Tsodilo Resources Limited Annual Report 2003

FY2003 Annual Report · Tsodilo Resources Limited

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D I A M O N D E X P L O R A T I O N I N

B

Tsodilo Resources Limited 2003

P R E S I D E N T ’ S M E S S AG E

FELLOW SHAREHOLDERS

What a difference a year makes! The past year proved to be a period
of change and transition for Tsodilo Resources Limited (“Tsodilo”
or the “Company”). This time last year, transfer of control to the
minority shareholders of Tsodilo, formerly known as Trans Hex
International Ltd., by Trans Hex Group Limited was being finalized
with the appointment of new directors, management and staff who
have dedicated themselves to the further exploration and develop-
ment of our properties in Botswana.

I am pleased to report that Tsodilo completed its initial ground
gravity and magnetic survey on selected targets in the east (“Guma”)
and in the west (“Nxau Nxau”) of our licence area. The results
are regarded as extremely encouraging and only reinforce our
contention that the source, or sources, for unexplained heavy
mineral anomalies to the west,
lies within our
Ngamiland licence block.

in Namibia,

At our Nxau Nxau target, in the west of the licence block, the geo-
physical surveys identified an isolated gravity “low”, approximately
500 metres by 300 metres, immediately to the south of the magnetic
“bull’s-eye” high designated A12. These geophysical characteristics,
coupled with a coincident,
ilmenites
(identified in previous sampling carried out by the Company),
provide compelling evidence that this target is a kimberlite, with an
estimated surface area of approximately 12 hectares.

isolated concentration of

Geophysical surveys carried out over two further magnetic targets
(A37 and A38) in the Nxau Nxau area, indicate that these too are
virgin kimberlites. The former comprises two prominent magnetic
bull’s-eye features (A37a and A37b), together with a group of four
subtler magnetic bull’s-eye features to the west. The latter are
associated with a major, isolated gravity “low”, elongate to the west-
northwest, with an estimated source width of approximately 600
metres. The gravity data indicate that the length of this source body,
is approximately 700 to 1,000 metres, but further work is required
to refine this estimate. This body is adjacent to, and may coalesce
with, a secondary gravity “low” associated with the A37a magnetic
“bull’s-eye”,
immediately to the east. The latter has estimated
length of 600 metres, and estimated width varying from 200 to 400
metres. The A38 target resolved into a series of magnetic “bull’s-eyes”
closely associated with a major northwest-trending dolerite dyke.
These magnetic features are associated with a series of coalescing
circular gravity “lows”, immediately to the south, over a length of
approximately two kilometres, and with widths varying from 50 to
650 metres. Previous sampling carried out over targets A37 and A38
recovered significant numbers of kimberlitic ilmenites, providing
strong encouragement that the source rocks are kimberlites. Our
preliminary interpretation of the geophysical results for A37 and
A38 is that both are large composite bodies, comprised of several
kimberlite feeders, with coalescing craters, each with surface areas
approaching and possibly exceeding 50 hectares.

These results indicate that A12 is comparable in size to the largest
kimberlites previously found in the Nxau Nxau area, while A37 and
A38 are both very significantly larger bodies. This is regarded as
highly significant, because in southern Africa the richest pipes in
a cluster of kimberlites are typically the largest. Follow-up soil
sampling and drilling are planned to confirm the interpretation of
the geophysical results.

At the Guma target in the east of the licence block, the Company has
identified coincident, or near-coincident gravity lows associated with
three bull’s-eye magnetic targets. In the coming year more detailed
work will be performed on these and other targets in the east in order
to determine if in fact we have discovered a virgin kimberlite field in
the Guma area.

I am pleased to report that Tsodilo has made application for
a further seven Prospecting Licences, with a surface area of
approximately 7,000 square kilometres, immediately to the south of
our current licence block. Including this additional area, as operator
Tsodilo now controls prospecting licences, or has applications
pending over some 24,000 square kilometres of targeted property
in northwestern Botswana.

During the past year, the Company funded exploration activity by
raising funds in the capital markets through the successful issuance
of stock by way of private placements. This process will continue in
the coming year. Our current share base consists of 5,676,391 issued
and outstanding (7,788,437 on a fully diluted basis) common shares.
Tsodilo has no significant debt, a 75% interest in our Botswana
Ngamiland project and is negotiating a 50/50 joint venture concerning
our new Botswana Gcwihaba project.

Although we still have a significant amount of work to do to
unlock the full potential inherent in our projects we are extremely
well positioned to achieve success in our search for economic
kimberlites. The Company will continue with soil sampling and
gravity/electromagnetic surveying in order to best select appropriate
targets in anticipation of the drilling program later this year.

James M. Bruchs
President and Chief Executive Officer

May 14, 2003

N G A M I L A N D K I M B E R L I T E P R OJ E C T

RESULTS OF GROUND GEOPHYSICAL SURVEYS

In March 2003, the Company completed the first phase of a system-
atic programme of ground gravity surveys and magnetic follow-up
of aeromagnetic targets in the Nxau Nxau and Guma areas of the
Ngamiland kimberlite project. The aim of this programme is to
identify a representative cross-section of geophysical targets for a
major drilling programme planned for the second half of 2003.
Management considers that our results to date, which are discussed
below, are most encouraging. These results are consistent with
our geomorphological model, which indicates that undiscovered
kimberlites within our licences are the source, or sources, of
unexplained surface concentrations of kimberlitic heavy minerals,
including diamonds and G10 garnets, to the west of our ground
in northeast Namibia.

NXAU NXAU AREA

In the Nxau Nxau area, our results indicate the likely presence of
three virgin kimberlites:

An isolated gravity “low”, approximately 500 metres by 300 metres
was identified immediately to the south of the magnetic target

designated A12. Previous sampling by Tsodilo has shown that
this target is associated with an isolated surface concentration of
kimberlitic ilmenites, with a distinctive chemical signature.
Collectively, these geophysical and geochemical results provide
compelling evidence that A12 has a kimberlite source, with a surface
area of approximately 12 hectares – comparable to, or larger in
size than the biggest kimberlite previously discovered in the area.

