Consolidated Financial Statements (Expressed in Canadian dollars) Silver Bear Resources Inc. For the year ended December 31, 2012 Management’s Responsibility for Financial Reporting The consolidated financial statements of Silver Bear Resources Inc. have been prepared by, and are the responsibility of the Company‟s management. The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board which have been adopted in Canada. In the opinion of management the accounting practices utilized are appropriate in the circumstances and the consolidated financial statements fairly reflect the financial position and results of operations of the Company within reasonable limits of materiality. Management has developed and is maintaining a system of internal controls to obtain reasonable assurance that the Company‟s assets are safeguarded, transactions are authorized, and financial information is reliable. All internal control systems have inherent limitations, including the possibility of circumvention and overriding controls, and, therefore, can provide only reasonable assurance as to financial statement preparation and safeguarding of assets. The Board of Directors is responsible for ensuring management fulfills its responsibilities. The Audit Committee meets with the Company‟s management and external auditors to discuss the results of the audit and to review the annual consolidated financial statements prior to the Audit Committee‟s submission to the Board of Directors for approval. The Audit Committee also reviews the quarterly financial statements and recommends them for approval to the Board of Directors, reviews with management the systems of internal control and security, approves the scope of the external auditors audit and non-audit work. The Audit Committee is composed entirely of directors not involved in the daily operations of the Company and thus is considered to be free from any relationship that could interfere with the exercise of independent judgment as a Committee member. The consolidated financial statements have been audited by PricewaterhouseCoopers LLP, Chartered Accountants and their report outlines the scope of their examination and gives their opinion on the consolidated financial statements. “Mark Trevisiol” _______________________________ Mark Trevisiol Director, President and Chief Executive Officer Toronto, Ontario, Canada March 26, 2013 “Deborah Battiston” _______________________________ Deborah Battiston Chief Financial Officer Page | 2 March 27, 2013 Independent Auditor’s Report To the Shareholders of Silver Bear Resources Inc. We have audited the accompanying consolidated financial statements of Silver Bear Resources Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2012 and December 31, 2011 and the consolidated statements of comprehensive loss, the consolidated statements of changes in equity, and the consolidated statements of cash flows for the years then ended, 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 (IFRS), 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 PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2 T: +1 416 863 1133, F: +1 416 365 8215, www.pwc.com/ca “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. Page | 3 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Silver Bear Resources Inc. and its subsidiaries as at December 31, 2012 and December 31, 2011 and their financial performance and their cash flows for the years then ended in accordance with IFRS. 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 the corporation's ability to continue as a going concern. (Signed) “PricewaterhouseCoopers LLP” Chartered Accountants, Licensed Public Accountants Page | 4 Silver Bear Resources Inc. Consolidated Statement of Financial Position (Canadian dollars) Approved by the Board of Directors on March 26, 2013 “Mark Trevisiol” _______________________________ Mark Trevisiol Director “Trevor Eyton” _______________________________ Trevor Eyton Director Page | 5 December 31, 2012December 31, 2011ASSETSCurrent assetsCash and cash equivalents141,669 4,282,883 Receivable (note 4)354,677 714,033 Inventories (note 5)1,781,914 573,727 Prepaid expenses (note 6)86,181 210,433 Total current assets2,364,441 5,781,076 Non-current assetsMineral property (note 7)1,791,068 1,212,964 Property, plant and equipment (note 8)2,065,814 636,008 Total assets6,221,323 7,630,048 LIABILITIESCurrent liabilitiesAccounts payable and accrued liabilities (note 9)1,294,795 617,446 Short-term loans (note 10)50,000 - Finance lease (note 11)221,212 - Total current liabilities1,566,007 617,446 Non-current liabilitiesAsset retirement obligation (note 18)1,143,383 579,478 Finance lease (note 11)243,182 - Total liabilities2,952,572 1,196,924 EQUITYEquity attributable to owners of Silver Bear Resources Inc.Share capital (note 12)83,580,384 78,730,574 Contributed surplus (note 12)11,473,112 10,081,156 Accumulated other comprehensive loss(517,054) (497,307) Deficit(91,267,691) (81,881,299) Total equity3,268,751 6,433,124 Total liabilities and shareholders' equity6,221,323 7,630,048 Going concern (note 1)Commitments and contingencies (note 16) Silver Bear Resources Inc. Consolidated Statement of Comprehensive Loss For the years ended December 31, 2012 and 2011 (Canadian dollars) Page | 6 20122011IncomeInterest income11,128 123,849 11,128 123,849 Expenses (Note 14)Exploration costs5,869,428 9,029,436 General and administrative 2,242,888 2,395,369 Depreciation230,369 324,865 Share-based payments998,421 919,649 Gain on disposal of property, plant and equipment(2,702) - Interest expense52,652 8,942 Foreign exchange loss (gain)6,464 (30,085) Expenses from operations9,397,520 12,648,176 Net loss for the year(9,386,392) (12,524,327) Other comprehensive lossExchange differences on translating foreign operations(19,747) (285,799) Comprehensive loss for the year(9,406,139) (12,810,126) Weighted average number of common shares outstanding50,487,994 41,473,030 Basic and diluted loss per share(0.19)(0.30)The accompanying notes are an integral part of these consolidated financial statements Silver Bear Resources Inc. Consolidated Statement of Changes in Equity For the years ended December 31, 2012 and 2011 (Canadian dollars) Page | 7 Share capitalContributed surplusAccumulated other comprehensive lossDeficitTotal equityBalance - December 31, 201073,771,289 9,166,433 (211,508) (69,356,972) 13,369,242 Net loss for the year- - - (12,524,327) (12,524,327) Other comprehensive loss:Cumulative translation adjustment- - (285,799) - (285,799) Comprehensive loss for the year- - (285,799) (12,524,327) (12,810,126) Share based payments- 919,649 - - 919,649 Options exercised10,060 (4,926) - - 5,134 Net proceeds from issuance shares in private placement 4,949,225 - - - 4,949,225 Balance - December, 201178,730,574 10,081,156 (497,307) (81,881,299) 6,433,124 Net loss for the year- - - (9,386,392) (9,386,392) Other comprehensive loss:Cumulative translation adjustment- - (19,747) - (19,747) Comprehensive loss for the year- - (19,747) (9,386,392) (9,406,139) Share based payments- 998,421 - - 998,421 Net proceeds from issuance shares in private placement 4,849,810 - - - 4,849,810 Warrants - 393,535 - - 393,535 Balance - December 31, 201283,580,384 11,473,112 (517,054) (91,267,691) 3,268,751 The accompanying notes are an integral part of these consolidated financial statements Silver Bear Resources Inc. Consolidated Statement of Cash Flow For the years ended December 31, 2012 and 2011 (Canadian dollars) Page | 8 20122011Cash provided by (used in)Operating activitiesTotal Loss for the year(9,386,392) (12,524,327) Adjustments for items not affecting cash:Depreciation230,369 324,865 Share-based payments998,421 919,649 Interest expense- 8,942 Gain on disposal of property, plant and equipment(2,702) - Net change in non-cash working capital (note 15)(7,875) (62,819) Net cash used in operations(8,168,179) (11,333,690) Investing activitiesAcquisition of property, plant and equipment(1,138,891) (66,254) Proceeds from sale of property, plant and equipment2,702 - Net cash used in investing activities(1,136,189) (66,254) Financing