**Exhibit 3**

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

This discussionand analysis has been prepared as at March 29, 2007 unless otherwise indicated,and it should be read in conjunction with the accompanying audited consolidatedfinancial statements of Queenstake Resources Ltd. (“Queenstake” or the “Company”)as at December 31, 2006 and the notes thereto which have been prepared inaccordance with accounting principles generally accepted in Canada (“CanadianGAAP”).   All dollar figures are in U.S.dollars, unless otherwise indicated.

**INTRODUCTION**

The Company engages in the mining, processing, production and sale ofgold, as well as related activities including development and exploration.  The Company’s principal asset and primarysource of revenue is its 100% owned Jerritt Canyon mine complex where itoperates several mines and an ore processing plant, located 50 miles north ofElko, Nevada.  The Jerritt Canyon minecomplex consists of two underground mines, which together with ore stockpilesfeed ore to an ore processing mill. Jerritt Canyon has extensive explorationpotential, comprised of an approximately 119-square mile land position that itcontrols, together with a geological database compiled over the past 29 years.

The Companyacquired the Jerritt Canyon Mine on June 30, 2003; prior to that date theCompany was an exploration company and did not have commercial scale goldproduction.

**2006FULL-YEAR OVERVIEW**

During thefull-year 2006, total ore tons mined were 777,836, total ore tons milled were973,593, total ounces of gold produced were 169,851, and cash operating costswere $533 per ounce of gold produced. Net loss for the year was $20.8 million.

Summary operating andfinancial results during the full-year 2006 included:

·                  The Companyreported a net loss of $20.8 million on sales of 167,762 ounces of gold;

·                  The operationfinished the year with an estimated 11,900 contained gold ounces in JerrittCanyon ore and an estimated 37,000 contained gold ounces in ore purchased fromNewmont in stockpiles adjacent to the mill;

·                  The StarvationCanyon exploration program continued to improve continuity of goldmineralization encountering one of the best drill intercepts in thethree-decade history of Jerritt Canyon: an intercept at Starvation Canyon of140 feet with an average grade of 0.46 ounce of gold per ton (opt);

·                  An evaporationpond, mandated by the Nevada Department of Environmental Protection (“NDEP”),was constructed and nearly completed, and will provide risk mitigation intailings solution handling and a reduction in the estimated closure timeperiod;

·                  Cash and cashequivalents on December 31, 2006 totaled $6.6 million;

·                  Unsold goldinventory on December 31,  2006 totaled520 ounces; and

·                  Theworking capital deficit as at December 31, 2006 was $12.4 million.

**2007SUBSEQUENT EVENTS**

On January 152007, the Company closed a secured convertible bridge loan financing facility(the “Facility”) of $8 million with Auramet Trading LLC.  The borrowed funds, less costs of thetransaction, primarily paid the costs of a new evaporation pond at the JerrittCanyon operations which was mandated by the NDEP.  The Company is pursuing reimbursement forsuch costs under its reclamation insurance policy with American InternationalSpecialty Lines Insurance Company, a subsidiary of AIG (the “Insurer”), but thetiming and receipt of such reimbursement is uncertain.  The Facility has an interest rate of 12.9%per annum and is repayable no later than May 31, 2007 (extended from April30, 2007) in cash, or at the option of Auramet, part or all of the Facility maybe repaid in common shares of Queenstake at a conversion price of $0.22 pershare.  The costs of the Facility includea 3.5% underwriting fee in respect of which Auramet elected to receive partialpayment with 1,464,579 Queenstake common shares.  In addition, Auramet received

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warrantsexercisable to acquire 10 million Queenstake common shares for a term of oneyear at an exercise price of $0.22 per share. This Facility was necessary as aresult of delays in the ongoing discussions with the Insurer for the yetunresolved reimbursement of the costs of the evaporation pond. Queenstake andits legal advisers believe that reimbursement for the cost of the evaporation pondis covered under its reclamation insurance policy and will continue to pursuethis matter with the Insurer.  The $9.0million evaporation pond was mandated by the NDEP earlier in 2006 as part ofJerritt Canyon’s long-term closure and reclamation plan. Construction began inthe third quarter of 2006 and was approximately 95% complete at December 31,2006. The lined evaporation pond is designed to allow water from the existingtailings containment system to be isolated while it evaporates. At December 31,2006, there were approximately $8 million of trade payables incurred for theevaporation pond, which were paid down subsequent to year end using proceeds ofthe Facility. Although the Company continues to expect reimbursement from theInsurer, the timing and receipt of such reimbursement is uncertain.

The Company filedsuit on January 19, 2007 against the Insurer in United States District Courtfor the District of Colorado.  The suit seeks $8.4 million forconstruction of the evaporation pond at the Company’s Jerritt Canyon operationsin Nevada plus an unspecified amount for additional damages as a result of theInsurance Company’s failure to reimburse Queenstake under its reclamation costsinsurance policy.  Queenstake’s insurancepolicy includes coverage in respect of reclamation related costs arising as aresult of changes in applicable environmental laws and governmentmandates.  The matter has been referredto arbitration.  Queenstake is beingrepresented in this matter by Anderson Kill & Olick, P.C. of New York.

Effective March16, 2007, the Company and YGC Resources Ltd. (“YGC”) completed all duediligence requirements and signed a definitive combination agreement to mergethe companies to form Yukon-Nevada Gold Corporation (“Newco”).  The business combination is structured as aplan of arrangement whereby the Company will become a wholly-owned subsidiaryof Newco.  Under the agreed upon terms,shareholders of YGC will retain one common share of Newco for each share of YGCheld, and shareholders of Queenstake will receive one common share of Newco foreach ten shares of Queenstake held. Outstanding warrants and options in each company will be assumed orexchanged by Newco on the basis of the same ratio.  The proposed transaction will combineQueenstake’s and YGC’s mineral property interests in North America to createoperating efficiency with emphasis on production from the Jerritt Canyon goldmine in Nevada, and the advancement towards production of the Ketza River goldproperty in the Yukon.  The businesscombination will yield benefits to the shareholders of Newco by providing agreater asset base and capitalization, creating operating synergies andefficiency, reducing overhead and creating a broader share trading market withthe potential for greater liquidity. In addition, the transaction will allow anaggressive and sustained exploration program throughout the extensive landpackages that will be wholly owned by Newco in Nevada and the Yukon.  It has been agreed that the Board of Directorsof Newco will comprise all of the current members of the Board of Directors ofYGC together with Dorian (Dusty) Nicol and Peter Bojtos of Queenstake.  It has been further agreed that the Presidentand CEO of Newco will be Graham C. Dickson, currently President and CEO of YGC,and that Dorian (Dusty) Nicol, currently President and CEO of Queenstake, willbe Executive Vice President of Exploration of Newco.  The business combination is subject toshareholder, court and regulatory approvals and other conditions precedent,including a minimum $Cdn. 80.0 million net proceeds financing to be completedby YGC for the benefit of Newco.   Therespective shareholder meetings of the Company and YGC are scheduled to be heldon May 18, 2007.

On March 23, 200745,950,000 warrants, issued as part of an equity financing completed on March23, 2005, expired unexercised.

**SELECTEDANNUAL INFORMATION**

The followingTable 1 summarizes selected financial data for the Company for each of thethree most recent fiscal years.  Theinformation herein is prepared in accordance with Canadian generally acceptedaccounting principles:

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Table 1 — SelectedAnnual Financial Data
| **(In millions of U.S. Dollars)**                                                     | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Revenues                                                                                                  | ** ** | **$**      | **102.9**  |     | $          | 90.2     |       | $ | 100.4 |   |
| Net loss from  continuing operations                                                                      | ** ** | **(21.4**  | **)**      | (20.5    | )          | (18.0    | )          |
| Net loss                                                                                                  | ** ** | **(20.8**  | **)**      | (19.7    | )          | (22.1    | )          |
| Basic and  diluted loss per share                                                                         | ** ** | **(0.04**  | **)**      | (0.04    | )          | (0.06    | )          |
| Total assets                                                                                              | ** ** | **123.2**  |       | 93.3     |       | 87.9     |       |
| Long-term  liabilties                                                                                     | ** ** | **24.6**   |       | 28.5     |       | 26.9     |       |
| Cash dividends  declared                                                                                  | ** ** | **—** |       | —   |       | —   |       |
| *During  the reporting periods, the Company reported no discontinued operations or  extraordinary items.* | * *   |
|                                                                                                           |            |            |            |          |            |          |            |  |  |  |

 

**RESULTSOF OPERATIONS**

Queenstakeimplemented several cost savings initiatives toward the end of the thirdquarter of 2006 that have delivered and are expected to continue to result insignificant reductions to operating costs going forward.  Cost initiatives completed include:discontinuing the services of one underground mining contractor; a reduction of11% of the workforce; reorganizing and centralizing the maintenance department;removing from service the high-hours, high-maintenance cost mining equipment;and deferring the production of ore tons that lie below the water table at theSmith Mine.