Our ground geophysical surveys indicate that two further aeromag-
netic targets (A37 and A38), approximately one kilometre apart,
are both composite bodies. The former comprises two prominent
bull’s-eye magnetic features (designated A37a and A37b), and a
group of at least four subtle magnetic bull’s-eye features to the west.
The latter magnetic targets are associated with a major isolated
gravity “low”, elongate to the west-northwest with a width of some
600 metres. The length of the source of this gravity “low” cannot be
defined with confidence, but is estimated at approximately 700 to
1,000 metres. Immediately to the east and possibly coalescing with
this major gravity feature is a subsidiary gravity “low”, associated
with A37a, which has an estimated length of 600 metres and width
varying between 200 and 400 metres.

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Newdico (Pty) Ltd.
Anomaly A12 — Magnetics

Magnetic Intensity

250

metres

Newdico (Pty) Ltd.
Anomaly A12 — Gravity
1st Vertical Derivative

The A38 magnetic target resolved into a major linear
feature, with a number of subsidiary more subtle
magnetic “highs” to both the northwest and southeast
of the initial target. Immediately to the south of this
group of magnetic targets are a number of roughly
circular coalescing gravity “lows” varying in diameter
from 50 metres to approximately 650 metres, which
collectively form a major linear negative gravity
anomaly. The lineament of magnetic “highs” and
associated gravity “lows” are aligned along a north-
west-trending magnetic feature that is interpreted to
reflect a dolerite dyke. Previous work has identified a
number of kimberlites closely associated with this
dyke to the northwest.

Previous sampling recovered kimberlitic ilmenites
over both the A37 and A38 magnetic targets. This,
coupled with their geophysical signature (magnetic
“high” associated with a gravity “low”), provides
strong encouragement that the source bodies are
kimberlites. Our preliminary interpretation of the
geophysical data is that both targets are composite
bodies, each consisting of a number of kimberlite
pipes with coalescing craters, and each with surface
areas approaching and possibly exceeding 50 hectares.
The linear A38 target is comparable in geometry
to major economic pipes such as Jwaneng in Botswana,
Argyle in Australia and Camafuca in Angola, all of
which are composite kimberlites with three or more
individual coalescing pipes that appear to be
aligned along structural features. Further geophysical
follow-up and drilling are planned to test these inter-
pretations.

These results from the Nxau Nxau area are considered
very encouraging for a number of reasons:

1. An in-house study shows that many, and possibly
the world’s large economic
the majority of
kimberlites (as is the case for Jwaneng, Argyle
and Camafuca) are in fact composite bodies. This
suggests that economic kimberlites favour areas of
locally more intense kimberlite volcanic activity.
This would certainly apply to the Kimberley area in
South Africa, where there are four economic pipes
in close proximity to the city.

2. In southern Africa, economic pipes tend to be
the largest in a cluster of kimberlites. Our A12
target is comparable in size to the largest of the
pipes previously discovered in the Nxau Nxau area,
while our geophysical interpretation indicates that
A37 and A38 will be several times larger than any
of the pipes discovered previously in the area.

3. Several of the magnetic anomalies identified from
our ground follow-up are subtle, and not obvious
from aeromagnetic data. There is a school of
thought that many economic pipes have subtle
magnetic features.

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Newdico (Pty) Ltd.
Anomaly A20 — Magnetics
Total Magnetic Field

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Newdico (Pty) Ltd.
Anomaly A20 — Gravity
1st Order Residual

4. Our

in-house geomorphological model (detailed
in the
Background to the Ngami Project on our website) indicates that
kimberlites in northwest Botswana could be the source of major
unexplained concentrations of kimberlitic heavy minerals,
including G10 garnets and diamonds, to the west in northeast
Namibia.

GUMA AREA

In the Guma area, our ground geophysical surveys identified a
subtle magnetic bull’s-eye feature, with an associated gravity “low”
(roughly 500 metres by 200 to 400 metres) approximately 600 metres
to the south of our A20 target. Sampling of A20 has recovered

anomalous numbers of ilmenites over this target, which our results
indicate have a chemical signature that differs from any of the Nxau
Nxau kimberlites for which data is available. Drilling previously
carried out at A20 has shown that this magnetic target has a
non-kimberlite source. The subtle magnetic high with the paired
gravity “low” to the south therefore represents a potential source
of the unexplained ilmenites recovered over A20. Two further
magnetic targets investigated in the Guma area also proved to
have associated gravity “lows”. While these results provide strong
encouragement for the presence of a virgin kimberlite field in the
Guma area, follow-up sampling is required over each of these targets
to confirm this.

G CW I H A B A K I M B E R L I T E P R OJ E C T

An analysis of the regional aeromagnetic data led to the identifica-
tion of a cluster of magnetic targets, comparable to those associated
with known kimberlites, immediately to the south of the Ngamiland
licences. This area had previously been considered to be located to
the south of the Angola/Congo craton (covered by the Ngamiland
licences). However, results of a recent seismic study suggest that the

deep mantle in this area is comparable in character to areas of
known economic kimberlites. Tsodilo has made application, via a
new wholly owned subsidiary, Gcwihaba Resources, for seven
new Prospecting Licences with a combined area of approximately
7,000 square kilometres, covering the cluster of magnetic targets.

G E O G R A P H I CA L P R E S E N C E

Tsodilo Resources Limited is focussed on its promising exploration properties
in northwestern Botswana to create long-term value for shareholders.

TORONTO

BOTSWANA

Ngamiland and
Gcwihaba Projects

BOTSWANA
Gaborone

Cape Town

ANGOLA

ZAMBIA

Kasane

Maun

ZIMBABWE

NAMIBIA

Orapa

Francistown

Ghanzi

Makadikgadi Line

e
n
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L
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a
K

Z o e t f o n t e i n F a u l t

Kukong

Gaborone

SOUTH AFRICA

100

200 km

-18

-20

-22

-24

-26

EXPLANATION

Margin of Kalahari

Geophysical Discontinuity

Major Fault Zone

Newdico Licences

Town

Kimberlite

MAJOR STRUCTURAL UNITS

Zimbabwe Craton
Congo Craton with overthrust Late Proterozoic
Kaapvaal Craton
Limpopo Belt

Ghanzi-Chobe Zone (Late Proterozoic)
Eburnian Crust (Early Proterozoic)
Kheis and Magondi Orogenic Belts (Early Proterozoic)
Mahalapye Complex

Structural setting of the Ngamiland and Gcwihaba Projects

C O R P O R AT E I N F O R M AT I O N

DIRECTORS

OFFICERS

CORPORATE HEAD OFFICE

Christopher M.H. Jennings •+ (Dr.)
Chairman
Toronto, Ontario
Appointed as director in 2002.

