the Corporation. Key management remuneration is as follows:
Nine-month ended
September 30,
2013
2012
$
$
Short-term benefits
Consulting fees capitalized in exploration and evaluation assets (1)
Professional and consulting fees(2 a), b), c))
Salaries
Share-based payments
Total compensation
2,000
224,669
226,669
226,669
4,221
230,344
63,483
298,048
139,900
437,948
The Corporation had the following transactions with related parties that were in the normal course of operations and
measured at the exchange amount, which is the amount of consideration established and agreed to by the related
parties:
1) Consulting fees of $2,000 to a private company controlled by a director of the Corporation for geological services
($4,221 in Q3-2012).
2) Professional and consulting fees includes:
a) Remuneration of CFO in the amount of $44,669 ($69,344 in Q3-2012) paid to a private company controlled by
him. In addition his company charged fees of $57,166 ($82,139 in Q3-2012) for support staff in respect of
accounting, bookkeeping and administrative services;
b) Consulting fee of $180,000 ($155,000 in Q3-2012) to a private company controlled by the President, CEO and
Executive Chairman; and
c) Consulting fees of $nil ($6,000 in Q3-2012) to a private company controlled by a director of the Corporation.
3) Legal fees of $23,711 ($23,282 in Q3-2012) of which $6,451 are share issue expenses ($4,422 in Q3-2012) to a
company controlled by the Corporate Secretary.
At September 30, 2013, $3,730 remains to be paid ($36,533 as at September 30, 2012) from these transactions.
- 12 -
Creso Exploration Inc.
Notes to Condensed Interim Consolidated Financial Statements
For the three-month and nine-month periods ended September 30, 2013 and 2012
(Presented in Canadian dollars)
(Unaudited)
14. Additional cash flows information
Additional information – non cash transactions
Issuance of shares for explorations and evaluation assets
Additions of exploration and evaluation assets included in accounts payable and
accrued liabilities
Depreciation of property, plant and equipment included in exploration and
evaluation assets
Share-based compensation cost included in exploration and evaluation assets
Nine-month ended
September 30,
2013
2012
$
$
45,000
115,570
97,541
58,187
-
58,188
14,000
15. Commitment
Consortium agreement with Nichromet
On June 1, 2013, the Corporation signed a consortium agreement with Nichromet whereby:
• Nichromet will build a $27 million demonstration plant; and
• The Corporation will provide concentrate from its Minto gold deposit (the “Minto Project”).
Nichromet’s objective is to finalize the development of the chlorination technology to extract precious metals such as
gold, at a pre-commercial stage through the construction of a demonstration plant of 15 tonnes per day (“TPD”) that will
operate on a continuous mode under industrial conditions.
The Minto Project, located within the Shining Tree district, will use an open pit mining method to extract a 30,000 tonne
bulk sample once the permitting is completed. Crushing and stockpiling for processing will be done onsite. All cost
incurred beyond the stockpiling will be incurred by Nichromet. The modular processing plant, to be built and paid for by
Nichromet, will include grinding and flotation. The concentrate product will be transported to Nichromet’s demonstration
plant, and 100% of the gold recovered will be returned to the Corporation.
Lease payments
In July 2012, the Corporation entered into a lease agreement with another corporation for office premises until June 30,
2015. The total annual rent amounting to approximately $53,372 is equally shared. The total shared commitment from
October 2013 to June 2015 is $93,399 and the Corporation’s share is as follows:
a) $6,671 from October to December 2013;
b) $26,686 in 2014; and
c) $13,343 from January to June 2015.
16. Subsequent event at the closing date
On November 22 2013, the Corporation entered into a merger agreement with Nichromet and a wholly-owned
subsidiary of Nichromet (“Subco”) pursuant to which the Corporation and Subco will amalgamate (the
“Amalgamation”) and the amalgamated company (“Amalco”) will become a wholly-owned subsidiary of Nichromet.
Prior to the Amalgamation, Nichromet will be renamed “Dundee Sustainable Technologies Inc.”
Pursuant to the Amalgamation, Nichromet would, indirectly, acquire all of the issued and outstanding common
shares of the Corporation, which it does not already own, and the shareholders of the Corporation would receive
one subordinate voting share of Nichromet in exchange for two common shares of the Corporation. Holders of
options and warrants of the Corporation will receive options and warrants, as applicable, of Nichromet based upon
the same exchange ratio. In connection with the Amalgamation, the common shares of the Corporation would be
de-listed from the TSX Venture Exchange.
- 13 -
Creso Exploration Inc.
Notes to Condensed Interim Consolidated Financial Statements
For the three-month and nine-month periods ended September 30, 2013 and 2012
(Presented in Canadian dollars)
(Unaudited)
16. Subsequent event at the closing date (Cont’d)
The Amalgamation must be approved by a special majority (66⅔%) of the votes cast at the Corporation
shareholders’ meeting to be held to consider the Amalgamation. In addition, since Dundee Sustainable
Technologies Inc. will have multiple voting shares outstanding (held by Dundee Corporation), the Amalgamation
must be approved by a majority of the minority of the shareholders of the Corporation. In this regard, the
Corporation is preparing a Management Information Circular which will be mailed to each shareholder of the
Corporation. The multiple voting shares of Dundee Sustainable Technologies Inc. will not be listed on any stock
exchange and are convertible, at the option of the holder, into subordinate voting shares for no additional
consideration.
Assuming completion of the proposed Amalgamation, but excluding any securities issuable pursuant to a future
financing in connection with the Amalgamation, Dundee Sustainable Technologies Inc. will have (i) 227,445,202
subordinate voting shares issued and outstanding, of which 27.5% will be held by the current shareholders of the
Corporation (excluding Nichromet) and 72.5% will be held by the current shareholders of Nichromet (including
Dundee Corporation), and (ii) 50,000,000 multiple voting shares issued and outstanding, all of which will be held
by Dundee Corporation. Accordingly, Dundee Corporation will exercise voting rights in respect of an aggregate
of 86.3% of the issued and outstanding voting securities of Dundee Sustainable Technologies Inc.
- 14 -
CRESO EXPLORATION INC.
Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
Creso Exploration Inc.
600 Maisonneuve Blvd. West, Suite 2750
Montreal, Quebec, H3A 3J2
Tel: (514) 866-6001 # 239 / Fax: (514) 866-6193
Website: www.creso.ca
TSX Venture Exchange: CXT / OTCQX: CRXEF / Frankfurt Exchange: C3X
March 22, 2013
Independent Auditor’s Report
To the Shareholders of Creso Exploration Inc.
We have audited the accompanying consolidated financial statements of Creso Exploration Inc.,
which comprise the statements of financial position as at December 31, 2012 and 2011 and the
statements of comprehensive loss, cash flows and changes in equity for the years ended
December 31, 2012 and 2011, and the related notes, which comprise 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 audits 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
made by management, as well as evaluating the overall presentation of the consolidated financial
statements.
PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l.,
1250 René-Lévesque Boulevard West, Suite 2800, Montréal, Quebec, Canada H3B 2G4
T: 514 205 5000, F: 514 876 1502, www.pwc.com/ca
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
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
financial position of Creso Exploration Inc. as at December 31, 2012
2 and 2011 and its financial
performance and its cash flows for the years ended December 31, 2012
2 and 2011 in accordance
with
ith International Financial Reporting Standards.
Emphasis of matter
Without qualifying our opinion, we draw attention to note 1 in the consolidated financial
statements which describes matters and conditions that indicate the existence of a material
uncertainty that may cast significant doubt about Creso Exploration Inc’s
’s ability to continue as a
going concern.
1
CPA Auditor, CA, public accountancy permit No. A119714
Creso Exploration Inc.
Consolidated Statements of Financial Position
(Presented in Canadian dollars)
As at December 31,
2012
2011
$
$
Assets
Current assets
Cash (Note 6)
Sales taxes receivable and other
Prepaid expenses and advances to suppliers
Non-current assets
Property, plant and equipment (Note 7)
Exploration and evaluation assets (Note 8)
Total assets
Liabilities
Current liabilities
Accounts payable and accrued liabilities
Non-current liabilities
Deferred proceeds on sale of exploration and evaluation assets (Notes 8 and 9)
Other liabilities
Total liabilities
Equity
Share capital (Note 10)
Conversion options (Note 9)
Warrants and compensation options (Note 11)
Contributed surplus
Deficit
Total equity
Total liabilities and equity
643,281
69,992
17,843
731,116
1,471,492
154,090
37,285
1,662,867
203,360
12,663,197
12,866,557
13,597,673
294,340
12,878,912
13,173,252
14,836,119
139,692
331,449
368,000
6,800
374,800
514,492
694,000
22,800
716,800
1,048,249
28,911,728
711,339
4,645,568
(21,185,454)
13,083,181
13,597,673
Going concern (Note 1)
Subsequent events at the closing date (note 20)
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors
(s) André Thibault
André Thibault, Director
(s) Pierre R. Gauthier
Pierre R. Gauthier, Director
-4-
27,569,128
108,000
2,330,507
2,492,500
(18,712,265)
13,787,870
14,836,119
Creso Exploration Inc.
Consolidated Statements of Comprehensive Loss
(Presented in Canadian dollars)
For the years ended
December 31,
2012
2011
$
$
Expenses
Professional and consulting fees
Salaries
Travel
Rent, insurance and other
Trustee and registration fees
Investor relation and promotion
Share-based compensation costs (Note 12)
Impairment of exploration and evaluation assets (Note 8)
Depreciation of property, plant and equipment
Foreign exchange loss
Operating loss
Other gains and losses
Interest income
550,562
103,053
30,021
149,599
57,111
130,111
159,500
1,246,000
13,396
720
2,440,073
775,274
92,249
62,242
183,827
56,513
150,897
31,688
615,100
12,198
1,301
1,981,289
(2,440,073)
(1,981,289)
115
(2,439,958)
Net loss before income taxes
Recovery of deferred income taxes (Note 15)
56,000
Net loss and comprehensive loss
Loss per share (basic and diluted)
Weighted average number of basic and diluted outstanding common shares
The accompanying notes are an integral part of these consolidated financial statements.
-5-
(1,970,250)
37,200
(2,383,958)
(1,933,050)
(0.02)
(0.02)
115,909,988
Going concern (Note 1)
11,039
87,083,767
Creso Exploration Inc.
Consolidated Statements of Changes in Equity
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
Number of
common shares
outstanding
Balance - January 1, 2012
Private placement of units (Note 10)
Proceeds from units issuance
Less: Value attributed to warrants
Less: Flow-through share premium
Warrants and compensation options (Note 11)
Warrants expired
Compensation options expired
Change of maturity date of warrants
Share-based compensation (Note 12)
Mineral properties payment (Note 8)
Conversion of debenture (Note 9)
Share and warrant issue expenses
Loss and comprehensive loss
Balance - December 31, 2012
108,421,956
30,400,000
-
Share capital
$
27,569,128
Conversion
options
$
108,000
Warrants and
compensation options
$
2,330,507
Contributed
surplus
$
2,492,500
-
182,400
-
-
1,520,000
(182,400)
(40,000)
450,000
-
45,000
-
139,271,956
28,911,728
(108,000)
-
The accompanying notes are an integral part of these consolidated financial statements.
-6-
(1,707,231)
(164,337)
70,000
711,339
Deficit
$
(18,712,265)
-
1,707,231
164,337
173,500
108,000
-
(70,000)
(19,231)
(2,383,958)
4,645,568
(21,185,454)
Total equity
$
13,787,870
1,520,000
(40,000)
173,500
45,000
(19,231)
(2,383,958)
13,083,181
Creso Exploration Inc.
Consolidated Statements of Changes in Equity
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
Number of
common
shares
outstanding
Balance - January 1, 2011
Private placements of units (Note 10)
Proceeds from shares and units issuance
Less: Value attributed to warrants
Less: Flow-through share premium
Warrants and compensation options (Note 11)
Proceeds from warrants exercised
Initial fair value of warrants exercised
Compensation options expired
Compensation options granted
Share options (Note 12)
Proceeds from options exercised
Initial fair value of options exercised
Share-based compensation
Mineral properties payment (Note 8)
Share and warrant issue expenses
Loss and comprehensive loss
Balance - December 31, 2011
80,786,288
Share capital
$
23,749,749
Conversion
options
$
108,000
Warrants and
compensation options
$
2,290,396
Contributed
surplus
$
2,524,012
-
-
3,067,480
(60,000)
5,400
-
-
372,300
27,260
23,060,668
-
3,067,480
(120,080)
(60,000)
-
120,080
-
2,440,000
-
372,300
101,829
-
-
(101,829)
(5,400)
27,260
410,000
1,725,000
-
61,500
68,600
327,750
-
-
-
108,421,956
27,569,128
108,000
2,330,507
The accompanying notes are an integral part of these consolidated financial statements.
-7-
(68,600)
31,688
2,492,500
Deficit
$
(16,491,783)
(287,432)
(1,933,050)
(18,712,265)
Total equity
$
12,180,374
61,500
31,688
327,750
(287,432)
(1,933,050)
13,787,870
Creso Exploration Inc.
Consolidated Statements of Cash Flows
(Presented in Canadian dollars)
For the years ended
December 31,
2012
2011
$
$
Cash flows from operating activities
Net loss
Items not affecting cash:
Impairment of exploration and evaluation assets
Depreciation of property, plant and equipment
Share-based compensation costs
Deferred income taxes recovery (Note 15)
Changes in non-cash working capital items:
Sales taxes receivable and other
Prepaid expenses and advances to suppliers
Accounts payable and accrued liabilities
Cash flows from financing activities
Issuance of shares and units
Share and warrant issue expenses
Cash flows from investing activities
Acquisition of property, plant and equipment
Additions to exploration and evaluation assets
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash at end of year
Additional cash flow information (Note 17)
The accompanying notes are an integral part of these consolidated financial statements.
-8-
(2,383,958)
(1,933,050)
1,246,000
13,396
159,500
(56,000)
(1,021,062)
615,100
12,198
31,688
(37,200)
(1,311,264)
84,098
19,442
1,096
104,636
(916,426)
415,176
106,238
(202,835)
318,579
(992,685)
1,520,000
(19,231)
1,500,769
3,501,280
(260,172)
3,241,108
(1,412,554)
(1,412,554)
(828,211)
1,471,492
643,281
(46,732)
(4,637,227)
(4,683,959)
(2,435,536)
3,907,028
1,471,492
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
1. General information, nature of operations and going concern assumption
Creso Exploration Inc. (“Creso Exploration” or the “Corporation”) was incorporated under the provisions of the
Business Corporations Act (Ontario) on August 25, 2004 and continued under the Canada Business Corporations Act
on September 29, 2010. The address of its registered office is 600 de Maisonneuve Blvd. West, Suite 2750, Montreal,
Quebec, Canada, H3A 3J2. Its common shares are listed on the TSX Venture Exchange (“the Exchange”) under the
symbol CXT and on the OTCQX (CRXEF) and the Frankfurt Exchange (C3X). The Corporation's financial year ends
on December 31. The consolidated financial statements for the year ended December 31, 2012, were approved and
authorized for issue by the Board of Directors on March 22, 2013.
The Corporation has interest in mineral properties located in Canada which are presently at the exploration and
evaluation stage. Until it is determined that properties contain mineral reserves or resources that can be economically
mined, they are classified as exploration and evaluation assets.
For the year ended December 31, 2012, the Corporation incurred a net loss of $2,383,958 (for the year ended
December 31, 2011 - $1,933,050). Deficit as at December 31, 2012 amounted to $21,185,454 ($18,712,265 as at
December 31, 2011) and negative cash flow from operations amounted to $916,426 ($992,685 as at December
31, 2011).
Management estimates that the funds available as at December 31, 2012 will not be sufficient to meet the
Corporation’s obligations and budgeted expenditures through December 31, 2013. The Corporation will have to raise
additional funds to continue operations. The Corporation is pursuing financing alternatives to fund its operations and
to continue its activities as a going concern. Although there is no assurance that the Corporation will be successful in
these actions, management is confident that it will be able to secure the necessary financing through the issuance of
new equity. While it has been successful in doing so in the past, there can be no assurance it will be able to do so in
the future.
Although these consolidated financial statements have been prepared using International Financial Reporting
Standards (“IFRS”) applicable to a going concern, the above-noted facts and circumstances cast significant doubt on
the Corporation’s ability to continue as a going concern.
These consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities,
to the reported revenues and expenses and to the financial position classifications that would be necessary if the
going concern assumption was inappropriate. These adjustments could be material.
2. Basis of preparation
These consolidated financial statements have been prepared in accordance with IFRS and the IFRS Interpretations
Committee. These consolidated financial statements have been prepared on a historical cost basis using the accrual
basis of accounting except for derivative financial instruments that are measured at fair value.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting
estimates. It also requires management to exercise its judgment in the process of applying the group’s accounting
policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates
are significant to the consolidated financial statements are disclosed in note 5.
3. Summary of significant accounting policies
Basis of measurement
These consolidated financial statements have been prepared on a historical cost basis using the accrual basis of
accounting except for derivative financial instruments that are measured at fair value.
Basis of consolidation
These consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiary,
Guatemala Copper S.A. Unrealized gains and losses on transactions between the Corporation and its subsidiary and
all intergroup transactions, balances, income and expenses are eliminated upon consolidation.
-9-
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
3. Summary of significant accounting policies (Cont'd)
Property, plant and equipment
Property, plant and equipment are recorded at cost and are amortized over their estimated useful life using the
straight-line method once put into service. Depreciation is capitalized to exploration and evaluation assets when
related to a specific exploration project.
Depreciation is provided on a straight-line basis as follows:
Useful life
3 years
5 years
Exploration, office and computer equipments
Camp and infrastructure
Exploration and evaluation assets
Exploration and evaluation ("E&E") assets are comprised of mineral properties and deferred exploration expenditures.
Expenditures incurred on activities that precede exploration for and evaluations of mineral resources, being all
expenditures incurred prior to securing the legal rights to explore an area, are expensed immediately.
E&E assets includes rights to explore in mineral properties ("mining rights"), paid or acquired through a business
combination or an acquisition of assets, and costs related to the initial search for mineral deposits with economic
potential or to obtain more information about existing mineral deposits.
Mining rights are recorded at acquisition cost or at fair value in the case of a devaluation caused by an impairment of
value. Mining rights and options to acquire undivided interests in mining rights are depreciated only as these
properties are put into commercial production.
From time to time, the Corporation may acquire or dispose of a property pursuant to the terms of an option
agreement. Due to the fact that options are exercisable entirely at the discretion of the option holder, the amounts
payable or receivable are not recorded. Option payments are recorded as property costs or recoveries when the
payments are made or received.
E&E expenditures for each separate area of interest are capitalized and include costs associated with prospecting,
sampling, trenching, drilling and other work involved in searching for ore like topographical, geological, geochemical
and geophysical studies. They also reflect costs related to establishing the technical and commercial viability of
extracting a mineral resource identified through exploration or acquired through a business combination or asset
acquisition. E&E expenditures include overhead expenses directly attributable to the related activities.
When a mine project moves into the development phase following the demonstration of the technical feasibility and
commercial viability of extracting a mineral resource, E&E expenditures capitalized are transferred to mine
development costs in property, plant and equipment.
Cash flows attributable to capitalized E&E costs are classified as investing activities in the statement of cash flows
under the heading addition to exploration and evaluation assets.
Proceeds on the sale of evaluation and exploration assets are first applied by property in reduction of the mineral
properties and then in reduction of the E&E expenditures. Any residual is recorded in the consolidated statement of
comprehensive loss.
Impairment of non-financial assets
Non-financial assets are reviewed for impairment if there is any indication that the carrying amount may not be
recoverable. If any such indication is present, the recoverable amount of the asset is estimated in order to determine
whether impairment exists. Where the asset does not generate cash flows that are independent from other assets,
the Corporation estimates the recoverable amount of the cash generating unit (“CGU”) to which the asset belongs.
- 10 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
3. Summary of significant accounting policies (Cont’d)
An asset’s recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use,
the estimated future cash flows are discounted to their present value, using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to the asset for which estimates of
future cash flows have not been adjusted.
If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount is
reduced to the recoverable amount. Impairment is recognized immediately as additional depreciation or amortization.
Where an impairment subsequently reverses, the carrying amount is increased to the revised estimate of recoverable
amount but only to the extent that this does not exceed the carrying value that would have been determined if no
impairment had previously been recognized. A reversal is recognized as a reduction in the depreciation or
amortization charge for the period.
Flow-through shares
The Corporation finances some exploration expenditures through the issuance of flow-through shares. The resource
expenditure deductions for income tax purposes are renounced to investors in accordance with the appropriate
income tax legislation. The Corporation recognizes a deferred tax liability for flow-through shares and a deferred tax
expense, at the moment the eligible expenditures are incurred. The difference between the fair values recognized in
common shares and the amount the investors pay for the shares ("premium") is recognized as other liability, using the
residual method, which is reversed into recovery of income taxes when eligible expenditures have been made.
Capital stock and warrants
Common shares and warrants are classified as equity. Proceeds from unit placements are allocated between shares
and warrants issued on a pro-rata basis of their value within the unit using the Black-Scholes pricing model to
determine the fair value of warrants issued.
Foreign currency translation
The functional currency of Creso Exploration Inc. is the Canadian dollar. In preparing the financial statements of the
individual entities, transactions in currencies other than the entities functional currency (foreign currencies) are
recorded at the rates of exchange prevailing at the dates of the transactions. At each financial position date, monetary
assets and liabilities are translated using the period end foreign exchange rate. Non-monetary assets and liabilities
are translated using the historical rate on the date of the transaction. All gains and losses on translation of these
foreign currency transactions are included in the consolidated statement of comprehensive loss within foreign
exchange gain or loss.
Income taxes
Income tax on the profit or loss for the periods presented comprises current and deferred tax. Income tax is
recognized in profit or loss except to the extent that it relates to items recognized directly in other comprehensive loss
or in equity, in which case it is recognized in other comprehensive loss or in equity, respectively. Mining taxes
represent Canadian provincial taxes levied on mining operations and are classified as income taxes since such taxes
are based on a percentage of mining profits.
Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or
substantively enacted at period end, adjusted for amendments to tax payable with regards to previous years.
Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax
regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to
be paid to the tax authorities.
Deferred tax is provided using the financial position liability method, providing for temporary differences between the
tax bases of assets and liabilities and their carrying amounts in the financial statements. The temporary differences
are not provided for if it arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a
transaction other than a business combination that at the time of the transaction affects neither accounting nor
taxable profit or loss. The amount of deferred tax provided is based on the expected manner of realization or
settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the
financial position reporting date.
- 11 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
3. Summary of significant accounting policies (Cont’d)
A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available
against which the asset can be utilized.
Deferred income tax assets and liabilities are presented as non-current and are offset when there is a legally
enforceable right to offset current tax assets against current tax liabilities and when deferred tax assets and liabilities
relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable
entities where there is an intention to settle the balances on a net basis.
Equity-settled share-based remuneration
The Corporation operates an equity-settled share based remuneration plan (the "Stock Option Plan") for its eligible
directors, officers, employees and consultants. This plan does not feature any options for a cash settlement. An
individual is classified as an employee when the individual is an employee for legal or tax purposes (including
directors and officers) or provides services similar to those performed by an employee. Equity-settled share-based
payment transactions with parties other than employees are measured at the fair value of the goods or services
received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value
of the equity instruments granted, measured at the date the entity obtains the goods or over the period the
counterparty renders the service.
Where employees are rewarded using share-based payments, the fair value of the services rendered by the
employee is determined indirectly by reference to the fair value of the equity instruments granted. This fair value is
measured at grant date, using the Black-Scholes option pricing model.
The fair value of options granted is recognized as an expense or capitalized to exploration and evaluation assets
depending on the nature of the payment and the counterpart is credited to the contributed surplus in equity. Upon
exercise of the options, the proceeds received are recorded as share capital. The accumulated charges related to the
options recorded in contributed surplus are also transferred to share capital.
Convertible debenture
The liability and conversion option components of the convertible debenture are presented separately on the
consolidated statement of financial position starting from initial recognition.
Before the listing of the Corporation on the TSX Venture Exchange in June 2010, the conversion option was classified
in liabilities as a derivative financial instrument due to the variability of the conversion price. The derivative financial
instrument has been measured initially at fair value based on the Black-Scholes option pricing model. Subsequent
changes in fair values were recognized through the consolidated statement of comprehensive loss. Upon the listing,
the variable feature of the conversion price has been extinguished and accordingly, since the listing, the conversion
option is classified as a component of shareholders’ equity.
The carrying amount of the liability component was calculated by deducting the carrying amount of the derivative
financial instrument from the amount of the debenture. Transaction costs were initially distributed between the liability
component and net earnings (deficit as of January 1, 2010) on a pro rata basis on their initial carrying amount.
Share and warrant issue expenses
Share and warrant issue expenses are recorded as a deduction from equity in the period in which they are incurred,
with the exception of expenses related to financings not closed at the end of any period, which are deferred and
reclassified to deficit when the issuance of equity is completed or expensed if the issuance of equity is not expected
to occur.
Segmented information
The Corporation’s principal operations are located in Canada and are conducted in a single operating segment, being
the investment, exploration and evaluation of mining assets. Property, plant and equipment are situated in Canada.
- 12 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
3. Summary of significant accounting policies (Cont’d)
Earnings (loss) per share
Earnings (loss) per share is calculated using the weighted average number of shares outstanding during each period.
Diluted earnings (loss) per share is calculated using the weighted average number of shares outstanding during each
period based on the application of the treasury stock method for the calculation of the dilutive effect of stock options
and other dilutive securities. The diluted loss per share is equal to the basic loss per share due to the anti-dilutive
effect of the convertible debenture, the stock options, the share purchase warrants and the compensation options.
Financial instruments – recognition and measurement
Financial assets and liabilities are recognized when the Corporation becomes a party to the contractual provisions of
the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired
or have been transferred and the Corporation has transferred substantially all risks and rewards of ownership.
Financial assets and liabilities are offset and the net amount is reported in the consolidated statement of financial
position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle
on a net basis, or realize the asset and settle the liability simultaneously.
At initial recognition, the Corporation classifies its financial instruments in the following categories depending on the
purpose for which the instruments were acquired:
(i) Financial assets and liabilities at fair value through profit or loss
A financial asset or liability is classified in this category if acquired principally for the purpose of selling or
repurchasing in the short-term. Derivatives, including derivatives embedded in host contracts that require
separation, are also included in this category unless they are designated as hedges.
Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are
expensed in the consolidated statement of comprehensive loss. Gains and losses arising from changes in fair
value are presented in the consolidated statement of comprehensive loss within other gains or losses in the
period in which they arise. Financial assets and liabilities at fair value through profit or loss are classified as
current except for the portion expected to be realized or paid beyond twelve months of the financial position date,
which is classified as non-current.
(ii) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not
quoted in an active market.
Loans and receivables are recognized initially at the amount expected to be received, less, when material, a
discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at
amortized cost using the effective interest method less a provision for impairment.
(iii) Financial liabilities at amortized cost
Financial liabilities at amortized cost include accounts payable and accrued liabilities. Accounts payable and
liabilities are initially recognized at the amount required to be paid, less, when material, a discount to reduce the
payables to fair value. Subsequently, accounts payable and accrued liabilities are measured at amortized cost
using the effective interest method.
Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are
presented as non-current liabilities.
- 13 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
3. Summary of significant accounting policies (Cont’d)
The Corporation has classified its financial instruments as follows:
4.
Financial instrument
Category
Cash
Loans and receivables
Accounts payable and accrued liabilities
Financial liabilities at amortized cost
Accounting standard issued but not yet applied
At the date of authorization of these consolidated financial statements, the IASB issued the following standards which
are relevant but have not yet been early adopted by the Corporation: IFRS 9, Financial Instruments, IFRS 10,
Consolidated Financial Statements and IFRS 13, Fair Value Measurement. Certain other new standards and
interpretations have been issued but are not expected to have material impact on the Corporation’s consolidated
financial statements. IFRS 9 is effective for annual periods beginning on or after January 1, 2015 and IFRS 10 and 13
are effective for annual periods beginning on or after January 1, 2013 with early adoption permitted. The Corporation
has not yet begun the process of assessing the impact that the new and amended standards will have on its financial
statements or whether to early adopt any of the new requirements.
The following is a brief summary of the new standards:
IFRS 9 - Financial instruments - classification and measurement
IFRS 9, Financial Instruments, was issued in November 2009. It addresses classification and measurement of
financial assets and replaces the multiple category and measurement models in IAS 39, Financial Instruments –
Recognition and Measurement, for debt instruments with a new mixed measurement model with only two categories:
amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments
and such instruments are either recognized at fair value through profit or loss or at fair value through other
comprehensive loss. Where such equity instruments are measured at fair value through other comprehensive loss,
dividends, to the extent not clearly representing a return of investment, are recognized in profit or loss; however, other
gains and losses (including impairments) associated with such instruments remain in accumulated comprehensive
loss indefinitely.
Requirements for financial liabilities were added in October 2010 and they largely carried forward existing
requirements in IAS 39, except that fair value changes due to credit risk for liabilities designated at fair value through
profit and loss would generally be recorded in other comprehensive loss.
IFRS 10 – Consolidation
IFRS 10 requires an entity to consolidate an investee when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over the investee. Under
existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of
an entity so as to obtain benefits from its activities. IFRS 10 replaces SIC-12 Consolidation—Special Purpose Entities
and parts of IAS 27 Consolidated and Separate Financial Statements.
IFRS 13 - Fair Value Measurement
IFRS 13 is a comprehensive standard for fair value measurement and disclosure requirements for use across all
IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid
to transfer a liability in an orderly transaction between market participants, at the measurement date. It also
establishes disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing
fair value is dispersed among the specific standards requiring fair value measurements and in many cases does not
reflect a clear measurement basis or consistent disclosures.
- 14 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
5. Critical accounting estimates, judgements and assumptions
Many of the amounts included in the financial statements require management to make judgments and/or estimates.
These judgments and estimates are continuously evaluated and are based on management’s experience and
knowledge of the relevant facts and circumstances. Actual results may differ from the amounts included in the
financial statements.
Areas of significant judgment and estimates affecting the amounts recognized in the financial statements include:
Impairment of exploration and evaluation assets
Pursuant to the Corporation’s significant accounting policies, after the legal right to undertake exploration and
evaluation activities on a project is acquired, the cost of acquiring mining rights, expenditures, directly related to the
exploration and evaluation of mining properties are capitalized to exploration and evaluation assets. After
capitalization, E&E assets are reviewed for impairment annually and if there is any indication that the carrying amount
may not be recoverable.
Determining if there are any facts and circumstances indicating impairment loss or reversal of impairment losses is a
subjective process involving judgment and a number of estimates and interpretations in many cases. Determining
whether to test for impairment exploration and evaluation assets requires management’s judgment, among others,
regarding the following:
a) The period for which the entity has the right to explore in the specific area has expired during the period or will
expire in the near future, and is not expected to be renewed;
b) Substantive expenditure on further exploration and evaluation of mineral resources in a specific area is neither
budgeted nor planned;
c) Exploration for and evaluation of mineral resources in a specific area have not led to the discovery of
commercially viable quantities of mineral resources and the entity has decided to discontinue such activities in the
specific area; or
d) Sufficient data exists to indicate that, although a development in a specific area is likely to proceed, the carrying
amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or
by sale.
Additional external factors which could trigger an impairment review include, but are not limited to, significant negative
industry or economic trend and significant drop in ore prices.
When an indication of impairment loss or a reversal of an impairment loss exists, the recoverable amount of the
individual asset must be estimated. If it is not possible to estimate the recoverable amount of the individual asset, the
recoverable amount of the cash generating unit to which the asset belongs must be determined. Identifying the cash
generating units requires considerable management judgment. In testing an individual asset or cash generating unit
for impairment and identifying a reversal of impairment losses, management estimates the recoverable amount of the
asset or the cash-generating unit. This requires management to make several assumptions as to future events or
circumstances. These assumptions and estimates are subject to change if new information becomes available. Actual
results with respect to impairment losses or reversals of impairment losses could differ in such a situation and
significant adjustments to the Corporation’s assets and losses may occur during the next period.
The total impairment charge of the exploration and evaluation assets recognized in the consolidated statement of
comprehensive loss amounts to $1,246,000 for the year ended December 31, 2012 ($615,100 for the year ended
December 31, 2011). No reversal of impairment losses has been recognized for the reporting periods.
Going concern
The assessment of the Corporation's ability to execute its strategy by funding future working capital requirements
involves judgment.
Estimates and assumptions are continually evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be reasonable under the circumstances.
- 15 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
6. Cash
On December 31, 2012, exploration funds of $282,793 ($213,094 as at December 31, 2011) are included in cash and
represent cash pursuant to flow-through financings. The Corporation has to dedicate these funds for exploration on
Canadian mineral properties by the end of fiscal 2013.
7. Property, plant and equipment
Gross carrying amount
Balance - January 1, 2012
Additions
Balance - December 31, 2012
Accumulated depreciation
Balance - January 1, 2012
Depreciation
Balance - December 31, 2012
Net carrying amount - December 31, 2012
Gross carrying amount
Balance - January 1, 2011
Additions
Balance - December 31, 2011
Accumulated depreciation
Balance - January 1, 2011
Depreciation
Balance - December 31, 2011
Net carrying amount - December 31, 2011
Camp and
infrastructure
$
291,061
291,061
58,212
58,212
116,424
174,637
Exploration
equipment
$
73,975
73,975
(1)
Camp and
infrastructure
$
257,560
33,501
291,061
58,212
58,212
232,849
39,234
19,372
58,606
15,369
(1)
Exploration
equipment
$
73,975
73,975
(1)
19,862
19,372
39,234
34,741
(1)
Office and
computer
equipment
$
58,043
58,043
Total
$
423,079
423,079
31,293
13,396
44,689
13,354
128,739
90,980
219,719
203,360
Office and
computer
equipment
$
44,812
13,231
58,043
Total
$
376,347
46,732
423,079
19,095
12,198
31,293
26,750
38,957
89,782
128,739
294,340
(1) Depreciation charges related to specific exploration projects are capitalized as exploration and evaluation assets.
- 16 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
8. Exploration and evaluation assets
As at
December 31,
2011
$
Mineral properties
Ontario, Canada
Shining Tree
E&E expenditures
Shining Tree
E&E expenditures
Ontario, Canada
Shining Tree
Impairment
$
NSR Royalty
$
3,007,720
95,521
(1,246,000)
(326,000)
1,531,241
9,871,192
12,878,912
1,260,764
1,356,285
(1,246,000)
(326,000)
11,131,956
12,663,197
As at
December 31,
2010
$
Mineral properties
Ontario, Canada
Shining Tree
Additions
$
As at
December 31,
2012
$
Additions
$
Impairment
$
NSR Royalty
$
As at
December 31,
2011
$
2,485,555
1,137,265
(615,100)
-
3,007,720
6,182,238
8,667,793
3,688,954
4,826,219
(615,100)
-
9,871,192
12,878,912
a) Acquisition of properties
Since 2007, the Corporation acquired a land package by acquisition through staking or optioning large areas of
ground adjacent to its 100% interests in the Tyranite, Minto, Duggan and Mann properties in the Shining Tree
camp of northern Ontario.
b) Option agreements
The Corporation entered into several options agreements since 2009 whereby it acquired options to acquire
100 % interests in exploration properties located in the Shining Tree area in Ontario by making cash payments,
issuing share capital and performing exploration work.
In 2012 and 2011, cash payment, share capital issuance and exploration work commitment conditions, fulfilled as
per the terms of the option agreements, were as follows:
In 2011
In 2012
Cash payment
$
760,000
45,000
Share capital
issuance
Number
1,725,000
450,000
Exploration
work
commitment
$
340,000
-
The fair value of the 450,000 common shares issued in 2012 (1,725,000 in 2011) relating to the agreements at an
amount $45,000 ($327,750 in 2011) has been determined based on the quoted price on the date the common
shares were issued.
During 2012, the Corporation recorded an impairment charge of $1,246,000 ($615,100 in 2011) for its properties
still under option following termination of these option agreements.
- 17 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
8. Exploration and evaluation assets (Cont’d)
c) Net Smelter Royalties
In September 2010, Franco-Nevada Corporation (“Franco-Nevada”) was granted an option (“NSR Option”) to
purchase a perpetual 2% NSR royalty on gold and other minerals produced from the Shining Tree property within
one of three defined sectors. The NSR Option may be exercised within sixty days following the date on which (i) a
decision is made to construct a mine by the Corporation and (ii) the planned mine is fully financed either with cash
on hand or a firm commitment of bank financing.
The NSR Option may be exercised at a purchase price equal to the after-tax net present value of the royalty
revenue calculated using a 6.5% discount rate applied to the base case model assumptions in the feasibility study
used to make the decision to construct and finance the mine.
The estimated fair value of the NSR option of $368,000 was recorded as deferred proceeds on sale of exploration
and evaluation assets under non-current liabilities. The deferred proceeds on sale will be recorded against the
exploration and evaluation assets if and when Franco-Nevada exercises its option (Note 9).
In addition, some of the exploration properties are subject to NSR royalty agreements with other parties, between
1.5% and 3% once mine production commences subject to partial buy-back by the Corporation under certain
conditions.
9. Deferred proceeds on sale of exploration and evaluation assets
On November 8, 2007, the Corporation closed a $2,000,000, interest free convertible debenture financing maturing
on November 8, 2012. In 2008, the Corporation reimbursed $100,000 to the debenture holder bringing the
outstanding principal amount to $1,900,000 as at December 31, 2008 and renegotiated the term of the financing.
Under the terms of the modified financing, the Corporation did not have an obligation to repay the debenture in cash,
unless the Corporation becomes bankrupt or insolvent. The debenture was convertible in part or in whole at the
holder’s option at any time into any combination of common shares or NSR royalty on certain properties owned by the
Corporation.
In 2010, the Corporation reimbursed $325,000 of the $1,900,000 convertible debenture to the holder in partial
payment of principal amount and in replacement of NSR royalties on certain properties owned by the Corporation.
Also in 2010, the holder of the debenture elected to convert a nominal amount of $900,000 of its debenture into
1,800,000 common shares bringing the outstanding principal amount to $675,000.
In November 2012, the holder of the debenture elected to convert the outstanding principal amount of $675,000 into a
2% NSR royalty on the Duggan property located in Shinning Tree. As a result, the carrying value of the deferred
proceeds on sale of exploration and evaluation assets of an amount of $326,000 was recorded against the
exploration and evaluation assets and the conversion option of an amount of $108,000 was reclassified to contributed
surplus.
A summary of the Corporation’s deferred proceeds on sale of exploration and evaluation assets and conversion
option is as follows:
Deferred proceeds
on sale of
exploration and
Conversion
evaluation assets
option
$
$
326,000
368,000
694,000
(326,000)
368,000
Convertible debenture: Balance at beginning of year
NSR option: Balance at beginning of year (Note 8)
Balance: Beginning of year
Conversion of debenture into NSR
Balance: End of year
- 18 -
108,000
108,000
(108,000)
-
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
10. Share Capital
Authorized
An unlimited number of common shares, voting, without par value.
Issuance following private placements
For the year ended December 31, 2012
a) During 2012, the Corporation issued 16,400,000 units for total consideration of $820,000 pursuant to nonbrokered private placements. A unit consists of one common share and one common share warrant, with
each warrant entitling its holder to purchase a common share at $0.10 over a two-year period.
The fair value of the 16,400,000 warrants was estimated using the Black-Scholes option pricing model based
on the following weighted average assumptions: risk-free interest rate of 1.12%, average expected volatility of
97%, expected dividend per share nil and expected life of warrants of two years. As a result, the fair value of
the purchase warrants was estimated at $98,400 after a pro-rata allocation of the fair value of the units’
components. This amount was allocated to warrants and the balance of $721,600 to share capital.
b) During 2012, the Corporation issued 14,000,000 units, on a flow-through basis, for total consideration of
$700,000 pursuant to non-brokered private placements. A unit consists of one flow-through common share
and one-half of a common share warrant, with each warrant entitling its holder to purchase a common share
at $0.10 over a two-year period.
The fair value of the 7,000,000 warrants was estimated using the Black-Scholes option pricing model based
on the following weighted average assumptions: risk-free interest rate of 1.01%, average expected volatility of
96%, expected dividend per share nil and expected life of warrants of two years. As a result the fair value of
the purchase warrants was estimated at $84,000 after a pro-rata allocation of the fair value of the units’
components. This amount was allocated to warrants, an amount of $40,000 was allocated to other liabilities
as a premium over the flow-through shares and the balance of $576,000 to share capital.
For the year ended December 31, 2011
a) On November 24, 2011, the Corporation issued 5,304,000 common shares for total consideration of
$636,480 and 3,333,334 units on a flow-through basis for total consideration of $500,000 pursuant to nonbrokered private placements. A unit consists of one flow through common share and one-half of a common
share warrant, with each warrant entitling its holder to purchase a common share at $0.20 over a two-year
period.
The fair value of the 1,666,667 warrants was estimated using the Black-Scholes option pricing model based
on the following assumptions: risk-free interest rate of 0.91%, average expected volatility of 92%, expected
dividend per share nil and expected life of warrants of two years. As a result the fair value of the purchase
warrants was estimated at $40,000 after a pro-rata allocation of the fair value of the units’ components. This
amount was allocated to warrants, an amount of $60,000 was allocated to other liabilities as a premium over
the flow through shares and the balance of $400,000 to share capital.
In connection with this financing, the Corporation paid the agent a cash commission of $113,648 and issued
to the agent 235,200 non-transferable share purchase warrants (the "Agent Warrants"). Each Agent Warrant
will entitle the agent to purchase one common share of the Corporation at a price of $0.12 per Agent Warrant
exercisable for one year. The fair value of the Agent Warrant was estimated using the Black-Scholes option
pricing model based on the following assumptions: risk-free interest rate of 0.92%, average expected volatility
of 98%, expected dividend per share nil and expected life of Agent Warrants of one year. As a result the
Agent Warrants were estimated at $11,760.
- 19 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
10. Share Capital (Cont'd)
Issuance following private placements (Cont’d)
For the year ended December 31, 2011 (Cont'd)
b) On November 9, 2011, the Corporation issued 7,750,000 common shares at $0.12 each for total
consideration of $930,000 pursuant to non-brokered private placements. In connection with this financing, the
Corporation paid the agent a cash commission of $93,000 and issued to the agent 387,500 non-transferable
Agent Warrants. Each Agent Warrant will entitle the agent to purchase one common share of the Corporation
at a price of $0.12 per Agent Warrant exercisable for one year. The fair value of the Agent Warrant was
estimated using the Black-Scholes option pricing model based on the following assumptions: risk-free interest
rate of 0.92%, average expected volatility of 101%, expected dividend per share nil and expected life of Agent
Warrants of one year. As a result the Agent Warrants were estimated at $15,500.
c) In September 2011, the Corporation issued 6,673,334 units, including 5,173,334 units issued on a flowthrough basis, at $0.15 each for total consideration of $1,001,000 pursuant to non-brokered private
placements. A unit consists of one common share and one-half of a common share warrant, with each
warrant entitling its holder to purchase a common share at $0.20 over a two-year period. In connection with
this financing, the Corporation paid the agent a cash commission of $25,000.
The fair value of the 3,336,667 warrants was estimated using the Black-Scholes option pricing model based
on the following assumptions: risk-free interest rate of 1.03%, average expected volatility of 80%, expected
dividend per share nil and expected life of warrants of two years. As a result the fair value of the purchase
warrants was estimated at $80,080 after a pro-rata allocation of the fair value of the units’ components. This
amount was allocated to warrants and the balance of $920,920 to share capital.
11. Warrants and compensation options
During the year ended December 31, 2012, no warrants or compensation options were exercised.
During the year ended December 31, 2011, 2,440,000 warrants and compensation options were exercised for cash
consideration of $372,300. As a result, a fair value of $101,829 from these warrants and compensation options has
been reclassified to share capital.
A summary of changes in the Corporation’s outstanding warrants is presented below:
Number of
warrants
Balance – Beginning of year
Issued (Note 10)
Exercised
Expired
Extension of the term
of warrants
Balance – End of year
28,797,245
23,400,000
(16,122,778)
36,074,467
For the year ended December 31,
2012
2011
Weighted
Weighted
average
average
exercise
Carrying
Number of exercise
price
amount
warrants
price
$
$
$
0.39
2,166,170
25,813,911
0.41
0.10
182,400
5,003,334
0.20
(2,020,000) 0.15
0.57
(1,707,231)
0.12
- 20 -
70,000
711,339
28,797,245
0.39
Carrying
amount
$
2,135,319
120,080
(89,229)
2,166,170
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
11. Warrants and compensation options (Cont'd)
A summary of outstanding warrants entitling their holders to subscribe for an equivalent number of common shares,
as at December 31, 2012, is as follows:
Number of
warrants
5,003,334
9,000,000
7,671,133
14,400,000
36,074,467
(1)
(1)
Exercise
price
$
0.20
0.10
0.15
0.10
Expiry date
Between September 13 and November 24, 2013
Between July 9 and September 17, 2014
Between September 14 and December 8, 2014
Between October 31 and December 31, 2014
In 2012, the Corporation extended for an additional two years the expiry date of these warrants issued in 2009, for an
original term of three years.
Change of maturity date
On September 24, 2012, the Corporation extended the maturity of 7,671,133 warrants by two years. The increase in
the weighted average fair value on the extension date of the Warrants awarded was $0.11 per warrant or $70,000
estimated using the Black-Scholes model.
The fair value was calculated based on the following weighted average assumptions:
Dividend yield
Average projected volatility
Risk-free interest rate
Expected life of warrants
Average exercise price of warrants
-%
95%
1.12%
2.17 years
$0.15
A summary of changes in the Corporation’s outstanding compensation options entitling their holders to subscribe to
common shares that represent the following number:
Number
Balance – Beginning of year
Issued
Exercised
Expired
Balance – End of year
1,715,124
(1,715,124)
-
For the year ended December 31,
2012
2011
Weighted
Weighted
average
average
exercise
Carrying
exercise
price
amount
Number
price
$
$
$
0.43
164,337
1,692,424
0.45
622,700(1) 0.12
(420,000)
0.17
0.43
(164,337)
(180,000)
0.17
1,715,124
0.43
(1)
Carrying
amount
$
155,077
27,260
(12,600)
(5,400)
164,337
Represents 311,350 Agent warrants, each entitling the holder to purchase one common share and one common share purchase
warrants, such warrant convertible into one additional common share.
- 21 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
12. Stock options
The Corporation maintains a Stock Option Plan, which provides that the board of directors of the Corporation may,
from time to time, in its discretion and in accordance with the Exchange Requirements, grant to directors, officers,
employees and consultants to the Corporation, non-transferable options to purchase common shares of the
Corporation, provided that the number of common shares reserved for issuance will not exceed 10% of the issued
and outstanding common shares of the Corporation.
The number of common shares reserved for issuance to any individual director or officer will not exceed 5% of the
issued and outstanding common shares of the Corporation, the number of common shares reserved for issuance to
any one consultant will not exceed 2% of the issued and outstanding common shares of the Corporation and the
number of common shares reserved for issuance to persons employed to provide investor relations services will not
exceed 2% of the issued and outstanding common shares of the Corporation.
Under the Stock Option Plan, such options will be exercisable for a period of up to 5 years from the date of grant.
Options granted are exercisable on the day of grant, unless otherwise stated by the Board of Directors. Options may
be exercised on the earlier of the date of the expiration of the option period or no later than 12 months following
cessation of the director, officer or employees position, 90 days following the cessation of the consultant mandate or
30 days after the termination of the person performing investor relations activities with the Corporation provided that if
the cessation of office, directorship, or technical consulting arrangement was by reason of death, the option may be
exercised within a maximum period of one year after such death, subject to the expiry date of such option.
Options granted to persons performing investor relations activities must at a minimum vest in stages over a period not
less than 12 months with no more than one fourth of the options vesting in any three-month period.
A summary of changes of the Corporation’s common share purchase options is presented below:
For the year ended December 31,
2012
Number
of options
Balance – Beginning of year
Granted
Exercised
Expired
Balance – End of year
6,015,000
2,650,000
(1,750,000)
6,915,000
2011
Weighted
average
exercise price
$
0.32
0.10
0.19
0.26
- 22 -
Number
of options
6,795,000
(410,000)
(370,000)
6,015,000
Weighted
average
exercise price
$
0.30
0.15
0.22
0.32
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
12. Stock options (Cont'd)
A summary of outstanding and exercisable options, entitling their holders to subscribe for an equivalent number of
common shares is as follows:
Number of
options
50,000
500,000
600,000
75,000
400,000
1,040,000
1,600,000
400,000
2,050,000
200,000
6,915,000
Exercise
price
$
0.60
0.15
0.40
0.60
0.10
0.15
0.40
0.87
0.10
0.10
Expiry date
February 1, 2013
February 26, 2013
March 1, 2013
March 1, 2013
November 1, 2013
September 30, 2014
July 9, 2015
September 29, 2015
February 20, 2017
July 23, 2017
During the year ended December 31, 2012, 2,650,000 options were granted and vested (nil in 2011). Share based
compensation cost amounted to $173,500 of which $14,000 was capitalized to exploration and evaluation assets as
part of the Shining Tree project cost on the basis that options were granted to consultants involved exclusively in the
exploration program. The balance of $159,500 was expensed in the consolidated statements of comprehensive loss.
The Corporation expensed $31,688 during year ended December 31, 2011, related to stock options granted the prior
year but vested during 2011.
The exercise price of the options compared to the weighted market price on grant date and their estimated weighted
fair values were as follows:
600,000 options granted to an officer and a director which exercise price
exceeds the market price
2,050,000 options granted, including 1,670,000 options granted to
directors and officers, which exercise price equal the market price
Weighted
fair
value
Exercise
price
Weighted
market
price
$0.05
$0.10
$0.08
$0.07
$0.10
$0.10
The weighted average of the fair value of an option, on the grant date of the options in 2012, is $0.07 and was
estimated using the Black-Scholes model based on the following weighted average assumptions:
Dividend yield
Average projected volatility
Risk-free interest rate
Expected life of options
-%
92.76%
1.44%
5 years
The weighted average share price at the time of exercise of options in 2011 was $0.44.
- 23 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
13. Policies and processes for managing capital
The capital of the Corporation consists of the items included in shareholders’ equity of $13,083,181 as of December
31, 2012 ($13,787,870 as of December 31, 2011). Initiatives undertaken to manage capital are described in note 10,
11, and 12. The Corporation’s objectives when managing capital are to safeguard its ability to continue its operations
as well as its acquisition and exploration programs. As needed, the Corporation raises funds through private
placements or convertible debentures. The Corporation does not use long term debt as it does not generate operating
revenues. There is no dividend policy. As at December 31, 2012, the Corporation does not have any externally
imposed capital requirements from regulatory or contractual requirements to which it is subject. Also, if the
Corporation closes a flow-through private placement, the funds are restricted in use for exploration expenses in
Canada.
14. Escrow arrangements
As at December 31, 2012, 1,567,333 common shares, 160,000 warrants and 560,000 stock options of the
Corporation, subject to a surplus security escrow agreement and a further 150,000 common shares, held under a
Capital Pool Company escrow agreement, will be released on June 9, 2013.
15. Income taxes
Major Components of tax income
The recovery of deferred income taxes for the year ended December 31, 2012, was generated by an amortization of
$56,000 of the flow-through premium liability. For the year ended December 31, 2011, the recovery of deferred
income taxes generated by the amortization of the flow-through premium liability amounted $37,200.
Relationship between recovery of deferred income taxes and accounting loss
The relationship between the expected tax income based on the combined federal and provincial income tax rate in
Canada and the recovery of deferred income taxes in the consolidated statement of comprehensive loss can be
reconciled as follows:
For the years ended
December 31,
2012
2011
$
$
Expected tax recovery at the Canadian composite statutory rate of 26.9%
(28.4% for 2011)
Impact of change in income tax rate on deferred income tax balance
Stock-based compensation costs
Other non deductible expenses
Other
Taxable gain on forgiveness of debt from convertible debenture (Note 9)
Non-taxable gain
Flow-though premium amortization
Unrecognized deferred taxes assets
Recovery of deferred income taxes
(656,349)
42,906
70,814
208
93,881
22,418
(56,000)
426,122
(56,000)
(559,551)
28,914
8,999
19,176
(498)
(37,200)
502,960
(37,200)
The effective tax rate in 2012 was lower than the effective tax rate in 2011 because of a change in the federal tax rate
that came into effect on January 1, 2012.
