Tsodilo Resources Limited Annual Report 2005

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FY2005 Annual Report · Tsodilo Resources Limited

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A N N U A L

R E P O R T 2 0 0 5

Contents

President’s Message to Shareholders

Newdico Proprietary Limited - Botswana

Gcwihaba Resources Proprietary Limited - Botswana 3

Management’s Discussion and Analysis
of Financial Results

Financial Reporting Responsibility of Management

Auditors’ Report to the Shareholders

Consolidated Financial Statements / Notes

Corporate Information

IBC

Ngamiland Project Botswana Soil sampling results 5x5 grid and 2004 airborne magnetic anomaly programs

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19°0'0"S

20°0'0"S

BOTSWANA

NAMIBIA

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3 3 5
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NEWDICO

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GCWIHABA

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Legend

Ilmenite Occurrence

Garnet Occurrence

Sample Location:
No Kims’s

2x2 Grid Outline

Outline of Newdico PLS

Outline of Gcwihaba PLS

drainage polygon

botswana border

k-border project

roads arc

rd 1m arc

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tsodilo resources limited

President’s Message

Fellow Shareholders,

The past year did indeed turn out

to be an exciting period in the annals

of Tsodilo Resources Limited.

Your Company met all of its goals

and objectives this past year and the

exploration and drilling program

resulted not only in the discovery

of additional kimberlites but also

the discovery of an older phase of

kimberlite never before found in

our license blocks.

Highlights of This Past Year
and Current Work Program

Kimberlite A15: Garnet, Ilmenite and Chrome Diopside

Geographical Information System

Thirteen ground geophysical grids completed to deﬁne drill targets

A computerized geographic information system (“GIS”) was

A series of ground gravity and magnetic grid surveys was

installed and the complete set of geological and geophysical

completed over the above positive KIM anomalies as well as

data collected to date in the licenses was captured. This

over a further selection of airborne magnetic targets. Six of

computer based system is capable of assembling, storing,

these grids, each covering 1 kilometer by 1 kilometer were

manipulating, and displaying geographically referenced

information, i.e. data identiﬁed according to their locations

enabling our geologists to review large amounts of

completed in the Nxau Nxau area, three further grids in the

Guma area and four grids on a group of anomalies 40 kilome-

ters due west of the Tsodilo Hills.

information at a single time.

Evaluation of possible paleo drainage channels on the border

Newdico Proprietary Limited - Botswana

with Namibia

Kimberlite Indicator Mineral Sampling yields a further 5 targets

The full set of results of a deﬂation soil sampling program

started in early 2004 and consisting of 312 samples taken

over selected airborne magnetic anomalies within the licenses

were received and analyzed. Positive results from the Guma

and Nxau Nxau areas again emphasize the importance of these

A gravity traverse along a 30 kilometer section of the Botswana

border fence with Namibia, from the foothills of the Aha Hills,

was surveyed to determine the possible presence of any alluvial

paleo drainage channels in the bedrock below the Kalahari

cover. This section is marked by a broad “bleached” feature on

the false-color satellite image.

anomalous ﬁelds where ﬁve magnetic anomalies that had not

The traverse objective was to trace the alluvial streams that

previously been sampled, returned positive kimberlite indicator

transported the diamonds and KIM’s that are found at the base

mineral (“KIM”) results.

of the Kalahari at Tsumkwe, some 40 kilometers west of the

tsodilo resources limited

traverse. The result of this gravity traverse indicated the possible
existence of two channels but a follow-up drill program (19
holes - 405 meters) showed that this interpretation was
incorrect. A follow up study by an independent consultant has
identiﬁed several possible paleo drainage systems in this
immediate area and throughout our license blocks which will be
drill tested in the coming year. A diagram of these paleo
drainage systems can be viewed in greater detail in the
“Imagery – Paleo Drainage Interpretation section of the
Company’s website, www.TsodiloResources.com.

Drill program discovers 22nd kimberlite at Nxau Nxau A15
very prospective

The drilling campaign in the Nxau Nxau kimberlite ﬁeld began with
a further two holes into A37, a kimberlite discovered in late 2003,
to obtain better samples of the kimberlite for further analysis. A
geochemical study of these samples indicates that the kimberlite
will be unlikely to host any economic deposit of diamonds.

Six further holes were drilled into Anomalies A15, A33, 1821
C12, 1821 C15, and A16. Although, kimberlite crater sedi-
ments were found in A16 and 1821 C12, no extensive

Kimberlite A15:

Chrome Diopside

Kimberlite A15:

Eclogitic Garnet

intersections of kimberlite were found. The single hole into
anomaly A15, however, intersected very weathered kimberlite
below the 34 meters of Kalahari cover. The kimberlite contin-
ued to a depth of 116 meters when the hole had to be stopped
because of high ground-water pressures.

The kimberlite at A15 is the 22nd kimberlite found to date in

the Nxau Nxau cluster and is very different from all of the

others found, because –

1) There was little crater sediment and the kimberlite is deeply
weathered and eroded – which probably indicates that it is
older than those kimberlites previously discovered.

2) There is an abundance of garnet, ilmenite and chrome diop-
side in the kimberlite, whereas those kimberlites previously
discovered were predominantly ilmenite rich in composition.

A selection of these indicator minerals was analyzed at the Euclid
Geometrics laboratory in Canada and their conclusions are:

1) The mineral chemistry of the ilmenite suite indicates a
reduced environment with a good to excellent potential for
diamond preservation, with low resorption.

2) The chemistry of the chrome diopside grains indicates that
58% fall into the diamond stability ﬁeld. The composition of
the A15 diopside is virtually identical to that of the Jericho
(NWT, Canada) and the Grib (Arkhangelsk, Russia) kimberlite
pipes, which have proved to be economically viable. In contrast
to the typical diopside of kimberlite, these three kimberlites all
exhibit a rare jadeite-kosmochlor substitution.

3) The composition of the A15 megacryst garnet is similar to
the megacrystic suite of the diamond-rich Jericho kimberlite of
the Slave craton with both exhibiting a distinct reduced crystal
chemistry, which is most promising for the stability and
preservation of diamond.

4) The A15 mineral compositions are comparable to those of
the diamond-rich Jericho kimberlite, a (Na, Ca)-rich rock in
which the diopside is jadeite-rich and the G10/G9 line
separating peridotitic garnet-with-diamond from garnet-with-
graphite is shifted towards Ca-rich compositions. This
modiﬁed plot places 51% of the A15 peridotitic garnet in the
diamond zone.

