Exhibit
4.10


 





 


 


AQUILINE RESOURCES INC.


 


CONSOLIDATED FINANCIAL STATEMENTS


 


DECEMBER 31, 2008 AND 2007


 


(EXPRESSED IN CANADIAN DOLLARS)


 

















 


MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING


 


The accompanying
consolidated financial statements of Aquiline Resources Inc. were prepared by
management in accordance with Canadian generally accepted accounting
principles. Management acknowledges responsibility for the preparation and
presentation of the consolidated financial statements, including responsibility
for significant accounting judgments and estimates and the choice of accounting
principles and methods that are appropriate to the Corporation’s circumstances.
The significant accounting policies of the Corporation are summarized in Note 2
to the consolidated financial statements.


 


Management has
established systems of internal control over the financial reporting process,
which are designed to provide reasonable assurance that relevant and reliable
financial information is produced.


 


The Board of Directors is
responsible for ensuring that management fulfills its financial reporting
responsibilities and for reviewing and approving the consolidated financial
statements together with other financial information. An Audit Committee
assists the Board of Directors in fulfilling this responsibility. The Audit
Committee meets with management as well as with the independent auditors to
review the internal controls over the financial reporting process, the
consolidated financial statements and the auditors’ report. The Audit Committee
also reviews the Annual Report to ensure that the financial information
reported therein is consistent with the information presented in the
consolidated financial statements. The Audit Committee reports its findings to
the Board of Directors for its consideration in approving the consolidated
financial statements together with other financial information of the
Corporation for issuance to the shareholders.


 


Management recognizes its
responsibility for conducting the Corporation’s affairs in compliance with
established financial standards, and applicable laws and regulations, and for
maintaining proper standards of conduct for its activities.


 


 


	
  (signed)

  	
   

  	
  (signed)

  
	
  Marc Henderson

  	
   

  	
  Dennis Gibson

  
	
  President and Chief
  Executive Officer

  	
   

  	
  Chief Financial Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Toronto, Canada

  	
   

  	
   

  
	
  March 30, 2009

  	
   

  	
   

  



 

















 


	
  

  	
   

  	
  701 Evans Avenue

  	
   

  	
  telephone:

  	
   

  	
  (416) 626-6000

  
	
   

  	
  8th Floor

  	
   

  	
  facsimile:

  	
   

  	
  (416) 626-8650

  
	
   

  	
  Toronto, Ontario Canada

  	
   

  	
  email:

  	
   

  	
  info@mscm.ca

  
	
   

  	
  M9C 1A3

  	
   

  	
  website:

  	
   

  	
  www.mscm.ca

  



 


Auditors’ Report


 


To
the Shareholders of


Aquiline
Resources Inc.


 


We
have audited the consolidated balance sheets of Aquiline Resources Inc. as at December 31,
2008 and 2007 and the consolidated statements of operations and deficit and
cash flows for the years then ended. 
These consolidated financial statements are the responsibility of the
Company’s management.  Our responsibility
is to express an opinion on these consolidated financial statements based on
our audits.


 


We
conducted our audits in accordance with Canadian generally accepted auditing
standards.  Those standards require that
we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.


 


In
our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
2008 and 2007 and the results of its operations and its cash flows for the
years then ended in accordance with Canadian generally accepted accounting
principles.


 


 


	
   

  	
  Signed:  “MSCM LLP”

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Chartered Accountants

  
	
   

  	
  Licensed Public Accountants

  
	
   

  	
   

  
	
   

  	
   

  
	
  Toronto,
  Ontario

  	
   

  
	
  March 25,
  2009

  	
   

  



 


2

















 


AQUILINE RESOURCES INC.


 


Consolidated
Balance Sheets


(Expressed
in Canadian Dollars)


 


	
  December 31,

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   Assets

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash equivalents

  	
   

  	
  $

  	
  2,357,921

  	
   

  	
  $

  	
  3,734,398

  	
   

  
	
  Short-term investments (Note 6)

  	
   

  	
  4,020,000

  	
   

  	
  2,900,000

  	
   

  
	
  Investments held for trading (Note 9)

  	
   

  	
  —

  	
   

  	
  374,400

  	
   

  
	
  Other receivables and prepaids (Note 20)

  	
   

  	
  1,236,377

  	
   

  	
  553,276

  	
   

  
	
  Prepaid transaction costs (Note 3(b))

  	
   

  	
  —

  	
   

  	
  188,000

  	
   

  
	
  Promissory note receivable (Note 7)

  	
   

  	
  —

  	
   

  	
  225,000

  	
   

  
	
  Current portion of long-term foreign tax recoverable
  (Note 8)

  	
   

  	
  884,831

  	
   

  	
  308,234

  	
   

  
	
   

  	
   

  	
  8,499,129

  	
   

  	
  8,283,308

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Long-term foreign tax recoverable (Note 8)

  	
   

  	
  6,416,917

  	
   

  	
  1,165,063

  	
   

  
	
  Long-term investments (Note 9)

  	
   

  	
  74,000

  	
   

  	
  2,615,320

  	
   

  
	
  Property and equipment (Note 10)

  	
   

  	
  1,608,121

  	
   

  	
  176,244

  	
   

  
	
  Deferred payments for future acquisition (Note 3(a))

  	
   

  	
  —

  	
   

  	
  21,407,914

  	
   

  
	
  Resource assets (Note 11)

  	
   

  	
  123,682,815

  	
   

  	
  34,849,462

  	
   

  
	
   

  	
   

  	
  $

  	
  140,280,982

  	
   

  	
  $

  	
  68,497,311

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Liabilities

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Payables and accruals (Note 20)

  	
   

  	
  $

  	
  5,975,113

  	
   

  	
  $

  	
  806,829

  	
   

  
	
  Debt (Note 12)

  	
   

  	
  514,212

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  6,489,325

  	
   

  	
  806,829

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Asset retirement obligation (Note 13)

  	
   

  	
  1,326,930

  	
   

  	
  422,240

  	
   

  
	
  Future income tax liability (Note 18)

  	
   

  	
  12,413,000

  	
   

  	
  7,655,000

  	
   

  
	
   

  	
   

  	
  20,229,255

  	
   

  	
  8,884,069

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Shareholders’ Equity

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Capital stock (Note 14(a))

  	
   

  	
  123,860,329

  	
   

  	
  70,994,372

  	
   

  
	
  Warrants (Note 14(c))

  	
   

  	
  7,461,455

  	
   

  	
  —

  	
   

  
	
  Contributed surplus

  	
   

  	
  15,514,378

  	
   

  	
  8,305,078

  	
   

  
	
  Convertible debenture (Note 15)

  	
   

  	
  15,822,904

  	
   

  	
  —

  	
   

  
	
  Deficit

  	
   

  	
  (42,344,839

  	
  )

  	
  (20,794,375

  	
  )

  
	
  Accumulated other comprehensive (loss) income

  	
   

  	
  (262,500

  	
  )

  	
  1,108,167

  	
   

  
	
   

  	
   

  	
  120,051,727

  	
   

  	
  59,613,242

  	
   

  
	
   

  	
   

  	
  $

  	
  140,280,982

  	
   

  	
  $

  	
  68,497,311

  	
   

  



 


Nature of Operations and
Going Concern (Note 1)


Commitments (Note 22)


 


On behalf of the Board of
Directors


 


	
  “MARC HENDERSON”
  (Signed)

  	
   

  	
  Director

  
	
  “JOHN SUTHERLAND”
  (Signed)

  	
   

  	
  Director

  



 





 


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


 


3

















 


AQUILINE RESOURCES INC.


 


Consolidated
Statements of Operations


(Expressed in Canadian Dollars)


 


	
  Years
  Ended December 31,

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Expenses

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Office and administration

  	
   

  	
  $

  	
  680,710

  	
   

  	
  $

  	
  355,382

  	
   

  
	
  IMA legal costs (Note 20)

  	
   

  	
  8,556

  	
   

  	
  307,476

  	
   

  
	
  Legal and audit (Note 20)

  	
   

  	
  192,924

  	
   

  	
  301,192

  	
   

  
	
  Accretion of asset retirement obligation (Note 13)

  	
   

  	
  125,607

  	
   

  	
  1,433

  	
   

  
	
  Amortization

  	
   

  	
  24,830

  	
   

  	
  29,541

  	
   

  
	
  Travel

  	
   

  	
  271,847

  	
   

  	
  365,401

  	
   

  
	
  Investor relations

  	
   

  	
  852,192

  	
   

  	
  545,476

  	
   

  
	
  Salaries and consulting

  	
   

  	
  2,273,996

  	
   

  	
  580,782

  	
   

  
	
  Capital tax

  	
   

  	
  21,014

  	
   

  	
  126,895

  	
   

  
	
  Stock option compensation (Note 14(b))

  	
   

  	
  4,301,437

  	
   

  	
  540,457

  	
   

  
	
   

  	
   

  	
  8,753,113

  	
   

  	
  3,154,035

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss before the following

  	
   

  	
  (8,753,113

  	
  )

  	
  (3,154,035

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interest income

  	
   

  	
  143,030

  	
   

  	
  356,579

  	
   

  
	
  Write-down of resource assets (Note 11)

  	
   

  	
  (19,721,079

  	
  )

  	
  (684,193

  	
  )

  
	
  Foreign exchange gain (loss)

  	
   

  	
  162,489

  	
   

  	
  (309,480

  	
  )

  
	
  Unrealized (loss) gain on investments held for
  trading

  	
   

  	
  (11,700

  	
  )

  	
  229,400

  	
   

  
	
  Gain (loss) on sale of long-term investments

  	
   

  	
  508,909

  	
   

  	
  (6,945

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net loss before income taxes

  	
   

  	
  (27,671,464

  	
  )

  	
  (3,568,674

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Future income tax recovery (Note
  18)

  	
   

  	
  (6,121,000

  	
  )

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net loss for the year

  	
   

  	
  $

  	
  (21,550,464

  	
  )

  	
  $

  	
  (3,568,674

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Basic and diluted loss per share
  (Note 19)

  	
   

  	
  $

  	
  (0.35

  	
  )

  	
  $

  	
  (0.07

  	
  )

  



 


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


 


4

















 


AQUILINE RESOURCES INC.


 


Consolidated
Statements of Changes in Shareholders’ Equity


(Expressed in Canadian Dollars)


 


	
  Years
  Ended December 31,

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Capital Stock

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance at beginning of year

  	
   

  	
  $

  	
  70,994,372

  	
   

  	
  $

  	
  56,574,750

  	
   

  
	
  Exercise of warrants

  	
   

  	
  149,999

  	
   

  	
  7,027,875

  	
   

  
	
  Value attributed to warrants exercised

  	
   

  	
  77,297

  	
   

  	
  2,771,950

  	
   

  
	
  Exercise of stock options

  	
   

  	
  3,593,450

  	
   

  	
  3,346,550

  	
   

  
	
  Value attributed to stock options exercised

  	
   

  	
  1,412,987

  	
   

  	
  1,273,247

  	
   

  
	
  Private placement, net of issue costs

  	
   

  	
  25,299,260

  	
   

  	
  —

  	
   

  
	
  Warrants valuation

  	
   

  	
  (6,866,755

  	
  )

  	
  —

  	
   

  
	
  Shares issued to acquire Absolut Resources Corp.

  	
   

  	
  29,199,719

  	
   

  	
  —

  	
   

  
	
  Balance at end of year

  	
   

  	
  $

  	
  123,860,329

  	
   

  	
  $

  	
  70,994,372

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Warrants

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance at beginning of year

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  2,771,950

  	
   

  
	
  Warrants exercised

  	
   

  	
  (77,297

  	
  )

  	
  (2,771,950

  	
  )

  
	
  Warrants issued

  	
   

  	
  7,461,455

  	
   

  	
  —

  	
   

  
	
  Warrants expired

  	
   

  	
  (637,712

  	
  )

  	
  —

  	
   

  
	
  Warrants issued to acquire Absolut Resources Corp.

  	
   

  	
  715,009

  	
   

  	
  —

  	
   

  
	
  Balance at end of year

  	
   

  	
  $

  	
  7,461,455

  	
   

  	
  $

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Contributed Surplus

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance at beginning of year

  	
   

  	
  $

  	
  8,305,078

  	
   

  	
  $

  	
  7,400,386

  	
   

  
	
  Stock options vested

  	
   

  	
  6,893,725

  	
   

  	
  2,177,939

  	
   

  
	
  Stock options issued to acquire Absolut Resources
  Corp.

