Tsodilo Resources Limited
Annual Report 2006

Plain-text annual report

Contents President’s Message to Shareholders Management’s Discussion and Analysis of Financial Results Financial Reporting Responsibility of Management Auditors’ Report to the Shareholders Consolidated Financial Statements / Notes Corporate Information 1 2 10 11 12 IBC Newdico and Gcwihaba Prospecting Diamond Licenses - as of March 7, 2007 480000 500000 520000 540000 560000 580000 600000 620000 640000 660000 Legend Diamond License Areas (Newdico) Diamond License Areas (Gcwihaba) Diamond License Application Areas (Gcwihaba) Base Metal License Areas (Gcwihaba) Base Metal License Application Areas (Gcwihaba) Botswana Border Settlement Road Watercourse Pan Kilometers 20 10 0 0 0 0 0 8 9 7 0 0 0 0 6 9 7 0 0 0 0 4 9 7 0 0 0 0 2 9 7 0 0 0 0 0 9 7 0 0 0 0 8 8 7 0 0 0 0 6 8 7 0 0 0 0 4 8 7 0 0 0 0 2 8 7 0 0 0 0 0 8 7 0 0 0 0 8 7 7 0 0 0 0 6 7 7 0 0 0 0 4 7 7 ' E " 0 0 ° 1 2 License applied f or 1 : License applied for: 2 License applied for: 3 ' E " 0 0 ° 2 2 62/2005 63/2005 License applied for: 4 Tsodilo Hills License applied for: 5 Sepupa 64/2005 65/2005 66/2005 67/2005 19°0'0"S Nxau Nxau 68/2005 69/2005 20 70/ 05 71/2005 117/2005 19°0'0"S Etsha 6 72/2005 73/2005 74/2005 Gumare Dobe 78/2005 75/2005 76/2005 77/2005 Nokaneng 79/2005 Xaixai License pending 118/2005 20°0'0"S 41/2003 119/2005 42/2003 43/2003 46/2003 120/2005 ' E " 0 0 ° 1 2 ' E " 0 0 ° 2 2 20°0'0"S Tsau Makakung 0 0 0 0 8 9 7 0 0 0 0 6 9 7 0 0 0 0 4 9 7 0 0 0 0 0 2 9 7 0 0 0 0 0 9 7 0 0 0 0 8 8 7 0 0 0 0 6 8 7 0 0 0 0 4 8 7 0 0 0 0 2 8 7 0 0 0 0 0 8 7 0 0 0 0 8 7 7 0 0 0 0 6 7 7 0 0 0 0 4 7 7 480000 500000 520000 540000 560000 580000 600000 620000 640000 660000 Front cover photo courtesy of www.game-reserve.com President’s Message A very busy and exciting year lies ahead as we make progress in the exploration for an economic kimberlite below the Kalahari cover on this sector of the Congo craton and expand our precious and base metals exploration. Fellow Shareholders, Drilling in the Kalahari 2006 was a year of significant advances for Tsodilo During the past year, the Company funded exploration Resources Limited (“Tsodilo” or the “Company”). We transi- activity by raising funds in the capital markets through the tioned from an exploration company which by necessity was successful issuance of stock by way of private placements. reliant on others to perform their work into an efficient and This process will continue in the coming year. Our current fully equipped exploration company second to none in share base consists of 13,577,354 issued and outstanding capabilities and experience. As a result of the decision to (17,820,448 on a fully diluted basis) common shares. purchase a drill rig and supporting equipment as well as Tsodilo has no debt, a 90% interest in our Botswana geophysical instruments, we now have the ability to select a Newdico project and a 100% interest in our Botswana target; perform a detail ground magnetic survey; and drill Gcwihaba projects. The Company is well positioned to meet test it all in a matter of weeks as opposed to the months or the challenges in the upcoming year. years which it previously took. Since the on-site commission- ing of the Atlas Copco CT14 drill rig, we have drilled approximately 5 kilometers in total depth and collected a similar amount of drill core for analysis. Operating our own drill rig has given us the ability and flexibility to advance our exploration at a far greater rate and at a fraction of the per meter drilling costs of what it was previously. In addition to our exploration program, which is designed to locate an economic kimberlite diamond deposit, the Company will also look to take advantage of opportunities which present themselves in base and precious metals A very busy and exciting year lies ahead as we make progress in the exploration for an economic kimberlite below the Kalahari cover on this sector of the Congo craton and expand our precious and base metals exploration. Please follow our progress carefully and remain informed by regular visits to our website, www.TsodiloResources.com. exploration. As precious and base metals are enjoying a tremendous increase in demand and appreciation, it is James M. Bruchs appropriate that we consider these resources as targets for President and Chief Executive Officer exploration and development. March 22, 2007 1 tsodilo resources limited Management’s Discussion and Analysis This management’s discussion and analysis (“MD&A”) should be paid by either Northbank Diamonds Limited, Hoanib Diamonds read in conjunction with the Consolidated Annual Financial (Proprietary) Limited or Trans Hex (Zimbabwe) Limited. In Statements for the year ended December 31, 2006 and comments addition, the Company was released from the long-term loans due on the factors that affected the Company’s performance during the to Trans Hex Group by the subsidiaries being sold, of $3,341,690, periods covered by the Consolidated Annual Financial Statements and Trans Hex Group agreed to return the 10,688,137 common as well as the Company’s financial condition and future prospects. shares in the capital of the Company, representing 73.22% of the The Company’s functional and reporting currency is United States issued and outstanding shares of the Company at that time, to dollars and all amounts stated are in United States dollar unless treasury for cancellation. The special meeting of shareholders also otherwise noted. The Company changed its financial year end from approved the discontinuance of the Company from the Province of March 31 to December 31 effective December 31, 2005 and was Ontario and its continuance under the Business Corporations Act made to align with the reporting schedule of comparable public (Yukon), the change of name of the Company from Trans Hex companies. The period December 31, 2005 was the transitional International Ltd. to Tsodilo Resources Limited, the election of new period and has a nine month reporting period. This management’s directors and the repeal of the existing stock option plan of the discussion and analysis has been prepared as at March 22, 2007. Company and adoption of a new stock option plan. Following the OVERVIEW Tsodilo Resources Limited (“Tsodilo” or the “Company”) was restructuring of the Company, as approved by shareholders in April 2002, Tsodilo has no long-term debt. organized under the laws of the Province of Ontario in 1996 and Outstanding Share Data continued under the laws of the Yukon in 2002. The shares of the As of March 22, 2007, 13,577,354 common shares of the Company are listed and posted for trading on the TSX Venture Company were outstanding. Of the options to purchase common Exchange under the symbol: TSD. Tsodilo is an international shares issued to eligible persons under the stock option plan diamond exploration company with the majority interest in a of the Company, 1,480,000 options remain outstanding of which kimberlite exploration project in northwest Botswana. The 873,375 are exercisable at exercise prices ranging from Canadian Company has not yet determined whether these properties contain $0.15 - $1.85. If all options were vested and exercised, reserves that can be economically mined. As an exploration stage 1,480,000 common shares of the Company would be issued. 