5) Eclogitic garnet were also identiﬁed from their chemical
composition; 40% of these fall within the diamond inclusion
ﬁeld. As with the Debswana Orapa kimberlite and several other
producing kimberlites, the potential diamond contribution
from eclogites in the A15 kimberlite may be considerable.

These very encouraging results have led to a decision to drill
further holes into the A15 kimberlite to obtain both a better
distribution and a bigger volume of sample. These samples will
be analyzed for micro-diamonds as an estimator of the
economic potential of this very promising kimberlite. Drilling is
scheduled to begin in early July 2005.

tsodilo resources limited

Drill program discovers 22nd kimberlite at Nxau Nxau A15 very prospective

Newdico - Anomaly A15 - 1st Order - Residual Gravity

Newdico - Anomaly A15 - 1st Order - Residual Magnetic

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Residual Gravity (mGal)

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metres (WGS 84 / UTM zone 34S)

Residual Magnetics (nT)

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metres (WGS 84 / UTM zone 34S)

2005 Program – Further drill evaluation and airborne
magnetic survey planned

In addition to the drill sampling of A15, we will also drill
further anomalous targets in the Nxau Nxau ﬁeld which have
geophysical characteristics similar to A15. In addition, a drill
section will be performed across several features tentatively
identiﬁed as paleo drainage channels in the Nxau Nxau
kimberlite ﬁeld. Later in the year, we will embark on a drill
evaluation of the eastern Guma ﬁeld, where there are nine
primary and seven secondary targets that await drill evaluation.
A further ground magnetic and gravity survey has recently been
completed over additional targets in the Guma ﬁeld and after
evaluation of the data, several of these targets may be added
to the upcoming drill program. A further drill section across the
eastern end of the satellite feature will continue our search for
KIM’s in paleo drainage channels.

We are also in the ﬁnal planning stages of a low-level airborne
magnetic survey that should begin late in the second quarter.
The survey will be ﬂown at 20m height and 100m line spacing
to distinguish the subtle kimberlite magnetic signature from

the strong dolerite dyke signature which characterizes a very
broad zone, the “dyke swarm” which transects our licenses
just south of the Nxau Nxau ﬁeld. This survey method is being
used to good effect in and around the Debswana Orapa
kimberlite ﬁeld by De Beers Prospecting Botswana. The Orapa
kimberlite ﬁeld is situated in the same dyke swarm as that
which traverses our Newdico license block.

Gcwihaba Resources Proprietary Limited -
Botswana

KIM Sampling targets a cluster of four magnetic anomalies

The results of a loam sampling program started in early 2004
and consisting of 159 samples taken over selected airborne
magnetic anomalies within the licenses was received and
analyzed. A single eclogitic low-chrome garnet, which plots in
the diamond inclusion zone, was recovered over airborne
anomaly 2021 B4. The 2021 B4 anomaly is part of a cluster
of four closely associated anomalies located roughly 40
kilometers due east from the Namibian border.

tsodilo resources limited

This positive KIM result was followed up with ground gravity
and magnetic grid surveys over the cluster of four mag-
netic anomalies that lie within a radius of 5 Km along the
Gcwihabadum linear.

A drilling campaign to explore these anomalies was abandoned
after 2 holes drilled at 2021 B4 (total of 271 meters) showed
the Kalahari cover was 158 meters thick at this location. The
one hole penetrated to bedrock and found this to be magnetite
quartzite, which explains the magnetic signature, but not the
garnet kimberlite indicator grain.

2005 Program – further drilling in the cluster

We plan to drill a further hole at 2021 B4 and one hole at the
well-deﬁned co-incident magnetic and gravity anomaly 2021
B2. A recent ground magnetic and gravity survey performed on
target anomaly 2021 A7 indicated a very large magnetic
high / gravity high isolated target which will be soil sampled
and drill tested in the coming months.

Gcwihaba - Anomaly 2021A7 - Bouguer Gravity

Gcwihaba - Anomaly 2021A7 - Total Magnetic Intensity

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544000 544500 545000 545500 546000 546500 547000 547500

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Bouguer Gravity (mGal)

250

500

Magnetic Intensity (nT)

metres (WGS 84 / UTM zone 34S)

250

500

metres (WGS 84 / UTM zone 34S)

Financing the Company’s exploration programs

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 10,723,336 issued and outstanding (12,416,127
on a fully diluted basis) common shares. Tsodilo has no debt,
an 81% interest in our Botswana Newdico project and a 100%
interest in our Botswana Gcwihaba project. The Company is
well positioned to meet the challenges in the upcoming year.

A very busy and exciting year lies ahead as we make pro-
gress in the exploration for an economic kimberlite below the

Kalahari cover on this sector of the Congo craton. Please follow
our progress carefully and remain informed by regular visits to
our website, www.TsodiloResources.com.

James M. Bruchs
President and Chief Executive Ofﬁcer
July 15, 2005

tsodilo resources limited

Management’s Discussion and Analysis

This management’s discussion and analysis should be read in
the Consolidated Annual Financial
conjunction with
Statements for the ﬁscal years ending March 31, 2005 and
2004, and comments on the factors that affected the
Company’s performance during the periods covered by the
Consolidated Annual Financial Statements as well as the
Company’s ﬁnancial condition and future prospects. In ﬁscal
2005, the Company’s functional and reporting currency has
been changed to United States dollars and all amounts stated
are in United States dollars unless otherwise stated. This
information is presented as at July 15, 2005.

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 the majority
interest in a kimberlite exploration project in northwest
Botswana. The Company 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. The Company is also actively
reviewing additional opportunities within southern Africa.

Corporate

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. Following the restructuring of the Company, as approved
by shareholders in April 2002, Tsodilo has no long-term debt.

Outstanding Share Data

As of July 15, 2005, 10,723,336 common shares of the
Company were outstanding. Of the options to purchase common
shares issued to eligible persons under the stock option plan of
the Company, 905,000 options remain outstanding at exercise
prices ranging from Canadian $0.15 - $1.85. If exercised,
905,000 common shares of the Company would be issued.

As of July 15, 2005, 787,791 warrants are outstanding. The
warrants were issued by way of the private placements utilized by
the Company for ﬁnancing purposes. Each warrant entitles the
holder thereof to purchase one common share of the Company at
purchase prices ranging from Canadian $0.50 - $2.35 for a period
of two years from the date of issuance. If converted, 787,791
common shares of the Company would be issued.

