Silvercorp Metals
Annual Report 2006

Plain-text annual report

Auditors’ Report and Consolidated Financial Statements of SILVERCORP METALS INC. (Formerly SKN Resources Limited) March 31, 2006 AUDITORS’ REPORT To the Shareholders of Silvercorp Metals Inc. We have audited the consolidated balance sheet of Silvercorp Metals Inc. as at March 31, 2006 and the consolidated statements of loss and deficit and cash flows for the year ended March 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at March 31, 2006 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles. The financial statements as at March 31, 2005 and for the eleven-months ended March 31, 2005 were audited by other auditors who expressed an opinion without reservation on those statements in their report dated June 3, 2005. Vancouver, Canada, June 15, 2006. Chartered Accountants A Member of Ernst & Young Global SILVERCORP METALS INC. CONSOLIDATED BALANCE SHEETS Basis of Presentation - See Note 1 March 31, 2006 March 31, 2005 Stated in Canadian dollars ASSETS Current Assets Cash and cash equivalent (Note 3) Short-term investments (Note 4) Prepaid expenses and deposits Deposits paid to contractors Other receivables Long term deposits (Notes 6 and 7(c)) Advances to joint venture parties (Note 10) Investment at equity (Notes 5 and 8) Property, Plant and Equipment (Note 6) Long term investments (Note 9(a)) Investment in and Expenditures on Resource Properties Mineral right and properties (Note 7) Reclamation deposits LIABILITIES Current Liabilities Accounts payable and accrued liabilities (Note 12) Deposits received from customers Amount due to related parties (Note 12) Commitments (Notes 7, 8 and 17) Non-controlling Interest SHAREHOLDERS' EQUITY Share capital (Note 11) Treasury shares held for cancellation (Note 11) Contributed surplus Cumulative translation adjustment Deficit Approved on behalf of the Board: "Rui Feng" Director "Paul Simpson" Director $ $ $ $ 3,899,812 8,700,000 701,242 124,006 170,829 13,595,889 356,720 305,760 855,079 1,740,552 2,371,882 4,200,000 115,802 - 105,504 6,793,188 - 61,654 1,683,338 586,373 500,000 1,041,333 3,721,801 10,000 1,931,501 10,000 21,085,801 $ 12,107,387 $ 1,398,362 357,685 35,070 1,791,117 237,254 - 43,784 281,038 700,637 - 38,130,910 - 4,886,735 46,168 (24,469,766) 18,594,047 27,211,096 (101,091) 2,926,855 - (18,210,511) 11,826,349 $ 21,085,801 $ 12,107,387 (The accompanying notes are an integral part of these consolidated financial statements) SILVERCORP METALS INC. CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT Stated in Canadian dollars Expenses Consulting (Note 12) Depreciation Foreign exchange loss General exploration and property investigation expenses Investor relations Mineral properties written off (Note 7) Office, adminstration and miscellaneous Professional fees (Note 12) Stock-based compensation expenses (Note 10(d)) Transfer agent and filing fees Other income and expenses Equity income (loss) in investment Gain on disposal of subsidiary (Note 9(a)) Mineral property option income Interest income Other income $ Year ended March 31, 2006 Eleven-month period ended March 31, 2005 $ 174,892 73,707 50,056 685,697 312,503 1,714,491 1,023,504 335,325 2,295,591 207,487 6,873,253 (159,334) - 342,376 164,369 135,899 483,310 115,196 62,175 143,133 274,423 55,754 - 378,397 132,442 786,910 25,006 1,973,436 18,381 503,518 529,406 104,282 607 1,156,194 Loss before non-controlling interest (6,389,943) (817,242) Non-controlling interest - share of loss 130,688 - Net loss for the year Deficit, beginning of year, as previously reported Stock-based compensation expenses, cumulative effect (Note 2) Deficit, beginning of year, as restated Deficit, end of year Basic and diluted loss per share (6,259,255) (817,242) (18,210,511) - (18,210,511) (16,935,583) (457,686) (17,393,269) (24,469,766) $ (18,210,511) (0.15) $ (0.02) $ $ Weighted Average Number of Shares Outstanding 42,416,005 37,459,614 (The accompanying notes are an integral part of these consolidated financial statements) SILVERCORP METALS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Stated in Canadian dollars Cash provided by (used for) Operating activities Net loss for the year Add (deduct) items not affecting cash : Equity income (loss) Gain on disposal of subsidiary (Note 9(a)) Mineral property option income Mineral property written off Stock-based compensation Non-controlling interest - share of loss Depreciation Net change in non-cash working capital Prepaid expenses and deposits Other receivables Deposits paid to contractors Accounts payable and accrued liabilities Deposits received from customers Deposits for sale of property Cash used in operating activities Investing activities Mineral property additions Mineral property - cost recovery Equipment and furniture additions Purchase of short-term investment Redemption of short-term investment Advance to related parties Investment in Henan Found Mining Co. Ltd. Increase in long term deposits Cash contribution for acquisition of Ying Project Cash transferred in on acquisition of Ying Project Payment to Joint Venture partner for acquisition of Ying Project Cash used in investing activities Financing activities Advance from related parties Advances to joint venture parties Proceeds from disposal of treasury shares Purchase of treasury shares Share subscriptions for cash, net of commissions Cash provided by financing activities Year ended March 31, 2006 Eleven-month period ended March 31, 2005 $ (6,259,255) $ (817,242) 159,334 - (342,376) 1,714,491 2,295,591 (130,688) 73,707 (2,489,196) (76,418) (65,325) 419,603 721,991 (75,676) - (1,565,021) (4,654,228) 5,455,665 (814,486) (4,500,000) - (8,714) - (356,720) (2,517,403) 1,899,365 (1,767,652) (7,264,173) - (244,106) - - 10,685,196 10,441,090 (18,381) (503,518) (529,406) - 786,910 - 62,175 (1,019,462) 46,244 23,167 - 54,650 - (27,414) (922,815) (436,028) - (7,217) - 800,000 - (1,927,718) - - - - (1,570,963) 114,992 4,586 93,050 (151,636) 2,875,035 2,936,027 Effect of exchange rate changes on cash (83,966) - Increase in cash 1,527,930 442,249 Cash and cash equivalents, beginning of year 2,371,882 1,929,633 Cash and cash equivalents, end of year Supplemental information: Interest paid Income tax paid Non-cash investing activities: Common shares of New Pacific Metals Corp. received as partial consideration for the Option Agreement in relation to the Kian Dian Project Common shares of Dajin Resources Ltd. received for the disposal of Victor Gold Ltd. $ $ $ $ $ 3,899,812 $ 2,371,882 21 $ - $ 1,898 429 342,376 $ 541,333 - $ 500,000 Non-cash financing activities: During the eleven months ended March 31, 2005, the Company issued 15,000 common shares for subscriptions received in a prior period. (The accompanying notes are an integral part of these consolidated financial statements) SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 1. BASIS OF PRESENTATION Silvercorp Metals Corp.