Full-year 2006gold production from Jerritt Canyon was 153,581 ounces, excluding productionfrom ore purchased from Newmont which added 16,270 ounces of totalproduction.  Cash operating costs perounce were $533 for 2006 reflecting the mill-related production shortfalls andlower throughput rate, delays in accessing ore and deferral of the mining ofhigher cost areas of the mines. Cash operating costs continue to be adverselyaffected by increases in basic commodity prices. The Jerritt Canyon cost of operationsshowed improvement in the fourth quarter of 2006 as a result of the costreduction measures implemented in late September, with production and costs andsufficient cash flow to continue to fund the ongoing operations at JerrittCanyon.

At the end of thethird quarter of 2006, and as announced on October 4, 2006, the Companyinstructed its financial advisors Blackmont Capital Inc. of Toronto to assistthe Company in evaluating and pursuing strategic alternatives regarding thelong-term value of Queenstake’s assets. As a result of this process, effective March 16, 2007, the Company andYGC Resources Ltd. (“YGC”) signed a definitive combination agreement to merge thecompanies to form Yukon-Nevada Gold Corporation (*see “2007Subsequent Events” above.*)

In November 2006,the Company entered into an agreement with the Nevada operations subsidiary ofNewmont Gold Company (“Newmont”) whereby the Company agreed to process loadedcarbon for Newmont utilizing existing excess capacity in the Company’s carbonstripping circuit.  Newmont agreed to paya processing fee to the Company, and the Company agreed to strip the gold fromthe loaded carbon while maintaining total segregation of the Newmont carbon andgold from Jerritt Canyon carbon and gold. As of December 31, 2006 the Company owed $11.2 million to Newmont forloaded carbon that had been delivered to the Jerritt Canyon site awaitingprocessing.  During 2006, the Companyrecognized $0.7 million in revenue for carbon processed under thisagreement.  As of March 29, 2006, theCompany has processed all Newmont loaded carbon on hand at December 31,2006.  The current contract extendsthrough to April 30, 2007.

Operations andproduction summary information as compared to the same period in the prior yearare as follows:

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| For the years ended December 31 | ** ** |
|----------------------------------------------------------|------------|
| ** **                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Gold ounces  produced                                    | ** ** | **169,851** |   | 204,091 |   |
| Gold ounces sold                                         | ** ** | **167,762** |   | 202,684 |   |
|                                                     | ** ** | ** ** |   |   |   |
| Average sales  price per ounce                           | ** ** | **$** | **609** |   | $ | 445 |   |
| Cash operating  costs per ounce                          | ** ** | **$** | **533** |   | $ | 386 |   |
|                                                     | ** ** | ** ** |   |   |   |
| Total tons mined                                         | ** ** | **1,099,752** |   | 1,407,359 |   |
| Ore tons mined                                           | ** ** | **777,836** |   | 959,099 |   |
| Tons processed                                           | ** ** | **973,593** |   | 1,106,937 |   |
| Grade processed  (opt)                                   | ** ** | **0.21** |   | 0.22 |   |
| Process recovery                                         | ** ** | **86.2** | **%** | 86.6 | % |

 

The above Tons Milled, Ounces Produced and Ounces Soldare inclusive of “Newmont Purchased Ore”.

Gold productionwas 169,851 ounces for the full-year 2006. Gold production declined by 34,240 ounces or 17% from the full-year2005.  Ore tons milled were 973,593 forthe full-year 2006, a decrease of 133,344 tons or 12% from full-year 2005.

The decrease ingold production was primarily due to declining ore tons mined from the SmithMine and Zone 1 of SSX.  The Smith Minewas adversely affected by water inflows in excess of the capacity of thepumping system to dewater.  Ore tonsbelow the water table in Smith are generally higher-grade and more contiguousand had been planned to provide in excess of 40% of total ore mined for theJerritt Canyon operation during 2006.  Atthe end of the third quarter of 2006, the Company reduced pumping activitiesand deferred mining of the wet Smith Mine ore to later years.  The Jerritt Canyon area has experienced fiveyears of successively higher rainfall and corresponding declines in evaporation.  Full-year rainfall totals for 2005 and 2006were 21 and 16 inches respectively, significantly higher than historical normsand higher than the mine dewatering systems design capacity limitations,compared to less than 11 inches for the same period in 2000.  The SSX Mine experienced grade declines dueto higher mining dilution as a result of the mining of smaller, less contiguousore blocks.  The Murray Mine was shutdown as planned in the second quarter of 2006. Although underground mine performance was positively affected by astable underground workforce, high availability of underground productionequipment, the presence of two contractors on site for the majority of the yearthat were dedicated to development and the continuation of the Company’sexcellent operating safety record, these improvements were not sufficient tooffset declines in mined ore tonnage and grade.

Total ore gradeprocessed for the full-year 2006 is 0.21 opt gold, a decline of 0.01 or 5% fromthe same period in 2005.  The grade ofQueenstake ore milled increased to 0.23 opt, a 0.01 opt or 5% improvement from2005.  A reconciliation table ofQueenstake Jerritt Canyon and Newmont purchased ore processed through the millis provided below.

Total tonsprocessed in 2006 were 973,593, a decline of 133,344 tons or 12% from2005.  The reduction in process tonnageis due to a combination of fewer ore tons mined, mill mechanical availabilityissues and the Company’s plan to scale-back roaster operations in early2006.  Beginning in August 2005 andcontinuing through April 2006, the mill processing rate had been scaled backfrom operating two roasters together to one roaster at a time.  The process rate was increased in April 2006and the second roaster fully utilized upon the commencement of delivery ofpurchased ore from Newmont (see “*Private Placement, OreProcessing and Property Lease Agreements”* below*)*.  Comparison to operating results from previousyears should be viewed in that context. The table below summarizes production results for both Jerritt Canyonore and ore purchased from Newmont.

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|                        | ** ** | **Year ended December 31, 2006** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|
| ** **             | ** ** | **Queenstake ore**                              | ** ** | **Newmont ore** | ** ** | **Total** | ** ** |
| Torns proccessed       | ** ** | **792,959**                                          | ** ** | **180,634** | ** ** | **973,593** | ** ** |
| Grade processed  (opt) | ** ** | **0.23**                                             | ** ** | **0.10** | ** ** | **0.21** | ** ** |
| Process recovery       | ** ** | **85.8**                                             | **%**      | **90.4** | **%** | **86.2** | **%** |
| Gold ounces produced   | ** ** | **153,581**                                          | ** ** | **16,270** | ** ** | **169,851** | ** ** |

 

Newmont begandelivering ore to the mill in April 2006 and by the end of 2006 the JerrittCanyon operation had received approximately 440,000 tons of purchased ore andhad over 259,000 tons of purchased ore in stockpile.  Under the terms of the purchase agreement theCompany is allowed to defer payment for purchased ore until the ore isprocessed and the gold produced.  As ofMarch 29, 2007, the Company is in compliance with all provisions of the oresale and purchase agreement with Newmont.