The largest shareholder of the Company is its President and
Chief Executive Ofﬁcer, James M. Bruchs, who currently controls
2,540,183 or 23.69% of the issued and outstanding common
shares as of July 15, 2005. The Firebird Global Master Fund,
Ltd. controls 1,410,322 or 13.15% of the issued and outstand-
ing shares as of July 15, 2005.

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 trans-
ferred in settlement of debt due and owing to Trans Hex Group
Limited (“Trans Hex Group”), the principal shareholder and
creditor of the Company prior to restructuring, of $612,783 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 addi-
tion, the Company was released from the long-term loans due to
Trans Hex Group by the subsidiaries being sold, of $3,341,690,
and Trans Hex Group agreed to return the 10,688,137 common
shares in the capital of the Company, representing 73.22% of

Subsidiaries

The Company has an 81% operating interest in its Botswana
subsidiary, Newdico (Proprietary) Limited (“Newdico”), which
holds prospecting licenses and applications covering approx-
imately 10,418 square kilometers in northwest Botswana on
which there is encouragement for the existence of undiscov-
ered kimberlites in at least three separate areas of the
property. The Company’s minority partner in this project,
Trans Hex Group, is an established South African diamond
mining company. During the 2005 ﬁscal year, Trans Hex
Group funded all but two quarters of their proportionate
exploration expenditure at this project, the result of which
reduced their interest in the project from 25% to 19%

tsodilo resources limited

effective January 1st, 2005. Some, or all, of the current licens-
es held by Newdico may be subject to the granting of a 2% free
carried interest in any mine or mines that may result thereon.

The Company has a 100% interest in its wholly owned
Botswana subsidiary, Gcwihaba Resources (Proprietary)
Limited (“Gcwihaba”), which has prospecting licenses
covering approximately 6,793 kilometers.

Proposed Transactions

The board of directors is not aware of any proposed transac-
tions involving a proposed asset or business acquisition or
disposition which may have an effect on ﬁnancial condition,
results of operations and cash ﬂows.

Exploration Activities

Additional gravity and magnetic surveys are near completion in
the Guma area of our license block. The results of this program
will determine which targets will be added to the nine primary
and seven secondary targets which are scheduled to be drill
tested in the 3rd quarter of ﬁscal 2006.

Planning is in the ﬁnal stages for a low-level airborne magnetic
survey to begin ﬂying in the 3rd quarter. This survey will be ﬂown
at a 10 - 20 meter height and 100 meter line spacing to distin-
guish subtle kimberlite magnetic signature from the strong
dolerite dyke signature which characterizes a very broad zone,
the “dyke swarm”, which transects the licenses just south of the
Nxau Nxau ﬁeld. This survey method has been employed in
similar conditions in and around the Orapa kimberlite ﬁeld with
excellent results.

Newdico (Proprietary) Limited - Botswana

Gcwihaba Resources (Proprietary) Limited - Botswana

A drilling program is scheduled to commence in early July 2005
at kimberlite A15 in the Company’s Nxau Nxau kimberlite ﬁeld.
Approximately eight hundred meters will be drilled in A15 for
the purpose of obtaining a representative sample for micro-
diamond analysis. In addition to the drilling at A15, additional
drilling will take place on four target anomalies in the Nxau
Nxau region. A program to drill several sections across inferred
paleo-channels will also commence.

Soil sampling, gravity and magnetic surveys, and further
drilling are all planned for ﬁscal 2006. As a result of a recent
gravity and magnetic survey, the Company has made an
application with the Botswana Ministry of Minerals Energy and
Water Resources for a base and precious metals exploration
license over a portion of our Gcwihaba license block. This
exploration program will proceed alongside the current
kimberlite exploration program.

SELECTED ANNUAL AND QUARTERLY FINANCIAL INFORMATION

ANNUAL INFORMATION

(in US dollars)

Total Revenues
Loss before non-controlling interest

Basic and diluted loss per share - cents

Non-controlling interest
Loss for the Year

Basic and diluted loss per share - cents

Total Assets
Total long term liabilities

Cash dividends declared

Fiscal Year

2004

–
405,814

$0.06

–
405,814

$0.06

1,010,432
213,549

–

2003

4,460
253,012

$0.05

2,612
250,400

$0.05

487,332
117,237

–

2005

–
620,822

$0.07

–
620,822

$0.07

2,087,421
237,008

–

tsodilo resources limited

QUARTERLY INFORMATION

The quarterly results have been as follows:

(in US dollars)

Fiscal Year 2003

Total Revenues
Loss for the period

Quarter 1

Quarter 2

Quarter 3

Quarter 4

–
36,342

–
93,526

Basic and diluted loss per share - cents $0.01

$0.02

Total assets
Total long term liabilities

Fiscal Year 2004

369,541
254,157

342,886
254,758

Total Revenues
Loss for the period

–
87,810
Basic and diluted loss per share - cents $0.01 $0.01
1,016,261
189,249

Total assets
Total long term liabilities

631,366
158,770

–
54,423

Fiscal Year 2005

Total Revenues
Loss for the period

–
75,106

Basic and diluted loss per share - cents $0.01

Total assets
Total long term liabilities

1,422,230
213,549

–
185,742
$0.02
1,408,529
237,245

4,460
50,974

–
72,170
$0.01 $0.01
487,332
117,237

413,996
280,882

–
82,849
$0.01
979,147
189,249

–
113,981
$0.01
1,842,605
237,245

–
180,732
$0.03
1,010,432
213,549

–
245,993
$0.03
2,087,421
237,008

LIQUIDITY AND CAPITAL RESOURCES

As at March 31, 2005, the Company had net working capital of
$609,979 (March 31, 2004: $130,016), which included cash
and equivalents of $637,805 (March 31, 2004: $148,371).
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. The Company does not hedge
its activities or otherwise use derivatives. The Company does not
have any material contractual obligations.

instruments. Due to the nature of the Company’s operations,
there is no signiﬁcant credit or interest rate risk.

Operating Activities

Cash outﬂow for use in operating activities increased from
$336,315 in ﬁscal 2004 to $473,835 in ﬁscal 2005. This
increase reﬂects increased costs to meet regulatory require-
ments including increases in legal, audit and accounting fees,
investor relations and ﬁling fees.

