THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION
If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other independent professional adviser.
If you have sold or transferred all your shares in CNNC International Limited (the ‘‘Company’’), you should at once hand this circular to the purchaser(s) or transferee(s) or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or transferee(s).
Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.
This circular is for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for any shares.
CNNC INTERNATIONAL LIMITED 中 核 國 際 有 限 公 司*
(Incorporated in the Cayman Islands with limited liability) (Stock Code: 2302)
MAJOR TRANSACTION
(1) OFFER TO ACQUIRE A MINIMUM OF 50.1% AND UP TO ALL THE ISSUED AND OUTSTANDING COMMON SHARES OF WESTERN PROSPECTOR (OTHER THAN THOSE ALREADY BENEFICIALLY OWNED BY FIRST DEVELOPMENT) (2) SUBSCRIPTION AGREEMENT TO SUBSCRIBE FOR NEW SHARES IN WESTERN PROSPECTOR BY FIRST DEVELOPMENT
* For identification purpose only
30 June 2009 CONTENTS
Page
DEFINITIONS ...... 1
LETTER FROM THE BOARD ...... 6
Introduction ...... 6
Support Agreement ...... 7
Subscription Agreement ...... 11
Basis of determining the Offer price and the Subscription price ...... 13
Information on Western Prospector ...... 14
Waiver from strict compliance with Rule 18.09(6) of the Listing Rules ...... 17
Risk factors ...... 18
Information on the Group ...... 20
Management discussion and analysis ...... 20
Financial effect of the Offer and the Subscription ...... 25
Working capital ...... 26
Indebtedness ...... 26
Financial and trading prospects of the Enlarged Group ...... 27
Reasons for and benefits of the Offer and the Subscription ...... 27
Listing Rules implications ...... 28
Additional information ...... 28
APPENDICES
I AUDITED FINANCIAL INFORMATION OF THE GROUP ...... I-1
II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR ...... II-1
III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP ...... III-1
IV REPORTS PREPARED BY INDEPENDENT TECHNICAL EXPERTS
A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA ...... IV A-1
B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR ...... IV B-1
V GENERAL INFORMATION ...... V-1
–i– DEFINITIONS
In this circular, unless the context otherwise requires, the following expressions shall have the following meanings:
‘‘Affiliate’’ with respect to any person, any other person who directly or indirectly controls, is controlled by, or is under direct or indirect common control with, such person, and includes any person in like relation to an affiliate; ‘‘control’’ as used with respect to any person, means the possession, directly or indirectly, of the power, in fact, to appoint the directors, management committee or similar managing body of such person, through the ownership of voting securities
‘‘Aker’’ Aker Solutions Canada Inc., an independent technical consultant
‘‘Announcement’’ the announcement of the Company dated 14 April 2009 in relation to the Offer and the Subscription
‘‘Applicable Securities Laws’’ any and all securities laws including statutes, rules, regulations, bye-laws, policies, guidelines, orders, decisions, rulings and awards, applicable in the jurisdictions in which the Subscription Shares will be offered, sold and issued
‘‘Bid Circular’’ the bid circular prepared by First Development in accordance with applicable Laws and to be mailed to each Holder of Common Shares as soon as reasonably practicable and, in any event, not later than 11: 59 p.m. (Toronto time) on 15 April 2009 (equivalent to 11: 59 a.m. (Hong Kong time) on 16 April 2009) or such later time as prescribed in the Support Agreement
‘‘Business Day’’ any day except a Saturday, Sunday or statutory holiday in Toronto, Ontario, Canada
‘‘CAD’’ Canadian dollars, the lawful currency of Canada
‘‘CAM’’ Chlumsky, Armbrust & Meyer, LLC, an independent technical consultant
‘‘CAM report’’ the Review and Valuation of Certain Mongolian Mineral Properties of Western Prospector prepared by CAM, the text of which is appended to Appendix IV B of this circular
‘‘CNNC Overseas’’ CNNC Overseas Uranium Holding Limited, a company incorporated in Hong Kong with limited liability and the shareholder of the Company who held approximately 70.25% of the issued share capital of the Company as at the Latest Practicable Date
‘‘Common Shares’’ common shares of Western Prospector (including the common shares issued after the date of the Offer and prior to the Expiry Time on the exercise, surrender or cancellation of Options), together with the associated rights issued under the Shareholder Rights Plan
‘‘Company’’ CNNC International Limited, an exempted company incorporated in the Cayman Islands with limited liability, whose shares are listed on the Main Board of the Stock Exchange
‘‘Compulsory Acquisition’’ an acquisition by First Development of Common Shares not tendered to the Offer utilizing the provisions of Part 9 — Division 6 of the Business Corporations Act (British Columbia)
‘‘Conditions’’ has the meaning as set out under the sub-section headed ‘‘Conditions to making of the Offer’’ in the section headed ‘‘Support Agreement’’ in the Letter from the Boardinthiscircular
‘‘connected persons’’ has the meaning ascribed to it under the Listing Rules
‘‘Directors’’ directors of the Company
–1– DEFINITIONS
‘‘Disclosure Letter’’ the letter dated the same date as the date of the Support Agreement from Western Prospector to First Development delivered concurrently with the Support Agreement
‘‘Effective Time’’ the time that First Development shall have taken up the number of Common Shares sufficient to satisfy the Minimum Condition
‘‘Enlarged Group’’ the Group after the completion of the Offer and the Subscription
‘‘Escrow Agent’’ Stikeman Elliott LLP, a limited liability partnership established under the laws of the Province of Ontario
‘‘Escrow Agreement’’ an escrow agreement dated 25 March 2009 (Toronto time) entered into between First Development, Western Prospector and the Escrow Agent, pursuant to which First Development has deposited a sum of CAD3,000,000 into a Canadian dollar escrow account maintained by the Escrow Agent at the Canadian Imperial Bank of Commerce
‘‘Expiry Date’’ the date on which the Expiry Time occurs
‘‘Expiry Time’’ the time at which the Offer initially expires, that is (i) not earlier than 5: 00 p.m. (Toronto time) on the 36th day after the day that the Bid Circular is mailed to Holders of Common Shares, subject to the right of First Development to extend from time to time the period during which Common Shares may be deposited under the Offer and (ii) not later than the Outside Date
‘‘Exploration Licenses’’ the exploration licenses 7685X and 4969X of Western Prospector which are the primary licenses for Western Prospector and together, encompass the Gurvanbulag Central Deposit
‘‘First Development’’ First Development Holdings Corporation, an indirect wholly-owned subsidiary of the Company incorporated in the British Virgin Islands
‘‘Fully-Diluted Basis’’ with respect to the number of outstanding Common Shares at any time, such number of Common Shares calculated assuming that all Options are exercised for Common Shares
‘‘Governmental Authority’’ (a) any domestic, federal, state, provincial, territorial, municipal, local, foreign or supranational regulatory authority or government department or agency, commission, ministry, office, court, tribunal, Crown corporation, stock exchange, central bank, or any other similar entity, (b) any subdivision or authority thereof, or (c) any quasi-governmental or private body exercising any regulatory, expropriation or taxing authority under or for the account of any of the above
‘‘Group’’ the Company and its subsidiaries from time to time
‘‘Guarantee’’ the unconditional and irrevocable guarantee dated the same date as the Support Agreement given by the Company as guarantor in favour of Western Prospector for the prompt payment and performance of all of the obligations of First Development (including obligations of indemnification) under and pursuant to the Support Agreement
‘‘HKD’’ Hong Kong dollars, the lawful currency of Hong Kong
‘‘Holders of Common the registered or beneficial holders of the issued and outstanding Common Shares’’ Shares from time to time
‘‘Hong Kong’’ Hong Kong Special Administrative Region of the PRC
‘‘Latest Practicable Date’’ 26 June 2009, being the latest practicable date for ascertaining certain information in this circular prior to publication
–2– DEFINITIONS
‘‘Laws’’ all applicable laws, statutes, bye-laws, rules, regulations, orders, codes, policies, notices and directions and judicial, arbitral, administrative, ministerial or departmental judgments, awards, or other requirements of any Governmental Authority, court or other authority having jurisdiction over First Development or Western Prospector
‘‘lbs’’ pounds
‘‘Listing Rules’’ the Rules Governing the Listing of Securities on the Stock Exchange
‘‘MAEA’’ Mongolia’s Atomic Energy Agency, a state administrative central organisation of the Mongolian government for coordination of all the activities of government policy and regulatory control in the field of developing nuclear technology, providing radiation protection and safety and the activities related with the mining or treatment of radioactive ore
‘‘Material Adverse Change’’ any change, effect, event or occurrence that is, or would reasonably be expected to, individually or in the aggregate with any other change, effect, event or occurrence, (a) be material and adverse to the business, affairs, properties, operations, claims, rights, privileges, results of operations, liabilities (including contingent liabilities) or financial condition of Western Prospector and its subsidiaries, taken as a whole, or on the ownership, leasehold, mineral rights- holding or concession-holding status of any property of Western Prospector or its subsidiaries, (b) prevent Western Prospector from performing its obligations under the Support Agreement in any material respect, or (c) result in an impairment on the ability of First Development and its subsidiaries to continue operating the business of Western Prospector and its subsidiaries after the Effective Time in substantially the same manner as it was operated immediately prior to the date of the Support Agreement; provided, however, that any change, effect, event or occurrence (i) relating to general political, economic or financial conditions in Canada or Mongolia (provided that Western Prospector is not disproportionately affected by such changes), (ii) relating to the state of securities markets in general (provided that the state of the markets does not affect Western Prospector in a manner that is disproportionate to others in the industry in which Western Prospector operates, having regard to the relative size of Western Prospector as compared to others in its industry), (iii) relating to conditions affecting the Mongolian uranium mining industry as a whole (provided that Western Prospector is not disproportionately affected by such conditions), (iv) relating to any change in the market price of uranium or the taxes or royalties relating thereto (provided that Western Prospector is not disproportionately affected by such changes), (v) relating to any action or inaction taken by Western Prospector or its subsidiaries at the written request of First Development, or (vi) relating to ongoing litigation including the Western Prospector and Adamas Mining Co. Ltd.; shall be deemed not to constitute a ‘‘Material Adverse Change’’ and shall not be considered in determining whether a ‘‘Material Adverse Change’’ has occurred
‘‘Minimum Condition’’ has the meaning as set out in paragraph (a) in the sub-section headed ‘‘Conditions to making of the Offer’’ in the section headed ‘‘Support Agreement’’ in the Letter from the Board in this circular
‘‘MRAM’’ Mineral Resources Authority of Mongolia, an independent implementing agency of the Mongolian government in charge of basic geological and mining surveys, research and the registering, issuing of licenses and map staking
‘‘NI 43-101’’ National Instrument 43-101, is a rule developed by the Canadian Securities Administrators and administered by the provincial securities commissions that governs how issuers disclose scientific and technical information about their mineral projects to the public
–3– DEFINITIONS
‘‘Offer’’ has the meaning as set out under the sub-section headed ‘‘Subject of the Offer’’ in the section headed ‘‘Support Agreement’’ in the Letter from the Board in this circular
‘‘Options’’ the options granted through the Stock Option Plan through which options may be granted to directors, officers and employees for the purchase of Common Shares
‘‘Outside Date’’ 30 June 2009 (Toronto time), or such later date as may be agreed to in writing by the parties of the Support Agreement
‘‘P&E’’ P&E Mining Consultants Inc., an independent technical consultant
‘‘P&E report’’ the Technical Report and Feasibility Study on the Gurvanbulag Uranium Deposit Saddle Hills Property Dornod Province, Mongolia prepared by P&E, the text of which is appended to Appendix IV A of this circular
‘‘Person’’ any individual, sole proprietorship, partnership, firm, entity, unincorporated association, unincorporated syndicate, unincorporated organization, trust, corporation, limited liability company, unlimited liability company, governmental, regulatory or court authority, and a natural person in such person’s capacity as executor, administrator or other legal representative
‘‘PRC’’ the People’s Republic of China
‘‘Probable Reserves’’ has the meaning ascribed to it by the Canadian Institute of Mining, Metallurgy and Petroleum, as the Canadian Institute of Mining Definition Standards on Mineral Resources and Mineral Reserves adopted by the Canadian Institute of Mining Council, which definition may be amended
‘‘Proven Reserves’’ has the meaning ascribed to it by the Canadian Institute of Mining, Metallurgy and Petroleum, as the Canadian Institute of Mining Definition Standards on Mineral Resources and Mineral Reserves adopted by the Canadian Institute of Mining Council, which definition may be amended
‘‘Regulator(s)’’ (i) any governmental or public entity department, court, commission, board, bureau, agency or instrumentality; (ii) any quasi-governmental, self-regulatory or private body exercising any regulatory authority; and (iii) any stock exchange
‘‘Right’’ a right to purchase one Common Share, upon the terms and subject to the conditions set forth in the Shareholder Rights Plan
‘‘Securities Act’’ the Securities Act (Ontario) and the rules and regulations made thereunder, as now in effect and as they may be amended from time to time
‘‘Securities Laws’’ all applicable securities laws in the provinces and territories of Canada
‘‘SFO’’ the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
‘‘Shareholder(s)’’ holder(s) of Shares
‘‘Shareholder Rights Plan’’ the shareholder rights plan of Western Prospector dated 25 April 2005 (Toronto time) entered into between Western Prospector and Computershare Investor Services Inc., which plan was duly reconfirmed by an ordinary resolution of the shareholders of Western Prospector at the annual and special meeting of shareholders of Western Prospector held on 19 June 2008 (Toronto time), and pursuant to which Western Prospector may grant the Right in accordance with the terms thereof
‘‘Shares’’ ordinary shares in the nominal value of HKD0.01 each in the share capital of the Company
‘‘State’’ the people of Mongolia
–4– DEFINITIONS
‘‘State Reserve Committee’’ the Mongolian governmental authority in charge of, among other functions, approving mineral resource reports
‘‘Stock Exchange’’ The Stock Exchange of Hong Kong Limited
‘‘Stock Option Plan’’ collectively, the Stock Option Plan of Western Prospector approved by the shareholders of Western Prospector on 19 June 2008 (Toronto time), as amended, supplemented or replaced from time to time, and any other plan, agreement on arrangement which provides for the issuance of options to acquire Common Shares
‘‘Subscription’’ the subscription of Common Shares by First Development pursuant to the Subscription Agreement
‘‘Subscription Agreement’’ the subscription agreement entered into between First Development and Western Prospector dated 25 March 2009 (Toronto time) whereby Western Prospector shall issue and First Development as subscriber shall irrevocably subscribe and offer to purchase, as soon as reasonably practicable after the take-up and payment of the Common Shares under the Offer subject to the conditions thereof, 5,371,350 Subscription Shares, representing approximately 10% of the issued and outstanding Common Shares (calculated on the basis of the Common Shares outstanding prior to the Offer) at a price of CAD0.56 per Common Share
‘‘Subscription Completion’’ the completion of the offer, sale and issuance of the Subscription Shares as contemplated by the Subscription Agreement
‘‘Subscription Completion has the meaning as set out under sub-section headed ‘‘Subscription Date’’ Completion’’ in the section headed ‘‘Subscription Agreement’’ in the Letter from the Board in this circular
‘‘Subscription Shares’’ 5,371,350 Common Shares irrevocably subscribed by First Development subject to the terms of the Subscription Agreement
‘‘Subsequent Acquisition any proposed arrangement, amalgamation, merger, reorganization, Transaction’’ consolidation, recapitalization or other transaction involving Western Prospector and/or its subsidiaries and First Development or an Affiliate of First Development which, if successfully completed, will result in First Development owning, directly or indirectly, all of the Common Shares and/or all of the assets of Western Prospector
‘‘Support Agreement’’ the support agreement dated 25 March 2009 (Toronto time) entered into between First Development and Western Prospector in relation to the Offer
‘‘TSXV’’ TSX Venture Exchange
‘‘Western Prospector’’ Western Prospector Group Ltd., a company incorporated pursuant to the laws of the Province of British Columbia, whose shares are listed on the TSXV
‘‘%’’ per cent.
The figures in CAD are converted into HKD at the rate of CAD1 to HKD6.7740 throughout this circular, which is a rate quoted from the Hongkong and Shanghai Banking Corporation Limited as at the Latest Practicable Date for indication purposes only.
All dates and times stated in this circular refer to Hong Kong local time, except as otherwise stated.
–5– LETTER FROM THE BOARD
CNNC INTERNATIONAL LIMITED 中 核 國 際 有 限 公 司*
(Incorporated in the Cayman Islands with limited liability) (Stock Code: 2302)
Executive Directors: Registered office: Mr. Han Ruiping P.O. Box 309GT, Mr. Xu Hongchao Ugland House, South Church Street, Non-executive Directors: Grand Cayman, Mr. Qiu Jiangang Cayman Islands Mr. Huang Mingang Head office and principal place Independent Non-executive Directors: of business: Mr. Cheong Ying Chew Henry Unit 2809, 28/F, Mr. Cui Liguo China Resources Building, Mr. Zhang Lei 26 Harbour Road, Wanchai, Hong Kong
30 June 2009 To the Shareholders
DearSirorMadam, MAJOR TRANSACTION (1) OFFER TO ACQUIRE A MINIMUM OF 50.1% AND UP TO ALL THE ISSUED AND OUTSTANDING COMMON SHARES OF WESTERN PROSPECTOR (OTHER THAN THOSE ALREADY BENEFICIALLY OWNED BY FIRST DEVELOPMENT) (2) SUBSCRIPTION AGREEMENT TO SUBSCRIBE FOR NEW SHARES IN WESTERN PROSPECTOR BY FIRST DEVELOPMENT INTRODUCTION Reference is made to the announcements made by the Company dated 1 April 2009, 14 April 2009 and 22 May 2009 respectively.
The Directors announced that, on 25 March 2009 (Toronto time), First Development, an indirect wholly- owned subsidiary of the Company and Western Prospector, a company listed on TSXV entered into a Support Agreement, whereby First Development has agreed to make the Offer to Holders of Common Shares to acquire all of the issued and outstanding Common Shares (other than those already beneficially owned by First Development) at a price per Common Share of CAD0.56 in cash in accordance with the terms of the Support Agreement and applicable Securities Laws.
* For identification purpose only
–6– LETTER FROM THE BOARD
The Directors further announced that on the same date as the date of the Support Agreement, First Development and Western Prospector entered into the Subscription Agreement, pursuant to which First Development as subscriber shall irrevocably subscribe for and offer to purchase, and Western Prospector shall sell, as soon as reasonably practicable after the take-up and payment of the Common Shares under the Offer subject to the conditions in the Subscription Agreement, 5,371,350 Subscription Shares, representing approximately 10% of the issued and outstanding Common Shares (calculated on the basis of the Common Shares outstanding prior to the Offer) at CAD0.56 per Subscription Share, conditional upon, among other things, satisfaction of the Minimum Condition, which may not be waived by First Development.
The Offer and the Subscription constitute a major transaction of the Company pursuant to Rule 14.06(3) of the Listing Rules, and will be subject to Shareholders’ approval under the Listing Rules. The Company has obtained a written approval for the Offer and the Subscription from CNNC Overseas, the controlling shareholder of the Company which held approximately 70.25% of the issued share capital of the Company as at the Latest Practicable Date. Accordingly, no general meeting for the Shareholders’ approval of the Offer and the Subscription is required to be held by the Company pursuant to Rule 14.44 of the Listing Rules.
The purpose of this circular is to provide you with furtherinformationinrelationtotheOfferandthe Subscription.
SUPPORT AGREEMENT
On 25 March 2009 (Toronto time), First Development, an indirect wholly-owned subsidiary of the Company and Western Prospector, a company listed on TSXV entered into a Support Agreement, details of which are set out below.
Date: 25 March 2009 (Toronto time)
Parties:
(i) First Development
(ii) Western Prospector
To the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, Western Prospector and its ultimate beneficial owners are third parties independent of the Company and its connected persons.
Prior to the execution of the Support Agreement, the Company on the one hand and Western Prospector and its ultimate beneficial owners on the other hand had not had any relationships with each other and had not entered into any prior transactions with each other which would require to be aggregated under Rule 14.22 and Rule 14A.25 of the Listing Rules.
On 25 March 2009 (Toronto time), the Company also executed the Guarantee, whereby the Company provided certain guarantees in favour of Western Prospector for the prompt payment and performance of all of the obligations of First Development (including obligations of indemnification) under and pursuant to the Support Agreement.
For the purpose of protecting the interests of Western Prospector in the event that the Support Agreement is terminated as a result of a breach by First Development, First Development and Western Prospector executed the Escrow Agreement on 25 March 2009 (Toronto time), pursuant to which First Development has deposited a sum of CAD3,000,000 into the Canadian dollar escrow account maintained by the Escrow Agent at the Canadian Imperial Bank of Commerce.
–7– LETTER FROM THE BOARD
Subject of the Offer
Pursuant to the Support Agreement, First Development has agreed to make an offer to acquire a minimumof50.1%anduptoalltheissuedandoutstanding Common Shares (other than those already beneficially owned by First Development) at a price per Common Share of CAD0.56 in cash (‘‘Offer’’) in accordance with the terms of the Support Agreement and applicable Securities Laws and subject to the Conditions. The Offer shall be open for acceptance by the Holders of Common Shares from the date when the Bid Circular is sent to all Holders of Common Shares, in any event not later than 11: 59 p.m. (Toronto time) on 15 April 2009, until a time or times that is (i) not earlier than 5: 00 p.m. (Toronto time) on the 36th day after the day that the Offer is mailed to the Holders of Common Shares, subject to the right of First Development to extend from time to time the period during which Common Shares may be deposited under the Offer; and (ii) not later than the Outside Date.
As at the Latest Practicable Date, First Development does not own any issued and outstanding Common Shares.
Under the Support Agreement, Western Prospector consents to the Offer and represents, among other things, that its board of directors: (i) has unanimously approved the Support Agreement; (ii) has, following consultation with its financial and legal advisors, unanimously determined that the Offer is in the best interests of Western Prospector and its shareholders; and (iii) has unanimously resolved to recommend acceptance of the Offer to Holders of Common Shares, provided that the Offer is not amended except in accordance with the terms of the Support Agreement.
At present, First Development has not received any binding commitment from any Holders of Common Shares to accept or reject the Offer. However, Western Prospector represents that the board of directors of Western Prospector has been advised and believes that each of the directors and senior officers of Western Prospector intends to tender or cause to be tendered to the Offer all Common Shares of which he or she is the beneficial owner and will either exercise or surrender their Options.
Subject to the satisfaction or waiver of the Conditions (except for the Minimum Condition which may not be waived), First Development has agreed to take up and pay for all the Common Shares tendered under the Offer as soon as reasonably possible and in any event not later than three Business Days following the time at which First Development becomes entitled to take up such Common Shares under the Offer pursuant to applicable Laws.
Subsequent Acquisition Transaction and Compulsory Acquisition
If, under the Offer, First Development takes up and pays for such number of Commons Shares which, together with any other Common Shares beneficially owned or over which control or discretion is exercised by 2 First Development and its Affiliate and joint actors, represents at least 66 /3% of the issued and outstanding Common Shares (on a Fully-Diluted Basis), First Development shall, with the full co-operation of Western Prospector, as soon as practicable, but in any event within 120 days after the completion of the Offer, pursue and use its best commercial efforts to consummate a Subsequent Acquisition Transaction to acquire the remaining Common Shares and/or assets of Western Prospector; subject to (i) the terms and conditions of the Support Agreement; and (ii) the receipt of any required relief from applicable securities regulators or authorities in respect of the Compulsory Acquisition or Subsequent Acquisition Transaction. Provided that, if as of the final expiration of the Offer, the Offer has been accepted by Holders of Common Shares holding not less than 90% of the issued and outstanding Common Shares on a Fully-Diluted Basis as at the Expiry Time, excluding Common Shares held prior to the commencement of the Offer by First Development or any Affiliate or associate (as defined in the Securities Act), First Development shall use its best commercial efforts to complete as soon as practicable the Compulsory Acquisition.
–8– LETTER FROM THE BOARD
Offer price
First Development agrees to make the Offer at a price per Common Share of CAD0.56 (equivalent to approximately HKD3.79) in cash. The maximum number of all issued and outstanding Common Shares to be acquired under the Offer, including all outstanding Options tendered to Western Prospector for exercise, surrender or cancellation no later than immediately prior to the take-up of the Common Shares by First Development, is approximately 58,471,562. On the assumption that First Development is able to acquire all of the issued and outstanding Common Shares through the Offer, it is expected that the aggregate consideration of the Offer amounts to approximately CAD31 million (equivalent to approximately HKD209,994,000).
It is currently expected that the consideration of the Offer payable by First Development will be financed by internal resources of the Company.
Conditions to making of the Offer
Under the Support Agreement, First Development will have the right to withdraw the Offer and not take up and pay for, or extend the period of time during which the Offer is open and postpone taking up and paying for, any Common Shares deposited under the Offer unless all of the following conditions (‘‘Conditions’’) are satisfied or waived by First Development at or prior to the relevant Expiry Time:
(a) there shall have been validly deposited under the Offer and not withdrawn as at the Expiry Time of the Offer, such number of Common Shares which, together with any Common Shares beneficially owned or over which control or direction is exercised by First Development and its Affiliates and joint actors, represents at least 50.1% of the issued and outstanding Common Shares (on a Fully- Diluted Basis) (‘‘Minimum Condition’’);
(b) all government or regulatory approvals (including those of applicable stock exchanges or securities law regulatory authorities) that in First Development’s or the Company’s reasonable judgement are necessary to be obtained by any of Western Prospector, First Development or the Company to complete the Offer or any Compulsory Acquisition or Subsequent Acquisition Transaction, shall have been obtained or concluded or, in the case of waiting or suspensory periods, expired or been terminated, each on terms and conditions satisfactory to First Development and the Company, acting reasonably;
(c) the Shareholders shall have approved the Offer as required by the Listing Rules;
(d) (i) no act, action, suit, demand or proceeding shall have been taken by or before any Canadian or foreign court, tribunal or Governmental Authority or administrative agency or commission or by or before any elected or appointed public official in Canada or elsewhere; and (ii) no law, regulation or policy shall have been proposed, enacted, promulgated or applied; in either case
(A) to cease trade, enjoin, prohibit or impose material limitations or conditions on the purchase by or the sale to First Development of any of the Common Shares or the right of First Development to own or exercise full rights of ownership of the Common Shares (either pursuant to the Offer or any Compulsory Acquisition or Subsequent Acquisition Transaction);
(B) which, if the Offer or Compulsory Acquisition or Subsequent Acquisition Transaction was consummated, would reasonably be expected to lead to a Material Adverse Change or to materially adversely affect First Development or the Company;
(C) which would materially and adversely affect the ability of First Development to proceed with the Offer (or any Compulsory Acquisition or any Subsequent Acquisition Transaction) and/or take up and pay for any Common Shares deposited under the Offer; or
–9– LETTER FROM THE BOARD
(D) seeking to prohibit or limit the ownership or operation by First Development of any material portion of the business or assets of Western Prospector or its subsidiaries or to compel First Development to dispose of or hold separate any material portion of the business or assets of Western Prospector or any of its subsidiaries as a result of the Offer (or any Compulsory Acquisition or any Subsequent Acquisition Transaction), which act, action, suit or proceeding or law, regulation or policy would reasonably be expected to have a Material Adverse Change;
(e) First Development and the Company shall have determined, in their sole judgment, acting reasonably, that there does not exist any prohibition at law (i) against First Development making or maintaining the Offer; (ii) taking up and paying for any Common Shares deposited under the Offer or completing any Compulsory Acquisition or Subsequent Acquisition Transaction; or (iii) in respect of the Company performing any of its obligations under the Guarantee;
(f) First Development shall have determined, in its sole judgment, acting reasonably, that there has not occurred any Material Adverse Change (i) since the date of the Support Agreement or (ii) prior to the date of the Support Agreement that has not previously been disclosed to First Development in the Disclosure Letter;
(g) First Development shall have determined, in its sole judgment, acting reasonably, that:
(i) no representation or warranty of Western Prospector (without giving effect to any materiality qualifiers contained therein) shall have been or have become untrue to the extent that the failure of such representation or warranty to be true and correct is reasonably likely to, individually or in the aggregate, cause a Material Adverse Change; and
(ii) Western Prospector has performed all of the covenants and agreements to be performed by it under the Support Agreement in all material respects;
and First Development shall have received a certificate to that effect from the president, chief executive officer and the chief financial officer of Western Prospector (or other officer reasonably satisfactory to First Development) to that effect;
(h) Western Prospector shall not have knowingly or intentionally breached a covenant in the Support Agreement;
(i) the Shareholder Rights Plan shall have been waived in respect of the Offer and the Separation Time as mentioned in the Shareholder Rights Plan shall not have occurred under the Shareholder Rights Plan;
(j) the Support Agreement shall not have been terminated or First Development shall have determined in its sole judgment, acting reasonably, that such termination shall not affect the ability of First Development to consummate the Offer or to complete a Compulsory Acquisition or Subsequent Acquisition Transaction, or that such termination was not related to any matter that is materially adverse to the business of Western Prospector or to the value of the Common Shares to First Development;
(k) where Compulsory Acquisition or Subsequent Acquisition Transaction is applicable, First Development shall in its sole judgment, acting reasonably, be satisfied that all outstanding Options and all other rights to acquire any Common Share, if any, shall have either been exercised, surrendered, converted, deemed exercised or terminated or may be terminated or otherwise dealt with on a basis acceptable to First Development, acting reasonably, prior to First Development taking up any Common Shares pursuant to the Offer;
–10– LETTER FROM THE BOARD
(l) each of the directors and officers of Western Prospector (other than those otherwise agreed to by First Development) shall have provided their resignations (in the case of directors, in a manner that allows for the orderly replacement of directors) and shall have delivered a release in favour of Western Prospector and First Development, effective on the date First Development first takes up the Common Shares pursuant to the Offer, in form and substance and on such terms as are satisfactory to First Development, acting reasonably; and
(m) the Support Agreement shall not have been terminated.
The foregoing conditions shall be for the exclusive benefit of First Development and, as applicable, the Company, and may be asserted by First Development or the Company, at any time.
Subject to the terms of the Support Agreement, First Development may waive any of the foregoing conditions, other than (a) above, in whole or in part at any time and from time to time, both before and after the relevant Expiry Time, without prejudice to any other rights which First Development may have. In addition, First Development will not waive condition (c) above.
As at the Latest Practicable Date, only Condition (c) has been fulfilled.
As set out in the announcement of the Company dated 22 May 2009, a notice was received from MRAM stating that the Exploration Licenses have been suspended for three months due to six counts of alleged non- compliance cited by inspectors from MAEA. In the event Western Prospector is unable to remove the suspension of the Exploration Licenses by the Expiry Time, conditions (d), (f) and (g) may not be fulfilled.
Accordingly, First Development as Offeror has decided to extend the Expiry Time to 5: 00 p.m. (Toronto time) on 29 June 2009 to allow more time for the relevant conditions to be fulfilled and to permit Holders of Common Shares who have not yet tendered their Common Shares under the Offer an extended opportunity to do so.
Please refer to the section headed ‘‘Risk Factors’’ below for discussion on whether the Company intends to proceed with the Offer and the Subscription if certain conditions to making the Offer are not fulfilled by the Expiry Time.
Listing status of Western Prospector after the Offer
Subject to the number of Common Shares validly deposited under the Offer, applicable law and the ability of Western Prospector to meet the listing requirements under the TSX Venture Exchange Corporate Finance Manual, First Development intends to de-list Western Prospector from the TSXV if it obtains more than 2 66 /3% of the total issued and outstanding Common Shares pursuant to the Offer.
SUBSCRIPTION AGREEMENT
On the same date as the date of the Support Agreement, First Development and Western Prospector entered into the Subscription Agreement, pursuant to which Western Prospector shall issue and First Development as subscriber shall irrevocably subscribe for and offer to purchase, after the take-up and payment of the Common Shares under the Offer subject to the conditions in the Subscription Agreement, 5,371,350 Subscription Shares, representing approximately 10% of the issued and outstanding Common Shares (calculated on the basis of the Common Shares outstanding prior to the Offer) at CAD0.56 per Subscription Share, conditional on, among other things, satisfaction of the Minimum Condition, which condition may not be waived by First Development.
–11– LETTER FROM THE BOARD
The reason for the entering into the Subscription Agreement to acquire additional interests in Western Prospector is that the consideration payable under the Subscription Agreement serves as additional capital for Western Prospector such that it will have sufficient cash to develop its business. Details of the Subscription Agreement are set out below.
Date: 25 March 2009 (Toronto time)
Parties:
(i) First Development
(ii) Western Prospector
Subscription price
The Subscription price was determined after arm’s length negotiations between First Development and the Company. The aggregate consideration of the Subscription amounts to approximately CAD3,007,956 (equivalent to approximately HKD20,375,894) and it is currently expected such consideration will be financed from internal resources of the Company.
Subscription Completion
Subject to the provisions in the Subscription Agreement in relation to termination, Subscription Completion will occur upon the later of:
(a) 21 days after the Expiry Date, at a time to be agreed upon by First Development and Western Prospector, provided that First Development has taken up and paid for the Common Shares tendered pursuant to the Offer; or
(b) such other date and time as First Development shall determine, provided that First Development shall provide at least five Business Days’ written notice of such date to Western Prospector;
(collectively, the ‘‘Subscription Completion Date’’), provided (i) such date is in compliance with applicable Securities Laws (including any rules and regulations of the TSXV); and (ii) subject to satisfaction or waiver by the relevant party of the conditions of Subscription Completion.
Upon completion of the Subscription, Western Prospector will receive approximately CAD3,007,956 (equivalent to approximately HKD20,375,894) from First Development to finance its operation. Depending on the progress of mine development and production, Western Prospector may consider raising further capital through issue of new shares, external borrowing or a combination of both. On the Enlarged Group basis, the Company may also consider injecting further capital into Western Prospector. However, for the time being, neither the Company nor Western Prospector has any concrete plan to raise capital for mine development and production of Western Prospector.
Conditions of Subscription Completion
The offer, sale and issuance of the Subscription Shares is subject to, among other things, the following conditions being fulfilled or performed on or before the Subscription Completion Date, which conditions may be waived, in whole or in part, by Western Prospector in its sole discretion:
(a) First Development shall execute the Subscription Agreement upon execution of the Support Agreement and deliver to Western Prospector not later than 5: 00 p.m. (Toronto time) on the day that is two Business Days before the Subscription Completion Date at Western Prospector’s office at 601 West Broadway, Suite 400, in Vancouver, British Columbia:
(i) one fully completed and duly executed copy of the Subscription Agreement, including the schedules and all other documentation contemplated by the Subscription Agreement; and
–12– LETTER FROM THE BOARD
(ii) a certified cheque, bank draft or evidence of completed wire transfer to ‘‘Western Prospector Group Ltd.’’ in accordance with the instructions in the Subscription Agreement or such other method of payment acceptable to Western Prospector, representing the aggregate subscription price payable for the Subscription Shares subscribed for by First Development;
(b) Western Prospector accepting the Subscription, in whole or in part;
(c) the offer, sale and issuance of the Subscription Shares being exempt from the prospectus and registration requirements of Applicable Securities Laws;
(d) First Development executing and delivering to Western Prospector all reports, undertakings or other documents required under Applicable Securities Laws in connection with the offer, sale and issuance of the Subscription Shares to First Development;
(e) Western Prospector obtaining all orders, permits, approvals, waivers, consents, licenses or similar authorizations of Regulators necessary to complete the offer, sale and issuance of the Subscription Shares;
(f) the representations and warranties of First Development and Western Prospector having been true and correct as of the date of the Subscription Agreement and being true and correct at the Subscription Completion Date; and
(g) all documentation relating to the offer, sale and issuance of the Subscription Shares being in form and substance satisfactory to Western Prospector.
The offer, sale and issuance of the Subscription Shares is conditional upon, among other things, First Development taking-up and paying for the Common Shares under the Offer before the Subscription Completion Date, which condition is for the exclusive benefit of First Development and may be waived, in whole or in part, by First Development in its sole discretion.
As at the Latest Practicable Date, only condition (b) above has been confirmed as fulfilled.
Pleasereferinthesectionheaded‘‘RiskFactors’’below for discussion on whether the Company intends to proceed with the Offer and the Subscription in the event the certain conditions to the Offer are not fulfilled by the Expiry Time.
Termination
The Subscription Agreement shall terminate, without any liability to either party, if Subscription Completion has not yet occurred on or prior to 31 August 2009 (Toronto time), or such other date as the parties may mutually agree to in writing.
BASIS OF DETERMINING THE OFFER PRICE AND THE SUBSCRIPTION PRICE
The Offer price and Subscription price represent a 51% premium to the closing price of the Common Shares of CAD0.37 on 24 March 2009, which is the closing price of the Common Shares on the last business day immediately preceding the date of the Support Agreement and Subscription Agreement.
The Offer price and the Subscription price were determined after arm’s length negotiations between First Development and Western Prospector on normal commercial basis with reference to (i) the development potential of the Gurvanbulag Central Deposit; (ii) the uranium resource and mine development plans of Western Prospector contained in the P&E report, an independent mining consultant; (iii) the market conditions; and (iv) the recent net assets value and financial performance and conditions of Western Prospector.
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The Company considers that the current net assets value of Western Prospector is not the most important factor in determining the Offer price and the Subscription price. Rather, the Company and First Development value the development potential and the uranium resource and mine development plans of Western Prospector.
The CAM report confirms the mineralogy of Western Prospector’s non-primary properties which are outside the area covered by the Exploration Licenses and such report confirms the development potential and mineral resources that exist on these properties.
When determining the consideration for the Offer and the Subscription, the Company ascribed no value to the resources covered in the CAM report. The Company and First Development value the development potential of Gurvanbulag Central Deposit and the uranium resource and mine development plans of Western
Prospector contained in the P&E report. Based on the prevailing price of U3O8 as identified by the Directors in the recent transactions, the value of the measured and indicated reserves of Gurvanbulag Central Deposit of
17.9 million lbs of U3O8 mentioned in the P&E report is well above the consideration for the Offer and the Subscription.
INFORMATION ON WESTERN PROSPECTOR
Western Prospector is a company with limited liability incorporated pursuant to the laws of the Province of British Columbia on 3 April 1998 and its common shares have been listed on the TSXV since 30 November 1999.
The principal business activity of Western Prospector is acquiring, exploring and developing mineral properties. All of the Western Prospector’s mineral property interests, consisting of various uranium and coal properties, are located in Mongolia.
Western Prospector holds interest in 18 mineral licenses in Mongolia, including the Saddle Hills Uranium Project and Bayanbulag, Baganuur and Bagakhangai coal projects. It is confirmed by Western Prospector that all of the relevant licenses have been obtained by the indirect wholly-owned subsidiaries of Western Prospector in Mongolia and are registered under the respective names of these subsidiaries of Western Prospector.
Saddle Hills Uranium Project
The Saddle Hills uranium project consists of various mineral exploration licenses covering approximately 147,676 hectares in north-eastern Mongolia. Key to the project is the Gurvanbulag Central Deposit, which includes three shafts and about 17 kilometres of underground tunnels down to the 260 meter level, constructed in the 1980s. This project provides Western Prospector with mineral rights to seven known uranium deposits and several additional exploration targets. Western Prospector contracted P&E to model the Gurvanbulag Central
Deposit and provide a NI 43-101 compliant preliminary resource report. Utilizing a 0.08% U3O8 cut-off grade,
P&E confirmed a measured resource of 774,000 tonnes grading 0.242% U3O8 containing 4.1 million lbs U3O8, an indicated resource of 3.51 million tonnes grading 0.178% U3O8 containing 13.8 million lbs of U3O8 and an inferred resource of 795,000 tonnes grading 0.126% U3O8 containing 2.2 million lbs of U3O8.P&Ealso determined that a diluted measured and indicated reserve existed for underground mining of 5,043,000 tonnes grading 0.161% U3O8. Proven Reserves are 914,500 tonnes grading 0.198% U3O8 containing 4.0 million lbs of
U3O8 and Probable Reserves are 4,128,500 tonnes grading 0.153% U3O8 containing 13.9 million lbs of U3O8.
Western Prospector is planning to develop the Gurvanbulag Central Deposit and commence production. No additional exploration is required to develop the Saddle Hills Uranium Project.
–14– LETTER FROM THE BOARD
Bayanbulag Coal Project
Located in north-eastern Mongolia, the Bayanbulag coal project is approximately 325 hectares in size and covers defined coal seams and additional exploration potential for coal seams within the Choibalsan coal basin. Drilling has demonstrated the existence of a horizontal coal seam outcropping or very close to the surface for which a resource has been calculated according to Mongolian standards and submitted to the State Reserve Committee for approval.
Baganuur Coal Project
Located in central Mongolia, the Baganuur coal project is approximately 17,800 hectares in size and covers exploration potential for coal seams within the Baganuur Basin. The Western Prospector licenses are located adjacent to and up to 4 kilometres from the operating mine. The Baganuur Basin is accessed by both a highway and a spur railway off the China-Mongolia-Russia main rail line — a busy route for movement of commerce between Russia and China. No resources have been defined within the licensed area.
Bagakhangai Coal Project
Located some 75 to 100 kilometres southwest of the Baganuur coal project, the Bagakhangai coal project covers areas of sediments with potential for coal, adjacent to the main rail line to Ulaanbaatar and China. The properties aggregate 7,200 hectares and the boundary of one property is adjacent to an abandoned open pit in which coal is exposed at less than 10 metres depth from the surface.
Western Prospector owns one mining license for the Bayanbulag coal project, but that project is still in the exploration stage because the Mongolian government has not yet approved the resource report in relation to that project. Save as disclosed above, all of the projects owned by Western Prospector mentioned above are in the exploration stage.
Other Mongolian Properties
In addition to the Saddle Hills area licenses described above, Western Prospector has a 70% interest in one exploration license 3367 in the Dornod region held by Adamas Mining Co. Ltd. (‘‘Adamas Mining’’). This license, also known as the ‘‘Tsever Prospect’’ project, is to be turned over to a joint venture between Western Prospector and Adamas Mining. However, the joint venture with Adamas Mining has yet to be formed, and currently is the subject of litigation in the Mongolian courts(Note). This project is at a very early stage and there is insufficient information to compile a reserve estimate. The information about this project is covered in the second paragraph of section 7.7 of the CAM report.
Note: ThelitigationisinrelationtoanactionbroughtbyWesternProspectoragainstAdamasMiningwherebyWesternProspector claims to compel Adamas Mining to perform its obligations under the joint venture Western-Adamas agreement signed by Western Prospector and Adamas Mining on 7 December 2004 (the ‘‘Joint Venture Agreement’’). The Joint Venture Agreement provided Western Prospector with the right to earn a 70% interestinthejointventurecompany,whichshouldhavebeenjointly established by the joint venture parties to manage the exploration license 3367X. The license 3367X is an exploration license covering several deposits. The Joint Venture Agreement also included an escrow agreement which requires both parties’ consent for the exploration license to be released from escrow and transferred to the joint venture company.
The Mongolian District Court denied Western Prospector’s claim to compel Adamas Mining to honour its commitments in the Joint Venture Agreement and Western Prospector was able to overturn the judgment of the Mongolian District Court in the Mongolian City Court. Adamas Mining appealed to the Mongolian Supreme Court which voided the City Court’s judgment. Western Prospector is currently preparing its case to appeal in the decision of the Mongolian Supreme Court.
Western Prospector will continue its joint venture dispute with Adamas Mining and intends to vigorously pursue all actions to complete the joint venture in accordance with the Joint Venture Agreement. Western Prospector confirms that the joint venture dispute is not material and does not impact Western Prospector’s NI 43-101 classified resources or the development of its main project in Gurvanbulag Central Deposit. In view of the uncertainty of the outcome in either the litigation or potential negotiations with Adamas Mining, Western Prospector had written off the balance of exploration expenditures related to license
–15– LETTER FROM THE BOARD
3367X as of 30 September 2008. Western Prospector believes that it will not suffer any loss/damages in the event that it loses the appeal at the Mongolian Supreme Court. As at the Latest Practicable Date, Adamas Mining has not made any claim for damages.
As at the Latest Practicable Date, save and except disclosed above and the litigation with Maximum Ventures (the details of which is set out on II-26 of this circular), the Company is not aware of any claim in relation to the exploration rights of Western Prospector.
The coal projects (as defined above) are at very early stage and there is not enough information on the coal projects to compile a reserve estimate.
Selected Financial Information
The following is a summary of the audited financial information of Western Prospector for the three years ended 31 December 2008:
As at As at As at 31 December 2008 31 December 2007 31 December 2006 (audited) (audited) (audited) (CAD’000) (CAD’000) (CAD’000)
Total assets 35,208 103,899 73,874 Total liabilities 2,513 1,750 1,840 Net assets 32,695 102,149 72,034
For the For the For the year ended year ended year ended 31 December 2008 31 December 2007 31 December 2006 (CAD’000) (CAD’000) (CAD’000)
Revenue(Note) ——— Loss before tax 72,292 7,045 5,455 Loss for the year 72,320 7,045 5,455
Note: Western Prospector has historically incurred losses in every quarter of its operations. As Western Prospector is currently engaged in exploration and development of certain mineral properties and has not yet commenced any exploitation activities, it has not generated revenue so far.
The Company does not hold any interests in Western Prospector before the Offer and the Subscription. Upon completion of the Offer and the Subscription, assuming that all the Holders of Common Shares have accepted the Offer, the Group will hold approximately 58,471,562 Common Shares of Western Prospector, representing approximately 100% of the then issued and outstanding Common Shares of Western Prospector, and Western Prospector will become a subsidiary of the Company. It is intended the financial information of Western Prospector will be consolidated into the Company’s account immediately after the completion of the Offer and the Subscription.
The Company reviewed the difference between Western Prospector’s financial information prepared in the Canadian Generally Accepted Accounting Principles (the ‘‘Canadian GAAP’’) and prepared in the Hong Kong Financial Reporting Standards (the ‘‘GAAP difference’’). Apart from the adjustments of CAD105,000 in relation to the available for sale investments for the year ended 31 December 2006, there are no other principal differences noted.
The current accounting treatment for available for sale investments under the Canadian GAAP is generally consistent with that of the International Financial Reporting Standards. However, prior to 1 January 2007, a GAAP difference existed in that Canadian GAAP did not require companies to carry available for sale
–16– LETTER FROM THE BOARD investments at fair value; rather, such investments were carried at cost. Western Prospector holds marketable investments that are classified as available for sale investments. Prior to 2007, available for sale investment was carried at cost. Therefore, a GAAP difference exists in the carrying value of these investments as of 31 December 2006. Based on the financial statements for the year ended 31 December 2006 of Western Prospector, the fair value of the available for sale investments was CAD481,000 and the carrying value was CAD376,000 as of 31 December 2006. Accordingly, CAD105,000 has to be debited to investment to reflect the adjustment to GAAP differences.
There were no GAAP differences of Western Prospector’s financial information for the years ended 31 December 2007 and 2008.
WAIVER FROM STRICT COMPLIANCE WITH RULE 18.09(6) OF THE LISTING RULES
For the purpose of providing information about the exploration licenses held by Western Prospector, the P&E report has been prepared by P&E and Aker, which is set out in Appendix IV A to this circular, and the CAM report has been prepared by CAM, which is set out in Appendix IV B to this circular.
The P&E report mainly addresses the Exploration Licenses for the Gurvanbulag Central Deposit. The CAM report covers nine other uranium exploration licenses and seven coal licenses held by Western Prospector.
The Company confirms that the P&E report has been prepared in compliance with NI 43-101 standard and Rule 18.09(6) of the Listing Rules.
As regards to the CAM report, several contents requirements set out in Rule 18.09(6) of the Listing Rules are in reality, not applicable to the resources covered by the CAM report (‘‘CAM Report Resources’’). The primary reason for this is that the CAM Report Resources are at too early stage of exploration where no proven reserves have yet been identified and no sufficient exploratory work has yet been carried out. For the same reason, the CAM report is not a report prepared in compliance with NI 43-101 or any other internationally recognised mining standards. Instead, the CAM report has been prepared in accordance with the basic precepts of Uniform Standards of Professional Appraisal Practice, being an appraisal standard. Therefore, the CAM report is not considered as a report prepared under Rule 18.09(6) of the Listing Rules. In order to produce an NI 43-101 report in respect of the CAM Report Resources, substantial exploratory work will have to be carried out. Western Prospector has no current intention to undertake such exploratory work.
Due to the fact that (i) the Company ascribed no value to the CAM Report Resources in determining the consideration for the Offer and the Subscription; (ii) the Company and First Development value the development potential of the Gurvanbulag Central Deposit and the uranium resource and mine development plans of Western Prospector contained in P&E report; (iii) based on the prevailing market price of U3O8 in recent transactions identified by the Directors, the value of the measured and indicated reserves of Gurvanbulag
Central Deposit of 17.9 million lbs of U3O8 mentioned in the P&E report is well above the consideration for the Offer and the Subscription; (iv) the information set out in the P&E report is sufficient for the Shareholders to assess the entering into of the Offer and the Subscription; and (v) the CAM Report Resources are at too early stage where no proven reserves have been identified and no sufficient exploratory work has been carried out, the Stock Exchange has granted the Company a waiver from strict compliance with Rule 18.09(6).
Shareholders should be aware that the CAM report is not a report prepared under Rule 18.09(6) of the Listing Rules and not in compliance with NI 43-101 and other internationally recognized mining standards and should therefore be cautious when reviewing the information set out in the CAM report.
–17– LETTER FROM THE BOARD
RISK FACTORS
Suspension of Exploration Licenses
As set out in the announcement of the Company dated 22 May 2009, a notice was received from MRAM stating that the Exploration Licenses have been suspended for three months on or about 14 April 2009 due to six counts of alleged non-compliance cited by inspectors from MAEA. Details of the non-compliance cited by the inspectors from MAEA are summarised below:
. the qualification assurance on land was not made by a professional organisation;
. when transporting radioactive mineral samples, permits are not attained from the radiation inspection authority, transportation indexes are not established and recorded, and the caution mark for dangerous substances are not placed on the badges;
. no radioactive waste management program was developed, reviewed or approved;
. there have been cases where employees worked in the underground mine without radon protection masks. The supply of personal radiation protection equipment and the actions to reduce the risk of internal exposure to radiation were inadequate; and
. the average unit activity rate of radioactive Radii-226 isotope of 9.33Bk/l in the water samples taken is 4.7 times higher than the acceptable content of the radioactive isotope.
In the event Western Prospector is unable to satisfy the inspectors within such three month period that they are in fact in compliance with the relevant laws and regulations, the Exploration Licenses may be revoked.
Western Prospector has a total of 18 mineral licenses and the Exploration Licenses are two primary licenses of Western Prospector which together cover the Gurvanbulag Central Deposit. The total amount of reserve in the area covered by the Exploration Licenses are estimated to be 5,043,000 tonnes of ore and 17.9 million lbs of U3O8. The license suspension from MRAM does not impact on the other 16 mineral licenses held by Western Prospector. Western Prospector believes and the Board agrees that the reasons cited by MRAM in the notice of license suspension do not warrant MRAM to suspend the Exploration Licenses.
Following receipt of the notice of suspension of the Exploration License from MRAM, Western Prospector, with the assistance from the Company, hascontactedandliaisedwithMRAM,MAEAandother relevant local authorities in endeavour to procure the release of the suspension. Western Prospector also provided a written reply to the relevant authorities on 19 May 2009 to address each of the six counts of alleged non-compliance cited by the inspectors from MAEA. Further, Western Prospector, according to its own expertise in Gurvanbulag Central Deposit, had taken the following actions:
. specified that Western Prospector did not breach the Law on Minerals for not having conducted a detailed environmental impact assessment as it is a pre-condition for mining licenses but not for exploration licenses Western Prospector currently obtained;
. appointed professional firms to perform the assessment and the relevant reports as requested from the inspectors from MAEA;
. took remedial actions to fix or upgrade its own production, safety facilities and waste system; and
. addressed the concerns raised from the inspectors from MAEA and provided with relevant supporting reports or documents.
–18– LETTER FROM THE BOARD
Lynch and Mahoney LLC, the Mongolian legal counsel to the Company, indicated in a letter dated 9 June 2009 that:
. if the inspectors from MAEA accept the response, they would notify MRAM and MRAM would be obligated to terminate the suspension;
. Western Prospector’s response is reasonable and comprehensive; and
. it would be reasonable for the inspectors from MAEA to conclude that Western Prospector had addressed all of the violations and breaches raised in the report to their satisfaction.
As at the Latest Practicable Date, the Company was not aware of any response from MRAM to Western Prospector’s submission. Based on the discussions so far and the legal opinion obtained from Mongolian legal counsel, the Board is confident that Western Prospector has reasonably and comprehensively addressed each of the six counts of non-compliance alleged by the relevant authorities. The Board also agrees with Western Prospector’s view that the reasons cited by MRAM in the notice of suspension of the Exploration Licenses do not warrant MRAM to suspend the licenses. The Board believes that, following the actions taken by Western Prospector and the Company, the suspension of the Exploration Licenses would be liftedinthenearfuture. While in place, the suspension prevents mine construction and uranium production from the properties covered by the Exploration Licenses.
However, under the current circumstances, it is unlikely that the suspension of the Exploration Licenses would be lifted by the Expiry Time, i.e. 5: 00 p.m. (Toronto time) on 29 June 2009 and hence, certain conditions to the Offer will unlikely be fulfilled by the Expiry Time. In the event the parties wish to further extend the Expiry Time to beyond 29 June 2009, First Development would have to renegotiate the terms of the Support Agreement and the Subscription Agreement with Western Prospector. As the Board is confident that the suspension of the Exploration Licenses will in time be released, the Board is mindful and concerned of the possible uncertainties in which the renegotiation of the agreements may result. As such, the Board decides not to further extend the Expiry Time.
In light of the above, despite the suspension of the Exploration Licenses, the reasons for the Board to invest in Western Prospector as set out in the Circular remain valid. In particular, the Directors believe that there remains value in the transaction, including, among other things, a good opportunity for the Group to invest and develop the uranium business. The Board therefore concludes that it is still in the interests of the Company and the Shareholders as a whole to proceed with the Offer and the Subscription before the suspension is lifted.
Amendments to the 2006 Minerals Law of Mongolia
The Mongolian Parliament adopted the 2006 Minerals Law of Mongolia (‘‘2006 Minerals Law’’), which permits the State, under certain conditions, to acquire equity interest of up to 34% in a company that is developing a minerals deposit explored and defined using private funds, and up to 50% in a company that is developing a minerals deposit explored and defined using State funds where such deposit has been designated by Parliament as a ‘‘mineral deposit of strategic importance.’’ The Mongolian Parliament has also been considering various amendments to the 2006 Minerals Law, the primary effect of which would be to increase the State’s involvement in the development of mineral resources in Mongolia. Amongst such amendments, it is proposed that the State’s equity interest be changed from ‘‘up to’’ 34% or 50%, to ‘‘at least’’ 34% or 50% in respect of deposits of strategic importance.
As advised by Lynch & Mahoney, the Mongolian legal adviser to the Company, the terms and conditions of the State’s equity interest participation are not clearly defined under the 2006 Minerals Law, i.e. the law provides that such terms and conditions must be negotiated by the State and the relevant investors. Further, the nature and scope of the proposed amendments to the 2006 Minerals Law are in a state of flux. Lynch & Mahoney confirms that the official policy in Mongolia is to encourage foreign investment in Mongolia.
–19– LETTER FROM THE BOARD
The Gurvanbulag Central Deposit of Saddle Hills property has been designated by the Mongolian Parliament as a ‘‘mineral deposit of strategic importance’’. The Company has already taken into account the effect of the designation of Gurvanbulag Central Deposit as a ‘‘mineral deposit of strategic importance’’ and business risks involved when determining the consideration for the Offer and the Subscription. Based on the Company’s understanding of the mineral industry in Mongolia, the informal discussions between the Company and the relevant Mongolian authorities and the legal advice sought, the Company believes that even if abovementioned amendments to the 2006 Minerals Law are implemented, the valuation of the exploration assets of Western Prospector would not be materially affected. As such, the Company considers that no impairment is required to be made to the exploration assets of Western Prospector.
However, the Company cannot give assurance that the Mongolian government will not acquire the Company’s interests in the exploration assets of Western Prospector on behalf of the State pursuant to the 2006 Minerals Law and/or its amendments. The Company will continue to monitor legal and regulatory developments in Mongolia. In case there is any material change to the interests of the Company in the exploration assets of Western Prospector upon completion of the Offer, the Company will make adjustments to the value of such assets as necessary.
INFORMATIONONTHEGROUP
The Company was incorporated as an exempted company with limited liability in the Cayman Islands on 25 June 2002 and its Shares have been listed on the Main Board of the Stock Exchange since 6 January 2003.
The principle activities of the Group are production and trading of metal die-casting products with its principal production facility located in Dongguan, the PRC.
The Company confirms that it has sufficient cash to satisfy the considerations of the Offer and the Subscription because the Company was injected with additional cash of approximately HKD387,927,905 on 5 November 2008 following the completion of (i) the subscription of 159,168,308 new Shares at a cash consideration of HKD1.77 per Share; and (ii) the issue of a convertible note in the principal amount of HKD106,200,000, by CNNC Overseas (which is set out in the Company’s announcements dated 23 June 2008 and 5 November 2008 respectively). The capital injection has been reflected in the Company’s results for the year ended 31 December 2008 published on 9 April 2009.
MANAGEMENT DISCUSSION AND ANALYSIS
Investors should read the following discussion and analysis in conjunction with the financial information of Western Prospector for the three years ended 31 December 2008, which is included as Appendix II to this circular and should not rely merely on the information contained in this section.
Overview
Western Prospector and its subsidiaries are in the business of acquiring, exploring and developing mineral properties. All of Western Prospector’s mineral property interests, consisting of various uranium and coal properties, are located in Mongolia. Western Prospector is a reporting issuer in British Columbia, Alberta and Ontario and trades on the TSXV under the symbol of WNP.
Selected Financial Information
The following is a summary of the audited financial information of Western Prospector for the three years ended 31 December 2008:
As at As at As at 31 December 2008 31 December 2007 31 December 2006 (audited) (audited) (audited) (CAD’000) (CAD’000) (CAD’000)
Total assets 35,208 103,899 73,874 Total liabilities 2,513 1,750 1,840 Net assets 32,695 102,149 72,034
–20– LETTER FROM THE BOARD
For the For the For the year ended year ended year ended 31 December 2008 31 December 2007 31 December 2006 (CAD’000) (CAD’000) (CAD’000)
Revenue(Note) ——— Loss before tax 72,292 7,045 5,455 Loss for the year 72,320 7,045 5,455
Note: Western Prospector has historically incurred losses in every quarter of its operations. As Western Prospector is currently engaged in exploration and development of certain mineral properties and has not yet commenced any exploitation activities, it has not generated revenue so far.
Financial Information for the Year Ended 31 December 2008
Western Prospector recorded a loss of CAD72.3 million for the 2008 financial year, which included an impairment write-off of CAD63.1 million against its Mongolian properties; CAD2.9 million for general overhead expenses; costs associated with various takeover offers of CAD2.5 million; share based compensation expense of CAD2.0 million; and a write down of investments of CAD1.3 million; offset by CAD0.6 million of interest income from cash investments. Western Prospector incurred CAD13.1 million exploration and mineral property expenditures, primarily on the Saddle Hills Uranium Project.
After receiving the Offer from First Development, Western Prospector conducted a review to determine if an impairment to its assets had occurred. Based on the equity value represented by the Offer, Western Prospector determined an impairment to its assets had occurred, and specifically to its Mongolian properties. As a result of this determination, and after evaluating the carrying values of all of its assets, Western Prospector recorded a write-off of CAD58.0 million against its resource assets as at 31 December 2008.
As a result of the uncertainty of the litigation with Adamas Mining, Western Prospector wrote off the entire asset balance of approximately CAD4.0 million as at 31 December 2008.
As at 31 December 2008, the directors of Western Prospector, after considering the economic conditions having regarded the resource reserve of the relevant licenses, had reviewed the recoverable amounts of the Western Prospector Group’s exploration and evaluation assets in Mongolia and had determined that the recoverable amount of certain assets used for drilling had declined below their carrying values. Accordingly, the carrying values of these assets were written down by approximately CAD1.1 million to reflect this impairment.
Certain investments Western Prospector held as at 31 December 2008 were written down by CAD1.3 million, as the management of Western Prospector determined it was unlikely that the market price of the investments would return to their cost bases in the foreseeable future.
Management and administrative services were much higher in 2008 compared to the same period in 2007 due to costs for strategic advisors working on Western Prospector ongoing partner development initiatives; changes in classification of certain employees from resource assets to management and administrative services; the currency effect of paying certain management salaries in US dollars; and, non-recurring costs associated with transition from use of a management company for these services.
Interest income decreased due to declining cash balances throughout 2008 as well as the reduction in available rates on low-risk investments, especially commencing in the fourth quarter.
Office operations and facilities expense increased between the years due to operating two Canadian offices for part of the first quarter and increases to rental costs in Western Prospector’s Mongolian headquarters.
–21– LETTER FROM THE BOARD
The allowance for uncollectible VAT credits began to be recorded once Western Prospector’s major Mongolian subsidiary, Emeelt Mines LLC, became eligible to participate in the VAT scheme in Mongolia in September 2008. The accumulated credits have been written off in their entirety to administrative expenses, as it is uncertain as to when Western Prospector might be able to offset these credits with VAT debits, which normally require a revenue stream.
Excluding costs associated with the takeover offers, shareholder communication costs decreased in 2008 compared to 2007. In 2008, most of the communications costs were tied directly to the various takeover offers, and Western Prospector spent approximately CAD240,000 on those efforts. In 2007, the communications costs were incurred in more traditional shareholder communications activities.
Foreign exchange gains primarily resulted from the decline in the average value of the Canadian dollar against the US dollar during 2008. The reverse was true for 2007, causing the foreign exchange loss during that year.
Financial information for the Year Ended 31 December 2007
Western Prospector recorded a loss of CAD7.0 million for the 2007 financial year, which included non- cash stock based compensation expense of CAD4.2 million; legal and audit fees of CAD1.9 million primarily due to the litigation with Maximum Ventures Inc. (a British Columbia company listed on the TSXV’s NEX Board) (‘‘Maximum Ventures’’); and a CAD0.4 million foreign exchange loss on US and Mongolian funds held due to the strengthening of the Canadian dollar; offset by CAD1.0 million of interest income from cash investments. Western Prospector incurred CAD14.7 million of exploration and mineral property expenditures, primarily on the Saddle Hills Uranium Project and also raised about CAD33.0 million (net) in proceeds from issue of new shares.
Stock-based compensation increased significantly when, on 11 June 2007, a majority of the directors of Western Prospector were replaced. This event triggered an immediate acceleration of vesting under the terms of the stock option plan and a resulting charge of CAD1.2 million to operations.
Legal fees were much higher in 2007 due to litigation costs associated with defending Western Prospector against the lawsuit by Maximum Ventures This lawsuit was discontinued at the request of the plaintiff, Maximum Ventures, in March 2008.
Foreign exchange losses were caused due to the increasing strength of the Canadian dollar against both the US dollar and the Mongolian Tugrig. Western Prospector attempted to maintain its available funds in Canadian dollars where possible; however, funds required for operations in Mongolia must be held either in Tugrigs or US dollars once transferred into Mongolia.
In 2006, Western Prospector culled a variety of mineral exploration licenses from its portfolio, resulting in a significant write-off. No such reductions occurred in 2007.
Financial information for the Year Ended 31 December 2006
Western Prospector recorded a loss of CAD5.5 million for the 2006 financial year, which included non- cash stock based compensation expense of CAD2.7 million; legal and audit fees of CAD0.9 million; CAD0.9 million for various office operations and facilities; CAD0.4 million for management and administrative services and write-off of mineral property and deferred exploration expenditures of CAD0.9 million; offset by CAD1.1 million of interest income from cash investments. Western Prospector incurred CAD32.8 million of exploration and mineral property expenditures, primarily on the Saddle Hills Project.
–22– LETTER FROM THE BOARD
Liquidity and Financial Position
Operating Activities
Cash flow used in operations totaled CAD5.5 million in 2008, compared to CAD4.2 million in 2007 and CAD2.8 million in 2006. This increase primarily consisted of approximately CAD2.5 million in costs associated with the various takeover offers; offset by CAD1.0 million in lower legal fees from avoiding the Maximum Ventures litigation (for details of the litigation, please refer to the paragraph headed ‘‘Capital Commitment and Contingent Liabilities) costs which occurred during 2007; foreign exchange gains of CAD0.8 million due to the increase in value of the US dollar; and, offset by CAD1.1 million in changes in the timing of receipt of receivables and payment of payables.
Financing Activities
During 2008, a net total of CAD25,000 from financing activities was raised by issuing new equity, compared to CAD33.0 million in 2007 and CAD1.6 million in 2006.
Investing Activities
Substantially all investment-related expenditures were incurred on the Mongolian properties. Total cash flow used in investing activities was CAD14.0 million in 2008, compared to CAD17.6 million in 2007 and CAD20.2 million in 2006.
Liquidity and Cash
As at 31 December 2008, Western Prospector had working capital of CAD7.7 million and cash of CAD9.6 million, compared to CAD28.1 million and CAD29.1 million, respectively, as at 31 December 2007 and CAD16.4 million and CAD17.9 million, respectively as at 31 December 2006. Based on Western Prospector’s project plans, the management of Western Prospector believe this provides Western Prospector with sufficient resources to continue operations until sometime into the fourth quarter of 2009 without further infusions of capital. Significant additional capital will be necessary to move the Saddle Hills Uranium Project to the full development and production phases.