James M. Bruchs, B.Sc., J.D.
President and
Chief Executive Officer
Appointed in 2002.

Andrew E. Moore (Dr.), MBA., Ph.D.,

Pr.Sci.Nat.
Vice President, Exploration
Appointed in 2002.

Stephen Woodhead, B. Com., CA (SA)
Chief Financial Officer and
Corporate Secretary
Appointed in 2002.

James M. Bruchs •
Gaborone, Botswana ▲
Appointed as director in 2002.

Andrew E. Moore (Dr.)
Gaborone, Botswana
Appointed as director in 2002.

Patrick C. McGinley •+
Washington, D.C.
Appointed as director in 2002.

• Member of the Audit Committee and the

Corporate Governance Committee

+ Member of the Compensation Committee

Residency application pending

Canada Trust Tower – BCE Place
161 Bay Street, Box 508
Toronto, Ontario M5J 2S1
Telephone: (416) 572-2033
Facsimile: (416) 572-4164
Website: www.tsodiloresources.com
E-Mail: info@tsodiloresources.com

AUDITORS

PricewaterhouseCoopers LLP
Toronto, Ontario

LEGAL COUNSEL

Cassels Brock & Blackwell LLP
Toronto, Ontario

BANKERS

Royal Bank of Canada
Toronto, Ontario

REGISTRAR AND TRANSFER AGENT
Computershare Trust Company of Canada
Toronto, Ontario

STOCK EXCHANGE LISTING
TSX Venture Exchange
Trading Symbol: TSD

Printed in Canada | Designed and produced by Stratagem Marketing & Design | www.stratagem.on.ca

▲
Tsodilo Resources Limited

Consolidated Financial Statements March 31, 2003 and 2002

MANAGEMENT’S DISCUSSION AND ANALYSIS

Management’s discussion and analysis should be read in con-

junction with the Consolidated Annual Financial Statements,

and is intended to provide the reader with a review of the

factors that affected the Company’s performance during the

fiscal year ended March 31, 2003 and the factors reasonably

expected to impact future operations and results.

Overview

Tsodilo Resources Limited (“Tsodilo” or the “Company”)

was organized under the laws of the Province of Ontario in

1996 and continued under the laws of the Yukon in 2002.

The shares of the Company are listed and posted for trading

on the TSX Venture Exchange under the symbol: TSD.

Tsodilo is an international diamond exploration company

with majority interests in kimberlite exploration projects in

northwest Botswana. The Company is also actively reviewing

additional opportunities within southern Africa.

Tsodilo has only 5,676,391 issued and outstanding common
shares at March 31, 2003 (March 31, 2002: 14,597,856), with
fully diluted common shares outstanding of 7,788,437
(March 31, 2002: 15,597,856). The largest shareholder of
the Company is its President and Chief Executive Officer,
who controls 1,954,344 (or 34.4%) of the issued and out-
standing common shares. Following the restructuring of
the Company, as approved by shareholders in April 2002,
Tsodilo has no long-term debt.

The Company has a 75% operating interest in prospecting
licences covering some 17,000 square kilometres in
northwest Botswana on which there is encouragement for
the existence of undiscovered kimberlites in at least three
separate areas of the property. The Company’s minority
partner in this project, Trans Hex Group Limited (“Trans
Hex”), is an established South African diamond mining
company. During the 2003 fiscal year, Trans Hex funded their
25% share of the exploration expenditure at this project.

Corporate

Investing Activities

At a special meeting of the holders of common shares of the
Company held on April 9, 2002, shareholders approved a
restructuring of the Company that incorporated the sale of
substantially all of the Company’s assets. The assets were
transferred in settlement of debt due and owing to Trans
Hex, the principal shareholder and creditor of the Company
prior to restructuring, of $952,000. The Company retained
an interest in all future dividends that may be paid by either
Northbank Diamonds Limited, Hoanib Diamonds
(Proprietary) Limited or Trans Hex (Zimbabwe) Limited.
In addition, the Company was released from the long-term
loans due to Trans Hex by the subsidiaries being sold, of
$5.24 million, and Trans Hex agreed to return 10,688,137
common shares in the capital of the Company, representing
73.22% of the issued and outstanding shares of the Company
at that time, to treasury for cancellation. The special meeting
of shareholders also approved the discontinuance of the
Company from the Province of Ontario and its continuance
under the Business Corporations Act (Yukon), the change of
name of the Company from Trans Hex International Ltd. to
Tsodilo Resources Limited, the election of new directors and
the repeal of the existing stock option plan of the Company
and adoption of a new stock option plan.

Liquidity and Capital Resources

As at March 31, 2003, the Company had a net working
capital deficiency of $35,000 (March 31, 2002: $904,000),
which included cash and equivalents of $38,000 (March 31,
2002: $48,000). These funds are managed in-house in
accordance with specific investment criteria approved by
the board of directors, the primary objective being the
preservation of capital to assure funding for exploration
activities. No hedging or derivative instruments are permitted.

Operating Activities

Cash flow used in operating activities decreased from $1.1
million in fiscal 2002 to $320,000 in the year under review.
This reduction reflects the decrease in general and adminis-
tration expenses, particularly consulting fees, corporate
remuneration,
legal fees, and office and administration
expenses following the restructuring of the Company in
April 2002. Most costs relating to the restructuring of the
Company were also expensed in the 2002 fiscal year.

Cash flow applied in investing activities similarly decreased
following the restructuring of the Company in April 2002.
All expenditure on exploration properties in fiscal 2003 was
attributable to the Ngami project in northwest Botswana.
[See note 3 to the Consolidated Annual Financial Statements
for more information.] There have been no material acquisi-
tions or disposals of capital assets or investments, except for
the restructuring of the Company discussed above.

