Exhibit 1.3

AUDITORS' REPORT

To
the Board of Directors of North American Palladium Ltd.

We
have audited the consolidated balance sheets of North American Palladium Ltd. ("the Company") as at December 31, 2009 and 2008 and the consolidated statements of operations,
comprehensive loss and deficit, cash flows and shareholders' equity for each of the years in the three-year period ended December 31, 2009. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). 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, 2009 and 2008 and the results of its
operations and its cash flows for each of the years in the three-year period ended December 31, 2009 in accordance with Canadian generally accepted accounting principles.



/s/
KPMG LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
March 29, 2010

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EXHIBIT 1

Consolidated Balance Sheets (expressed in thousands of Canadian dollars)

|                                                            
|------------------------------------------------------------
|December 31                                                 
|                                                            
|ASSETS                                                      
|Current Assets                                              
|Cash and cash equivalents                                   
|Concentrate awaiting settlement  Note 4                    
|Taxes receivable                                            
|Inventories  Note 5                                        
|Other assets  Note 6                                       
|                                                            
|                                                            
|Mining interests  Note 7(a)                                
|Reclamation deposits  Note 8                               
|                                                            
|Total Assets                                                
|                                                            
|LIABILITIES AND SHAREHOLDERS' EQUITY                        
|Current Liabilities                                         
|Accounts payable and accrued liabilities                    
|Current portion of obligations under capital leases  Note 9
|Senior credit facilities  Note 10                          
|                                                            
|                                                            
|Taxes payable  Note 20                                     
|Asset retirement obligations  Note 8                       
|Obligations under capital leases  Note 9                   
|Future mining tax liability                                 
|                                                            
|Total Liabilities                                           
|Shareholders' Equity                                        
|Common share capital and purchase warrants  Note 12        
|Stock options  Note 12                                     
|Contributed surplus                                         
|Deficit                                                     
|                                                            
|Total shareholders' equity                                  
|                                                            
|                                                            
|                                                            

Commitments  Notes 8 and 16
Contingencies  Note 19

See accompanying notes to the consolidated financial statements

On
Behalf of the Board of Directors

|GRAPHIC                   |  | GRAPHIC                 
|------------------------- |  | ------------------------
|André J. DouchaneDirector |  | Steven R. BerlinDirector

27

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Consolidated Statements of Operations,
Comprehensive Loss and Deficit (expressed in thousands of Canadian dollars, except share and per share amounts)

|                                                           
|-----------------------------------------------------------
|Year ended December 31                                     
|                                                           
|Revenue  before pricing adjustments                       
|Pricing adjustments:                                       
|                                                           
|                                                           
|                                                           
|Revenue  after pricing adjustments Note 17               
|                                                           
|Operating expenses                                         
|Care and maintenance costs                                 
|Production costs                                           
|Inventory pricing adjustment  Note 5                      
|Smelter treatment, refining and freight costs              
|Amortization  Note 7(b)                                   
|Loss (gain) on disposal of equipment                       
|Asset retirement obligation accretion  Note 8             
|Asset impairment charge  Note 7(c)                        
|Insurance recovery  Note 13                               
|                                                           
|Total operating expenses                                   
|                                                           
|Income (loss) from mining operations                       
|                                                           
|Other expenses                                             
|General and administration                                 
|Exploration                                                
|Interest and other costs (income)  Note 18                
|Foreign exchange loss (gain)                               
|                                                           
|Total other expenses                                       
|                                                           
|Loss before taxes                                          
|Income and mining tax expense (recovery)  Note 20         
|                                                           
|Net loss and comprehensive loss for the year               
|Deficit, beginning of year, as previously reported         
|Adoption of new accounting standards for inventory  Note 2
|                                                           
|Deficit, end of year                                       
|                                                           
|Net loss per share                                         
|                                                           
|                                                           
|Weighted average number of shares outstanding              
|                                                           
|                                                           