activitiesNet proceeds from issuance units in private placement5,243,345 4,949,225 Short-term loan50,000 - Proceeds from exercised options- 5,134 Finance lease repayments(130,575) - Net cash generated from financing activities5,162,770 4,954,359 Effect of exchange rate changes on cash and cash equivalents384 (385,809) Decrease in cash and cash equivalents during the year(4,141,214) (6,831,394) Cash and cash equivalents - beginning of the year4,282,883 11,114,277 Cash and cash equivalents - end of the year141,669 4,282,883 Cash and cash equivalents consist of:Cash106,669 4,282,883 Cash equivalents35,000 - 141,669 4,282,883 The accompanying notes are an integral part of these consolidated financial statements Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 1. NATURE OF OPERATIONS AND GOING CONCERN Silver Bear Resources Inc. (“Silver Bear”) was incorporated under the Business Corporations Act of the Province of Ontario, Canada, on April 8, 2004 and continued under Articles of Continuance dated August 30, 2004 under the Business Corporations Act (Yukon) and February 1, 2005 under the Business Corporations Act (Ontario). The primary business of Silver Bear and its subsidiaries („the Company”) is the evaluation, acquisition, exploration and development of precious metal properties. The head office of the Company is located in Toronto, Canada. The principal asset of the Company is the project described in Note 7. The exploration strategy of the Company is to focus on the discovery of precious metal deposits. To date, Silver Bear has not earned revenue from operations and is considered to be in the exploration stage. As at December 31, 2012, the Company has no source of operating cash flows. The Company‟s ability to meet its obligations and continue as a going concern is dependent on the ability to identify and complete future funding. These audited consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) applicable to a going concern which contemplates that the Company will be able to realize its assets and settle its liabilities in the normal course as they come due for the foreseeable future. As at December 31, 2012, the Company had no source of operating cash flows and reported a net loss for the year then ended of $9,386,392 and a deficit of $91,267,691. In order to fund operations and maintain rights under licenses and agreements, the Company must secure sufficient future funding. In these circumstances, there exists significant doubt as to the ability of the Company to continue to meet its obligations as they come due and, hence the ultimate appropriateness of the use of accounting principles applicable to a going concern. The Company has an immediate need for additional capital and, while it has been successful in obtaining short term bridge financing (see note 21) in order to meet its funding requirements, there can be no assurance that it will be able to do so in the future. These consolidated financial statements do not include adjustments or disclosures that may result should the Company not be able to continue as a going concern. If the going concern assumption were not appropriate for these consolidated financial statements, then adjustments would be necessary to the carrying value of assets and liabilities, the expenses, the reported comprehensive loss and balance sheet classifications used that would be necessary if the company were unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. These adjustments could be material. 2. BASIS OF PREPARATION These consolidated financial statements have been prepared in accordance with the Handbook of the Canadian Institute of Charted Accountants, in accordance with IFRS, as issued by International Accounting Standards Board (“IASB”), applicable to the preparation of consolidated financial statements and in accordance with accounting policies based on IFRS standards and International Financial Reporting Interpretations Committee (“IFRIC”) interpretations. The Company has consistently applied the accounting policies used in the preparation of its IFRS statement of financial position throughout all periods presented, as if these policies had always been in effect. The Board of Directors approved the financial statements on March 26, 2013. These consolidated financial statements comprise the financial statements of the Company and its 100% owned subsidiaries: Silver Bear Holdings Limited (a Barbados corporation) (“Holdings”), and ZAO Prognoz (a Russian Federation corporation). All significant inter-company accounts and transactions have been eliminated on consolidation. Page | 9 Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 2. Basis of preparation (continued) Significant Accounting Policies Foreign currency translation Items included in the financial statements of each entity are measured using the currency of the primary economic environment in which it operates (“functional currency”). The consolidated financial statements are presented in Canadian dollars which is Silver Bear‟s functional currency, as well as functional currency of Silver Bear Holdings. The financial statements of ZAO Prognoz have a Russian rouble as its functional currency and are translated into presentation currency of Canadian dollars for consolidation purposes as follows: assets and liabilities – at the closing rate at the date of the statement of financial position, and income and expenses at the average rate for each quarter (as this is considered a reasonable approximation to actual rates). All resulting changes are recognized in other comprehensive income as cumulative translation adjustments. Foreign currency transactions are translated into the functional currency of the entity in which they occur using the exchange rates prevailing at the dates of transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation of monetary assets and liabilities denominated in currencies other than functional currency at period-end exchange rates are recognized in the statement of comprehensive loss. Mineral properties Mineral properties include the costs of acquiring exploration and mining licenses, as well as cost of an asset associated with the obligation for environmental rehabilitation. Licenses are valued at cost at the date of acquisition less impairment. Property, plant and equipment Property, plant and equipment are carried at cost, less accumulated depreciation and impairment losses. All property, plant and equipment, with the exception of leasehold improvements, are depreciated on a straight line basis over three to five years. Leasehold improvements are amortized over the remaining life of the lease. Significant components of the property, plant and equipment are recorded and depreciated separately. Residual values, method of depreciation and the useful lives of assets are revised annually and adjusted prospectively, if appropriate, if there is an indicator of a significant change since the last reporting date. Exploration costs Field exploration, supervisory costs and costs associated with maintaining a mineral property are expensed until the Company has a reasonable expectation that the property is capable of commercial production, supported by a positive economic analysis and approved by the Board of Directors. Impairment of non-financial assets The Company reviews and evaluates the recoverable amount of its mineral properties, property, plant and equipment annually and when events or changes in circumstances indicate that the carrying amounts of related assets or groups of assets might not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).The recoverable amount is the higher of an asset‟s fair value less costs to sell and value in use (being the present value of the expected future cash flows of the relevant asset). Any resulting write-down of the excess of carrying value over the recoverable amount is charged to the consolidated statement of operations. Page | 10 Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 2. Basis of preparation (continued) Provision for decommissioning and restoration liability Mining and exploration