  	
   

  	
  1,090,850

  	
   

  	
  —

  	
   

  
	
  Stock options exercised

  	
   

  	
  (1,412,987

  	
  )

  	
  (1,273,247

  	
  )

  
	
  Warrants expired

  	
   

  	
  637,712

  	
   

  	
  —

  	
   

  
	
  Balance at end of year

  	
   

  	
  $

  	
  15,514,378

  	
   

  	
  $

  	
  8,305,078

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Convertible debenture

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance at beginning of year

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  
	
  Convertible debenture, net of issue costs

  	
   

  	
  15,822,904

  	
   

  	
  —

  	
   

  
	
  Balance at end of year

  	
   

  	
  $

  	
  15,822,904

  	
   

  	
  $

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Deficit

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance at beginning of year

  	
   

  	
  $

  	
  (20,794,375

  	
  )

  	
  $

  	
  (17,225,701

  	
  )

  
	
  Net loss for the year

  	
   

  	
  (21,550,464

  	
  )

  	
  (3,568,674

  	
  )

  
	
  Balance at end of year

  	
   

  	
  $

  	
  (42,344,839

  	
  )

  	
  $

  	
  (20,794,375

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accumulated Other Comprehensive
  (Loss) Income

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance at beginning of year

  	
   

  	
  $

  	
  1,108,167

  	
   

  	
  $

  	
  —

  	
   

  
	
  Transition adjustments - financial instruments

  	
   

  	
  —

  	
   

  	
  134,325

  	
   

  
	
  Reclassification of unrealized gain on
  available-for-sale long-term investments

  	
   

  	
  (1,253,217

  	
  )

  	
  (116,975

  	
  )

  
	
  Net unrealized (loss) gain on available-for-sale
  long-term investments

  	
   

  	
  (117,450

  	
  )

  	
  1,090,817

  	
   

  
	
  Balance at end of year

  	
   

  	
  $

  	
  (262,500

  	
  )

  	
  $

  	
  1,108,167

  	
   

  



 


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


 


5














 


AQUILINE RESOURCES INC.


 


Consolidated
Statements of Comprehensive Loss


(Expressed
in Canadian Dollars)


 


	
  Years
  Ended December 31,

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net loss  for
  the year

  	
   

  	
  $

  	
  (21,550,464

  	
  )

  	
  $

  	
  (3,568,674

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Other comprehensive loss

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net unrealized (loss) gain on available-for-sale
  long-term investments

  	
   

  	
  (117,450

  	
  )

  	
  1,090,817

  	
   

  
	
  Reclassification
  of unrealized gains on  available-for-sale long-term investments

  	
   

  	
  (1,253,217

  	
  )

  	
  (116,975

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total comprehensive loss

  	
   

  	
  $

  	
  (22,921,131

  	
  )

  	
  $

  	
  (2,594,832

  	
  )

  



 


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


 


6

















 


AQUILINE RESOURCES INC.


 


Consolidated
Statements of Cash Flows


(Expressed
in Canadian Dollars)


 


	
  Years
  Ended December 31,

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CASH (USED IN) PROVIDED BY:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  OPERATING ACTIVITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net loss for the year

  	
   

  	
  $

  	
  (21,550,464

  	
  )

  	
  $

  	
  (3,568,674

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Adjustments for:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Amortization

  	
   

  	
  24,830

  	
   

  	
  29,541

  	
   

  
	
  Long-term foreign tax recoverable

  	
   

  	
  —

  	
   

  	
  (407,527

  	
  )

  
	
  Accretion of asset retirement obligation

  	
   

  	
  125,607

  	
   

  	
  1,433

  	
   

  
	
  Stock option compensation

  	
   

  	
  4,301,437

  	
   

  	
  540,457

  	
   

  
	
  Unrealized (loss) gain on investments held for
  trading

  	
   

  	
  11,700

  	
   

  	
  (229,400

  	
  )

  
	
  (Gain) loss on sale of long-term investments

  	
   

  	
  (508,909

  	
  )

  	
  6,945

  	
   

  
	
  Future income tax recovery

  	
   

  	
  (6,121,000

  	
  )

  	
  —

  	
   

  
	
  Write-down of resource assets

  	
   

  	
  19,721,079

  	
   

  	
  684,193

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net change in non-cash working capital (Note 17)

  	
   

  	
  (2,714,410

  	
  )

  	
  (898,258

  	
  )

  
	
   

  	
   

  	
  (6,710,130

  	
  )

  	
  (3,841,290

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  FINANCING ACTIVITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Repayment of debt

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Issue of common shares, net of share issue costs

  	
   

  	
  29,042,709

  	
   

  	
  10,374,425

  	
   

  
	
  Proceeds from convertible debenture and warrants,
  net of issue costs

  	
   

  	
  16,417,604

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  45,460,313

  	
   

  	
  10,374,425

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  INVESTING ACTIVITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Prepaid transaction costs

  	
   

  	
  —

  	
   

  	
  (80,000

  	
  )

  
	
  Promissory note receivable

  	
   

  	
  —

  	
   

  	
  (225,000

  	
  )

  
	
  Purchase of long-term investments

  	
   

  	
  (877,500

  	
  )

  	
  (1,193,153

  	
  )

  
	
  Proceed on disposal of long-term investments

  	
   

  	
  1,022,945

  	
   

  	
  1,162,805

  	
   

  
	
  Purchase of property and equipment

  	
   

  	
  (581,921

  	
  )

  	
  (45,392

  	
  )

  
	
  Proceeds on sale of exploration equipment

  	
   

  	
  —

  	
   

  	
  33,225

  	
   

  
	
  Deferred payments for future acquisition

  	
   

  	
  —

  	
   

  	
  (11,299,684

  	
  )

  
	
  Net redemption of short-term investments

  	
   

  	
  (1,120,000

  	
  )

  	
  13,714,214

  	
   

  
	
  Acquisition of Minera Argenta S.A. and Aquiline
  Holdings Inc.

  	
   

  	
  (15,000,150

  	
  )

  	
  —

  	
   

  
	
  Cash acquired on Minera Argenta S.A. and Aquiline
  Holdings Inc.

  	
   

  	
  1,515,747

  	
   

  	
  —

  	
   

  
	
  Cash acquired on Absolut Resources Inc.

  	
   

  	
  505,040

  	
   

  	
  —

  	
   

  
	
  Purchase of investments held for trading

  	
   

  	
  —

  	
   

  	
  (145,000

  	
  )

  
	
  Purchase of resource assets

  	
   

  	
  (26,543,935

  	
  )

  	
  (5,758,545

  	
  )

  
	
   

  	
   

  	
  (41,079,774

  	
  )

  	
  (3,836,530

  	
  )

  
								



 


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


 


7

















 


AQUILINE RESOURCES INC.


 


Consolidated
Statements of Cash Flows - Continued


(Expressed
in Canadian Dollars)


 


	
  Years
  Ended December 31,

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Effect of translation on foreign currency net
  monetary assets

  	
   

  	
  953,114

  	
   

  	
  584,512

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (Decrease) increase in cash and
  cash equivalents

  	
   

  	
  (1,376,477

  	
  )

  	
  3,281,117

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash equivalents,
  beginning of year

  	
   

  	
  3,734,398

  	
   

  	
  453,281

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash equivalents, end of
  year

  	
   

  	
  $

  	
  2,357,921

  	
   

  	
  $

  	
  3,734,398

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash equivalents consist
  of:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash

  	
   

  	
  $

  	
  2,307,921

  	
   

  	
  $

  	
  859,628

  	
   

  
	
  Guaranteed investment certificates

  	
   

  	
  50,000

  	
   

  	
  2,874,770

  	
   

  
	
   

  	
   

  	
  $

  	
  2,357,921

  	
   

  	
  $

  	
  3,734,398

  	
   

  



 


SUPPLEMENTAL
CASH FLOW INFORMATION (Note 17)


 


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


 


8

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


1.                                   Nature of Operations and Going Concern


 


Aquiline Resources
Inc. (“Aquiline” or the “Corporation”) is a publicly traded company listed on
the TSX under the symbol “AQI” involved in the exploration and development of
gold and silver projects in Argentina and Peru. The majority of the Corporation’s
deferred exploration expenses relate to the development of the Calcatreu
property located in the Province of Rio Negro, Argentina, the Navidad Silver
Project and the Regalo gold property in the Chubut Province of Argentina and
the Pico Machay and Chaparra gold projects in Peru. Aquiline also owns and has
interests in platinum and palladium projects in the Sudbury region of Ontario,
Canada and holds a net smelter royalty (“NSR”) on a development stage gold and
silver project in Mexico (“La Jojoba Project”). The Corporation also holds
equity share positions in exploration and development companies that operate
within certain countries in the Americas.


 


The business of
mining for minerals involves a high degree of risk. The underlying value of the
mineral properties is dependent upon the existence and economic recovery of
mineral reserves, the ability to raise long-term financing to complete the
development of the properties, government policies and regulations, and upon
future profitable production or, alternatively upon the Corporation’s ability
to dispose of its interest on an advantageous basis; all of which are uncertain.


 


In order to meet
future expenditures, the Corporation will need to raise additional funding.
Although the Corporation has been successful in raising funds to date, there
can be no assurance that adequate funding will be available in the future, or available
under terms favorable to the Corporation. These consolidated financial
statements have been prepared on a going concern basis that assumes the
Corporation will be able to continue to realize its assets and discharge its
liabilities in the normal course of business. In the event the Corporation is
not able to obtain adequate funding, there is uncertainty as to whether the
Corporation will be able to continue as a going concern and maintain or
complete the exploration and development of its resource properties. These
consolidated financial statements do not reflect the adjustments to the
carrying values of assets and liabilities that would be necessary if the
Corporation were unable to obtain adequate financing.  Changes in future conditions could require
material write downs of the carrying values of resource assets.


 


2.                                   Summary of Significant Accounting
Policies


 


Principles
of consolidation


 


The consolidated
financial statements include the accounts of the Corporation and its
wholly-owned subsidiaries in Canada, Absolut Resources Inc. (“Absolut”), in
Peru, Minera Calipuy S.A.C., in Mexico, Minera Aquilon S.A. de C.V. and Minera
San Isidro S.A. de C.V, and in Argentina, Minera Aquiline Argentina S.A, Minera
Argenta S.A. and Aquiline Holdings Inc., which were formed or acquired to
facilitate the acquisition, exploration and development of mineral properties
in these respective countries. These consolidated financial statements have
been prepared by management in accordance with Canadian generally accepted
accounting principles.


 


9

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


2.                                   Summary of Significant Accounting
Policies (Continued)


 


Measurement
uncertainty


 


The preparation of
financial statements in conformity with Canadian generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amount of revenues and expenses during the reporting period. Actual results may
differ from those estimates. Significant estimates and assumptions include
those related to the valuation of resource assets, recoverability of foreign
taxes, determinations as to whether costs are expensed or deferred, asset
retirement obligations, future income taxes and stock compensation valuation
assumptions.


 


Cash
and cash equivalents


 


Cash and cash
equivalents comprise cash at banks and on hand and other highly liquid short
term investments, which may be settled on demand or within a maximum 90 day
period at the date of acquisition.


 


Short-term
investments


 


Short-term
investments are liquid investments with an original maturity greater than three
months but less than one year at the date of acquisition.


 


Resource
assets


 


The cost of the
resource assets and related exploration and development costs are deferred
until the properties are placed into production, become inactive, or are sold
or abandoned. These costs will be amortized over the estimated useful lives of
the properties following the commencement of production or written off if the
properties are sold, allowed to lapse, or abandoned. The amount shown for
resource assets represents costs incurred to date and is not intended to
reflect present or future values.


 


Although the
Corporation has taken steps to verify title to resource assets in which it has
an interest, these procedures do not guarantee the Corporation’s title.
Property title may be subject to unregistered prior agreements and
non-compliance with regulatory requirements.


 


Property
and equipment


 


Property and
equipment are recorded at cost. Amortization on office equipment is recorded on
the declining balance basis at an annual rate of 30%. Amortization on leasehold
improvements is recorded on the straight line basis over the lease term.
Amortization is recorded on a straight line basis over periods ranging from 3
to 10 years and is charged to resource assets.


 


10

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


2.                                   Summary of Significant Accounting
Policies (Continued)


 


Stock
option compensation


 


The fair value of
any stock options granted to directors, officers, consultants and employees is
recorded over the vesting period with a corresponding increase recorded to
contributed surplus. Costs directly related to the mineral properties or
deferred payments for future acquisition are capitalized, indirect costs are
expensed. The fair value of the stock option compensation is determined using
the Black-Scholes option pricing model and management’s assumptions as
disclosed in Note 14(b). Upon exercise of the stock options, consideration paid
by the option holder together with the amount previously recognized in
contributed surplus is recorded as an increase to capital stock.