Western Prospector typically invests its excess cash in bankers’ acceptances and other low risk, short term investments. It has not invested in asset-backed commercial paper or other assets with “sub-prime” investment risk. Also, it did not purchase foreign currency hedge or forward contracts, as Western Prospector reduces currency risk by minimizing balances in currencies other than the Canadian dollar.
The gearing ratio, defined as total interest-bearing borrowings divided by capital and reserves, as at 31 December 2006, 31 December 2007 and 31 December 2008 was 0%, 0% and 0% respectively.
Capital Commitment and Contingent Liabilities
As at 31 December 2006, 2007 and 2008, Western Prospector had capital commitments for acquisition of property, plant and equipment of approximately CAD2.8 million, CAD2.8 million and CAD1.9 million respectively. Western Prospector used its internal resources and issue of new shares to finance such commitment.
As at 31 December 2006, 2007 and 2008, the identified contingent liabilities were as follows:
(a) On 2 March 2006, Maximum Ventures commenced an action (the ‘‘Action’’) in the Supreme Court of British Columbia naming Western Prospector, Mr. Kenneth de Graaf, and companies controlled by Mr. Kenneth de Graaf as defendants. Maximum Ventures is a British Columbia company listed on the Toronto Stock Exchange Venture Exchange. Mr. Kenneth de Graaf is a former director of Western Prospector. In the Action, Maximum Ventures sought a declaration that Western Prospector held the exploration and evaluation assets acquired from Mr. de Graaf or his
–23– LETTER FROM THE BOARD
companies in trust for Maximum Ventures. The trust declaration claimed by Maximum Ventures against Western Prospector related to certain of the Western Prospector’s material exploration and evaluation assets in Mongolia. The Action was stopped on 3 March 2008.
However, in various communications between counsel for Maximum Ventures and counsel for Western Prospector, Maximum Ventures has threatened to commence a new action against the defendants. Should this occur, Western Prospector will take all steps necessary to defend itself and to protect its interests.
Maximum Ventures placed into trust approximately CAD242,000 for legal costs of the defendants. As at 31 December 2007, Western Prospector intends to apply for reimbursement of its share of the trust fund, but has not recorded a receivable for any reimbursement as the amount, if any, is indeterminable and fully at the discretion of the court. On 1 December 2008, Western Prospector received approximately CAD122,000 reimbursement of its share of the trust fund and credited to its exploration and evaluation assets. Western Prospector is not expected to receive any additional reimbursement.
(b) On 7 December 2004, Western Prospector entered into an agreement with Adamas Mining, a Mongolian company, which provided the possibility to own to 70% of a Mongolian exploration license held by Adamas Mining. The provisions of this agreement required Western Prospector to make cash payments to Adamas Mining totaling US$790,000 (equivalent to CAD967,000). Additionally, Western Prospector was obligated to make minimum exploration expenditures on the property of at least US$1,350,000 (equivalent to CAD1,653,000) before the end of 2007. Western Prospector has complied with both of these provisions, and therefore believes it has earned the right to the 70% joint venture interest.
After numerous attempts to form the joint venture with Adamas Mining, Western Prospector chose to file suit in the Bayanzurkh District Court of Mongolia to compel Adamas Mining to form the joint venture. In January 2008, the Court ruled in favour of Adamas Mining. Western Prospector appealed this judgment, which also was denied in April 2008. Western Prospector currently is evaluating its options to resolve the dispute.
In 2008, as a result of the uncertainty of the litigation with Adamas Mining, Western Prospector wrote off the whole amount of approximately CAD4,023,000, which had been capitalised as exploration and evaluation assets, for the year ended 31 December 2008.
Indebtedness
No interest-bearing borrowings were incurred by Western Prospector as at 31 December 2006, 31 December 2007 and 31 December 2008, respectively.
Material Acquisitions and Disposal of Subsidiaries and Associated Companies
There was no material acquisitions or disposals of subsidiaries and associated companies by Western Prospector for the three years ended 31 December 2008.
Significant Investments
As at 31 December 2006, 2007 and 2008, Western Prospector did not have any significant investments apart from the Mongolian properties which have been disclosed in this circular.
Charges of Assets
As at 31 December 2006, 2007 and 2008, Western Prospector did not have any charges on assets.
–24– LETTER FROM THE BOARD
Future Plans for Material Investments
For each of the three years ended 31 December 2008, Western Prospector did not have any plans for material investments apart from the Mongolian properties which have been disclosed in this circular.
Interest Rate and Foreign Currency Risks Management Objectives and Policies
Western Prospector’s significant subsidiaries are located in Mongolia. As a result, a portion of its expenditures, accounts receivable, accounts payable and accruals are denominated in U.S. Dollars and Mongolian Tugriks and are therefore subject to fluctuation in exchange rates. As at 31 December 2008 approximately CAD1.3 million was held in U.S. dollars. A 1% change in the exchange rate between the Canadian and U.S. dollar or the Canadian dollar and Mongolian Tugriks would have an insignificant impact on the Company’s net loss.
Interest rate risk mainly arises from the interest rate impact on Western Prospector’s cash and cash equivalents that receive interest based on market interest rates. As at 31 December 2008, holding all other variables constant, a 1% change in the interest rate would have an insignificant impact on net loss.
Western Prospector typically invests its excess cash in bankers’ acceptances and other low risk, short term investments. It did not invest in asset-backed commercial paper or other assets with ‘‘sub-prime’’ investment risk. Also, Western Prospector did not purchase foreign currency hedge or forward contracts, as it reduces currency risk by minimizing balances in currencies other than the Canadian dollar. Western Prospector did this by funding its foreign operations on an ‘‘as-needed’’ basis for projected expenditures over the subsequent two to eightweeks.Investedcashisclassifiedas‘‘cashandcashequivalents’’ on its consolidated balance sheets. Income associated with these investments, which was CAD0.6 million in 2008 compared to CAD1.0 million in 2007, is classified as ‘‘interest income’’ on the statements of loss and deficit.
Employees and Remuneration Policies
As at each of 31 December 2006, 31 December 2007 and 31 December 2008, Western Prospector had approximately 61, 62 and 56 employees respectively. Total salaries and bonuses, excluding stock-based compensation, incurred during the year ended 31 December 2006, 31 December 2007 and 31 December 2008 were approximately CAD1.6 million, CAD1.4 million and CAD1.9 million respectively. Western Prospector ensures that the level of remuneration for its employees is competitive in the market.
FINANCIAL EFFECT OF THE OFFER AND THE SUBSCRIPTION
Upon completion of the Offer and the Subscription, assuming that all the Holders of Common Shares have accepted the Offer, the Company will be directly interested in 100% of the then issued and outstanding Common Shares and Western Prospector will become an indirect wholly-owned subsidiary of the Company. The financial results of Western Prospector will be consolidated into the financial statement of the Group after upon completion of the Offer and the Subscription.
Based on the unaudited pro forma financial information of the Enlarged Group set out in Appendix III to this circular, the financial effects of the Offer and the Subscription are summarised below:
Effects on assets and liabilities
As shown in the unaudited pro forma financial information of the Enlarged Group, if the Company has acquired 50.1% of Common Shares of Western Prospector, the respective pro forma total assets and pro forma liabilities of the Enlarged Group following the Offer and the Subscription would amount to approximately HKD735 million and approximately HKD160 million as compared to the respective total assets and total liabilities of the Company amount to approximately HKD614 million as at 31 December
–25– LETTER FROM THE BOARD
2008 and approximately HKD144 million as at 31 December 2008 before the Offer and the Subscription, representing an increase of approximately 19.7% in total assets and approximately 11.1% in total liabilities from those set out in the audited financial statement of the Company as at 31 December 2008.
If the Company has acquired 100% of Common Shares of Western Prospector, the respective pro forma total assets and pro forma liabilities of the Enlarged Group following the Offer and the Subscription would amount to approximately HKD630 million and approximately HKD160 million as compared to the respective total assets and total liabilities of the Company amount to approximately HKD614 million as at 31 December 2008 and approximately HKD144 million as at 31 December 2008 before the Offer and the Subscription, representing an increase of approximately 2.6% in total assets and approximately 11.1% in total liabilities from those set out in the audited financial statement of the Company as at 31 December 2008.
Effect on earning
The loss for the year attributive to the equity holders of the Group as at 31 December 2008 was approximately HKD19.7 million and the loss per share attributable to ordinary equity holders of the Group was approximately HKD0.081. The net loss for Western Prospector based on its audited financial statements as of 31 December 2008 was approximately CAD72.3 million. On the basis of the above and on the assumption that the Enlarged Group was formed as of 1 January 2008, the Directors are of the view that upon the completion of the Offer and the Subscription, the net loss and loss per share for the Group are expected to increase.
Effects on gearing
The gearing level of the Group, which is calculated as interest bearing debts divided by total capital plus interest bearing debts, was approximately 17.5% as at 31 December 2008. The gearing level of the Enlarged Group calculating on the same basis following the Offer and the Subscription if the Company has acquired 50.1% and 100% of Common Shares of Western Prospector, would be approximately 14.7% and 17.5% respectively.
The transaction cost for the Offer and the Subscription is approximately HKD17.9 million, which consists mainly of the professional and legal fees directly attributable to the Offer and the Subscription and is estimated based on terms stipulated in the respective engagement letter of each professional party involve in the transaction.
WORKING CAPITAL
The Directors are of the opinion that, after taking into account the internal resources and financial facilities of the Enlarged Group and after due and careful enquiry, the Enlarged Group will have sufficient working capital for its normal business for the next twelve months from the date of this circular.
INDEBTEDNESS
(a) Borrowings
At the close of business on 30 April, 2009, being the latest practicable date for the purpose of preparing this indebtedness statement, the Enlarged Group had the following borrowings:
The Enlarged Group HKD’000
Unsecuredbankloans 16,000
–26– LETTER FROM THE BOARD
(b) Debt securities
At the close of business on 30 April, 2009, the Enlarged Group had the following outstanding convertible note:
Carrying amount of debt Principal component at Conversion Amount 30 April 2009 price HKD’000 HKD’000 HKD
Convertible note issued on 5 November 2008 106,200 85,863 1.77
Save as disclosed above and apart from intra-group liabilities and normal trade payables, neither the Group nor Western Prospector had, as at 30 April 2009, any outstanding loan capital issued or agreed to be issued, bank overdrafts, other loans or other similar indebtedness, liabilities under acceptances (other than normal trade bills), acceptance credits, debentures, mortgage, charges, guarantees or other material contingent liabilities.
To the best of the knowledge of the Directors, having made all reasonable enquiries, there has been no material adverse change in the level of indebtedness of the Group since 30 April 2009.
FINANCIAL AND TRADING PROSPECTS OF THE ENLARGED GROUP
In the future, the Group will on the one hand, continue the business development in its existing operation on production and trading of metal die-casting products, and at the same time, explore new business and/or investment opportunities in uranium projects globally. The Company expects such new business initiatives will benefit from the strong fundamentals supporting the uranium industry. This business strategy of the Group is consistent with the plans disclosed in the announcement dated 23 June 2008.
Upon completion of the Offer and the Subscription, the Company will obtain direct access to exploration facilities and licenses of Western Prospector which allows the Company to share the future growth prospect in uranium industry. The Directors are of the view that the Offer and the Subscription, if implemented, will further enhance the Company’s portfolio of businesses. The Directors consider that the Offer and the Subscription would contribute positively to the future results of the Group.
Presently, the Company continues maintain the current core management of Western Prospector to carry on the businesses.
REASONS FOR AND BENEFITS OF THE OFFER AND THE SUBSCRIPTION
The global demand for natural uranium is expected to increase due to the number of new nuclear power reactors being planned and under construction. With strong fundamentals supporting the industry, the outlook for the natural uranium market is promising.
As disclosed in the announcement of the Company dated 23 June 2008, following the completion of the unconditional mandatory cash offer to acquire all the Shares in the Company by CNNC Overseas, CNNC Overseas may look into investment or business opportunities for the Group, particularly those relating to uranium leveraging, to diversify the Group’s business for the purpose of broadening its income source.
The Offer and the Subscription reflects the Group’s strategy of investing in uranium projects around the world. Despite the fact that Western Prospector has historically incurred losses and has not generated revenue so far, Western Prospector has a NI 43-101 classified resource and the Company intends to develop and benefit from the production of the main project in Gurvanbulag Central, Mongolia. The Group shall also enjoy the benefits brought from the experienced management team of Western Prospector. The existing management of
–27– LETTER FROM THE BOARD
Western Prospector consists of experienced professionals in the uranium exploration business. With the proven experience of the current management team of Western Prospector, the Enlarged Group is exposed to various business and investment opportunities in the upstream uranium market and more importantly, will gain from the know-how and expertise in uranium exploration.
The Directors consider the terms of the Support Agreement and the Subscription Agreement are on normal commercial terms and the Offer and the Subscription pursuant to the Support Agreement and the Subscription Agreement, respectively, are fair and reasonable and in the interests of the Company and the Shareholders as a whole.
If First Development takes up and pays for the validly tendered Common Shares, the Company intends to continue the existing business of Western Prospector after the completion of the Offer and the Subscription. The Company has no intention to dispose of or re-deploy the assets of or inject its assets to Western Prospector, other than in the ordinary course of the business of Western Prospector.
LISTING RULES IMPLICATIONS
The Offer and the Subscription constitute a major transaction of the Company, and will be subject to Shareholders’ approval pursuant to Rule 14.49 of the Listing Rules.
Pursuant to Rule 14.44 of the Listing Rules, shareholders’ approval for the Offer and the Subscription may be obtained by written shareholders’ approval in lieu of holding a general meeting if (a) no Shareholder is required to abstain from voting if the Company were to convene a general meeting for the approval of the Offer and the Subscription; and (b) written Shareholders’ approval has been obtained from a Shareholder who holds more than 50% in nominal value of the issued share capital of the Company giving the right to attend and vote at that general meeting to approve the Offer and the Subscription. So far as the Directors are aware after making reasonable enquiries, no shareholder is required to abstain from voting if the Company were to convene a general meeting for the approval of the Offer and the Subscription. The Company has obtained a written approval for the Offer and the Subscription from its controlling shareholder, CNNC Overseas, who held approximately 70.25% of the issued share capital of the Company as at the Latest Practicable Date.
ADDITIONAL INFORMATION
Your attention is also drawn to ‘‘Audited Financial Information of the Group’’ as set out in Appendix I to this circular, ‘‘Accountants’ Report of Western Prospector’’ as set out in Appendix II to this circular, ‘‘Unaudited Pro Forma Financial Information of the Enlarged Group’’ as set out in Appendix III to this circular, ‘‘Technical Report and Feasibility Study on the Gurvanbulag Uranium Deposit Saddle Hills Property Dornod Province, Mongolia’’ as set out in Appendix IV A to this circular, ‘‘Review and Valuation of Certain Mongolian Mineral Properties of Western Prospector’’ as set out in Appendix IV B to this circular and ‘‘General information’’ as set out in Appendix V to this circular.
WARNING: THE COMPLETION OF THE OFFER AND THE SUBSCRIPTION AGREEMENT WILL BE SUBJECT TO THE FULFILMENT OF CERTAIN CONDITIONS. THEREFORE, THE OFFER AND THE SUBSCRIPTION AGREEMENT MAY OR MAY NOT BE COMPLETED AND SHAREHOLDERS AND/OR POTENTIAL INVESTORS OF THE COMPANY ARE ADVISED TO EXERCISE CAUTION WHEN DEALING IN THE SHARES.
By order of the Board CNNC International Limited Li Philip Sau Yan Company Secretary
–28– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
(A) FINANCIAL SUMMARY
Set out below is a summary of the financial information of the Group for each of the three years ended 31 December 2008 extracted from the unqualified audited financial statements of the Company for the relevant years as contained in the relevant annual reports of the Company.
Consolidated Income Statement For the year ended 31 December 2008 2007 2006 HKD’000 HKD’000 HKD’000
Revenue 209,082 234,919 242,831 Cost of sales (200,166) (209,638) (202,042)
Gross profit 8,916 25,281 40,789 Other income 2,303 1,544 705 Selling and distribution expenses (8,927) (7,975) (9,986) Administrative and other expenses (20,584) (14,534) (15,286) Impairment loss on property, plant and equipment — (7,337) — Impairment loss on goodwill — — (685) Finance costs (2,138) (1,373) (1,367)
(Loss) profit before taxation (20,430) (4,394) 14,170 Income tax credit (expense) 713 38 (754)
(Loss) profit for the year (19,717) (4,356) 13,416
(Loss) earnings per share — basic (HK8.1 cents) (HK2.0 cents) HK6.1 cents
The Company did not have any minority interests and had not declared any dividends for the three years ended 31 December 2008.
–I-1– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
Consolidated Balance Sheet As at 31 December 2008 2007 2006 HKD’000 HKD’000 HKD’000
Non-current assets Property, plant and equipment 116,004 113,454 111,932 Prepaid lease payments 6,020 6,153 6,285 Available-for-sale investment — — 1,438 Deposits paid for acquisition of property, plant and equipment 1,070 3,249 6,738
123,094 122,856 126,393
Current assets Inventories 38,848 40,983 41,328 Trade and other receivables and prepayments 51,081 55,745 57,404 Prepaid lease payments 133 133 133 Available-for-sale investments — 1,483 — Investments held for trading 207 543 — Taxation recoverable — 340 — Bank balances and cash 400,150 18,807 31,348
490,419 118,034 130,213
Current liabilities Trade and other payables and accruals 40,549 30,840 30,680 Taxation payable 15 84 390 Unsecured bank loans wholly repayable within one year 16,000 19,334 14,000
56,564 50,258 45,070
Net current assets 433,855 67,776 85,143
Total assets less current liabilities 556,949 190,632 211,536
Non-current liabilities Unsecured bank loans due after one year — — 17,466 Convertible note 83,284 — — Deferred tax liabilities 4,025 958 983
87,309 958 18,449
Net assets 469,640 189,674 193,087
Capital and reserves Share capital 3,792 2,200 2,200 Reserves 465,848 187,474 190,887
Equity attributable to equity holders of the Company 469,640 189,674 193,087
–I-2– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
(B) AUDITED FINANCIAL INFORMATION OF THE GROUP
Set out below is the audited financial statements together with relevant notes to the financial statements of the Group as extracted from Annual Report 2008 of the Company. The auditor’s reports as set out in the annual reports of the Group for the years ended 31 December 2007 and 2008 were unqualified.
Consolidated Income Statement For the year ended 31 December 2008
2008 2007 NOTES HKD’000 HKD’000
Revenue 5 209,082 234,919 Cost of sales (200,166) (209,638)
Gross profit 8,916 25,281 Other income 6 2,303 1,544 Selling and distribution expenses (8,927) (7,975) Administrative and other expenses (20,584) (14,534) Impairment loss on property, plant and equipment 12 — (7,337) Finance costs 7 (2,138) (1,373)
Loss before taxation (20,430) (4,394) Income tax credit 8 713 38
Loss for the year 9 (19,717) (4,356)
Basic loss per share 11 (HK8.1 cents) (HK2.0 cents)
–I-3– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
Consolidated Balance Sheet As at 31 December 2008
2008 2007 NOTES HKD’000 HKD’000
Non-current assets Property, plant and equipment 12 116,004 113,454 Prepaid lease payments 13 6,020 6,153 Deposits paid for acquisition of property, plant and equipment 14 1,070 3,249
123,094 122,856
Current assets Inventories 15 38,848 40,983 Trade and other receivables and prepayments 16 51,081 55,745 Prepaid lease payments 13 133 133 Available-for-sale investment 17 — 1,483 Investments held for trading 18 207 543 Taxation recoverable — 340 Bank balances and cash 19 400,150 18,807
490,419 118,034
Current liabilities Trade and other payables and accruals 20 40,549 30,840 Taxation payable 15 84 Unsecured bank loans wholly repayable within one year 21 16,000 19,334
56,564 50,258
Net current assets 433,855 67,776
Total assets less current liabilities 556,949 190,632
Non-current liabilities Convertible note 22 83,284 — Deferred tax liabilities 23 4,025 958
87,309 958
Net assets 469,640 189,674
Capital and reserves Share capital 24 3,792 2,200 Reserves 465,848 187,474
Equity attributable to equity holders of the Company 469,640 189,674
–I-4– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
Consolidated Statement of Changes in Equity For the year ended 31 December 2008
Attributable to equity holders of the Company Investments Non- General Convertible Share Share revaluation distributable Merger reserve note equity Translation Accumulated capital premium reserve reserve reserve fund reserves reserve profits Total HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 (Note 24) (Note 25) (Note 25) (Note 25)
At 1 January 2007 2,200 39,352 (62) 16,584 127 6,594 — 4,265 124,027 193,087 Exchange differences arising on translation — — — — — — — 898 — 898 Gain on fair value changes of an available-for-sale-investment — — 45 — — — — — — 45
Income recognised directly in equity — — 45 — — — — 898 — 943 Loss for the year — — — — — — — — (4,356) (4,356)
Total recognised income for the year — — 45 — — — — 898 (4,356) (3,413) Transfer — — — — — 408 — — (408) —
At 31 December 2007 2,200 39,352 (17) 16,584 127 7,002 — 5,163 119,263 189,674
Exchange differences arising on translation — — — — — — — 829 — 829 Gain on fair value changes of an available-for-sale investment — — 44 — — — — — — 44
Income recognised directly in equity — — 44 — — — — 829 — 873 Investment revaluation reserve released on disposal — — (27) — — — — — — (27) Loss for the year — — — — — — — — (19,717) (19,717)
Total recognised income (expense) for the year — — 17 — — — — 829 (19,717) (18,871)
Issue of new shares 1,592 280,136 — — — — — — — 281,728 Share issue expenses — (3,261) — — — — — — — (3,261) Recognition of equity component of the convertible note — — — — — — 24,395 — — 24,395 Deferred tax liability on recognition of equity component of convertible note (Note 23) — — — — — — (4,025) — — (4,025) Transfer — — — — — 204 — — (204) —
At 31 December 2008 3,792 316,227 — 16,584 127 7,206 20,370 5,992 99,342 469,640
–I-5– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
Consolidated Cash Flow Statement For the year ended 31 December 2008
2008 2007 HKD’000 HKD’000
OPERATING ACTIVITIES Loss before taxation (20,430) (4,394) Adjustments for: Depreciation of property, plant and equipment 17,173 17,294 Dividend income (30) (30) Finance costs 2,138 1,373 Impairment loss on property, plant and equipment — 7,337 Interest income (718) (236) Loss on written-off of property, plant and equipment 109 — Gain on disposal of available-for-sale investment (27) —
Operating cash flows before movements in working capital (1,785) 21,344 Decrease in inventories 2,135 345 Decrease in trade and other receivables and prepayments 6,191 1,659 Decrease (increase) in investments held for trading 336 (543) Increase (decrease) in trade and other payables and accruals 7,872 (1,718)
Cash generated from operations 14,749 21,087 Hong Kong Profits Tax refund (paid) 340 (563) Taxation in other jurisdictions paid (314) (70)
NET CASH FROM OPERATING ACTIVITIES 14,775 20,454
INVESTING ACTIVITIES Purchase of property, plant and equipment (13,836) (16,812) Deposits paid on acquisition of property, plant and equipment (1,070) (3,249) Interest received 718 236 Dividends received 30 30
NETCASHUSEDININVESTINGACTIVITIES (14,158) (19,795)
FINANCING ACTIVITIES Proceed from issue of new shares 281,728 — Proceed from issue of convertible note 106,200 — New bank loans raised 11,000 10,000 Repayment of bank loans (14,334) (22,132) Share issue expenses (3,261) — Interest paid (659) (1,373)
NET CASH FROM (USED IN) FINANCING ACTIVITIES 380,674 (13,505)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 381,291 (12,846) CASH AND CASH EQUIVALENTS BROUGHT FORWARD 18,807 31,348 EFFECT OF FOREIGN EXCHANGE RATE CHANGES 52 305
CASH AND CASH EQUIVALENTS CARRIED FORWARD, represented by bank balances and cash 400,150 18,807
–I-6– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
Notes to the Consolidated Financial Statements For the year ended 31 December 2008
1. GENERAL
CNNC International Limited (the ‘‘Company’’) was incorporated as an exempted company with limited liability in the Cayman Islands under the Companies Law of the Cayman Islands on 25 June 2002 and its shares have been listed on The Stock Exchange of Hong Kong Limited (the ‘‘Stock Exchange’’) since 6 January 2003.
In the opinion of the directors, the Company’s ultimate holding company is China Nuclear International Uranium Corporation, which is, in turn, a wholly-owned subsidiary of China National Nuclear Corporation (中國核工業集團公司) (‘‘CNNC’’), an entity owned by the People’s Republic of China (the ‘‘PRC’’) government (‘‘state-controlled entities’’). The Company’s parent is CNNC Overseas Uranium Holding Limited (‘‘CNNC Overseas’’), a company incorporated in Hong Kong with limited liability.
The addresses of the registered office and principal place of business of the Company are disclosed in the ‘‘Corporate Information’’ section to the annual report.
The functional currency of the Company is United States dollars (‘‘US$’’). The consolidated financial statements are presented in Hong Kong dollars (‘‘HKD’’) for the convenience of the shareholders, as the Company is listed in Hong Kong.
The principal activities of the Company and its subsidiaries (hereinafter collectively referred to as the ‘‘Group’’) are die casting and sale of metal products.
2. APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (‘‘NEW HKFRSs’’)
In the current year, the Group has applied the following amendments and interpretations (‘‘new HKFRSs’’) issued by the Hong Kong Institute of Certified Public Accountants (‘‘HKICPA’’) which are or have become effective.
HKAS 39 & HKFRS 7 (Amendments) Reclassification of Financial Assets HK(IFRIC) — Int 11 HKFRS 2: Group and Treasury Share Transactions HK(IFRIC) — Int 12 Service Concession Arrangements HK(IFRIC) — Int 14 HKAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction
The adoption of the new HKFRSs had no material effect on how the results and financial position for the current or prior years have been prepared and presented. Accordingly, no prior year adjustment has been required.
The Group has not early applied the following new and revised standards, amendments or interpretations that have been issued butarenotyeteffective.
HKFRSs (Amendments) Improvements to HKFRSs1 HKAS 1 (Revised) Presentation of Financial Statements2 HKAS23(Revised) BorrowingCosts2 HKAS 27 (Revised) Consolidated and Separate Financial Statements3 HKAS 32 & 1 (Amendments) Puttable Financial Instruments and Obligations Arising on Liquidation2 HKAS 39 (Amendment) Eligible hedged items3 HKFRS 1 & HKAS 27 (Amendments) Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate2 HKFRS 2 (Amendment) Vesting Conditions and Cancellations2 HKFRS 3 (Revised) Business Combinations3 HKFRS 7 (Amendment) Improving Disclosures about Financial Instruments2 HKFRS 8 Operating Segments2 HK(IFRIC) — Int 9 & HKAS 39 Embedded Derivatives4 (Amendments) HK(IFRIC) — Int 13 Customer Loyalty Programmes5 HK(IFRIC) — Int 15 Agreements for the Construction of Real Estate2 HK(IFRIC) — Int 16 Hedges of a Net Investment in a Foreign Operation6 HK(IFRIC) — Int 17 Distribution of Non-cash Assets to Owners3 HK(IFRIC) — Int 18 Transfers of Assets from Customers7
1 Effective for annual periods beginning on or after 1 January 2009 except the amendments to HKFRS 5, effective for annual periods beginning on or after 1 July 2009 2 Effective for annual periods beginning on or after 1 January 2009 3 Effective for annual periods beginning on or after 1 July 2009
–I-7– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
4 Effective for annual periods ending on or after 30 June 2009 5 Effective for annual periods beginning on or after 1 July 2008 6 Effective for annual periods beginning on or after 1 October 2008 7 Effective for transfers on or after 1 July 2009
The application of HKFRS 3 (Revised) may affect the Group’s accounting for business combination for which the acquisition date is on or after 1 January 2010. HKAS 27 (Revised) will affect the accounting treatment for changes in the Group’s ownership interest in a subsidiary. The directors of the Company anticipate that the application of the other new and revised standards, amendments or interpretations will have no material impact on the results and the financial position of the Group.
3. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments, which are measured at fair values, as explained in the accounting policies set out below.
The consolidated financial statements have been prepared in accordance with HKFRSs issued by the HKICPA. In addition, the consolidated financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Hong Kong Companies Ordinance.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.
Wherenecessary,adjustmentsaremadetothefinancialstatements of subsidiaries to bring their accounting policies into line with those used by other members of the Group.
All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods sold in the normal course of business, net of returns and sales related taxes.
Revenue from sales of goods are recognised when goods are delivered and title has passed.
Interest income from a financial asset excluding financial assets at fair value through profit or loss is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expectedlifeofthefinancialassettothatasset’snetcarryingamount.
Dividend income from investments is recognised when the Group’s rights to receive payment have been established.
Property, plant and equipment
Property, plant and equipment, other than construction in progress, are stated at cost less subsequent accumulated depreciation and accumulated impairment losses.
Depreciation is provided to write off the cost of items of property, plant and equipment other than construction in progress, over their estimated useful lives and after taking into account their estimated residual value, using the straight-line method.
Construction in progress includes property, plant and equipment in the course of construction for production or for its own use purposes. Construction in progress is carried at cost less any recognised impairment loss. Construction in progress is classified to the appropriate category of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.
–I-8– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated income statement in the year in which the item is derecognised.
Leasehold land and buildings under development for future owner-occupied purpose
When the leasehold land and buildings are in the course of development for production or for administrative purposes, the leasehold land component is classified as a prepaid lease payment and amortised over a straight-line basis over the lease term. During the construction period, the amortisation charge provided for the leasehold land is included as part of costs of buildings under construction. Buildings under construction are carried at cost, less any identified impairment losses. Depreciation of buildings commences when they are available for use (i.e. when they are in the location and condition necessary for them to be capable of operating in the manner intended by management).
Leasing
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are recognised as a reduction of rental expense over the lease term on a straight-line basis.
Leasehold land and building
The land and building elements of a lease of land and building are considered separately for the purpose of lease classification, unless the lease payments cannot be allocated reliably between the land and building elements, in which case, the entire lease is generally treated as a finance lease and accounted for as property, plant and equipment. To the extent the allocation of the lease payments can be made reliably, leasehold interests in land are accounted for as operating leases.
Foreign currencies
In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in its functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognised in profit or loss in the period in which they arise, except for exchange differences arising on a monetary item that forms part of the Group’s net investment in a foreign operation, in which case, such exchange differences are recognised in equity in the consolidated financials statements. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity, in which cases, the exchange differences are also recognised directly in equity.
For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group’s operations are translated into the presentation currency of the Group (i.e. Hong Kong dollars) at the rate of exchange prevailing at the balance sheet date, and their income and expenses are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during the period, in which case, the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognised as a separate component of equity (the translation reserve). Such exchange differences are recognised in profit or loss in the period in which the foreign operation is disposed of.
Borrowing costs
All borrowing costs are recognised as and included in finance costs in the consolidated income statement in the period in which they are incurred.
–I-9– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
Government grants
Government grants are recognised as income over the periods necessary to match them with the related costs. Grants related to depreciable assets are presented as a deduction from the carrying amount of the relevant asset and are released to income over the useful lives of the assets. Grants related to expense items are recognised in the same period as those expenses are charged in the consolidated income statement and are deducted in reporting the related expense.
Retirement benefit costs
Payments to retirement benefit schemes are charged as an expense when employees have rendered service entitling them to the contributions.
Taxation
Income tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes income statement items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to equity,inwhichcasethedeferredtaxisalsodealtwithinequity.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average method.
Financial instruments
Financial assets and financial liabilities are recognised on the balance sheet when a group entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.
Financial assets
The Group’s financial assets are classified into one of the three categories, including financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial assets. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.
–I-10– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
Effective interest method
The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period.
Income is recognised on an effective interest basis, other than financial assets at fair value through profit or loss, of which interest income is included in net gains or losses.
Financial assets at fair value through profit or loss
The Group’s financial assets at fair value through profit and loss represent financial assets held for trading. A financial asset is classified as held for trading if:
. it has been acquired principally for the purpose of selling in the near future; or
. it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or
. it is a derivative that is not designated and effective as a hedging instrument.
At each balance sheet date subsequent to initial recognition, financial assets held for trading are measured at fair value, with changes in fair value recognised directly in profit or loss in the period in which they arise. The net gain or loss recognised in profit or loss includes any dividend or interest earned on the financial assets.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At each balance sheet date subsequent to initial recognition, loans and receivables (including trade and other receivables and bank balances) are carried at amortised cost using the effective interest method, less any identified impairment losses (see accounting policy on impairment loss on financial assets below).
Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are neither classified as financial assets at fair value through profit or loss nor loans and receivables. At each balance sheet date subsequent to initial recognition, available-for-sale financial assets are measured at fair value. Changes in fair value are recognised in equity, until the financial asset is disposed of or is determined to be impaired, at which time, the cumulative gain or loss previously recognised in equity is removed from equity and recognised in profit or loss (see accounting policy on impairment loss on financial assets below).
Impairment of financial assets
Financial assets, other than those financial assets at fair value through profit or loss, are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial assets have been impacted.
For an available-for sale equity investment, a significant or prolonged decline in the fair value of that investment below its cost is considered to be objective evidence of impairment.
For all other financial assets, objective evidence of impairment could include:
. significant financial difficulty of the issuer or counterparty; or
. default or delinquency in interest or principal payments; or
. it becoming probable that the borrower will enter bankruptcy or financial re-organisation.
–I-11– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
For certain categories of financial asset, such as trade receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group’s past experience of collecting payments and observable changes in national or local economic conditions that correlate with default on receivables.
For financial assets carried at amortised cost, an impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.
The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to profit or loss.
For financial assets measured at amortised cost, if, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment losses was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.
Impairment losses on available-for-sale equity investments will not be reversed in profit or loss in subsequent periods. Any increase in fair value subsequent to impairment loss is recognised directly in equity.
Financial liabilities and equity
Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.
An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities. The accounting policies adopted in respect of financial liabilities and equity instruments are set out below.
Effective interest method
The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.
Interest expense is recognised on an effective interest basis.
Financial liabilities
Financial liabilities including trade and other payables and unsecured bank loans are subsequently measured at amortised cost, using the effective interest method.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
Derecognition
Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised directly in equity is recognised in profit or loss.
Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.
–I-12– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
Convertible note
Convertible note issued by the Group that contain both the liability and conversion option components are classified separately into respective items on initial recognition. Conversion option that will be settled by the exchange of a fixed amount of cash or another financial asset for a fixed number of the Company’s own equity instruments is classified as an equity instrument.
On initial recognition, the fair value of the liability component is determined using the prevailing market interest of similar non-convertible debts. The difference between the gross proceed of the issue of the convertible note and the fair value assigned to the liability component, representing the conversion option for the holder to convert the notes into equity, is included in equity (convertible note equity reserve).
In subsequent periods, the liability component of the convertible note is carried at amortised cost using the effective interest method. The equity component, representing the option to convert the liability component into ordinary shares of the Company, will remain in convertible note equity reserve until the embedded option is exercised in which case the balance stated in convertible note equity reserve will be transferred to share premium. Where the option remains unexercised at the expiry date, the balance stated in convertible note equity reserve will be released to accumulated profits. No gain or loss is recognised in profit or loss upon conversion or expiration of the option.
Transaction costs that relate to the issue of the convertible note are allocated to the liability and conversion option components in proportion to their relative fair values. Transaction costs relating to the conversion option derivative is charged to profit or loss immediately. Transaction costs relating to the liability component are included in the carrying amount of the liability portion and amortised over the period of the convertible note using the effective interest method.
Impairment losses on tangible assets
At each balance sheet date, the Group reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.
Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.
4. KEY SOURCE OF ESTIMATION UNCERTAINTY
The Group makes estimates and assumptions concerning the future. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets within the next financial year, are discussed below:
Estimated impairment on property, plant and equipment
Management reviews the recoverability of the Group’s property, plant and equipment with reference to its intended use and profit generating power whenever events or changes in circumstances indicate that the carrying amount of the assets exceeds its recoverable amount. Appropriate impairment for estimated irrecoverable amounts are recognised in profit and loss when there is objective evidence that the asset is impaired.
In determining whether impairment on property, plant and equipment, the Group takes into consideration the present value of future cash flow expected to receive. Impairment is recognised as the difference between the carrying amount and the fair value less costs to sell (2007: value in use) for the year ended 31 December 2008. As at 31 December 2008, the carrying amount of the property, plant and equipment is HKD116,004,000 (2007: HKD113,454,000).
–I-13– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
5. REVENUE AND SEGMENTAL INFORMATION
Revenue represents the amounts received and receivable for goods sold, net of returns and sales related taxes, to outsiders during the year.
Business segments
For management purposes, the Group’s business is currently organised into four operating divisions which are the basis on which the Group reports its primary segment information.
Principal activities are as follows:
Aluminium parts — sale of aluminium die casting parts manufactured and processed by the Group.
Zinc parts — sale of zinc die casting parts manufactured and processed by the Group and zinc die casting parts purchased from suppliers but processed by the Group.
Magnesium parts — sale of magnesium die casting parts manufactured and processed by the Group.
Others — sale of screw machined brass parts and other casting purchased from suppliers but processed by the Group.
For the year ended 31 December 2008
Aluminium Magnesium parts Zinc parts parts Others Consolidated HKD’000 HKD’000 HKD’000 HKD’000 HKD’000
REVENUE 195,110 12,647 1,181 144 209,082
RESULTS Segment results (15,250) 11 (261) (69) (15,569)
Dividend income from available-for-sale investments 30 Interest income 718 Unallocated corporate income 1,555 Unallocated corporate expenses (5,026) Finance costs (2,138)
Loss before taxation (20,430) Income tax credit 713
Loss for the year (19,717)
BALANCE SHEET ASSETS Segment assets 160,639 13,259 3,236 115 177,249 Investment held for trading 207 Unallocated corporate assets 436,057
Consolidated total assets 613,513
LIABILITIES Segment liabilities 33,766 263 92 — 34,121 Unsecured bank loan wholly repayable within one year 16,000 Unallocated corporate liabilities 93,752
Consolidated total liabilities 143,873
OTHER INFORMATION Capital additions 16,500 150 — 568 17,218 Depreciation of property, plant and equipment 16,185 648 340 — 17,173 Loss on written off of property, plant and equipment 109 — — — 109
–I-14– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
For the year ended 31 December 2007
Aluminium Magnesium parts Zinc parts parts Others Consolidated HKD’000 HKD’000 HKD’000 HKD’000 HKD’000
REVENUE 214,129 18,230 2,529 31 234,919
RESULTS Segment results 4,253 484 80 1 4,818
Dividend income from available-for-sale investments 30 Interest income 236 Impairment loss on property, plant and equipment (7,337) Unallocated corporate income 1,278 Unallocated corporate expenses (2,046) Finance costs (1,373)
Loss before taxation (4,394) Income tax credit 38
Loss for the year (4,356)
BALANCE SHEET ASSETS Segment assets 170,315 13,904 3,582 90 187,891 Available-for-sale investments 1,483 Investment held for trading 543 Unallocated corporate assets 50,973
Consolidated total assets 240,890
LIABILITIES Segment liabilities 27,685 205 71 — 27,961 Unsecured bank loans 19,334 Unallocated corporate liabilities 3,921
Consolidated total liabilities 51,216
OTHER INFORMATION Capital additions 20,029 2,027 3,706 — 25,762 Depreciation of property, plant and equipment 16,430 499 365 — 17,294
Geographical segments
The following table provides an analysis of the Group’s revenue by geographical market, irrespective of the origin of the goods:
Sales revenue by geographical market 2008 2007 HKD’000 HKD’000
The PRC 44,400 45,793 Hong Kong 16,275 35,457 North America 68,260 79,574 Europe 65,925 62,777 Others 14,222 11,318
209,082 234,919
–I-15– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
The following is an analysis of the carrying amount of segment assets, and additions to property, plant and equipment, analysed by the geographical area in which the assets are located:
Additions to property, plant Carrying amount of segment assets and equipment 2008 2007 2008 2007 HKD’000 HKD’000 HKD’000 HKD’000
Geographical region The PRC 133,625 143,454 16,166 23,929 Hong Kong 43,624 44,437 1,052 1,833
177,249 187,891 17,218 25,762
6. OTHER INCOME
2008 2007 HKD’000 HKD’000
Included in other income are the followings: Dividend income from available-for-sale investments 30 30 Gain on disposal of available-for-sale investment 27 — Interest income 718 236
7. FINANCE COSTS
2008 2007 HKD’000 HKD’000
Interest on unsecured bank loans 659 1,373 Effective interest expenses on convertible note (note 22) 1,479 —
2,138 1,373
8. INCOME TAX CREDIT
2008 2007 HKD’000 HKD’000
Current tax: Hong Kong Profits Tax Overprovision in previous years —(85)
Taxation in other jurisdictions Current year 245 257 Overprovision in previous years — (185)
245 72
245 (13)
Deferred tax (note 23): Current year (903) (25) Effect of change in tax rate (55) —
(958) (25)
Taxation attributable to the Company and its subsidiaries (713) (38)
On 26 June 2008, the Hong Kong Legislative Council passed the Revenue Bill 2008 which reduced corporate profits tax rate from 17.5% to 16.5% effective from the year of assessment 2008/2009. Therefore, Hong Kong Profits Tax is calculated at 16.5% (2007: 17.5%).
–I-16– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
Taxation arising in other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
Pursuant to the relevant laws and regulations in the PRC prior to the year of 2008, Dongguan United Metal Products Co., Ltd. 東莞鏗利五金制品有限公司 (‘‘Dongguan United’’), was regarded as a ‘‘High and New Technology enterprise with Foreign Investment’’ and as an export oriented production company, while United Castings (Dongguan) Co., Ltd. 東莞科鑄金屬制品有限公司 (‘‘United Castings’’) and United Metal Products (Shanghai) Co., Ltd. 科鑄金屬制品（上海）有限公司 (‘‘United Shanghai’’) were regarded as ‘‘Production Enterprise with Foreign Investment established on coastal economic open zones’’. Accordingly, they were subject to a reduced PRC Enterprise Income Tax rate of 24% for the year ended 31 December 2007.
On 16 March 2007, the PRC promulgated the Law of the PRC on the PRC on Enterprise Income Tax (the ‘‘New Law’’) by Order No. 63 of the President of the PRC. On 6 December 2007, the State Council of the PRC issued Implementation Regulations of the New Law. Under the New Law and Implementation regulations, the new PRC Enterprise Income Tax standard rate was increased to 25% from 1 January 2008 onwards.
Pursuant to the relevant law and regulations in the PRC prior to the year of 2008, Dongguan United was entitled to a 50% reduction in tax rate in the year of 2007 as over 70% of Dongguan United’s turnover was for export purpose. Accordingly, its tax rate for the year of 2007 was 12%. Under the New Law, such incentive was abolished and therefore the tax rate for the year 2008 is 25%.
United Castings is entitled to exemption from the PRC Enterprise Income Tax for two years commencing from their first profit- making year of operation and thereafter, it is entitled to 50% relief from the PRC Enterprise Income tax for the following three years. Its first profit making year was 2006. Accordingly, tax relief will expire in the year of 2010. The tax rate for the year of 2008 is 12.5% (2007: 12%).
No provision for taxation has been made for United Shanghai for both years 2007 and 2008 as the company had no assessable profit for both years.
The income tax credit for the year can be reconciled to the loss before taxation per the consolidated income statement as follows:
2008 2007 HKD’000 HKD’000
Loss before taxation (20,430) (4,394)
Tax at the PRC enterprise income tax rate of 25% (2007: 24%) (5,108) (1,055) Tax effect of income not taxable for tax purpose (507) (557) Tax effect of expenses not deductible for tax purpose 2,895 2,455 Tax effect of tax losses not recognised 1,368 429 Effect of tax relief granted to the Company’s certain subsidiaries (122) (1,033) Effect of different tax rates of subsidiaries operating in other jurisdictions 740 9 Overprovision in previous years — (270) Effect of change in tax rate (55) — Others 76 (16)
Taxation for the year (713) (38)
–I-17– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
9. LOSS FOR THE YEAR
2008 2007 HKD’000 HKD’000
Loss for the year has been arrived at after charging: Directors’ remuneration (note 10) 5,095 5,648 Other staff costs 51,800 51,421 Retirement benefit schemes contributions (note 31) 3,083 1,164
Total staff costs 59,978 58,233
Amortisation of prepaid lease payments 133 133 Less: Amount capitalised in construction in progress (133) (133)
——
Auditors’ remuneration 1,016 1,018 Cost of inventories recognised as expense 200,166 209,638 Depreciation of property, plant and equipment 17,173 17,294 Net exchange loss 466 685 Loss on written-off of property, plant and equipment 109 — Operating lease charges on land and buildings 4,414 3,611 Penalty paid to a construction contractor in respect of a lawsuit, included in administrative and other expenses 1,704 —
10. DIRECTORS’ AND EMPLOYEES’ EMOLUMENTS
The emoluments paid or payable to each of the thirteen (2007: six) directors are as follows:
2008
Kong Cheong Loke Yu, Tsang Cheuk Ying alias Wong Han Xu Chiu Luen Cui Zhang Chew Lee Tho Wang Loke Hoi Qiu Huang Wing Ruiping* Hongchao* Wai** Trevor** Liguo* Lei* Henry* Siem** Jianguo** Lam** Jiangang* Mingang* Sing** Total HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000
Director’sfee 1010——101010555555101055290 Other emoluments Salaries and other benefits— —2,0652,579———— —— — ——4,644 Retirement benefit scheme contributions— —1111—————— — ——22
Total emoluments 10 10 2,076 2,590 10 10 10 55 55 55 10 10 55 4,956
2007
Kong Cheuk Loke Yu, Tsang Chiu Luen Lee Tho Wang alias Loke Wong Wai Trevor Siem Jianguo Hoi Lam Wing Sing Total HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000
Director’sfee ——55555555220 Other emoluments Salariesandotherbenefits2,4532,951————5,404 Retirement benefit scheme contributions 1212————24
Totalemoluments 2,4652,963555555555,648
* Mr. Han Ruiping, Mr. Xu Hongchao, Mr. Cui Liguo, Mr. Zhang Lei, Mr. Cheong Ying Chew Henry, Mr. Qiu Jiangang and Mr. Huang Mingang were appointed on 5 November 2008.
–I-18– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
** Mr.TsangChiuWai,Mr.KongCheukLuenTrevor,Mr.LeeThoSiem,Mr.WangJianguo,Mr.LokeYuandMr.Wong Wing Sing resigned as directors on 3 December 2008.
Of the five individuals with the highest emoluments in the Group, two individuals (2007: two individuals) were directors of the Company whose emoluments are included in the disclosure set out above. The emoluments of the remaining three (2007: three) individuals were as follows:
2008 2007 HKD’000 HKD’000
Salaries and other benefits 2,367 2,068 Retirement benefit schemes contributions 12 24
2,379 2,092
2008 2007 No. of No. of individuals individuals
Emoluments of the employees were within the following band: Nil to HKD1,000,000 33
During the year, no emoluments were paid by the Group to any of the directors or the five highest paid individuals (including directors and employees) as an inducement to join or upon joining the Group or as compensation for loss of office. None of the directors has waived any emoluments during the year.
11. LOSS PER SHARE
The calculation of the basic loss per share attributable to the ordinary equity holders of the Company is based on the following data:
2008 2007 HKD’000 HKD’000
Loss for the purposes of basic loss per share (19,717) (4,356)
2008 2007 ’000 ’000
Number of shares Weighted average number of ordinary shares for the purposes of basic loss per share 244,856 220,000
No diluted loss per share for the year ended 31 December 2008 is presented as the conversion of convertible note would result in a decrease in loss per share.
No diluted loss per share for the year ended 31 December 2007 is presented as there were no potential dilutive ordinary shares outstanding during the year.
–I-19– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
12. PROPERTY, PLANT AND EQUIPMENT
Furniture, Leasehold Plant and fixtures and Motor Construction Buildings improvements machinery equipment vehicles in progress Total HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000
COST At 1 January 2007 3,620 11,650 134,942 11,811 1,356 23,251 186,630 Exchange realignment 95 125 1,492 357 38 — 2,107 Transfer — — 942 — — (942) — Additions — 2,263 12,088 2,589 — 8,822 25,762 Written-offs — (875) — — — — (875)
At 31 December 2007 3,715 13,163 149,464 14,757 1,394 31,131 213,624 Exchange realignment 156 343 3,451 587 63 — 4,600 Additions — 2,596 10,169 1,438 — 3,015 17,218 Written-offs — — (141) — — — (141)
At 31 December 2008 3,871 16,102 162,943 16,782 1,457 34,146 235,301
DEPRECIATION AND IMPAIRMENT At 1 January 2007 2,334 7,205 56,960 7,070 1,129 — 74,698 Exchange realignment 80 116 1,195 291 34 — 1,716 Provided for the year 430 2,885 12,026 1,887 66 — 17,294 Impairment loss recognised in the income statement — — — — — 7,337 7,337 Eliminated on written-offs — (875) — — — — (875)
At 31 December 2007 2,844 9,331 70,181 9,248 1,229 7,337 100,170 Exchange realignment 114 242 1,162 424 44 — 1,986 Provided for the year 307 2,067 12,669 2,075 55 — 17,173 Eliminated on written-offs — — (32) — — — (32)
At 31 December 2008 3,265 11,640 83,980 11,747 1,328 7,337 119,297
CARRYING VALUES At 31 December 2008 606 4,462 78,963 5,035 129 26,809 116,004
At 31 December 2007 871 3,832 79,283 5,509 165 23,794 113,454
The above items of property, plant and equipment, other than construction in progress, are depreciated over their estimated useful lives and after taking into account of their estimated residual value on a straight-line basis at the following rates per annum:
Buildings Over the term of the leases, or 20 years, whichever is the shorter Leasehold improvements Over the term of the leases, or 5 years, whicheveristheshorter Plant and machinery 9% Furniture, fixtures and equipment 18%–25% Motor vehicles 18%–25%
–I-20– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
In respect of the alleged breach of contractual undertakings of several construction contracts, a subsidiary has been named as a defendant in a District Court action in the PRC during the year ended 31 December 2007. Accordingly, all construction costs in dispute of approximately HKD2,080,000 were accrued in the consolidated balance sheet while relevant legal expenses approximately HKD150,000 were charged to the consolidated income statement during the year ended 31 December 2007.
This also resulted in a significant delay in the completion date of the new factory premises. The directors of the Company conducted an impairment review in respect of the Group’s construction in progress as at 31 December 2007. A number of the relevant assets were determined to be impaired. Accordingly, an impairment loss of approximately HKD7,337,000 was recognised during the year ended 31 December 2007 based on value-in-use calculation.
In 2008, the District Court in the PRC ruled in favour of the plaintiff. The subsidiary and its legal counsel appealed to the Intermediate Court in the PRC but the Intermediate Court in the PRC still ruled in favour of the plaintiff. Accordingly, additional construction costs of approximately HKD2,661,000 in dispute were accrued in the consolidated balance sheet; while additional penalties of approximately HKD1,704,000 and additional legal expenses of approximately HKD198,000 were charged to the consolidated income statement during the year. The judgement from the Intermediate Court is considered final.
The directors of the Company conducted another impairment review in respect of the Group’s construction in progress as at 31 December 2008. The fair value of the Group’s construction in progress at 31 December 2008 have been arrived at on the basis of a valuation carried out on that date by Greater China Appraisal Limited (‘‘Greater China’’), independent qualified professional valuers not connected with the Group. Greater China are members of the Institute of Valuers, and have appropriate qualifications and recent experiences in the valuation of similar properties in the relevant locations. With reference to the valuation arrived at by Greater China, the recoverable amount based on the fair value less costs to sell basis is higher than the relevant carrying amount as at 31 December 2008. As such, no further impairment has been recognised.
13. PREPAID LEASE PAYMENTS
The Group’s prepaid lease payments represent payments for medium-term land use right in the PRC.
Analysed for reporting purposes as:
2008 2007 HKD’000 HKD’000
Current asset 133 133 Non-current asset 6,020 6,153
6,153 6,286
Note: The amount had been reduced by a government grant of approximately HKD8,335,000 in the form of deduction of consideration paid in respect of the land use right acquired by the Group in a prior year, details of which are set out in note 32.
Prepaid lease payments are amortised over the term of the land use right of 50 years on a straight-line basis.
The amount represents the rights to use the land (the ‘‘Land Use Right’’) in the PRC acquired by the Group. While the Group has paid the full purchase consideration, the relevant government authorities have not granted formal title to the Land Use Right to the Group. In the opinion of the directors, the absence of formal title to the Land Use Right does not impair the value of the relevant properties to the Group. The directors also believe that formal title to the Land use right will be granted to the Group in due course.
14. DEPOSITS PAID FOR ACQUISITION OF PROPERTY, PLANT AND EQUIPMENT
The deposits were paid by the Group in connection with the acquisition of property, plant and equipment for production facilities in the PRC. Additional amounts committed are shown as capital commitments in note 29.
15. INVENTORIES
2008 2007 HKD’000 HKD’000
Raw materials 7,712 13,156 Work-in-progress 17,175 14,258 Finished goods 13,961 13,569
38,848 40,983
–I-21– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
16. TRADE AND OTHER RECEIVABLES AND PREPAYMENTS
2008 2007 HKD’000 HKD’000
Trade receivables 44,049 50,993 Less: allowance for doubtful debts ——
44,049 50,993
Other receivables Deposits paid 3,973 2,540 Others 2,184 1,259
6,157 3,799
Prepayments 875 953
51,081 55,745
The Group allows a credit period of 30 to 90 days to its trade customers. The following is an aged analysis of trade receivables at the balance sheet date:
2008 2007 HKD’000 HKD’000
0to30days 15,821 30,133 31 to 60 days 15,999 11,979 61 to 90 days 6,070 5,383 91 to 120 days 4,036 2,757 Over 120 days 2,123 741
44,049 50,993
Before accepting any new customer, the Group will understand the potential customer’s credit quality and defines its credit limits. Credit sales are made to customers with an appropriate credit history. Credit limits attributed to customers are reviewed regularly.
At both balance sheet dates, the directors considered that trade receivables which are neither past due nor impaired are of good credit quality.
Included in the Group’s trade receivable balance are debtors with aggregate carrying amount of HKD12,874,000 (2007: HKD8,881,000) which are past due at the reporting date for which the Group has not provided for impairment loss. The Group does not hold any collateral over these balances.
Ageing of trade receivables which are past due but not impaired
2008 2007 HKD’000 HKD’000
31 to 60 days 3,157 6,022 61 to 90 days 3,558 2,892 91 to 120 days 4,036 2,546 Over 120 days 2,123 1,058
Total 12,874 12,518
The directors consider trade receivables which are past due but not impaired are of good credit quality. Satisfactory settlements were received subsequent to the balance sheet date.
–I-22– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
Trade and other receivables that are denominated in currencies other than the functional currencies of the relevant group entities are set out below:
RMB US$ Euro HKD’000 HKD’000 HKD’000
As at 31 December 2008 302 2,444 411
As at 31 December 2007 47 3,996 1,471
17. AVAILABLE-FOR-SALE INVESTMENT
Available-for-sale investment comprises:
2008 2007 HKD’000 HKD’000
Unlisted investment fund — 1,483
As at 31 December 2007, the available-for-sale investment is stated at fair value. Fair value of this investment has been determined by reference to prices quoted by the counterparty financial institution.
The available-for-sale investment matured on 28 December 2008 and reclassified to other receivables upon maturity. The consideration on redemption of the investment of approximately HKD1,527,000 was received subsequent to the balance sheet date.
18. INVESTMENTS HELD FOR TRADING
2008 2007 HKD’000 HKD’000
Investments held for trading comprise: Equity securities listed in Hong Kong 207 543
The fair values of the above investments held for trading are determined based on the quoted market bid prices available on the Stock Exchange.
19. BANK BALANCES AND CASH
Bank balances carry interest at market rates which range from 0.05% to 1.22% (2007: 0.01% to 4.86%) per annum.
Bank balances that are denominated in currencies other than functional currencies of the relevant group entities are set out below:
RMB US$ Yen Euro HKD’000 HKD’000 HKD’000 HKD’000
As at 31 December 2008 98 1,754 13 615
As at 31 December 2007 340 7,103 1,551 1,217
–I-23– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
20. TRADE AND OTHER PAYABLES AND ACCRUALS
The following is an aged analysis of trade payables at the balance sheet date:
2008 2007 HKD’000 HKD’000
Trade payables 0to30days 10,456 6,514 31 to 60 days 872 2,005 61 to 90 days 352 437 91 to 120 days 17 222 Over 120 days 289 688
11,986 9,866
Other payables Accruals 12,354 11,930 Other payables 12,094 5,555 Deposits received 4,115 3,489
28,563 20,974
40,549 30,840
The average credit period on purchase of goods is 60 days. The Group has financial risk management policies in place to monitor the credit quality of these trade payable.
Trade and other payables that are denominated in currencies other than the functional currencies of the relevant group entities are set out below:
RMB US$ Euro HKD’000 HKD’000 HKD’000
As at 31 December 2008 — 807 771
As at 31 December 2007 2,234 1,176 951
21. UNSECURED BANK LOANS WHOLLY REPAYABLE WITHIN ONE YEAR
The unsecured bank loans comprise:
Carrying amount 2008 2007 HKD’000 HKD’000
Floating-rate borrowings: HIBOR + 0.45%(1) 16,000 10,000 LIBOR + 0.8%(2) — 9,334
16,000 19,334
(1) Repayable at the end of each interest period. Amount repaid may be redrawn immediately. The intervals of each interest period vary from one to three months.
(2) Thisunsecuredbankloanwasfully repaid during the year.
The average effective interest rate of the Group’s unsecured bank loans is 3.2% (2007: 5.5%) per annum.
Included in the unsecured bank loans is a bank loan of HKD16,000,000 (2007: HKD10,000,000) which is denominated in currency other than functional currency of the relevant group entity.
–I-24– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
22. CONVERTIBLE NOTE
The Company issued a 2% unsecured convertible note to a substantial shareholder of the Company, with principal amount of HKD106,200,000 on 5 November 2008. On the same date, a supplementary agreement was entered into between the Company and the noteholder that the amount to be paid on the maturity day will be fixed at US$13,702,000 and the note interest will be settled quarterly in fixed amounts of US$68,512. The convertible note entitles the holder to convert it, in whole or in part of the principal amount, into ordinary shares of the Company at any time prior to seven business days preceding the maturity date on 4 November 2011, at the conversion price of HKD1.77 per share (equivalent to US$0.23 per share), subject to anti-dilutive adjustments. If the convertible note has not been converted, it will be redeemed at par on 4 November 2011.
At 31 December 2008, the effective interest rate of the liability components of the convertible note is 11.58%.
The movement of the liability component of the convertible note for the year is set out as below:
Liability component HKD’000
As at 1 January 2008 — Issued during the year 81,805 Interest charge 1,479
As at 31 December 2008 83,284
23. DEFERRED TAX
The following are the major deferred tax liabilities and assets recognised and movements thereon during the current and prior years:
Accelerated tax Convertible depreciation Tax losses note Total HKD’000 HKD’000 HKD’000 HKD’000
At 1 January 2007 2,881 (1,898) — 983 (Credited) charged to the consolidated income statement for the year (219) 194 — (25)
At 31 December 2007 2,662 (1,704) — 958 (Credited) charged to the consolidated income statement for the year (2,510) 1,607 — (903) Charged to equity — — 4,025 4,025 Effect of change in tax rate (152) 97 — (55)
At 31 December 2008 — — 4,025 4,025
At the balance sheet date, the Group had unused tax losses of approximately HKD8,054,000 (2007: HKD12,316,000) available for offset against future profits. A deferred tax asset has been recognised as at 31 December 2007 in respect of approximately HKD9,734,000 (2008: Nil) of such losses. No deferred tax asset has been recognised in respect of the remaining tax losses of HKD8,054,000 (2007: HKD2,582,000) due to the unpredictability of future profits streams. Unrecognised tax losses of HKD3,948,000 (2007: HKD1,678,000) will gradually expire from 2009 to 2013 (2007: from 2009 to 2012). The remainings may be carried forward indefinitely.
At the balance sheet date, the Group had deductible temporary differences of approximately HKD7,337,000 (2007: HKD7,337,000). No deferred tax asset had been recognised in relation to such deductible temporary difference as it is not probable that taxable profit will be available against which the deductible temporary differences can be utilised.
–I-25– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
24. SHARE CAPITAL
Number of ordinary shares Amount 2008 2007 2008 2007 ’000 ’000 HKD’000 HKD’000
Ordinary shares of HKD0.01 each Authorised: At 1 January and 31 December 1,000,000 1,000,000 10,000 10,000
Issued and fully paid: At 1 January 220,000 220,000 2,200 2,200 Issue of new shares (Note) 159,168 — 1,592 —
At 31 December 379,168 220,000 3,792 2,200
Note: On 4 June 2008, a conditional subscription agreement was entered into between the Company and CNNC Overseas Uranium Holding Limited, the substantial shareholder of the Company, to subscribe 159,168,308 new shares of HKD0.01 each in the Company at a price of HKD1.77 per share. The transaction was completed on 5 November 2008.
25. RESERVES
The non-distributable reserve represents the aggregate amount of the share premium of the subsidiaries as at the time of a group reorganisation effected on 13 December 2002 (the ‘‘Group Reorganisation’’).
The merger reserve represents the difference between the aggregate nominal amount of the share capital of the subsidiaries and the nominal amount of the Company’s shares issued in exchange thereof pursuant to the Group Reorganisation.
As stipulated by the relevant laws and regulations in the PRC, subsidiaries established in the PRC (the ‘‘PRC subsidiaries’’) are required to maintain a general reserve fund which is non-distributable. Appropriations to this reserve fund are made out of profit for the year of the PRC subsidiaries’ PRC statutory financial statements which are prepared in accordance with the accounting principles generally accepted in the PRC. The amount and allocation basis are decided by the board of directors of the PRC subsidiaries annually and is not less than 10% of the profit for the year of the PRC subsidiaries for that year. The general reserve fund can be used for expanding the capital base of the PRC subsidiaries by means of capitalisation issue.
26. SHARE OPTION SCHEME
The Company’s share option scheme (the ‘‘Scheme’’) was adopted for a period of ten years commencing from 11 December 2002 pursuant to a written resolution of all shareholders passed on 11 December 2002 for the primary purpose of providing incentives or rewards to directors and eligible employees. Under the Scheme, the Company may grant options to eligible employees and directors of the Company and its subsidiaries, to subscribe for shares in the Company. Additionally, the Company may, from time to time, grant share options to outside eligible advisors and consultants to the Company and its subsidiaries at the discretion of its board of directors.
The number of shares which may be issued under the Scheme is subject to the following limits:
(i) the maximum number of shares in respect of which options may be granted under the Scheme and any other share option scheme of the Company must not in aggregate exceed 30% of the total number of issued shares of the Company from time to time;
(ii) without prior approval from the Company’s shareholders, the total number of shares in respect of which options may be granted under the Scheme and any other share option scheme is not permitted to exceed 22,000,000 shares, representing 10% of the issued share capital of the Company at 6 January 2003; and
(iii) the number of shares in respect of which options may be granted to any individual in any one year is not permitted to exceed 1% of the issued share capital of the Company as at the date of such grant.
A nominal consideration of HKD1 is payable upon acceptance of the grant of the option. The exercise price is determined by the directors of the Company and will be at least the higher of (i) the average of the closing prices of the ordinary shares of the Company for the five trading days immediately preceding the date of the grant; (ii) the closing price of the ordinary shares of the Company on the date of the grant; and (iii) the nominal value of the ordinary shares of the Company.
Any options granted under the Scheme must be exercised during such option period as may be determined and notified by the directors of the Company, which shall not exceed 10 years from the date of acceptance of the option.
–I-26– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
No options have been granted under the Scheme since its adoption.
27. CAPITAL RISK MANAGEMENT
The Group manages its capital to ensure its subsidiaries will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance.
The capital structure of the Group consists of debt, which includes unsecured bank loan wholly repayable within one year and convertible note, and equity attributable to equity holders of the Company, comprising share capital, share premium, investments revaluation reserve, non-distributable reserve, merger reserve, general reserve fund, convertible note equity reserve, translation reserve and accumulated profits as disclosed in the consolidated financial statements.
The directors of the Company review the capital structure annually. As part of this review, the directors of the Company assess the annual budget prepared by management of the Company. Based on the proposed annual budget, the directors of the Company consider the cost of capital and the risks associated with each class of capital. The directors of the Company also balance its overall capital structure through the payment of dividends, new share issues of the proposed floatation of the Company as well as the issue of new debt or the redemption of existing debt.
28. FINANCIAL INSTRUMENTS
(a) Categories of financial instruments
2008 2007 HKD’000 HKD’000
Financial assets Fair value through profit or loss 207 543 Loans and receivables (including cash and cash equivalents) 450,356 73,599 Available-for-sale financial assets — 1,483
Financial liabilities Amortised cost 122,648 34,751
(b) Financial risk management objectives and policies
The Group’s major financial instruments include available-for-sale investments, trade and other receivables, investments held for trading, bank balances, trade and other payables, unsecured bank loans wholly repayable within one year and convertible note. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. Management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.