See accompanying notes to the consolidated financial statements

28

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Consolidated Statements of Cash Flows (expressed in thousands of Canadian dollars)

|                                                          
|----------------------------------------------------------
|Year ended December 31                                    
|                                                          
|Cash provided by (used in)                                
|Operations                                                
|Net loss for the year                                     
|Operating items not involving cash                        
|                                                          
|                                                          
|                                                          
|                                                          
|                                                          
|                                                          
|                                                          
|                                                          
|                                                          
|                                                          
|                                                          
|                                                          
|                                                          
|                                                          
|Changes in non-cash working capital  Note 21(a)          
|                                                          
|                                                          
|                                                          
|Financing Activities                                      
|Issuance of common shares and warrants, net of issue costs
|Repayment of senior credit facilities                     
|Repayment of obligations under capital leases             
|Reclamation deposit                                       
|                                                          
|                                                          
|                                                          
|Investing Activities                                      
|Acquisition costs associated with Cadiscor Resources Inc. 
|Additions to mining interests                             
|Proceeds on disposal of mining interests                  
|                                                          
|                                                          
|                                                          
|Increase (decrease) in cash and cash equivalents          
|Cash and cash equivalents, beginning of year              
|                                                          
|Cash and cash equivalents, end of year                    
|                                                          
|Cash and cash equivalents consisting of:                  
|Cash                                                      
|Short-term investments                                    
|                                                          
|                                                          
|                                                          

Supplementary information  Note 21(b), (c) (d) and (e)

See
accompanying notes to the consolidated financial statements

29

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Consolidated Statements
of Shareholders' Equity (expressed in thousands of Canadian dollars, except share amounts)

|                                              | Number of
shares                                      |            | Capital
stock |        | Shares
issuable |        | Stock
options |       | Warrants |        | Equity
component
of
convertible
notes
payable |   | Contributed
surplus |       | Deficit   |   | Total
shareholders'
equity |        | 
|--------------------------------------------- | ----------------------------------------------------- | ---------- | ------------- | ------ | --------------- | ------ | ------------- | ----- | -------- | ------ | --------------------------------------------- | - | ------------------- | ----- | --------- | - | -------------------------- | ------ | 
|                                             
|Balance, December 31, 2008                    | 85,158,975                                            |            | $469,214      |        | $2,080          |        | $2,305        |       | $14,092  |        | $                                            |   | $12,336             |       | $(383,126 | ) | $116,901                   |        | 
|Common shares issued/issuable:                |                                                       |            |               |        |                 |        |               |       |          |        |                                               |   |                     |       |           |   |                            |        | 
|                                              | On acquisition of Cadiscor                            | 14,457,685 |               | 27,325 |                 |       |               |      |          |       |                                               |  |                     |      |           |  |                            | 27,325 | 
|                                              | Pursuant to conversion of convertible debenture       | 2,457,446  |               | 4,644  |                 |       |               |      |          |       |                                               |  |                     |      |           |  |                            | 4,644  | 
|                                              | For principal repayments on convertible notes payable | 1,486,900  |               | 2,062  |                 | (2,062 | )             |      |          |       |                                               |  |                     |      |           |  |                            |       | 
|                                              | For interest payments on convertible notes payable    | 14,738     |               | 18     |                 | (18    | )             |      |          |       |                                               |  |                     |      |           |  |                            |       | 
|                                              | Pursuant to 2009 unit offering, net of issue costs    | 18,400,000 |               | 51,333 |                 |       |               |      |          |       |                                               |  |                     |      |           |  |                            | 51,333 | 
|                                              | Private placement of flow-through shares (net)        | 4,000,000  |               | 14,077 |                 |       |               |      |          |       |                                               |  |                     |      |           |  |                            | 14,077 | 
|Warrants issued:                              |                                                       |            |               |        |                 |        |               |       |          |        |                                               |   |                     |       |           |   |                            |        | 
|                                              | On acquisition of Cadiscor                            |           |               |       |                 |       |               |      |          | 1,168  |                                               |  |                     |      |           |  |                            | 1,168  | 
|                                              | Pursuant to 2009 unit offering, net of issue costs    |           |               |       |                 |       |               |      |          | 2,243  |                                               |  |                     |      |           |  |                            | 2,243  | 
|                                              | Warrants exercised                                    | 1,115,997  |               | 3,167  |                 |       |               |      |          | (866   | )                                             |  |                     |      |           |  |                            | 2,301  | 
|Warrants expired:                             |                                                       |            |               |        |                 |        |               |       |          |        |                                               |   |                     |       |           |   |                            |        | 
|                                              | Pursuant to 2007 unit offering                        |           |               |       |                 |       |               |      |          | (6,053 | )                                             |  |                     | 6,053 |           |  |                            |       | 
|Stock options issued:                         |                                                       |            |               |        |                 |        |               |       |          |        |                                               |   |                     |       |           |   |                            |        | 
|                                              | On acquisition of Cadiscor                            |           |               |       |                 |       |               | 1,014 |          |       |                                               |  |                     |      |           |  |                            | 1,014  | 
|                                              | Stock options exercised                               | 85,800     |               | 113    |                 |       |               |      |          |       |                                               |  |                     |      |           |  |                            | 113    | 
|Fair value of stock options exercised         |                                                      |            | 119           |        |                |        | (119          | )     |         |        |                                              |   |                    |       |          |   |                           |        | 
|Fair value of stock options cancelled         |                                                      |            |              |        |                |        | (1,301        | )     |         |        |                                              |   | 1,219               |       |          |   | (82                        | )      | 
|Stock-based compensation expense              | 205,510                                               |            | 433           |        |                |        | 805           |       |         |        |                                              |   |                    |       |          |   | 1,238                      |        | 
|Net loss for the year ended December 31, 2009 |                                                      |            |              |        |                |        |              |       |         |        |                                              |   |                    |       | (30,014   | ) | (30,014                    | )      | 
|                                             
|Balance, December 31, 2009                    | 127,383,051                                           |            | $572,505      |        | $              |        | $2,704        |       | $10,584  |        | $                                            |   | $19,608             |       | $(413,140 | ) | $192,261                   |        | 
|                                             