Financing Activities

Following the restructuring of Tsodilo in April 2002 and the
cancellation of the shares formerly held by Trans Hex, the
source of financing for the Company’s activities changed
from debt (related party) finance to equity, through the
issue of common shares by way of non-brokered private
placements. During the fiscal year ended March 31, 2003 the
Company completed the issue and sale, through non-bro-
kered private placements, of a total of 1,758,672 units of the
Company. These units were issued at prices increasing from
$0.15 per unit in June 2002 to $0.50 per unit in March 2003,
for proceeds to the Company of some $494,000. [Please refer
to note 5 to the Consolidated Annual Financial Statements
for more information.]

In January 2003, the board of directors of the Company’s
Botswana subsidiary, Newdico (Proprietary) Limited, including
the representatives of
joint venture partner Trans Hex,
approved an exploration program and budget for the period
April 2003 to March 2004 that calls for expenditures totalling
some Pula 4.7 million (approximately $1.2 million). Trans
Hex is responsible for funding 25% of the expenses of this
company, which holds the Ngami project. The approved
exploration program includes provision for additional soil
sampling, ground magnetic and gravity surveying, and
geophysical interpretation, as well as a program of reverse
circulation drilling.

Tsodilo expects to raise the $1.3 million required to fund
its 75% share of the Ngami program, as well as corporate
general and administration expenses, by way of non-brokered
private placements at prices of $0.50 per share or greater.
Such private placements are expected to include a half-
warrant priced at a similar level to the units sold.

Results of Operations

On a consolidated basis Tsodilo recorded a net loss of
$390,000 in the fiscal year ended March 31, 2003 (8 cents per
common share), compared to a net loss of $9.6 million (66
cents per common share) in the year ended March 31, 2002.
The 2002 loss included expensing all of the accumulated
exploration costs at the Barra Grande project in Brazil ($6.0
million), the Northbank project in Namibia ($2.3 million)
and the Limpopo project in Zimbabwe. General and
administration expenses in 2002 amounted to $1.3 million,
including the costs associated with the restructuring of the
Company, compared with $397,000 in 2003. This reduction
also reflects a reduced head office overhead structure.

Exploration expenditure incurred during the year ended
March 31, 2003 at the Ngami project in Botswana was
$249,000 (2002: exploration expenditure on all projects
amounted to $3.0 million, including $0.4 million at the
Ngami project in Botswana). The principal components of
the Ngami exploration program were: (a) completion of the
processing and analysis of the soil samples collected during
2002; (b) commissioning of a ground magnetic and gravity
survey of selected aeromagnetic anomalies; and (c) initiating
of the detailed processing of aeromagnetic maps covering
the target areas. Data from all three sources will be combined
and analysed to select at least 20 targets for reverse circula-
tion drilling during the next fiscal year.

Personnel

At March 31, 2003 the Company and its subsidiaries
employed 4 personnel (2002: 8 personnel), including senior
officers, administrative and operations personnel including
those on short-term contract bases. Individual components
of the exploration program, such as soil sampling, geophysi-
cal surveying and reverse circulation drilling, are contracted
out to independent third parties operating under the control
and direction of the Company’s Exploration Vice President,
Dr. Andrew Moore.

Uncertainties and Risk Factors

Tsodilo’s primary objective is the discovery of a diamond
deposit capable of rapid advancement to feasibility stage
and ultimate development as a producing property. The dis-
covery of a kimberlite is only the first step in the exploration
process. Subsequent evaluation begins with caustic fusion
diamond analysis of the kimberlite and, if results warrant,
continues through progressively larger mini-bulk and bulk

samples in order to make an increasingly accurate determi-
nation of the content and quality of the diamonds. Early
stages of kimberlite evaluation provide an initial qualitative
assessment rather than an accurate indication of either the
grade of the ore body or the value per carat of the diamonds.
Collection of larger bulk samples and formal appraisal of a
commercial-size parcel of diamonds are necessary to make
an accurate determination of these parameters. At any stage
in the process the results may indicate that the deposit lacks
the required economic value.

In the absence of cash flow from operations, Tsodilo relies
on capital markets to fund its operations. The ongoing
exploration and eventual successful development of a dia-
mond mine would require significant additional financing.
There can be no assurance that adequate funding will be
available, or available under terms favourable to the
Company, for these purposes when ultimately required. The
exploration and development of mineral deposits involve
significant financial risks over an extended period of time.
Even a combination of careful evaluation, experience and
knowledge may not eliminate these risks. While discovery of
a diamond deposit may result in substantial rewards, few
exploration properties ultimately become producing mines.

The Company’s operations are subject to all the hazards and
risks normally incident to the exploration, development and
mining of diamond deposits, any of which could result in
damage to life or property, environmental damage and
possible legal liability for any or all damage. Whether a
diamond deposit will ultimately be commercially viable
depends on a number of factors, including the particular
attributes of the deposit such as the deposit’s size; the quality
and quantity of the diamonds; its proximity to existing
infrastructure; financing costs and the prevailing prices for
diamonds. Also of key importance are government regula-
tions, including those relating to prices, taxes, royalties, land
tenure, land use, the importing and exporting of diamonds
and production plant and equipment, and environmental
protection. The effects of these factors cannot be accurately
predicted, but any combination of them may impede the
development of a deposit or render it uneconomic.

Substantially all of the Company’s exploration activities are
carried out through joint ventures with other parties. Doing
so allows the Company to maximize its exposure to promising
exploration opportunities, to manage the risks inherent in
diamond exploration, and to optimize its use of financial and
management resources.

Accounting Standards

Outlook

Tsodilo follows Canadian generally accepted accounting
policies. In line with accepted industry practice, the Company
has adopted the policy of deferring property specific
acquisition and exploration costs. Deferred costs relating
to properties that are relinquished, or where continued
exploration is deemed inappropriate are written off in the
year such assessment is made. If Tsodilo adopted a policy of
expensing all exploration costs, the Company’s asset base,
shareholders’ equity, and loss from operations would be
materially different.