activities normally give rise to obligations for environmental rehabilitation. Rehabilitation work may include facility decommissioning and dismantling; removal or treatment of waste materials; site and land rehabilitation, including compliance with and monitoring of environmental regulations; security and other site-related costs required to perform the rehabilitation work; and operation of equipment designed to reduce or eliminate environmental effects. The extent of work required and the associated costs are dependent on the requirements of relevant authorities and our environmental policies. Routine operating costs that may impact the ultimate closure and rehabilitation activities, such as waste material handling conducted as an integral part of a mining or exploration process, are not included in the provision. The timing of the actual rehabilitation expenditure is dependent upon a number of factors such as the life and nature of the asset, the license conditions and the operating environment. Expenditures may occur before and after the site closure and can continue for an extended period of time depending on rehabilitation requirements. Rehabilitation provisions are measured at the expected value of future cash flows, associated with the settlement of the obligation and discounted to their present value using a pre-tax discount rate which reflects current assessments of the time value of money. The expected future cash flows exclude the effect of inflation. The unwinding of the discount in subsequent periods is presented as interest expense. The asset associated with retirement obligations represents the part of the cost of acquiring the future economic benefits of the operation and is capitalized to mineral properties as part of the carrying amount of the long-lived asset and amortized over the expected economic life of the operation to which it relates. The Company re-measures the liability at each reporting date. Changes in estimates are recorded using current discount rate assumptions. Adjustments are also accounted for as a change in the corresponding value of the related assets. Financial instruments Financial assets: Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit and loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets, or derivatives. The Company determines the classification of its financial assets at initial recognition. The Company‟s financial assets include cash and amounts receivable. Initially they are recognized at fair value, subsequently measured at amortized cost using the effective interest method. Amortized cost approximate fair value due to the short-term maturity of these assets. They are included in current assets, except for maturities greater than twelve months after the year-end. Regular purchases and sales of financial assets are recognized on the trade-date the date on which the Company commits to purchase or sell assets. Financial assets are derecognized when the rights to receive cash flows from investments and the Company has transferred substantially all risks and rewards of ownership. Financial liabilities: Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Companies financial liabilities include accounts payable, accrued liabilities and short-term loans. Initially they are recognized at fair value, subsequently measured at amortized cost using the effective interest method. Amortized cost approximate fair value due to the short-term maturity of these liabilities. Page | 11 Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 2. Basis of preparation (continued) Financial instruments are initially recorded at fair value. The fair values of cash and cash equivalents, receivable from related party (Note 13), miscellaneous receivables and, accounts payable and accrued liabilities approximate their recorded amounts because of their short-term nature. Cash and cash equivalents Cash represents cash on hand and demand deposits. Cash equivalents represent short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of change in value. Such short-term investments include treasury bills with original maturities of less than 90 days. Treasury bills with original maturities in excess of 90 days are classified under short-term investments. Equity investments are excluded from cash equivalents. Income Taxes The Company uses the asset and liability method of accounting for income taxes, under which deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying value of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates or laws is recognized as part of the provision for income tax in the year the changes are considered substantively enacted. Deferred tax benefits attributable to these differences, if any, are recognized to the extent that the realization of such benefits is more likely than not. Loss per share Basic loss per share is computed by dividing loss for the period by the weighted average number of common shares outstanding for the year. In the event of the Company reporting net profit, the diluted loss per share will be similar to basic earnings per share, except that the denominator will be increased to include the number of additional shares that would have been outstanding if the dilutive potential common shares in connection with the issued share options had been issued using the treasury stock method. Share-based payments The fair value of any stock options granted to directors, officers, consultants and employees is recognized as an expense over the vesting period with a corresponding increase recorded to contributed surplus. The fair value of stock based compensation is determined using the Black-Scholes option pricing model and management's assumptions as disclosed in Note 12. An estimate for forfeitures is made when determining the number of equity instruments expected to vest. Upon exercise of the stock options, consideration paid by the option holder together with the amount previously recognized in contributed surplus is recorded as an increase to share capital. Prepaid expenses Prepaid expenses represent payments made or obligations incurred in advance of the receipt of goods or rendering of services. Prepaid expenses are typically included in other current assets on the consolidated statement of financial position. Inventories Inventories consist of fuel, supplies and spare parts to be consumed in exploration activities and are stated at the lower of weighted average cost and net realizable value. Page | 12 Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 2. Basis of preparation (continued) Contingencies In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, the Company and its legal counsel evaluate the perceived merits of any legal proceedings or unasserted claims of the amount of relief sought or expected to be sought. If the assessment of a contingency suggests that a loss is probable, the amount can be reliably estimated, and there is a present obligation as a result of a past event, then a loss is recorded. The details of a contingent loss are disclosed unless the possibility of any outflow in settlement is remote. Legal fees incurred with pending legal proceeding are expensed as incurred. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the agreement at the inception date. Finance leases Finance leases which transfer substantially all the risks and rewards incidental to ownership of the leased item to the Company as a lessee, are capitalized at the inception of the lease at the fair value of the leased asset, or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and the reduction of the lease liability. Finance charges are recognized in finance cost in the consolidated statements of earnings. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Company will obtain ownership by the end of the term of the lease. Operating leases Leases that do not transfer substantially all the risks and rewards incidental to ownership to the Company as a lessee are classified as operating leases. Operating lease payments are recognized as an expense in the consolidated statements of earnings on a straight-line basis over the lease term. Accounting estimates and management judgments The preparation of consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. The significant areas of estimation and uncertainties considered by management in preparing the consolidated financial statements include: Critical judgement in applying accounting policies: Determination of functional currency Based on the primary indicators in IAS 21 – The Effects of Change in Foreign Exchange Rates – Russian rouble has been determined as the functional currency of ZAO Prognoz, operating subsidiary of Silver Bear, because Russian rouble is the currency that mainly influences labour, material and other costs of providing goods or services, and is the currency in which these costs are denominated and settled. Page | 13 Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 2. Basis of preparation (continued) Significant management judgment was exercised, since the second primary indicator related to the currency influencing the sales price is not applicable, as ZAO Prognoz that does not yet generate any revenue. Effects of changes in foreign exchange rates at the consolidation of financial statements are recorded in the other comprehensive income and carried in the form of cumulative translation adjustment in the accumulated other comprehensive income section of the Statement of financial position of the Company. If the functional currency of the Russian entity had been Canadian dollar, the effect of changes in foreign exchange rates would have been reflected in net income as foreign exchange gain (loss) on the Statement of comprehensive loss. Assets‟ carrying values and impairment charges In the determination of carrying values and impairment charges, management looks at the higher of recoverable amount or fair value less costs to sell in the case of assets and at objective evidence, significant or prolonged decline of fair value on financial assets indicating impairment. These determinations and their individual assumptions require that management make a decision based on the best available information at each reporting period. Impairment of mineral properties While assessing whether any indications of impairment exist for mineral properties, consideration is given to both external and internal sources of information. Information the Company considers includes changes in the market, economic and legal environment in which the Company operates that are not within its control that could affect the recoverable amount of mineral properties. Internal sources of information include the manner in which mineral properties are being used or are expected to be used and indications of expected economic performance of the assets. Estimates include but are not limited to estimates of the discounted future after-tax cash flows expected to be derived from the Company‟s mineral properties, costs to sell the properties and the appropriate discount rate. Reductions in metal price forecasts reductions in the amount of recoverable mineral reserves and mineral resources and/or adverse current economics can result in a write-down of the carrying amounts of the Company‟s mineral properties. Contingencies Refer to Note 16. Key sources of estimation uncertainty: Depreciation rates All property, plant and equipment, with the exception of leasehold improvements, are depreciated on a straight line basis over three to five years, which the Company believes is the best approximation of the asset utility to the Company. If the estimated life had been longer by than management‟s estimate, the carrying amount of the asset would have been higher. Rehabilitation provisions and asset retirement obligations Exploration activities carried by the Company give rise to obligations for environmental rehabilitation. Significant uncertainty exists to the amount and timing of associated cash flows and regulatory requirements. A Russian Central Bank borrowing rate is used in discounting of future cash flows as a pre-tax discount rate. Page | 14 Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 2. Basis of preparation (continued) A term of the exploration license is used as the discounting period. If the estimated pre-tax discount rate used in the calculation had been higher than the management estimate, the carrying amount of the provision would have been lower and interest expense higher. If the estimated period over which the cash flows associated with the asset retirement obligations are calculated had been longer that the management estimates, the carrying amount of the provision would have been lower as would be interest expense. Share-based payment transactions The Company records share-based compensation at fair value over the vesting period. The fair value of the grant is determined using the Black-Scholes options pricing model and management assumptions regarding dividend yield, expected volatility, forfeiture rate, risk free rate and expected life. Should the underlying assumptions change, it will impact the fair value of the share-based compensation. New accounting standards The following items are the key new accounting standards and amendments to existing standards and interpretations that have been issued by the IASB, but not yet applied by the Company when preparing these consolidated financial statements. Updates that are not applicable or are not consequential to the Company have been excluded thereof. IAS 1 – Financial Statements Presentation. On 16 June 2011 the IASB issued amendments to IAS 1Financial Statement Presentation. These amendments improve presentation of components of other comprehensive income. require entities to separate items presented in other comprehensive income (“OCI”) into two groups, based on whether or not items may be recycled in the future. Entities that choose to present OCI items before tax will be required to show the amount of tax related to the two groups separately. The amendment is effective for annual periods beginning on or after July 1, 2012. The Company is currently assessing the impact of the amendments to IAS 1 on its financial statements. IFRS 9 – Financial Instruments IFRS 9 was issued in November 2009 and contained requirements for financial assets. This standard addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39 for debt instruments with a new mixed measurement model having 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 income. Where such equity instruments are measured at fair value through other comprehensive income, dividends are recognized in profit or loss to the extent not clearly representing a return of investment; however, other gains and losses (including impairments) associated with such instruments remain in accumulated comprehensive income indefinitely. Requirements for financial liabilities were added in October 2010 and they largely carried forward existing requirements in IAS 39, Financial Instruments – Recognition and Measurement, 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 income. This standard is required to be applied for accounting periods beginning on or after January 1, 2015, with earlier adoption permitted. The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early. Page | 15 Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 2. Basis of preparation (continued) IFRS 10 – Consolidated Financial Statements. IFRS 10 (issued in May 2011) provides a single consolidation model that identifies control as the basis for consolidation for all types of entities and establishes principles for the preparation and presentation of consolidated financial statements when an entity controls one or more entities. IFRS 10 replaces IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation—Special Purpose Entities and is effective for annual periods beginning on or after 1 January 2013, with earlier application permitted. The Company is currently assessing the impact of the standard. IFRS 12 – Disclosure of Interest in Other Entities IFRS 12 (issued in May 2011) sets the disclosure requirements for an entity‟s interest in subsidiaries, joint arrangements, associates and unconsolidated structured entities. The Company has not yet determined whether it will adopt the standard early, but doesn‟t anticipate any significant impact the standard. Requirements for financial liabilities were added in October 2010 and they largely carried forward existing requirements in IAS 39, Financial Instruments – Recognition and Measurement, 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 income. This standard is required to be applied for accounting periods beginning on or after January 1, 2015, with earlier adoption permitted. The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early. The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early. IFRS 13 – Fair Value Measurement IFRS 13 converges IFRS and US GAAP on how to measure fair value and the related fair value disclosures. The new standard creates a single source of guidance for fair value measurements, where fair value is required or permitted under IFRS, by not changing how fair value is used but how it is measured. The focus will be on an exit price. IFRS 13 is effective for annual periods beginning on or after January 1, 2013. Company is currently assessing the impact of the standard. 