(formerly SKN Resources Limited), a company incorporated under the legislation of the Province of British Columbia, Canada, together with its subsidiaries (individually and collectively referred to as the “Company”), is an exploration stage company engaged in the acquisition and exploration of mineral properties in the People’s Republic of China (“China”). During 2005, the Company changed its fiscal year end from April 30 to March 31, 2005. As a result, the results of the operations and cash flows of the prior period represent the eleven month period ended March 31, 2005. 2. SIGNIFICANT ACCOUNTING POLICIES (a) Principles of consolidation These consolidated financial statements of the Company include the accounts of the Company and its subsidiaries, Yunnan Jin Chang Jiang Mining Co. Ltd. (“YJCJM”), Fortune Mining Ltd., Fortune Copper Ltd., Fortress Gold Mining Inc., Fortress Mining Inc., Victor Resources Ltd., Lachlan Gold Ltd., Victor Mining Ltd. and its 77.5% owned subsidiary, Henan Found Mining Co. Ltd. (“Henan Found”) (Note 5). All significant inter-company transactions and accounts have been eliminated upon consolidation. (b) Accounting estimates The preparation of financial statements in conformity with accounting principles generally accepted in Canada requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. (c) Foreign currency translation All the subsidiaries, except Henan Found, are considered to be integrated foreign operation and their financial statements are translated to Canadian dollars under temporal method. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect at the balance sheet date and non-monetary assets and liabilities at historical exchange rate. Revenues and expenses are translated at the average exchange rate in effect during the period. Realized and unrealized foreign exchange gains and losses are included in earnings. The consolidated financial statements are presented in Canadian dollars and the functional currency of Henan Found is Chinese Yuan Renminbi (“RMB”). Henan Found is considered to be a self-sustaining operation. The assets and liabilities of Henan Found are translated into Canadian dollars using current rate method at period-end exchange rates and resulting translation adjustments are reflected as a separate component of shareholders’ equity. Revenues and expenses of Henan Found are translated at average exchange rates of the period. SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) (d) Cash and cash equivalents Cash and cash equivalents includes cash and short-term investments maturing within 90 days of the original date of acquisition. (e) Mineral properties Direct mineral exploration and development expenditures are capitalized. When production is attained, the capitalized costs will be amortized using the unit of production method based upon estimated proven and probable recoverable resources. The Company capitalizes exploration costs, net of cost recovery from incidental revenues. The Company reviews the carrying value of each property that is in the exploration stage by reference to the project economics including the timing of the exploration and/or development work, the work programs and the exploration results experienced by the Company and others. The review of the carrying value of each producing property will be made by reference to the estimated future operating results and net cash flows. When the carrying value of a property exceeds its estimated net realizable amount, provision will be made for the decline in value. The carrying amount will be written off if the Company decides to abandon the property. The recoverability of the amounts capitalized for the undeveloped mineral properties and deferred development costs is dependent upon the determination of economically recoverable ore resources, confirmation of the Company’s interest in the underlying mineral claims, the ability to obtain the necessary financing to complete their development and future profitable production or proceeds from the disposition thereof. (f) Property, plant and equipment Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method at the following rates, calculated to amortize the cost of the assets less their residual values over their estimated useful lives. Motor vehicles Equipment and furniture Computer equipment Computer software Mining equipment Machinery Building 20% 20% - 50% 20% - 50% 50% 10% 10% - 20% 5% SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) (g) Stock-based compensation plans Effective May 1, 2004, the Company adopted the new requirements of the Canadian Institute of Chartered Accountants Standard 3870 which requires an expense to be recognized in the financial statements for all forms of employee and non-employee stock-based compensation, including stock options. All stock- based awards are measured and recognized using a fair value based method. Previously, the Company did not record any compensation cost on the granting of stock options to employees and directors as the exercise price was equal to or greater than the market price at the date of the grants. The Company has adopted this policy retroactively without restatement. Accordingly, the opening deficit as at May 1, 2004 was increased to reflect