Investing Activities

Financial Instruments

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

Cash flow applied in investing activities increased to
$589,095 in ﬁscal 2005 (March 31, 2004: $399,943).
$417,216 or 70% of the exploration expenditures were spent
on the Newdico properties and $174,983 or 30% of the
expenditures were on the Gcwihaba properties. All expenditure

tsodilo resources limited

on exploration properties in ﬁscal 2005 were attributable to
the Newdico and Gcwihaba projects in northwest Botswana
and were in addition to the 25% to 19% share funded by the
Trans Hex Group for the Newdico project. There were no mate-
rial acquisitions or disposals of capital assets or investments
during the year.

proceeds were received in the amount of $508,491 from the
issuance of common shares upon the exercise of options and
warrants during the ﬁscal year.

Subsequent to the ﬁscal year end, the Company received
proceeds in the amount of $95,970 through the exercise of
241,710 warrants.

In February 2005, the board of directors of Newdico, includ-
ing the representatives of joint venture partner Trans Hex
Group, approved an exploration program and budget for the
period April 2005 to March 2006 that calls for expenditures
totaling approximately Pula 3.9 million (approximately $0.7
million as of July 15, 2005). Trans Hex Group is presently
responsible for funding 19% of the expenses of this company.
The approved exploration program includes provision for addi-
tional soil sampling, ground magnetic and gravity surveying,
and geophysical interpretation, as well as a program of reverse
circulation drilling.

The required second year exploration program expenditures,
including license fees, for Gcwihaba amounted to approxi-
mately Pula 0.42 million (approximately $0.08 million as of
July 15, 2005). Gcwihaba’s expenditures will exceed this
required amount in the second year. The required expenditure
in the third second year exploration program amounts to
approximately Pula 0.45 million (approximately $0.08 mil-
lion as of July 15, 2005). As with previous years, Gcwihaba
expects to meet or exceed this requirement.

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
units by way of non-brokered private placements. Each unit
has consisted of one common share of the Company and one
or one-half a warrant of the Company, with each full such
warrant entitling the holder to purchase one common share of
the Company for a purchase price equal to the unit price for
a period of two years from the date of issuance. During the
ﬁscal year ended March 31, 2005 the Company completed
the issue and sale, through non-brokered private placements,
of a total of 1,316,253 units of the Company. These units
were issued at prices increasing from $0.57 (C$0.75) per
unit in May 2004 to high of $1.93 (C$2.35) per unit in
November 2004, for proceeds to the Company of
approximately $1,020,414. In addition, during ﬁscal 2005,

Tsodilo expects to raise the amounts required to fund its 81%
share of the Newdico project, the Gcwihaba project and
corporate general and administration expenses, by way of
negotiated non-brokered private placements.

RESULTS OF OPERATIONS

On a consolidated basis Tsodilo recorded a net loss of
$620,822 in the fiscal year ended March 31, 2005
($0.07 cents per common share) compared to a net loss of
$405,814 in the ﬁscal year ended March 31, 2004 ($0.06
cents per common share). Eliminating the effect of non-cash
charges relating to stock-based compensation and the effects
of foreign exchange gains and losses totaling $172,955 in
2005 (2004: $74,419), general and administration expenses
in 2005 amounted to $447,867 compared with $331,395 in
2004 after eliminating these items. This increase is due to
increased costs to meet regulatory requirements including
increases in legal, audit and accounting fees, investor relations
and ﬁling fees partially off set by reductions in consulting fees.

Exploration expenditure incurred during the year ended March
31, 2005 at the Newdico project in Botswana was $417,216
compared to $337,584 during the year ended March 31,
2004. Exploration expenditure on all projects amounted to
$592,199 during the year compared to $354,291 for the
previous year. The principal components of the Newdico
exploration program were: (a) additional soil sampling and the
completion of the processing and analysis of the soil samples;
(b) commissioning of further ground magnetic and gravity
survey of selected aeromagnetic anomalies; (c) analyzing
detailed proprietary aeromagnetic maps covering the target
areas; and (d) commencement of a reverse circulation drilling
program on selected targets.

PERSONNEL

At March 31, 2005 the Company and its subsidiaries
employed 6 personnel compared to 7 personnel at March
31, 2004, including senior officers, administrative and
operations personnel including those on short-term contract

tsodilo resources limited

bases. Individual components of the exploration program,
such as soil sampling, geophysical surveying and reverse
circulation drilling, are contracted out to independent third
parties operating under the control and direction of the
Company’s subsidiaries’ Managing Director, James M.
Bruchs, and the Company’s Exploration Vice President,
Peter W. A. Walker.

FOURTH QUARTER - 2005

During the fourth quarter, the board decided that it was in the
best interests of the Company in terms of efﬁciencies and
based on the Company’s operating program that ﬁnancial data
would be reported in United States dollars. As a result of this
decision the ﬁnancial history of the Company was appropri-
ately translated from inception in 1996 from Canadian dollar
values to United States dollars. Assets, liabilities and major
transactions were translated on a historical basis at the date
of the transaction and operating expenses were translated on
a quarterly basis.

RISKS AND UNCERTAINTIES

Tsodilo’s primary objective is the discovery of an economic
kimberlite diamond deposit capable of rapid advancement to
feasibility stage and ultimate development as a producing
property. The discovery 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 determination of the content and quality of the
diamonds. Early stages of kimberlite evaluation provide an
initial qualitative assessment rather than an accurate indica-
tion 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 neces-
sary 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.

available under terms favorable 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 elimi-
nate these risks. While discovery of a diamond deposit may
result in substantial rewards, few exploration properties
ultimately become producing mines.

Off-Balance Sheet Arrangements

The Company has not entered into any off-balance sheet
ﬁnancing arrangements.

Exploration Risks

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 regulations, 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 can-
not be accurately predicted, but any combination of them may
impede the development of a deposit or render it uneconomic.

At this time, the major portion of the Company’s exploration
activity is carried out in partnership with another party. 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.