Processed oretonnage and gold production for the full-year 2006 were unfavorably impacted asthe Company made the decision to run the mill at a reduced capacity in order tominimize the risk of further mill pinion and bull gear mechanical issues.  A new mill pinion gear was installed in April2006 and the bull gear was turned over and several cracked teeth repaired atthat time.  However, through the thirdquarter of 2006, the new pinion gear exhibited a high degree of wear andpitting and elevated gear surface temperatures that could have posed a risk ofcatastrophic failure and potential collateral damage if the mill had continuedto run at full capacity.  As a result ofthis experience, the bull and pinion gears are subject to intense monitoringand daily inspection shutdowns, further limiting mill throughput.  A new bull gear has been ordered and isexpected to be delivered in April 2007. The ball mill was operated through the end of 2006 at an average ofapproximately 75% ball charge in order to reduce the load on the pinion andbull gear.  The Company intends tomaintain the 75% ball charge and limit the risk of failure on the gears untilthe new bull gear is installed during the second quarter of 2007.  As of March 29, 2007, the mill was operatingon average at approximately 75% capacity processing a blend of Jerritt Canyonmined ore, Jerritt Canyon stockpiled ore and Newmont purchased ore.  The blend of ore through the mill is determinedbased on grade, recovery, metallurgical complements to other ore types,minimization of re-handling costs and other factors.

In order tominimize risk and assure optimum mill utilization, the Company completed ananalysis of critical spares and inventory in 2006.  The analysis identified areas requiringimprovement especially in light of current steel component shortages andmachine fabrication lead times for major mechanical components, as is beingexperienced across the entire Nevada gold mining industry and globally.  These areas are being addressed and acomplement of critical spares inventory is expected to be in place bymid-2007.  At March 29, 2007, theoperation has two new spare pinion gears on site and a new bull gear hascompleted fabrication in Australia during early-March and is in transit to theJerritt Canyon site.

The reduced millthroughput for full-year 2006 has resulted in a deferral of the processing ofcurrently stockpiled ore to 2007.  TheCompany has estimated that there were a total of approximately 11,900 containedounces of Jerritt Canyon ore and approximately 37,000 contained ounces ofpurchased ore in stockpiles at the mill at the end of 2006.

It is planned thatthe installation of the new bull gear will be completed in the second quarterof 2007, and that the mill will operate at 75% throughput capacity until thatcapital replacement project is completed. After installation of the bull gear and completion of planned annualmaintenance work, the mill will increase feed tonnage and ball charge to againoperate at 100% capacity or approximately 1.5 million tons per year.  Mill feed will consist of both Jerritt Canyonore, and concentrates and ore purchased from Newmont’s Nevada operations.

Capitalized minedevelopment of 7,083 feet during the year was essentially on 2006 plan, as themining emphasis shifted to short-term production as the high-grade stockpileswere being depleted during the second quarter. Two mining contractors that had been dedicated to development werephased-out during the year and internal crews were assigned to those headings.

Over the pastyear, cash operating costs were negatively impacted by $3.2 million inincreased commodity costs, including fuel, electric power, commodities andfreight, $2.1 million in higher labor costs from wage increases and

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higher thananticipated overtime, and $3.1 million from increased contractor costs. Thesefactors accounted for increases in cash operating costs per ounce of $48through 2006.

*Gold Prices*

Market prices for goldgenerally increased through 2006 with the lowest price of $525 per ounceoccurring on January 5, 2006 and the average price for the year being$603.  The high market price forfull-year 2006 of $725 per ounce occurred on May 5, 2006.  During the fourth quarter, the gold pricegenerally increased with the lowest price of $561 occurring on October 6, 2006at the beginning of the quarter and an average price of $613 for thequarter.  The high market price for thefourth quarter was $649 occurring on December 1, 2006.

The Company realized anaverage sales price of $609 per ounce for the full year 2006, $6 per ouncehigher than the average market price of $603 for the full year.  The Company realized an average sales priceof $615 per ounce for fourth quarter of 2006, an improvement of $2 per ounce ascompared to the average market price of $613 for the quarter.

Gold prices averaged $603 and$445 per ounce respectively for the full years 2006 and 2005.  Gold prices averaged $613 and $484 per ouncerespectively for the fourth quarters of 2006 and 2005

*PrivatePlacement, Ore Processing and Property Lease Agreements*

On April 13, 2006,the Company closed an equity private placement with Newmont Canada Limited, asubsidiary of Newmont, whereby Newmont purchased 28.5 million Queenstake commonshares at Cdn $0.41 per share for gross proceeds of $10.2 million.  As part of the private placement, Newmontreceived warrants exercisable to acquire up to 28.5 million additional commonshares of Queenstake at a price of Cdn $0.55 through April 12, 2010.  These warrants, which are currently out ofthe money, would generate Cdn $15.7 million in cash if exercised.  Through April 13, 2008, Newmont will have theright to participate in future equity offerings by Queenstake to preserve itsfully diluted shareholding percentage and will have certain additional rightsto participate in debt financings. Proceeds of this private placement are being used to fund explorationand for other corporate uses.

Coincident withthe closing of the equity private placement, an affiliate of Newmont conveyedby mineral lease three of its Nevada early-stage exploration properties toQueenstake.  The properties are subjectto a sliding scale net smelter return royalty, dependent on the gold price, of3% to a maximum of 5% if gold is at or above $500 per ounce, and Newmontretains the right to back into a 51% joint venture interest in each of theproperties.

In addition,another affiliate of Newmont entered into an agreement to sell concentrates andore from its Nevada operations to Queenstake for processing at its JerrittCanyon roasting and milling facility. The contract calls for Queenstake to purchase at least 500,000 tons peryear of ore or concentrate over two years. Queenstake is paying Newmont the net amount for the recoverable ouncesin the purchased concentrates and ore, less commercial terms for processing andrefining.  Ore purchases with Newmont maycontinue for up to three additional years if Queenstake has the spareprocessing capacity.  Following thecompletion of the bull gear replacement in the second quarter of 2007, theJerritt Canyon mill throughput is expected to increase to approximately 100% ofits previously demonstrated capacity of approximately 1.5 million tons per yearproviding for treatment of Newmont’s purchased ore, which is expected to lowerthe Company’s unit operating costs by spreading the fixed costs over moreounces produced.

*Gold Production*

Gold production for thefull-year 2006 was 169,851 ounces, a decrease of 34,240 ounces (17%) fromfull-year 2005.

Quarterly production andfinancial information provided below as at December 31, 2006, is not indicativeof future annual production or financial results.  Key quarterly production statistics areillustrated in Table 1.

 

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Table 2 — Jerritt CanyonQuarterly Production Statistics
| **Three months ended**    | ** ** |
|-------------------------------------|------------|
| ** **                          | ** ** | **December 31,  2006** | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** | **March 31,  2005** | ** ** |
| Gold ounces produced                | ** ** | **45,776** |   | 43,781 |   | 50,421 |   | 29,873 |   | 45,555 |   | 49,613 |   | 54,156 |   | 54,767 |   |
| Gold ounces sold                    | ** ** | **44,929** |   | 43,129 |   | 51,216 |   | 28,488 |   | 46,828 |   | 54,446 |   | 50,560 |   | 50,850 |   |
|                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average sales price per  ounce      | ** ** | **$** | **615** |   | $ | 617 |   | $ | 627 |   | $ | 553 |   | $ | 485 |   | $ | 442 |   | $ | 428 |   | $ | 427 |   |
| Cash operating costs per  ounce (1) | ** ** | **$** | **545** |   | $ | 643 |   | $ | 461 |   | $ | 558 |   | $ | 413 |   | $ | 401 |   | $ | 371 |   | $ | 365 |   |
|                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ore tons mined                      | ** ** | **199,219** |   | 161,371 |   | 188,283 |   | 228,963 |   | 223,060 |   | 220,779 |   | 234,625 |   | 280,635 |   |
| Tons processed                      | ** ** | **253,945** |   | 297,563 |   | 271,857 |   | 150,228 |   | 211,587 |   | 267,116 |   | 316,800 |   | 311,434 |   |
| Grade processed (opt)               | ** ** | **0.22** |   | 0.18 |   | 0.22 |   | 0.25 |   | 0.25 |   | 0.21 |   | 0.21 |   | 0.21 |   |
| Process recovery                    | ** ** | **85.6** | **%** | 86.3 | % | 86.0 | % | 86.4 | % | 86.8 | % | 865 | % | 87.3 | % | 85.8 | % |

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(1)          The Company has adopted the Gold InstituteProduction Cost Standard (the “Standard”) to calculate and report cashoperating costs per ounce of gold produced. This is a non-GAAP measure, intended to complement conventional GAAPreporting; accordingly these data should not be considered a substitute forGAAP measures. Management believes that cash operating costs per ounce is auseful indicator of a mine’s performance. Where GAAP operating costs are adjusted to calculate per ounce dataconsistent with the Standard, reconciliations to GAAP measures are provided,see Table 7.