|
|

|                                              | Number of
shares                                                   |           | Capital
stock |        | Shares
issuable |       | Stock
options |   | Warrants |     | Equity
component
of
convertible
notes
payable |        | Contributed
surplus |       | Deficit   |      | Total
shareholders'
equity |        |  
|--------------------------------------------- | ------------------------------------------------------------------ | --------- | ------------- | ------ | --------------- | ----- | ------------- | - | -------- | --- | --------------------------------------------- | ------ | ------------------- | ----- | --------- | ---- | -------------------------- | ------ | -
|                                             
|Balance, December 31, 2007                    | 75,770,570                                                         |           | $430,793      |        | $              |       | $1,673        |   | $13,193  |     | $6,044                                        |        | $6,292              |       | $(222,044 | )    | $235,951                   |        |  
|                                              | Transitional adjustment on adoption of inventory standard  Note 2 |          |               |       |                 |      |               |  |          |    |                                               |       |                     |      |           | (403 | )                          | (403   | )
|Common shares issued/issuable:                |                                                                    |           |               |        |                 |       |               |   |          |     |                                               |        |                     |       |           |      |                            |        |  
|                                              | For principal repayments on convertible notes payable              | 6,111,869 |               | 28,270 |                 | 2,062 |               |  |          |    |                                               | (6,044 | )                   | 6,044 |           |     |                            | 30,332 |  
|                                              | For interest payments on convertible notes payable                 | 165,185   |               | 714    |                 | 18    |               |  |          |    |                                               |       |                     |      |           |     |                            | 732    |  
|                                              | Pursuant to 2007 unit offering, net of issue costs                 | 2,800,000 |               | 9,575  |                 |      |               |  |          |    |                                               |       |                     |      |           |     |                            | 9,575  |  
|                                              | Tax effect of flow-through shares                                  |          |               | (1,452 | )               |      |               |  |          |    |                                               |       |                     |      |           |     |                            | (1,452 | )
|Warrants issued:                              |                                                                    |           |               |        |                 |       |               |   |          |     |                                               |        |                     |       |           |      |                            |        |  
|                                              | Pursuant to 2007 unit offering, net of issue costs                 |          |               |       |                 |      |               |  |          | 899 |                                               |       |                     |      |           |     |                            | 899    |  
|                                              | Warrants exercised                                                 | 100       |               | 1      |                 |      |               |  |          |    |                                               |       |                     |      |           |     |                            | 1      |  
|Stock-based compensation expense              | 311,251                                                            |           | 1,313         |        |                |       | 632           |   |         |     |                                              |        |                    |       |          |      | 1,945                      |        |  
|Net loss for the year ended December 31, 2008 |                                                                   |           |              |        |                |       |              |   |         |     |                                              |        |                    |       | (160,679  | )    | (160,679                   | )      |  
|                                             
|Balance, December 31, 2008                    | 85,158,975                                                         |           | $469,214      |        | $2,080          |       | $2,305        |   | $14,092  |     | $                                            |        | $12,336             |       | $(383,126 | )    | $116,901                   |        |  
|                                             