the effect of compensation expense associated with stock option grants to employees and directors from January 1, 2002 to April 30, 2004, in the amount of $457,686, and share capital and contributed surplus for the period ended March 31, 2005 increased by $122,325 and $335,361 respectively, to reflect the assigned value of the stock options issued. Unvested options for consultants are measured at their then-current value at each reporting date. This re- measurement continues until the vesting date. (h) Long-term investments Long-term investments over which the Company has no control or for which it does not wield significant influence or control are valued at cost, less a provision for other than temporary impairments in value. Investments in which the Company has a significant influence are accounted for by the equity method, whereby the Company records its proportionate share of the investee’s income or loss. Quoted market values presented do not necessarily reflect the long-term net realizable value and assume that the Company is able to dispose of all shares held at the closing trading price at year end. (i) Assets retirement obligations According to current Chinese environmental regulations and contracts of the Company, there is no obligation for the Company to dismantle and remove plant and equipment or to remediate sites upon the cessation of operations. The Company has not made any provision on the assets retirement obligations. If there is any change in the regulations in the future, the Company will make necessary provisions to meet the related potential liabilities. SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) (j) Impairment of long-lived assets Management of the Company regularly reviews the net carrying value of each long-lived asset. Where information is available and conditions suggest impairment, estimated future net cash flows are calculated using estimated future prices, proven and probable reserves, selling prices for mineral ores and concentrates, and operating, capital and reclamation costs on an undiscounted basis. Reductions in the carrying value of long-lived assets would be recorded to the extent the net book value of the related assets exceeds the estimated undiscounted future cash flows. The impairment amount would correspond to the excess of the carrying value over the fair value. Where estimates of future net cash flows are not available and where other conditions suggest impairment, management assesses if carrying value can be recovered. Management’s estimates of mineral prices, recoverable proven and probable reserves, selling prices for ores and concentrates, and operating, capital and reclamation costs are subject to certain risks and uncertainties which may affect the recoverability of long-lived assets. Although management has made its best estimate of these factors, it is possible that changes could occur in the near term, which could adversely affect management’s estimate of the net cash flow to be generated from its assets. (k) Income taxes The Company uses the liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are computed based on differences between the carrying amounts of assets and liabilities on the balance sheet and their corresponding tax values, using the enacted or substantively enacted, as applicable, income tax rates at each balance sheet date. Future income tax assets also result from unused loss carryforwards and other deductions. The valuation of future income tax assets is reviewed yearly and adjusted, if necessary, by use of a valuation allowance to reflect the estimated realizable amount. (l) Loss per common share The basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the year. The diluted loss per share reflects the potential dilution of common share equivalents, such as outstanding stock options and share purchase warrants, in the weighted average number of common shares outstanding during the year, if dilutive. For this purpose, the “treasury stock method” is used whereby the assumed proceeds upon the exercise of stock options and warrants are used to purchase common shares at the average market price during the year. Diluted loss per share is equal to basic loss per share for the periods presented because common stock equivalents that are outstanding at March 31, 2006 and 2005 are anti-dilutive. SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) (m) Comparative figures Certain of the comparative figures have been reclassified to conform with the presentation as at and for the eleven months ended March 31, 2005. 3. CASH AND CASH EQUIVALENT Cash equivalent consists of a term deposit of RMB10,000,000 ($1,456,000) (2005: nil) bearing interest at 1.71% per annum maturing on June 30, 2006. As of March 31, 2006, the related interest receivable is $136 (2005: nil). 4. SHORT-TERM INVESTMENTS Short term investments of $8,700,000 (2004 - $4,200,000) are made up of Guaranteed Investment Certificates with the following terms: Principal Amount Interest Rate Per Annum Maturity Date $ $ 6,200,000 2,500,000 8,700,000 Prime minus 2.05% Prime minus 1.9% September 21, 2006 March 16, 2007 As of March 31, 2006, the related interest receivable is $101,057 (2005: $41,011). 