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).