See accompanying notes to the consolidated financial statements

30

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Consolidated Statements
of Shareholders' Equity (expressed in thousands of Canadian dollars, except share amounts)

|                                              | Number of
shares                                      |            | Capital
stock |        | Stock
options |   | Warrants |       | Equity
component
of
convertible
notes
payable |        | Contributed
surplus |       | Deficit   |   | Total
shareholders'
equity |        |  
|--------------------------------------------- | ----------------------------------------------------- | ---------- | ------------- | ------ | ------------- | - | -------- | ----- | --------------------------------------------- | ------ | ------------------- | ----- | --------- | - | -------------------------- | ------ | -
|                                             
|Balance, December 31, 2006                    | 52,947,693                                            |            | $331,705      |        | $1,269        |   | $8,038   |       | $12,336                                       |        | $                  |       | $(193,364 | ) | $159,984                   |        |  
|Common shares issued:                         |                                                       |            |               |        |               |   |          |       |                                               |        |                     |       |           |   |                            |        |  
|                                              | For principal repayments on convertible notes payable | 3,120,997  |               | 26,180 |               |  |          |      |                                               | (6,292 | )                   | 6,292 |           |  |                            | 26,180 |  
|                                              | For interest payments on convertible notes payable    | 341,528    |               | 2,644  |               |  |          |      |                                               |       |                     |      |           |  |                            | 2,644  |  
|                                              | Private placement of flow-through shares (net)        | 550,000    |               | 5,686  |               |  |          |      |                                               |       |                     |      |           |  |                            | 5,686  |  
|                                              | Tax effect of flow-through shares                     |           |               | (1,114 | )             |  |          |      |                                               |       |                     |      |           |  |                            | (1,114 | )
|                                              | Pursuant to unit offering, net of issue costs         | 18,666,667 |               | 64,461 |               |  |          |      |                                               |       |                     |      |           |  |                            | 64,461 |  
|Warrants issued:                              |                                                       |            |               |        |               |   |          |       |                                               |        |                     |       |           |   |                            |        |  
|                                              | Pursuant to unit offering, net of issue costs         |           |               |       |               |  |          | 5,155 |                                               |       |                     |      |           |  |                            | 5,155  |  
|Stock options exercised                       | 5,000                                                 |            | 17            |        |              |   |         |       |                                              |        |                    |       |          |   | 17                         |        |  
|Fair value of stock options exercised         |                                                      |            | 10            |        | (10           | ) |         |       |                                              |        |                    |       |          |   |                           |        |  
|Stock-based compensation expense              | 138,685                                               |            | 1,204         |        | 414           |   |         |       |                                              |        |                    |       |          |   | 1,618                      |        |  
|Net loss for the year ended December 31, 2007 |                                                      |            |              |        |              |   |         |       |                                              |        |                    |       | (28,680   | ) | (28,680                    | )      |  
|                                             
|Balance, December 31, 2007                    | 75,770,570                                            |            | $430,793      |        | $1,673        |   | $13,193  |       | $6,044                                        |        | $6,292              |       | $(222,044 | ) | $235,951                   |        |  
|                                             

See accompanying notes to consolidated financial statements.