Effective April 1, 2002, Tsodilo adopted the new CICA
standard for accounting for stock-based compensation.
Under the new standard, the Company may continue to
follow the intrinsic value method of accounting for stock
options granted to directors, officers and employees, with the
addition of certain pro forma information. Tsodilo has
applied the pro forma disclosure provisions of the new
standard to options granted on or after April 1, 2002. The
pro forma effect of awards prior to April 1, 2002 has not been
included. [Please refer to note 5 to the Consolidated Annual
Financial Statements for more information.]

The new accounting standard on stock-based compensation
also requires the use of the fair value method for options
granted as compensation for services rendered to the
Company other than in the course of employment. Tsodilo
has not granted options on this basis.

Diamond exploration remains a high-risk undertaking
requiring patience and persistence. Despite difficult capital
markets in the junior resource sector, the Company remains
committed to international diamond exploration through
carefully managed programs. The design and conduct of the
Company’s exploration programs are the responsibility of
Dr. Andrew Moore, a professional geologist registered with
the South African Council for Natural Scientific Professions.

Forward-looking Statements

The Annual Report, including this MD&A, contains certain
forward-looking statements related to, among other things,
expected future events and the financial and operating
results of the Company. Forward-looking statements are
subject to inherent risks and uncertainties including, but not
limited to, market and general economic conditions, changes
in regulatory environments affecting the Company’s
business and the availability and terms of financing. Other
risks are outlined in the Uncertainties and Risk Factors
section of this MD&A. Consequently, actual results and
events may differ materially from those included in, contem-
plated or implied by such forward looking statements for a
variety of reasons.

“Signature”

Stephen Woodhead
Chief Financial Officer
May 14, 2003

FINANCIAL REPORTING RESPONSIBILITY OF MANAGEMENT

The annual report and consolidated financial statements have been prepared by management. The consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in Canada and include amounts
that are based on informed judgments and best estimates. The financial information presented in this annual report is consistent
with the consolidated financial statements. Management acknowledges responsibility for the fairness, integrity and objectivity of
all information contained in the annual report including the consolidated financial statements. Management is also responsible
for the maintenance of financial and operating systems, which include effective controls to provide reasonable assurance that
assets are properly protected and that relevant and reliable financial information is produced. Our independent auditors have
the responsibility of auditing the consolidated financial statements and expressing an opinion on them.

The Board of Directors, through its Audit Committee,
is responsible for ensuring that management fulfills its
responsibilities for financial reporting and internal control. The Audit Committee is composed of three directors, two of whom
are non-executive directors. This committee meets periodically with management and the external auditors to review accounting,
auditing, internal control and financial reporting matters. The Audit Committee reviews the annual financial statements and
recommends their approval to the Board of Directors.

The financial statements have been audited by PricewaterhouseCoopers LLP, the external auditors, in accordance with
Canadian generally accepted auditing standards on behalf of the shareholders. Their report follows hereafter.

“Signature”

James M. Bruchs
Chief Executive Officer
May 14, 2003

AUDITORS’ REPORT

Stephen Woodhead
Chief Financial Officer
May 14, 2003

TO THE SHAREHOLDERS OF TSODILO RESOURCES LIMITED

We have audited the consolidated balance sheets of Tsodilo Resources Limited as at March 31, 2003 and 2002 and the
consolidated statements of operations, deficit and cash flows for the years then ended. 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 audits.

We conducted our audits 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, 2003 and 2002 and the results of its operations and its cash flows for the years then ended in
accordance with Canadian generally accepted accounting principles.

“PricewaterhouseCoopers LLP”

Chartered Accountants
Toronto, Canada
April 15, 2003

2003

$000

38
12

700
–
6

756

–

177

2002

$000

48
9

918
6
210

1,191

961

5,240

–

32,640
26
8,486
(40,658)

494

756

32,172
–
3,090
(40,272)

(5,010)

1,191

CONSOLIDATED BALANCE SHEETS

As at March 31

ASSETS
Current:
Cash and equivalents
Accounts receivable and prepaid expenses

Exploration Properties and Joint Ventures (note 3)
Investments
Capital Assets (note 4)

LIABILITIES
Current:
Accounts payable and accrued liabilities

Long-Term:
Loan from related party (note 8)

Minority Interest (note 3)

SHAREHOLDERS’ EQUITY/(DEFICIENCY)
Share Capital (note 5)
Warrants (note 5)
Contributed Surplus (note 12)
Deficit

Going Concern (note 1)

A P P R OV E D O N B E H A L F O F T H E B OA R D O F D I R E C TO R S

“Signature”

Christopher M.H. Jennings
Director

“Signature”

James M. Bruchs
Director

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended March 31

Revenue
Interest
Disposal of investments

Expenses
Consulting fees
Corporate remuneration
Corporate travel and subsistence
Investor relations
Legal and audit
Office and administration
Taxation
Amortization
Mining properties abandoned or where continued

exploration is deemed inappropriate

Loss before minority interest

Minority Interest

Loss for the year

Basic and Diluted Loss per share – cents (note 7)

CONSOLIDATED STATEMENTS OF DEFICIT

For the years ended March 31

Deficit – Beginning of year
Loss for the year

Deficit – End of year

The accompanying notes are an integral part of these consolidated financial statements.

2003

$000

2002

$000

–
7

18
174
30
24
35
103
12
1

–

397

(390)

(386)

(8)

45
–

265
481
18
28
292
193
45
5

8,303

9,630

(9,585)

–

(9,585)

(66)

2003

$000

(40,272)
(386)

(40,658)

2002

$000

(30,687)
(9,585)

(40,272)

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended March 31

Cash provided by (used in):

Operating Activities
Loss for the year
Adjustments for non-cash items:

Amortization
Mining properties abandoned or where continued

exploration is deemed inappropriate

Profit on disposal of investments
Other non-cash items

Net change in non-cash working capital balances

Investing Activities
Exploration properties and joint ventures
Investments
Disposals of/(additions to) capital assets

Financing Activities
Issue of common shares
Increase in loan from related party
Contribution by joint venture partner

Change in cash and equivalents – For the year
Cash and equivalents – Disposed of in restructuring
Cash and equivalents – Beginning of year

Cash and equivalents – End of year

No income taxes or interest were paid in the years 2003 and 2002.

The accompanying notes are an integral part of these consolidated financial statements.