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 As of March 22, 2007, 2,763,094 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 $0.70 - $2.35 for a period of two years from the date of issuance. If converted, 2,763,094 common shares of the Company would be issued. Africa. Corporate 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 Group Limited (“Trans Hex Group”), the principal shareholder and creditor of the Company prior to restructuring, of $612,783. The Principal Shareholders of the Company The largest shareholder of the Company is its President and Chief Executive Officer, James M. Bruchs, who currently owns, controls or directs 2,545,983 or 18.75% of the issued and outstanding common shares as of March 22, 2007. The Firebird Global Master Fund, Ltd. controls 1,875,630 or 13.81% of the issued and outstanding shares as of March 22, 2007 and John R. Redmond, a Director of the Company, currently owns, controls or directs 1,764,359 or 12.99% of the issued and outstanding shares as of Company retained an interest in all future dividends that may be March 22, 2007. 2 tsodilo resources limited Subsidiaries 2007. Drilling is currently ongoing and expected to continue into The Company has a 90% operating interest in its Botswana the 2nd quarter. Upon completion of the drilling in the Guma subsidiary, Newdico (Proprietary) Limited (“Newdico”), which area, various half core samples will be collected from select drill holds prospecting licenses and applications covering holes for petrographic description and for analysis of kimberlite approximately 16,800 square kilometers in northwest Botswana indicator minerals. 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 (10%) in this project, Trans Hex Group, is an established South African diamond mining company. Some, or all, of the current licenses held by Newdico may be subject to the granting of a 2% free carried interest in any mine or mines that may result thereon. Planned Exploration Program for 2007 The program is based on our strategy of using a combination of indicator mineral sampling, magnetic and gravity data to generate individual targets for drill evaluation and our regional strategy of evaluating possible transport corridors giving rise to the alluvial secondary kimberlite indicator minerals (“KIM”) and diamond deposits at Tsumkwe and Omatako. Our program for 2007 will The Company has a 100% interest in its wholly owned Botswana include the following: subsidiary, Gcwihaba Resources (Proprietary) Limited (cid:129) Drill evaluation of 10 high-priority targets in the Nxau Nxau (“Gcwihaba”), which has diamond prospecting licenses covering kimberlite field. approximately 6,800 square kilometers and base and precious metal licenses covering 3,780 square kilometers. Exploration Activities (cid:129) Drill evaluation of 4 previously discovered diamondiferous kimberlites in the Nxau Nxau field for petrography and KIM chemistry analysis. Geophysical surveys will be performed prior NEWDICO (Pty) Limited (“Newdico”) to drilling. Summary of work completed in 2006 and to date (cid:129) Ground magnetic geophysical surveys over ten priority targets and two paleo drainage channels were completed in the Nxau (cid:129) The Company will commence a drill program to collect 100 tons of kimberlite for macro diamond analysis on kimberlite A15 if the KIM chemistry of A15 (5) is favorable. A decision is expected in Nxau area. the 2nd quarter of 2007. (cid:129) A Geographical Information System was completed with all available geological, geophysical and geochemical data captured onto the system. The data is being used to prioritize target areas for further exploration. (cid:129) Access tracks and site clearing totaling 40 kilometers was completed. The favorable chemistry and diamond preservation potential of the kimberlites in our license blocks together with the known secondary alluvial diamond discoveries down slope across the border in Namibia establish the greater Nxau Nxau field as highly prospective with the possibility of several economic kimberlites present within our ground. To date, at least 18% of the kimberlites discovered and tested for diamond in the Nxau Nxau field are known to be (cid:129) Twenty-five diamond core drill holes were completed to diamondiferous. investigate 13 priority targets in the Nxau Nxau kimberlite field. Various half core samples have been collected from those drill holes that intersected kimberlite or kimberlite crater sediments GCWIHABA Resources (Pty) Limited (“Gcwihaba”) for petrographic description and for analysis of kimberlite Diamond Licenses indicator minerals. Summary of work completed in 2006 and to date (cid:129) Ground magnetic geophysical surveys over 6 priority targets were (cid:129) Ground magnetic geophysical surveys over five targets were completed in the northern Ngamiland region. completed. (cid:129) In the Guma area, 17 diamond core drill holes over 10 targets (cid:129) Access tracks and site clearing totaling 19 kilometers was have been completed since drilling commenced in late January completed. 