Credit risk
The Group’s principal financial assets include trade and other receivables and cash and cash equivalents. The Group’s maximum exposure to credit risk in the event of the counterparties’ failure to perform their obligations as at 31 December 2008 in relation to each class of recognised financial assets is the carrying amount of those assets as stated in the consolidated balance sheet. In order to minimise the credit risk, management of the Group has delegated a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. The Group only extends credit to customers based upon careful evaluation of the customers’ financial conditions and credit history.
In addition, the Group reviews the recoverable amount of each individual receivable at each balance sheet date to ensure that adequate impairment losses are recognised for irrecoverable amounts. In this regard, the directors of the Group consider that the Group’s exposure to bad debts and concentration risk is minimal.
The Group has concentration of credit risk as 50% of the total trade receivables as at 31 December 2008 (2007: 49%) was due from the Group’s five largest customers, respectively. Those five largest customers are reputable electrical appliance company, automotive traders and agents with long business history with the Group. Management perform periodic evaluations and customer visits to ensure the Group’s exposure to bad debts is not significant. The historical experience in the collection of trade receivables from the five largest customers falls within the expectation of the directors.
–I-27– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
Credit risk on bank balances is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies.
Market risk
(i) Foreign currency risk management
While most of the Group’s operations are transacted in the functional currencies on the respective group entities, the Group undertakes certain transactions denominated in foreign currencies. The Group currently has not formulated any hedging policies against its exposure to currency risk. Yet, the Group still manages its foreign currency risk by closely monitoring the movement of the foreign currency rate.
The carrying amount of the Group’s monetary assets and monetary liabilities denominated in foreign currencies at the balance sheet dates are as follow:
RMB US$ Yen Euro HKD’000 HKD’000 HKD’000 HKD’000
As at 31 December 2008 Assets 400 4,198 13 1,026 Liabilities — 807 — 771
As at 31 December 2007 Assets 387 11,099 1,551 2,688 Liabilities 2,234 10,510 — 951
Management monitors foreign exchange exposure as stated above and will consider hedging significant foreign currency exposure should the need arises.
Sensitivity analysis
Foreign currency risk refers to the risk that movement in foreign currency exchange rate which will affect the Group’s financial results and its cash flows. Management considers the Group does not expose to significant foreign currency risk as majority of its transactions are denominated in functional currency of the Group’s subsidiaries. US$ financial assets and financial liabilities are mainly held by a subsidiary of the Company using HKD as its functional currency. Since HKD is pegged to US$, relevant foreign currency risk is minimal. Except US$, there were only insignificant balances of financial assets and liabilities denominated in foreign currency at the balance sheet dates as disclosed above. A reasonably possibleincreaseordecreaseinforeignexchangerateof functional currencies against relevant foreign currencies would not have a significant effect on the consolidated income statement of the Group.
(ii) Interest rate risk
The Group’s exposure to changes in interest rates is mainly attributable to its bank balances, unsecured bank loans and convertible note. Bank balances and unsecured bank loans at variable rates expose the Group to cash flow interest-rate risk, while the convertible note expose the Group to fair value interest rate risk. Details of the Group’s bank balances, unsecured bank loans and convertible note are disclosed in notes 19, 21 and 22, respectively.
The Group currently does not have an interest rate hedging policy. However, management monitors interest rate exposure and will consider hedging significant interest rate exposure should the need arises.
Sensitivity analysis
The sensitivity analyses below have been determined based on the exposure to interest rates for bank balances and bank loans at the balance sheet date. For variable-rate bank balances, the analysis is prepared assuming the amount outstanding at the balance sheet date was outstanding for the whole year. A 50 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates.
If interest rates had been 50 basis points higher/lower and all other variables were held constant, the Group’s loss for the year ended 31 December 2008 would decrease/increase by HKD1,902,000 (2007: increase/ decrease by HKD43,000).
–I-28– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
Liquidity risk
In the management of the liquidity risk, the Group monitors and maintains a level of cash and cash equivalents deemed adequate by management to finance the Group’s operations and mitigate the effects of fluctuations in cash flows. Management monitors the utilisation of borrowings.
The following tables detail Group’s contractual maturity for its non-derivative financial liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The tables include both interest and principal cash flows.
Weighted Total Total average 61 to 365 undiscounted carrying interestrate 0to30days31to60days days 1–5 years cash flows amount % HKD’000 HKD’000 HKD’000 HKD’000 HKD’000 HKD’000
As at 31 December 2008 Trade and other payables — 14,881 8,388 95 — 23,364 23,364 Unsecured bank loans wholly repayable within one year 3.2 16,325 — — — 16,325 16,000 Convertible note 2.0 — 531 1,593 110,448 112,572 83,284
31,206 8,919 1,688 110,448 152,261 122,648
As at 31 December 2007 Trade and other payables — 12,391 3,026 — — 15,417 15,417 Unsecured bank loans wholly repayable within one year 5.5 — 19,492 — — 19,492 19,334
12,391 22,518 — — 34,909 34,751
(c) Fair value
The fair value of financial assets and financial liabilities are determined as follows:
. the fair value of financial assets with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market bid prices; and
. the fair value of other financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices or rates from observable current market transactions as input.
The directors consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the consolidated financial statements approximate to their fair values.
29. CAPITAL COMMITMENTS
2008 2007 HKD’000 HKD’000
Capital expenditure in respect of acquisition of property, plant and equipment: Authorised but not contract for in the consolidated financial statements 1,167 — Contracted for but not provided in the consolidated financial statements 16,833 29,701
18,000 29,701
–I-29– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
30. OPERATING LEASE COMMITMENTS
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases for rented premises which fall due as follows:
2008 2007 HKD’000 HKD’000
Within one year 6,241 3,632 In the second to fifth year inclusive 11,353 9,028
17,594 12,660
Operating lease payments represent rentals payable by the Group for certain of its office premises and factory land and buildings. The average lease term is 3 years. Rentals are fixed and no arrangements have been entered into for contingent rental payments.
31. RETIREMENT BENEFIT SCHEMES
Effective from 1 December 2000, the Group has participated in a Mandatory Provident Fund Scheme (the ‘‘MPF Scheme’’) for all its eligible employees in Hong Kong. The MPF Scheme is registered with the Mandatory Provident Fund Scheme Authority under the Mandatory Provident Fund Ordinance. The assets of the MPF Scheme are held separately from those of the Group in funds under the control of an independent trustee. Under the rules of the MPF Scheme, the employer and its employees are each required to make contributions to the scheme at rates specified in the rules. The only obligation of the Group with respect to the MPF Scheme is to make the required contributions under the scheme. No forfeited contributions are available to reduce the contribution payable in the future years.
The Group is also required to make contributions to state-management retirement benefit schemes operated by the PRC government based on a certain percentage of the monthly payroll costs of the employees of Dongguan United, Everhope Industrial Limited (‘‘Everhope’’) and United Castings. The Group has no other obligations under the state-management retirement benefit schemes in the PRC other than the contribution payable.
During the year, the total amount contributed by the Group to the relevant retirement benefit schemes are as follows:
2008 2007 HKD’000 HKD’000
MPF Scheme 215 183 State-management retirement benefit schemes 2,890 1,005
3,105 1,188
32. GOVERNMENT GRANT
During the year ended 31 December 2005, the Group received a government grant of approximately HKD8,335,000 in relation to a piece of land use right situated in the PRC acquired by the Group during that year. The amount has been deducted from the carrying amount of the prepaid lease payments as set out in note 13. The amount is transferred to income in the form of reduced amortisation charge over the term of the prepaid lease payments. This policy has resulted in a credit to income in the current period of HKD167,000 (2007: HKD167,000). As at 31 December 2008, an amount of HKD7,737,000 (2007: HKD7,904,000) remains to be amortised.
–I-30– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
33. RELATED PARTY DISCLOSURES
(I) Remuneration of directors and other members of key management
The remuneration of directors and other members of key management during the year was as follows:
2008 2007 HKD’000 HKD’000
Short-term benefits 6,842 7,661 Post-employment benefits 24 36
6,866 7,697
The remuneration of directors and key executives is determined by the remuneration committee having regard to the performance of individuals and market trends.
On 3 December 2008, Mr. Tsang Chiu Wai and Mr. Kong Cheuk Luen Trevor, former directors and existing shareholders of the Company, had entered into new service agreements with the Company for two years until 3 December 2010. Pursuant to the agreed terms of the service agreements, each of Mr. Tsang and Mr. Kong shall be entitled to a fixed salary of HKD3,500,000 per annum plus potential 15% profit bonus and 5% discretionary profit bonus. It is also a term of the service agreements that both Mr. Tsang and Mr. Kong shall guarantee on United Non-Ferrous (Overseas) Limited and its subsidiaries’ consolidated net asset value of not less than the sum of HKD189,674,000 as at 3 December 2010. Otherwise, each of Mr. Tsang and Mr. Kong should be liable to pay half of such shortfall to the Group.
(II) Transactions and balances with other state-controlled entities in the PRC
The Group itself is part of a larger group of companies under CNNC which is controlled by the PRC government. Apart from the issue of a convertible note as set out in note 22 and the related interest expenses of approximately HKD1,479,000 to its immediate holding company, CNNC Overseas, during the year, the Group doesn’t conduct business with other state-controlled entities.
In addition, the Group has entered into various transactions, including deposits placements with certain banks and financial institutions which are state-controlled entities in its ordinary course of business. In view of the nature of those banking transactions, the directors of the Company are of the opinion that separate disclosure would not be meaningful.
34. POST BALANCE SHEET EVENT
On 25 March 2009, an indirectly wholly-owned subsidiary of the Company entered into a definitive agreement with Western Prospector Group Ltd. (‘‘Western Prospector’’), a company incorporated in Canada with its shares listed on the Toronto Stock Exchange Venture Exchange, to acquire all of the issued and outstanding common shares of Western Prospector from the holders of common share at a price of CAD0.56 per common share and to subscribe for 5,371,350 subscription shares of Western Prospector, representing approximately 10% of the issued and outstanding common shares of Western Prospector, at CAD0.56 per subscription share. The consideration will be satisfied in cash. Western Prospector is principally engaged in the acquisition, exploration and development of mineral properties located in Mongolia. A press release published by Western Prospector in Canada in relation to the entering into of the definitive agreement has been published by the Company by way of an announcement on 1 April 2009.
–I-31– APPENDIX I AUDITED FINANCIAL INFORMATION OF THE GROUP
35. PARTICULARS OF THE SUBSIDIARIES OF THE COMPANY
Particulars of the Company’s subsidiaries are as follows:
Place of incorporation/ Issued and fully paid Proportion of nominal establishment share/registered value of issued/registered capital Name of subsidiary and operations capital held by the Company Principal activities Directly Indirectly 2008 2007 2008 2007 %%%%
China Nuclear British Virgin Ordinary US$50,000 100 — — — Inactive International Islands Corporation
CNNC International (HK) Hong Kong Ordinary — — 100 — Inactive Limited HKD10,000
Dongguan United PRC Registered capital — — 100 100 Die casting and (note i) HKD40,000,000 trading of metal products
Everhope Hong Kong Ordinary HKD2 — — 100 100 Die casting and trading of metal products
United Metals Company Hong Kong Ordinary HKD1,602 — — 100 100 Trading of metal Limited products
United Metals Asset British Virgin Ordinary US$1 — — 100 100 Investment holding Management Co., Ltd. Islands/ Hong Kong
United Non-Ferrous Hong Kong Ordinary HKD1,602 — — 100 100 Provision of (H.K.) Limited administrative services
United Metals Asset Hong Kong Ordinary HKD2 — — 100 — Investment holding Management (H.K.) Co., Ltd.
United Non-Ferrous British Virgin Ordinary US$17,622 100 100 — — Investment holding (Overseas) Limited Islands/ Hong Kong
United Non-Ferrous Sdn. Malaysia Ordinary RM2 — — 100 100 Investment holding Bhd. and trading of metal products
United Shanghai (note i) PRC Registered capital — — 100 100 Inactive US$12,000,000 (note ii)
United Castings PRC Registered capital — — 100 100 Die casting and (note i) HKD18,000,000 trading of metal (note ii) products
Notes:
(i) Dongguan United, United Shanghai and United Castings are established in the PRC as wholly foreign owned enterprises.
(ii) As at 31 December 2008, the capital of United Shanghai and United Castings were paid up as to US$3,870,000 and HKD17,750,000, respectively.
(iii) None of the subsidiaries had issued any debt securities at the end of the year.
–I-32– APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
The following is the text of a report dated 30 June 2009, prepared for the purpose of inclusion in the circular, received from Deloitte Touche Tohmatsu, Certified Public Accountants.
30 June 2009
The Directors CNNC International Limited
Dear Sirs,
We set out below our report on the financial information (the ‘‘Financial Information’’) regarding Western Prospector Group Ltd. (‘‘Western Prospector’’) and its subsidiaries (hereinafter collectively referred to as the ‘‘Western Prospector Group’’) for each of the three years ended 31 December 2008 (the ‘‘Relevant Periods’’) for inclusion in a circular dated 30 June 2009 issued by CNNC International Limited (the ‘‘Company’’, the Company and its subsidiaries are hereinafter collectively referred to as the ‘‘Group’’) in connection with the Group’s proposed acquisition of a minimum of 50.1% and up to all of the issued and outstanding common shares of Western Prospector (the ‘‘Circular’’).
Western Prospector was incorporated pursuant to the laws of the Province of British Columbia, Canada, on 3 April 1998. Its shares are listed on the Toronto Stock Exchange Venture Exchange.
At the date of this report, Western Prospector has the following subsidiaries and their particulars are as follows:
Issued Attributable equity Place and date of and fully paid interests held by incorporation/ share capital/ Western Prospector Name of subsidiaries registration registered capital Directly Indirectly Principal activities %%
Western World Holdings Ltd. Malaysia US$100 100% — Investment holding 4 March 2005
Western Prospector U.S. Inc. The United States US$1 100% — Provision of management (the ‘‘U.S.’’) service 4November2007
Western Fortune Ltd. Malaysia US$100 — 100% Mineral exploration in 4 March 2005 Mongolia
Dornod Trans LLC Mongolia US$10,000 — 100% Mineral exploration in 27 August 2004 Mongolia
Eastern Prospector LLC Mongolia US$10,000 — 100% Mineral exploration in 25 October 2005 Mongolia
Emeelt Mines LLC Mongolia US$10,000 — 100% Mineral exploration in 27 August 2004 Mongolia
Mardaigol LLC Mongolia US$10,000 — 100% Mineral exploration in 15 June 2005 Mongolia
Western Prospector Mongolia Mongolia US$10,000 — 100% Mineral exploration in LLC 22 June 2004 Mongolia
–II-1– APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
At the date of this report, Western Prospector has a jointly controlled entity and its particulars are as follows:
Attributable equity Place and date Registered interests held by Name of jointly controlled entity of registration capital Western Prospector Principal activities
XXEM LLC Mongolia Tugrik 5,825 50% Powerline operations 5 December 2007
All the companies comprising the Western Prospector Group have adopted 31 December as their financial year end date.
The statutory consolidated financial statements of the Western Prospector Group for each of the three years ended 31 December 2008 were prepared in accordance with the generally accepted accounting principles in Canada (‘‘the CND GAAP Financial Statements’’). The CND GAAP Financial Statements for each of the three years ended 31 December 2008 were audited by PricewaterhouseCoopers LLP, Chartered Accountants, registered in Canada.
The Financial Information of the Western Prospector Group for the Relevant Periods set out in this report has been prepared in accordance with Hong Kong Financial Reporting Standards (the ‘‘HKFRSs’’) issued by the Hong Kong Institute of Certified Public Accountants (the ‘‘HKICPA’’) based on the CND GAAP Financial Statements, after making necessary adjustments as we consider appropriate for the purpose of preparing our report for the inclusion in the Circular.
We have examined the CND GAAP Financial Statements in accordance with the Auditing Guideline 3.340 ‘‘Prospectuses and the Reporting Accountant’’ as recommended by the HKICPA.
The CND GAAP Financial Statements are the responsibility of the directors of Western Prospector who approved their issue. The directors of the Company are responsible for the contents of the Circular in which this report is included. It is our responsibility to compile the Financial Information set out in this report from the CND GAAP Financial Statements, to form an independent opinion on the Financial Information and to report our opinion to you.
In our opinion, the Financial Information gives, for the purpose of this report, a true and fair view of the state of affairs of the Western Prospector Group as at 31 December 2006, 2007 and 2008 and of its loss and cash flows for each of the years then ended.
Without qualifying our opinion, we draw attention to Note 2 and Section B(4) of the Financial Information respectively. Note 2 to the Financial Information explains that the Western Prospector Group incurred recurring losses since inception, having an accumulated losses of approximately CAD91,706,000 at 31 December 2008, which indicates the existence of a material uncertainty in respect of the Western Prospector Group’s ability to continue as a going concern. In addition, Section B(4) explains that subsequent to the Relevant Periods, two of the Western Prospector Group’s exploration licenses were suspended temporarily because the Western Prospector Group was either claimed to have breached the Law on Minerals of Mongolia or violated or breached the Land Law and Law on Radiation Safety of Mongolia according to a report issued by the state inspector of Mongolia (the ‘‘Inspector’’). In response to the suspension, the Western Prospector Group has replied to the relevant Mongolian authority in respect of the alleged violation and breaches. The Western Prospector Group’s independent Mongolian legal counsel has indicated that the Western Prospector Group’s response is reasonable and comprehensive and that it would be reasonable for the Inspector to conclude that the Western Prospector’s Group had addressed all of the violation and breaches raised in the report to their satisfaction and if the Inspector accepts the response, they would notify Mineral Resources Authority of Mongolia (‘‘MRAM’’) and MRAM would be obligated to terminate the suspension.
The Financial Information does not include any adjustments should the going concern assumption be inappropriate, nor does it include any adjustments that would result from the failure to remove the temporary suspension of the licences as the ultimate outcome of the matter cannot presently be determined.
–II-2– APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
A. FINANCIAL INFORMATION
Consolidated Income Statement
Year ended 31 December 2006 2007 2008 NOTES CAD’000 CAD’000 CAD’000
Revenue — — — Other income 1,213 1,577 1,080 Administrative expenses (5,803) (8,622) (8,917) Impairment loss on available-for-sale investments — — (1,332) Write-off of exploration and evaluation assets 11 (865) — (63,123)
Loss before tax (5,455) (7,045) (72,292) Income tax expense 6 — — (28)
Loss for the year 7 (5,455) (7,045) (72,320)
Loss per share — Basic (CAD) 9 0.13 0.14 1.33
–II-3– APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
Consolidated Balance Sheet
At 31 December 2006 2007 2008 NOTES CAD’000 CAD’000 CAD’000
Non-current assets Property, plant and equipment 10 2,133 5,640 7,071 Exploration and evaluation assets 11 53,031 67,759 17,758 Available-for-sale investments 13 481 672 191
55,645 74,071 25,020
Current assets Other receivables and prepayments 327 747 627 Bank balances and cash 14 17,902 29,081 9,561
18,229 29,828 10,188
Current liabilities Other payables 1,396 1,470 2,499 Amounts due to related companies 15 444 280 — Taxation payable — — 14
1,840 1,750 2,513
Net current assets 16,389 28,078 7,675
Total assets less current liabilities 72,034 102,149 32,695
Capital and reserves Share capital 16 78,086 110,608 110,655 Reserves (6,052) (8,459) (77,960)
Equity attributable to equity holders of Western Prospector 72,034 102,149 32,695
–II-4– APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
Consolidated Statement of Changes in Equity
Share option and Investment Share warrant revaluation Accumulated capital reserve reserve losses Total CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 (Note 16) (Notes 17 & 18)
At 1 January 2006 64,899 3,082 (101) (6,886) 60,994
Gain on fair value changes of available- for-sale investments recognised directly in equity — — 206 — 206 Loss for the year — — — (5,455) (5,455)
Total recognised income (expense) for the year — — 206 (5,455) (5,249) Issue of shares 10,963 — — — 10,963 Exercise of share options and warrants 2,224 (644) — — 1,580 Recognition of equity-settled share- based payments — 3,746 — — 3,746
At 31 December 2006 78,086 6,184 105 (12,341) 72,034
Loss on fair value changes of available- for-sale investments recognised directly in equity — — (1,157) — (1,157) Transfer to profit or loss on disposal of available-for-sale investments — — 162 — 162 Loss for the year — — — (7,045) (7,045)
Total recognised expenses for the year — — (995) (7,045) (8,040) Placement of shares 34,615 — — — 34,615 Share issue expenses — by cash (2,265) — — — (2,265) Share issue expenses — by warrants (899) 899 — — — Exercise of share options 1,071 (452) — — 619 Recognition of equity-settled share- based payments — 5,186 — — 5,186
At 31 December 2007 110,608 11,817 (890) (19,386) 102,149
Loss on fair value changes of available- for-sale investments recognised directly in equity — — (481) — (481)
Loss for the year — — — (72,320) (72,320) Impairment loss on available-for-sale investments — — 1,332 — 1,332
Total recognised income (expenses) for the year — — 851 (72,320) (71,469) Exercise of share options 47 (22) — — 25 Recognition of equity-settled share- based payments — 1,990 — — 1,990
At 31 December 2008 110,655 13,785 (39) (91,706) 32,695
–II-5– APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
Consolidated Cash Flow Statements
Year ended 31 December 2006 2007 2008 CAD’000 CAD’000 CAD’000
OPERATING ACTIVITIES Loss before tax (5,455) (7,045) (72,292) Adjustments for: Depreciation of property, plant and equipment 76 25 85 Gain on disposal of available-for-sale investments — (162) — Interest income (1,077) (1,037) (630) Loss on disposal of property, plant and equipment 46 — — Equity-settled share-based payments 2,681 4,220 1,990 Impairment loss on available-for-sale investments — — 1,332 Write-off of exploration and evaluation assets 865 — 63,123
Operating cash flows before movements in working capital (2,864) (3,999) (6,392) Decrease (increase) in other receivables and prepayments 353 (420) 120 (Decrease) increase in other payables (295) 180 737
Cash used in operations (2,806) (4,239) (5,535) Income tax paid — — (14)
NET CASH USED IN OPERATING ACTIVITIES (2,806) (4,239) (5,549)
INVESTING ACTIVITIES Additions of exploration and evaluation assets (19,377) (14,967) (12,082) Purchase of property, plant and equipment (1,915) (4,065) (2,544) Interest received 1,077 1,037 630 Proceeds on disposal of property, plant and equipment 4 — — Proceeds on disposal of available-for-sale investments — 444 —
NET CASH USED IN INVESTING ACTIVITIES (20,211) (17,551) (13,996)
FINANCING ACTIVITIES Proceeds from issue of new shares 1,580 35,234 25 Share issue expenses — (2,265) —
NET CASH FROM FINANCING ACTIVITIES 1,580 32,969 25
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (21,437) 11,179 (19,520)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 39,339 17,902 29,081
CASH AND CASH EQUIVALENTS AT END OF THE YEAR, — represented bank balances and cash 17,902 29,081 9,561
–II-6– APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
Notes to the Financial Information
1. GENERAL INFORMATION
Western Prospector was incorporated pursuant to the laws of the Province of British Columbia, Canada on 3 April 1998 and its shares are listed on the Toronto Stock Exchange Venture Exchange. The registered address and principal place of the business of Western Prospector is 2700-700 W. Georgia St., Vancouver, BC V7Y 188 Canada and 400-601 West Broadway, Vancouver, BC VSZ 4C2, Canada, respectively. Western Prospector is engaged in investment holding. The activities of its subsidiaries are set out in note 25.
The Financial Information has been prepared in accordance with the accounting policies adopted by the Group, except those not applicable to the Group including HKFRS 6 ‘‘Exploration for and Evaluation of Mineral Resources’’, Hong Kong Accounting Standard (‘‘HKAS’’) 31 ‘‘Interests in Joint Ventures’’ and HKFRS 2 ‘‘Share-based payments’’. Details of which are set out in note 4.
The Financial Information is presented in Canadian Dollars (‘‘CAD’’), which is the same as the functional currency of Western Prospector.
No segment information is presented as the Western Prospector Group has only one business activity namely mineral exploration and operates in Mongolia.
2. BASIS OF PREPARATION OF FINANCIAL INFORMATION
The Western Prospector Group completed a definitive feasibility study for its exploration and evaluation assets located in Mongolia. This study indicated that the project contains economically viable reserves. The recoverability of the exploration and evaluation assets is dependent upon the existence of economically recoverable reserves, the ability of the Western Prospector Group to obtain the necessary financing to complete the exploration and development of its properties, and upon future profitable production or proceeds from the disposition of the properties.
The Financial Information has been prepared on the basis that the Western Prospector Group will continue as a going concern, which assumes that the Western Prospector Group will be able to meet its commitments, continue operations and realise its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Western Prospector Group has incurred losses since inception, has an accumulated losses of approximately CAD91,706,000 at 31 December 2008 and will need additional financing to fund ongoing exploration and administrative expenses. The validity of the assumption is therefore dependent on the successful implementation by the Western Prospector Group of the actions set out below.
On 25 March 2009, Western Prospector has signed a definitive agreement with First Development Holdings Corporation (‘‘FDHC’’), a wholly-owned subsidiary of the Company whereby FDHC will offer to acquire all the outstanding common shares of Western Prospector for CAD0.56 per share in cash (the ‘‘Offer’’), valuing Western Prospector’s equity at approximately CAD31 million. The Offer is conditional, among other things, upon receiving a valid tender of Western Prospector’s common shares representing at least 50.1% of the outstanding shares on a fully diluted basis. The Offer requires certain conditions to complete.
In addition, Western Prospector has entered into a subscription agreement with FDHC whereby FDHC agreed, under certain conditions, to subscribe up to 5,371,350 common shares of Western Prospector at CAD0.56 per share, representing a potential cash infusion of approximately CAD3.0 million.
The Financial Information does not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications that would be necessary were the going concern assumption found to be inappropriate. Such adjustments could be material.
3. APPLICATION OF HONG KONG FINANCIAL REPORTING STANDARDS
For the purposes of preparing and presenting the Financial Information for the Relevant Periods, the Western Prospector Group has consistently adopted all the HKASs, HKFRSs, amendments and interpretations (herein collectively referred to as ‘‘new HKFRSs’’), which are effective for the accounting periods beginning on or effective from 1 January 2008 onwards throughout the Relevant Periods.
–II-7– APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
The Group has not early applied the following new and revised standards, amendments or interpretations that have been issued butarenotyeteffective.
HKFRSs (Amendments) Improvements to HKFRSs1 HKFRSs (Amendments) Improvements to HKFRSs 20092 HKAS 1 (Revised) Presentation of Financial Statements3 HKAS23(Revised) BorrowingCosts3 HKAS 27 (Revised) Consolidated and Separate Financial Statements4 HKAS 32 & 1 (Amendments) Puttable Financial Instruments and Obligations Arising on Liquidation3 HKAS 39 (Amendment) Eligible Hedged Items4 HKFRS 1 & HKAS 27 (Amendments) Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate3 HKFRS 2 (Amendment) Vesting Conditions and Cancellations3 HKFRS 3 (Revised) Business Combinations4 HKFRS 7 (Amendment) Improving Disclosures about Financial Instruments3 HKFRS 8 Operating Segments3 HK(IFRIC) — Int 9 & HKAS 39 Embedded Derivatives5 (Amendments) HK(IFRIC) — Int 13 Customer Loyalty Programmes6 HK(IFRIC) — Int 15 Agreements for the Construction of Real Estate3 HK(IFRIC) — Int 16 Hedges of a Net Investment in a Foreign Operation7 HK(IFRIC) — Int 17 Distributions of Non-cash Assets to Owners4 HK(IFRIC) — Int 18 Transfers of Assets from Customers8
1 Effective for annual periods beginning on or after 1 January 2009 except the amendments to HKFRS 5, effective for annual periods beginning on or after 1 July 2009 2 Effective for annual periods beginning on or after 1 January 2009, 1 July 2009 and 1 January 2010, as appropriate 3 Effective for annual periods beginning on or after 1 January 2009 4 Effective for annual periods beginning on or after 1 July 2009 5 Effective for annual periods ending on or after 30 June 2009 6 Effective for annual periods beginning on or after 1 July 2008 7 Effective for annual periods beginning on or after 1 October 2008 8 Effective for transfers on or after 1 July 2009
The adoption of HKFRS 3 (Revised) may affect the Western Prospector Group’s accounting for business combination for which the acquisition date is on or after 1 January 2010. HKAS 27 (Revised) will affect the accounting treatment for changes in the Western Prospector Group’s ownership interest in a subsidiary.
The management of Western Prospector anticipate that the application of the other new and revised standards, amendments or interpretation will have no material impact on the results and the financial position of the Western Prospector Group.
4. SIGNIFICANT ACCOUNTING POLICIES
The Financial Information has been prepared on the historical cost basis except for certain financial instruments, which are measured at fair values, as explained in the accounting policies set out below.
The Financial Information has been prepared in accordance with the following accounting policies which conform with HKFRSs issued by the HKICPA. In addition, the Financial Information includes applicable disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and by the Hong Kong Companies Ordinance.
Basis of consolidation
The Financial Information incorporates the financial statements of Western Prospector and entities controlled by Western Prospector (its subsidiaries). Control is achieved where Western Prospector has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
Wherenecessary,adjustmentsaremadetothefinancialstatements of subsidiaries to bring their accounting policies into line with those used by other members of the Western Prospector Group.
All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable.
–II-8– APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
Interest income from a financial asset excluding financial assets at fair value through profit or loss is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expectedlifeofthefinancialassettothatasset’snetcarryingamount.
Dividend income from investments is recognised when the Western Prospector Group’s rights to receive payment have been established.
Interest in a jointly controlled entity
Interest in a jointly controlled entity is accounted for by the proportionate consolidation method. Under this method, the Western Prospector Group’s share of each of the assets, liabilities, income and expenses of the jointly controlled entity are combined with the Western Prospector Group’s similar line items, line by line, in the Financial Information. All material intercompany transactions and balances have been eliminated to the extent of the Western Prospector Group’s interest.
Exploration and evaluation assets
The Western Prospector Group records its interests in mineral properties and areas of geological interest at cost. Exploration and evaluation costs relating to these interests and projects are capitalised on the basis of specific claim blocks or areas of geological interest until the mineral properties to which they relate are placed into production, sold or allowed to lapse. The Western Prospector Group expenses all other administration costs incurred during the Relevant Periods.
Exploration and evaluation assets include the cost of exploration rights and the expenditures incurred in the search for natural resources as well as the determination of the technical feasibility and commercial viability of extracting those resources.
When the technical feasibility and commercial viability of extracting natural resources become demonstrable, previously recognised exploration and evaluation assets are reclassified as either intangible or tangible assets. These assets are assessed for impairment before reclassification, and any impairment loss is recognised in profit or loss.
Property, plant and equipment
Property, plant and equipment are stated at cost less subsequent accumulated depreciation and accumulated impairment losses.
Depreciation is provided to write off the cost of items of property, plant and equipment over their estimated useful lives and after taking into account their estimated residual value, using the straight-line method.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated income statement in the year in which the item is derecognised.
Leasing
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are recognised as a reduction of rental expense over the lease term on a straight-line basis.
Foreign currencies
In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in its functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are recognised in profit or loss in the period in which they arise.
–II-9– APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
Taxation
Income tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes income statement items that are never taxable or deductible. The Western Prospector Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the Financial Information and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and interest in a jointly controlled entity, except where the Western Prospector Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to equity,inwhichcasethedeferredtaxisalsodealtwithinequity.
Equity-settled share-based payment transactions
Share options granted to directors/employees on or before 7 November 2002, or granted after 7 November 2002 and vested before 1 January 2005
The financial impact of the share options granted is not recorded in the Financial Information until such time as the options are exercised, and no charge is recognised in the consolidated income statement in respect of the value of options granted. Upon the exercise of the share options, the resulting shares issued are recorded as additional share capital. Options which lapse or are cancelled prior to their exercise date are deleted from the register of outstanding options.
Share options granted to director/employees after 7 November 2002 and vested on or after 1 January 2005
The fair value of services received determined by reference to the fair value of share options granted at the grant date is recognised in full or capitalised to exploration and evaluation assets as appropriate when the share options granted vest immediately or expensed on a straight-line basis over the vesting period, with a corresponding increase in equity (share option and warrant reserve).
At each balance sheet date, the Western Prospector Group revises its estimates of the number of share options that are expected to ultimately vest. The impact of the revision of the estimates during the vesting period, if any, is recognised in profit or loss, with a corresponding adjustment to share option and warrant reserve.
Warrants granted to service providers
Warrants issued in exchange for services are measured at the fair values of the services received, unless that fair value cannot be reliably measured, in which case the services received are measured by reference to the fair value of the warrants issued. The fair values of the services received are recognised as expenses immediately, with a corresponding increase in equity (share option and warrant reserve), unless the services qualify for recognition as assets or transaction cost of an equity transaction.
At the time when the share options or warrants are exercised, the amount previously recognised in share option and warrant reserve will be transferred to share capital. When the share options or warrants are forfeited or are still not exercised at the expiry date, the amount previously recognised in share option and warrant reserve will continue to be held in share option and warrant reserve.
– II-10 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
Financial instruments
Financial assets and financial liabilities are recognised on the consolidated balance sheet when the Western Prospector Group becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.
Financial assets
The Western Prospector Group’s financial assets are classified as loans and receivables and available-for-sale financial assets. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.
Effective interest method
The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period.
Interest income is recognised on an effective interest basis for debt instruments.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At each balance sheet date subsequent to initial recognition, loans and receivables (including other receivables and bank balances and cash) are carried at amortised cost using the effective interest method, less any identified impairment losses (see accounting policy on impairment loss on financial assets below).
Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are either designated or not classified as financial assets at fair valuethroughprofitorloss,loansandreceivablesorheld-to-maturity investments. At each balance sheet date subsequent to initial recognition, available-for-sale financial assets are measured at fair value. Changes in fair value are recognised in equity, until the financial asset is disposed of or is determined to be impaired, at which time, the cumulative gain or loss previously recognised in equity is removed from equity and recognised in profit or loss (see accounting policy on impairment loss on financial assets below)
Impairment of financial assets
Financial assets are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial assets have been impacted.
For an available-for sale equity investment, a significant or prolonged decline in the fair value of that investment below its cost is considered to be objective evidence of impairment.
For loans and receivable, objective evidence of impairment could include:
. significant financial difficulty of the issuer or counterparty; or
. default or delinquency in interest or principal payments; or
. it becoming probable that the borrower will enter bankruptcy or financial re-organisation.
For financial assets carried at amortised cost, an impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.
– II-11 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
For financial assets measured at amortised cost, if, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment losses was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.
Impairment losses on available-for-sale equity investments will not be reversed in profit or loss in subsequent periods. Any increase in fair value subsequent to impairment loss is recognised directly in equity.
Financial liabilities and equity
Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.
An equity instrument is any contract that evidences a residual interest in the assets of the Western Prospector Group after deducting all of its liabilities. The accounting policies adopted in respect of financial liabilities and equity instruments are set out below.
Effective interest method
The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.
Interest expense is recognised on an effective interest basis.
Financial liabilities
Financial liabilities including other payables and amounts due to related companies are subsequently measured at amortised cost, using the effective interest method.
Equity instruments
Equity instruments issued by Western Prospector are recorded at the proceeds received, net of direct issue costs.
Warrants issued by Western Prospector that will be settled by a fixed amount of cash for fixed number of Western Prospector’s own equity instruments are classified as equity. The net proceeds received from the issue of warrants are recognised in equity (share option and warrant reserve). The share option and warrant reserve will be transferred to share capital accounts upon the exercise of the warrants. When warrants are still not exercised at the expiry date, the amount previously recognised in share option and warrant reserve will continue to be held in share option and warrant reserve.
Derecognition
Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Western Prospector Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised directly in equity is recognised in profit or loss.
Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.
Impairment loss on tangible and exploration and evaluation assets
At each balance sheet date, Western Prospector Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.
– II-12 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.
5. KEY SOURCE OF ESTIMATION UNCERTAINTY
The key source of estimation uncertainty at the balance sheet dates, that has a significant risk of causing a material adjustment to the carrying amounts of assets within the next financial year, is discussed below.
Impairment loss on exploration and evaluation assets
The Western Prospector Group conducts impairment review of exploration and evaluation assets whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Changes in circumstances include the Western Prospector Group’s right to explore in the specific area expired, will expire in the near future, or suspended temporarily and its renewal/removal is in doubt.
The Western Prospector Group suffered from a temporary suspension, details of which are set out in Section B(4). The removal of the temporary suspension of the exploration licences is conditional on whether the remedial actions taken by the Western Prospector Group are to the Inspector’s satisfaction. The ultimate outcome of the matter cannot presently be determined. Should the temporary suspension not be removed, it would affect the conclusion of having no impairment of the exploration and evaluation assets.
6. INCOME TAX EXPENSE
Year ended 31 December 2006 2007 2008 CAD’000 CAD’000 CAD’000
Income tax expense — — 28
Canadian Federal Income Tax (‘‘FIT’’) is calculated at 30.5%.
Taxation arising in other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions.
Income tax expense for the Relevant Periods can be reconciled to the loss before tax in the Financial Information as follows:
Year ended 31 December 2006 2007 2008 CAD’000 CAD’000 CAD’000
Loss before tax (5,455) (7,045) (72,292)
Tax at FIT rate of 30.5% (1,664) (2,149) (22,049) Tax effect of expenses not deductible for tax purpose 979 838 817 Tax effect of deferred tax assets not recognised 642 1,089 19,794 Effect of different tax rates of subsidiaries operating in other jurisdictions including Mongolia 43 222 1,466
Income tax expense — — 28
At the balance sheet dates, the Western Prospector Group has unused tax losses of approximately CAD4,640,000, CAD8,948,000, CAD14,187,000 and deductible temporary differences mainly related to capitalised expenditures on exploration and evaluation assets of CAD7,636,000, CAD6,898,000, CAD66,557,000 as at 31 December 2006, 2007 and 2008 respectively available for offset against future profits. No deferred tax asset has been recognised in respect of such losses and deductible temporary differences due to the unpredictability of future profit streams and it is not probable that taxable profit will be available against which the deductible temporary differences can be utilised. The tax losses may be carried forward for twenty years.
– II-13 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
7. LOSS FOR THE YEAR
Year ended 31 December 2006 2007 2008 CAD’000 CAD’000 CAD’000
Loss for the year has been arrived at after charging (crediting): Directors’ emoluments (note 8) 363 398 1,668 Other staff costs 920 763 359 Equity-settled share-based payments, including directors’ 2,681 4,220 1,990
Total staff costs 3,964 5,381 4,017
Auditor’s remuneration 70 90 90 Depreciation of property, plant and equipment (Note) 76 25 85 Net exchange loss — 364 — Loss on disposal of property, plant and equipment 46 — — Interest income (1,077) (1,037) (630) Gain on disposal of available-for-sale investments — (162) — Net exchange gain (7) — (450)
Note: For the years ended 31 December 2006, 2007 and 2008, depreciation of approximately CAD87,000, CAD533,000 and CAD1,028,000 was capitalised in exploration and evaluation assets respectively.
8. DIRECTORS’ REMUNERATION AND FIVE HIGHEST PAID EMPLOYEES
The emoluments paid or payable to each of the directors are as follows:
2006
John Eric Wayne Kenneth Gordon David Douglas S. Brock Bohren J. Roberts B. de Graaf R. E. Davis R. Reid C. Proctor Total CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 (note i)
Director’sfee ———————— Other emoluments Bonus and other benefits 209 — 154 — — — — 363 Share option benefits 175 645 100 398 265 265 125 1,973
Total emoluments 384 645 254 398 265 265 125 2,336
2007
John Eric Wayne Charlie Kenneth Gordon David Douglas Thomas Bobby Felix S. Brock Bohren J. Roberts J. Pullin B. de Graaf R. E. Davis R. Reid C. Proctor H. Parker E. Copper Pardo Total CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 (note iii) (note iv) (note iii) (note iii) (note iv) (note iv) (note iv)
Director’s fee 3 11 — 3 3 7 — 7 3 9 3 49 Other emoluments Bonusandotherbenefits222—127— — ——————349 Share option benefits 196 1,383 196 756 — 123 123 123 368 368 368 4,004
Total emoluments 421 1,394 323 759 3 130 123 130 371 377 371 4,402
– II-14 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
2008
John Eric Charlie Kenneth Gordon Douglas Thomas Bobby Felix S. Brock Bohren J. Pullin B. de Graaf E. Pridham C. Proctor H. Parker E. Copper Pardo Total CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 CAD’000 (note ii) (note v) (note vi)
Director’s fee 26 — — 17 224 — 140 138 151 696 Other emoluments Salaries, bonus and other benefits 94 439 439 — — — — — — 972 Share option benefits 193 — — 193 580 — 193 193 193 1,545
Total emoluments 313 439 439 210 804 — 333 331 344 3,213
Notes:
i. Mr. Bohren was appointed as a director of Western Prospector on 14 November 2006.
ii. Mr. Brock was resigned as a director of Western Prospector on 19 June 2008.
iii. Mr. Roberts, Mr. Davis and Mr. Reid were resigned as a director of Western Prospector on 11 June 2007.
iv. Mr. Pullin, Mr. Parker, Mr. Copper and Mr. Pardo were appointed as a director of Western Prospector on 11 June 2007.
v. Mr. de Graaf was resigned as a director of Western Prospector on 15 May 2008.
vi. Mr. Pridham was appointed as a director of Western Prospector on 15 May 2008.
The five highest paid individuals were directors for the Relevant Periods.
No directors have waived any remuneration during the Relevant Periods.
9. LOSS PER SHARE — BASIC
The calculation of the basic loss per share is based on the following data:
2006 2007 2008 CAD’000 CAD’000 CAD’000
Loss attributable to the equity holders of Western Prospector for the purpose of basic loss per share (5,455) (7,045) (72,320)
Year ended 31 December 2006 2007 2008
Weighted average number of ordinary shares for the purpose of basic loss per share 41,897,759 49,964,012 54,172,729
The diluted loss per share for the Relevant Periods has not been presented as assuming the exercise of the share options and warrants outstanding during the Relevant Periods would result in a decrease in the loss per share for the Relevant periods.
– II-15 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
10. PROPERTY, PLANT AND EQUIPMENT
Furniture and computer Buildings Equipment equipment Vehicles Total CAD’000 CAD’000 CAD’000 CAD’000 CAD’000
COST At 1 January 2006 140 168 73 73 454 Additions 712 890 272 41 1,915 Disposals — — — (61) (61)
At 31 December 2006 852 1,058 345 53 2,308 Additions 116 3,889 60 — 4,065
At 31 December 2007 968 4,947 405 53 6,373 Additions — 2,003 66 475 2,544
At 31 December 2008 968 6,950 471 528 8,917
DEPRECIATION At 1 January 2006 2 8 6 7 23 Provided for the year 7 118 31 7 163 Eliminated on disposals — — — (11) (11)
At 31 December 2006 9 126 37 3 175 Provided for the year 118 305 121 14 558
At 31 December 2007 127 431 158 17 733 Provided for the year 97 622 116 278 1,113
At 31 December 2008 224 1,053 274 295 1,846
CARRYING VALUES At 31 December 2006 843 932 308 50 2,133
At 31 December 2007 841 4,516 247 36 5,640
At 31 December 2008 744 5,897 197 233 7,071
The above items of property, plant and equipment are depreciated on a straight-line basis at the following estimated useful lives:
Buildings 10 years Equipment 5–15 years Furniture and computer equipment 3–5 years Vehicles 5 years
– II-16 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
11. EXPLORATION AND EVALUATION ASSETS
CAD’000
COST At 1 January 2006 21,148 Additions 32,748 Write-downs (865)
At 31 December 2006 53,031 Additions 14,728
At 31 December 2007 67,759 Additions 13,122 Write-downs (63,123)
At 31 December 2008 17,758
For the year ended 31 December 2006 and 2008, the directors of Western Prospector, after considering the economic condition having regard the insufficiency of resource reserve level of the relevant licenses, had determined that the recoverable amounts of certain assets had declined below their carrying values. Accordingly, the carrying values of these assets werewrittendownbyapproximately CAD865,000 and CAD1,144,000 to reflect these impairments.
On 25 March 2009, Western Prospector announced the execution of a definitive agreement with FDHC to acquire all the outstanding common shares of Western Prospector for CAD0.56 per share in cash, valuing its net assets at approximately CAD31 million. Based on the above market valuation, this offer indicated impairment to the Western Prospector Group’s assets, specifically its exploration and evaluation assets in Mongolia. As a result of management’s analysis, after evaluating the carrying values of all of its assets, the Western Prospector Group writes off CAD57,956,000 against its exploration and revaluation assets as at 31 December 2008.
On 30 September 2008, as a result of the uncertainty of the litigation with Adamas (as defined in note 23(b)), the Western Prospector Group had written off its shared investment in exploration and evaluation assets of approximately CAD4,023,000 for the year ended 31 December 2008.
The Mongolian Minerals Act of 2006 provides that the government is entitled to an ownership interest of up to 34% of the production output of mining licences generally, and up to 50% of properties defined as ‘‘strategic’’ under the law. Most of the Western Prospector Group’s licenses are exploration licences which will have to be converted into mining licences before development could take place. The preponderance of expenditures historically has been on exploration assets deemed ‘‘strategic’’ under the law. Amendments to the Minerals Act of 2006 have been proposed which would change the government’s ownership percentage from ‘‘up to’’ 34% (or 50% for ‘‘strategic’’ properties) to ‘‘at least’’ 34% (or 50% for ‘‘strategic’’ properties). Under the existing law and under the proposed amendments, it is unclear as to how, or in what form, the government intends to take its ownership interest. Based on information currently available, the Western Prospector Group has determined that its exploration and evaluation assets are not impaired as a result of the legal environment. The Western Prospector Group will continue to monitor legal and regulatory development in Mongolia.
12. INTEREST IN A JOINTLY CONTROLLED ENTITY
In November 2007, one of the Western Prospector Group’s wholly-owned subsidiaries formed a jointly controlled entity with an unrelated party in order to jointly build and operate a powerline and substation for exploring mineral properties in Mongolia. The jointly controlled entity commenced its business in 2008.
At the respective balance sheet date, particulars of the jointly controlled entity are as follows:
Attributable equity Name of jointly Place and date of Issued and registered interests held by Western controlled entity registration capital Prospector Principal activity 200620072008
XXEM LLC Mongolia Tugrik 5,825 N/A 50% 50% Powerline operation 5 December 2007
– II-17 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
The summarised financial information in respect of the Western Prospector Group’s interest in the jointly venture which is accounted for using proportionate consolidation with the line-by-line reporting format is set out below:
At 31 December 2006 2007 2008 CAD’000 CAD’000 CAD’000
Non-current assets Property, plant and equipment — — 4,611 Exploration and evaluation assets — — 527
— — 5,138
Current assets Other receivables and prepayment — — 92 Bank balances and cash — — 337
— — 429
Current liability Other payables — — 52
Net current assets — — 377
— — 5,515
Expenses and share of loss for the year — — (125)
No assets and liabilities were proportionately consolidated by the Western Prospector Group for the year ended 31 December 2007 as no capital was injected before the year end.
13. AVAILABLE-FOR-SALE INVESTMENTS
Available-for-sale investments comprise:
At 31 December 2006 2007 2008 CAD’000 CAD’000 CAD’000
Equity securities listed in Canada 481 672 191
All listed investments are stated at fair value which was determined by reference to market bid prices quoted in relevant stock exchange.
14. BANK BALANCES AND CASH
All bank balances carry interest at market rates ranging from 1% to 5% per annum during the Relevant Periods.
15. AMOUNTS DUE TO RELATED COMPANIES
The amounts are unsecured, interest-free and repayable on demand.
Details of the accounts due to related companies are as follows:
Year ended 31 December 2006 2007 2008 CAD’000 CAD’000 CAD’000
Gamah International Ltd. (‘‘Gamah International’’) (note i) 22 — — Davis & Co LLP (‘‘Davis & Co’’) (note ii) 37 — — Badger & Co. Management Corp. (‘‘Badger & Co.’’) (note iii) 385 280 —
444 280 —
– II-18 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
Notes:
i. Gamah International is owned by an officer of Western Prospector.
ii. A former director of Western Prospector is a partner of the firm.
iii. Badger & Co. is owned by three former directors or officers of Western Prospector.
16. SHARE CAPITAL
Authorised
Western Prospector’s unlimited common shares are without par value.
Issued
Movements of Western Prospector’s share capital are as follows:
Number of ordinary shares Amount CAD’000
At 1 January 2006 40,524,062 64,899 Issue of shares (note i) 3,250,000 10,963 Exercise of share options and warrants (note ii) 588,800 2,224
At 31 December 2006 44,362,862 78,086 Placement of shares (note iii) 8,050,000 34,615 Share issue expenses — by cash — (2,265) Share issue expenses — by warrants (Note 18) — (899) Exercise of share options (note iv) 1,593,200 1,071
At 31 December 2007 54,006,062 110,608 Exercise of share options (note v) 250,000 47
At 31 December 2008 54,256,062 110,655
Notes:
i. Western Prospector issued 3,250,000 common shares to acquire exploration and evaluation assets in Gurvanbulag, Mongolia in 2006. The number of common shares issued by Western Prospector was determined based on the fair value, as determined by reference to the carrying amounts of the exploration and evaluation assets, at the date of the acquisition amounting to approximately CAD10,963,000, and the then market price per share of Western Prospector. The new shares rank pari passu in all aspects with the then existing issued shares.
ii. Western Prospector issued 423,500 common shares upon the exercise of 573,500 warrants for a total proceed of approximately CAD1,514,000 and issued 165,300 common shares upon the exercise of 165,300 share options for a total proceed of approximately CAD66,000. The new shares rank pari passu in all aspects with the then existing issued shares.
iii. On 18 June 2007, Western Prospector made a private placement of 8,050,000 common shares priced at CAD4.30 per share for a gross proceed of approximately CAD34,615,000. The new shares rank pari passu in all aspects with the then existing issued shares.
iv. Western Prospector issued 1,593,200 common shares at CAD0.39 per share upon the exercise of 1,593,200 share options for a total proceed of approximately CAD619,000. The new shares rank pari passu in all aspects with the then existing issued shares.
v. Western Prospector issued 250,000 common shares at CAD0.10 per share upon the exercise of 250,000 share options for a total proceed of approximately CAD25,000. The new shares rank pari passu in all aspects with the then existing issued shares.
– II-19 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
17. SHARE OPTION SCHEME
In 2002, Western Prospector adopted a share option plan, authorising the granting of share options to qualified optionees to purchase a total of up to 10% of the then issued and outstanding common shares of Western Prospector.
Under the terms of the Plan, the term of share options granted may not exceed five years following the date of grant. The share options granted may be fully vested upon issue or vested as to 25% on the date of grant, further 25% in one year and remaining 50% in two years.
The exercise price of the share options shall be fixed by the Board at the time the share options are granted, which shall not be less than the fair market value of Western Prospector’s shares, being the last closing price before the date of the grant.
The following table discloses movements in such holdings during the years:
2006
Outstanding Granted Exercised Forfeited Outstanding Exercise at 1 January during during during at 31 December Name of directors Date of grant Exercise period price 2006 the year the year the year 2006 CAD
Category 1: Directors John S. Brock 4 June 2002 4 June 2002 to 4 June 2007 0.10 250,000 — — — 250,000 3 October 2003 3 October 2003 to 3 October 2008 0.10 250,000 — — — 250,000 3 September 2004 3 September 2004 to 3 September 2009 0.42 200,000 — — — 200,000 4 January 2006 4 January 2006 to 4 January 2011 5.30 — 175,000 — — 175,000 Eric Bohren 12 December 2006 12 December 2006 to 12 December 2011 4.30 — 150,000 — — 150,000 Wayne. J. Roberts 4 June 2002 4 June 2002 to 4 June 2007 0.10 300,000 — — — 300,000 3 October 2003 3 October 2003 to 3 October 2008 0.10 190,000 — — — 190,000 3 September 2004 3 September 2004 to 3 September 2009 0.42 160,000 — — — 160,000 4 January 2006 4 January 2006 to 4 January 2011 5.30 — 100,000 — — 100,000 Kenneth B. de. Graaf 17 May 2004 17 May 2004 to 17 May 2009 0.28 100,000 — — — 100,000 4 January 2006 4 January 2006 to 4 January 2011 5.30 — 75,000 — — 75,000 Gordon R. E. Davis 3 October 2003 3 October 2003 to 3 October 2008 0.10 30,000 — (30,000) — — 3 September 2004 3 September 2004 to 3 September 2009 0.42 100,000 — — — 100,000 4 January 2006 4 January 2006 to 4 January 2011 5.30 — 50,000 — — 50,000 David R. Reid 3 September 2004 3 September 2004 to 3 September 2009 0.42 100,000 — — — 100,000 4 January 2006 4 January 2006 to 4 January 2011 5.30 — 50,000 — — 50,000 Douglas C. Proctor 3 November 2005 3 November 2005 to 3 November 2010 5.20 100,000 — — — 100,000 4 January 2006 4 January 2006 to 4 January 2011 5.30 — 50,000 — — 50,000 21 July 2006 21 July 2006 to 21 July 2011 2.50 — 50,000 — — 50,000
Total for directors 1,780,000 700,000 (30,000) — 2,450,000
Category 2: Employees 4 June 2002 4 June 2002 to 4 June 2007 0.10 30,000 — (10,000) — 20,000 3 October 2003 3 October 2003 to 3 October 2008 0.10 100,000 — — — 100,000 17 May 2004 17 May 2004 to 17 May 2009 0.28 10,000 — (5,000) — 5,000 3 September 2004 3 September 2004 to 3 September 2009 0.42 278,000 — (115,300) — 162,700 3 November 2005 3 November 2005 to 3 November 2010 5.20 250,000 — — — 250,000 4 January 2006 4 January 2006 to 4 January 2011 5.30 — 305,000 — — 305,000 2 February 2006 2 February 2006 to 2 February 2011 5.30 — 50,000 — (50,000) — 28 April 2006 28 April 2006 to 28 April 2011 3.85 — 200,000 — — 200,000 15 May 2006 15 May 2006 to 15 May 2011 3.80 — 100,000 — — 100,000 21 July 2006 21 July 2006 to 21 July 2011 2.50 — 239,000 (5,000) — 234,000
Total for employees 668,000 894,000 (135,300) (50,000) 1,376,700
Totalforallcategories 2,448,000 1,594,000 (165,300) (50,000) 3,826,700
Exercisable at the end of the year 3,826,700
– II-20 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
2007
Outstanding Granted Exercised Forfeited Outstanding Exercise at 1 January during during during at 31 December Name of directors Date of grant Exercise period price 2007 the year the year the year 2007 CAD
Category 1: Directors John S. Brock 4 June 2002 4 June 2002 to 4 June 2007 0.10 250,000 — (250,000) — — 3 October 2003 3 October 2003 to 3 October 2008 0.10 250,000 — — — 250,000 3 September 2004 3 September 2004 to 3 September 2009 0.42 200,000 — — — 200,000 4 January 2006 4 January 2006 to 4 January 2011 5.30 175,000 — — — 175,000 8 January 2007 8 January 2007 to 8 January 2012 4.90 — 40,000 — — 40,000 Eric Bohren 12 December 2006 12 December 2006 to 12 December 2011 4.30 150,000 — — — 150,000 8 January 2007 8 January 2007 to 8 January 2012 4.90 — 25,000 — — 25,000 19 October 2007 19 October 2007 to 19 October 2012 2.10 — 600,000 — — 600,000 Wayne J. Roberts 4 June 2002 4 June 2002 to 4 June 2007 0.10 300,000 — (300,000) — — 3 October 2003 3 October 2003 to 3 October 2008 0.10 190,000 — (190,000) — — 3 September 2004 3 September 2004 to 3 September 2009 0.42 160,000 — (160,000) — — 4 January 2006 4 January 2006 to 4 January 2011 5.30 100,000 — — — 100,000 8 January 2007 8 January 2007 to 8 January 2012 4.90 — 40,000 — — 40,000 Charlie J. Pullin 19 June 2007 19 June 2007 to 19 June 2012 4.90 — 150,000 — — 150,000 11 November 2007 11 November 2007 to 11 November 2012 1.94 — 400,000 — — 400,000 Kenneth B. de. Graaf 17 May 2004 17 May 2004 to 17 May 2009 0.28 100,000 — (100,000) — — 4 January 2006 4 January 2006 to 4 January 2011 5.30 75,000 — — — 75,000 Gordon R. E. Davis 3 September 2004 3 September 2004 to 3 September 2009 0.42 100,000 — (100,000) — — 4 January 2006 4 January 2006 to 4 January 2011 5.30 50,000 — — (50,000) — 8 January 2007 8 January 2007 to 8 January 2012 4.90 — 25,000 — (25,000) — David R. Reid 3 September 2004 3 September 2004 to 3 September 2009 0.42 100,000 — (100,000) — — 4 January 2006 4 January 2006 to 4 January 2011 5.30 50,000 — — (50,000) — 8 January 2007 8 January 2007 to 8 January 2012 4.90 — 25,000 — (25,000) — Douglas C. Proctor 3 November 2005 3 November 2005 to 3 November 2010 5.20 100,000 — — (100,000) — 4 January 2006 4 January 2006 to 4 January 2011 5.30 50,000 — — (50,000) — 21 July 2006 21 July 2006 to 21 July 2011 2.50 50,000 — (50,000) — — 8 January 2007 8 January 2007 to 8 January 2012 4.90 — 25,000 — (25,000) — Thomas H. Parker 19 June 2007 19 June 2007 to 19 June 2012 4.90 — 150,000 — — 150,000 Bobby E. Copper 19 June 2007 19 June 2007 to 19 June 2012 4.90 — 150,000 — — 150,000 Felix Pardo 19 June 2007 19 June 2007 to 19 June 2012 4.90 — 150,000 — — 150,000
Total for directors 2,450,000 1,780,000 (1,250,000) (325,000) 2,655,000
Category 2: Employees 4 June 2002 4 June 2002 to 4 June 2007 0.10 20,000 — (20,000) — — 3 October 2003 3 October 2003 to 3 October 2008 0.10 100,000 — (100,000) — — 17 May 2004 17 May 2004 to 17 May 2009 0.28 5,000 — (5,000) — — 3 September 2004 3 September 2004 to 3 September 2009 0.42 162,700 — (162,700) — — 3 November 2005 3 November 2005 to 3 November 2010 5.20 250,000 — — — 250,000 4 January 2006 4 January 2006 to 4 January 2011 5.30 305,000 — — (32,500) 272,500 28 April 2006 28 April 2006 to 28 April 2011 3.85 200,000 — (15,000) — 185,000 15 May 2006 15 May 2006 to 15 May 2011 3.80 100,000 — — — 100,000 21 July 2006 21 July 2006 to 21 July 2011 2.50 234,000 — (40,500) (10,500) 183,000 8 January 2007 8 January 2007 to 8 January 2012 4.90 — 126,000 — (11,000) 115,000 30 January 2007 30 January 2007 to 30 January 2012 4.90 — 25,000 — — 25,000 19 October 2007 19 October 2007 to 19 October 2012 2.10 — 20,000 — — 20,000 30 November 2007 30 November 2007 to 30 November 2012 1.35 — 250,000 — — 250,000
Total for employees 1,376,700 421,000 (343,200) (54,000) 1,400,500
Totalforallcategories 3,826,700 2,201,000 (1,593,200) (379,000) 4,055,500
Exercisable at the end of the year 4,055,500
– II-21 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
2008
Outstanding Granted Exercised Forfeited Outstanding Exercise at 1 January during during during at 31 December Name of directors Date of grant Exercise period price 2008 the year the year the year 2008 CAD
Category 1: Directors John S. Brock 3 October 2003 3 October 2003 to 3 October 2008 0.10 250,000 — (250,000) — — 3 September 2004 3 September 2004 to 3 September 2009 0.42 200,000 — — — 200,000 4 January 2006 4 January 2006 to 4 January 2011 5.30 175,000 — — — 175,000 8 January 2007 8 January 2007 to 8 January 2012 4.90 40,000 — — — 40,000 12 February 2008 12 February 2008 to 12 February 2013 1.02 — 50,000 — — 50,000 Eric Bohren 12 December 2006 12 December 2006 to 12 December 2011 4.30 150,000 — — — 150,000 8 January 2007 8 January 2007 to 8 January 2012 4.90 25,000 — — — 25,000 19 October 2007 19 October 2007 to 19 October 2012 2.10 600,000 — — — 600,000 Wayne J. Roberts 4 January 2006 4 January 2006 to 4 January 2011 5.30 100,000 — — (100,000) — 8 January 2007 8 January 2007 to 8 January 2012 4.90 40,000 — — (40,000) — Charlie J. Pullin 19 June 2007 19 June 2007 to 19 June 2012 4.90 150,000 — — — 150,000 11 November 2007 11 November 2007 to 11 November 2012 1.94 400,000 — — — 400,000 Kenneth B. de. Graaf 4 January 2006 4 January 2006 to 4 January 2011 5.30 75,000 — — (75,000) — 12 February 2008 12 February 2008 to 12 February 2013 1.02 — 50,000 — (50,000) — Gordon E. Pridham 15 May 2008 15 May 2008 to 15 May 2013 0.06 — 150,000 — — 150,000 Thomas H. Parker 19 June 2007 19 June 2007 to 19 June 2012 4.90 150,000 — — — 150,000 12 February 2008 12 February 2008 to 12 February 2013 1.02 — 50,000 — — 50,000 Bobby E. Copper 19 June 2007 19 June 2007 to 19 June 2012 4.90 150,000 — — — 150,000 12 February 2008 12 February 2008 to 12 February 2013 1.02 — 50,000 — — 50,000 Felix Pardo 19 June 2007 19 June 2007 to 19 June 2012 4.90 150,000 — — — 150,000 12 February 2008 12 February 2008 to 12 February 2013 1.02 — 50,000 — — 50,000
Total for directors 2,655,000 400,000 (250,000) (265,000) 2,540,000
Category 2: Employees 3 November 2005 3 November 2005 to 3 November 2010 5.20 250,000 — — — 250,000 4 January 2006 4 January 2006 to 4 January 2011 5.30 272,500 — — (150,000) 122,500 28 April 2006 28 April 2006 to 28 April 2011 3.85 185,000 — — — 185,000 15 May 2006 15 May 2006 to 15 May 2011 3.80 100,000 — — — 100,000 21 July 2006 21 July 2006 to 21 July 2011 2.50 183,000 — — — 183,000 8 January 2007 8 January 2007 to 8 January 2012 4.90 115,000 — — (45,000) 70,000 30 January 2007 30 January 2007 to 30 January 2012 4.90 25,000 — — (25,000) — 19 October 2007 19 October 2007 to 19 October 2012 2.10 20,000 — — (20,000) — 30 November 2007 30 November 2007 to 30 November 2012 1.35 250,000 — — — 250,000 12 February 2008 12 February 2008 to 12 February 2013 0.72 — 115,000 — — 115,000
Total for employees 1,400,500 115,000 — (240,000) 1,275,500
Totalforallcategories 4,055,500 515,000 (250,000) (505,000) 3,815,500
Exercisable at the end of the year 3,815,500
The fair value of share options granted was estimated at the grant date based on the Black-Scholes option pricing model using the following assumptions:
2006 2007 2008
Weighted average share price CAD4.42 CAD3.17 CAD0.83 Exercise price CAD0.40 CAD0.38 CAD0.10 Expected dividend yield nil nil nil Expected life 5 years 3 years to 5 years 5 years Average risk-free interest rate 4.25% 4.25% to 4.50% 3.25% to 4.25% Expected volatility 132% 112% to 128% 117% to 120%
Black-Scholes option pricing model require the input of highly subjective assumptions including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore, the existing models do not necessarily provide a reliable measure of the fair value of Western Prospector’s share options.
– II-22 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
For the years end 31 December 2006, 2007 and 2008, share-based compensation of approximately CAD2,681,000, CAD4,220,000 and CAD1,990,000 respectively, was included in the consolidation income statement and CAD1,065,000, CAD966,000 and nil, respectively, was included in the exploration and evaluation assets.
18. WARRANTS
The movements of outstanding warrants are as follows:
Number of shares issuable Number of on exercise of warrants warrants Fair value CAD’000
At 1 January 2006 (note i) 761,000 611,000 1,241 Expired during the year (note ii) (187,500) (187,500) (305) Exercised during the year (Note 16(ii)) (573,500) (423,500) (936)
At 31 December 2006 — — — Issued during the year (note iii) 402,499 402,499 899
At 31 December 2007 402,499 402,499 899 Expired during the year (note iv) (402,499) (402,499) (899)
At 31 December 2008 — — —
Notes:
(i) In April and October 2005, Western Prospector closed two private placements of 9,800,000 common shares in aggregate priced at CAD4.16 per share for a gross proceeds of approximately CAD40,810,000 in total. In conjunction with the private placements, in addition to cash commission, Western Prospector issued 761,000 warrants entitling the underwriters to acquire up to 611,000 common shares at a price ranging from CAD2.70 to CAD5.20 per share as commission expense to the underwriters.
(ii) The warrants expired during the year ended 31 December 2006.