2003

$000

2002

$000

(390)

(9,585)

–
(7)
–

(396)
76

(320)

(249)
13
(4)

(240)

494
–
68

562

2
(12)
48

8,303
–
312

(965)
(141)

(1,106)

(2,954)
–
77

(2,877)

–
2,543
–

2,543

(1,440)
–
1,488

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2003 and 2002

NATURE OF OPERATIONS AND GOING CONCERN

Tsodilo Resources Limited (“Tsodilo” or the “Company”), formerly called Trans Hex International Ltd., is an international
diamond exploration company engaged in the process of exploring its mineral properties in northwestern Botswana and has not
yet determined whether these properties contain reserves that can be economically mined. As an exploration stage company,
the recoverability of amounts shown for exploration expenditures is dependent upon the discovery of reserves that can be
economically mined, the securing and maintenance of the interests in the properties, the ability of the Company to obtain the
necessary financing to complete the development, and future production or proceeds from the disposition thereof.

As at March 31, 2003, the Company reported a deficit of $41 million (2002: $40 million) and cash outflows from operations of
$320,000 (2002: $1,106,000) for the year then ended. The cash position of the Company is insufficient to finance continued
exploration. The continuity of the Company’s operations is dependent on Tsodilo raising future financing for working
capital, the continued exploration and development of its properties, and for acquisition and development costs of new project
opportunities. There can be no assurance that adequate financing will be available, or available under terms favourable to the
Company. These financial statements have been prepared on a going concern basis that assumes the continuity of operations and
realization of assets and settlement of liabilities in the normal course of business. Should it be determined that the Company is
no longer a going concern adjustments, which could be significant, would be required to the carrying value of assets.

SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation and preparation of the financial statements
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada
and include the accounts of the Company and its direct and indirect subsidiaries and its proportionate interest in joint ventures.
All inter-company transactions and balances have been eliminated.

Group Companies: March 31, 2003

Tsodilo Resources Bermuda Limited
Newdico (Proprietary) Limited (Botswana)1

1 Investment held by Tsodilo Resources Bermuda Limited

100%
75%

Use of estimates
The preparation of the consolidated financial statements in conformity with Canadian generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated financial statements. The most significant estimates are
related to recoverability of exploration expenditures, fixed assets and contingencies. Actual results could differ from those estimates.

Exploration properties
All costs relating to the acquisition, exploration and development of non-producing mining properties are capitalized as
incurred. Some of the exploration activities of the Company are conducted jointly with others and accordingly, where the
arrangements are of a joint venture nature, these financial statements reflect only the Company’s proportionate interest in these
activities. The amounts capitalized represent costs to be charged to operations in the future and do not necessarily reflect the
present or future values of the particular properties.

If a property proceeds to development, these costs become part of preproduction and development costs of the mine and will be
amortized over the expected life of the mine. If a property is abandoned, sold or continued exploration is not deemed appropriate
in the foreseeable future, the related costs and expenditures are written off. Proceeds from the sale of exploration properties are
credited to the costs of the relevant property.

Exploration costs that do not relate to specific non-producing mining properties are expensed as incurred.

Amortization
Capital assets are amortized principally on a straight-line basis over their estimated useful lives of three to ten years. Capital assets
awaiting installation on site are not amortized until they are commissioned, but are reviewed for impairment and if deemed impaired,
an impairment loss is measured and recorded based on the net recoverable value of the asset.

Foreign currency translation
Foreign currency transactions are translated into Canadian dollars at the rates prevailing on the dates of the transactions. The
operations of the Company’s subsidiaries are determined to be of an integrated nature. Accordingly, monetary items are
translated at the year-end exchange rate and non-monetary items are translated at historical exchange rates. Translation gains or
losses are included in the results of operations.

Cash and equivalents
Cash and equivalents are comprised of cash, short-term deposits and money market instruments with investment grade credit
ratings and maturity dates shorter than 90 days from the date of acquisition.

Income taxes
Income and resource taxes are calculated using the asset and liability method of tax accounting. Under this method, current
income taxes are recognized for the estimated income taxes payable for the current period. Future income tax assets and liabilities
are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using
the substantially enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation
allowance is recognized to the extent the recoverability of future income tax assets is not considered more likely than not.

Stock-based compensation plans
Tsodilo has a Stock Option Plan (refer to note 5). Under the Stock Option Plan, the Company may grant options to directors,
officers and employees for up to 1,000,000 shares of common stock. The exercise price is determined by the board of directors,
but is not less than the market price of the Company’s stock on the date of the grant. An option’s maximum term is 5 years.

Effective April 1, 2002 Tsodilo adopted the new CICA Handbook Section 3870. Under the new standard, the Company is
allowed to continue to follow the intrinsic value method of accounting for stock options granted to employees, whereby no
compensation expense is recognized when stock options are granted, with the addition of pro forma information. Any consider-
ation paid on exercise of the stock options is credited to Share Capital. Tsodilo has applied the pro forma disclosure provisions
of the new standard to awards granted on or after April 1, 2002. The pro forma effect of awards granted prior to April 1, 2002 has
not been included.

3. EXPLORATION PROPERTIES AND JOINT VENTURES

These may be summarized as follows:

Ngami
Botswana

Skeleton Northbank
(Block 9)

Coast

$000

Barra
Grande

$000

Limpopo
Zimbabwe

Total

$000

Balance at March 31, 2001
2002 expenditures
Exploration costs written
off to operations

Balance at March 31, 2002
2003 expenditures
Exploration costs written
off to operations

Balance at March 31, 2003

68
383

–

451
249

–

700

375
92

–

467
–

467

2,134
175

2,309

–
–

–

3,664
2,302

5,966

–
–

–

26
2

–
–

–

– (i)

6,267
2,954

8,303

918
249

467

700

(i) These exploration properties were sold to Trans Hex Group Limited in terms of the restructuring of Trans Hex International Ltd. approved by shareholders on

April 9, 2002.