 


Income
taxes


 


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


 


Loss
per share


 


Basic loss per
share is computed by dividing the loss for the year by the weighted average
number of common shares outstanding during the year, including contingently
issuable shares which are included when the conditions necessary for issuance
have been met. Diluted earnings per share is calculated in a similar manner,
except that the weighted average number of common shares outstanding is
increased to include potentially issuable common shares from the assumed
exercise of common share purchase options and warrants, if dilutive. The number
of additional shares included in the calculation is based on the treasury stock
method for options and warrants. The effect of potential issuances of shares
under options and warrants would be anti-dilutive and accordingly basic and
diluted loss per share are the same.


 


Foreign
currency translation


 


The operations of
the Corporation’s subsidiaries are considered to be of an integrated nature.
Monetary assets and liabilities denominated in foreign currencies are
translated at the exchange rates in effect at the balance sheet date.
Non-monetary items are translated at historical rates. Revenues and expenses
are translated at the average exchange rate during the year. Translation gains
and losses are included in operations.


 


Asset
retirement obligation


 


The fair value of
the liability for an asset retirement obligation is recorded when it is
incurred and can be reasonably estimated, and the corresponding increase to the
asset is amortized over the life of the asset. The liability is increased over
time to reflect an accretion element considered in the initial measurement at
fair value.


 


11

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


2.                                   Summary of Significant Accounting
Policies (Continued)


 


Impairment
of long-lived assets


 


Long-lived assets
held and used by the Corporation and subject to amortization are reviewed for
possible impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If changes in circumstances
indicate that the carrying amount of an asset that an entity expects to hold
and use may not be recoverable, future cash flows expected to result from the
use of the asset and its disposition must be estimated. If the sum of
discounted value of the future cash flows is less than the carrying amount of
the asset or if long-lived assets are abandoned, the excess of the carrying
amount over the estimated fair value, based on discounted future cash flows, is
recorded as a charge to net income.


 


Financial instruments, comprehensive income (loss) and hedges


 


The
Corporation’s long-term investments are classified as “available-for-sale” and
are measured at fair value. Changes in fair value are recognized in other
comprehensive income (loss) until their disposition, at which time they are
transferred to net income. Investments in securities having quoted market
values and which are publicly traded on a recognized securities exchange and
for which no sales restrictions apply are recorded at values based on the
current bid prices.


 


The
Corporation has classified its cash and cash equivalents and short-term
investments as held for trading, which are measured at fair value. Other
receivables, promissory note receivable and foreign tax recoverable are
classified as loans and receivables, which are measured at amortized cost.
Payables and accruals, long-term debt and asset retirement obligations are
classified as other financial liabilities, which are measured at amortized
cost.


 


Capital Disclosures and Financial Instruments — Disclosures
and Presentation


 


On December 1,
2006, the CICA issued three new accounting standards: Capital Disclosures
(Handbook Section 1535), Financial Instruments — Disclosures (Handbook Section 3862),
and Financial Instruments — Presentation (Handbook Section 3863). These
new standards became effective for the Corporation on January 1, 2008.


 


Capital Disclosures


 


Handbook
Section 1535 specifies the disclosure of (i) an entity’s objectives,
policies and processes for managing capital; (ii) quantitative data about
what the entity regards as capital; (iii) whether the entity has complied
with any capital requirements; and (iv) if it has not complied, the
consequences of such noncompliance. The Corporation has included disclosures
recommended by the new Handbook section in Note 4 to these consolidated
financial statements.


 


Financial Instruments


 


Handbook
Sections 3862 and 3863 replace Handbook Section 3861, Financial Instruments
— Disclosure and Presentation, revising and enhancing its disclosure
requirements, and carrying forward unchanged its presentation requirements.
These new sections place increased emphasis on disclosures about the nature and
extent of risks arising from financial instruments and how the entity manages
those risks. The Corporation has included disclosures recommended by the new
Handbook sections in Note 5(b) to these consolidated financial statements.


 


12

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


2.                                   Summary of Significant Accounting
Policies (Continued)


 


Future
Accounting Pronouncements


 


International Financial Reporting Standards (“IFRS”)


 


In January 2006,
the CICA’s Accounting Standards Board (“AcSB”) formally adopted the strategy of
replacing Canadian GAAP with IFRS for Canadian enterprises with public
accountability. The  conversion timetable
calls for financial reporting under IFRS for accounting periods commencing on
or after January 1, 2011. Accordingly, IFRS will be required for interim
and annual financial statements relating to fiscal years beginning on or after January 1,
2011. Aquiline will be required to have prepared, in time for its first quarter
2011 filing, comparative financial statements in accordance with IFRS for the
three months ended March 31, 2010.


 


Goodwill and Intangible Assets


 


Section 3064,
Goodwill and Intangible Assets, establishes revised standards for recognition,
measurement, presentation and disclosure of goodwill and intangible assets.
Concurrent with the introduction of this standard, the CICA withdrew EIC 27,
Revenues and expenses during the pre-operating period. As a result of the withdrawal
of EIC 27, the Corporation will no longer be able to defer costs and revenues
incurred prior to commercial production at new operations. The new standard is
effective as of January 1, 2009.


 


Business Combinations. Consolidated Financial Statements and
Non-Controlling Interests


 


The
CICA issued three new accounting standards in January 2009: Section 1582,
Business Combinations, Section 1601, Consolidated Financial Statements and
Section 1602, Non-Controlling interests. These new standards will be effective
for fiscal years beginning on or after January 1, 2011. The Corporation is
in the process of evaluating the requirements of the new standards.


 


Sections
1582 replaces section 1581 and establishes standards for the accounting for a
business combination. It provides the Canadian equivalent to IFRS 3 - Business
Combinations. The section applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after January 1, 2011. Sections 1601 and
1602 together replace section 1600, Consolidated Financial Statements. Section 1601,
establishes standards for the preparation of consolidated financial statements.
Section 1601 applies to interim and annual consolidated financial
statements relating to fiscal years beginning on or after January 1, 2011.
Section 1602 establishes standards for accounting for a non-controlling
interest in a subsidiary in consolidated financial statements subsequent to a
business combination. It is equivalent to the corresponding provisions of IFRS
lAS 27 - Consolidated and Separate Financial Statements and applies to interim
and annual consolidated financial statements relating to fiscal years beginning
on or after January 1, 2011.


 


The Corporation is
currently assessing the impact of these new accounting standards on its
consolidated financial statements.


 


13

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


3.                                   Business Combinations


 


(a)                Navidad Silver Project, Argentina


 


A
positive legal decision was received on July 14, 2006 from the Supreme
Court of British Columbia awarding the Corporation ownership of the Navidad Silver
Project (“Navidad”) and its surrounding claims located in the Chubut Province
of Argentina. The Navidad project would likely be an open pit mine which is
currently the subject of a ban in the Chubut province. The continued ban on
open pit mining may prohibit the project feasibility at current resource
estimates.


 


On October 19,
2006 the Corporation announced that it had reached agreement with IMA
Exploration Inc. (“IMA”) to give effect to the July 14, 2006 judgment.
During the appeal period, Aquiline operated the Navidad Project under the terms
of an Interim Project Development Agreement (the “IPDA”) that had been executed
by the parties. The key terms of the IPDA are as follows:


 


·                   The shares (the “Shares”) of IMA’s wholly
owned subsidiaries Inversiones Mineras Argentinas Inc. and Inversiones Mineras
Argentinas S.A. (the “Subsidiaries”) would be held in trust pending the
completion of the appeal process. The boards of these companies would be
replaced with nominees of Aquiline and the ongoing development of the Navidad
Project would be funded by Aquiline. Aquiline had sole operational control of
the Navidad Project. IMA representatives had observer status and would be kept
apprised of Aquiline’s exploration and development plans.


 


·                   The parties agreed that IMA’s
reimbursable costs for Navidad were $18.5 million, a figure which excluded
Aquiline’s legal costs which could have been set off against IMA’s reimbursable
costs in the event that Aquiline is determined to be the ultimate owner of the
Navidad Project in the court action.


 


·                   On completion of the trust transfer of
the Shares, Aquiline had to deposit $7.5 million into escrow to partially
secure payment of IMA’s reimbursable costs.


 


·                   Aquiline agreed to spend up to $11
million to further the development of the Navidad Project during the appeal
period.


 


·                   A standstill clause provided that neither
party would attempt to acquire the other, solicit proxies in the other, or
encourage any third parties in such an endeavour for the duration of the appeal
period.


 


In February 2007,
an additional 900,000 shares of Consolidated Pacific Bay and 300,000 shares of
Tinka Resources Inc. (“Tinka”) with a market value of $184,500 and $96,000
respectively were received and were being held in trust pending the outcome of
the judgment. Upon payment of the final $11 million, these shares were released
to the Corporation.


 


On June 7,
2007, the British Columbia Court of Appeal released its judgment in favour of
Aquiline. The appeal launched by IMA was dismissed, with no variations made to
the original judgment. IMA filed to seek leave to appeal the judgment to the
Supreme Court of Canada.


 


14

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


3.                                   Business Combinations (Continued)


 


(a)                Navidad Silver Project, Argentina
(Continued)


 


On December 20,
2007, the Supreme Court of Canada dismissed with costs the application for
leave to appeal brought by IMA. IMA had no further recourse and its appeal was
terminated. Aquiline was determined to be the sole beneficial owner of the
Navidad silver deposit, subject to payment of amounts owed to IMA under the
IPDA, as follows:


 


(i)             the parties would cause the sum of $7.5
million plus interest accrued thereon, held in trust, to be released to IMA by
no later than December 31, 2007. This amount was released;


 


(ii)          Aquiline would pay to IMA the sum of $11
million, provided however that Aquiline is entitled to set off its legal costs
against such amount. This amount was paid;


 


(iii)       on
the date upon which the last of the payments in subparagraphs (i) and (ii) above
were made, the trust was terminated and Aquiline then held sole legal and
beneficial title to the Shares and the underlying Navidad property.


 


As at December 31,
2007, the deferred payments for future acquisition of $21,407,914 was comprised
of a loan to Minera Argenta S.A. (the holder of the Navidad property) in the
amount of $10,151,259, stock option compensation of $794,576, other advances
and expenses of $8,959,079 and related capitalized future income tax costs of
$1,503,000.


 


On February 11,
2008, Aquiline paid the sum of $11 million owing to IMA as final payment for
the acquisition of IMA’s wholly owned subsidiaries, pursuant to the court
decision on December 20, 2007. The acquisition of IMA’s wholly owned
subsidiaries, Minera Argenta S.A. and Aquiline Holdings Inc., was accounted for
using the purchase method. The results of operations are included in the
accounts from February 11, 2008, the effective date of acquisition.


 


Details
of the acquisition are as follows:


 


	
  Purchase Price

  	
   

  	
   

  	
   

  
	
  Cash paid

  	
   

  	
  $

  	
  18,500,000

  	
   

  
	
  Transaction costs

  	
   

  	
  4,000,000

  	
   

  
	
   

  	
   

  	
  $

  	
  22,500,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Fair Value of Net Assets Acquired

  	
   

  	
   

  	
   

  
	
  Current assets

  	
   

  	
  $

  	
  4,272,008

  	
   

  
	
  Long-term investments

  	
   

  	
  93,000

  	
   

  
	
  Resource assets

  	
   

  	
  37,231,082

  	
   

  
	
  Property and equipment

  	
   

  	
  746,245

  	
   

  
	
   

  	
   

  	
  42,342,335

  	
   

  
	
  Less: current liabilities

  	
   

  	
  (13,938,907

  	
  )

  
	
  Less: future tax liabilities

  	
   

  	
  (5,470,000

  	
  )

  
	
  Less: asset retirement obligation

  	
   

  	
  (433,428

  	
  )

  
	
   

  	
   

  	
  $

  	
  22,500,000

  	
   

  



 


15

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


3.                                   Business Combinations (Continued)


 


(b)                Acquisition of Absolut Resources
Corp. (“Absolut”)


 


On October 2,
2007, Aquiline entered into a binding letter agreement (the “Letter Agreement”)
pursuant to which Aquiline offered to acquire 100% of the issued and
outstanding shares of Absolut.