3 tsodilo resources limited (cid:129) During the year our Geographical Information System was Planned Exploration Program for 2007 completed with all available geological, geophysical and (cid:129) There are several zones of co-incident base metal anomalies that geochemical data for these licenses captured onto the system. require follow-up sampling as a first step in the evaluation The data is being used to prioritize target areas for further process. A Chalcophyle Index has been prepared and is currently exploration. (cid:129) Three diamond core drill holes were completed to investigate 3 being reviewed by the Company’s consultants in preparation to assist in the prioritization of these zones for further drill testing. priority targets in the Gcwihaba. The drill holes did not intersect (cid:129) Exploratory drilling of suspected base metal deposits to kimberlite and given the depth of the drill holes (150 – 175 determine their nature, composition and size will take place in meters) no further work on these targets is recommended even the 3rd quarter. though the magnetic anomaly signatures have not been explained. LIQUIDITY AND CAPITAL RESOURCES As at December 31, 2006, the Company had net working capital Planned Exploration Program for 2007 of $213,702 (2005: $296,541), which included cash and (cid:129) Drill evaluation of eight priority targets in the Gcwihaba area is equivalents $201,177 (2005: $289,810). These funds are scheduled for the 4th quarter. Base and Precious Metals Licenses Summary of work completed in 2006 and to date (cid:129) Four base and precious metal licenses were granted to the Company on October 1, 2005, and encompass an area of some 3,780 square kilometers. These licenses were issued for an initial period of three years, renewable for 2 two-year periods. 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. At year end the Company did not have any material contractual obligations. The Company is required to spend a minimum on prospecting over the period of its licenses (Newdico: $1.7 million, Gcwihaba: $0.34 million). To date, the Company has (cid:129) The license areas were selected based on the results of a 1999 exceeded this requirement in the Newdico project. government geochemical soil sampling program, released and partially reported on in November 2001. (cid:129) Three diamond core drill holes were completed on the JEB intrusion (fka 2021A7) to a depth of between 206 – 225 meters. The JEB target is located in the Company’s southern most license block and lies south of the Gumare fault. Various Financial Instruments The carrying amounts reflected in the consolidated balance sheets for cash and equivalents, accounts receivable and accounts payable and accrued liabilities approximate their fair values due to the short maturities of these instruments. Due to the nature of the Company’s operations, there is no significant credit or interest half core samples were submitted for multi-element analysis. The results of this multi-element analysis were subject to further rate risk. study to determine Ni sulfide potential. The metal tenor of the Operating Activities sulfides in the JEB rocks have 1.75% Ni. However, it appears that based on all the data that these rocks crystallized from magma too differentiated to have potential for significant sulfide Cash outflow used in operating activities decreased from $340,924 in fiscal December 31, 2005 to $284,395 for the year ended December 31, 2006. This decrease is due to the result in ores as most of the Ni will have been extracted from the magma gains in foreign exchange. by earlier crystallizing olivine and pyroxene. 4 tsodilo resources limited 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 Net Loss for the Year Basic and diluted loss per share - cents Total Assets Total long term liabilities Cash dividends declared QUARTERLY INFORMATION (in US dollars) Fiscal Year Nine Months Ended Fiscal Year Dec. 31 2006 Dec. 31 2005 Mar. 31 2005 – 541,132 $0.04 – 541,132 $0.04 3,472,693 245,491 – – 470,811 $0.04 – 470,811 $0.04 2,032,426 280,642 – – 620,822 $0.07 – 620,822 $0.07 2,087,421 237,008 – Quarter 1 Quarter 2 Quarter 3 Quarter 4 Fiscal Year 2005 (ended March 31, 2005) Total Revenues Loss for the period Basic and diluted loss per share - cents Total assets Total long term liabilities – 75,106 $0.01 1,422,230 213,549 Fiscal Period 2005* (ended December 31, 2005) Total Revenues Loss for the period Basic and diluted loss per share - cents Total assets Total long term liabilities – 83,068 $0.01 2,171,006 294,236 * Transitional period for year end change to December 31 Fiscal Year 2006 (ended December 31, 2006) Total Revenues Loss for the period Basic and diluted loss per share - cents Total assets Total long term liabilities – 156,252 $0.01 2,689,555 289,490 – 185,742 $0.02 1,408,529 237,245 – 190,070 $0.02 2,166,670 294,236 – 234,194 $0.02 2,891,225 235,769 – 113,981 $0.01 1,842,605 237,245 – 197,673 $0.02 2,032,426 280,642 – 89,720 $0.01 3,278,118 219,441 – 245,993 $0.03 2,087,421 237,008 – 60,966 $0.00 3,472,693 245,491 5 tsodilo resources limited Investing Activities Company received proceeds in the amount of $1,739,907 from Cash flow applied in investing activities increased to $1,508,994 the issuance of common shares upon the exercise of warrants for the year ended December 31, 2006 (2005: $281,249). during the fiscal period. $693,394 or 93.1% of the exploration expenditures were spent on the Newdico properties and $51,108 or 6.9% of the expenditures were on the Gcwihaba properties. Total expenditures of $744,502 on exploration properties for the period ended December 31, 2006 were attributable to the Newdico and Gcwihaba projects in northwest Botswana and included the 10% share funded by the Trans Hex Group for the Newdico project. During the year the Company acquired a Mobile drill rig and support vehicles at a total cost of $752,625. There were no material disposals of capital assets or investments during the year. In November 2006, the board of directors of Newdico approved an exploration program and budget for the period January 1, to December 31, 2007 that calls for expenditures totaling approximately Pula 10.6 million (approximately $1.7 million as of Subsequent to the fiscal period end, the Company issued, through non-brokered private placement 141,516 units at a price of $0.68 (C$0.80) per unit for gross proceeds of $95,853. Each unit consists of one common share of the Company and one warrant of the Company, each warrant entitling the holder to purchase one common share of the Company at a price of C$0.80 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 February 15, 2008. Tsodilo expects to raise the amounts required to fund its 90% share of the Newdico project, the Gcwihaba projects and corporate general and administration expenses, by way of negotiated non- brokered private placements. March 22, 2007). Trans Hex Group is presently responsible for RESULTS OF OPERATIONS funding 10% of the expenses of this company. The approved exploration program includes provision for additional drilling, soil sampling, airborne and ground magnetics and ground gravity surveying, geophysical interpretation. The required third year diamond exploration program expenditures, including license fees, for Gcwihaba amount to approximately Pula 0.42 million (approximately $0.07 million as of March 22, 2007). Gcwihaba’s expenditures will exceed this required amount. The required expenditure in the first year of the base metal exploration program amounts to approximately Pula 0.20 million (approximately $0.03 million as of March 22, 2007). 