Cash operating costsper ounce for the fourth quarter of 2006 were $545 per ounce or 32% higher thanthe same period of 2005 due to the decreased ore mined, decreased ore grade andmill mechanical issues discussed previously and increasing fuel, labor andcommodity prices.  A reconciliation ofcost of sales to cash operating costs per ounce is provided in Table 5.

*Statements of Income*

The Company reported a net loss of $20.8 million ($.04 per share) forthe year ended December 31, 2006 as compared to a net loss of $19.7 million($.04 per share) for 2005.  The principalcomponents of the loss for the year 2006 were: loss from operations of $21.4million, other income, net of expense of $0.9 million, foreign exchange gain of$0.1 million related to Company’s Canadian cash reserves, gain on disposal ofassets of $0.1 million related to the sale of excess mine equipment and, losson write-down of assets of $0.2 million related to a failed mill piniongear.  Principal components of the lossfor the year 2005 were: loss from operations of $20.5 million, $0.4 millioninterest expense, $0.9 million other income (net), foreign exchange gains of$0.2 million, and gain on disposal of assets of $0.1 million.  Loss from operations is illustrated in Table3.

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Table 3 — Loss from operations

| (In millions of U.S. Dollars)      | ** ** | **2006**  | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Gold sales                                             | ** ** | **$**     | **102.9**  |     | $          | 90.2     |       | $ | 100.4 |   |
|                                                   |       |      |       |     |       |     |       |
| Cost of Sales                                          | ** ** | **93.4**  |       | 80.3     |       | 85.3     |       |
| Depreciation,  depletion and amortization              | ** ** | **19.0**  |       | 17.2     |       | 19.6     |       |
| Non-hedge  derivatives                                 | ** ** | **0.2**   |       | 2.6      |       | 2.5      |       |
| Exploration                                            | ** ** | **4.9**   |       | 3.9      |       | 6.6      |       |
| General and  administrative                            | ** ** | **4.4**   |       | 4.9      |       | 3.4      |       |
| Accretion of  reclamation and mine closure liabilities | ** ** | **1.2**   |       | 1.2      |       | 0.4      |       |
| Stock-based  compensation                              | ** ** | **1.2**   |       | 0.6      |       | 0.6      |       |
|                                                   | ** ** | **124.3** |       | 110.7    |       | 118.4    |       |
| Income (Loss) from  operations                         | ** ** | **$**     | **(21.4**  | **)**    | $          | (20.5    | )          | $ | (18.0 | ) |

 

During the year2006, revenues of $102.2 million were generated from the sale of 167,762 ouncesof gold at an average realized gold price of $609 per ounce.  Also during 2006, the Company generated $0.7million in revenue from the processing of loaded carbon for Newmont.  Revenues for 2005 were $90.2 milliongenerated from the sale of 202,684 ounces at an average realized gold price of$445 per ounce.

Costs of sales anddepreciation, depletion and amortization (“DD&A”) costs are substantiallyall associated with the Jerritt Canyon operations.  A reconciliation of cost of sales to cashoperating costs per ounce is provided in Table 5.

DD&A chargeswere $19.9 million for the year 2006 compared with $17.2 million for 2005.  Due to the increase in stockpiled ore andwork-in-process ore inventories during the year, DD&A of $0.9 million wascapitalized in the ending inventory and DD&A of $19.0 was included in costof sales for the year.

Non-hedgederivative financial instruments, consisting of gold put option contracts, havebeen purchased from time to time to protect against the risk of falling goldprices.  The Company does not use goldforward sales contracts to fix future gold prices realized.  During the year 2006, there were $0.2 millionof costs associated with the purchased gold put option contracts, and theremaining value of all gold put options were written off during the year.  The cost associated with the purchased goldput option contracts was $2.6 million during 2005, which included $0.9 millionin a write-down of non-hedge derivatives to fair market value.

Exploration expenses for the full-year 2006 and 2005 were $4.9 millionand $3.9 million, respectively, all associated with the Jerritt CanyonDistrict.

General and administrative (“G&A”) costs are associated with theCompany’s corporate offices.  During thefull-year 2006, G&A costs were $4.4 million compared to $4.9 million infull-year 2005.

Accretion expenseconsists of fair value increases recognized for future reclamation and mineclosure costs.  Accretion expense for thefull-year 2006 and 2005 was $1.2 million for each year.  The estimate of reclamation and mine closurecosts was updated during 2006.  Estimatedmine closure costs were reduced by $4.0 million at the end of 2006 due to theimpact of the new evaporation pond on closure costs related to the tailingsfacility.  The construction of theevaporation pond, as mandated by the NDEP for closure purposes, reduces thetime frame necessary for removing excess moisture from the tailings facility byas much as four years.  During 2005 and2006, the Company retained the services of an environmental consultant toreview and assist in updating cost estimates for reclamation and mine closure.

The principal remaining components of the Company’s net income/(loss)are illustrated in Table 4.

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Table 4 — Other NetIncome/(Loss) Components

| (In millions of U.S. Dollars) | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest expense                                  | ** ** | **$**    | **0.4**    |     | $          | 0.4      |       | $ | 4.9 |   |
| Other income, net of  other expense               | ** ** | **(0.9** | **)**      | (0.9     | )          | (0.3     | )          |
| Foreign exchange (gain)  loss                     | ** ** | **(0.1** | **)**      | (0.2     | )          | 0.1      |       |
| Gain on disposal of  assets                       | ** ** | **(0.1** | **)**      | (0.1     | )          | (0.6     | )          |
| Write-down of assets                              | ** ** | **0.2**  |       | —   |       | —   |       |
|                                              | ** ** | **$**    | **(0.5**   | **)**    | $          | (0.8     | )          | $ | 4.1 |   |

 

Other income, net of otherexpense of $0.9 million and $0.9 million for each of 2006 and 2005, wereprimarily the result of interest earned on surplus cash balances.  A foreign exchange gain of $0.1 million in2006 and $0.2 million in 2005 reflected the strengthening of the Canadian dollaragainst the United States dollar as applied to the Company’s Canadian dollarcash reserves during the year.

Table5 - Summary of Quarterly Results
| **(In millions of U.S. Dollars, except per share data)**           | ** ** | **Dec 31,  2006** | ** ** | **Sept 30,  2006** | ** ** | **June 30,  2006** | ** ** | **Mar 31,  2006** | ** ** | **Dec 31,  2005** | ** ** | **Sept 30,  2005** | ** ** | **June 30,  2005** | ** ** | **Mar 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|-------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|-------------------------|------------|------------------------|------------|
| Total revenues                                                                                             | ** ** | **$**                  | **28.3**   |                    | $          | 26.6                    |       | $                      | 32.2       |                   | $          | 15.8                    |       | $                       | 22.7       |                   | $          | 24.1 |   | $ | 21.7 |   | $ | 21.7 |   |
| Net income (loss)                                                                                          | ** ** | **(7.6**               | **)**      | (8.1                    | )          | 0.7                     |       | (5.8                   | )          | (2.6                   | )          | (4.3                    | )          | (5.7                    | )          | (7.1                   | )          |
| Net income (loss) per  share - basic                                                                       | ** ** | **(0.02**              | **)**      | (0.01                   | )          | —                  |       | (0.01                  | )          | (0.01                  | )          | (0.01                   | )          | (0.01                   | )          | (0.02                  | )          |
| *During  the reporting periods, the Company reported not discontinued operations or  extraordinary items.* | * *   |
|                                                                                                            |            |                        |            |                         |            |                         |            |                        |            |                        |            |                         |            |                         |            |                        |            |  |  |  |  |  |  |  |  |

 

The trend in total quarterly revenues illustrated above correlates withgold ounces sold and average sales price per ounce sold as illustrated in Table2.