3. CAPITAL MANAGEMENT AND FINANCIAL RISK FACTORS The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support the acquisition and exploration of precious metal properties. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of management to sustain future development of the business. The property in which the Company currently has an interest is in the exploration stage; as such the Company is dependent on external financing to fund ongoing activities. In order to carry out the planned exploration and pay for administrative costs, the Company will spend existing working capital and plan to raise additional amounts as needed. The Company will continue to assess new properties and seek to acquire an interest in additional properties where sufficient geologic or economic potential are noted and if financial resources exist to do so. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There were no changes in the Company‟s approach to capital management during the year ended December 31, 2012 compared to the year ended December 31, 2011. Neither the Company nor its subsidiaries are subject to externally imposed capital requirements. Page | 16 Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 3. Capital management and financial risk factors (continued) FINANCIAL RISK FACTORS The Company‟s risk exposures and the impact on the Company‟s financial instruments are summarized below: Credit risk The Company has no significant concentration of credit risk arising from operations. Cash equivalents consist of interest earning bank accounts, which are invested with Canadian chartered banks and a major Russian bank with credit rating from AA for Canadian banks and BB for Russian bank and a stable future outlook. Miscellaneous receivables and prepaid expenses other than taxes due from the Federal Government of Canada and Russian Value Added Tax refunds from the Russian tax authorities are insignificant. Management believes that the credit risk concentration with respect to accounts receivable is low. Liquidity risk The Company‟s approach to managing liquidity risk is to ensure it will have sufficient liquidity to meet liabilities when due. As at December 31, 2012, the Company had a cash balance of $141,669 (December 31, 2011 – $4,282,883). The company had total obligation of $464,394 at December 31, 2012 (December 31, 2011 – nil) under a three-year finance lease of exploration equipment and a short-term loan of 50,000 (December 31, 2011 – nil) repayable within six month of the date of a loan agreement. At December 31, 2012 the Company had total current assets of $2,364,441 (December 31, 2011 - $5,781,076) to settle current liabilities of $1,566,007 (December 31, 2011 – $617,446), as well as its commitments outlined in Note 16. Interest rate risk The Company has cash balances and interest-bearing debt. The Company‟s current policy is to invest excess cash in interest-earning bank accounts with Canadian and Russian financial institutions. The Company periodically monitors the investments it makes and is satisfied with the credit ratings of its banks. Foreign currency risk The Company has funded certain exploration and administrative expenses on a transaction by transaction basis using U.S. dollar and Russian rouble currency converted from its Canadian dollar bank accounts held in Canada. Management believes the foreign exchange risk derived from currency conversions is low and therefore does not hedge its foreign exchange risk. Sensitivity analysis The carrying amount of accounts receivable equals fair market value. The effect of changes in foreign exchange rates on net loss is deemed to insignificant as number and amount of foreign-currency transactions are relatively small. Had the foreign exchange rates been higher (lower) by 5%, the cumulative translation adjustment in the other comprehensive income section of the Statement of financial position would have been lower (higher) by $125,891. Page | 17 Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 4. RECEIVABLE 5. INVENTORIES Material and supplies inventories are stated at the lower of weighted average costs and net realizable value. Inventories consist of the following: 6. PREPAID EXPENSES Prepaid expenses consist of the following: 7. MINERAL PROPERTY Mineral property includes the cost of acquiring exploration and mining licenses, as well as value of asset associated with asset retirement obligations. Mineral property consists of the following: The change in value of the asset is due to additional cost incurred in the process of license extension, revision of asset retirement obligation and foreign exchange difference on translation of the asset. Page | 18 December 31, 2012 December 31, 2011 Russian Value Added Tax $ 121,370 $ 652,632 Canadian Harmonized Sales Tax 50,754 $ 61,401 Other 182,553 - 354,677$ 714,033$ December 31, 2012 December 31, 2011 Fuel and lubricants588,486$ 93,562$ Parts and supplies1,193,428 480,165 1,781,914$ 573,727$ December 31, 2012 December 31, 2011 Insurance $ 25,880 $ 30,949 Exploration services and goods 3,109 107,688 Consulting services 52,500 - Employee advances 345 19,619 Rent and administrative costs 4,347 52,177 86,181$ 210,433$ Mangazeisky December 31, 2012 December 31, 2011 Balance at the beginning of the year $ 1,212,964 $ 1,085,277 Additions 545,940 159,520 Translation adjustment 32,164 (31,833)Balance at the end of the year1,791,068$ 1,212,964$ Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 7. Mineral property (continued) The Company acquired the exploration licence in respect of the Mangazeisky property when it acquired all the shares of ZAO Prognoz on October 21, 2004. On December 27, 2012, the Mangazeisky License was extended by the Federal Subsoil Use Agency in the Russian Federation (“Rosnedra”) through December 31, 2016. The cumulative exploration costs incurred and expensed from inception to date are as follows: 8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost, less accumulated depreciation and consist of the following: Reconciliation of the carrying amount at the beginning and end of the years ended December 31, 2012 and 2011. The carrying value of equipment held under finance leases as at December 31, 2012 was $866,748 (December 31, 2011 - $Nil). Additions during the year ended December 31, 2012 included $1,043,363 of equipment under finance leases. Leased assets are pledged as security for the related finance lease obligations. 