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 On a consolidated basis Tsodilo recorded a net loss of $541,132 in the fiscal year ended December 31, 2006 ($0.04 cents per common share) compared to a net loss of $470,811 in the nine month fiscal period ended December 31, 2005 ($0.04 cents per common share). The Company experienced increases in travel, investor relations and office and admin expenses reflecting increased activity in general corporate activity partially offset by reductions in consulting and legal and audit as a result of less reliance on outside consultants and professional services. The increase in stock option expense reflects the timing of option grants and the change in year end from March 31 to December 31 in 2005, resulting in options issued in one period would have been reported in the next fiscal if the year end had not been changed. Exploration expenditure on all projects amounted to $744,502 during the year ended December 31, 2006 compared to $282,977 for the period ended December 31, 2005. Exploration expenditure incurred on the Newdico project for the year ended December 31, 2006 was $693,394 compared to $239,505 for the period ended December 31, 2005. The principal components of the Newdico exploration program were: (a) additional soil of the Company, with each full such warrant entitling the holder to sampling and the completion of the processing and analysis of the purchase one common share of the Company for a purchase price soil samples; (b) commissioning of further ground magnetic and equal to the unit price for a period of two years from the date of gravity survey of selected aeromagnetic anomalies; (c) analyzing issuance. During the year ended December 31, 2006 the detailed proprietary aeromagnetic maps covering the target areas; 6 tsodilo resources limited and (d) commencement of a reverse circulation drilling program on adequate funding will be available, or available under terms selected targets. Exploration expenditure incurred on the Gcwihaba favorable to the Company, for these purposes when ultimately project for the year ended December 31, 2006 was $51,108 required. The exploration and development of mineral deposits compared to $43,472 for the period ended December 31, 2005. involve significant financial risks over an extended period of time. The principal component of the Gcwihaba exploration program was Even a combination of careful evaluation, experience and commencement of a reverse circulation drilling program on knowledge may not eliminate these risks. While discovery of a selected targets PERSONNEL diamond deposit may result in substantial rewards, few exploration properties ultimately become producing mines. At December 31, 2006 the Company and its subsidiaries Off-Balance Sheet Arrangements employed eighteen (18) individuals as compared to six at The Company has not entered into any off-balance sheet financing December 31, 2005, including senior officers, administrative and arrangements. operations personnel including those on short-term contract bases. Exploration Risks FOURTH QUARTER – 2006 The Company’s operations are subject to all the hazards and risks The fourth quarter was a normal operating period for a quarter and normally incident to the exploration, development and mining of year end. Having acquired drilling equipment during the year, the diamond deposits, any of which could result in damage to life or Company was able to continue its drilling program to the end of the property, environmental damage and possible legal liability for any year. Operating expenses were at normal levels for the last quarter or all damage. Whether a diamond deposit will ultimately be of the year. 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 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. 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 cannot 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. At any stage in the process, the results may indicate that the Currency Risks deposit lacks the required economic value. Capital Requirements 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 diamond mine would require significant additional financing. There can be no assurance that The Company’s financing has generally been received in United States dollars while significant portions of its operating expenses has been and will be incurred in Botswana Pula. On May 29, 2005, the Botswana Minister of Finance and Development Planning announced a 12% devaluation of the pula against a basket of currencies, as well as a change in the system of 7 tsodilo resources limited exchange-rate adjustments to a crawling peg rather than the reporting and display of comprehensive income. It does not discrete steps previously used, in order to improve Botswana’s address issues of recognition or measurement for comprehensive competitiveness. This action has stabilized the current pula / income and its components. The Company is assessing the impact dollar rates similar to those in 2002. of the adoption of Section 1506 on the consolidated financial 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. 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. Changes in Accounting Policies including Initial Adoption There were no changes in accounting policies for the fiscal year ended December 31, 2006. The following accounting policies impact 2007. statements of the Company. Effective January 1, 2007, the Company will be required to adopt CICA Handbook Section 3051 which replaces Section 3050. This Section establishes standards for accounting for investments subject to significant influence and for measuring and disclosing certain other non-financial instrument investments. The adoption of Section 3051 is not expected to have a material impact on the consolidated financial statements of the Company. Effective January 1, 2007 the Company will be required to adopt CICA Handbook Section 3251 which replaces Section 3250. This Section establishes standards for the presentation of equity and changes in equity during the reporting period. The adoption of Section 3251 is not expected to have a material impact on the consolidated financial statements of the Company. Effective January 1, 2007, the Company will be required to adopt the changes to CICA Handbook Section 3855 and to adopt Section 3861 which replaces Section 3250. Section 3855 establishes standards for recognizing and measuring