 


The
agreement contemplated that the Absolut shareholders would receive Aquiline
shares based on the following exchange ratio: (i) 1 common share of
Aquiline for 10 common shares of Absolut, (ii) 1 warrant of Aquiline for
each 10 warrants of Absolut and (iii) 1 option of Aquiline for each 10
options of Absolut, subject to adjustment of the exchange ratio based on the
ratio of trading prices of the respective companies based on the average share
prices of the last five trading days before the Special Meeting of the Absolut
shareholders. The exchange ratio was restricted to a maximum of 1 for 11 and a
minimum of 1 for 9.


 


The
special meeting of the Absolut shareholders was held on March 5, 2008 and
the transaction was approved. Based on the trading on the last five days before
the special meeting, the exchange ratio was determined to be 1 for 9.


 


The
transaction was closed on April 1, 2008 and 2,961,432 Aquiline common
shares, 218,889 Aquiline options and 205,558 Aquiline warrants were issued in
exchange for common shares, options and warrants of Absolut. This transaction
is between two companies with an established historical relationship, and
resulted in the creation of a gold division within Aquiline, the initial focus
of which will be Absolut’s Pico Machay project in Peru and Aquiline’s Calcatreu
project in Argentina.


 


Details
of the acquisition are as follows:


 


	
  Purchase Price

  	
   

  	
   

  	
   

  
	
  2,961,432
  common shares issued in exchange for  26,652,888 Absolut common shares
  outstanding (net of 3,025,000 shares in Absolut held by the Corporation)

  	
   

  	
  $

  	
  29,199,719

  	
   

  
	
  Fair value of 205,558 warrants issued in exchange
  for 1,850,000 Absolut warrants

  	
   

  	
  715,009

  	
   

  
	
  Fair value of 218,889 options issued in exchange for
  1,970,000 Absolut options

  	
   

  	
  1,090,850

  	
   

  
	
  Cost of 3,025,000 Absolut shares originally held by
  the Corporation

  	
   

  	
  1,989,817

  	
   

  
	
  Transaction costs

  	
   

  	
  260,770

  	
   

  
	
   

  	
   

  	
  $

  	
  33,256,165

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Fair Value of Net Assets Acquired

  	
   

  	
   

  	
   

  
	
  Current assets

  	
   

  	
  $

  	
  737,008

  	
   

  
	
  Resource assets

  	
   

  	
  45,751,349

  	
   

  
	
  Property and equipment

  	
   

  	
  557,510

  	
   

  
	
   

  	
   

  	
  47,045,867

  	
   

  
	
  Less: current liabilities

  	
   

  	
  (1,603,110

  	
  )

  
	
  Less: long-term liabilities

  	
   

  	
  (317,592

  	
  )

  
	
  Less: future tax liabilities

  	
   

  	
  (11,869,000

  	
  )

  
	
   

  	
   

  	
  $

  	
  33,256,165

  	
   

  



 


16














 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


4.             Capital
Management


 


The capital of the
Corporation consists of items included in shareholders’ equity and debt
obligations, net of cash and cash equivalents and short-term investments.


 


The Corporation
manages its capital structure and makes adjustments to it, based on the funds
available to the Corporation, in order to support the acquisition, exploration
and development of resource assets. The Board of Directors does not establish
quantitative return on capital criteria for management, but rather relies on
the expertise of the Corporation’s management to sustain future development of
the business.


 


The properties in
which the Corporation currently has an interest are in the exploration stage;
as such the Corporation is dependent on external financing to fund its
activities. In order to carry out the planned exploration and pay for
administrative costs, the Corporation will spend its existing working capital
and raise additional amounts as needed. The Corporation will continue to assess
new properties and seek to acquire an interest in additional properties if it
feels there is sufficient geologic or economic potential and if it has adequate
financial resources to do so.


 


Management reviews
its capital management approach on an ongoing basis and believes that this
approach, given the relative size of the Corporation, is reasonable.


 


There were no
changes in the Corporation’s approach to capital management during the year
ended December 31, 2008. Neither the Corporation nor its subsidiaries are
subject to externally imposed capital requirements.


 


5.            Property
and Financial Risk Factors


 


(a)      Property risk


 


The Corporation’s major mineral properties are the
Calcatreu gold property, Navidad Silver Project and Pico Machay gold property.
Unless the Corporation acquires or develops additional material properties, the
Corporation will be mainly dependent upon these three properties. If no additional
major mineral exploration properties are acquired by the Corporation, any
adverse development affecting these three properties would have a material
adverse effect on the Corporation’s financial condition and results of
operations.


 


(b)      Financial risk


 


The
Corporation’s activities expose it to a variety of financial risks: credit
risk, liquidity risk and market risk (including interest rate, foreign exchange
rate and other price risk).


 


Risk
management is carried out by the Corporation’s management team with guidance
from the Audit Committee under policies approved by the Board of Directors. The
Board of Directors also provides regular guidance for overall risk management.


 


17

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


5.            Property
and Financial Risk Factors (Continued)


 


(b)      Financial risk (Continued)


 


Credit risk


 


The Corporation’s
credit risk is primarily attributable to short-term investments, other
receivables and foreign tax recoverable. The Corporation has no significant
concentration of credit risk arising from operations. Short-term investments
consist of guaranteed investment certificates, which have been invested with
reputable financial institutions, from which management believes the risk of
loss to be remote. Other receivables consist of goods and services tax due from
the Federal Government of Canada and receivables from other companies. Foreign
tax recoverable consists of value added taxes paid on exploration costs that
are refundable from the Government of Argentina. In Argentina, claims for the
foreign tax recoverable can only be made one year after the stated expenditures
have been paid when there is no tax collection from revenues to offset.
$7,301,748 represents the maximum credit exposure. Management believes that the
credit risk concentration with respect to other receivables and foreign tax
recoverable is remote. Management does not believe the receivables are
impaired.


 


Liquidity risk


 


The Corporation’s
approach to managing liquidity risk is to ensure that it will have sufficient
liquidity to meet liabilities when due. As at December 31, 2008, the
Corporation had cash and cash equivalents and short-term investments of
$6,377,921 (December 31, 2007 - $6,634,398) to settle current liabilities
of $6,489,325 (December 31, 2007 - $806,829). Other than its current debt
(see Note 12), all of the Corporation’s financial liabilities have contractual
maturities of less than 90 days and are subject to normal trade terms.


 


Market
risks


 


Interest rate risk


 


The Corporation
has cash balances and no interest-bearing debt. The Corporation’s current
policy is to invest excess cash in investment-grade short-term deposit
certificates issued by its banking institutions. The Corporation periodically
monitors the investments it makes and is satisfied with the credit ratings of
its banks.


 


Foreign
currency risk


 


The Corporation’s
functional currency is the Canadian dollar and major purchases are transacted
in Canadian dollars, Argentine Pesos and Peruvian New Soles. The Corporation
funds major operations and exploration expenses in Argentina and Peru. The
Corporation maintains Argentine pesos bank accounts in Argentina and Peruvian
sole bank accounts in Peru. The Corporation is subject to gains and losses due
to fluctuations in Argentine Peso and Peruvian New Sole against the Canadian
dollar.


 


Price
risk


 


The Corporation is
exposed to price risk with respect to commodity and equity prices. Equity price
risk is defined as the potential adverse impact on the Corporation’s earnings
due to movements in individual equity prices or general movements in the level
of the stock market. Commodity price risk is defined as the potential adverse
impact on earnings and economic value due to commodity price movements and
volatilities. The Corporation closely monitors commodity prices of gold and
silver, individual equity movements, and the stock market to determine the
appropriate course of action to be taken.


 


18

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


5.            Property
and Financial Risk Factors (Continued)


 


(b)      Financial risk (Continued)


 


Financial
Instruments


 


The
Corporation’s financial instruments consist of cash and cash equivalents,
short-term investments, other receivables, foreign tax recoverable, long-term
investments, payables and accruals, current debt and asset retirement
obligations. As at December 31, 2008, the carrying and fair value amounts
of the Corporation’s financial instruments are the same. Changes in fair value
of the Corporation’s long-term investments are recognized in other comprehensive
income.


 


Sensitivity
analysis


 


Based
on management’s knowledge and experience of the financial markets, the
Corporation believes the following movements are “reasonably possible” over a
twelve month period.


 


Short-term
investments include deposits at call which are at variable rates. Sensitivity
to a plus or minus 1% change in rates would affect net loss by $40,200.


 


The
Corporation’s long-term investments are denominated in Canadian dollars.
Sensitivity to a plus or minus 10% movement in the Canadian listed equity
prices would affect comprehensive loss by $7,400.


 


The
Corporation is exposed to foreign currency risk on fluctuations of financial
instruments related to cash and cash equivalents, other receivables, foreign
tax recoverable, payables and accruals that are denominated in Argentine Pesos
and Peruvian New Soles. Sensitivity to a plus or minus 5% change in the foreign
exchange rate would affect net loss by $105,339.


 


Price
risk is remote since the Corporation is not a producing entity.


 


6.            Short-Term Investments


 


Short-Term
Investments are Guaranteed Investment Certificates (GICs) of $4,020,000 (2007 -
$2,900,000) with maturity dates of more than 90 days and not more than 12
months, redeemable without penalty after 30 days. Of these investments $20,000
(2007 - $50,000) is collateral for the Corporation’s credit cards.


 


19

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


7.            Promissory
Note Receivable


 


On December 14,
2007, the Corporation advanced $225,000 to Absolut under a promissory note
secured by a general security agreement. This note has been eliminated upon
acquisition of Absolut, see Note 3(b)).


 


8.             Foreign Tax Recoverable


 


Foreign tax
recoverable consists of value added taxes (“VAT”) paid on exploration costs
that are refundable from the Government of Argentina. In Argentina, claims for
the VAT refund can only be made one year after the stated expenditures have
been paid when there is no VAT collection from revenues to offset. The ability
to make such claims for refunds began in fiscal year 2005.


 


The timing of
receipt of the refunds subsequent to submission of the claim depends on the
timing of approval and processing of the claim by the Government of Argentina.
There is limited previous payment history upon which to predict the timing of
the receipt of these amounts. Expenditures for which the one year waiting
period has passed and a claim has been made are classified as current. All
other expected refund amounts have been classified as long term.


 


9.             Investments Held for Trading and
Long-Term Investments


 


The
Corporation’s long-term investments include:


 


	
   

  	
   

  	
  December 31,

  	
   

  	
  December 31,

  	
   

  
	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
  Number of

  	
   

  	
   

  	
   

  	
  Number of

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Shares

  	
   

  	
  Value

  	
   

  	
  Shares

  	
   

  	
  Value

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Absolut Resources Corp. common shares

  	
   

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  2,766,000

  	
   

  	
  $

  	
  2,406,420

  	
   

  
	
  Absolut Resources Corp. warrants

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  1,170,000

  	
   

  	
  374,400

  	
   

  
	
  Sierra Minerals Inc. common shares

  	
   

  	
  170,000

  	
   

  	
  21,250

  	
   

  	
  170,000

  	
   

  	
  71,400

  	
   

  
	
  Sierra Minerals Inc. warrants

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  50,000

  	
   

  	
  —

  	
   

  
	
  Columbia Metals Corporation Limited common shares

  	
   

  	
  625,000

  	
   

  	
  43,750

  	
   

  	
  625,000

  	
   

  	
  137,500

  	
   

  
	
  Columbia
  Metals Corporation Limited  warrants

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  625,000

  	
   

  	
  —

  	
   

  
	
  Tinka Resources Ltd. common shares

  	
   

  	
  300,000

  	
   

  	
  9,000

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  74,000

  	
   

  	
   

  	
   

  	
  2,989,720

  	
   

  
	
  Less: classified as held for trading

  	
   

  	
   

  	
   

  	
  —

  	
   

  	
   

  	
   

  	
  (374,400

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Long-term investments

  	
   

  	
   

  	
   

  	
  $

  	
  74,000

  	
   

  	
   

  	
   

  	
  $

  	
  2,615,320

  	
   

  



 


20

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


9.             Investments
Held for Trading and Long-Term Investments (Continued)


 


(a)     In 2007, the Corporation sold 2,339,500
common shares of Absolut for total proceeds of $1,162,805 and subscribed to an
additional 2,340,000 units at a price of $0.50 per unit. Each unit consists of
one common share and one half of one common share purchase warrant. One whole
common share purchase warrant entitled the holder to purchase one common share
at a price of $0.75 per share for a period of eighteen months from February 26,
2007. At the time of acquisition, the warrants were assigned a value of
$145,000 using the Black-Scholes option pricing model. These warrants were
considered a derivative financial instrument and accordingly were classified as
held for trading. At December 31, 2007, these warrants had a fair value of
$374,400. The resulting increase in value has been recognized in net income -
unrealized gain on investments held for trading.