- 24 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
15. Income taxes (Cont’d)
Deferred tax assets
The following differences between the carrying amounts and tax bases from timing differences, unused tax losses
and unused tax credits give rise to the following unrecognized deferred assets:
December 31,
2012
2011
$
$
Unrecognized deferred tax assets
Operating losses carried forward
2,584,000
2,262,000
Capital losses carried forward
62,000
85,000
Property, plant and equipment
60,000
35,000
Exploration and evaluation assets
449,000
297,000
Share and warrant issue expenses
194,000
275,000
Total net future income tax assets
3,349,000
2,954,000
The deferred income tax assets takes into account the effect of the renouncement, in favor of investors, of deferred
exploration and evaluation expenses in connection with the flow-through financing.
The Canadian Corporation has non-capital losses of $9,611,000 which are available to reduce income taxes in future
periods, for which no deferred tax asset has been recorded in the consolidated statement of financial position. These
losses will expire as follows:
$
Years ending December 31,
2026
1,187,000
2027
1,786,000
2028
931,000
2029
529,000
2030
2,162,000
2031
1,708,000
2032
1,308,000
As at December 31, 2012, the Corporation has accumulated capital losses in Canada for income tax purposes
amounting to approximately $464,000 and can be carried forward indefinitely against future capital gains.
These tax values of assets have not been agreed with the relevant tax authorities nor have they been disputed.
16. Key management personnel
Key management personnel are those persons having authority and responsibility for planning, directing and
controlling the activities of the Corporation, including any director of the Corporation. Key management of the
personnel of the Corporation includes President & CEO, the Chief Financial Officer (“CFO”) and any Director of the
Corporation. Key management remuneration is as follows:
Year ended December 31,
2012
2011
$
$
Short-term benefits
17,000
71,242
Consulting fees capitalized in exploration and evaluation assets
Professional and consulting fees (2 a), c), d), e))
307,669
417,801
Salaries
69,888
29,986
394,557
519,029
Share-based payments
139,900
27,000
Total compensation
534,457
546,029
- 25 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
16. Key management personnel (Cont’d)
The Corporation had the following transactions with related parties that were in the normal course of operations and
measured at the exchange amounts, which is the amount of consideration established and agreed to by the related
parties:
1) Consulting fees of $17,000 to a private company controlled by a director of the Corporation for geological services
($71,242 to a private company controlled by the former President of the Corporation for geological services).
2) Professional and consulting fees includes:
a) Remuneration of CFO in the amount of $86,669 ($136,238 in 2011) paid to a private company controlled by
him. In addition his company charged fees of $101,841 ($148,298 in 2011) for the support staff in respect of
accounting, bookkeeping and administrative services;
b) Legal fees of $Nil ($14,582 in 2011) to a legal firm of which a director was a partner and of $31,251 of which
$6,682 are share issue expenses ($40,060 in 2011) to a company controlled by the Corporate Secretary;
c) Consulting fee of $210,000 ($180,000 in 2011) to a private company controlled by the Acting President and
CEO and Executive Chairman;
d) Consulting fees of $11,000 ($nil in 2011) to a private company controlled by a director of the Corporation; and
e) Consulting fees of $101,563 in 2011 to a private company controlled by the former President of the
Corporation.
3) Legal fees relating to the financings of $6,683 ($7,135 in 2011) to a company controlled by the Corporate
Secretary.
At December 31, 2012, $16,000 remains to be paid ($Nil as at December 31, 2011) from these transactions.
17. Statements of cash flows
Additional information – non cash transactions
Issuance of shares for explorations and evaluation assets
Additions of exploration and evaluation assets included in accounts payable and
accrued liabilities
Compensation options included in share and warrant issue expenses
Depreciation of property, plant and equipment included in exploration and
evaluation assets
Share-based compensation cost included in exploration and evaluation assets
Conversion of a debenture into a NSR
Year ended December
31,
2012
2011
$
$
45,000
327,750
74,297
-
267,150
27,260
77,584
14,000
326,000
77,584
-
18. Financial instruments
The Corporation is exposed to various financial risks resulting from both its operations and its investment activities.
The Corporation’s management manages financial risks. The Corporation does not enter into financial instrument
agreements including derivative financial instruments for speculative purposes. The Corporation’s main financial risk
exposure and its financial risk management policies are as follows:
Fair value
The Corporation has determined the estimated fair value of its financial instruments based on estimates and
assumptions. Actual results may differ from those estimates, and the use of different assumptions or methodologies
may have material effects on the estimated fair value amounts. The fair value of cash and accounts payable and
accrued liabilities is comparable to their carrying values due to the relatively short period to maturity of the
instruments.
- 26 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
18. Financial instruments (Cont’d)
Interest rate risk
Cash and accounts payable and accrued liabilities are non-interest bearing.
Foreign currency risk
Parts of the Corporation purchases are denominated in foreign currencies, primarily in U.S. dollars. Consequently,
certain assets and liabilities, namely cash, and accounts payable and accrued liabilities, include amounts in U.S.
dollars that are exposed to currency fluctuations.
The following balance sheet items included amounts in foreign currencies:
As at December 31,
2012
2011
US$
US$
Cash
Accounts payable and accrued liabilities
Net balance
2,846
2,846
5,003
(14,816)
(9,813)
Equivalent in Canadian dollars
2,846
(10,006)
Assuming that all the other variables are constant, a decrease of 10% in the U.S. dollar exchange rate based on the
balances as of December 31, 2012 and 2011 would not have a significant impact on the Corporation’s net loss.
Liquidity risk (Note 1)
Liquidity risk is the risk that the Corporation will not be able to meet the obligations associated with its financial
liabilities as they fall due. The Corporation’s approach to managing liquidity is to ensure that it will have sufficient
liquidity to meet its liabilities when due. The Corporation’s liquidity and operating results may adversely be affected if
the Corporation’s access to the capital market is hindered, whether as a result of a downturn in stock market
conditions generally or related to matters specific to the Corporation. The Corporation generates cash flows primarily
from its financing activities.
As at December 31, 2012, the Corporation has a cash balance of $643,281 ($1,471,492 as at December 31, 2011)
including exploration funds of $282,793 ($213,094 as at December 31, 2011) to settle current liabilities of $139,692
($331,449 as at December 31, 2011). All of the Corporation’s financial liabilities have contractual maturities of less
than 30 days and are subject to normal trade terms. The Corporation regularly evaluates its cash position to ensure
preservation and security of capital as well as maintenance of liquidity.
Management seeks additional financing through the issuance of new equity instruments to continue its operations,
and while it has been successful in doing so in the past, there can be no assurance it will be able to do so in the
future.
Credit Risk
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other
party to incur a financial loss. The Corporation is subject to concentrations of credit risk mainly through cash and cash
equivalents. The Corporation maintains substantially all of its cash and cash equivalents with a financial institution in
Canada. Therefore, according to management, credit risk of counterparty non-performance is remote.
- 27 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2012 and 2011
(Presented in Canadian dollars)
19. Commitment
In July 2012, the Corporation entered into a lease agreement with another corporation for office premises until June
30, 2015. The total annual rent amounting to approximately $53,372 is equally shared. The total shared commitment
from January 2013 to June 2015 is $133,430 and the Corporation’s share is as follows:
a) $26,686 in 2013;
b) $26,686 in 2014; and
c) $13,343 from January to June 2015.
20. Subsequent events at the closing date
Private placement
On February 28, 2013, the Corporation completed the closing of a non-brokered private placement consisting of the
issuance of 5,540,000 units at $0.05 for a total consideration of $277,000. A unit consists of one common share and
one common share purchase warrant, with each warrant entitling its holder to purchase a common share at $0.10
over a two-year period following the closing.
All securities issued pursuant to the private placement are subject have a hold period of four months from the date of
closing. As finders' fees, Creso paid in cash $7,490.
- 28 -
CRESO EXPLORATION INC.
Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
Creso Exploration Inc.
600 Maisonneuve Blvd. West, Suite 2750
Montreal, Quebec, H3A 3J2
Tel: (514) 866-6001 # 239 / Fax: (514) 866-6193
Website: www.creso.ca
TSX Venture Exchange: CXT / OTCQX: CRXEF / Frankfurt Exchange: C3X
March 29, 2012
Independent Auditor’s Report
To the Shareholders of Creso Exploration Inc.
We have audited the accompanying consolidated financial statements of Creso Exploration Inc. which
comprise the consolidated statements of financial position as at December 31, 2011 and 2010 and January
1, 2010 and the consolidated statements of comprehensive loss, changes in equity and cash flows for the
years ended December 31, 2011 and 2010, and the related notes, which comprise a summary of significant
accounting policies and other explanatory information.
Management’s responsibility for the consolidated 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 audits 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 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.
PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., Chartered Accountants
1250 René-Lévesque Boulevard West, Suite 2800, Montréal, Quebec, Canada H3B 2G4
T: +1 514 205 5000, F: +1 514 876 1502, www.pwc.com/ca
“PwC” refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited,
each member firm of which is a separate legal entity.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Creso Exploration Inc. as at December 31, 2011 and 2010 and January 1, 2010 and its financial
performance and its cash flows for the years ended December 31, 2011 and 2010 in accordance with
International Financial Reporting Standards.
Emphasis of matter
Without qualifying our opinion, we draw attention to note 1 in the consolidated financial statements which
describes matters and conditions that indicate the existence of a material uncertainty that may cast
substantial doubt about Creso Exploration Inc.’s ability to continue as a going concern.
1
Chartered accountant auditor permit No. 20910
2
Creso Exploration Inc.
Consolidated Statements of Financial Position
(Presented in Canadian dollars)
As at
December 31,
2011
$
Assets
Current assets
Cash and cash equivalents (Note 7)
Sales taxes receivable and other
Prepaid expenses and advances to suppliers
Non-current assets
Property, plant and equipment (Note 8)
Exploration and evaluation assets (Note 9)
Total assets
Liabilities
Current liabilities
Accounts payable and accrued liabilities
Non-current liabilities
Deferred proceeds on sale of exploration and
evaluation assets (Notes 10 and 11ii)
Derivative financial instrument (Note 10)
Other liabilities
Total liabilities
Equity
Share capital (Note 11)
Conversion options (Note 10)
Warrants and compensation options (Note 12)
Contributed surplus
Deficit
Total equity
Total liabilities and equity
2010
$
(Note 21)
1,471,492
154,090
37,285
1,662,867
3,907,028
569,266
143,523
4,619,817
865,750
100,110
6,082
971,942
294,340
12,878,912
13,173,252
14,836,119
337,390
8,667,793
9,005,183
13,625,000
10,636
4,041,106
4,051,742
5,023,684
331,449
750,626
93,902
694,000
22,800
716,800
1,048,249
694,000
694,000
1,444,626
918,000
38,000
265,000
1,221,000
1,314,902
23,749,749
108,000
2,290,396
2,524,012
(16,491,783)
12,180,374
13,625,000
10,630,088
862,165
1,926,800
(9,710,271)
3,708,782
5,023,684
27,569,128
108,000
2,330,507
2,492,500
(18,712,265)
13,787,870
14,836,119
Going concern (Note 1)
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors
(s) André Thibault
André Thibault, Director
(s) Pierre R. Gauthier
Pierre R. Gauthier, Director
-3-
As at
January 1,
2010
$
(Note 21)
Creso Exploration Inc.
Consolidated Statements of Comprehensive Loss
(Presented in Canadian dollars)
For the years ended
December 31,
2011
2010
$
$
(Note 21)
Expenses
Professional and consulting fees
Salaries
Travel
Rent, insurance and other
Trustee and registration fees
Investor relation and promotion
Acquisition of historical geological database
Share-based compensation costs (Note 13)
Depreciation of property, plant and equipment
Depreciation and impairment of exploration and evaluation assets (Note 9)
Foreign exchange loss (gain)
Operating loss
Other gains and losses
Loss on repurchase of right of first refusal (Note 11ii)
Loss on reverse takeover acquisition (Note 6)
Interest income
Change in fair value of derivative financial instrument (Note 10)
775,274
92,249
62,242
183,827
56,513
150,897
31,688
12,198
615,100
1,301
1,981,289
956,122
128,085
88,520
161,961
164,473
162,856
203,000
574,812
11,878
362,928
(4,354)
2,810,281
(1,981,289)
(2,810,281)
11,039
(1,970,250)
Net loss before income taxes
Recovery of deferred income taxes (Note 16)
37,200
Net loss and comprehensive loss
Loss per share (basic and diluted)
Weighted average number of basic and diluted outstanding common shares
The accompanying notes are an integral part of these consolidated financial statements.
-4-
(5,978,938)
265,000
(1,933,050)
(5,713,938)
(0.02)
(0.09)
87,083,767
Going concern (Note 1)
(400,000)
(2,519,169)
16,512
(266,000)
65,949,746
Creso Exploration Inc.
Consolidated Statements of Changes in Equity
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
Number of
common
shares
outstanding
Balance - January 1, 2011
Private placements (Note 11i)
Proceeds from shares and units issuance
Less: Value attributed to warrants
Less: Flow-through share premium
Warrants and compensation options
(Note 12):
Proceeds from warrants exercised
Initial fair value of warrants exercised
Compensation options expired
Compensation options granted
Share options (Note 13):
Proceeds from options exercised
Initial fair value of options exercised
Share-based compensation
Mineral properties payment (Note 9)
Share issue expenses
Loss and comprehensive loss
Balance - December 31, 2011
80,786,288
Share
capital
$
23,749,749
Conversion
options
$
108,000
Warrants
and
compensation options
$
2,290,396
Contributed
surplus
$
2,524,012
-
-
3,067,480
(60,000)
5,400
-
-
372,300
27,260
23,060,668
-
3,067,480
(120,080)
(60,000)
-
120,080
-
2,440,000
-
372,300
101,829
-
-
(101,829)
(5,400)
27,260
410,000
1,725,000
-
61,500
68,600
327,750
-
-
-
108,421,956
27,569,128
108,000
2,330,507
The accompanying notes are an integral part of these consolidated financial statements.
-5-
(68,600)
31,688
2,492,500
Deficit
$
(16,491,783)
Total equity
$
12,180,374
(287,432)
(1,933,050)
61,500
31,688
327,750
(287,432)
(1,9333,050)
(18,712,265)
13,787,870
Creso Exploration Inc.
Consolidated Statements of Changes in Equity (Cont’d)
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
Number of
common
shares
outstanding
(Note 21)
Balance - January 1, 2010
Shares deemed issued upon Reverse Take Over
including finder’s fee (Note 6)
Private placements (Note 11i)
Proceeds from shares and units issuance
Less: Value attributed to warrants
Agent corporate finance fee in units
Less: Value attributed to warrants
Agent warrants
Private placement with Franco-Nevada (Note 11ii)
Proceeds from issuance of shares and
option
Less: Value attributed to NSR option
Repurchase right of first refusal
Warrants (Note 12):
Proceeds from warrants exercised
Initial fair value of warrants exercised
Share options (Note 13):
Proceeds from options exercised
Initial fair value of options exercised
Share-based compensation
Mineral properties payment (Note 9)
For services rendered (Note 11iii)
Share issue expenses
Reclassification to equity of the conversion option
(Note 10)
Repayment of convertible debenture (Note 10)
Conversion of debenture (Note 10)
Loss and comprehensive loss
Balance - December 31, 2010
53,434,481
Share
capital
$
10,630,088
Conversion
options
$
-
Warrants
and
compensation options
$
862,165
6,533,249
2,540,889
-
-
75,000
-
2,615,889
13,022,222
60,000
-
8,040,000
(1,461,111)
30,000
(6,600)
-
-
1,461,111
6,600
191,360
-
-
8,040,000
30,000
191,360
1,415,094
500,000
1,500,000
(368,000)
400,000
-
-
-
-
1,500,000
(368,000)
400,000
2,741,243
-
1,192,293
230,840
-
-
-
1,192,293
-
679,999
550,000
50,000
-
102,000
57,350
254,500
28,500
-
-
1,800,000
-
579,000
-
80,786,288
23,749,749
304,000
(52,000)
(144,000)
108,000
The accompanying notes are an integral part of these consolidated financial statements.
-6-
(230,840)
Contributed
surplus
$
1,926,800
-
(57,350)
695,562
-
-
(116,000)
-
2,290,396
2,524,012
Deficit
$
(9,710,271)
(1,067,574)
(5,713,938)
(16,491,783)
Total equity
$
3,708,782
102,000
695,562
254,500
28,500
(1,067,574)
304,000
(168,000)
435,000
(5,713,938)
12,180,374
Creso Exploration Inc.
Consolidated Statements of Cash Flows
(Presented in Canadian dollars)
Cash flows from operating activities
Net loss
Items not affecting cash:
Loss on reverse takeover acquisition
Depreciation of property, plant and equipment
Share-based compensation costs
Depreciation and impairment of exploration and evaluation assets
Change in fair value of derivative financial instrument
Loss on repurchase of right of first refusal
Shares issued for services rendered (Note 11iii)
Deferred income taxes recovery (Note 16)
Changes in non-cash working capital items:
Sales taxes receivable and other
Prepaid expenses and advances to suppliers
Accounts payable and accrued liabilities
Cash flows from financing activities
Issuance of shares, warrants and NSR options
Repayment of convertible debenture
Share issue expenses
Cash acquired on reversal take over
Cash flows from investing activities
Acquisition of property, plant and equipment
Additions to exploration and evaluation assets
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Additional cash flow information (Note 18)
The accompanying notes are an integral part of these consolidated financial statements.
-7-
For the years ended
December 31,
2011
2010
$
$
(Note 21)
(1,933,050)
(5,713,938)
12,198
31,688
615,100
(37,200)
(1,311,264)
2,519,169
11,878
574,812
362,928
266,000
400,000
28,500
(265,000)
(1,815,651)
415,176
106,238
(202,835)
318,579
(992,685)
(469,156)
(137,441)
140,405
(466,192)
(2,281,843)
3,501,280
(260,172)
3,241,108
10,834,293
(325,000)
(846,214)
174,511
9,837,590
(46,732)
(4,637,227)
(4,683,959)
(2,435,536)
3,907,028
1,471,492
(342,639)
(4,171,830)
(4,514,469)
3,041,278
865,750
3,907,028
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
1. General information, nature of operations and going concern assumption
Creso Exploration Inc. (formerly Willowstar Capital Inc.) (“Creso Exploration” or the “Corporation”) was incorporated
under the provisions of the Business Corporations Act (Ontario) on August 25, 2004 and continued under the Canada
Business Corporations Act on September 29, 2010. The address of its registered office is 600 Maisonneuve Blvd.
West, Suite 2750, Montreal, Quebec, Canada, H3A 3J2. Its common shares are listed on the TSX Venture Exchange
(“the Exchange”) under the symbol CXT and on the OTCQX (CRXEF) and Frankfurt Exchange (C3X). The
consolidated financial statements for the year ended December 31, 2011 (including comparatives) were approved
and authorized for issue by the Board of Directors on March 29, 2012.
Prior to June 1, 2010 the Corporation was a Capital Pool Company (“CPC”) as defined in Policy 2.4 of the Exchange.
On that date the Corporation completed its qualifying transaction (the “Qualifying Transaction”) pursuant to the rules
and policies of the Exchange by acquiring Creso Resources Inc. (“Creso Resources”) and evolved into a junior
natural resource exploration company. On June 1, 2010, the Corporation also changed its name to Creso Exploration
Inc. This transaction has been accounted for as a reverse takeover of the Corporation by Creso Resources.
Accordingly, the reported balances and transactions for periods prior to June 1, 2010 are those of Creso Resources.
On January 1, 2011, Creso Exploration and Creso Resources were amalgamated and continued as one corporation
under the name Creso Exploration Inc. The Corporation's financial year ends on December 31.
The Corporation has interest in mineral properties located in Canada and Guatemala which are presently at the
exploration and evaluation stage. Until it is determined that properties contain mineral reserves or resources that can
be economically mined, they are classified as exploration and evaluation assets.
For the year ended December 31, 2011, the Corporation incurred a loss of $1,933,050 (for the year ended December
31, 2010 - $5,713,938). Deficit as at December 31, 2011 amounted to $18,712,265 ($16,491,783 as at December 31,
2010 and $9,710,271 as at January 1, 2010) and negative cash flow from operations amounted to $992,685
($2,281,843 as at December 31, 2010).
Management estimates that the funds available as at December 31, 2011 will not be sufficient to meet the
Corporation’s obligations and budgeted expenditures through December 31, 2012. The Corporation will have to raise
additional funds to continue operations. The Corporation is pursuing financing alternatives to fund its operations and
to continue its activities as a going concern. Although there is no assurance that the Corporation will be successful in
these actions, management is confident that it will be able to secure the necessary financing through the issuance of
new equity. While it has been successful in doing so in the past, there can be no assurance it will be able to do so in
the future.
Although these consolidated financial statements have been prepared using International Financial Reporting
Standards (“IFRS”) applicable to a going concern, the above-noted facts and circumstances cast significant doubt on
the Corporation’s ability to continue as a going concern.
These consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities,
to the reported revenues and expenses and to the financial position classifications that would be necessary if the
going concern assumption was inappropriate. These adjustments could be material.
2. Basis of preparation and adoption of IFRS
The accompanying consolidated financial statements have been prepared in accordance with Canadian generally
accepted accounting principles as set out in Part 1 of the Handbook of the Canadian Institute of Chartered
Accountants (“CICA Handbook”). In 2010, the CICA Handbook was revised to incorporate the IFRS, as published by
the International Accounting Standards Board, and require publicly accountable enterprises to apply such standards
effective for years beginning on or after January 1, 2011. Accordingly, the Corporation has commenced reporting on
this basis the consolidated financial statements of 2011 (see Note 21 for explanation of the transition to IFRS). In the
financial statements, the term “Canadian GAAP” refers to Canadian GAAP before the adoption of IFRS.
-8-
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
2. Basis of preparation and adoption of IFRS (Cont'd)
The consolidated financial statements are presented in accordance with IAS 1, Presentation of Financial Statements.
The Corporation has elected to present the consolidated statement of comprehensive loss in a single statement. In
accordance with IFRS 1, First-time adoption of international financial reporting standards, the Corporation presents
three consolidated statements of financial position in its first IFRS consolidated financial statements. In future periods,
IAS 1 requires two comparative periods to be presented for the consolidated statement of financial position only in
certain circumstances.
3. Summary of significant accounting policies
Basis of measurement
These consolidated financial statements have been prepared on a historical cost basis using the accrual basis of
accounting except for derivative financial instruments that are measured at fair value.
Basis of consolidation
These consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries,
Guatemala Copper S.A. and Creso Resources Inc. (until January 1, 2011) Unrealized gains and losses on
transactions between the Corporation and its subsidiaries and all intergroup transactions, balances, income and
expenses are eliminated upon consolidation.
Cash and cash equivalents
Cash and cash equivalents consists of cash on hand, bank balances and short-term liquid investments with original
maturities of three months or less or cashable at any time without penalties.
Property, plant and equipment
Property, plant and equipment are recorded at cost and are amortized over their estimated useful life using the
straight-line method once put into service. Depreciation is capitalized to exploration and evaluation assets when
related to a specific exploration project.
Depreciation is provided on a straight-line basis as follows:
Useful life
3 years
5 years
Exploration, office and computer equipments
Camp and infrastructure
Exploration and evaluation assets
Exploration and evaluation ("E&E") assets are comprised of mineral properties and deferred exploration expenditures.
Expenditures incurred on activities that precede exploration for and evaluations of mineral resources, being all
expenditures incurred prior to securing the legal rights to explore an area, are expensed immediately.
E&E assets includes rights to explore in mineral properties ("mining rights"), paid or acquired through a business
combination or an acquisition of assets, and costs related to the initial search for mineral deposits with economic
potential or to obtain more information about existing mineral deposits.
Mining rights are recorded at acquisition cost or at fair value in the case of a devaluation caused by an impairment of
value. Mining rights and options to acquire undivided interests in mining rights are depreciated only as these
properties are put into commercial production.
From time to time, the Corporation may acquire or dispose of a property pursuant to the terms of an option
agreement. Due to the fact that options are exercisable entirely at the discretion of the option holder, the amounts
payable or receivable are not recorded. Option payments are recorded as property costs or recoveries when the
payments are made or received.
-9-
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
3. Summary of significant accounting policies (Cont’d)
Exploration and evaluation assets (Cont’d)
E&E expenditures for each separate area of interest are capitalized and include costs associated with prospecting,
sampling, trenching, drilling and other work involved in searching for ore like topographical, geological, geochemical
and geophysical studies. They also reflect costs related to establishing the technical and commercial viability of
extracting a mineral resource identified through exploration or acquired through a business combination or asset
acquisition. E&E expenditures include overhead expenses directly attributable to the related activities.
When a mine project moves into the development phase following the demonstration of the technical feasibility and
commercial viability of extracting a mineral resource, E&E expenditures capitalized are transferred to mine
development costs in property, plant and equipment.
Cash flows attributable to capitalized E&E costs are classified as investing activities in the statement of cash flows
under the heading addition to exploration and evaluation assets.
Proceeds on the sale of evaluation and exploration assets are first applied by property in reduction of the mineral
properties and then in reduction of the exploration and evaluation expenditures. Any residual is recorded in the
consolidated statement of comprehensive loss.
Impairment of non-financial assets
Non-financial assets are reviewed for impairment if there is any indication that the carrying amount may not be
recoverable. If any such indication is present, the recoverable amount of the asset is estimated in order to determine
whether impairment exists. Where the asset does not generate cash flows that are independent from other assets,
the Corporation estimates the recoverable amount of the cash generating unit (“CGU”) to which the asset belongs.
An asset’s recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use,
the estimated future cash flows are discounted to their present value, using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to the asset for which estimates of
future cash flows have not been adjusted.
If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount is
reduced to the recoverable amount. Impairment is recognized immediately as additional depreciation or amortization.
Where an impairment subsequently reverses, the carrying amount is increased to the revised estimate of recoverable
amount but only to the extent that this does not exceed the carrying value that would have been determined if no
impairment had previously been recognized. A reversal is recognized as a reduction in the depreciation or
amortization charge for the period.
Flow-through shares
The Corporation finances some exploration expenditures through the issuance of flow-through shares. The resource
expenditure deductions for income tax purposes are renounced to investors in accordance with the appropriate
income tax legislation. The Corporation recognizes a deferred tax liability for flow-through shares and a deferred tax
expense, at the moment the eligible expenditures are incurred. The difference between the fair values recognized in
common shares and the amount the investors pay for the shares ("premium") is recognized as other liability, using the
residual method, which is reversed into recovery of income taxes when eligible expenditures have been made.
Capital stock and warrants
Common shares and warrants are classified as equity. Proceeds from unit placements are allocated between shares
and warrants issued on a pro-rata basis of their value within the unit using the Black-Scholes pricing model to
determine the fair value of warrants issued.
- 10 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
3. Summary of significant accounting policies (Cont’d)
Foreign currency translation
The functional currency of Creso Exploration Inc. is the Canadian dollar. In preparing the financial statements of the
individual entities, transactions in currencies other than the entities functional currency (foreign currencies) are
recorded at the rates of exchange prevailing at the dates of the transactions. At each financial position date, monetary
assets and liabilities are translated using the period end foreign exchange rate. Non-monetary assets and liabilities
are translated using the historical rate on the date of the transaction. All gains and losses on translation of these
foreign currency transactions are included in the consolidated statement of comprehensive loss within foreign
exchange gain or loss.
Income taxes
Income tax on the profit or loss for the periods presented comprises current and deferred tax. Income tax is
recognized in profit or loss except to the extent that it relates to items recognized directly in other comprehensive loss
or in equity, in which case it is recognized in other comprehensive loss or in equity, respectively.
Mining taxes represent Canadian provincial taxes levied on mining operations and are classified as income taxes
since such taxes are based on a percentage of mining profits.
Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or
substantively enacted at period end, adjusted for amendments to tax payable with regards to previous years.
Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax
regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to
be paid to the tax authorities.
Deferred tax is provided using the financial position liability method, providing for temporary differences between the
tax bases of assets and liabilities and their carrying amounts in the financial statements. The temporary differences
are not provided for if it arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a
transaction other than a business combination that at the time of the transaction affects neither accounting nor
taxable profit or loss. The amount of deferred tax provided is based on the expected manner of realization or
settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the
financial position reporting date.
A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available
against which the asset can be utilized.
Deferred income tax assets and liabilities are presented as non-current and are offset when there is a legally
enforceable right to offset current tax assets against current tax liabilities and when deferred tax assets and liabilities
relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable
entities where there is an intention to settle the balances on a net basis.
Equity-settled share-based remuneration
The Corporation operates an equity-settled share based remuneration plan (the "Share Option Plan") for its eligible
directors, officers, employees and consultants. This plan does not feature any options for a cash settlement. An
individual is classified as an employee when the individual is an employee for legal or tax purposes (including
directors and officers) or provides services similar to those performed by an employee. Equity-settled share-based
payment transactions with parties other than employees are measured at the fair value of the goods or services
received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value
of the equity instruments granted, measured at the date the entity obtains the goods or over the period the
counterparty renders the service.
- 11 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
3. Summary of significant accounting policies (Cont’d)
Equity-settled share-based remuneration (Cont’d)
Where employees are rewarded using share-based payments, the fair value of the services rendered by the
employee is determined indirectly by reference to the fair value of the equity instruments granted. This fair value is
measured at grant date, using the Black-Scholes option pricing model.
The fair value of options granted is recognized as an expense or capitalized to exploration and evaluation assets
depending on the nature of the payment and the counterpart is credited to the contributed surplus in equity. Upon
exercise of the options, the proceeds received are recorded as share capital. The accumulated charges related to the
options recorded in contributed surplus are also transferred to share capital.
Convertible debenture
The liability and conversion option components of the convertible debenture are presented separately on the
consolidated statement of financial position starting from initial recognition.
Before the listing of the Corporation on the TSX Venture Exchange, the conversion option was classified in liabilities
as a derivative financial instrument due to the variability of the conversion price. The derivative financial instrument
has been measured initially at fair value based on the Black-Scholes option pricing model. Subsequent changes in
fair values were recognized through the consolidated statement of comprehensive loss. Upon the listing, the variable
feature of the conversion price has been extinguished and accordingly, since the listing, the conversion option is
classified as a component of shareholders’ equity.
The carrying amount of the liability component was calculated by deducting the carrying amount of the derivative
financial instrument from the amount of the debenture. Transaction costs were initially distributed between the liability
component and net earnings (deficit as of January 1, 2010) on a pro rata basis on their initial carrying amount.
Share and warrant issue expenses
Share and warrant issue expenses are recorded as a deduction from equity in the period in which they are incurred,
with the exception of expenses related to financings not closed at the end of any period, which are deferred and
reclassified to deficit when the issuance of equity is completed or expensed if the issuance of equity is not expected
to occur.
Segmented information
The Corporation’s principal operations are located in Canada and are conducted in a single operating segment, being
the investment, exploration and evaluation of mining assets. Property, plant and equipment are situated in Canada.
Earnings (loss) per share
Earnings (loss) per share is calculated using the weighted average number of shares outstanding during each period.
Diluted earnings (loss) per share is calculated using the weighted average number of shares outstanding during each
period based on the application of the treasury stock method for the calculation of the dilutive effect of stock options
and other dilutive securities. The diluted loss per share is equal to the basic loss per share due to the anti-dilutive
effect of the convertible debenture, the stock options, the share purchase warrants and the compensation options.
- 12 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
3. Summary of significant accounting policies (Cont’d)
Financial instruments – recognition and measurement
Financial assets and liabilities are recognized when the Corporation becomes a party to the contractual provisions of
the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired
or have been transferred and the Corporation has transferred substantially all risks and rewards of ownership.
Financial assets and liabilities are offset and the net amount is reported in the consolidated statement of financial
position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle
on a net basis, or realize the asset and settle the liability simultaneously.
At initial recognition, the Corporation classifies its financial instruments in the following categories depending on the
purpose for which the instruments were acquired:
(i) Financial assets and liabilities at fair value through profit or loss
A financial asset or liability is classified in this category if acquired principally for the purpose of selling or
repurchasing in the short-term. Derivatives, including derivatives embedded in host contracts that require
separation, are also included in this category unless they are designated as hedges.
Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are
expensed in the consolidated statement of comprehensive loss. Gains and losses arising from changes in fair
value are presented in the consolidated statement of comprehensive loss within other gains or losses in the
period in which they arise. Financial assets and liabilities at fair value through profit or loss are classified as
current except for the portion expected to be realized or paid beyond twelve months of the financial position date,
which is classified as non-current.
(ii) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not
quoted in an active market.
Loans and receivables are recognized initially at the amount expected to be received, less, when material, a
discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at
amortized cost using the effective interest method less a provision for impairment.
(iii) Financial liabilities at amortized cost
Financial liabilities at amortized cost include accounts payable and accrued liabilities. Accounts payable and
liabilities are initially recognized at the amount required to be paid, less, when material, a discount to reduce the
payables to fair value. Subsequently, accounts payable and accrued liabilities are measured at amortized cost
using the effective interest method.
Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are
presented as non-current liabilities.
The Corporation has classified its financial instruments as follows:
Financial instrument
Category
Cash and cash equivalents
Loans and receivables
Accounts payable and accrued liabilities
Financial liabilities at amortized cost
Derivative financial instrument
Financial assets and liabilities at fair value through profit or loss
- 13 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
4.
Accounting standard issued but not yet applied
At the date of authorization of these consolidated financial statements, the IASB issued the following standards which
are relevant but have not yet been early adopted by the Corporation: IFRS 9, Financial Instruments, IFRS 10,
Consolidated Financial Statements and IFRS 13, Fair Value Measurement. Certain other new standards and
interpretations have been issued but are not expected to have material impact on the Corporation’s condensed
interim financial statements. IFRS 9 is effective for annual periods beginning on or after January 1, 2015 and IFRS 10
and 13 are effective for annual periods beginning on or after January 1, 2013 with early adoption permitted. The
Corporation has not yet begun the process of assessing the impact that the new and amended standards will have on
its financial statements or whether to early adopt any of the new requirements.
The following is a brief summary of the new standards:
IFRS 9 - Financial instruments - classification and measurement
IFRS 9, Financial Instruments, was issued in November 2009. It addresses classification and measurement of
financial assets and replaces the multiple category and measurement models in IAS 39, Financial Instruments –
Recognition and Measurement, for debt instruments with a new mixed measurement model with only two categories:
amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments
and such instruments are either recognized at fair value through profit or loss or at fair value through other
comprehensive loss. Where such equity instruments are measured at fair value through other comprehensive loss,
dividends, to the extent not clearly representing a return of investment, are recognized in profit or loss; however, other
gains and losses (including impairments) associated with such instruments remain in accumulated comprehensive
loss indefinitely.
Requirements for financial liabilities were added in October 2010 and they largely carried forward existing
requirements in IAS 39, except that fair value changes due to credit risk for liabilities designated at fair value through
profit and loss would generally be recorded in other comprehensive loss.
IFRS 10 – Consolidation
IFRS 10 requires an entity to consolidate an investee when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over the investee. Under
existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of
an entity so as to obtain benefits from its activities. IFRS 10 replaces SIC-12 Consolidation—Special Purpose Entities
and parts of IAS 27 Consolidated and Separate Financial Statements.
IFRS 13 - Fair Value Measurement
IFRS 13 is a comprehensive standard for fair value measurement and disclosure requirements for use across all
IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid
to transfer a liability in an orderly transaction between market participants, at the measurement date. It also
establishes disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing
fair value is dispersed among the specific standards requiring fair value measurements and in many cases does not
reflect a clear measurement basis or consistent disclosures.
- 14 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
5. Critical accounting estimates, judgments and assumptions
Many of the amounts included in the financial statements require management to make judgments and/or estimates.
These judgments and estimates are continuously evaluated and are based on management’s experience and
knowledge of the relevant facts and circumstances. Actual results may differ from the amounts included in the
financial statements.
Areas of significant judgment and estimates affecting the amounts recognized in the financial statements include:
Impairment of exploration and evaluation assets
Pursuant to the Corporation’s significant accounting policies, after the legal right to undertake exploration and
evaluation activities on a project is acquired, the cost of acquiring mining rights, expenditures, directly related to the
exploration and evaluation of mining properties are capitalized to exploration and evaluation assets. After
capitalization, E&E assets are reviewed for impairment annually and if there is any indication that the carrying amount
may not be recoverable.
Determining if there are any facts and circumstances indicating impairment loss or reversal of impairment losses is a
subjective process involving judgment and a number of estimates and interpretations in many cases. Determining
whether to test for impairment exploration and evaluation assets requires management’s judgment, among others,
regarding the following:
a) the period for which the entity has the right to explore in the specific area has expired during the period or will
expire in the near future, and is not expected to be renewed;
b) substantive expenditure on further exploration and evaluation of mineral resources in a specific area is neither
budgeted nor planned;
c) exploration for and evaluation of mineral resources in a specific area have not led to the discovery of
commercially viable quantities of mineral resources and the entity has decided to discontinue such activities in the
specific area; or
d) sufficient data exists to indicate that, although a development in a specific area is likely to proceed, the carrying
amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or
by sale.
Additional external factors which could trigger an impairment review include, but are not limited to, significant negative
industry or economic trend and significant drop in ore prices.
When an indication of impairment loss or a reversal of an impairment loss exists, the recoverable amount of the
individual asset must be estimated. If it is not possible to estimate the recoverable amount of the individual asset, the
recoverable amount of the cash generating unit to which the asset belongs must be determined. Identifying the cash
generating units requires considerable management judgment. In testing an individual asset or cash generating unit
for impairment and identifying a reversal of impairment losses, management estimates the recoverable amount of the
asset or the cash-generating unit. This requires management to make several assumptions as to future events or
circumstances. These assumptions and estimates are subject to change if new information becomes available. Actual
results with respect to impairment losses or reversals of impairment losses could differ in such a situation and
significant adjustments to the Corporation’s assets and losses may occur during the next period.
The total impairment charge of the exploration and evaluation assets recognized in the consolidated statement of
comprehensive loss amounts to $615,100 for the year ended December 31, 2011 ($362,928 for the year ended
December 31, 2010). No reversal of impairment losses has been recognized for the reporting periods.
Going concern
The assessment of the Corporation's ability to execute its strategy by funding future working capital requirements
involves judgment.
Estimates and assumptions are continually evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be reasonable under the circumstances.
- 15 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
6. Reverse takeover
On June 1, 2010, the Corporation acquired, on a one for one basis, all of the issued and outstanding common shares
of Creso Resources by way of an amalgamation of Creso Resources with a wholly-owned subsidiary of the
Corporation. In addition, the Corporation issued replacement options, warrants, broker warrants, agent's warrants and
a convertible debenture to all holders of Creso Resources options, warrants, compensation options and a convertible
debenture at identical exercise terms. The Corporation also issued 1,500,000 common shares in payment of finder's
fees upon completion of the Qualifying Transaction.
Furthermore, Creso Resources closed a concurrent brokered private placement for aggregate gross proceeds of
$4.6 million (Note 11i).
On June 1, 2010, the Corporation had 5,033,249 issued and outstanding common shares and 299,999 options to
acquire common shares of the Corporation at an exercise price of $0.15. After giving effect to the foregoing issuances
of securities, the total issued and outstanding capital of the Corporation consisted of the following: 69,327,730
common shares; 26,264,467 common share purchase warrants; 300,000 broker warrants; 736,000 agent's warrants;
4,299,999 options to acquire common shares of the Corporation; and a convertible debenture in the principal amount
of $1,900,000 convertible into common shares of the Corporation at a conversion price of $0.50 per share.
As a result of this transaction, the former shareholders of Creso Resources obtained control of the Corporation and
consequently, the transaction has been accounted for as a reverse takeover with Creso Resources as the acquirer.
Considering that the Corporation did not meet the definition of a business, the transaction was considered a capital
transaction in substance. That is, the transaction is equivalent to the issuance of shares and options by Creso
Resources for the net monetary assets of the Corporation. The deemed shares and options issued by Creso
Resources has been recognized at fair value..
The fair value of the identifiable net assets acquired is summarized as follows:
Amount
$
Assets acquired
Cash
Accounts receivable
174,511
25,000
Liabilities assumed
Accounts payable and accrued liabilities
Identifiable net assets acquired
(102,791)
96,720
The consideration deemed issued at fair value under the acquisition is allocated as follows:
Amount
$
1,946,213
594,676
2,540,889
75,000
2,615,889
5,033,249 common shares issued and outstanding
1,500,000 common shares issued as finder’s fee
A total of 6,533,249 common shares issued
299,999 options
Total consideration
Reverse takeover excess
(2,519,169)
96,720
- 16 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
6. Reverse takeover (Cont'd)
The fair value of the 299,999 options was estimated at $75,000 using the Black-Scholes option pricing model based
on the following assumptions: risk-free interest rate of 1.55%, average expected volatility of 80%, expected dividend
per share nil and expected life of options of 12 months.
The deemed cost of the shares issued is $2,540,889 and represents the fair value of the shares that Creso
Resources would have had to issue for the ratio of ownership in the combined entity to be the same, if the transaction
had taken the legal form of Creso Resources acquiring 100% of the shares in Creso Exploration. The amount
expensed of $2,519,169 corresponds to the excess of the fair value of the shares ($2,540,889) and options ($75,000)
issued over the net identifiable assets acquired ($96,720).
7. Cash and cash equivalents
As at
December 31,
2011
$
Cash
Cash equivalents
As at
December 31,
2010
$
1,471,792
1,471,492
407,028
3,500,000
3,907,028
As at
January 1,
2010
$
(Note 21)
865,750
865,750
As at December 31, 2010, cash and cash equivalents includes $3,500,000 of a guaranteed investment certificate
(“GIC”) issued by a Canadian financial institution, bearing interest at a variable rate (1.15% per annum), cashable at
any time without penalties and maturing in October 2011.
On December 31, 2011, exploration funds of $213,094 ($nil as at December 31, 2010 and $500,000 as at January 1,
2010) are included in cash and cash equivalents and represent cash pursuant to flow-through financings. The
Corporation has to dedicate these funds to Canadian mineral exploration properties.
8. Property, plant and equipment
Gross carrying amount
Balance - January 1, 2011
Additions
Balance - December 31, 2011
Accumulated depreciation
Balance - January 1, 2011
Depreciation
Balance - December 31, 2011
Net carrying amount - December 31, 2011
Camp and
infrastructure
$
257,560
33,501
291,061
58,212
58,212
232,849
- 17 -
Exploration
equipment
$
73,975
73,975
(1)
19,862
19,372
39,234
34,741
(1)
Office and
computer
equipment
$
44,812
13,231
58,043
Total
$
376,347
46,732
423,079
19,095
12,198
31,293
26,750
38,957
89,782
128,739
294,340
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
8. Property, plant and equipment (Cont’d)
Camp and
infrastructure
$
257,560
257,560
Gross carrying amount
Balance - January 1, 2010
Additions
Balance - December 31, 2010
Accumulated depreciation
Balance - January 1, 2010
Depreciation
Balance - December 31, 2010
Net carrying amount - December 31, 2010
257,560
(2)
Exploration
equipment
$
17,853
56,122
73,975
Office and
computer
equipment
$
15,855
28,957
44,812
Total
$
33,708
342,639
376,347
11,181
8,681
19,862
54,113
11,891
7,204
19,095
25,717
23,072
15,885
38,957
337,390
6,672
3,964
10,636
-
Net carrying amount – January 1, 2010
(1) Depreciation charges related to specific exploration projects capitalized as exploration and evaluation assets.
(2) The camp and infrastructure was under construction during 2010 and was put in operation in January 2011.
Therefore, no depreciation was recorded during 2010.
9. Exploration and evaluation assets
As at
December 31,
2010
$
Mineral properties
Ontario, Canada
Shining Tree
E&E expenditures
Ontario, Canada
Shining Tree
(i)
Additions
$
Depreciation
$
As at
December 31,
2011
$
2,485,555
1,137,265
(615,100)
3,007,720
6,182,238
8,667,793
3,688,954
4,826,219
(615,100)
9,871,192
12,878,912
- 18 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
9. Exploration and evaluation assets (Cont'd)
Mineral properties
Ontario, Canada
Shining Tree
Guatemala
Oxec
Krystabel
Hopes
Patache
Padre Antonio
As at
January 1, 2010
$
(i)
1,738,824
746,731
Option
100%
100%
100%
100%
28,611
9,150
11,171
6,504
55,436
1,794,260
46,425
3,934
4,832
3,848
51,788
110,827
857,558
2,129,589
4,052,649
49,441
33,415
34,401
117,257
2,246,846
4,041,106
22,695
19,020
18,847
18,846
79,408
4,132,057
4,989,615
E&E expenditures
Ontario, Canada
Shining Tree
Guatemala
Oxec
Krystabel
Hopes
Patache
i)
Additions
$
As at
December 31,
2010
$
Impairment
$
(75,036)
(13,084)
(16,003)
(10,352)
(51,788)
(166,263)
(166,263)
(22,695)
(68,461)
(52,262)
(53,247)
(196,665)
(196,665)
(362,928)
2,485,555
2,485,555
6,182,238
6,182,238
8,667,793
Shining Tree properties in Ontario, Canada
a) Acquisition of properties
The Corporation acquired a land package by acquisition through staking or optioning large areas of ground
adjacent to its 100% interests in the Tyranite, Minto, Duggan and Mann properties in the Shining Tree camp of
northern Ontario.
b) Option agreements
The Corporation entered into several agreements since 2009 whereby it acquired options to acquire 100 %
interests in exploration properties located in the Shining Tree area in Ontario under the following conditions:
In 2009 – completed
In 2010 – completed
In 2011 – completed
In 2012
In 2013
Cash payment
$
292,000
330,000
760,000
1,195,000
350,000
- 19 -
Share capital
issuance
Number
370,000
550,000
1,725,000
475,000
50,000
Exploration
work
commitment
$
250,000
340,000
1,220,000
250,000
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
9. Exploration and evaluation assets (Cont'd)
i)
Shining Tree properties in Ontario, Canada (Cont’d)
b) Option agreements (Cont'd)
Cash payment, share capital issuance and exploration work commitment conditions indicated in the above
table were fulfilled since 2009 as per the terms of the option agreements.
The fair value of the 1,725,000 common shares issued in 2011 (550,000 in 2010) relating to the agreements at
an amount $327,750 ($254,500 in 2010) has been determined based on the quoted price on the date the
common shares were issued if such issuance occurred after the Qualifying Transaction or on the value of the
last issuance, before the date of each transaction, of regular common shares for cash if such issuance
occurred before the Qualifying Transaction.
In 2011, the Corporation recorded a depreciation charge of $615,100 as of December 2011 for the Athena,
Michelle, Pinkerton, Matona, Hare Lake and Indian Lake properties under option following the termination of
these option agreements.
c) Net Smelter Royalties
As part of the private placement closed in September 2010 (Note 11ii), Franco-Nevada Corporation (“FrancoNevada”) was granted an option (“NSR Option”) to purchase a perpetual 2% NSR royalty on gold and other
minerals produced from the Shining Tree property within one of three defined sectors. The NSR Option may
be exercised within sixty days following the date on which (i) a decision is made to construct a mine by the
Corporation and (ii) the planned mine is fully financed either with cash on hand or a firm commitment of bank
financing.
The NSR Option may be exercised at a purchase price equal to the after-tax net present value of the royalty
revenue calculated using a 6.5% discount rate applied to the base case model assumptions in the feasibility
study used to make the decision to construct and finance the mine.
In addition, some of the exploration properties are subject to NSR royalty agreements with other parties,
between 1.5% and 3% once mine production commences subject to partial buy-back by the Corporation under
certain conditions.
ii) Guatemalan properties
The Corporation holds interests in exploration licenses in Guatemala. The Corporation doesn’t anticipate any
exploration expenditures of its own on the Guatemalan properties in the near future until it brings in a joint venture
partner with whom to share investment risk. In 2010, the Corporation recorded an impairment charge of all those
properties costs.
10. Deferred proceeds on sale of exploration and evaluation assets
On November 8, 2007, the Corporation closed a $2,000,000, interest free convertible debenture financing maturing
on November 8, 2012. In 2008, the Corporation reimbursed $100,000 to the debenture holder bringing the
outstanding principal amount to $1,900,000 as at December 31, 2008 and renegotiated the term of the financing.
Under the terms of the modified financing, the Corporation does not have an obligation to repay the debenture in
cash, unless the Corporation becomes bankrupt or insolvent. The debenture is convertible in part or in whole at the
holder’s option at any time into any combination of:
a) common shares of the Corporation at $0.75 per common share or the price per common share at which the
common shares are issued pursuant to any issuance of common shares by the Corporation in connection with
which application is made to list the common shares for trading on a recognized stock exchange; and
b) an NSR royalty on certain properties owned by the Corporation.
- 20 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
10. Deferred proceeds on sale of exploration and evaluation assets (Cont’d)
Any principal amount of this debenture not converted by the holder on the maturity date shall automatically be
converted into common shares of the Corporation at $0.75 per common share.
The convertible debenture has an equity component consisting of a call option granting the holder of the debenture
the right, for a specified period of time, to convert the debenture into common shares of the Corporation. The
debenture holder has also the right to convert the debenture into a net smelter royalty on specified mining assets of
the Corporation and, as such, the Corporation has an obligation to deliver a non-financial asset. Accordingly, the
convertible debenture has also a non-financial liability component. Further, the holder of the debenture has a right of
first refusal in respect of the grant by the Corporation of any royalties on properties acquired at any time after the date
of issuance of the debenture. The right of first refusal was repurchased by the Corporation in September 2010 (Note
11 ii).
The Corporation separates the non-financial liability and equity elements presented in the convertible debenture by
assigning to the less easily measurable component (in this case the liability element) the residual amount after
deducting from the instrument as a whole the amount separately determined for the equity instrument that is more
easily measurable based on the Black-Scholes option pricing model.
The residual value of the convertible debenture was attributed to the non-financial liability portion and is disclosed as
deferred proceeds on sale of exploration and evaluation assets under non-current liabilities. The deferred proceeds
on sales will be recorded against the exploration and evaluation assets if and when the debenture holder foregoes his
conversion option and converts instead a tranche of his debenture into an NSR.
As mentioned above, the convertible debenture allowed the holder to convert at the lower of $0.75 per common share
or the price per common share at which the common shares are issued pursuant to any issuance of common shares
by the Corporation in connection with which application is made to list the common shares for trading on a recognized
stock exchange.
At inception, the variability in the exercise price, as a function of share price of the entity, results in a variable amount
of cash for a fixed number of shares. The ‘fixed for fixed’ requirement to classify the convertible portion into equity
was not fulfilled. As a result, the conversion option was classified in non-current liabilities as a derivative financial
instrument with subsequent valuation recorded into the statement of comprehensive loss. The fair value hierarchy
under which this derivative was valued was considered a level 3.
The fair value of the derivative financial instrument changed at the following dates and was estimated based on the
Black-Scholes option pricing model on the following assumptions:
June 1,
2010
Dividend yield
Stock price
Exercise price
Average projected volatility
Risk-free interest rate
Expected life of options
Estimated fair value
-%
$0.39
$0.50
80%
2.11%
2.41 years
$0.16
March 31,
2010
-%
$0.39
$0.50
80%
2.03%
2.58 years
$0.17
January 1,
2010
-%
$0.11
$0.50
80%
1.92%
2.83 years
$0.02
The requirement of the fixed to fixed requirement was fulfilled on June 1, 2010 when the shares of the Corporation
became publicly traded and a financing at a price of $0.50 was completed. At that point, the conversion option was
reclassified to equity.
In June 2010, the Corporation reimbursed $325,000 of the $1,900,000 convertible debenture to the holder in partial
payment of principal amount and in replacement of NSR royalties on certain properties owned by the Corporation.
The Corporation allocated an amount of $157,000 to the non financial liability, $52,000 to the equity component and
the balance of $116,000 to contributed surplus consistent with the method used in the original allocation of the
proceeds received by the Corporation on issuance of the convertible debenture.
- 21 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
10. Deferred proceeds on sale of exploration and evaluation assets (Cont’d)
In July and August 2010, the holder of the debenture elected to convert a nominal amount of $900,000 of its
debenture into 1,800,000 common shares bringing the outstanding principal amount to $675,000. The Corporation
allocated an amount of $435,000 to the non-financial liability and $144,000 to the equity component consistent with
the carrying amount of the convertible debenture. These amounts were determined based on a prorata basis between
the nominal amount of the debenture converted and the respective carrying value of the deferred proceeds on sale of
exploration and evaluation assets and the conversion options.
As of December 31, 2011, the outstanding principal amount of $675,000 is convertible at the holder’s option into
1,350,000 common shares of the Corporation or a 2% NSR royalty on the Duggan property.