financial assets, financial liabilities and non-financial derivatives. Section 3861 establishes standards for presentation of financial instruments and non- Effective January 1, 2007, the Company will be required to adopt financial derivatives, and identifies the information that should be the Canadian Institute of Chartered Accountants ("CICA") disclosed about them. The Company is assessing the impact of the Handbook Section 1506. This Section establishes criteria for adoption of Sections 3855 and 3861 on the consolidated financial changing accounting policies, together with treatment and statements of the Company. disclosure of changes in accounting policies and estimates and correction of errors. The Company is assessing the impact of the adoption of Section 1506 on the consolidated financial statements of the Company. Effective January 1, 2007, the Company will be required to adopt the changes to CICA Handbook Section 3865. This Section establishes standards for when and how hedge accounting may be applied. The adoption of Section 3865 is not Effective January 1, 2007, the Company will be required to adopt expected to have a material impact on the consolidated financial the Canadian Institute of Chartered Accountants ("CICA") statements of the Company. Handbook Section 1530. This Section establishes standards for 8 tsodilo resources limited Over the next five years the CICA will adopt its new strategic plan FORWARD-LOOKING STATEMENTS for the direction of accounting standards in Canada which was The Annual Report, including this MD&A, contains certain ratified in January 2006. As part of that plan, accounting forward-looking statements related to, among other things, standards in Canada for public companies will converge with expected future events and the financial and operating results of International Financial Report Standards (IFRS) over the next five the Company. Forward-looking statements are subject to inherent years. The Company continues to monitor and assess the impact risks and uncertainties including, but not limited to, market and of the planned convergence of Canadian GAAP with IFRS. 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 March 22, 2007 DISCLOSURE CONTROLS The Company’s Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining the Company’s disclosure controls and procedures. The Chief Executive Officer and the Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures as at December 31, 2006, have concluded that the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would have been known to them. RELATED PARTY TRANSACTIONS During the year ended December 31, 2006, the Company borrowed $100,000 on an interim basis from a person who is an officer and director of the Company. The loan had no interest rate, no maturity date, and no terms of repayment. The loan was repaid during the year. The Company did not enter into transactions with related parties during the year ended December 31, 2005. 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. ADDITIONAL INFORMATION Additional information relating to Tsodilo Resources Limited is available on its website www.TsodiloResources.com or through SEDAR at www.sedar.com. 9 9 tsodilo resources limited tsodilo resources limited  Financial Reporting Responsibility of Management The annual report and consolidated financial statements have financial reporting and internal control. The Audit Committee is been prepared by management. The consolidated financial composed of three directors, all of whom qualify as unrelated statements have been prepared in accordance with Canadian directors and are independent of management and free from any generally accepted accounting principles and include amounts interest or business relationship which could, or could be that are based on informed judgments and best estimates. The perceived to, materially interfere with their ability to act in the financial information presented in this annual report is consis- best interests of the Company. This committee meets periodical- tent with the consolidated financial statements. Management ly with management and the external auditors to review acknowledges responsibility for the fairness, integrity and accounting, auditing, internal control and financial reporting objectivity of all information contained in the annual report matters. The Audit Committee reviews the annual financial including the consolidated financial statements. Management is statements before they are presented to the Board of Directors also responsible for the maintenance of financial and operating for approval and considers the independence of the auditors. 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 respon- sible for ensuring that management fulfills its responsibilities for The financial statements for the period ended December 31, 2006 have been audited by KPMG Inc., the external auditors, in accordance with Canadian generally accepted auditing standards on behalf of the shareholders. Their report follows hereafter. James M. Bruchs President and Chief Executive Officer March 22, 2007 L. Kirk Boyd Chief Financial Officer March 22, 2007 10 tsodilo resources limited 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 December 31, 2006 and the consolidated and disclosures in the financial statements. An audit also includes statements of operations, deficit and cash flows for each of the years assessing the accounting principles used and significant estimates in the two-year period ended December 31, 2006. These financial made by management, as well as evaluating the overall financial statements are the responsibility of the Company’s management. Our statement presentation. responsibility is to express an opinion on these financial statements based on our audits. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at We conducted our audits in accordance with Canadian generally December 31, 2006 and the results of its operations and its cash accepted auditing standards. Those standards require that we plan flows for each of the years in the two-year period ended December 31, and perform an audit to obtain reasonable assurance whether the 2006 in accordance with Canadian generally accepted accounting financial statements are free of material misstatement. An audit principles. KPMG Inc. Registered accountants and auditors Bloemfontein, South Africa March 22, 2007 11 tsodilo resources limited Tsodilo Resources Limited Consolidated Balance Sheets As at December 31, 2006 and 2005 (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 Deficit Going Concern (note 1) Subsequent events (note 5) Commitments (note 11) 2006 2005 201,177 53,055 254,232 2,424,118 794,343 3,472,693 40,530 245,491 27,024,564 1,018,683 6,336,204 (837,425) (30,355,354) 3,186,672 3,472,693 289,810 28,055 317,865 1,679,616 34,945 2,032,426 21,324 280,642 26,218,172 140,112 6,023,823 (837,425) (29,814,222) 1,730,460 2,032,426 APPROVED ON BEHALF OF THE BOARD OF DIRECTORS James M. Bruchs Director Patrick C. McGinley Director The accompanying notes are an integral part of these consolidated financial statements. 