 


800,000 warrants matured in December 2007 and were not exercised
by the Corporation.


 


In 2008, the
Corporation sold 911,000 common shares of Absolut for total proceeds of
$1,022,945 and subscribed to an additional 1,170,000 common shares at a price of
$0.75 per common share.


 


On April 1,
2008, the Corporation acquired Absolut. Refer to Note 3(b) for further
details.


 


(b)    In 2006, the Corporation subscribed to
100,000 shares of Sierra Minerals Inc. (“Sierra”) at $0.35 per share as part of
a 3,395,449 share non-brokered placement by Sierra. 50,000 warrants were also
received as part of the placement. Each warrant entitled the holder to purchase
one common share at a price of $0.50 per share over a period of 18 months from
the date of closing. These warrants had no value as at January 1, 2007 and
December 31, 2007.


 


The 50,000
warrants matured in March 2008 and were not exercised by the Corporation.


 


(c)     Pursuant to a Settlement Agreement as
detailed in Note 11, the Corporation subscribed to 625,000 units of Columbia
Metals Corporation Limited (“Columbia”) at a price of $0.80 per unit and
acquired a 2% net smelter return royalty for $500,000. The purchase price was
allocated $450,000 to the purchase of units in Columbia and $50,000 to the net
smelter return royalty as part of the resource assets. Each unit in Columbia
was comprised of one common share and one common share purchase warrant
entitling the purchaser to purchase one common share of Columbia at the price
of $0.90 per share until March 17, 2008. The warrants had no value at January 1,
2007 and December 31, 2007.


 


The 625,000
warrants matured in March 2008 and were not exercised by the Corporation.


 


(d)    In February 2008, with the
acquisition of Navidad Silver Project, the Corporation received 300,000 shares
of Tinka (see Note 3(a)).


 


21

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


10.           Property
and Equipment


 


	
   

  	
   

  	
   

  	
   

  	
  Accumulated

  	
   

  	
  Net

  	
   

  
	
   

  	
   

  	
  Cost

  	
   

  	
  Amortization

  	
   

  	
  Book Value

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2008

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Office equipment

  	
   

  	
  $

  	
  167,159

  	
   

  	
  $

  	
  117,540

  	
   

  	
  $

  	
  49,619

  	
   

  
	
  Leasehold improvements

  	
   

  	
  46,028

  	
   

  	
  34,804

  	
   

  	
  11,224

  	
   

  
	
  Exploration equipment

  	
   

  	
  2,001,501

  	
   

  	
  454,223

  	
   

  	
  1,547,278

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
   2,214,688

  	
   

  	
  $

  	
  606,567

  	
   

  	
  $

  	
  1,608,121

  	
   

  



 


	
   

  	
   

  	
   

  	
   

  	
  Accumulated

  	
   

  	
  Net

  	
   

  
	
   

  	
   

  	
  Cost

  	
   

  	
  Amortization

  	
   

  	
  Book Value

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2007

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Office equipment

  	
   

  	
  $

  	
  114,315

  	
   

  	
  $

  	
  73,452

  	
   

  	
  $

  	
  40,863

  	
   

  
	
  Leasehold improvements

  	
   

  	
  28,825

  	
   

  	
  22,274

  	
   

  	
  6,551

  	
   

  
	
  Exploration equipment

  	
   

  	
  256,573

  	
   

  	
  127,743

  	
   

  	
  128,830

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
   399,713

  	
   

  	
  $

  	
  223,469

  	
   

  	
  $

  	
  176,244

  	
   

  



 


11.         Resource Assets


 


As of December 31,
2008 accumulated costs with respect to the Corporation’s interest in mineral
properties owned, leased or under option, consisted of the following:


 


	
   

  	
   

  	
  Opening

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Ending

  	
   

  
	
   

  	
   

  	
  December 31,

  	
   

  	
  Acquisitions/

  	
   

  	
   

  	
   

  	
  December 31,

  	
   

  
	
  Description

  	
   

  	
  2007

  	
   

  	
  Additions

  	
   

  	
  Reductions

  	
   

  	
  2008

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Calcatreu gold property - Argentina

  	
   

  	
  $

  	
  34,068,894

  	
   

  	
  $

  	
  1,718,783

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  35,787,677

  	
   

  
	
  Platinum and palladium - Sudbury, Ontario

  	
   

  	
  730,568

  	
   

  	
  2,681

  	
   

  	
  (683,249

  	
  )

  	
  50,000

  	
   

  
	
  Gold properties - La Jojoba, Mexico

  	
   

  	
  50,000

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  50,000

  	
   

  
	
  Regalo gold property - Argentina

  	
   

  	
  —

  	
   

  	
  268,035

  	
   

  	
  —

  	
   

  	
  268,035

  	
   

  
	
  Navidad Silver Project - Argentina

  	
   

  	
  —

  	
   

  	
  57,527,103

  	
   

  	
  —

  	
   

  	
  57,527,103

  	
   

  
	
  Pico Machay - Peru

  	
   

  	
  —

  	
   

  	
  44,553,784

  	
   

  	
  (16,553,784

  	
  )

  	
  28,000,000

  	
   

  
	
  Chaparra - Peru

  	
   

  	
  —

  	
   

  	
  4,484,046

  	
   

  	
  (2,484,046

  	
  )

  	
  2,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
   34,849,462

  	
   

  	
  $

  	
  108,554,432

  	
   

  	
  $

  	
  (19,721,079

  	
  )

  	
  $

  	
  123,682,815

  	
   

  



 


22

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


11.           Resource Assets (Continued)


 


	
   

  	
   

  	
  Opening

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Ending

  	
   

  
	
   

  	
   

  	
  December 31,

  	
   

  	
  Acquisitions/

  	
   

  	
   

  	
   

  	
  December 31,

  	
   

  
	
  Description

  	
   

  	
  2006

  	
   

  	
  Additions

  	
   

  	
  Reductions

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Calcatreu gold property - Argentina

  	
   

  	
  $

  	
  24,203,830

  	
   

  	
  $

  	
  9,865,064

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  34,068,894

  	
   

  
	
  Platinum and palladium - Sudbury, Ontario

  	
   

  	
  1,385,025

  	
   

  	
  29,736

  	
   

  	
  (684,193

  	
  )

  	
  730,568

  	
   

  
	
  Gold properties - La Jojoba, Mexico

  	
   

  	
  50,000

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  50,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
   25,638,855

  	
   

  	
  $

  	
  9,894,800

  	
   

  	
  $

  	
  (684,193

  	
  )

  	
  $

  	
  34,849,462

  	
   

  



 


Calcatreu Gold Property - Argentina


 


In July 2003,
the Corporation acquired Minera Normandy Argentina S.A. a fully owned
subsidiary of Newmont Mining Corporation (“Newmont”) and subsequently renamed
it Minera Aquiline Argentina S.A. Through this subsidiary, Aquiline acquired
Newmont’s gold project (“Calcatreu property”) which was at the time comprised
of 73,000 hectares in Argentina for US $2,135,000 with a vendor take back non
interest bearing mortgage having an undiscounted value of US $2,035,000. Upon
satisfaction of the purchase price, Newmont will receive a 2.5% net smelter
royalty on gold, silver and base metal production. The vendor take back
mortgage was repaid in staged cash payments over a 36 month period ending July 2006.
Both the 2.5% net smelter royalty and the vendor take back mortgage were
secured by the Calcatreu property. In October 2006 the security lien for
the mortgage was removed as the mortgage was paid in full. The 2.5% net smelter
royalty continues to be secured by the Calcatreu property. In February 2008,
Newmont assigned the 2.5% net smelter royalty to Franco Nevada Corporation.


 


Since
purchasing the project in July 2003, the Corporation conducted exploration
and development programs advancing the Calcatreu Gold project to the mine
feasibility stage.


 


On March 15,
2007 a mine feasibility study on the Calcatreu Project was announced which
supported the project feasibility based on the use of cyanide and confirmed
that other processes are not viable alternatives for the Calcatreu Project. The
objective of this program was to increase the resource to one million
gold-silver equivalent ounces and increase the mine life and profitability.


 


Mine
permitting efforts have been complicated by a political decision. On July 21,
2005, the Governor of Rio Negro successfully passed through the legislative
council a law that has enforced a provincial wide ban on the use of cyanide
within the mining industry. This action was inconsistent with the position of
the Argentinean Federal Government and their pro-active stance on encouraging
mineral development within Argentina. The Corporation’s management is now
actively participating in discussions with senior officials, from both the
federal and provincial governments of Argentina on this issue. Due to the
ongoing of negotiations and the potential net present value of the project, as
calculated in the 2007 mine feasibility study, no impairment is required at
this time.  The continued ban on the use
of cyanide may prohibit the project feasibility at current resource estimates.


 


23

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


11.           Resource Assets (Continued)


 


Regalo gold property - Argentina


 


On March 12,
2008, the Corporation and Consolidated Pacific Bay Minerals Ltd. (“Pacific Bay”)
signed a definitive option and joint venture agreement regarding the Regalo
gold property (“Regalo”) located in Chubut Province, Argentina (the “Agreement”).


 


Under
the Agreement, Aquiline can earn a 70% interest in Regalo by paying Pacific Bay
US$100,000 on signing of the Agreement (paid), reimbursing (within 30 days)
Pacific Bay US$169,000 for an airborne survey already underway (subsequently
reimbursed), returning to Pacific Bay 900,000 of Pacific Bay’s common shares
issued to Aquiline under a prior agreement (within 30 days) (returned), and
completing 3,000 metres of drilling on the Regalo property within two years.
There have not been any drilling to date. Once Aquiline has completed the
forgoing, it will have earned a 70% interest in Regalo, and the parties will
thereafter form a joint venture whereby each company will participate in
programs according to their respective interests. If either party’s interest is
diluted through non-participation in programs to 15% or less, that party’s
interest automatically converts to a 2% NSR, which either party can purchase
from the other for $2 million.


 


Navidad Silver Project - Argentina


 


On February 11,
2008, the Corporation acquired the Navidad Silver Project. Total resource
assets acquired amounted to $37,231,082 (Note 3(a)). The balance of $20,296,021
consists of additions during the period.


 


Upon
the acquisition of the Navidad Silver project, Aquiline held an aggregate land
position in Chubut of 401,700 hectares. Exploration concessions are
administered by the province of Chubut, which imposes limitations on the number
of exploration cateos granted to an individual legal entity. These limitations
apply to cateos that have been granted (ie. not to cateos that are in progress
or to mining claims). Granted cateos to an individual legal entity are limited
to 200,000 hectares or 20 individual cateos. Aquiline is below this limit, at 7
granted cateos covering 34,000 hectares. However, Aquiline entered into a
dialogue with the government concerning the disposition of cateos that are
currently in progress so that Aquiline maintains compliance with the provincial
regulation and has reduced its land position in Chubut to 184,811 hectares.


 


Total
drilling at Navidad now stands at 185,371 metres in 920 drill holes at December 31,
2008; 74,595 of the drilling was done in 2008.


 


Pico Machay and Chaparra - Peru


 


On April 1,
2008, the Corporation acquired the Pico Machay and the Chaparra Projects. Total
resource assets acquired amounted to $45,751,349 (Note 3(b)). The balance of
$3,286,481 consists of additions during the period (Note 3(b)). Most of the
work completed at Pico Machay during 2008 was focused on completing an internal
feasibility study (non NI 43-101 compliant).


 


The Pico Machay
and the Chaparra Projects were written-down in December 2008 to
$28,000,000 and $2,000,000, respectively, to reflect their fair value.


 


24

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


11.           Resource Assets (Continued)


 


Platinum and palladium properties - Sudbury, Ontario


 


The
principal Canadian resource assets of the Corporation are the interests it
holds in properties in the Sudbury region of Ontario as follows:


 


Central River Valley Property


 


On March 4,
1999, the Corporation entered into a sub option agreement with Mustang Gold
Corporation to earn up to a 70% interest in 96 units. Under this agreement, the
Corporation paid $15,000 and issued 100,000 common shares and agreed to pay an
additional $75,000 over the next two years to the optionor. The Corporation had
also undertaken to expend at least $500,000 prior to December 2006 on the
property in order to maintain in force the working rights and option granted to
it. Due to changed metal prices, the project is not economical at this time and
the Corporation had no plans to do more work on this property and accordingly,
the property was written-down to $50,000 in December 2008. Total
capitalized costs on this property as at December 31, 2008 were $50,000 (December 31,
2007 - $730,568).