In addition to the impact of operating costs and gold production, thenet loss variations recognized from quarter to quarter during 2006 resultedfrom a $0.5 million decrease in corporate general and administrative costsdespite increased expenses for consulting and contractors to fulfillSarbanes-Oxley compliance, financial advisory work fees to identify corporatestrategic alternatives, legal fees related to the Newmont transaction, D&Oinsurance premiums and other general costs. During 2005, corporate general and administrative costs includedapproximately $1.0 million in corporate restructuring charges during the firstquarter, $0.5 million in increased consulting and advisory services related tothe redevelopment plan in the third quarter, a $0.9 million non-cash write downin the value of outstanding gold put options, which were classified asnon-derivative financial instruments in the fourth quarter, and othernon-operating expense items.

The Companyrealized an average sales price during the fourth quarter of 2006 of $615 perounce, $2 higher than the average spot price for the quarter and 27% higherthan the average realized gold sales price during the same period in 2005 of$485.  The Company realized an averagesales price during the full-year 2006 of $609 per ounce, $6 higher than theaverage spot price for full-year 2006, and $164 or 37% higher than the averagerealized gold sales price during the same period in 2005 of $445.  Gold prices have trended generally upward duringthe past five years, achieving a 25-year high of $725 per ounce in May2006.  The increase from the former highof $537 per ounce in December of 2005 can be attributed to a number of factors,including: a decrease in the value of the US dollar during 2006 in comparisonto other major foreign currencies, a continued increase in global demand forcommodities, including gold, and a bullish sentiment in the precious metalsmarket.

The Company sellsits gold production at the spot price and has no forward sales commitments.

The Company willoccasionally purchase gold put options to provide for price risk protectionduring times of volatile market prices. No new put options were acquired in 2006 and the Company wrote off theremaining $0.2 million in value of outstanding gold put options during theyear.  Put options expire and relatedpremiums are paid in accordance with the number of put options purchased andthe assigned strike price for each respective month.  The purchase of

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gold put optionsprovides the Company with downside price protection for future gold sales andprovides some assurance of future revenue cash flows for future production andplanning.

*Development and Exploration*

Capitalized minedevelopment of 7,083 feet was essentially on plan during the full-year 2006compared with 9,412 feet completed in the same period of 2005.  The mine phased-out its use of miningcontractors during the third and fourth quarters of 2006 with no miningcontractors on site at the end of the year.

Queenstake invested$4.9 million in exploration during the full-year 2006 with five surface drillrigs working at the Jerritt Canyon District, at Starvation Canyon and othertargets.  The Company completed 930surface drill holes totaling 135,940 feet during 2006.  On August 3, 2006 the Company announced oneof the best drill intercepts in the three-decade history of Jerritt Canyon: anintercept at Starvation Canyon of 140 feet with an average grade of 0.46 ounceof gold per ton (opt).  This intervalincluded an intercept of 70 feet of 0.6 opt. This discovery of high-grade gold mineralization at Starvation Canyon islocated between two known gold resource zones and could potentially represent anew northwest trending gold-bearing structure. Exploration expenditures for 2006were ultimately limited by cash from operations and availability of drill rigs.

The Company isevaluating development of an exploration drift for the Starvation Canyonproject that could more rapidly advance the project using underground drillplatforms.  Preliminary designs indicatethat an 800-foot drift would reach the known boundary of the west zone.

During thefull-year 2006, underground exploration continued at the SSX-Steer MineComplex, the Mahala, West Dash and West Coulee deposits at the Smith Mine, with930 holes completed, totaling 175,526 feet of drilling.

*MineralReserves and Resources*

It is the policyand practice of the Company to update mineral reserves and resources on anannual basis at the end of the calendar year based on recent geology, drillingand grade information derived from the past field season.

Estimated provenand probable mineral reserves totaled 485,700 ounces of gold contained in 2.0 milliontons of ore at an average grade of 0.245 opt at December 31, 2006, based on athree-year average gold price of $485 per ounce. Measured and indicatedresources, including reserves, were estimated at 1.9 million ounces of goldcontained in 8.2 million tons of ore at an average grade of 0.232 opt.  The Company also estimated inferred resourcesof 2.4 million tons of ore at an average grade of 0.226 opt for 545,200 containedounces of gold.  The Company’s proven andprobable reserves and measured and indicated resources were audited andverified by SRK Consulting (U.S.), Inc. as satisfying the standards of CanadianNational Instrument 43-101.   The reservereport prepared by SRK will be filed on SEDAR in the second quarter of2007.  See the report filed for detailsof reserve and resource estimation methodology and assumptions used.

Proven andprobable reserves, estimated using a $485 per ounce gold price,  at December 31, 2006 were lower than in 2005,largely due to increases in the mining unit costs, increase in cutoff grade,remnant ounces condemned with the shutdown of the Murray Mine and, eliminationfrom  reserves of ounces below the watertable at the Smith Mine.  A largeproportion of gold ounces eliminated from reserves for economic reasons remainin the measured and indicated resource category.  The refinement of the geologic models, firstadopted in 2005, in applying smaller, narrower blocks in mine planningcontinues to improve the overall quality of the resources and reserves.  The proven reserve component of total provenand probable reserves remained at 36% at December 31, 2006, unchanged fromyear-end 2005.  The Qualified Person forthe technical information contained in this *Management’s Discussionand Analysis* section is Mr. Dorian L. (Dusty) Nicol, President andChief Executive Officer of the Company.

*Risks andUncertainties*

This document contains “forward-looking statements” that involve variousrisks and uncertainties.   The Companyrelies on forecasts, estimates and projections related to production, operatingcosts and global economic factors all of which are subject to events or resultsthat may not be anticipated, estimated or intended (see “*CautionaryStatement Regarding Forward-Looking Statements”* below.)

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The Company is subject to various financial and operational risks due tofactors outside of the control of the Company. Gold prices are affected byfactors such as global supply and demand, expectations of the future rate ofinflation, the strength of, and confidence in, the U.S. dollar relative toother currencies, interest rates and geopolitical events.  Should the price of gold drop and the pricesrealized by the Company on gold sales decrease significantly and remain at sucha level for any substantial period, the Company’s profitability and cash flowwould be negatively affected.

Although the Company has carefully prepared its mineral reserve andresource estimates, no assurance can be given that the indicated mining andprocessing recoveries of gold from the estimated reserves will be realized overthe life of the mine.

The business of mining is generally subject to a number of risksincluding equipment failure, operational accidents, unstable ground conditionsand severe weather.

The Company is subject to inflationary cost pressures related tocommodities used in operating activities, including but not limited to,gasoline, propane, diesel, crude oil products, cement, cyanide and variousother commodities used in mining activities. The Company actively seeks to mitigate these cost pressures throughcontinuous improvement in supply chain relationships and other operationalinitiatives.

The Company competes with other mining companies for experiencedpersonnel to staff mining and administrative positions.  The demand for mining engineers, geologists,accounting and other professional positions is intense among miningcompanies.  The demand for trades-personsincluding underground miners, mechanics, electricians and millwrights is alsohigh and the available workforce is limited. The Company actively seeks to offset these pressures by providing competitivewages and salaries, industry standard benefits, excellent training, advancementopportunities and a safe workplace. However, there remains a risk that manpower needs will not be met andproduction shortfalls will result.

The Company purchases ore from Newmont at a price determined based onthe calculated recoverable gold content of the ore and at the gold market priceper ounce in effect at the time the ore is delivered to the Jerritt Canyonproperty.  The Company may elect toprocess Newmont purchased ore at a later date. The Company is at risk should the price of gold drop between the timethe ore is purchased and the time the purchased ounces are produced and sold.

The Company has purchased and accumulated significant amounts of goldinventory contained in ore stockpiles. Although the Company uses industry best practices in determining thegold grade and estimated recovery of ores placed in stockpiles, there is a riskthat gold losses can occur in storage and handling of the ore and, that ouncesrecovered from stockpiles may be significantly different than calculated.