31

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Notes to the Consolidated Financial Statements for the years ended December 31, 2009, 2008 and 2007(expressed in thousands of Canadian dollars, except per share
 amounts and metal prices)

1.  NATURE OF OPERATIONS

North American Palladium Ltd. ("NAP" or "the Company") is a diversified precious metals company that owns two mines and various mineral properties in mining friendly
jurisdictions. Its principal asset is the Lac des Iles ("LDI") palladium mine, located in the Thunder Bay District in Ontario, which commenced operations in 1993. NAP's other significant asset is the
Sleeping Giant gold mine located in the Abitibi region in Quebec, Canada, which reached commercial production on January 1, 2010.

The
Company's financial position and operating results are directly affected by the market price of palladium and gold in relation to the Company's production costs. The prices of palladium and gold,
foreign currency, and by-product metals (platinum, nickel and copper) fluctuate widely and are affected by numerous factors beyond the Company's control. On October 21, 2008, the
Company announced that, due to declining metal prices, it was temporarily placing its LDI mine on care and maintenance effective October 29, 2008. The closure resulted in the layoff of
approximately 350 employees. On December 8, 2009, the Company announced its plans to resume operations in the second quarter of 2010 in the Roby underground zone at the LDI mine.

The
LDI mine consists of an open pit mine, an underground mine and processing facilities. The primary deposits on the property are the Roby Zone and the Offset Zone. The Company began mining the Roby
Zone in 1993 using open pit mining methods. In April 2006, the underground mine went into commercial production to access a higher grade underground portion of the Roby Zone.

In
addition to mining, development and exploration activities around the LDI property, the Company has historically conducted grassroots exploration activities within the Province of Ontario and
elsewhere as opportunities are identified.

As
a result of the acquisition of Cadiscor Resources Inc. ("Cadiscor") in May 2009, the Company now owns the Sleeping Giant gold mine consisting of an underground mine and a mill. The
Sleeping Giant gold mine was in production from 1988 to 1991 and 1993 to September 2008, when it was placed on care and maintenance by its previous owner. The mine is accessed by a
four-compartment production shaft. The mill is a carbon-in-leach plant with a nameplate capacity of 900 tonnes per day and was operating at approximately
800 tonnes per day in August 2008 by its previous owner.

The
Company's Québec based holdings now consist of the Discovery Project, Flordin, Cameron Shear and Florence Properties, Laflamme Gold Property, and Dormex and Harricana properties.

2.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). All amounts are in Canadian
dollars unless otherwise noted. The more significant accounting policies are summarized as follows:

Basis of Consolidation

These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Lac des Iles Mines Ltd. ("LDI"), North American Palladium
Arctic Services Oy and Cadiscor Resources Inc. All inter-company balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Significant estimates and assumptions relate to
recoverability of mining operations and mineral exploration properties. While management believes that these estimates and assumptions are reasonable, actual results could vary significantly.

32

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Certain
assumptions are dependent upon reserves, which represent the estimated amount of ore that can be economically and legally extracted from the Company's properties. In order to estimate
reserves, assumptions are required about a range of geological, technical and economic factors, including quantities, grades, production techniques, recovery rates, production costs, transportation
costs, commodity demand, commodity prices and exchange rates. Estimating the quantity and/or grade of reserves requires the size, shape and depth of ore bodies to be determined by analyzing geological
data such as drilling samples. This process may require complex and difficult geological judgments to interpret the data.