(iii) On 18 June 2007, Western Prospector closed a private placement of 8,050,000 common shares priced at CAD4.30 per share for gross proceeds of approximately CAD34,615,000. In conjunction with the private placement, Western Prospector paid 6% of the gross proceeds to the underwriters, and issued warrants entitling the underwriters to acquire up to 402,499 common shares at a price of CAD4.61 per share as commission expense to the underwriters.
The warrants were valued at approximately CAD899,000 and were credited to share option and warrant reserve. The warrant value was calculated using the Black-Scholes option pricing model and the following assumptions: risk free interest rate of 4.25%, expected volatility of 112%, market price of CAD4.90, and expected life of 1 year.
(iv) These warrants expired during the year ended 31 December 2008.
19. CAPITAL RISK MANAGEMENT
The Western Prospector Group manages its common shares, share options and warrants as capital. As the Western Prospector Group is in the development stage, its principal source of funds is from the issuance of common shares.
The Western Prospector Group’s objectives when managing its capital are:
. to safeguard the ability to continue as a going concern in order to pursue the development of its exploration and evaluation assets; and
. to provide an adequate return to shareholders.
In order to facilitate the management of capital requirements, the Western Prospector Group prepares annual expenditure budgets and continuously monitors and reviews actual and forecasted cash flow. The annual and updated budgets are approved by the Board of Directors.
– II-23 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
20. FINANCIAL INSTRUMENTS
(a) Categories of financial instruments
At 31 December 2006 2007 2008 CAD’000 CAD’000 CAD’000
Financial assets Loans and receivables (including cash and cash equivalents) 18,139 29,767 10,103 Available-for-sale financial assets 481 672 191
Financial liabilities At amortised cost 1,840 1,750 2,499
(b) Financial risk management objectives and policies
The Western Prospector Group’s major financial instruments including available-for-sale investments, other receivables, bank balances and cash, other payables and amounts due to related companies. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. Management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manners. There has been no significant change to the Western Prospector Group’s exposure to market risks or the manner in which it manages and measures the risk.
Credit risk
Financial instruments that potentially subject the Western Prospector Group to credit risk consist of bank balances and cash and other receivables. The carrying amounts of these financial assets in the consolidated balance sheet as at 31 December 2006, 2007 and 2008 represented the Western Prospector Group’s maximum exposure to credit risk at the respective balance sheet dates. During the Relevant Periods, Western Prospector Group deposits cash and cash equivalents with high credit quality financial institutions as determined by rating agencies.
Foreign exchange risk
The Western Prospector Group’s significant subsidiaries are located in Mongolia. As a result, a portion of the Western Prospector Group’s expenditures, other receivables and other payables are denominated in United States Dollars (‘‘US$’’). Therefore, the Western Prospector Group is subject to fluctuation in exchange rates.
At 31 December 2006, 2007, 2008, approximately CAD1.0 million, CAD1.3 million and CAD1.3 million liabilities was held in US$. A 1% change in the exchange rate between CAD and US$ or the CAD and Mongolian Tugriks would have an insignificant impact on the Western Prospector Group’s net losses.
Interest rate risk
Interest rate risk mainly arises from the interest rate impact on bank deposits that receive interest based on market interest rates.
As at 31 December 2006, 2007 and 2008, holding all other variables constant, a 1% change in the interest rate would have an insignificant impact on net loss.
Liquidity risk
The Western Prospector Group relies on the capital contribution from its shareholders to finance its payment of the exploration and evaluation assets. The Western Prospector Group incurred a loss of approximately CAD5,455,000, CAD7,045,000 and CAD72,320,000 for three years ended 31 December 2008 respectively.
The Western Prospector Group manages liquidity risk by maintaining an adequate level of cash and cash equivalents to meet its ongoing obligations. Details of Western Prospector Group’s ability to continue as a going concern, which is conditional on certain events to take place, are set out in note 2. The Western Prospector Group continuously reviews its actual and forecast cash flows and monitors its capital and operating needs. Should the tender offer and common stock subscription transactions with the Group proceed the Western Prospector Group would significantly lower its liquidity risk through the direct receipt of the subscription proceeds and the benefits of the Company’s proposed controlling interest in the Western Prospector Group and its better access to capital.
– II-24 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
The following table details the Western Prospector Group’s remaining contractual maturity for its non-derivative financial liabilities. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Western Prospector Group can be required to pay. The table includes both interest and principal cash flows.
Liquidity table
Less than Total 1 month or 3monthsto undiscounted Carrying on demand 1–3 months 1year cash flows amount CAD’000 CAD’000 CAD’000 CAD’000 CAD’000
Non-derivative financial liabilities Other payables — 1,396 — 1,396 1,396 Amounts due to related parties 444 — — 444 444
At 31 December 2006 444 1,396 — 1,840 1,840
Non-derivative financial liabilities Other payables — 1,470 — 1,470 1,470 Amounts due to related parties 280 — — 280 280
At 31 December 2007 280 1,470 — 1,750 1,750
Non-derivative financial liabilities Other payables at 31 December 2008 — 1,967 532 2,499 2,499
(c) Fair values
The Western Prospector Group’s carrying values of bank balances and cash, other receivables, and other payables approximate their fair values at each respective balance sheet dates due to their short term to maturity. Investments in marketable securities have been classified as available-for-sale investments and are reported at their fair market value based on quoted market prices.
21. OPERATING LEASE COMMITMENTS
Minimum lease payments paid under operating leases during the Relevant Periods:
Year ended 31 December 2006 2007 2008 CAD’000 CAD’000 CAD’000
Premises 205 152 221
At the respective balance sheet dates, the Western Prospector Group had commitments for future minimum lease payments in respect of premises under non-cancellable operating leases which fall due as follows:
At 31 December 2006 2007 2008 CAD’000 CAD’000 CAD’000
Within one year 152 221 218
Leases are negotiated and rentals are fixed for a period of one year or less.
– II-25 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
22. CAPITAL COMMITMENTS
At 31 December 2006 2007 2008 CAD’000 CAD’000 CAD’000
Capital expenditures contracted for but not provided in the Financial Information in respect of property, plant and equipment 2,813 2,832 1,900
23. CONTINGENT LIABILITIES
(a) On 2 March 2006, Maximum Ventures Inc. (‘‘Maximum Ventures’’) commenced an action (the ‘‘Action’’) in the Supreme Court of British Columbia naming Western Prospector, Mr. Kenneth de Graaf, and companies controlled by Mr. Kenneth de Graaf as defendants. Maximum Ventures is a British Columbia company listed on the Toronto Stock Exchange Venture Exchange. Mr. Kenneth de Graaf is a formerdirectorofWesternProspector. In the Action, Maximum Ventures sought a declaration that Western Prospector held the exploration and evaluation assets acquired from Mr. de Graaf or his companies in trust for Maximum Ventures. The trust declaration claimed by Maximum Ventures against Western Prospector related to certain of the Western Prospector’s material exploration and evaluation assets in Mongolia. The Action was stopped on 3 March 2008.
However, in various communications between counsel for Maximum Ventures and counsel for Western Prospector, Maximum Ventures has threatened to commence a new action against the defendants. Should this occur, Western Prospector will take all steps necessary to defend itself and to protect its interests.
Maximum Ventures placed into trust approximately CAD242,000 for legal costs of the defendants. As at 31 December 2007, Western Prospector intends to apply for reimbursement of its share of the trust fund, but has not recorded a receivable for any reimbursement as the amount, if any, is indeterminable and fully at the discretion of the court. On 1 December 2008, Western Prospector received approximately CAD122,000 reimbursement of its share of the trust fund andcreditedtoitsexplorationandevaluationassets.Western Prospector is not expected to receive any additional reimbursement.
(b) On 7 December 2004, the Western Prospector Group entered into an agreement with Adamas Mining, LLC (‘‘Adamas’’), a Mongolian company, which provided the possibility to own to 70% of a Mongolian exploration license held by Adamas. The provisions of this agreement required the Western Prospector Group to make cash payments to Adamas totaling US$790,000 (equivalent to CAD967,000). Additionally, the Western Prospector Group was obligated to make minimum exploration expenditures on the property of at least US$1,350,000 (equivalent to CAD1,653,000) before the end of 2007. The Western Prospector Group has complied with both of these provisions, and therefore believes it has earned the right to the 70% joint venture interest.
After numerous attempts to form the joint venture with Adamas, the Western Prospector Group chose to file suit in the Bayanzurkh District Court of Mongolia to compel Adamas to form the joint venture. In January 2008, the Court ruled in favour of Adamas. The Western Prospector Group appealed this judgment, which also was denied in April 2008. The Western Prospector Group currently is evaluating its options to resolve the dispute.
In 2008, as a result of the uncertainty of the litigation with Adamas, the Western Prospector Group wrote off the whole amount of approximately CAD4,023,000, which had been capitalised as exploration and evaluation assets, for the year ended 31 December 2008.
24. RELATED PARTY DISCLOSURES
(a) During the Relevant Periods, the Western Prospector Group had the following transactions with its related parties:
Yearended31December Name of related parties Nature of transaction 2006 2007 2008 CAD’000 CAD’000 CAD’000
J. Badger Consulting (note i) Consulting services — — 100 Gamah International Geological services 226 227 80 Davis & Co Legal services 864 795 — Professional and Badger & Co. administrative services 1,690 1,426 9 De Randt Enterprise Corp. (note ii) Service charge 112 — — Acquisition of exploration Brant Enterprises Inc (note iii) and evaluation assets 10,500 — —
– II-26 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
Notes:
i. J. Badger Consulting is owned by a former director of Western Prospector.
ii. De Randt Enterprise Corp. is owned by a former director and an officer of Western Prospector.
iii. Brant Enterprises Inc. is owned by a former director of Western Prospector.
(b) Details of balances with related parties at the respective balance sheet dates are set out in note 15.
(c) Compensation of key management personnel
Key management personnel of the Western Prospector Group mainly comprise directors of Western Prospector. The compensation of directors of Western Prospector and the movement of their share options held during the Relevant Periods are set out in notes 8 and 17 respectively.
25. SUBSIDIARIES
As at 31 December 2006, 2007 and 2008, Western Prospector Group has the following subsidiaries:
Attributable equity interests held by Place and date of Issued and fully Western Prospector incorporation/ paid registered/ Directly Indirectly Name of subsidiary registration share capital 2006 2007 2008 2006 2007 2008 Principal activities
Western World Malaysia US$100 100% 100% 100% — — — Investment holding Holdings Ltd. 4 March 2005
Western Prospector The U.S. US$1 — 100% 100% — — — Provision of U.S. Inc. 4 November 2007 management service
Western Fortune Ltd Malaysia US$100 — — — 100% 100% 100% Mineral exploration 4 March 2005 in Mongolia
Dornod Trans LLC Mongolia US$10,000 — — — 100% 100% 100% Mineral exploration 27 August 2004 in Mongolia
Eastern Prospector LLC Mongolia US$10,000 — — — 100% 100% 100% Mineral exploration 25 October 2005 in Mongolia
Emeelt Mines LLC Mongolia US$10,000 — — — 100% 100% 100% Mineral exploration 27 August 2004 in Mongolia
Mardaigol LLC Mongolia US$10,000 — — — 100% 100% 100% Mineral exploration 15 June 2005 in Mongolia
Western Prospector Mongolia US$10,000 — — — 100% 100% 100% Mineral exploration Mongolia LLC 22 June 2004 in Mongolia
Hulgar Aryn Nuur, Mongolia US$10,000 — — — 100% 100% — Dissolved in 2008 LLC 3 June 2005
B. SUBSEQUENT EVENTS
(1) On 13 January 2009, Western Prospector granted share options allowing directors and officers to purchase up to 550,000 common shares, and to other employees to purchase up to 115,000 common shares. The 665,000 options are exercisable at CAD0.31 per share and are exercisable until 13 January 2014, and vest as to 25% on the date of grant, further 25% in one year and remaining 50% in two years, subject to the terms and conditions of the Plan.
(2) Western Prospector sought specific performance in connection with B.C. Ltd’s take-over bid of Western Prospector which was guaranteed by Tinpo Holdings Industrial Company Limited (‘‘Tinpo’’). The take-over bid was withdrawn by B.C. Ltd in late September 2008. On 5 December
– II-27 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
2008, a judge of the Ontario Superior Court granted an order approving the discontinuance of the take-over by B.C. Ltd. On 6 February 2009, Western Prospector discontinued its legal action against Tinpo.
(3) On 25 March 2009, Western Prospector announced the execution of a definitive agreement whereby the Company will offer to acquire all the outstanding common shares of Western Prospector for CAD0.56 per share in cash, valuing Western Prospector at approximately CAD31 million. In addition, the Company agreed to subscribe up to 5,371,350 common shares at CAD0.56 per share should their purchase offer succeed.
(4) On 3 June 2008, a notice was issued by the Inspector, requesting the Western Prospector Group to eliminate various noncompliance and deficiencies with respect to Environmental Law Package and Law on Radiation Safety of Mongolia. The Western Prospector Group had accordingly taken remedial actions to address the alleged and deficiencies.
Notwithstanding that, another notice dated 16 April 2009 was issued by the Inspector in which two of the Western Prospector Group’s exploration licenses were suspended temporarily because the Western Prospector Group was claimed not in compliance with Law on Minerals, Land Law and Law on Radiation Protection and Safety of Mongolia.
Details of the abovementioned non-compliance are summarised as follows:
. The Inspector claimed that the Western Prospector Group did not conduct a detailed environmental impact assessment, which wastobeusedtoformulateanenvironmental protection plan and the environmental protection plan should be approved and report its implementation.
. The Inspector claimed that qualification assurance on land was not made by a professional organisation.
. The Inspector claimed that when transporting radioactive mineral samples, permits are not attained from the radiation inspection authority, transportation indexes are not established and recorded, and the caution mark for dangerous substances are not placed on the badges.
. The Inspector claimed that no radioactive waste management program was developed, reviewed or approved.
. The Inspector claimed that there have been cases where employees worked in the underground mine without radon protection masks. The supply of personal radiation protection equipment and the actions to reduce the risk of internal exposure to radiation were inadequate.
. The Inspector claimed that the average unit activity rate of radioactive Radii-226 isotope is 9.33Bk/l in the water samples taken which is 4.7 times higher than the acceptable content of the radioactive isotope.
Following the receipt of the notice of suspension of the exploration licences, the Western Prospector Group, with the assistance from the Company, has contacted relevant local authorities in endeavour to procure the release of the suspension. The Western Prospector Group also provided a written reply to the relevant authorities on 19 May 2009 to address each of the six counts of alleged non- compliance cited by the Inspector. Based on the discussions and the legal opinion obtained from Mongolian legal counsel, Lynch and Mahoney LLC, the directors of Western Prospector is confident that the Western Prospector Group has reasonably and comprehensively addressed each of the six counts of non-compliance alleged by the relevant authorities. The directors of Western Prospector believes that, following the actions taken, the suspension of the exploration licences would be lifted in the near future.
– II-28 – APPENDIX II ACCOUNTANTS’ REPORT OF WESTERN PROSPECTOR
C. SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements of the Western Prospector Group, Western Prospector or any of the companies comprising the Western Prospector Group have been prepared subsequent to 31 December 2008.
Yours faithfully, Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong
– II-29 – APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
(A) INTRODUCTION
The accompanying unaudited pro forma statement of assets and liabilities of the Enlarged Group, has been prepared by the directors of the Company in accordance with paragraph 4.29 of The Listing Rules, for illustrative purposes only, to provide information about how the proposed Offer and Subscription (as defined in this circular) as detailed in the ‘‘Letter from the Board’’ included in this circular might have affected the financial position of the Group as if the Offer and the Subscription had been completed on 31 December 2008.
The unaudited pro forma financial information of the Enlarged Group has been prepared based on the audited consolidated balance sheet of the Group as at 31 December 2008 as set out in Appendix I to this circular and the audited consolidated balance sheet of the Western Prospector Group as at 31 December 2008 as set out in the accountants’ report in Appendix II to this circular after giving effect to the pro forma adjustments as described in the accompanying notes. A narrative description of the pro forma adjustments of the Offer and the Subscription that are (i) directly attributable to the transaction; and (ii) factually supportable, is summarised in the accompanying notes.
The unaudited pro forma financial information of the Enlarged Group is based on a number of assumptions, estimates, uncertainties and currently available information. As a result of these assumptions, estimates and uncertainties, the accompanying unaudited pro forma financial information of the Enlarged Group does not purport to describe financial position of the Enlarged Group that would have been attained had the Offer and the Subscription been completed on the date indicated herein. Furthermore, the accompanying unaudited pro forma financial information of the Enlarged Group does not purport to predict the Enlarged Group’s future financial position.
The unaudited pro forma financial information of the Enlarged Group should be read in conjunction with the audited consolidated financial statements of the Group as set out in Appendix I to this circular, the audited financial information of the Western Prospector Group as set out in Appendix II to this circular and other financial information included elsewhere in this circular.
– III-1 – APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
(B) UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP AS AT 31 DECEMBER 2008 (IF THE COMPANY HAS ACQUIRED 50.1% OF COMMON SHARES OF WESTERN PROSPECTOR)
Western Pro Forma Prospector Pro Forma Enlarged The Group Group Adjustments Group HKD’000 HKD’000 HKD’000 HKD’000 (Note 1) (Note 2) (Note 3)
Non-current assets Property, plant and equipment 116,004 45,663 161,667 Exploration and evaluation assets — 114,677 12,209 126,886 Prepaid lease payments 6,020 — 6,020 Deposit paid for acquisition of property, plant and equipment 1,070 — 1,070 Available-for-sale investments — 1,233 1,233
123,094 161,573 296,876
Current Assets Inventories 38,848 — 38,848 Trade and other receivables and prepayments 51,081 4,049 55,130 Prepaid lease payments 133 — 133 Investments held for trading 207 — 207 Bank balances and cash 400,150 61,743 (117,988) 343,905
490,419 65,792 438,223
Current Liabilities Trade and other payables and accruals 40,549 16,138 56,687 Taxation payable 15 90 105 Unsecured bank loans wholly repayable within one year 16,000 — 16,000
56,564 16,228 72,792
Net current assets 433,855 49,564 365,431
Total asset less current liabilities 556,949 211,137 662,307
Non-current Liabilities Convertible note 83,284 — 83,284 Deferred tax liabilities 4,025 — 4,025
87,309 — 87,309
Net assets 469,640 211,137 574,998
– III-2 – APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
(C) UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP AS AT 31 DECEMBER 2008 (IF THE COMPANY HAS ACQUIRED 100% OF COMMON SHARES OF WESTERN PROSPECTOR)
Western Pro Forma Prospector Pro Forma Enlarged The Group Group Adjustments Group HKD’000 HKD’000 HKD’000 HKD’000 (Note 1) (Note 2) (Note 3)
Non-current assets Property, plant and equipment 116,004 45,663 161,667 Exploration and evaluation assets — 114,677 6,947 121,624 Prepaid lease payments 6,020 — 6,020 Deposit paid for acquisition of property, plant and equipment 1,070 — 1,070 Available-for-sale investments — 1,233 1,233
123,094 161,573 291,614
Current Assets Inventories 38,848 — 38,848 Trade and other receivables and prepayments 51,081 4,049 55,130 Prepaid lease payments 133 — 133 Investments held for trading 207 — 207 Bank balances and cash 400,150 61,743 (218,084) 243,809
490,419 65,792 338,127
Current Liabilities Trade and other payables and accruals 40,549 16,138 56,687 Taxation payable 15 90 105 Unsecured bank loans wholly repayable within one year 16,000 — 16,000
56,564 16,228 72,792
Net current assets 433,855 49,564 265,335
Total asset less current liabilities 556,949 211,137 556,949
Non-current Liabilities Convertible note 83,284 — 83,284 Deferred tax liabilities 4,025 — 4,025
87,309 — 87,309
Net assets 469,640 211,137 469,640
– III-3 – APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
Notes:
1. The balances are extracted from the audited consolidated financial statements of the Group for the year ended 31 December 2008 as set out in Appendix I to this circular.
2. The balances are extracted from the audited financial information of the Western Prospector Group for the year ended 31 December 2008, which was presented in CAD. For the purpose of this unaudited pro forma financial information, the amounts in CAD were converted into HKD at a rate of CAD1 to HKD6.4578 which was the rate quoted from the Hong Kong Association of Banks as at 31 December 2008.
3. Pursuant to the Offer, the Group will acquire a minimum of 50.1% and up to all of the issued and outstanding common shares of Western Prospector.
The Offer is accounted for as purchase of assets through the acquisition of subsidiaries, as the subsidiaries acquired is not constitute a business.
For the consideration of the Offer, the Group would settle by cash at CAD0.56 for each Western Prospector’s common share. The maximum number of all issued and outstanding Common Shares to be acquired under the Offer, including all outstanding Options tendered to Western Prospector for exercise, surrender or cancel no later than immediately prior to the take-up of the Common Shares by the Group is expected to be approximately 55,400,000.
Two sets of unaudited pro forma statement of assets and liabilities of the Enlarge Group are presented to illustrate the two scenarios of acquiring not less than 50.1% and 100% of common shares of Western Prospector.
(a) On the assumption that the Group is only able to acquire 50.1% of the issued and outstanding common shares of Western Prospector through the Offer, it is expected that the consideration of the Offer amounts to approximately CAD15.5 million (equivalent to approximately HKD100,096,000). The amount in CAD was converted into HKD at a rate of CAD1 to HKD6.4578. Taken into account of estimated legal and professional costs directly attributable to the Offer and the Subscription of HKD17,892,000, the aggregate consideration is approximately HKD117,988,000.
For the purpose of the unaudited pro forma financial information, the excess of the aggregate consideration over the carrying value of the Western Prospector Group’s identifiable assets and liabilities attributable to 50.1% acquired amounting to HKD12,209,000 is included as part of the cost of the purchased assets which are the exploration and evaluation assets. The aggregate consideration shall be allocated to the assets acquired and liabilities assumed based on their relative fair value and the amount allocated is subject to change upon completion of the Offer.
(b) On the assumption that the Group is able to acquire all of the issued and outstanding common shares of Western Prospector through the Offer, it is expected that the consideration of the Offer amounts to approximately CAD31.0 million (equivalent to approximately HKD200,192,000). The amount in CAD was converted into HKD at a rate of CAD1 to HKD6.4578. Taken into account of estimated legal and professional costs directly attributable to the Offer and the Subscription of HKD17,892,000, the aggregate consideration is approximately HKD218,084,000.
For the purpose of the unaudited pro forma financial information, the excess of the aggregate consideration over the carrying value of the Western Prospector Group’s identifiable assets and liabilities amounting to HKD6,947,000 is included as part of the cost of the purchased assets which are the exploration and evaluation assets. The aggregate consideration shall be allocated to the assets acquired and liabilities assumed based on their relative fair value and the amount allocated is subject to change upon completion of the Offer.
Pursuant to the Subscription, Western Prospector shall issue and the Group shall subscribe 5,371,350 Subscription Shares at CAD0.56 per Subscription Share, after the take-up and payment of the Common Shares under the Offer. The subscription of new shares to be issued by Western Prospector, after becoming a subsidiary of the Group, is fully eliminated in the consolidation of pro forma Enlarged Group.
– III-4 – APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION
TO THE DIRECTORS OF CNNC INTERNATIONAL LIMITED
We report on the unaudited pro forma financial information of CNNC International Limited (the ‘‘Company’’) and its subsidiaries (hereinafter collectively referred to as the ‘‘Group’’), which has been prepared by the directors of the Company for illustrative purposes only, to provide information about how the proposed acquisition of a minimum of 50.1% and up to all of the issued and outstanding common shares of Western Prospector Group Ltd. (the ‘‘Acquisition’’) might have affected the financial information presented, for inclusion in Appendix III of the circular dated 30 June 2009 (the ‘‘Circular’’). The basis of preparation of the unaudited pro forma financial information is set out on page III-1 to the Circular.
Respective responsibilities of directors of the Company and reporting accountants
It is the responsibility solely of the directors of the Company to prepare the unaudited pro forma financial informationinaccordancewithparagraph29ofChapter4 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the ‘‘Listing Rules’’) and with reference to Accounting Guideline 7 ‘‘Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars’’ issued by the Hong Kong Institute of Certified Public Accountants.
It is our responsibility to form an opinion, as required by paragraph 29(7) of Chapter 4 of the Listing Rules, on the unaudited pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.
Basis of opinion
We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 ‘‘Accountants’ Reports on Pro Forma Financial Information in Investment Circulars’’ issued by the Hong Kong Institute of Certified Public Accountants. Our work consisted primarily of comparing the unadjusted financial information with source documents, considering the evidence supporting the adjustments and discussing the unaudited pro forma financial information with the directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.
We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the unaudited pro forma financial information has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purpose of the unaudited pro forma financial information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.
The unaudited pro forma financial information is for illustrative purpose only, based on the judgements and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in future and may not be indicative of the financial position of the Group as at 31 December 2008 or any future date.
– III-5 – APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
Opinion
In our opinion:
a) the unaudited pro forma financial information has been properly compiled by the directors of the Company on the basis stated;
b) such basis is consistent with the accounting policies of the Group; and
c) the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.
Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong
30 June 2009
– III-6 – APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
The following is the text of a report, prepared for the purpose of inclusion to this circular, received from P&E Mining Consultants Inc. and Aker Solutions Canada Inc., independent technical consultants in mineral assets, in connection with its valuation as at 23 March 2009 of the Gurvanbulag Uranium Deposit in Mongolia. The report will be signed by Mr. Eugene J. Puritch for P&E Mining Consultants Inc. and Mr. John S. Rogers for Aker Solutions Canada Inc. Mr. Puritch and Mr. Rogers confirmed that the report is current as of 23 March 2009.
EXECUTIVE SUMMARY
The following report was prepared to provide a National Instrument 43-101 compliant Technical Report and Definitive Feasibility Study on the Gurvanbulag Central Deposit, Saddle Hills Property, Mongolia.
This report was prepared by P&E Mining Consultants Inc. (‘‘P&E’’), in conjunction with Aker Solutions (‘‘Aker’’), at the request of Mr. Gerald Harper, Senior Vice-President, Mongolian Operations, Western Prospector Group Ltd (‘‘Western Prospector’’ or ‘‘WNP’’). Western Prospector is a Vancouver based company trading on the TSX Venture Exchange under the symbol of ‘‘WNP’’.
TECHNICAL SUMMARY
PROPERTY DESCRIPTION AND LOCATION
The Saddle Hills Property is located in the Dornod Aimag (province), in northeastern Mongolia and is approximately 100 km south and west of the Russian and Chinese borders respectively. The area is approximately 115 km north-northwest of Choibalsan, the capital and commercial hub of Dornod Aimag.
The Saddle Hills Property consists of twelve Exploration Licenses for a total of 188,566 hectares. The Gurvanbulag Central Deposit is located along the border between Exploration Licenses 7685X and 4969X. These two licenses, as well as nine other licenses are held 100% by Western Prospector. All licenses are currently in good standing. Western Prospector has a 70% joint venture interest with Adamas Mining LLC (‘‘Adamas’’) in Exploration License 3367X which is currently in dispute.
Exploration of the Gurvanbulag Central Deposit is conducted from mine site buildings and supported by a 200-person accommodations camp. Infrastructure at the mine site and camp will be expanded during construction and operation phases. In 2008, a 100,000-V power line was constructed to deliver power from the Choibalsan thermal power station and a cellular telephone tower was erected and is now operation. An air service runs between Ulaanbaatar and Choibalsan with 130 km of unimproved dirt track between Choibalsan and Saddle Hills.
Along with Southern Siberia this part of Asia has a continental climate, with long, cold, dry winters and brief, mild, and relatively wet summers. The multiyear mean January temperature in Dornod Aimag is -20.58C andinJuly+19.98C. Surface water exists through most of the year in larger rivers and lakes. The groundwater table is relatively close to surface in valley areas.
HISTORY
The Gurvanbulag deposit was explored and developed by the Ministry of Geology of the Soviet Union in the 1970s and 1980s. Underground development at Gurvanbulag comprised three vertical shafts with the deepest to approximately 287 m with limited development on the 140 m and 200 m levels with most development on the 260 m level. Russian exploration included both surface and underground diamond and percussion drilling.
–IVA-1– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
One area of Gurvanbulag’s Russian C1 category resources was recalculated in a manner consistent with resources as defined by the Canadian Institute of Mining and in accordance with NI 43-101 to verify tonnage and grade reported by the Russians. A historic Russian C1 resource of approximately 4.2 million tonnes grading
0.25% U3O8 containing 22.7 million lbs U3O8 was reported.
Western Prospector contracted SRK Consulting (Canada) Inc. (‘‘SRK’’) in 2006 to model the Gurvanbulag Central deposit and provide a NI 43-101 compliant preliminary resource report. Utilizing a
0.07% U3O8 cut-off grade, SRK confirmed an indicated resource of 2.83 million tonnes grading 0.22% U3O8 containing 13.6 million lbs U3O8 and an additional inferred resource of 2.67 million tonnes grading 0.15% U3O8 containing 8.6 million lbs.
GEOLOGY
The Saddle Hills Property occurs in Mesozoic volcanic rocks located within a uranium province that extends into Russian and includes the uranium deposits of Strel’tsov. The Gurvanbulag Central Deposit shares many similarities with the Strel’tsov deposits but differs in the fact that the majority of the mineralization is hosted by stratabound deposits.
The Gurvanbulag Central deposit falls within the broad classification of a volcanic-hosted uranium deposit with a U-Mo-F association. Common to all uranium deposits in volcanic rocks is their occurrence in a bimodal suite of rocks consisting of large amounts of high silica rhyolites which overlie intermediate and basaltic units. The Gurvanbulag Central Deposit differs from other volcanic-hosted uranium deposit types by being associated with a laterally extensive volcanic glass horizon and extensive bedding conformable mineralization. No comparable deposit is known.
Uranium mineralization at Gurvanbulag occurs in extensively altered, hydro-mica rich clays occurring immediately above and below the obsidian horizon underlying massive felsitic ignimbrites, dipping 5-20 degrees to the southeast. Minor localized mineralization occurs in steeply dipping faults in the overlying ignimbrites and as small stratabound deposits below the main Gurvanbulag horizon.
MINERAL RESOURCES
Western Prospector have undertaken a substantial exploration program which included 40,457 m of diamond drilling and 8,360 m of reverse circulation drilling on surface, airborne magnetic and radiometric survey and an underground exploration program that included geological mapping, channel sampling and radiometric logging of Russian-era drill holes. A total of 2,220 Russian and Western Prospector drill holes, underground channels and gamma logged drill holes were used in the resource modelling area.
The Gurvanbulag Central Deposit domain boundaries were determined from lithology, structure and grade boundary interpretation from visual inspection of drill hole sections. Two domains were created named Hanging Wall and Footwall.
The resource estimate was derived from applying a 0.08% U3O8 cut-off grade to the block model and reporting the resulting tonnes and grade for potentially mineable areas. Mineralization within the existing underground workings was removed from the resource model.
–IVA-2– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
The following table shows the Resource Estimate prepared by P&E for the Gurvanbulag Central Deposit, effective as of 15 October 2008.
Hanging Wall Zone Footwall Zone Total of Both Zones
Resources (1)(2) Tonnes %U3O8 Tonnes %U3O8 Tonnes %U3O8 Lbs U3O8 (millions)
Measured 224,000 0.194 550,000 0.261 774,000 0.242 4.1 Indicated 1,316,000 0.174 2,194,000 0.180 3,510,000 0.178 13.8 Measured & Indicated 1,540,000 0.177 2,744,000 0.196 4,284,000 0.189 17.9 Inferred 233,000 0.135 562,000 0.122 795,000 0.126 2.2
1. Mineral resources which are not mineral reserves do not have demonstrated economic viability. The estimate of mineral resources may be materially affected by environmental, permitting, legal, title, taxation, socio-political, marketing, or other relevant issues.
2. The quantity and grade of reported inferred resources in this estimation are uncertain in nature and there has been insufficient exploration to define these inferred resources as an indicated or measured mineral resource and it is uncertain if further exploration will result in upgrading them to an indicated or measured mineral resource category.
3. The Resource Estimate has been prepared in accordance with the guidelines of the Canadian Institute of Mining, Metallurgy and Petroleum (CIM), CIM Standards on Mineral Resources and Reserves, Definitions and Guidelines prepared by the CIM Standing Committee on Reserve Definitions and adopted by CIM Council 11 December 2005.
Golder Associates Ltd. (‘‘Golder’’) assisted Western Prospector by providing mine geotechnical input into the feasibility study. One aspect of this assistance consisted of preparing a rock mechanics assessment for the purposes of underground mine design.
The rock mechanics assessment was based on review of existing geotechnical information, review of existing core logging information, and observation of the current state of underground openings at the mine site.
Golder examined foundation conditions for the major buildings and for the tailings dam. They examined information on climate, hydrology/hydrogeology, soil conditions, and seismicity. Recommendations were made following test pitting, test drilling, and laboratory testing. The recommendations were used in the tailings dam design and in the design of buildings.
The diluted measured and indicated reserve estimate for underground mining, at a 0.08% U3O8 cutoff, is 5,043,000t grading 0.161% U3O8. A mining recovery of 95% and dilution of 20% was included, with the diluting material carrying a background grade of 0.013% U3O8.
Approximately 12% of the hoisted reserves are rejected by the radiometric ore sorter. It has been assumed that the tonnage rejected amounts to 620,000t at a grade of 0.035% U3O8. This leaves 4,423,000t at 0.179%
U3O8 as feed for the process plant.
Reserves
Description Ore Grade of U3O8 U3O8 (tonnes) (%) (million lbs)
Proven Reserves 914,500 0.198 4.0 Probable Reserves 4,128,500 0.153 13.9 Total Reserves 5,043,000 0.161 17.9
The Gurvanbulag mineralised zones will be mined by underground mining techniques. The known potentially economic mineralisation extends from surface to approximately 500 m below surface elevation.
–IVA-3– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
Underground mining will use a combination of mobile rubber-tired diesel-powered equipment, slushers, handheld drills and track equipment. The mine is designed to be capable of mining at a rate of 1,630 tonnes per day or 570,000 annual tonnes of ore. The ore will be trucked to the jaw crusher, part of the ore sorting circuit. The ore sorter will upgrade the feed to be processed by rejecting low grade ore.
The main access to the underground mine for the first 4 years of production will be via a main ramp from surface (Phase 1). To facilitate preproduction development within a 2-year time frame, Main Shaft will also be equipped with a temporary head frame, hoist, and cage to provide limited rock hoisting capacity and movement of men and materials.
Main Shaft will be deepened, equipped, and placed into service to coincide with commencing of mining of stopes down to the other main haulage level, the 440 Level, in Year 5 of the mine life (Phase 2). The Shaft will be equipped with a double-drum production hoist for ore and waste rock and a single-drum service hoist for personnel, equipment, and materials. Shaft hoisting operations will only be suspended when shaft and hoist inspections and maintenance work are being performed.
All mining areas will be accessed and ore hauled to surface in the ramp (during the ramp haulage phase) using mobile mechanised equipment, the majority of which will be diesel powered. Mining will use long tom drills (jackleg drills mounted on air controlled arms, with a rubber-tired air-operated carrier), slushers, and handheld drills. Rock haulage from ore passes to the Main Production Shaft (later mining phase) will use rail haulage.
The main proposed mining method is drift and fill stoping with cemented waste rock backfill. Once a stoping drift is mined out, it will be filled with cemented waste rock backfill. The average dilution to be expected from a drift and fill stope is 20%.
In areas where the orebody locally increases in vertical thickness to over 5 m, uphole longhole mining will be employed. The mined out stope will be filled with cemented rock fill to minimise caving. Longhole mining dilution of 20% is included in the mined tonnages.
The process plant that has been designed for the Gurvanbulag operation is based on a Resin Extraction Process (REP).
The first stage of processing is the sorting stage. This is followed by grinding, leaching, the resin extraction process and elution, product precipitation, and finally calcining and packaging. The post-sorting nominal capacity of the plant is 1,613 tonnes per day. Other functions involved in the process are tailings neutralisation, effluent treatment, and reagent preparation. The operation is supported by a sulphuric acid plant, oxygen plant, water supply and utilities.
The process plant is designed for a feed of 500,000 tonnes per year (post sorting) at a maximum sustained feed grade of 0.25% U3O8. The process plant is designed to operate at 85% availability for 365 days per year, or equivalently, 24 hours per scheduled day for 310 operating days a year. At the average post-sorting feed grade of
0.179% U3O8, recovery will be 94.2% and the plant will ship 842.8t (1.86 million lbs) per year of U3O8 as yellowcake.
The first stage of processing, crushing and radiometric ore sorting, is used to upgrade the ore from the underground mine and reduce the size of grinding feed. It divides the feed into material with lower (reject) and higher (process plant feed) uranium concentrations than the processing cut-off grade.
The grinding circuit reduces the size of the process plant feed to 80% passing 150mm, appropriate for leaching. The major equipment in grinding consists of a semi-autogenous grinding (SAG) mill and a ball mill.
–IVA-4– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
The leaching circuit is used to extract uranium present in the mill feed (cyclone overflow). Leaching is accomplished through the addition of sulphuric acid and oxygen. The major equipment in leaching consists of the neutral thickener and nine leach tanks.
The resin extraction process circuit is composed of resin extraction and resin elution. The resin extraction process preferentially extracts dissolved uranium from the pregnant leach solution by absorbing it into a resin matrix. The major equipment in the resin extraction process consists of eight tanks with Kemix pump cells, a vendor package.
The resin elution circuit removes the dissolved uranium from the resin, allowing the resin to be re- circulated to the resin extraction process circuit. The uranium is stripped from the resin with a sulphuric acid solution. The major pieces of equipment in the resin elution circuit are three resin elution columns.
The impurity precipitation circuit removes excess sulphuric acid and metals co-absorbed on the resin from solution. The precipitated impurities are separated from the uranium bearing solution. The major equipment in the impurity precipitation circuit consists of six impurity precipitation tanks and the gypsum belt filter.
The uranium precipitation circuit precipitates uranium from solution. The resulting product is thickened and uranium is precipitated. The major pieces of equipment in uranium precipitation are three uranium precipitation tanks and the product thickener.
The product calcining circuit washes the uranium product, dries it and converts it to a high specific gravity product preferred by refineries. The major equipment in the product calcining circuit consists of the centrifuge, the calciner and three scrubbers. Yellowcake, the final product, is packaged in drums for shipment to a uranium refinery.
The tailings neutralisation circuit treats uranium production process waste flows and precipitate from the water treatment plants. The thickened tailings is pumped to the tailings management facility. The major equipment in the tailings neutralisation circuit consists of two tailings neutralization tanks and the tailings thickener.
The effluent treatment circuit removes dissolved impurities from effluent prior to its release or recycle. The major equipment in the effluent treatment circuit are reverse osmosis, the primary and secondary effluent treatment circuits, each consisting of two effluent treatment tanks and a clarifier, three effluent sand filters and two monitoring ponds.
The tailings waste management facility (WMF) was designed by Golder and it is capable of storing an estimated 4.5 million tonnes over the 9-year life of the current reserves.
In addition to waste, the WMF will be designed to contain a minimum water cover over the tailings as well as runoff and precipitation from the local watershed basin. In order to minimise the impact of the waste on the quality of the local and regional groundwater system, the entire WMF ground surface area will be lined in order to protect the recharge area from potential contamination.
The location identified for the WMF requires construction of a single dam to provide containment for the facility. The total tailings volume storage capacity to be provided by the WMF is 3,445,100 m3.
Permanent power supply is provided by a new 110 kV line from the power station operated by Dornod Energy System LLC (DES) at Choibalsan.
–IVA-5– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
Satellite links presently provide telephone, television, and broadband data services at the mine and camp sites. One of Mongolia’s cellular telephone companies has set up, and is operating, a cell at the site under a contract whereby Emeelt Mines provides power and a transmission tower and the telephone company provides the cell system.
Water will be retrieved from a fresh water well which will be located approximately 2 km south of the mill building. This water will be pumped to the water treatment facility, and to the mill building, as required. The accommodation camp has its own wells.
It is planned that a new road will be constructed to connect the Gurvanbulag site with Choibalsan. The road, approximately 117 km long, follows the route of the existing power line.
A railway line runs north from Choibalsan via Boorj in Russia to connect with the Trans-Siberian Railway line. Emeelt Mines will acquire warehousing and storage areas in Choibalsan in order to undertake trans- shipment of bulk and other materials between rail and truck. A warehouse adjacent to the Main Shaft, as well as a storage area inside the mill building, will be used for storage for bulk materials.
The principal industrial surface infrastructure on site will consist of the process building, head-frame and hoist building, maintenance garage, coal-fired hot water heating plant, sulphuric acid plant, oxygen plant and explosive magazines. Support infrastructure will include the administration building, sewage treatment plant, potable water treatment plant, and waste incinerator. These facilities are located in close proximity to each other, and strategically located between the main sources and user areas. A clinic will be located inside the new administration building.
The camp site currently consists of accommodations for 200 persons, kitchen, dining room, washroom buildings, office building, laundry room, medical clinic, office and recreation building. These facilities will be expanded to accommodate additional personnel during the construction and the operating phases of the Project.
Following a market study, a price of US$65 per pound of U3O8 contained in yellowcake was adopted for the economic analysis. The product will need to be exported to a fuel production facility. The yellowcake product will be packaged in 205 litre drums, approximately 400 kg per drum. Drums will be secured in ocean- shipping containers. The containers will be shipped by truck to the rail freight depot at Choibalsan and transported via Russia or China rail systems enroute to customers.
In matters related to the environment, Emeelt Mines has committed itself to meeting the highest of Mongolian, Canadian or Australian standards and to undertake best management practices in all its activities. All undertakings to date and those contemplated are compliant with International Finance Corporation/World Bank guidelines.
Very early in the Project, Emeelt Mines began to collect samples from mine shafts and wells to gain an understanding of water quality in the area. As part of the baseline study, samples were taken from all aquifers in the area, and measurements were taken of radiation levels in both natural and previously disturbed areas.
As part of mine dewatering, a study was done of the drainage channel to be used for the discharge; this study has been repeated three times. Routine sampling of the water discharged to the environment has also been done and continues.
The environmental protection plan (EPP) for the operations is geared to address water issues, process chemicals and material, tailings and waste disposal. During operations, a set program of sampling and monitoring will be followed. As well, a regional study similar to the baseline study will be done every 3 years to document any changes which might be occurring, while a study of the discharge water drainage channel will be
–IVA-6– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA done once each year. In order to accomplish these objectives and assure the effectiveness of the EPP once mining and processing are underway, a full analytical laboratory will be established on site. This will allow the analysis of samples to be done shortly after samples are taken and adverse results addressed quickly.
The tailings from the process will be impounded in the tailings of Waste Management Facility. The effluent from the tailings will be reclaimed and returned to the mill for process use. Under normal operations there will be no direct discharge from the tailings pond to the environment. Should discharge to the environment be necessary, the effluent will be treated to assure that it is environmentally acceptable.
A Hazards & Operability (‘‘HAZOP’’) Analysis was facilitated by HITE Engineering on behalf of Aker Solutions and Western Prospector.
The initial capital cost for mining and surface facilities, based on a capacity of 500,000 tonnes processed per year, is USD280.2 million in second quarter 2008. This expenditure covers the costs from EPCM phase up to and including plant commissioning and production start up. The sustaining capital costs are USD157.6 million, also including freight, insurance, taxes, duties and contingency. These expenditures are primarily for the underground except for USD9.1 million for raising the tailings dam and USD5.9 million for closure.
The total operating costs for the 1,613t/d DFS Gurvanbulag Uranium Project, with a nominal process plant throughput of 1,500t/d, are estimated to be USD107.77 per tonne of process plant feed (post-sorting tonnage).
The operations will have 768 people on the company payroll of which 22 will be expatriates and the remainder Mongolian nationals. The mining area accounts for approximately 80% of the total site workforce. The mine will also provide employment for an additional 148 people as contractors in the areas of catering, security, medical services, and power line operation. Extensive underground miner training programs will be instituted during the preproduction period. The training of process and other national employees will also be undertaken prior to the start-up of the mill.
The principal financial parameters of the Gurvanbulag Project are listed below. A significant component of the cost burden that impacts on the project cash flow is attributed to taxes, which amount to USD162 million. These taxes encompass income tax, royalties, VAT and import duties.
Financial Data (USD ’000) Total
Revenue 1,068,126 Operating Costs, Mine Site 477,186 Operating Costs, Shipping 12,420 Total Operating Costs 489,605 Initial Capital — Mining 64,550 Initial Capital — Process and Infrastructure 184,743 Taxes 162,263 Pretax Cumulative Cash Flow 187,080 After Tax Cumulative Cash Flow 24,816
–IVA-7– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
The investment returns, on a pretax and after tax basis are highlighted below.
IRR and Net Present Values (NPVs) (USD ’000) Pretax After Tax
IRR (%) 9.2 1.3 NPV at 0% 187,080 24,816 NPV at 5% 58,900 -51,304 Payback Period, Years 6.1 8.6
The scheduled start of the EPCM activities is 26 June 2009, dependent on receiving Government of Mongolia approval for the Project. The overall duration from July, 2009 to achieving full production is 36 months. A 6-month duration for production ramp-up is planned.
The following activity key dates are identified:
29 May 2009 Government approval 26 June 2009 Award of EPCM 21 August 2009 Award of purchase order for the grinding mills 29 March 2010 Start of construction surface facilities 4 March 2011 Grinding mills delivered on site 20 December 2011 Completion of mine development 2 December 2011 Process plant mechanical completion 2 January 2012 Start production 29 June 2012 Full production
Risks and opportunities exist in the areas of permitting, geology, mining, and processing.
Examples of some of the risks have to do with delays in the receipt of the necessary permits and licenses, reduction in the recoverable resources, a tight timetable for the shaft deepening, and adoption of the resin extraction process.
Opportunities exist for the addition of reserves and the purchase of used equipment at lower capital cost. Further optimization testwork is planned; this could reduce the capital and operating costs in the grinding area andintheresinextractionprocess.
Many of the processing risks were identified by a HAZOP analysis that was facilitated by an independent consultant, as described in Section 30.
Aker Solutions concluded that:
. the results of the DFS are positive and indicate that the Project is viable;
. the Uranium market pricing used in the DFS is considered to be conservative;
. no undue delays are anticipated in getting a mine operating license as the political atmosphere in Mongolia indicates that the Government is determined to conclude investment agreements with mining companies in a timely manner;
–IVA-8– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
. the process design selected for Gurvanbulag is based on detail testwork and offers the optimum benefits to Western Prospector in terms of capital and operating costs and metallurgical recovery;
. the mining risk at Gurvanbulag is minimized by the fact that the existing underground development has allowed Western Prospector, and their geotechnical and mining consultants, to access the workings and examine the layout, openings and rock conditions in detail;
. the Project execution schedule is conservative and allows ample time for metallurgical testwork, the procurement of long delivery items, mine development, plant construction and production ramp up.
Aker Solutions recommended that:
. the Project be advanced to the detailed engineering stage;
. initiation of further process testwork proceed as recommended by Melis;
. the access road from Choibalsan to site is constructed at the earliest feasible time frame;
. negotiations to establish the needed logistic facilities in Choibalsan are undertaken as soon as a decision to proceed has been taken.
1.0 INTRODUCTION AND TERMS OF REFERENCE
1.1 Terms of Reference
The following report presents the results of an updated 2008 Resource Estimate (the ‘‘2008 Resource Estimate’’) prepared by P&E Mining Consultants Inc. (‘‘P&E’’) along with the results of a Definitive Feasibility Study (the 2008 ‘‘DFS’’) prepared by Aker Metals, A Division of Aker Solutions Canada Inc. (‘‘Aker Solutions’’) regarding the Gurvanbulag Central uranium deposit on the Saddle Hills Property located in north- eastern Mongolia (the ‘‘Property’’). Both the 2008 Resource Estimate and 2008 DFS outlined in this report have been prepared in compliance with the requirements of Canadian National Instrument (NI) 43-101 and in accordance with the guidelines of the Canadian Institute of Mining, Metallurgy and Petroleum (CIM), CIM Standards on Mineral Resources and Reserves, Definitions and Guidelines prepared by the CIM Standing Committee on Reserve Definitions and adopted by CIM Council 11 December 2005.
This report was prepared at the request of Mr. Gerald Harper, Senior Vice-President, Mongolian Operations, Western Prospector Group Ltd (‘‘Western Prospector’’ or ‘‘WNP’’). Western Prospector is a Vancouver based company trading on the TSX Venture exchange under the symbol of ‘‘WNP’’, with its corporate office at:
Suite 400–601 West Broadway Street Vancouver, British Columbia V5Z 4C2
Tel: +1 (604) 675-6985 Fax: +1 (604) 608-3413
This report is considered current as of 15 October 2008.
Aker Solutions was retained by Western Prospector to prepare a DFS for the Gurvanbulag property in order to progress this uranium deposit through to an underground production scenario. This report presents the results of the DFS along with the details of the updated Resource Estimate that served as the resource basis for the DFS.
–IVA-9– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
Western Prospector retained a number of consulting firms to contribute to the DFS. The general areas in which these firms worked are as follows.
. EcoTrade LLC (‘‘EcoTrade’’): Environmental Consulting;
. Golder Associates Ltd (‘‘Golder’’): Geotechnical Consulting;
. Melis Engineering Ltd (‘‘Melis’’): Metallurgical Testwork; Flow Sheet and Process Equipment Sizing (testwork was undertaken at SGS Lakefield Research Ltd (‘‘SGS Lakefield’’));
. P&E: Updated Resource Estimate, Block Model; Mine Development Plans; Mining Schedule; Mining Capital and Operating Costs;
. Redpath Mongolia LLC (‘‘Redpath’’): Mining Contractor at Gurvanbulag — Assisted P&E with Cost Estimation of Development and the Hoisting System;
. Gamah International Ltd (‘‘Gamah’’): Marketing and Product Shipment.
The Gurvanbulag uranium deposit, located in northeastern Mongolia, lies within the Saddle Hills Property, a group of exploration licenses held by Emeelt Mines LLC (‘‘Emeelt Mines’’) and Western Prospector Mongolia LLC (‘‘Western Prospector Mongolia’’). Both Emeelt Mines and Western Prospector Mongolia are wholly-owned by Western Prospector. The Property is operated by Emeelt Mines. The Property lies approximately 780 km northeast of the capital Ulaanbaatar with coordinates 49803’N and 114800’E.
The Gurvanbulag deposit was explored and partially developed in the 1970s and 1980s by the uranium exploration arm of the Ministry of Geology of the former Soviet Union.
Aker Solutions prime assignment was to generate a DFS to examine the economic viability of the Gurvanbulag Central uranium deposit. In order to complete this assignment, Aker Solutions provided overall management and coordination of the Study Report, including liaison with the mining, metallurgical, geotechnical, and tailings management consultants selected by Western Prospector.
In addition, Aker Solutions was responsible for the following tasks and activities:
. Participateinsitevisitstoconsidertheprocessplantandtailingssiteselectionissuesaswellasto garner cost and availability information regarding Mongolian sources of material, process reagents, fabrication facilities, labour costs, and logistic services available;
. Develop, in conjunction with the Western Prospector metallurgical consultant, the basic process design parameters;
. Provide process equipment data sheets, equipment duty specifications for budget pricing purposes;
. Estimate the operating and capital cost estimates for the process plant and the surface production infrastructure. Costs will be within an overall accuracy tolerance range of ±15%;
. Develop a DFS-level financial analysis model including base case cash flow and sensitivity analysis;
. Develop a process control philosophy;
. Develop a preliminary Project execution schedule;
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. Monitor the Study progress, issue regular status reports and conduct periodic reviews with Western Prospector;
. Monitor the progress of the mining study being carried out by P&E and review the final Report for completeness and adherence to the DFS objectives;
. Develop DFS-level engineering drawings for the process plant and surface facilities to support cost estimating;
. Prepare material quality estimates for the process and surface facilities to support cost estimating.
The following aspects of the Report were excluded from the Aker Solutions scope of services and were carried out by Western Prospector or their consultants:
. Mineral resources and mining;
. Detailed review of metallurgical testwork;
. Environmental evaluations or studies;
. Geotechnical and waste management;
. Geotechnical testing of waste materials;
. Permitting;
. Taxation and import duty issues;
. Production of a Technical Report to NI 43-101 standards.
In order to complete its mandate, the following information or data were supplied to Aker Solutions, by Western Prospector:
. All available relevant data, reports and other historical information regarding the Project or the deposit;
. Outline, plan, and sections of the mineralized zones;
. Updated resource estimate;
. Mine design, production schedule, and capital and operating costs;
. Process design criteria, flow sheets, mass balances, reagent consumption, and operating personnel requirements;
. Capital cost of the power line and substation;
. Electrical power tests;
. Marketing report and prices for uranium concentrate sales;
. Assistance in determining appropriate local labour rates and other Mongolian payroll burdens;
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. Access to the site for reconnaissance visits;
. All local transportation, food and lodgings in Mongolia.
Site visits to the Saddle Hills Property have been carried out by the following individuals who have provided specific input to the present Report.
Name Company Site Visit Dates
Buck, Malcolm P&E 29 to 30 January 2005 Malloch, Kirstine P&E June 2006 to April 2008 Botham, Leon Golder 17 to 20 October 2006 Fielder, Bruce Melis 17 to 20 October 2006 15 to 20 June 2007 King, David Aker Solutions 17 to 20 October 2006 Puritch, Eugene P&E 14 to 18 November 2006 18 to 21 January 2008 Steed, Chuck Golder 13 to 16 May 2007 Rogers, John Aker Solutions 10 to 21 January 2008 Chen, Felix Golder 9 to 21 April 2008 Rosinski, Wally Aker Solutions 12 to 21 May 2008 Amin, Faramarz Aker Solutions 14 to 20 May 2008
1.2 Currency and Exchange Rate
Metric units of measure have been used throughout this Report, unless noted otherwise. For example, prices for uranium may be used in terms of United States dollars (USD) per pound of contained calcined yellowcake. Costs have been estimated in United States dollars of end of First Quarter 2008 value. The currency of Mongolia is the Mongolian Tugrik (MNT), with an exchange rate of 1,150 to 1,180 to the US dollar, as of the end of the First Quarter 2008.
1.3 Sources of Information
This report is based, in part, on internal company technical reports, and maps, published government reports, company letters and memoranda, and public information as listed in the ‘‘References’’ Section 20.0 at the conclusion of this report.
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1.4 Glossary of Terms
Abbreviation Description
%Percent ~ approximate(ly) ‘ minute(s) (angular measure, 1/60 degree) *multipliedby
CaSO4‧2H2Ogypsum CAPEX capital cost estimate Cd Cadmium cfm cubic foot per minute cfr cost and freight Cl Chlorine Cm centimetre(s) Cr Chromium Cu Copper cu yd cubic yard(s) dday DCN Distributed Communication Network DCS Distributed Control System DEIA Detailed Environmental Impact Assessment DES Dornod Energy System LLC DFS Definitive Feasibility Study Dia diameter
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Abbreviation Description
DVTS Dornod Volcanic Tectonic Structure Eeast e.g. exampli gratia, meaning ‘‘for example’’ ea each
eU3O8 Used to indicate that results are from gamma logging and assume radioactive equilibrium between uranium and its gamma emitting daughters which validation was undertaken for the Russian core data EcoTrade EcoTrade LLC EGL effective grinding length EIA Environmental Impact Assessment Emeelt Mines Emeelt Mines LLC EPCM Engineering, Procurement, Construction and Management EPP Environmental Protection Plan et al. et alii, meaning ‘‘and other people’’ EUR European EURO Fe iron ft foot (feet) g acceleration due to gravity g gram(s) G&A General and Administration g/t grams per tonne Ga billion years ago Gamah Gamah International Ltd. GBP Pound Sterling GEA General Environmental Assessment G&DS Geophysics and Drilling Services Company LLC GK Gauss Kruger Golder Golder Associates Ltd. gpm gallons per minute GW gigawatt(s) GWe gigawatts electrical GWh gigawatt hour(s) h hour(s) h/d hour(s) per day
H2SO4 sulphuric acid Harper Mr. Gerald Harper HAZOP Hazard and Operability HDPE high density polyethylene HES&R health, environment, safety and regulations Hg mercury HITE HITE (Engineering Corporation) HP horsepower HP/t horsepower per tonne HSE Health, Safety and Environment Hz hertz IAEA International Atomic Energy Agency in inch(es) IRR internal rate of return ISL in-situ leach k kilo (prefix)
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Abbreviation Description
Khan Khan Resources Inc. km kilometre(s) km/h kilometres per hour km2 square kilometre(s) kPa kilopascal(s) kV kilovolt kVa kilovolt ampere(s) kW kilowatt(s) kWh kilowatt hour kWh/t kilowatt hours per tonne Llitre(s) L/s litres per second lb pound(s) LCD Liquid Crystal Display LOM Life of Mine mmetre(s) M million m/s meters per second m2 square metre(s) m3 cubic metre(s) m3/d cubic metre(s) per day m3/s cubic metre(s) per second Ma million years ago Masl metres above sea level max. maximum Melis Melis Engineering Ltd. MET Ministry of Environment and Tourism mg milligrams(s) Mg magnesium mg/L milligrams per litre MgO magnesium oxide
Mg(OH)2 magnesium hydroxide Micon Micon International Limited Min minutes(s) min. minimum mL millilitre(s) ML million litres ML/a million litres per annum Mlb million pound(s) Mlb/a million pound(s) per annum mm millimetre(s) mm/a millimetre(s) per annum Mm3 million cubic metre(s) MMAMC Maximum Monthly Arithmetic Mean Concentration MNT Mongolian Tugrik Mo molybdenum MRPAM Mineral Resources and Petroleum Authority of Mongolia Mt million tonnes MTPH metric tonnes per hour mV milivolt(s)
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Abbreviation Description
MW megawatt(s) MWe megawatts electrical N north NGI-Q Norwegian Geotechnical Institute Q System NGO(s) non-governmental organisations(s)
NH4 ammonium Ni nickel NI National Instrument
NO3 nitrate NPP Nuclear Power Plant NPV Net Present Value NRA National Radiation Agency NSR net smelter return NUTP National Uranium Tailings Program OGMC Office of Geology and Mining Cadastre OPEX operating cost estimate ORP oxidation reduction potential OWS operator work stations P&E P&E Mining Consultants Inc. Pa pascal (pressure, stress) Pb lead Pb210 lead-210 Pb214 lead-214 pH power of hydrogen PLC Programmable Logic Controller ppb parts per billion PPE personal protective equipment ppm parts per million QA/QC quality assurance/quality control Ra226 radium-226 Rand South African Rand RC Reverse Circulation Redpath Redpath Mongolia LLC REP Resin Extraction Process RG Redpath Group RIL Resin in Leach RMR Rock Mass Rating Rn222 radon-222 RO reverse osmosis RQD rock quality designation s second(s) S sulphur SAG semi-autogenous grinding Se selenium SEDAR System of Electronic Document Analysis and Retrieval SG specific gravity SGS Lakefield SGS Lakefield Research Ltd SHE safety, health and environment
SO2 sulphur dioxide
SO3 sulphur trioxide
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Abbreviation Description
SO4 sulphate SPT standard penetration test SRK SRK Consulting (Canada) Inc SSIA State Specialised Inspection Agency T tonne(s) t/a tonnes per annum t/d tonnes per day t/h tonnes per hour
Th230 thorium-230 TOR terms of reference TSS total suspended solids
[UO2(SO4)3]4- tetravalent uranyl sulphate U Uranium
U3O8 calcined yellowcake
UO3 uranium trioxide
UO4 uranium tetraoxide
UO4‧xH2O uranium peroxide USD United States dollar(s) UTM Universal Transverse Mercator Vvolt(s) VAL Value Added Tax VAT value added tax VPSA Vapour Pressure Swing Adsorption w/w weight in weight WNP Western Prospector Group Limited Western Prospector Western Prospector Group Limited Western Prospector Western Prospector Mongolia LLC Mongolia wk Week WMF Waste Management Facility WNA World Nuclear Association XinXin XinXin Mining Co. Ltd. XRF x-ray diffraction Zn zinc
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2.0 RELIANCE ON OTHER EXPERTS
P&E and Aker Solutions have assumed, and relied on the fact, that all the information and existing technical documents listed in the References section of this report are accurate and complete in all material aspects. While we carefully reviewed all the available information presented to us, we cannot guarantee its accuracy and completeness. We reserve the right, but will not be obligated to revise our report and conclusions if additional information becomes known to us subsequent to the date of this report.
Although copies of the tenure documents, operating licenses, permits, and work contracts were reviewed, an independent verification of land title and tenure was not performed. P&E has not verified the legality of any underlying agreement(s) that may exist concerning the licenses or other agreement(s) between third parties but has relied on the clients solicitor’s to have conducted the proper legal due diligence. It is reported, by Harper (2005), that a legal review of most of the licenses was undertaken by B. Erdenebayar who reported to the secretary of Western Prospector, on 5 April 2005 that they were valid and in good standing. English translations of each of the licenses as well as copies of the land leases are included as Appendix A in Harper (2005). Emeelt Mines licensing agent, B. Ariuntulga, is responsible for the review of licenses and payment of the relevant fees for 2008–09 to ensure that licenses are in good standing.
A draft copy of the report has been reviewed for factual errors by the client and P&E has relied on Western Prospector’s historical and current knowledge of the property in this regard. Any statements and opinions expressed in this document are given in good faith and in the belief that such statements and opinions are not false and misleading at the date of this report.
Western Prospector retained Barry Smee, PhD, P.Geo, to conduct an independent audit of their QA/QC program and analytical laboratories in February 2006. A second independent audit of Western Prospector’s assay database was conducted remotely by Caroline Gilson, P.Geo, of Maxwell Geoservices in Vancouver. SRK (2006) has reviewed this work and noted that they had maintained close contact with Ms. Gilson during their data compilation exercise. P&E and Aker Solutions have relied upon the foregoing audits of the QA/QC to ensure that the QA/QC procedures were conducted in accordance with acceptable Industry Standards.
3.0. PROPERTY DESCRIPTION AND LOCATION
3.1 Location
The Saddle Hills Property is located in the Dornod Aimag in northeastern Mongolia and is approximately 100 km from the borders of both Russia to the north and China to the east. The area is approximately 115 km north-northwest of Choibalsan, the capital and commercial hub of Dornod Aimag (Figure 3-1).
The licenses are located within the 1: 100,000 scale map sheets M-49-108, M-49-120, M-50-97 and M-50- 109. The centre of the Saddle Hills area is at latitude 49 degrees north and longitude 114 degrees east. The area extends 83 km in a north-south direction and approximately 80 km in an east-west direction.
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Figure 3-1: Location map of the Saddle Hills Property
3.2. Property Description and Tenure
The Saddle Hills Property comprises the Gurvanbulag Central Deposit, as well other uranium prospects including the Gurvanbulag Intermediate and Southwest, Dornod(-Khavor), Mardaingol and Nemer (Figure 3-2). This report is chiefly concerned with the Gurvanbulag Central Deposit.
Figure 3-2: Saddle Hills Property deposits and prospects
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3.2.1 Exploration Licenses
Saddle Hills Property consists of twelve exploration licenses covering 188,566 hectares (Figure 3-3). The licenses cover part of five soums: Dashbalbar, Gurvanzagal, Sergelen, Bayandun and Tsagaan-Ovoo. Within the Aimags, or primary administrative areas of Mongolia, soums are the secondary administrative areas.
Figure 3-3: Location map of the licenses of the Saddle Hills Property
All of the tenements are contiguous but within the envelope there are areas of Exploration and Mining Licenses issued to third parties. Bounding the licenses are two State Protected Areas; to the northwest, Ugtam Uul and to the southeast, Yahi Nuur of the tenements.
Eleven exploration licenses are held directly by Western Prospector Mongolia and Emeelt Mines issued by the Mongolian Government in accordance with the terms of the Mineral Resources Act of Mongolia (Table 3.1). Both Emeelt Mines and Western Prospector Mongolia are wholly-owned by Western Fortune Ltd., a Malaysian registered company wholly-owned by Western Prospector.
License 3367X is in dispute, having previously been held by Adamas Mining LLC (‘‘Adamas’’) (currently held by an escrow agent) and in which Western Prospector believe they have completed exploration work to earn a 70% joint venture interest. However, the joint venture with Adamas has yet to be formed and is currently the subject of litigation in the Mongolian courts. In the third quarter of 2008, Western Prospector wrote off CAD3.9 million of exploration expenditures associated with the license dispute (WNP MD&A, Q3 17 Nov 2008, News Release 08-23).
The Gurvanbulag Central Deposit (Figure 3-3) is located along the border between Exploration Licenses 7685X (Ar bulag) and 4969X (Ulaan Nuur 2).
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Western Prospector also hold other licenses in the Dornod Aimag which are not part of the Saddle Hills Property and are not discussed within this report.