5. ACQUISITION OF THE YING SILVER-LEAD-ZINC PROJECT In May 2004, the Company, through its wholly-owned subsidiary, Victor Mining Ltd., entered into a cooperative joint venture agreement with a Chinese party to earn a 77.5% interest in the high grade Ying Silver-Lead-Zinc Project located in Henan Province, China. Under the cooperative agreement, the Company had the right to earn up to 77.5% of the Ying Project by funding exploration and development of the Project in the amount of US$3,670,000 ($4,445,121) to the joint venture company, Henan Found Mining Co. Ltd. (“Henan Found”), over a period of three years for a 55% interest in Henan Found and paying US$1,500,000 ($1,767,652) to the Chinese party over a period of three years to earn another 22.5% interest in Henan Found. In September 2005, the Company reached an agreement with the Chinese partner to immediately earn its 77.5% interest in the Ying Project through making the required cash contributions. Pursuant to the agreement, the Chinese partner will maintain a fully-carried 22.5% interest. SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 5. ACQUISITION OF THE YING SILVER-LEAD-ZINC PROJECT (Continued) During the period from March 11, 2005 to September 30, 2005, while its ownership interest in Henan Found was between 20% and 50% the Company accounted for its investment in Henan Found on the equity basis. The amount was carried at cost, adjusted for the Company’s proportionate share of Henan Found’s losses. Capital contribution to Henan Found Payment to the Chinese partner of Hennan Found Investment In Hennan Found $ $ 4,445,121 1,767,652 6,212,773 On September 30, 2005, the Company completed all necessary payments, and has fully earned its 77.5% ownership interest in the Ying Project. The following table summarizes the fair values of the assets acquired and liabilities assumed on the transaction date, September 30, 2005: Cash Deposits paid to contractors and suppliers Prepaid expenses and deposits Property, plant and equipment Mineral properties/rights Accounts payable and accrued liabilities Deposits received from customers Investment in Hennan Found $ 1,472,008 421,297 394,492 442,239 4,158,907 (340,316) (335,855) 6,212,773 $ The operating results of Henan Found have been consolidated into the Company’s consolidated financial statements from October 1, 2005. Up to September 30, 2005, the Company made cash contributions of US$3,670,600 ($4,445,121) to Henan Found and paid US$1,500,000 ($1,767,652) to the Chinese partner. From the period from October 1, 2005 to March 31, 2006, the Company made additional cash contribution of US$331,000 ($388,395) to Henan Found. As the ore and concentrate sold are extracted as a by-product of exploration and development tunnels at the Ying Project, the cost recovery is offset against the exploration and development costs capitalized (Note 7). On March 30, 2006, Henan Found obtained the mining permit from the Chinese regulatory authority. SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 6. PROPERTY, PLANT AND EQUIPMENT 2006 Accumulated Depreciation Net Book Value 2005 Net Book Value Cost Motor vehicle Equipment and furniture Computer equipment Computer software Mining equipment Machinery Building Construction in progress $ $ $ $ 322,136 150,734 95,671 65,899 491,643 203,589 154,766 486,525 1,970,963 50,956 29,494 66,443 3,714 67,182 8,304 4,318 - 230,411 271,180 121,240 29,228 62,185 424,461 195,285 150,448 486,525 1,740,552 $ $ $ $ 59,623 28,459 43,560 113 454,618 - - - 586,373 On September 20, 2005, Henan Found entered into an agreement with a non-related party to purchase one storey of an office building in Henan Province, China for a consideration of $728,000 (RMB5,000,000). As at March 31, 2006, Henan Found has paid a deposit of $218,400 (RMB1,500,000) which is classified as long term deposit on the consolidated balance sheet. SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 7. MINERAL RIGHT AND PROPERTIES Cost Balance, March 31, 2005 and May 1, 2004 Mineral rights addition Balance, March 31, 2006 Exploration and development costs Balance, May 1, 2004 Consulting and management fees Drilling, assay fee and reportng Office and miscellaneous Balance, March 31, 2005 Acquisition on mineral property Consulting and management fees Drilling, assay fee and reporting Office and miscellaneous Tunneling and trenching Balance, March 31, 2006 Total cost, exploration and development cost Mineral property written off Cost recovery Balance, March 31, 2006 Tuobuka Ying Total $ $ 421,978 - 421,978 $ - 3,236,996 3,236,996 $ $ 421,978 3,236,996 3,658,974 $ $ 679,091 57,318 404,577 105,776 1,246,762 - - 31,150 8,235 6,366 1,292,513 $ $ $ 65,568 169,248 - 27,945 262,761 1,044,630 255,072 1,779,718 700,520 1,867,386 5,910,087 744,659 226,566 404,577 133,721 1,509,523 1,044,630 255,072 1,810,868 708,755 1,873,752 7,202,600 $ $ $ 1,714,491 (1,714,491) - $ - $ 9,147,083 - (5,425,282) 3,721,801 $ $ 10,861,574 (1,714,491) (5,425,282) 3,721,801 $ Although the Company has taken steps to verify title to the mineral properties in which it, through its subsidiaries, has an interest, in accordance with industry standards for the stage of exploration of such property, those procedures do not guarantee the Company’s title. Property title may be subject to unregistered prior agreements and non-compliance with regulatory requirements. SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 7. MINERAL PROPERTIES (Continued) (a) Ying Property (See Note 5) (b) Tuobuka Property On August 1, 2003, the Company, through its wholly-owned subsidiary Lachlan Gold Ltd., signed a cooperative joint venture agreement with a Chinese party to form a Sino-Foreign Joint Venture Cooperative Company, Yunnan Jin-Chang-Jiang Mining Co. Ltd. (“YJCJM”), to explore the Tuobuka Gold Property located in Yunnan Province, China. Under the terms of the cooperative joint venture agreement, the Chinese party held a 20% interest in YJCJM in consideration of the transference of the Tuobuka Project exploration permit to YJCJM, and the Company was to earn its 80% interest in YJCJM by contributing RMB8,000,000 ($1,324,800) (paid) three years and paying RMB1,000,000 ($165,000) (paid) to the Chinese party. On January 13, 2004, the Company acquired the remaining 20% interest in YJCJM from the Chinese party by paying an additional RMB1,600,000 ($256,978) (paid). The Company now has a 100% interest in the Tuobuka Gold Project and has no remaining commitments under the joint venture agreement. to YJCJM over The Company has written off the mineral exploration expenses of $1,714,491 capitalized in relation to the Tuobuka Property as the Company decided to suspend carrying out any exploration work on the Tuobuka Property. (c) Acquisition of Two Exploration Permits Adjacent to the Ying Project Henan Found has acquired two additional exploration permits for properties in China, adjacent to the existing boundary of Ying Project for RMB1,800,000 ($261,000) and