12 tsodilo resources limited Tsodilo Resources Limited Consolidated Statements of Operations For the years ended December 31, 2006 and 2005 (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 (gain)/loss Stock-based compensation (note 5) Loss before non-controlling interest Non-controlling interest Loss for the period Basic and diluted loss per share - cents (note 7) Consolidated Statements of Deficit For the years ended December 31 (in United States dollars – note 2) Deficit – Beginning of period Loss for the year Deficit - End of year 2006 2005 - 124,254 36,089 74,437 37,392 67,305 5,092 (60,876) 257,439 541,132 (541,132) - (541,132) ($0.04) 17,939 99,844 5,029 35,374 56,799 40,836 1,688 50,546 162,756 470,811 (470,811) – (470,811) ($0.04) 2006 2005 (29,814,222) (541,132) (30,355,354) (29,343,411) (470,811) (29,814,222) The accompanying notes are an integral part of these consolidated financial statements. 13 tsodilo resources limited Tsodilo Resources Limited Consolidated Statements of Cash Flows For the years ended December 31, 2006 and 2005 (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 5) Net change in non-cash working capital balances INVESTING ACTIVITIES Exploration properties Additions to Property, Plant and Equipment FINANCING ACTIVITIES Issue of common shares Contribution from non-controlling interest Change in cash and equivalents - For the period Cash and equivalents - Beginning of period Cash and equivalents - End of period 2006 2005 (541,132) (470,811) 5,092 257,439 (278,601) (5,794) (284,395) (617,723) (891,271) (1,508,994) 1,739,905 (35,151) 1,704,756 (88,633) 289,810 201,177 1,688 162,756 (306,367) 34,557 (340,924) (273,924) (7,325) (281,249) 230,544 43,634 274,178 (347,995) 637,805 289,810 The accompanying notes are an integral part of these consolidated financial statements. 14 tsodilo resources limited Tsodilo Resources Limited Notes to the Consolidated Financial Statements For the years ended December 31, 2006 and 2005 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 Africa. As at December 31, 2006, the Company reported an accumulated deficit of $30,355,354 (2005: $29,814,222) and cash outflows from operations $284,395 (2005: $340,924) for the period 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. Tsodilo expects to raise amounts to fund continued exploration by way of negotiated non-brokered private placements (refer note 5). 2. SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation and preparation of the consolidated 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. Group Companies: December 31, 2006 and 2005 Tsodilo Resources Bermuda Limited Gcwihaba Resources (Proprietary) Ltd (Botswana) (“Gcwihaba”) 2006 100% 100% 2005 100% 100% Newdico (Proprietary) Limited (Botswana) (“Newdico”) 90% (note 3) 81% (note 3) Earnings per share Basic Earnings-Per-Share (EPS) is computed as net income (loss) applicable to common stockholders’ divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issued through stock options, warrants and other convertible securities when the effect would be dilutive. 15 tsodilo resources limited 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. 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. Property, Plant and Equipment 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. Property, plant and equipment 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 Company’s functional and reporting currency is the US dollar. The Company’s subsidiaries are accounted for as integrated foreign operations. Transactions of the Company and its subsidiaries originating in foreign currencies are translated at the rates in effect at the time of the transaction. Monetary items are denominated in foreign currencies which are translated to US dollar at exchange rates in effect at the balance sheet dates and non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Revenue and expense items are translated at the average rate prevailing during the year except for depreciation, depletion, amortization and write-downs, which are translated at the same exchange rates as the assets to which they relate. Foreign exchange gains and losses are included in the statement of operations. Cash and Equivalents Cash and equivalents are comprised of cash, term deposits and money market instruments with investment grade credit ratings and market maturity dates remaining of 90 days or less from the date of acquisition. 16 tsodilo resources limited Income Taxes The Company uses the asset and liability method of accounting for income taxes. 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. A valuation allowance is recorded against any future income to an asset if it is more than likely than not that the asset will not be realized. 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 1,789,750 shares of common stock. The exercise price is determined by the Chairman of the Compensation Committee and the President and CEO in consultation with 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. Under the fair value method stock-based payments are measured at the fair value of the equity investments and are amortized over the vesting period. Consideration paid on exercise of stock options is credited to common share capital. 3. EXPLORATION PROPERTIES These may be summarized as follows: Balance at March 31, 2005 Apr. to Dec. 2005 expenditures Balance at December 31, 2005 Jan. to Dec. 2006 expenditures Balance at December 31, 2006 Newdico Botswana $ 1,260,547 239,505 1,500,052 693,394 2,193,446 Gcwihaba Botswana $ 136,092 43,472 179,564 51,108 230,672 Total $ 1,396,639 282,977 1,679,616 744,502 2,424,118 17 tsodilo resources limited 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. In 2005, the Company was reissued its prospecting licenses for an initial term of three years, and are renewable for 2 two year periods upon application and have a final expiry of 2012. The terms of the licenses also require Newdico to spend a minimum of Botswana Pula 8.6 million (approximately $1.4 million) on prospecting over this period, inclusive of the renewals. Originally, Newdico was held 75% by Tsodilo and 25% by Trans Hex Group Limited (“THG”), with Tsodilo being the operator. THG has funded or been attributed to its proportionate share of expenditure and these amounts have been reflected as non-controlling interest of $245,491 (2005: $280,642) in the financial statements. During the year ended December 31, 2006, THG decided not to fund its proportional share of expenditures on cash calls and therefore as of January 1, 2007, the Company’s interest in Newdico had effectively increased from 75% to 90% (2005: 81%) in accordance with the exploration agreement between the two parties. Trans Hex Group has also advanced funds amounting to $205,591 (2005: $205,591) 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 Trans Hex Group’s share of any future earnings of Newdico after repayment of loans relating to the Newdico Project. 