The Company’s exploration work involves many risks and may beunsuccessful.  Substantial expendituresare required to establish proven and probable mineral reserves and to completethe related mine development.  It maytake several years from the initial phases of drilling until production ispossible.  As a result of theseuncertainties, there is no assurance that current or future explorationprograms will be successful and result in the expansion or replacement ofcurrent production with new reserves.

The validity of mining claims, which constitute most of the Company’sproperty holdings, can be uncertain and may be contested.  Although the Company has attempted to ensuresatisfactory title to its properties, some risk exists that some titles may bedefective.

The Company seeks to minimize risks through the use, from time to time,of non-hedge derivative financial instruments, or gold put options, to providea minimum price realizable for a portion of its near-term gold production,through independent reviews of its mineral reserve and resource estimates,careful operational planning, and transferring some of the risk through thepurchase of insurance.

The Company’srevenues and most of its expenditures are incurred in U.S. dollars.  However, equity financing completed by theCompany is primarily in Canadian dollars. Consequently, the Company is at risk to foreign exchange movementsbetween these two currencies to the extent that cash reserves, outstandingwarrants and options are denominated in Canadian dollars.

 

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The Company isobligated to repay the $8.0 million Facility to Auramet Trading LLC (“Auramet”)by May 31, 2007 (extended from April 30, 2007).  The Company expects to repay the Facilitythrough a combination of completion of the Queenstake and YGC merger *(see “2007 Subsequent Events” above)*, equity financing, cashgenerated through operations, conversion of the facility or other means.  If the Queenstake-YGC merger and integralfinancing is delayed or terminated, the Company will seek to restructure and furtherextend the payment term of the Facility.

*Reconciliationof Non-GAAP Measures*

Table 6 provides areconciliation of cash operating costs per ounce, a non-GAAP measure, to costsof sales as reported in the Consolidated Statements of Operations.

Table 6 — CashOperating Costs per Ounce
| **(In millions of U.S. Dollars)**      | ** ** | **2006**    | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| Cost of sales per  Consolidated Statements of Operations   | ** ** | **$**       | **93.4**   |     | $          | 80.3     |       | $ | 85.3 |   |
| Less: Royalty expense  and production taxes included above | ** ** | **0.5**     |       | (2.6     | )          | (2.6     | )          |
| Effects of inventory  and other adjustments                | ** ** | **(3.3**    | **)**      | 0.8      |       | (0.1     | )          |
| Cash operating  costs associated with ounces sold          | ** ** | **$**       | **90.6**   |     | $          | 78.5     |       | $ | 82.6 |   |
|                                                       |       |        |       |     |       |     |       |
| Ounces produced                                            | ** ** | **169,851** |       | 204,091  |       | 245,651  |       |
|                                                       |       |        |       |     |       |     |       |
| Cash operating costs per ounce                             | ** ** | **$**       | **533**    |     | $          | 386      |       | $ | 336 |   |

**LIQUIDITY AND CAPITAL RESOURCES**

At December 31,2006, the Company had a working capital deficit of $12.4 million, a reductionof $17.2 million from December 31, 2005, primarily due to the increase inpurchased ore stockpile inventories and decreased cash and cashequivalents.  Newmont continued todeliver purchased ore tons to the property throughout the year on the scheduleas originally agreed and, at the current process capacity, the mill was generallynot able to process the delivered tons, thereby building purchased oreinventory in stockpile.  At December 31,2006 the Company was carrying $24.7 million in purchased ore inventory andloaded carbon.  The Company paid $7.4million to Newmont during the full-year 2006 in accordance with the terms ofthe Newmont contract for purchased ore. At December 31, 2006, the Company owed Newmont $27.7 million for ore andloaded carbon delivered and the Company was not in default of any terms of theore and carbon processing purchase agreement with Newmont.

The fundamentalchanges to operating practices made at the end of the third quarter of 2006 areexpected to reduce expenses by approximately $16 million per year at JerrittCanyon. The estimated annual savings include approximately $12 million (15%reduction) in cash operating costs and approximately $4 million (20-25%reduction) in development contractor costs.

The workingcapital deficit was $12.4 million at December 31, 2006 compared to a positiveworking capital position of $4.8 million at December 31, 2005.  Cash and cash equivalents were $6.6 millionat December 31, 2006, a decrease of $3.6 million from year-end 2005.  Unsold gold inventory was $0.3 million at December31, 2006, a decrease of $0.8 million from December 31, 2005.  As compared to December 31, 2005, the $27.7million increase in inventories, representing a significant build up inpurchased ore stockpiled, was offset by a $41.3 million increase in accruedliabilities and trade payables, including $27.7 million related to ore purchasedat the end of the year, $8.0 million reclamation work reimbursable from AIG andhigher energy and commodity costs.  TheCompany has estimated that there are approximately 11,900 ounces contained inthe Jerritt Canyon ore stockpile and approximately 37,000 ounces in the Newmontpurchased ore stockpile at the mill at December 31, 2006.   For the first and second quarters of 2007,it is anticipated that the mill will be running at approximately 75% ofcapacity, processing both Jerritt Canyon mined ore, and concentrates and orepurchased from Newmont’s Nevada operations. The Company’s cash flows from operations

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are expected to besufficient to fund currently planned mining operations, propertyobligations and general and administrative activities through completion of theQueenstake-YGC business combination. Under the current schedule, which requires the Company to complete themill annual maintenance and bull gear change in the second quarter, the Companyexpects that the mill and roasters will have capacity to process the stockpilesof Newmont purchased ore by year-end 2007 as well as planned ore deliveriesfrom Newmont through the end of the year.

The Company has recorded an asset in “Jerritt Canyon Mineral Property,Plant and Equipment, Net” for $8.4 million at year-end 2006 for the evaporationpond, a reclamation project expenditure that the Company considers isreimbursable under the Company’s Environmental Risk Transfer Program with theInsurer *(see “2007 Subsequent Events” above.)*  Proceeds from the Insurer, when received,will offset the costs recorded in Mineral Property, Plant and Equipment.  The Company expects that the dispute will beresolved by the first quarter of 2008. The lawsuit filed with the Insurer also includes other direct costs incurredas a result of delays in reimbursement, financing, legal and other items.

Upon completion of the installation of the new bull gear on the mill,which is planned for the end of the second quarter of 2007, the Companyanticipates that the mill will be able to operate at its full capacity ofapproximately 1.5 million tons per year. At this expected processing rate, the accumulated purchased oreinventory is expected to be depleted by the fourth quarter of 2007.  Under the terms of the agreement with Newmont,the Company pays Newmont for the purchased ore ounces as the ounces areproduced and sold.  Under the current2007 mine production and processing plan, purchased ore tons are expected tomake up more than 50% of mill throughput.

The Company invested$31.9 million in the Jerritt Canyon mines during the full-year 2006,principally in underground mine development and in purchasing and refurbishingplant and equipment.  As mentionedearlier, the Company continues to experience higher commodity costs, which alsoimpact underground mine development costs. The Company anticipates funding these programs from cash generated fromoperating activities and cash balances on hand.

Net cash generatedby financing activities during the full-year 2006 was $9.7 million compared tonet cash generated of $32.9 million during the full-year 2005.  During 2006, financing activities included$10.0 million the Company received for the Newmont transaction (see “*Private Placement, Ore Processing and Property Lease Agreements*”above) and $1.6 million received from exercise of warrants, offset by $1.9million in payments for operating leases and other financing activities.

The Company’s material contractual obligations at December 31, 2006 areillustrated in Table 7.