9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following: Page | 19 December 31, 2012 December 31, 2011 Mangazeisky $ 50,677,700 $ 44,808,272 CostAccumulated depreciationNet book valueCostAccumulated depreciationNet book valueProperty plant and equipment: Mangazeisky site $ 5,728,711 $ 3,662,897 $ 2,065,814 $ 3,961,848 $ 3,338,918 $ 622,930 Yakutsk office 124,869 124,869 - 121,114 117,972 3,142 Other office furniture, equipment and leasehold improvements 59,620 59,620 - 267,583 257,647 9,936 $ 5,913,200 $ 3,847,386 $ 2,065,814 $ 4,350,545 $ 3,714,537 $ 636,008 December 31, 2012December 31, 2011 Mangazeisky site equipment Yakutsk equipment Office equipment TotalCarrying amount at January 1, 2011854,608$ 18,687$ 26,777$ 900,072$ Additions65,581 673 - 66,254 Disposals- - - - Depreciation(291,263) (16,761) (16,841) (324,865) Exchange differences(5,996) 543 - (5,453) Carrying amount at December 31, 2011 $ 622,930 3,142$ 9,936$ 636,008$ Carrying amount at January 1, 2012622,930$ 3,142$ 9,936$ 636,008$ Additions1,687,304 - - 1,687,304 Disposals- - - - Depreciation(217,240) (3,193) (9,936) (230,369) Exchange differences(27,180) 51 - (27,129) Carrying amount at December 31, 2012 $ 2,065,814 -$ -$ 2,065,814$ December 31, 2012 December 31, 2011 Exploration costs - Mangazeisky project $ 432,170 $ 147,795 Corporate - accounts payable and accrued liabilities $ 862,625 469,651 1,294,795$ 617,446$ Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 10. SHORT-TERM LOANS On January 30, 2013, amended March 12, 2013, the Company entered into a loan agreement with Forbes & Manhattan Inc. Forbes & Manhattan Inc. agreed to provide an unsecured bridge loan in the amount of $350,000 in three tranches repayable in cash on the earlier of (a) July 30, 2013 and (b) the date on which the Company completes an equity financing. The Executive Chairman of Forbes & Manhattan Inc. is a director of the Company. Interest is calculated at rate of 8% per annum and is payable on maturity day of the loan. The first tranche of $50,000 was received on December 31, 2012. On March 25, 2013, the Company received $50,000 pursuant to a loan agreement with Aberdeen International Inc. Terms of the loan agreement are being finalized. Mr. Bharti, a director of the Company, is the Chairman of the Board of Aberdeen International Inc. 11. FINANCE LEASE The Company entered into a long-term lease agreement with Caterpillar Financial Ltd. for the purchase of certain exploration equipment payable in monthly installments over a three-year period. The lease payments were discounted at a rate of 11.5%. The Company made a downpayment for the 50% of the cost of equipment. Future minimum lease payments under finance lease, together with the present value of the net minimum lease payments, are as follows: 12. SHAREHOLDERS’ EQUITY Common shares Authorized: Unlimited number of common shares and preferred shares issued with no par value: Reconciliation of the number and value of common shares at the beginning and end of the years ended December 31, 2012 and 2011. All issued shares are fully paid. Page | 20 Payments due by period December 31, 2012 December 31, 2011 Within one year235,232$ -$ With two to five years294,040 - 529,272 - Future finance charges on finance lease(64,878) - Present value of the net lease payments464,394 - Current portion221,212 - Long-term portion243,182 - Total obligations under finance lease464,394$ -$ Number of common shares$Number of common shares$Balance - Beginning of year44,203,902 78,730,574 37,935,569 73,771,289 Issued pursuant to private placement, net9,662,405 4,849,810 6,250,000 4,949,225 Issued pursuant to options exercised- - 18,333 10,060 Balance - End of year53,866,307 83,580,384 44,203,902 78,730,574 20122011 Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 12. Shareholders’ equity (continued) On May 11, 2011, the Company announced the closing of Private Placement of common shares resulting in aggregate proceeds to the Company of $5 million from the issue of 6,250,000 common shares at a price of $0.80 per share. Share issue costs amounted to $50,775. On March 16, 2012 the Company completed a non-brokered private placement financing of 4,375,000 common shares of the Company (the “Common Shares”) at an issue price of $0.80 for gross proceeds in the amount of $3,500,000 (the “Private Placement”). Tabac Ventures Limited (“Tabac”), a company affiliated with Aterra Capital, an investment fund established by Alexey Mordashov, acquired all of the Common Shares issued in connection with the Private Placement. A nominee of Tabac, Boris Granovsky was appointed to the Board of Directors of the Company. Share issue costs amounted to $36,610. On June 7, 2012 the Company closed the first tranche of a private placement financing through the sale of 3,507,405 units (the "Units") at a price of $0.345 per unit for gross proceeds of $1,210,055. On July 17, 2012 the Company announced the closing of the second tranche of a private placement financing through the sale of 1,780,000 units at a price of $0.345 per unit for gross proceeds of $614,100. Each Unit consists of one common share of the Company (a "Common Share") and one-half of one common share purchase warrant (each whole warrant, a "Warrant"). Each Warrant entitles the holder thereof to acquire a Common Share at the exercise price of $0.58 per share for a period of up to 36 months following the closing. Share issue costs amounted to $44,185. While the Company has been successful in raising financing to date, there can be no assurance that it will be able to do so in the future. Stock Options The Company has a stock option plan which is intended to provide an incentive to officers, employees, directors and consultants of the Company. Stock options are granted from time to time and the option price is determined by the Compensation Committee of the Board of Directors at its sole discretion but shall not be less than the closing price of the Company‟s common stock on the Toronto Stock Exchange on the last trading date preceding the date of the grant. The term of each option is granted for a period not exceeding five years from the date of the grant. Except as expressly provided for in the option holder‟s employment, consulting or termination contract, the option holder may exercise the option to the extent exercisable on the date of such termination at any time within twelve months after the date of termination. The maximum aggregate number of Shares reserved by the Company for issuance and which may be purchased upon the exercise of all Options granted under its option plan is not greater than 10% of the outstanding Shares (on a non-diluted basis) issued and outstanding at the time of the granting of the Options. As at December 31, 2012 the total number of options available for issue was 5,386,631. A total of 542,464 options are available for future issue as at December 31, 2012. On April 4 and April 24, 2012, 317,500 and 100,000 options respectively were granted to directors, officers or employees of the Company. Granted stock options vest gradually over two years, one-third at the grant date, and one-third on every anniversary of the grant. On September 26, 2012 515,000 options were granted to directors, officers and consultants of the Company. Granted stock options vested immediately. In total, during the year ended December 31, 2012, 932,500 stock options (year ended December 31, 2011: 2,331,000) were granted to directors, officers, or employees of the Company. Page | 21 Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 12. Shareholders’ equity (continued) During the period ended December 31, 2012 options generated a share based payments expense of $998,421 (year ended December 31, 2011: $919,649). The fair value of options is estimated on the date of grant using the Black-Scholes option pricing model. Where relevant, the expected life used in the model has been adjusted based on management‟s best estimate for the effects of non-transferability, exercise restrictions (including the probability of meeting market conditions attached to the option. Expected volatility is based on the historical share price volatility over the past 5 years. The expected life of the option was calculated based on the history of option exercises. Reconciliation of the number of options at the beginning and end of the twelve months ended December 31, 2012 and December 31, 2011 follows: As at December 31, 2012, the Company had share options outstanding and exercisable as follows: Contributed surplus consists of the following: Page | 22 GrantAwards GrantedGrant PriceMarket PriceFair