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. Gcwihaba Resources (Proprietary) Limited – Botswana Gcwihaba, a wholly owned subsidiary of the Company, holds prospecting licenses in the southern Ngamiland project area. Diamond Exploration The terms of the licenses grant Gcwihaba the right to prospect for a total of three years to 2006, and were renewed for 2 two year period with a final expiry of 2010. The terms require Gcwihaba to spend a minimum of Botswana Pula 1.05 million (approximately $0.17 million) on prospecting over the initial period of the licenses exclusive of the current renewals. Base and Precious Metal Exploration The terms of the licenses grant Gcwihaba the right to prospect for a total of three years to 2008, and are renewable for 2 two year periods upon application and have a final expiry of 2012. The terms require Gcwihaba to spend a minimum of Botswana Pula 0.72 million (approximately $0.12 million) on prospecting over this period, exclusive of their current renewals. 18 tsodilo resources limited 4. PROPERTY, PLANT AND EQUIPMENT December 31, 2005 Vehicles Furniture and Equipment December 31, 2006 Vehicles Furniture and Equipment Cost 40,473 32,595 73,068 887,855 76,484 964,339 Accumulated amortization 21,555 16,568 38,123 132,387 37,609 169,996 Book value 18,918 16,027 34,945 755,468 38,875 794,343 An amount of $126,781 of the accumulated depreciation has been capitalized under exploration properties. 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, 2005 10,481,626 25,909,032 On exercise of warrants (including $78,596 reallocated from warrants) (b) 563,419 309,140 Issued and outstanding at December 31, 2005 11,045,045 26,218,172 Shares (number) Amount $ On private placement for cash (i) On private placement for cash (ii) On private placement for cash (iii) On private placement for cash (iv) On private placement for cash (v) Ascribed to warrants issued (b) 468,776 319,108 649,984 161,586 791,339 499,990 248,828 405,441 100,000 485,648 - (933,515) Issued and outstanding at December 31, 2006 13,435,838 27,024,564 19 tsodilo resources limited (i) Private Placement In January 2006, the Company issued, through a non-brokered private placement, 468,776 units of the Company at a price of $1.07 (C$1.25) per unit for gross proceeds to the Company of $499,990. Each unit consists of one common share of the Company and one warrant of the Company, each warrant entitling the holder to purchase one common share of the Company at a price of $0.87 (C$1.00) 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 January 27, 2007. (ii) Private Placement In February 2006, the Company issued, through a non-brokered private placement, 319,108 units of the Company at a price of $0.78 (C$0.90) per unit for gross proceeds to the Company of $248,828. Each unit consists of one common share of the Company and one warrant of the Company, each warrant entitling the holder to purchase one common share of the Company at a price of $0.87 (C$1.00) 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 June 21, 2006. (iii) Private Placement In May 2006, the Company issued, through a non-brokered private placement 649,984 units of the Company at a price of $0.63 (C$0.70) per unit for gross proceeds to the Company of $405,441. 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 $0.62 (C$0.70) for a period of two years. The common shares, warrants and warrant shares are subject to a negotiated hold period of 12 months, expiring on May 9, 2007. (iv) Private Placement In July 2006, the Company issued, through a non-brokered private placement 161,586 units of the Company at a price of $0.62 (C$0.70) per unit for gross proceeds to the Company of $100,000. 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 $0.62 (C$0.70) for a period of two years. The common shares, warrants and warrant shares are subject to a negotiated hold period of 12 months, expiring on July 28, 2007. (v) Private Placement In September 2006, the Company issued, through a non-brokered private placement 791,339 units of the Company at a price of $0.63 (C$0.70) per unit for gross proceeds to the Company of $485,648. 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 $0.63 (C$0.70) for a period of two years. The Company has negotiated finder’s fees of $13,875, payable in accordance with the policies of the TSX Venture Exchange with respect to 500,000 units of the placement. The common shares, warrants and warrant shares are subject to a statutory hold period under securities laws of 4 months, expiring on January 27, 2007. 20 tsodilo resources limited (vi) Private Placement In February 2007, the Company issued, through a non-brokered private placement 141,516 units of the Company at a price of $0.68 (C$0.80) per unit for gross proceeds to the Company of $95,853. 