A summary of the significant joint venture and other agreements entered into by the Company is as follows:

Ngami, Botswana

On November 22, 1999 Newdico (Proprietary) Limited (“Newdico”) was granted an initial five prospecting licences in the
Ngamiland District of northwest Botswana. A further 10 prospecting licences were granted to Newdico in May 2001, with a total
of another five being added during fiscal 2003. Following the relinquishment of a portion of the initial five prospecting licences
upon their renewal, these licences now cover an area of 16,829 square kilometres. The terms of the licences grant Newdico the
right to prospect for a total of three years, renewable upon application, and require Newdico to spend a minimum of Botswana
Pula 3.6 million (approximately $1.0 million) on prospecting over this period, inclusive of their current renewals. Newdico is
held as to 75% by Tsodilo and 25% by Trans Hex Group Limited (refer to note 12), with Tsodilo being the operator. Trans Hex
Group has funded its proportionate share of expenditure, and these amounts have been reflected as minority interest in the finan-
cial statements. Development of this project is subject to the payment of a 2% net profit interest to Dr. A.E. Moore.

Joint Ventures

In fiscal 2002 the Company held a 66% interest in the Barra Grande and a 50% interest in the Northbank joint venture. Those
investments were accounted for using the proportionate consolidation method. The Company’s share of the assets, liabilities,
expenses and cash flows from those joint ventures were as follows:

Loss for the year

Assets
Liabilities

Net investment

Cash provided by (used in):
Operating activities
Investing activities
Financing activities

Change in cash and equivalents – For the year

4. CAPITAL ASSETS

Land and buildings
Plant and equipment
Vehicles
Furniture and equipment

SHARE CAPITAL

Common Shares

2002
$000

8,555

159
1

158

(178)
(2,431)
2,564

(45)

Accumulated
amortization

2003
Book value

2002
Book value

$000

–
1
–
8

–
2
–
4

$000

37
163
4
6

210

Cost

$000

–
3
–
12

Authorized
The authorized capital stock of the Company comprises an unlimited number of common shares.

Issued and outstanding
Details of the issued and outstanding common shares are as follows:

Issued and outstanding at April 1, 2001 and 2002

Shares returned to treasury for cancellation:
With restructuring approved by shareholders on April 9, 2002

Shares issued:
Private placement (i)
Private placement (ii)
Private placement (iii)
Private placement (iv)

Ascribed to warrants issued

Issued and outstanding at March 31, 2003

Warrants
As at March 31, 2003, the following warrants were outstanding:

Expiry Date

June 13, 2004 (i)
October 14, 2004 (ii)
November 14, 2004 (iii)
March 24, 2005 (iv)

(i) Private Placement

Shares
(number)

Amount
(dollars)

14,597,856

32,171,895

(10,688,137)

–

835,300
372,120
236,130
323,122

125,295
93,030
118,065
157,561

493,951

(26,055)

5,676,391

32,639,791

Exercise
Price
(dollars)

0.40
0.25
0.50
0.50

Number of
Warrants
(number)

835,300
372,120
118,065
161,561

1,487,046

Ascribed to
Warrants
(dollars)

8,353
3,721
5,903
8,078

26,055

On June 14, 2002 the Company issued, through a non-brokered private placement, 835,300 units of the Company at a price
of $0.15 per unit for gross proceeds to the Company of $125,295. Each unit consists of one common share of the Company
and one warrant of the Company, each such warrant entitling the holder to purchase one common share of the Company
at a price of $0.40 for a period of two years.

(ii) Private Placement

On October 15, 2002 the Company issued, through a non-brokered private placement, 372,120 units of the Company
at a price of $0.25 per unit for gross proceeds to the Company of $93,030. Each unit consists of one common share
of the Company and one warrant of the Company, each such warrant entitling the holder to purchase one common share
of the Company at a price of $0.25 for a period of two years.

(iii) Private Placement

On November 15, 2002 the Company issued, through a non-brokered private placement, 236,130 units of the Company at
a price of $0.50 per unit for gross proceeds to the Company of $118,065. Each unit consists of one common share of the
Company and half a warrant of the Company, each full such warrant entitling the holder to purchase one common share of
the Company at a price of $0.50 for a period of two years.

(iv) Private Placement

On March 25, 2003 the Company issued, through a non-brokered private placement, 315,122 units of the Company at a
price of $0.50 per unit for gross proceeds to the Company of $157,561. Each unit consists of one common share of the
Company and half a warrant of the Company, each full such warrant entitling the holder to purchase one common share of
the Company at a price of $0.50 for a period of two years. With respect to the placement of 100,000 units with participants
located in New Zealand, a finder’s fee of 8% was paid to an agent. In settlement of this obligation, 8,000 units were issued.

Stock Option Plan
Outstanding stock options granted to directors, officers and employees at March 31, 2003 and 2002 were as follows:

Expiry

May 21, 2003
July 4, 2005
June 24, 2007
September 18, 2007
December 31, 2007

Price

(dollars)

0.40
0.30
0.15
0.23
0.41

Options exercisable at end of year

Weighted average exercise price
– outstanding
– exercisable

Outstanding

Granted/

Outstanding

Granted/

Outstanding

April 1, 2001

(Cancelled) March 31, 2002

(Cancelled)

March 31, 2003

450,000
550,000
–
–
–

(170,000)
(250,000)
–
–
–

1,000,000

(420,000)

280,000
300,000
–
–
–

580,000

480,000

$ 0.35
$ 0.36

(280,000)
(300,000)
260,000
200,000
165,000

45,000

(a)
(a)
(b)
(b)
(c)

–
–
260,000
200,000
165,000

625,000

501,250

$ 0.24
$ 0.20

(a) All remaining outstanding stock options expired with the restructuring of the Company that was approved by the holders

of common shares on April 9, 2002.

(b) These common share purchase options vest as to one-half immediately and one-half on the six-month anniversary of the

date granted.

month and 18-month anniversaries of the date granted.

Tsodilo uses the intrinsic method of accounting for stock options granted to directors, officers and employees. Canadian account-
ing standards require the disclosure of pro forma net earnings and earnings per share information as if the corporation had
accounted for the stock options under the fair value method. The fair value of the stock options issued during the 2003 fiscal year
was determined using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of between
5.079% and 4.248%; annual dividend yield of 0.0%; expected price volatility of Tsodilo’s shares of 200%; and an expected option
life of 5 years. If the fair value method had been used to determine the compensation cost for the stock options granted during
the 2003 fiscal year, the Company’s loss for the year and basic loss per share would have increased by $120,000 and $0.02 per share
respectively. A further charge of $29,000 will apply to future years.