ValueDividend YieldRisk Free RatePre-vest Forfeiture RateExpected LifeVolatilityApril 4, 2012317,500$0.62$0.62$0.4260%1.39%5.5%3.34109%April 24, 2012100,000$0.56$0.56$0.3830%1.54%5.5%3.34108%September 26, 2012515,000$0.50$0.50$0.3410%1.18%6.19%3.29109%932,500$0.55$0.55$0.3940%1.29%5.88%3.31109%Weighted averageWeighted averageexercise price, exercise price$$Balance - Beginning of the year4,036,667 0.73 1,903,333 0.48 Granted932,500 0.55 2,331,000 0.91 Exercised- - (18,333) 0.28 Expired / Cancelled / Forfeited (125,000) 1.07 (179,333) 0.59 Balance - End of the year4,844,167 0.69 4,036,667 0.73 NumberNumber20122011Weighted averageWeighted averageexercise price, exercise price$$2013636,667 0.28 636,667 0.28 20151,070,000 0.59 713,334 0.59 20162,205,000 0.92 831,668 0.92 2017932,500 0.55 654,166 0.52 4,844,167 0.69 2,835,835 0.60 Expiry yearNumberNumberOutstandingExercisable December 31, 2012 December 31, 2011 Balance-Beginning of year $ 10,081,156 $ 9,166,433 Share-based payments 998,421 919,649 Warrants 393,535 - Exercised options- (4,926) Balance- End of year $ 11,473,112 $ 10,081,156 Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 12. Shareholders’ equity (continued) Share purchase warrant transactions are summarized as follows: At December 31, 2012, the following warrants were outstanding: The fair value of warrants is estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: risk free rate of return 1.08%, volatility of 105.74% and expected life of 3 years. Loss per share Basic and diluted loss per share is calculated by dividing the net loss by the weighted average number of shares in issue during the year. As a result of net losses in each of the periods, the potential effect of exercising stock options and warrants has not been included in the calculation of loss per share because to do so would be anti- dilutive. 13. RELATED PARTY DISCLOSURES The Company shares office space with companies that have officers or directors in common with the Company. The costs associated with this space and certain other services are administered by 2227929 Ontario Inc. Aservices Ltd., a company controlled by Alfa Group Consortium, a shareholder of the Company, provided consulting services relating to the exploration license extension. Mr. Andrey Tseshinskiy was appointed as Alfa Group‟s representative to the Board of Directors of the Company effective September 23, 2011. In addition, effective May 11, 2011, an administration fee of $25,000 per month is charged by Forbes & Manhattan Inc. pursuant to a consulting agreement entered into between the companies. Mr. Stan Bharti, a director of the Company, is the Executive Chairman of Forbes & Manhattan Inc. Page | 23 Weighted averageWeighted averageexercise price, exercise price$$Balance - Beginning of the year- - - - Granted2,643,703 0.58 - - Exercised- - - - Expired / Cancelled / Forfeited - - - - Balance - End of the year2,643,703 0.58 - - Number of share purchase warrantsNumber of share purchase warrants20122011ExpiryExercise price, $Number of warrantsGrant date fair value recorded, $June 7, 20150.58 1,753,703 264,254 July 16, 20150.58 890,000 129,281 2,643,703 393,535 2012 2011 Net loss(9,386,392) (12,524,327) Weighted average number of common shares outstanding50,487,994 41,473,030 (0.19)$ (0.30)$ Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 13. Related party disclosures (continued) On January 30, 2013 amended March 12, 2013 the Company entered into a loan agreement with Forbes & Manhattan Inc. Forbes & Manhattan Inc agreed to provide an unsecured bridge loan in the amount of $350,000 in three tranches repayable in cash on the earlier of (a) July 30, 2013 and (b) the date on which the Company completes and equity financing.. Interest is calculated at rate of 8% per annum and is payable on maturity day of the loan. The first tranche of $50,000 was received on December 31, 2012. Please refer to Note 21 for the events after reporting period. On March 25, 2013, the Company received $50,000 pursuant to a loan agreement with Aberdeen International Inc. Terms of the loan agreement are being finalized. Mr. Bharti, a director of the Company, is the Chairman of the Board of Aberdeen International Inc. The Company entered into an agreement with Tabac Ventures Limited (“Tabac”) whereby Tabac shall provide certain consulting services related to government relations in Russia. The services will include but not be limited to guidance with respect to exploration and mining license processes, as well as guidance with respect to correspondence, government submittals, approvals and permits. During the years ended December 31, 2012 and December 31, 2011 the Company entered into transactions with the following related parties: The following balances were outstanding as at December 31, 2012: These amounts are unsecured, non-interest bearing with no fixed terms of repayment. The related party transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. Compensation of key management Key management includes the Company‟s directors and officers. Compensation awarded to key management included: Page | 24 Goods and services received from (provided to):2012201120122011New Gold Inc.-$ 76,760$ -$ 1,798$ 2227929 Ontario Inc.292,635 133,086 - - Forbes & Manhattan Inc.300,000 211,875 52,257 Aservices Ltd.- 160,000 - - Tabac Ventures Limited157,500 - - - Other entities of F&M Group- 83,251 - - 750,135$ 664,972$ -$ 54,055$ Goods and services providedGoods and services receivedOutstanding balancesDecember 31, 2012December 31, 2011December 31, 2012December 31, 20112227929 Ontario Inc.- 36,104 19,760 20,259 Forbes & Manhattan Inc.- - 226,000 - Aservices Ltd.- - - 160,000 Tabac Ventures- - 210,000 - -$ 36,104$ 455,760$ 180,259$ 20122011Salaries, fees and short-term employee benefits789,800$ 561,409$ Share-based payments607,442 556,514 1,397,242$ 1,117,923$ Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 14. EXPENSES BY NATURE The following table provides the breakdown of Company‟s expenses by nature. Certain comparative figures have been reclassified to conform to the current period‟s presentation. Employee benefits expense for the years ended December 31, 2012 and 2011 consisted of the following: 15. NET CHANGE IN NON-CASH WORKING CAPITAL Net change in non-cash working capital consists of the following: 16. COMMITMENTS AND CONTINGENCIES In order to maintain the exploration license at the Mangazeisky Project in good standing, Silver Bear is required to conduct certain minimum levels of exploration activity. The Company was required to undertake 5,000 cubic metres of trenching and 3,000 metres of drilling to satisfy license agreement requirements in 2012. The Company has fulfilled these requirements for 2012. The Company is in the process of obtaining its mining license. As part of the process the Company has completed a required Russian Feasibility Study (“RFS”) and submitted it along with a Russian reserve estimate to the Russian government. Page | 25 20122011Employee compensation3,631,390$ 3,587,124$ Drilling and trenching2,000,444 2,633,297 Depreciation232,640 324,865 Professional fees711,389 426,578 Geological & environmental studies342,799 1,203,009 Transportation750,208 3,192,337 Camp maintenance479,318 414,856 Taxes56,877 46,322 Office expenses384,871 774,869 Travel expenses410,485 619,376 Interest expense52,031 8,942 Foreign exchange6,461 (30,085) VAT refund- (888,016) Other expenses338,607 334,702 9,397,520$ 12,648,176$ 20122011Salaries, fees and short-term employee benefits2,632,969$ 2,667,475$ Share-based payments998,421 919,649 3,631,390$ 3,587,124$ December 31, 2012December 31, 2011Receivable377,943$ (722,970)$ Inventories(1,185,085) 516,831 Prepaid expenses127,344 (176,900) Accounts payable and accrued liabilities671,923 320,220 (7,875)$ (62,819)$ Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 16. Commitments and contingencies (continued) The Company‟s exploration license requirement for 2013 requires the completion of 3,000 meters of drilling and 5,000 cubic meters of trenching. It is the Company‟s intention to complete these requirements. The Company entered into a long-term lease agreement with Caterpillar Financial Ltd. for the purchase of certain exploration equipment payable in monthly installments of US$19,703 over a three-year period. The Company is party to certain management contracts and severance obligations. These contracts contain clauses requiring additional payments of up to $573,200 be made upon the occurrence of certain events such as a change of control. As the likelihood of these events taking place is not determinable, the contingent payments have not been reflected in these consolidated financial statements. Additional minimum management contractual commitments remaining under the agreements are approximately $582,998, all due within one year. The Company may be involved in legal proceedings from time to time, arising in the ordinary course of its business. The amount of ultimate liability with respect to these actions will not, in the opinion of management, materially affect Silver Bear‟s financial position, results of operations or cash flows. There were no material outstanding legal proceedings as of December 31, 2012. 