A summary of change of the Corporation’s deferred proceeds on sale of exploration and evaluation assets, derivative
financial instrument and conversion option is as follows:
Deferred
proceeds on sale
of exploration
and evaluation
assets
$
Convertible debenture (Note 21)
Balance – Beginning of 2010
Fair value variation
Reclassification to equity
Reimbursement of principal amount
Conversion into common shares
Carrying amount of debenture – End of 2011 and 2010
NSR option (Note 11ii)
Balance – End of 2011 and 2010
918,000
(157,000)
(435,000)
326,000
368,000
694,000
Derivative
financial
instrument
$
38,000
266,000
(304,000)
-
Conversion
option
$
304,000
(52,000)
(144,000)
108,000
108,000
11. Share Capital
i)
Issuance following private placements
For the year ended December 31, 2011
a) On November 24, 2011, the Corporation issued 5,304,000 common shares for total consideration of
$636,480 and 3,333,334 units on a flow-through basis for total consideration of $500,000 pursuant to nonbrokered private placements. A unit consists of one flow through common share and one-half of a common
share warrant, with each warrant entitling its holder to purchase a common share at $0.20 over a two-year
period.
The fair value of the 1,666,667 warrants was estimated using the Black-Scholes option pricing model based
on the following assumptions: risk-free interest rate of 0.91%, average expected volatility of 92%, expected
dividend per share nil and expected life of warrants of two years. As a result the fair value of the purchase
warrants was estimated at $40,000 after a pro-rata allocation of the fair value of the units’ components. This
amount was allocated to warrants, an amount of $60,000 was allocated to other liabilities as a premium over
the flow through shares and the balance of $400,000 to share capital.
In connection with this financing, the Corporation paid the agent a cash commission of $113,648 and issued
to the agent 235,200 non-transferable share purchase warrants (the "Agent Warrants"). Each Agent Warrant
will entitle the agent to purchase one common share of the Corporation at a price of $0.12 per Agent Warrant
exercisable for one year. The fair value of the Agent Warrant was estimated using the Black-Scholes option
pricing model based on the following assumptions: risk-free interest rate of 0.92%, average expected volatility
of 98%, expected dividend per share nil and expected life of Agent Warrants of one year. As a result the
Agent Warrants were estimated at $11,760.
- 22 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
11. Share Capital (Cont'd)
i)
Issuance following private placements (Cont’d)
For the year ended December 31, 2011 (Cont'd)
b) On November 9, 2011, the Corporation issued 7,750,000 common shares at $0.12 each for total
consideration of $930,000 pursuant to non-brokered private placements. In connection with this financing, the
Corporation paid the agent a cash commission of $93,000 and issued to the agent 387,500 non-transferable
Agent Warrants. Each Agent Warrant will entitle the agent to purchase one common share of the Corporation
at a price of $0.12 per Agent Warrant exercisable for one year. The fair value of the Agent Warrant was
estimated using the Black-Scholes option pricing model based on the following assumptions: risk-free interest
rate of 0.92%, average expected volatility of 101%, expected dividend per share nil and expected life of Agent
Warrants of one year. As a result the Agent Warrants were estimated at $15,500.
c) In September 2011, the Corporation issued 6,673,334 units, including 5,173,334 units issued on a flowthrough basis, at $0.15 each for total consideration of $1,001,000 pursuant to non-brokered private
placements. A unit consists of one common share and one-half of a common share warrant, with each
warrant entitling its holder to purchase a common share at $0.20 over a two-year period. In connection with
this financing, the Corporation paid the agent a cash commission of $25,000.
The fair value of the 3,336,667 warrants was estimated using the Black-Scholes option pricing model based
on the following assumptions: risk-free interest rate of 1.03%, average expected volatility of 80%, expected
dividend per share nil and expected life of warrants of two years. As a result the fair value of the purchase
warrants was estimated at $80,080 after a pro-rata allocation of the fair value of the units’ components. This
amount was allocated to warrants and the balance of $920,920 to share capital.
For the year ended December 31, 2010
a) On June 1, 2010, concurrent with the reverse takeover, Creso Resources closed a brokered private
placement for aggregate gross proceeds of $4,600,000. The financing consisted of the offering and issuance
of an aggregate of 9,200,000 units at a price of $0.50 per unit. Each unit was comprised of one common
share and one common share purchase warrant, with each such warrant entitling the holder to subscribe for
one additional common share at a price of $0.65 until June 1, 2012.
The fair value of the 9,200,000 warrants was estimated using the Black-Scholes option pricing model based
on the following assumptions: risk-free interest rate of 1.73%, average expected volatility of 80%, expected
dividend per share nil and expected life of warrants of two years. As a result the fair value of the purchase
warrants was estimated at $1,012,000 after a pro-rata allocation of the fair value of the units’ components.
This amount was allocated to warrants and the balance of $3,588,000 to share capital.
In connection with this financing, Creso Resources paid the agent a cash commission equal to 8% of the
gross proceeds sold and issued to the agent 736,000 non-transferable share purchase warrants (the "Agent
Warrants"), being an amount equal to 8% of the units sold pursuant to the financing. Each Agent Warrant will
entitle the agent to purchase one unit comprised of one common share and one common share purchase
warrant (a “Unit Warrant”) of the Corporation at a price of $0.50 per Agent Warrant exercisable until June 1,
2012. Each Unit Warrant will entitle the agent to purchase one additional common share of the Corporation at
a price of $0.65 until June 1, 2012. The fair value of the Agent Warrant was estimated using the binomial
pricing model based on the following assumptions: risk-free interest rate of 1.73%, average expected volatility
of 80%, expected dividend per share nil and expected life of Agent Warrants of two years. As a result the
Agent Warrants were estimated at $191,360.
Creso Resources also reimbursed the agent an amount of $23,500 for fees and expenses incurred in
connection with this financing and paid the agent a corporate finance fee of 60,000 units. The fair value of the
60,000 units of $30,000 has been determined based on the value of the concurrent financing of $0.50 per
unit. Each unit was comprised of one common share and one common share purchase warrant entitling the
holder to subscribe to one additional common share at a price of $0.65 until June 1, 2012.
- 23 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
11. Share Capital (Cont'd)
i)
Issuance following private placements (Cont’d)
For the year ended December 31, 2010 (Cont'd)
b) On October 8, 2010, the Corporation closed a non-brokered private placement for gross proceeds of
$3,440,000. The financing consisted of the issuance of 3,822,222 units at a price of $0.90 per unit. Each unit
consisted of one common share and one-half common share purchase warrant, with each such whole
warrant entitling the holder to subscribe for one additional common share at a price of $1.25 until October 8,
2012. The Corporation shall have the right to require the exercise of the warrants in the event that the closing
price of the common share on the stock exchange is at least $2.00 during a period of 20 consecutive days.
The fair value of the 1,911,111 warrants was estimated using the Black-Scholes option pricing model based
on the following assumptions: risk-free interest rate of 1.31%, average expected volatility of 80%, expected
dividend per share nil and expected life of warrants of two years. As a result the fair value of the purchase
warrants was estimated at $449,111 after a pro-rata allocation of the fair value of the units’ components. This
amount was allocated to warrants and the balance of $2,990,889 to share capital.
Total issue costs of the brokered private placements, including the cash commission of $368,000, the value
of the Agent Warrants of $191,360 and the value of the agent corporate finance fee of $30,000, was
$759,562. Total issue cost of the non-brokered private placement including the cash finders' fee of $275,200
was $293,150. Total issue costs relating to the other issuance of common shares was $14,862.
ii) Issuance following private placement with Franco-Nevada
On September 28, 2010, the Corporation issued 1,415,094 common shares at a price of $1.06 in a non-brokered
private placement for an amount of $1,500,000 with Franco-Nevada. As part of the private placement, FrancoNevada was granted an NSR option to purchase a perpetual 2% NSR royalty on gold and other minerals
produced from the Shining Tree property.
The financing has two components, an equity element and the NSR Option. This option is disclosed as deferred
proceeds on sale of exploration and evaluation assets under non-current liabilities. The deferred proceeds on
sale will be recorded against the exploration and evaluation assets if and when Franco-Nevada exercises its
option. The Corporation separates the non-financial liability and equity elements presented in the private
placement by assigning to the liability element the residual amount after deducting from the instrument as a whole
the amount separately determined for the equity instrument. The fair value of one share of $0.80 was determined
based on the terms of a private placement that was under negotiation with third parties. The estimated fair value
of the equity element was $1,132,000 and the residual amount of $368,000 was attributed to the NSR Option,
which was recorded as deferred proceeds on sale of exploration and evaluation assets under non-current
liabilities (Note 10).
Concurrent with this financing, the Corporation repurchased the right of first refusal previously granted to the
holder of the convertible debenture, in respect of the grant by the Corporation of any royalties on certain
properties in consideration for the issuance of 500,000 common shares by the Corporation at an estimated fair
value of $400,000 or $0.80 per common share determined based on the value of the concurred financing. The
repurchase was recorded in the consolidated statements of comprehensive loss.
iii) Shares issued for services rendered
In 2010, in connection with the listing of the Corporation on the OTCQX, the premier tier of the U.S. over the
counter market, the Corporation paid a fee in cash of $33,972 and issued 50,000 common shares having a fair
value of $28,500 to its investment banker. The fair value was determined based on the quoted price on the date
the common shares were issued. The aggregate amount of $62,472 was expensed in the consolidated
statements of comprehensive loss under trustee and registration fees.
- 24 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
12. Warrants and compensation options
During the year ended December 31, 2011, 2,440,000 warrants and compensation options were exercised
(2,741,243 warrants and compensation options in 2010) for cash consideration of $372,300 ($1,192,293 in 2010). A
fair value of $101,829 ($230,840 in 2010) from these warrants and compensation options has been reclassified to
share capital.
A summary of changes in the Corporation’s outstanding warrants is presented below:
Number of
warrants
Balance – Beginning of year
Issued (Note 11i)
Exercised
Balance – End of year
25,813,911
5,003,334
(2,020,000)
28,797,245
For the year ended December 31,
2011
2010
Weighted Carrying
Number of Weighted
average
amount
warrants
average
exercise
exercise
price
price
$
$
$
0.41
2,135,319
17,004,467
0.19
0.20
120,080
11,111,111
0.75
0.15
(89,229)
(2,301,667) 0.42
0.39
2,166,170
25,813,911
0.41
Carrying
amount
$
844,165
1,461,111
(169,957)
2,135,319
A summary of outstanding warrants entitling their holders to subscribe for an equivalent number of common shares,
as at December 31, 2011, is as follows:
Number of
warrants
9,827,800
3,000,000
8,055,000
1,911,111
1,000,000
5,003,334
28,797,245
Exercise
price
$
0.15
0.165
0.65
1.25
0.75
0.20
Expiry date
Between June 29 and December 23, 2012
June 29, 2012
June 1, 2012
October 8, 2012
December 23, 2012
Between September 13 and November 24, 2013
A summary of changes in the Corporation’s outstanding compensation options entitling their holders to subscribe to
common shares that represent the following number:
Number
Balance – Beginning of year
Issued - Agent warrants (Note 11)
Issued - Corporate finance warrants
(Note 11)
Exercised
Expired
Balance – End of year
1,692,424
622,700
(1)
(420,000)
(180,000)
1,715,124
For the year ended December 31,
2011
2010
Weighted
Weighted
average
average
exercise Carrying
exercise Carrying
price
amount
Number
price
amount
$
$
0.45
155,077
600,000
0.17
18,000
0.12
27,260
1,472,000 (1)
0.65
191,360
0.17
0.17
0.43
(12,600)
(5,400)
164,337
60,000
(439,576)
1,692,424
0.65
0.51
0.45
6,600
(60,883)
155,077
(1) Represents 311,350 (736,000 in 2010) Agent warrants, each entitling the holder to purchase one common share and one
common share purchase warrants, such warrant convertible into one additional common share.
- 25 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
12. Warrants and compensation options (Cont'd)
A summary of outstanding compensation options entitling their holders to subscribe to common shares, as at
December 31, 2011, is as follows:
Number of
Compensation
Exercise
options
price
Expiry date
$
328,124
0.50
June 1, 2012
764,300
0.65
June 1, 2012
387,500
0.12
November 9, 2012
235,200
0.12
November 24, 2012
1,715,124
13. Stock options
The stock option plan (the “Option Plan”) as at April 14, 2011 is a continuation of the stock option plan of the
Corporation as at June 1, 2010 and before the Qualifying Transaction. The Corporation maintains the Option Plan,
which provides that the board of directors of the Corporation may, from time to time, in its discretion and in
accordance with the Exchange Requirements, grant to directors, officers, employees and consultants to the
Corporation, non-transferable options to purchase common shares of the Corporation, provided that the number of
common shares reserved for issuance will not exceed 10% of the issued and outstanding common shares of the
Corporation.
The number of common shares reserved for issuance to any individual director or officer will not exceed 5% of the
issued and outstanding common shares of the Corporation, the number of common shares reserved for issuance to
any one consultant will not exceed 2% of the issued and outstanding common shares of the Corporation and the
number of common shares reserved for issuance to persons employed to provide investor relations services will not
exceed 2% of the issued and outstanding common shares of the Corporation.
Under the Option Plan, such options will be exercisable for a period of up to 5 years from the date of grant. Options
granted are exercisable on the day of grant, unless otherwise stated by the Board of Directors. Options may be
exercised on the earlier of the date of the expiration of the option period or no later than 12 months following
cessation of the director or officer position, 90 days following the cessation of the consultant mandate or 30 days after
the termination of the person performing investor relations activities with the Corporation provided that if the cessation
of office, directorship, or technical consulting arrangement was by reason of death, the option may be exercised
within a maximum period of one year after such death, subject to the expiry date of such option.
Options granted to persons performing investor relations activities must at a minimum vest in stages over a period not
less than 12 months with no more than one fourth of the options vesting in any three-month period.
A summary of changes of the Corporation’s common share purchase options is presented below:
For the year ended December 31,
2011
2010
Weighted
Weighted
Number
average
Number
average
of options
exercise price
of options
exercise price
$
$
Balance – Beginning of year
6,795,000
0.30
4,000,000
0.15
Options deemed issued upon
reverse takeover (Note 6)
299,999
0.15
Granted
3,175,000
0.47
Exercised
(410,000)
0.15
(679,999)
0.15
Expired
(370,000)
0.22
Balance – End of year
6,015,000
0.32
6,795,000
0.30
- 26 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
13. Stock options (Cont'd)
A summary of outstanding and exercisable options, entitling their holders to subscribe for an equivalent number of
common shares is as follows:
Number of
options
400,000
500,000
100,000
500,000
250,000
500,000
1,040,000
2,200,000
400,000
125,000
6,015,000
Exercise
price
$
0.15
0.15
0.40
0.15
0.50
0.15
0.15
0.40
0.87
0.60
Expiry date
June 6, 2012
June 9, 2012
June 9, 2012
August 7, 2012
July 14, 2012
February 26, 2013
September 30, 2014
July 9, 2015
September 29, 2015
November 19, 2015
During the year ended on December 31, 2011, the Corporation has not granted stock options. The Corporation
expensed $31,688 related to stock options granted the prior year but vested during in 2011. In 2010, the total stock
option compensation cost fair value for the 3,175,000 options granted amount to $695,562 including $120,750
capitalized to deferred exploration expenses as part of the Shining Tree project costs on the basis that options were
granted to consultants and an employee involved exclusively in the exploration program. The balance of $574,812
was expensed in the consolidated statements of comprehensive loss.
For options granted after the Qualifying Transaction, the weighted exercise price of the options compared to the
weighted market price on grant date and their estimated weighted fair values were as follows:
Weighted
Weighted
Weighted
exercise
market
fair value
price
price
2,650,000 options granted which exercise price exceeds the market price
$0.17
$0.41
$0.30
525,000 options granted which exercise price equal the market price
$0.53
$0.81
$0.81
The weighted average of the fair value of an option, on the grant date of the options in 2010, is $0.22 and was
estimated using the Black-Scholes model based on the following weighted average assumptions:
2010
Dividend yield
Average projected volatility
Risk-free interest rate
Expected life of options
-%
80%
2.40%
4.8 years
The weighted average share price at the time of exercise of options in 2011 is $0.44 ($0.83 in 2010).
14. Policies and processes for managing capital
The capital of the Corporation consists of the items included in shareholders’ equity of $13,887,870 as of December
31, 2011 ($12,180,374 as of December 31, 2010 and $3,708,782 as of January 1, 2010). Initiatives undertaken to
manage capital are described in note 11, 12, and 13. The Corporation’s objectives when managing capital are to
safeguard its ability to continue its operations as well as its acquisition and exploration programs. As needed, the
Corporation raises funds through private placements or convertible debentures. The Corporation doesn’t use long
term debts since it doesn’t generate operating revenues. There is no dividend policy. The Corporation doesn’t have
any externally imposed capital requirements from regulatory or contractual requirements to which it is subject, except
for the convertible debenture. Also, if the Corporation closes a flow-through private placement, the funds are
restricted in use for exploration expenses in Canada.
- 27 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
15. Escrow arrangements
a) 3,918,334 common shares, 400,000 warrants and 2,700,000 stock options of the Corporation are subject to a
surplus security escrow agreement, whereby a 36-month escrow period applies, with 5% having been released
on receipt of final approval of the Exchange (June 9, 2010), 5% having been released on December 9, 2010 and
and 10% having been released on June 9, 2011 and December 9, 2011 respectively, 15% being releasable on
the dates that are 24 months and 30 months from final Exchange approval and 40% being releasable on the date
that is 36 months from final Exchange approval. As at December 31, 2011, 2,742,833 common shares, 280,000
warrants and 1,890,000 stock options are subject to this escrow;
b) A further 999,999 common shares are held under a CPC escrow agreement, with 10% having been released on
receipt of final Exchange approval (June 9, 2010), 15% having been released on December 9, 2010, June 9,
2011 and December 9, 2011, respectively and a further 15% being releasable every six month thereafter. As at
December 31, 2011, 450,000 common shares are subject to this escrow.
16. Income taxes
Major Components of tax income
The recovery of deferred income taxes for the year ended December 31, 2011, was generated by an amortization of
$37,200 of the flow-through premium liability. For the year ended December 31, 2010, the recovery of deferred
income taxes generated by the amortization of the flow-through premium liability amounted $265,000.
Relationship between recovery of deferred income taxes and accounting loss
The relationship between the expected tax income based on the combined federal and provincial income tax rate in
Canada and the recovery of deferred income taxes in the consolidated statement of comprehensive loss can be
reconciled as follows:
Expected tax recovery at the Canadian composite statutory rate of 28.40%
(29.90% for 2010)
Impact of change in income tax rate on deferred income tax balance
Stock-based compensation costs
Other non deductible expenses
Other
Flow-though premium amortization
Loss on reverse takeover acquisition
Unrecognized deferred taxes assets
Recovery of deferred income taxes
For the years ended
December 31,
2011
2010
$
$
(Note 21)
(559,551)
(1,787,702)
28,914
8,999
19,176
(498)
(37,200)
502,960
(37,200)
72,454
207,973
53,724
(2,790)
(265,000)
753,232
703,109
(265,000)
The effective tax rate in 2011 was lower than the effective tax rate in 2010 because of a change in the federal tax rate
that came into effect on January 1, 2011.
- 28 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
16. Income taxes (Cont’d)
Deferred tax assets
The following differences between the carrying amounts and tax bases from timing differences, unused tax losses
and unused tax credits give rise to the following unrecognized deferred assets:
December 31,
2011
2010
$
$
(Note 21)
Unrecognized deferred tax assets
Operating losses carried forward
Capital losses carried forward
Property, plant and equipment
Exploration and evaluation assets
Share issue expenses
Total net future income tax assets
2,262,000
85,000
35,000
297,000
275,000
2,954,000
1,803,000
85,000
11,000
318,000
323,000
2,540,000
January 1,
2010
$
(Note 21)
910,000
85,000
7,000
752,000
129,000
1,883,000
The deferred income tax assets takes into account the effect of the renouncement, in favor of investors, of deferred
exploration and evaluation expenses in connection with the flow-through financing.
The Canadian Corporation has non-capital losses of $8,653,000 which are available to reduce income taxes in future
periods, for which no deferred tax asset has been recorded in the consolidated statement of financial position. These
losses will expire as follows:
$
Years ending December 31
2014
2015
2025
2026
2027
2028
2029
2030
2031
30,000
24,000
212,000
1,271,000
1,786,000
931,000
529,000
2,162,000
1,708,000
As at December 31, 2011, the Corporation has accumulated capital losses in Canada for income tax purposes
amounting to approximately $630,000 and can be carried forward indefinitely against future capital gains.
These tax values of assets have not been agreed with the relevant tax authorities nor have they been disputed.
- 29 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
17. Related party transactions
Key management personnel are those persons having authority and responsibility for planning, directing and
controlling the activities of the Corporation, including any director of the Corporation. Key management of the
personnel of the Corporation includes President & CEO, the Chief Financial Officer and any Director of the
Corporation. Key management remuneration is as follows:
Year ended December 31,
2011
2010
$
$
Short-term benefits
Consulting fees capitalized in exploration and evaluation assets (1)
71,242
50,995
Professional and consulting fees (2 a), c), d), e))
566,099
783,114
Salaries – Directors’ fee
29,986
64,034
Share-based payments
27,000
552,000
Total compensation
694,327
1,450,143
The Corporation had the following transactions with related parties that were in the normal course of operations and
measured at the exchange amounts, which is the amount of consideration established and agreed to by the related
parties:
1) Consulting fees of $71,242 to a private company controlled by the former President of the Corporation for
geological services ($37,803 from July 15 to December 31, 2010 and $13,192 from January 1 to July 15, 2010,
paid to two former Presidents of the Corporation, respectively).
2) Professional and consulting fees includes:
a) Accounting fees of $284,536 ($359,823 in 2010) to a private company controlled by the Chief Financial
Officer (“CFO”) of the Corporation for bookkeeping, accounting, clerical and related administrative services;
b) Legal fees of $14,582 ($15,011 in 2010) to a legal firm of which a director was a partner and of $40,060
($56,831 in 2010) to a company controlled by the Corporate Secretary;
c) Consulting fee of $180,000 ($295,000 in 2010) to a private company controlled by the Acting President and
CEO and Executive Chairman;
d) Consulting fees of $101,563 to a private company controlled by the former President of the Corporation
($55,956 from July 15 to December 31, 2010);
e) Consulting fees of $72,335 from January 1 to July 15, 2010 to a private company controlled by the former
President of the Corporation;
3) Legal fees relating to the financings of $nil ($32,640 in 2010) to a legal firm of which a director was a partner and
of $7,135 ($23,759 in 2010) to a company controlled by the Corporate Secretary;
At December 31, 2011, no amount remains to be paid ($69,294 as at December 31, 2010) from these transactions.
18. Statements of cash flows
Additional information – non cash transactions
Issuance of shares for explorations and evaluation assets
Additions of exploration and evaluation assets included in accounts payable and
accrued liabilities
Compensation options included in share issue expenses
Share-based compensation cost included in exploration and evaluation assets
Depreciation of property, plant and equipment included in exploration and
evaluation assets
Issuance of shares in counterpart of broker finance fee
Conversion of debenture credited to share capital
Issuance of shares for services rendered
- 30 -
For the years ended
December 31,
2011
2010
$
$
327,750
254,500
267,150
27,260
-
483,492
221,360
120,750
77,584
-
30,000
579,000
28,500
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
19. Financial instruments
The Corporation is exposed to various financial risks resulting from both its operations and its investments activities.
The Corporation’s management manages financial risks. The Corporation does not enter into financial instrument
agreements including derivative financial instruments for speculative purposes. The Corporation’s main financial risk
exposure and its financial risk management policies are as follows:
Fair value
The Corporation has determined the estimated fair value of its financial instruments based on estimates and
assumptions. Actual results may differ from those estimates, and the use of different assumptions or methodologies
may have material effects on the estimated fair value amounts. The fair value of cash and cash equivalents and
accounts payable and accrued liabilities is comparable to their carrying values due to the relatively short period to
maturity of the instruments.
Interest rate risk
Cash and accounts payable and accrued liabilities are non-interest bearing. Cash equivalents bear interest at a
variable rate and the Corporation is, therefore, not exposed to the risk of changes in fair value resulting from interest
rate fluctuations.
Foreign currency risk
Parts of the Corporation purchases are denominated in foreign currencies, primarily in U.S. dollars. Consequently,
certain assets and liabilities, namely cash, and accounts payable and accrued liabilities, include amounts in US$ that
are exposed to currency fluctuations.
The following balance sheet items included amounts in foreign currencies:
As at December 31,
2011
2010
US$
US$
Cash
Accounts payable and accrued liabilities
Net balance
5,003
(14,816)
(9,813)
1,480
(71,958)
(70,478)
Equivalent in Canadian dollars
(10,006)
(70,478)
Assuming that all the other variables are constant, a decrease of 10% in the U.S. dollar exchange rate based on the
balances as of December 31, 2011 and 2010 would not have a significant impact on the Corporation’s net loss.
Liquidity risk (Note 1)
Liquidity risk is the risk that the Corporation will not be able to meet the obligations associated with its financial
liabilities as they fall due. The Corporation’s approach to managing liquidity is to ensure that it will have sufficient
liquidity to meet its liabilities when due. The Corporation’s liquidity and operating results may adversely be affected if
the Corporation’s access to the capital market is hindered, whether as a result of a downturn in stock market
conditions generally or related to matters specific to the Corporation. The Corporation generates cash flows primarily
from its financing activities.
As at December 31, 2011, the Corporation has a cash and equivalents balance of $1,471,492 ($3,907,028 as at
December 31, 2010, $865,750 as at January 1, 2010) including exploration funds of $190,654 (Nil as at December
31, 2010, $500,000 as at January 1, 2010) to settle current liabilities of $331,449 ($750,626 as at December 31,
2010, $93,902 as at January 1, 2010). All of the Corporation’s financial liabilities have contractual maturities of less
than 30 days and are subject to normal trade terms. The Corporation regularly evaluates its cash position to ensure
preservation and security of capital as well as maintenance of liquidity.
Management seeks additional financing through the issuance of new equity instruments to continue its operations,
and while it has been successful in doing so in the past, there can be no assurance it will be able to do so in the
future.
- 31 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
19. Financial instruments (Cont’d)
Credit Risk
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other
party to incur a financial loss. The Corporation is subject to concentrations of credit risk mainly through cash and cash
equivalents. The Corporation maintains substantially all of its cash and cash equivalents with a financial institution in
Canada. Therefore, according to management, credit risk of counterparty non-performance is remote.
20. Commitment
In July 2010, the Corporation entered into a sub-lease agreement with another corporation for office premises until
June 30, 2012. The total annual rent amounting to approximately $60,394 is equally shared. The total shared
commitment from January 2012 to June 2012 is $30,197 and the Corporation’s share is $15,099.
21. First-time adoption of IFRS
These are the Corporation's first IFRS annual consolidated financial statements. The date of transition to IFRS is
January 1, 2010.
Subject to the IFRS 1 exemptions and exceptions described below, the Corporation's IFRS accounting policies
presented in Note 3 have been applied in preparing the consolidated financial statements for the year ended
December 31, 2011, the comparative information and the opening consolidated statement of financial position at the
date of transition.
The Corporation has applied IFRS 1 in preparing these IFRS consolidated financial statements. The effects of the
transition to IFRS on equity, total comprehensive loss and reported cash flows for the year ended December 31, 2011
and as at December 31, 2010 and January 1, 2010 are presented in this section and are further explained in the
notes that accompany the following tables.
a) First-time adoption - Exceptions applied
Upon transition, IFRS 1 dictate certain mandatory exceptions and certain optional exemptions from full
retrospective application. The exceptions and exemptions adopted by the Corporation are set out below:
Mandatory exceptions
The estimates established by the Corporation in accordance with IFRS at the date of transition to IFRS are
consistent with estimates made for the same date in accordance with Canadian GAAP, after adjustments to
reflect any difference in accounting principles, if applicable.
Optional exemptions
The Corporation has chosen not to apply IFRS 2, Share-based Payment, retrospectively to options granted after
August 25, 2004 and vested before the date of transition to IFRS. The Corporation has elected not to apply IFRS
3, Business Combinations, retrospectively to business combinations that occurred before the date of transition
(January 1, 2010).
The Corporation has decided to elect exemption related to compound financial instruments.
b) Reconciliation of equity, comprehensive loss and cash flows
Reconciliation of equity
Equity at the date of transition and at December 31, 2010 can be reconciled to the amounts reported under
Canadian GAAP as follows:
- 32 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
21. First-time adoption of IFRS (Cont'd)
December 31, 2010
Note
FINANCIAL POSITION
Assets
Current assets
Cash and cash equivalents
Sales tax receivable and other
Prepaid expenses and advances
to suppliers
Non-current assets
Exploration funds
Property, plant and equipment
Exploration and evaluation
assets
Total assets
Liabilities
Current liabilities
Accounts payable and accrued
liabilities
Non-current liabilities
Deferred proceed on sale of
exploration and evaluation assets
Derivative financial instrument
Other liabilities
Total liabilities
Equity
Share capital
Conversion options
Warrants, and compensation options
Contributed surplus
Deficit
Total equity
Total liability and equity
(i)
Canadian
GAAP
$
Adj.
$
January 1, 2010
IFRS
$
Canadian
GAAP
$
Adj.
$
IFRS
$
500,000
865,750
100,110
3,907,028
569,266
3,907,028
569,266
365,750
100,110
143,523
4,619,817
143,523
4,619,817
6,082
471,942
337,390
337,390
500,000
10,636
8,667,793
9,005,183
13,625,000
8,667,793
9,005,183
13,625,000
4,041,106
4,551,742
5,023,684
750,626
750,626
93,902
694,000
-
694,000
-
918,000
-
38,000
918,000
38,000
(ii)
694,000
1,444,626
694,000
1,444,626
918,000
1,011,902
265,000
303,000
303,000
265,000
1,221,000
1,314,902
(ii)
(iii)
(iv)
(iii)
21,672,235
(i)
(iii)
(iii)
(iv)
(ii)
(iii)
(iv)
161,000
2,290,396
2,478,012
(14,421,269)
12,180,374
13,625,000
(296,655) 23,749,749
(73,000)
2,447,169
(53,000)
108,000
2,290,396
(26,000) 2,524,012
72,000
296,655 (16,491,783)
152,000
(2,519,169)
- 12,180,374
- 13,625,000
- 33 -
10,926,743
500,000
(500,000)
(500,000)
-
6,082
971,942
10,636
4,041,106
4,051,742
5,023,684
93,902
(296,655) 10,630,088
456,000
862,165
1,926,800
(456,000)
862,165
1,926,800
(10,159,926)
31,655
418,000
(9,710,271)
4,011,782
5,023,684
(303,000)
-
3,708,782
5,023,684
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
21. First-time adoption of IFRS (Cont’d)
Reconciliation of comprehensive loss
The Corporation’s statement of comprehensive loss presents expenses by nature. These changes are
reclassifications within the statement of comprehensive loss so there is no net impact to the Corporation’s reported
operating loss as a result of these changes. Comprehensive loss for the year ended December 31, 2010, can be
reconciled to the amounts reported under Canadian GAAP as follows:
12 months ended December 31, 2010
Note
$
(2,810,281)
Operating loss
Other gains and losses
Repurchase of right of first refusal
Reversal take over excess
Interest income
Change in fair value of derivative financial
instrument
Net loss before income taxes
Recovery of deferred income taxes
Net loss and comprehensive loss
Loss per share (basic and diluted)
Canadian GAAP
Adj.
IFRS
$
-
$
(2,810,281)
(400,000)
16,512
(2,519,169)
-
(400,000)
(2,519,169)
16,512
(iii)
(3,193,769)
(266,000)
(2,785,169)
(266,000)
(5,978,938)
(ii)
208,000
(2,985,769)
(0.05)
57,000
(2,728,169)
(0.04)
265,000
(5,713,938)
(0.09)
(iv)
(i) Cash held for exploration expenses.
Under IFRS, exploration funds held for exploration expenses are presented as current asset under cash and
cash equivalent.
(ii) Flow-through shares.
Under Canadian GAAP, when flow-through shares are issued, they are initially recorded in share capital at
their issue price. On the date the expenses are renounced (by filing the prescribed forms) to the investors, a
future tax liability was recognized as a cost of issuing the shares (an increase in deficit). Under IFRS, flowthrough shares are recognized based on the fair value of the existing shares on the date of the issue. The
difference between the amount recognized in share capital and the amount the investors pay for the shares
("premium") is recognized as other liability which is reversed into recovery of deferred income taxes as
eligible expenditures are incurred. The tax effect resulting from the payment of eligible expenditures is
recorded as a deferred tax expense when eligible expenditures have been made.
(iii) Under Canadian GAAP, the convertible debenture was split into a non-financial liability and a conversion
option in equity. The conversion option was first determined and then, the residual amount was allocated to
the non-financial liability.
The convertible debenture allowed the holder to convert at the lower of $0.75 per common share or the price
per common share at which the common shares are issued pursuant to any issuance of common shares by
the Corporation in connection with which application is made to list the common shares for trading on a
recognized stock exchange.
The variability in the exercise price, as a function of share price of the entity, results in a variable amount of
cash for a fixed number of shares. Under IFRS as per IAS 32, the ‘fixed for fixed’ requirement to classify the
convertible portion into equity is not fulfilled. As a result, the conversion option is classified in liabilities as a
derivative financial instrument with subsequent valuation as the fair value of the derivative financial instrument
changes. The fair value hierarchy under which this derivative is valued is considered a level 3.
- 34 -
Creso Exploration Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(Presented in Canadian dollars)
21. First-time adoption of IFRS (Cont’d)
The fair value of the derivative financial instrument changed at the following dates and was estimated based
on the Black-Scholes option pricing model on the following assumptions:
June 1,
2010
Dividend yield
Stock price
Exercise price
Average projected volatility
Risk-free interest rate
Expected life of options
Estimated fair value
-%
$0.39
$0.50
80%
2.11%
2.41 years
$0.16
March 31,
2010
-%
$0.39
$0.50
80%
2.03%
2.58 years
$0.17
January 1,
2010
-%
$0.11
$0.50
80%
1.92%
2.83 years
$0.02
The requirement of IAS 32 of the fixed to fixed requirement was fulfilled on June 1, 2010 when the shares of
the Corporation became publicly traded. At that point, the conversion option was reclassified to equity.
(iv) On June 1, 2010, Creso Exploration acquired, on a one for one basis, all of the issued and outstanding
common shares of Creso Resources. As a result of this transaction, the former shareholders of Creso
Resources obtained control of Creso Exploration and consequently, the transaction has been accounted for
as a reverse takeover with Creso Resources as the acquirer. Under Canadian GAAP, considering that the
Corporation did not meet the definition of a business, the transaction was considered a capital transaction in
substance. That is, the transaction was equivalent to the issuance of shares and options by Creso Resources
for the net monetary assets of the Corporation.
Under IFRS, such transaction falls within the scope of IFRS 2 Share-based payments, which requires the
deemed shares issued by the private entity (the consideration for the acquisition of the public shell company)
to be recognised at fair value. IFRS 2 applies to transactions where an entity grants equity instruments and
cannot identify specifically some or all of the goods or service received in return. Because the Corporation
has issued shares with a value in excess of the assets received, IFRS 2 indicates that the difference is
expensed.
The deemed cost of the shares issued is $2,540,889 and represents the fair value of the shares that Creso
Resources would have had to issue for the ratio of ownership in the combined entity to be the same, if the
transaction had taken the legal form of Creso Resources acquiring 100% of the shares in Creso Exploration.
The amount expensed of $2,519,169 corresponds to the fair value of the shares ($2,540,889) and options
($75,000) issued less the net assets acquired ($96,720).
Adjustment to the statement of cash flows
The transition from Canadian GAAP to IFRS had no significant impact on the statement of cash flows.
- 35 -
APPENDIX “E” - MD&A OF THE CORPORATION
Creso Exploration Inc.
Management's Discussion and Analysis
For the three and nine-month periods ended September 30, 2013
600 de Maisonneuve Blvd. West, Suite 2750
Montréal, Quebec, H3A 3J2
Tel: (514) 866-6001 # 239 / Fax: (514) 866-6193
Website: www.creso.ca
TSX Venture Exchange: CXT / OTCQX: CRXEF / Frankfurt Exchange: C3X
Creso Exploration Inc.
Table of content
For the three and nine-month periods ended September 30, 2013
Description of Business and Corporate Objective ................................................................ 3
Overview ................................................................................................................................... 3
Mineral Properties .................................................................................................................... 5
Investing Activities .................................................................................................................. 8
Financing Activities ................................................................................................................. 9
Operating Activities ................................................................................................................. 9
Transactions with Related Parties .........................................................................................10
Summary of Quarterly Results ...............................................................................................11
Liquidity and Capital Resources ............................................................................................12
Outstanding Share Data .........................................................................................................12
Off-Balance Sheet Arrangements ..........................................................................................12
Financial Instruments and Other Instruments ......................................................................12
Commitment ............................................................................................................................13
Stock Option Plan ...................................................................................................................13
Management’s Responsibility for Financial Information & Accounting Estimates ............13
Accounting Standards Issued but not Yet Applied ..............................................................13
Risk Factors ............................................................................................................................14
Cautionary Statement on Forward-Looking Information......................................................14
-2-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the three and nine-month periods ended September 30, 2013
The following Management’s Discussion and Analysis (the “MD&A”) of the financial position and results of
operations of Creso Exploration Inc. (“Creso” or the “Corporation”) constitutes management’s review of
the factors that affected the Corporation’s financial and operating performance as at and for the three and
nine-month periods ended September 30, 2013. This MD&A has been prepared based upon information
available to the Corporation as at November 26, 2013 and should be read in conjunction with the
Corporation’s unaudited condensed interim consolidated financial statements for the three and ninemonth periods ended September 30, 2013, the audited consolidated financial statements for the years
ended December 31, 2012 and 2011 and notes thereto and with the Corporation’s MD&A included in the
2012 Annual Report.
The Corporation’s condensed interim consolidated financial statements and MD&A are presented in
Canadian dollars and have been prepared in accordance with International Financial Reporting Standards
(“IFRS”) including comparative figures unless otherwise noted.
Readers are cautioned that the MD&A contains forward-looking statements and that actual events may
vary from management’s expectations. Readers are encouraged to read the Cautionary Statement on
Forward-Looking Information at the end of this MD&A.
Further information related to the Corporation is available on the System for Electronic Document
Analysis and Retrieval (SEDAR) in Canada and can be accessed at www.sedar.com. For additional
information, the Corporation’s website can be found at www.creso.ca.
Description of Business and Corporate Objective
The Corporation has interest in mineral properties located in Canada which are presently at the
exploration and evaluation stage. Until it is determined that the properties contain mineral reserves or
resources that can be economically mined, they are classified as exploration and evaluation assets.
The Corporation’s common shares are listed on the TSX Venture Exchange (“the Exchange”) under the
symbol CXT and on the OTCQX (CRXEF) and Frankfurt Exchange (C3X).
Creso’s corporate objective is to acquire and explore high grade mineral properties primarily in gold and
silver, as well as copper and zinc. The Corporation's principal mining exploration holdings are located in
the Shining Tree area of Northern Ontario within 100 km of the Timmins and Kirkland Lake mining camps.
Overview
Merger agreement with Nichromet Extration Inc.
On November 22 2013, the Corporation entered into a merger agreement with Nichromet Extraction Inc.
(“Nichromet”) and a wholly-owned subsidiary of Nichromet (“Subco”) pursuant to which the Corporation
and Subco will amalgamate (the “Amalgamation”) and the amalgamated company (“Amalco”) will become
a wholly-owned subsidiary of Nichromet. Prior to the Amalgamation, Nichromet will be renamed “Dundee
Sustainable Technologies Inc.”
Pursuant to the Amalgamation, Nichromet would, indirectly, acquire all of the issued and outstanding
common shares of the Corporation, which it does not already own, and the shareholders of the
Corporation would receive one subordinate voting share of Nichromet in exchange for two common
shares of the Corporation. Holders of options and warrants of the Corporation will receive options and
warrants, as applicable, of Nichromet based upon the same exchange ratio. In connection with the
Amalgamation, the common shares of the Corporation would be de-listed from the TSX Venture
Exchange.
-3-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the three and nine-month periods ended September 30, 2013
Overview (Cont’d)
The Amalgamation must be approved by a special majority (66⅔%) of the votes cast at the Corporation
shareholders’ meeting to be held to consider the Amalgamation. In addition, since Dundee Sustainable
Technologies Inc. will have multiple voting shares outstanding (held by Dundee Corporation), the
Amalgamation must be approved by a majority of the minority of the shareholders of the Corporation. In
this regard, the Corporation is preparing a Management Information Circular which will be mailed to each
shareholder of the Corporation. The multiple voting shares of Dundee Sustainable Technologies Inc. will
not be listed on any stock exchange and are convertible, at the option of the holder, into subordinate
voting shares for no additional consideration.
Assuming completion of the proposed Amalgamation, but excluding any securities issuable pursuant to a
future financing in connection with the Amalgamation, Dundee Sustainable Technologies Inc. will have (i)
227,445,202 subordinate voting shares issued and outstanding, of which 27.5% will be held by the
current shareholders of the Corporation (excluding Nichromet) and 72.5% will be held by the current
shareholders of Nichromet (including Dundee Corporation), and (ii) 50,000,000 multiple voting shares
issued and outstanding, all of which will be held by Dundee Corporation. Accordingly, Dundee
Corporation will exercise voting rights in respect of an aggregate of 86.3% of the issued and outstanding
voting securities of Dundee Sustainable Technologies Inc.
About Nichromet:
Nichromet is a private Canadian company controlled by Dundee Corporation that has developed patented
precious and base metal extraction processes that are environmentally friendly in that the residues of
mining operations are totally void of contaminants such as sulfur and arsenic. These new processes are
based on chlorination and are particularly efficient for the treatment of polymetallic ores either in the form
of sulfides, oxides or arsenides. These chloride based patented processes are a substitute to cyanidation,
which is commonly used in the mining industry.
Exploration and evaluation activities
The following are the main exploration and evaluation activities conducted during the nine-month period
ended September 30, 2013:
a) The Corporation initiated a drilling program on the Minto and Duggan properties in December
2012. A total of 11 diamond drill holes, totalling 2,193 metres were completed in January 2013.
Highlights from the results include 5.13 g/t Au over 36.5m on the Minto property and 1.50 g/t over
80.9m on the Duggan property;
b) The Corporation carried out an exploration program on selected claims located within the
Churchill, Asquith and Fawcett Townships. The program consisted in line cutting, ground
geophysical surveys, outcrop stripping and sampling and a technical evaluation study; and
c) In June 2013, the Corporation signed a consortium agreement with Nichrometwhereby Nichromet
will build a demonstration plant and the Corporation will provide concentrate from its Minto gold
deposit.
Financing activities
In February 2013, the Corporation closed private placement financings amounting to $277,000 and in July
2013, the Corporation borrowed $500,000 from Nichromet.
-4-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the three and nine-month periods ended September 30, 2013
Mineral Properties
Shining Tree Area, Ontario
The Corporation's principal mining exploration holdings are located in the Shining Tree mining camp of
Northern Ontario, located within 100 km south and southwest, respectively, of the Timmins and Kirkland
Lake mining camps. The Corporation assembled a land package of ground adjacent to its Minto, Tyranite,
Duggan and Mann properties, all totalling approximately 124 square km.
The Corporation has been conducting major geophysical surveys, diamond drilling and geological
programs on the Shining Tree area since 2007 (Please refer to the 2012 Annual Report for a detailed
description of exploration activities conducted in 2011 and 2012). Exploration activities conducted during
the nine-month period ended September 30, 2013 are as follows:
Minto Property
The Minto gold property, 100% owned by the Corporation, is located approximately 96 km south of
Timmins and 93 km southwest of Kirkland Lake.
Diamond drill program:
The Corporation completed a diamond drill program, consisting of 6 holes totalling 1,076 metres on the
Minto property in December 2012.
Gold assay results highlights from drill holes CM12-01 to CM12-06 are as follows:
Hole ID
CM12-01
CM12-02
CM12-03
CM12-04
CM12-05
CM12-06
From (m)
140.5
24.9
24.6
66.0
40.2
66.1
To (m)
Interval (m)*
141.2
0.7
61.4
36.5
60.3
35.7
67.4
1.4
60.75
20.55
66.95
0.85
no significant results
no significant results
*Intervals represent core lengths and not true width
Au g/t
18.4
5.13
2.53
17.5
1.94
4.43
The Minto gold rich breccia lies in a N-S deformation corridor intersected by E-W structures. Hole CM1201 tested the southern portion of the property in an area where a recent compilation had indicated strong
similarities with the northern portion of the Minto property which previously returned 18.2 g/t over 65.7 m
in the upper body and 13.3 g/t Au over 82.5 m in the lower body (See press release of August 9, 2010).
Holes CM12-02 to CM12-04 tested the main Minto zone. Holes CM12-05 and CM12-06 tested E-W
sections North and South of the Main Zone of the property and are considered as exploratory drill holes.
Overall exploration on the Minto property has been quite restrictive focusing more on the high grade
Minto breccia pod than the controlling structures. Structures and structural offsets are clearly indicated by
IP lineaments and detailed Magnetic trends.
Bulk sampling:
In 2012, the gold extraction by Nichromet of a 5.5 tonne bulk sample taken from the Minto property, using
its patented chloride leach process achieved better than 90% recovery. Using cyanide on the same
starting material resulted in only 35% gold recovery. The cyanide tests showed very poor extraction
results and confirmed the refractory behavior of the gold in this deposit as predicted by the mineralogical
studied performed by SGS Lakefield in 2011.
In June 2013, the Corporation signed a consortium agreement with Nichromet to develop the Minto gold
deposit using innovative patented extraction processes (the “Project”). The Project is part of a $27 million
demonstration plant financed by Nichromet.
-5-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the three and nine-month periods ended September 30, 2013
Mineral Properties (Cont’d)
Nichromet was awarded a $5 million grant by the Government of Canada through Sustainable
Development Technology Canada (SDTC) for the development of its innovative patented technology that
will increase efficiency in processing gold while reducing the environmental impact and the construction of
a demonstration plant of $27 million.
The Project will use an open pit mining method to extract a 30,000 tonne bulk sample, at a projected rate
of 1,200 tonnes per day (“TPD”). Crushing and stockpiling for processing will be done onsite. All cost
incurred beyond the stockpiling will be incurred by Nichromet. The modular processing plant, to be built
by Nichromet and at its cost, will include grinding and flotation and is planned to operate at a rate of 300
TPD. The concentrate product will be transported to Nichromet’s demonstration plant in Thetford Mines,
and 100% of the gold recovered will be returned to Creso.
Operations are scheduled to begin once the permitting process is completed, and are anticipated to last
for approximately eight months, during which time, the site will be prepared, a concentrator will be built
and the bulk sample will be mined and processed.
The Corporation contracted AMEC Environment & Infrastructure, a division of AMEC Americas Limited
(AMEC) to conduct a site visit, scoping workshop and work plan in support of the Minto project at a cost
of $24,000. The work plan will define the required baseline studies and field studies related to
geotechnical, hydrogeological, aquatics, and terrestrial aspects, the preliminary project schedule
(including permitting) and recommendations for scope of respective field programs.
Subsequently, the Corporation contracted WSP Genivar Inc. (“Genivar”) to conduct a terrestrial and
aquatic baseline environmental study to undertake an inventory of biophysical and biological features
present on the site and surrounding areas. The cost of this study is expected to amount $18,000.
Finally, the Corporation contracted Genivar to conduct baseline and field studies related to geotechnical,
and tailing management, environmental assessment, mining and closure plan, along with permitting and
consultation with the public and First Nations at a cost of $300,000.
Tyranite property
The Tyranite mine, 100% owned by the Corporation, is located 2.5 km north of the Minto Project on a
parallel North-South structure. Historic geologic reports from the Tyranite Mine suggest the gold-bearing
structure has a strike length of over 1,200 metre. The old Tyranite mine has a shaft 343m deep that
serviced seven levels and produced 223,810 tonnes of ore at a recovered grade of 0.140 oz per tonne
(4.46 g/t) Au, resulting in the production of some 31,352 ounces of gold, the most of any zone in the
Shining Tree district (from M.W. Carter, 1977, Ontario Division of Mines Geoscience Report 152).
Duggan property
The Duggan property, 100% owned by the Corporation, is located 1.8 km to the west-northwest of the
Tyranite Zone and approximately 3.5 km northwest of the Minto Zone. Quartz-carbonate veins, together
with linear magnetic lows, define a general North-Northwest South-Southeast structural trend at Duggan.
A total of 5 diamond drill holes, totalling 1,117 metres, were completed in December of 2012 and January
of 2013. The drilling program tested the historic drill holes in five sections within the mineralized deposit
over 280m, confirming historic mineralization (e.g. CD13-03: historic section 1.3 g/t over 87m).
The Duggan zone comprises several N-S vein systems over 900m of a strike length, tested to 150m
depth, and open to the North and South showing continued structure, alteration, and anomalous gold.
-6-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the three and nine-month periods ended September 30, 2013
Mineral Properties (Cont’d)
Result highlights released on February 14th and March 13th, 2013 are as follows:
• CD13-03: 1.50 g/t over 80.9 metres, including 2.82 g/t over 34.50 metres and 15.49 g/t over 5.7
metres.
• CD13-04: 2.13 g/t over 10.20 m, including 11.70 g/t over 1.10 metres; and 2.24 g/t over 4.45
metres.
Interpretation of available exploration data on the Duggan deposit show a north-northwest trending
auriferous zone which steeply dips to the west with a strike length of over 600 metres, a true width up to
85 metres and down to 250 metres in depth.
Churchill, Asquith and Fawcett Townships
During the first quarter of 2013, the Corporation carried out an exploration program on selected claims
located within the Churchill, Asquith and Fawcett Townships. The program consisted in line cutting,
ground geophysical surveys, outcrop stripping and sampling and a technical evaluation study.
The ground HLEM (Horizontal Loop Electromagnetic) and Magnetic geophysical surveys were conducted
on claims located in Churchill Township. A total of 22.8 line-km of magnetic survey and 21.0 line-km of
HLEM survey, using three frequencies and a 100 metres coil separation, were completed during this
period. The geophysical surveys produced a good magnetic image of the underlying rock formation but
did not detect any definite HLEM conductors which could be associated with massive conductive
mineralization. Recommendations for further work consist of induced polarization and resistivity profiles in
order to detect disseminated to semi-massive mineralization.
Outcrop stripping and sampling was carried out on two mining claims located in Asquith Township. The
work program consisted of mechanical stripping and trenching. The immediate area was levelled and
sloped to allow for chip and channel samples to be taken. A total of 46 samples were taken, 33 from
Stripped Area 1 and 13 from Stripped Area 2. The 46 samples taken were sent to Swastika Laboratories
for analysis, where they were assayed for gold, silver, copper, lead and zinc. Results were disappointing
but not typical of the Shining Tree camp.
A CARDS (Computer Aided Resource Detection System) technical evaluation was carried out by Diagnos
Inc. over claims located within Churchill, Asquith and Fawcett Townships. The purpose of this study was
to identify favourable exploration targets based on the analysis of all available geoscientific data using
artificial intelligence and datamining techniques. A total of 533 training points were subject to evaluation
using a high resolution geophysical airborne survey conducted in 2008 by Terraquest Ltd. on behalf of the
Corporation. CARDS generated gold exploration targets in two specific zones. The first enhances the
northern continuity of the Corona horizon and the second highlights similar geological context as the
Downey and Gibson occurrences. Other geophysical observations suggest the presence of new structural
features which can be associated with CARDS targets.
Properties under option
The Corporation entered into several option agreements since 2009 whereby it acquired options to
acquire 100 % interests in exploration properties located in the Shining Tree area in Ontario by making
cash payments, issuing shares and performing exploration work.
Impairment of exploration and evaluation assets
Considering the difficult market conditions in the mining sector, the Corporation decided to focus its
activities on its properties held at 100% and adopted a plan to reduce its spending commitments relating
to its option agreements by terminating its agreements in 2012. For the nine-month period ended
September 30, 2012, the Corporation recorded an impairment charge of $1,181,000 for some of its
properties still under option following termination of these option agreements. In addition, the Corporation,
abandoned non-core claims during the nine-month period ended September 30, 2013 and therefore
partially impaired its mineral properties for $290,000.
-7-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the three and nine-month periods ended September 30, 2013
Mineral Properties (Cont’d)
Outlook for 2014-2015
The Minto property bulk sampling is scheduled to begin once the permitting process is completed, and is
anticipated to last for approximately eight months, during which time, site will be prepared by the
Corporation, concentrator will be built by Nichromet and the bulk sample will be mined and processed.
Crushing and stockpiling for processing will be done onsite. All cost incurred beyond the stockpiling will
be incurred by Nichromet.
This proposed bulk sampling is subject to the availability of funds. In the past, the Corporation has been
able to rely on its ability to raise financing in public or privately negotiated equity offerings. The proposed
amalgamation with Nichromet will allow the Corporation, as a combined entity, to have a larger asset
base and greater access to capital markets. Alternatively, the Corporation may consider advancing the
exploration through joint-venture participation of its key properties.