Because
the economic assumptions used to estimate reserves change from period to period, and because additional geological data is generated during the course of operations, estimates of reserves may
change from period to period. Changes in reported reserves may affect the Company's financial results and financial position in a number of ways, including the following:



Revenue and Concentrate Awaiting Settlement

Revenue from the sale of palladium and by-product metals from the LDI mine is provisionally recognized net of royalties based on quoted market prices upon the
delivery of concentrate to the smelter, which is when title transfers and the rights and obligations of ownership pass. The Company's smelter contract provides for final prices to be determined by
quoted market prices in a period subsequent to the date of concentrate delivery. Variations from the provisionally priced sales are recognized as revenue adjustments when final pricing is determined.
Concentrate awaiting settlement is an accounts receivable that is recorded net of estimated treatment and refining costs which is subject to final assay adjustments.

Revenue
from the sale of gold-silver doré bars from Sleeping Giant is recognized when the significant risks and rewards of ownership have transferred to the buyer and
selling prices are known or can be reasonably estimated.

Concentrate, Crushed and Broken Ore Stockpiles, Gold and Supplies Inventories

Concentrate, crushed and broken ore stockpiles, and gold inventory are valued at the lower of average production cost (including an allocation of the amortization of production
related assets) and net realizable value. Crushed and broken ore stockpiles represent coarse ore that has been extracted from the mine and is available for further processing. The amount of stockpiled
ore that is not expected to be processed within one year, if any, is shown as a long-term asset. Gold inventory is comprised of unprocessed ore on surface, in stockpiles or bins,
unrecovered gold in either carbon or solution within the milling circuit, and gold-silver doré bars produced but not sold as at the reporting date. Supplies inventory is
valued at the lower of average cost and net realizable value.

Mining Interests

Plant and equipment are recorded at cost with amortization generally provided either on the unit-of-production method over the proven and probable
reserves to which they relate or on a straight-line basis over their estimated useful lives, ranging from three to seven years. The Company capitalizes interest on major projects where
direct indebtedness has occurred.

33

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The
Company leases certain equipment under capital leases. These leases are capitalized based on the lower of fair market value and the present value of future minimum lease payments. The
corresponding liabilities are recorded as obligations under capital leases. This equipment is being amortized on the same basis as described above.

Mining
leases and claims, royalty interests, and other development costs are recorded at cost and are amortized on the unit-of-production method over the proven and probable
reserves.

Exploration
costs relating to properties are charged to earnings in the year in which they are incurred. When it is determined that a mining property can be economically developed as a result of
established proven and probable reserves, future development and exploration expenditures are capitalized. Determination as to reserve potential is based on the results of studies, which indicate
whether production from a property is economically feasible. Upon commencement of commercial production of a development project these costs are amortized using the
unit-of-production method over the proven and probable reserves. Capitalized exploration costs, net of salvage values, relating to a property that is later abandoned or
considered uneconomic for the foreseeable future, are written off in the period the decision is made.

The
decision on when commercial production is reached is based on a range of criteria that is considered relevant to the specific situation, including: a pre-determined percentage of
design capacity for the mine and mill; achievement of continuous production, ramp-ups, or other output; and expected net margins during the pre-production period. In a phased
mining approach, consideration is given to milestones achieved at each phase of completion. Management assesses the operation's ability to sustain production over a period of approximately one to
three months, depending on the complexity related to the stability of continuous operation. Commercial production is considered to have commenced at the beginning of the month in which the criteria
are met. No amortization is provided in respect of mine development expenditures until commencement of economical commercial production. Any production revenue earned prior to commercial production,
net of related costs, is offset against the development costs.

Impairment of Long-lived Assets

Each year, the Company reviews mining plans for the remaining life of each property. Significant changes in the mine plan can occur as a result of mining experience, new
discoveries, changes in mining methods and rates, process changes, investments in new equipment and technology and other factors. The Company reviews its accounting estimates and adjusts these
estimates based on year-end recoverable minerals determined by the Company, in the current mine plan.