Table 7 — Material Contractual Obligations
| ** **                                            | ** ** | **Payments due by period** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------|------------|
| **(In millions of U.S. dollars)** | ** ** | **Total**                                 | ** ** | **Less than 1  year** | ** ** | **1 - 3 years** | ** ** | **4 - 5 years** | ** ** | **More than 5  years** | ** ** |
| Capital lease  obligations                            | ** ** | **$**                                     | **3.3**    |   | $ | 1.2 |   | $ | 1.8 |   | $ | 0.3 |   | $ | — |   |
| Operating leases                                      | ** ** | **0.4**                                   |       | 0.2 |   | 0.2 |   | — |   | — |   |
| Non-hedge  derivative financial instruments           | ** ** | **0.1**                                   |       | 0.1 |   | — |   | — |   | — |   |
| Total Material  Contractual Obligations               | ** ** | **$**                                     | **3.8**    |   | $ | 1.5 |   | $ | 2.0 |   | $ | 0.3 |   | $ | — |   |

 

On April 13, 2006, the Company entered into anagreement with Newmont to process ore at the Company’s Jerritt Canyon roasterfacility.  The Company is committed toprocess 500,000 tons of Newmont ore annually for two years from the date of theagreement.  The Company purchases orefrom Newmont at a price determined based on the calculated recoverable goldcontent of the ore and at the gold market price per ounce in effect at the timethe ore is delivered to the Jerritt Canyon property.  The Company is at risk should the price ofgold drop between the time the ore is purchased and the time the purchasedounces are produced and sold.  Sincecommencement of deliveries in April 2006 and through December 31, 2006 theCompany received approximately 440,000 tons of ore pursuant to the agreement.

At the end of the thirdquarter, the Company instructed its financial advisors Blackmont Capital Inc.of Toronto to assist the Company in evaluating and pursuing strategicalternatives regarding the long-term value of Queenstake’s assets.  As a result of this process, on March 16,2007, the Company and YGC Resources Ltd. (“YGC”) signed a definitivecombination agreement to merge the companies to form Yukon-Nevada GoldCorporation *(see“2007 Subsequent Events” above)*.  Upon completion of the merger,the Company is obligated to pay Blackmont a success fee equal to 1.25 percent ofthe transaction value.

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**2006 FOURTH QUARTER OVERVIEW**

Gold productionfor the three month period ended December 31, 2006 was 45,776 ounces,essentially unchanged from the 45,555 ounces of gold produced in the sameperiod for 2005.

Cash operatingcosts of $545 per ounce during the fourth quarter of 2006 were $132 or 32%higher than the fourth quarter of 2005.  The increased cash operatingcosts per ounce resulted from lower ore tons mined (23,841 tons or 11%),declining ore grade (0.03 opt or 12%), higher commodity and supplies costs andreduced capital development.  Approximately $48 per ounce or 36% of thetotal increase in cash operating costs per ounce from the third quarter of 2005can be attributed to increased commodities, labor and contractor costs.

During the threemonths ended December 31, 2006, revenues of $27.6 million were generated fromsale of 44,929 ounces at an average realized sales price of $615 perounce.  For the fourth quarter of 2005, revenues of $22.7 were generatedfrom the sale of 46,828 ounces at an average realized sales price of $485 perounce.  The Company also generated $0.7million in revenue during the fourth quarter of 2006 from processing loadedcarbon from Newmont.

The Company had anet loss of $7.6 million ($0.02 per share) for the three month period endedDecember 31, 2006 compared to a net loss of $2.6 million ($0.01 per share) forthe same period of 2005.  The increase in net loss is mainly attributed tothe increase in operating costs per ounce and fewer ounces sold (1,899 ouncesor 4%).

**OUTLOOK**

*Full Year2007*

The Companyexpects to close the Queenstake-YGC business combination in the second quarterof 2007 (*see “2007 Subsequent Events” above.*)  Upon closure of the merger, the new Board ofDirectors and management of Yukon-Nevada Gold Corporation will determine theproduction outlook, exploration and capital investment levels, and strategicfocus in order to deliver maximum value from the Jerritt Canyon operation andassets.

If the Queenstake-YGC mergeris delayed or does not close during 2007, the Board of Directors and managementof the Company will release 2007 production estimate based on a revised mineplan for Jerritt Canyon to achieve cash self sufficiency during 2007 without asignificant investment in exploration, mine development or capital infrastructure.  The cost cutting measures undertaken in late2006 appear to be taking effect, however, ore tons mined and grade havedeclined over the past 15 months.  TheCompany expects that gold production will stabilize but at a reduced rate fromthe 2006 level.  The Company is analyzingthe full impact of the cost reduction measures implemented, developmentrequirements, mill shutdown and bull gear replacement timing issues, and otherproduction/cost improvement measures. The mill should be processing at full capacity, or approximately 1.5million tons per year, beginning in July 2007 upon completion of bull gearreplacement.  All Newmont purchased orestockpiles existing as of March 29, 2007 should be processed by year-end2007.  During the second quarter of 2007,the mill is scheduled to be down for 10 days to allow for annual maintenanceand bull gear replacement.  During thescheduled mill down-time, the mines will continue to mine ore and accumulatethe ore in stockpiles adjacent to the mill that will then be processed duringthe third quarter of 2007.  Cashoperating costs are expected to continue to be adversely affected by increasesin basic commodity prices.

If theQueenstake-YGC merger is delayed or does not close, it is unlikely that asignificant exploration or sustaining capital program could be funded withoutseeking additional financing.

Royalties paid tocertain land owners in the Jerritt Canyon District are expected to beapproximately $2 per ounce at a gold price of $600 to $650 per ounce.

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**CRITICAL ACCOUNTING ESTIMATES**

The preparation ofits consolidated financial statements requires the Company to use estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses.  The Company’s criticalaccounting estimates relate to the estimate of gold reserves and assetretirement obligations.

The Companycapitalized the Jerritt Canyon acquisition costs, valuing the related non-cashconsideration at fair value.  The Company’spolicy is to capitalize long-term mine development and reserve expansionprogram costs incurred within, or contiguous to, known gold ore reserves.  These costs constitute a significant portionof the Jerritt Canyon property, plant and equipment and are amortized on aunits-of-production basis over estimated gold reserves.  Under this method, depletion cost, andtherefore net book values of mining property and capitalized development isdirectly affected by the Company’s estimate of proven and probable mineralreserves at Jerritt Canyon.  In addition,the useful lives of plant and equipment may be limited by the expected minelife which is dependent on mineral reserves. The Company engaged an independent consulting firm, to review theCompany’s mineral reserve and resource estimates, and to prepare a technicalreport in conformance with Canadian National Instrument 43-101, which isplanned to be filed in the second quarter of 2007.  If these estimates prove inaccurate, or ifthe Company revises its mine plan at Jerritt Canyon due to changes in themarket price of gold or significant changes in mine operating costs, and as aresult the estimate of mineral reserves is reduced, the Company could berequired to write-down the book value of the Jerritt Canyon property, plant andequipment, and/or to increase the amount of depreciation and depletion expense,both of which would reduce the Company’s earnings and net assets.  The Company does not currently anticipate anysignificant impact to the Jerritt Canyon mineral reserve estimate.

The Company alsoassesses Jerritt Canyon property, plant and equipment for impairment at the endof each accounting period.  If priorestimates of future cash flows prove to be inaccurate, due to reductions in theprice of gold, increases in the costs of production, and/or reductions in theamount of recoverable reserves, the Company would be required to write-down therecorded value of Jerritt Canyon property, plant and equipment, which couldreduce the Company’s earnings and net assets.

The Company has anobligation to reclaim the Jerritt Canyon property after the minerals have beenfully depleted, and has estimated the present value of the costs to comply withexisting reclamation standards.  It is possiblethat the Company’s estimate of its ultimate reclamation liabilities couldchange as a result of changes in regulations; the extent of environmentalremediation required or completed the means of reclamation or changes in costestimates.  Currently, reclamation andclosure obligations are expected to be funded by the Company by means of therestricted cash account established with AIG.

**FINANCIALINSTRUMENTS AND OTHER INSTRUMENTS**

The fair value of the Company’s current financial assets, excluding marketable securities, and current financial liabilities approximate their carrying values due to their short-term maturities.

The profitability of the Company is directly related to the market priceof gold.  The Company from time to timepurchases non-hedge derivative financial instruments, or gold put optioncontracts, to protect against the risk of falling gold prices.  The put option premiums related to the putoption contracts are recognized as a deferred charge and liability onacquisition and expensed to operations and paid, respectively, in the period inwhich the contracts expire.  If the goldprice is lower than the strike price of the respective purchased put option onthe expiry date, gold is sold at the strike price of the put option.  If the market gold price is higher that thestrike price of the put option, the option expires without exercise.  These derivate financial instruments are fairvalued at each reporting date and changes in fair value are recorded inoperating expenses.  The Company does notuse gold forward sales contracts to fix future gold prices realized.  Other than short-term (less than 3-weeks)price protection obligations related to the Facility financing, the Company didnot purchase any gold put options during 2006 or subsequently.