Technical report
For additional information on the Minto, Tyranite, and Duggan properties, please refer to the press
releases issued and to the 43-101 revised technical report dated April 19, 2012 available on
www.sedar.ca.
Qualified person
Mr. Jean-Philippe Mai, B. Sc, P. Geo. is the Qualified Person under National Instrument 43-101 who has
reviewed the scientific and technical information in this document.
Investing Activities
Exploration and Evaluation assets
Creso’s accounting policy is to capitalise the exploration and evaluation (“E&E”) costs of non-producing
mineral properties. E&E assets are comprised of mineral properties and deferred E & E expenditures.
During the nine-month period ended September 30, 2013, Creso’s additions to mineral properties totalled
$2,846 and it incurred E&E expenditures of $682,165 on its Shining Tree properties.
Mineral properties:
Additions of $2,846 on the Shining Tree area consisted of claim renewal costs.
E&E expenditures:
Following are the detailed E&E expenditures incurred in the Shining Tree area, Ontario, Canada:
For the nine-month period
ended September 30,
2013
2012
$
$
204,015
130,788
66,058
69,895
57,241
210,449
100,046
90,556
21,761
92,317
76,101
207,222
28,200
104,179
14,000
58,187
58,188
682,165
907,038
Drilling
Assays
Geology
Geophysics
Geochemistry
Bulk sampling
Logistics, accommodation and travel
Stripping, trenching and other
Share-based compensation costs
Depreciation of property, plant and equipment
Total
-8-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the three and nine-month periods ended September 30, 2013
Financing Activities
For the nine-month period ended September 30, 2013:
Private placement
In February 2013, the Corporation issued 5,540,000 units at $0.05 per unit for total consideration of
$277,000 pursuant to non-brokered private placements. A unit consists of one common share and one
common share warrant, with each warrant entitling its holder to purchase a common share at $0.10 over
a two-year period.
Short-term loan
In July 2013, the Corporation borrowed $500,000 from Nichromet. The loan is unsecured and bears
interest at a rate of 6% per annum payable on maturity. The principal amount of the loan together with
interest thereon is due and payable July 10, 2014.
Share and warrant issue expenses
Issuance expenses relating to shares and warrants totalled $30,108.
For the nine-month period ended September 30, 2012:
In July 2012, the Corporation issued 10,000,000 units issued on a flow-through basis for total
consideration of $500,000 pursuant to a non-brokered private placement. A unit consists of one flowthrough common share and one-half of a common share warrant, with each warrant entitling its holder to
purchase a common share at $0.10 over a two-year period.
In September 2012, the Corporation issued 4,000,000 units for total consideration of $200,000 pursuant
to non-brokered private placements. A unit consists of one common share and one common share
warrant, with each warrant entitling its holder to purchase a common share at $0.10 over a two-year
period.
The Corporation issued 450,000 common shares to fulfill its obligation relating to the acquisition of an
option to purchase a 90% interest in the Milner property. This issuance of common shares is a non-cash
transaction.
Share and warrant issue expenses
Issuance expenses relating to shares and warrants totalled $13,856.
Operating Activities
Review of interim period ended September 30, 2013 (“Q3-2013) as compared to the interim period ended
September 30, 2012 (“Q3-2012”)
The net loss for the nine-month period ended September 30, 2013 was $1,028,697 compared to
$2,042,176 for the nine-month ended September 30, 2012 reflecting:
a) An increase of $69,633 in professional and consulting fees is described below;
b) A decrease of $35,418 in salaries, $11,032 in travel and $23,873 in investor relations and
promotion activities following cost cutting measures adopted in 2013;
c) Share-based compensation costs amounted to $Nil in Q3-2013 compared to $159,500 in Q32012 due to option vesting; and
d) An impairment of exploration and evaluation assets of $290,000 in Q3-2013 compared to $Nil in
Q3-2012 due to claims abandoned by the Corporation. Also, an impairment of exploration and
evaluation assets of $Nil in Q3-2013 as compared to $1,181,000 in Q3-2012 considering that
optioned properties were returned to their owners.
-9-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the three and nine-month periods ended September 30, 2013
Operating Activities (Cont’d)
Professional and consulting fees consist of:
For the nine-month period
ended September 30,
2013
2012
$
$
43,910
27,430
92,451
158,868
316,445
196,875
452,806
383,173
Legal fees
Accounting and audit fees
Consulting fees
Total professional and consulting fees
Legal fees increased in Q3-2013 as compared to Q3-2012 due to fees paid to an external legal firm
assisting the Corporation in the proposed Amalgamation with Nichromet. In addition, the Corporation has
mandated Hatch Management Consulting (“Hatch”), an engineering firm, to evaluate Nichromet.
Consulting fees in Q3-2013 include an amount of $131,445 relating to this contract.
Accounting and audit fees decreased in Q3-2013 compared to Q3-2012 due to the decrease in its
activities.
The majority of the professional and consulting fees, excluding Hatch services, were paid to related
parties and the following section covers in detail the allocation of fees.
Rent, insurance and other expenses consist of:
Telecommunication, website maintenance and information technology
Rent
Office and other expenses
Insurance
Total rent, insurance and other expenses
For the nine-month period
ended September 30,
2013
2012
$
$
37,271
39,035
48,013
38,179
21,980
12,758
15,470
22,766
122,734
112,738
The Corporation’s rent increased in July 2012 when it entered into a new lease agreement for office
premises until June 30, 2015.
The Corporation decreased its insurance coverage following the decrease of it exploration activities.
Transactions with Related Parties
The Corporation had the following transactions with related parties that were in the normal course of
operations and measured at the exchange amount, which is the amount of consideration established and
agreed to by the related parties:
- 10 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the three and nine-month periods ended September 30, 2013
Transaction with Related Parties (Cont’d)
For the nine-month period
ended September 30,
2013
2012
$
$
Exploration expenses (1)
Share issue expenses (3)
Professional and consulting fees
Accounting fees (2a)
Legal fees (3)
Consulting fees (2b)
2,000
6,451
4,221
4,422
101,835
17,260
180,000
299,094
307,546
151,483
18,859
161,000
331,342
339,985
1) Consulting fees of $2,000 to a private company controlled by Rejean Gosselin, a director of the
Corporation, for geological services ($4,221 in Q3-2012).
2) Professional and consulting fees includes:
a) Remuneration of Vatche Tchakmakian, Chief Financial Officer, in the amount of $44,669
($69,344 in Q3-2012) paid to a private company controlled by him. In addition his company
charged fees of $57,166 ($82,139 in Q3-2012) for support staff in respect of accounting,
bookkeeping and administrative services;
b) Consulting fee of $180,000 ($161,000 in Q3-2012) to a private company controlled by Pierre
Gauthier, the President and Chief Executive Officer and Executive Chairman; and
c) Consulting fees of $nil ($6,000 in Q3-2012) to a private company controlled by Rejean
Gosselin, a director of the Corporation.
3) Legal fees of $23,711 ($23,281 in Q3-2012) of which $6,451 are share issue expenses ($4,422 in
Q3-2012) to a company controlled by Luce Saint-Pierre, the Corporate Secretary.
At September 30, 2013, $3,730 remains to be paid ($36,533 as at September 30, 2012) from these
transactions.
Summary of Quarterly Results
The following table contains selected financial information for the last eight quarters:
Loss for the period
Loss per share
September 30,
2013 (i)
$
(471,242)
(0.003)
Three months ended
June 30, March 31, December 31,
2013
2013
2012 (i)
$
$
$
(211,043)
(346,412)
(341,782)
(0.001)
(0.002)
(0.002)
Loss for the period
Loss per share
September 30,
2012 (i)
$
(907,465)
(0.007)
Three months ended
June 30, March 31, December 31,
2012
2012 (i)
2011(i)
$
$
$
(203,114)
(931,597)
(500,987)
(0.002)
(0.009)
(0.005)
(i) The net loss includes impairment of exploration and evaluation assets of $290,000 in Q3-2013,
$65,000 in Q4-2012, $711,000 in Q3-2012, $470,000 in Q1-2012 and $220,000 in Q4-2011.
- 11 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the three and nine-month periods ended September 30, 2013
Liquidity and Capital Resources
The Corporation has no long term debt and a negative working capital (current assets less current
liabilities) of $523,957 as at September 30, 2013 as compared to $591,424 on December 31, 2012.
Management estimates that the funds available at September 30, 2013 will not be sufficient to meet the
Corporation’s obligations and budgeted expenditures through September 30, 2014.
Advanced exploration of some of the mineral properties would require substantially more financial
resources. In the past, the Corporation has been able to rely on its ability to raise financing in public or
privately negotiated equity offerings. There is no assurance that such financing will be available when
required, or under terms that are favourable to the Corporation. The Corporation may also elect to
advance the exploration of mineral properties through joint-venture participation.
During the nine-month period ended September 30, 2013, the Corporation borrowed $500,000 from
Nichromet for working capital purposes and implemented cost cutting measures to reduce its operating
cost. The Corporation will have to raise additional funds to continue operations. The proposed merger
with Nichromet will allow the Corporation, as a combined entity, to have a larger asset base and greater
access to capital markets.
Should the Corporation not be able to close the merger with Nichromet, raise additional funds or bring in
a joint venture partner with whom to share exploration expenditures, the Corporation may consider the
opportunity to adopt a plan to further reduce discretionary expenses.
Although these condensed interim consolidated financial statements have been prepared using IFRS
applicable to a going concern, the above-noted facts and circumstances cast significant doubt on the
Corporation’s ability to continue as a going concern. These condensed interim consolidated financial
statements do not reflect the adjustments to the carrying values of assets and liabilities, to the reported
revenues and expenses and to the balance sheet classifications that would be necessary if the going
concern assumption was inappropriate. These adjustments could be material.
Outstanding Share Data
(on November 26, 2013)
Common shares issued
Stock options
Warrants
Fully diluted
Number
144,811,956
5,090,000
36,611,133
186,513,089
Off-Balance Sheet Arrangements
The Corporation does not have any off-balance sheet arrangements.
Financial Instruments and Other Instruments
Financial instruments
Creso is exposed to various financial risks resulting from both its operations and its investments activities.
Creso does not enter into financial instrument agreements including derivative financial instruments for
speculative purposes. Creso’s main financial risk exposure and its financial risk management policies are
disclosed in Note 12 to the condensed interim consolidated financial statements for the nine-month period
ended September 30, 2013 and in Note 18 to the annual consolidated financial statements for the years
ended December 31, 2012 and 2011.
- 12 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the three and nine-month periods ended September 30, 2013
Commitment
Consortium agreement with Nichromet
On June 1, 2013, the Corporation signed a consortium agreement with Nichromet whereby:
• Nichromet will build a $27 million demonstration plant; and
• The Corporation will provide concentrate from its Minto gold deposit (the “Minto Project”).
Nichromet’s objective is to finalize the development of the chlorination technology to extract precious
metals such as gold, at a pre-commercial stage through the construction of a demonstration plant of 15
tonnes per day (“TPD”) that will operate on a continuous mode under industrial conditions.
The Minto Project, located within the Shining Tree district, will use an open pit mining method to extract a
30,000 tonne bulk sample once the permitting is completed. Crushing and stockpiling for processing will
be done onsite. All costs incurred beyond the stockpiling will be incurred by Nichromet. The modular
processing plant, to be built and paid for by Nichromet, will include grinding and flotation. The concentrate
product will be transported to Nichromet’s demonstration plant, and 100% of the gold recovered will be
returned to the Corporation.
Lease payments
In July 2012, the Corporation entered into a lease agreement with another corporation for office premises
until June 30, 2015. The total annual rent amounting to approximately $53,372 is equally shared. The
total shared commitment from October 2013 to June 2015 is $93,399 and the Corporation’s share is as
follows:
a) $6,671 from October to December 2013;
b) $26,686 in 2014; and
c) $13,343 from January to June 2015.
Stock Option Plan
The purpose of the Stock Option Plan (the “Plan”) is to serve as an incentive for the directors, officers,
employees and service providers who will be motivated by the Corporation’s success as well as to
promote ownership of common shares of the Corporation by these people. There is no objective attached
to the Plan and no relationship to manage the Corporation’s risks.
Management’s Responsibility for Financial Information & Accounting Estimates
Creso’s condensed interim consolidated financial statements are the responsibility of Creso’s
management and were prepared by Creso’s management in accordance with IFRS. A description of
Creso's significant accounting policies can be found in Note 3 of Creso's annual consolidated financial
statements for the year ended December 31, 2012.
Many of the amounts included in those financial statements require management to make judgments
and/or estimates. These judgments and estimates are continuously evaluated and are based on
management’s experience and knowledge of the relevant facts and circumstances. Actual results may
differ from the amounts included in the financial statements. A description of Creso's critical accounting
estimates, judgments and assumptions can be found in Note 4 of Creso's condensed interim consolidated
financial statements for the nine-month period ended September 30, 2013.
Accounting Standards Issued but not Yet Applied
A description of accounting standards issued but not yet applied can be found in Note 3 of Creso's
condensed interim consolidated financial statements for the nine-month period ended September 30,
2013.
- 13 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the three and nine-month periods ended September 30, 2013
Risk Factors
Due to the nature of the Corporation’s business, the legal and economic climate in which the Corporation
is operating and the present stage of development of the Corporation, It may be subject to significant
risks. Details of risk factors are outlined in the Corporation’s 2012 Annual report dated March 22, 2013.
Cautionary Statement on Forward-Looking Information
This MD&A contains forward-looking statements that address future events and conditions, which are
subject to various risks and uncertainties. Forward-looking statements include, but are not limited to,
statements with respect to: the terms and conditions of the proposed Amalgamation; the completion of
any future financing; use of funds; and the business and operations of the resulting issuer, Nichromet,
after the proposed Amalgamation. Actual results could differ materially from those anticipated in such
forward-looking statements as a result of numerous factors, some of which may be beyond the
Corporation’s control. These factors include: general market and industry conditions and other risks
disclosed in the Corporation’s filings with Canadian Securities Regulators, including those that will be
contained in the Management Information Circular that will be prepared and filed in connection with the
proposed Amalgamation.
Forward-looking statements are based on the expectations and opinions of the Corporation’s
management on the date the statements are made. The assumptions used in the preparation of such
statements, although considered reasonable at the time of preparation, may prove to be imprecise and,
as such, undue reliance should not be placed on forward-looking statements. The Corporation expressly
disclaims any intention or obligation to update or revise any forward-looking statements whether as a
result of new information, future events or otherwise, except as required by applicable law.
November 26, 2013
(S) Pierre Gauthier
Pierre Gauthier
President and CEO
(S) Vatché Tchakmakian
Vatché Tchakmakian, CPA, CA
Chief Financial Officer
- 14 -
Creso Exploration Inc.
Management's Discussion and Analysis
For the years ended December 31, 2012 and 2011
Creso Exploration Inc.
600 de Maisonneuve Blvd. West, Suite 2750
Montreal, Quebec, H3A 3J2
Tel: (514) 866-6001 # 239 / Fax: (514) 866-6193
Website: www.creso.ca
TSX Venture Exchange: CXT / OTCQX: CRXEF / Frankfurt Exchange: C3X
Creso Exploration Inc.
Table of content
For the years ended December 31, 2012 and 2011
Description of Business and Corporate Objective ..................................................................3
2012 Overview .............................................................................................................................3
Mineral Properties.......................................................................................................................4
Investing Activities ...................................................................................................................10
Financing Activities ..................................................................................................................11
Operating Activities ..................................................................................................................12
Transactions with Related Parties ..........................................................................................13
Selected Annual Information ...................................................................................................13
Summary of Quarterly Results ................................................................................................14
Fourth Quarter Analysis...........................................................................................................14
Liquidity and Capital Resources .............................................................................................15
Subsequent events after the closing date..............................................................................15
Outstanding Share Data ...........................................................................................................16
Off-Balance Sheet Arrangements............................................................................................16
Financial Instruments and Other Instruments .......................................................................16
Commitment ..............................................................................................................................16
Stock Option Plan .....................................................................................................................16
Management’s Responsibility for Financial Information & Accounting Estimates ............16
Accounting Standards Issued but not yet Applied................................................................17
Risk Factors ..............................................................................................................................17
Cautionary Statement on Forward-Looking Information ......................................................20
-2-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
The following Management’s Discussion and Analysis (the “MD&A”) of the financial position and results of
operations of Creso Exploration Inc. (“Creso” or the “Corporation”), constitutes management’s review of
the factors that affected the Corporation’s financial and operating performance as at and for the years
ended December 31, 2012 and 2011. This MD&A has been prepared based upon information available to
the Corporation as at March 22, 2013 and should be read in conjunction with the Corporation’s audited
consolidated financial statements for the years ended December 31, 2012 and 2011 and notes thereto.
The Corporation’s audited consolidated financial statements and MD&A are presented in Canadian
dollars and have been prepared in accordance with International Financial Reporting Standards (“IFRS”)
including comparative figures unless otherwise noted.
Readers are cautioned that the MD&A contains forward-looking statements and that actual events may
vary from management’s expectations. Readers are encouraged to read the Cautionary Statement on
Forward-Looking Information at the end of this MD&A.
Further information related to the Corporation is available on the System for Electronic Document
Analysis and Retrieval (SEDAR) in Canada and can be accessed at www.sedar.com. For additional
information, the Corporation’s website can be found at www.creso.ca.
Description of Business and Corporate Objective
The Corporation has interest in mineral properties located in Canada which are presently at the
exploration and evaluation stage. Until it is determined that properties contain mineral reserves or
resources that can be economically mined, they are classified as exploration and evaluation assets.
The Corporation’s common shares are listed on the TSX Venture Exchange (“the Exchange”) under the
symbol CXT and on the OTCQX (CRXEF) and Frankfurt Exchange (C3X).
Creso’s corporate objective is to acquire and explore high grade mineral properties primarily in gold and
silver, as well as copper and zinc. The Corporation's principal mining exploration holdings are located in
the Shining Tree area of Northern Ontario within 100 km of the Timmins and Kirkland Lake mining camps.
2012 Overview
Exploration and evaluation activities
The Corporation incurred $1.3 million of exploration and evaluation expenditures on the Shining Tree
properties. The following are the main exploration and evaluation activities conducted in 2012:
a) The Corporation conducted a ten diamond drill hole program for a total of 509 metres on the
Mann property between January and March 2012. Five holes in this program were designed to
further define vein extensions from historically mined zones, and five were designed to test for
new vein zones on both the east and west sides of the Mann Fault. The areas checked for new
vein zones were targeted by results from the Gradient and Insight Section Array Induced
Polarization survey completed in January 2012. Highlights from the results reported are the
intervals 695 g/t Ag over 1.4m, from 23.3 to 24.7m in a new zone intersection grading 58.7 g/t Ag
over 21.7m, from 16.6m to 38.3m in DDH MN12-06 (see Press Release dated April 4, 2012);
b) JVX Geophysics Ltd has performed a Clarity 3D Inversion Model downhole induced polarization
(DSIP) survey to assist in the definition of a 3D model of the Minto Upper and Lower zones;
c) The Corporation announced the result of a twelve hole diamond drilling program conducted
between October and December 2011, on the Tyranite property (see Press Release dated
January 31, 2012);
-3-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
d) The Corporation initiated a drilling program on the Minto and Duggan properties in December
2012. A total of 11 diamond drill holes, totalling 2,193 metres were completed in January 2013.
Highlights from the results include 5.13 g/t Au over 36.5m on the Minto property (see press
release dated January 24, 2013) and 1.50 g/t over 80.9m on the Duggan property (see press
release dated March 13, 2013); and
e) Considering the difficult market conditions, the Corporation decided to focus its activities on its
properties held at 100% and adopted a plan to reduce its spending commitments relating to its
option agreements by terminating its option agreements. The Corporation recorded a
depreciation charge of $1,246,000 in 2012 following termination of these agreements.
Financing activities
In 2012, the Corporation closed private placement financings amounting to $1,520,000.
Subsequent events
In February 2013, the Corporation closed private placement financings amounting to $277,000.
Mineral Properties
Shining Tree Area, Ontario
The Corporation's principal mining exploration holdings are located in the Shining Tree mining camp of
Northern Ontario, located within 100 km south and southwest, respectively, of the Timmins and Kirkland
Lake mining camps. The Corporation assembled a significant land package of ground adjacent to its
Duggan, Minto, Tyranite and Mann properties, all totalling approximately 150 square km. Each of these
properties has the potential for extensions of the known mineralized zones that currently define them.
The Corporation has been conducting major geophysical surveys, diamond drilling, and geological
programs on the Shining Tree area since 2007. Exploration activities conducted in 2011 and 2012 are as
follows:
Minto Property
The Minto gold property, 100% owned by the Corporation, is located approximately 96 km south of
Timmins and 93 km southwest of Kirkland Lake and approximately 42 km South-West of the then
Northgate Minerals Corporation’s Young-Davidson gold deposit.
Year ended December 31, 2011:
A total of 781 metres of core were drilled from holes MC10-10 (391m-lower half), MC11-11 (250 metres),
and MC11-12 (140 metres) in the first quarter of 2011. The highlight of this program was encountering
192 metres of 1.01 g/t gold (“Au”) from 28.0 metres to 220.0 metres in MC11-11, including 42.7 metres of
3.94 g/t Au beginning at 136.2 metres, and 24.4 metres of 5.04 g/t Au from 145.9 metres to 170.3 metres.
Hole MC10-10 displayed 8.4 metres of 0.24 g/t Au beginning at 231.3 metres, and MC11-12 had only
slightly anomalous gold assays locally.
Drilling confirms Au mineralization is related to vein systems in a northerly trending structure with
mineralization related to upper chlorite carbonate breccias (altered basaltic breccias, Soda depleted and
Potash enriched) and a lower (north of breccias) felsic-intermediate flow/breccia system. Results show an
anomalous Au system averaging 2 to 10 times background with localized higher pods.
General geology (crossing Minto) intersected by drilling and/or surface work indicated a north, E-W to
NNE-SSW felsic intermediate unit of porphyry and pyroclastic flows, interbedded with tuffs and
fragmentals and primary sulphide lenses and pods. A similar section is indicated to the south that also
shows beds and lenses of Fe Formation. Separating the above is a predominantly mafic flow/sill system
with localized ultramafic flows. All units dip 45-50deg N.
-4-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
An SEM (Laurentian University) petrographic study shows the current character of Mineralized and local
rock types. All show extreme hydrothermal and structural (quartz-carbonate veining) alteration of all
samples of key interest are secondary-vuggy pyrite grains: 2 phases of pyrite are observed a more
primary phase showing a general uniform composition and more euhedral structure and a secondary
vuggy phase, commonly associated with more intense alteration/recrystallization and often with vein
structures.
The secondary phase shows enrichment in other elements, especially Arsenic, Silver and Tellurium.
Some of the vuggy textured crystals have distinct Au grains. Preliminary examination suggests this
sulphide (recrystallized, secondary) is the predominant control of Au mineralization and as observed its
occurrence is erratic. As such this can explain the erratic assay numbers in exploration analysis
especially in drill core, and the variation of drill results from surface and bulk sampling.
Year ended December 31, 2012:
JVX Ltd. has performed borehole geophysical surveys a Clarity 3D Inversion Model downhole induced
polarization (DSIP) survey to assist in the definition of a 3D model of the Minto Upper and Lower zones
with a view to delineating the gold bearing zones for follow up drilling. This program included previously
untested holes MC10-07 and MC10-10 and anticipated expanding upon the previous diamond drill results
at the Minto, which include 13.3 g/t Au over 82.5m from 508.5m to 591.4m (uncut) in hole MC09-01.
The compilation of results of the JVX Ltd. borehole IP survey was completed in June 2012.
Characteristics of higher gold assay intervals of the drill holes and alteration were correlated with
chargeability and resistivity profiles, for reference in planning a future drill campaign.
A 200m long by 2m wide E-W trench was completed approx. 150 metres south of the historic pit, to
confirm the identification of structures and rock types in that area.
The Corporation completed a diamond drill program, consisting of 6 holes totalling 1,076 metres on the
Minto property in December 2012.
The Corporation has mandated Roscoe Postle Associates Inc. to complete a review of the drilling and
provide a letter report on the Minto property. Gold assay results highlights from drill holes CM12-01 to
CM12-06 are as follows:
Hole ID
CM12-01
CM12-02
CM12-03
CM12-04
CM12-05
CM12-06
From (m)
140.5
24.9
24.6
66
40.2
66.1
To (m)
Interval (m)*
141.2
0.7
61.4
36.5
60.3
35.7
67.4
1.4
60.75
20.55
66.95
0.85
no significant results
no significant results
*Intervals represent core lengths and not true width
Au g/t
18.4
5.13
2.53
17.5
1.94
4.43
The Minto gold rich breccia lies in a N-S deformation corridor intersected by E-W structures. Hole CM1201 tested the southern portion of the property in an area where a recent compilation had indicated strong
similarities with the northern portion of the Minto property which previously returned 18.2 g/t over 65.7 m
in the upper body and 13.3 g/t Au over 82.5 m in the lower body (See press release of August 9, 2010).
Holes CM12-02 to CM12-04 tested the main Minto zone. Holes CM12-05 and CM12-06 tested E-W
sections North and South of the Main Zone of the property and are considered as exploratory drill holes.
-5-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
Overall exploration on the Minto property has been quite restrictive focusing more on the high grade
Minto breccia pod than the controlling structures. Structures and structural offsets are clearly indicated by
IP lineaments and detailed Magnetic trends.
Tyranite property
The Tyranite mine, 100% owned by the Corporation, is located 2.5 km north of the Minto Project on a
parallel North-South structure. Historic geologic reports from the Tyranite Mine suggest the gold-bearing
structure has a strike length of over 1,200 metre. The old Tyranite mine has a shaft 343m deep that
serviced seven levels and produced 223,810 tonnes of ore at a recovered grade of 0.140 oz per tonne
(4.46 g/t) Au, resulting in the production of some 31,352 ounces of gold, the most of any zone in the
Shining Tree district (from M.W. Carter, 1977, Ontario Division of Mines Geoscience Report 152).
Year ended December 31, 2011:
The Corporation completed three diamond drill holes totalling 1,698 metres on the Tyranite property
during Q1-2011 (TY11-01=473m; TY11-02=614m; and TY11-03=611m). The Tyranite results
demonstrate that significant gold mineralization is developed over some 470 vertical metres and 1,200
metres along strike, open vertically at depth and along strike. Moreover, airborne geophysics suggests
that the Tyranite Main Zone mineralization aligns with the Minto deposit, 2.5 km to the SSE, along a
narrow structural corridor trending N10W.
Highlights from this program were released on April 21, 2011 by press release. Significant widths and
gold grades are evidenced along multiple strands of mineralization within the Main Zone (N-S strike; 73°
W dip) of the Tyranite mine. The best and deepest intercept from this drill program had 5.22 g/t Au over
11.8 metres in hole TY11-02, from 492.5m to 504.3m (including 10.61 g/t Au over 4m). This intercept
penetrated the Main Zone at approximately 130m depth below the deepest level (1125 level) of the old
Tyranite mine, some 470m vertically below the surface. In addition, hole TY11-03b intercepted 3.68 g/t
Au over 30 metres, including 6.5 g/t Au over 4.5 metres, with the highest individual assay from this
interval grading 11.85 g/t Au over 1.5m, from 429.5m to 431m. The highest single sample value from this
drill program is 14.0 g/t Au over 0.3m, from 419.8m to 420.1m in hole TY11-01. Additional outliers of
mineralization occur locally away from the Main Zone, both in the hanging wall and footwall, with the latter
exemplified by the interval of 5.53 g/t Au over 0.7m, from 437.4m to 438.1m in hole TY11-01. Creso
geologists believe there is additional gold potential deeper beneath the current drilling.
In the forth quarter of 2011, the Corporation conducted a 12 hole program (TY11-04 to TY11-15), totalling
2,225m, designed to confirm the results of historic drill holes in the Tyranite Main Zone and to test targets
to the east and west of that zone by drilling locations selected on the basis of IP criteria confirmed by
surface exposures of pyrite mineralization.
Year ended December 31, 2012:
In January 2012, the Corporation released the result of the diamond drilling program completed between
October and December 2011 on the Tyranite property. Hole TY11-04 intersected 15.7m of 3.04 g/t Au at
a depth of only 27.5 metres confirming the near surface mineralization and open pit potential. Also
highlighted from the results is the intersection in hole TY11-12 of 1.68 g/t Au over 39.9m from 222.9 to
262.8m, including the intercept 3.99 g/t Au over 4.0m from 229.0 to 233.0m.
The current drilling campaign along with historical drilling now confirms the mineralization over a strike
length of 1,200 metres in a North--South direction and to a depth of 550 metres. The mineralization
remains open along the North-South strike and at depth. (Refer to press release dated January 31, 2012
for additional information).
A compilation was undertaken during April-May 2012 to complete the assessment of historic drill logs and
record whole rock analyses from the historic core sampling.
-6-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
Duggan property
The Duggan property, 100% owned by the Corporation, is located 1.8 km to the west-northwest of the
Tyranite Zone and approximately 3.5 km northwest of the Minto Zone. Quartz-carbonate veins, together
with linear magnetic lows, define a general North-North West-South South-East structural trend at
Duggan. These geophysical features continue North onto 2 claims earned by Creso from Temex
Resources (75% held by Creso, 25% by Temex).
Mineralization occurs with four northerly vein systems within a granophyric phase of the Syenodiorite
intrusion and within contact ultramafic flows.
The Duggan mineralization alteration zone occurs within syenodiorite (compositionally grey to pink
syenite in colour) and is part of the Milly Creek pluton, a felsic-intermediate stock with a low to high
airborne magnetic response. It also sits at the margin of a potash/airborne radiometric high (Terraquest
Airborne), probably representing sericite/K-feldspar content. Alteration is pervasive and varies from pink,
to black to greenish mineral assemblages (A NNW-SSE structural/schist zone also seems to have some
control of alteration and mineralization.
Also of interest and possible mineralizing significance, is the presence of angular mafic blocks within the
syenodiorite indicating the occurrence of explosive activity in the geological formation process, further
suggested by a circular magnetic feature (high magnetic boundary with central magnetic low) in the SW
boundary of the property. This is likely the representation of an eruptive volcanic/intrusive event.
Alteration in the syenodiorite comprises quartz, sericite, feldspar and contains abundant disseminated
sulphide. Whole rock chemistry indicates strong potash enrichment and soda depletion. Sulphur and
carbon enrichment is also noted.
Gold mineralization occurs along the NNW-SSE structure in two altered rock types. South of 5279600 m
N, 498000 m E (UTM NAD 83) gold generally occurs in altered ultramafic rocks within shear zones up to
several metres wide. North of this coordinate, gold occurs in altered syenodiorite in zones averaging
1.0g/t Au over approximately 100 metre wide containing narrow high grade gold (with vg) quartz sulphide
zones. Mineralization is also associated with erratic IP anomalies. Drilling has confirmed the mineralized
zone to 200m depth and open. The alteration zone is associated with a Terraquest airborne radiometric
Potash anomaly and a magnetic low, bordering a magnetic high and continues north, suggesting
significant additional and untested mineral potential.
Historic drill sections indicated an alteration/gold anomaly zone possibly extending northward and to
depth. Testing was limited to a depth of about 100 metres. 2007 drilling has indicated continuity of gold
along a pyritized shear/alteration zone of NNW direction for 700 metres and down to a depth of 240
metres. Of particular interest, Hole 97-225 indicated a gold zone with sporadic high gold sections over 76
metres, Hole D3-07 showed a quartz/syenite breccia zone with abundant disseminated sulphide, and
Hole D9-07 intersected the same zone over 93 metres, 220 metres north of hole D3-07.
Whole rock geochemistry indicates the Milly Creek Pluton to comprise three compositional phases
consisting of syenite with an average of 60% SiO2 and a gabbroic-diorite phase averaging 53% SiO2 and
a granitic phase averaging 67% SiO2. All phases contain elevated alkalis.
Year ended December 31, 2011:
During the fourth quarter of 2010 and the first quarter of 2011, the Corporation conducted a 1,037 metre
drilling program on the Duggan property essentially to test previous drilling. Two holes for 1,485 metres,
DUG10-13 and 14 were drilled to the North on Temex option ground, the Duggan zone was intersected
with sporadic anomalous to 1g/t Au and a 200m wide Potash enrichment zone.
-7-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
Five holes (DUG10-15 through DUG10-19) were drilled across the north-trending Duggan Zone and
encountered multiple narrow sulfide-bearing quartz-carbonate veins, confirming the structural continuity of
this zone. The Corporation completed 564 metres of diamond core drilling in three holes, DUG10-17B
(197m), DUG10-18 (242m), and DUG10-19 (125m) in the first quarter of 2011. The highlights of this
program included 48.8 metres of 0.69 g/t Au in DUG10-17B beginning at 96.0 metres, and 28.9 metres of
1.25 g/t Au beginning at 53.3 metres in DUG10-19, including 0.5 metres of 38.0 g/t Au beginning at 79.4
metres. Previously, in the fourth quarter of 2010, three additional holes were drilled for a total of 499.2
metres (DUG10-15=278m; DUG10-16=190.2m, and DUG10-17A=31m).
Year ended December 31, 2012:
A total of 5 diamond drill holes, totalling 1,117 metres, were completed in December of 2012 and January
of 2013. The drilling program tested the historic drill holes in five sections within the mineralized deposit
over 280m, confirming historic mineralization (eg CD13-03: historic section 1.3g/t over 87m).
The Duggan zone comprises several N-S vein systems over 900m of a strike length, tested to 150m
depth, and open to the North and South showing continued structure, alteration, and anomalous gold.
Result highlights released on February 13, 2013 are as follows:
• CD13-03: 2.20 g/t over 34.50 metres, including 11.41 g/t over 5.65 metres which includes 40 g/t
over 1.0 metre and 27.50 g/t over 0.80 metres.
• CD13-04: 2.13 g/t over 10.20 m, including 11.70 g/t over 1.10 metres; and 2.24 g/t over 4.45
metres.
Interpretation of all available exploration work on the Duggan deposit show a north-northwest trending
auriferous zone which steeply dips to the west with a strike length of over 600 metres, a true width up to
85 metres and down to 250 metres in depth.
Outlook for 2013:
From the NI 43-101 revised Technical Report dated April 19, 2012, there is a recommendation for a
Phase 2 drill program totalling 5,000 metres for resource definition at approximately $1,000,000 for the
Tyranite, Minto and Duggan properties. The Corporation completed 2,193 metres diamond drilling in early
2013 on the Minto and Duggan properties, representing approximately 45% of the recommended work
according to the NI 43-101 Technical Report.
Given the results that have been reported above, the Corporation intends to complete an additional 3,000
meters of diamond drilling at an estimated cost of $500,000 in 2013.
The objective of the program is to assess additional targets and extensions of known mineralization
based on structural and geophysical characteristics of known ore zones in order to quantify the potential
resources of the above noted properties.
This proposed drill program is subject to the availability of funds. In the past, the Corporation has been
able to rely on its ability to raise financing in public or privately negotiated equity offerings. Alternatively,
the Corporation may consider advancing the exploration through joint-venture participation of these key
properties.
For additional information on the Minto, Tyranite, and Duggan properties, please refer to the press
releases issued and to the 43-101 revised technical report dated April 19, 2012 available on
www.sedar.ca.
-8-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
Mann property
In November 2011, the Corporation exercised its option and acquired 100% interest in the Mann silver
property located in Milner Township. The property produced 178,000 ounces of silver from some 8,000
tons of ore for an average grade of over 21 ounces per ton (720.3 grams per tonne) of silver. The
property has five shafts, the deepest of which (No. 3) is 200 vertical feet. A ramp was also driven to the
210-foot level (from Report by L.J. Cunningham, Manridge Explorations Limited, February 11, 1985). The
Corporation’s objective at the Mann mine will be to confirm targets in the D-zone, which was partially
mined and had intersections of up to 506 ounces per ton (17,356 grams per tonne) of silver over 9 feet,
as well as 495 ounces per ton (16,978 grams per tonne) of silver over 7 feet, and numerous other veins
reported. The Corporation cannot yet confirm the grades and thicknesses reported in the historic
literature. The Mann property is contiguous to the Corporation’s claims in the Milner Township.
From 1968 to 1970, 8,096 tons of ore were treated at the Mann mine with an average grade of 21.5
ounces (609 grams) of silver per ton. From 1983 to 1984 1,000 tons of ore were processed from the ramp
and produced approximately 30,000 ounces of silver. Operations ceased on December 1984. The Mann
property is located “in the Gowganda Region of the famous Temiskaming Silver Area, from which
570,000,000 ounces of silver have been produced, including 60,000,000 ounces produced in the
Gowganda Region. All of the silver production shows a close spatial and genetic relationship to the
Nipissing diabase, which has intruded older rocks from a number of points to form a series of arches,
basins and irregular forms.
In the Gowganda Region over 95% of the silver produced has been obtained from the Nipissing diabase
within basin structures. Elsewhere in the Temiskaming Silver area, much of the silver produced has been
derived from intruded rocks” (Extract from a report prepared for Manridge Explorations Limited by L.J
Cunningham, .Sc., P. Eng. Dated February 11, 1985).
Year ended December 31, 2011:
In November 2011, the Corporation completed a drill program consisting of a combined 930 metres of
diamond drilling on the Mann property to confirm historical results of hole #67-60 that reported 520 oz/t
Ag over a width of 2.9 feet at a depth of 12 metres from surface and test the extension of the D Zone both
laterally and at depths below 39 metres where values of 6,309 oz/t Ag over 2.0 feet were reported at the
end of an inclined ramp.
A highlight from the diamond drill program is the interval of 5130 g/t Ag over 0.65m from 39.8 to 40.45m
from Hole MN11-03, 400 g/t Ag over 1.0m at 35.4 to 36.4m from Hole MN11-04 and 39 g/t over 1.5m at
39.5 to 41.0m from Hole MN 11-05. Hole MN11-04 is located 27m west of Hole MN11-03. Hole MN11-03
was designed to test the near-surface vein cluster in which historic hole 67-60 had reported 520 oz/ton
over 2.9ft (17,828.7g/t over 0.88m).
Year ended December 31, 2012:
In January 2012 a gradient array IP chargeability/resistivity survey designed to define north-south
trending anomalies was completed on the property. Six zones of interest were noted for further
exploration.
In February/March of 2012 a 509m diamond drill program was conducted on the property. Five holes
MN12-01 to MN12-05, inclusive, were designed to further define the No. 3 and 'D' zones historic
workings. Five holes, MN12-06 to MN12-10, inclusive, were designed to test targets in a previously
undrilled NW-SE trending zone to the south and west of the historic areas, as indicated by the IP survey
results. Silver values are found in carbonate and chlorite mineralized veins which are hosted in medium to
coarse grained diabase displaying moderate to strong magnetization in each of the five holes designed to
test the new zones. (Refer to press release dated April 4, 2012 for additional information).
-9-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
Highlights from the diamond drill program are the intervals 695 g/t Ag over 1.4m, from 23.3 to 24.7m in a
new zone intersection grading 58.7 g/t Ag over 21.7m, from 16.6 to 38.3m in DDH MN12-06. Also
reported are two newly discovered anomalous zones, which are localized in Cobalt sediments; one from
DDH MN12-07 giving 43.2 g/t Ag over 4.0m, from 7.0 to 11.0m, and the other from DDH MN12-08 giving
37.4 g/t Ag over 2.6m, from 31.9 to 34.5m.
An analysis of current and previous data indicates significant Silver potential in the Mann area, especially
at depth. Additional Induced polarization geophysical work is suggested and a structural geophysical
model prepared to indicate potential new drill targets. The Corporation is currently in negotiation with a
potential partner for a joint-venture.
Properties under option
The Corporation entered into several options agreements since 2009 whereby it acquired options to
acquire 100 % interests in exploration properties located in the Shining Tree area in Ontario by making
cash payments, issuing share capital and performing exploration work.
In 2012 and 2011, cash payment, share capital issuance and exploration work commitment conditions,
fulfilled as per the terms of the option agreements, were as follows:
In 2011
In 2012
Cash
payment
$
760,000
45,000
Share capital
issuance
Number
1,725,000
450,000
Exploration
work
commitment
$
340,000
-
The fair value of the 450,000 common shares issued in 2012 (1,725,000 in 2011) relating to the
agreements at an amount $45,000 ($327,750 in 2011) has been determined based on the quoted price
on the date the common shares were issued.
Considering the difficult financial market conditions, the Corporation decided to focus its activities on its
properties held at 100% and adopted a plan to reduce its spending commitments relating to its option
agreements by terminating its agreements. During 2012, the Corporation recorded an impairment charge
of $1,246,000 ($615,100 in 2011) for its properties still under option following termination of these option
agreements.
Qualified person
Mr. Mike White, M. Sc, P. Geo., is the Qualified Person under National Instrument 43-101 who has
reviewed the scientific and technical information in this document.
Investing Activities
Exploration and Evaluation (“E&E”) assets
Creso’s accounting policy is to capitalise the E&E cost of non-producing mineral properties. E&E assets
are comprised of mineral properties and deferred exploration and evaluation expenditures. In 2012,
Creso’s additions to mineral properties totalled $95,521 ($1,137,265 in 2011) and it incurred E&E
expenditures of $1,260,764 ($3,688,954 in 2011) in Canada.
Mineral properties
Year ended December 31, 2012:
In January 2012, the Corporation acquired an option to purchase a 90% interest in the Milner property
located in Milner Township in the Shining Tree area. The new property, totalling 11 claim units, adjoins to
the north and south of the Mann property. A feature of the property is the sites of 9 historic shafts,
including the former past producer Bartlett Mine.
- 10 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
The Corporation paid in cash $45,000 and issued 450,000 common shares of the Corporation in January
2012. The fair value of the 450,000 common shares issued at an amount $45,000 has been determined
based on the quoted price on the date the common shares were issued.
A further payment of $45,000 cash and issuance of an additional 450,000 common shares due in
September 2012 to earn the 90% interest was not completed. Creso terminated its option agreement on
this property with no further obligation or interest in or to the property.
Other additions of $5,521 on the Shining Tree area consisted of claim renewal costs.
During 2012, the Corporation recorded an impairment charge of $1,246,000 for its properties still under
option following termination of these option agreements.
Year ended December 31, 2011:
During 2011, the Corporation paid in cash $760,000 and issued 1,725,000 common shares to fulfill
commitments relating to several option agreements for properties located in the Shining Tree area. The
fair value of the 1,725,000 common shares at an amount of $327,750 has been determined based on the
quoted price on the date the common shares were issued.
Other additions of $49,515 on the Shining Tree area consisted of newly staked claims or claim renewal
costs.
During 2011, the Corporation recorded an impairment charge of $615,100 for some of its properties under
option following termination of these option agreements.
E&E expenditures
Following are the detailed E&E expenditures incurred in the Shining Tree area, Ontario, Canada:
For the years ended
December 31,
2012
2011
$
$
258,342
1,672,635
72,379
495,009
326,176
608,682
121,579
245,671
21,761
20,845
256,369
514,623
112,574
53,905
14,000
77,584
77,584
1,260,764
3,688,954
Drilling
Assays
Geology
Geophysics
Geochemistry
Logistics, accommodation and travel
Assessment reporting and other
Share-based compensation costs
Depreciation of property, plant and equipment
Total
Financing Activities
Net cash provided by financing activities was $1,500,769 in 2012 compared to $3,241,108 in 2011.
The issuance of shares and units in 2012 is as follows:
a) 16,400,000 units for total cash proceeds of $820,000;
b) 14,000,000 units, on a flow-through basis, for total consideration of $700,000;
c) 450,000 common shares to fulfill its obligation relating to the acquisition of an option to purchase
a 90% interest in the Milner property. This issuance of common shares is a non-cash transaction;
and
d) Share and warrant issue expenses relating to these transactions totalled $19,231.
- 11 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
The issuance of shares and units in 2011 is as follows:
a) 10,006,668 units, including 8,506,668 units issued on a flow-through basis, for total cash
proceeds of $1,501,000;
b) 13,054,000 common shares for total cash proceeds of $1,566,480;
c) 2,850,000 common shares on exercise of warrants, compensation options and options for total
cash proceeds of $433,800;
d) 1,725,000 common shares to fulfill commitments relating to several option agreements for
properties located in the Shining Tree area. This issuance of common shares is a non-cash
transaction; and
e) Share and warrant issue expenses relating to these transactions totalled $287,432.
Operating Activities
The net loss for the year ended December 31, 2012 was $2,383,958 compared to $1,933,050 for prior
year reflecting:
a) Share-based compensation costs amounted to $159,500 due to option vesting in 2012 compared to
$31,688 in 2011;
b) An impairment of exploration and evaluation assets of $1,246,000 in 2012 as compared to $615,100
in 2011 considering that optioned properties were returned to their owners;
c) A decrease in professional and consulting fees.
Professional and consulting fees consist of:
For the year ended
December 31,
2012
2011
$
$
33,139
56,066
253,645
358,401
263,778
360,807
550,562
775,274
Legal fees
Accounting and audit fees
Consulting fees
Total professional and consulting fees
A decrease in accounting and audit fees this year as compared to last year in 2011 is due to nonrecurring fees in 2011 relating to the IFRS transition. The majority of the professional and consulting fees
were paid to related parties and the following section covers in detail the allocation of fees.
Rent, insurance and other expenses consist of:
Telecommunication, website maintenance and information technology
Rent
Office and other expenses
Insurance
Total rent, insurance and other expenses
For the year ended
December 31,
2012
2011
$
$
53,792
47,946
47,661
43,728
20,358
56,837
27,788
35,316
149,599
183,827
The Corporation didn’t incur exploration and evaluation expenditures on its properties in Guatemala since
the end of 2010 but maintained a presence there in 2011. The decrease in office and other expenses is
mainly due to the Corporation’s decision to close its office in Guatemala in early 2012.
In 2012, the Corporation decreased its insurance coverage following the decrease of it exploration
activities.
- 12 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
Transactions with Related Parties
The Corporation had the following transactions with related parties that were in the normal course of
operations and measured at the exchange amounts, which is the amount of consideration established
and agreed to by the related parties:
For the years ended
December 31,
2012
2011
$
$
Exploration expenses (1)
Share issue expenses (3)
Professional and consulting fees (2)
Accounting fees (a)
Legal fees (b)
Consulting fees (c)(d)(e)
17,000
6,682
71,242
7,135
188,510
24,569
221,000
434,079
457,761
284,536
54,642
281,563
620,741
699,118
1) Consulting fees of $17,000 to a private company controlled by a director of the Corporation for
geological services ($71,242 to a private company controlled by the former President of the
Corporation for geological services).
2) Professional and consulting fees includes:
a) Remuneration of CFO in the amount of $86,669 ($136,238 in 2011) paid to a private
company controlled by him. In addition his company charged fees of $101,841 ($148,298 in
2011) for the support staff in respect of accounting, bookkeeping and administrative services;
b) Legal fees of $Nil ($14,582 in 2011) to a legal firm of which a director was a partner and of
$31,251 of which $6,682 are share issue expenses ($40,060 in 2011) to a company
controlled by the Corporate Secretary;
c) Consulting fee of $210,000 ($180,000 in 2011) to a private company controlled by the Acting
President and CEO and Executive Chairman;
d) Consulting fees of $11,000 ($nil in 2011) to a private company controlled by a director of the
Corporation; and
e) Consulting fees of $101,563 in 2011 to a private company controlled by the former President
of the Corporation.
3) Legal fees relating to the financings of $6,683 ($7,135 in 2011) to a company controlled by the
Corporate Secretary.
At December 31, 2012, $16,000 remains to be paid ($Nil as at December 31, 2011) from these
transactions.
Selected Annual Information
Sales
Loss for the year
Loss per share – basic and diluted
Year ended December 31
2011
2010
$
$
(2,383,958)
(1,933,050)
(5,713,938)
(0.02)
(0.02)
(0.09)
Total assets
13,597,673
2012
$
- 13 -
14,836,119
13,625,000
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
Summary of Quarterly Results
The following table contains selected financial information for the last eight quarters:
Loss for the period
Loss per share
Three months ended
December 31, September June 30,
2012
2012 (i)
30, 2012 (i)
$
$
$
(341,782)
(907,465) (203,114)
(0.002)
(0.007)
(0.002)
March 31,
2012 (i)
$
(931,597)
(0.009)
Loss for the period
Loss per share
Three months ended
December 31, September June 30,
2011 (i)
2011
30, 2011 (i)
$
$
$
(500,987) (581,392) (484,946)
(0.005)
(0.01)
(0.005)
March 31,
2011
$
(365,725)
-
(i) The net loss includes impairment of exploration and evaluation assets of $65,000 in Q4-2012,
$711,000 in Q3-2012, $470,000 in Q1-2012, $220,000 in Q4-2011, $272,100 in Q3-2011 and
$123,000 in Q2-2011.
Fourth Quarter Analysis
Investing activities
During the fourth quarter of 2012, additions to the Shining Tree property totalled $3,918 ($462,858 in Q42011) consisted in claim renewal cost. The breakdown for 2011 is as follows:
Q4-2011
a) The Corporation acquired the Mann property located in the Shining Tree area. Creso paid in cash
$100,000 and issued 1,000,000 common shares of the Corporation valued at $130,000;
b) The Corporation paid $195,000 in cash and issued 250,000 common shares of the Corporation
valued at $27,500 to fulfil commitments relating to several option agreements from prior years;
and
c) Other additions of $10,358 consisted of claim renewal costs.
During the fourth quarter of 2012, the Corporation incurred $353,726 ($1,103,892 in Q4-2011) in
exploration and evaluation expenses on its Shining Tree property consisting mainly of geological work in
preparation of the drilling programs on Minto and Duggan properties and diamond drilling on the Minto
property (diamond drilling on the Tyranite and Mann properties in Q4-2011).
Financing activities
Q4-2012
Net cash flows from the issuance of shares and warrants in the fourth quarter of 2012 totalled $814,625
and consisted of non-brokered private placements for an aggregate amount $820,000 less share and
warrant issue expenses of $5,375.
Q4-2011
Net cash flows from the issuance of shares and warrants in the fourth quarter of 2011 totalled $1,838,490
and consisted of non-brokered private placements for an aggregate amount $2,066,480 less share and
warrant issue expenses of $227,990.
- 14 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
Operating activities
The Corporation reported a net loss of $341,782 for the fourth quarter of 2012 compared to a net loss of
$500,987 the same period last year. The main reasons for the variance are:
a) A decrease of $30,344 in professional fees in Q4-2012 compared to Q4-2011. The decrease is
due to non-recurring fees in 2011 relating to the IFRS transition;
b) A decrease of $155,000 in impairment of E&E assets in Q4-2012 compared to Q4-2011. In Q42012 an impairment of $65,000 was recorded as compared to an impairment of $220,000 in Q42011.
Liquidity and Capital Resources
The Corporation has no long term debt and a working capital (current assets less current liabilities) of
$591,424 as at December 31, 2012 as compared to $1,331,418 on December 31, 2011. Management
estimates that these funds will not be sufficient to meet the Corporation’s obligations and budgeted
expenditures through December 31, 2013. The Corporation will have to raise additional funds to continue
operations. The Corporation is pursuing financing alternatives to fund its operations and to continue its
activities as a going concern. Since the end of the year ended December 31, 2012, the Corporation
improved its working capital position through the closing of a private placement for gross proceeds of
$277,000 (see subsequent events after the closing date section).
Advanced exploration of some of the mineral properties would require substantially more financial
resources. In the past, the Corporation has been able to rely on its ability to raise financing in public or
privately negotiated equity offerings. There is no assurance that such financing will be available when
required, or under terms that are favourable to the Corporation. The Corporation may also elect to
advance the exploration of mineral properties through joint-venture participation.
Should the Corporation not be able to raise additional funds or bring in a joint venture partner with whom
to share exploration expenditures, the Corporation may consider the opportunity to adopt a plan to reduce
discretionary expenses.
Although the audited consolidated financial statements have been prepared using IFRS applicable to a
going concern, the above-noted facts and circumstances cast significant doubt on the Corporation’s
ability to continue as a going concern. The audited consolidated financial statements do not reflect the
adjustments to the carrying values of assets and liabilities, to the reported revenues and expenses and to
the balance sheet classifications that would be necessary if the going concern assumption was
inappropriate. These adjustments could be material.
Subsequent events after the closing date
Private placement
On February 28, 2013, the Corporation completed the closing of a non-brokered private placement
consisting of the issuance of 5,540,000 units at $0.05 for a total consideration of $277,000. A unit
consists of one common share and one common share purchase warrant, with each warrant entitling its
holder to purchase a common share at $0.10 over a two-year period following the closing.
All securities issued pursuant to the private placement are subject to a hold period of four months from
the date of closing. As finders' fees, Creso paid in cash $7,490.