Currency Risks

Capital Requirements

In the absence of cash ﬂow from operations, Tsodilo relies on
capital markets to fund its operations. The ongoing explo-
ration and eventual successful development of a diamond
mine would require signiﬁcant additional ﬁnancing. There can
be no assurance that adequate funding will be available, or

The Company’s ﬁnancing has generally been received in United
States dollars while signiﬁcant portions of its operating expens-
es has been and will be incurred in Botswana Pula. In ﬁscal
2005, the Pula showed unexpected and substantial strength
against most major world currencies including the US dollar. On
May 29, 2005 the Botswana Minister of Finance and
Development Planning announced a 12% devaluation of the

tsodilo resources limited

pula against a basket of currencies, as well as a change in the
system of exchange-rate adjustments to a crawling peg rather
than the discrete steps previously used, in order to improve
Botswana's competitiveness. This action resulted in current
pula / dollar rates similar to those in 2002.

ADDITIONAL INFORMATION

Additional information relating to Tsodilo Resources Limited
is available on its website www.TsodiloResources.com, or
through SEDAR at www.sedar.com.

Key Personnel

The Company is dependent upon on a relatively small number
of key employees, the loss of any of whom could have an
adverse effect on the Company. The Company currently does
not have key personal insurance on these individuals.

ACCOUNTING STANDARDS

Tsodilo follows Canadian generally accepted accounting
principles. 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.

OUTLOOK

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. Peter W. A. Walker, a professional
geologist registered with the South African Council for Natural
Scientiﬁc Professions is the qualiﬁed person responsible for the
design and conduct of the Company’s exploration programs.

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, contemplated or implied by
such forward looking statements for a variety of reasons.
Readers are therefore cautioned not to place undue reliance
on any forward-looking statement. The Company disclaims
any intention and assumes no obligation to update any
forward-looking statement even if such information becomes
available as a result of future events or for any other reason.

L. Kirk Boyd

Chief Financial Ofﬁcer
July 15, 2005

tsodilo resources limited

Financial Reporting Responsibility of Management

The annual report and consolidated ﬁnancial statements have been

The Board of Directors, through its Audit Committee, is responsible

prepared by management. The consolidated ﬁnancial statements

for ensuring that management fulﬁlls its responsibilities for

have been prepared in accordance with accounting principles

ﬁnancial reporting and internal control. The Audit Committee is

generally accepted in Canada and include amounts that are based

composed of three directors, two of whom qualify as unrelated

on informed judgments and best estimates. The ﬁnancial

directors and are independent of management and free from any

information presented in this annual report is consistent with the

interest or business relationship which could, or could be perceived

consolidated ﬁnancial statements. Management acknowledges

to, materially interfere with their ability to act in the best interests

responsibility for the fairness, integrity and objectivity of all

of the Company. This committee meets periodically with manage-

information contained in the annual report including the

ment and the external auditors to review accounting, auditing,

consolidated ﬁnancial statements. Management is also responsible

internal control and ﬁnancial reporting matters. The Audit

for the maintenance of ﬁnancial and operating systems, which

Committee reviews the annual ﬁnancial statements before they are

include effective controls to provide reasonable assurance that

presented to the Board of Directors for approval and considers the

assets are properly protected and that relevant and reliable ﬁnancial

independence of the auditors.

information is produced. Our independent auditors have the

responsibility of auditing the consolidated ﬁnancial statements and

expressing an opinion on them.

The ﬁnancial statements have been audited by Pricewaterhouse-

Coopers LLP, the external auditors, in accordance with Canadian

generally accepted auditing standards on behalf of the shareholders.

Their report follows hereafter.

James M. Bruchs
Chief Executive Ofﬁcer
July 15, 2005

L. Kirk Boyd
Chief Financial Ofﬁcer
July 15, 2005

Auditors’ Report to the Shareholders of Tsodilo Resources Limited

We have audited the consolidated balance sheets of Tsodilo

includes examining, on a test basis, evidence supporting the amounts

Resources Limited as at March 31, 2005 and 2004 and the

and disclosures in the ﬁnancial statements. An audit also includes

consolidated statements of operations, deﬁcit and cash ﬂows for the

assessing the accounting principles used and signiﬁcant estimates

years then ended. These ﬁnancial statements are the responsibility of

made by management, as well as evaluating the overall ﬁnancial

the Company’s management. Our responsibility is to express an

statement presentation.

opinion on these ﬁnancial statements based on our audits.

In our opinion, these consolidated ﬁnancial statements present fairly,

We conducted our audits in accordance with Canadian generally

in all material respects, the ﬁnancial position of the Company as at

accepted auditing standards. Those standards require that we plan

March 31, 2005 and 2004 and the results of its operations and its

and perform an audit to obtain reasonable assurance whether the

cash ﬂows for the years then ended in accordance with Canadian

ﬁnancial statements are free of material misstatement. An audit

generally accepted accounting principles.

Chartered Accountants
Toronto, Ontario, Canada
June 28, 2005

tsodilo resources limited

Tsodilo Resources Limited
Consolidated Balance Sheets
As at March 31
(in United States dollars – note 2)

ASSETS

Current:

Cash and equivalents

Amounts receivable and prepaid expenses

Exploration Properties (note 3)

Property, Plant and Equipment (note 4)

LIABILITIES

Current:

Accounts payable and accrued liabilities

NON-CONTROLLING INTEREST (note 3)

SHAREHOLDERS' EQUITY

Share Capital (note 5)

Warrants (note 5)

Contributed Surplus (note 5)

Cumulative Translation (note 2)

Deficit

Going Concern (note 1)

2005

2004

637,805

14,616

652,421

1,396,639

38,361

2,087,421

42,442

237,008

25,909,032

233,057

5,846,718

(837,425)

(29,343,411)

1,807,971

2,087,421

148,371

13,767

162,138

804,440

43,854

1,010,432

32,122

213,549

24,466,943

144,179

5,738,084

(861,856)

(28,722,589)

764,761

1,010,432

APPROVED ON BEHALF OF THE BOARD OF DIRECTORS

Christopher M.H. Jennings
Director

Patrick C. McGinley
Director

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

tsodilo resources limited

Tsodilo Resources Limited
Consolidated Statements of Operations
For the years ended March 31
(in United States dollars – note 2)

EXPENSES

Consulting fees

Corporate remuneration

Corporate travel and subsistence

Investor relations

Legal and audit

Office and administration

Amortization

Foreign exchange loss

Stock-based compensation (note 5)

Loss before non-controlling interest

Non-controlling interest

Loss for the year

Basic and diluted loss per share - cents (note 7)

Consolidated Statements of Deficit

For the years ended March 31
(in United States dollars – note 2)