 


Dana North Property


 


This
property consists of 62 units in Dana and Pardo Townships, with a 2% and 3% net
smelter royalty. The property was written off as of December 31, 2007.


 


Anaconda Property


 


This
property consists of 36 claim units located in Dana Township. 150,000 common
shares of the Corporation may be issued to the original vendor if the property
advances through the pre feasibility stage. The property was written off as of December 31,
2007.


 


La Jojoba - Mexico


 


The
Corporation entered into an agreement in April 2005 (the “Settlement
Agreement”) with Columbia Metals Corporation Limited (“Columbia”), under which
the parties agreed that Columbia would pay Aquiline $500,000 in satisfaction of
its indebtedness to the Corporation and Aquiline would subscribe to 625,000
units of Columbia at a price of $0.80 per unit. Each unit was comprised of one
common share of Columbia and one common share purchase warrant of Columbia,
each warrant entitling the holder to purchase one Columbia common share at the
price of $0.90 per share until March 17, 2008. In March 2006 the
Corporation completed this subscription and acquired the common shares and
purchase warrants in Columbia for long term investment purposes (Note 9).


 


In
addition, under the Settlement Agreement, upon the closing of the transaction,
Columbia granted a 2% net smelter return (“NSR”) royalty to Aquiline on the La
Jojoba Property. Columbia has the right to acquire the 2% NSR royalty from
Aquiline, free and clear of any encumbrances upon the payment of $1,000,000 for
each 1% NSR royalty. As of December 31, 2008, Columbia has not acquired
back any portion of the NSR.


 


25

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


12.          Debt


 


This debt is related
to Absolut’s Chaparra acquisition in 2005. The debt arose on June 8, 2005,
is in $US, and no interest is payable. No security has been taken by the
creditors.


 


The fair value of
the loan at the date of issue was $575,527 calculated using an 8% discount rate.
The deemed interest of $24,776 (December 31, 2007 - $Nil) for the nine
month period since acquisition of Absolut has been capitalized and recorded in
resource assets.


 


	
   

  	
   

  	
   

  	
   

  	
  Balance

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  December 31,

  	
   

  
	
  Creditor/

  	
   

  	
  Repayment

  	
   

  	
  2008

  	
   

  
	
  Creditor group

  	
   

  	
  $US

  	
   

  	
  ($Cdn)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Ex-Shareholders of Compania Minera Colorado

  	
   

  	
  September 2008:$75,000**

  	
   

  	
   

  	
   

  
	
  (includes a related party*)

  	
   

  	
  September 2009:
  $375,000

  	
   

  	
  $

  	
  514,212

  	
   

  
							



 






* The related party, an officer of Compania Minera
Colorado, was owed 35% or $US210,000 of the original face amount of the loans (December 31,
2008 - US $131,250) and is paid on the same basis as other creditors.


 


** The US $75,000 due in September 2008 has not
been paid.


 


13.          Asset Retirement Obligation


 


The following
table summarizes the changes in asset retirement obligations during the fiscal
years presented:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
  Opening balance

  	
   

  	
  $

  	
  422,240

  	
   

  	
  $

  	
  26,999

  	
   

  
	
  Additions

  	
   

  	
  673,374

  	
   

  	
  393,808

  	
   

  
	
  Accretion expense

  	
   

  	
  125,607

  	
   

  	
  1,433

  	
   

  
	
  Foreign exchange effect on liability

  	
   

  	
  131,894

  	
   

  	
  —

  	
   

  
	
  Reclamation costs incurred

  	
   

  	
  (26,185

  	
  )

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  1,326,930

  	
   

  	
  $

  	
  422,240

  	
   

  



 


Asset
retirement obligations relate to the Corporation’s Calcatreu gold property and
Navidad Silver Project in Argentina, Pico Machay in Peru and the dismantling of
the mine facilities and environmental reclamation of the areas affected by
mining operations.


 


26

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


13.          Asset Retirement Obligation
(Continued)


 


Calcatreu gold
property


 


At December 31,
2008, management estimates that the total undiscounted amount of the estimated
cash flows required to settle the Corporation’s asset retirement obligations is
$449,600 USD. It is expected that this amount will be incurred over the years
2009 to 2010. The credit-adjusted, risk-free interest rates used to discount
estimated cash flows for liabilities incurred was 10%.


 


Navidad Silver
Project


 


At December 31,
2008, management estimates that the total undiscounted amount of the estimated
cash flows required to settle the Corporation’s asset retirement obligations
for the Navidad Silver Project is $710,000 USD. It is expected that this amount
will be incurred over the years 2009 to 2010. The credit adjusted, risk-free
interest rates used to discount estimated cash flows for liabilities incurred
was 10%.


 


At December 31,
2008, management estimates that the total undiscounted amount of the estimated
cash flow required to settle the Corporation’s asset retirement obligation
should be increased to $710,000 USD.


 


Pico Machay
Project and Chaparra Project


 


On April 1,
2008, the Corporation acquired the Pico Machay Project and the Chaparra
Project. Total asset retirement obligation acquired amounted to $89,000 USD for
the Pico Machay Project and $20,000 USD for the Chaparra Project (Note 3(b)).


 


14.          Capital Stock


 


(a)   The authorized capital of the Corporation consists of an
unlimited number of no par value common shares.


 


	
   

  	
   

  	
  Shares

  	
   

  	
  Value

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Outstanding at December 31, 2006

  	
   

  	
  52,226,654

  	
   

  	
  $

  	
  56,574,750

  	
   

  
	
  Exercise of warrants

  	
   

  	
  2,342,625

  	
   

  	
  7,027,875

  	
   

  
	
  Value attributed to warrants exercised

  	
   

  	
  —

  	
   

  	
  2,771,950

  	
   

  
	
  Exercise of stock options

  	
   

  	
  1,912,600

  	
   

  	
  3,346,550

  	
   

  
	
  Value attributed to stock options exercised

  	
   

  	
  —

  	
   

  	
  1,273,247

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Outstanding at December 31, 2007

  	
   

  	
  56,481,879

  	
   

  	
  70,994,372

  	
   

  
	
  Private placement, net of issue costs (i)

  	
   

  	
  1,818,182

  	
   

  	
  14,886,054

  	
   

  
	
  Warrants valuation (i)

  	
   

  	
  —

  	
   

  	
  (3,027,273

  	
  )

  
	
  Private placement, net of issue costs (ii)

  	
   

  	
  5,310,000

  	
   

  	
  10,413,206

  	
   

  
	
  Warrants valuation (ii)

  	
   

  	
  —

  	
   

  	
  (3,839,482

  	
  )

  
	
  Proceeds from exercise of warrants

  	
   

  	
  22,222

  	
   

  	
  149,999

  	
   

  
	
  Value attributed to warrants exercised

  	
   

  	
  —

  	
   

  	
  77,297

  	
   

  
	
  Exercise of stock options

  	
   

  	
  1,016,400

  	
   

  	
  3,593,450

  	
   

  
	
  Value attributed to stock options exercised

  	
   

  	
  —

  	
   

  	
  1,412,987

  	
   

  
	
  Shares issued to acquire Absolut (Note 3(b))

  	
   

  	
  2,961,432

  	
   

  	
  29,199,719

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Outstanding at December 31, 2008

  	
   

  	
  67,610,115

  	
   

  	
  $

  	
  123,860,329

  	
   

  



 


27














 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


14.                            Capital Stock
(Continued)


 


(i)                  On May 7, 2008, the Corporation
closed a non-brokered private placement financing for gross proceeds of
$15,000,000. The offering was placed with a mining company whose identity
remains confidential. The investor has specified use of proceeds to be
dedicated to accelerating the exploration and development activities of the
Navidad silver project in Chubut, Argentina.


 


The
offering was comprised of 1,818,182 Units at $8.25, consisting of one common
share and one warrant to purchase one common share at an exercise price of
$10.00 up to the expiry date of December 31, 2009.


 


The fair value of the warrants was estimating using
the Black-Scholes pricing model as follows: dividend yield 0%; expected
volatility 55%; risk-free interest rate 2.62% and an expected average life of
1.66 years. Value assigned was $3,027,273.


 


The
common shares and warrants sold under this offering were restricted for a
period of four months from the closing date. No external advisors were engaged
by either party, and as such, no advisory or investment banking fees are
deductible from the gross proceeds, other than legal fees.


 


(ii)               A total of 5,310,000 Units of the
Corporation were issued in a private placement at a price of $2.00 per Unit.
Total proceeds received of $10,413,206 is net of cost of issue and commission
for $206,794. The Units were issued in two tranches, with 3,695,000 Units
issued in the first tranche closed on October 22, 2008 and 1,615,000 Units
issued in the second and final tranche closed on November 6, 2008.


 


Each
Unit consisted of one common share and one warrant to purchase one common share
at an exercise price of $2.50 with an expiry date of three years.


 


The fair value of the warrants was estimating using
the Black-Scholes pricing model as follows: dividend yield 0%; expected
volatility 70%-78%; risk-free interest rate 1.80%-2.09% and an expected average
life of 2.25 years. Value assigned was $3,839,482.


 


The
common shares and warrants sold under this offering were restricted for a
period of four months from the closing date. No external advisors were engaged
by either party, and as such, no advisory or investment banking fees are
deductible from the gross proceeds other than legal fees.


 


(b)                Stock options


 


The
Corporation has a Stock Option Plan (the “Plan”), which has been approved by
the shareholders to provide incentive for the directors, officers, employees,
consultants and service providers of the Corporation (and its subsidiaries).
The number of stock options to be granted is limited to not more than 10% of
the issued Common Shares of the Corporation at the time of the stock option
grant. Stock options are granted in accordance with the Plan at not less than
the closing price of the Common Shares on the business day immediately prior to
the effective date of grant.


 


28

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


14.                            Capital Stock
(Continued)


 


(b)                Stock options (Continued)


 


A summary of the status of the Corporation’s
stock option plan as of December 31, 2008 and 2007 is as follows:


 


	
   

  	
   

  	
  Share Purchase

  	
   

  	
  Weighted Average

  	
   

  
	
   

  	
   

  	
  Options

  	
   

  	
  Exercise price ($)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Outstanding, December 31, 2006

  	
   

  	
  4,420,000

  	
   

  	
  3.49

  	
   

  
	
  Options granted

  	
   

  	
  685,000

  	
   

  	
  8.54

  	
   

  
	
  Options exercised

  	
   

  	
  (1,912,600

  	
  )

  	
  1.75

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Outstanding, December 31, 2007

  	
   

  	
  3,192,400

  	
   

  	
  5.62

  	
   

  
	
  Options granted

  	
   

  	
  4,495,000

  	
   

  	
  6.98

  	
   

  
	
  Options exercised

  	
   

  	
  (1,016,400

  	
  )

  	
  3.54

  	
   

  
	
  Options expired/cancelled

  	
   

  	
  (1,644,445

  	
  )

  	
  8.20

  	
   

  
	
  Options
  issued to acquire  Absolut (Note 3(b))

  	
   

  	
  218,889

  	
   

  	
  6.15

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Outstanding, December 31, 2008

  	
   

  	
  5,245,444

  	
   

  	
  6.40

  	
   

  



 


The
following table reflects the stock options outstanding at December 31,
2008:


 


	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Weighted

  	
   

  	
  Weighted

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Average

  	
   

  	
  Average

  	
   

  	
   

  	
   

  
	
  Options

  	
   

  	
  Exercise

  	
   

  	
  Options

  	
   

  	
  Exercise

  	
   

  	
  Contractual

  	
   

  	
  Expiry

  	
   

  
	
  Granted

  	
   

  	
  Price ($)

  	
   

  	
  Exercisable

  	
   

  	
  Price ($)

  	
   

  	
  Life (Years)

  	
   

  	
  Date

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  156,000

  	
   

  	
  8.00

  	
   

  	
  156,000

  	
   

  	
  8.00

  	
   

  	
  0.01

  	
   

  	
  January 3, 2009

  	
   

  
	
  500,000

  	
   

  	
  1.35

  	
   

  	
  500,000

  	
   

  	
  1.35

  	
   

  	
  0.21

  	
   

  	
  March 19, 2009

  	
   

  
	
  150,000

  	
   

  	
  8.92

  	
   

  	
  150,000

  	
   

  	
  8.92

  	
   

  	
  0.30

  	
   

  	
  April 20, 2009

  	
   

  
	
  11,112

  	
   

  	
  5.40

  	
   

  	
  11,112

  	
   

  	
  5.40

  	
   