Table 3.1: Exploration Licenses in the Saddle Hills project area
License Area Name Aimag Soum Surface (ha) Owner Interest (%)
3367X Erkht ovoo tolgoi Dornod Dashbalbar, 39,942 Adamas Earned 70% Gurvanzagal JV interest 4846X Burd Dornod Dashbalbar, 5,753 Emeelt Mines 100 Bayandun 4969X Ulaan Nuur 2 Dornod Sergelen, Bayandun, 6,761 Emeelt Mines 100 Dashbalbar 4970X Ulaan Nuur 1 Dornod Sergelen, Bayandun 10,876 Emeelt Mines 100 4974X Ulaan Nuur 3 Dornod Dashbalbar, Sergelen *14,111 Emeelt Mines 100 6995X Bulagtai Dornod Bayandun 1,017 Emeelt Mines 100 7023X Baishintiin ukhaa Dornod Dashbalbar, **12,962 Emeelt Mines 100 Gurvanzagal 7405X Dalan khariin bulag Dornod Sergelen 1,031 Emeelt Mines 100 7685X Ar bulag Dornod Bayandun 7,254 ***Emeelt Mines 100 9283X Dashbalbar 2 Dornod Dashbalbar 127 Emeelt Mines 100 9353X Khureet Nuur Dornod Tsagaan-Ovoo, 52,811 Western Prospector 100 Bayandun, Mongolia Sergelen 9363X Ugtam Uul Dornod Dashbalbar 34,939 Western Prospector 100 Mongolia
* Change in license area due to MRPAM boundary redefinition of the State Protected Areas, January 2007
** MRPAM revision to calculated area, loss of 1 hectare, January 2007.
*** Ownership of this license was transferred from Western Prospector Mongolia to Emeelt Mines on 26 June 2008
(See Harper, 2005, for detailed coordinates of each of the licenses, coordinates for area change to license 4974X in Appendix VII)
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Under the Minerals Law of Mongolia (effective August 2006), exploration licenses have a potential life of up to nine years, subject to payment of an escalating annual hectare-based tax (Ts. Nyamdorj, 2006). Exploration license fees are US$0.10 per hectare for the first year, US$0.20 per hectare for the second year, US$0.30 per hectare for the third year, US$1.00 per hectare for years four to six and US$1.50 per hectare for years seven to nine. Thereafter the license holder has the option and exclusive right to obtain a mining license on any part of the exploration license. Table 3.2 lists each of the Western Prospector licenses with the ultimate (nine year) expiry dates and the amount of tax due at the next license anniversary.
Table 3.2: Exploration License fees for Saddle Hills project area
License# Issue date End date Area (ha) Next tax due $US/hectare Amount $US
3367X 7 June 2001 6 June 2010 39,942 6 June 2009 1.50 59,913.00 4846X 5 Sept 2002 4 Sept 2011 5,753 4 Sept 2009 1.50 8,629.50 4969X 8 Oct 2002 7 Oct 2011 6,761 7 Oct 2009 1.50 10,141.50 4970X 8 Oct 2002 7 Oct 2011 10,876 7 Oct 2009 1.50 16,314.00 4974X 8 Oct 2002 7 Oct 2011 *14,111 7 Oct 2009 1.50 21,166.50 6995X 25 Feb 2004 24 Feb 2013 1,017 24 Feb 2009 1.00 1,017.00 7023X 4 Mar 2004 3 Mar 2013 **12,962 3 Mar 2009 1.00 12,962.00 7405X 7 May 2004 6 May 2013 1,031 6 May 2009 1.00 1,031.00 7685X 10 June 2004 9 June 2013 7,254 9 June 2009 1.00 7,254.00 9283X 11 Feb 2005 10 Feb 2014 127 10 Feb 2009 1.00 127.00 9353X 23 Feb 2005 22 Feb 2014 52,811 22 Feb 2009 1.00 52,811.00 9363X 7 Mar 2005 6 Mar 2014 34,939 6 Mar 2009 1.00 34,939.00
* Change in license area due to MRPAM boundary redefinition of the State Protected Areas, January 2007
** MRPAM revision to calculated area, loss of 1 hectare, January 2007
The fundamental title document for a license is a three page certificate issued by the Mineral Resources and Petroleum Authority of Mongolia (‘‘MRPAM’’) which body is charged under the Act with issuing such records and updating them each time any changes are made. Harper (2005) examined the original versions of the currently updated license certificates in Mongolian and the English translations thereof and has cross checked the coordinates of corner locations between license text copies and with plotted map positions on mineral property maps and found them to be the same and correctly as shown and as intended by the owner. In January 2007 the area of license 4974X was redefined by the MRPAM due to redefining of the State Protected Area boundaries. Appendix VII has the translation of the notification of changes to the license boundary of 4974X and the new co-ordinates. P&E has confirmed that the license fees due in 2008 and early 2009 have been paid and the licenses are in good standing into 2009.
The registered holder of each of the Exploration Licenses 4846X, 4969X, 4970X, 4974X, 6995X, 7023X, 7405X, 7685X and 9283X is Emeelt Mines. Exploration Licenses 4846X, 4969X, 4970X and 7023X were acquired from Brant Enterprises Inc. Details of the acquisition agreement are presented in WNP press releases #04-28 and #4-30. Exploration licenses 6995X and 7405X were acquired from a private Mongolian individual and a private Mongolian corporation. Details of the acquisition agreements are covered in WNP’s press release #04-39. Ownership of 7685X was transferred to Emeelt Mines from Western Prospector Mongolia in June 2008.
The registered holder of Exploration Licenses 9253X and 9363X is Western Prospector Mongolia. Exploration licenses 9253X and 9363X were acquired in February and March 2005.
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Mongolian Mineral Law of 2006 requires an annual minimum expenditure on each license calculated on a per-hectare basis that increases by year of ownership. Minimum expenditure is US$0.00 for the first year, US$0.50 per hectare for years two to three, US$1.00 per hectare for years four to six and US$1.50 per hectare for years seven to nine. Table 3.3 reports minimum expenditure on the 12 Saddle Hills Licenses for 2009. Exploration licenses may be held for 3 years, plus two 3 year extensions, after which the license must be upgraded to a mining license, or dropped. A pre mining period of three years has been introduced at the expiration of the exploration license term. During this period, the Minerals Law permits feasibility, and environmental impact assessment to be completed. License fees payable in years seven, eight and nine are applicable during this period.
Table 3.3: Minimum annual expenditure required to maintain good standing on Saddle Hills Exploration Licenses
License# Issue date End date Area (ha) $US/hectare Amount $US
3367X 7 June 2001 6 June 2010 39,942 1.50 59,913.00 4846X 5 Sept 2002 4 Sept 2011 5,753 1.50 8,629.50 4969X 8 Oct 2002 7 Oct 2011 6,761 1.50 10,141.50 4970X 8 Oct 2002 7 Oct 2011 10,876 1.50 16,314.00 4974X 8 Oct 2002 7 Oct 2011 *14,111 1.50 21,166.50 6995X 25 Feb 2004 24 Feb 2013 1,017 1.00 1,017.00 7023X 4 Mar 2004 3 Mar 2013 **12,962 1.00 12,962.00 7405X 7 May 2004 6 May 2013 1,031 1.00 1,031.00 7685X 10 June 2004 9 June 2013 7,254 1.00 7,254.00 9283X 11 Feb 2005 10 Feb 2014 127 1.00 127.00 9353X 23 Feb 2005 22 Feb 2014 52,811 1.00 52,811.00 9363X 7 Mar 2005 6 Mar 2014 34,939 1.00 34,939.00
* Change in license area due to MRPAM boundary redefinition of the State Protected Areas, January 2007
** MRPAM revision to calculated area, loss of 1 hectare, January 2007
The total cost of maintaining the existing licenses, including licensing fees and minimal expenditure on each license, totals approximately US$450,000.00 in 2009 for the entire Saddle Hills project area. P&E has not reviewed and in any event cannot offer any legal opinion on tenement title, however both SRK (2006) and Harper (2005) have reviewed the original title documents and receipts for maintenance payments (in Ulaanbaatar) all indicate that the licenses are in good order as of the date of inspection. P&E has reviewed the 2008–09 status and the licenses are current and in good standing.
Western Prospector has filed an independent resource report with the MRPAM for the Gurvanbulag Uranium deposit. The Mongolian-format resource report is the last document required for approval before making a formal application for conversion of Gurvanbulag Exploration Licenses to a mining license. Western Prospector intends to make a formal application for a mining license following receipt of resource approval. (WNP, MD&A, Q3, 17 Nov 2008).
Western Prospector is also exploring several additional uranium deposits within the property area and, on completion of resource calculations, may apply for mining licenses over other exploration licenses including licenses 3367X, 4974X, 9283X and 9353X.
Mining licenses have a set annual licensing fee of US$15.00 per hectare with the exception of coal and common mineral deposits on which the annual mining license fees are US$5.00 per hectare. The license may be held for a period of 30 years, with two 20 year extensions.
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3.2.2 Surface Rights and Leases
Surface rights were acquired to cover lands potentially required for surface facilities related to future mining operations, infrastructure, and transportation corridors. These surface rights are authorized by the Aimag government after approval by the relevant Soum government. The leases cover four soums; Dashbalbar, Bayandun, Sergelen and Gurvanzagal.
As of August 2008, all land use certificates are held by Emeelt Mines totalling 14,530.10 hectares. Maintenance of the surface leases is by annual rental payment. The annual payment for 2008 was approximately US$7,600 (fees paid in Mongolian Tugrik (‘‘MNT’’) equalled 10,474,000 MNT, converted to USD at 1 USD = 1,350 MNT, as of January 2009). Figure 3-4 shows the overall area of leases granted superimposed on the mineral licenses areas. Soum boundaries are also shown.
All environmental permits are in place, and the author is unaware of any legal impediments to limit Western Prospector’s abilities to conduct exploration in the Gurvanbulag project area. In December 2008 Western Prospector filed an Environmental Impact Assessment for the Gurvanbulag project with the Mongolian Ministry of Nature and the Environment (WNP press release, PR08-26). The report was prepared by environmental consultants EcoTrade, an environmental consulting firm based in Ulaanbaatar, Mongolia. The report responds to the Terms of Reference issued by the Ministry in December 2007 and describes the Gurvanbulag mine project as contemplated in Western Prospector’s Feasibility Study. It reviews the impacts, mitigation measures, operating and closure plans of the mine project, and outlines ‘best practice’ procedures.
Figure 3-4: Location and Distribution of the Saddle Hills Surface Leases.
Under terms of a ‘‘Cooperative Alliance Agreement’’ between Western Prospector and Khan Resource Inc (‘‘Khan’’), Khan agreed to purchase a portion of a certain exploration license and surface rights held by Western Prospector in the vicinity of Khan’s Dornod uranium deposits (WNP press release
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#05-02, WNP MD&A, Q3, 19 Nov 2007). This enables Khan to access, via existing production and service shafts, their Dornod Uranium No. 7 underground deposit as well as a possible southerly extension of the No. 7 deposit.
3.3 Mongolian Minerals Law
Mongolia adopted a new minerals law in 2006, (Ts. Nyamdorj 2006). The law permits the national government, under certain conditions, to share or own mineral property interests up to 34% for properties developed using private funds, and up to 50% for properties either developed using state funds or classified as a ‘‘mineral deposit of strategic importance’’, or both. The Saddle Hills Property has been classified as ‘‘mineral deposits of strategic importance’’. In April 2008, the Parliament has been considering amendments to the 2006 law, changing the words ‘‘up to’’ to ‘‘at least’’. These amendments have yet to be presented for voting. The law is unclear as to how and what form the government intends to take its ownership interest (WNP MD&A, Q3, 17 Nov 2008).
3.4 Terminology and Coordinate Systems
The ‘‘Gauss Kruger’’ (GK) coordinate system was the Soviet standard coordinate system and has no direct correlation with Western ‘‘Universal Transverse Mercator’’ (UTM). For former Soviet security reasons most maps smaller than a scale of 1: 50,000 lacked latitude and longitude so cannot be related to current industry standard coordinate (or software mapping) systems. A persistent problem when working to western standards and with western equipment, such as Global Positioning System (GPS) units is the different map base used in the former Soviet bloc countries.
The Russians used their Gauss Kruger coordinate system as the basis for all their survey data including as the base for their Saddle Hills area mines sites surface and underground surveying. Thus none of the mines have local grids which are inconsistent with regional maps. All Russian maps in the technical data package reviewed are consistent and the ability to move from one scale to another without confusion is valuable.
The Gurvanbulag deposit is covered by two zones of the UTM system: zones 49N and 50N, with a zone boundary offset of 2.2 km. The limiting longitude of 1148 is located through the middle of the deposit, bisecting the main and the west shaft of the underground workings. Within the GK system, this area is covered by only one zone, GK zone 20N, and this system was used for all drilling and database information. However, all surveying work was done using GPS units and the UTM system. Software programs are available to allow conversion between the two systems as well as latitude and longitude which is used by the MRPAM for license staking.
The Russians also used the absolute elevation for their underground elevations determination. Thus the first level at Gurvanbulag Mine is the +860 m level, second level +800 m level, etc. For westerners this is an atypical and confusing system and assumes that on deepening the mine to below sea level that elevations and level names will be preceded by a minus sign. Western Prospector have adopted the naming of the levels on depth below surface at the main shaft, the Russian +860 m level becomes 200 level and Russian +800 m becomes 260 level.
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4.0 ACCESSIBILITY, CLIMATE, LOCAL RESOURCES, INFRASTRUCTURE AND PHYSIOGRAPHY
4.1 Access
The capital of Dornod Aimag is Choibalsan which is situated 570 km by air due east of Ulaanbaatar, the capital of Mongolia. Choibalsan is connected to Ulaanbaatar by unimproved roads for half of the total travel distance (paved for approximately 300 km) of 655 kms (Figure 4-1), and by air on a regularly scheduled basis, three times weekly by Eznis Airways turboprop aircraft. The Saddle Hills Property is situated some 130 km by unimproved dirt track north-northwest of Choibalsan.
A railway allows travel to Choibalsan by train. However, the line is very circuitous linking with Russia to the north. The railway between Choibalsan and Boorj in Russia is still operated but trains no longer run along the branch to Mardhai. Rail is still in place on the branch to the Dornod deposit area and a graded rail bed exists from there on through Mardhai and to Gurvanbulag.
To support their activities in the Saddle Hills area, the Russians constructed elements of an improved road network between the town of Mardhai and the mine development areas. Much of the road gravel was waste from mine development. Although badly eroded, with bridges and culverts collapsed, this network provides the present base of road communication in the project area.
Engineering for an upgraded road from Choibalsan to the mine site has been completed by Avarga Zam LLC (‘‘Avarga’’) and filed with the Mongolian Ministry of Roads. Environmental assessment studies for road construction have been completed and approved.
The 5 km road between the Gurvanbulag mine site and the accommodation camp has been improved and up-kept by Western Prospector.
Figure 4-1: Primary Mongolian Access and Infrastructure.
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4.2 Climate
Mongolia is known to the world as the country of ‘‘Blue Sky’’. Along with Southern Siberia this part of Asia has a continental climate, with long, cold, dry winters and brief, mild, and relatively wet summers. By Mongolian standards Dornod Aimag is relatively well endowed for moisture with the average annual precipitation amounting to 250 mm. of rain and snow equivalent. In contrast southern desert areas receive as little as 115 mm. and northern mountainous Aimags 350 mm. The multiyear mean January temperature in Dornod Aimag is -20.58C and in July +19.98C (Mongolia Meteorological Service). Surface water exists through most of the year in larger rivers and lakes. The groundwater table is relatively close to surface in valley areas, where farmers are able to acquire water from 2 m deep wells. However the water table under hill features may be deeper than 150 m as evidenced by the water table level in the main shaft at Gurvanbulag.
Emeelt Mines operates a weather station at Gurvanbulag, collecting data from 2005 to present day. This weather data is presented in the report by Aker Solutions (2008).
Wild life is present in large numbers throughout the region with antelope herds numbering thousands. Wolves are also in evidence as are numerous varieties of small burrowing animals. A wide variety of birds are attracted to the area, some in course of migration, and some on a year round basis.
Nomadic herders raising horse, cattle, sheep, goat and camel are restricted for the most part to the valley floors where water is plentiful at or near surface.
4.3 Local Resources and Infrastructure
Ulaanbaatar, the capital of the country, has a population of some 900,000; some 36% of the country population of 2.5 millions (Harper, 2005). Ulaanbaatar also contains virtually all the commercial, industrial and administrative capacity of the nation. It can readily support exploration parties provided specialist equipment is imported in anticipation.
Dornod Aimag has a population of 74,000 persons of which 50% are urban residents of Choibalsan (Harper, 2005). Prior to the withdrawal of the major Russian Soviet presence in Mongolia in the early 1990s the population of Choibalsan was probably double that due to the large military establishment based there including army and air force contingents. The major industry in Choibalsan is an open pit coal mine which supplies coal to a large mine mouth power station less than 1 kilometre away, both on the outskirts of the town. It is also the administrative capital, transport and communications hub of the region.
Other than the industrial and mining activities in the Choibalsan area the primary activities in Dornod Aimag are agricultural; animal husbandry and to a lesser extent crop production. The Soums immediately north of Saddle Hills annually produce a large crop of potatoes.
When Russian personnel were exploring and developing the Saddle Hills area uranium deposits they closed the area to non-essential personnel, moved out all Mongolians and secured the area with 3,000 military personnel in support of the 10,000 plus persons working on the project, all of whom were housed in the rapidly built town of Mardhai, accessed by a branch rail line off the Boorj — Choibalsan railway. After the cessation of Russian exploration, development and production from the mines in the early 1990s the town of Mardhai was abandoned and since then a few Mongolians have moved there, largely independently engaged in the scrap metal retrieval and recycling business of infrastructure including the railway line and buried water pipes (Harper, 2005). There are no longer any usable buildings or serviceable infrastructure.
A 110,000-V power line, jointly financed by Emeelt Mines and XinXin Mining Co. Ltd. (XinXin) was built to deliver power from the Choibalsan thermal power station to their respective project sites (Figure 4-2). The line runs 117 km north-northeast to the Emeelt Mines’ sub-station and a further 7 km east to the XinXin sub-
–IVA-27– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA station. Contracted supply is up to 10 MW of electricity each, sufficient for full production at both sites. The line was commissioned in 2008 and both companies have placed diesel generators on standby. A low voltage distribution line runs from Choibalsan to Gurvanzagal. Satellite facilities at the mine and camp offices provide telephone, internet and television communications.
A Skytel cellular telephone tower has been erected and a mobile phone service is now operational.
Mine site buildings currently include an office, core shack, mine dry and warehouse, with temporary head- frame and hoist room. Infrastructure will include process building, head-frame and hoist building, maintenance garage, coal-fired heating plant, sulphuric acid plant, oxygen plant and explosive magazines when the mine is operational.
Accommodations consist of a 200-person camp with kitchen, dining room, washroom and laundry facilities, medical clinic, offices and recreation building. These facilities will be expanded to accommodate additional personnel during construction and operation phases.
Water will be retrieved from a fresh water well which will be located approximately 2 km south of the mill building. The accommodation camp has its own water supply.
Figure 4-2: Local infrastructure at the Saddle Hills project area
4.4 Physiography
The Gurvanbulag deposit is located in a terrain of gently rolling hills, hence the name ‘‘Saddle Hills’’. This style of terrain extends north-easterly for more than 100 km and is up to 40 km wide. To the south, extending south past Choibalsan the terrain becomes much flatter as it begins it gentle slope to the northeast flowing Kherlen River, the third longest river in Mongolia. Both terrain blocks are characterized by steppe grassland vegetation with sparse coniferous tree cover making its appearance in the Saddle Hills area, locally on slopes sheltered from the prevailing winds. The area straddles the triple point junction of the Mongol-Daurian Mountains Forest Steppe to the northwest, the Middle Khalkh Steppe to the south and the East Mongolia Steppe to the east as defined by Russian and Mongolian scientists (Jigjidsuren and Johnson, 2003).
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5.0 HISTORY AND PREVIOUS EXPLORATION
5.1 Historical Russian Exploration
The following section summarises the history of Russian exploration in the Saddle Hills project area up until 1989. A full account of historical exploration is available in Harper (2005) and SRK (2006).
Russian exploration occurred between 1944 and 1989. Prospecting for uranium in the Choibalsan area begin in 1971 with the first reference to uranium occurrences in the district in 1975 where radiometric surveying identified uranium anomalies (Chirzov et al. 1976). Subsequent to these surveys, a number of regional and local exploration programs were conducted including geological mapping at 1: 50,000 and 1: 200,000 scales, airborne and ground spectrometric surveys, geochemistry and trenching.
The Gurvanbulag deposit was explored and developed by the Ministry of Geology of the Soviet Union in the 1970s and 1980s. Underground development at Gurvanbulag comprised three vertical shafts with the deepest to approximately 287 m with limited development on the 140 m (+920 Russian level) and 200 m levels (+860 Russian level) with most development on the 260 m level (+800 Russian level).
Underground diamond and percussion drilling at Gurvanbulag targeted density of 25 by 25 m but in many areas as holes fanned out from levels above and below the zone, spacing along sections was closer to 10 m.
Initially surface drilling was drilled at 200 x 100 m spacing with detailed follow-up of 100 by 50 m grids in areas identified as mineralized. All holes were radiometrically probed.
The property was abandoned with the pullout of all Russian military and civilian personnel from Mongolia in the early 1990s following the collapse of the former Soviet Union. The shafts were capped, surface infrastructure removed or destroyed and underground workings were allowed to flood.
Exploration and drilling for uranium and underground development also occurred at Mardaingol and Dornod in the Saddle Hills project area.
5.2 Historical Russian Resource Estimates
For the Saddle Hills area, Harper (2005) stated: ‘‘Historic resources calculated by the Russians for the three deposit areas (Gurvanbulag, Mardaingol and Dornod-Khavar) during the period from 1982 through 1989 1 aggregate 4.27 million tonnes grading 0.245% U3O8 for a contained 23.0 million lbs, in their C category of 2 resource and 10.65 million tonnes grading 0.140% U3O8 for a contained 32.9 million lbs, in their C category. In addition they had demonstrated quantities of P1 category resources and displayed a successful ability to upgrade P1 resources to C2 category resources in consecutive years of major surface drilling programs through the 1980s to increase the density of definition sampling’’.
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Table 5.1, taken from Harper (2005), summarises the C1 and C2 category resources of the Gurvanbulag deposit (Central, Intermediate and Southwest) defined by the Russians. These resources are not compatible with resources or reserves as those terms are defined under Canada’s National Instrument 43-101. The location of these deposits on the Saddle Hills Property is shown in Figure 3-2.
Table 5.1: Summary of Gurvanbulag Resources in all area deposits (after Rogov and Urchenko (1987) and Harper (2005) as of 1 July 1987)
Category C1 Category C2 Area Tonnes % U Tonnes U Tonnes % U Tonnes U
Central 4,214,059 0.208 8,761 3,204,219 0.118 3,788 Intermediate 2,690,408 0.104 2,800 Southwest 451,337 0.160 724 TOTAL 4,214,059 0.208 8,761 6,345,964 0.115 7,312
Expressed as U3O8 %U3O8 Tonnes U3O8 %U3O8 Tonnes U3O8
0.245 10,338 0.136 8,628
% U Tonnes U % U3O8 Tonnes U3O8
All zones and C1+C2 categories 10,560,023 0.152 16,073 0.179 18,966
One area of Gurvanbulag’s C1 category resources was recalculated by Harper (2005) in a manner consistent with resources as defined by the Canadian Institute of Mining and in accordance with NI 43-101 to verify tonnage and grade reported by the Russians. Harper deduced that ‘‘resources considered by the Russians to be defined as C1 ranking are categorized as Inferred Resources as defined in NI 43-101. There are no Indicated or Measured Resources as defined in NI 43-101. There are no Mineral Reserves’’. Table 5.2 outlines C1, historic inferred resources for the Gurvanbulag Central Deposit.
Table 5.2: Russian Historic Inferred Resources for the Gurvanbulag Central Deposit (after Rogov and Urchenko 1987 and Harper 2005, as of 1 July 1987)
U3O8 6 Area Mineralisation (T) % U U (T) % U3O8 (lbs x 10 )
Gurvanbulag Central zone 4,214,059 0.208 8,761 0.245 21.75
It should be noted that all resource estimates quoted above are based on prior data and reports obtained and prepared by previous operators and information provided by the State. The Company is not treating the mineral resource estimates as NI 43-101 defined resources verified by a qualified person therefore the historical estimates should not be relied upon in whole or in-part.
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5.3 Resource Estimate, SRK 2006
SRK Consulting (Canada) Inc. (‘‘SRK’’) prepared a 43-101 compliant Mineral Resource estimate of the Gurvanbulag Central Deposit using underground and surface drill holes from both Russian historical drilling and the Western Prospector 2005–06 drill program (SRK 2006). The Russian data was supported by 110 confirmation diamond drill holes completed by Western Prospector. SRK subjected the database to quality assurance tests and statistical comparisons between the Russian and Western Prospector data.
SRK utilised a geological model consisting of two mineralized horizons that follow the upper and lower contacts of a laterally continuous, stratigraphically distinct, mixed volcaniclastic and obsidian-bearing unit, with an average dip of 158. The envelopes used a modelling-cut off grade of 0.07% U3O8 and a minimum true width of 1.5 m. Assays and unsampled intervals within these two envelopes were composited to 0.5 m lengths, producing 12,405 composites.
Because of the undulating nature of the Gurvanbulag horizon, SRK flattened the composites into two horizontal planes (hangwall and footwall) using Gemcom’s ‘Unwrinking tool’ to facilitate interpolation. Grade estimates were made using Ordinary Kriging with separate runs and different parameters for the hangwall and footwall.
SRK classified estimated blocks that met the following criteria as Indicated Mineral Resources:
. Minimum of five samples;
. From at least two drillholes;
. With a maximum average distance of 35 m between samples;
. A greater than 50% change of being above the cut-off grade;
. Falling within a manually digitized domain designed to contain closely spaced mineralized areas in the vicinity of underground workings.
All other estimated blocks were assigned to Inferred Mineral Resources.
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The SRK resources were quoted at a cut-off grade of 0.07% U3O8 and were based on a long term price for
U3O8 of USD47/lb and an estimate of potential operating costs. Table 5.3 presents the SRK resource estimate for the Gurvanbulag Central Deposit. Detailed results of the study are reported in the ‘‘Independent Technical Report and Resource Estimate for the Gurvanbulag Deposit’’ written by SRK and dated 17 November 2006. This report can be viewed at www.sedar.com.
Table 5.3: Gurvanbulag Central Deposit, SRK Mineral Resource Estimate, 2006.
Hanging Wall Footwall Totals
Tonnes Tonnes Tonnes Lbs U3O8
(000’s) % U3O8 (000’s) % U3O8 (000’s) % U3O8 (000s)
Indicated Mineral Resources 570 0.19 2,260 0.22 2,830 0.22 13,633 Inferred Mineral Resources 700 0.13 1,970 0.15 2,670 0.15 8,642
5.4 Previous Mineral Processing and Metallurgical Testing
Metallurgical testwork designed by Melis for the Gurvanbulag deposit was carried out at SGS Lakefield, in June 2006. The testwork program included grindability, leaching, liquid/solid separation, solvent extraction, precipitation and tailings preparation. Melis developed a simplified processing flowsheet for the purpose of preliminary economic assessment. Testing was undertaken only on drill core. It was noted that access to the underground workings would allow collection of samples not subjected to differential washing that occurs during drilling.
Metallurgical testwork results are summarised in the ‘‘Independent Technical Report on the Results of a Preliminary Economic Assessment, Gurvanbulag Uranium Deposit, Mongolia’’, authored by Micon International Ltd., dated 27 November 2007. This report can be viewed at www.sedar.com.
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6.0 GEOLOGICAL SETTING
This geological section has been variously sourced and summarized from Western Prospector Year End internal reports and SRK (2006) report.
6.1 Regional Geology
Mongolia forms part of the Central Asian Fold Belt. Rocks from the belt are as old as 2.65 Ga. and indicate active ongoing geological history with few apparent pauses. A widely held view is that of progressive crustal concentration of uranium through time. Uranium values enriched to several times crustal abundance are common in the youngest felsic volcanic rocks of Mesozoic age. Under ideal structural and hydrothermal conditions these became fertile sources for mineable deposits as found at Strel’tsov in Russia and Saddle Hills.
Mironov (2005) divides Mongolia into seven fold belts or fold systems as shown in Figure 6-1. The Saddle Hills project area is part of the Central Mongolia Fold Belt. This belt trends east-west in central Mongolia, then swings northeast through northern Dornod Aimag and into Russia and China. The fold belt is about 1,700 km long and 100 to 300 km wide. It is characterized by Proterozoic gneisses, schists, and anatectic granites occurring as inliers in early Paleozoic volcanic and sedimentary rocks. Silurian and Devonian sandstones and shales are widespread. Upper Paleozoic volcanic and sedimentary rocks unconformably overlie earlier Proterozoic and Paleozoic rocks. Folding, granite intrusions, the Variscan orogeny and erosion closed the Paleozoic and prepared the platform on which perhaps 85 million years later the Jurassic and Cretaceous uranium bearing bimodal basalt-rhyolite complexes were erupted.
Faults have broken up the Central Mongolia Fold Belt into blocks, the northeastern one being the Kerulen block. Within the Kerulen block northeast faults parallel to regional strike and northwest cross faults determine the distribution of outcrops of basement rock and Mesozoic volcanic structures.
Figure 6-1: Tectonic Fold Belts of Mongolia
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Mironov (2005) further divides Mongolia into a hierarchy of ‘‘uranium ore provinces’’. The deposits of the Saddle Hills Property occur in the Argun-Mongolia Uranium Province. In Mongolia this province approximates the area and location of the Central Mongolian Fold Belt, and extends into Russia to include the Strel’tsov uranium deposits, located about 330 km northeast of the Saddle Hills project area.
In the Argun-Mongolia uranium province, faulted but little folded bimodal mafic to felsic volcanic and sedimentary rocks of latest Jurassic and earliest Cretaceous age overlie a complex Proterozoic-Paleozoic basement described earlier. A pronounced erosional time break, perhaps extending from the end of the Permian to the middle of the Jurassic, about 85 million years, separates events in the basement from the earliest Mesozoic volcanic rocks.
6.2 Local and Project Geology
The North Choibalsan Uranium District of Mironov (2005) consists of five volcanic-tectonic structures or complexes: Upper Turgem, Turgem, Ugtam, Dornod and Engershand.
The Saddle Hills project area occurs within the Dornod Volcanic Tectonic Structure (‘‘DVTS’’) and consists of the Gurvanbulag deposit, as well as Dornod, Mardaigol and Nemer and numerous uranium occurrences. Dornod is about 25 km east of Gurvanbulag, and Mardaigol is about 6 km northwest of Dornod.
6.2.1 Saddle Hills Stratigraphy
The DVTS consists of three volcanic depressions or down-thrown tectonic blocks; Ulaan, Erkh(tiyskiy) and Mardaigol and basement highs. The stratigraphic profiles in the three down-faulted blocks are similar but not identical. Each has a lower succession of sedimentary rocks, basalts, intermediate tuffs and rhyolites, capped by a thick upper succession of felsic volcanic rocks. This is a typical bimodal basalt-rhyolite association. The volcanic rocks erupted in late Jurassic to early Cretaceous time. K-Ar dates have large spreads suggesting that the volcanic eruptions may have occurred over a 5 million to 35 million year period.
The volcanic succession rests on a basement of Proterozoic to late Paleozoic age. The basement rocks have pronounced paleo-relief from pre- and syn-volcanic erosional and tectonic processes.
The earliest manifestation of late Jurassic activity was flooding of paleo-valleys and filling of their bottoms with fine to coarse sedimentary debris. Much of this is rich in carbonaceous plant remains. Later volcanic flows and pyroclastic eruptions and inflow of more sedimentary debris gradually filled the valleys. Eventually the last ridges were covered. The distribution of lower strata is therefore uneven, being dependent on the basement paleo-topography. Only when the paleo-high had been covered, did later volcanic and sedimentary deposits form more continuous sheets.
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The geology of the Saddle Hills area comprises two structural stages; a lower structural stage of basement rocks and the upper structural stage composed of Mesozoic volcanics and sediments as outlined in Table 6.1 below.
Table 6.1: Stratigraphy of the Saddle Hills Property
Maximum Thickness (m) Complex Rock Type 200 Upper Subcomplex Trachyandesites 10 Conglomerates, sandstones Unconformity 600 Middle Subcomplex Trachyrhyolites 250 Spheroidal and flow felsites 700 Massive flow felsites (ignimbrites), spherulitized with lenses of tuffs, volcanic glass (Gurvanbulag horizon) 150 Vitroclastic ashy felsite tuffs 200 Dacites, rhyolites, their lava breccias and tuffs 150 Vitrolithoclastic felsite tuffs 30 Conglomerates, sandstones, tuff-sandstones, siltstones Unconformity 30 Lower Subcomplex Amygdaloidal andesite-basalts 15 Conglomerates, sandstones, siltstones 160 Trachyandesites/trachydacites, their lavas, breccias, tuffs 20 Sandstones, tuffaceous sandstones 120 Amygdaloidal andesite-basalts 15 Sandstones, tuffaceous sandstones 140 Quartz-feldspar porphyries and their tuffs 70 Dacitic tuffs, tuffites 130 Conglomerates, sandstones, siltstones, acid tuff lenses Major Unconformity Basement Proterozoic crystalline slates, schists, gneisses and amphibolites intruded by Paleozoic gabbro, gabbro-diorite and granitoid intrusives
Basement Rocks (Lower Structural Stage)
The rocks of the basement and rim are represented by two complexes of different ages: Proterozoic metamorphic rocks of the substrate and Paleozoic intrusions. According to borehole and geophysical data, the basement relief is complex, due to erosion and tectonic processes. The Central and South-west ore-bearing areas are located over the slopes of the largest of the basement depressions.
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Mesozoic Rocks (Upper Structural Stage)
The Upper Mesozoic sedimentary-volcanic horizons are divided into the Lower, Middle and Upper Subcomplexes, separated by unconformities.
. The Lower Subcomplex is an intercalation of layers of quartz-feldspar porphyries, trachydacites and andesite-basalts with horizons of tuff-sedimentary rocks. The total thickness of the subcomplex varies from 150 to 450 m;
. The Middle Subcomplex comprises structurally and texturally varied layers of volcanic rocks, with a total thickness of 300–800 m;
. The Upper Subcomplex includes layers of trachyandesites a few hundred metres thick.
The sedimentary-volcanic layers have a gentle monoclinal dip to the south-east of 5–20 degrees. Near the margin and adjacent to major faults the dip increases to 30–40 degrees.
6.2.2 Gurvanbulag Deposit Stratigraphy
The stratigraphic column of the Gurvanbulag deposit is presented in Figure 6-2. The Gurvanbulag uranium deposit occurs in close spatial association with an obsidian horizon, up to 15 m thick in the Middle Subcomplex. Mineralization is hosted in complex, highly altered clays in vitroclastic, ashy felsite tuffs in the hangwall and footwall immediately adjacent to the volcanic glass (Figure 6-3). The glass is commonly barren of uranium mineralization. Mineralization as strata-bound lenses is also associated with other lithologies of the Middle and Lower complexes at depth below the Gurvanbulag horizon. Minor localized vein-type mineralization is hosted by steeply-dipping faults, above and below the Gurvanbulag horizon.
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Footwall Ashy Tuffs
The Russian vitroclastic tuffs range from well-bedded ash, to fine lapilli tuffs to coarse fragmental agglomerates to a mottled purple and beige indefinable rock. These rocks are mainly green and purple but it is uncertain as to whether this is due to a change of oxidation state. Sections of the tuff have a high clay content. The fragment size suggests a fairly distal deposition away from the vent source. Well-bedded ash and fine lapilli occurs immediately below the volcanic glass horizon. Mineralization can occur in these tuffs, along bedding conformable structures that parallel the gently dipping overlying Gurvanbulag horizon and associated obsidian.
Figure 6-2: Stratigraphy of the Gurvanbulag Deposit
Host Rocks of the Saddle Hills Uranium Deposits
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Figure 6-3: Geology of the Gurvanbulag Central Deposit
Volcanic Glass (Gurvanbulag Horizon)
The obsidian commonly occurs at the base of the hangwall felsites and outcrops northwest of the deposit (Figures 6-3 and 6-4). The horizon is a relatively thin sheet of astonishing extent and continuity, traceable for up to 15–20 km. The glass ranges from 0 m to 12 m thick, commonly 3 m to 8 m thick with an aerial extent estimated at 159 km2 by Mironov (2005). The obsidian is gently dipping at 5–20 degrees and the down-dip extension of the obsidian is unknown.
The horizon is dated at 150 Ma, with some devitrification along the contacts with the tuffs but for the most part fresh. The least altered is vitreous black with a conchoidal fracture. All stages of devitrification to complete replacement by light grey, putty-like clay are observed.
No analogue of this extensive horizon is known and its genesis has been debated. Unusual conditions must be in place to explain the unusual fluidity and extent of the volcanic glass. Conditions similar to those at Strel’tsov of high volatile content and abnormally high melt temperatures may explain the fluidity of a felsic melt that should be quite viscous. A greater understanding of this horizon is needed to help understand the distribution of the uranium deposit.
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Figure 6-4: Cross-Section of the Gurvanbulag Central Deposit (9400N)
Note that smaller obsidian horizons are associated with the two other low angled ‘‘Russian faults’’, Khurtynbulag and Khayakh, at a higher stratigraphic level and associated with Gurvanbulag Intermediate and Southwest.
Hangwall Felsites
The felsitic ignimbrites above the Gurvanbulag horizon are very fine grained, and coarse explosive fragmentals usually associated with ignimbrites are not present. These felsites are hematized and silicified immediately above the mineralized zone. Columnar jointing is prominent and this jointing along with high silica and fine grain size causes the outcrop to be very hard and brittle, sometimes resembling a breccia in the drill core. Flow banding marked by seams of hematite and eutaxitic texture (fiamme), may parallel regional dip. The felsites are impervious and may have acted as barriers to hydrothermal solutions. The exceptions to this are steeply dipping faults (70–908) that cut the felsites and are variably mineralized.
6.3 Structure
The Gurvanbulag, Dornod and Mardaigol deposits occur in three separate downthrown ‘‘blocks’’ or grabens, as described above. The blocks are separated from each other by prominent block defining faults, some with measurable offsets of the local stratigraphic contacts.
Prominent steeply dipping faults trend northeast, northwest and north-northwest and may have been active during more than one geological time period. It is possible that these faults are regional lineaments and may have controlled the location of crustal weaknesses and volcanic eruptions.
At Strel’tsov the structure is a well established caldera with irregular outline and surface area of about 150 km2. It is not known if caldera-like subsidence also took place at Saddle Hills. The dip of stratigraphy in all three downthrown blocks/grabens is gently southeast, mostly 0–20 degrees.
Intrablock faulting is prominent as steeply dipping faults, mostly 70–90 degrees. These faults are abundant and penetrate the entire stratigraphic succession, as shown in Figure 6-5. Laterally, they may be traced for great distances, but rarely offset contacts by more than a few metres. A defining feature is that many steeply dipping faults are not single planes, but wide zones of parallel fractures. The same is observed at Strel’tsov, where steeply dipping fracture zones may be hundreds of metres wide.
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Dominant fault directions of the steeply dipping faults are northwest, north-south (meridional), northeast and east-west (latitudinal). Mineralisation at the Gurvanbulag Central Deposit appears to be associated with and concentrated along north-south steeply dipping faults. These structures appear to be ore-controlling and ore-containing throughout the Saddle Hills Property.
Gurvanbulag mineralisation is interpreted by the Russians to be associated with and controlled by an extensive detachment, the Gurvanbulag fault. This ‘fault’ rarely offsets steeply-dipping faults nor has an obvious crush zone. There is disagreement if these often mineralised and bedding parallel structures are true faults. A further obstacle involved in referring to the main Gurvanbulag bedding conformable zone as a fault is that the surface contains many small irregularities such as depressions and slight rises. The ‘fault’ faithfully follows these irregularities which a detachment fault is unlikely to do.
Figure 6-5: Intra-block faulting identified by Russian mapping and confirmed by Western Prospector exploration, Gurvanbulag Central Deposit
6.4 Hydrothermal Alteration
Most alteration studies in the Saddle Hills area were done in the 1970s and 80s by various Russian workers. Reports agree that alteration took place in several stages, and can broadly be divided into either high temperature alteration in the basement or low temperature uranium-bearing alteration.
High temperature alteration is for the most part confined to basement rocks and some early volcanics. K- Ar dates range around 195–150 Ma. The Ulaan Pb-Zn breccias and skarns formed during this period.
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Low temperature alteration formed near the end or after volcanism stopped. The intensity of the alteration is largely determined by rock composition, and usually more than one kind of alteration is superimposed on others. Hydromica alteration formed around 140 Ma, prior to uranium mineralization. This alteration was pervasive forming strata shaped aureoles and increasing the porosity of the host rocks. Uranium was accompanied by weak silicification, hematization, chlorite and some fluorite. The last stage of alteration included quartz, fluorite, hydromicas, chlorite, kaolinite, montmorillonite, zeolites and carbonates.
Alteration of the Gurvanbulag horizon consists of white, putty like clay minerals, silification, hematite, chlorite, carbonates, albite, analcite and fluorite along the upper and lower contacts of the obsidian. Hematization and silicification of the felsitic ignimbrites is intense along the lower contact with the obsidian.
Steeply dipping faults and fractures are sometimes bleached and have white clay and sometimes hematite, fluorite, uranophane and manganese as coatings on the fracture plane.
7.0 DEPOSIT TYPES
The SRK (2006) report gives an excellent overview of uranium mineralization deposit types. Much of the following is summarised from this report and the reader should refer to this report for detailed information.
The deposits of the Saddle Hills Property fall within the broad classification of a volcanic-hosted uranium deposit with an U-Mo-F association as outlined in section 7.4 below.
7.1 Uranium Deposit Classification Systems
A variety of classification systems exist for uranium deposits and the reader is referred to the SRK (2006) report for an extensive review of these systems. Most schemes rank deposits on the basis of their economic significance with volcanic/igneous associated deposits ranked down the list. Some systems are confusing and often very general in nature.
7.2 Time and Uranium Deposits
There are four major periods of uranium concentration in four of the major deposit types (Derry 1980, Robertson et al. 1978), with most of the world’s uranium coming from three of these:
. Archean-Early Proterozoic: Witwatersrand (2.9 Ga) ad Elliot Lake (2.4 Ga) conglomerates. Uranium in the deposits is thought to be paleo-placer accumulations;
. Mid-Proterozoic: Unconformity type deposits dated at 1.8 to 1.4 Ga with examples in Canada, Australia and Gabon (Marmont 1987, Ruzicka 1993);
. Cambrian-Devonian: Black shales with grades of about 300ppm in Sweden and USA. These have not been mined;
. Mesozoic: Uranium in sandstones. These are more far widely distributed than the earlier deposit types.
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7.3 Source of Uranium Production
Most uranium production comes from conglomerates, sandstones and unconformity types as referred to in section 7.2 as well substantial production from the Olympic Dam breccia complex in Australia. Kazakhstan expects to produce 15% of the world’s uranium from sandstone deposits.
Uranium occurrences in volcanic rocks form a subordinate deposit type even though they occur in many countries.
7.4 Volcanic-hosted Uranium
This deposit type has been defined by Bagby (1986) with the Dornod and Gurvanbulag deposits given as type examples (Obolenskiy et al 2007). Mineralisation is usually associated with calderas in continental rift environments.
Common host rocks are high-silica alkali rhyolite, potash trachyte and peralkaline and peraluminous rhyolite rocks in subaerial to subaqueous near-surface volcanic complexes. Common to all uranium deposits in volcanic rocks is their occurrence in a bimodal suite of rocks consisting of large amounts of high silica rhyolites
(72–78% SiO2) which overlie intermediate and basaltic units. Usually, this succession overlies a basement of metamorphic rocks which contains a high proportion of intrusive granitoids.
Mineralization occurs in fractures and breccias occurring along the margins of shallow intrusives. Uranium minerals include coffinite, uraninite and brannerite with associated pyrite, realgar-orpiment, leucoxene, molybdenite, fluorite, quartz, adularia and barite. Host rocks are altered to kaolinite, montmorillonite and alunite, with spatially associated silicification and accompanied by adularia. Complex and intense hydrothermal alteration is present.
This deposit type only makes up a small proportion of the world’s uranium resources. The Russian’s identify U-Mo-F association as a dominant sub-type within the volcanic type classification. Occurrences can be found as follows:
. Canada, Michelin deposit in Central Mineral Belt of Labrador;
. United States, McDermitt caldera in northwestern Nevada (Aurora uranium occurrences) and in Marysvale, Utah;
. Margarita Mine Mexico;
. Australia, Ben Lomond and Maureen Queensland;
. China, Tianmujian caldera, Jaingxi province;
. Kazakhstan;
. Russia, Strel’tsov caldera;
. Argentina, Cerro Galan caldera;
. Mongolia, Dornod and Gurvanbulag deposits.
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Uranium deposits in volcanic rocks occur as hydrothermal veins in steeply dipping faults and shear zones which may cut a complex volcanic-sedimentary succession or basement. Bedding conformable deposits are generally small if present.
Hydrothermal uranium-bearing veins in a volcanic setting differ little from uranium-bearing veins in other settings. As a class, vein type deposits appear to be independent of rock types. However, in a volcanic setting they do appear to be a special case in that rhyolites are always present.
The Gurvanbulag Central Deposit differs from other volcanic-hosted uranium deposit type by being associated with a laterally extensive volcanic glass horizon and extensive bedding conformable uranium mineralisation above and below this horizon. No comparable deposit is known and there is no sub-type classification that fits this deposit.
8.0 MINERALIZATION
The following summarises overviews of Gurvanbulag mineralization reported in Harper (2005), Western Prospector year end reports and the SRK (2006) report.
The uranium deposits of the Saddle Hills project area form part of the northeast trending Argun- Mongolia uranium province. This uranium province extends from the Gobi desert in south-central Mongolia to about 250 km into Russia where the province hosts the Strel’tsov uranium deposits. The Gurvanbulag deposit shares similar features with the Strel’tsov deposit but differs significantly as the deposit conforms to stratigraphy as opposed to being hosted by steeply-dipping veins.
Uranium mineralization is associated with the DVTS, occurring in basement rocks and the Lower and Middle Subcomplexes. The best concentrations occur in the lower part of the Middle Subcomplex (Gurvanbulag deposit) and the upper parts of the Lower Subcomplex (Dornod). Mineralization in the DVTS was discovered by the Russians to at least 550 m below surface.
8.1 Styles of Mineralization
Veins occur most commonly in volcanic rocks laced with steeply dipping sub-volcanic intrusions, feeder pipes or fissures. This relationship holds true for Mardaigol and Dornod. Gurvanbulag has no known feeder system and true vein deposits are few and localized. The best mineralization at Gurvanbulag occurs in bedding conformable and sheet-like bodies.
Mineralization at Strel’tsov occurs at six lithostructural levels, one within the basement rocks and the remainder in the volcanic-sedimentary caldera fill. Mironov (2005) recognises seven lithostructural levels similar to Strel’tsov which are described in detail in SRK (2006) and summarised below:
. Lithotectonic Level 1: Uranium (and molybdenum) in veins, lenticular zones, and stockworks controlled by steeply dipping faults in feldspar porphyry flows and extrusions;
. Lithotectonic Level 2a, 2b, 3: Three levels that are gently-dipping bedding conformable alteration zones in the Ulaan block. Mironov refers to them as ‘‘master faults’’. They occur in the middle of the Middle Subcomplex. Each ‘‘fault’’ forms the base of felsitic rocks, often associated with obsidian. In stratigraphic order they are Khurtynbulag fault at the highest stratigraphic level, followed by Khayakh and Gurvanbulag faults at successively lower levels (Mironov lithotectonic levels 2a, 2b and 3).
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The Gurvanbulag horizon being at the lowest stratigraphic level of the three ‘‘faults’’, is the most widely developed, underlying much of the Ulaan block. The economic importance of the Gurvanbulag horizon far exceeds that of the other two with as much as 88% of resources outlined in the Ulaan block occurring at the Gurvanbulag horizon. The Gurvanbulag ‘‘fault’’ carries mineralization in both hanging and footwall clays of a volcanic glass horizon at the base of the massive ignimbrite. Mineralization varies greatly in thickness and grade. Small, localized bedding conformable deposits occur in tuffaceous felsites below the Gurvanbulag horizon. The Gurvanbulag horizon extends over 159 km2 of the Ulaan block. Mineralization is known over a 43.1 km2 area. Minor mineralization also occurs in steeply dipping faults that cut the overlying felsitic ignimbrites;
. Lithotectonic Level 4: Uranium contained in Oligophyric rhyolites at the base of the Middle Subcomplex. Eg. Dornod 2a;
. Lithotectonic Level 5: Uranium associated with organic matter in sedimentary rocks best developed in low angle ‘‘detachment faults’’ (stratabound). Eg. Dornod 2b at the Dornod open pit;
. Lithotectonic Level 6a: Basaltic andesite breccia at the top of the Lower Subcomplex hosts uranium- bearing sheet-like zone. Eg. Dornod 7;
. Lithotectonic Level 6c and 7: Uranium (and molybdenum) occurring as veins in the basement and in sediments associated with organic matter above the basement unconformity. Eg. Nemer;
. Lithotectonic Level 7: Uranium mineralisation in the basement. Occurrences only in the DVTS, which are economically insignificant. It should be noted that at Strel’tsov, two large deposits are hosted by the basement, 20 m below the unconformity with overlying volcanics. Most uranium hosted in basement rocks has been found below uranium in overlying volcanic rocks. There is potential to find mineralisation in the basement below the Gurvanbulag deposit.
8.2 Structure and Controls on Mineralization
Mineralization is best developed where paleo-valleys have formed within the upper parts of the basement unconformity, and diminishes toward the margins and over basement highs. If the paleo-valleys are controlled by block faulting, the implication is that mineralization shares a spatial relationship with grabens that have the greatest throws. The position of the Central Gurvanbulag deposit above basement escarpments with the greatest elevation change implies a relationship with long-lived, crustal scale faults or lineaments.
The role of steeply dipping ‘faults’ is ambiguous. The Russians associated most uranium mineralization with faulting. Most often the mineralization is described as ‘related to’, ‘associated with’ or ‘controlled by’ one or other steeply dipping fault or the intersection of faults. When faults or fractures are as common as they are at Saddle Hills they are assigned a role in mineralization.
Mineralization occurs in steeply dipping faults in the overlying felsitic ignimbrites above the Gurvanbulag horizon. It is most likely that this is secondary mineralization, due to the mobility of uranium and movement of fluids along these faults.
It has been well established by the Russians that physical and chemical conditions were such that at Strel’tsov and Saddle Hills some levels of the stratigraphic succession are better hosts than others. The Russians leaned strongly toward tectonic explanations. For them, uranium precipitated mostly where hydrothermal solutions could exploit tectonically prepared openings. This explains uranium in steeply dipping fractures, but does not adequately explain the low angle bedding conformable mineralization. The Russians interpreted these
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8.3 Uranium
Uranium at Gurvanbulag comprises fracture coating yellow uranophane and fracture, vein and disseminated black pitchblende or coffinite. Coarse grains of pitchblende or coffinite in veins and planar sheets of same of fractures are more common than disseminated grains. Uranophane, beta-uranotile, autunite etc. are found in the zone of oxidation. These minerals fill small-scale fissures, form pockets and insets of various forms and cement mineralized fissures.
There is little written on the genesis of the uranium at the Saddle Hills project area. The Russians suggested the following events occurred:
. Initial porosity formed through early syn-volcanic or tectonic processes ahead of alteration;
. Pre-uranium hydromica alteration. Solutions preferentially followed high porosity paths of least resistance. Alteration further increases porosity;
. Uranium-bearing solutions preferentially follow channels of altered, high porous rocks;
. Reductants at the site of uranium deposition eg. Organic matter, iron sulphides, titanium oxides.
Deposits that appear to be bedding conformable, such as Gurvanbulag, were explained by the Russians as occurring along detachment faults. However, these faults do not displace features and little movement is indicated. An alternative explanation is given in Western Prospector internal year end report for 2005:
. High silica (uranium-enriched) magma, made fluid by contained volatiles (eg. Fluorine) flowed over wet, porous tuffs. It consolidated and cooled rapidly forming an extensive volcanic glass horizon. The top and bottom of the glass cooled more rapidly than the interior forming cooling contraction cracks;
. Felsitic ignimbrites erupted soon after with their base cooling rapidly against the glass forming cooling contraction breccias in the base of the ignimbrites;
. Therefore initial high porosity formed over an extensive area on either side of the obsidian;
. Hydrothermal fluids preferentially flowed along these high porosity horizons, altering breccias to hydromicas and further increasing porosity;
. Later uranium-bearing hydrothermal fluids would flow along these horizons and precipitate uranium.
The source of the uranium at Saddle Hills is unknown but recent work at Strel’tsov by a joint Russian- French research team (Chabiron et al 2001, 2003) concludes that the uranium is sourced from the host felsic volcanic pile and its basement rocks. The Strel’tsov district has yielded more than 100,000 tonnes of uranium to date and is estimated to contain an additional 128,000 tonnes in reserves (www.wise-uranium.org).
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8.4 Other Mineral Deposits and Occurrences
Base metals occur in the project area as veins in the basement and in the Pb-Zn (+Au+Ag) breccias and skarn of the Ulaan deposit.
The Ulaan deposit is located on the northeast margin of the Ulaan block, 7 km east of the Gurvanbulag deposit. The mineralized volcanic breccia pipe(s) cut volcanic rocks of the Lower and Middle Subcomplexes and can be traced to the basement. The pipes are located along the northwest-trending Mukhar fault system. The mineralogy of the deposit suggests that alteration at Ulaan formed at a much higher temperature than alteration associated with the Saddle Hills uranium deposits. A small uranium resource occurs with the deposit.
Gold occurs in veins in early Mesozoic diorites and granodiorites and placers derived from the veins. Two veins occurrences are 25km northeast of Dornod and several others 30–65 km northwest of Gurvanbulag.
Three deposits and many occurrences of fluorite in quartz veins occur in the Saddle Hills project area. The deposits are epithermal, forming at low temperatures. Northwest, North-South and Northeast faults are important structural controls on vein orientation. Grades of fluorite range from 20–95%. There is no mention by the Russians that the fluorites are radioactive, however it should be noted that the Strel’tsov deposit was discovered by drilling below a vein-hosted fluorite occurrence.
9.0 EXPLORATION
9.1 2004 Exploration Program
An extensive overview of Western Prospector’s exploration program for 2004 is present in Harper (2005). The following is a summary of exploration undertaken:
. Commencement of systematic acquisition of exploration licenses in the Saddle Hills area after assessment of the uranium potential of the Gurvanbulag deposit;
. Confirmation of mineralization at Gurvanbulag by hand held spectrometer readings of grab samples
from rock dump adjacent to shaft. Assaying of these samples gave up to 13.8% U3O8.Thiswas followed up by systematic sampling;
. Research and translation of Russian reports. Scanning and digital enhancement of coloured maps;
. 4,610 line kilometres of airborne magnetic and radiometric survey completed by Fugro Airborne Surveys over an area of 920 km2, covering most of the consolidated property area at a flight altitude of 60 m and flight line spacing of 200 m;
. Sampling of ground water from shafts and surface for future water use and dewatering purposes.
9.2 2005 Exploration Program
The following is a summary from the following reports SRK (2006) and Micon (2007) which should be referred to for an extensive outline of Western Prospector’s 2004–06 exploration program.
The primary objective of the 2005 program was to initiate a drilling program to enhance confidence in Russian data, verifying former sampling results and allow a new resource calculation to be made that would be acceptable under 43-101 standards.
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The program was also designed to test new targets and anomalies identified in Russian reports and those identified by airborne radiometric survey as having potential. The work took the form of the laying out of several large grids which were then covered by geological mapping, ground radiometric and magnetic surveys. Fifteen grids covering 85.7 sq. km. were completed. Maps were created at 1: 10,000 scale for use in GIS software.
Magnetic maps show contrasting results. Highly pronounced linear or curved magnetic lows outline fault structures, dominantly in NW-SE, NNW-SSE and WSW-ENE directions. In the Gurvanbulag area, the undulating SW-NE unconformity is also outlined by undulating magnetic lows. Higher uranium values in the radiometric image neatly map the Mesozoic volcano-sedimentary sequence while lower values coincide with surrounding basement rocks and alluvium filled valleys. Within the volcanics, the Gurvanbulag deposit is characterized by higher uranium values.
Trenching by both hand and excavator was undertaken to identify obsidian as the marker horizon for the main mineralization in Gurvanbulag, to identify targets from geophysical works and help locate drill hole positions.
Targets were prioritised for drilling and commenced with one diamond drill rig at mid year with up to three drill rigs running, totalled approximately 16,500 m for 2005. Details of the 2005–06 diamond drilling program are provided in section 10.1.
Largely due to delays in permitting, the planned underground dewatering and sampling of the Gurvanbulag deposit had to be postponed to 2006.
9.3 Underground Exploration Program
With completion of mine water settling ponds and installation of a temporary headframe, hoist and ventilation system, water was pumped from the Russian underground mine workings and access was gained to the 260 level in October 2006. Exploration of the 260 level included the channel sampling and mapping of cross- cuts and radiometric (gamma) logging of Russian drill holes. Previously unknown percussion drill holes were discovered in the 260 level that were not identified on the Russian historic database held by Western Prospector at the time (WNP Press Release 08-03). Maps were later obtained of Russian underground exploration with the locations of the percussion holes.
Access via a man-way built in the north shaft from the 260 level allowed a short sampling program to take place on the 200 level in October 2008.
In December 2008, with the sampling program completed, the operations were put on ‘care and maintenance’. The pumps were pulled and the mine allowed to flood.
9.3.1 2006–08 Underground Channel Sampling
Channel sampling on the 260 level was initiated in November 2006 and continued to March 2007. The objective of the underground sampling program was to channel sample existing underground workings to fill a gap in the available Russian information and to provide a substantial quantity of new assay information for incorporation into a NI 43-101 compliant resource estimate.
The channel sampling program was based on existing Russian data, with sampling at 2 m intervals within the ore body and elsewhere along the cross-cuts at 4 m intervals. Each vertical channel was, on average 2 m high, 10 cm wide and 5 cm deep, cut into the sidewalls using a mechanical saw. The channel was divided roughly into 2–4 samples, usually 0.5 m but this length was dependent on lithological contacts.
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The majority of accessible cross-cuts on the 260 level were sampled along with any sill-drifts or inclines that were accessible and intersecting the Gurvanbulag horizon. A total of 1,144 channels with a total length of approximately 2,240 m were cut with 4,444 samples assayed. Figure 9-1 shows the distribution of the samples taken in 260 level.
Figure 9-1: Location of underground channels for sampling in 260 level of Gurvanbulag mine workings
The highest assay results were predominantly from the 9,900 cross cut, as well as 10,250 and 10,400 cross cuts. The table below gives the significant intercept results from the 260 level channel sampling program.
Table 9.1: Significant results from the underground channel sampling
Channel Number Cross Cut Interval (m) U3O8%assay
GCU60004 9,900 1.5 1.14 GCU60020 9,900 2.0 1.81 GCU60022 9,900 1.0 0.59 GCU60023 9,900 1.0 0.76 GCU60044 9,900 1.5 0.96 GCU60051 9,900 1.9 0.90 GCU60619 10,250 2.0 0.47 GCU60620 10,250 1.5 0.37 GCU61074 10,400 0.8 0.68 GCU61079 10,400 1.0 1.76 GCU61100 9,950 1.5 0.37
Access to the 200 level in October 2008 allowed a short, one week sampling program to take place. The channel sampling method was the same as that outlined in the 2006–07 program of the 260 level. Channels were cut at 2 metre spacings, approximately 50 m north and 50 m south of the North Shaft. Sampling was limited by rock falls blocking access and adequate ventilation of the level to prevent radon
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gas build up proved to be a problem. A total of 37 channels were cut with 153 samples assayed. Preliminary results from this sampling program were received after the Effective Date and are therefore not included as part of the resource estimate.
Before allowing the workings to flood, bulk samples weighing upwards of 50 kg per sample, were taken of the different lithologies. These samples are in storage for future use in grinding tests which will be included in the final mine construction plans.
9.3.2 2006–07 Underground Geological Mapping
Geological mapping of the cross-cuts on the 260 level was undertaken to better understand the structural geology and nature of the ore body. Mapping was governed by access to cross-cuts for channel sampling. Rock falls, boarding along bad ground and shotcrete in part obscured structures and the mineralized zone. Lithologies mapped underground conformed to the sequence well known from surface diamond drilling and major Northwest, Northeast and North-trending structures mapped by the Russians were identified.
9.3.3 2007–08 Underground Radiometric (Gamma) Logging
Radiometric (gamma) logging was undertaken in Russian-era diamond and percussion drill holes on the 260 level of the mine workings (Figure 9-3).
Figure 9-2: Underground radiometric (gamma) logging on the 260 level mine workings of the Gurvanbulag Central Deposit
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The gamma logging was contracted to Geophysics and Drilling Services Company LLC (‘‘G&DS’’), a Mongolian company in May 2007. Prior to commencing logging, the probe was sent to North America for calibration by a specialist. Details of the logging process, calibration and quality control of the data is given in Section 13.4 of this report.
Only drill holes drilled upward from the footwall and into the overlying ore body were deemed suitable as these remained open and largely debris free. Prior to gamma logging the holes were cleared out and measured then compressed air was used to expel built-up radon gas, two hours before the actual logging of the hole took place. Gemcom was used as an exploration guide to assess whether the drill holes still intersected the mineralized zones or if the hole was caved in before it hit the zone, determining if the hole was logged. The data from this logging was used to supplement the channel sampling, to confirm the Russian assay data and provide NI 43-101 compliant data.
A total of 248 Russian drill holes or 8,382 m were gamma logged in 2007–08. The logs provide a continuous measurement of uranium concentration expressed in parts per million. Values as high as 1.3%
eU3O8 over 9.00 m in hole 170 and 1.0% eU3O8 over 29.14 m in hole 186 were returned (WNP Press Release 08-03). (Note that the term ‘eU3O8’ is used to indicate that results are from gamma logging and assume radioactive equilibrium between uranium and its gamma emitting daughters which validation was undertaken for the Russian core data).
9.4 2007–08 Surface Radiometric (Gamma) Logging
Commencing in November 2007, 62 reverse circulation (‘‘RC’’) drill holes were drilled in the Gurvanbulag Central Deposit immediately adjacent to the mine workings, totalling 4,500 m. This drill program was completed in March 2008. Details of the drilling program are covered in Section 10 of this report.
Out of the 62 drill holes drilled, 54 were radiometric (gamma) logged.
These surface RC drill holes were gamma logged using the same company and instrument that was used to gamma log the underground Russian drill holes (section 9.3.3). The probe was lowered by an automatic winch into the drill hole immediately following drilling, thereby avoiding radon gas build-up. Gamma logs generated are the same as the underground gamma logging program. After problems of collapsing of the hole, it was decided to log through the drill rods. A correction factor for the rods was applied to the results, however results were also affected by rod joins with a change in rod thickness every 3 m. It was deemed too problematic to apply a correction factor for the rod joins. Logging was not performed on holes with blockage/collapse issues and some holes were missed when the instrument had to be repaired.
Problems with calibration of the results for the surface gamma logging, precludes these results from use in the resource estimate. Assays from the RC chips are instead used in the resource estimate and are deemed more reliable.
9.5 2008 Geotechnical Works
Geotechnical works were undertaken on the site in April 2008 and discussed in detail in section 22 and the Golder (2008) report. Golder oversaw the project which included the drilling of 22 shallow vertical holes to evaluate the ground for proposed waste management facilities, proposed mill site and mine site infrastructure. The overburden was drilled by auger drill then by core drill to provide core for compression testing.
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10.0 DRILLING
10.1 2005–06 Diamond Drilling Program
An extensive overview of the diamond drilling program for all of the Saddle Hills licenses is present in the SRK (2006), Micon (2007) and WNP year end reports.
Of the 48,240.45 m of diamond drilling done on the licenses of the Saddle Hills project area during 2005– 06, 40,457 m were drilled on the Gurvanbulag Central Deposit, numbering 153 holes (Figure 10-1). Five different rigs operated by two different companies, Australasian Independent Diamond Drilling (‘‘AIDD’’) and Landdrill Inc. (‘‘Landdrill’’) were used in the Saddle Hills area.
All holes were angled, with down hole surveys taken every 50 m to check for down hole deviation. Initially the holes were HQ diameter and changed to NQ if the hole extended past 300 m. After drilling, the position of the collar was surveyed and checked in Gemcom.
The density of drill holes was greatly increased in 2006 in the Gurvanbulag Central Deposit. In 2006 the program targeted the Russian resource block 1–6 (west of the mine workings), sought extensions to or infilling zones with higher grade intersections, followed potentially significant structural trends and investigated certain zones with a previously low density of drilling. Mineralized targets included principally the main shallow- dipping Gurvanbulag horizon but also near-vertical structures and shallow-dipping stratabound horizons below the Gurvanbulag horizon.
Of the 153 holes diamond drill holes drilled in the Gurvanbulag Central Deposit, 31 of these twinned Russian drill holes for comparison and verification of mineralization. In general, the Western Prospector results were of a lower grade than Russian results and there was difficulty in comparing results. This was thought to be due to either hole deviation causing sampling points to be further separated than intended or, most likely, it reflects the extreme spatial variation of mineralized grade and thickness that is typical of the Gurvanbulag Central Deposit or a combination of these two factors.
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Table 10.1 lists the best intersections in the diamond drilling program at Gurvanbulag.