Deficit – Beginning of year

Loss for the year

Deficit - End of year

2005

2004

29,933

135,113

52,190

61,541

112,059

54,642

2,389

49,915

123,040

620,822

(620,822)

–

(620,822)

($0.07)

46,758

133,253

51,149

25,761

19,745

53,244

1,485

–

74,419

405,814

(405,814)

–

(405,814)

($0.06)

2005

2004

(28,722,589)

(620,822)

(29,343,411)

(28,316,775)

(405,814)

(28,722,589)

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

tsodilo resources limited

Tsodilo Resources Limited
Consolidated Statements of Cash Flows

For the years ended March 31
(in United States dollars – note 2)

CASH PROVIDED BY (USED IN):

OPERATING ACTIVITIES

Loss for the year

Adjustments for non-cash items:

Amortization

Stock-based compensation (note 2)

Net change in non-cash working capital balances

INVESTING ACTIVITIES

Exploration properties

Disposals of / (Additions to) Property, Plant and Equipment

FINANCING ACTIVITIES

Issue of common shares

Contribution from non-controlling interest

Change in cash and equivalents - For the year

Cash and equivalents - Beginning of year

Cash and equivalents - End of year

2005

2004

(620,822)

(405,814)

2,389

123,040

(495,393)

21,558

(473,835)

(592,199)

3,104

(589,095)

1,528,905

23,459

1,552,364

489,434

148,371

637,805

1,485

74,419

(329,910)

(6,405)

(336,315)

(354,291)

(45,652)

(399,943)

762,487

96,313

858,800

122,542

25,829

148,371

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

tsodilo resources limited

Tsodilo Resources Limited
Notes to the Consolidated Financial Statements

For the years ended March 31, 2005 and 2004

1. NATURE OF OPERATIONS AND GOING CONCERN

Tsodilo Resources Limited (“Tsodilo” or the “Company”) is an international diamond exploration company engaged in the process

of exploring its mineral properties in northwest Botswana. The Company 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. The Company is also actively reviewing additional opportunities within

southern Africa.

As at March 31, 2005, the Company reported an accumulated deﬁcit of $29,343,411 (2004: $28,722,589) and cash outﬂows

from operations of $473,835 (2004: $336,315) 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 favorable 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.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation and preparation of the financial statements

The consolidated ﬁnancial statements have been prepared in accordance with Canadian generally accepted accounting principles

(“GAAP”) and include the accounts of the Company and its direct and indirect subsidiaries. All inter-company transactions and

balances have been eliminated.

Change in reporting currency

Management has elected to change the reporting currency of the Company from Canadian to United States dollars, as this more accurately

reﬂects the requirements of the Company’s investors and other users of the ﬁnancial statements.

Accordingly, the 2005 ﬁnancial statements have been presented in US dollars, and the 2004 ﬁnancial statements have been

represented in US dollars to provide information on a consistent basis. The change in reporting currency did not have a material

impact on the reported results for 2004.

tsodilo resources limited

Group Companies: March 31, 2005

Tsodilo Resources Bermuda Limited

Gcwihaba Resources (Proprietary) Ltd (Botswana) (“Gcwihaba”)

100%

Newdico (Proprietary) Limited (Botswana) (“Newdico”)

81% (note 3)

Use of estimates

The preparation of the consolidated ﬁnancial statements in conformity with GAAP 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 the 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 or when other events and circumstances indicate that the carrying amount may not be recovered, the

related costs and expenditures are written down to the net recoverable amount at the time the determination is made. 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

Property, plant and equipment are amortized principally on a straight-line basis over their estimated useful lives of three to ten years.

Property, plant and equipment 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

The US dollar is the currency in which the ﬁnancial statements are presented. Foreign currency transactions and balances, and

the ﬁnancial statements of foreign operations, all of which are integrated, are translated into US dollars using the temporal

method. Under this method, monetary assets and liabilities of the Company and its subsidiaries denominated in foreign currencies

are translated into US dollars at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are

translated at the historical rates. Revenue and expense items are translated at the average rate prevailing during the year, except

tsodilo resources limited

for depreciation, depletion, amortization and write downs, which are translated at the same exchange rates as the assets to which

they relate with gains and losses arising on settlement recognized in the statement of operations. Gains and losses on translation

from functional currencies into US dollars are reﬂected in cumulative translation account.

Cash and Equivalents

Cash and equivalents are comprised of cash, term deposits and money market instruments with investment grade credit ratings

and original maturity dates of 90 days or less from the date of acquisition.

Income Taxes

The Company uses the asset and liability method of accounting for income tax. Assets and liabilities are recognized for the

estimated future tax consequences attributable to differences between the ﬁnancial statement carrying amounts of existing assets

and liabilities and their respective tax bases. Future income tax assets and liabilities are measured using tax rates in effect for

the period in which those temporary differences are expected to be recovered or settled. The effect on future income tax assets

and liabilities of a change in tax rates or laws is recognized as part of the provision for income taxes in the period the changes

are considered substantively enacted.

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 1,250,000 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. The

Company uses the fair value method of accounting for stock options. Consideration paid on exercise of stock options is credited

to common share capital.

CICA 3870 “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.

3. EXPLORATION PROPERTIES

These may be summarized as follows:

Balance at March 31, 2003

2004 expenditures

Balance at March 31, 2004

2005 expenditures

Balance at March 31, 2005

Gcwihaba

Botswana

–

16,707

174,983

191,690

Ngami

Botswana

450,149

337,584

787,733

417,216

1,204,949

tsodilo resources limited

Total

450,149

354,291

804,440

592,199

1,396,639

A summary of the signiﬁcant agreements entered into by the Company is as follows:

Newdico (Proprietary) Limited - Botswana

Newdico holds prospecting licenses in the Ngamiland District of northwest Botswana.. The Company acquired the various licenses

in 1999, 2001 and 2003. The terms of the licenses grant Newdico the right to prospect for a total of three years, and are

renewable upon application. The Company has renewed its prospecting licenses for which the original terms have expired and

these now expire in 2007, 2008 and 2009. The terms of the licenses also require Newdico to spend a minimum of Botswana

Pula 3.9 million (approximately $0.7 million) on prospecting over this period, inclusive of their current renewals. Originally

Newdico was held as to 75% by Tsodilo and 25% by Trans Hex Group Limited (“Trans Hex Group”), with Tsodilo being the

operator. Some, or all, of the current licenses held by Newdico may be subject to the granting of a 2% free carried interest in any

diamond mine or mines that may result thereon.