17. SEGMENTED INFORMATION The Company‟s operating segments include one property in the Russian Federation (Mangazeisky) and a corporate office in Toronto, Canada. 18. PROVISION FOR DECOMMISSIONING AND RESTORATION LIABILITY The Company‟s mining and exploration activities are subject to various governmental laws and regulations relating to the protection of the environment. These environmental regulations are continually changing and are generally becoming more restrictive. The Company has made, and intends to make in the future, expenditures to comply with such laws and regulations. The Company has recorded a liability and corresponding asset for the estimated future cost of reclamation and closure, including site rehabilitation and long-term treatment and monitoring costs, discounted to net present value. Such estimates are, however, subject to change based on negotiations with regulatory authorities, or changes in laws and regulations. Page | 26 Country / PropertyCash and cash equivalentsInventories Prepaid expensesReceivablesMineral PropertiesProperty, plant and equipment DepreciationInterest expense Net Loss for the yearRussia - Mangazeisky241,847$ 573,727$ 117,597$ 652,632$ 1,212,964$ 626,072$ 308,024$ 8,942$ 8,289,601$ Canada - corporate4,041,036 - 92,836 61,401 - 9,936 16,841 - 4,234,726 4,282,883$ 573,727$ 210,433$ 714,033$ 1,212,964$ 636,008$ 324,865$ 8,942$ 12,524,327$ As at December 31, 2011Country / PropertyCash and cash equivalentsInventories Prepaid expensesReceivablesMineral PropertiesProperty, plant and equipment DepreciationInterest expense Net Loss for the yearRussia - Mangazeisky11,015$ 1,781,914$ 6,035$ 303,923$ 1,791,068$ 2,065,814$ 220,433$ 52,016$ 5,551,091$ Canada - corporate130,654 - 80,146 50,754 - - 9,936 636 3,835,302 141,669$ 1,781,914$ 86,181$ 354,677$ 1,791,068$ 2,065,814$ 230,369$ 52,652$ 9,386,393$ As at December 31, 2012 Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 18. Provision for decommissioning and restoration liability (continued) The Company‟s provision for decommissioning and restoration liability consist of management‟s best estimate of reclamation and closure costs for Mangazeisky exploration project located in the Republic of Sakha, Yakutia in the Russian Federation. Significant reclamation and closure activities include land rehabilitation, demolition of buildings and site facilities and other costs defined by the license requirements. Asset retirement obligation consists of the following: The estimated value of the obligation to rehabilitate the site expressed in Canadian dollars is $1,570,014. A Russian Central bank borrowing rate of 8.25% has been used in discounting of future cash flows. 19. FINANCIAL INSTRUMENTS Financial assets and financial liabilities as at December 31, 2012 and December 31, 2011 were as follows: The carrying value of cash equivalents, amounts receivable, and accounts payable and accrued liabilities reflected in the consolidated statement of financial position approximate fair value because of the relatively short-term maturities. Page | 27 December 31, 2012 December 31, 2011 Balance at the beginning of the period579,478$ 588,609$ Increase in liability545,940 - Accretion expense- 8,942 Translation adjustment17,965 (18,073) Balance at the end of the period1,143,383$ 579,478$ At December 31, 2012Loans and receivablesAssets/liabilities at fair value through profit and lossOther liabilitiesTOTALCash and cash equivalents141,669 - - 141,669 Accounts Receivables354,677 - - 354,677 Short-term loans50,000 - - 50,000 Accounts payables and accrued liabilities- - 1,294,795 1,294,795 Finance lease464,394 464,394 At December 31, 2011Loans and receivablesAssets/liabilities at fair value through profit and lossOther liabilitiesTOTALCash and cash equivalents4,282,883 - - 4,282,883 Accounts Receivables714,033 - - 714,033 Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 20. INCOME TAXES Reconciliation between tax expense and the product of accounting loss multiplied by the Company's domestic tax rate is as follows: The 2012 statutory tax rate of 26.50% differs from the 2011 statutory tax rate of 28.25% because of the reduction in both federal and Ontario substantively enacted tax rates. The Company offsets tax assets and liabilities if and only if it has a legally enforceable right to set off the current tax assets and current tax liabilities or deferred tax assets and liabilities and they relate to taxes levied by the same tax authority. The tax benefit of the following unused tax losses and deductible temporary differences have not been recognized in the financial statements due to the unpredictability of future earnings: At December 31, 2012, the Company has the unclaimed non-capital losses that expire as follows: In addition, ZAO Prognoz has approximately $79,424 (2011 – $46,984) of non-capital losses for Russian income tax purposes that expire at the end of the years 2017 through 2022 (2011 – 2017 through 2020). Page | 28 20122011Statutory tax rate26.50%28.25%Tax benefit of statutory rate(2,487,394)$ (3,538,122)$ Expenses not deductible for income tax purposes418,212 553,015 Prior year true-up- Tax effect of unrecognized temporary difference1,727,044 2,294,831 Losses not previously recognized- 6,384 Foreign tax rate differential342,138 683,892 Total tax expense-$ -$ Deductible Temporary Differences December 31, 2012December 31, 2011Tax loss carry-forwards22,342,145$ 19,702,205$ Exploration and Development39,456,005 33,437,358 Share issue costs95,101 48,273 Asset Retirement Obligation1,143,383 579,487 Property plant and equipment5,895,806 6,119,491 68,932,439$ 59,886,814$ Expiry DateAmount201477,604$ 20152,260,735 20262,104,195 20272,934,330 20283,240,724 20293,527,150 20302,401,498 20313,109,109 20322,349,906 22,005,251$ Silver Bear Resources Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2012 and 2011 21. EVENTS AFTER THE REPORTING PERIOD On January 30, 2013, amended March 12, 2013, the Company entered into a loan agreement with Forbes & Manhattan Inc. Forbes & Manhattan Inc. agreed to provide an unsecured bridge loan in the amount of $350,000 in three tranches repayable in cash on the earlier of (a) July 30, 2013 and (b) the date on which the Company completes and equity financing. Interest is calculated at rate of 8% per annum and is payable on maturity day of the loan. The first tranche of $50,000 was received on December 31, 2012. The second tranche of $250,000 was received on January 31, 2013. The third tranche of $50,000 received on March 12, 2013. On March 25, 2013, the Company received $50,000 pursuant to a loan agreement with Aberdeen International Inc. Terms of the loan agreement are being finalized. Mr. Bharti, a director of the Company, is the Chairman of the Board of Aberdeen International Inc. The loans were obtained so that the Company could secure the shipment of certain supplies while the winter road in Russia was still available. Failure to do so would have hampered the exploration program. Page | 29