RMB1,000,000 ($145,000). As at March 31, 2006, Henan Found has paid a total deposit of RMB700,000 ($101,920) and the deposits are classified as long term deposits on the consolidated balance sheet. The transfer of the exploration permits was still in progress as at March 31, 2006. (d) HPG Silver-Gold-Lead Property On March 31, 2006, the Company has signed a co-operative joint venture agreement (following an initial letter agreement) with a private Chinese company to acquire a 60% interest in the Hou-Ping-Gou (“HPG”) silver-gold-lead mine, located within the Ying Silver-Lead-Zinc Property area, Henan Province, China. The acquisition of the HPG Mine remains subject to the regulatory approvals. SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 7. MINERAL PROPERTIES (Continued) (d) HPG Silver-Gold-Lead Property (Continued) Under the joint venture agreement, a joint venture company, Henan Huwei Mining Co. Ltd. (“Henan Huwei”), will be established. The Company will have a 60% interest and the Chinese party will have a 40% interest in Henan Huwei. The Chinese party will contribute the HPG mine property and exploration permits to Henan Huwei and the Company will pay a total of RMB42,000,000 ($6,115,200) to the Chinese party in installments, timed with the signing of the final joint venture contract, receipts of government approvals, issuance of the business license for the JV Company and transfer of the exploration and mining permits to the JV Company. The Company will take over control of the operation upon receipt of a business license for the JV Company. Once the Company has acquired its 60% interest, any future profit and funding requirement will be shared based on a 60%-40% ratio with a straight line dilution clause. The Company has advanced $305,760 (Note 10) to the Chinese party as at March 31, 2006 as initial funding for setting up Henan Huwei. 8. INVESTMENT AT EQUITY (a) New Pacific Metals Corp. In November 2003, the Company, through a wholly owned subsidiary SKN Nickel & Platinum Ltd. (“SNP”), entered into two letter agreements with the respective holders of the permits and permit applications comprising the Kang Dian Project located in Sichuan Province, China, thereby obtaining the rights to acquire 75% and 90% interests, respectively, in the exploration permits by contributing US$2,500,000 ($3,024,000) to fund the exploration and development of the Project over a period of four years and paying US$80,000 ($96,768) to a Chinese party within 10 days after obtaining the approvals from China government. After SNP has earned its 75% and 90% interests, respectively, contributions to fund the exploration and development of the Project will be made pro rata. The interest of the Chinese property owners can be diluted to not less than 10% to 12%, respectively, if they elect not to make cash contributions. SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 8. INVESTMENT AT EQUITY (Continued) (a) New Pacific Metals Corp. (Continued) The Company has signed a letter agreement with New Pacific Metals Corp. (“NPM”), a related party by way of common director, whereby NPM has the option to acquire SNP, through meeting the required capital commitment of SNP under the joint venture contract, and thereby the Kang Dian Project through the issuance of a total of 6,500,000 common shares at a market price as at the date of release. The common shares will be issued on the basis of 2,500,000 common shares on issuance of a Bulletin by the TSX Venture Exchange accepting the transaction; a further 2,000,000 shares will be issued upon successful completion of the US$374,000 ($452,390) work program recommended under the Technical Report that has been completed on the Project; and 2,000,000 shares will be issued on completion of US$1,000,000 ($1,209,600) in funding obligations by SNP under the agreement with one of the permit holders. The initial 2,500,000 common shares will be subject to escrow with a release of 650,000 common shares upon receipt of exchange approval and 154,167 every quarter over the 3 year escrow period. The first 2,000,000 common shares issuable upon completion of the work program will be subject to escrow with a release of 250,000 common shares every three months. The common shares remaining in escrow are subject to cancellation in the event NPM determines not to continue contributing to the joint venture company to be created. The Company has the right to place a representative on the NPM board of directors. As of March 31, 2006, NPM issued into escrow 4,500,000 (2005: 2,500,000) common shares. The Company is entitled to the voting rights attached to the escrow shares. A total of 1,670,835 (2005: 804,167) shares were released from escrow as of March 31, 2006. For the eleven months ended March 31, 2005, mineral property option income of $529,406 had been recorded on the income statement after offsetting the mineral property cost of $11,927. Mineral property income of $342,376 has been recorded on the income statement for the year ended March 31, 2006. Although the Company does not exercise control over NPM as the decision making process require majority board members’ approval, the Company has been considered to have the ability to exercise significant influence on NPM in its decision making process as NPM has two common directors with the Company. The Company thus accounts for its investment in NPM on the equity basis, which is carried at cost, adjusted for the Company’s proportionate share of their undistributed earnings or losses. 