Trans Hex Group has funded its proportionate share of expenditure, and these amounts have been reﬂected as non-controlling

interest of $237,008 (2004: $213,549) in the ﬁnancial statements. During the year Trans Hex decided not to fund a portion of

its share of expenditures on a cash call and therefore on January 1, 2005, the Company increased its interest in Newdico from

75% to 81% in accordance with the exploration agreement between the two parties.

Trans Hex Group has also advanced funds amounting to $187,052 (2004: $187,052) to Newdico, relating to exploration properties

which have been written off in earlier years. This liability has not been recorded in these ﬁnancial statements as it is repayable only

from Tran Hex Group’s share of any future earnings of Newdico after repayment of loans relating to the Newdico Project.

Gcwihaba Resources (Proprietary) Limited - Botswana

Gcwihaba, a wholly owned subsidiary of the Company, holds prospecting licenses to the south of the Ngamiland project area. The

terms of the licenses grant Gcwihaba the right to prospect for a total of three years to 2006, renewable for a total of four additional

years and require Gcwihaba to spend a minimum of Botswana Pula 0.42 million (approximately $0.08 million) on prospecting

over this period, inclusive of their current renewals.

4. PROPERTY PLANT AND EQUIPMENT

Cost

Accumulated

Book value

amortization

2005

2004

Vehicles

Furniture and Equipment

40,473

25,270

65,743

13,767

13,615

27,382

26,706

11,655

38,361

33,912

9,942

43,854

tsodilo resources limited

5. SHARE CAPITAL

Common Shares

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 March 31, 2003

Shares issued:

On private placement (i)

On private placement (ii)

On private placement (iii)

On private placement (iv)

Ascribed to warrants issued (b)

On exercise of stock options (including $2,508 reallocated from contributed surplus) (c)

On exercise of warrants (including $1,850 reallocated from warrants) (b)

(number)

Amount

(dollars)

5,676,391

23,831,420

535,906

325,708

746,812

166,864

191,878

118,183

270,981

95,035

–

(129,858)

1,775,290

60,000

379,899

546,219

8,487

80,817

Issued and outstanding at March 31, 2004

7,891,580

24,466,943

On private placement for cash (v)

On private placement for cash (vi)

On private placement for cash (vii)

On private placement for cash (viii)

Ascribed to warrants issued (b)

687,409

113,938

53,336

461,570

–

1,316,253

On exercise of stock options (including $14,406 reallocated from contributed surplus) (c)

121,250

On exercise of warrants (including $107,760 reallocated from warrants) (b)

1,152,543

379,620

104,643

102,780

433,371

(208,982)

811,432

47,329

583,328

Issued and outstanding at March 31, 2005

10,481,626

25,909,032

(i) Private Placement

In May 2003 the Company issued, through a non-brokered private placement, 535,906 units of the Company at a price of $0.36

(C$0.50) per unit for gross proceeds to the Company of $191,878. 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 C$0.50 for a period of two years.

tsodilo resources limited

(ii) Private Placement

In August 2003 the Company issued, through a non-brokered private placement, 325,708 units of the Company at a price of

$0.36 (C$0.50) per unit for gross proceeds to the Company of $118,183. 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 C$0.50 for a period of two years.

(iii) Private Placement

In September 2003 the Company issued, through a non-brokered private placement, 746,812 units of the Company at a price

of $0.36 (C$0.50) per unit for gross proceeds to the Company of $270,981. 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 C$0.50 for a period of two years.

(iv) Private Placement

In January 2004 the Company issued, through a non-brokered private placement, 166,864 units of the Company at a price of

$0.57 (C$0.75) per unit for gross proceeds to the Company of $95,035. 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 C$0.75 for a period of two years.

(v) Private Placement

In June 2004 the Company issued, through a non-brokered private placement, 687,409 units of the Company at a price of $0.57

(C$0.75) per unit for gross proceeds to the Company of $379,620. 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 C$0.75 for a period of two years. The common shares, warrants and warrant shares are subject to a hold period of 12

months as agreed to by the parties, expiring on June 1, 2005.

(vi) Private Placement

In October 2004 the Company issued, through a non-brokered private placement, 113,938 units of the Company at a price of

$0.92 (C$1.12) per unit for gross proceeds to the Company of $104,643. 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 C$1.12 for a period of two years. The common shares, warrants and warrant shares are subject to a hold

period of 12 months as agreed to by the parties, expiring on October 14, 2005.

tsodilo resources limited

(vii) Private Placement

In November 2004 the Company issued, through a non-brokered private placement, 53,336 units of the Company at a price of

$1.93 (C$2.35) per unit for gross proceeds to the Company of $102,780. 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 C$2.35 for a period of two years. The common shares, warrants and warrant shares are subject to a hold

period of 12 months as agreed to by the parties, expiring on November 8, 2005.

(viii) Private Placement

In March 2005 the Company issued, through a non-brokered private placement, 461,570 units of the Company at a price of

$0.94 (C$1.15) per unit for gross proceeds to the Company of $433,371. 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 C$1.15 for a period of two years. The common shares, warrants and warrant shares are subject to a statutory

hold period under securities laws of 4 months, expiring on July 3, 2005.

(b) Warrants

As at March 31, 2005, the following warrants were outstanding:

Expiry

Date

Exercise
Price

Opening

Issued/
(Exercised)

Closing

Opening
(dollars)

Issued/
(Exercised)

Closing
(dollars)

Number of Warrants

Value

June 13, 2004 (i)

C$0.40

765,501

(765,501)

October 14, 2004 (ii)

C$0.25

62,020

(62,020)

November 14, 2004 (iii)

C$0.50

118,065

(118,065)

March 24, 2005 (iv)

C$0.50

161,561

(161,561)

–

May 26, 2005 (i)

C$0.50

267,953

(26,243)

241,710

August 17, 2005 (ii)

C$0.50

162,854

(23,065)

139,789

September 29, 2005 (iii)

C$0.50

373,406

(104,850)

268,556

January 15, 2006 (iv)

June 1, 2006 (iv)

October 14, 2006 (v)

November 8, 2006 (vi)

March 4, 2005 (vii)

C$0.75

C$1.12

C$2.35

C$1.15

83,432

(83,432)

65,024

56,969

26,668

–

65,024

56,969

26,668

230,785

5,042

393

3,745

5,491

51,487

17,415

44,811

15,795

–

( 5,042)

( 393)

( 3,745)

( 5,491)

(5,195)

(2,663)

(12,910)

(15,795)

14,164

20,156

20,622

85,170

–

46,292

14,752

31,901

–

14,164

20,156

20,622

85,170

1,994,792

(965,291)

1,029,501

144,179

88,878

233,057

tsodilo resources limited

During the year, 1,152,543 warrants were exercised for proceeds to the Company of $475,569. This exercise resulted in the

issuance of 1,152,543 common shares. In addition, $107,760 attributed to the warrants exercised during the year has been

reallocated to share capital. A value of $208,982 (2004: $129,858) has been attributed to the warrants issued during the year.