  	
  0.36

  	
   

  	
  May 12, 2009

  	
   

  
	
  16,667

  	
   

  	
  9.00

  	
   

  	
  16,667

  	
   

  	
  9.00

  	
   

  	
  0.69

  	
   

  	
  September 9, 2009

  	
   

  
	
  3,333

  	
   

  	
  5.58

  	
   

  	
  3,333

  	
   

  	
  5.58

  	
   

  	
  1.76

  	
   

  	
  October 6, 2010

  	
   

  
	
  1,835,000

  	
   

  	
  12.00

  	
   

  	
  917,500

  	
   

  	
  12.00

  	
   

  	
  2.13

  	
   

  	
  February 15, 2011

  	
   

  
	
  100,000

  	
   

  	
  12.00

  	
   

  	
  75,000

  	
   

  	
  12.00

  	
   

  	
  2.25

  	
   

  	
  April 1, 2011

  	
   

  
	
  150,000

  	
   

  	
  8.25

  	
   

  	
  75,000

  	
   

  	
  8.25

  	
   

  	
  2.44

  	
   

  	
  June 9, 2011

  	
   

  
	
  125,000

  	
   

  	
  8.25

  	
   

  	
  62,500

  	
   

  	
  8.25

  	
   

  	
  2.45

  	
   

  	
  June 14, 2011

  	
   

  
	
  2,155,000

  	
   

  	
  2.00

  	
   

  	
  2,155,000

  	
   

  	
  2.00

  	
   

  	
  2.93

  	
   

  	
  December 4, 2011

  	
   

  
	
  43,332

  	
   

  	
  6.30

  	
   

  	
  43,332

  	
   

  	
  6.30

  	
   

  	
  3.56

  	
   

  	
  July 23, 2012

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5,245,444

  	
   

  	
  6.40

  	
   

  	
  4,165,444

  	
   

  	
  5.07

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


For
fiscal 2008, the aggregate fair value of options granted (excluding the options
issued to acquire Absolut) was $7,493,775 (fiscal 2007 - $2,429,870) or $1.67
(fiscal 2007 - $3.55) per share. As at December 31, 2008, 1,080,000
options remain unvested.


 


29

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


14.                            Capital Stock
(Continued)


 


(b)                Stock options (Continued)


 


(i)                             On January 3, 2007, the Corporation
granted 285,000 stock options to employees and consultants  with an exercise price of $8.00 expiring January 3,
2009. These stock options vested immediately at time of grant. The fair value
of these options was recorded as follows: $225,540 expensed as stock option
compensation, $322,200 recorded as deferred payments for future acquisition and
$370,530 capitalized as resource assets.


 


The
fair value of the stock options was estimating using the Black-Scholes pricing
model as follows: dividend yield 0%, expected volatility 86.6%, risk - free
interest rate 3.97% and an expected average life of 1.5 years. Value assigned
was $918,270.


 


(ii)                          On April 20, 2007, the Corporation
granted 400,000 stock options to officers and employee with an exercise price
of $8.92 expiring April 20, 2009. These stock options vested 50% on October 20,
2007 and 50% on April 20, 2008. The fair value of these options was
recorded as follows: $377,900 expensed as stock option compensation, $566,850
capitalized as deferred payments for future acquisition and $566,850 recorded
as resource assets.


 


The
fair value of the stock options was estimating using the Black-Scholes pricing
model as follows: dividend yield 0%, expected volatility 86.9%, risk - free
interest rate 4.17% and an expected average life of 1.5 years. Value assigned
was $1,511,600.


 


(iii)                       On February 15, 2008, the Corporation granted
1,965,000 stock options to directors, officers and employees with an exercise
price of $12.00 expiring February 15, 2011. These options will be recorded
as stock option compensation in the statement of operations or resource assets
as the options vest. These stock options will vest 50% on August 15, 2008
and 50% on February 15, 2009. The fair value of these options was recorded
as follows: $2,825,286 expensed as stock option compensation and $2,023,358
capitalized as resource assets. The remaining value of $323,236 will be
expensed or capitalized, as appropriate, in the remainder of 2009.


 


The
fair value of the stock options was estimating using the Black-Scholes pricing
model as follows: dividend yield 0%, expected volatility 53.2%, risk - free
interest rate 3.12% and an expected average life of 1.5 years. Value assigned
is $5,171,880.


 


(iv)                       On April 1, 2008, the Corporation
granted 100,000 stock options to a director with an exercise price of $12.00
expiring April 1, 2011. These options will be recorded as stock option
compensation in the statement of operations as the options vest. These stock
options will vest 50% immediately, 25% on October 1, 2008 and 25% on April 1,
2009. The fair value of these options was recorded as follows: $288,672
expensed as stock option compensation. The remaining value of $9,694 will be
expensed as appropriate, in the remainder of 2009.


 


The
fair value of the stock options was estimating using the Black-Scholes pricing
model as follows: dividend yield 0%, expected volatility 75.7%, risk - free
interest rate 2.66% and an expected average life of 2 years. Value assigned is
$298,366.


 


30

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


14.                            Capital Stock
(Continued)


 


(b)                Stock options (Continued)


 


(v)                          On April 1, 2008, the Corporation
granted 218,889 stock options to stock option holders of Absolut with an
exercise price between $4.50 to $9.00 and which expire at various dates between
December 9, 2008 to July 23, 2012. These options are included in the
purchase price of Absolut.


 


The
fair value of the stock options was estimating using the Black-Scholes pricing
model as follows: dividend yield 0%, expected volatility from 47% to 68%, risk
- free interest rate from 2.29% to 2.63% and an expected average life from 0.67
to 2 years. Value assigned is $1,090,850.


 


(vi)                       On June 9, 2008, the Corporation
granted 150,000 stock options to a director with an exercise price of $8.25
expiring June 9, 2011. These options will be recorded as stock option
compensation in the statement of operations as the options vest. These stock
options will vest 50% on December 10, 2008 and 50% on June 9, 2009.
The fair value of these options was recorded as follows: $342,265 expensed as
stock option compensation. The remaining value of $96,460 will be expensed as
appropriate, in the remainder of 2009.


 


The
fair value of the stock options was estimating using the Black-Scholes pricing
model as follows: dividend yield 0%, expected volatility 75.7%, risk - free
interest rate 2.60% and an expected average life of 2 years. Value assigned is
$438,725.


 


(vii)                    On June 14, 2008, the
Corporation granted 125,000 stock options to a director with an exercise price
of $8.25 expiring June 14, 2011. These options will be recorded as stock
option compensation in the statement of operations as the options vest. These
stock options will vest 50% on December 14, 2008 and 50% on June 14,
2009. The fair value of these options was recorded as follows: $128,450
expensed as stock option compensation. The remaining value of $188,158 will be
expensed as appropriate, in the remainder of 2009.


 


The
fair value of the stock options was estimating using the Black-Scholes pricing
model as follows: dividend yield 0%, expected volatility 79%, risk - free
interest rate 2.77% and an expected average life of 2 years. Value assigned is
$316,608.


 


(viii)               On December 4, 2008, the Corporation granted 2,155,000 stock
options to directors, officers and employees with an exercise price of $2.00
expiring December 4, 2011. These stock options vested immediately at time
of grant. The fair value of these options was recorded as follows: $638,296
expensed as stock option compensation and $463,166 capitalized as resource
assets.


 


The
fair value of the stock options was estimating using the Black-Scholes pricing
model as follows: dividend yield 0%, expected volatility 75%, risk - free
interest rate 1.52% and an expected average life of 2.25 years. Value assigned
is $1,101,462.


 


For
the year ended December 31, 2008, the fair value of previous year stock
options granted that vested during the period was recorded as follows: $4,301,437
(2007 - $540,457) expensed as stock option compensation, $2,592,288 (2007 -
$842,906) capitalized as resource assets and $Nil (2007 - $749,576) recorded as
deferred payments for future acquisition.


 


31

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


14.                            Capital Stock
(Continued)


 


(c)                 Warrants


 


The
following table reflects the continuity of warrants:


 


	
   

  	
   

  	
  December 31,

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  December 31,

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2007

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  2008

  	
   

  	
  Warrant

  	
   

  
	
  Expiry
  Date

  	
   

  	
  Balance

  	
   

  	
  Issued

  	
   

  	
  Exercised

  	
   

  	
  Expired

  	
   

  	
  Balance

  	
   

  	
  Value

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (i) See Note 15

  	
   

  	
  —

  	
   

  	
  237,500

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  237,500 

  	
   

  	
  $

  	
  594,700

  	
   

  
	
  September 16, 2008 (ii)

  	
   

  	
  —

  	
   

  	
  205,558

  	
   

  	
  (22,222

  	
  )

  	
  (183,336

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  
	
  December 31, 2009 (iii)

  	
   

  	
  —

  	
   

  	
  1,818,182

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  1,818,182 

  	
   

  	
  3,027,273

  	
   

  
	
  October 22, 2011 (iv)

  	
   

  	
  —

  	
   

  	
  3,695,000

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  3,695,000 

  	
   

  	
  2,580,587

  	
   

  
	
  November 6, 2011 (v)

  	
   

  	
  —

  	
   

  	
  1,615,000

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  1,615,000 

  	
   

  	
  1,258,895

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  —

  	
   

  	
  7,571,240

  	
   

  	
  (22,222

  	
  )

  	
  (183,336

  	
  )

  	
  7,365,682

  	
   

  	
  $

  	
  7,461,455

  	
   

  



 


	
   

  	
   

  	
  December 31,

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  December 31,

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2006

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  2007

  	
   

  	
  Warrant

  	
   

  
	
  Expiry
  Date

  	
   

  	
  Balance

  	
   

  	
  Issued

  	
   

  	
  Exercised

  	
   

  	
  Expired

  	
   

  	
  Balance

  	
   

  	
  Value

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  October 2007

  	
   

  	
  2,342,625

  	
   

  	
  —

  	
   

  	
  (2,342,625

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  
															



 






(i)                              On February 8, 2008, the Corporation
issued 237,500 warrants in connection with the convertible debenture (Note 15).


 


(ii)                           On April 1, 2008, the Corporation
issued 205,558 warrants in connection with the acquisition of Absolut (Note
3(b)). 22,222 of these warrants were exercised and 183,336 warrants matured and
were not exercised by the holder.


 


(iii)                        On May 7, 2008, the Corporation closed a
non-brokered private placement financing and issued 1,818,182 warrants (Note
14(a)(i)).


 


(iv)                       On October 22, 2008, the Corporation
closed the first tranche of a non-brokered private placement financing and
issued 3,695,000 warrants (Note 14(a)(ii)).


 


(v)                          On November 6, 2008, the Corporation
closed the second and final tranche of a non-brokered private placement
financing and issued1,615,000 warrants (Note 14(a)(ii)).


 


32

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


15.                            Convertible Debenture


 


On February 8,
2008, Silverstone Resources Corp. (“Silverstone”) purchased a $17.5 million
convertible debenture (the “Debenture”) from Aquiline. Silverstone may elect to
convert the Debenture into Common Shares of Aquiline at a conversion price of
$12.00 or into a contract (“Contract”) granting Silverstone the right to
purchase, at the lesser of US$4.00 per ounce of silver and the prevailing
market price per ounce of silver on the London Metal Exchange at the time
production is delivered, 12.5% of the life of mine payable silver from the Loma
de La Plata zone which is one of seven zones comprising the Navidad project, or
if unavailable, from the other zones of the Navidad project.


 


Silverstone may
elect to convert the Debenture into Common Shares of Aquiline or a Contract at
any time until the Conversion Deadline, which is defined as 30 days after the
earlier of: (a) January 8, 2010; and (b) the Maturity Date which
is defined as the later of the completion of a feasibility study on the
Property, the decision of Aquiline to proceed with a mine, and receipt of all
necessary permits to proceed with construction of a mine.


 


Silverstone and
Aquiline shall negotiate a definitive Contract not yet signed which shall be
subject to Exchange approval. Upon conversion to the Contract, the $17.5
million face value of the Debenture will form part of an upfront payment by
Silverstone of US$50 million to secure the silver, structured as: upon election
to convert to the Contract, US$17,599,750 being equivalent to the CDN$17.5
million face value of the Debenture; US$14,900,250 on the Conversion Deadline;
and US$17.5 million in four equal installments of US$4,375,000, each three
months apart, the first installment starting three months after the start of
construction and the remaining installments due every three months thereafter.


 


The Debenture
carries a coupon of 150,000 warrants in lieu of interest, with each warrant
entitling Silverstone to purchase one Common Share at an exercise price of
CDN$13.00 per Common Share for a period expiring six months after the
Conversion Deadline.