Figure 10-1: Diamond and Reverse Circulation drill holes on the Gurvanbulag Central Deposit
Table 10.1: Gurvanbulag diamond drill significant intersections
Drill Hole Section Intercept (m) Interval (m) U3O8% (assay)
GCE5001 9600E 185.5–187.7 2.2 0.21 GCE5002 9850E 252.3–255.1 2.8 0.29 GCE5003 9900E 310.2–317.0 6.8 0.57 GCE5004 9950N 278.7–281.4 2.7 0.12 GCE5005 10100N 55.0–57.0 2.0 0.16 120.7–125.0 4.3 0.09 GCE5006 10000N 270.5–277.6 7.1 2.12 GCE5007 10050N 251.0–259.0 8.0 0.34 GCE5008 10000N 272.0–275.1 3.1 0.07 GCE5009 10150N 155.0–157.0 2.0 0.25 GCE5010 10200N 250.8–253.5 2.7 0.04 GCE5011 10250N 228.1–230.5 2.4 0.12 GCE5012 10300N 27.5–37.7 10.2 0.07* GCE5013 10350N 436.0–439.6 3.6 0.39 GCE5014 9400N 113.1–115.1 2.0 0.09 GCE5015 9400N 99.0–101.1 2.1 0.46 GCE5016 9417N 105.4–106.8 1.4 0.16
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Drill Hole Section Intercept (m) Interval (m) U3O8% (assay)
GCE5017 9433N 110.0–112.1 2.1 0.37 GCE5018 9450N 96.4–98.5 2.1 0.28 GCE5019 9450N 103.7–105.5 1.8 0.19 GCE5020 9450N 115.2–117.0 1.8 0.09 GCE5021 9450N 118.7–120.5 1.8 0.17 GCE5022 9450N 70.3–71.1 0.8 0.05 GCE5026 9400N 60.7–63.3 2.6 0.12 GCE5027 9400N 70.8–73.0 2.2 0.09 GCE5029 9400N 83.0–84.2 1.2 0.05 GCE5030 9350N 102.4–104.4 2.0 0.42 GCE5031 9300N 96.1–98.9 2.8 0.18 GCE5033 9300N 62.0–63.8 1.8 0.23 GCE5034 9300N 106.5–107.3 0.8 0.06 GCE5039 9400N 101.9–102.9 1.0 0.12 GCE5040 9500N 144.7–146.0 1.3 0.12 GCE5041 9500N 118.4–119.4 1.0 0.12 GCE5042 9500N 111.0–113.0 2.0 0.23 GCE5043 9500N 121.0–123.1 2.1 0.18 134.8–137.1 2.3 0.10 GCE5048 9550N 111.0–111.9 0.9 0.10 GCE5050 9550N 123.6–130.1 6.5 0.44 GCE5051 9550N 133.2–137.6 4.4 0.37 GCE5052 9550N 147.7–150.0 2.3 0.16 GCE5053 9550N 158.6–161.0 2.4 0.21 169.9–172.0 2.1 0.18 GCE5059 10600N 491.0–492.0 1.0 0.09 GCE5062 9300N 88.1–90.0 1.9 0.72 GCE5063 9400N 102.7–103.2 0.5 0.07 GCE5065 11400N 119.6–121.6 2.0 0.07 GCE5067 11600N 37.5–41.5 4.0 0.06 GCE5068 10350N 224.0–226.0 2.0 0.08 GCE5074 10450N 414.9–419.2 4.3 0.62 423.5–424.2 0.7 0.51 GCE5076 9600N 147.0–149.7 2.7 0.14 GCE5077 11100N 185.6–186.4 0.8 0.05 GCE5079 11050N 253.0–255.1 2.1 0.42 GCE5080 10450N 250.6–252.0 1.4 0.03 GCE5081 9600N 166.0–168.1 2.1 0.18 GCE5082 10500N 62.0–73.0 11.0 0.23 62.0–66.0 4.0 0.52 GCE5084 10850N 295.5–297.7 2.2 0.15 GCE5086 11400N 25.0–44.0 19.0 0.04 GCE5088 10000N 291.0–293.0 2.0 0.33 GCE5089 9350N 102.1–104.1 2.0 0.35 GCE5090 9950N 266.4–267.7 1.3 0.05 GCE5091 9392N 95.0–97.0 2.0 0.13 GCE5092 9300N 61.0–63.0 2.0 0.38 GCE5095 9325N 80.0–81.5 1.5 0.73 GCE5096 9950N 298.6–301.1 2.5 0.16 GCE5097 9350N 74.0–78.5 4.5 0.38 74.0–76.0 2.0 0.74
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Drill Hole Section Intercept (m) Interval (m) U3O8% (assay)
GCE5099 9250N 75.0–77.0 2.0 0.19 GCE5100 9350N 90.0–92.0 2.0 0.10 GCE5101 9350N 87.0–88.7 1.7 0.18 GCE5106 10000N 218.0–219.5 1.5 0.12 GCE5108 9550N 339.0–342.0 3.0 0.74 413.3–415.0 1.7 0.21 465.4–467.4 2.0 0.14 GCE5110 9600N 153.4–155.4 2.0 0.44 165.4–168.1 2.7 0.25 GCE5111 10000N 204.0–205.7 1.7 0.19 GCE5115 10350N 40.0–42.0 2.0 0.22 GCE5116 10475N 17.5–25.0 7.5 0.13 75.7–79.1 3.4 0.30 GCE5118 9550N 402.0–404.0 2.0 0.52 GCE5119 9275N 81.5–83.0 1.5 0.14 GCE5122 9500N 417.5–419.1 1.6 0.41 GCE5124 9800N 284.8–289.8 5.0 0.66 307.7–310.4 2.7 0.18 GCE5125 9975N 267.0–268.0 1.0 0.08 GCE5129 9900N 234.8–236.4 1.6 0.06 241.5–244.0 2.5 0.09 GCE5133 9900N 502.3–504.0 1.7 0.13 506.0–509.0 3.0 0.15 GCE5138 11500N 431.85–432.85 1.0 0.05 GCE5148 11150N 398.2–398.8 0.6 0.09 GCE5149 11200N 407.6–408.6 1.0 0.05 446.3–447.3 1.0 0.12 GCE5151 11200N 404.1–405.9 1.8 0.05 437.2–438.0 0.8 0.11 GCE5152 9920N 240.7–243.2 2.5 0.52 244.2–249.2 5.0 0.08 GCE5153 10200N 529.2–530.2 1.0 0.05 GCE5155 10200N 515.0–516.0 1.0 0.06 517.7–518.7 1.0 0.53 GCE5163 10400N 414.2–417.0 2.8 0.37 419.0–422.0 3.0 0.11 458.8–427.8 2.0 0.06 428.8–429.0 1.0 0.06 GCE5164 10550N 262.9–265.7 2.8 0.05 269.2–270.0 1.8 0.24 GCE5165 10000N 485.0–485.6 0.6 0.08 GCE5166 11600N 21.0–22.0 1.0 0.12 23.0–27.0 4.0 0.05 75.0–80.0 5.0 0.82 270.0–273.0 3.0 0.08 GCE5168 11600N 20.0–23.0 3.0 0.08 195.0–197.7 2.7 0.07 272.6–274.9 2.3 0.05
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The best intersections were in the Gurvanbulag horizon but good results were occasionally obtained from steeply dipping faults that cut the overlying ignimbrites.
Many of the better results were in Russian Block 1–6 (Figure 10-1), in the shallow zone up-dip from the underground mine development area. Other relatively good intersections were not unexpectedly in the mine development area (GCE5118, GCE5124, GCE5152); an area immediately northeast of the North Shaft (GCE5082, GCE5116); and GCE5079 located 1.1 km north-northeast of the Main Shaft.
Drilling indicates a strong positive correlation between uranium mineralization and the intensity of fracturing and alteration. The program confirmed the erratic distribution of the mineralization.
SRK (2006) concluded that the results of the program suggest that in view of the density of prior Russian drilling, it will be difficult to find undiscovered attractive mineralization in the immediate vicinity of the Russian resource blocks.
10.2 2007–08 Reverse Circulation Drilling Program
In the 2007–08 program, 62 holes totalling 8,360 m were drilled by two AIDD RC rigs (Figure 10-1). Initial hole collapse issues and problems with drilling through the water-logged clays of the Gurvanbulag horizon led to a change of drill bit and of hole diameter from 4 inches to 5.5 inches. The RC drilling method was chosen to provide a comparison with results from earlier diamond drill holes which experienced a degree of core loss due to wash-out of the soft mineralized clay.
The RC drill program targeted a Russian mineralized block (resource block 1–6) associated with north- south and east-west trending structures identified by the Russians on license 7685X. This block is immediately west of and up-dip of the 200 level mine workings of the Gurvanbulag Central Deposit. Mineralization is less than 200 m below surface and as close as 50 m in the northwestern-most portion of the block, in close proximity to outcropping obsidian.
The program of infill drilling was designed to convert the Inferred Resources of the SRK resource report (2006) to Indicated Resources by increasing drill hole density. Holes were vertical and drilled 25 m off section, and parallel to, the Russian northwest-southeast section lines and spaced 25 m–33 m apart depending on location of the inferred resource blocks and previously drilled holes. The drilling was targeted specifically at the shallow-dipping mineralized Gurvanbulag horizon and terminated just below this horizon. Approximately 850 assay samples were taken from the 62 holes drilled.
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A table of the significant intersections from RC drilling through the Gurvanbulag horizon is present below.
Table 10.2: Gurvanbulag RC drill significant intersections
Drill Hole Section Intercept (m) Interval (m) U3O8% (assay)
GCE5169 9275N 85–87 2.0 0.25 GCE5171 9225N 59–60 1.0 0.08 65–66 1.0 0.17 76–78 2.0 0.44 GCE5174 9275N 24–26 2.0 0.05 GCE5178 9425N 80–81 1.0 0.09 GCE5180 9375N 95–98 3.0 0.17 GCE5181 9375N 38–39 1.0 0.05 87–88 1.0 0.11 GCE5182 9325N 34–38 4.0 0.07 92–96 4.0 0.41 GCE5183 9375N 66–68 2.0 0.07 GCE5184 9275N 84–85 1.0 0.19 99–102 3.0 0.06 GCE5189 9375N 100–102 2.0 0.06 GCE5190 9375N 106–107 1.0 0.21 GCE5191 9425N 43–44 1.0 0.08 GCE5192 9250N 86–88 2.0 0.07 GCE5193 9225N 93–94 1.0 0.13 GCE5198 9375N 76–77 1.0 0.05 GCE5199 9375N 90–95 5.0 0.05 GCE5200 9425N 75–81 6.0 0.06 GCE5205 9475N 88–92 4.0 0.11 93–96 3.0 0.06 GCE5207 9425N 90–91 1.0 0.15 GCE5209 9475N 110–112 2.0 0.20 GCE5210 9475N 108–111 3.0 0.06 121–122 1.0 0.05 131–134 3.0 0.28 GCE5212 9475N 123–125 2.0 0.06 GCE5213 9525N 123–125 2.0 0.27 GCE5214 9525N 127–130 3.0 0.05 GCE5215 9525N 133–134 1.0 0.08 GCE5216 9525N 146–147 1.0 0.07 148–149 1.0 0.10 162–164 2.0 0.07 GCE5217 9525N 161–163 2.0 0.14 174–179 5.0 0.13 192–197 5.0 0.10 GCE5218 9625N 74–75 1.0 0.05 169–172 3.0 0.19 GCE5219 9675N 18–20 2.0 0.05 185–187 2.0 0.08 191–193 2.0 0.07 GCE5220 9675N 184–185 1.0 0.18
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Drill Hole Section Intercept (m) Interval (m) U3O8% (assay)
GCE5221 9725N 214–216 2.0 0.07 GCE5224 9525N 193–195 2.0 0.05 GCE5225 9525N 184–185 1.0 0.09 GCE5227 9425N 178–180 2.0 0.08 GCE5228 9425N 193–198 5.0 0.19
The majority of mineralization in Russian resource block 1–6 is in the hangwall of the Gurvanbulag horizon, with minor mineralization in the footwall and localized mineralization in steeply dipping faults in the overlying ignimbrites. Drill hole GCE5217 was drilled below the Gurvanbulag horizon, where it intersected two lower localized mineralized horizons, most likely stratabound. These horizons were identified in Russian drill sections and indicate the potential of mineralized stratabound horizons below the Gurvanbulag horizon.
Two holes were drilled on license 4969X to test an easterly extension of the Gurvanbulag horizon at intersecting north-south and east-west structures identified by Russian mapping. The structural setting of this area was deemed similar to that of Russian resource block 1–6 on license 7685X. Problems with RC drilling were encountered as the drill bit jammed in water-logged clay in the hangwall of the Gurvanbulag horizon and the drill program for this area was abandoned.
10.3 Drill Hole Database
Russian plan and section maps were scanned and digitised in 2005 to re-create a drilling and assay database which was merged with Western Prospector’s drilling results into a single Access database for use in Gemcom. In total, the drill hole database contains data for 1,488 Russian drill holes and 215 Western Prospector diamond and RC drill holes for the Gurvanbulag deposit.
11.0 SAMPLING METHOD AND APPROACH
For sampling method and approach prior to June 2006, the reader is referred to the SRK (2006) Technical Report.
Also sourced are Western Prospector internal year end reports for 2006, 2007 and 2008.
11.1 2005–2006 Diamond Drilling
Every core box was labelled at the drill site with its hole identification number and box number clearly marked with water-proof black felt marker on top (i.e. upper left edge) and on the front end of each core box. The drillers used metric labelling to two decimal places on their depth blocks.
Re-usable plywood lids were used to close the wooden core boxes before transportation. The lids were securely fastened as each core box was filled. All core boxes were gently loaded and unloaded to avoid tipping and movement of the core within the boxes, and core boxes were properly secured within vehicles.
A separate outside vehicle-accessible staging area was set up for each drill at the entrance of the core logging building. Core boxes were unloaded by the drillers from the transport vehicle at the end of each shift. Technicians arranged the core boxes at the beginning of the shift in chronologic order, removed the lids and generally washed any drilling fluid or mud from the boxes while in the staging area. Core boxes were then carefully carried to the core logging tables within the logging facility and arranged chronologically. The geotechnical assistant then marked the core at one metre intervals on all core boxes.
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Core recovery was recorded by the geotechnical assistant immediately after the core boxes arrived in the core logging facility. Core recovery is the measured recovery of drill core between two wooden marker blocks. The assistant measured each individual piece of core between consecutive depth blocks. The length of core between two consecutive blocks recorded by the drillers and the length effectively measured by the technician were recorded on the ‘‘Geotechnical Drill Log’’. The measurement was divided by the effective length measured for the drilling interval to give the percentage recovery of that interval. The process was repeated for all depth intervals in each core box. The overall sum of the measured intervals divided by the total length of the drill-hole gave the core recovery for one drill-hole. The first few metres of overburden were not considered in the recovery calculations at Saddle Hills and core recoveries expressed for the project only reflect the recoveries of rock. Core recoveries were on average 96.9%.
After geotechnical and geological logging, all of the core was photographed in detail prior to any core splitting and sampling. Two core racks were constructed in the core splitting room located between two of the core logging rooms. These racks were made to support three boxes of HQ or NQ core. These core racks are approximately 1.5 m high by 1.5 m wide with a 458 sloping front. There is a permanently affixed metric rule between the three rows of core boxes which provides a scale for the photographs.
Digital colour photographs were taken in good light directly at the core boxes by a photographer standing on a stool so that the sloping core rack is perpendicular to the camera. In this manner the entire lengths of all three core boxes could be photographed without shadows. Photographs were taken prior to core splitting and sampling.
The digital images were downloaded daily to an on-site computer. Selection was made between several pictures of the best one for each series of core boxes. The pictures were then filed with the logs. The rejects were not discarded but also filed in another folder in case of future need.
After a spectrometer scan of the core, the geologist in charge of logging chose the sampling interval, taking into account the radiometric results and the geology. It was decided that samples must be comprised of one geological unit. For mineralized zones of 2 m and less, sample lengths were 0.5 m and for zones over 2 m, sample lengths were 1 m. Two to three samples were collected on either side of the mineralized intersection.
Sampling was always undertaken in the Gurvanbulag Horizon, regardless of radiometric readings. This horizon is usually identified by the presence of obsidian and ‘jasperiod’ as well as intense alteration and the presence of clays, immediately below the ‘felsites’.
Any interval with a radiometric reading of 500 cps or above was sampled with at least two samples either side (for diamond and RC drilling). The Gurvanbulag Horizon was always sampled and 5 m either side of it, for the diamond drill program. For the RC drill program, the Gurvanbulag Horizon was always sampled as well as 2 m either side of it (two intervals).
The radiometric scan was converted to a graph, which helped in choosing the zones to sample and as a check on inadvertently forgotten zones. This check was done prior to the shipment of samples to the laboratory. This proved to be useful, as at the beginning of the program prior to the systematic implementation of the graphs, sampling of a forgotten zone was often done late, and usually these samples became part of a later shipment. In late 2005, re-sampling occurred as shown by disrupted sample number sequences in the drill-hole, but all samples were sent in the same sample shipment.
Sampling occurred after the core was photographed and the different geotechnical measurements of the core were made. The geologist marked the sample length on the core, and then the technician split the core piece by piece into two halves. One half of the core was returned to the core box for witness purposes and the other
–IVA-58– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA half was placed in a plastic sample bag. A pre-numbered tag, corresponding to the sample number in the geological log and to a sampling book form, was added to the bag immediately after the split. The sample number was also marked on the bag with a felt pen and moved to a safe storage room before shipment.
11.2 2007–2008 Reverse Circulation Drilling
For the reverse circulation drill program: samples from every one metre interval were taken and stored in chip trays which were photographed. Metre markings were written directly onto the boxes along with the drill hole number. The pictures are filed with the logs from each hole.
RC drill chip bags were labeled at the drill site with hole number and interval. RC drill chips were collected at one metre intervals and were screened with a hand-held spectrometer. Intervals recording 500 or more counts per second were selected for sampling, together with a 2 m envelope above and below. In addition, all material from lithologies that define the Gurvanbulag Zone was sampled regardless of spectrometer count. The recovered material was passed through a riffle to produce a representative sample, typically 3–4.5 kg. (range of weights from 0.49–5.85 kg). A representative sample for each interval for the entire length of each hole is sampled into chip trays, only chip bags that have been sampled are kept on site.
11.3 2006–2007 Underground Sampling Program
For the underground channel sampling program, channels were marked up by the geologist every 2 m across the Gurvanbulag Horizon and thereafter every 4 m. The channels were cut using diamond saws then sampled using mechanical chippers.
Every channel was photographed with a metre rule next to the channel and a board with the cross cut number and channel sample number written on it. The pictures are filed with the logs from each channel.
A geological log for each channel together with specific gravity and radiometric readings were prepared. A sample book and shipment documents were prepared using the same procedure as those for drill hole sample shipments. Five shipments of underground samples, consisting of a total of approximately 460 samples were sent for analysis in 2006. Shipment documents were prepared using the same procedure as those for drill hole sample shipments. Twenty shipments of underground samples, consisting of a total of approximately 5,100 samples (including control samples) were sent for analysis in 2007. Underground samples ranged in weight from 0.85 kg to 11.92 kg. They were sent in separate shipments from drill samples, however shipment procedures are the same as those for drill hole samples.
Every channel that was cut was sampled, and all samples were assayed regardless of radiometric readings. Radiometric readings of the samples were taken in the core shed to prevent the influence of background noise in the underground workings. Each bag was isolated from the surrounding samples while the radiometric reading was taken.
11.4 Sample Shipment
Immediately prior to loading samples in the Western Prospector truck, sample bags were closed and set in sequential order in the core shed for checking. The sample list was prepared from drill-hole ‘sample books’ by the geologist in charge of the drill-hole (or the channel or trench). For confidentiality reasons, no drill-hole numbers and depth of the samples are reported on these listings.
Next, a verification was done of the samples sorted in the core shed with the shipment list. Each sample number was checked against the list by a technician and the QA/QC geologist responsible for the shipment.
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If a difference was found between the shipment list and the samples, sample books were checked to find the difference. At the beginning of the program, many differences were found, most of them due to forgotten field duplicate preparation or to samples stored in the wrong place (the new QA/QC program implemented after the Smee (2006) report also helped lessen errors in shipments).
When shipment listing and the sample bags plus QA/QC tags were in agreement, sample bags are loaded in a wooden box in the truck. A special box with metal and wood reinforcements is used to carry highly radioactive samples. Radiation inside the truck with this special box is measured prior to allowing the transportation to go ahead.
The person in charge of the shipment counted the sample bags being loaded and double checked the count with the total number of samples in the shipment list. The boxes were closed and the truck departed from the site to the preparation laboratories of Alex Stewart Assayers Mongolia LLC (‘‘Alex Stewart’’ or ‘‘ASA’’) and Actlabs Asia LLC (‘‘Actlabs Mongolia’’), and ultimately for shipment to Activation Laboratories Ltd (‘‘Actlabs Canada’’) in Canada. From mid 2006 onwards, samples were sent alternately to the preparation laboratories in Ulaanbaatar, using both Actlabs Mongolia and Alex Stewart. All prepared shipments were shipped to Actlabs Canada from both labs.
Initially the Western Prospector technician was instructed to send the instructions letter to Actlabs Canada with the samples. However, as Actlabs Canada reported receiving most shipments without any instructions, the procedure had to be changed and in the second part of the drill program, all letters and listings were sent by mail from the camp to the laboratories. A copy of all the listings of samples and letters of instruction for each shipment (including empty bags for duplicate insertion) went to the preparation labs and Actlabs Canada. Documents were also sent electronically to all the labs concerned.
Complete shipment information with the corresponding drill-hole and sample depths were sent by mail to management officials Gerald Harper and Wayne Roberts.
All exploration samples sent from the Saddle Hills project are assigned a shipment number. They include regular samples to be assayed, rocks sent for thin sections, or round robins of home-made standards. For an immediate request of re-assay, the initial shipment number is used. For further later control a new shipment number is used for samples leaving the camp or rejects leaving their storage in Canada. The same procedure will be used for metallurgical or geotechnical samples as it helps in tracking them.
It is the author’s opinion that the core logging procedures employed are thorough and provide sufficient geotechnical and geological information. There are no apparent drilling or recovery factors that would materially impact the accuracy and reliability of the drilling results.
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12.0 SAMPLE PREPARATION, ANALYSES AND SECURITY
Sample prep labs were alternated from 2006 onwards, using both Actlabs Mongolia and Alex Stewart.
12.1 Alex Stewart Labs
Alex Stewart is a privately owned, independent Company, providing professional inspection, sampling, assaying and consultancy services to the mining exploration, metals and minerals, recycling, petrochemical, agricultural and environmental industries. The Group’s Head Office is based in Knowsley, Merseyside, UK. ASA has established a global network of offices and laboratories to provide extensive coverage to industry. They have also been accredited by ISOQAR Ltd to ISO 9001: 2000 Quality Standards.
The ASA laboratory in Ulaanbataar received the sample shipments directly from the Saddle Hills camp. Sample preparation at the laboratory included the following steps:
. Drying. ASA dried samples in an oven at less than 408 C;
. Crushing to 52 millimetres;
. Splitting 500 grams for a normal sample, twice 500 grams for a coarse duplicate;
. Pulverizing to 495% 575mm and prepare a 25 gram bag of the pulp;
. Pulp duplicate preparation. Two pulp bags of 25 grams each were prepared for the pulp duplicates;
. One pulp is sent to Actlabs Canada the other returns to site along with the coarse rejects;
. All samples are stored in a series of sample sheds (converted containers) — electronic maps of each shed with location of shipments and samples is stored on the site computer.
12.2 Actlabs Mongolia
In 2006, Actlabs established a full laboratory in Ulaanbataar, Mongolia. Actlabs’ Quality System is accredited to international quality standards through International Organization for Standardization/ International Electrotechnical Commission (ISO/IEC) 17025 (ISO/IEC 17025 includes ISO 9001 and ISO 9002 specifications). Actlabs Canada also possesses certification with CAN-P-1758 (Forensics) and CAN-P- 1579 (Mineral Analysis) for specific registered tests by the Standards Council of Canada (SCC). Actlabs Canada is one of only two ISO/IEC 17025 with CAN-P-1579 registered laboratories in North America.
The preparation procedure is as follows:
. Crushing to 52 millimetres;
. Splitting 500 grams for a normal sample, twice 500 grams for a coarse duplicate;
. Pulverizing to >95% 575mm and prepare a 25 gram bag of the pulp;
. Pulp duplicate preparation. Two pulp bags of 25 grams each were prepared for the pulp duplicates;
. One pulp is sent to Actlabs Canada the other returns to site along with the coarse rejects.
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12.3 Lab Preparation and Insertion of Coarse and Pulp Duplicates
12.3.1 Coarse Reject Duplicates
The coarse duplicate aims at monitoring the preparation at the laboratory as various assays are made from different pulps issued from the same coarse split. A selected sample sent to ASA or Actlabs Mongolia was split after it was dried and crushed. Two samples were prepared from the initial sample and were named CD1 for the regular sample and CD2 for the coarse duplicate.
CD1 sample carries the initial number always ending in 15 to allow for a simple routine.
CD2 is prepared at ASA or Actlabs Mongolia. The crushed initial sample is split and two pulps are prepared separately out of the two coarse fractions. A CD2 sample uses the following number in the sequence ending in 25. Tags with numbers ending in 25 are marked as CD in the sample books and sent to the ASA preparation laboratory with the shipment listing and instruction letter. As the sample is not collected, the designation CD2 was introduced to allow the geologists and the technicians a quick check of the presence of the regular sample and its coarseduplicatetaginthesameshipment.
ASA renumbered the second fraction of the CD1 sample with the number ending in 25. This CD2 sample followed the same pulverizing and assaying process as all the other samples in the batch.
From mid-2006 for the diamond drill and RC drilling programs CD1 was placed at 5, 25, 45, 65, 85 with the CD2 at 6, 26, 46, 66, and 86. This was maintained for the underground channel sampling.
12.3.2 Pulp Duplicates
The pulp duplicate aims at monitoring the analytical precision as various assays are made from the same pulp. Two pulps are issued from the initial sample. The regular sample was named PD1 and the pulp duplicate PD2.
The PD1 sample carries the initial number always ending in 45 for a simple routine. The PD1 sample follows the same assaying process as all other samples in the batch.
The PD2 sample was prepared at ASA or Actlabs Mongolia. The request form required preparing two pulps of the PD1 regular sample and sending them with the rest of the pulps for shipment to Actlabs Canada.
PD2 samples are noted as pulp duplicates in the sample book. As the sample was not collected in the field, the name PD2 was introduced to allow the geologists and technicians a quick check of the presence of a regular sample and its pulp duplicate tag in the same shipment. Confusion with this QA/QC procedure resulted in a risk of using the 65 tag for another regular sample.
From mid-2006 onward, PD1 was placed at 10, 30, 50, 70, 90 and PD2 at 11, 31, 51, 71, 91 for the diamond drill and RC drilling programs. The same procedure was used for the underground channel sampling program.
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12.4 Analysis
Analysis of uranium is done by Delayed Neutron Counting (DNC). DNC is a rapid form of neutron activation analysis which is used for measuring fissile elements such as U235. In DNC, the samples are placed in a neutron flux produced by a nuclear reactor. The U235 within the sample absorbs neutrons which fission some of the U235 fission products, including neutrons. After rapid removal from the reactor, the neutrons are thermalized and measured by an array of BF3 neutron detectors. This technique is ideal for measuring uranium from sub-ppm to percentage levels. High values were repeated by a lithium metaborate/tetraborate fusion to make a glass disc and then put through XRF using a Panalytical PW-1540 XRF.
Vanadium and Barium were determined by pressed pellet XRF also using a Panalytical PW-1540 XRF.
Molybdenum was determined by aqua regia digestion and ICP using a Perkin Elmer Optima 3000 ICP.
Fluorine was done by lithium metaborate/tetraborate fusion and Specific Ion Electrode.
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13.0 DATA VERIFICATION
The Gurvanbulag Project was visited by Mr. Eugene Puritch, P. Eng. from 15 to 17 November 2006 and again from 18 to 20 January 2008. In 2006 data verification sampling was done on diamond drill core, with 12 samples distributed in 12 holes collected for assay, and in 2008 on RC holes with 12 samples collected from 10 holes. An attempt was made to sample intervals from a variety of low and high-grade material.
For the diamond drill holes, the chosen sample intervals were then sampled by taking quarter splits of the remaining half-split core. For the RC holes, the samples were taken by scooping material out of the bags using a small garden spade. The samples in 2006 and 2008 were then documented, bagged, and sealed with packing tape and were brought by Mr. Puritch to the Actlabs Mongolia prep lab in Ulanbataar. From there the sample pulps were sent to Actlabs Canada in Ancaster, Ontario for neutron activation.
At no time, prior to the time of sampling, were any employees or other associates of Western Prospector advised as to the location or identification of any of the samples to be collected.
A comparison of the P&E independent sample verification results versus the original assay results can be seen in Figures 13-1 and 13-2. The P&E results were satisfactory and clearly demonstrate that the tenor of the
U3O8 is similar to what was originally reported by Western Prospector.
Figure 13-1: P&E Site Visit Verification Sample Results for U3O8 : November 2006
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Figure 13-2: P&E Site Visit Verification Sample Results for U3O8 : January 2008
13.1 Preparation and Qualification of Blanks and Standards
All QA/QC was done on site from mid-2006 with the new QA/QC insertion numbering. All blanks and standards were housed on site and inserted into the shipment before it was sent to the prep labs in Ulaanbaatar.
Only the two high grade standards (from the initial five standards created pre-2006) were used, however these standards were exhausted in early 2007 and other round robins were done to characterize two new standards. The higher grade of the two was too high and was not used, while the second, lower grade standard was used predominantly for the underground channel sampling and RC drilling programs.
A geological blank was inserted as cobble sized rock obtained from outcropping local basement granite.
13.2 Re-assaying Procedure
In mid-2006 sampling was guided by radiometric readings of the core and/or samples and by geological contacts. Shipments were overseen first by the geotechnicians and then by the geologist in charge of that particular shipment. When preliminary results were obtained from Actlabs Canada these were compared against the radiometric readings for each sample in that shipment. For any discrepancies, Actlabs Canada was contacted and requested to re-run that sample as well as two samples either side to ensure there was no mix-up with the samples.
13.3 Preparation of Field Duplicates
The field duplicate aims at monitoring the preparation in the field and the geological heterogeneity of a sample. From June 2006 onwards: for both diamond and RC drilling FD1 was placed at 15, 35, 75, 95 and FD2 at 16, 36, 76, 96. For the RC program, a riffle splitter was used to obtain the two field duplicates for a sample.
Field duplicates were not taken for the underground channel sampling program.
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13.4 Gamma Logging QA/QC
Gamma logging of the 260 level underground mine workings commenced in May 2007. The logging was contracted to G&DS, a local geophysical company. Robert Wilson, an independent consulting scientist with over 25 years of geophysical experience undertook QA/QC of the data (refer to Curriculum Vitae of Robert Wilson in Appendix VIII).
Logging was undertaken systematically, ventilating each cross-cut before any work commenced. Russian- era holes that were drilled upwards from the footwall into the mineralized zone were identified and numbered in a cross-cut and then cleared out of any debris and measured. The length of the holes, along with the surveyed location of the drill collar was entered into Gemcom. Gemcom was utilized as a tool by on-site geologists to verify whether or not a drill hole was blocked before it intersected the mineralized zone. The list of holes to be logged was passed onto the logging contractors. Two hours prior to logging, the hole was cleaned of any build up of radon using compressed air. The contractors provided daily verbal and weekly updated reports to WNP as to which holes had been logged.
Initial results obtained from logging between May and August 2007 were anomalously high in thorium (Th) and the decision was made to send the gamma probe to the United States for re-calibration. The probe was originally calibrated in Canada before being sent to Mongolia.
Logging recommenced in October and was completed in November 2007. Two different calculations were used in producing final results depending on whether a hole had been logged before or after the probe was re- calibrated. Formulas were calculated by Robert Wilson, and G&DS used these to process the data. Robert Wilson visited the site to observe the logging process and to make recommendations. Two holes were selected as control holes (7 and 127), and were logged both before and after re-calibration.
A geophysicist was not regularly present on site and logging and processing was undertaken by G&DS technicians. Final checking and processing was done by G&DS in Ulaanbaatar and the final data were quality controlled by Robert Wilson.
G&DS provided azimuth and dips for every hole that was gamma logged.
Final data were received from G&DS as graphic.pdf’s generated from the Wellcad program. Each pdf recorded the assigned hole number, X, Y and Z location of the drill collar surveyed by Western Prospector surveyors, the formula used in processing results, date of logging, operator, probe name, and depth of logged hole. Total count and uranium (U), thorium (Th) and potassium (K) were recorded for the entire length of the hole and presented as line graphs. Total counts exceeding 80,000 were converted and capped to a reported grade of 1.8% eU3O8. G&DS also supplied the Wellcad files for every hole, processed data in an excel spreadsheet and the raw data (.dat format).
13.5 Performance of Blank Material
All blank data were examined from June 2006 through 2008. Prior to Smee’s (2006) audit the blank material was already pulverized, and therefore measured only possible analytical error. All data for this earlier period of time were in the order of 5 ppm U with maximum values of up to 7 ppm U.
From 2006 onward, when the blank material was switched to barren granite cobbles, the blank data had values up to 26 ppm U. The deposit cut-off grade is 700 ppm U, therefore these values fall well below cut-off grade and no action was required.
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13.6 Performance of Duplicates
All duplicate data were graphed using a simple scatter graph for the field, coarse reject and pulp duplicate types. At the field duplicate level, the sample pairs already had very high precision, with progressively better precision as grain size decreased and homogeneity increased. At the pulp duplicate level the ratio of the pairs was essentially 1: 1.
13.7 Performance of Quality Control Standards
In the spring of 2007, results were received from four labs for a new round robin characterization for two new standards. New standards were necessary as the old ones were near depletion. Eleven samples were sent to each of four labs for characterization of a high grade and a very high grade U standard.
The very high grade was 1.4% U and was deemed too high to be of use in the drilling and underground sampling programs. It was not used. The new high grade standard had an average grade of 0.29% U and this standard was used for the RC drilling and underground channel sampling programs.
13.8 Diamond Drilling Standards
The 2005–2006 diamond drill holes used the early standards with grades of 0.075% U and 0.30% U.
There were 21 data points for the 0.30% U grade standard and all but one value fell within +/- two standard deviations from the mean.
The 0.075% U grade standard had 45 data points and all but three points fell within +/- two standard deviations from the mean. The three points falling outside +/- two standard deviations from the mean were barely above the +2 line and fell well within +3 standard deviations.
13.9 RC Drilling Standards
All the RC drill holes used the 2007 standard with a mean grade of 0.29% U, and all 52 data points fell within +/- two standard deviations from the mean.
13.10 Performance of Underground Channel Sampling Standards
The underground program used both the old, pre-2006 standard with a mean grade of 0.30% U, as well as the new 2007 standard with a mean grade of 0.29% U.
The pre-2006 standard had 40 data points with all points falling between +/- two standard deviations from the mean. A high bias is observed however with 100% of the data points falling above the mean.
The new 2007 standard had 161 data points. All but nine values fell within +/- two standard deviations from the mean, however they were well within + three standard deviations. A high bias was noted for this standard as well with all but four values falling above the mean.
13.11 Performance of Underground Blank Samples
There were 276 data points for the blank material. The values clustered around 2 ppm U (0.0002%) with three high values between 16 and 24 ppm U. These values are all well below cut-off grade.
The author believes the data are suitable for use in a resource estimate.
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14.0 ADJACENT PROPERTIES
Adjacent to the project area are two exploration and two mining licenses owned by third parties (Figure 3- 2).
At about 49805’N and 114805’E, the 101 km2 Mining License 247A and Exploration License 1562X are owned by XinXin Mining Co. Ltd. (‘‘XinXin’’), a Chinese company, which recently completed bulk sampling of the Ulaan polymetallic deposit. XinXin purchased a small area of License 4974X from Emeelt Mines to provide XinXin with space for mill and tailings facilities (Micon 2007).
At about 49805’N and 114820’E, the 962.5 km2 Mining License 237A partially covers the Dornod uranium deposits and is owned by Central Asia Uranium Corporation which is 58% owned by Khan. To the south of License 237A, Khan owns 100% of exploration license 9282X, subject to a 3% royalty to Western Prospector on any mineral produced and 400,000 shares issued to Western Prospector in 2007 (WNP Press Release #05-02, WNP MD&A, Q3, Nov 19, 2007). Khan has undertaken definition drilling on the Dornod deposits to validate earlier Russian resources and completed a NI 43-101 compliant pre-feasibility study (Scott Wilson RPA 2007).
Mineral Resource and Reserve estimates have been reported by Khan for the No. 2 and No. 7 Dornod deposits (Scott Wilson RPA 2007). At the 0.04% U3O8 cut-off grade and 5 m minimum vertical thickness of mineralization, the No. 7 Deposit contains 11.28 million tonnes of Probable Mineral Reserves at an average grade of 0.156% U3O8, containing approximately 38.9 million lbs of U3O8 and 14.36 million tonnes of Indicated Mineral Resources at an average grade of 0.154% U3O8. At the 0.03% U3O8 cut-off grade and 2 m minimum vertical thickness of mineralization, the No. 2 Deposit contains 3.34 million tonnes of Probable Mineral
Reserves at an average grade of 0.081% U3O8, containing approximately 6.0 million lbs of U3O8 and 9.55 million tonnes of Indicated Mineral Resources at an average grade of 0.071% U3O8.
P&E has been unable to verify the information on these two properties and the reader is cautioned that the above information is unreliable and not necessarily indicative of the mineralization on Western Prospector Saddle Hills Property. P&E are not aware of any other exploration work currently being carried out on lands surrounding the Saddle Hills Property.
–IVA-68– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
15.0 METALLURGICAL PROCESSING AND METALLURGICAL TESTING
15.1 Testing Programs
The process design was supported by two stages of test work carried out on samples from the Gurvanbulag uranium mineralization, one prior to completion of a Preliminary Economic Assessment and the second following on from this.
Phase I metallurgical testwork for the Gurvanbulag Saddle Hills Uranium Project was undertaken at SGS Lakefield in Lakefield, Ontario under the direction of Melis. Drill core samples were received in mid-June 2006. The metallurgical testwork, including grindability, leaching, liquid/solid separation, solvent extraction, precipitation and tailings preparation, was completed by December 2006.
For Phase II, it was decided to test the resin elution process to replace solvent extraction. Testwork began with sample selection at the Gurvanbulag site in June 2007. Drill core and channel samples were received at SGS Lakefield in December 2007. Metallurgical testwork, including grindability, leaching, resin loading and elution, precipitation and tailings preparation, was completed by September 2008. Tailings aging tests were complete by year-end. Prior to final design, further optimization testwork is planned for grinding and resin extraction.
15.2 Grinding and Leaching
The ore is hard, with a Bond Work Index of 20.0 kWh/t.
The leach test results suggest that to obtain a 24 hour leach extraction of approximately 96.5%:
. The primary grind should be approximately 80% passing150 mm;
. The leach temperature should be approximately 50 8C;
. The free acid concentration should be approximately 15g H2SO4/L; and
. The oxidation/reduction potential of the pulp should be adjusted to 535 mV.
Sodium chlorate (NaClO3) was used as an oxidant in the Phase II leach testwork rather than oxygen because other testwork has shown that the chemical composition of the oxidant does not influence the leach extraction, and the sodium chlorate consumption was simpler to measure than potential oxygen consumption.
Achieving an average oxidation/reduction potential of 535 mV can require as little oxidant as 0.75kg NaClO3/t.
15.3 Bottle Roll Tests
The potential for heap or underground stope leaching was evaluated by conduction bottle roll leach tests on composites prepared for that purpose. The tests were performed on composites crushed to –19 mm. Sixteen bottle roll leach tests were performed, on 16 composites with an average head grade of 0.038% U3O8. In eight of these tests, the uranium extraction after 16 days was 66.6% or higher.
15.4 Resin Loading and Elution
Using pregnant leach solution with a grade of 1.05g U3O8/L, Purolite A660 resin was loaded with uranium as high as 79.2g U3O8/L.
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Limited elution tests were conducted on loaded resin. The tests suggest that an eluted resin grade of 0.8g
U3O8/L, and an eluate grade of 15.2g U3O8/L, can be achieved by eluting loaded resin with a 150g H2SO4/L eluate at 508C.
Before final design, further testwork is required to better define and quantify the elution process.
15.5 Uranium Precipitation
Uranium was precipitated from eluate solution and assayed. All measured analytes were lower than the typical refinery reject and surcharge limits, showing that yellowcake produced from Gurvanbulag ore would be satisfactory to refineries.
15.6 Waste Treatment and Tailings Neutralization
Tailings were prepared from leach residue from a bulk leach test and barren leach solution produced in the resinextractiontests.Theprocedureusedtogeneratetailings also generated treated effluent, which in a mill may be released to the environment. The tests performed on the tailings were:
. Elemental and radionuclide analysis on solids and supernatant;
. A detailed particle size analysis using a Malvern Instrument;
. A settling test; and
. Aging tests, including elemental and radionuclide analysis of the supernatant on Days 0, 14, 28 and 56.
A neutralized tailings sample was submitted for specific gravity determination. The specific gravity of the Gurvanbulag tailings produced was 2.57.
Particle size analysis with the Malvern Instrument indicated that the K80 of the neutralized tailings was 171mm.
With a flocculant dosage of 60g Magnafloc 351 per tonne, the neutralized tailings sample settled to an ultimate density of 44.0% solids (w/w) in a static settling test.
A neutralized tailings sample was submitted for acid base accounting (ABA) and net acid generation (NAG) tests. Based on the ABA neutralization potential, the acid generation potential of the tailings sample was classified as being uncertain. The NAG testwork indicated a carbonate neutralizing potential to acid potential ratio of 0.27, suggesting that the tailings tested were potentially acid generating. The combined results of these two tests define the Gurvanbulag tailings as potentially acid generating.
Aging tests on the prepared tailings were used to judge the quality of the supernatant released as the tailings consolidate over the first 60 days.
The molybdenum concentration in the treated effluent was 1.78 mg Mo/L on Day 0 and had stabilized at approximately 1.48 mg Mo/L on Day 56, so treatment to reduce the concentration of molybdenum in the supernatant will be required for release of effluent.
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Table 15.1 compares analytes of interest in the treated effluent with the Maximum Monthly Arithmetic Mean Concentration (MMAMC) Discharge Limits for those analytes specified in the (Government of Saskatchewan) Mineral Industry Environmental Protection regulations and the (Government of Canada) Metal Mining Effluent Regulations.
Table 15.1: Treated Effluent Analysis and Discharge Limits
Emeelt Mines LLC. and Western Prospector Group Ltd. Gurvanbulag Deposit, Saddle Hills Uranium District, Mongolia Treated Effluent Analysis and Monthly Arithmetic Mean Concentration Discharge Limits
Maximum Monthly Arithmetic Mean Concentration Discharge Analyte Units Treated Effluent Assay Limits
pH units 6.89 6.0–9.5 TSS mg/L N/A 15 As mg/L 0.0251 0.5 Cu mg/L 0.0030 0.3 Mo mg/L 0.363 0.5 Ni mg/L 0.0150 0.5 Pb mg/L 0.00012 0.2 Se mg/L 0.006 0.010(1) Umg/LN/A2.5 Zn mg/L 0.005 0.5 Pb210 Bq/L Pending 0.92 Ra226 Bq/L Pending 0.37 Th230 Bq/L Pending 1.85
Note: Typical limit. Exact limit is normally calculated from environmental loading.
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16.0 MINERAL RESOURCE ESTIMATES
16.1 Introduction
The purpose of this report section is to estimate the Mineral Resources of the Gurvanbulag Central Zone in compliance with NI 43-101 and CIM standards. This resource estimate was undertaken by Eugene Puritch, P.Eng., and Antoine Yassa, P.Geo., of P&E Mining Consultants Inc. of Brampton Ontario. The effective date of this resource estimate is 15 October 2008.
16.2 Database
AlldrillingdatawereprovidedbyWesternProspector Group Limited (‘‘WNP’’) in the form of a MS- Access database. Two hundred thirty nine (239) drill cross sections were developed on a Gauss Kruger grid looking Northeast on an azimuth of 40 degrees at a 10 m spacing named from 9,150-NE to 11,530-NE.
The Gemcom database provided by WNP contained numerous types of data and a portion of this data was used in the resource modeling area. See Table 16.1 below. Surface and underground drill hole plans are shown in Appendix-I.
Table 16.1: Gurvanbulag Central Deposit Drill Holes and Channels
Number Total Number Constrained in Data Type in Database Resource Domains
Russian Surface DDH 796 779 WNP Surface DDH 153 140 WNP Surface RC 57 56 UG Channel 1,144 412 UG Gamma Logged 248 235 Russian UG DDH 692 598
Total 3,090 2,220
The database was verified in Gemcom with minor corrections made to bring it to an error free status. The
Assay Tables of the database contained 19,240 U3O8 assays. Data are expressed in metric units and grid coordinates are represented in the Gauss Kruger Zone 20 system.
16.3 Data Verification
Verification of assay data entry was performed on 3,317 assay intervals with a few very minor data entry errors observed and were subsequently corrected. The 3,317 verified intervals were checked against digital assay lab certificates from Activation Laboratories of Ancaster, Ontario. The checked assays represented 79.6% of the data to be used for the resource estimate and approximately 17.2% of the entire database.
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16.4 Domain Interpretation
The Gurvanbulag Central Deposit domain boundaries were determined from lithology, structure and grade boundary interpretation from visual inspection of drill hole sections. Two domains were created named Hanging Wall and Footwall. These domains were created with computer screen digitizing on drill hole sections in Gemcom by the authors of this report. The outlines were influenced by the selection of mineralized material above 0.04% U3O8 that demonstrated lithological and zonal continuity along strike and down dip. In some cases mineralization below 0.04% U3O8 was included for the purpose of maintaining zonal continuity. Smoothing was utilized to remove obvious jogs and dips in the domains and incorporated a minor addition of inferred mineralization. This exercise allowed for easier domain creation without triangulation errors from solids validation.
On each section, polyline interpretations were digitized from drill hole to drill hole but not typically extended more than 50 meters into untested territory. Minimum constrained true width for interpretation was 1.4 m. The interpreted polylines from each section were ‘‘wireframed’’ in Gemcom into 3-dimensional domains. The resulting solids (domains) were used for statistical analysis, grade interpolation, rock coding and resource reporting purposes. See Appendix-II.
16.5 Rock Code Determination
The rock codes used for the resource model were derived from the mineralized domain solids. The list of rockcodesusedisasfollows:
Rock Code Description
0Air 10 Hanging Wall Domain 20 Footwall Domain 99 Waste
16.6 Composites
Length weighted composites were generated for the drill hole data that fell within the constraints of the above-mentioned domains. These composites were calculated for U3O8 over 1.5 m lengths starting at the first point of intersection between assay data hole and hanging wall of the 3-D zonal constraint. The compositing process was halted upon exit from the footwall of the aforementioned constraint. Un-assayed intervals were set 1 to /2 assay detection limit values. Any composites that were less than 0.40 m in length were discarded so as not to introduce any short sample bias in the interpolation process. The constrained composite data were transferred to Gemcom extraction files for the grade interpolation as X, Y, Z, U3O8 files.
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16.7 Grade Capping
Grade capping was investigated on the raw assay values in the databases within the constraining domains to ensure that the possible influence of erratic high values did not bias the database. Extraction files were created for the constrained U3O8 data. From these extraction files, log-normal histograms were generated. See graphs in Appendix-III.
Table 16.2: U3O8 Grade Capping Values
Capped Capping Value Number of Cumulative % Raw Coefficient Coefficient
Domain U3O8 % Assays Capped for Capping of Variation of Variation
Hanging Wall 1.5 9 99.6 2.33 2.06 Footwall 2.5 7 99.8 2.21 2.05
16.8 Variography
Reasonable omnivariograms and directional variograms were attained for the Hanging Wall and Footwall domains which permitted the classification of measured and indicated resources. See variograms in Appendix- IV.
16.9 Bulk Density
The bulk density data available for the deposit was utilized for the creation of separate density block models for the Hanging Wall and Footwall domains. 312 bulk density measurements within the Hanging Wall Domain and 330 within the Footwall Domain utilized a simple spherical search ellipse to generate their respective bulk density block models. The average bulk density was calculated to be 2.51 tonnes/m3 for the Hanging Wall Domain and 2.45 tonnes/m3 for the Footwall Domain.
16.10 Block Modeling
The Gurvanbulag Central Zone resource model was divided into a block model framework containing 11,760,000 blocks that were 10 m in X direction, 10 m in Y direction and 5 m in Z direction. There were 250 columns (X), 280 rows (Y) and 168 levels (Z). The block model was rotated 40 degrees clockwise. Separate block models were created for rock type, density, percent, classification and U3O8.
The percent block model was set up to accurately represent the volume and subsequent tonnage that was occupied by each block inside the constraining domains. As a result, the domain boundary was properly represented by the percent model ability to measure infinitely variable inclusion percentages within that domain.
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The U3O8 composites were extracted from the Microsoft Access database composite table into separate 2 files. Inverse distance squared (1/d ) grade interpolation was utilized to code the U3O8 blocks. The first grade model interpolation pass was utilized for the Measured classification, the second the Indicated classification and the third pass for the Inferred classification. The resulting U3O8 grade blocks can be seen on the block model cross-sections and plans in Appendix-V. Grade blocks were interpolated using the following parameters:
Table 16.3: U3O8 Block Model Grade Interpolation Parameters
Dip Dip Strike Across Dip Max Min Max Domain Dir. Strike Dip Range (m) Range (m) Range (m) per Hole Sample Sample
HW Measured 1308 408 –138 25 20 10 1 3 12 HW Indicated 1308 408 –138 35 30 20 1 2 12 HW Inferred 1308 408 –138 150 150 50 1 1 12 FW Measured 1308 408 –138 25 20 10 1 3 12 FW Indicated 1308 408 –138 35 25 20 1 2 12 FW Inferred 1308 408 –138 150 150 50 1 1 12
16.11 Resource Classification
During the Gurvanbulag Central Zone classification interpolation search ellipsoid passes, 6,811 grade blocks were coded as Measured, 69,572 were coded as Indicated and 62,125 were coded as Inferred. Classification block cross-sections and plans can be seen in Appendix VI.
16.12 Resource Estimate
The resource estimate was derived from applying a 0.08% U3O8 cut-off grade to the block model and reporting the resulting tonnes and grade for potentially mineable areas. Mineralization within the existing underground workings was removed from the resource model. The following calculation demonstrates the rationale supporting the 0.08% U3O8 cut-off grade that determined potentially economic portions of the mineralized domains.
U3O8 Price USD60/lb
U3O8 Process Recovery 95% Mining Cost US$50/tonne mined Process Cost (1,500tpd) US$35/tonne processed General/Administration $15/tonne processed
The U3O8 cut-off grade for this underground resource estimate was calculated as follows:
Operating costs per ore tonne = ($50 + $35 + $15) = $100/tonne
($100)/($60 x 22.05 x 95% Recovery) = 0.08% U3O8
The above data were derived from similar underground projects to Gurvanbulag. The resulting resource estimate can be seen in the following table.
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Table 16.4: Gurvanbulag Central Zone Mineral Resources at 0.08% U3O8 Cut Off
Hanging Wall Zone Footwall Zone Total of Both Zones (1)(2) Resources Tonnes %U3O8 Tonnes %U3O8 Tonnes %U3O8 Lbs U3O8 (millions)
Measured 224,000 0.194 550,000 0.261 774,000 0.242 4.1 Indicated 1,316,000 0.174 2,194,000 0.180 3,510,000 0.178 13.8 Measured & Indicated 1,540,000 0.177 2,744,000 0.196 4,284,000 0.189 17.9 Inferred 233,000 0.135 562,000 0.122 795,000 0.126 2.2
1. Mineral resources which are not mineral reserves do not have demonstrated economic viability. The estimate of mineral resources may be materially affected by environmental, permitting, legal, title, taxation, socio-political, marketing, or other relevant issues.
2. The quantity and grade of reported inferred resources in this estimation are uncertain in nature and there has been insufficient exploration to define these inferred resources as an indicated or measured mineral resource and it is uncertain if further exploration will result in upgrading them to an indicated or measured mineral resource category.
3. The Resource Estimate has been prepared in accordance with the guidelines of the Canadian Institute of Mining, Metallurgy and Petroleum (CIM), CIM Standards on Mineral Resources and Reserves, Definitions and Guidelines prepared by the CIM Standing Committee on Reserve Definitions and adopted by CIM Council 11 December 2005.
In order to investigate the sensitivity of the mineral resource estimate to cut off grade, the block model was reported at several other U3O8 cut off grades as shown in Table 16.5 below.
Table 16.5: Gurvanbulag Central Zone Mineral Resource Estimate Sensitivity
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16.13 Confirmation of Estimate
As a test of the reasonableness of the resource estimate, the block model was queried at a 0.001% U3O8 cut off grade with blocks in all classifications summed and their grades weight averaged. This average is the average grade of all blocks within the mineralized domains. The values of the interpolated grades for the block model were compared to the length weighted capped average grades and average grade of composites of all samples from within the domains. See below.
Table 16.6: Comparison of Weighted Average Grade of Capped Assays and Composites with Total Block Model Average Grades
Hanging Wall Zone Footwall Zone
U3O8% U3O8%
Capped Assays 0.086 0.165 Composites 0.091 0.169 Block Model 0.045 0.064
The comparison above shows the average grade of all the grade blocks in the constraining domains to be considerably lower than the weighted average of all capped assays and composites used for grade estimation.
This U3O8 grade reduction is due to the extreme clustering of high grade values in the underground diamond drilling, gamma logging and channel sampling areas wherein the block model spatially smoothes out these values for a more reliable estimate. In addition, a volumetric comparison was performed with the block model volume of the model versus the geometric calculated volume of the domain solids.
Hanging Wall Domain
Total Block Model Volume = 5,434,067 m3 Total Geometric Domain Volume = 5,406,340 m3 Difference = 0.51%
Footwall Domain
Total Block Model Volume = 5,714,808 m3 Total Geometric Domain Volume = 5,687,142 m3 Difference = 0.48%
17.0 OTHER RELEVANT DATA AND INFORMATION
There are no other data considered relevant to this report that have not previously been included.
18.0 INTERPRETATION AND CONCLUSIONS
The reader is referred to Section 36.0 of this Report titled Conclusions and Recommendations.
19.0 RECOMMENDATIONS
The reader is referred to Section 36.0 of this Report titled Conclusions and Recommendations.
20.0 REFERENCES
The reader is referred to Section 37.0 of this Report for References.
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21.0 CERTIFICATES
The reader is referred to Section 38.0 of this Report for Certificates of Qualifications.
ADDITIONAL REQUIREMENTS FOR TECHNICAL REPORTS ON DEVELOPMENT AND PRODUCTION PROPERTIES
22.0 GEOTECHNICAL
22.1 Mining
Golder assisted Western Prospector by providing mine geotechnical input into the DFS. One aspect of this assistance consisted of preparing a rock mechanics assessment for the purposes of underground mine design.
The rock mechanics assessment was based on review of existing geotechnical information, review of existing core logging information, and observation of the current state of underground openings at the mine site. The rock mass quality values obtained were used to provide recommendations for:
. Opening dimensions;
. Assessment of stability of mine openings;
. Assessment of appropriate mining methods;
. Ground support requirements for development and stope headings;
. Assessment of stress interactions as a result of underground stoping.
Based on the assessment of rock mass quality, the following was observed:
. The overall rock mass qualities observed at the mining horizon within the ore zone and immediate hanging wall are rated Very Poor to Fair under the Norwegian Geotechnical Institute Q System (‘‘NGI-Q’’) and Rock Mass Rating (‘‘RMR’’) rock mass classification systems, respectively;
. The overall rock mass qualities in the overlying hanging wall rock is slightly better than the immediate hanging wall rocks and are classified as Poor to Fair by the NGI-Q and RMR rock mass classification systems, respectively;
. The overall rock mass quality of the underlying footwall rock tends to improve with distance from the ore zone and is classified as Fair by both the NGI-Q and RMR rock mass classification systems.
Due to the geometry of the ore zone and potential very poor rock quality in the vicinity of the ore zone, the preferred underground mining method considered for the DFS was by a drift and fill technique, using tightly placed consolidated rock backfill.
22.2 Foundations
Golder examined foundation conditions for the major buildings and for the tailings dam. They examined information on climate, hydrology/hydrogeology, soil conditions, and seismicity. Recommendations were made following test pitting, test drilling, and laboratory testing. The recommendations were used in the tailings dam design and in the design of buildings.
–IVA-78– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
23.0 RESERVES
The diluted measured and indicated reserve estimate for underground mining, at a 0.08% U3O8 cutoff, is
5,043,000 t grading 0.161% U3O8. A mining recovery of 95% and dilution of 20% was included, with the diluting material carrying a background grade of 0.013% U3O8.
Approximately 12% of the hoisted reserves are rejected by the radiometric ore sorter. It has been assumed that the tonnage rejected amounts to 620,000 t at a grade of 0.035% U3O8. A reconciliation of the in situ reserves and process tonnage follows in Table 23-1.
Table 23.1: Reserves
Description Ore Grade of U3O8 U3O8 (tonnes) (%) (million lbs)
Proven Reserves 914,500 0.198 4.0 Probable Reserves 4,128,500 0.153 13.9
Total Reserves 5,043,000 0.161 17.9
Reconciliation
Rejected at Sorter 620,000 0.035 0.5 Feed to Process Plant 4,423,000 0.179 17.4
24.0 MINING OPERATIONS
The Gurvanbulag mineralised zones will be mined by underground mining techniques. The known potentially economic mineralisation extends from surface to approximately 500 m below surface elevation.
Underground mining will use a combination of mobile rubber-tired diesel-powered equipment, slushers, handheld drills and track equipment. The mine is designed to be capable of mining the mineralised zones at a rate of 1,630 tonnes per day or 570,000 annual tonnes of ore. The ore will be trucked to the jaw crusher. The jaw crusher is part of the ore sorting circuit. The ore sorter will upgrade the feed to be processed by rejecting low grade ore. It is estimated that approximately 12% of the ore will be rejected and stockpiled.
The main access to the underground mine for the first 4 years of production will be via a main ramp from surface (Phase 1). To facilitate preproduction development within a 2-year time frame, Main Shaft will also be equipped with a temporary head frame, hoist, and cage to provide limited rock hoisting capacity and movement of men and materials.
Main Shaft will be deepened, equipped, and placed into service to coincide with commencing of mining of stopes down to the other main haulage level, the 440 Level, in Year 5 of the mine life (Phase 2). The Shaft will be equipped with a double-drum production hoist for ore and waste rock and a single-drum service hoist for personnel, equipment, and materials. Shaft hoisting operations will only be suspended when shaft and hoist inspections and maintenance work are being performed.
All mining areas will be accessed and ore hauled to surface in the ramp (during the ramp haulage phase) using mobile mechanised equipment, the majority of which will be diesel powered. Mining will use long tom drills (jackleg drills mounted on air controlled arms, with a rubber-tired air-operated carrier), slushers, and handheld drills. Rock haulage from ore passes to the Main Production Shaft (later mining phase) will use rail haulage.
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The main proposed mining method is drift and fill stoping with cemented waste rock backfill. Stoping will take place in panels which are nominally 150 m wide and mine up dip over a vertical interval of 60 m to 120 m. Once a stoping drift is mined out, it will be filled with cemented waste rock backfill.
Mining will take place initially on one horizon which must be fully developed before ore extraction starts. For the first years of production, all development on 260 Level and 140 Level must be completed before drift and fill production mining between those levels starts. The hanging wall drift on the top level of a stoping panel is required to permit flow-through one-pass ventilation. The average dilution to be expected from a drift and fill stope is 20%.
In areas where the orebody locally increases in vertical thickness to over 5 m, uphole longhole mining will be employed. The mined out stope will be filled with cemented rock fill to minimise caving. Longhole mining dilution of 20% is included in the mined tonnages.
Golder (Mississauga, Canada) performed rock mechanics studies on the Gurvanbulag deposit for underground mining and provided the following design parameters.
. Ore Zone and Immediate Hanging Wall Drift Back. It is recommended that drift spans do not exceed 6 m and for average conditions, pattern bolting by 2.1 m long grouted rebar on 1.3 m by 1.3 m spacing and fibre or screen reinforced shotcrete be employed. Where only the lower ore zone is mined, cement grouted cable bolts may need to be installed in addition and anchored into solid rock above the upper ore zone contact;
. Hanging Wall Access Drifts. It is recommended that permanent hanging wall access drifts of up to 5 m span be arched and pattern bolting of 1.8 m long grouted rebar on 1.3 m by 1.3 m spacing with non-reinforced shotcrete or screen be employed. In zones near the orebody and where the hanging wall drifts may be influenced by stress changes due to underlying mining, support may have to be increased to include fibre or screen reinforced shotcrete;
. Hanging Wall through Immediate Hanging Wall and Ore Zone to Footwall Access. When the hanging wall drift passes through the immediate hanging wall and ore zone to access the footwall, support required for permanent access through these zones may include pattern bolting by 2.1 m long grouted rebar on 1.0 m spacing and 100 mm of fibre or mesh reinforced concrete, or steel sets. When the drift passes directly beneath the fault zones, support may be augmented, as required, by cable support of sufficient length to anchor into overlying solid ground. Where the access drifts pass through the orebody, barrier pillars on each side of the access of at least three times the planned ore mining height should be established to protect the opening. If possible, access drifts that cross the ore zone should be planned through waste zones;
. Footwall Access Drifts. It is recommended that permanent footwall access drifts of up to 5 m span be arched and spot bolting by 1.8 m long grouted rebar be employed as required. In zones near the orebody and where footwall drifts may be influenced by stress changes due to underlying mining, support may have to be increased to include pattern bolting on a 1.4 m spacing and non-reinforced shotcrete or screen.
Golder also stated that the high extraction ratios anticipated will not be achieved without the use of a good quality cemented backfill. The backfill will also provide regional support and minimise the potential for transfer of mining effects to surface in the form of subsidence. In order to provide optimum support, the fill must be placed tightly against the mine back.
–IVA-80– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
25.0 MINERAL PROCESSING
25.1 Introduction
The process plant that has been designed for the Gurvanbulag operation is based on a Resin Extraction Process (REP).
Ore from the underground operation will be trucked to surface, dumped and then reloaded into rear dump surface haulage trucks for transportation to the processing plant. The delivered ore will ordinarily be dumped into the primary crusher receiving feed hopper at the process plant. If the trucks are unable to dump into the hopper, then the ore will be stockpiled on a storage pad close to the hopper.
The first stage of processing is the sorting stage. This is followed by grinding, leaching, the resin extraction process and elution, product precipitation, and finally calcining and packaging. The post-sorting nominal capacity of the plant is 1,613 tonnes per day. Other functions involved in the process are tailings neutralisation, effluent treatment, and reagent preparation. The operation is supported by a sulphuric acid plant, oxygen plant, water supply and utilities.
The process plant is designed for a feed of 500,000 tonnes per year (post sorting) at a maximum sustained feed grade of 0.25% U3O8. The process plant is designed to operate at 85% availability for 365 days per year, or equivalently, 24 hours per scheduled day for 310 operating days a year. At the average post-sorting feed grade of
0.179% U3O8, recovery will be 94.2% and the plant will ship 842.8t (1.86 million lbs) per year of U3O8 as yellowcake.
The process design was supported by the two stages of testwork described in Section 15.
The approach taken in the design of the control system for the Gurvanbulag processing plant has been to limit the complexity of the control equipment to a level that can be maintained by locally-trained instrument technicians. The control equipment specified has all been in use and proven in similar metallurgical plants for several years. The approach has been to provide instrumentation which will ease the operation of the plant, minimise spillage and enhance the safety of the operation. Automated control will be limited and manual controls and monitoring will be performed by the operators.
25.2 Sorting
The first stage of processing, ore sorting, is used to upgrade the ore from the underground mine. It divides the feed into material with lower (reject) and higher (process plant feed) uranium concentrations than the processing cut-off grade. The major equipment in ore sorting consists of two jaw crushers, a triple deck screen, one radiometric ore sorter, and various belt conveyors. It is estimated that approximately 12% of the crusher feed will be rejected and stockpiled.
25.3 Grinding and Leaching
The grinding circuit reduces the size of the process plant feed from a nominal minus 60 mm discharging from ore sorting or a nominal minus 85 mm discharging from the crusher to 80% passing 150 mm, appropriate for leaching. The major equipment in grinding consists of a semi-autogenous grinding (SAG) mill and a ball mill.
The leaching circuit is used to extract uranium present in the mill feed (cyclone overflow). Leaching is accomplished through the addition of sulphuric acid and oxygen. The major equipment in leaching consists of the neutral thickener and nine leach tanks.
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25.4 Resin Extraction Process
The resin extraction process circuit is composed of resin extraction and resin elution. The resin extraction process preferentially extracts dissolved uranium from the pregnant leach solution by absorbing it into a resin matrix. The major equipment in the resin extraction process consists of eight tanks with Kemix pump cells, a vendor package.
The resin elution circuit removes the dissolved uranium from the resin, allowing the resin to be re- circulated to the resin extraction process circuit. The uranium is stripped from the resin with a sulphuric acid solution. The major pieces of equipment in the resin elution circuit are three resin elution columns. As noted in Section 15, before final design, further testwork is required to better define and quantify the elution process.