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 $0.68 (C$0.80) for a period of two years. The common shares, warrants and warrant shares are subject to a negotiated hold period of 12 months, expiring on February 13, 2008. (b) Warrants As at December 31, 2006, the following warrants were outstanding: Expiry Number of Warrants Exercise Price Opening Issued/ (Exercised) (Expired) Closing Opening (dollars) Value Issued/ (Exercised) (Expired) Closing (dollars) June 1, 2006 C$0.75 65,024 (65,024) October 14, 2006 C$1.12 56,969 (56,969) November 8, 2006 C$2.35 26,668 (26,668) - - - 14,164 (14,164) 20,156 (20,156) 20,622 (20,622) - - - March 4, 2007 C$1.15 230,785 - 230,785 85,170 - 85,170 January 27, 2008 February 21, 2008 May 4, 2008 July 19, 2008 September 21, 2008 C$1.00 C$1.00 C$0.70 C$0.70 C$0.70 - - - - - 468,776 468,776 319,108 319,108 649,984 649,984 161,586 161,586 791,339 791,339 - - - - - 146,788 146,788 109,988 109,988 167,886 167,886 49,643 49,643 459,208 459,208 379,446 2,242,132 2,621,578 140,112 878,571 1,018,683 During the year 2,390,853 warrants issued and a value of $933,813 was attributed as at December 31, 2006 (2005: none issued). During the year ended December 31, 2006 warrants were valued using the Black-Scholes model, using key assumptions of volatility ranging from 69-89%, a risk-free interest rate of 4.5%, a term equivalent to the life of the warrant, and reinvestment of all dividends in the Company. (c) Contributed Surplus As at March 31, 2005 Relating to expiry of warrants Relating to issue of stock options As at December 31, 2005 Relating to the expiry of warrants Relating to issue of stock options As at December 31, 2006 5,846,718 14,349 162,756 6,023,823 54,942 257,439 6,336,204 21 tsodilo resources limited (d) Stock Option Plan Outstanding stock options granted to directors, officers and employees at December 31, 2006 and December 31, 2005 were as follows: Outstanding Granted/ Outstanding March (Cancelled/ December Expiry Price 31, 2005 Exercised) 31, 2005 Granted (Cancelled) June 24, 2007 C$0.15 150,000 (50,000) 100,000 September 18, 2007 C$0.23 150,000 (50,000) 100,000 December 31, 2007 C$0.41 50,000 - 50,000 July 8, 2008 C$0.50 150,000 (50,000) 100,000 Outstanding December 31, 2006 (i) (i) (ii) (ii) 100,000 100,000 50,000 100,000 January 1, 2009 C$0.75 60,000 August 31, 2009 C$0.75 260,000 - - 60,000 260,000 (10,000) (ii) 50,000 (10,000) (ii) 250,000 January 3, 2010 C$1.85 85,000 (50,000) 35,000 (25,000) (ii) 10,000 August 19, 2010 C$1.25 January 3, 2011 C$1.25 April 27, 2011 C$0.70 August 18, 2011 C$0.70 November 1, 2011 C$1.00 - - - - - 280,000 280,000 (20,000) (ii) 260,000 - - - - - - - - 85,000 (25,000) (ii) 60,000 300,000 65,000 50,000 (ii) (ii) (ii) 300,000 65,000 50,000 905,000 80,000 985,000 500,000 (90,000) 1,395,000 Options exercisable at end of year 696,250 680,000 Weighted average exercise price - issued - outstanding - exercisable C$0.55 C$0.60 C$0.46 All options have a term of five years. C$0.67 C$0.83 C$0.65 873,375 C$0.76 C$0.80 C$0.79 (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 $257,439 (2005: $162,756) 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 C$124,043 relating to options granted before December 31, 2006 but not yet vested. On January 2, 2007, the Company issued 85,000 options under its Stock Option Plan to persons who were officers and employees of the Company. 22 tsodilo resources limited 6. INCOME TAXES The recovery of income taxes varies from the amounts that would be computed by applying the Canadian federal and provincial statutory rate of approximately 36.12% (Dec. 2005 – 36.12%) to income before taxes as follows: Net loss for the period Income tax (recovery) provision at Canadian statutory income tax rates Current year losses not recognized Permanent differences Provision for (recovery of ) income taxes December 31 December 31 2006 2005 (541,132) (195,457) 106,030 89,427 (470,811) (170,057) 111,263 58,794 - - The following summarizes the principal temporary differences and related future tax effect: Property, Plant and Equipment Exploration & Development - Canada Exploration & Development - Botswana Losses carried forward - Canada Losses carried forward - Botswana Other Subtotal – future income tax asset Valuation allowance Net future income tax asset recorded Dec 31 2006 14,000 93,000 Dec 31 2005 12,000 92,000 (890,617) (606,000) 1,389,000 1,585,000 941,562 42,000 642,000 42,000 1,588,944 1,767,000 (1,588,944) (1,767,000) - - At December 31, 2006, the Company has Canadian net operating losses carried forward that expire as follows: Loss 740,000 818,000 697,000 315,000 369,000 492,000 185,000 214,000 Year of Expiry 2007 2008 2009 2010 2011 2012 2012 2013 (1) (1) (1) (1) (1) *(1) *(2) (2) * 2005 was a transitional year for year end change from March 31 to December 31. (1) expires March 31 and (2) expires December 31. 23 tsodilo resources limited Total assessable losses relating to the activity in Botswana as at December 31, 2006 was $3,337,768 (December 31, 2005: $1,778,000) of which $2,606,760 (December 31, 2005: $1,680,000) have no expiry date. 7. LOSS PER SHARE Loss per share is computed on the basis of the loss of $541,132 for the year ended December 31, 2006 (2005: $470,811) and the weighted average number of common or equivalent shares outstanding during period, December 31, 2006: 12,473,977 (2005: 10,811,496). The effect of stock options and warrants in computing diluted per share amounts for December 31, 2006 and December 31, 2005 is anti-dilutive. 8. RELATED PARTY TRANSACTIONS During the year ended December 31, 2006, the Company borrowed $100,000 on an interim basis from a person who is an officer and director of the Company. The loan had no interest rate, no maturity date, and no terms of repayment. The loan was repaid during the year. The Company did not enter into transactions with related parties during the year ended December 31, 2005. 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 ($2,720) and Botswana ($791,623). 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 accounts payable and accrued liabilities approximate their fair values due to the short maturities of these instruments. 11. COMMITMENTS All operating leases that are for a period of no longer than one year are prepaid. Minimum lease payments for leased storage space are as follows: 2008 2009 27,216 27,216 The lease commitment is for storage space in Botswana at an annual rental of BWP 158,888 per year for 2008 and 2009 converted at an exchange rate as of the date of the report to US dollar. The Company holds prospecting licenses which require the Company to spend a specified minimum amount on prospecting over the period of the terms as outlined in note 3. 24 tsodilo resources limited Corporate Information DIRECTORS OFFICERS CORPORATE HEAD OFFICE 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) 987-4369 Website: www.TsodiloResources.com E-Mail: info@TsodiloResources.com AUDITORS KPMG Inc. Johannesburg, South Africa 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 James M. Bruchs Gaborone, Botswana President and Appointed as director in 2002 Chief Executive Officer Patrick C. McGinley Washington, D.C. Appointed as director in 2002 R. Stuart Angus Vancouver, British Columbia Appointed as director in 2004 John R. Redmond Potomac, Maryland Appointed as director in 2005 Appointed in 2002 L. Kirk Boyd, B. Com. Chief Financial Officer Appointed in 2005 Gail McGinley Corporate Secretary Appointed in 2005 Design: Macrae Design 

Continue reading text version or see original annual report in PDF format above