INCOME TAXES

As at March 31, 2003, the Company had net operating losses carried forward of $6.0 million (2002: $5.7 million) for income tax
purposes, as well as $0.3 million (2002: $0.3 million) of Canadian exploration and development expenditures that may be used
to reduce income taxes payable in future periods. The net operating losses carried forward expire as follows:

2003
2004
2005
2006
2007
2008
2009
2010

2003
$000

–
877
1,230
884
863
954
792
367

5,967

2002
$000

52
877
1,230
884
863
954
792
–

5,652

Significant components of the Company’s future tax assets as at March 31, 2003 and 2002 were as follows:

Future tax assets
Valuation allowance

Net future tax assets

2003
$000

1,887
(1,887)

–

2002
$000

1,718
(1,718)

–

The Company has recorded a valuation allowance against its future tax assets.

LOSS PER SHARE

Loss per share is based on a weighted average number of common shares outstanding of 5,076,035 for fiscal 2003 (2002:
14,597,856). Diluted loss per share assumes that outstanding stock options and warrants are exercised at the beginning of
the period (or at the time of issuance, if later) and the proceeds used to purchase common stock at the then ruling closing price.
The results for 2003 and 2002 are anti-dilutive.

RELATED PARTY TRANSACTIONS

During the year, the Company entered into transactions with related parties at standard commercial rates and prices.

At March 31, 2003, Tsodilo Resources Limited had no long-term debt. The minority interest disclosed in the consolidated balance
sheet of the Company relates to 25% of the accumulated expenditure of its subsidiary, Newdico (Proprietary) Limited, that was
funded by Tsodilo’s joint venture partner, Trans Hex Group Limited.

At March 31, 2002, the Company and its subsidiaries had drawn down $5.24 million on project finance loan agreements negotiated
previously with Trans Hex. In addition, a further amount due to Trans Hex totaling $952,000 was included in accounts payable
and accrued liabilities. Both of these obligations were settled in terms of the restructuring of the Company approved by share-
holders on April 9, 2002 (refer to note 12).

SEGMENTED INFORMATION

Substantially all working capital balances of the Company are situated at the head office in Canada and in Botswana. The capital
assets of the Company are presently located in Canada ($4,000) and Botswana ($2,000). The geographic distribution of the
property acquisition costs and exploration expenditures is evident from the details presented in note 3.

10. FINANCIAL INSTRUMENTS

The carrying amounts reflected in the consolidated balance sheets for cash and equivalents, accounts receivable and prepaid
expenses, and accounts payable and accrued liabilities approximate their fair values due to the short maturities of these instruments.

11. COMMITMENTS

Minimum lease payments for leased equipment are as follows:

2004
2005
2006

$000

4
4
3

12. RESTRUCTURING

At a Special Meeting held on April 9, 2002, shareholders approved the sale of substantially all of the Company ’s assets. The assets
sold were as follows:

–

a 100% interest in Trans Hex (Namibia) (Proprietary) Limited, together with a loan in the amount of $2.75 million due and
owing to Trans Hex (Bermuda) Limited;

a 100% interest in Trans Hex Brasil Limitada, together with a loan in the amount of $1.44 million due and owing to Trans
Hex Bermuda;

a 100% interest in Trans Hex (Zimbabwe) Limited, together with a loan in the amount of $3.23 million due and owing to
Trans Hex Bermuda; and

a 25% interest in the equity and debt of Newdico (Proprietary) Limited, the remaining 75% interest to be retained by the
Company.

The assets were transferred in exchange for the settlement of debt due and owing to Trans Hex Group as at closing. In addition,
the Company was also released from the long-term loans due to Trans Hex Group by the subsidiaries being sold. An amount of
$5.40 million has been reflected in contributed surplus as a result of this transaction.

At the Special Meeting, shareholders also approved the following matters:

–

the discontinuance of the Company from the Province of Ontario and its continuance under the Business Corporations Act
(Yukon), in compliance with the provisions of the YBCA, including a new general by-law for the Company and authority
for the board of directors to fix the number of directors from time to time within the minimum and maximum numbers
set forth in the articles of continuance;

the change of name of the Company to Tsodilo Resources Limited;

the election of new directors; and

the repeal of the existing stock option plan of the Company and adoption of a new stock option plan.

13. COMPARATIVE FIGURES

The comparative financial statements have been reclassified from statements previously presented to conform to the presentation
in the current year.

CORPORATE INFORMATION

DIRECTORS

OFFICERS

CORPORATE HEAD OFFICE

Christopher M.H. Jennings •+ (Dr.)
Chairman

Toronto, Ontario

President and

Chief Executive Officer

Appointed as director in 2002.

Appointed in 2002.

James M. Bruchs, B.Sc., J.D.

Canada Trust Tower – BCE Place

161 Bay Street, Box 508

Toronto, Ontario M5J 2S1

Telephone: (416) 572-2033

Facsimile: (416) 572-4164

James M. Bruchs •
Gaborone, Botswana ▲

Andrew E. Moore (Dr.), MBA., Ph.D.,

Website: www.tsodiloresources.com

Pr.Sci.Nat.

E-Mail: info@tsodiloresources.com

Appointed as director in 2002.

Vice President, Exploration

Andrew E. Moore (Dr.)

Gaborone, Botswana

Appointed in 2002.

AUDITORS

Stephen Woodhead, B. Com., CA (SA)

PricewaterhouseCoopers LLP

Toronto, Ontario

Appointed as director in 2002.

Chief Financial Officer and

Patrick C. McGinley •+
Washington, D.C.

Appointed as director in 2002.

Corporate Secretary

Appointed in 2002.

• Member of the Audit Committee and the

Corporate Governance Committee

+ Member of the Compensation Committee

Residency application pending

LEGAL COUNSEL

Cassels Brock & Blackwell LLP

Toronto, Ontario

BANKERS

Royal Bank of Canada

Toronto, Ontario

REGISTRAR AND

TRANSFER AGENT

Computershare Trust Company

of Canada

Toronto, Ontario

STOCK EXCHANGE LISTING

TSX Venture Exchange

Trading Symbol: TSD

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