 


The Corporation
paid a finder’s fee of 6% in cash of the Debenture principal amount (CDN$1.05
million) and 87,500 warrants with the same terms as those granted to
Silverstone, and incurred costs of $32,396.


 


The fair value of
the 237,500 warrants was estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions: dividend yield - 0%;
volatility - 53.3%; risk-free interest rate - 3.06% and an expected life of 1.5
years. The fair value attributed to the warrants was $594,700.


 


Neither of the
conversion options give rise to a contractual obligation on the part of the
Corporation to deliver cash or another financial asset or to exchange another
financial instrument under conditions that are potentially unfavourable. As
such the Corporation has classified the debenture as an equity instrument net
of cash issue costs in the amount of $1,082,396 and the value attributed to the
warrants of $594,700.


 


33

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


16.                            Segmented Information


 


The Corporation
operates in the mining, exploration and development business and has operations
in Argentina, Canada, Peru and Mexico. The Corporation has no operating
revenue. The interest income and realized gain on investments held for trading
relate to investments held in Canada.


 


	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  2008

  	
   

  



 


	
   

  	
   

  	
  Canada

  	
   

  	
  Argentina

  	
   

  	
  Mexico

  	
   

  	
  Peru

  	
   

  	
  Consolidated

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current assets

  	
   

  	
  $

  	
  6,463,176

  	
   

  	
  $

  	
  1,854,024

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  181,929

  	
   

  	
  $

  	
  8,499,129

  	
   

  
	
  Property and equipment

  	
   

  	
  63,244

  	
   

  	
  1,146,956

  	
   

  	
  —

  	
   

  	
  397,921

  	
   

  	
  1,608,121

  	
   

  
	
  Other assets

  	
   

  	
  74,000

  	
   

  	
  6,416,917

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  6,490,917

  	
   

  
	
  Resource assets

  	
   

  	
  50,000

  	
   

  	
  93,582,815

  	
   

  	
  50,000

  	
   

  	
  30,000,000

  	
   

  	
  123,682,815

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
   6,650,420

  	
   

  	
  $

  	
  103,000,712

  	
   

  	
  $

  	
  50,000

  	
   

  	
  $

  	
  30,579,850

  	
   

  	
  $

  	
  140,280,982

  	
   

  



 


	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  2007

  	
   

  



 


	
   

  	
   

  	
  Canada

  	
   

  	
  Argentina

  	
   

  	
  Mexico

  	
   

  	
  Peru

  	
   

  	
  Consolidated

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current assets

  	
   

  	
  $

  	
  7,226,116

  	
   

  	
  $

  	
  1,057,192

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  8,283,308

  	
   

  
	
  Property and equipment

  	
   

  	
  47,414

  	
   

  	
  128,830

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  176,244

  	
   

  
	
  Other assets

  	
   

  	
  15,037,038

  	
   

  	
  10,151,259

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  25,188,297

  	
   

  
	
  Resource assets

  	
   

  	
  730,568

  	
   

  	
  34,068,894

  	
   

  	
  50,000

  	
   

  	
  —

  	
   

  	
  34,849,462

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
   23,041,136

  	
   

  	
  $

  	
  45,406,175

  	
   

  	
  $

  	
  50,000

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  68,497,311

  	
   

  



 


17.                               Supplemental Cash Flow
Information


 


	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Changes in non-cash working capital items:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Other receivables and prepaids

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
  (451,133

  	
  )

  	
  $

  	
  (189,391

  	
  )

  
	
  Current portion of long-term foreign tax recoverable

  	
   

  	
   

  	
   

  	
  (576,597

  	
  )

  	
  (27,086

  	
  )

  
	
  Long-term foreign tax recoverable

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  (5,251,854

  	
  )

  	
  —

  	
   

  
	
  Payables and accruals

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  3,565,174

  	
   

  	
  (681,781

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
   (2,714,410

  	
  )

  	
  $

  	
  (898,258

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interest received

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
  143,030

  	
   

  	
  $

  	
  356,579

  	
   

  



 


34

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


18.                            Income Taxes


 


The following
table reconciles the expected income tax recovery at the Canadian statutory
income tax rate of 33.5% (2007 - 36%) to the amounts recognized in the
consolidation statements of operations:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss
  before income taxes reflected in consolidated  financial statements

  	
   

  	
  $

  	
  27,671,464

  	
   

  	
  $

  	
  3,568,674

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Expected income tax recovery at Canadian statutory
  rate

  	
   

  	
  9,270,000

  	
   

  	
  1,285,000

  	
   

  
	
  Non-taxable foreign exchange

  	
   

  	
  54,000

  	
   

  	
  (191,000

  	
  )

  
	
  Non-taxable component of gains on investments

  	
   

  	
  275,000

  	
   

  	
  —

  	
   

  
	
  Non-deductible expenses and other items

  	
   

  	
  (528,000

  	
  )

  	
  —

  	
   

  
	
  Deductible share issue costs

  	
   

  	
  176,000

  	
   

  	
  119,000

  	
   

  
	
  Stock option compensation expense

  	
   

  	
  (1,441,000

  	
  )

  	
  (195,000

  	
  )

  
	
  Unrealized gain on investments held for trading

  	
   

  	
  —

  	
   

  	
  83,000

  	
   

  
	
  Valuation allowance

  	
   

  	
  (1,685,000

  	
  )

  	
  (1,101,000

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Income tax recovery recognized

  	
   

  	
  $

  	
  6,121,000

  	
   

  	
  $

  	
  —

  	
   

  



 


The
following table reflects future income tax assets at December 31, 2008 and
2007:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Excess
  of tax resources pools over book value of Canadian resource assets

  	
   

  	
  $

  	
  1,289,000

  	
   

  	
  $

  	
  289,000

  	
   

  
	
  Share issue costs

  	
   

  	
  544,000

  	
   

  	
  252,000

  	
   

  
	
  Excess of tax cost of marketable securities over
  carrying value

  	
   

  	
  56,000

  	
   

  	
  —

  	
   

  
	
  Canadian non-capital losses

  	
   

  	
  6,640,000

  	
   

  	
  4,266,000

  	
   

  
	
  Less: recognized to offset future income tax
  liabilities

  	
   

  	
  —

  	
   

  	
  (516,000

  	
  )

  
	
  Valuation allowance

  	
   

  	
  (8,529,000

  	
  )

  	
  (4,291,000

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
   —

  	
   

  	
  $

  	
  —

  	
   

  



 


35

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


18.                            Income Taxes (Continued)


 


The following
table reflects future income tax liabilities at December 31, 2008 and
2007:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Book value of financial instruments in excess of tax
  value

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  (516,000

  	
  )

  
	
  Excess
  of book value of Argentina and Peru resource properties over  eligible deductible costs (1)

  	
   

  	
  (12,413,000

  	
  )

  	
  (7,655,000

  	
  )

  
	
  Less: reduction due to utilization of available
  future income tax assets

  	
   

  	
  —

  	
   

  	
  516,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
   (12,413,000

  	
  )

  	
  $

  	
  (7,655,000

  	
  )

  



 






(1)          The Corporation has incurred costs in
Canada related to its resource assets that are not deductible or eligible for
tax pools. As such, the Corporation has recorded a future tax liability and
capitalized the costs to the associated property.


 


As at December 31,
2008, the Corporation had Canadian non-capital losses, for which no future
income tax asset has been recognized in these consolidated financial
statements, which may be applied against future taxable income, expiring as
follows:


 




	
  2009

  	
   

  	
  $

  	
  1,413,000

  	
   

  
	
  2010

  	
   

  	
  1,912,000

  	
   

  
	
  2014

  	
   

  	
  2,742,000

  	
   

  
	
  2015

  	
   

  	
  3,652,000

  	
   

  
	
  2026

  	
   

  	
  2,134,000

  	
   

  
	
  2027

  	
   

  	
  2,025,000

  	
   

  
	
  2028

  	
   

  	
  4,995,000

  	
   

  
	
   

  	
   

  	
  $

  	
   18,873,000

  	
   

  






 


19.                            Basic and Diluted Loss
Per Share


 


The
following table sets out the computation for basic and diluted loss per share:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Numerator:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss for the period

  	
   

  	
  $

  	
  (21,550,464

  	
  )

  	
  $

  	
  (3,568,674

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Denominator:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Weighted
  average number of  common shares outstanding

  	
   

  	
  61,626,489

  	
   

  	
  53,689,338

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Basic and diluted loss per share

  	
   

  	
  $

  	
  (0.35

  	
  )

  	
  $

  	
  (0.07

  	
  )

  



 


Diluted loss per
share has not been presented for the years ended December 31, 2008 and
2007 because the effect of dilutive options and warrants is anti-dilutive.


 


36

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


 


December 31, 2008 and 2007


 


20.                            Related Party
Transactions and Balances


 


During
the year, the Corporation was charged $85,450 ($71,000 in 2007) for consulting
fees by a company in which a director of the Corporation has a beneficial
interest. $20,000 of the $85,450 (December 31, 2007 - $71,000) consulting
fees were included in resource assets. At December 31, 2008, $5,000 was
due by the Corporation (at December 31, 2007, $20,747 of general and
office expenses recovery were due to the Corporation).


 


At December 31,
2008, the Corporation held 170,000 shares (December 31, 2007 - 170,000
shares) of Sierra Minerals Inc. (“Sierra”) (see Note 9). Included in other
receivables and prepaids is $151,561 (December 31, 2007 - $126,882)
receivable from Sierra. The balance pertains to general and office expenses
paid on behalf of Sierra of which $78,776 were collected at the date of this
report.


 


Included
in other receivables and prepaids is $41,897 (December 31, 2007 - $65,733)
receivable from Laramide Resources Ltd., with which the Corporation has a director
in common and common management. Such amount was collected at the date of this
report.


 


Payables
to a law firm in which a partner is an officer of the Corporation were $97,361
at December 31, 2008 (December 31, 2007 - $110,592). Also, as at December 31,
2008, the law firm held $20,000 (December 31, 2007 - $Nil) on behalf of
the Corporation. The Corporation was charged $298,071 by this law firm for the
year ended December 31, 2008 (December 31, 2007 - $227,111) for legal
services included in IMA legal costs and legal and audit expenses.


 


Included
in other receivables and prepaids is $14,420 (December 31, 2007 - $Nil)
receivable from Crown Point Ventures Ltd. with which the Corporation has a
director in common.


 


Included
in other receivables and prepaids is $41,405 (December 31, 2007 - $146)
receivable from Treasury Metals Inc. with which the Corporation has an officer
and director in common.


 


Included
in other receivables and prepaids is $7,731 (December 31, 2007 - $184)
receivable from Lydian International Limited with which the Corporation has a
common director.


 


Transactions
with related parties were in the normal course of operations and are measured
at the exchange amounts which is the amount agreed to by the related parties.
Any amounts due to or from these related parties are subject to normal trade
payment terms.


 


21.                            Contingencies


 


The
Corporation is involved in various litigation matters arising in the ordinary
course of its business. The Corporation has no reason to believe that the
disposition of any such current matter could reasonably be expected to have a
materially adverse impact on the Corporation financial position and results of
operations.


 


37

















 


AQUILINE RESOURCES INC.


 


Notes
to Consolidated Financial Statements


(Expressed
in Canadian Dollars)


December 31, 2008 and 2007


 


22.                            Commitments


 


(a)               The Corporation entered into agreements
to lease office spaces and warehouses until June 30, 2013. Minimum annual
rent payable in each of the next five years are as follows:


 


	
  2009

  	
   

  	
  $

  	
  386,279

  	
   

  
	
  2010

  	
   

  	
  391,162

  	
   

  
	
  2011

  	
   

  	
  327,958

  	
   

  
	
  2012

  	
   

  	
  140,399

  	
   

  
	
  2013

  	
   

  	
  70,200

  	
   

  
	
   

  	
   

  	
  $

  	
   1,315,998

  	
   

  



 


The Corporation has arrangements with the tenants in
its corporate offices and expects to recover approximately 24% of the indicated
amounts.


 


(b)              As per the purchase option agreement with
Chaparra’s concession holders, a payment of US $850,000 is required by the
Corporation in October 2009 in order to complete the purchase option of
these mining rights. No security has been taken by the concession holders other
than the mining rights.


 


23.                            Subsequent Events


 


Subsequent to December 31,
2008, the Corporation received $675,000 from the exercise of 500,000 stock
options which expired on March 19, 2009 and had an exercise price of
$1.35.


 


38