- 15 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
Outstanding Share Data
(on March 22, 2013)
Common shares issued
Stock options
Warrants
Fully diluted
Number
144,811,956
5,690,000
41,614,467
191,116,423
Off-Balance Sheet Arrangements
The Corporation does not have any off-balance sheet arrangements.
Financial Instruments and Other Instruments
Financial instruments
Creso is exposed to various financial risks resulting from both its operations and its investments activities.
Creso does not enter into financial instrument agreements including derivative financial instruments for
speculative purposes. Creso’s main financial risk exposure and its financial risk management policies are
disclosed in Note 18 to the annual consolidated financial statements for the years ended December 31,
2012 and 2011.
Other instruments
The liability and conversion option components of the convertible debenture are presented separately on
the consolidated statement of financial position starting from initial recognition and are disclosed in details
in Note 9 to the annual consolidated financial statements for the year ended December 31, 2012.
In November 2012, the holder of the debenture elected to convert the outstanding principal amount of
$675,000 into a 2% NSR royalty on the Duggan property located in Shinning Tree.
Commitment
In July 2012, the Corporation entered into a lease agreement with another corporation for office premises
until June 30, 2015. The total annual rent amounting to approximately $53,372 is equally shared. The
total shared commitment from January 2013 to June 2015 is $133,430 and the Corporation’s share is as
follows:
a) $26,686 in 2013;
b) $26,686 in 2014; and
c) $13,343 from January to June 2015.
Stock Option Plan
The purpose of the Stock Option Plan (the “Plan”) is to serve as an incentive for the directors, officers,
employees and service providers who will be motivated by the Corporation’s success as well as to
promote ownership of common shares of the Corporation by these people. There is no objective attached
to the Plan and no relationship to manage the Corporation’s risks.
Management’s Responsibility for Financial Information & Accounting Estimates
Creso’s consolidated financial statements are the responsibility of Creso’s management and were
prepared by Creso’s management in accordance with IFRS. A description of Creso's significant
accounting policies can be found in Note 3 of Creso's annual consolidated financial statements for the
year ended December 31, 2012.
- 16 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
Many of the amounts included in those financial statements require management to make judgments
and/or estimates. These judgments and estimates are continuously evaluated and are based on
management’s experience and knowledge of the relevant facts and circumstances. Actual results may
differ from the amounts included in the financial statements. A description of Creso's critical accounting
estimates, judgments and assumptions can be found in Note 5 of Creso's annual consolidated financial
statements for the year ended December 31, 2012.
Accounting Standards Issued but not yet Applied
A description of accounting standards issued but not yet applied can be found in Note 4 of Creso's annual
consolidated financial statements for the year ended December 31, 2012.
Risk Factors
Due to the nature of the Corporation’s business, the legal and economic climate in which the Corporation
is operating and the present stage of development of the Corporation, It may be subject to significant
risks. Accordingly, readers should carefully consider the following discussion of risks that pertain to the
Corporation.
Exploration and Development
All of the resource properties in which the Corporation has an interest or the right to acquire an interest
are in the exploration and evaluation stages. Development of Creso's resource properties will only follow
upon obtaining satisfactory results from exploration activities. Exploration and evaluation for and the
development of natural resources involve a high degree of risk and few properties that are explored are
ultimately developed into producing properties. There is no assurance that the Corporations' exploration
and evaluation activities will result in any discoveries of commercial bodies of mineral deposits. The long
term profitability of the Corporation's operations will be in part directly related to the cost and success of
its exploration programs, which may be affected by a number of factors.
Substantial expenditures are required to establish mineral reserves, to develop processes to extract the
resources and, in the case of new properties, to develop the extraction and processing facilities and
infrastructure at any site chosen for extraction. Although substantial benefits may be derived from the
discovery of gold and base metals, no assurance can be given that resources will be discovered in
sufficient quantities to justify commercial operations or that the funds required for development will be
obtained on a timely basis.
Operating Hazards and Risks
Resource exploration involves many risks, which even a combination of experience, knowledge and
careful evaluation may not be able to overcome. Operations in which the Corporation will have a direct or
indirect interest will be subject to all of the hazards and risks normally incidental to exploration,
development and production of natural resources including, but not limited to, drilling, trenching and
surveying all of which could result in personal injuries, loss of life and damage to the property of the
Corporation or others, unusual or unexpected formations, cave-ins, pollution, equipment breakdown,
rugged terrain, wildlife hazards and harsh weather conditions, all of which could result in work stoppages,
damage to property, and possible environmental damage. The nature of the risks associated with the
Corporation's activities is such that potential liabilities and hazards might not be insurable against, or the
Corporation might not elect to insure itself against such liabilities due to high premium costs or other
reasons, in which event the Corporation could incur significant costs that could have a materially adverse
effect upon its financial condition.
- 17 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
Limited Operating History, Lack of Cash Flow and going concern
The Corporation does not have an operating history. None of its properties have commenced commercial
production. The only present source of funds available to the Corporation is through the sale of equity,
debt, securities or other borrowings. Even if the results of exploration are encouraging, the Corporation
may not have sufficient funds to conduct the further exploration that may be necessary to determine
whether or not commercially feasible reserves exist on any property and may not realize a return on its
investment. The Corporation may generate additional working capital through equity offerings,
borrowings, operation, development, sale or possibly the joint venture development of its properties
and/or a combination thereof; however, there is no assurance that any such funds will be available for
operations. Failure to obtain such additional funds, if needed, would have a material adverse effect on the
Corporation's operations.
There can be no assurance that the Corporation will be able to execute on its plans and there are no
guarantees that measures taken by management will be successful. Without new funding being available,
the Corporation may be unable to continue its operations, and amounts realized for assets may be less
than amounts reflected in the consolidated financial statements of the Corporation. The consolidated
financial statements do not reflect the adjustments to the carrying values of assets and liabilities, the
reported amounts of revenues and expenses, and the classification of financial position items where the
going concern assumption is inappropriate, and these adjustments could be material.
Fluctuating Commodity Prices
The Corporation's revenues, if any, are expected to be in large part derived from the extraction and sale
of minerals. The price of this commodity has fluctuated widely, particularly in recent years, and is affected
by numerous factors beyond the Corporation's control including international, economic, and political
trends, expectations of inflation, currency exchange fluctuations, interest rates, global or regional
consumptive patterns, civil unrest, multinational treaties, speculative activities, and increased production
due to new extraction developments and improved extraction and production methods. The effect of
these factors on the price of any production, and therefore the economic viability of any of the
Corporation's exploration projects, cannot accurately be predicted.
Regulatory Requirements
The Corporation's operations may be regulated under a number of international, federal and local laws
and regulations that govern, among other things, the handling of waste materials, some of which are
classified as hazardous materials, and the discharge of hazardous materials into the environment. The
Corporation's operations will be subject to stringent regulations relating to the protection of the
environment and waste handling. In addition to liability for the Corporation's own non-compliance, these
laws and regulations may expose the Corporation to liability for the non-compliance of other parties,
without regard to whether the Corporation was negligent. Sanctions for non-compliance with applicable
environmental laws and regulations may include administrative, civil and criminal penalties, revocation of
permits and corrective action orders. Furthermore, the Corporation may be liable for costs for
environmental cleanup at currently or previously owned or operated properties or off-site locations.
Compliance with existing laws or regulations, the adoption of new laws or regulations or the more
vigorous enforcement of environmental laws or regulations could seriously harm the Corporation's
business by increasing the Corporation's expenses and limiting the Corporation's future opportunities.
Permits and Licences
The operations of the Corporation may require licences and permits from various governmental
authorities. The Corporation believes that it holds all necessary licences and permits required to carry on
with activities that each is currently conducting under applicable laws and regulations and believes that it
is presently complying in all material respects with the terms of such laws and regulations. However,
such laws and regulations are subject to change. There can be no assurance that the Corporation will be
able to obtain all necessary licences and permits required to carry out exploration, development and
mining operations at its projects, or that existing permits will remain in good standing and in full force and
effect at all times.
- 18 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
Industry Conditions
The mineral exploration and mining industry is intensely competitive and there is no assurance that, even
if commercial quantities of a mineral resource are discovered, a profitable market would exist for the sale
of same. The Corporation may compete with corporations and other business entities which are better
financed and have better access to capital than the Corporation; there is no assurance that the
Corporation will be able to successfully compete against such other corporations and entities for capital or
for properties. Mineral exploration properties are sometimes subject to land claims by aboriginal peoples.
There is no assurance that such claims, if asserted, can be satisfactorily resolved on an economic or
timely basis.
Conflicts of Interest
Some of the directors or officers of the Corporation are also directors or officers of other reporting and
non-reporting issuers. Conflicts of interest may arise which could influence these persons in evaluating
possible acquisitions or operations or in generally acting on behalf of the Corporation, notwithstanding
that they will be bound by the provisions of the Canada Business Corporations Act to act at all times in
good faith in the interest of the Corporation and to disclose such conflicts to the Corporation if and when
they arise.
Market for Securities and Volatility of Share Price
There can be no assurance that an active trading market in the Corporation's securities will be
established or sustained. The market price for the Corporation's securities could be subject to wide
fluctuations. Factors such as announcements of quarterly variations in operating results, as well as
market conditions in the industry, may have a significant adverse impact on the market price of the
securities of the Corporation. The stock market has from time to time experienced extreme price and
volume fluctuations, which have often been unrelated to the operating performance of particular
companies.
No Assurances of Title
The acquisition of title to mineral properties is a very detailed and time-consuming process. Although
precautions will be taken by the Corporation to ensure that legal title to its property interests is properly
recorded where possible, there can be no assurance that such title will ultimately be secured.
Furthermore, there is no assurance that the interests of the Corporation in any of its properties may not
be challenged or impugned by competitors, aboriginal groups or otherwise.
Management of Growth
Any expansion of the Corporation's business may place a significant strain on its financial, operational
and managerial resources. There can be no assurance that the Corporation will be able to implement and
subsequently improve its operations and financial systems successfully and in a timely manner in order to
manage any growth it experiences. There can be no assurance that the Corporation will be able to
manage growth successfully. Any ability of the Corporation to manage growth successfully could have a
material adverse effect on the Corporation's business, financial condition and results of operations.
Reliance on Key Personnel and Consultants
There can be no assurance that any of the Corporation's employees will remain with the Corporation or
that, in the future, the employees will not organize competitive businesses or accept employment with
companies competitive with the Corporation.
Environmental Risks and Hazards
All phases of the operations of the Corporation will be subject to environmental regulation in the
jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air
and water quality standards and land reclamation. They also set forth limitations on the generation,
transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving
in a manner which will require stricter standards and enforcement, increased fines and penalties for noncompliance, more stringent environmental assessments of proposed projects and a heightened degree of
responsibility for companies and their officers, directors and employees. There is no assurance that future
- 19 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2012 and 2011
changes in environmental regulation, if any, will not adversely affect the operations of the Corporation.
Environmental hazards may exist on the properties on which Creso holds interests which are unknown to
Creso at present and which have been caused by previous or existing owners or operators of the
properties.
Government approvals and permits are currently, and may in the future be, required in connection with
the operations of the Corporation. To the extent such approvals are required and not obtained, the
Corporation may be curtailed or prohibited from continuing its operations or from proceeding with planned
exploration or development of mineral properties.
Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement
actions thereunder, including orders issued by regulatory or judicial authorities causing operations to
cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of
additional equipment, or remedial actions. Parties engaged in mining operations or in the exploration or
development of mineral properties may be required to compensate those suffering loss or damage by
reason of the mining activities and may have civil or criminal fines or penalties imposed for violations of
applicable laws or regulations.
Amendments to current laws, regulations and permits governing operations and activities of mining and
exploration companies, or more stringent implementation thereof, could have a material adverse impact
on the mining operations and cause increases in exploration expenses, capital expenditures or production
costs, or a reduction in production levels at producing properties, or require the abandonment or delays in
development of new mining properties.
Cautionary Statement on Forward-Looking Information
All statements in this management's discussion and analysis, other than statements of historical fact, that
address future events or developments that Creso expects to occur, are forward-looking statements.
Although Creso believes the expectations expressed in such forward-looking statements are based on
reasonable assumptions, such statements are not guarantees of future performance and actual results or
developments may differ materially from those in the forward-looking statements. Factors that could
cause actual results to differ materially from those in forward-looking statements include results of
exploration activities, industry-related risks, regulatory approvals, and continued availability of capital and
financing and general economic, market or business conditions.
Forward-looking statements are based on the expectations and opinions of the Corporation's
management on the date this management’s discussion and analysis is made. The assumptions used in
the preparation of this discussion, although considered reasonable at the time of preparation, may prove
to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. The
Corporation expressly disclaims any intention or obligation to update or revise any forward-looking
statements whether as a result of new information, future events or otherwise, except as required by
applicable law. Depending on exploration results and available financing, the Corporation may at any
point modify the suggested work program.
March 22, 2013
(S) Pierre Gauthier
Pierre Gauthier
President and CEO
(S) Vatché Tchakmakian
Vatché Tchakmakian, CPA, CA
Chief Financial Officer
- 20 -
Creso Exploration Inc.
Management's Discussion and Analysis
For the years ended December 31, 2011 and 2010
Creso Exploration Inc.
600 Maisonneuve Blvd. West, Suite 2750
Montreal, Quebec, H3A 3J2
Tel: (514) 866-6001 # 239 / Fax: (514) 866-6193
Website: www.creso.ca
TSX Venture Exchange: CXT / OTCQX: CRXEF / Frankfurt Exchange: C3X
Creso Exploration Inc.
Table of content
For the years ended December 31, 2011 and 2010
Description of Business and Corporate Objective ........................................................................3
2011 Overview ..............................................................................................................................3
2012 Outlook.................................................................................................................................4
Background...................................................................................................................................5
Mineral Properties.........................................................................................................................5
Investing Activities ......................................................................................................................12
Financing Activities .....................................................................................................................13
Operating Activities .....................................................................................................................14
Transactions with Related Parties ..............................................................................................15
Selected Annual Information.......................................................................................................16
Summary of Quarterly Results....................................................................................................16
Fourth Quarter Analysis ..............................................................................................................17
Liquidity and Capital Resources .................................................................................................18
Outstanding Share Data .............................................................................................................18
Off-Balance Sheet Arrangements ...............................................................................................18
Financial Instruments and other instruments ..............................................................................19
Commitment................................................................................................................................19
Stock Option Plan .......................................................................................................................19
Management’s Responsibility for Financial Information & Critical Accounting Estimates...........19
Accounting Standards Issued but not yet Adopted .....................................................................19
IFRS Convergence .....................................................................................................................20
Risk Factors ................................................................................................................................21
Cautionary Statement on Forward-Looking Information .............................................................24
-2-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
The following Management’s Discussion and Analysis (the “MD&A”) of the financial position and results
of operations of Creso Exploration Inc. (“Creso” or the “Corporation”), constitutes management’s review
of the factors that affected the Corporation’s financial and operating performance as at and for the
years ended December 31, 2011 and 2010. This MD&A has been prepared based upon information
available to the Corporation as at March 29, 2012 and should be read in conjunction with the
Corporation’s audited consolidated financial statements for the years ended December 31, 2011 and
2010 and notes thereto.
The Corporation’s audited consolidated financial statements and MD&A are presented in Canadian
dollars and have been prepared in accordance with International Financial Reporting Standards
(“IFRS”). Previously, the Corporation prepared its annual consolidated financial statements in
accordance with Canadian generally accepted accounting principles (“Canadian GAAP”). The
Corporation’s 2010 comparatives in this MD&A have been restated and presented in accordance with
IFRS.
Readers are cautioned that the MD&A contains forward-looking statements and that actual events may
vary from management’s expectations. Readers are encouraged to read the Cautionary Statement on
Forward-Looking Information at the end of this MD&A.
Further information related to the Corporation is available on the System for Electronic Document
Analysis and Retrieval (SEDAR) in Canada and can be accessed at www.sedar.com. For additional
information, the Corporation’s website can be found at www.creso.ca.
Description of Business and Corporate Objective
The Corporation has interest in mineral properties located in Canada and Guatemala which are
presently at the exploration and evaluation stage. Until it is determined that properties contain mineral
reserves or resources that can be economically mined, they are classified as exploration and evaluation
assets.
The Corporation’s common shares are listed on the TSX Venture Exchange (“the Exchange”) under the
symbol CXT and on the OTCQX (CRXEF) and Frankfurt Exchange (C3X).
Creso’s corporate objective is to acquire and explore high grade mineral properties primarily in gold and
silver, as well as copper and zinc. The Corporation's principal mining exploration holdings are located in
the Shining Tree area of Northern Ontario within 100 km of the Timmins and Kirkland Lake mining
camps.
2011 Overview
Exploration and evaluation activities
In 2011, The Corporation paid in cash $0.8 million and issued 1,725,000 common shares to fulfill
commitments relating to several option agreements for properties located in the Shining Tree area.
In addition, the Corporation incurred $3.7 million of exploration and evaluation expenditures on the
Shining Tree properties. The following are the main exploration and evaluation activities conducted in
2011:
a)
The Corporation continued the diamond drilling program on the Minto property and announced
the results from 10 drill holes totalling 6,347 meters in February 2011. Highlights from the results
reported were 24.48 g/t Au over 1.41 meters in the deeper part of Hole MC09-01 and 6.8 g/t Au
over 20.79 meters in a more complete tabulation of a previously reported interval in Hole MC1003;
-3-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
b)
c)
d)
e)
f)
g)
Creso conducted a diamond drill program during Q1-2011 consisting of 4 holes on Minto and 2
holes on the adjoining Athena property. The highlight of this drill program was the intercept of
5.04g/t Au over 24.4 meters in breccia in Hole MC11-11 on Minto.
In Q1-2011, the Corporation completed three diamond drill holes totaling 1,698 meters on the
Tyranite property.
In Q2-2011, the Corporation conducted a combined 1,393 meters diamond drill program on the
Matona, Porphyry Lake, Hare Lake and Tyrrell properties.
In Q3-2011, Creso conducted an exploration program consisting of surface grab and channel
sampling at the Corporation’s Moore-McDonald, Downey, Gibson, Bennett and Kubiak properties
located in the West Shining Tree district. Gold values over 1 g/t occurred in 65 of 297 samples
with 15 samples exceeding 10 g/t Au;
In Q4-2011, the Corporation conducted a 12 hole program, totalling 2,225 meters on the Tyranite
property. Hole TY11-04 intersected 15.7m of 3.04 g/t gold at a depth of 27.5 metres;
In November 2011, the Corporation acquired 100% interest in the Mann silver property located in
Milner Township and completed a drill program consisting of a combined 930 meters of diamond
drilling. A highlight from the diamond drill program is the interval of 5130 g/t Ag over 0.65m from
from Hole MN11-03 and 400 g/t Ag over 1.0m from Hole MN11-04.
Financing
Net cash flows from issuance of common shares and warrants totaled $3.2 million in 2011 and
consisted of the following items:
a) The Corporation closed non-brokered private placements for an aggregate amount of
$3.1 million;
b) Proceeds from warrants, compensation options and options exercise totaled $0.4 million; and
c) Share issue expenses of $0.3 million.
2012 Outlook
The Corporation conducted a ten diamond drill hole program on the Mann property between January
and March, 2012, and intends to release the results in April 2012 once the results of the last holes are
received from the lab and those are fully tabulated. Five holes in this program were designed to further
define vein extensions from historically mined zones, and five were designed to test for new vein zones
on both the east and west sides of the Mann Fault. The areas checked for new vein zones were
targeted by results from the Gradient and Insight Section Array Induced Polarization survey completed
in January 2012. The Corporation intends to follow up with ground exploration of the target areas as
snow conditions permit.
JVX Geophysics Ltd have been engaged to perform a Clarity 3D Inversion Model downhole induced
polarization (DSIP) survey to assist in the definition of a 3D model of the Minto Upper and Lower zones
as soon as conditions permit. This program is to include one previously surveyed hole (MC10-02), and
a previously untested hole (MC10-10), and a full compilation of results will be completed to improve the
targeting of any next step of drilling at the Minto property.
The Corporation has completed a twelve hole drilling program between October and December, 2011,
on the Tyranite property (see Press Release dated January 31, 2012). From the NI 43-101 Technical
Report dated December 12, 2011, there is a recommendation for a Phase 2 drill program totalling 5,000
metres for approximately $1,000,000. The Corporation will be carefully compiling all current and historic
geological and geophysical information before making any final decision on a follow up drilling program.
-4-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
Background
Creso Exploration Inc. (formerly Willowstar Capital Inc.) was incorporated under the provisions of the
Business Corporations Act (Ontario) on August 25, 2004 and was continued under the Canada
Business Corporations Act as of September 29, 2010. Prior to June 1, 2010 the Corporation was a
Capital Pool Company as defined in Policy 2.4 of the Exchange. On June 1, 2010, the Corporation
completed its qualifying transaction (the “Qualifying Transaction”) by acquiring Creso Resources Inc.
(“Creso Resources”), closed a concurrent brokered private placement for aggregate gross proceeds of
$4.6 million and evolved into a junior natural resource exploration company. On June 1, 2010, the
Corporation changed its name to Creso Exploration Inc.
This transaction has been accounted for as a reverse takeover of Creso Exploration by Creso
Resources. Accordingly, the reported balances and transactions for periods prior to June 1, 2010 are
those of Creso Resources. On January 1, 2011, Creso Exploration and Creso Resources were
amalgamated and continued as one corporation under the name Creso Exploration Inc. The
corporation's financial year ends on December 31.
Mineral Properties
Shining Tree Area, Ontario
The Corporation's principal mining exploration holdings are located in the Shining Tree mining camp of
Northern Ontario, located within 100 km south and southwest, respectively, of the Timmins and Kirkland
Lake mining camps. The Corporation assembled a significant land package by acquisition through
staking or optioning large areas of ground adjacent to its Duggan, Minto, Tyranite and Mann properties,
all totalling approximately 280 square kilometres. Each of these properties has the potential for
extensions of the known mineralized zones that currently define them.
The Corporation has been conducting major geophysical surveys, diamond drilling, and geological
programs on the Shining Tree area since the closing of the brokered financing on June 1, 2010.
Exploration activities conducted in 2011 and 2010 are as follows:
Year ended December 31, 2011:
Geophysics program:
During the first quarter of 2011, Insight Geophysics Inc. was contracted by the Corporation to perform
an Insight Section and Gradient IP/Resistivity grid survey over the Duggan Zone. An Interpretive Report
of this work was received by the Corporation in April 2011.
In February 2011, the Corporation received the Interpretive Report of the Insight Section and Gradient
IP/Resistivity grid survey that was done over the Tyranite and Minto Zones. The Corporation employed
Mr. Bill Doerner, a well respected international geophysicist, to review and conduct a structural
interpretation of the previously acquired Terraquest airborne radiometrics, magnetic, and VLF data
flown over the Minto, Tyranite, and Duggan zones. Mr. Doerner then integrated this data with the
Insight IP/Resistivity data to create a 3-D display of merged surface gradient and airborne data that was
used by Corporation geologists to help develop drill targets at the Tyranite Zone that aligned with N10W
to N-S structures that link the Tyranite and Minto zones and displayed coincident anomalies of
Chargeability and Resistivity highs of variable levels of intensity.
In January 2011, JVX Ltd. collected borehole gradient array time-domain IP/Resistivity data from Minto
holes MC-09-01, MC09-02, and MC10-04. From January to June 2011 several 3D Chargeability and
Resistivity Models were constructed from inversion plots of Spectral Pole-Dipole pseudo sections.
Time-decay variants were developed to distinguish fine-grained disseminated pyrite (short decay time)
from coarser-grained disseminated pyrite (longer decay time) in the areas surrounding the boreholes
from which the measurements were taken.
-5-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
Year ended December 31, 2010
The Corporation conducted a detailed airborne and surface/down-hole geophysics, EM/IP, magnetic,
and radiometric surveys to better define geology, alteration, and structure, and to outline potential
concentrations of disseminated sulphides on the Shining Tree area. This work was followed by a
detailed 3D modeling/geologic/structural study.
The Corporation announced the signature of two airborne (fixed-wing and helicopter) geophysical
contracts with Terraquest Ltd which started in August 2010. The Helicopter Survey, which used Single
Sensor High Resolution Aero-magnetics, Radiometrics, and XDS/VLF-EM systems was based on 4,512
line kilometres, flown at low altitude. The fixed-wing aircraft surveyed the entire eastern half of the
Shining Tree properties covering large areas (524 km²) of the Tyrrell, Knight, and Milner Townships,
and used High Resolution Aeromagnetics, Horizontal Gradiometer, Radiometrics, and XDS/VLF-EM
systems over 5,853 line kilometres at a 100m line spacing.
The Helicopter Survey covered an area of 68 square kilometers surrounding the Minto, Duggan, and
Matona properties, encompassing 10.0 kilometers in a North-South direction and 6.8 kilometers in an
East-West direction. The Survey was done on 15 meter spacing intervals. In addition, the Helicopter
Survey covered an area of 11.65 square kilometers in Morel Township for a total of 426 line kilometres,
where two shafts are located 2 kilometers apart with historical values ranging up to 5.5 grams per tonne
of gold, 14% Copper, 600 grams per tonne of Silver, and 0.89 % Cobalt.
The Corporation also initiated borehole geophysics studies in August 2010 on Minto holes #1 and #2
with DGI Geoscience Inc. to log High-Range Poly Resistivity /Natural Gamma and Spectral Gamma
Radiometrics, Induced Polarization, Inductive Conductivity, Magnetic Susceptibility, Optical Televiewer,
Directional Orientation, and Full Wave Form Sonics. These surveys were followed by 3-Dimensional
Borehole Spectral Induced Polarization (gradient) and Deep Surface Directional Arrays (pole-dipole) IP
surveys done by JVX Ltd on the extended portions of Minto holes #1 and #2 to respective depths of
672m and 920m.
During the fourth quarter of 2010, the Corporation conducted a deep penetrative Time Domain Surface
IP Survey over the Minto and Tyranite Zones with Insight Geophysics Inc. The Corporation has also
signed a contract with Diagnos Inc. (TSX-V: ADK) for the use of its Computer Aided Resources
Detection System (CARDS) which is used to identify areas with a high probability of containing a
significant mineral deposit in order to identify lateral extensions of the Minto property, as well as to
define the signatures of the other gold mineralization within the Survey area.
The combination of these multi geophysical surveys is particularly well adapted to the Shining Tree
area where contrasts in hydrothermal alteration, mineralized volcanic and intrusive rocks, and complex
structural features are common. Radiometric surveys will aid in delineating potassium enriched
alteration zones commonly associated with gold mineralization in the area.
Diamond drilling program
Minto Property
The Minto gold property, 100% owned by the Corporation, is located approximately 96 km south of
Timmins and 93 km southwest of Kirkland Lake and approximately 42 kilometers South-West of the
then Northgate Minerals Corporation’s Young-Davidson gold deposit.
Year ended December 31, 2010:
In 2009-2010, 2 holes were drilled on the Minto property to test historic drilling and surface work. Hole 1
was drilled to depth of 269 meters and Hole 2 to 290 meters the maximum depth of the drill being used
at the time. Anomalous Au was detected in most of holes except more mafic units. Top of both holes
had isolated veins near hole tops, MC09-01, 10.4 g/t Au at 31.3 to 39.9 meters and MC09-02, 2.0g/t Au
at 4.8 to 5.9 meters; MC09-02 was strongly anomalous to 235 meters.
-6-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
The best results of the 2009 NQ diamond drilling two-hole program were from MC09-2, drilled to 290
meters depth:
1)
2)
18.2 g/t Au over 65.7 meters from 49.3 metres to 115 meters, (7.9 g/t Au if cut at 31.1 g/t), and
4.61 g/t Au over 79.6 meters from 132.4 meters to 212 meters, (3.35 g/t Au if cut at 31.1 g/t).
In 2010 due to untested potential not reached by earlier drilling of Holes 1 and 2, another drill company
was engaged to deepen the holes and drill a 3rd hole (Hole MC10-3b) to undercut the first 2 holes to
depth. Hole MC09-01 is currently bottomed at 920 meters and Hole MC09-02 is at 672 meters. The
holes cross one another and are approximately 52 meters apart at depth in plan view. The high grade
zone of Hole MC09-01 ran 13.3 g/t Au over 82.5 meters starting at the southern contact of the mafic
flow unit.
The third diamond drill hole, MC10-03b, was completed in early October 2010 to a depth of 1,020
meters. On October 29, 2010, the Corporation announced preliminary results on this hole with 280
meters averaging 1.2 g/t Au from 536.9 meters to 816.9 meters depth. Further holes MC10-04 to
MC11-12 were drilled to test mineralization in the upper zone only, with drill locations based on
Downhole and surface IP.
Year ended December 31, 2011:
A total of 781 meters of core were drilled from holes MC10-10 (391m-lower half), MC11-11 (250
meters), and MC11-12 (140 meters) in the first quarter of 2011. The highlight of this program was
encountering 192 meters of 1.01 g/t Au from 28.0 meters to 220.0 meters in MC11-11, including 42.7
meters of 3.94 g/t Au beginning at 136.2 meters, and 24.4 meters of 5.04 g/t Au from 145.9 meters to
170.3 meters. Hole MC10-10 displayed 8.4 meters of 0.24 g/t Au beginning at 231.3 meters, and
MC11-12 had only slightly anomalous gold assays locally.
Drilling confirms Au mineralization is related to vein systems in a northerly trending structure with
mineralization related to an upper chlorite carbonate breccia and a lower felsic-intermediate
flow/breccia system. Results show an anomalous Au system averaging 2 to 10 times background with
localized higher pods.
General geology (crossing Minto) intersected by drilling and/or surface work indicated a north, E-W to
NNE-SSW felsic intermediate unit of porphyry and pyroclastic flows, interbedded with tuffs and
fragmentals and primary sulphide lenses and pods. A similar section is indicated to the south that also
shows beds and lenses of Fe Formation. Separating the above is a predominantly mafic flow/sill system
with localized ultramafic flows. All units dip 45-50deg N.
An SEM (Laurentian University) petrographic study shows the current character of Mineralized and
local rock types. All show extreme hydrothermal and structural (quartz-carbonate veining) alteration of
all samples.of key interest are secondary -vuggy pyrite grains: 2 phases of pyrite are observed a more
primary phase showing a general uniform composition and more euhedral structure and a secondary
vuggy phase, commonly associated with more intense alteration/recrystallization and often with vein
structures.
The secondary phase shows enrichment in other elements, especially Arsenic, Silver and Tellurium.
Some of the vuggy textured crystals have distinct Au grains. Preliminary examination suggests this
sulphide (recrystallized, secondary) is the predominant control of Au mineralization and as observed its
occurrence is erratic. As such this can explain the erratic assay numbers in exploration analysis
especially in drill core, and the variation of drill results from surface and bulk sampling.
Overall exploration on the Minto property has been quite restrictive focusing more on the high grade
Minto breccia pod and IP anomalies (interpretation questionable) than the controlling structures. These
structural offsets are clearly indicated by IP lineaments and detailed Magnetic trends. At this time,
(other than deep holes MC-901, 10-3b. that indicate mineralization structure south of the main mafic
unit at depth), the southern extensions have not been tested.
-7-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
Duggan property
The Duggan property, 100% owned by the Corporation, is located 1.8 kilometers to the west-northwest
of the Tyranite Zone and approximately 3.5 kilometers northwest of the Minto Zone. Quartz-carbonate
veins, together with linear magnetic lows, define a general North-North West-South South-East
structural trend at Duggan. Mineralization occurs with four northerly vein systems within a granophyric
phase of the Syenodiorite intrusion and within contact ultramafic flows.
The Duggan mineralization alteration zone occurs within syenodiorite (compositionally grey to pink
syenite in colour) and is part of the Milly Creek pluton, a felsic-intermediate stock with a low to high
airborne magnetic response. It also sits at the margin of a potash/airborne radiometric high (Terraquest
Airborne), probably representing sericite/K-feldspar content. Alteration is pervasive and varies from
pink, to black to greenish mineral assemblages (A NNW-SSE structural/schist zone also seems to have
some control of alteration and mineralization.
Also of interest and possible mineralizing significance, is the presence of angular mafic blocks within
the syenodiorite indicating the occurrence of explosive activity in the geological formation process,
further suggested by a circular magnetic feature (high magnetic boundary with central magnetic low) in
the SW boundary of the property. This is likely the representation of an eruptive volcanic/intrusive
event. Alteration in the syenodiorite comprises quartz, sericite, feldspar and contains abundant
disseminated sulphide. Whole rock chemistry indicates strong potash enrichment or potash enrichment
and soda depletion. Sulphur and carbon enrichment is also noted.
Gold mineralization occurs along the NNW-SSE structure in two altered rock types. South of
5279600 m N, 498000 m E (UTM NAD 83) gold generally occurs in altered ultramafic rocks within shear
zones up to several metres wide. North of this coordinate, gold occurs in altered syenodiorite in zones
averaging 1.0g/t Au over approximately 100 meter wide containing narrow high grade gold (with vg)
quartz sulphide zones. This alteration zone is associated with a magnetic low, bordering a magnetic
high and continues north, suggesting significant additional and untested mineral potential.
Terraquest Radiometrics response also outlines this potential trend. Historic drill sections indicated an
alteration/gold anomaly zone possibly extending northward and to depth. Testing was limited to a depth
of about 100 meters. 2007 drilling has indicated continuity of gold along a pyritized shear/alteration
zone of NNW direction for 700 meters and down to a depth of 240 meters. Of particular interest, Hole
97-225 indicated a gold zone with sporadic high gold sections over 76 metres, Hole D3-07 showed a
quartz/syenite breccia zone with abundant disseminated sulphide, and Hole D9-07 intersected the
same zone over 93 meters, 220 metres north of hole D3-07.
Whole rock geochemistry indicates the Milly Creek Pluton to comprise three compositional phases
consisting of syenite with an average of 60% SiO2 and a gabbroic-diorite phase averaging 53% SiO2
and a granitic phase averaging 67% SiO2. All phases contain elevated alkalis.
During the fourth quarter of 2010 and the first quarter of 2011, the Corporation conducted a 1,037 metre
drilling program on the Duggan property essentially to test previous drilling. Five holes (DUG10-15
through DUG10-19) were drilled across the north-trending Duggan Zone and encountered multiple
narrow sulfide-bearing quartz-carbonate veins, confirming the structural continuity of this zone. The
Corporation completed 564 metres of diamond core drilling in three holes, DUG10-17B (197m),
DUG10-18 (242m), and DUG10-19 (125m) in the first quarter of 2011. The highlights of this program
included 48.8 meters of 0.69 g/t Au in DUG10-17B beginning at 96.0 meters, and 28.9 meters of 1.25
g/t Au beginning at 53.3 meters in DUG10-19, including 0.5 meters of 38.0 g/t Au beginning at 79.4
meters. Previously, in the fourth quarter of 2010, three additional holes were drilled for a total of 499.2
meters (DUG10-15=278m; DUG10-16=190.2m, and DUG10-17A=31m).
The Duggan Zone still remains open to the North and to depth. A new Au zone intersected by historic
Hole 97-02 intersected in a structure to the east also remains open.
-8-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
North Duggan property
The North Duggan property consists of the Mining Claims L 121 9455 and L 121 9456, each consisting
of 12 claim units in the Larder Lake Division, Province of Ontario. This property adjoins the Duggan
property immediately to the north. The Corporation drilled a total of 1,489.3 meters in two holes
(DUG10-13=731.3m and DUG10-14=758.0m) in 2010. The northern extension of the Duggan zone
passes onto the North Duggan property, as determined by Dug10-13, with a low grade intercept of 3.25
meters of 0.49 g/t Au, beginning at 292.65 meters. The North Duggan property is a joint venture with
Temex Resources Corp., where Creso has earned a 75% interest. Multiple zones of gold
mineralization that are present in Dug10-14, east of the main Duggan Zone, are likely expressions of
multiple parallel N10W structures evidenced from ground-based gradient array IP/Resistivity surveys
conducted by Creso. The best of these gold zones in DUG10-14 has 2.0 meters of 2.82 g/t Au,
beginning at 111.0 meters.
Tyranite property
The Tyranite mine, 100% owned by the Corporation, is located 2.5 kilometers north of the Minto Project
on a parallel North-South structure that has been recently interpreted from ground and airborne
geophysical surveys. Historic geologic reports from the Tyranite Mine suggest the gold-bearing
structure has a strike length of over 1,200 meter. The old Tyranite mine has a shaft 343m deep that
serviced seven levels and produced 223,810 tonnes of ore at a recovered grade of 0.140 oz per tonne
(4.46 g/t) Au, resulting in the production of some 31,352 ounces of gold, the most of any zone in the
Shining Tree district (from M.W. Carter, 1977, Ontario Division of Mines Geoscience Report 152).
The Corporation completed three diamond drill holes totalling 1,698 meters on the Tyranite property
during Q1-2011 (TY11-01=473m; TY11-02=614m; and TY11-03=611m). The Tyranite results
demonstrate that significant gold mineralization is developed over some 470 vertical meters and 1,200
meters along strike, open vertically at depth and along strike. Moreover, airborne geophysics suggests
that the Tyranite Main Zone mineralization aligns with the Minto deposit, 2.5 km to the SSE, along a
narrow structural corridor trending N10W.
Highlights from this program were released on April 21, 2011 by press release. Significant widths and
gold grades are evidenced along multiple strands of mineralization within the Main Zone (N-S strike;
73° W dip) of the Tyranite mine. The best and deepest intercept from this drill program had 5.22 g/t Au
over 11.8 meters in hole TY11-02, from 492.5m to 504.3m (including 10.61 g/t Au over 4m). This
intercept penetrated the Main Zone at approximately 130m depth below the deepest level (1125 level)
of the old Tyranite mine, some 470m vertically below the surface. In addition, hole TY11-03b
intercepted 3.68 g/t Au over 30 meters, including 6.5 g/t Au over 4.5 meters, with the highest individual
assay from this interval grading 11.85 g/t Au over 1.5m, from 429.5m to 431m. The highest single
sample value from this drill program is 14.0 g/t Au over 0.3m, from 419.8m to 420.1m in hole TY11-01.
Additional outliers of mineralization occur locally away from the Main Zone, both in the hanging wall and
footwall, with the latter exemplified by the interval of 5.53 g/t Au over 0.7m, from 437.4m to 438.1m in
hole TY11-01. Creso geologists believe there is additional gold potential deeper beneath the current
drilling.
In the forth quarter of 2011, the Corporation conducted a 12 hole program (TY11-04 to TY11-15),
totalling 2,225m, designed to confirm the results of historic drill holes in the Tyranite Main Zone and to
test targets to the east and west of that zone by drilling locations selected on the basis of IP criteria
confirmed by surface exposures of pyrite mineralization.
Hole TY11-04 intersected 15.7m of 3.04 g/t Au at a depth of only 27.5 metres confirming the near
surface mineralization and open pit potential. Also highlighted from the results is the intersection in
hole TY11-12 of 1.68 g/t Au over 39.9m from 222.9 to 262.8m, including the intercept 3.99 g/t Au over
4.0m from 229.0 to 233.0m. The current drilling campaign along with historical drilling now confirms the
mineralization over a strike length of 1200 metres in a North--South direction and to a depth of 550
metres. The mineralization remains open along the North--South strike and at depth. (Please refer to
press release dated January 31, 2012 for additional information).
-9-
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
For additional information on the Minto, Tyranite, and Duggan properties, please refer to the press
releases issued and to the 43-101 technical report dated December 12, 2011 available on
www.sedar.ca.
Mann property
In November 2011, the Corporation exercised its option and acquired 100% interest in the Mann silver
property located in Milner Township. The property produced 178,000 ounces of silver from some 8,000
tons of ore for an average grade of over 21 ounces per ton (720.3 grams per tonne) of silver. The
property has five shafts, the deepest of which (No. 3) is 200 vertical feet. A ramp was also driven to the
210-foot level (from Report by L.J. Cunningham, Manridge Explorations Limited, February 11, 1985).
The Corporation’s objective at the Mann mine will be to confirm targets in the D-zone, which was
partially mined and had intersections of up to 506 ounces per ton (17,356 grams per tonne) of silver
over 9 feet, as well as 495 ounces per ton (16,978 grams per tonne) of silver over 7 feet, and numerous
other veins reported. The Corporation cannot yet confirm the grades and thicknesses reported in the
historic literature. The Mann property is contiguous to the Corporation’s claims in the Milner Township.
From 1968 to 1970, 8,096 tons of ore were treated at the Mann mine with an average grade of 21.5
ounces (609 grams) of silver per ton. From 1983 to 1984 1,000 tons of ore were processed from the
ramp and produced approximately 30,000 ounces of silver. Operations ceased on December 1984. The
Mann property is located “in the Gowganda Region of the famous Temiskaming Silver Area, from which
570,000,000 ounces of silver have been produced, including 60,000,000 ounces produced in the
Gowganda Region. All of the silver production shows a close spatial and genetic relationship to the
Nipissing diabase, which has intruded older rocks from a number of points to form a series of arches,
basins and irregular forms. In the Gowganda Region over 95% of the silver produced has been
obtained from the Nipissing diabase within basin structures. Elsewhere in the Temiskaming Silver area,
much of the silver produced has been derived from intruded rocks” (Extract from a report prepared for
Manridge Explorations Limited by L.J Cunningham, .Sc., P. Eng. Dated February 11, 1985).
The Corporation paid $100,000 cash and issued of 1,000,000 common shares of the Corporation to
acquire this property.
In November 2011, the Corporation completed a drill program consisting of a combined 930 meters of
diamond drilling on the Mann property to confirm historical results of hole #67-60 that reported 520 oz/t
Ag over a width of 2.9 feet at a depth of 12 meters from surface and test the extension of the D Zone
both laterally and at depths below 39 meters where values of 6,309 oz/t Ag over 2.0 feet were reported
at the end of an inclined ramp.
A highlight from the diamond drill program is the interval of 5130 g/t Ag over 0.65m from 39.8 to 40.45m
from Hole MN11-03, 400 g/t Ag over 1.0m at 35.4 to 36.4m from Hole MN11-04 and 39 g/t over 1.5m at
39.5 to 41.0m from Hole MN 11-05. Hole MN11-04 is located 27m west of Hole MN11-03. Hole MN1103 was designed to test the near-surface vein cluster in which historic hole 67-60 had reported 520
oz/ton over 2.9ft (17,828.7g/t over 0.88m).
Properties under option
Athena Property
Drilling on the Athena Option (JV with Goldeye Explorations Limited) in the first quarter of
2011consisted of 895 meters (AT10-01 = 452m and AT10-02 = 443m). The Athena claims are
immediately east of the Minto claims, with AT10-02 collared approximately 330 meters east of the Minto
Pit, and AT10-01 collared approximately 230 meters south of AT10-02. These holes were designed to
test a N-S trending magnetic linear that parallels a similar structure some 300 meters to the westnorthwest at Minto, as well as eastern extensions of chargeability anomalies observed in a gradient
array IP/Resistivity survey done over the Minto Pit.
- 10 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
The Athena drill holes showed local narrow zones with low-level gold values (up to 0.15 g/t Au),
although no significant gold intercepts were observed. However, noteworthy mineralization in a quartzcarbonate vein from 44.5 meters to 44.9 meters (0.4m, true width uncertain) in Hole AT10-01 returned
0.134 g/t Au, 43.1 g/t Ag, 24.5 g/t Te, and 57 g/t Bi. (See Press Release dated February 9, 2011).
In light of recent work and budget prioritizations, it was decided to return the properties optioned from
Goldeye (Athena, Michelle and Pinkerton properties) to its underlying owner.
Matona, Porphyry Lake, Hare Lake, and Tyrrell properties
In May and June 2011, the Corporation completed a drill program consisting of a combined 1,393
meters of diamond drilling on the Matona, Porphyry Lake, Hare Lake, and Tyrrell properties located in
the Shining Tree area.
The Corporation held options to acquire a 100% interest in these properties. The Matona property,
located 4.5 km west of the Minto property, is contiguous to the east with the Hare Lake property. The
Porphyry Lake property is located 3 km southeast of the main Matona shaft and 1.5 km west of the
historic Minto Pit. The Tyrrell property is located some 0.75 km south of the Minto Pit along the N10W
fracture zone that aligns the Minto and Tyranite Zones.
The results, announced on August 17, 2011, include the Hare Lake HR11-01 drill hole from 77.0 to 78.5
meters (1.5 meters) grading 33.1 g/t Au. This high grade gold intercept appears to occur along a N10W
structure, at the intersection with a cross cutting N60E structure, and may be indicative of a broader
zone of mineralization at depth. This occurrence, as well as numerous other similar, and somewhat
isolated, high grade gold occurrences, occur throughout the Shining Tree District and will require
ongoing geologic evaluation to determine the true potential of this district.
During the third quarter of 2011 and after review of the results of the Matona mineralization and taking
into account the required cash payments, the Corporation has decided not to continue the option
agreements with the underlying property owner and has returned the property.
In November 2011, the Corporation has reached an agreement to renew its option to acquire 100% of
the Matona property for an additional payment of $50,000, instead of the required $200,000 cash
payment, and the issuance of 100,000 additional common shares of the Corporation. At present, the
other obligations of the Corporation in connection with this option are the following:
June 16, 2012
June 16, 2013
Cash Payments
$
$450,000
$300,000
Exploration Work
Commitment
$100,000
$100,000
In light of recent work and budget prioritizations, it was decided to return the two Hare Lake, as well as
the Indian Lake option properties, to their respective underlying owners.
In summary, as at December 31, 2011, the Corporation has options to acquire 100% interest in seven
exploration properties located in the Shining Tree area. In order to earn its 100% interest, the
Corporation has to make cash payments, issue common shares of its capital and incur exploration
expenditures under the following conditions:
Exploration
work
Share capital
Cash payment
issuance
commitment
$
Number
$
In 2012
1,195,000
475,000
1,220,000
In 2013
350,000
50,000
250,000
- 11 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
Qualified person
Mr. Mike White, M. Sc, P. Geo., is the Qualified Person under National Instrument 43-101 who has
reviewed the scientific and technical information in this document.
Investing Activities
Property, plant and equipment
Total additions for 2011 to property, plant and equipment were $46,732 compared with $342,639 for
2010. The Corporation completed the refurbishing of its infrastructure at the Tyranite camp in January
2011 at a cost of $33,501 ($257,560 in 2010).
Exploration and Evaluation (“E&E”) assets
Creso’s accounting policy is to capitalise the E&E cost of non-producing mineral properties. E&E assets
are comprised of mineral properties and deferred exploration and evaluation expenditures. In 2011,
Creso’s additions to mineral properties totalled $1,137,265 ($857,558 in 2010 consisting of $746,731 in
Canada and $110,827 in Guatemala) and it incurred E&E expenditures of $3,688,954 in Canada
($4,132,057 in 2010 consisting of $4,052,649 in Canada and $79,408 in Guatemala).
Mineral properties
During 2011, the Corporation paid in cash $760,000 ($330,000 in 2010) and issued 1,725,000 (550,000
in 2010) common shares to fulfill commitments relating to several option agreements for properties
located in the Shining Tree area. The fair value of the 1,725,000 (550,000 in 2010) common shares at
an amount of $327,750 ($254,500 in 2010) has been determined based on the quoted price on the date
the common shares were issued if such issuance occurred after the Qualifying Transaction or on the
value of the last issuance, before the date of each transaction, of regular common shares for cash if
issuance occurred before the Qualifying Transaction. Note 9i) b) to the consolidated financial
statements provides further details on options agreements acquired by the Corporation.
Other additions of $49,515 ($162,231 in 2010 consisting of $51,404 in Canada and $110,827 in
Guatemala) on the Shining Tree area consisted of newly staked claims or claim renewal costs.
During 2011 and in light of recent work results and budget prioritizations, it was decided to return the
Athena, Michelle, Pinkerton, Matona, Hare Lake, as well as the Indian Lake option properties, to their
respective underlying owners and the Corporation recorded a depreciation of $615,100. In Q4-2011,
the Corporation has reached an agreement to renew its option to acquire 100% of the Matona property
(Refer to Mineral Properties - Matona section for further details).
- 12 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
E&E expenditures
Following are the detailed E&E expenditures incurred in the Shining Tree area, Ontario, Canada:
For the years ended
December 31,
2011
2010
$
$
1,672,635
1,826,052
495,009
217,988
608,682
345,800
245,671
1,156,811
20,845
156,827
514,623
193,512
53,905
34,909
120,750
77,584
3,688,954
4,052,649
Drilling
Assays
Geology
Geophysics
Geochemistry
Sampling Minto pit
Logistics, accommodation and travel
Other
Share-based compensation costs
Depreciation of property, plant and equipment
Total
Following are the detailed E&E expenditures incurred in Guatemala in 2010 (nil in 2011):
For the year ended December 31, 2010
Consulting - Geologist
Overhead directly related to exploration
Total
Oxec Krystabel
$
$
17,702
13,240
4,993
5,780
22,695
19,020
Hopes
Patache
$
$
13,240
13,240
5,607
5,606
18,847
18,846
Total
$
57,422
21,986
79,408
At the end of 2010, the Corporation didn’t anticipate any exploration and evaluation expenditures of its
own on the Guatemalan properties in the near future. In 2010, the Corporation decided to record an
impairment charge of $362,928 on all those properties costs.
Financing Activities
Net cash provided by financing activities was $3,241,108 in 2011 compared to $9,837,590 in 2010.
In 2011, cash flows from issuance of shares and warrants totalled $3,501,280 less share issue
expenses in cash of $260,172 consisted of the following items:
a) From September to November 2011, the Corporation issued 10,006,668 units, including
8,506,668 units issued on a flow-through basis, for total cash proceeds of $1,501,000;
b) In November 2011, the Corporation issued 13,054,000 common shares for total cash proceeds
of $1,566,480; and
c) The Corporation issued 2,850,000 common shares on exercise of warrants, compensation
options and options for total cash proceeds of $433,800.
In 2010, cash flows from issuance of shares, warrants and NSR options totalled $10,834,293 less share
issue expenses in cash of $846,214 and consisted of the following items:
a) Concurrent with the reverse takeover of June 1, 2010, Creso issued 9,200,000 units in a
brokered private placement for total cash proceeds of $4,600,000;
b) On September 28, 2010, the Corporation issued 1,415,094 common shares in a non-brokered
private placement for total cash proceeds of $1,500,000 with Franco-Nevada;
c) In October 2010, the Corporation issued 3,822,222 units in a non brokered private placement
for total cash proceeds of $3,440,000; and
d) The Corporation issued 3,421,242 common shares on exercise of warrants, compensation
options, and options for total cash proceeds of $1,294,293.
- 13 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
The other issuances of common shares are non-cash transactions and are described in details the
consolidated financial statements.
In June 2010, the Corporation reimbursed $325,000 of the $1,900,000 convertible debenture to the
holder in partial payment of the principal amount and in replacement of NSR royalties on certain
properties owned by the Corporation. In addition, the holder of the debenture, elected to convert a
nominal amount of $900,000 of its debenture into 1,800,000 common shares bringing the outstanding
principal amount to $675,000. As at December 31, 2011, the outstanding debenture is convertible into
1,350,000 common shares of the Corporation or a 2% NSR royalty on the Duggan property at the
option of the holder by November 8, 2012.
In 2010, cash acquired on reverse takeover totaled $174,511.
Operating Activities
The net loss for the year ended December 31, 2011 was $1,933,050 compared to a net loss of
$5,713,938 for the prior year reflecting:
a) A decrease in professional and consulting fees in 2011 as compared to 2010 due mainly to the
payment of $225,000 in bonuses to management in 2010 relating to the listing of the Corporation
on the Exchange;
b) A decrease in salaries due mainly to the payment of $28,000 in Director's fees in 2011 as
compared to $60,000 in 2010;
c) An increase in rent, insurance and other expenses in 2011 relates mainly to an increase in office
expenses and insurances subscribed by the Corporation following its listing on the Exchange in
June 2010;
d) A decrease in trustee and registration fees in 2011 as compared to 2010 due to non-recurring
expenses in 2010 relating to the listing fees of the Corporation on the Exchange and OTCQX;
e) In July 2010, the Corporation acquired a historical database of geological work performed on the
Northern part of Ontario outside the Shining Tree area. This database was analyzed and, compiled
together with prospecting maps and a detailed anomaly report was produced. The report outlines
the potential targets for gold, copper, and nickel mineralization as well as for diamonds and any
other discoveries in this area of interest. The Corporation paid a total amount of $200,000 for this
service and an additional $3,000 for other services. Considering that Creso did not have the legal
title to this area, the expenditure was recorded in the consolidated statements of comprehensive
loss;
f) Share-based compensation costs amounted to $31,688 due to options vesting in 2011compared to
$574,812 in 2010;
g) A depreciation of E&E assets of $615,100 was recorded in 2011 considering that the several
properties under option were returned to their respective owners (For further details, refer to
Properties Under Option – Mineral Properties section) compared to an impairment of the
Guatemalan E&E assets of $362,928 in 2010;
h) In 2010, a repurchase of the right of first refusal from the debenture holder in respect of the grant by
the Corporation of any royalties on certain properties in consideration for the issuance of 500,000
common shares at an estimated fair value of $400,000;
i) As a result of the reverse takeover of June 2010, the excess of the deemed fair value of the shares
of Creso Resources over the assets acquired of $2,519,169 was recorded in the Statements of
Comprehensive Loss;
j) In 2010, the change in fair value of the derivative financial instrument generated a loss of $266,000;
and
k) A recovery of deferred income taxes of $37,200 ($265,000 in 2010) in 2011 as eligible flow-through
exploration expenditures were incurred;
- 14 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
Professional and consulting fees consist of:
For the years ended,
December 31,
2011
2010
$
$
56,066
81,829
358,401
432,551
360,807
441,742
775,274
956,122
Legal fees
Accounting and audit fees
Consulting fees
Total professional and consulting fees
In 2010, consulting fees include a $150,000 bonus paid to a company controlled by the Executive
Chairman and accounting fees include $75,000 paid to a company controlled by the Chief Financial
Officer (“CFO”) in recognition to their contribution during the completion of the Qualifying Transaction.