25.5 Precipitation
The impurity precipitation circuit removes excess sulphuric acid and metals co-absorbed on the resin from solution. The precipitated impurities are separated from the uranium bearing solution. The major equipment in the impurity precipitation circuit consists of six impurity precipitation tanks and the gypsum belt filter.
The uranium precipitation circuit precipitates uranium from solution. The resulting product is thickened to a minimum density of 35% solids (w/w). Uranium is precipitated through the addition of hydrogen peroxide and the pH controlled through the addition of magnesium hydroxide. The major pieces of equipment in uranium precipitation are three uranium precipitation tanks and the product thickener.
25.6 Calcining and Product Handling
The product calcining circuit washes the uranium product, dries it and converts it to a high specific gravity product preferred by refineries. The major equipment in the product calcining circuit consists of the centrifuge, the calciner and three scrubbers. Yellowcake, the final product, is packaged in standard 205 litre drums for shipment to a uranium refinery.
25.7 Tailings and Effluent Treatment
The tailings neutralisation circuit treats uranium production process waste flows and precipitate from the water treatment plants. Lime addition increases the pH of the combined streams to pH 10 and the thickened tailings is pumped to the tailings management facility. The major equipment in the tailings neutralisation circuit consists of two tailings neutralization tanks and the tailings thickener.
The effluent treatment circuit removes dissolved impurities from effluent prior to its release or recycle. The major equipment in the effluent treatment circuit are reverse osmosis, the primary and secondary effluent treatment circuits, each consisting of two effluent treatment tanks and a clarifier, three effluent sand filters and two monitoring ponds.
26.0 PROCESSING WASTE AND WATER MANAGEMENT
26.1 Process Waste Management
The tailings waste management facility (WMF) was designed by Golder and it is capable of storing an estimated 4.5 million tonnes over the 9-year life of the current reserves.
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In addition to waste, the WMF will be designed to contain a minimum water cover over the tailings as well as runoff and precipitation from the local watershed basin. In order to minimise the impact of the waste on the quality of the local and regional groundwater system, the entire WMF ground surface area will be lined in order to protect the recharge area from potential contamination.
It is assumed that any rain or snowfall will occur uniformly over the watershed and that the average annual precipitation for the area will apply. Although diversion of run-off around the facility is possible, the additional storage volume required to contain it is manageable relative to the difficulties that would be faced constructing a ditch many kilometres around the facility in the hill and valley terrain.
The location identified for the WMF requires construction of a single dam to provide containment for the facility. The dam will be constructed as a conventional earth or rock fill embankment and the entire WMF facility will be lined. Local borrow materials from the surrounding hills can be used in the construction of the embankment. The total tailings volume storage capacity to be provided by the WMF is 3,445,100 m3.A minimum freeboard of 3 m will be maintained in the WMF to accommodate design, production and climate changes.
26.2 Water Balance
The WMF is the focal point for the water management of the operation as the majority of the process water used will be reclaimed from this facility. Golder was engaged to evaluate this facet. The water balances for the tailings facility were performed using Golder’s in-house water balance model.
The tailings facility has been designed to be a zero discharge facility able to store the deposited tailings during operations while maintaining at least a 1 m water cover over the tailings surface at all times. During the initial operating period, the volume of free water in the pond should be allowed to increase until a sufficiently large pond is developed to allow continuous reclaim to occur.
No water will be reclaimed from the tailings facility to the mill until such time as a pond of approximately 225,000 m3 has been developed. This pond volume can be achieved approximately 4 months following start of operations. Once this minimum pond has been developed, the reclaim rate will be gradually increased to allow the pond to increase to approximately 360,000 m3 by the end of the first year of operation. The reclaim rate has been set at 50% of the total process water (tailings slurry water) requirements for Months 5 and 6 following start-up, increasing to 70% for Months 7 to 12 of the first year of operation. Ultimately, this percentage is estimated to increase to 85%. The remaining 15% of process water needed would come from the mine water discharge.
During Years 2 to 9, 862,484 m3 per year of water will be sent to the WMF contained in the tailings. The amount pumped from the tailings pond to the mill will amount to 733,111 m3 per year. As a result, the mill will need annually 129,373 m3 of make-up water, or 15 m3/h over the full year. The quantity of water inflow pumped from the mine is expected to vary between 25 m3/h and 35 m3/h. This water balance indicates that somewhat in the order of 20 m3/h would be in excess of the process needs. This excess would be treated and discharged to the environment.
27.0 PROJECT INFRASTRUCTURE
Permanent power supply is provided by a new 110 kV line from the power station operated by Dornod Energy System LLC (DES) at Choibalsan. Approximately 10 MW of power will be available to Gurvanbulag, and the electrical load studies show that this is enough for the entire operation, underground and above ground.
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Satellite links presently provide telephone, television, and broadband data services at the mine and camp sites. One of Mongolia’s cellular telephone companies has set up, and is operating, a cell at the site under a contract whereby Emeelt Mines provides power and a transmission tower and the telephone company provides the cell system.
Water will be retrieved from a fresh water well which will be located approximately 2 km south of the mill building. This water will be pumped to the water treatment facility, and to the mill building, as required. The accommodation camp has its own wells.
It is planned that a new road will be constructed to connect the Gurvanbulag site with Choibalsan. The road, approximately 117-km long, follows the route of the existing power line. The detailed engineering, soils testing and route design have been completed by the civil engineering firm, Avarga. A feasibility study and environmental impact assessment have been completed, filed with and accepted by the appropriate Mongolian Government Ministries.
A railway line runs north from Choibalsan via Boorj in Russia to connect with the Trans-Siberian Railway line. Mongolian Railways presently operates one or two trains per week and has had discussions with Emeelt Mines regarding handling of the greater freight requirements for the mining construction and operation. Emeelt Mines will acquire warehousing and storage areas in Choibalsan in order to undertake trans-shipment of bulk and other materials between rail and truck. A warehouse adjacent to the Main Shaft, as well as a storage area inside the mill building, will be used for storage for bulk materials.
The principal industrial surface infrastructure on site will consist of the process building, head-frame and hoist building, maintenance garage, coal-fired hot water heating plant, sulphuric acid plant, oxygen plant and explosive magazines. Support infrastructure will include the administration building, sewage treatment plant, potable water treatment plant, and waste incinerator. These facilities are located in close proximity to each other, and strategically located between the main sources and user areas. A clinic will be located inside the new administration building.
The camp site currently consists of accommodations for 200 persons, kitchen, dining room, washroom buildings, office building, laundry room, medical clinic, office and recreation building. These facilities will be expanded to accommodate additional personnel during the construction and the operating phases of the Project.
28.0 MARKETING AND PRODUCT SHIPMENT
A study by Gamah quoted the World Nuclear Association (WNA) as predicting that the annual demand for yellowcake will range between 178 million lbs (Mlb) and 230 Mlb by 2015 depending on the actual construction rate for new Nuclear Power Plants (NPPs) and extensions of licenses of existing NPPs. The WNA also cite a ‘‘Reference Case’’ of 203 Mlb being their most likely scenario.
Mine production in 2007 was recorded at 106 Mlb. Gamah are forecasting that additional annual mine production of 142 Mlb will be coming on stream. Assuming that all the new mine production comes on stream as scheduled then all the WNA cases are accommodated with a tight margin for the maximum demand figure. In the years prior to 2015 there is a deficit suggesting that prices will be stronger in the near-term future rather than later. Given the likely scenario that supplies will be tight through the period prior to 2015 it is not anticipated that the price will dip back down to the cyclical lows experienced after the 1970s rise.
In January 2009, the spot price of U3O8 contained in yellowcake was USD 51/lb and the term price was reported by Ux Consulting to be USD 70/lb. Based on an opinion provided to the Directors of Western Prospector by National Bank Financial and other market forecasts, the recommended average annual prices used in the study are constant at USD 65/lb between 2012 and 2021 (refer to Table 28.1).
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Table 28.1: Average Annual Price (USD/lb)
Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Price 65 65 65 65 65 65 65 65 65 65
Western Prospector has made connections with several potential purchasers of calcined yellowcake, the intended Gurvanbulag Mines output product. Such potential purchasers include organisations which are State owned or quasi State owned, have relationships with Mongolia, have relationships with Mongolia’s neighbouring countries to facilitate movement of product, and have an expressed desire for product in the time frame likely for production.
Whether product is destined ultimately for Mongolian Nuclear Power Plant usage or third parties, it will need to be exported to a fuel production facility. The yellowcake product will be packaged in 205-litre drums, approximately 400 kg per drum. Drums will be secured in ocean-shipping containers. The containers will be shipped by truck to the rail freight depot at Choibalsan and transported via Russia or China rail systems enroute to customers.
29.0 ENVIRONMENTAL CONSIDERATIONS
In matters related to the environment, Emeelt Mines has committed itself to meeting the highest of Mongolian, Canadian or Australian standards and to undertake best management practices in all its activities. All undertakings to date and those contemplated are compliant with International Finance Corporation/World Bank guidelines.
There are currently 29 laws relating to environmental management in Mongolia. There are two laws best described as general — Law on Environmental Protection (1995, 2005) and Law on Environmental Impact Assessment (EIA) (1998, 2002). The rest of the laws govern the use of particular resources or areas of environmental management. There are 23 laws, orders, regulations, requirements or standards governing the use of water resources; 5 governing the use of plant resources, 20 for mineral resources, 18 for protected areas, 9 for wildlife resources, 19 for toxic chemicals, and 41 for forest resources.
Very early in the Project, Emeelt Mines began to collect samples from mine shafts and wells to gain an understanding of water quality in the area. As part of the baseline study, samples were taken from all aquifers in the area, and measurements were taken of radiation levels in both natural and previously disturbed areas.
As part of mine dewatering, a study was done of the drainage channel to be used for the discharge; this study has been repeated three times. Routine sampling of the water discharged to the environment has also been done and continues.
The environmental protection plan (‘‘EPP’’) for the operations is geared to address water issues, process chemicals and material, tailings and waste disposal. During operations, a set program of sampling and monitoring will be followed. As well, a regional study similar to the baseline study will be done every 3 years to document any changes which might be occurring, while a study of the discharge water drainage channel will be done once each year. In order to accomplish these objectives and assure the effectiveness of the EPP once mining and processing are underway, a full analytical laboratory will be established on site. This will allow the analysis of samples to be done shortly after samples are taken and adverse results addressed quickly.
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The tailings from the process will be impounded in the tailings Waste Management Facility. The effluent from the tailings will be reclaimed and returned to the mill for process use. Under normal operations there will be no direct discharge from the tailings pond to the environment. Should discharge to the environment be necessary, the effluent will be treated to assure that it is environmentally acceptable.
The sources of waste include routine garbage (kitchen waste, paper products), sewage, empty barrels, bags and containers, waste oils, demolition rubble, old machinery, mine timbers and cable, etc. These can be classified in five categories: clean solid waste, sewage, contaminated solid waste, hazardous waste, and liquid industrial waste. Waste will be recycled wherever possible. Materials that are free of contamination and which are of value to a second user or recycler will be recycled. Clean solid waste, including routine kitchen garbage, will be incinerated to reduce the volume of waste. Contaminated solid waste will be disposed in a controlled and secure area on site, probably in the tailings facility. Hazardous wastes will be disposed in accordance with existing regulations and ‘‘best practices’’. Liquid wastes such as oils and solvents will be disposed of by controlled burning in the incinerator.
The main concern at closure will be minimising, to the extent possible, any ongoing radiation emission from the site. The principal of As Low As Reasonably Achievable (ALARA) will be followed. All buildings, infrastructure and support will be removed down to ground level. Pipelines and other buried support items will be removed. Radioactive ‘‘hot spots’’ will be managed by moving materials to the tailings pond or to the underground mine; other contamination will be handled in accordance with best practices. Once all work underground is complete and contaminated materials from surface have been relocated into the mine, the pumps will be shut off and the mine will be allowed to flood. The tailings will be covered with soil and left in place. During the operating phase, a series of trial covers will be tested on the tailings to find the most effective for reducing radon gas emissions. Typically, a soil cover of less than 300 mm or up to 400 mm will reduce gamma radiation to acceptable levels. Control of radon generally requires covers of less than a metre for tailings from low-grade ore bodies, more than enough to control the gamma radiation.
30.0 HAZOP ANALYSIS
A Hazards & Operability (‘‘HAZOP’’) Analysis was facilitated by HITE Engineering on behalf of Aker Solutions and Western Prospector.
The scope of this DFS-level HAZOP analysis was to perform a ‘‘High Level’’ review of the preliminary process and instrumentation flow sheets in order to identify any major design changes or recommendations. A total of 26 ‘‘nodes’’, each representing a different process area, were examined by a cross-functional team over approximately 4 days. Team members included personnel from Aker Solutions, Western Prospector, Melis, and a radiation protection team consultant from Environmental Instruments Canada Inc.
Deviations from the design intent were discussed, identified, and provided with a risk rating. Recommendations for each deviation were assigned to key personnel for follow up and/or implementation. Most of the recommendations are to be implemented during the detailed engineering stage of design or prior to the start of construction and operations. All of the applicable recommendations for the DFS were implemented in the design and costing.
A detailed HAZOP analysis which will encompass specific equipment and process deviations is intended for a later stage in the Project, once detailed engineering and design has been completed to a satisfactory degree.
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31.0 CAPITAL COST ESTIMATE
31.1 Initial Capital Cost
The initial capital cost for mining and surface facilities, based on a capacity of 500,000 tonnes processed per year, is USD 280.2 million in second quarter 2008 US dollars. This expenditure covers the costs from EPCM phase up to and including plant commissioning and production start up. It also includes Owner’s costs and accounts for all applicable freight, insurance, taxes, duties and contingency. Table 31.1 indicates the distribution of these expenditures.
Table 31.1: Preproduction Capital Costs
Preproduction Capital Costs
Area Cost % of Total Cost (USD) (%)
Equipment 35,543,628 12.7 Contractor 201,290,918 71.8 Material 18,501,209 6.6 Equipment Usage 6,171,921 2.3 Labour 18,713,321 6.6
TOTAL 280,221,000 100.0
Engineering costs of USD 1.7 million are part of the USD 35.5 million for EPCM services included.
An additional USD 10.8 million is expended on underground ore development. This expenditure is also capitalized, resulting in a total initial capital cost of USD 291.0 million.
31.2 Sustaining Capital Cost
The sustaining capital costs are USD 157.6 million, also including freight, insurance, taxes, duties and contingency. These expenditures are primarily for the underground except for USD 9.1 million for raising the tailings dam and USD 5.9 million for closure.
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32.0 OPERATING COST ESTIMATE
The total operating costs for the 1,613t/d DFS Gurvanbulag Uranium Project, with a nominal process plant throughput of 1,500t/d, are presented in this section. A contingency allowance of 10% has been added to allow for unidentified items within the current scope of the Project. This is an estimate to ±25% accuracy. Not included are off-site Owner’s costs, and freight to markets as well as social benefit costs on salaries. Table 32.1 summarizes the different elements to the operating costs calculations.
Table 32.1: Summary of Operating Cost
Operating Cost
Operating Cost Component Total Cost LOM Per Tonne Milled (USD’000) (USD/t)
Plant Operating Cost 131,544 29.74 Direct Mining Operating Cost 212,286 48.00 Mine Services and Overheads 69,305 15.67 General and Administration (G&A) 63,524 14.36
TOTAL 107.77
The mining cost is based on delivering 570,000t per year to the radiometric sorter, which will reject an estimated 70,000 tonnes per year.
The operation of the process plant is based on a total annual treatment of 500,000t of ore grading 0.179% uranium. The types and consumptions of supplies and consumables are estimated based on the design criteria, process calculations, completed test work and similar previous project experience.
Maintenance supplies were estimated to be approximately 3% of the process plant direct capital cost. This is an amount based on experience from other plants of similar size and complexity. The estimated direct capital costs for this plant are approximately USD 76,943,000 which is the basis for the estimate for maintenance supplies.
The G&A costs were broken down into three categories; site labour, site expenses and other. The G&A cost for the DFS have been estimated at USD 14.36 for every tonne of ore milled. An allowance of USD 652,535 has been included for undefined areas of site-related G&A operating costs. This equates to approximately 10% of the known G&A costs. G&A expenses related to corporate activity and expenses have been excluded from this estimate.
The salary bases for the different categories are based on current salaries at Emeelt Mines and other similar projects in Mongolia. A 30% payroll burden is has been allowed for and carried as a line item in the economic model under the sub heading of Taxes. The operations will have 768 people on the company payroll of which 22 will be expatriates and the remainder Mongolian nationals. The mining area will employ 625 people, who represent approximately 80% of the total site workforce. The remaining 143 are distributed in the processing area and general and administration aspects of the operations. The mine will also provide employment for an additional 148 people as contractors in the areas of catering, security, medical services, and power line operation. Extensive underground miner training programs will be instituted during the preproduction period. The training of process and other national employees will also be undertaken prior to the start-up of the mill. Initially this training will be supervised primarily by expatriate employees.
A unit cost of USD 0.065/kWh was used for the power cost estimate for the DFS.
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33.0 FINANCIAL ANALYSIS
The principal financial parameters of the Gurvanbulag Project are listed in Table 33.1. A significant component of the cost burden that impacts on the project cash flow is attributed to taxes, which amount to USD 162 million. These taxes encompass income tax, royalties, VAT and import duties.
Table 33.1: Financial Data
Financial Data (USD’000)
Total
Revenue 1,068,126 Operating Costs, Mine Site 477,186 Operating Costs, Shipping 12,420 Total Operating Costs 489,605 Initial Capital — Mining 64,550 Initial Capital — Process and Infrastructure 184,743 Taxes 162,263 Pretax Cumulative Cash Flow 187,080 After Tax Cumulative Cash Flow 24,816
The investment returns, on a pretax and after tax basis are highlighted in Table 33.2.
Table 33.2: Investment Returns
IRR and Net Present Values (NPVs) (USD’000)
Pretax After Tax
IRR (%) 9.2 1.3 NPV at 0% 187,080 24,816 NPV at 5% 58,900 –51,304 Payback Period, Years 6.1 8.6
–IVA-89– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
Figure 33-1 illustrates the rate of change in the pretax NPV with respect to product pricing, CAPEX and OPEX.
Figure 33-1: Sensitivity Graph (Pretax NPV)
34.0 PROJECT SCHEDULING
The scheduled start of the EPCM activities is 26 June 2009, dependent on receiving Government of Mongolia approval for the Project. The overall duration from July, 2009 to achieving full production is 36 months. A 6-month duration for production ramp-up is planned.
The following activity key dates are identified:
29 May 2009 Government approval 26 June 2009 Award of EPCM 21 August 2009 Award of purchase order for the grinding mills 29 March 2010 Start of construction surface facilities 4 March 2011 Grinding mills delivered on site 20 December 2011 Completion of mine development 2 December 2011 Process plant mechanical completion 2 January 2012 Start production 29 June 2012 Full production
The feasibility study report includes a Gantt chart, indicating the relationship between the Project development activities and identifying the critical tasks.
–IVA-90– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
35.0 OPTIMIZATION, PROJECT RISKS AND OPPORTUNITIES
Risks and opportunities exist in the areas of permitting, geology, mining, and processing.
Examples of some of the risks have to do with delays in the receipt of the necessary permits and licenses, reduction in the recoverable resources, a tight timetable for the shaft deepening, and adoption of the resin extraction process.
Opportunities exist for the addition of reserves and the purchase of used equipment at lower capital cost. Further optimization testwork is planned; this could reduce the capital and operating costs in the grinding area andintheresinextractionprocess.
Many of the processing risks were identified by a HAZOP analysis that was facilitated by an independent consultant, as described in Section 30.
36.0 CONCLUSIONS AND RECOMMENDATIONS
36.1 Conclusions
Aker Solutions concluded that:
. the results of the DFS are positive and indicate that the Project is viable;
. the Uranium market pricing used in the DFS is considered to be conservative;
. no undue delays are anticipated in getting a mine operating license as the political atmosphere in Mongolia indicates that the Government is determined to conclude investment agreements with mining companies in a timely manner;
. the process design selected for Gurvanbulag is based on detail testwork and offers the optimum benefits to Western Prospector in terms of capital and operating costs and metallurgical recovery;
. the mining risk at Gurvanbulag is minimized by the fact that the existing underground development has allowed Western Prospector, and their geotechnical and mining consultants, to access the workings and examine the layout, openings and rock conditions in detail;
. the Project execution schedule is conservative and allows ample time for metallurgical testwork, the procurement of long delivery items, mine development, plant construction and production ramp up.
36.2 Recommendations
Based on the Definitive Feasibility Study of Aker (2008), it is recommended that:
. although no undue delays are expected, works on the property are not to commence until the necessary approvals and authorizations from the Mongolian government for mine development to proceed are received;
. before commencing detailed design, a third round of metallurgical testwork be undertaken, including grinding testwork, with a view to further optimization and if successful, decreasing both the capital cost and operating cost estimates. This phase of work is estimated to cost US$200,000;
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. the Project be advanced to the detailed engineering and construction stage. The preproduction costs for mining and surface facilities, based on a capacity of 500,000 t/a, is approximately US$280.2 million in second quarter 2008. This expenditure covers the costs from detailed engineering stages up to and including plant commissioning and preproduction start up. The cost of the detailed engineering stage is estimated at approximately US$35.5 million. An additional estimated expenditure of US$10.8 million is required to perform ore development. Overall duration of detailed engineering and mine development stage to achieving full production is estimated at 36 months.
37.0 REFERENCES
Aker Solutions (2008) Western Prospector Group Limited, Gurvanbulag Uranium Project, Definitive Feasibility Study. 10 December 2008.
Bagby W.C. (1986) Descriptive model of volcanogenic U. In:Cox,D.P.andSinger,D.A.(eds)Mineral Deposit Models, USGS Bulletin 1693.
Chabiron A., Alyoshin A.P., Cuney M., Deloule E., Golubev V.N., Velitchkin V.I., Poty B. (2001) Geochemistry of the rhyolitic magmas of the Streltsovka caldera (Transbaikalia, Russia): a melt-inclusion study. Chemical Geology, vol 175 (3–4), 273–290.
Chabiron A., Cuney M., Poty B. (2003) Possible uranium sources for the largest uranium district associated with volcanism: the Streltsovka caldera (Transbaikalia, Russia). Mineralium Deposita, vol 38, pages 127–140.
Chirzov L.D., Samovitch D.A. Markov, A.I., Gusev, A.I., Demianov, V.V., Menschin, V.A., Malevitch, L.V., Schegolev, A.A. and Bronin, Ya.I. (1976) Report on the results of aero- and auto-gamma-spectrometric surveys at the 1: 25000 scale (Geological order MGME-6) in the north-eastern part of the Mongolian People Republic in 1974-1975 (map sheets L-49-A, M-49-r, M-50-B). Ministry of Geology of the USSR — Mongolian Geological Mapping Expedition. Irkutsk. Mongolian Geo-information Centre Report 2447.
Derry D.R. (1980) Uranium deposits through time. In: The continental crust and its mineral deposits. Geological Association of Canada, Special Paper 20, pages 625–632.
G&DS (2007) Report on uphole gamma logging of the Gurvanbulag Underground mine. Internal report for Western Prospector Group, November 2007.
Golder (2008) Technical Memorandum: Geotechnical Recommendations for Surface Infrastructure, Gurvanbulag Uranium Project, Mongolia. Report for Western Prospector Group, 28 November 2008.
Harper G. (2005) Report on Saddle Hills area uranium prospects. Exploration Licenses 3367X, 4846X, 4969X, 4970X, 4974X, 6995X, 7023X, 7405X, 7685X and 9283X, Dornod Aimag, eastern Mongolia. NI 43-101 report for Western Prospector Group Ltd.
Jigjidsuren S. and Johnson D.A. (2003) Forage plants in Mongolia. Admon Publishing Co., Ulaanbaatar, Mongolia. 563 pp.
Marmont S. (1987) Unconformity-type uranium deposits. In: Ore Deposit Models, Geoscience Canada, Reprint Series 3, pages 103–115.
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Micon International (2007) Independent Technical Report on the Results of a Preliminary Economic Assessment, Gurvanbulag Uranium Deposit, Mongolia. NI 43-101 report prepared for Western Prospector Group Ltd. 27 November 2007.
Mironov Y.B. (2005) Uranium of Mongolia. English translation, Center for Russian and Central EurAsian Mineral Studies (CERCAMS), London.
Nash J.T., Granger H.C. and Adams S.S. (1981) Geology and concepts of genesis of important types of uranium deposits. Economic Geology, 75th Anniversary Volume, pages 63–116.
Obolenskiy A.A., Rodionov S.M., Ariunbileg S., Dejidmaa G., Distanov E.G., Dorjgotov D., Gerel O., Hwang D.H., Sun F., Gotovsuren A., Letunov S.N., Li X., Nokleberg W.J., Ogasawara M., Ratkin V.V., Seminsky Z.V., Shpikerman V.I., Goryachev N.A., Smelov A.P., Sotnikov V.I., Spiridonov A.A., Zorina L.V. and Yan H. (2007) Mineral Deposit Models for Northeast Asia. U.S. Geological Survey Open-File Report 2007- 1183-C, 123 p.
Robertson D.S., Tilsley J.E., Hogg GM (1978) The time-bound character of uranium deposits. Economic Geology, vol 73, pages 1409-1419.
Rogov U.G. and Urchenko I.A. (1987) Gurvanbulag and Dornod deposits of uranium (Mongolia), (in six volumes), Report on results of detailed prospecting in the period 1982–1987, with calculations of reserves as of 1 July 1987, in six volumes; Vol. 1 Report text, Vol. 4 text and table attachments, figures, Ministry of Geology, USSR, Irkutsk, Mongolian Geo-information Centre Report 5251.
Ruzicka V. (1993) Unconformity-type uranium deposits. In: Mineral Deposits Modeling, GAC Special Paper 40, pages 125–149.
Scott Wilson RPA (2007) Technical Report on the Dornod Uranium Project, Mongolia. NI 43-101 report prepared for Khan Resources Inc., 27 September 2007.
Smee & Associates Consulting Ltd (2006) A Review of Quality Control Data, Procedures, and Analytical Laboratories with Recommendations, Saddle Hills Uranium Project, Dornod Aimag. Internal report prepared for Western Prospector Group Ltd, February 2006.
SRK Consulting (Canada) Inc (2006) Independent Technical Report and Resource Estimate for the Gurvanbulag Deposit, Saddle Hills Uranium Project, Mongolia. NI 43-101 report prepared for Western Prospector Group Ltd, 17 November 2006.
Ts. Nyamdorj (2006) The Minerals Law of Mongolia (Amended Law). Official English Translation, 30 October 2006.
Volfson F.I., Seltsov B.M. and Filonenko Y.D. (1988) Geological-Structural and Mineralogical- Geochemical Conditions of the Formation of Gurvanbulag and Dornod Deposits in Eastern Mongolia. Academy of Science of the USSR. Institute of Ore Deposits, Petrography, Mineralogy & Geochemistry. Moscow. Mongolian Geo-information Centre Report 5261.
Western Prospector Group Ltd (2005) Saddle Hills project, year end report. Internal report.
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38.0 CERTIFICATES
CERTIFICATE of AUTHOR
TRACY J. ARMSTRONG, P.GEO.
I, Tracy J. Armstrong, P.Geo., residing at 2007 Chemin Georgeville, res. 22, Magog, QC J1X 3W4, do hereby certify that:
1. I am an independent geological consultant contracted by P&E Mining Consultants Inc.
2. I am a graduate of Queen’s University at Kingston, Ontario with a B.Sc (HONS) in Geological Sciences (1982).
3. I am a geological consultant currently licensed by the Order of Geologists of Que´bec (License No. 566) and the Association of Professional Geoscientists of Ontario (License No. 1204).
4. I have worked as a geologist for a total of 25 years since obtaining my B.Sc. degree.
5. I am responsible for Sections 11, 12 and 13 of the Technical Report titled ‘‘Technical Report and Feasibility Study on the Gurvanbulag Uranium Deposit, Saddle Hills Property, Dornod Province, Mongolia’’ and dated 20 February 2009 and revised as of 23 March 2009 (the ‘‘Technical Report’’).
6. I have not visited the Gurvanbulag Central Deposit or Saddle Hills Property.
7. I have had no prior involvement with the property that is the subject of the Technical Report.
8. As of the date of this certificate, to the best of my knowledge, information and belief, the Technical Report contains all scientific and technical information that is required to be disclosed to make the Technical Report not misleading.
9. I have read the definition of ‘‘qualified person’’ set out in National Instrument 43-101 (NI 43-101) and certify that by reason of my education and past relevant work experience, I fulfill the requirements to be a ‘‘qualified person’’ for the purposes of NI 43- 101. This Technical Report is based on my personal review of information provided by the Western Prospector Group Ltd., (the ‘‘Issuer’’) and on discussions with the Issuer’s representatives. My relevant experience for the purpose of the Technical Report is:
. Underground production geologist, Agnico-Eagle Laronde Mine 1988–1993; . Exploration geologist, Laronde Mine 1993–1995; . Exploration coordinator, Placer Dome 1995–1997; . Senior Exploration Geologist, Barrick Exploration 1997–1998; . Exploration Manager, McWatters Mining 1998–2003; . Chief Geologist Sigma Mine 2003; . Consulting Geologist 2003–2009.
10. I am independent of the Issuer applying the test in Section 1.4 of NI 43-101.
11. I have read NI 43-101 and Form 43-101F1 and the Technical Report has been prepared in compliance therewith.
Effective date: 15 October 2008
Signing Date: 20 February 2009
Revised as of: 23 March 2009
SIGNED AND SEALED
Tracy Armstrong
Tracy J. Armstrong, P.Geo
–IVA-94– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
CERTIFICATE of AUTHOR
EUGENE J. PURITCH, P.ENG.
I, Eugene J. Puritch, P. Eng., residing at 44 Turtlecreek Blvd., Brampton, Ontario, L6W 3X7, do hereby certify that:
1. I am an independent mining consultant contracted by Western Prospector Group Ltd., (the ‘‘Issuer’’).
2. I am a graduate of The Haileybury School of Mines, with a Technologist Diploma in Mining, as well as obtaining an additional year of undergraduate education in Mine Engineering at Queen’s University. In addition I have also met the Professional Engineers of Ontario Academic Requirement Committee’s Examination requirement for Bachelor’s Degree in Engineering Equivalency.
3. I am a mining consultant currently licensed by the Professional Engineers of Ontario (License No. 100014010) and registered with the Ontario Association of Certified Engineering Technicians and Technologists as a Senior Engineering Technologist. I am also a member of the National and Toronto CIM.
4. I have practiced my profession continuously since 1978. My summarized career experience is as follows:
— Mining Technologist — H.B.M.&S. and Inco Ltd. 1978–1980 — Open Pit Mine Engineer — Cassiar Asbestos/Brinco Ltd 1981–1983 — Pit Engineer/Drill & Blast Supervisor — Detour Lake Mine 1984–1986 — Self-Employed Mining Consultant — Timmins Area 1987–1988 — Mine Designer/Resource Estimator — Dynatec/CMD/Bharti 1989–1995 — Self-Employed Mining Consultant/Resource — Reserve Estimator 1995–2004 — President — P&E Mining Consultants Inc. 2004–Present
5. I have read the definition of ‘‘qualified person’’ set out in National Instrument 43-101 (‘‘NI 43-101’’) and certify that, by reason of my education, affiliation with a professional association (as defined in NI 43-101) and past relevant work experience, I fulfill the requirements to be a ‘‘qualified person’’ for the purposes of NI 43-101.
6. I am responsible for co-authoring Sections 16 and 22 of the Technical Report titled ‘‘Technical Report and Feasibility Study on the Gurvanbulag Uranium Deposit, Saddle Hills Property, Dornod Province, Mongolia’’ and dated 20 February 2009 and revised as of 23 March 2009 (the ‘‘Technical Report’’).
7. I have had prior involvement with the property that is the subject of the Technical Report, in that I co-authored the NI 43-101 report: ‘‘Independent Technical Report on the Results of a Preliminary Economic Assessment, Gurvanbulag Uranium Deposit, Mongolia’’ dated 27 November 2007.
8. As of the date of this certificate, to the best of my knowledge, information and belief, the Technical Report contains all scientific and technical information that is required to be disclosed to make the Technical Report not misleading.
9. I am independent of the Issuer applying the test in Section 1.4 of NI 43-101.
10. I have read NI 43-101 and Form 43-101F1 and the Technical Report has been prepared in compliance therewith.
11. I visited the Gurvanbulag Central Deposit or Saddle Hills Property on 14 to 18 November 2006 and 18 to 21 January 2008.
Effective date: 15 October 2008
Signing Date: 20 February 2009
Revised as of: 23 March 2009
SIGNED AND SEALED
Eugene Puritch
Eugene J. Puritch, P.Eng
–IVA-95– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
CERTIFICATE of AUTHOR
ANTOINER.YASSA,P.GEO
I, Antoine R. Yassa, P. Geo., residing at 241 Rang 6 West, Evain, Quebec, do hereby certify that:
1. I am an independent geological consultant contracted by P&E Mining Consultants Inc.
2. I am a graduate of Ottawa University at Ottawa, Ontario with a B.Sc (HONS) in Geological Sciences (1977).
3. I am a geological consultant currently licensed by the Order of Geologists of Que´bec (License No 224).
4. I have worked as a geologist for a total of 30 years since obtaining my B.Sc. degree.
5. I am responsible for co-authoring Section 16.0 of the technical report titled ‘‘Technical Report and Feasibility Study on the Gurvanbulag Uranium Deposit, Saddle Hills Property, Dornod Province, Mongolia’’ and dated 20 February 2009 and revised as of 23 March 2009 (the ‘‘Technical Report’’).
6. I have not visited the Gurvanbulag Central Deposit or Saddle Hills Property.
7. I have had no prior involvement with the property that is the subject of the Technical Report.
8. As of the date of this certificate, to the best of my knowledge, information and belief, the Technical Report contains all scientific and technical information that is required to be disclosed to make the Technical Report not misleading.
9. I have read the definition of ‘‘qualified person’’ set out in National Instrument 43-101 (NI 43-101) and certify that by reason of my education and past relevant work experience, I fulfill the requirements to be a ‘‘qualified person’’ for the purposes of NI 43-101. This Technical Report is based on my personal review of information provided by Western Prospector Group Ltd., (the ‘‘Issuer’’) and on discussions with the Issuer’s representatives. My relevant experience for the purpose of the Technical Report is:
. Minex Geologist (Val d’Or), 3D Modeling (Timmins), Placer Dome 1993–1995; . Database Manager, Senior Geologist, West Africa, PDX, 1996–1998; . Senior Geologist, Database Manager, McWatters Mine 1998–2000; . Database Manager, Gemcom modeling and Resources Evaluation (Kiena Mine) QAQC Manager (Sigma Open pit), McWatters Mines 2001–2003; . Database Manager and Resources Evaluation at Julietta Mine, Far-East Russia, Bema Gold Corporation, 2003–2006; . Consulting Geologist since 2006.
10. I am independent of the Issuer applying the test in Section 1.4 of NI 43-101.
11. I have read NI 43-101 and Form 43-101F1 and the Technical Report has been prepared in compliance therewith.
Effective date: 15 October 2008
Signing Date: 20 February 2009
Revised as of: 23 March 2009
SIGNED AND SEALED
Antoine Yassa
AntoineR.Yassa,P.Geo OGQ # 224
–IVA-96– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
CERTIFICATE of AUTHOR
DR. WAYNE D. EWERT, P.GEO.
I, Wayne D. Ewert, P. Geo., residing at 10 Langford Court, Brampton, Ontario, L6W 4K4 do hereby certify that:
1. I am a principal of P&E Mining Consultants Inc. and currently contracted as a consultant by Western Prospector Group Ltd.
2. I graduated with an Honours Bachelor of Science degree in Geology from the University of Waterloo in 1970 and with a PhD degree in Geology from Carleton University in 1977.
3. I am a member of the Geological Association of Canada, of the Canadian Institute of Mining and Metallurgy and a P. Geo., Registered in the Province of British Columbia (APEGBC No. 18965) and the Province of Ontario (APGO No. 0866).
4. I have worked as a geologist for a total of 40 years since obtaining my B.Sc. degree.
5. I have read the definition of ‘‘qualified person’’ set out in National Instrument 43-101 (‘‘NI 43-101’’) and certify that by reason of my education, affiliation with a professional association (as defined in NI 43-101) and past relevant work experience, I fulfill the requirements to be a ‘‘qualified person’’ for the purposes of NI 43-101. My relevant experience for the purpose of the Technical Report is:
. Principal, P&E Mining Consultants Inc., 2004–Present; . Vice-President, A.C.A. Howe International Limited, 1992–2004; . Canadian Manager, New Projects, Gold Fields Canadian Mining Limited, 1987–1992; . Regional Manager, Gold Fields Canadian Mining Limited, 1986–1987; . Supervising Project Geologist, Getty Mines Ltd., 1982–1986; . Supervising Project Geologist III, Cominco Ltd., 1976–1982.
6. I have not visited the Gurvanbulag Central Deposit or Saddle Hills Property and have not had any prior involvement with it.
7. I am responsible for Sections 1 and 2 of the technical report titled ‘‘Technical Report and Feasibility Study on the Gurvanbulag Uranium Deposit, Saddle Hills Area, Dornod Province, Mongolia’’ and dated 20 February 2009 and revised as of 23 March 2009 (the ‘‘Technical Report’’).
8. As of the date of this certificate, to the best of my knowledge, information and belief, the technical report contains all scientific and technical information that is required to be disclosed to make the technical report not misleading.
9. I am independent of the issuer applying all of the tests in section 1.4 of National Instrument 43-101.
10. I have read National Instrument 43-101 and Form 43-101F1, and the Technical Report has been prepared in compliance with that instrument and form.
Effective date: 15 October 2008
Signing Date: 20 February 2009
Revised as of: 23 March 2009
SIGNED AND SEALED
Wayne D. Ewert
Dr.WayneD.EwertP.Geo.
–IVA-97– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
CERTIFICATE of AUTHOR
MALCOLM BUCK, P.ENG.
I, Malcolm Buck, M.Eng., P. Eng., residing at 164 Castle Crescent, Oakville, Ontario, Canada do hereby certify that:
1. I am a Senior Associate Mining Engineer at P&E Mining Consultants Inc.
2. I am a graduate of The Technical University of Nova Scotia, with a Bachelor of Engineering in Mining Engineering (1983). I have also obtained a Masters of Engineering, in Mining Engineering (Mineral Economics) from McGill University (1986). My summarized career experience is:
. Practiced my profession continuously since 1983; . Extensive and progressively more senior operational and engineering duties at base metals, gold and uranium mining operations and development projects; . 15 years experience performing all types of feasibility studies and due diligence and strategic planning studies for mines and mining companies.
3. I am licensed by the Professional Engineers Ontario (License No. 5881503). In addition, I am a member of the Canadian Institute of Mining, Metallurgy and Petroleum.
4. I am responsible for Section 24 and co-authored Sections 23, 31, 32,35and36,ofthetechnicalreport titled ‘‘Technical Report and Feasibility Study on the Gurvanbulag Uranium Deposit, Saddle Hills Area, Dornod Province, Mongolia’’ and dated 20 February 2009 and revised as of 23 March 2009 (the ‘‘Technical Report’’).
5. I visited the Gurvanbulag Central Deposit or Saddle Hills Property on 29 to 30 January 2005. The information and data used in Sections 23, 24, 31, 32, 35 and 36 of the report are for the most part public and were obtained from the references cited.
6. As of the date of this certificate, to the best of my knowledge, information and belief, the technical report contains all scientific and technical information that is required to be disclosed to make the technical report not misleading.
7. I am independent of the issuer applying all of the tests in sect 1.4 of NI 43-101.
8. I have had prior involvement with the property that is the subject of the Technical Report, in that I prepared the dewatering plan for the underground existing workings in 2005 and co-authored the NI 43-101 report: ‘‘Independent Technical Report on the Results of a Preliminary Economic Assessment, Gurvanbulag Uranium Deposit, Mongolia’’ dated 27 November 2007.
9. I have read the definition of ‘‘qualified person’’ set out in National Instrument 43-101 (NI 43-101) and certify that by reason of my education and past relevant work experience, I fulfill the requirements to be a ‘‘qualified person’’ for the purposes of NI 43-101.
10. I have read National Instrument 43-101 and Form 43-101F1, and the Technical Report has been prepared in compliance with that instrument and form.
Effective date: 15 October 2008
Signing Date: 20 February 2009
Revised as of: 23 March 2009
SIGNED AND SEALED
Malcolm Buck
Malcolm Buck, P.Eng.
–IVA-98– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
CERTIFICATE of AUTHOR
KIRSTINE R. MALLOCH
I, Kirstine R. Malloch, AusIMM, residing at 83 Woodhaven Drive, Brampton, Ontario L7A 1Y8, do hereby certify that:
1. I am an independent geological consultant employed by P&E Mining Consultants Inc and currently contracted as a consultant by Western Prospector Group Ltd.
2. I am a graduate of Canterbury University, Christchurch, New Zealand with a Bachelor of Science degree in Geological Sciences (1996), and a Master of Science (with first class honours) degree in Geological Sciences (1999).
3. I am a member of the Australasian Institute of Mining and Metallurgy (AusIMM member number 301578).
4. I have worked as a geologist for a total of 11 years since obtaining my Bachelor of Science degree.
5. I am responsible for Sections 3 to 10, 13.4, 14, 17, 20 (37) and 21 (38) as well as the overall structure of the Technical Report titled ‘‘Technical Report and Feasibility Study on the Gurvanbulag Uranium Deposit, Saddle Hills Property, Dornod Province, Mongolia’’ and dated 20 February 2009 and revised as of 23 March 2009 (the ‘‘Technical Report’’).
6. I have visited the site, working as a geologist on the Gurvanbulag Central Deposit or Saddle Hills Property from June 2006 until April 2008.
7. I have had prior involvement with the Property that is the subject of the Technical Report, having worked on site continuously for 23 months.
8. As of the date of this certificate, to the best of my knowledge, information and belief, the Technical Report contains all scientific and technical information that is required to be disclosed to make the Technical Report not misleading.
9. I have read the definition of ‘‘qualified person’’ set out in National Instrument 43-101 (NI 43-101) and certify that by reason of my education and past relevant work experience, I fulfill the requirements to be a ‘‘qualified person’’ for the purposes of NI 43- 101. This Technical Report is based on my personal experience and review of information provided by Western Prospector Group Ltd., (the ‘‘Issuer’’) and on discussions with the Issuer’s representatives. My relevant experience for the purpose of the Technical Report is:
. Senior Geologist, Western Prospector Group Ltd 2005–2008 . Geologist, Geological Survey of NSW, Australia 2002–2005
10. I am independent of the Issuer applying the test in Section 1.4 of NI 43-101.
11. I have read NI 43-101 and Form 43-101F1 and the Technical Report has been prepared in compliance therewith.
Effective date: 15 October 2008
Signing Date: 20 February 2009
Revised as of: 23 March 2009
SIGNED AND SEALED
Kirstine Malloch
Kirstine Malloch
–IVA-99– APPENDIX IV A TECHNICAL REPORT AND FEASIBILITY STUDY ON THE GURVANBULAG URANIUM DEPOSIT SADDLE HILLS PROPERTY DORNOD PROVINCE, MONGOLIA
CERTIFICATE of AUTHOR
CHARLES MICHAEL STEED, P.ENG.
As a co-author of this technical report entitled ‘‘Technical Report and Feasibility Study on the Gurvanbulag Uranium Deposit, Saddle Hills Property, Dornod Province, Mongolia’’ and dated 20 February 2009 and revised as of 23 March 2009 (the ‘‘Technical Report’’), I hereby make the following statements:
1. My name is Charles Michael Steed and I hold the position of Principal, Mining Geotechnical Engineer at Golder Associates Ltd. My office address is 2390 Argentia Road, Mississauga, Ontario, L5N 5Z7.
2. (a) I hold the following registrations and memberships:
. Registered Professional Engineer in Ontario; . Member of the Canadian Institute of Mining and Metallurgy.
(b) I graduated from the Mining Engineering program at Queen’s University with a B.Sc. in 1978 and M.Sc. in 1985. I have been practicing as a registered professional engineer for 28 years.
3. I am responsible for the underground mining geotechnical design aspects of the Technical Report, referred to in Section 22, and by reason of experience and education, I fulfill the requirements of a Qualified Person as set out in National Instrument 43-101.
4. I visited the Gurvanbulag Central Deposit or Saddle Hills Property between 13 and 16 May 2007.
5. I have had no prior involvement with the property that is the subject of the Technical Report.
6. I have read National Instrument 43-101 and Form 43-101F1. This report has been prepared in accordance with generally accepted Canadian mining industry practice and is in compliance with National Instrument 43-101. It is based on my examination and analysis of data and records provided by Western Prospector Group Limited and on my personal observations. This report is a statement of material facts and opinion and may be used by Western Prospector Group Limited in support of their valuation of the property.
7. As of the date of this Certificate, I am not aware of any changes in fact or circumstance as regards the subject matter of this report, which materially affects the content of the report or the conclusions reached.
8. I have neither received, nor do I expect to receive any interest, direct or indirect, in the Gurvanbulag Uranium Project, or any other property owned by Western Prospector Group Limited. I also do not beneficially own, directly or indirectly, any securities of Western Prospector Group Limited. I am independent of Western Prospector Group Limited, as set out in Part 1.4 of NI 43- 101.
Effective date: 15 October 2008
Signing Date: 20 February 2009
Revised as of: 23 March 2009
SIGNED AND SEALED
C.M. Steed
C.M. Steed, P.Eng
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CERTIFICATE of AUTHOR
LEON CURTIS BOTHAM, P.ENG.
As a co-author of this report entitled ‘‘Technical Report and Feasibility Study on the Gurvanbulag Uranium Deposit, Saddle Hills Property, Dornod Province, Mongolia’’ and dated 20 February 2009 and revised as of 23 March 2009 (the ‘‘Technical Report’’), I hereby make the following statements:
1. My name is Leon Curtis Botham and I hold the position of Principal, Senior Geotechnical Engineer at Golder Associates Ltd. My office address is 1721 8th Street East, Saskatoon, Saskatchewan, S7H 0T4.
2. (a) I hold the following registrations and memberships:
. Registered Professional Engineer in Ontario, Saskatchewan, Yukon Territory and Northwest Territories; . Member of the Canadian Institute of Mining and Metallurgy.
(b) I graduated from the Civil Engineering program at the University of Saskatchewan with a B.E. (Civil) in 1988 and a M.S.C.E. (Geotechnical) from Purdue University in 1991. I have been practicing as a registered professional engineer for 17 years.
3. I am responsible for the mine waste design aspects of this report, referred to in Section 26 and the foundation geotechnical aspects of Technical Report, referred to in Section 22.2, and by reason of experience and education, I fulfill the requirements of a Qualified Person as set out in National Instrument 43-101.
4. I visited the Gurvanbulag Central Deposit or Saddle Hills Property between 17 and 20 October 2006.
5. I have had no prior involvement with the property that is the subject of the Technical Report.
6. I have read National Instrument 43-101 and Form 43-101F1. This technical report has been prepared in accordance with generally accepted Canadian mining industry practice and is in compliance with National Instrument 43-101. It is based on my examination and analysis of data and records provided by Western Prospector Group Limited and on my personal observations. This report is a statement of material facts and opinion and may be used by Western Prospector Group Limited in support of their valuation of the property.
7. As of the date of this Certificate, I am not aware of any changes in fact or circumstance as regards the subject matter of this report, which materially affects the content of the report or the conclusions reached.
8. I have neither received, nor do I expect to receive any interest, direct or indirect, in the Gurvanbulag Uranium deposit, or any other property owned by Western Prospector Group Limited. I also do not beneficially own, directly or indirectly, any securities of Western Prospector Group Limited. I am independent of Western Prospector Group Limited, as set out in Part 1.4 of NI 43-101.
Effective date: 15 October 2008
Signing Date: 20 February 2009
Revised as of: 23 March 2009
SIGNED AND SEALED
Leon C. Botham
Leon C. Botham, P.Eng
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CERTIFICATE of AUTHOR
JOHN S. ROGERS, P.ENG.
As the co-author of the report entitled ‘‘Technical Report and Feasibility Study on the Gurvanbulag Uranium Deposit, Saddle Hills Property, Dornod Province, Mongolia’’ and dated 20 February 2009 and revised as of 23 March 2009 (the ‘‘Technical Report’’), I, John S. Rogers do hereby certify that:
1. I was employed as Senior Project Manager and carried out this assignment for:
Aker Metals, a division of Aker Solutions Canada Inc. Suite 400, 1920 Yonge Street Toronto, Ontario M4S 3E2 Tel: (416) 343 9307 Fax: (416) 343 9300 Email: [email protected]
2. I hold the following academic qualifications:
BSc. E.E. University of New Brunswick 1967 M.Eng. (Mining) McGill University 1970
3. I am a registered Professional Engineer with the Professional Engineers Ontario (membership # 39507017). I am also a member in good standing of the Canadian Institute of Mining, Metallurgy and Petroleum.
4. I have worked in the mining industry for 38 years at various levels of mine management, project development and feasibility studies in Canada, Philippines and Saudi Arabia.
5. I have read the definition of ‘‘qualified person’’ set out in National Instrument 43-101 (‘‘NI 43-101’’) and certify that by reason of my education, affiliation with a professional association (as defined in NI 43-101) and past relevant work experience, I fulfill the requirements to be a ‘‘qualified person’’ for the purposes of NI 43-101.
6. I visited the Gurvanbulag Central Deposit or Saddle Hills Property between 10 to 21 January 2008.
7. I am responsible for the preparation of sections 27–36 of the Technical Report.
8. I have had no prior involvement with the property that is the subject of the Technical Report or the Western Prospector Group Ltd (‘‘the Issuer’’).
9. As of the date of this certificate, to the best of my knowledge, information and belief, the technical report contains all scientific and technical information that is required to be disclosed to make the technical report not misleading.
10. I am independent of the parties involved in the Gurvanbulag Project as defined in section 1.4 of National Instrument 43-101.
11. I have read National Instrument 43-101 and Form 43-101F1, and the Technical Report has been prepared in compliance with that instrument and form.
Effective date: 15 October 2008
Signing Date: 20 February 2009
Revised as of: 23 March 2009
SIGNED AND SEALED
John S. Rogers
John S. Rogers, P.Eng
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CERTIFICATE of AUTHOR
BRUCE C. FIELDER, P.ENG.
Principal Process Engineer, Melis Engineering Ltd. Suite 100, 2366 Avenue C North, Saskatoon SK Canada S7L 5X5 Tel: (306) 652-4084 Fax: (306) 653-3779 Email: [email protected]
I, Bruce C. Fielder, am a Registered Professional Engineer in the Province of Saskatchewan, Registration No. 10309. I am Principal Process Engineer at Melis Engineering Ltd. and I reside at 249 Brock Crescent, Saskatoon, Saskatchewan, Canada.
1. I am a member of the Canadian Institute of Mining Metallurgy and Petroleum and I hold a Consulting Engineer designation with the Association of Professional Engineers and Geoscientists of Saskatchewan. I graduated from the University of Alberta with a BSc. Degree in Metallurgical Engineering in 1981.
2. I have practiced my profession continuously since 1981 and have been involved in: metallurgical testwork supervision, process engineering, preparation of process audits, scoping, pre-feasibility, and feasibility level studies, and mill operations for precious metals, base metals, uranium and diamond projects worldwide.
3. I have read the definition of ‘‘qualified person’’ set out in National Instrument 43-101 (‘‘NI 43-101’’)andcertifythatbyreasonof my education, affiliation with a professional association (as defined in NI 43-101) and past relevant work experience, I fulfill the requirements to be a ‘‘qualified person’’ for the purposes of NI 43-101.
4. I served as the Qualified Person for Sections 15, 25 and 32 of the Technical Report titled ‘‘Technical Report and Feasibility Study on the Gurvanbulag Uranium Deposit, Saddle Hills Property, Dornod Province, Mongolia’’ and dated 20 February 2009 and revised as of 23 March 2009 (the ‘‘Technical Report’’). The work was completed at a commercial testing laboratory and in the Melis Engineering Ltd. office.
5. I visited the Gurvanbulag Central Deposit or Saddle Hills Property during 17 to 20 October 2006 and 15 to 20 June 2007 to review drill core, sampling and general site conditions.
6. I have been involved with the project from May 2006 until the present. This involvement takes the form of the design and supervision of metallurgical testwork and process design for the definitive feasibility study.
7. As of the date of this certificate, to the best of my knowledge, information and belief, the metallurgical and process sections of the Technical Report contains all scientific and technical information that is required to be disclosed to make the metallurgical component of the Technical Report not misleading.
8. I am independent of the Issuer, Western Prospector Group Ltd., in accordance with the application of Section 1.4 of National Instrument 43-101.
9. I have read National Instrument 43-101 and certify that the portions of the report for which I served as a Qualified Person have been prepared in compliance with that Instrument.
Effective date: 15 October 2008
Signing Date: 20 February 2009
Revised as of: 23 March 2009
SIGNED AND SEALED
Bruce C. Fielder
Bruce C. Fielder, P.Eng
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APPENDIX I
SURFACE AND UNDERGROUND DRILL HOLE PLANS
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APPENDIX II
3D DOMAINS
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APPENDIX III
LOG NORMAL HISTOGRAMS
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APPENDIX IV
VARIOGRAMS
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APPENDIX V
U3O8 BLOCK MODEL CROSS SECTIONS AND PLANS
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APPENDIX VI
CLASSIFICATION BLOCK MODEL CROSS SECTIONS AND PLANS
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APPENDIX VII
NOTIFICATION OF CHANGES TO EXPLORATION LICENSE 4974X
Attention: Ms D. Altan-Lish, Director, Emeelt Mines LLC From: MRPAM Date: 12 Feb 2007 Re No. 7-1036: Notification
This letter is to notify that following changes were made in coordinates of exploration Special Permission No. 4974X held by your company in Dornod Aimag, Sergelen and Dashbalbar sums, in accordance with Resolution No. 586 of the Head of Geology and Mining Cadastre Office, dated 12 February 2007:
Coordinate changes:
1. 114006’00” 48058’18.59” 2. 114006’00” 48059’00” 3. 114005’00” 48059’00” 4. 114005’00” 49001’00” 5. 114004’30” 49001’00” 6. 114004’30” 49004’43” 7. 114005’30” 49004’43” 8. 114005’30” 49004’30” 9. 114006’30” 49004’30” 10. 114006’30” 49005’10” 11. 114004’30” 49005’10” 12. 114004’30” 49005’20” 13. 114010’00” 49005’20” 14. 114010’00” 49005’25” 15. 114020’00” 49005’25” 16. 114020’00” 49004’32.41” 17. 114016’50” 49003’10”
Total area: 14,167 ha
Records were made in attachments 1 and 2 of Special Permission number 4974X as well as in area map.
T. Zanashir The Head of OGMC
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APPENDIX VIII
CURRICULUM VITAE ROBERT WILSON
ROBERT D. WILSON Consulting Scientist 12699 County Road 40.5, Mancos, CO 81328 (970)533-9043, [email protected]
Synopsis: Ph.D. in Engineering Physics from University of Virginia, over 25 years experience with nuclear measurements with emphasis on measurement physics, radiation transport, detector modeling, and design of geophysical measurement systems. Currently a consultant to Weatherford International, a world-wide provider of services to the gas and oil industry, and to Delta Epsilon Instruments Corp., a manufacturer of geophysical instrumentation.
Special Qualifications:
. Experienced user of MCNP Monte Carlo radiation transport code;
. Knowledge of physical basis for most nuclear analysis methods;
. Calibration of neutron and gamma-ray instruments for geophysical application;
. Teacher of physics and engineering;
. Experienced writer of reports and manuscripts.
Professional Accomplishments:
. Co-inventor of instrument for measurement of neutron and gamma source direction; participated in developing a prototype that has application in homeland security;
. Invented and patented new method of gas saturation logging. Invented analysis method for this logging measurement based on a model that inverts the measured responses to the petrophysical parameters of interest;
. Conceived and developed gamma-ray spectral shape factor methodology for logging contaminant distributions and identifying 90 Sr at the Hanford Tank Farms;
. Invented a novel density/moisture logging tool suitable for vadose zone logging in cased boreholes and led a project that demonstrated proof-of-principle;
. Started and operated a consulting business specializing in the computer simulation of nuclear logging measurements used in environmental and oil/gas applications;
. Led a group of researchers that significantly advanced the state of spectral gamma-ray logging technology.
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Employment History:
. Consulting Scientist
San Juan Scientific (Mancos, CO)
November, 1999–March, 2000 and February, 2003–present
Duties: Perform research for clients developing nuclear measurements for various geophysical and environmental applications; perform radiation analyses to determine shielding requirements for sources used in moisture and density gauging.
. Research Scientist
Computalog USA, Technical Services Group (Fort Worth, TX)
March, 2000–January, 2003
Duties: Develop and characterize new nuclear measurements for use in well logging of formation density, moisture, and hydrocarbon content. Provide computer modeling of these measurements with Monte Carlo methods. Awarded U.S. patent for a new gas saturation logging method. Co-inventor of four additional patents. Co-authored two SPE papers in 2001.
. Principal Nuclear Engineer
Waste Management Technical Services (Richland, WA)
March, 1998–November, 1999
Duties: Performed radiation shielding analyses for radionuclide transportation casks. Performed computer simulations of nuclear measurements used to safeguard nuclear materials and to characterize radionuclide content of storage tanks and of contaminated soils. Published technical reports and a manuscript presented at July 1999 SPIE symposium in Denver, CO.
. Lead Principal Scientist
Rust Geotech and MACTEC-ERS (Grand Junction, CO)
October, 1992–January, 1998
Duties: Conducted research to develop and evaluate new nuclear measurement techniques for use in waste site characterization and remediation. Dr. Wilson conceived new logging measurements, designed experiments to evaluate performance, analyzed data, and reported results at symposia and in refereed journals. Published paper at 1995 IEEE Nuclear Science Symposium and a refereed article in the IEEE Transactions on Nuclear Science, 1998.
. Consulting Physicist
Highland Scientific, Ltd. (Ashland, OR)
Spring, 1985–September, 1992
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Duties: Started Highland Scientific as a consulting company to research nuclear measurement problems. The company eventually employed three people full time. Dr. Wilson supervised an administrative assistant/technician, and a junior level scientist/programmer. Clients included Mobil Research and Development Corporation, Westinghouse Hanford Company, Fenix-Scisson (Nevada Test Site), Computalog Wireline Research Company, and Baker-Hughes Corporation. Principal author of two articles in the journal Nuclear Geophysics one related to research done for Mobil R&D and the other for Fenix-Scisson.
. Associate Professor of Physics
Southern Oregon State College (now a university, Ashland, OR)
August, 1983–May, 1988
Duties: Taught undergraduate physics and engineering at all levels. Established undergraduate research program in nuclear science. Obtained grant for research project that employed many students and other faculty members. A former student eventually became an employee of Dr. Wilson’s consulting company.
. Research Scientist
Gearhart Industries Research Center (Austin, TX)
August, 1981–August, 1983
Duties: Initiated and conducted research to conceive and develop nuclear borehole logging tools for oil and gas exploitation.
. Advanced Research Geoscientist
Bendix Field Engineering Corporation (Grand Junction, CO)
May, 1976–August, 1981
Duties: Leader of Gamma Ray Logging Group — conducted research and development leading to the successful deployment of the spectral gamma logging method for uranium exploration. Co-authored several SPWLA symposium papers.
. Visiting Assistant Professor of Nuclear Engineering
University of Virginia (Charlottesville, VA)
August, 1974–May, 1976
Duties: Taught undergraduate and graduate level courses in nuclear engineering. Established senior thesis projects for undergraduates.
. Assistant Professor of Physics
Virginia Military Institute (Lexington, VA)
August, 1971–May, 1974
Duties: Taught undergraduate physics at all levels. Established research projects for senior thesis course.
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Relevant experience:
Led a team that developed gamma spectral analysis methods for uranium exploration (US DOE National Uranium Resource Evaluation program, 1976–1982, publications: 20th SPWLA Symposium, Tulsa, June 1979, papers EE and FF).
As a consultant for Computalog, EXLOG, Nevada Test Site, Mobile R&D, participated in several nuclear logging instrument research and development projects (1985 through 1991, one example of several papers and publications: Nucl. Geophys. Vol. 3, No. 4, pp. 323-334, 1989).
Member of team to develop and evaluate neutron capture gamma logging for contaminant detection at US DOE waste sites. Designed and built contaminant calibration models. Processed high-resolution gamma spectra to obtain contaminant elemental concentrations (1992 through 1996, US DOE project, Grand Junction, CO).
Developed spectral shape analysis method to measure gamma contaminant distribution surrounding cased boreholes (US DOE project, Grand Junction, CO. first author of publication: IEEE Trans. Nucl. Sci. Vol. 45, No 3, pp 997-1001, June 1998).
Developed and tested prototype moisture/density tool for vadose-zone logging using fast neutron and inelastic gamma measurements (1996 through 1998, US DOE project and Gas Research Institute project, Grand Junction, CO).
Member of team that applied neutron-capture gamma spectroscopy for vadose-zone moisture logging (US DOE project, Hanford site, first author of publication: SPIE Proceedings, Vol. 3769, pp 178-188, Denver, 1999).
As a Precision Energy Services (now part of Weatherford International) employee and consultant (2000 to present) Wilson has worked on pulsed-neutron well-logging tools with emphasis on new measurements to improve the cased-hole density and porosity log.
Patent applications have been filed or issued. There have been two SPE papers with R. Odom and D. Tiller as co-authors (SPE 71042 and SPE 71742).
Wilson patents:
US 7,026,627 B2. ‘‘Neutron/Gamma Ray Survey Instrument With Directional Gamma Ray Sensitivity’’, Fred E. Fowler Jr., Jerry L. Burnham, Robert D. Wilson, Assignee: Delta Epsilon Instruments, Delta, CO (US), patent issued 11 April 2006.
US 6,495,837. ‘‘Geometrically Optimized Fast Neutron Detector’’, Richard C. Odom, Donald E. Tiller, Robert D. Wilson, issued 17 Dec. 2002.
US 6,207,953, ‘‘Apparatus and methods for determining gas saturation and porosity of a formation penetrated by a gas filled or liquid filled borehole’’ Robert D. Wilson, issued 27 March 2001. The apparatus utilizes a pulsed source of 14 MeV neutrons and detects scattered fast neutrons and inelastic gamma rays from the formation.
US 5,900,627. ‘‘Formation Density Measurement Utilizing Pulse Neutrons’’, Odom, R.C., Streeter, R.W., Wilson, R.D., issued 4 May 1999. The method is based on density-dependent attenuation of inelastic gamma rays produced by fast neutron scattering in the formation.
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Recent papers:
Richard C. Odom, Don E. Tiller, Robert D. Wilson, Experiments on Closely Spaced Detector Candidates for Carbon/Oxygen Logging, Petrophysics, Vol. 46, No. 3 (June 2005), p. 188–198. Wilson provided radiation simulations and data analysis support for this research.
Several SPE (Society of Petroleum Engineers) and SPLWA (Society of Professional Well Log Analysts) papers with Richard Odom as first author in period from 1999 to 2002. Subject is pulsed-neutron cased-hole well logging for geophysical parameters. Wilson, acting as consultant, provided computer simulation and other scientific support for these papers.
Wilson, R.D., Randall, R.R., Meisner, J.E., Boles, J.L., and Reynolds, K.D., ‘‘Moisture logging in cased boreholes using capture gamma-ray spectroscopy,’’ SPIE Proceedings, Vol. 3769, pp 178–188, Denver, 1999.
WilsonR.D.,C.J.Koizumi,J.E.Meisner,andD.C.Stromswold, 1998. ‘‘Spectral shape analysis for contaminant logging at the Hanford Site’’, IEEE Transactions on Nuclear Science, Vol. 45, No. 3, pp 997–1001, June 1998.
Wilson R.D., 1995, ‘‘Bulk Density Logging With High-Energy Gammas Produced by Fast Neutron Reactions with Formation on Oxygen Atoms’’, 1995 IEEE Nuclear Science Symposium, p. 209–213.
R.D. Wilson and J.G. Conaway, (1993). ‘‘Simulations of Spectral Gamma-ray Logging Tool Response to Formation and Borehole Wall Source Distributions’’, Nucl. Geophys. Vol. 7, No. 1, p. 35–53.
R.D. Wilson, D.C. Stromswold, W.R. Mills and T.K. Cook, (1989). ‘‘Porosity logging using epithermal neutron lifetime — Monte Carlo simulations,’’ Nucl. Geophys., Vol. 3, No. 4 p. 323–334.
Professional Affiliations:
Elected to Sigma Pi Sigma — Physics Honor Society
Elected to Sigma Xi — Research Society
Member Institute of Electrical and Electronic Engineers
Member Society of Professional Well Log Analysts
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The following is the text of a review and valuation, prepared for the purpose of inclusion to this circular, received from Chlumsky, Armbrust & Meyer, LLC, an independent technical consultant in mineral assets, in connection with its valuation as at 29 April 2009 of the uranium properties comprising the Saddle Hills project area, and three coal exploration licenses, located in Mongolia controlled by Western Prospector. The report will be signed by Dr. Richard Nielsen for Chlumsky, Armbrust & Meyer, LLC.
TABLE OF CONTENTS
Page No.