2006 Cost of 1,670,835 shares of NPM Equity in loss of investee company Investment in NPM on equity basis $ $ 883,709 (28,630) 855,079 SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 9. LONG TERM INVESTMENTS 2006 2005 Dajin Resources Corp. (Note 9(a)) - 2,000,000 (2005: 2,000,000) common shares $ (market value at March 31, 2006: $500,000 (2005: $520,000)) 500,000 $ 500,000 New Pacific Metals Corp. ((Note 8(a)) 2005: 804,167 common shares - (market value at March 31, 2005: $329,708) - 541,333 $ 500,000 $ 1,041,333 (a) Dajin Resources Corp. On February 4, 2004, Dajin Resources Corp. (“Dajin”), previously known as Windridge Technology Corp., signed an acquisition agreement with the Company whereby Dajin would acquire 100% of the Company’s rights in the Gou Gold Project through the purchase of 100% of the issued and outstanding shares of Victor Gold Ltd. Under the terms of the agreement, Dajin would issue 2,000,000 (an interest of approximately 8%) of its common shares (received) to the Company at a market price of $0.25 per share and reimburse the Company the sum of US$20,000 (received) for expenses previously incurred in relation to its acquisition of the Gou Property. The transaction was completed on January 19, 2005 and 2,000,000 shares of Dajin Resources Corp. have been received by the Company as consideration. A gain on disposal of subsidiary of $503,518 was recorded on the income statement for the period ended March 31, 2005. 10. ADVANCES TO JOINT VENTURE PARTIES As of March 31, 2006, the Company made an advance to the Chinese party of HPG Silver-Gold-Lead Property of $305,760 (Note 7(d)). As of March 31, 2005, the Company made an advance to the Chinese party of the Ying Property (Note 5) of $16,501 and the Chinese parties of the Kian Dian Project (Note 8) of $45,153. SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 11. SHARE CAPITAL (a) Authorized Unlimited number of common shares without par value. (b) Issued and outstanding (Continued) Changes in outstanding common shares were as follows: Balance, April 30, 2004 Retroactive application of fair value method of accounting for stock options Shares issued for subscription received Issued for cash under private placement in February 2005 Issuance of brokers warrants for commission on private placement Exercise of warrants Exercise of options Cash received Transfer from contributed surplus Balance, March 31, 2005 Exercise of options Cash received Transfer from contributed surplus Exercise of warrants Cash received Transfer from contributed surplus Issued for cash under private placement Cancellation of shares Balance, March 31, 2006 Number of Shares Amount 33,578,812 - $ 24,124,435 122,325 15,000 1,500,000 - 5,164,095 337,500 - 40,595,407 1,189,250 - 1,477,500 - 2,000,000 (200,000) 45,062,157 9,000 2,126,523 (57,500) 568,264 180,250 137,799 27,211,096 $ 516,575 278,209 3,806,500 57,500 6,362,121 (101,091) 38,130,910 $ In September 2005, the Company completed a non-brokered private placement of 2,000,000 Units at $3.20 per Unit for net proceeds of $6,362,121. Each Unit was comprised of one common share and one- half share purchase warrant. Each whole warrant entitles the holder to acquire one additional common share at a price of $4.60 per share expiring on September 15, 2006. SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 11. SHARE CAPITAL (Continued) (b) Issued and outstanding (Continued) During the year ended March 31, 2006, the Company cancelled 200,000 shares purchased from the open market with cost of purchase of $101,091. (c) Share Purchase Warrants The Company adopted the Residual Approach in valuing the share purchase warrants attached to private placement units issued. Under this approach, proceeds up to the Company’s share market value are allocated to the shares and only the excess above the market value is allocated to the attached share purchase warrants. No value has been allocated to these warrants as determined under the Residual Approach. The following is a summary of warrant transactions: Number of Warrants Outstanding as at April 30, 2004 Issued during the period Number of Warrants Balance of Warrants Exercised Price Per Expired/Exercised Outstanding as at during the period March 31, 2005 Warrant Expiry Date 5,163,195 200,000 1,220,000 151,350 - 6,734,545 - - - - 800,000 800,000 (5,163,195) - (1,220,000) (151,350) - (6,534,545) - 200,000 - - 800,000 1,000,000 $ 0.11 1.05 2.25 2.18 1.75 November 14, 2004 September 23, 2005 November 4, 2004 November 4, 2004 February 23, 2006 Number of Warrants Outstanding as at March 31, 2005 Issued during the year Number of Warrants Balance of Warrants Expired/Exercised Outstanding as at Exercised Price Per during the year March 31, 2006 Warrant Expiry Date 200,000 800,000 - 1,000,000 - - 1,000,000 1,000,000 (200,000) (800,000) (477,500) (1,477,500) - - 522,500 522,500 $ 1.05 1.75 4.60 September 23, 2005 February 23, 2006 September 15, 2006 SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 11. SHARE CAPITAL (Continued) (d) Stock Options The Company is able to grant stock options to acquire up to 5,100,000 shares. The options are exercisable for a period of up to ten years from the date of grant, as determined by the Board of Directors. The exercise price cannot be less than the last price on the TSX Exchange immediately preceding the grant of the option. Options vest over a minimum period of eighteen months from the date of grant. A summary of the status of the Company’s stock options as of March 31, 2006 and 2005, and changes during the year and period ended on those dates is presented below: Balance, April 30, 2004 Options granted Options exercised Options cancelled Balance, March 31, 2005 Options granted Options exercised Options cancelled Balance, March 31, 2006 Number of Shares 2,183,875 1,590,000 (337,500) (20,000) 3,416,375 517,000 (1,189,250) (107,500) 2,636,625 Weighted Average Exercise Price Per Share $ 0.45 0.81 0.53 0.63 0.59 2.64 0.43 0.56 1.07 $ During the year, the Company granted incentive stock options to directors, employees and consultants for 517,000 shares at a price ranging from $1.60 to $4.00 per share and exercisable for between one to five years. 250,000 options granted in the year were 8.33% vested on grant date and 8.33% of the options are vested every three months after the date of grant for three years while the remaining options were 25% vested on grant date and 12.5% of the options are vested every three months after the date of grant for one and half years. The fair value of unvested options issued to consultants as at March 31, 2006 was $393,733. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with weighted average assumptions are as follows: SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 11. SHARE CAPITAL (Continued) (d) Stock Options Risk free interest rate Expected life of options in years Expected volatility Dividend per share 2006 2005 2.93% to 3.79% 3.25% to 3.84% 1 to 5 years 149% to 153% $0.00 1 to 5 years 105% to 147% $0.00 The weighted average grant date fair value of options granted during the year is $2.06 (2005: $0.81). For the year ended March 31, 2006, $2,295,591 (2005: $786,910) has been recorded as compensation expense. The following table summarizes information about stock options outstanding at March 31, 2006: Number Outstanding at March 31, 2006 Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Exercisable at March 31, 2006 Weighted Average Exercise Price $ $ 575,000 138,125 200,000 800,000 50,000 57,500 100,000 300,000 254,000 150,000 12,000 2,636,625 1.79 1.75 2.29 3.57 2.29 2.78 2.08 3.92 2.52 2.68 2.14 2.77 0.35 0.40 0.50 0.55 0.70 1.00 1.60 1.90 2.25 3.90 4.00 1.07 575,000 138,125 200,000 800,000 50,000 35,000 33,334 225,000 158,375 25,000 6,000 2,476,375 $ $ 0.35 0.40 0.50 0.55 0.70 1.00 1.60 1.90 2.25 3.90 4.00 0.73 Range of Exercise Prices $ 0.35 0.40 0.50 0.55 0.70 1.00 1.60 1.90 2.25 3.90 4.00 $0.35 - $4.00 SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 11. SHARE CAPITAL (Continued) (e) Shareholders Right Plan In the Annual General meeting held on August 4, 2005, a Shareholders Rights Plan has been approved by shareholders for implementation. The Rights Plan is designed to encourage the fair treatment of shareholders in the event of any take-over offer for the Company. The Rights Plan will provide the Board of Directors and the shareholders with more time than the 35 days provided by statute, to fully consider any unsolicited take-over bid for the Company without undue pressure, and allow the Board of Directors to pursue, if appropriate, other alternatives to maximize shareholder value and to allow additional time for competing bids to emerge. Under the Rights Plan, a bidder making a Permitted Bid (as defined in the Plan) for the common shares of the Company may not take up any shares before the close of business on the 60th day after the date of the bid and unless at least 50% of the Company's common shares not beneficially owned by the person making the bid and certain related parties are deposited, in which case the bid must be extended for 10 business days on the same terms to allow other shareholders to deposit to the Bid. The Rights Plan will encourage an offeror to proceed by way of Permitted Bid or to approach the Board of Directors with a view to negotiation by creating the potential for substantial dilution of the offeror's position if a non-Permitted Bid is attempted. The Permitted Bid provisions of the Rights Plan are designed to ensure that, in any take-over bid, all shareholders are treated equally, receive the maximum available value for their investment and are given adequate time to properly assess the bid on a fully informed basis. 12. RELATED PARTY TRANSACTIONS Except as disclosed elsewhere in the financial statements, the Company had the following related party transactions during the period: (a) During the year ended March 31, 2006, the Company: (i) (ii) incurred consulting fees of $174,000 (2005 - $123,500) payable to two officers and directors; incurred legal fees of $77,546 (2005 - $45,111) payable to a law firm of which a director of the Company is the proprietor. (iii) incurred management fees of $128,801 (2005 - $110,000) payable to an officer and director. (iv) (v) incurred accounting fees of $69,614 (2005 - $22,277) payable to an accounting firm of which an officer is a partner. through YJCJM, received income of $135,899 (2005 – nil) from Henan Found through providing geological survey services for the period from April 1, 2005 to September 30, 2005. (b) Included in accounts payable is an amount of $22,085 (2005 - $49,866) due to a law firm of which a director of the Company is the proprietor. SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 12. RELATED PARTY TRANSACTIONS (Continued) (c) Included in accounts payable is an amount of $32,843 (2005 - $11,250) due to three directors for their services in March 2006. (d) Included in accounts payable is an amount of $8,246 (2005 - $6,918) due to an accounting firm of which an officer is a partner. (e) Included in due to related party is an amount of $5,812 (2005 - $9,652) due to two directors for expenses incurred on behalf of the Company. (f) Included in due to related party is an amount of $31,329 (2005 - $34,132) due to two related companies by common director for expenses incurred on behalf of the Company. (g) Included in other receivables as at March 31, 2005 was an amount of $973 due from a director as travel advances for normal business courses. The amount was paid off and there is no outstanding balance as at March 31, 2006. (h) Included in other receivables is an amount of $2,906 (2005 - nil) due from an officer as travel advances for normal business courses. The transactions with related parties during the current period are conducted in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed by the parties. The balances with related parties are unsecured, non-interesting bearing and due on demand. 