The majority of the professional and consulting fees were paid to related parties and the following
section covers in detail the allocation of fees.
Rent, insurance and other expenses increased following the listing of the Corporation of the Exchange
in June 2010. Expenses consist of:
Telecommunication, website maintenance and information technology
Rent
Office and other expenses
Insurance
Total administrative expenses
For the years ended
December 31,
2011
2010
$
$
47,946
58,164
43,728
45,793
56,837
34,950
35,316
23,054
183,827
161,961
Transactions with Related Parties
The Corporation had the following transactions with related parties that were in the normal course of
operations and measured at the exchange amounts, which is the amount of consideration established
and agreed to by the related parties:
For the years ended
December 31,
2011
2010
$
$
Exploration expenses (1)
71,242
50,995
Share issue expenses (2)
7,135
56,399
284,536
54,642
281,563
620,741
359,823
71,842
423,291
854,956
699,118
962,350
Professional and consulting fees (3)
Accounting fees (a)
Legal fees (b)
Consulting fees (c)(d)(e)
- 15 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
1) Consulting fees of $71,242 to a private company controlled by the former President of the
Corporation for geological services ($37,803 from July 15 to December 31, 2010 and $13,192
from January 1 to July 15, 2010, paid to two former Presidents of the Corporation, respectively).
2) Legal fees relating to the financings of $nil ($32,640 in 2010) to a legal firm of which a director
was a partner and of $7,135 ($23,759 in 2010) to a company controlled by the Corporate
Secretary;
3) Professional and consulting fees includes:
a) Accounting fees of $284,536 ($359,823 in 2010) to a private company controlled by the
CFO of the Corporation for bookkeeping, accounting, clerical and related administrative
services;
b) Legal fees of $14,582 ($15,011 in 2010) to a legal firm of which a director was a partner
and of $40,060 ($56,831 in 2010) to a company controlled by the Corporate Secretary;
c) Consulting fee of $180,000 ($295,000 in 2010) to a private company controlled by the
Acting President and CEO (from November 1, 2011 to February 28, 2012) and Executive
Chairman; On March 1, 2012, the Corporation appointed a new President and CEO.
d) Consulting fees of $101,563 to a private company controlled by the former President of the
Corporation ($55,956 from July 15 to December 31, 2010);
e) Consulting fees of $72,335 from January 1 to July 15, 2010 to a private company controlled
by the former President of the Corporation;
At December 31, 2011, no amount remains to be paid ($69,294 as at December 31, 2010) from these
transactions.
Selected Annual Information
Sales
Loss for the year
Loss per share – basic and diluted
Year ended December 31
2010 (i)
2009 (ii)
$
$
(1,933,050)
(5,713,938)
(854,851)
(0.02)
(0.09)
(0.02)
Total assets
14,836,119
2011 (i)
$
13,625,000
5,023,684
(i) Prepared in accordance to IFRS.
(ii) Prepared in accordance to Canadian GAAP.
Summary of Quarterly Results
The following table contains selected financial information for the last eight quarters:
Loss for the period
Loss per share
December 31
2011
$
(500,987)
(0.005)
Three months ended
September
June 30
30, 2011
2011
$
$
(581,392)
(484,946)
(0.01)
(0.005)
March 31
2011
$
(365,725)
-
Loss for the period
Loss per share
December 31
2010
$
(796,361)
(0.01)
Three months ended
September
June 30
30, 2010
2010
$
$
(1,408,218)
(3,038,530)
(0.02)
(0.05)
March 31
2010
$
(470,829)
(0.01)
- 16 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
Fourth Quarter Analysis
Investing activities
During the fourth quarter of 2011, additions to the Shining Tree property totalled $462,858 ($176,765 in
Q4-2010) and the breakdown is as follows:
Q4-2011
a) The Corporation acquired the Mann property located in the Shining Tree area. Creso paid in
cash $100,000 and issued 1,000,000 common shares of the Corporation valued at $130,000;
b) The Corporation paid $195,000 in cash and issued 250,000 common shares of the Corporation
valued at $27,500 to fulfil commitments relating to several option agreements from prior years;
and
c) Other additions of $10,358 consisted of claim renewal costs
Q4-2010
a) The Corporation entered into an option agreement to acquire interest in 3 claims (The
Buckingham, Moore-McDonald agreement) located in MacMurchy townships in the Shining
Tree area. Creso paid $25,000 in cash and issued 50,000 common shares of the Corporation
valued at $32,000 for these claims;
b) The Corporation paid $60,000 in cash and issued 50,000 common shares of the Corporation
valued at $59,000 to fulfill commitments relating to several option agreements from prior year;
and
c) Other additions of $765 consisted of claim renewal costs.
During the fourth quarter of 2011, the Corporation incurred $1,103,892 ($2,307,512 in Q4-2010) in
exploration and evaluation expenses on its Shining Tree property consisting mainly of diamond drilling
on the Tyranite and Mann properties.
Financing activities
Q4-2011
Net cash flows from the issuance of shares and warrants in the fourth quarter of 2011 totalled
$1,838,490 and consisted of non-brokered private placements for an aggregate amount $2,066,480
(Refer to Notes 11 i) a) and b) to the consolidated financial statements).
Q4-2010
Net cash flows from the issuance of shares, warrants and options in the fourth quarter of 2010 totalled
$4,010,668 and consisted of the following items:
a) Non-brokered private placement for an aggregate amount of $3,440,000 (Refer to Note 11 i) b)
to the consolidated financial statements); and
b) Issuance of 1,827,269 common shares on exercise of warrants, compensation options, and
options for an amount of $878,796.
Operating activities
The Corporation reported a net loss of $500,987 for the fourth quarter of 2011 compared to a net loss of
$796,361 the same period last year. The main reasons for the variance are:
a) A decrease of $66,575 in investor relations and travel fees in Q4-2011 compared to Q4-2010.
To enhance the visibility of the Corporation following its listing on the Exchange in June 2010,
the Corporation conducted several promotional activities during the fourth quarter of 2010;
b) A decrease of $103,872 in trustee and registration fees in Q4-2011 compared to Q4-2010. In
particular, The Corporation incurred $87,616 in Q4-2010 for the listing of the Corporation on the
OTCQX in the United States; and
- 17 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
c) A decrease of $91,140 in impairment and depreciation E&E assets. In Q4-2011 a depreciation
of $220,000 was recorded considering that the Athena, Michelle and Pinkerton properties under
option were returned to the owner compared to an impairment of the of $311,140 of the
Guatemalan E&E assets in Q4-2010.
Liquidity and Capital Resources
The Corporation has no long term debt and a working capital (current assets less current liabilities) of
$1,331,418 as at December 31, 2011 as compared to $3,869,191 on December 30, 2010. Management
estimates that these funds will not be sufficient to meet the Corporation’s obligations and budgeted
expenditures through December 31, 2012. The Corporation will have to raise additional funds to
continue operations. The Corporation is pursuing financing alternatives to fund its operations and to
continue its activities as a going concern.
Advanced exploration of some of the mineral properties would require substantially more financial
resources. In the past, the Corporation has been able to rely on its ability to raise financing in public or
privately negotiated equity offerings. There is no assurance that such financing will be available when
required, or under terms that are favourable to the Corporation. The Corporation may also elect to
advance the exploration of mineral properties through joint-venture participation.
Should the Corporation not be able to raise additional funds or bring in a joint venture partner with
whom to share exploration expenditures, the Corporation may consider the opportunity to adopt a plan
to reduce its spending commitments relating to its option agreements (See note 9 i) b)) to the annual
consolidated financial statements for further details) or to reduce discretionary expenses.
Although these annual consolidated financial statements have been prepared using IFRS applicable to
a going concern, the above-noted facts and circumstances cast significant doubt on the Corporation’s
ability to continue as a going concern. These annual consolidated financial statements do not reflect the
adjustments to the carrying values of assets and liabilities, to the reported revenues and expenses and
to the balance sheet classifications that would be necessary if the going concern assumption was
inappropriate. These adjustments could be material.
Outstanding Share Data
(on March 29, 2012)
Common shares issued
Stock options
Compensation options
Warrants
Debenture(1)
Fully diluted
Number
108,871,956
8,465,000
1,715,124
28,797,245
1,350,000
149,199,325
(1) Representing a debenture of $675,000 maturing on November 8, 2012 and convertible at the option of the
holder into 1,350,000 common shares or a 2% NSR royalty on the Duggan property.
Off-Balance Sheet Arrangements
The Corporation does not have any off-balance sheet arrangements.
- 18 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
Financial Instruments and other instruments
Financial instruments
Creso is exposed to various financial risks resulting from both its operations and its investments
activities. Creso does not enter into financial instrument agreements including derivative financial
instruments for speculative purposes. Creso’s main financial risk exposure and its financial risk
management policies are disclosed in Note 19 to the annual consolidated financial statements for the
years ended December 31, 2011 and 2010.
Other instruments
The liability and conversion option components of the convertible debenture are presented separately
on the consolidated statement of financial position starting from initial recognition and are disclosed in
Note 10 to the annual consolidated financial statements for the years ended December 31, 2011 and
2010.
Commitment
In July 2010, the Corporation entered into a sub-lease agreement with another corporation for office
premises until June 30, 2012. The total annual rent amounting to approximately $60,394 is equally
shared. The total shared commitment from January 2012 to June 2012 is $30,197 and the
Corporation’s share is $15,099.
In addition, the Corporation has options to acquire 100% interests in exploration properties located in
the Shining Tree area in Ontario. In order to earn its 100% interest the Corporation has to make cash
payments, issue common shares of its capital and incur exploration expenditures. Commitments are
disclosed in Note 9 i) b) to the annual consolidated financial statements for the years ended December
31, 2011 and 2010.
Stock Option Plan
The purpose of the Stock Option Plan (the “Plan”) is to serve as an incentive for the directors, officers,
employees and service providers who will be motivated by the Corporation’s success as well as to
promote ownership of common shares of the Corporation by these people. There is no objective
attached to the Plan and no relationship to manage the Corporation’s risks.
Management’s Responsibility for Financial Information & Critical Accounting Estimates
Creso’s consolidated financial statements are the responsibility of Creso’s management. The annual
consolidated financial statements were prepared by Creso’s management in accordance with IFRS. A
description of Creso's significant accounting policies can be found in Note 3 of Creso's annual
consolidated financial statements.
Many of the amounts included in those financial statements require management to make judgments
and/or estimates. These judgments and estimates are continuously evaluated and are based on
management’s experience and knowledge of the relevant facts and circumstances. Actual results may
differ from the amounts included in the financial statements. A description of Creso's critical accounting
estimates, judgments and assumptions can be found in Note 5 of Creso's annual consolidated financial
statements.
Accounting Standards Issued but not yet Adopted
A description of accounting standards issued but not yet adopted can be found in Note 4 of Creso's
annual consolidated financial statements.
- 19 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
IFRS Convergence
Effective January 1, 2011, Canadian publicly listed entities are required to prepare their financial
statements in accordance with IFRS for interim and annual periods. Due to the requirement to present
comparative financial information, the effective transition date is January 1, 2010. The three months
ended March 31, 2011 was the Corporation’s first reporting period under IFRS.
The IFRS project team has completed the conversion implementation. Post-implementation will
continue in future periods. A detailed discussion of accounting policies under IFRS is included in Note 3
and the quantitative impact of adopting IFRS is further discussed in Note 21 of the annual consolidated
financial statements.
As a result of the accounting policy differences on conversion from Canadian GAAP to IFRS, the
Corporation has recorded changes in cash and cash equivalents, derivative financial instrument, other
liabilities,, share capital, conversion options (equity component of convertible debenture), contributed
surplus and deficit in addition to the corresponding changes in the statements of comprehensive loss
for year ended December 31, 2010 discussed in Note 21 of the annual consolidated financial
statements for December 31, 2011.
Financial Statements presentation changes
The transition to IFRS has resulted in financial statement presentation changes in the financial
statements, most significantly on the creation of a Statement of Change in Equity. There were no
significant changes to the Statement of Financial Position and the Statement of Comprehensive Loss
and no significant impact to the Corporation’s Cash Flow Statement as a result of the implementation of
IFRS as discussed in Note 15 of the annual consolidated financial statements for December 31, 2011.
The following is a summary of the significant changes to the Corporation’s financial statement
presentation:
•
•
•
•
If applicable, exploration funds in the Statement of Financial Position was reclassified from noncurrent assets to current assets to present its availability within the normal operating cycle of
the Corporation.
Reversal take over under IFRS requires expensing the value in excess of the equity
instruments granted when we cannot identify specifically some or all of the goods or services
received in return.
Convertible debenture, under IFRS, states that the conversion option is classified in liabilities
as a derivative financial instrument due to the variability of the conversion price with
subsequent valuation as the fair value of the Corporation changes. This instrument is
reclassified to equity once the number of equities to be delivered becomes fixed.
Deferred income tax recovery under IFRS reflects the amortization of the other liability that was
established for a portion of the flow-through shares.
Control and procedures
The conversion to IFRS does not have a significant impact on the Corporation’s internal controls
(including information technology systems), and accounting processes. However, the extent of change
in accounting framework has required the Corporation to update its internal controls, disclosure controls
and procedures to ensure they are appropriately designed and operated effectively for reporting under
IFRS. These include: training communication to ensure IFRS knowledge is transferred from subject
matter experts to the entire organization; documentation to ensure corporate accounting policies are
updated for IFRS, and transitional analysis and decisions are adequately supported; and review to
ensure segregation of duties in the review and approval of IFRS information from preparer to
management, and ultimately by the Audit Committee. As a result of these incremental internal control
enhancements, the impact of the conversion from Canadian GAAP to IFRS on the Corporation’s risk
management or other business activities is reduced.
- 20 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
Business activities and key performance measures
The Corporation is not subject to any financial covenants or key ratios, therefore the transition had no
impact in this regard.
Information technology and systems
The IFRS transition project did not have a significant impact on the Corporations’ information systems
for the convergence periods. Significant changes are also not expected in the post-convergence
periods.
Ongoing activities
The commencement of Post-Implementation phases will involve continuous monitoring of the additional
new or revised IFRSs or IFRICs in relation to consolidation, joint ventures and financial instruments.
The Corporation also notes that the International Accounting Standards Board is currently working on
an extractive industries project, which could significantly impact the Corporation’s financial statements
primarily in the areas of capitalization of exploration and evaluation expenditures and disclosures.
There are processes in place to ensure that potential changes are monitored and evaluated. The
impact of any new IFRSs and IFRIC Interpretations will be evaluated as they are drafted and published.
Risk Factors
Due to the nature of the Corporation’s business, the legal and economic climate in which the
Corporation is operating and the present stage of development of the Corporation, It may be subject to
significant risks. Accordingly, readers should carefully consider the following discussion of risks that
pertain to the Corporation.
Exploration and Development
All of the resource properties in which the Corporation has an interest or the right to acquire an interest
are in the exploration and evaluation stages. Development of Creso's resource properties will only
follow upon obtaining satisfactory results from exploration activities. Exploration and evaluation for and
the development of natural resources involve a high degree of risk and few properties that are explored
are ultimately developed into producing properties. There is no assurance that the Corporations'
exploration and evaluation activities will result in any discoveries of commercial bodies of mineral
deposits. The long term profitability of the Corporation's operations will be in part directly related to the
cost and success of its exploration programs, which may be affected by a number of factors.
Substantial expenditures are required to establish mineral reserves, to develop processes to extract the
resources and, in the case of new properties, to develop the extraction and processing facilities and
infrastructure at any site chosen for extraction. Although substantial benefits may be derived from the
discovery of gold and base metals, no assurance can be given that resources will be discovered in
sufficient quantities to justify commercial operations or that the funds required for development will be
obtained on a timely basis.
Operating Hazards and Risks
Resource exploration involves many risks, which even a combination of experience, knowledge and
careful evaluation may not be able to overcome. Operations in which the Corporation will have a direct
or indirect interest will be subject to all of the hazards and risks normally incidental to exploration,
development and production of natural resources including, but not limited to, drilling, trenching and
surveying all of which could result in personal injuries, loss of life and damage to the property of the
Corporation or others, unusual or unexpected formations, cave-ins, pollution, equipment breakdown,
rugged terrain, wildlife hazards and harsh weather conditions, all of which could result in work
stoppages, damage to property, and possible environmental damage. The nature of the risks
associated with the Corporation's activities is such that potential liabilities and hazards might not be
insurable against, or the Corporation might not elect to insure itself against such liabilities due to high
premium costs or other reasons, in which event the Corporation could incur significant costs that could
have a materially adverse effect upon its financial condition.
- 21 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
Limited Operating History, Lack of Cash Flow and going concern
The Corporation does not have an operating history. None of its properties have commenced
commercial production. The only present source of funds available to the Corporation is through the
sale of equity, debt, securities or other borrowings. Even if the results of exploration are encouraging,
the Corporation may not have sufficient funds to conduct the further exploration that may be necessary
to determine whether or not commercially feasible reserves exist on any property and may not realize a
return on its investment. The Corporation may generate additional working capital through equity
offerings, borrowings, operation, development, sale or possibly the joint venture development of its
properties and/or a combination thereof; however, there is no assurance that any such funds will be
available for operations. Failure to obtain such additional funds, if needed, would have a material
adverse effect on the Corporation's operations.
There can be no assurance that the Corporation will be able to execute on its plans and there are no
guarantees that measures taken by management will be successful. Without new funding being
available, the Corporation may be unable to continue its operations, and amounts realized for assets
may be less than amounts reflected in the consolidated financial statements of the Corporation. The
consolidated financial statements do not reflect the adjustments to the carrying values of assets and
liabilities, the reported amounts of revenues and expenses, and the classification of financial position
items where the going concern assumption is inappropriate, and these adjustments could be material.
Fluctuating Commodity Prices
The Corporation's revenues, if any, are expected to be in large part derived from the extraction and sale
of minerals. The price of this commodity has fluctuated widely, particularly in recent years, and is
affected by numerous factors beyond the Corporation's control including international, economic, and
political trends, expectations of inflation, currency exchange fluctuations, interest rates, global or
regional consumptive patterns, civil unrest, multinational treaties, speculative activities, and increased
production due to new extraction developments and improved extraction and production methods. The
effect of these factors on the price of any production, and therefore the economic viability of any of the
Corporation's exploration projects, cannot accurately be predicted.
Regulatory Requirements
The Corporation's operations may be regulated under a number of international, federal and local laws
and regulations that govern, among other things, the handling of waste materials, some of which are
classified as hazardous materials, and the discharge of hazardous materials into the environment. The
Corporation's operations will be subject to stringent regulations relating to the protection of the
environment and waste handling. In addition to liability for the Corporation's own non-compliance, these
laws and regulations may expose the Corporation to liability for the non-compliance of other parties,
without regard to whether the Corporation was negligent. Sanctions for non-compliance with applicable
environmental laws and regulations may include administrative, civil and criminal penalties, revocation
of permits and corrective action orders. Furthermore, the Corporation may be liable for costs for
environmental cleanup at currently or previously owned or operated properties or off-site locations.
Compliance with existing laws or regulations, the adoption of new laws or regulations or the more
vigorous enforcement of environmental laws or regulations could seriously harm the Corporation's
business by increasing the Corporation's expenses and limiting the Corporation's future opportunities.
Permits and Licences
The operations of the Corporation may require licences and permits from various governmental
authorities. The Corporation believes that it holds all necessary licences and permits required to carry
on with activities that each is currently conducting under applicable laws and regulations and believes
that it is presently complying in all material respects with the terms of such laws and regulations.
However, such laws and regulations are subject to change. There can be no assurance that the
Corporation will be able to obtain all necessary licences and permits required to carry out exploration,
development and mining operations at its projects, or that existing permits will remain in good standing
and in full force and effect at all times.
- 22 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
Industry Conditions
The mineral exploration and mining industry is intensely competitive and there is no assurance that,
even if commercial quantities of a mineral resource are discovered, a profitable market would exist for
the sale of same. The Corporation may compete with corporations and other business entities which
are better financed and have better access to capital than the Corporation; there is no assurance that
the Corporation will be able to successfully compete against such other corporations and entities for
capital or for properties. Mineral exploration properties are sometimes subject to land claims by
aboriginal peoples. There is no assurance that such claims, if asserted, can be satisfactorily resolved
on an economic or timely basis.
Conflicts of Interest
Some of the directors or officers of the Corporation are also directors or officers of other reporting and
non-reporting issuers. Conflicts of interest may arise which could influence these persons in evaluating
possible acquisitions or operations or in generally acting on behalf of the Corporation, notwithstanding
that they will be bound by the provisions of the Canada Business Corporations Act to act at all times in
good faith in the interest of the Corporation and to disclose such conflicts to the Corporation if and when
they arise.
Market for Securities and Volatility of Share Price
There can be no assurance that an active trading market in the Corporation's securities will be
established or sustained. The market price for the Corporation's securities could be subject to wide
fluctuations. Factors such as announcements of quarterly variations in operating results, as well as
market conditions in the industry, may have a significant adverse impact on the market price of the
securities of the Corporation. The stock market has from time to time experienced extreme price and
volume fluctuations, which have often been unrelated to the operating performance of particular
companies.
No Assurances of Title
The acquisition of title to mineral properties is a very detailed and time-consuming process. Although
precautions will be taken by the Corporation to ensure that legal title to its property interests is properly
recorded where possible, there can be no assurance that such title will ultimately be secured.
Furthermore, there is no assurance that the interests of the Corporation in any of its properties may not
be challenged or impugned by competitors, aboriginal groups or otherwise.
Management of Growth
Any expansion of the Corporation's business may place a significant strain on its financial, operational
and managerial resources. There can be no assurance that the Corporation will be able to implement
and subsequently improve its operations and financial systems successfully and in a timely manner in
order to manage any growth it experiences. There can be no assurance that the Corporation will be
able to manage growth successfully. Any ability of the Corporation to manage growth successfully
could have a material adverse effect on the Corporation's business, financial condition and results of
operations.
Reliance on Key Personnel and Consultants
There can be no assurance that any of the Corporation's employees will remain with the Corporation or
that, in the future, the employees will not organize competitive businesses or accept employment with
companies competitive with the Corporation.
- 23 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
Environmental Risks and Hazards
All phases of the operations of the Corporation will be subject to environmental regulation in the
jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of
air and water quality standards and land reclamation. They also set forth limitations on the generation,
transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving
in a manner which will require stricter standards and enforcement, increased fines and penalties for
non-compliance, more stringent environmental assessments of proposed projects and a heightened
degree of responsibility for companies and their officers, directors and employees. There is no
assurance that future changes in environmental regulation, if any, will not adversely affect the
operations of the Corporation. Environmental hazards may exist on the properties on which Creso holds
interests which are unknown to Creso at present and which have been caused by previous or existing
owners or operators of the properties.
Government approvals and permits are currently, and may in the future be, required in connection with
the operations of the Corporation. To the extent such approvals are required and not obtained, the
Corporation may be curtailed or prohibited from continuing its operations or from proceeding with
planned exploration or development of mineral properties.
Failure to comply with applicable laws, regulations and permitting requirements may result in
enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing
operations to cease or be curtailed, and may include corrective measures requiring capital
expenditures, installation of additional equipment, or remedial actions. Parties engaged in mining
operations or in the exploration or development of mineral properties may be required to compensate
those suffering loss or damage by reason of the mining activities and may have civil or criminal fines or
penalties imposed for violations of applicable laws or regulations.
Amendments to current laws, regulations and permits governing operations and activities of mining and
exploration companies, or more stringent implementation thereof, could have a material adverse impact
on the mining operations and cause increases in exploration expenses, capital expenditures or
production costs, or a reduction in production levels at producing properties, or require the
abandonment or delays in development of new mining properties.
Foreign Operations
Creso’s subsidiary operates in Guatemala, an emerging nation and consequently its properties may be
subject to a higher level of risk compared to developed countries. The operations of the Corporation in
Guatemala will be mainly in US dollars and in Guatemalan Quetzal. Fluctuations in the exchange rate
between such currencies and the Canadian dollar may have a material adverse effect on the
Corporation's business, financial condition, and operating results.
Cautionary Statement on Forward-Looking Information
All statements in this management's discussion and analysis, other than statements of historical fact,
that address future events or developments that Creso expects to occur, are forward-looking
statements. Although Creso believes the expectations expressed in such forward-looking statements
are based on reasonable assumptions, such statements are not guarantees of future performance and
actual results or developments may differ materially from those in the forward-looking statements.
Factors that could cause actual results to differ materially from those in forward-looking statements
include results of exploration activities, industry-related risks, regulatory approvals, and continued
availability of capital and financing and general economic, market or business conditions.
- 24 -
Creso Exploration Inc.
Management’s Discussion and Analysis
For the years ended December 31, 2011 and 2010
Forward-looking statements are based on the expectations and opinions of the Corporation's
management on the date this management’s discussion and analysis is made. The assumptions used
in the preparation of this discussion, although considered reasonable at the time of preparation, may
prove to be imprecise and, as such, undue reliance should not be placed on forward-looking
statements. The Corporation expressly disclaims any intention or obligation to update or revise any
forward-looking statements whether as a result of new information, future events or otherwise, except
as required by applicable law. Depending on exploration results and available financing, the
Corporation may at any point modify the suggested work program for 2012.
March 29, 2012
(S) Vernon K. Drylie
Vern Drylie, P. Eng.
President and CEO
(S) Vatché Tchakmakian
Vatché Tchakmakian, CA
Chief Financial Officer
- 25 -
APPENDIX “F” - FINANCIAL STATEMENT OF NICHROMET
Nichromet Extraction Inc.
Consolidated Financial Statements
Nine-month period ended September 30, 2013 and
Years ended December 31, 2012 and 2011
(Expressed in Canadian dollars)
Nichromet Extraction Inc.
600 De Maisonnewe Boulevard West, Suite 2750, Montreal, QC, H3A 3J2
Tel.: 514.866.6001 Fax: 514.866.6193
pwc
November 28, 2013
Independent Auditor's Report
'I'o the Directors ofNichromet Extraction Inc.
We have audited the accompanying consolidated financial statements of Nichromet Extraction Inc. and its
subsidiaries, which comprise the consolidated statements of financial position as at September 30, 2013
and December 31, 2012 and the consolidated statements of comprehensive loss, changes in equity and
cash flows for the nine-months period ended September 30, 2013 and the years ended December 31, 2012
and 2011 and the related notes, which comprise a summary of significant accounting policies and other
explanatory information.
Management's responsibility for the consolidated 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 n ecessary 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 stat ements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we comply v.rith 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 fi.nancial 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 made by
management, as well as evaluating the overall p resentation of the consolidated financial statements.
PricewaterhouseCoopers LLP/s.r.l./s.e.11.c.r.l.
1250 Rene-Levesqm Boulevard West, Suite 2800, Montreal, Quebec, Canada H3B 2G4
T: +1514205 5000, F: +1514 8761502, www.pwc.com/ca
"PwC" refers to PricewaterhouseCoopers LLP/s.r.l.ls .e.n.c.r.I., an Ontario limited liability partnership.
pwc
We believe that the audit evidence we have obtained in our audit 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 financial
position of Nichromet Extraction Inc. and its subsidiaries as at September 30, 2013 and December 3 1,
2012 and its financial performance and its cash flows for the nine-month period ended September 30,
2013 and the years ended December 31, 2012 and 2011 in accordance with International Financial
Reporting Standards.
Emphasis of matter
Without qualifying our opinion, we draw attention to note 1 in the consolidated financial statements which
describes matters and conditions that indicate the existence of a material uncertainty that may cast
substantial doubt about Nichromet Extraction Inc's ability to continue as a going concern.
1
CPA auditor, CA, public accountancy permit No. A122718
(2)
Nichromet Extraction Inc.
Consolidated Statements of Financial Position
As at September 30, 2013 and December 31 , 2012
(Expressed in Canadian dollars)
Note
As at
September 30,
2013
$
As at
December 31,
2012
$
4,556,072
201 ,069
314,341
500,000
24,898
5,596,380
1,376,903
200,655
80,238
13,407
1,671 ,203
989,955
9, 110
4,617,910
5,616,975
2,809
4,613,813
4,616,622
11,213,355
6,287,825
341 , 162
384,993
726, 155
189,424
Assets
Current assets
Cash and cash equivalents
Research and development tax credits receivable
Sales taxes and other receivables
Promissory note receivable
Preeaid expenses
5
Non-current assets
Investment s
Property, plant and equipment
Intangible assets
4
6
Total assets
Liabilities and Equity
Current liabilities
Accounts payable and accrued liabilities
Deferred contribution from STDC
Total liabilities
7
Equity
Share capital
Contributed surplus
Deficit
Total equity
8
Total liabilities and equity
Going concern
Commitments
Subsequent events
29,889,629
6,400,497
(25,802,926}
10,487,200
23,573,018
5,513,049
(22,987,666}
6,098,401
11 ,213,355
6,287,825
1
12
15
The accompanying notes are integral part of these consolidated financial statements.
-4-
189 424
Nichromet Extraction Inc.
Consolidated Statements of Comprehensive Loss
For the nine-month period ended September 30, 2013 and for the years ended December 31, 2012 and 2011
(Expressed in Canadian dollars, except number of shares)
Note
Expenses
Wages and compensation
Professional and consulting fees
Administrative
Research and development, net of tax credit of
$201,069 (2012 - $271 ,747; 2011 - $4 73,861) and
STDC contribution $271,550 (2012- nil; 2011 nil)
Share-based payments
Depreciation of property, plant and equipment
Amortization of intangible assets
Total expenses
9
Operating loss
Gain on investments
Interest income
Gain {loss~ on foreign currenc;t exchange
4
Nine-month
period ended
September 30,
2013
$
202,311
730,868
263,271
226,206
663,439
381,426
202,536
603,807
242,781
1,885,745
104,589
2,273
5,713
3,194,770
2,052,000
460,702
10,320
998
3,795,091
1,681 ,684
367,250
12, 191
3,890
3,114,139
(3, 194,770)
(3,795,091)
(3,114,139)
6,208
{13,548}
{7,751}
p,802,431!
~3,117,749!
345,485
26,742
7,283
~2,815,260!
Net loss and comerehensive loss
Basic and diluted net loss per share
Weighted average number of common shares
outstanding - basic and diluted
Year ended
Year ended
December 31, December 31,
2012
2011
$
$
{0.03}
(0.03)
138,530,036
119,857,287
{0.02}
170,923,021
Going concern
The accompanying notes are integral part of these consolidated financial statements.
-5-
4,141
Nichromet Extraction Inc.
Consolidated Statements of Changes in Equity
For the nine-month period ended September 30, 2013 and for the years ended December 31, 2012 and 2011
(Expressed in Canadian dollars, except number of shares)
Note
Balance - December 31, 2010
Net loss and comprehensive loss
for the year
Proceeds from private placement of
units and shares
Exercise of shareholder options
Fair value of warrants
Exercise of warrants
Share-based comeensation
Balance - December 31, 2011
Net loss and comprehensive loss
for the year
Exercise of warrants
Share-based comeensation
Balance - December 31 , 2012
Net loss and comprehensive loss
for the period
Proceeds from private placement of
units
Fair value of warrants
Acquisition of investments
Exercise of warrants
Exercise of options
Share-based comeensation
Balance - Seetember 30, 2013
Number of
common
shares
Share
Contributed
ca~ital
sur~lus
$
104,662,547 15,931 ,677
$
5,226,438
Total
Deficit
$
(16,067,486)
eguit~
$
5,090,629
(3,117,749) (3,117,749)
8
8
8
8
9
12,986,667
14,250,000
1,250,000
2,532,000
1,801 ,585
(311,852)
278,874
133,149,214 20,232,284
8
9
14,465,000
3,340,734
147,614,214 23,573,018
(376,585)
311,852
(28,874)
367,250
5,500,081 {19,185,235)
2,532,000
1,425,000
250,000
367,250
6,547,130
(3,802,431) (3,802,431)
(447,734)
2,893,000
460,702
460,702
5,513,049 {22,987,666) 6,098,401
(2,815,260) (2,815,260)
8
50,000,000
8
4
8
9
9
9,889,510
7, 125,000
300,000
5,000,000
(1,036,125)
644,470
1,657,570
50,696
2141928172:4 291889,629
5,000,000
1,036,125
644,470
(232,570)
1,425,000
(20,696)
30,000
104,589
104,589
614001497 ~2518021926! 10,4871200
The accompanying notes are integral part of these consolidated financial statements.
-6-
Nichromet Extraction Inc.
Consolidated Statements of Cash Flows
For the nine-month period ended September 30, 2013 and for the years ended December 31, 2012 and 2011
(Expressed in Canadian dollars)
Note
Operating activities
Net loss for the year
Adjusted for:
Share-based payments
Gain on investments
Contribution from SDTC received in excess of
amount recognized
Depreciation of property, plant and equipment
Amortization of intangible assets
Year ended
December 31,
2011
$
(2,815,260)
(3,802,431)
(3, 117,749)
104,589
(345,485)
7
384,993
2,273
5,713
(2,663, 177)
6
Net cash used in oeerating activities
Financing activities
Private placement of units and shares
Exercise of warrants
Exercise of options
Exercise of shareholder oetions
Net cash prov ided by financing activities
Year ended
December 31,
2012
$
9
4
Changes in non-cash operating working capital items:
Research and development tax credits receivable
Sales taxes and other receivables
Prepaid expenses
Accounts ~a:t:able and accrued liabilities
Investing activities
Promissory note disbursement
Acquisition of property, plant and equipment
Acguisition of intangible assets
Net cash used in investing activities
Nine-month
period ended
September 30,
2013
$
5
460,702
10,320
998
(3,330,411)
367,250
12,191
3,890
(2,734,418)
(414)
(234, 103)
(11,491)
151,738
404,747
196, 152
76,998
·81 ,277
(383,412)
(141,925)
(70,718)
{94,270}
759, 174
(743,986}
{2,757,447)
{2,5'71 ,237)
(3,478,404)
~147,931}
(500,000)
(25,320)
(8,574)
{9,810}
{4,888}
(518,384)
(30,208)
5,000,000
1,425,000
30,000
2,893,000
2,532,000
250,000
6,455,000
2,893,000
1,425,000
4,207,000
Net change in cash and cash equivalents
Cash and cash eguivalents - beginning
Cash and cash equivalents - end
3,179,169
1,376,903
4,556,072
321,763
1,055, 140
1,376,903
698,388
356,752
1,055,140
Components of cash and cash equivalents are as follows:
Cash
Cash equivalents
556,072
376,903
55,140
4,000,000
1,000,000
1,000,000
8
8
9
Going concern
The accompanying notes are integral part of these consolidated financial statements.
-7-
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31 , 2012 and 2011
(Expressed in Canadian dollars)
1.
NATURE OF OPERATIONS AND GOING CONCERN
Nichromet Extraction Inc. ("Nichromet" or the "Corporation") was incorporated under the Canada Business
Corporations Act on July 22, 1997. The Corporation's head office is located at 600 De Maisonneuve
Boulevard West, Suite 2750, Montreal, Quebec, Canada, H3A 3J2.
The Corporation has developed metallurgical processes based on a chloride leach technology. It is a method
of treating and extracting gold and/or silver and other base metals by creating a chloride with either chlorine
or hydrochloric acid. The approach is very broad and can involve either oxide or sulfide ores and allows the
recovery of nickel/cobalt from oxide type ores such as serpentine, laterites and other siliceous metal bearing
ores. It also allows the extraction of precious metals from refractory ores with content of sulfides and arsenic.
These technolog ies are subject to all risks inherent to their development and may require significant
additional development, testing and investments prior to any final commercialization. There can be no
assurance that such technologies will be successfully developed, or that output from any use of the
Corporation's technologies could be produced at a commercial lev·el at reasonable costs or be successfully
marketed. To date, the Corporation has not earned significant revenues and is considered to be in the
development stage. At September 30, 2013, Dundee Corporation ("Dundee") was the principal and majority
shareholder of the Corporation.
For the nine-month period ended September 30, 2013, the Corrporation incurred a loss of $2,815,260
(respectively $3,802,431 and $3, 117,749 for years ended December 31, 2012 and 2011 ). Deficit as at
September 30, 2013 amounted to $25,802,926 (respectively $22,987,666 and $19,185,235 as at
December31, 2012 and 2011) and cash flow used in operating activities for the nine-month period ended
September 30, 2013, amounted to $2,757,447 (respectively $2,571 ,237 and $3,478,404 for the years ended
December 31 , 2012 and 2011).
Management estimates that the Corporation will not have sufficient funds to meet its obligations and
budgeted expenditures through to September 30, 2014. The Corporation will therefore periodically have to
raise additional funds to continue operations. T he Corporation is pursuing financing alternatives to fund its
operations and to continue its activities as a going concern. Although there is no assurance that the
Corporation will be successful in these actions, management is confident that it will be able to secure the
neces.sary financing through the issU1ance of new equity. While it has been successful in doing so in the past,
there can be no assurance it will be able to do so in the future.
Although these consolidated financial statements have been prepared using International Financial
Reporting Standards ("IFRS") applicable to a going concern, the above-noted facts and circumstances cast
significant doubt on the Corporation's ability to continue as a going concern.
These consolidated financial statements do not reflect the adjustments to the carrying values of assets and
liabilities, to the reported expenses and to the financial position classifications that would be necessary if the
going concern assumption was inappropriate. These adjustments could be material.
On December 3, 2013, these consolidated financial statements were authorized for publication by the Board
of Directors.
-8-
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31 , 2012 and 2011
(Expressed in Canadian dollars)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used in the preparation of these consolidated financial statements are
described below.
2.1 Basis of preparatio n
These consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). These
consolidated financial statements also take into consideration any automatic or specific waivers granted by
the regulatory authorities. These consolidated financial statements display comparative information for the
years ended December 31 , 2012 and 2011 and were prepared in accordance with IAS 1, Presentation of
Financial Statements, such periods being specifically allowed by Form 44-101F1 of National Instrument
44-101 .
2.2 Basis of measurement
The consolidated financial statements have been prepared under the historical cost convention except for
financial instruments measured at fair value. In addition, these financial statements have been prepared
using the accrual basis of accounting, except for cash flow information.
2.3 Principles of consolidation
These consolidated financial statements include the accounts of the Corporation , and its foreign subsidiaries:
Nichromet Guatemala, S.A. ("Nichromet Guatemala") (99.99%); Rio Nickel SA ("Rio Nickel") (99.99%); and
Nichromet Dominicana, S.A. ("Nichromet Dominicana") (99.99%). INichromet Guatemala and Rio Nickel are
both incorporated in Guatemala and Nichromet Dominicana is incorporated in the Dominican Republic. All
intercompany transactions have been eliminated in these consolidat ed financial statements.
2.4 Cash and cash equivalents
Cash and cash equivalents consists of cash on hand, bank balances and highly liquid short-term investments
with original maturities of three months or less or cashable at any time without penalties.
2.5 Financial instruments
Financial assets and financial liabilities are recognized when the Corporation becomes a party to the
contractual provisions of the financial instrument.
Financial assets are derecognized when the contractual rights to the cash flows from the financial asset
expire, or when the fi111ancial asset and all substantial risks and rewards are transferred. A financial liability is
derecognized when it is extinguished, discharged, cancelled or when it expires.
Financial assets and liabilities are initially measured and recognized at their fair value. Transaction costs that
are directly attributable to the acquisition or issue of financial assets and liabilities (other than financial assets
and liabilities at fair value through profit or loss ("FVTPL")) are added to or deducted from the fair value of the
financial asset and liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to
the acquisition of finaincial assets or liabilities at FVTPL are recognized immediately in net income or loss.
Classification of financial instruments in the Corporation's consolidated financial statements depends on the
purpose for which the financial instruments were acquired or incurred. Management determines the
classification of financial instruments at initial recognition.
-9-
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31, 2012 and 2011
(Expressed in Canadian dollars)
a) Fiinancial assets
Financial assets are subsequently measured at amortised cost when the asset is held within a business
model whose objective is to hold assets in order to collect contractual cash flows and when the contractual
terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal
and interest on the principal amount outstanding.
Financial assets are subsequently measured at fair value unless they are not measured at amortised cost.
Financial instruments subsequently measured at fair value can be carried at fair value with changes in fair
value recorded in profit or loss, or in other comprehensive income if they are not held for trading and are
designated as such on initial recognition ("FVOCI").
b) Fi nancial liabilities
Financial liabilities are subsequently measured at amortized cost using the effective interest method, except
for:
•
Financial liabilities at FVTPL. Such liabilities, including derivatives that are liabilities, shall be
subsequently measured at fair value.
•
Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognizing or
when the continuing involvement approach applies.
The Corporation's financial instruments are classified as follows:
Catego ry
Financial assets
Amortized cost and effective interest method
Cash and cash equivalents
Loans and receivables
Other receivables
Loans and receivables
Promissory note rec.eivable
Loans and receivables
Financial assets at fair value through profit or loss
Investments
Financial liabilities
Amortized cost and effective interest method
Accounts payable and accrued liabilities
FVTPL
Financial liabilities at amortized cost
2.6 Research and development tax credits and government assistances
a) Research and development tax credits
The Corporation is entitled to scientific research and experimental development ("SR&ED") tax credits
granted by the Canadian federal government and the Government of Quebec. SR&ED tax credits are
accounted for using the cost reduction method. Accordingly, tax credits are recorded as a reduction of the
related expenses or capital expenditures in the period the expenses are incurred. The non-refundable portion
of such credits is recorded in the period in which the related expenditures are incurred to the extent that
realization of such credits is considered to be reasonably assured.
-10-
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31 , 2012 and 2011
(Expressed in Canadian dollars)
b) Government assistance
The Corporation periodically receives financial assistance under government incentive programs.
Government assistance is recognized initially as deferred revenue at fair value when there is reasonable
assurance that it will be received and the Corporation will comply with the conditions associated with the
assistance. Assistance that compensate the Corporation for expenses incurred are recognized as an
adjustment to research and development expense on a systematic basis in the same periods in which the
expenses are incurred. Assistance that compensates the Corporation for the cost of an asset are recognized
in reduction of the associated capital expenditures. Forgivable loans from the government are treated as
government assistance when there is reasonable assurance that the Corporation will meet the terms for
forgiveness of the loan.
2.7 Pro perty, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment
losses. The cost of an item of property, plant and equipment consists of the purchase price which may
include construction or development of an item of property, plant and equipment, any costs directly
attributable to bringing the asset to the location and condition necessary for its intended use, an initial
estimate of the costs of dismantling the item and restoring the site on which it is located. Repairs and
maintenance costs are charged to the consolidated statement of comprehensive loss in the period in which
they are incurred.
The major categories of property, plant and equipment are depreciated as follows:
Method
Period
Computer equipment
Straight-line
3 years
Office furniture
Straight-line
3 years
The Corporation allocates the amount initially recognized in respect of an item of property, plant and
equipment to its significant parts and depreciates separately each such part. Residual values, method of
depreciation and useful lives of the assets are reviewed annually and adjusted if appropriate.
Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds
with the carrying amount of the asset and are included in the consolidated statement of comprehensive loss.
2.8 Intangible assets
Intangible assets consist mainly of intellectual property, patent application fees, software and development
costs.
Intellectual property represents the acquisition cost of the technology. Using the straight-line method,
amort,ization of intellectual property will be calculated over its estimated useful life upon commercialization of
the chlorine leach technology ("CLT").
Patent application fees relate to direct costs incurred in securing the patent. Using the straight-line method,
amortization of patent application fees will be calculated over the estimated useful lives of the patents upon
commercialization of the CLT.
Software represents fees paid for the implementation of the accounting software. Using the straight-line
method, amortization of the software is calculated over three years.
- 11 -
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31 , 2012 and 2011
(Expressed in Canadian dollars)
Development costs are stated at cost and include the expenditures incurred for the development of the CLT
process and the equipment, material and services used or consumed for the development activities,
including the design, construction a111d operation of a plant that is not at a scale economically feasible for
commercial production. The capitalized costs meet the following generally accepted criteria: i) the technical
feasibility of completing the intangible asset so that it will be available for use or sale; ii) the Corporation
intention to complete the intangible asset; iii) the Corporation ability to use or sell the intangible asset; iv) the
probability of generating measurable future economic benefits; v) the availability of adequate technical,
financial and other resources to complete the development; and vi) the Corporation ability to measure
reliably the expenditure attributable to the intangible asset during its development. The capitalized costs will
be amortized over the expected useful life of the CLT process developed using the straight-line method upon
commercialization of the CLT.
2.9 Impairment of non-financial assets
Non-financial assets are reviewed for impairment if there is any indication that the carrying amount may not
be recoverable. If any such indication is present, the recoverable amount of the asset is estimated in order to
determine whether impairment exists. Where the asset does not generate cash flows that are independent
from other assets, the Corporation estimates the recoverable amount of the cash-generating unit ("CGU") to
which the asset belongs.
An asset or CGU's recoverable amount is the higher of fair value less costs to sell and value in use. In
assessing value in use, the estimated future cash flows are discounted to their present value, using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to
the asset for which estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount. the carrying
amount is reduced to the recoverable amount. Impairment is recognized immediately as additional
depreciation or amortization. Where an impairment subsequently reverses, the carrying amount is increased
to the revised estimate of recoverable amount but only to the extent that this does not exceed the carrying
value that would have been determined if no impairment had previously been recognized. A reversal is
recognized as a reduction in the depreciation or amortization charge for the year.
2.10 Share-based payments
The fair values of share options granted to employees are recognized as an expense over the vesting period
with a corresponding increase in contributed surplus. An individual is classified as an employee when the
individual is an employee for legal or tax purposes (direct employee) or provides services similar to those
performed by a direct employee, including directors of the Corporation.
The fair value is measured at the grant date and recognized over the period in which the options vest. The
fair value of the options granted is measured using an option pricing model, taking into account the terms
and conditions upon which the options were granted. At each financial position reporting date, the amount
recognized as an expense is adjusted to reflect the actual number of share options that are expected to vest.
2.11 Share capital and warrants
Common shares and warrants are classified as equity. Incremental costs directly attributable to the issuance
of shares or warrants are recognized as a deduction from the proceeds in equity in the period the transaction
occurs. Proceeds from unit placements are allocated between shares and warrants issued on a pro rata
basis of their respective fair value within the unit, using the Black-Scholes option pricing model to determine
the fair value of warrants issued.
- 12 -
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31, 2012 and 2011
(Expressed in Canadian dollars)
2.12 Income taxes
Income tax on the profit or loss for the years presented comprises current and deferred income tax. Income
tax is recognized in the consolidated statement of comprehensive loss except to the extent that it relates to
items recognized directly in equity, in which case it is recognized in equity.
Current tax income expense is the expected tax payable on the taxable income for the year, using tax rates
enacted or substantively enacted at year-end, adjusted for amendments to income tax payable with regard to
previous years. Management periodically evaluates positions taken in income tax returns with respect to
situations in which applicable tax regulation is subject to interpretation. It establishes provisions where
appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred income tax is provided using the liability method, providing for temporary differences between the
tax bases of assets and liabilities and their carrying amounts in the financial st atements. The temporary
difference is not provided for if it arises from the initial recognition of goodwill or the initial recognition of an
asset or liability in a transaction other than a business combination that at the time of the transaction affects
neither accounting nor taxable profit or loss. The amount of deferred income tax provided is based on the
expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates
enacted or substantively enacted at the financial position reporting date and whose implementation is
expected over the period in which the deferred income tax is realized or recovered.
A deferred income tax asset is recognized only to the extent that it is probable that future taxable profits will
be available against which the asset can be used.
Deferrred income tax assets and liabilities are presented as non-current and are offset when there is a legally
enforceable right to offset current income tax assets against current income tax liabilities and when deferred
income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the
same taxable entity or different taxable entities where there is an intention to settle the balances on a net
basis.
2.13 Loss per share
The calculation of earnings (loss) per share ("EPS") is based on the weighted average number of shares
outstanding during each period. The basic EPS is calculated by dividing the profit or loss attributable to the
equity owners of the Corporation by the weighted average number of common shares outstanding at the end
of the year.
The computation of diluted EPS assumes the conversion, exercise or contingent issuance of securities only
when such conversion, exercise or issuance would have a dilutive effect on the EPS. The treasury stock
method is used to determine the dilutive effect of the warrants and share options. When the Corporation
reports a loss, the diluted net loss per common share is equal to the basic net loss per common share due to
the anti-dilutive effect of the outstanding warrants, share options and shareholder options.
2.14 Fo reign currency translatio n
These consolidated financial statements are presented
currency of the Corporation and its subsidiaries.
- 13 -
in
Canad ian dollars, which is also the, functional
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31 , 2012 and 2011
(Expressed in Canadian dollars)
For the Corporation and its subsidiaries having the Canadian dollar as their functional currency, monetary
assets and liabilities denominated in a foreign currency are translated at the exchange rate in effect at the
financial position date, whereas non-monetary assets and liabilities denominated in a foreign currency are
translated at the exchange rate in effect at the transaction date. Expenses denominated in a foreign currency
are translated at the average rate in effect during the period with the exception of depreciation, which is
translated at the historical rate. Gains and losses on exchange arising from the translation of foreign
operations are recorded in the consolidated statement of comprehensive loss.
2.15 Changes in accounting policies implemented during the nine-month period ended September 30,
2013
a) IFRS 9, " Financial instruments: classification and measurement" ("IFRS 9" )
The Corporation has elected to early adopt IFRS 9. This standard replaces the guidance in IAS 39,
"Financial Instruments: Recognition and Measurement" relating to the classification and measurement of
financial assets and liabilities. IFRS 9 eliminates the classification of financial instruments as "availablefor-sale" and "held to maturity", and the requirement to bifurcate embedded derivatives with respect to
hybrid contracts. Under IFRS 9, equity instruments are classified as financial instruments carried at fair
value with changes in fair value recorded in profit or loss ("FVTPL"), or in other comprehensive income if
they are not held for trading and are designated as such on initial recognition ("FVOCI").
The Corporation's investments are classified as FVTPL. Fixed income investments are measured at
amortized cost if both of the following criteria are met: (i) the financial asset is held within a business
model whose objective is to hold financial assets in order to collect contractual cash flows; and (ii) the
contractual terms of the financial asset gives rise, on specified dates, to cash flows that are solely
payments of principal and interest on the principal outstanding. Otherwise, fixed income investments are
measured as FVTPL.
There were no changes to the classification of financial liabilities as a result of the adoption of IFRS 9.
Furthermore, the implementation of IFRS 9 did not result in any significant changes to the measurement
of the fair values of the Corporation's financial instruments. The Corporation adopted IFRS 9 on January
1, 2013 on a retrospective basis and there was no impact on the individual financial statement line items.
b) IFRS 10, Consolidated financial statements
IFRS 10 requires an entity to consolidate an investee when it is exposed, or has rights, to variable
returns from its involvement with the investee and has the ability to affect those returns through its power
over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern
the financial and operating policies of an entity so as to obtain benefits from its activities. IFRS 10
replaces SIC 12, Consolidation - Special Purpose Entities, and parts of IAS 27, Consolidated and
Separate Financial Statements. The Corporation adopted IFRS 10 on January 1, 2013 and it had no
impact on the Corporation's financial statements.
c) IFRS 12, Disclosure of Interests in Other Entities
IFRS 12 establishes disclosure requirements for interests in other entities, such as joint arrangements,
equity accounted investments, special purpose vehicles and off balance sheet vehicles. The standard
carries forward existing disclosure and also introduces significant additional disclosure requirements that
address the nature of, and risks associated with an entity's interests in other entities. The Corporation
adopted IFRS 12 on January 1, 2013. The adoption of this disclosure standard did not have an impact
on the Corporation's Consolidated Financial Statements.