Section
1.0 EXECUTIVESUMMARY ...... IVB-3
2.0 SCOPEOFWORK ...... IVB-4
3.0 PROPERTYDESCRIPTIONANDLOCATION ...... IVB-5
3.1 PropertyLicenses ...... IVB-7
4.0 HISTORY ...... IVB-8
4.1 UraniumProperties ...... IVB-8
4.2 CoalProperties ...... IVB-8
5.0 GEOLOGIC SETTING ...... IVB-9
5.1 UraniumProperties ...... IVB-9
5.2 CoalProperties ...... IVB-9
6.0 MINERALIZATION ...... IVB-10
6.1 UraniumMineralization...... IVB-10
6.2 Coal ...... IVB-11
7.0 URANIUMPROPERTIES ...... IVB-11
7.1 Introduction ...... IVB-11
7.2 Gurvanbulag Intermediate and Southwest Zones ...... IVB-11
7.3 Dornod(Khavor)AreaDeposits ...... IVB-12
7.4 DorDeposit ...... IVB-13
7.5 MardaigolUraniumDeposits—FirstandSecondZones...... IVB-13
7.6 NemerDeposit ...... IVB-14
7.7 OtherUraniumProspects...... IVB-14
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Page No.
8.0 COALPROPERTIES ...... IVB-16
8.1 Choibalsan...... IVB-16
8.2 Baganuur ...... IVB-16
8.3 Bagakhangai ...... IVB-16
9.0 VALUATION...... IVB-16
9.1 Valuation Methods for Uranium Properties ...... IVB-16
9.2 Gurvanbulag Intermediate and Southwest ...... IVB-17
9.3 Dornod(Khavor) ...... IVB-17
9.4 Dor ...... IVB-17
9.5 Mardaigol ...... IVB-18
9.6 OtherUraniumProspects...... IVB-18
9.7 ValuationofCoalProperties ...... IVB-18
10.0 RISKANDOTHERFACTORS ...... IVB-18
10.1 Claims ...... IVB-18
10.2 MongolianMineralsLawandRegulatoryEnvironment ...... IVB-19
11.0 QUALIFICATIONS ...... IVB-19
12.0 REFERENCES...... IVB-20
13.0 CERTIFICATEOFAUTHOR...... IVB-20
Tables
1 EstimatedResourcesandEstimatedValuesWNPExplorationProperties ...... IVB-4
2 PropertyLicenses ...... IVB-7
3 NemerDepositEstimatedResource ...... IVB-14
4 EstimatedResourcesandEstimatedValuesWNPExplorationProperties ...... IVB-18
Figures
1 LocationMapofExplorationProperties ...... IVB-5
2 SaddleHillsPropertyMap ...... IVB-6
3 UraniumProvincesandDistrictsofMongolia ...... IVB-9
4 MapofPrincipalUraniumDepositsandProspects ...... IVB-10
5 PrincipleUraniumTargetsfromAirborneRadiometricSurvey...... IVB-15
–IVB-2– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
1.0 EXECUTIVE SUMMARY
Chlumsky, Armbrust & Meyer, LLC (‘‘CAM’’) performed a review and valuation of the Fair Market Value of uranium properties comprising the Saddle Hills project area, and three areas of coal exploration containing seven licenses, located in Mongolia, These properties are 100% controlled by Western Prospector Group Ltd (WNP — ticker symbol for the company on the Toronto Stock Exchange). The effective date of valuation is 17 April 2009.
Properties in the Saddle Hills project area consist of 11 contiguous exploration licenses covering 148,625 hectares, in an area of established infrastructure and past mining activity. All these licenses are in good standing, and rental payments are current.
Soviet companies carried out exploration and mining activities between 1944 and 1995. Uranium ore was mined by Soviets from the Dornod mine and shipped by rail to a mill just inside Siberia. The Soviets drilled several deposits extensively, and reported uranium resources according to the Soviet system, for more than 10 separate deposits. The Soviets departed shortly after the collapse of the Soviet Union.
Following property acquisition and an air-borne geophysical survey in 2004, WNP focused exploration on the Gurvanbulag deposit. Some 207 diamond drill core holes were directed at defining and confirming a resource at Gurvanbulag. A limited number of holes were drilled into other prospects to verify the presence of uranium mineralization.
Four NI 43-101 reports were prepared from 2005 to 2009, focusing on the resources and economic potential at Gurvanbulag. The reports contain historical information generated by the Soviet activities. These historical data are the basis for the present report that contains CAM’s valuation estimates of the exploration properties.
In preparing this report, CAM applied its extensive NI 43-101 experience, and the values embodied by professional organizations such as the Society of Economic Geologists, the American Institute of Professional Geologists, and the Mining and Metallurgical Society.
Uranium mineralization at Saddle Hills occurs in sedimentary and volcanic host rocks of Mesozoic age that form an oval basin, 120 km in its longest direction. Uranium mineralization is present mainly as stratiform layers and lenses that conform to sedimentary layering in the host rocks. Many mineralized layers are present, and are most common in sediments close to the contact with overlying massive volcanic rocks. Mineralization is also present in some of the deposits in veins and fissures that cut across the sedimentary layers.
Uranium minerals include yellow uranophane that coats fracture surfaces; black coffinite disseminated in sediments, and in veins and fractures; and black pitchblende in small amounts, including stratiform lenses up to 0.5 m in length and 0.1 m thick.
Gurvanbulag Central is the principal uranium deposit in the Saddle Hills project area. Several additional prospects have been tested by Soviet drilling. These appear to have coherent mineralization with potential resources, and are located on lands 100% controlled by WNP. They include the Gurvanbulag Intermediate and Gurvanbulag Southwest Zones, and some of the deposits near the Dornod mine. Other prospects include known uranium mineral occurrences and air-borne radiometric anomalies that have not been tested by surface exploration sampling or drilling. At least 15 targets of this type exist and ten probably are regarded as high priority for future exploration activities. Other prospects with potential resources are present in the Saddle Hills region but are present on lands not controlled or owned by WNP, namely the prospects located on exploration License 3367, the license that is held in escrow and is the subject of litigation. These other prospects are not includedinourvaluationestimate,whichisshowninTable1.
–IVB-3– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
Coal and lignite of varying ranks occur in a number of sedimentary basins in Mongolia. The lignite (‘‘brown coal’’) discussed in this report occurs in terrestrial sedimentary basins of Tertiary age in the eastern part of Mongolia.
Three areas of coal licenses at Choibalsan, Baganuur and Bagakhangai probably contain minable beds of brown coal or lignite. Choibalsan is located near the Saddle Hills project area and possibly could supply energy requirements for the project. Two other areas of licenses, Baganuur and Bagakhangai are located near the capital city of Mongolia, Ulaanbaatar. These two area licenses are near open-pit lignite mines that presently are in production or have past production. These licenses have favorable infrastructure and are accessible by highwayandbyanearbyrailroadline.
For the uranium properties CAM carried out the valuation by assigning a value of approximately 1% of the in-ground uranium (U3O8) mineralization that past Soviets work identified in the Soviet C2 class resource, which we regard as ‘‘exploration potential’’ rather than mineral resource in the Western sense. The reasoning is explained in Section 7.0, below. Results of the valuation are shown in Table 1.
The value of lignite deposits depend entirely on the use of the lignite as fuel at an accessible power plant. Without a supporting economic study, a per-ton value cannot be assigned. Therefore CAM can only assign a nominal value to each license, as the cost of acquiring a titled, and presumably saleable license. CAM has assigned a nominal value of US$100,000 to each of the three area licenses.
Table 1 Estimated Resources and Estimated Values WNP Exploration Properties
Mineralized Zone Tonnes % U3O8 lbs U3O8 Estimated Value
Gurvanbulag Intermediate Zone 2,690,000 0.123 7,268,800 US$3,634,000 Gurvanbulag Southwest Zone 451,000 0.189 1,879,000 US$937,000 Dornod (Khavor) 2,492,000 0.135 7,401,000 US$3,701,000 Dor value not included, due to litigation on property title Mardaigol value not included, due to litigation on property title Other Exploration Targets US$150,000 Coal Area Licenses (Choibalsan, Baganuur, and Bagakhangai) @ US$100,000 US$300,000 TOTAL ESTIMATED VALUE OF EXPLORATION PROPERTIES US$8,722,000
2.0 SCOPE OF WORK
Western Prospector Group Ltd. (WNP) controls 100% of 11 Exploration Licenses covering 148,623 hectares in the uranium-bearing region of northeast Mongolia, and 7 exploration Licenses for lignite (brown coal) in central and northeast Mongolia. Uranium prospects on these properties include drill-confirmed resources of uranium mineralization, several prospects that have drill-confirmed presence of mineralization, and numerous prospects defined by presence of uranium-bearing minerals or defined by airborne radiometric anomalies. CAM does not have access to any information that would serve to value these coal properties.
Per the CAM agreement with CNNC International Ltd., CAM reviewed the available information regarding the WNP’s exploration prospects and targets and developed a Fair Market Value that addresses the various properties. Each property is valued at Fair Market Value, as of 17 April 2009.
–IVB-4– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
The review and evaluation of the geology and mineralization was done by Richard Nielsen, PH.D., Professional Geologist registered in California, and a Qualified Person under the Canadian National instrument NI 43-101 rules. Dr. Nielsen served as exploration District Manager, Rocky Mountain region for Anaconda Uranium Company 1978–1980.
3.0 PROPERTY DESCRIPTION AND LOCATION
The Saddle Hills project area is located in the Aimag (province) of Dornod in northeast Mongolia, about 100 km south and west of the Russian and Chinese borders respectively (Figure 1). Location is about 115 km north-northwest of Choibalsan, the capital and commercial hub of Dornod Aimag. One Exploration License for coal is located near the Saddle Hills project area. The two other areas of licenses are located in central Mongolia near road and railroad infrastructure.
The Saddle Hills project area consists of 12 Exploration Licenses for a total of 188,566 hectares (Figure 2). All licenses currently are in good standing. Western Prospector Group Ltd. (WNP, ticker symbol for the company of the Toronto Stock Exchange) has a 70% joint venture interest with Adamas Mining LLC in Exploration License 3367X, which interest is currently in dispute. Thus 11 contiguous exploration licenses, containing 148,623 hectares are 100% controlled by WNP. These include E.L. 7685X and 4969X that contain the Gurvanbulag Central deposit.
Figure 1 Location Map of Exploration Properties
–IVB-5– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
Figure 2 Saddle Hills Property Map
Exploration activities at Saddle Hills are carried out from mine site buildings and a 200-person camp. In 2008, a 100,000-V power line was constructed to deliver power from the Choibalsan thermal power station. A cellular phone tower was erected and is in operation. From Saddle Hills, 130 km of unimproved dirt road run to Choibalsan, which has air service to Ulaanbaatar.
This part of Asia has continental climate, with long cold, dry winters and brief, mild and relatively wet summers. Exploration activities are carried out through the year. The mean January temperature in Dornod Aimag is –20.5º C and in July +19.9º C. Surface water is present through most of the year in larger rivers and lakes. Groundwater is relatively close to the surface in valley areas. Antelope, wolves and a variety of small mammals inhabit the arid grasslands.
–IVB-6– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
3.1 Property Licenses
The fundamental title document for a license is a three page certificate issued by the Mineral Resources and Petroleum Authority of Mongolia (‘‘MRPAM’’) which body is charged under the Act with issuing such records and updating them each time any changes are made.
Exploration licenses may be held for three years, plus two three-year extensions, after which the license must be upgraded to a mining license, or dropped. A pre mining period of three years has been introduced at the expiration of the exploration license term.
WNP reported to have exercised customary due diligence with respect to title to properties in which it has a material interest, there is no guarantee that title will not be challenged. WNP’s mineral property interests may be subject to prior unregistered agreements or transfers, historical land claims, government expropriation or other undetected defects. There is no assurance that WNP’s mineral title rights in Mongolia will not be subject to dispute in the future. (See section 10.2 Mongolian Minerals Law and Regulatory Environment for additional information)
Table 2: Property Licenses
License Issue Date Annual Fee Number Deposit/Project License Name Area (d/m/y) (US$)
Coal 9352X Baganuur Zuun Baganuur-2 5,035 23-Feb-2005 $5,035.00 9106X Choibalsan Choibalsan-1 230 10-Jul-2005 $460.00 9107A Choibalsan Choibalsan-2 95 1-Jul-2005 $0.00 10492X Baganuur Baruun Baganuur 8,963 22-Sep-2005 $8,963.00 10818X Bagakhangai Bagahangai 2 2,252 16-Nov-2005 $2,252.00 10972X Bagakhangai Bagahangai 3 4,950 20-Dec-2005 $4,950.00 10974X Baganuur Shivee Ukhaa 3,799 20-Dec-2005 $3,799.00
Saddle Hills 9353X Saddle Hills Khureet nuur 52,811 23-Feb-2005 $52,811.00 9363X Saddle Hills Ugtam uul 34,939 7-Mar-2005 $34,939.00 4846X Saddle Hills Burd 5,753 5-Sep-2002 $8,629.50 4970X Saddle Hills Ulaan nuur 1 10,876 8-Oct-2002 $16,314.00 4974X Saddle Hills Ulaan nuur 3 1,411 8-Oct-2002 $21,166.50 6995X Saddle Hills Bulagtai 1,017 25-Feb-2004 $1,017.00 7023X Saddle Hills Baishintiin Uhaa 12,962 4-Mar-2004 $12,962.00 7405X Saddle Hills Dalan haryn bulag 1,031 7-May-2004 $1,031.00 9283X Saddle Hills Dashbalbar 2 127 11-Feb-2005 $127.00 7685X Saddle Hills Ar Bulag 7,254 10-Jun-2004 $7,254.00 4969X Saddle Hills Ulaan nuur 2 6,761 8-Oct-2002 $10,141.50
Joint Venture with Adamas Mining 3367X Dor, Mardaigol, Erkht ovoot tolgoi 39,942 7-Jun-2001 $59,913.00 Nemer, Tsever, Ilreh
–IVB-7– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
4.0 HISTORY
4.1 Uranium Properties
Soviet exploration and development in the Choibalsan uranium region took place between 1944 and 1989. Prospecting in the Choibalsan area that includes all properties that are subject of this report began in 1971 and uranium anomalies were identified in 1975 by radiometric surveys.
Soviet efforts focused on three main areas: Gurvanbulag, Dornod, and Mardaigol. During their presence in Mongolia, the Soviets carried out exploration activities at all three of the principal deposits by drilling, followed by underground development and sampling. Resources were defined at all three areas. No significant mining was done at Gurvanbulag and Mardaigol. Soviet activities also served to locate and define additional small deposits, radiometric anomalies and prospects.
Production of uranium mineralization started in 1988 with mining by the Soviets of the flat-lying, near- surface deposit in an open pit at Dornod. Ore was loaded into gondola cars and shipped by rail some 500 km into Siberia to a mill facility. Soviet military and other personnel withdrew from Mongolia in 1991 following the collapse of the Soviet Union except for those involved in production at the Dornod open pit which continued until 1995. At that time the core of the Dornod property was acquired by a firm called Central Asia Uranium Company Ltd.; the major shareholder was American, and minority interests were held by Russian and Mongolian Government entities. Attempts to restart mining were unsuccessful. Western Prospector Group Ltd. (WNP) acquired exploration licenses in 2004. Search for and review of reports in the Russian language led WNP to recognize Gurvanbulag as the prospect with greatest potential. Late in 2004, Fugro Airborne Surveys completed a 4,610-line kilometer airborne radiometric, magnetic and gradiometer survey. Environmental studies were started. More than 200 diamond drill holes by WNP were directed to resource verification in order to provide a basis for an independent classified resource in accordance with NI 43-101 guidelines. The distribution and spacing of the drilling conducted by WNP is disclosed in the Technical Report and Feasibility Study on the Gurvanbulag Uranium Deposit Saddle Hills Property Dornod Province Mongolia prepared by P&E Mining Consultants Inc. Underground workings at Gurvanbulag were dewatered to allow systematic sampling of mineralization. Preliminary verification drilling was carried out at several of the deposits on the licenses where Soviet work had estimated resources.
WNP has produced a NI 43-101-compliant resource estimate of Gurvanbulag, carried out metallurgical, engineering and environmental studies. Four NI 43-101 reports have been prepared and one of these includes a preliminary economic assessment and feasibility study of the Gurvanbulag deposit.
4.2 Coal Properties
Lignite has been known in a number of localities in Mongolia for many years, and has been abundantly exploited as fuel for large power plants as well as for lesser uses.
One operating open-pit coal mine in the Choibalsan area provides fuel for a nearby electrical generating plant that distributes electrical power to the eastern Mongolia power grid. Soviet drilling on the WNP Choibalsan property defined reserve in the Mongolian/Soviet systems, not consistent with NI 43-101 definitions. WNP have not undertaken drilling.
The Baganuur Basin hosts the largest operating brown-coal or lignite open-pit mine in central Mongolia, 4 kilometers from WNP’s property. Lignite from the mine is shipped by rail to electrical generating plants in Ulaanbaatar.
–IVB-8– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
The Bagakhangai property, located in the Baganuur Basin, is near a historic open pit which formerly exploited lignite. WNP has not done any drilling, and have not found any Soviet reports with results of any exploration in the area.
5.0 GEOLOGIC SETTING
5.1 Uranium Properties
Uranium deposits of the Saddle Hills region lie within an ellipsoidal Mesozoic volcanic-sedimentary basin over 120 km in its longest direction. The district lies within the northeast-trending Argun-Mongolia uranium province that extends from the Gobi desert in south-central Mongolia to about 250 km into Russia, where it host the prolific Strel’tsov uranium deposit cluster (Figure 3).
Figure 3 Uranium Provinces and Districts of Mongolia
Local stratigraphic setting of the Saddle Hills basin is fairly simple, and is well understood through the extensive subsurface drill data. Uranium deposits are hosted by a late Jurassic-early Cretaceous bimodal volcanic sequence consisting of a lower succession of sedimentary rocks, basalts, intermediate tuffs and rhyolites, capped by a thick upper succession of felsic volcanic rocks. These Mesozoic rocks are gently folded and rest unconformably upon Proterozoic and late Paleozoic basement rocks consisting of gneisses migmatites, amphibolites, granites, aplites, and pegmatites. Basement relief is irregular and was likely developed by horst and graben style block faulting during basin formation.
5.2 Coal Properties
Details have not provided to CAM about the sedimentary basins containing coal, but these are known to be terrestrial (continental) basins which are only weakly deformed. The lignite strata are near-horizontal.
–IVB-9– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
6.0 MINERALIZATION
6.1 Uranium Mineralization
Figure 4 shows the relative locations of the deposits discussed in this report. Uranium mineralization is present predominantly as strata-bound lenses, broadly following sedimentary layers in the lower part of the Mesozoic sedimentary sequence that grades upward into more massive volcanic rocks.
Figure 4 Map of Principal Uranium Deposits and Prospects
Multiple horizons of uranium mineralization have been discovered, some of which are described in some Soviet reports as occurring within flat-lying to gently-dipping structures, coincidentally paralleling the bedding. In addition, uranium mineralization occurs as structurally controlled, steeply dipping to vertical zones that may connect with the strata-bound zones.
The mineralization consists of yellow uranophane that coats fractures, and black coffinite in fractures, veins and disseminations. Predominant host rocks are felsic volcanic rocks, tuffs or volcanic sediments with some mineralization in coarse agglomerates or andesitic volcanic rocks. Coarse grains of coffinite and pitchblende are present as veins, planar sheets and fractures, which are more common than disseminated grains. Major mineralized zones at Gurvanbulag are present as ‘‘sheet-like’’ or strata-bound bodies immediately below a predominantly massive volcanic unit. Within these sheets are stratiform lenses of high grade, semi-massive to massive pitchblende up to one meter along strike and dip, and 0.1 meter thick.
Distribution of mineralization at Mardaigol is greatly influenced by steep structures, many of which host post mineral felsic dikes, resulting in irregular pods and veins with relatively minor amount in stratiform layers.
A difference in mineralogy and host rock is noted from northeast to southwest in the Saddle Hills basin. It is reflected in the observations by the Soviets that metallurgy of the Gurvanbulag deposits in the southwest part of the basin, with metallurgical recoveries better than 90%, is superior to other deposits elsewhere in the basin.
–IVB-10– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
The best mineralization is found with the most complete and thickest sections of the lower or footwall stratigraphy. Expressed differently, the best uranium is present over paleo-valleys defined by geometry of the basement unconformity. Mineralization diminishes toward the margins and over basement highs. If these paleo- valleys are controlled by block faulting, the implication is that mineralization shares a spatial relationship with the down-dropped blocks (i.e. grabens) with the greatest throws.
Uranium-bearing veins are present most commonly in volcanic rocks associated with steeply dipping sub- volcanic intrusions, feeder pipes or fissures. This relationship holds for Mardaigol and Dornod. Gurvanbulag has no known feeder system and true vein deposits are few. Here the best mineralization occurs in bedding conformable and sheet-like bodies. Features that determine high uranium grades within these bodies are intra- formational faulting, cooling contraction fractures, grain size of tuff or breccia fragments and resulting permeability, chemical alteration, and reductants such as plant remains, iron sulfides and titanium oxides.
6.2 Coal
Coal deposits thought to be present on WNP exploration licenses lie within coal-bearing sedimentary basins. The coal is lignite or brown coal and is present in flat-lying or very gently dipping beds up to about 20 meters thick. CAM is not aware of any test-work done to assess the quality of the coal beds.
7.0 URANIUM PROPERTIES
7.1 Introduction
Gurvanbulag Central is the principal uranium deposit in the Saddle Hills project area and is generally referred to as ‘‘Gurvanbulag’’ and contained within licenses #7685 and #4969. It is at an advanced stage, with well-defined uranium resources, and is not a subject for valuation in this present report that concerns exploration properties.
Refer to Table 2 for all the licenses contained within the Saddle Hills Property.
Several additional prospects are present throughout the large land holding, divisible into two main groups. The first group contains prospects that have been drill-tested and appear to have coherent mineralization with potential resources. These include the Gurvanbulag Intermediate and Gurvanbulag Southwest deposits, Dornod (-Khavor), Mardaigol first and second zones, Nemer and Dor prospect (also referred to as Dornod Blocks 1 to 12). The second group contains other prospects with known uranium mineral occurrences and air-borne radiometric anomalies that have not been tested by surface exploration sampling or drilling. At least 15 targets are in the second group (Harper, 2005) and ten probably are high priority.
7.2 Gurvanbulag Intermediate and Southwest Zones
The Gurvanbulag Intermediate Zone is located about 2.5 km south-southwest of the Gurvanbulag uranium deposit. The Gurvanbulag Southwest Zone lies adjacent to the Gurvanbulag Intermediate Zone and is located about 1.5 km further to the southwest.
The Gurvanbulag Intermediate Zone is located on Exploration License #7685X and the Gurvanbulag Southwest Zone is located on Exploration License #7685X and 4970X. Both these licenses are held 100% by Emeelt Mines, a 100% owned subsidiary of WNP. These licenses require a yearly tax and minimum exploration expenditure. The next tax on License #7685X is US$7,254.00 due 9 June 2009. Next tax on License #4970X is US$16,314.00 due Oct 7, 2009. The ‘‘end date’’ for License 7685X is 9 June 2013 and for License 4970X is Oct 7, 2011. Before these dates all or part of the respective exploration licenses must be converted to mining licenses.
–IVB-11– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
Minimum annual expenditures required to remain in good standing are US$7,254 for License 7685X and US$16,314 for License 4970X. The Gurvanbulag Intermediate Zone is located on the same exploration license as the Gurvanbulag deposit itself, so that work here will apply to the required minimum expenditures.
The Gurvanbulag Intermediate Zone prospect appears to contain five separate layered or stratiform mineralized units and Gurvanbulag Southwest Zone contains one according to Soviet maps (Harper, 2005). Soviets drilled the Gurvanbulag Intermediate Zone and the Gurvanbulag Southwest Zone with stratigraphic and exploration holes in the 1970’s. No underground exploration work was done. Soviet reports indicate that uranium mineralization is hosted in roughly the same strata as at the Gurvanbulag deposit about 2.5 km to the northeast. Five layers or mineralized units were defined at the Gurvanbulag Intermediate Zone and only one was located at Gurvanbulag Southwest Zone. WNP drilled four holes with a total of 1,752 m into these prospects mainly for verification (the SRK NI 43-101 technical report (2005) appears to combine the Gurvanbulag Intermediate Zone and Gurvanbulag Southwest Zone into one they label as the Southwest zone.)
Number of exploration holes drilled by the Soviets in the Gurvanbulag Intermediate Zone and Gurvanbulag Southwest Zone is unknown, but they had acquired sufficient data to provide a resource estimate, with a cut-off grade of 0.047% U3O8 :
. Gurvanbulag Intermediate Zone has a total of 2.690 million tonnes @ 0.123% U3O8 with 3,309
tonnes U3O8.
. Gurvanbulag Southwest Zone has a total of 0.451 million tonnes @ 0.189% U3O8 with 852 tonnes
U3O8.
The Soviet classification of these resources is Category C2. This Soviet category cannot be correlated with the Canadian system of ‘‘measured, indicated and inferred’’. Harper (2005) argues that a C2 category resource should be considered as a potential resource. CAM agrees with this conclusion mainly because of the absence of drilling data in the Soviet reports. To upgrade a Soviet C2 resource to inferred or indicated status in the North American system would require greater amount of drilling and/or underground development that would aim for resource definition.
7.3 Dornod (Khavor) Area Deposits
This area of mineralization is located about 25 km east of the Gurvanbulag deposit and about 8 km southeast of the Mardaigol deposit (Figure 4). Uranium mineralization is present in upper parts of the lower sediment-dominant part of Jurassic and Cretaceous host rocks. Specifically, mineralization at Dornod is present in boulder breccias and basalts that underlie the relatively massive upper volcanic units. Coffinite, U-titanite, brannerite and pitchblende are the principal ore minerals. Flat-lying mineralization was recognized in the Deposit #2 at Dornod and this was the first area defined to be mined by the Soviets. Ore from an open pit was shipped by rail into Russia to a mill facility at Strel’tsov. About 946,000 tonnes of ore were mined yielding 1,018 tonnes of U3O8 recovered. Remaining mineralization in the #2 deposit is estimated at 4.1 million tonnes @
0.16% U3O8 containing 6,680 tonnes of U3O8. This resource estimate is based upon records left behind by the Soviets, and presumably upon additional definition drilling. This potential resource is located mostly on mining licenses owned by Central Asia Uranium Corporation of which Khan Resources Inc., a Canadian-based junior mining company, has acquired the controlling interest. A small part of the deposit lies within WNP’s licenses and surface rights and in addition, any expanded open pit will require considerable push back onto WNP ground.
A NI 43-101 technical report prepared for Khan Resources by Scott Wilson Roscoe Postle (Oct 2006) indicates that Dornod mining joint venture has been organized with 58% owned by Khan Resources, 21% owned by the Mongolian government, and 21% owned by the Priargunsky Industrial, Mining and Chemical
–IVB-12– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
Enterprise. The #2 deposit will be mined in an open pit operation. A second deposit, #7 will be mined underground. Khan acquired part of Exploration License 9282X from WNP and WNP will retain a 3% production royalty on any production from the area of License 9282X.
Several small structure-controlled deposits of uranium mineralization are satellites to the main deposit controlled by Khan Resources. Three to five deposits may be located on License #4974X that is owned by WNP. The next tax payment on this 14,111 hectare license in the amount of US$21,166.50 is due Oct 7, 2009. The ‘‘end date’’ by which time the license must be converted to a mining license is Oct 7, 2011. Minimum annual expenditure on the property is US$21,166.50.
The Khavor uranium deposit is shown on location maps (Figure 4) as close to the Dornod deposit and likely is present on the above-mentioned License #4974. No descriptive information on this deposit can be found in the available NI 43-101 reports. However, Table 1, p.4 of Harper (2005) shows a C2 category Soviet-prepared resource of 2,494,200 tonnes @ 0.135% U3O8 containing 7.401 million lbs U3O8. CAM could find no information on geologic setting or amount of exploration done. The Harper (2005) report of the Soviet estimate is the only source of information found. No additional post-Soviet drilling apparently was done.
WNP has not undertaken drilling on the Dornod (Khavor) Area Deposits.
7.4 Dor Deposit
The Dor uranium deposit is shown on location maps (Figure 4) as a short distance east of the Dornod deposit. It is located on the disputed Exploration License #3367. No descriptive information on this deposit can be found in available NI 43-101 reports. Table 1, p. 4 of Harper (2005) lists this deposit as Dornod blocks 1-12, and shows a C-2 Soviet-prepared resource of 942,428 tonnes @ 0.158% U or 0.187% U3O8, containing 3.89 million lbs U3O8. All C2 resources in the Soviet system should be considered as ‘‘exploration potential’’ in Western parlance. This deposit appears to be partially on Exploration License #3367 that is the subject of litigation in Mongolian courts. It also is located partly on the Special Protected Area withdrawn from exploration by the Mongolian government. WNP has not undertaken drilling on the Dor Area Deposits.
7.5 Mardaigol Uranium Deposits — First and Second Zones
This mineralized area is located about 25 km east-northeast of the Gurvanbulag deposit and about 10 km northwest of Dornod (Figure 4). It lies entirely on License #3367 that currently is in dispute. The license was previously held by Adamas Mining LLC (‘‘Adamas’’) and is presently held by an escrow agent. WNP believes it has completed exploration work to earn a 70% joint venture interest in the license. The JV with Adamas has yet to be formed and currently is the subject of litigation in the Mongolian courts. In the third quarter of 2008, WNP wrote off US$3.9 million of exploration expenditures associated with the license dispute.
Uranium mineralization is hosted in sediments and tuffaceous sediments of the lower and middle parts of the Jurassic and Cretaceous section. Mineralization is not exposed at the surface and was discovered by drilling from the surface. Details on number of holes and detailed drill logs are not available in the technical reports. Apparently two blocks of mineralization, the First and Second Zones were identified at Mardaigol.
The Soviets sank a vertical shaft to about 350 m depth with development on one level to the east and west of the shaft towards the two, targeted deposits. Results of underground work at Mardaigol were disappointing in that the deposits were found to have less continuity than projected, and to be badly cut up by faults and dikes. Mineralization is comprised of irregularly shaped bodies controlled in part by stratigraphy and partly along structures. WNP carried out 905.5 m of confirmation drilling at Mardaigol.
Soviet estimated resources at Mardaigol are: C1 category. 52,700 tonnes @ 0.221% U3O8, for 117 tonnes
U3O8; and C2 category, 871,936 tonnes @ 0.136% U3O8 for 1,186 tonnes U3O8.
–IVB-13– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
C1 category is roughly equivalent to inferred resources in the North American system. C2 category should be considered as a potential resource.
WNP reports they made an internal resource estimate calculation that determined a total of 846,094 tonnes at 0.116% U3O8 for a total of 980.31 tonnes of U3O8 (cut off 0.05%, maximum extrapolation 25 m, no classification to the estimate is given). These numbers reported by WNP compare closely with the Soviet estimate.
WNP reports they subsequently commissioned Minorex Ltd., a Vancouver-based geological consulting group to prepare a NI 43-101 compliant resource estimate for Mardaigol. A report by D. Blanchflower showed a resource of 498,000 tonnes at a grade of 0.096% U3O8 for a total of 1,056,000 lbs. U3O8 (all classified as inferred; using a cut off grade of 0.07% U3O8. This resource is significantly lower than the above mentioned as geostatistical studies indicate there is not enough confidence in continuity to join up many blocks that had been connected by previous workers. Thus, considerable additional sampling will be required to bring confidence to the resource to allow the larger contained uranium quantity to be confirmed.
The Blanchflower resource estimate has not been released publicly; by the time it was completed the property ownership was in dispute. This report is not available to CAM, and an estimated value of this resource is not included in CAM’s valuations.
7.6 Nemer Deposit
This deposit appears to be located on the disputed Exploration License 3367. It was discovered by the Soviets very near the end of their work in the Dornod area and a resource estimate never appeared in any Soviet report. WNP reports that it subsequently received information in 2006 from Soviet sources that a resource has been estimated as shown in Table 3.
Table 3 Nemer Deposit Estimated Resource
Grade Tonnes
Area Category Tonnes of Ore %U3O8 U3O8
Zone 1 C2 693,200 0.148 1,211 Zone 2 C2 672,300 0.165 1,111 Zone 3 C2 364,700 0.181 658 Total 1,730,200 0.172 2,980
The Soviets had not closed off Zone 3 and additional drilling by WNP provided data that allowed a new estimate for that zone: 482,505 tonnes at 0.171% U3O8 for 825 tonnes U3O8 at a Cut-off of 0.05% U3O8.
CAM has not seen any reports that confirm this estimate; and because of its location on disputed property, this resource has not been included in the property valuation.
7.7 Other Uranium Prospects
Davan Prospect is located about 5 km northeast of Gurvanbulag and southwest of the Ulaan polymetallic deposit that is off the WNP land position. Davan appears to be located on License #4969. No information is available to CAM on this prospect. However, WNP sources indicate about 15 holes were drilled by the Soviets and a small resource may be present. Further, WNP sources report a small resource on the adjacent Ulaan property of about 140,000 tonnes at 0.11% U3O8. WNP indicates they have an agreement with owners to mine uranium deposits from the adjacent property. WNP has not undertaken drilling on the Davan Prospect.
–IVB-14– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
Tsever Prospect is located southwest of Mardaigol and appears to correspond to location of airborne radiometric anomaly C5 (Figure 5). It lies within License #3367 that is the subject of litigation with Adamas. Several Soviet drill holes intersected stratabound uranium mineralization at shallow depths near the present edge of the sedimentary basin. No information is available on thickness and grade of mineralization encountered, so it is not possible to provide a value. WNP has not undertaken drilling on the Tsever Prospect.
Ilreh Prospect is located about midway between Mardaigol and Dornod #2 zone open pit. It is located on Exploration License #3367 that is the subject of litigation between WNP and Adamas in Mongolian courts. Ilreh coincides with an airborne radiometric anomaly and is located on the present edge of the Mesozoic basin and therefore mineralization possibly is present at shallow depth (Figure 5). No information is on this prospect is available in the NI 43-101 technical reports. WNP has not undertaken drilling on the Ilreh Prospect.
Figure 5 Principle Uranium Targets from Airborne Radiometric Survey
Additional exploration targets have been identified from WNP’s airborne radiometric survey done in 2004, and from the reported Soviet exploration activities. Harper (2005) notes that at least 15 uranium exploration targets are present on WNP Licenses and at least ten may be regarded as high priority. No substantial information on geology and size of these targets are available. Location and size of these targets may be inferred from Figure 5.
–IVB-15– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
8.0 COAL PROPERTIES
In total, WNP holds 7 coal licenses in three areas.
8.1 Choibalsan
WNP reports that it controls licenses 9106X and 9107A with 325 hectares with exploration potential in coal seams. One operating open-pit coal mine in the basin provides fuel for a nearby electrical generating plant that distributes electrical power to the eastern Mongolia power grid.
WNP reports their license contains a brown coal or lignite deposit that has drilled reserves (by Mongolian and Soviet systems, but not consistent with NI 43-101 requirements) of 30 million tonnes of near surface coal that dips less than five degrees and has a thickness of about 20 meters. WNP indicates it has prepared an internal feasibility study and plans to open-pit mine the deposit as a source of coal for the Gurvanbulag operation; to provide heat for surface facilities and energy for operations. Estimated potential production at 100,000 to 250,000 tonnes per year; run of mine coal will be trucked to customers. CAM does not have access to any technical information that would provide a resource estimate of coal on these licenses. WNP has undertaken limited drilling to confirm the results of the Russian drilling for the resource estimation. WNP drilled 12 holes in 2007. WNP reports that the coal is within a single continuous flat-lying seam ranging in thickness to more than 25 metres with the upper contact ranging from 2 to 25 metres below surface.
8.2 Baganuur
WNP sources indicate this area properties of about 5,000 hectares is located in central Mongolia in the Baganuur sedimentary basin. The basin hosts the largest operating brown-coal or lignite open-pit mine in central Mongolia that reportedly produces and ships over six million tonnes per year. It supplies fuel for the coal-fired electrical generating plants in Mongolia’s capital city of Ulaanbaatar. The WNP licenses #9352X, #10974X and #10492X are located four kilometers from the operating mine. The Baganuur coal basin is accessible by both a highway and a spur railroad off the China-Mongolia-Russia main line.
WNP indicates it is likely that the coal-bearing strata extend onto its license but no drilling has been done so a resource has not been determined.
8.3 Bagakhangai
WNP reports that it owns licenses #10972X and #10818X over a key part of a basin about 40 km southwest of Baganuur. This area is also cut by the main coal-hauling railroad from Baganuur to Ulaanbaatar. Immediately adjacent to the main license is an historic open pit with brown coal in the walls, some five to 10 meters below the surface with a thickness more than five meters. WNP believes the lignite beds are under its license but have not done any drilling and have not found any Soviet reports with results of any exploration in the area. CAM has not seen any independent third-party reports that would confirm presence of brown coal on the licenses. WNP has not undertaken drilling on Bagakhangai.
9.0 VALUATION
9.1 Valuation Methods for Uranium Properties
Owing to unsettled condition in the mining industry during the past year with regard to uranium prices, operating costs, and access to capital, and given the relatively sparse economic data provided, it was not feasible to establish realistic cost-price scenarios that would allow a quantitative business model for the Saddle Hills properties.
–IVB-16– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
CAM sometimes uses a Modified Income Approach (which possibly could be called a modified Sales Comparison approach), to value well-drilled metals deposits that have not been subjected to an economic study; i.e. those at defined resource stage. This method considers the likely cost of mining and processing ores including transport, and also considers likely capital cost to place a property in production. Experience has shown that for relatively remote metal properties (those not near a major mining and processing center) the net profit over life-of-project can be approximated as 2% of the market value of the in-the-ground metals.
The 2% figure derives from the fact that base-metals project often have a NPV (Net Present Value) equal to 10–15% of the gross in-the-ground metal value. Development of a mining project involves six definable stages: exploration drilling towards resources, definition drilling, economic scoping study, pre-feasibility, and construction/development, each of which increases the project value.
CAM considers that using a 2% of the market value of U3O8 in the ground for these exploration projects is not justified at Saddle Hills, owing to the lack of sufficient drilling, poor definition of resources, and the lack of engineering and metallurgical studies. Thus we have discounted the 2% figure to 1% for the drilled prospects that Soviets have identified a C2 class resource, which we regard as ‘‘exploration potential’’ as it is understood in Western parlance.
CAM thus placed a value of US$0.50 per pound of U3O8 in the ground, or roughly one percent of the present 2009 (Trade Tech quoted) price of U3O8 (US$40.50/lb as of 10 April 2009). No factor has been applied to adjust for recovery. There is also no adjustment for political or other risks.
Due to the lack of sufficient drilling and early-stage nature of these exploration projects, mining recovery, dilution factors and recovery factors cannot be determined. Likewise, a production policy and financing requirement to commence commercial production cannot be determined. WNP has a stated focus of developing the Gurvanbulag Central project, which is not the subject of this report. WNP has not reported definitive plans to conduct drilling or exploration activities on the properties reviewed in this report. CAM cannot provide an estimate of the funds required over the next two years in connection with exploration that may or may not be conducted by WNP. The total annual fee to maintain WNP’s licenses is approximately US$200,000.
9.2 Gurvanbulag Intermediate and Southwest
Gurvanbulag Intermediate Zone contains estimated 3,309,000 kg of U3O8 in the ground, or 7,280,000 lbs
U3O8. Gurvanbulag Southwest Zone contains estimated 852,000 kg U3O8 in the ground or 1,874,000 lbs U3O8.
Estimated combined uranium in the ground in the two zones appears to be 9,154,000 lbs U3O8. At US$ 0.50, the value is US$4.577 million.
9.3 Dornod (Khavor)
Harper (2005) shows a C2 category Soviet-prepared resource of 2,494,200 tonnes @ 0.135% U3O8 containing 7.401 million lbs U3O8. No additional post-Soviet drilling apparently was done. Assigning a value of US$0.50 per pound for this resource in the ground without a factor for recovery; the estimated value is US$3.701 million.
9.4 Dor
The Soviet-prepared C-2 resource of 942,428 tonnes @ 0.158% U or 0.187% U3O8, containing 3.89 million lbs U3O8, but C2 resources in the Soviet system should be considered as ‘‘exploration potential’’ by Western standards. In addition, this deposit appears to be partially on Exploration License 3367 that is the subject of litigation in Mongolian courts. The deposit is partly on the Special Protected Area withdrawn from exploration by the Mongolian government. For these reasons the resource at Dor is not included in our estimate of value for exploration properties.
–IVB-17– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
9.5 Mardaigol
Because of the irregular shape of mineralized bodies, relatively small size of the blocks, and very sparse confirmation drilling, CAM believes that a value should be applied in very conservative manner; value of the resource is estimated using US$0.50 per pound. The total estimated potential resource is 1,303,000 kg or
2,867,000 lbs U3O8. The estimated value would thus be US$1,433,000, but CAM has not included this in the total value of all of WNP properties (Table 1), owing to the litigation in progress concerning the Exploration License.
9.6 Other Uranium Prospects
These other exploration targets probably have some value, but information is lacking on the amount of exploration work that could provide an estimate of possible uranium content. Therefore, we estimate a value based upon the estimated cost of the air-borne radiometric survey and this estimated value is US$150,000.
9.7 Valuation of Coal Properties
Lignite or brown coal is not a commodity mineral, and the value of any deposit depends entirely on the use of the lignite as fuel at a nearby power plant. Without a supporting economic study, a per-tonne value cannot be assigned. CAM can only assign a nominal value to each of the three area licenses, as the cost of acquiring a titled and presumably saleable license. CAM has assigned a nominal value of US$100,000 to each of the three exploration area licenses for coal (Table 4).
Table 4 Estimated Resources and Estimated Values WNP Exploration Properties
Mineralized Zone tonnes % U3O8 lbs U3O8 Estimated Value
Gurvanbulag Intermediate Zone 2,690,000 0.123 7,268,800 US$3,634,000 Gurvanbulag Southwest Zone 451,000 0.189 1,879,000 US$937,000 Dornod (Khavor) 2,492,000 0.135 7,401,000 US$3,701,000 Dor value not included, due to litigation on property title Mardaigol value not included, due to litigation on property title Other Exploration Targets US$150,000 Coal Area Licenses (Choibalsan, Baganuur, and Bagakhangai) @ US$100,000 US$300,000 TOTAL ESTIMATED VALUE OF EXPLORATION PROPERTIES US$8,722,000
10.0 RISK AND OTHER FACTORS
10.1 Claims
The Nemer Deposit, Tsever Prospect, Ilreh Prospect, Mardaigol Deposits and Dor are located on exploration License #3367, which is held in escrow and is subject of litigation in the Mongolian courts. As a result of this dispute, the value of these properties is not included in CAM’s valuations. CAM is not aware of additional claims on the exploration rights of WNP.
–IVB-18– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
10.2 Mongolian Minerals Law and Regulatory Environment
In 2006, Mongolia adopted a new minerals law. Within the 2006 law, the national government is permitted, under certain conditions, to share or own mineral property interests up to 34% for properties developed using private funds, and up to 50% for properties either developed using state funds or classified as a ‘‘mineral deposit of strategic importance’’ or both. WNP properties have been classified as ‘‘mineral deposits of strategic importance.’’
Beginning in April 2008, the Mongolian Parliament has been considering an amendment to the 2006 minerals law changing the words ‘‘up to’’ to ‘‘at least’’ as indicated above. These amendments have yet to be presented for a vote by Parliament. Further, it is unclear as to how, or in what form, the government intends to take its ownership interest. Also, the Mongolian government is considering implementation of a ‘‘uranium law’’ which would specifically regulate uranium mining and processing in Mongolia. These activities are presently regulated under the 2006 minerals law. At this time, such draft legislation has been reviewed by a parliamentary committee but has not yet been presented to Parliament.
11.0 QUALIFICATIONS
Chlumsky, Armbrust & Meyer, LLC is an international mineral resource consulting and engineering group based in Lakewood, Colorado. The company offers complete geological, mining, processing, infrastructure, geotechnical and environmental consulting services to the mineral industry and financial institutions.
CAM offers expertise in all aspects of evaluation and development of resources for base and precious metals, coal and industrial minerals. CAM professionals have extensive experience in the feasibility-study stage, planning, design, and management of mining-industry projects. CAM professionals have completed over 1,500 assignments in the minerals and energy industries.
CAM professionals have conducted exploration assessments/audits in support of feasibility studies, financing, mergers, and acquisitions in Egypt, Turkey, Canada, the U.S., Mexico, Peru, Chile, Nicaragua, Argentina, Madagascar, DRC, Panama, Costa Rica, San Salvador, Indonesia, and Russia.
Project Geologist, Dr. Richard Nielsen, PhD, California Professional Geologist (C.P.G.), has conducted exploration programs, property examinations, due diligence reviews, reserve audits, feasibility studies, and research projects on over 100 uranium, base and precious metal deposits in North America, South America, Africa and Asia.
Dr. Nielsen’s prior studies have included reserve audits and geologic evaluations for SEC filings, feasibility studies, technical appraisals for project financing and acquisitions, privatization plans for foreign government agencies, and general project reviews to develop efficient exploration programs. Dr. Nielsen has special expertise in uranium, metallic mineral deposits, including gold, silver, porphyry copper, and selected other base metal deposits; exploration geology from regional appraisal to drilling evaluation. Dr. Nielsen was in charge of the Anaconda uranium geological and evaluation team in the late 70’s and early 80’s.
Greg Chlumsky is the nominated Project Manager and Principal at CAM. Mr. Chlumsky has served as Project Manager for a feasibility study on the Ellatsite Project in Bulgaria, and for pre-feasibility studies on the Rosia Montana project in Romania, the Esquel Gold Project in Argentia, and the McDonald Gold Project in the USA.
–IVB-19– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
Mr. Chlumsky is a member in good standing of the Mining and Metallurgical Society of America and has been for 16 years. Mr. Chlumsky is a recognized Qualified Person (QP) in Metallurgy and Process from that Organization with QP Member Number 01117QP. Mr. Chlumsky has over 35 years of experience in Metallurgy and Process Costing. Mr. Chlumsky graduated from the Colorado School of Mines with a BS degree in Chemistry and a minor in Chemical Engineering, and has practiced the profession continuously since 1970.
12.0 REFERENCES
The reports listed below are all posted on www.SEDAR.com.
Agnervor, Hrayr and Heymann L.H., 2006, Technical Report on Preliminary Assessment of the Dornod Uranium Project, Mongolia. NI 43-101 report prepared for Khan Resources Inc. by Scott Wilson Roscoe Postle Associates, Inc 25 October 2006.
Harper, G., 2005, Report on Saddle Hills area uranium prospects. Exploration Licenses 3367X, 4846X, 4969X, 4970X, 4974X, 6995X, 7023X, 7405X, 7685X and 9283X, Dornod Aimag, eastern Mongolia. NI 43-101 report prepared for Western Prospector Group Ltd. 4 May 2005.
Micon International, 2007, Independent Technical Report on the Results of a Preliminary Economic Assessment, Gurvanbulag Uranium Deposit, Mongolia, NI 43-101 report prepared for Western Prospector Group Ltd., 27 November 2007.
P&E. Mining Consultants Inc., 2009, Technical Report and Feasibility Study on the Gurvanbulag Uranium Deposit, Saddle Hills Property, Dornod Province, Mongolia. NI 43-101 report prepared for Western Prospector Group Ltd., 15 October 2008.
SRK Consulting (Canada) Inc., 2006, Independent Technical Report and Resource Estimate for the Gurvanbulag Deposit, Saddle Hills Uranium Project, Mongolia.
NI 43-101 report prepared for Western Prospector Group Ltd., 17 November 2006.
13.0 CERTIFICATE OF AUTHOR
I, Richard L. Nielsen, Ph.D. do hereby certify that:
As an author of this review and valuation dated 29 April 2009, I do hereby make the following statements:
I am a consulting geologist employed by Chlumsky, Armbrust and Meyer LLC (CAM) at 12600 W. Colfax Avenue, Suite A-250 Lakewood, Colorado, 80215, USA.
I graduated with a B.Sc. degree in Geology from the California Institute of Technology (Caltech) in 1955; earned a M.Sc. degree from Caltech in 1957; and earned a Ph.D. degree in Geology from the University of California, Berkeley in 1964.
I am Professional Geologist #4405 registered in the State of California; and a member in good standing of the Society of Economic Geologists and the American Institute of Professional Geologists.
I have worked as a geologist for total of 53 years since my graduation from university.
–IVB-20– APPENDIX IV B REVIEW AND VALUATION OF CERTAIN MONGOLIAN MINERAL PROPERTIES OF WESTERN PROSPECTOR
I have read the definition of ‘‘qualified person’’ set out in National Instrument 43-101 and certify that by reason of my education, affiliation with a professional association (as defined in NI 43-101), certification to practice geology by the State of California, and past relevant work experience, I fulfill the requirements to be a ‘‘qualified person’ for the purpose of NI 43-101.
I am responsible for preparation of this review and valuation.
I am independent of the issuer applying all the tests in section 1.5 of National Instrument 43-101.
I have no prior involvement with the property or its owner, Western Prospector Group Ltd, that is the subject of this review and valuation.
Richard Nielsen
Richard L. Nielsen, Calif. Professional Geol. #4405
–IVB-21– APPENDIX V GENERAL INFORMATION
RESPONSIBILITY STATEMENTS
This circular includes particulars given in compliance with the Listing Rules for the purpose of giving informationwithregardtotheCompany.TheDirectorscollectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts the omission of which would make any statement herein misleading.
SHARE CAPITAL
The authorised and issued share capital of the Company as at the Latest Practicable Date were as follows:
Authorised:
HKD10,000,000 divided into 1,000,000,000 ordinary shares of par value HKD0.01 each
Issued and fully paid up:
HKD3,791,683.08 divided into 379,168,308 ordinary shares of par value HKD0.01 each
No Shares have been issued since 31 December 2008, being the date up to which the latest published audited financial statements of the Company were made up, and up to the Latest Practicable Date. All the issued Shares ranked pari passu in all respects including as to dividends, voting rights and capital.
DISCLOSURE OF INTERESTS
(a) Directors and chief executive
As at the Latest Practicable Date, none of the Directors or chief executive of the Company had any interests or short positions in any Shares, underlying Shares or debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which were required: (i) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which were taken or deemed to have under such provisions of the SFO); or (ii) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (iii) pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules, to be notified to the Company and the Stock Exchange.
–V-1– APPENDIX V GENERAL INFORMATION
(b) Substantial Shareholders
As at the Latest Practicable Date, so far as known to the Directors, the following persons (not being a Director or a chief executive of the Company) had an interest or short position in the Shares or underlying Shares which are required to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO or, required to be entered in the register maintained by the Company pursuant to Section 336 of the SFO, or were, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of the Group:
Percentage of the issued Number of issued share capital of the Shares/underlying Company as at the Latest Name of Shareholder Capacity Shares held Practicable Date (%)
CNNC Overseas (Note (a)) Beneficial owner 326,372,273 86.08% 中國國核海外鈾資源開發公司(Note (a)) Interest in a controlled 326,372,273 86.08% (China Nuclear International Uranium corporation Corporation) 中國核工業集團公司(Note (a)) Interest in a controlled 326,372,273 86.08% (China National Nuclear Corporation) corporation Mr. Lau Luen Hung, Thomas (Note(b)) Beneficial owner/Interest in a 23,494,622 6.20% controlled corporation
Notes:
(a) As at the Latest Practicable Date, 中國核工業集團公司 (China National Nuclear Corporation) was deemed to hold a long position of 326,372,273 Shares through a wholly-owned subsidiary, 中國國核海外鈾資源開發公司 (China Nuclear International Uranium Corporation), which in turn owned a 100% interest in CNNC Overseas which directly held a long position of 326,372,273 Shares (comprising 266,372,273 Shares directly held by CNNC Overseas and 60,000,000 Shares to be issued to CNNC Overseas upon exercise in full of a convertible note by CNNC Overseas).
(b) As at the Latest Practicable Date, Mr. Lau Luen Hung, Thomas was interested in 23,494,622 Shares, comprising a beneficial interest of 9,275,000 Shares and a deemed interest in 14,219,622 Shares held directly by a corporation controlled by Mr. Lau, Shine Top Limited.
Save as disclosed above, as at the Latest Practicable Date, so far as known to the Directors, there were no persons who had interests and/or short positions in the Shares or underlying Shares which is required to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO or, who was, directly or indirectly, interested in 10% or more of the nominal value of the issued share capital carrying rights to vote in all circumstances at general meetings of any member of the Group.
DIRECTORS’ SERVICE CONTRACTS
Each of the executive and independent non-executive Directors has entered into a service contract with the Company. The term of office of each of the non-executive Directors is the period from his appointment to the time of retirement by rotation in accordance with the Company’s Articles of Association. No Director had entered into any service contract with the Company, which is not terminable by the Company within one year without payment of compensation (other than statutory compensation).
COMPETING INTEREST
As at the Latest Practicable Date, so far as known to the Directors, no Directors or their respective associates had any interest in businesses which competes or is likely to compete, either directly or indirectly, with the business of the Group.
–V-2– APPENDIX V GENERAL INFORMATION
EXPERTS’ STATEMENTS
This circular includes statement(s), opinion(s) and/or advice(s) made by the following experts:
Name Qualification
Aker Solutions Canada Inc. independent technical consultant providing resource evaluation, mining engineering and mine valuation services
Chlumsky, Armbrust & Meyer, LLC independent technical consultant providing resource evaluation, mining engineering and mine valuation services
Deloitte Touche Tohmatsu Certified Public Accountants
Lynch & Mahoney Mongolian legal counsel
P&E Mining Consultants Inc. independent technical consultant providing resource evaluation, mining engineering and mine valuation services
The above experts have given and have not withdrawn their written consent to the issue of this circular with the inclusion of their reports and references to their names in the form and context in which they respectively included.
As at the Latest Practicable Date, none of the above expert was beneficially interested in the share capital of any member of the Group nor did they have any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group or any interest, either direct or indirect, in any assets which have been, since 31 December 2008, the date to which the latest published audited consolidated financial statements of the Group were made up, acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Group.
As at the Latest Practicable Date, none of the above experts had any interest in any assets which have been, since 31 December 2008 (being the date to which the latest published audited accounts of the Group were made up), acquired or disposed of by or leased to any member of the Enlarged Group, or are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group.
As at the Latest Practicable Date, the Directors, P&E, Aker and CAM confirmed that each of them did not have any interests in any assets of the Company within two years immediately preceding the issue of the circular.
NO MATERIAL INTERESTS
As at the Latest Practicable Date, none of the Directors had any shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.
As at the Latest Practicable Date, none of the Directors had any interest in any assets which have been acquired or disposed of by or leased to, or which are proposed to be acquired or disposed of by or leased to, any member of the Enlarged Group, since 31 December 2008, being the date up to which the latest published audited financial statements of the Company were made up.
None of the Directors was materially interest in any contract or arrangement subsisting at the Latest Practicable Date of this circular which was significant in relation to the business of the Enlarged Group.
–V-3– APPENDIX V GENERAL INFORMATION
MATERIAL ADVERSE CHANGE
As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2008, being the date to which the latest audited financial statements of the Company were made up.
MATERIAL LITIGATION OF THE ENLARGED GROUP
1. Litigation between United Metal Products (Shanghai) Co. Ltd. and Shanghai Baosteel Engineering & Construction Corp.
United Metal Products (Shanghai) Co. Ltd. (科鑄金屬制品(上海)有限公司)(‘‘United Shanghai’’), an indirect wholly-owned subsidiary of the Company, received a paper of civil judgment ((2007) Jia Min Yi (Min) Chu Zi No. 744) issued by the People’s Court of Shanghai Municipality Jiading District (‘‘Shanghai Court’’) dated 17 October 2008 against United Shanghai for the sum of RMB5,370,777 together with interests in respect of the construction work of the Group’s factory in Shanghai which has been stalled for no reason by the subcontractor, Shanghai Baosteel Engineering & Construction Corp. (上海寶鋼工程建設總公司)(‘‘Baosteel’’), as previously disclosed in the annual report of the Company for the financial year ended 31 December 2007.
As disclosed in the announcement of the Company dated 31 October 2008, the Shanghai Court, as court of first instance, made the following judgment on 17 October 2008 (the ‘‘First Judgment’’):
(1) the factory construction sub-contract entered into by Baosteel and United Shanghai on 17 January 2006 together with its supplement (‘‘Contract’’) was terminated on 13 June 2008;
(2) United Shanghai shall pay to Baosteel the construction costs for the sum of RMB3,870,777 within 10 days after the judgment becoming legally effective;
(3) United Shanghai shall pay to Baosteel the penalty for breaching the Contract for the sum of RMB1,500,000 within 10 days after the judgment becoming legally effective;
(4) the counterclaims by United Shanghai against Baosteel for the sum of RMB2,100,000, being penalty for breaching the Contract, and for an order to terminate the supplemental agreement to the Contract were dismissed;
(5) other claims by Baosteel against United Shanghai were dismissed; and
(6) Baosteel shall be liable to pay RMB23,603.27 and United Shanghai shall be liable to pay RMB49,395.44, being the relevant courts fees for this matter. The amount payable by United Shanghai shall be settled within 7 days after the judgment becoming legally effective.
Any delay in settlement of the judgment amounts shall be subject to interests in late payment.
As disclosed in the announcement of the Company dated 6 November 2008, United Shanghai appealed to the Second Intermediate People’s Court of Shanghai (the ‘‘Second Intermediate Court’’) against the First Judgment. The appeal was sought for:
(1) the withdrawal of the second order in the First Judgment and sought an order that United Shanghai should only be liable for RMB2,990,558 as the construction costs upon satisfactory documentary evidence received by United Shanghai on the completion of the construction and that the quality of construction has been approved pursuant to the conditions of inspection for acceptance;
(2) the withdrawal of the third order in the First Judgment and sought an order that the order against United Shanghai for the sum of RMB1.5 million, being the penalty for breaching the Contract, be dismissed; and
–V-4– APPENDIX V GENERAL INFORMATION
(3) the withdrawal of the fourth order in the First Judgment and sought an order for the reinstatement of the counterclaims by United Shanghai against Baosteel for the sum of RMB2.1 million, being penalty for breaching the Contract, and for an order to terminate the supplemental agreement to the Contract.
As disclosed in the announcement of the Company dated 6 November 2008, on 6 November 2008, United Shanghai received a copy of Baosteel’s appeal dated 30 October 2008 to the Second Intermediate Court against the First Judgment. Baosteel has sought an appeal for:
(1) the withdrawal of the second order in the FirstJudgementandsoughtanorderagainstUnited Shanghai for the sum totalling to RMB4,349,719 being the construction costs of RMB3,870,777 and the loss of profits in relation to future construction of RMB478,942; and
(2) the withdrawal of the third order in the First Judgement and sought an order against United Shanghai for the sum of RMB3 million being the penalty for breaching the Contract.
As disclosed in the announcement of the Company dated 27 February 2009, on 20 February 2009, United Shanghai received a paper of civil judgment ((2008) Hu Er Zhong Min Er (Min) Zhong Zi No. 2417) issued by the Second Intermediate Court (the ‘‘Second Judgment’’) whereby the Second Intermediate Court upheld the First Judgment granted by the Shanghai Court on 17 October 2008. In addition to the First Judgment in which United Shanghai has to pay to Baosteel a sum of RMB3,870,777 in respect of construction work of the Group’s factory in Shanghai and a sum of RMB1,500,000 in respect of penalty for breach of contract and the relevant courts fees of RMB49,395.44, United Shanghai has to pay the Second Intermediate Court a sum of RMB30,641.75 for the appeal fees in the Second Judgment. The Second Judgment is considered final.
2. Litigation between Western Prospector and Adamas Mining
ThelitigationisinrelationtoanactionbroughtbyWestern Prospector against Adamas Mining Co. Ltd. (‘‘Adamas Mining’’) whereby Western Prospector claims to compel Adamas Mining to perform its obligations under the joint venture Western-Adamas agreement signed by Western Prospector and Adamas Mining on 7 December 2004 (the ‘‘Joint Venture Agreement’’). The Joint Venture Agreement provided Western Prospector with the right to earn a 70% interest in the joint venture company, which should have been jointly established by the joint venture parties to manage the exploration license 3367X. The license 3367X is an exploration license covering several deposits. The Joint Venture Agreement also included an escrow agreement which requires both parties’ consent for the exploration license to be released from escrow and transferred to the joint venture company.
The Mongolian District Court denied Western Prospector’s claim to compel Adamas Mining to honour its commitments in the Joint Venture Agreement and Western Prospector was able to overturn the judgment of the Mongolian District Court in the Mongolian City Court. Adamas Mining appealed to the Mongolian Supreme Court which voided the City Court’s judgment. Western Prospector is currently preparing its case to appeal in the decision of the Mongolian Supreme Court.
Western Prospector will continue its joint venture dispute with Adamas Mining and intends to vigorously pursue all actions to complete the joint venture in accordance with the Joint Venture Agreement. Western Prospector confirms that the joint venture dispute is not material and does not impact Western Prospector’s NI 43-101 classified resources or the development of its main project in Gurvanbulag Central uranium deposit. In view of the uncertainty of the outcome in either the litigation or potential negotiations with Adamas Mining, Western Prospector had written off the balance of exploration expenditures related to license 3367X as of 30 September 2008. Western Prospector believes that it will not suffer any loss/damages in the event that it loses the appeal at the Mongolian Supreme Court. As at the Latest Practicable Date, Adamas Mining has not made any claim for damages.
–V-5– APPENDIX V GENERAL INFORMATION
As at the Latest Practicable Date, save as disclosed in this circular, no member of the Enlarged Group was engaged in any litigation or arbitration or claims which would materially and adversely affect the operations of the Company and no litigation or arbitration or claims which would materially and adversely affect the operations of the Company was known to the Directors to be pending or threatened by or against any member of the Enlarged Group.
MATERIAL CONTRACTS
The following contracts, not being entered into in the ordinary course of business, were entered into by members of the Enlarged Group within the two years immediately preceding the Latest Practicable Date and are, or may be, material:
(i) the agreement dated 4 June 2008 entered into between the Company and CNNC Overseas in respect of (a) the purchase of 125,208,965 Shares by CNNC Overseas; (b) the subscription of 159,168,308 Shares by CNNC Overseas; and (iii) the subscription of an unsecured, three-year maturity 2% annual coupon convertible note with a principal amount of HKD106,200,000 issued by the Company to CNNC Overseas on 5 November 2008, the particulars of which are set out in the circular of the Company dated 12 November 2008;
(ii) the support agreement dated 15 July 2008 entered into between Western Prospector and 0829984 B.C. Ltd. (a company governed by the laws of the Province of British Columbia) in respect of an offer to acquire all of the common shares of Western Prospector by 0829984 B.C. Ltd.;
(iii) the contracts entered into between the Company and Mr. Tsang Chiu Wai, and Mr. Kong Cheuk Luen, Trevor respectively for their respective appointments as senior management of the Company on 5 November 2008, the particulars of which are set out in the circular of the Company dated 12 November 2008;
(iv) the Support Agreement; and
(v) the Subscription Agreement.
MISCELLANEOUS
(i) The registered office of the Company is P.O. Box 309GT, Ugland House, South Church Street, Grand Cayman, Cayman Islands.
(ii) The branch share registrar and transfer office of the Company in Hong Kong is Computershare Hong Kong Investor Service Limited at 46th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong
(iii) The head office & principal place of business of the Company is Unit 2809, 28/F., China Resources Building, No. 26 Harbour Road, Wanchai, Hong Kong.
(iv) The company secretary and qualified accountant of the Company is Mr. Li Philip Sau Yan. Mr. Li, aged 50, is an associate member of the Institute of Chartered Accountants in England and Wales and a fellow of Hong Kong Institute of Certified Public Accountants.
(v) The English language text of this circular shall prevail over the Chinese language text.
–V-6– APPENDIX V GENERAL INFORMATION
DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents will be available for inspection during normal business hours at the Company’s head office in Hong Kong at Unit 2809, 28/F., China Resources Building, No. 26 Harbour Road, Wanchai, Hong Kong for a period of 14 days (except Saturdays, Sundays and public holidays) from the date of this circular:
(i) the memorandum and articles of association of the Company;
(ii) the consolidated audited accounts of the Company for the financial years ended 31 December 2008, the text of which is set out in Appendix I to this circular;
(iii) the accountants’ report of Western Prospector, the text of which is set out in Appendix II to this circular;
(iv) the letter from Deloitte Touche Tohmatsu in respect of the unaudited pro forma financial information of the Group, the text of which is set out in Appendix III to this circular;
(v) the Technical Report and Feasibility Study on the Gurvanbulag Uranium Deposit Saddle Hills Property Dornod Province, Mongolia prepared by P&E Mining Consultants Inc. and Aker Solutions Canada Inc., the text of which is set out in Appendix IV A to this circular;
(vi) the Review and Valuation of Certain Mongolian Mineral Properties of Western Prospector prepared by Chlumsky, Armbrust & Meyer, LLC, the text of which is set out in Appendix IV B to this circular;
(vii) the letters of consent as referred to under the paragraph headed ‘‘Experts’ Statements’’ in this Appendix;
(viii) copies of the material contracts as referred to under the paragraph headed ‘‘Material Contracts’’ in this Appendix; and
(ix) this circular.
–V-7–