13. INCOME TAXES The provision for income taxes differs from the amount computed by applying the cumulative Canadian federal and provincial income tax rates to the loss before income tax provision due to the following: Loss before non-controlling interest Canadian basic statutory tax rate Expected income tax recovery Effect of lower tax rate in foreign jurisdictions Non-deductible expenses Benefit of lossses not recognized 2006 (6,389,943) 34.50% 2005 (817,242) 35.62% $ 2,204,530 152,638 (1,023,643) (1,333,525) $ - $ 291,102 373,356 (284,093) (380,365) $ - SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 13. INCOME TAXES (Continued) Henan Found and YJCJM have total tax losses of approximately RMB 4,900,000 ($714,000) in China. Tax losses incurred in China can generally be carried forward for five years. The Company’s wholly-owned subsidiary, YJCJM, and 77.5% owned subsidiary, Henan Found, are governed by the Income Tax Law of the China concerning Foreign Investment Enterprises (“FIEs”) and Foreign Enterprises and various local income tax laws (the “Income Tax Laws”). Under the Income Tax Laws, FIEs generally are subject to an income tax at an effective rate of 33% (30% state income taxes plus 3% local income taxes) on incomes reported in the statutory financial statements after appropriate tax adjustments, unless the enterprise is located in a specially designated region for which more favorable effective tax rates are applicable at a reduced rate of 15%. YJCJM and Henan Found are in the process of applying for exemption from income taxes in the first and second years and a fifty percent reduction in the standard tax rates in the third to fifth years from the first year of having positive taxable income after offsetting prior years’ unclaimed and unexpired tax losses. The application of the tax holiday is subject to Chinese tax authorities’ regulatory approval. The approximate tax effect of each type of temporary difference that gives rise to the Company’s future tax assets is as follows: Future income tax assets arising from tax loss carryforwards Unused cumulative exploration and development expenses Valuation allowance Net future income tax assets 2006 2005 $ 2,278,655 957,310 3,235,965 (3,235,965) $ 1,562,498 1,202,989 2,765,487 (2,765,487) $ - $ - Due to the uncertainty surrounding the realization of future income tax assets in future taxation years, the Company has made a full valuation allowance against its future income tax assets. SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 13. INCOME TAXES (Continued) The Company has non-capital losses of approximately $6,080,000 available to apply against future Canadian income for tax purposes. The non-capital losses will expire as follows: 2007 2008 2009 2010 2011 2012 2013 2014 $ 73,000 401,000 236,000 186,000 140,000 1,745,000 1,154,000 2,145,000 6,080,000 $ The Company also has capital losses of approximately $16,000 in Canada available to apply against future capital gain. 14. FINANCIAL INSTRUMENTS The fair values of the Company’s cash and cash equivalent, short-term investments, other receivables, advance to joint venture parties, accounts payable, deposits received from customers and amount due to related parties are estimated to approximate their carrying values. The fair value of the long-term investments is estimated using the market price as disclosed in Note 8. Due to the non-arms length nature of amounts due from a related company, the fair value is not determinable. The Company undertakes transactions denominated in foreign currencies and as such is exposed to risk due to fluctuations in foreign exchange rates. The Company does not use derivative instruments to reduce its exposure to foreign currency risks. Credit risk arises from the potential that a counterparty will fail to perform its obligations. The Company invests its cash balances in money market instruments with financial institutions with high credit standing. The majority of the Company’s assets, liabilities, revenues and expenses are denominated in Renminbi, which was tied to the U.S. Dollar until July 2005 and is now tied to a basket of currencies of China’s largest trading partners. The Renminbi is not freely convertible currency. At March 31, 2006, approximately $3,206,632 (2005: $188,558) cash and short term deposits are held in Renminbi. SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 15. SEGMENTED INFORMATION (a) Industry information The Company operates in one reportable operating segment, being the acquisition, exploration and development of mineral properties. (b) Geographic information British Virgin Islands China Canada Total - - 855,079 500,000 - - 1,683,338 1,041,333 3,721,801 1,701,012 - - 1,931,501 544,861 - - - 39,540 - - - 41,512 - - 3,721,801 1,740,552 855,079 500,000 1,931,501 586,373 1,683,338 1,041,333 Year ended March 31, 2006 Mineral right and properties Property, plant and equipment Investment at equity Long term investments Eleven months ended March 31, 2005 Mineral properties Property, plant and equipment Investment at equity Long term investments 16. SUBSEQUENT EVENTS On April 26, 2006, the Company completed a short form prospectus financing which raised gross proceeds of $47,773,875 through the sale of 2,501,250 units at a price of $19.10 per Unit. Each Unit is comprised of one common share of the Company and one half share purchase warrant. Each whole warrant is exercisable for a period of eighteen months from the closing date at a strike price of $24 per common share. Subsequent to the year end, on June 13, 2006, the Board of Directors approved a Normal Course Issuer Bid to acquire up to 1,000,000 of its Common Shares (being approximately 2% of the currently issued and outstanding), over a one year period. Purchases will be made at the discretion of the Directors at prevailing market prices, through the facilities of the TSX Exchange. The Company intends to hold all shares acquired under the issuer bid for cancellation. The Issuer Bid is subject to regulatory approval. Subsequent to the year end, the Company considered that the Ying Project is in the mine development stage since Henan Found obtained the mining permit on March 30, 2006. SILVERCORP METALS INC. (Formerly SKN Resources Limited) Notes to the Consolidated Financial Statements Year ended March 31, 2006 and Eleven months ended March 31, 2005 17. Commitments (a) Commitments on acquiring two additional exploration permits adjacent to the Ying Project - Note 7(c) (b) Commitments on HPG Silver-Gold-Lead Property - Note 7(d) (c) Commitment on acquiring a storey of an office building in Henan Province, China - Note 6 (d) With respect to its leasehold obligations, the Company has commitments totaling $852,530 over 6 years (2007: $109,059, 2008 - 2011: $162,153 per year, 2012: $94,859). 

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