- 14 -
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31, 2012 and 2011
(Expressed in Canadian dollars)
d) IFRS 13, Fair value measurement
IFRS 13 is a comprehensive standard for fair value measurement and disclosure requirements for use
across all IFRS. The new standard clarifies that fair value is the price that would be received to sell an
asset, or paid to transfer a liability in an orderly transaction between market participants, at the
measurement date. It also establishes disclosures about fair value measurement. Under existing IFRS,
guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair
value measurements and in many cases doe·s not reflect a clear measurement basis or consistent
disclosures. The Corporation adopted IFRS 13 on January 1, 2013. This standard had no impact on
measurement at the date of adoption.
3. CRITICAL ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
Many of the amounts included in the consolidated financial statements require management to make
judgments and/or estimates. These judgments and estimates are continually evaluated and are based on
management's experience and knowledge of the relevant facts and circumstances. Actual results may differ
from the amounts included in the consolidated financial statements.
Areas of significant judgment and estimates affecting the amounts recognized in the consolidated financial
statements include the following.
3.1 Significant judgments
a) Impairment of non-financial assets
Assets are reviewed for an indication of impairment at each statement of financial position date and when
there are indicators of impairment. This determination requires significant judgment. Factors which could
trigger an impairment review include, but are not limited to, the expiration of the Corporation intellectual rights
or patents or if such rights and/or patents will expire in the near future and are not expected to be renewed ;
the Corporation failure to raise the required funds to continue its development activity; if development
activities have failed in demonstrating that Nichromet's technology is effective or if the entity has decided to
discontinue such activities in the specific area; if sufficient data exists to indicate that, although the
Corporation is able to demonstrate that it's technology is effective, the carrying amount of the assets is
unlikely to be recovered in full from successful exploitation or by sale, significant negative industry or
economic trends and a significant drop in commodity prices.
b) Going concern
The assessment of the Corporation's ability to execute its strategy by funding future working capital
requirements involves judgment. Estimates and assumptions are continually evaluated and are based on
historical experience and other factors, including expectations of future events that are believed to be
reasonable under the circumstances.
c) Research and development tax credits receivable
The calculation of research and development tax credits receivable on qualified expenditure incurred involves
a degree of estimation and judgment in respect of certain items whose tax treatment cannot be finally
determined until a notice of assessment has been issued by the relevant taxation authority and payment has
been received. Difference arising between the actual results following final resolution of some of these items
and the assumptions made could necessitate adjustments in future periods.
d) Recovery of the promissory note receivable and other receivables
The recovery of the promissory not e receivable and other receivables requires judgement to determine
whether reasonable assurance exists that the Corporation will be repaid in full.
- 15 -
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31, 2012 and 2011
(Expressed in Canadian dollars)
3.2 Significant estimations
a) Fair value of financial instrumeints
Certain financial instruments are recorded in the Corporation's consolidated statements of financial position at
values that are representative of, or approximate fair value. The fair value of a financial instrument that is
traded in active markets at each reporting date is determined by reference to its quoted market price or dealer
price quotations. For all other financial instruments carried at fair value, the fair value is determined using
valuation techniques. Such techniques may reflect recent arm's length transactions in equity trading of the
underlying financial instrument, or reference to the current fair value of another instrument that has
substantially the same terms and discounted cash flow analysis. By their nature, these valuation models
require the use of assumptions. Changes in the underlying assumptions of these models could materially
impact the determination of the fair value of a financial instrument. Imprecision in determining fair value using
these valuation techniques may affect the amount of net earnings recorded for a particular investment in a
particular period. The Corporation believes that its estimates of fair value are reasonable and appropriate.
The Corporation reviews assumptions relating to financial instruments on an ongoing basis to ensure that the
basis for the determination of fair value is appropriate.
4. INVESTMENTS
The Corporation's investments are classified as FVTPL.
As at
September 30,
As at
December 31,
2013
2012
$
$
Publicly traded securities
Balance - beginning
Acquisition through issuance of shares
Change in fair value
Balance - end
593,370
296,685
890,055
Warrants
Balance - beginning
Acquisition through issuance of shares
Change in fair value
Balance - end
51 ,100
48,800
99,900
989,955
As at September 30, 2013
Cost Market Value
Publicly traded securities
Warrants
-16-
$
$
593,370
51,100
644,470
890,055
99,900
989,955
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31, 2012 and 2011
(Expressed in Canadian dollars)
Gains on investments
Publicly traded securities
Warrants
Nine-month period
ended September
30,2013
Realized Unrealized
$
$
296,685
48,800
345,485
Year ended
Year ended
December 31,
December 31,
2012
2011
Realized Unrealized Realized Unrealized
$
$
$
$
On July 9, 2013, Dundee and a company controlled by an executive of Dundee sold to the Corporation
19,779,000 common shares of Creso Exploration Inc. ("Creso") and 9,500,000 common share purchase
warrants of Creso and in exchange, the Corporation issued 9,889,510 of its common shares. Each Creso
share purchase warrant entitles the Corporation to purchase one Creso common share at an exercise price
of $0.10 per common share until July 14, 2014 for 5 ,000,000 of such warrants and until December 21 , 2014
for the remaining 4,500,000 of such share purchase warrants.
The fair value of Creso common shares, at the acquisition date, was determined using the quoted market
price of Creso shares on the TSX Venture Exchange. The fair value of Creso warrants was determined using
the Black-Scholes option pricing model using the following assumptions: dividend yield of 0%, estimated
volatility of 112.2%, risk-free interest rate of 1.1 7%, and using a weighted expected life of 1.23 years.
The fair value of Creso common shares, as at September 30, 2013, was determine·d using the quoted market
price of Creso shares on the TSX Venture Exchange. The fair value of Creso warrants was determined using
the Black-Scholes option pricing model using the following assumptions: dividend yield of 0%, estimated
volatility of 117.1 %, risk-free interest rate of 1.19%, and using a weighted expected life of 1 year.
5.
PROMISSORY NOTE RECEIVABLE
A promissory note in the principal amount of $500,000 is receivable from Creso, according to an agreement
dated July 10, 2013. The unsecured note is due on July 10, 2014 and bears an annual interest rate of 6%
payable at maturity.
- 17 -
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31, 2012 and 2011
(Expressed in Canadian dollars)
6.
INTANGIBLE ASSETS
A s at
December 31,
2012
$
Intellectual properties - Oxide
Patent application fees - Oxide
Softw.are
Development cost - Oxide
Less: SR&ED tax credit
Software
Development cost - Oxide
Less: SR&ED tax credit
7.
605,000
129,474
4,097
5,809,233
(1,929,894)
4 ,617,910
605,000
129,474
5,809,233
(1 ,929,894)
4,613,813
As at
December 31,
2011
$
Intellectual properties - Oxide
Patent application fees - Oxide
Additions
$
As at
September 30,
Amortization
2013
$
$
9,810
(5,713)
9,810
(5,713)
Additions
$
605,000
129,474
998
5,809,233
(1 ,929 ,894}
4,614,811
As at
December 31,
2012
$
Amortization
$
605,000
129,474
(998}
5,809,233
(1,929,894)
4,613,813
(998)
GOVERNMENT ASSISTANCE
In June 2013, the Corporation entered into a Contribution Agreement with the Sustainable Development
Technology Canada Foundation ("SDTC"). Upon meeting certain conditions, the SDTC agreed to financially
assist the Corporation in developing and demonstrating its chloride leach technology. Under the terms of the
agreement, the SDTC will contribute up to the lesser of 25.30% of eligible project costs or $5,000,000.
As part of the Contribution Agreement, the Corporation received on July 17, 2013, $656,543 from SDTC
corresponding to the eligible activities to be incurred from June 1, 2013 to December 31, 2013. For further
details, also refer to note 12, commitments.
For the
nine-month
period ended
September 30,
2013
$
Deferred contribution from STDC
Balance - beginning
SDTC grant received
Reclassification of deferred contribution through profit or
loss as per eligible expenditures incurred during the period
Balance - end
656,543
(271,550)
384,993
656,543
Total government grant received
- 18 -
For the
year ended
December 31,
2012
$
For the
year ended
December 31,
2011
$
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31, 2012 and 2011
(Expressed in Canadian dollars)
8.
SHARE CAPITAL
8.1 Authorized
The authorized capital of the Corporation consists of an unlimited number of common shares without nominal
or par value.
8.2 Issued and outstandi ng
a) Nine-mo nth peri od ended September 30, 201 3
On July 9, 2013, the Corporation closed a non-brokered private placement with Dundee for gross proceeds
of $5,000,000. The financing consisted of the issuance of 50,000,000 units at a price of $0.10 per unit. Each
unit comprises one common share and one common share purchase warrant. Each warrant entitles the
holder thereof to acquire one common share at a price of $0.10 for a two-year period following closing. The
fair value of the warrants included in the units was estimated at $1 ,036, 125 using the Black-Scholes model
based on the following weighted average assumptions: dividend yield of 0%, estimated volatility of 60%, riskfree interest rate of 1. 17%, and expected life of warrants of two yearn.
In connection with the investments described in Note 4, Investments, Nichromet issued 9,889,510 of its
common shares. Nichromet issued shares were accounted for at the fair value of tihe counterpart received at
the acquisition date.
b) Year ended December 31, 2011
On February 10, 2011, the Corporation issued 4,900,000 units to Dundee for $490,000 following partial
exercise of the shareholder option as described below. Each unit comprises one common share and one-half
common share purchase warrant. Each whole warrant entitles the holder thereof to acquire one common
share at a price of $0 .20 for a two-year period following closing. The fair value of the warrants included in the
units was estimated at $80,132 using the Black-Scholes model based on the following weighted average
assumptions: dividend yield of 0%, estimated volatility of 100%, risk-free interest rate of 1.88%, and
expected life of warrants of two years. This partial exercise of the shareholder option resulted in a credit to
share capital of $129,492 ($0.0264 per share issued).
On March 22, 2011 , the Corporation issued 4,850,000 units to Dundee for $485,000 following partial
exerci:se of the shareholder option as described below. Each unit comprises one common share and one-half
common share purchase warrant. Each whole warrant entitles the holder thereof to acquire one common
share at a price of $0 .20 for a two-year period following closing. The fair value of the warrants included in the
units was estimated at $79,072 using the Black-Scholes model based on the following weighted average
assumptions: dividend yield of 0%, estimated volatility of 100%, risk-free interest rate of 1.70%, and
expected life of warrants of two years. This partial exercise of the shareholder option resulted in a credit to
share capital of $128, 171 ($0.0264 per share issued).
On May 25, 201 1, the Corporation issued 4,500,000 units to Dundee for $450,000 following partial exercise
of the shareholder option as described below. Each unit comprises one common share and one-half
common share purchase warrant. Each whole warrant entitles the holder thereof to acquire one common
share at a price of $0 .20 for a two-year period following closing. The fair value of the warrants included in the
units was estimated at $73,366 using the Black-Scholes model based on the following weighted average
assumptions: dividend yield of 0%, estimated volatility of 100%, risk-free interest rate of 1.67%, and
expected life of warrants of two years. This partial exercise of the shareholder option resulted in a credit to
share capital of $118,922 ($0.0264 per share issued).
-19-
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31, 2012 and 2011
(Expressed in Canadian dollars)
8.
SHARE CAPITAL (CONT'D)
On July 15, 2011 , the Corporation closed a non-brokered private placement with Dundee for gross proceeds
of $682,000. The financing consisted of the issuance of 6,820,000 units at a price of $0.10 per unit. Each unit
comprises one common share and one-half common share purchase warrant. Each whole warrant entitles the
holder thereof to acquire one common share at a price of $0.20 for a two-year period following closing. The
fair value of the warrants included in the units was estimated at $79,282 using the Black-Scholes model
based on the following weighted average assumptions: dividend yield of 0%, estimated volatility of 100%, riskfree interest rate of 1.57%, and expected life of warrants of two years.
On November 1, 2011 , the Corporation closed a non-brokered private placement with Dundee for gross
proceeds of $1,750,000. The financing consisted of the issuance of 5,833,333 shares at a price of $0.30
per share.
On December 8, 2011, the Corporation closed a non-brokered private placement for gross proceeds of
$100,000. The financing consisted of the issuance of 333,334 shares at a price of $0.30 per share.
8.3 Warrants and shareholder options
a) Warrants
Changes in the Corporation's outstanding common share purchase warrants were as follows:
For the
nine-month
For the
For the
period ended
year ended
year ended
September 30, 2013
December 31, 2012
December 31, 2011
Number of
warrants
Balance - beginning
10,535,000
Carrying Number of
amount
warrants
$
311 ,852 26,250,000
Issued for cash as part of
private placement
50,000,000 1,036, 125
Issued for cash as part of
units
Ex·ercised
(7,125,000) (232,570) (14,465,000)
Expired
(3,410,000)
(79,282) (1 ,250,000)
50,000,000 1,036,125 10,535,000
Balance - end
Carrying Number of
amount
warrants
$
788,502 26,560,336
Carrying
amount
$
2,094,048
3,410,000
79,282
7, 125,000
232,570
(447,734) (1,250,000)
(28,874)
(28,916) (9,595,336) (1,588,524)
311,852 26,250,000
The weighted average exercise price was $0.20 per share (201 2- $0.20; 2011 - $0.20).
- 20 -
788,502
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31 , 2012 and 2011
(Expressed in Canadian dollars)
8.
SHARE CAPITAL (CONT'D)
A summary of outstanding warrants entitling their holders to subscribe for an equivalent number of
common shares , as at September 30, 2013, is as follows:
Number of
warrants
50,000,000
Exercise
price
$
0.10
Expiry date
July 9, 2015
b) Shareholder options
For the
nine-month
period ended
September 30, 2013
Number of
s hare-holder
options
For the
year ended
December 31 , 2012
Number of
Carrying share-holder
amount
options
$
Balance - beginning
Exercised
Expired
Balance - end
For the
year ended
December 31 , 2011
Number of
Carrying share-holder
amount
optio ns
Carrying
amount
$
$
21 ,070,000
556,817
(14,250,000)
(6,820,000)
(376,585)
(180,232)
On May 25, 2010, as part of a private placement, the Corporation granted to Dundee an option to
subscribe to an additional 45,000,000 units at $0.10 per unit (the "shareholder option"). Each unit
comprises one common share and one-half common share purchase wanrant. Each whole warrant
entitled the holder thereof to acquire one common share at a price of $0.20 for a two-year period
following the exercise of the shareholder option. The shareholder option was exercisable, in total or in
part, at any time until May 25, 2011 . The fair value of the shareholder option was estimated at
approximately $0.0264 per unit, using a binomial model. When the shareholder option is exercised, an
amount equal to the number of units subscribed for multiplied by the $0.0264 per unit was transferred
from contributed surplus to share capital. For the year ended December 31 , 2011 , 14,250,000 units
were subscribed for pursuant to the shareholder option, and a corresponding amount of $376,585 was
credited to share capital.
9.
STOCK OPTION PLAN
The Board of Directors of the Corporation has full and final discretion to designate the persons who are to be
granted options and to determine such number of options as well as their exercise price and vesting period .
On June 8, 201 1, the Corporation granted a total of 5,650,000 stock options to its officers, directors and
employees, exercisable at $0.10 per share. Options vested at the grant date. These options expire on the
fifth anniversary of their date of issuance. The fair value of options awarded is $0.07 per share for a total
share-based payment expense of $367,250.
On November 28, 2012, the Corporation granted a total of 2,575,000 stock options to its officers, directors
and employees, exercisable at $0.20 per share. Options vested at the grant date.. These options expire on
the tenth anniversary of their date of issuance. The fair value of options awarded is $0.18 per share for a
totals.hare-based payment expense of $460,702.
- 21 -
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31, 2012 and 2011
(Expressed in Canadian dollars)
9.
STOCK OPTION PLAN (CONT'D)
On February 6, 2013, the Corporation granted a total of 600,000 stock options to employees and officers,
which are exercisable at $0.20 per share. Options vested at the grant date. These options expire on the fifth
anniversary of their date of issuance. The fair value of options awarded is $0.15 per share for a total sharebased payment expense of $89,648.
On March 22, 2013, the Corporation granted a total of 100,000 stock options to an employee, which are
exerci'sable at $0.20 per share. Options vested at the grant date. These options expire on the fifth
anniversary of their date of issuance. The fair value of options awarded is $0.15 per share for a total sharebased payment expense of $14,941 .
The changes in the Corporation's outstanding and exercisable options are as follows:
For the
nine-month
For the
For the
period ended
year ended
year ended
Seetember 30, 2013
December 31, 2012
December 31, 2011
Weighted
Weighted
Weighted
average
average
average
Number
exercise
Number
exercise
Number
exercise
of op,tions
price of options
price of options
price
$
$
$
8,625,000
0.13 7,800,000
0.10
0.10 3,900,000
700,000
0.20 2,575,000
0.10
0.20 5,650,000
(300,000)
0 .10
0.10
0.10 p ,750,000)
- (1,750,000)
9,025,000
0.14 8,625,000
0.10
0.13 7,800,000
Balance -beginning
Awarded
Exercised
Exeired
Balance - end
As at September 30, 2013 outstanding and exercisable options are as follows:
Number of
options
100,000
300,000
5,350,000
2,575,000
600,000
100,000
9,025,000
Exercise
price
$
0.10
0.10
0.10
0.20
0.20
0.20
Expiry date
November 7, 2014
October 18, 2015
June 8, 2016
November 27, 2022
February 6, 2018
March 22, 2018
The residual weighted average contractual term of outstanding options was 4.63 years as at September 30,
2013 (December 31 , 2012 - 5.33 years; December 31 , 2011 - 3.45 years).
The fair value of options at the grant date was calculated based on the Black-Scholes option pricing model,
using the following weighted average assumptions:
2013
5 years
1.63%
100%
0%
$0.15
Expected life
Risk-free interest rate
Expected volatility
Expected dividend yield
Fair value ~er share
- 22 -
2012
10 years
2011
5 years
1.52%
100%
0%
$0.18
2.22%
100%
0%
$0.07
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31, 2012 and 2011
(Expressed in Canadian dollars)
10. INCOME TAXES
The income tax expense on the Corporation's loss before income taxes differs from the income tax expense
that would arise using the combined Canadian federal and provincial statutory tax rate of 26.9%
(2012 - 26.9%; 2011 - 28.4%) as a result of the following items:
Loss before tax at statutory rate of 26.9%
(2012 - 26.9%; 2011 - 28.4%)
Effect on taxes of
Non-deductible expenses
Unrecognized tax benefit
Income tax ex pense
For the
nine-month
period ended
September 30,
For the
year ended
December 31,
For the
year ended
December 31,
201 3
2012
2011
$
$
$
(757,305)
28 ,202
729 ,103
(1 ,022,854)
123,947
898,907
(885,441)
111 ,018
774,423
Recognized deferred tax assets and liabilities
The Corporation recognized deferred tax assets related to tax loss carryforwards to the extent of deferred tax
liabilities.
September 30,
December 31,
December 31,
2013
2012
2011
$
$
$
Deferred tax asset
Tax loss carryforwards
628 ,868
683,704
762,077
Deferred tax liabilities
Intangible assets
Other
(367,908)
(260,960)
(527,202)
(156,502)
(530,725)
(231 ,352)
Unrecognized deductible temporary differences
The benefit of the following tax loss carryforwards and deductible temporary differences has not been
recognized in the financial statements:
Tax loss carryforwards
Unclaimed SR&ED expenditures
Other
September 30,
December 31,
December 31,
2013
2012
2011
$
$
$
6,876 ,000
4,881 ,000
445 000
12,202,000
5,679,000
4,374,000
63,000
10,116,000
2,569,000
4 ,374,000
68,000
7 011 ,000
The loss carryforwards expire between 2028 and 2033 and the unclaimed SR&ED ,expenditures have no
expiries. In addition, the Corporation has unused tax credits of $622,000 (2012 and 2011 - $443,000) which
expire between 2023 and 2031.
- 23 -
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31, 2012 and 2011
(Expressed in Canadian dollars)
11
RELATED PARTY TRANSACTIONS
Details of related party transactions with the officers and directors of the Corporation and .companies
controlled by directors not otherwise disclosed in these consolidated financial statements are as follows:
A director or a corporation held by directors
Professional and consulting fees
Officers
Professional fees
For the
nine-month
period ended
September 30,
2013
For the
year ended
December 31,
2012
For the
year ended
December 31 ,
2011
$
$
$
356,227
455,274
452,886
201 ,808
558,035
119,101
574,375
144,963
597,849
Compensation of key management
Key management includes directors and officers. The compensation paid or payable to key management is
presented below:
For the
nine-month
period ended
September 30,
2013
$
Officers and directors' professional fees
Share-based payments
558,035
44,824
602,859
- 24 -
For the
year ended
December 31,
2012
For the
year ended
December 31,
2011
$
$
574,375
277,295
851,670
597,849
286,000
883,849
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31, 2012 and 2011
(Expressed in Canadian dollars)
12 COMMITMENTS
12.1 Construction of a $27 million demo nstration plant
In connection with the agreement reached with the SDTC, the Corporation had to file consortium agreements
with third parties regarding the global financing of a demonstration plant and the procurement of mineral
concentrates. As of June 1, 2013, consortium agreements were signed with Creso and Dundee Precious
Metals, a company controlled by Dundee. Dundee had earlier confirmed to the SDTC its intention to arrange
the required financing of the construction of the demonstration plan from its own or from third parties.
The Corporation's objective is to finalize the development of the clhlorination technology to extract precious
metals such as gold, at a pre-commercial stage through the construction of a demonstration plant of
15 tonnes per day that will operate on a continuous mode under industrial conditions.
Of the $27 million demonstration plant projected budget, the Corporation has spent in total $1,073,644 all
incurred during the nine-month period ended September 30, 2013 and included in our Consolidated
Statements of Comprehensive Loss in the Research and development line item. As at September 2013, the
Corporation has a firm purchasing commitment for $1 ,388,653 towards equipment and services relating to
the demonstration plant.
As part of the Contribution Agreement, the Corporation received on July 17, 2013, $656,543 firom SDTC
corresponding to the eligible activities to be incurred from June 1, 2013 to December 31, 2013. The
Corporation still has to incur $1 ,522, 168 of eligible expenditures by the planned date of December 31, 2013.
12.2 Lease payments
On January 11 , 2008, the Corporation entered into a three-year lease (the "Thetford Mines Lease"). The
annual rent was $100,000. In October 2010, the Corporation renewed the Thetford Mines Lease for a
three-year period ending December 31 , 2013, at an annual rent of $106,000. On July 1, 2013, the
Corporation renewed and modified the Thetford Mines Lease to rent more space, for a ten-year period at an
annual rent of $204,380 that is subject to a yearly increase of 1.5%.
On November 1, 2012, the Corporation and Creso entered into a lease for the head office until June 30,
2015. The annual rent is $26,686.
The aggregate annual payments due over the following periods are as follows:
As at
September 30,
Less than 1 year
Between 1 and 5 years
More than 5 years
- 25 -
As at
A s at
December 31, December 31,
2013
201 2
2011
$
231,066
868,792
1, 134,403
$
143,550
40,028
$
128,915
116,865
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31 , 2012 and 2011
(Expressed in Canadian dollars)
13
FINANCIAL RISK MA NAGEMENT OBJECTIVES AND POLICIES
The Corporation is exposed to various financial risks resulting from both its operations and its investment
activities. The Corporation's management manages the financial risks. The Corporation does not enter into
financial instrument agreements including derivative financial instruments for speculative purposes.
The main financial risks to which the Corporation is exposed are detailed below.
13.1 Liquidity risk
The Corporation manages its liquidity risk by using budgets that enable it to determine the amounts required
to fund its development programs. The Corporation also ensures that it has sufficient working capital
available to meet its day-to-day commitments.
As at September 30, 2013, the Corporation has cash and cash equivalents of $4,556,072
(2012 - $1,376,903; 2011 - $1 ,055,140) to settle account payables and accrued liabilities of $341 , 162
(2012 - $189,424; 2011 - $108, 147).
As at September 30, 2013, management estimates that funds available will not be sufficient to meet the
Corporation's obligations and budget ed expenditures through September 30, 2014 (note 1).
Any funding shortfall may be met in the future in a number of ways including, but not limited to, the issuance
of new debt or equity instruments, expenditures reductions and/or the introductioin of joint venture partners
and/or business combinations. Whrne management has been successful in securing financing in the past,
there can be no assurance it will be able to do so in the future or that these sources of funding or initiatives
will be available to the Corporation or that they will be available on terms which are acceptable to the
Corporation. If management is unable to obtain new funding, the Corporation may be unable to continue its
operations, and amounts realized for assets might be less than amounts reflected in these consolidated
financial statements. All of the Corporation's financial liabilities have contractual maturities of less than 30
days and are subject to normal trade terms. The Corporation regularly evaluates its cash position to ensure
preservation and security of capital as well as maintenance of liquidity.
13.2 Currency risk
The Corporation does not use derivative instruments or hedges to manage risks because its exposure to
currency risk is not significant given that its operations are carried out predominantly in Canada. As at
September 30, 2013, cash and cash equivalents amounted to $4,556,072, of which $4,551 ,870 is
denominated in Canadian dollars, $1,577 in Guatemalan quetzals, $1 ,221 in Dominican pesos and $1,404 in
US dollars. Other financial instruments are all denominated in Canadian dollars.
13.3 Cred it risk
Credit risk is the risk that a loss will occur from the failure of another party to perform according to the terms
of the contract. The Corporation's credit risk is primarily attributable to cash and cash equivalents, other
receivables and promissory note receivable. Cash and cash equivalents are held mainly with Canadian
chartered banks, which reduce the risks. The promissory note receivable and the other receivables are with
Creso and with Maya Gold & Silver Inc. ("Maya"), and are within normal terms of payment. The Corporation
had $586,475 of receivables from Creso and $46,045 from Maya. Creso and Maya are exploration and
evaluation stage junior mining companies with no income from operating activities and for which there are
material uncertainties on their ability to continue as a going concern. There are no significant amounts that
- 26 -
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31 , 2012 and 2011
(Expressed in Canadian dollars)
13.3 Credit risk (Cont'd)
are past due as at September 30, 2013. Amounts receivable from Creso and Maya are continually monitored
to ensure their collection.
13.4 Interest rate risk
The Corporation has cash balances , and its current policy is to invest excess cash in certificates of deposit
or high-interest savings accounts with Canadian chartered banks. As at September 30, 2013, the
Corporation had cash equivalents of $4,000,000 invested with a Canadian chartered bank, bearing interest
at a yearly rate of 1.35%. The promissory note bears interest at an annual interest rate of 6%. Other
receivables from Creso and Maya are not bearing interest.
13.5 Market risk
The publicly traded securities held by the Corporation consist in shares of Creso, an issuer listed on the TSX
Venture. The fair value of those publicly traded securities together with the related warrants represents the
maximum exposure to price risk. As of September 30, 2013, a 10% decrease (increase) in the closing price
on the stock market would result in an estimated increase (decrease) in operating loss of approximately
$98,996 (nil as of December 31 , 2012 and 20 11). The fair value of the Corporation investments in Creso
common share purchase warrants was determined using the Black-Scholes option pricing model as they are
not traded on a recognized securit ies exchange. The fair value of the Creso common share purchase
warrants is closely related to the fair value of Creso common shares.
13.6 Fair v alue hierarchy
The following table provides information about financial assets and liabilities measured at market value in the
Corporation's statement of financial position and categorized by level according to the significance of the
inputs used in making the measurements:
Publicly traded securities
Warrants
Level 1
$
890,055
890,055
As at September 30, 2013
Level 3
Total
$
$
890,055
99,900
99,900
99,900
989,955
Level2
$
Level 1: quoted prices in active markets for identical assets.
Level 2: for the warra1nts, the fair value is determined using a Black-Scholes option pricing model.
Level 3: Significant unobservable inputs.
14 POLICIES AND PROCESS TO MANAGE CAPITAL
The capital of the Corporation consists of items included in shareholder's equity totalling $10,487,200 as at
September 30, 2013. The Corporation's objective when managing capital is to safeguard its ability to
continue its operations and advance the development of its technologies. As needed, it raises funds through
private placements. The Corporation does not use long-term debt since it does not generate operating
revenues. It has no dividend policy.
- 27 -
Nichromet Extraction Inc.
Notes to Consolidated Financial Statements
For the nine-month period ended September 30, 2013 and for the years ended December 31, 2012 and 2011
(Expressed in Canadian dollars)
The Corporation does not have any externally imposed capital requirements from regulatory or contractual
requirements to which it is subject. Changes in capital for the years ended December 31, 2012 and 2011 and
for the nine-month period ended September 30, 2013 are described in the consolidated statements of
changes in equity.
15
SUBSEQUENT EVENTS
On October 3, 2013 , the Board of directors of the Corporation approved a reorganization of the capital
structure of the Corporation (the "Capital Reorganization") by amending its articles of incorporation as
follows:
a) to change the name of the Corporation to "Dundee Sustainable Technologies Inc." in the
English language and "Dundee Technologies Durables Inc." in the French language;
b) to change the designation of the common shares to "subordinated voting shares" and change the
rights, privileges, restrictions and conditions attaching thereto; and
c) to create and authorize the issuance of an unlimited number of multiple voting shares, each
multiple voting share having 10 votes.
On November 14, 2013, the Board of directors also approved the management proxy circular in connection
with a special meeting of the shareholders of the Corporation to be held on December 5, 2013 (the
"Meeting"). At the Meeting the shareholders of the Corporation will be asked to approve, amongst other, the
Capital Reorganization.
On November 22, 2013, Nichromet and a wholly-owned subsidiary of Nichromet ("Subco") entered into a
merger agreement with Creso pursuant to which Creso and Subco will amalgamate (the "Amalgamation")
and the amalgamated company will become a wholly-owned subsidiary of Nichromet which would have
changed its name to Dundee Sustainable Technologies Inc.
Pursuant to the Amalgamation, Nichromet would, indirectly, acquire all of the issued and outstanding
common shares of Creso, which it does not already own, and the shareholders of Creso would receive one
subordinate voting share of Nichromet in exchange for two common shares of Creso. Holders of options
and warrants of Creso will receive options and warrants, as applicable, of Nichromet based upon the same
exchange ratio.
Assuming completion of the propos·ed Amalgamation, but excluding any securities issuable pursuant to a
future financing in connection with the Amalgamation, Dundee Sustainable Technologies Inc. will have
(i) 227,445,202 subordinate voting shares issued and outstanding, of which 72.5% will be held by the
current shareholders of Nichromet (including Dundee Corporation) and 27.5% will be held by the current
shareholders of Creso (excluding Nichromet}, and (ii) 50,000,000 multiple voting shares issued and
outstanding, all of which will be held by Dundee Corporation. Accordingly, Dundee Corporation will exercise
voting rights in respect of an aggregate of 86.3% of the issued and outstanding voting securities of Dundee
Sustainable Technologies Inc. The multiple voting shares of Dundee Sustainable Technologies Inc. will not
be listed on any stock exchange and are convertible, at the option of the holder, into subordinate voting
shares for no additional consideration.
Completion of the Amalgamation is subject to requisite shareholder and regulatory approvals and standard
closing conditions for transactions of this nature.
- 28 -
APPENDIX “G” - MD&A OF NICHROMET
Dundee Sustainable Technologies Inc.
(Previously known as Nichromet Extraction Inc.)
Management’s Discussion and Analysis
Nine-month period ended September 30, 2013 and
Years ended December 31, 2012 and 2011
Dundee Sustainable Technologies Inc.
600 De Maisonneuve Boulevard West, Suite 2750, Montreal, QC, H3A 3J2
Tel.: 514.940.1046 – Fax: 514.866.6193
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
TABLE OF CONTENT
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013 AND YEARS ENDED DECEMBER 31, 2012 AND 2011
BACKGROUND ............................................................................................................................................................. 3
FORWARD LOOKING STATEMENTS .......................................................................................................................... 3
INCORPORATION AND NATURE OF OPERATIONS .................................................................................................. 3
CORPORATE OVERVIEW ............................................................................................................................................ 3
HIGHLIGHTS ................................................................................................................................................................. 5
INFORMATION ON EQUITY ......................................................................................................................................... 5
FINANCING ACTIVITIES ............................................................................................................................................... 6
INVESTMENT ACTIVITIES ........................................................................................................................................... 7
LIQUIDITY AND WORKING CAPITAL ........................................................................................................................... 7
DISCUSSION AND ANALYSIS OF OPERATIONS ....................................................................................................... 8
SELECTED QUARTERLY INFORMATION ................................................................................................................. 10
OFF BALANCE SHEET ARRANGEMENTS ................................................................................................................ 10
CONTRACTUAL OBLIGATIONS AND COMMITMENTS ............................................................................................ 10
RELATED PARTY TRANSACTIONS ........................................................................................................................... 11
SUBSEQUENT EVENTS ............................................................................................................................................. 11
ACCOUNTING POLICY CHANGES, CRITICAL ACCOUNTING ESTIMATES, JUDGMENTS AND ASSUMPTIONS 12
RISKS AND UNCERTAINTIES .................................................................................................................................... 12
-2-
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013 AND YEARS ENDED DECEMBER 31, 2012 AND 2011
BACKGROUND
The following management discussion and analysis (the “MD&A”) of Dundee Sustainable Technologies Inc.
(previously known as Nichromet Extraction Inc.) (“Nichromet” or the “Corporation”) constitutes management’s
review of the factors that affected the Corporation’s financial and operating performance for the nine-month
period ended September 30, 2013 and for the years ended December 31, 2012 and 2011. This MD&A should
be read in conjunction with the Corporation’s audited consolidated financial statements for the nine-month
period ended September 30, 2013 and for the years ended December 2012 and 2011, prepared in accordance
with the International Financial Reporting Standards (“IFRS”). Unless otherwise noted, all figures are in
Canadian dollars, the presentation and reporting currency.
FORWARD LOOKING STATEMENTS
Some statements contained in this MD&A constitute forward looking statements, including, without limitation,
anticipated developments in the Corporation’s operations in future periods and other events or conditions that
may occur in the future. These statements are about the future and are inherently uncertain and actual
achievements of the Corporation or other future events or conditions may differ materially from those reflected
in the forward-looking statements due to a variety of risks, uncertainties and other factors, including, without
limitation, those mentioned herein under heading “RISKS AND UNCERTAINTIES”. Management believes
that the expectations reflected in these statements are reasonable but no assurance can be given that these
expectations will prove to be correct. It is recommended not to place undue reliance on forward-looking
statements as the plans, intentions or expectations upon which they are based might not occur.
INCORPORATION AND NATURE OF OPERATIONS
Nichromet was incorporated under the Canada Business Corporations Act on July 22, 1997.
Since 2006, the Corporation has developed at a pilot level metallurgical processes based on a chloride leach
technology, a method of treating and extracting gold and/or silver and other base metals by creating a chloride
with either chlorine or hydrochloric acid. The approach developed at pilot level is very broad and can involve
either oxide or sulfide ores. It enables the recovery of nickel and cobalt from oxide type ores such as
serpentine, laterites and other siliceous metal bearing ores and the extraction of precious metals from
refractory ores with content of sulfides and arsenic.
These technologies are subject to all technology development inherent risks and may require significant
additional development, testing and investments prior to final commercialization. There can be no assurance
that such technologies will be successfully further developed, or that output from any use of the Corporation’s
technologies could be produced at a commercial level at reasonable costs or successfully marketed. To date,
the Corporation has not earned significant revenues and is considered to be in the development stage. At
September 30, 2013, the principal and majority shareholder of the Corporation is Dundee Corporation and
related parties (collectively, “Dundee”).
CORPORATE OVERVIEW
Metallurgy Processes Development
Nichromet has developed a chlorination approach for the recovery of base and precious metals from two broad
categories of ores namely the oxides (metals combined with oxygen) and the sulfides (metals combined with
sulfur).
In the period 2006-2008, the technique related to the oxides (serpentinic ores, laterites) was successfully
piloted for the extraction of nickel from laterites as established by independent engineering studies.
-3-
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013 AND YEARS ENDED DECEMBER 31, 2012 AND 2011
The piloting of the oxide ores has been a fruitful exercise for the valuation of the sulfide ores which started in
2009. The Nichromet process applied to the sulfide ores includes an oxidation stage in order to remove the
sulfur and other impurities such as arsenic in the starting sulfide ore. The completion of this oxidative step
transforms the sulfide into an oxide with the removal of the sulfur from the metal and its replacement by oxygen.
When this transformation is completed, the new oxide is submitted to the Nichromet treatment, using acid
leaching to collect base metals (Cu, Zn, Ni) and hypochloride to collect the precious metals (Au, Ag). The
piloting of the sulfides (batch size of 1 ton) was completed in 2012.
The next step for the development of the technology is the completion of a demonstration plant and the
exploratory operations at laboratory scale of various ores. Work on the demonstration plant started on June 1,
2013. The design of the demonstration plant is completed and the installation of the demonstration facilities is
scheduled for completion by the end of 2014.
Corporate Strategy
The technology being developed by Nichromet uses chlorination in order to extract precious metals such as
gold. This process is an alternative to the conventional process used by the mining industry, namely
cyanidation, which presents many disadvantages and environmental hazards.
The current stage of the Nichromet’s chlorination extraction technology is the result of 10 years of effort in
combined laboratory development and pilot plant scale validation. The results obtained at a laboratory scale
led to the construction of a pilot plant installation in 2011 and 2012 in order to pursue the development of
Nichromet’s chlorination extraction technology. With successful pilot results, the next stage is to finalize the
development of the chlorination extraction technology at a pre-commercial stage. This first requires the
construction of a pre-commercialization demonstration plant operating on a continuous production basis.
The pre-commercialization demonstration plant will have a capacity of 15 tons per day (“TPD”) in order to
assess on a pre-industrial scale Nichromet’s chlorination extraction technology under continuous operating
conditions. The demonstration plant will offer the first test of the Nichromet’s chlorination extraction technology
in an operating environment with near industrial conditions. The scale-up factor is in the order of 15:1
compared to the pilot installation. Although the size of the pre-commercialization demonstration plant seems
modest according to references in the mining industry, it is large enough to establish the credibility of the
process on an industrial scale. This pre-commercialization demonstration plant will serve as reference for the
establishment of full scale plants operating with the same technology.
In the medium term, the Nichromet business model is expected to be the licensing of its technology to third
parties. Rights to Nichromet’s chlorination extraction technology would be licensed to companies wishing to
use Nichromet’s chlorination extraction technology in return for royalties. Cyanide has been banned for usage
by most countries and there are many gold ore bodies that are lying idle for lack of a process that can extract
the gold without cyanide and that may represent potential users of the Nichromet technology. The technology
is of particular interest for gold mining companies and therefore the price of gold will be a significant factor in
the Corporation’s business development. Refer to “Risks and Uncertainties”.
Research and development activities at both laboratory and pilot levels are carried out in house except for the
verification of certain results which are referred to an independent laboratory and in parallel with the
construction of the demonstration plant.
Intellectual Property
Nichromet’s technology is protected by patents filed during the development of the technology to reinforce the
level of protection.
-4-
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013 AND YEARS ENDED DECEMBER 31, 2012 AND 2011
HIGHLIGHTS
Nine-month period ended September 30, 2013
•
•
•
•
•
Contribution Agreement with the Sustainable Development Technology Canada Foundation (“SDTC”).
Under the terms of the agreement, the SDTC could contribute up to the lesser of 25.30% of eligible
project costs or $5,000,000 for the construction of the demonstration plant. As part of the Contribution
Agreement, the Corporation received on July 17, 2013, $656,543 from SDTC corresponding to the
eligible activities to be incurred from June 1, 2013 to December 31, 2013 net of a 10% holdback;
Engineering for the fluidized bed for the demonstration plant;
Beginning of the engineering of the demonstration plant;
Activities in the pilot plant: analysis of the gold absorption system over carbon in relation with
bromine recycling; modelisation of the process (Metsim); deposition of gold on silica; silver
extraction from complex ore; vitrification of arsenic containing other toxic elements; recovery of
precious metals from waste electronic products; valorisation of zinc/silver/lead ores;
Investment in Creso Exploration Inc. (“Creso”) - Refer to “Investing Activities”.
Year ended December 31, 2012
• Québec government financial assistance for green technology of $271,747;
• Hypochlorite gold extraction on a continuous basis;
• Installation of the fluidized bed at laboratory scale for the oxidation of sulfide;
• Stabilization of arsenic by formation of glass;
• Development of an approach for iron/arsenic removal in the presence of copper and zinc;
• Operation of the pilot with all features: oxidation, chlorination, recycling and reagents and gold
recovery;
• Successful completion of Phase Two of the pilot plant.
Year ended December 31, 2011
• Successful completion of Phase One of the pilot plant project consisting of the chlorination extraction
of gold;
• Start of Phase Two of the pilot plant project in July 2011 (oxidation of sulfide);
• Québec government financial assistance for green technology of $403,695;
• Filing of patent concerning chlorination dealing with the recycling of the chlorinating agent;
• Presentation by Nichromet at the World Gold Conference in October 2011;
• Development of a new method for the production of potassium sulfate at low temperature;
• Application of Nichromet technology to nickel recovery (Cajalbana, Cuba);
• Piloting of chlorine recirculation by electrolysis;
• Design of a fluidized bed for oxidation of sulfide;
• Treatment of gold ore from Creso Duggan deposit.
INFORMATION ON EQUITY
Shares
Options
Warrants
Total – fully diluted
January 31, September 30, December
2014
2013
31, 2012
214,928,724
214,928,724 147,614,214
21,425,000
9,025,000
8,625,000
50,000,000
50,000,000
10,535,000
286,353,724
273,953,724 166,774,214
December
31, 2011
133,149,214
7,800,000
26,250,000
167,199,214
At September 30, 2013 Dundee owned 179,005,144 shares of the Corporation (64.2%) and all of the
outstanding warrants.
-5-
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013 AND YEARS ENDED DECEMBER 31, 2012 AND 2011
Stock Option Plan
The Board of Directors of the Corporation has full and final discretion to designate the persons who are to be
granted options and to determine such number of options as well as their exercise price and vesting period.
The purpose of the stock option plan is to serve as an incentive for the directors, officers, employees and
service providers who will be motivated by the Corporation’s success as well as to promote ownership of
common shares of the Corporation by these people. There is no performance indicator relating to profitability
or risk attached to the plan.
In the nine-month period ended September 30, 2013, the Corporation granted a total of 700,000 stock options
exercisable at $0.20 per share and expiring on the fifth anniversary of their date of issuance. In 2012, the
Corporation granted a total of 2,575,000 stock options exercisable at $0.20 per share and expiring on the tenth
anniversary of their date of issuance. In 2011, the Corporation granted a total of 5,650,000 stock options
exercisable at $0.10 per share and expiring on the fifth anniversary of their date of issuance. All options vested
on the date of the grant.
FINANCING ACTIVITIES
(also refer to the “Subsequent Events” section)
Private placements
Nine-month period ended September 30, 2013
On July 9, 2013, the Corporation closed a non-brokered private placement with Dundee for gross proceeds of
$5,000,000. The financing consisted of the issuance of 50,000,000 units at a price of $0.10 per unit. Each unit
comprises one common share and one common share purchase warrant. Each warrant entitles the holder
thereof to acquire one common share at a price of $0.10 for a two-year period following closing.
Year ended December 31, 2012
During the year ended December 31, 2012, Dundee exercised 14,465,000 warrants to purchase same amount
of shares for total proceeds of $2,893,000.
Year ended December 31, 2011
On July 15, 2011, the Corporation closed a non-brokered private placement with Dundee for gross proceeds
of $682,000. The financing consisted of the issuance of 6,820,000 units at a price of $0.10 per unit. Each unit
comprises one common share and one-half common share purchase warrant. Each whole warrant entitles the
holder thereof to acquire one common share at a price of $0.20 for a two-year period following closing.
On November 1, 2011, the Corporation closed a non-brokered private placement with Dundee for gross
proceeds of $1,750,000. The financing consisted of the issuance of 5,833,333 shares at a price of $0.30 per
share.
On December 8, 2011, the Corporation closed a non-brokered private placement for gross proceeds of
$100,000. The financing consisted of the issuance of 333,334 shares at a price of $0.30 per share.
Exercise of warrants, options and shareholder options
Following the exercise of warrants by Dundee, the Corporation received proceeds of $1,425,000 in the ninemonth period ended September 30, 2013 ($2,893,000 in 2012 and $250,000 in 2011). In addition, options
were exercised in the nine-month period ended September 30, 2013 for proceeds of $30,000 (Nil in 2012 and
2011). In 2011, 14,250,000 shareholder options were exercised by Dundee for proceeds of $1,425,000.
-6-
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013 AND YEARS ENDED DECEMBER 31, 2012 AND 2011
INVESTMENT ACTIVITIES
On July 9, 2013, Dundee sold to the Corporation 19,779,000 common shares of Creso and 9,500,000 common
share purchase warrants of Creso and in exchange, the Corporation issued 9,889,510 of its common shares.
Each Creso share purchase warrant entitles the Corporation to purchase one Creso common share at an
exercise price of $0.10 per common share until July 14, 2014 for 5,000,000 of such warrants and until
December 21, 2014 for the remaining 4,500,000 of such share purchase warrants. Nichromet accounted the
transaction at the fair value of the counterpart received for its shares at the acquisition date.
In addition, a promissory note in the principal amount of $500,000 is receivable as at September 30, 2013
from Creso, according to an agreement dated July 10, 2013. The unsecured note is due on July 10, 2014 and
bears an annual interest rate of 6% payable at maturity.
Amalgamation with Creso Exploration Inc. (“Creso”)
On November 22, 2013 the Corporation, a wholly-owned subsidiary of Corporation (“Subco”) and Creso
entered into an agreement pursuant to which Creso and Subco will amalgamate (the “Amalgamation”) and the
amalgamated company will become a wholly-owned subsidiary of Nichromet which by then would have
changed its name to Dundee Sustainable Technologies Inc. Pursuant to the Amalgamation, Nichromet would,
indirectly, acquire all of the issued and outstanding common shares of Creso, which it does not already own,
and the shareholders of Creso would receive one subordinate voting share of Nichromet in exchange for two
common shares of Creso. Holders of options and warrants of Creso will receive options and warrants, as
applicable, of Nichromet based upon the same exchange ratio. Assuming completion of the proposed
Amalgamation, but excluding any securities issuable pursuant to a future financing in connection with the
Amalgamation, Dundee Sustainable Technologies Inc. will have (i) 227,445,202 subordinate voting shares
issued and outstanding, of which 72.5% will be held by the current shareholders of Nichromet (including
Dundee Corporation) and 27.5% by the current shareholders of Creso (excluding Nichromet), and (ii)
50,000,000 multiple voting shares issued and outstanding, all of which will be held by Dundee Corporation.
The capital reorganization of the Corporation involving (i) its change of name to Dundee Sustainable
Technologies Inc.; and (ii) the amendment of its articles to (A) change the designation of the common shares
to subordinated voting shares" and change the rights, privileges, restrictions and conditions attaching thereto;
and (B) create and authorize the issuance of an unlimited number of multiple voting shares and set the rights,
privileges, restrictions and conditions, was approved by the shareholders at a special meeting held on
December 5, 2013. Articles of amendment were filed on January 7, 2014. Completion of the Amalgamation
is subject to regulatory approvals and standard closing conditions for transactions of this nature. Also refer to
the “Subsequent Events” section.
LIQUIDITY AND WORKING CAPITAL
On September 30, 2013, the working capital of the Corporation was at $4,870,225 ($1,481,779 as at
December 31, 2012 and $1,919,190 as at December 31, 2011).
Management estimates that the Corporation will not have sufficient funds to meet its obligations and budgeted
expenditures through to September 30, 2014. The Corporation will therefore periodically have to raise
additional funds to continue operations. The Corporation is pursuing financing alternatives to fund its
operations and to continue its activities as a going concern. Although there is no assurance that the
Corporation will be successful in these actions, management is confident that it will be able to secure the
necessary financing through the issuance of new equity. While it has been successful in doing so in the past,
there can be no assurance it will be able to do so in the future. Refer to the Section “Subsequent Events”.
-7-
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013 AND YEARS ENDED DECEMBER 31, 2012 AND 2011
DISCUSSION AND ANALYSIS OF OPERATIONS
The Corporation’s objective is to finalize the development of the chlorination technology to extract precious
metals such as gold, at a pre-commercial stage through the construction of a demonstration plant of 15 tonnes
per day that will operate on a continuous mode under industrial conditions.
In connection with the agreement reached with the SDTC, the Corporation filed consortium agreements with
third parties regarding the global financing of demonstration plant and the procurement of mineral
concentrates. As of June 1, 2013 consortium agreements were signed with Creso and Dundee Precious
Metals for the procurement of mineral concentrates.
Of the $27 million demonstration plant projected budget, the Corporation has spent in total $1,073,644 during
the nine-month period ended September 30, 2013. As at September 2013, the Corporation has firm purchasing
commitment for $1,388,653 towards equipment and services relating to the demonstration plant.
The Corporation reported a loss of $2,815,260 for the nine-month period ended September 30, 2013 versus
a loss of $3,802,431 in 2012 and $3,117,749 in 2011.
Following are the details of research and development:
Nine month period
ended September 30,
2013
$
Salaries
819,814
Contractors
692,141
Building maintenance
270,576
Equipment
249,194
Consumables
173,376
Other
153,263
2,358,364
Government assistance and tax credits
(472,619)
Research and development expenses
1,885,745
Year ended
December 31,
2012
$
748,615
315,464
105,731
757,882
311,784
83,971
2,323,447
(271,447)
2,052,000
Year ended
December 31,
2011
$
595,363
368,632
221,019
556,315
132,333
281,883
2,155,545
(473,861)
1,681,684
Research and development expenses in 2013 include $1.1 million of costs for the demonstration plant. The
remaining expenses relate to research activities conducted in the pilot plant. In 2012, the development costs
include costs related to the oxidation and chlorination processes.
Tax credits amounted to $472, 619 in 2013 ($271,747 in 2012 and $473,861 in 2011). Tax credits include a
subsidy for green technology from the Quebec government of $271,747 in 2012 and $403,695 in 2011 and a
contribution from the SDTC recognised through the Consolidated Statement of Comprehensive Loss of
$271,550 in 2013 (Nil in 2012 and 2011). The remaining balance of the tax credits is composed of the Quebec
reimbursable SR&ED credits.
Following are the details of professional and consulting fees:
Nine-month period
ended September
30, 2013
$
Legal
195,212
Audit
159,090
Consulting administration
150,064
Professional fees
119,738
Consulting geology
90,812
Accounting
15,952
Marketing consulting
Professional and consulting fees
730,868
-8-
Year ended
December 31,
2012
$
54,753
54,110
250,236
101,468
155,383
5,483
42,006
663,439
Year ended
December 31,
2011
$
98,683
51,265
186,007
154,173
104,507
9,172
603,807
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013 AND YEARS ENDED DECEMBER 31, 2012 AND 2011
Legal fees include corporate secretariat services and other legal fees. The increase in the nine-month period
ended September 30, 2013 is due to: (i) the investing activities (investment in and loan to Creso); (ii) the
Contribution Agreement with SDTC and related Consortium Agreements; and (iii) the negotiations and renewal
of the Thetford Mines lease. The decrease in 2012 compared to 2011 is due to the fact that there were no
private placements in 2012.
The increase in the audit fees between the nine-month periods ended September 30, 2013 and the year ended
December 31, 2012 is caused by the financial statement audit requirement generated by the agreement
reached with the SDTC (e.g. audit of the twelve-month period ended December 2012 and 2011) and by the
audit of the nine-month period ended September 30, 2013.
Consulting administration fees are annual fees paid to officers of companies controlled by officers. Consulting
administration fees in 2012 include a bonus of $50,000 paid to Nichromet’s president.
Professional fees consist of business development activities in Guatemala and also include certain audit
related fees performed in 2013. The variance is due to audit related work performed in 2011 and 2013
regarding R&D credit claims (Nil in 2012) and other services related to the SDTC grant in 2013 only.
Consulting geology fees are paid to a company controlled by a director of the Corporation for services rendered
in relation with the testing of minerals from Cuba and the Dominican Republic. The difference in 2012
compared to 2011 and 2013 is attributable to travels to Cuba and the Dominican Republic.
Marketing consulting relates to a special promotion program to present Nichromet’s technology to the mining
industry that took place only in 2012.
Following are the details of the administrative expenses:
Insurance
Patent application fees
Rent
Website and technical support
Telecommunications
Transportation
Others
Administrative expenses
Nine-month period
ended September 30
2013
$
66,838
65,725
52,888
25,862
19,286
9,483
23,189
263,271
Year ended
December 31,
2012
$
89,119
70,297
66,068
53,233
28,902
35,465
38,342
381,426
Year ended
December 31,
2011
$
25,013
29,887
20,616
34,036
28,330
28,607
76,292
242,781
The patent fees vary with the number of patents filed.