Warrants were valued using the Black-Scholes model, using key assumptions of volatility ranging from 69-89%, a risk-free interest

rate of 4%, a term equivalent to the life of the warrant, and reinvestment of all dividends in the Company.

As at March 31, 2003

Relating to issue of stock options

Transferred to share capital on exercise of options

As at March 31, 2004

Relating to issue of stock options

Transferred to share capital on exercise of options

As at March 31, 2005

(d) Stock Option Plan

5,666,173

74,419

(2,508)

5,738,084

123,040

(14,406)

5,846,718

Outstanding stock options granted to directors, ofﬁcers and employees at March 31, 2005 and 2004 were as follows:

Expiry

Price

Outstanding

Granted/

Outstanding

Granted/

Outstanding

June 24, 2007

C$0.15

September 18, 2007

December 31, 2007

July 8, 2008

January 1, 2009

January 26, 2009

August 31, 2009

January 3, 2010

C$0.23

C$0.41

C$0.50

C$0.75

C$1.85

March 31, 2003

(Cancelled/ March 31, 2004

(Cancelled/ March 31, 2005

Exercised)

260,000

200,000

165,000

(60,000)

200,000

(50,000)

(i) 150,000

–

200,000

(50,000)

165,000

(115,000)

(i)

(ii)

150,000

50,000

210,000

110,000

50,000

210,000

(60,000)

(ii) 150,000

110,000

(50,000)

50,000

(50,000)

(ii)

60,000

–

260,000

(ii) 260,000

85,000

(ii)

85,000

625,000

310,000

935,000

(30,000)

905,000

Options exercisable at end of year

501,250

668,750

696,250

Weighted average exercise price

- outstanding

- exercisable

$0.39

$0.31

$0.60

$0.46

tsodilo resources limited

All options have a term of ﬁve years.

(i)

These common share purchase options vest as to one-half immediately and one-half on the six-month anniversary of the date granted.

(ii) These common share purchase options vest as to one-quarter immediately and one-quarter on each of the six-month,

12-month and 18-month anniversaries of the date granted.

(iii) The Company recognized an expense of $123,040 (2004: $74,419) relating to the fair value of options granted or vesting

during the year. The fair value of options granted was calculated using the Black-Scholes model, using key assumptions of

volatility of 88%, a risk-free interest rate of 4%, a term equivalent to the life of the option, and reinvestment of all dividends

in the Company. The Company will recognize expense of $111,962 relating to options granted before March 31, 2005 but

not yet vested.

6. INCOME TAXES

The Company uses the asset and liability method of accounting for income tax. Assets and liabilities are recognized for the

estimated future tax consequences attributable to differences between the ﬁnancial statement carrying amounts of existing assets

and liabilities and their respective tax bases. Future income tax assets and liabilities are measured using tax rates in effect for

the period in which those temporary differences are expected to be recovered or settled. The effect on future income tax assets

and liabilities of a change in tax rates or laws is recognized as part of the provision for income taxes in the period the changes

are considered substantively enacted.

The Company’s income tax provision (recovery) has been calculated as follows:

Net Income (loss) for the year

Income tax (recovery) provision at Canadian statutory rates

Current year losses not recognized

Permanent differences

Increase in valuation allowance

Provision for (recovery of ) income taxes

(620,822)

(277,507)

218,180

49,972

9,355

The following summarizes the principal temporary differences and related future tax effect:

Property, Plant and Equipment

Exploration & Development

Losses carried forward

Other

Subtotal – future income tax asset

Valuation allowance

Net future income tax asset recorded

15,000

108,000

1,202,000

49,000

1,374,000

(1,374,000)

tsodilo resources limited

At March 31, 2005, the Company has Canadian net operating losses carried forward that expire as follows (in Canadian dollars):

Loss

884,000

863,000

954,000

813,000

367,000

431,000

538,000

Year of Expiry

2006

2007

2008

2009

2010

2011

2012

7. LOSS PER SHARE

Loss per share is based on a weighted average number of common shares outstanding of 9,136,737 for ﬁscal 2005 (2004:

7,125,514). 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

effect of conversion in computing diluted per share amounts for 2005 and 2004 is anti-dilutive.

8. RELATED PARTY TRANSACTIONS

During the year, the Company did not enter into transactions with related parties

9. SEGMENTED INFORMATION

Substantially all working capital balances of the Company are situated at the head ofﬁce in Canada and in Botswana. Materially

all of the Company’s property plant and equipment is presently located in Canada and Botswana. The geographic distribution of

the property acquisition costs and exploration expenditures is outlined 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:

2006

4,949

tsodilo resources limited

Corporate Information

DIRECTORS

OFFICERS

CORPORATE HEAD OFFICE

Christopher M. H. Jennings (Dr.)

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

Canada Trust Tower - BCE Place

Chairman
Toronto, Ontario

President and

Chief Executive Officer

Appointed as director in 2002

Appointed in 2002

James M. Bruchs
Gaborone, Botswana

Peter W.A. Walker, B.Sc. (Honors)

MBA., Pr.Sci.Nat.

Appointed as director in 2002

Vice President, Exploration

Patrick C. McGinley
Washington, D.C.

Appointed as director in 2002

R. Stuart Angus
Vancouver, British Columbia

Appointed as director in 2004

Appointed in 2004

L. Kirk Boyd, B. Com.

Chief Financial Officer and

Corporate Secretary

Appointed in 2005

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

Fasken Martineau DuMoulin LLP

Toronto, Ontario

REGISTRAR AND
TRANSFER AGENT

Computershare Trust
Company of Canada

Toronto, Ontario

STOCK EXCHANGE LISTING

TSX Venture Exchange

Trading Symbol: TSD

Design: Macrae Design