Marketable securities,consisting of 25,000 shares of Nevada Pacific Gold, Ltd. a TSX Venture Exchangelisted gold company, are carried at market value.

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**OUTSTANDINGSHARE DATA**

The Company isauthorized to issue an unlimited number of common shares without par value.Outstanding share data are illustrated in Table 8.

Table 8 —Outstanding Share Data
| **Units in thousands**         | ** ** | **Common shares  issued and  outstanding** | ** ** | **Common share  purchase warrants** | ** ** | **Common share  purchase options** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| Balance,  December 31, 2006              |       | 583,706                                              |       | 74,462                                        |       | 16,887                                       |       |
| Common shares  issued with debt issuance |       | 1,465                                                |       | —                                        |       | —                                       |       |
| Warrants issued  with debt issuance      |       | —                                               |       | 10,000                                        |       | —                                       |       |
| Warrants expired                         |       | —                                               |       | (45,850                                       | )          | —                                       |       |
| Options expired                          |       | —                                               |       | —                                        |       | (410                                         | )          |
| Balance, March 29,  2007            |       | 585,171                                              |       | 38,612                                        |       | 16,477                                       |       |

 

**CONTROLSAND PROCEDURES**

The Company maintainsa system of internal controls and procedures over financial reporting designedto safeguard assets and ensure the financial information is reliable.

As of December 31,2006, an evaluation was carried out by the Company’s Chief Executive Officerand Chief Financial Officer, of the effectiveness of the Company’s disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under theSecurities Exchange Act of 1934, as amended). Based on that evaluation, the Company’s Chief Executive Officer andChief Financial Officer concluded that the disclosure controls and procedureswere effective to ensure that information required to be disclosed by theCompany in reports that it files or submits under the Exchange Act is (i)accumulated and communicated to the Company’s management, including its ChiefExecutive Officer and Chief Financial Officer, to allow timely decisionsregarding required disclosure, and (ii) recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms.

During the courseof evaluating controls and procedures relating to financial reporting,management identified and corrected a material weakness in internal controlswhere the review, approval and quality control of critical financial accountingspreadsheets were not effective. Additional controls and procedures to strengthen internal controls inthis area were implemented by the Company to prevent a similar material errorfrom occurring in the future.

Because of theinherent limitations in all control systems, including resource constraints andcosts, these systems cannot provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been prevented or detected.

The Company alsomaintains internal control over financial reporting. The term “internal controlover financial reporting,” as defined by Rule 13a-15(f) of the Exchange Act,means a process designed by, or under the supervision of, our principal executiveand principal financial officers, or persons performing similar functions, andeffected by our board of directors, management and other personnel, to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withGAAP, and includes those policies and procedures that:

·                  Pertain to themaintenance of records that in reasonable detail accurately and fairly reflectthe transactions and dispositions of our assets;

·                  Providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with GAAP, and that ourreceipts and expenditures are being made only in accordance with authorizationsof our management and directors; and

·                  Providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or

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disposition of our assets that could have a materialeffect on our Consolidated Financial Statements.

Section 404 of theSarbanes-Oxley Act of 2002 requires that the Company include annually amanagement report on internal control over financial reporting and such reportis included below.

Management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange Act Rule 13a-15(f).The evaluation of the effectiveness of our internal control over financialreporting is based upon the criteria established in*Internal Control - Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”).Based on the Company’s evaluation under the COSO framework, except for thematerial weakness in internal controls over financial accounting spreadsheetsdiscussed above, which was remediated, management has concluded that internalcontrols over financial reporting are effective as of December 31, 2006.

The Company’s CEOis required to annually file a certification with the AmericanStock Exchange (“AMEX”),certifying compliance with the corporate governance listing standards of theAMEX. During 2006, the Company’s CEO filed such annual certification with theAMEX, which was not qualified in any respect, indicating that they were notaware of any violations by the Company of the AMEX corporate governance listingstandards.  The Company’s CEO and CFO arealso required to, among other things, file quarterly certifications with theSEC regarding the quality of our public disclosures, as required by Section 302of the Sarbanes-Oxley Act. Such certifications for the year ended December 31,2006 have been filed as exhibits 31.1 and 31.2 to this Annual Report on Form40-F.

**ADDITIONALINFORMATION**

Additionalinformation relating to the Company, including the Company’s Annual InformationForm and annual audited financial statements are on SEDAR at www.sedar.com andon EDGAR at www.sec.gov.   Mineral “resources”or “resource” used in this document are as defined in National Instrument43-101 of the Canadian Securities Administrators and are not terms recognizedor defined by the U.S. Securities and Exchange Commission (SEC). Mineralresources are not reserves and do not have demonstrated economic viability. For further information, please refer to the risk factors and definitionsof reserves and resources in the Company’s filings on SEDAR and with the SEC onthe Company’s website, www.queenstake.com. The Qualified Person for thetechnical information contained in this document is Mr. Dorian L. (Dusty)Nicol, President and Chief Executive Officer of Queenstake. The Company’sprevious technical report on reserves and resources with respect to CanadianNational Instrument 43-101 was filed on SEDAR on May 4, 2006. This report isavailable under Investor Information/Financial Information/SEDAR filings atwww.queenstake.com or at www.sedar.com under the Company’s name.  The Company will be filing an updatedtechnical report on reserves and resources in the second quarter of 2007.

*CautionaryStatement Regarding Forward-Looking Statements*

This document contains “forward-lookingstatements” within the meaning of Section 21E of the Securities Exchange Act ofthe United States.  Forward-looking statements include, but are notlimited to, statements with respect to anticipated commencement dates of miningor metal production operations, projected quantities of future metalproduction, anticipated production rates and mine life, operating efficiencies,costs and expenditures and conversion of mineral resources to reserves. In certain cases, forward-looking statements can be identified by the use ofwords such as “could”, “expect”, “believe”, “will”, “estimate”, “anticipate”, “project”and similar expressions and statements relating to matters that are nothistorical facts.  Forward-looking statements include, without limitation,(i) estimates and projections of future gold production and cash operatingcosts, (ii) estimates of savings, cost reductions and mill refurbishment andmaintenance costs, (iii) estimates related to financial performance, includingcash flow, capital expenditures, exploration and administrative costs, (iv)estimates and projections of mineral reserves and resources, (v) estimates andopinions regarding geologic and mineralization interpretation, (vi) estimatesof exploration investment, scope of exploration programs and timing of projectadvancement, commencement of production and availability of drills and otherequipment, (vii) estimates of reclamation and closure costs, and (viii)statements relating to the proposed combination of the Company and YGCResources.  Forward-looking statements are subject to risks, uncertaintiesand other factors, including gold and other commodity

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price volatility, politicaland operational risks, mine development, production and cost estimate risks, risksrelating to the proposed combination of the Company and YGC Resources and otherrisks, including those described under the heading “Risk Factors” in theRenewal Annual Information Form and in the Management’s Discussion andAnalysis, included herein as Exhibits 1 and 3, respectively, which may causethe actual results, performance or achievements of the Company to be materiallydifferent from any future results, performance or achievements expressed orimplied by such forward-looking statements.  Although the Company hasattempted to identify important factors that could cause actual actions, eventsor results to differ materially from those described in forward-lookingstatements, there may be other factors that cause actions, events or resultsnot to be as anticipated, estimated or intended.  There can be noassurance that forward-looking statements will prove to be accurate, as actualresults and future events could differ materially from those anticipated insuch statements.  Important factors that could cause actual results todiffer materially from Queenstake’s expectations are disclosed in Queenstakedocuments filed from time to time with Canadian Regulatory authorities onSEDAR, the U.S. Securities and Exchange Commission (SEC) and other regulatoryauthorities.  Accordingly, readers should not place undue reliance onforward-looking statements.  The Company undertakes no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise.

 

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