The variance in the rent is due to renewal of the lease of the head office premises.
In addition, an unrealized gain of $345,485 (Nil in 2012 and 2011) was recorded in the nine-month period
ended September 30, 2013 on the investment in Creso.
-9-
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013 AND YEARS ENDED DECEMBER 31, 2012 AND 2011
SELECTED QUARTERLY INFORMATION
The following table sets forth selected historical financial information for the Corporation the last eight quarters.
Such information is derived from the Corporation’s internal unaudited financial statements prepared in
accordance with IFRS.
Cash and cash equivalents
Working capital
Total assets
Equity
Interest revenues
Total expenses
Net loss and comprehensive loss
Q3-13
$
4,556,072
4,870,225
11,213,355
10,487,200
24,875
1,331,859
948,613
Q2-13
$
988,678
1,160,754
6,062,051
5,791,343
556
781,501
786,548
Q1-13
$
1,309,723
1,494,240
6,335,438
6,127,891
1,311
1,081,410
1,080,099
Q4-12
$
1,376,903
1,481,779
6,287,825
6,098,401
2,676
1,586,031
1,596,903
Cash and cash equivalents
Working capital
Total assets
Equity
Interest revenues
Total expenses
Net loss and comprehensive loss
Q3-12
$
1,340,467
1,725,350
6,487,168
6,342,445
505,831
505,831
Q2-12
$
103,604
501,479
5,369,150
5,120,276
780,032
780,032
Q1-12
$
371,592
777,399
5,578,451
5,400,308
3,532
923,197
919,665
Q4-11
$
1,055,140
1,919,190
6,655,277
6,547,130
3,663
618,343
614,680
The increase in Cash and cash equivalents, Working Capital, Total assets and Equity in the third quarter of
2013 is due to the $5,000,000 private placement closed in July 2013. Total assets of the third quarter of 2013
also include investments in Creso of $989,955. The variation in Total expenses is attributable to the level of
research and development activities.
OFF BALANCE SHEET ARRANGEMENTS
The Corporation did not enter into any off-balance sheet arrangements in nine-month period ended September
30, 2013 and years ended December 31, 2012 and 2011.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The contractual obligations of the Corporation include lease payments for the Thetford Mines facilities and the
head office.
The aggregate annual payments due over the following periods are as follows:
As at
As at
As at
September 30, December 31, December 31,
2013
2012
2011
$
$
$
Less than 1 year
231,066
143,550
128,915
Between 1 and 5 years
868,792
40,028
116,865
More than 5 years
1,134,403
In addition, at September 30, 2013, the Corporation has firm purchasing commitments of equipment and
services relating to the demonstration plant totalling $1,388,653.
- 10 -
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013 AND YEARS ENDED DECEMBER 31, 2012 AND 2011
RELATED PARTY TRANSACTIONS
In addition to the transactions discussed in the financing and investing sections, details of related party
transactions with the officers and directors of the Corporation and companies they control are as follows:
Nine-month period
ended September 30,
2013
$
Year ended
December
31, 2012
$
Year ended
December 31,
2011
$
Professional and consulting fees
Administration(1)
Legal(2)
Geology(3)
Professional(4)l
Research and development(5)
Share-based expenses(6)
(1)
(2)
(3)
(4)
(5)
(6)
135,000
230,000
252,338
114,864
46,656
68,845
65,250
75,000
75,000
46,035
72,778
76,265
196,886
149,940
124,400
44,824
277,295
286,000
602,859
851,670
883,849
In the period ended September 30, 2013 and the years ended December 31, 2012 all fees were paid
to a private company controlled by Pierre Gauthier, Chairman, President and Chief Executive Officer
in 2013 and 2012, including a bonus of $50,000 in 2012. In 2011, the fees also included $123,300
paid to a private company controlled by Marc Filion who was then President and Chief Executive.
Fees paid to a private company controlled by Luce Saint-Pierre, Corporate Secretary and, in 2013 an
amount of $23,000 paid to a law firm of which a director is a partner for services relating to the renewal
of the lease in Thetford Mines. Other factors of variation from 2012 to 2013 are a special mandate
relating to the listing of the Corporation on a Canadian exchange and investing activities of the
Corporation. The variation from 2011 to 2012 is due to a lower number of private placements in 2011.
Fees paid to a company controlled by a director who is also President of Nichromet Dominicana and
Nichromet Guatemala for his services in relation with the testing of minerals from Cuba, the Dominican
Republic and other Caribbean countries.
Fees paid to the General Manager of Nichromet Guatemala for business development in Guatemala.
Related party transactions recorded in Research and development are the fees paid to a company
controlled by a director who is also Vice-President, Research and Development and starting in April
2013, the salary paid to the Executive Vice-President.
In 2013, 700,000 options were granted to related parties compared to 1,475,000 in 2012 and
4,150,000 in 2011. The life of the options granted in 2013 and 2012 is of 10 years while the life of the
options granted in 2011 is of five years.
SUBSEQUENT EVENTS
On January 31, 2014, 50,000,000 subordinate voting shares held by Dundee were converted into same
number of multi-voting shares, each carrying 10 votes.
On January 8, 2014, Dundee Corporation agreed to loan $3,000,000 to the Corporation (the “Bridge Loan”).
The funds from the Bridge Loan were disbursed on January 31, 2014. The Bridge Loan is secured, bears
interest at the rate of 12.68% per annum and matures on April 30, 2014. The Corporation has the option to
repay the Bridge Loan at any time but must use the proceeds from the sale of any assets in excess of $250,000
or any financing in excess of $3,000,000 to repay the Bridge loan. The use of the cash received pursuant to
the Bridge Loan is restricted. The Bridge Loan shall only be used to fund (i) the building of a demonstration
plant and (ii) for general corporate purposes.
- 11 -
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013 AND YEARS ENDED DECEMBER 31, 2012 AND 2011
On December 20, 2013, the Corporation loaned $200,000 to Creso. The loan loan has been made upon the
same terms and conditions as under the loan agreement in the amount of $500,000 dated July 10, 2013,
entered into between the Corporation and Creso, namely that the loan is unsecured, bears interest at a rate
of 6% per annum and is payable on July 10, 2014.
On December 12, 2013, 12,550,000 stock options (the “Options”) were granted to directors, officers,
employees and consultants of the Corporation, each option entitling the holder thereof to acquire one
subordinate voting share from treasury until December 12, 2018 at an exercise price of $0.10 per share
On December 5, 2013, the shareholders of the Corporation approved a capital reorganization to re-designate
the common shares of the Corporation subordinate voting shares and a new class of multiple voting shares
was created and to change the name of the Corporation to Dundee Sustainable Technologies Inc. Articles of
amendment giving effect to the new designation where filed on January 8, 2014.
On November 22, 2013, the Corporation, Creso and Subco (a wholly-owned subsidiary of the Corporation)
entered into the Amalgamation Agreement pursuant to which the Creso shareholders will exchange all of the
issued and outstanding Creso common shares for the issuance of the Corporation’s subordinate voting
shares, on the basis of half a Corporation subordinate voting share for every one (1) Creso common share.
On the Amalgamation Date, Creso and Subco will be amalgamated to form Amalco, a wholly-owned
subsidiary of Nichromet.
Holders of options and warrants of Creso will receive options and warrants, as applicable, of the Corporation
based upon the same exchange ratio.
Assuming completion of the proposed Amalgamation, the Corporation will have (i) 227,445,202 subordinate
voting shares issued and outstanding, of which 72.5% will be held by the current shareholders of the
Corporation (including Dundee) and 27.5% will be held by the current shareholders of Creso (excluding the
Corporation), and (ii) 50,000,000 multiple voting shares issued and outstanding, all of which will be held by
Dundee. Accordingly, Dundee will exercise voting rights in respect of an aggregate of 86.3% of the issued
and outstanding voting securities of the Corporation. The Corporation’s multiple voting shares will not be listed
on any stock exchange and are convertible, at the option of the holder, into subordinate voting shares for no
additional consideration. Completion of the Amalgamation is subject to the approval by the shareholders of
Creso as well as regulatory approvals and standard closing conditions for transactions of this nature.
ACCOUNTING POLICY CHANGES, CRITICAL ACCOUNTING ESTIMATES, JUDGMENTS AND
ASSUMPTIONS
The preparation of financial statements in conformity with IFRS requires management to make estimates and
assumptions that affect amounts reported in the financial statements and accompanying notes. There is a full
disclosure and description of the Corporation’s critical accounting policies, estimates, judgments, assumptions
in the financial statements as at September 30, 2013 in notes 1, 2 and 3.
RISKS AND UNCERTAINTIES
The technology is new and has no operating history
The Corporation has limited history of operations that, to date has consisted primarily of research and
development. The Corporation has generated no revenue from its technology and does not have experience
in selling or marketing the technology. The technology has not gained significant market exposure or
demonstrable market acceptance as yet. Whether the Corporation can successfully manage the transition to
a commercial enterprise will depend upon a number of factors, including expanding the sales and marketing
capabilities, as well as establishing relationships with strategic partners. Given the absence of clear market
acceptance with respect to this line of products, there can be no assurance as to the achievability of projected
market penetration rates and associated sales revenues.
There has been no independent evaluation of the Process
- 12 -
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013 AND YEARS ENDED DECEMBER 31, 2012 AND 2011
While the Corporation’s research with respect to the technology has, in the opinion of management, been
validated in various applications and while various third parties (without limitation Dundee Precious Metals and
Creso) have carried out due diligence procedures to their satisfaction, there has been no independent
evaluation of the Process. There can be no assurance that we will be able to achieve our growth strategy and
bring the Process to commercialization. Our inability to bring the process to commercialization will have a
material adverse effect on our operations.
Intellectual Property
The Corporation relies on patent, trade secret, trademark and copyright laws to protect its intellectual property.
The patents to which the Corporation currently has rights expire between 2022 and 2026. The Corporation’s
present or future-issued patents may not protect the Corporation’s technological leadership, and the
Corporation’s patent portfolio may not continue to grow at the same rate as it has in the past. Moreover, the
Corporation’s patent position is subject to complex factual and legal issues that may give rise to uncertainty
as to the validity, scope and enforceability of a particular patent. Accordingly, there is no assurance that: (a)
any of the patents owned by the Corporation will not be invalidated, circumvented, challenged, rendered
unenforceable; or (b) any of the Corporation’s pending or future patent applications will be issued with the
breadth of claim coverage sought by the Corporation, if issued at all. In addition, effective patent, trade secret,
trademark and copyright protection may be unavailable, limited or not applied for in certain countries.
The Corporation also seeks to protect its proprietary intellectual property, including intellectual property that
may not be patented or patentable, in part by confidentiality agreements and, if applicable, inventors’ rights
agreements with strategic partners and employees. The Corporation can provide no assurance that these
agreements will not be breached, that the Corporation will have adequate remedies for any breach, or that
such persons or institutions will not assert rights to intellectual property arising out of these relationships.
Management does not believe the processes infringing on the proprietary rights of third parties. There can be
no assurance, however, that third parties will not claim such infringement by the Corporation with respect to
current or future products or processes. Dealing with any such claims, with or without merit, could be time
consuming, result in costly litigation, or require the Corporation to enter into further royalty or licensing
agreements, which may or may not be available on terms acceptable to the Corporation. The failure to do any
of the foregoing may have a material adverse effect on the Corporation.
Competition
The Corporation competes with other companies to develop products and services designed to extract
precious and base metals. Many of these other companies have substantially greater technical and financial
resources than we do. There can be no assurance that developments by others will not materially adversely
affect the competitiveness of the Corporation.
The mining industry is characterized by extensive research efforts and is going through a period of rapid
technological change. Competition can be expected to increase as technological advances are made and
commercial applications for extraction products and services increase. Competitors of the Corporation may
use different technologies or approaches to develop products and services similar to products and services
which the Corporation is seeking to develop, or may develop new or enhanced products and services that may
be more effective, less expensive, safer or more readily available before the Companies obtain approval of
their products and services. There can be no assurance that the Corporation’s products and services will
compete successfully or that research and development will not render the Companies’ products and services
obsolete or uneconomical.
Impact of unfavourable economic and political conditions and other developments and risks.
- 13 -
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013 AND YEARS ENDED DECEMBER 31, 2012 AND 2011
Unfavourable global, domestic or regional economic or political conditions and other developments and risks
could negatively affect the Corporation’s business. For example, unfavourable changes related to interest
rates, rates of economic growth, fiscal and monetary policies of governments, inflation, deflation, consumer
credit availability, consumer debt levels, tax rates and policy, unemployment trends, commodity prices, oil
prices, and other matters that influence, confidence and spending could adversely impact our business and
results of operations. In addition, unstable political conditions or civil unrest, including terrorist activities and
worldwide military and domestic disturbances and conflicts, may disrupt commerce and could have a material
adverse effect on our business and results of operations.
Key personnel
The Corporation’s management team of seasoned and committed industry veterans has achieved success in
developing the Corporation’s business. The Corporation’s continued success and the execution of its growth
strategy will depend, in part, on the continued service of this management team.
The Corporation’s management team is composed of a relatively small group of senior executive officers. The
loss of the technical knowledge, management expertise and knowledge of the Corporation’s operations of one
or more members of the team could result in a diversion of management resources, as the remaining members
of management would need to cover the duties of any senior executive who leaves the Corporation and would
need to spend time usually reserved for managing the Corporation’s business to search for, hire and train new
members of management. The loss of some or all of the Corporation’s management team could negatively
affect the Corporation’s ability to develop and pursue its growth strategy, which could adversely affect its
business and financial condition. In addition, the market for key personnel in the industry in which the
Corporation competes is highly competitive, and the Corporation may not be able to attract and retain key
personnel with the skills and expertise necessary to manage its business.
Ability to attract and retain quality employees
The Corporation’s business is dependent upon attracting and retaining quality employees. If the Corporation
were unable to hire, train and retain employees capable of developing the technology, the Corporation may
not be able to maintain its competitive strength and realize on its growth strategy. The Corporation may be
unable to commercialize its technology.
The Corporation’s ability to meet its labour needs while controlling the costs associated with hiring and training
new employees is subject to external factors such as unemployment levels, prevailing wage rates, minimum
wage legislation and changing demographics. Changes that adversely impact the Corporation’s ability to
attract and retain quality employees could adversely affect its business.
Material disruption in computer systems
The Corporation relies extensively on its computer systems to process transactions, collect and summarize
data and manage its business. Computer systems are subject to damage or interruption from power outages,
computer and telecommunications failures, computer viruses, security breaches, catastrophic events such as
fires, floods, earthquakes, tornadoes, hurricanes, acts of war or terrorism, and usage errors by our employees.
If the Corporation’s computer systems are damaged or cease to function properly, the Corporation may have
to make a significant investment to fix or replace them, and may suffer loss of critical data and interruptions or
delays in operations in the interim. Any material interruption in the computer systems could adversely affect
the Corporation’s business or results of operations and reputation.
Regulations
The Corporation is subject to customs, environmental and other laws. Although the Corporation undertakes to
monitor changes in these laws, if these laws change without the Corporation’s knowledge, it could be subject
to fines or other penalties under the controlling regulations, any of which could adversely affect its business.
- 14 -
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013 AND YEARS ENDED DECEMBER 31, 2012 AND 2011
Insurance related risks.
The Corporation maintains directors and officers insurance, liability insurance, and property insurance.
However, there is no guarantee that the insurance coverage will be sufficient, or that insurance proceeds will
be timely paid to the Corporation. In addition, there are types of losses we may incur but against which the
Corporation cannot be insured or which management believes are not economically reasonable to insure,
such as losses due to acts of war and certain natural disasters. If the Corporation incurs these losses and they
are material, the Corporation’s business, operating results and financial condition may be adversely affected.
Also, certain material events may result in sizable losses for the insurance industry and materially adversely
impact the availability of adequate insurance coverage or result in significant premium increases. Accordingly,
the Corporation may elect to self-insure, accept higher deductibles or reduce the coverage.
Environment
The Corporation could be liable for environmental damages resulting from it research, development
operations.
The Corporation’s business is exposed to the risk of harmful substances escaping into the environment,
resulting in personal injury or loss of life, damage to or destruction of property, and natural resource damage.
Depending on the nature of the claim, the Corporation’s current insurance policies may not adequately
reimburse us for costs incurred in settling environmental damage claims, and in some instances, we may not
be reimbursed at all.
Credit risk
Credit risk is the risk that a loss will occur from the failure of another party to perform according to the terms
of the contract. The Corporation’s credit risk is primarily attributable to cash and cash equivalents, other
receivables and promissory note receivable. Cash and cash equivalents are held mainly with Canadian
chartered banks, which reduce the risks. The promissory note receivable and the other receivables are with
Creso and with Maya Gold & Silver Inc. (“Maya”), and are within normal terms of payment. The Corporation
had $586,475 of receivables from Creso and $46,045 from Maya. Creso and Maya are exploration and
evaluation stage junior mining companies with no income from operating activities and for which there are
material uncertainties on their ability to continue as a going concern. There are no significant amounts that are
past due as at September 30, 2013. Amounts receivable from Creso and Maya are continually monitored to
ensure their collection.
Commodity risk
Commodity price risk is the potential adverse impact on earnings and economic value due to commodity price
movements and volatilities. The price of gold and precious metals may affect the profitability of the Corporation.
Historically, such prices have fluctuated and are affected by numerous factors outside of the Corporation’s
control, including, but not limited to: industrial and retail demand, central bank lending, forward sales by
producers and speculators, levels of worldwide production, short-term changes in supply and demand because
of speculative hedging activities and other factors such as significant mine closures.
Going concern
Management estimates that the Corporation will not have sufficient funds to meet its obligations and budgeted
expenditures through to September 30, 2014. The Corporation will therefore periodically have to raise
additional funds to continue operations. The Corporation is pursuing financing alternatives to fund its
operations and to continue its activities as a going concern. Although there is no assurance that the
Corporation will be successful in these actions, management is confident that it will be able to secure the
necessary financing through the issuance of new equity. While it has been successful in doing so in the past,
there can be no assurance it will be able to do so in the future.
- 15 -
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2013 AND YEARS ENDED DECEMBER 31, 2012 AND 2011
Although the referenced consolidated financial statements have been prepared using IFRS applicable to a
going concern, the above-noted facts and circumstances cast significant doubt on the Corporation’s ability to
continue as a going concern.
The referenced consolidated financial statements do not reflect the adjustments to the carrying values of
assets and liabilities, to the reported expenses and to the financial position classifications that would be
necessary if the going concern assumption was inappropriate. These adjustments could be material.
January 31, 2014
(s) Pierre Gauthier
Pierre Gauthier
President and CEO
- 16 -
APPENDIX “H” - PRO FORMA FINANCIAL STATEMENT OF THE RESULTING ISSUER
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
(Previously known as Nichromet Extraction Inc.)
Unaudited Pro Forma
Consolidated Financial Statements
As at September 30, 2013 and for the nine-month period then ended
and for the year ended December 31, 2012
Dundee Sustainable Technologies Inc.
Pro Forma Consolidated Statement of Financial Position
As at September 30, 2013
(Unaudited)
(Expressed in Canadian dollars)
Nichromet
Extraction
Inc.
$
Assets
Current assets
Cash and cash equivalents
Research and development tax credits
receivable
Sales taxes and other receivables
Promissory note receivable
Prepaid expenses
Non-current assets
Investments
Property, plant and equipment
Intangible assets
Exploration and evaluation assets
Total assets
Liabilities and equity
Current liabilities
Accounts payable and accrued liabilities
Short-term loan
Deferred contribution from STDC
Non-current liabilities
Deferred proceeds on sale of exploration
and evaluation assets
Total liabilities
Equity
Share capital
Contributed surplus
Deficit
Total equity
Total liabilities and equity
Creso
Exploration
Pro Forma
Inc.
Note 4 Adjustments
$
$
c
d
4,556,072
85,003
201,069
314,341
500,000
24,898
5,596,380
43,873
17,996
146,872
989,955
9,110
4,617,910
5,616,975
11,213,355
135,125
13,058,208
13,193,333
13,340,205
c
341,162
-
170,829
500,000
a
a
d
384,993
726,155
670,829
726,155
368,000
1,038,829
29,889,629
29,155,488
6,400,497
5,390,147
(25,802,926)
(22,244,259)
10,487,200
11,213,355
12,301,376
13,340,205
(400,000)
3,000,000
7,241,075
(86,475)
(500,000)
2,013,525
201,069
271,739
42,894
7,756,777
(989,955)
5,737,855
4,747,900
6,761,425
144,235
4,617,910
18,796,063
23,558,208
31,314,985
(86,475)
(500,000)
3,000,000
2,413,525
425,516
3,000,000
c
(368,000)
2,045,525
3,810,509
c
c
c
c
c
c
c
(29,155,488)
14,378,789
(5,390,147)
267,600
810,942
22,244,259
1,559,945
4,715,900
6,761,425
44,268,418
a
a
c
See accompanying notes to the unaudited pro forma consolidated financial statements.
-2-
Pro Forma
Consolidated
$
384,993
3,810,509
7,479,039
(24,242,981)
27,504,476
31,314,985
Dundee Sustainable Technologies Inc.
Pro Forma Consolidated Statement of Loss
For the nine-month period ended September 30, 2013
(Unaudited)
(Expressed in Canadian dollars, except number of shares)
Nichromet
Extraction
Inc.
$
Expenses
Wages and compensation
Professional and consulting fees
Administrative
Research and development, net of tax
credit of $201,069 and STDC
contribution $271,550
Trustee and registration fees
Investor relation and promotion
Share-based payments
Impairment of exploration and evaluation
assets
Depreciation of property, plant and
equipment
Amortization of intangible assets
Total expenses
Operating loss
Gain on investments
Interest expense on short-term loan
Interest income
Gain (loss) on foreign currency exchange
Net loss before income taxes
Recovery of deferred income taxes
Net loss
Creso
Exploration
Pro Forma
Inc.
Note 4 Adjustments
$
$
Pro Forma
Consolidated
$
202,311
730,868
263,271
45,882
452,806
125,332
-
248,193
1,183,674
388,603
1,885,745
104,589
46,624
57,910
-
-
1,885,745
46,624
57,910
104,589
-
290,000
-
290,000
2,273
5,713
3,194,770
10,048
1,028,602
-
12,321
5,713
4,223,372
(3,194,770)
(1,028,602)
-
(4,223,372)
345,485
26,742
7,283
(2,815,260)
(2,815,260)
(6,833)
178
(240)
c
b
b
(1,035,497)
6,800
(1,028,697)
Basic and diluted net loss per share (Note 8)
(345,485)
6,833
(6,833)
(345,485)
(345,485)
20,087
7,043
(4,196,242)
6,800
(4,189,442)
(0.02)
Weighted average number of shares
outstanding – basic and diluted (Note 8)
233,439,499
See accompanying notes to the unaudited pro forma consolidated financial statements.
-3-
Dundee Sustainable Technologies Inc.
Pro Forma Consolidated Statement of Loss
For the year ended December 31, 2012
(Unaudited)
(Expressed in Canadian dollars, except number of shares)
Nichromet
Extraction
Inc.
$
Expenses
Wages and compensation
Professional and consulting fees
Administrative
Research and development, net of tax
credit of $271,747
Trustee and registration fees
Investor relation and promotion
Share-based payments
Impairment of exploration and evaluation
assets
Depreciation of property, plant and
equipment
Amortization of intangible assets
Total expenses
Operating loss
Interest income
Loss on foreign currency exchange
Net loss before income taxes
Recovery of deferred income taxes
Net loss
Creso
Exploration
Inc.
$
Pro forma
adjustments
$
Pro forma
consolidated
$
226,206
663,439
381,426
103,053
550,562
179,620
-
329,259
1,214,001
561,046
2,052,000
460,702
57,111
130,111
159,500
-
2,052,000
57,111
130,111
620,202
-
1,246,000
-
1,246,000
10,320
998
3,795,091
13,396
2,439,353
-
23,716
998
6,234,444
(3,795,091)
(2,439,353)
-
(6,234,444)
6,208
(13,548)
115
(720)
-
6,323
(14,268)
(3,802,431)
(2,439,958)
-
(6,242,389)
(3,802,431)
56,000
(2,383,958)
Basic and diluted net loss per share (Note 8)
-
56,000
(6,186,389)
(0.03)
Weighted average number of shares
outstanding – basic and diluted (Note 8)
201,046,514
See accompanying notes to the unaudited pro-forma consolidated financial statements.
-4-
Dundee Sustainable Technologies Inc.
Notes to the Pro Forma Consolidated Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
1. Basis of preparation
The unaudited pro forma consolidated financial statements (the “Pro Forma Financial Statements”) have been prepared
by management in connection with Dundee Sustainable Technologies Inc.’s (previously known as Nichromet Extraction
Inc.) (“Nichromet” or the “Corporation”) proposed capital reorganization and acquisition (the “Transaction”), upon and
subject to the terms and conditions set out in the Circular, of all of the issued and outstanding common shares of Creso
Exploration Inc. (“Creso”).
The Pro Forma Financial Statements have been prepared for illustrative purposes only and give effect to the proposed
Transaction as further described in Note 3 and pursuant to the assumptions and adjustments described in Note 4. The
unaudited pro forma consolidated statement of financial position as at September 30, 2013 gives effect to the proposed
Transaction as if it had occurred as at September 30, 2013. The unaudited pro forma consolidated statement of loss for
the nine-month period ended September 30, 2013 and for the year ended December 31, 2012 gives effect to the
proposed Transaction as if it had occurred on January 1, 2012.
The Pro Forma Financial Statements are not necessarily indicative of the financial position and results of operations
that would have been achieved if the proposed Transaction had been completed on the dates or for the period
presented, nor do they claim to project the results of operations or financial position of the consolidated entities for any
future period or as of any future date. Any potential synergies that may be realized and integration costs that may be
incurred upon completion of the proposed Transaction, if successful, have been excluded from the Pro Forma Financial
Statements.
In preparing the unaudited pro forma consolidated statement of financial position and the unaudited pro forma
consolidated statements of loss, the following historical information, that was prepared in accordance with International
Financial Reporting Standards (“IFRS”), was used:
a) For the unaudited pro forma consolidated statement of financial position as at September 30, 2013:
(i) the audited consolidated statement of financial position of Nichromet as at September 30, 2013; and
(ii) the unaudited consolidated statement of financial position of Creso as at September 30, 2013.
b) For the unaudited pro forma consolidated statement of loss for the nine-month period ended September 30,
2013:
(i) the audited consolidated statement of comprehensive loss of Nichromet for the nine-month period
ended September 30, 2013; and
(ii) the unaudited consolidated statement of comprehensive loss of Creso for the nine-month period
ended September 30, 2013.
c) For the unaudited pro forma consolidated statement of loss for the year ended December 31, 2012:
(i) the audited consolidated statement of comprehensive loss of Nichromet for the year ended December
31, 2012; and
(ii) the audited consolidated statement of comprehensive loss of Creso for the year ended December 31,
2012.
The Pro Forma Financial Statements should be read in conjunction with: (i) the description of the transaction in the
Circular, and (ii) the historical consolidated financial statements, together with the notes thereto, of Nichromet and Creso
referred to above which are included in the Circular.
In the opinion of Nichromet’s management, these Pro Forma Financial Statements include all adjustments necessary
for a fair presentation of the transactions described in the notes to the Pro Forma Financial Statements applied on a
basis consistent with Nichromet’s accounting policies.
-5-
Dundee Sustainable Technologies Inc.
Notes to the Pro Forma Consolidated Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
2. Significant accounting policies
The accounting policies used in preparing the Pro Forma Financial Statements are set out in Nichromet’s audited
consolidated financial statements for the nine-month period ended September 30, 2013 and years ended December
31, 2012 and 2011. In preparing the Pro Forma Financial Statements, a review of publicly available information was
undertaken to identify accounting policy differences between Nichromet and Creso. While management believes that
the significant accounting policies of Nichromet and Creso are consistent in all material respects, accounting policy
differences may be identified upon completion of the proposed Transaction. Also, given the absence of an accounting
policy for exploration and evaluation activities, the Corporation elected to apply Creso’s accounting policy for such
activities.
Certain assets, liabilities, revenues, expenses, gains and losses of Creso have been reclassified to conform to
Nichormet’s consolidated financial statements presentation.
3. Capital Reorganization and Acquisition
On November 14, 2013, Nichromet and Creso announced that the two Corporations agreed to enter into a merger
agreement. On November 22, 2013, Nichromet and a wholly-owned subsidiary of Nichromet (“Subco”) entered into the
merger agreement with Creso pursuant to which Creso and Subco will amalgamate (the “Amalgamation”) and the
amalgamated company will become a wholly-owned subsidiary of Nichromet. On that date, Nichromet already owned
19,779,000 common shares and 9,500,000 common share purchase warrants of Creso.
Pursuant to the Amalgamation, Nichromet would, indirectly, acquire all of the issued and outstanding common shares
of Creso, which it does not already own, and the shareholders of Creso would receive 62,516,478 subordinated voting
shares of Nichromet on the basis of one subordinate voting share of Nichromet in exchange for two common shares
of Creso. Holders of Creso shareholder options and Creso common share purchase warrants will receive 2,545,000
shareholder options (“Replacement Options”) and 13,555,566 common share purchases warrants (“Replacement
Warrants”), as applicable, of the amalgamated company based upon the same exchange ratio.
Furthermore, on December 5, 2013, the shareholders of Nichromet approved a reorganization of the capital structure
of the Corporation (the “Capital Reorganization”) by amending its articles of incorporation as follows:
a) to change the name of the Corporation to “Dundee Sustainable Technologies Inc.” in the English
language and “Dundee Technologies Durables Inc.” in the French language;
b) to change the designation of the common shares in the capital of Nichromet to subordinate voting
shares and including the change to the rights, privileges, restrictions and conditions attaching thereto;
and
c) to create and authorize the issuance of an unlimited number of multiple voting shares, each multiple voting
share having 10 votes.
Assuming completion of the proposed Amalgamation, but excluding any securities issuable pursuant to a future
financing in connection with the Amalgamation, Dundee Sustainable Technologies Inc. (“Dundee Sustainable Tech.”)
will have (i) 227,445,202 subordinate voting shares issued and outstanding, of which 72.5% will be held by the current
shareholders of Nichromet (including Dundee Corporation) and 27.5% will be held by the current shareholders of
Creso (excluding Nichromet), and (ii) 50,000,000 multiple voting shares issued and outstanding, all of which will be
held by Dundee Corporation. Accordingly, Dundee Corporation will exercise voting rights in respect of an aggregate
of 86.3% of the issued and outstanding voting securities of Dundee Sustainable Tech. The multiple voting shares of
Dundee Sustainable Tech. will not be listed on any stock exchange and are convertible, at the option of the holder,
into subordinate voting shares for no additional consideration.
-6-
Dundee Sustainable Technologies Inc.
Notes to the Pro Forma Consolidated Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
3. Capital Reorganization and Acquisition (Cont’d)
Purchase price:
62,516,478 subordinated voting shares of Dundee Sustainable Tech. to be issued at a deemed
price of $0.23
Fair value of 13,555,566 Replacement Warrants to be issued
Fair value of 2,545,000 Replacement Options to be issued
Fair value of the Creso shares already owned by Nichromet
Fair value of the Creso common share purchase warrants already owned by Nichromet
Dundee Sustainable Tech. estimated transaction costs
Less net assets acquired:
Shareholders’ equity of Creso as at September 30, 2013
Impact of the fair value adjustment of the Deferred proceeds on sale of exploration
and evaluation assets
Creso’s estimated transaction costs
Total
Excess of Purchase price allocated to exploration and evaluation assets
$14,378,789
810,942
267,600
2,274,585
275,315
250,000
18,257,231
12,301,376
368,000
(150,000)
12,519,376
5,737,855
The fair value of warrants was estimated using the Black-Scholes option pricing model based on the following weighted
average assumptions: risk-free interest rate of 1.11%, average projected volatility of 126%, dividend yield of nil,
expected life of warrants of 0.75 years and fair value per Nichromet share of $0.23.
The fair value of options was estimated using the Black-Scholes option pricing model based on the following weighted
average assumptions: risk-free interest rate of 1.17%, average projected volatility of 116%, dividend yield of nil,
expected life of options of 1.99 years and fair value per Nichromet share of $0.23.
The allocation of the purchase price is based upon management’s preliminary estimates along with certain assumptions
with respect to the fair value increment associated with the assets to be acquired and the liabilities to be assumed. The
actual purchase price and the fair value of Creso’s assets and liabilities will be determined as of the closing date of the
Amalgamation and may differ materially from the amounts disclosed above in the preliminary pro forma purchase price
allocation.
4. Pro Forma Adjustments
The Pro Forma Financial Statements includes the following adjustments:
a) To reflect the elimination of certain intercompany balances;
b) To reflect the elimination of certain intercompany transactions;
c) To record the issuance of subordinated voting shares, Replacement Options and Warrants, the elimination of
Creso’s historical equity balances, the elimination of Nichromet’s investments in Creso’s and the preliminary
allocation of the purchase price. The amount of $1,559,945 recorded directly in deficit in the Pro Forma Consolidated
Statement of Financial Position corresponds to the difference between the fair value of the Creso equity instruments
already owned by Nichromet as shown in the Purchase price and the carrying amount of such instruments as shown
in Nichromet’s consolidated statement of financial position as at September 30, 2013 (See note 3); and
d) To record a bridge loan of $3,000,000 provided by Dundee Corporation to Dundee Sustainable Tech. on January 31,
2014. The bridge loan is secured and bears interest at a rate of 12.68% per annum payable on maturity. The
principal amount of the loan together with interest is due and payable on April 30, 2014. The bridge loan shall only
be used to fund the building of a demonstration plant and for general corporate purposes.
-7-
Dundee Sustainable Technologies Inc.
Notes to the Pro Forma Consolidated Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
5. Share capital
A continuity of Nichromet’s issued and outstanding share capital and related recorded values after giving effect to the
pro forma adjustments described in Note 3 is set out as follows:
Common shares
$
Balance, September 30, 2013 214,928,724
29,889,629
Capital Reorganization
Issuance of shares upon
Amalgamation
(214,928,724)
Multiple voting shares
$
-
(29,889,629) 50,000,000
-
-
50,000,000
Subordinated voting
shares
$
-
3,963,875
164,928,724
25,925,754
3,963,875
62,516,478
227,445,202
14,378,789
40,304,543
6. Dundee Sustainable Tech. warrants
A summary of outstanding warrants entitling their holders to subscribe for an equivalent number of common shares
upon the Amalgamation is as follows:
Number of warrants
2,000,000
3,835,566
4,950,000
2,770,000
50,000,000
63,555,566
7.
Exercise price
$
0.20
0.30
0.20
0.20
0.10
Expiry date
Between July 9 and September 17, 2014
Between September 25 and December 8, 2014
Between October 31 and December 31, 2014
Between February 22 and 27, 2015
July 9, 2015
Dundee Sustainable Tech. stock options
A summary of outstanding options entitling their holders to subscribe for an equivalent number of common shares
upon the Amalgamation is as follows:
Number of options
520,000
100,000
700,000
200,000
300,000
5,350,000
1,125,000
700,000
2,425,000
11,420,000
Exercise price
$
0.30
0.10
0.80
1.74
0.10
0.10
0.20
0.20
0.20
Expiry date
September 30, 2014
November 7, 2014
July 9, 2015
September 29, 2015
October 18, 2015
June 8, 2016
February 20 and July 23, 2017
February 6 and March 22, 2018
November 27, 2022
All of the Replacement Options held by the directors of Creso, who will not be appointed as directors in Dundee
Sustainable Tech., will expire twelve months after the date of the Amalgamation in accordance with Creso’s stock
option plan and Exchange requirements.
-8-
Dundee Sustainable Technologies Inc.
Notes to the Pro Forma Consolidated Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
8. Pro Forma basic and diluted net loss per share
The computation of the pro forma basic and diluted net loss per share is as follows:
Nine-month
period ended
September 30,
2013
Year ended
December 31,
2012
Pro forma net loss
($4,189,442)
($6,186,389)
Historical weighted average number of Nichromet shares outstanding
Issuance of shares upon Amalgamation
Pro forma weighted average number of shares outstanding – basic and diluted
170,923,021
62,516,478
233,439,499
138,530,036
62,516,478
201,046,514
(0.02)
Pro forma basic and diluted net loss per share
(0.03)
Pro forma diluted loss per share for each period is identical to the respective pro forma basic loss per share as all
potentially dilutive instruments are anti-dilutive to the pro forma loss per share reported for each period presented.
-9-
APPENDIX “I” – RESULTING ISSUER SHARE TERMS
DUNDEE SUSTAINABLE TECHNOLOGIES INC.
SECTION ONE
INTERPRETATION
Section 1.01
References to "Act": Unless there is something in the context inconsistent
herewith, in these provisions "Act" means the Canada Business Corporations Act, (R.S.C., 1985,
c. C-44) or its successor, as amended from time-to-time.
Section 1.02
Headings, Gender and Number: These provisions shall be read without regard
to article, section or subsection headings, which are included for ease of reference only and shall
not affect the construction or interpretation hereof, and with all changes in gender and number
required by the context.
Section 1.03
Canada.
Currency:
All monetary amounts referred to herein are in lawful money of
SECTION TWO
SUBORDINATE VOTING SHARES AND MULTIPLE VOTING SHARES
The Subordinate Voting Shares and the Multiple Voting Shares shall have attached thereto the
following respective rights, privileges, restrictions and conditions:
Section 2.01
Votes: The holders of Subordinate Voting Shares and Multiple Voting Shares are
entitled to receive notice of, and to attend, all meetings of shareholders of the Company, except
meetings at which only holders of another specified class or series of shares are entitled to vote.
The holders of Subordinate Voting Shares are entitled to one vote for each Subordinate Voting
Share held on all votes taken at such meetings and the holders of Multiple Voting Shares are
entitled to 10 votes for each Multiple Voting Share held on all votes taken at such meetings.
Section 2.02
Dividends: Subject to the prior rights, privileges, restrictions and conditions
attaching to the shares of any other class ranking senior to the Subordinate Voting Shares and
Multiple Voting Shares, the holders of Subordinate Voting Shares and Multiple Voting Shares
shall be entitled to receive and to participate equally as to dividends, share for share, as and
when declared by the directors of the Company and all such dividends shall be declared and paid
at the same time in an equal amount on all Subordinate Voting Shares and Multiple Voting
Shares at the time outstanding.
Section 2.03
Conversion of Multiple Voting Shares: Upon and subject to the terms and
conditions hereinafter set forth, a holder of Multiple Voting Shares shall be entitled at any time
and from time-to-time to have any or all of the Multiple Voting Shares held by him converted into
Subordinate Voting Shares on the basis of one Subordinate Voting Share for each one Multiple
Voting Share so converted (subject to adjustment as set forth below):
A. Exercise of Conversion Right: In order to exercise such right of conversion such holder
shall deliver and surrender to the Company or to its transfer agent the certificate or
certificates representing the Multiple Voting Shares which such holder desires to convert
together with a written notice to the effect that such holder desires to exercise the right of
conversion in respect of that number of Multiple Voting Shares specified in the
DOCSMTL: 5337119\2
conversion notice. The conversion notice shall state the name or names in which the
holder wishes the certificate or certificates representing the Subordinate Voting Shares to
be issued and the address or addresses to which such holder wishes such certificate or
certificates to be sent and shall be signed by the holder or the agent of the holder duly
authorized in writing. If less than all of the Multiple Voting Shares represented by any
certificate or certificates accompanying any conversion notice are to be converted, the
holder shall be entitled to receive, at the expense of the Company, a new certificate
representing the Multiple Voting Shares comprised in the certificate or certificates
surrendered as aforesaid which are not to be converted.
B. Share Certificate: On any conversion of Multiple Voting Shares into Subordinate Voting
Shares the certificate or certificates representing the Subordinate Voting Shares resulting
therefrom shall be issued at the expense of the Company in the name or names indicated
in the conversion notice or, in the absence of such indication, in the name of the holder of
the Multiple Voting Shares converted, provided that the holder shall pay any applicable
security transfer taxes or charges if such certificate or certificates are to be issued in a
name or names other than the name of the holder.
C. Date of Exercise of Conversion Right: The right of a holder of Multiple Voting Shares to
convert the same into Subordinate Voting Shares shall and for all purposes shall be
deemed to have been exercised and the holder of Multiple Voting Shares to be converted
(or any person or persons in whose name or names such holder of Multiple Voting
Shares shall have directed a certificate or certificates representing Subordinate Voting
Shares to be issued as provided above) shall and for all purposes shall be deemed to
have become a holder of Subordinate Voting Shares on the date of receipt by the
Company or by its transfer agent of the certificate or certificates representing all of the
Multiple Voting Shares to be converted accompanied by an appropriate conversion notice
as provided above, notwithstanding any delay in the delivery by the Company or by its
transfer agent of the certificate or certificates representing the Subordinate Voting Shares
into which the Multiple Voting Shares have been converted.
D. Prior Notice of Dividends: The Company shall not pay any dividend upon the
Subordinate Voting Shares payable in shares of the Company, or issue to holders of
Subordinate Voting Shares rights to purchase Subordinate Voting Shares, unless it shall
have given to the holders of Multiple Voting Shares notice of the payment of such
dividend or the issue of such rights at least 30 days prior to the record date for the
determination of holders of Subordinate Voting Shares entitled to such dividend or such
rights and shall not, during such notice period, take any other corporate action which
might deprive the holders of Multiple Voting Shares of the opportunity of exercising the
right of conversion as aforesaid.
E. Dilution Protection: In the event of:
i.
any subdivision, consolidation, conversion, exchange or reclassification of the
Multiple Voting Shares or Subordinate Voting Shares;
ii.
any reorganization of the share capital of the Company affecting in any manner
the Multiple Voting Shares or Subordinate Voting Shares; or
iii.
the amalgamation of the Company with any other company or companies;
the appropriate adjustment shall be made to the conversion right provided above so as to
preserve that right in all respects.
DOCSMTL: 5337119\2
Section 2.04
Change in Shares:
A. Rights of Holders of Class of Shares Changed: Subject to the provisions of the Act, any
amendment to the articles of the Company to delete or vary any right, privilege, restriction
or condition attached to the Subordinate Voting Shares or the Multiple Voting Shares or
to create any shares ranking in priority to or on a parity with either the Subordinate Voting
Shares or the Multiple Voting Shares or to subdivide, consolidate, reclassify or change
the Subordinate Voting Shares or the Multiple Voting Shares, may only be made if
approved by at least two-thirds of the votes cast at a meeting of the holders of
Subordinate Voting Shares or Multiple Voting Shares, as the case may be, called for that
purpose.
B. Rights of Holders of Other Class: The rights, privileges, restrictions and conditions
attached to either the Subordinate Voting Shares or the Multiple Voting Shares may not
be changed in any manner whatsoever unless the other class of such shares is changed
in the same manner and in the same proportion or unless the prior approval of the
holders of Subordinate Voting Shares and of holders of Multiple Voting Shares has been
obtained for such change, such approval to be given by at least a majority of the votes
cast at meetings of the holders of Subordinate Voting Shares and Multiple Voting Shares
called for that purpose.
Section 2.05
Dissolution: In the event of the liquidation, dissolution or winding-up of the
Company or other distribution of the assets of the Company for the purpose of winding up its
affairs, holders of Subordinate Voting Shares and Multiple Voting Shares shall, after payment to
the holders of shares of any other class ranking senior to the Subordinate Voting Shares and
Multiple Voting Shares of the amount payable to them, be entitled to receive the remaining
property and assets of the Company without preference or distinction share-for-share.
Section 2.06
Ranking of Subordinate Voting Shares and Multiple Voting Shares: Except as
set forth in sections 2.01 through 2.05 hereof, both inclusive, the holders of Subordinate Voting
Shares and the holders of Multiple Voting Shares shall rank equally in all respects and have the
same rights and restrictions and, without limitation, shall rank, subject to the prior rights of shares
of any other class ranking senior to the Subordinate Voting Shares and the Multiple Voting
Shares, pari passu with the other as to any distribution of the remaining property and assets of
the Company in the event of the liquidation, dissolution or winding-up of the Company or other
distribution of the assets of the Company for the purpose of winding-up its affairs.
Section 2.07
Limitation: Subject to the provisions of the Act and subsections 2.04(a) and
2.04(b) hereof, the holders of Subordinate Voting Shares and Multiple Voting Shares shall not be
entitled to vote separately on any proposal to amend the articles of the Company to:
i.
increase or decrease any maximum number of authorized Subordinate Voting Shares
or Multiple Voting Shares, or increase any maximum number of authorized shares of
a class or series having rights or privileges equal or superior to the Subordinate
Voting Shares and Multiple Voting Shares;
ii.
effect an exchange, reclassification or cancellation of all or part of the Subordinate
Voting Shares or Multiple Voting Shares; or
iii.
create a new class or series of shares equal or superior to the Subordinate Voting
Shares and Multiple Voting Shares.”
***
DOCSMTL: 5337119\2
APPENDIX “J” – AUDIT COMMITTEE CHARTER
HBdocs - 15642863v17
CHARTER OF THE AUDIT COMMITTEE
I
PURPOSE
The Audit Committee (the "Committee") assists the Board of Directors (the “Board”) in fulfilling its
financial reporting and controls responsibilities to the shareholders of the Company and the investment
community. The external auditors will report directly to the Committee. The Committee's primary duties and
responsibilities are:
•
overseeing the integrity of the Company's financial statements and reviewing the financial reports and
other financial information provided by the Company to any governmental body or the public and other
relevant documents;
•
recommending the appointment and reviewing and appraising the audit efforts of the Company's
external auditors, overseeing the external auditors' qualifications and independence and providing an open
avenue of communication among the external auditors, financial and senior management and the Board;
•
monitoring the Company's financial reporting process and internal controls, its management of
business and financial risk, and its compliance with legal, ethical and regulatory requirements.
II
COMPOSITION
1.
The Committee shall consist of a minimum of three directors of the Company, including the
Chair of the Committee, the majority of whom shall not be employees, officers or "control persons", as such
term is defined hereunder, of the Company. All members shall, to the satisfaction of the Board, be
"financially literate" as such term is defined hereunder.
2.
The members of the Audit Committee shall be elected by the Board at the annual organizational
meeting of the Board for the following year or until their successors are duly elected. The Board may remove a
member of the Audit Committee at any time in its sole discretion by resolution of the Board. The members of
the Committee may fill vacancies on the Committee by appointment from among the directors. If and when a
vacancy shall exist on the Committee, the remaining members may exercise all of its powers so long as
quorum remains.
Unless the Board elects a Chair of the Committee, the Committee shall elect a Chair.
III
DUTIES AND RESPONSIBILITIES
1.
The Committee shall:
(a)
review and recommend to the Board for approval the annual audited consolidated financial
statements;
(b)
as required by the board, review and approve or recommend that the Board approve the quarterly non
audited consolidated financial statements and MD&A;
(c)
review with financial management and the external auditor the Company's financial statements,
MD&As and earnings releases prior to filing with regulatory bodies such as securities commissions
and/or prior to their release;
(d)
review document referencing, containing or incorporating by reference the annual audited
consolidated financial statements or non audited interim financial statements results (e.g., prospectuses,
press releases with financial results) prior to their release;
(e)
make changes or additions to security policies at the Company and report, from time to time, to
the Board on the appropriateness of the policy guidelines in place to administer the Company's security
programs.
2.
The Committee, in fulfilling its mandate, will:
(a)
ensure to its satisfaction that adequate internal controls and procedures are in place to allow the
Chief Executive Officer and the Chief Financial Officer to certify financial statements and other
disclosure documents as required under securities laws;
(b)
ensure to its satisfaction that adequate procedures are in place for the review of the issuer's public
disclosure of financial information extracted or derived from the issuer's financial statements, other than
MD&A and annual and interim earnings press releases, and periodically assess the adequacy of those procedures;
(c)
recommend to the Board the selection of the external auditor, consider the independence and
effectiveness and approve the fees and other compensation to be paid to the external auditor;
(d)
monitor the relationship between management and the external auditor including reviewing any
management letters or other reports of the external auditor, and discussing and resolving any material
differences of opinion or disagreements between management and the external auditor;
(e)
review the performance of the external auditor and approve any proposed discharge and
replacement of the external auditor when circumstances warrant. Consider with management the rationale for
employing accounting/auditing firms other than the principal external auditor;
(f)
periodically consult with the external auditor out of the presence of management about significant risks
or exposures, internal controls and other steps that management has taken to control such risks, and the
fullness and accuracy of the organization's financial statements. Particular emphasis should be given to the
adequacy of internal controls to expose any payments, transactions, or procedures that might be deemed
illegal or otherwise improper;
(g)
arrange for the external auditor to be available to the Audit Committee and the full Board as
needed;
(h)
ensure that the auditors report directly to the Audit Committee and are made accountable to the Board
and the Audit Committee, as representatives of the shareholders to whom the auditors are ultimately responsible;
(i)
review and approve hiring policies for employees or former employees of the past and present
external auditors;
(j)
review the scope of the external audit, including the fees involved;
(k)
review the report of the external auditor on the annual audited consolidated financial statements;
(l)
review problems found in performing the audit, such as limitations or restrictions imposed by
management or situations where management seeks a second opinion on a significant accounting issue;
(m)
review major positive and negative observations of the auditor during the course of the audit;
(n)
review with management and the external auditor of the Company's major accounting policies,
including the impact of alternative accounting policies and key management estimates and judgments that can
materially affect the financial results;
(o)
review emerging accounting issues and their potential impact on the Company's financial
reporting;
(p)
review and approve requests for any management consulting engagement to be performed by the
external auditor and be advised of any other study undertaken at the request of management that is beyond the
scope of the audit engagement letter and related fees;
(q)
review with management, the external auditors and legal counsel, any litigation, claims or other
contingency, including tax assessments, which could have a material affect upon the financial position or
operating results of the Company, and whether these matters have been appropriately disclosed in the financial
statements;
(r)
review the conclusions reached in the evaluation of management's internal control systems by the
external auditors, and management's responses to any identified weaknesses;
(s)
review with management their approach to controlling and securing corporate assets (including
claims management) and information systems, the adequacy of staffing of key functions and their plans for
improvements;
(t)
review with management their approach with respect to business ethics and corporate conduct;
(u)
review annually the legal and regulatory requirements that, if breached, could have a significant
impact on the Company's published financial reports or reputation;
(v)
receive periodic reports on the nature and extent of compliance with security policies. The nature
and extent of non-compliance together with the reasons therefore, with the plan and timetable to correct such
non-compliance will be reported to the Board, if material;
(w)
review with management the accuracy and timeliness of filing with regulatory authorities;
(x)
review periodically the business continuity plans for the Company;
(y)
review annually general insurance coverage of the Company to ensure adequate protection of
major corporate assets including but not limited to Directors & Officers coverage;
(z)
perform such other duties as required by the Company's incorporating statute and applicable
securities legislation and policies; and
(aa)
establish procedures for:
(i) the receipt, retention and treatment of complaints received by the Company regarding
accounting, internal controls, or auditing matters; and
(ii) the confidential, anonymous submission by employees of the Company of concerns regarding
questionable accounting or audit matters.
3.
The Committee may engage and communicate directly and independently with outside legal and
other advisors for the Committee as required and set and pay the compensation of such advisors.
4.
On a yearly basis, the Committee will review the Audit Committee Charter and where
appropriate recommend changes to the Board.
IV
SECRETARY
The Secretary of the Committee will be appointed by the Chair.
V
MEETINGS AND MINUTES
1.
The Committee shall meet at such times and places as the Committee may determine, but no less than
four times per year. At least annually, the Committee shall meet separately with management and with the
external auditors.
2.
Meetings may be conducted with members present, in person, by telephone or by video
conference facilities.
3.
A resolution in writing signed by all the members of the Committee is valid as if it had been passed
at a meeting of the Committee.
4.
Notice must be given to each committee member not less than 48 hours before the time when the
meeting is to be held. The notice period may be waived by a quorum of the Committee.
5.
The external auditors or any member of the Committee may also call a meeting of the Committee.
The external auditors of the Company will receive notice of every meeting of the Committee.
6.
The Board shall be kept informed of the Committee's activities by a report, including copies of
minutes, at the next Board meeting following each Committee meeting.
VI
QUORUM
Quorum for the transaction of business at any meeting of the Audit Committee shall be a majority of the number
of members of the Committee.
VII DEFINITIONS
In accordance with Multilateral Instrument 52-110-Audit Committee,
"Financially literate" means that the director has the ability to read and understand a set of financial statements
that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth
and complexity of the issues that can reasonably be expected to be raised by the Company's financial statements.
"Control Person" means any person that holds or is one of a combination of persons that holds a sufficient
number of any of the securities of the Company so as to affect materially the control of the Company, or that
holds more than 20% of the outstanding voting shares of the Company except where there is evidence showing
that the holder of those securities does not materially affect the control of the Company.