The
Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances arise that may result in impairments in the carrying value of those assets.
Impairment is considered to exist if total estimated future undiscounted cash flows are less than the carrying amount of the asset. Future cash flows are estimated based on quantities of recoverable
minerals, expected palladium, gold, and other commodity prices and expected foreign exchange rates (considering current, historical and expected future prices and foreign exchange rates and related
factors), production levels and cash costs of production and capital and reclamation expenditures, all based on detailed life-of-mine plans and projections. The term
"recoverable minerals" refers to the estimate of recoverable production from measured, indicated and inferred mineral resources that are considered economically mineable and are based on management's
confidence in converting such resources to proven and probable reserves. Assumptions underlying future cash flow estimates are subject to risk and uncertainty. Any differences between significant
assumptions and market conditions such as metal prices, exchange rates, recoverable metal, and/or the Company's operating performance could have a material effect on the Company's ability to recover
the carrying amounts of its long-lived assets resulting in possible additional impairment charges.

Asset Retirement Obligations

Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The amount of the liability is subject to re-measurement at each
reporting period. The liability is accreted over

34

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time
through periodic charges to earnings. In addition, the asset retirement cost is capitalized as part of mining interests and amortized over the estimated life of the mine.

Stock-Based Compensation Plans

The Company has stock-based compensation plans which consist of a group registered retirement savings plan described in note 12(c), a corporate stock option plan which is
described in note 12(e) and a Restricted Share Unit ("RSU") Plan which is described in note 12(g). The Company recognizes as an expense the cost of stock-based compensation based
on the estimated fair value of new stock options granted to employees and directors. The initial fair value of each stock option and RSU, is assigned based on the fair market value of the Company's
common shares at the grant date. Amounts related to RSU obligations are recorded as a liability on the Company's consolidated balance sheet and recognized over the vesting period. The value of the RSU
liability is adjusted to reflect changes in the market value of the Company's common shares at each reporting date.

Translation of Foreign Currency

The reporting and functional currency of the Company and its subsidiaries is the Canadian dollar. Accordingly, the Company translates monetary assets and liabilities denominated
in foreign currency at the rate of exchange prevailing at the consolidated balance sheet dates, non-monetary assets and liabilities denominated in foreign currency at the rate in effect at
the date the transaction occurred and revenues and expenses denominated in foreign currency at the exchange rate in effect
during the applicable accounting period. All resulting foreign exchange gains and losses are recorded in the consolidated statements of operations, comprehensive loss and deficit.

Income Taxes

The Company follows the asset and liability method of accounting for income taxes. Under this method, future tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to
reverse. The effect on future tax liabilities and assets of a change in tax rates is recognized in income in the period that the change occurs. The Company provides a valuation allowance for future
tax assets when it is more likely than not that some portion or all of the future tax assets will not be realized.

Cash and Cash Equivalents

Cash and cash equivalents are stated at fair value and include cash on account less outstanding cheques, demand deposits and short-term guaranteed investments with
original maturities of three months or less.

Deferred Financing Costs

Deferred financing costs represent the costs of negotiating and securing the Company's long-term debt facilities. The Company records all transaction costs for
financial assets and financial liabilities as a reduction of the related asset or liability and the effective interest rate method is used to amortize these costs to operations.

Basic and Diluted Loss Per Share

Basic loss per common share is computed by dividing the loss for the period by the weighted average number of common shares outstanding during the reporting period. Diluted loss
per common share is computed using the treasury stock method whereby the weighted average number of shares outstanding is increased to include additional common shares from the assumed exercise of
stock options, convertible notes and common share purchase warrants (equity instruments), if dilutive. The number of additional common shares is calculated by assuming that outstanding equity
instruments were exercised and that proceeds from such exercises were used to acquire shares of common stock at the average market price during the reporting period. These common equivalent shares are
not included in the calculation of the weighted average number of shares outstanding for diluted loss per common share when the effect would be anti-dilutive.

35

---



Flow-Through Shares

The Company finances a portion of its exploration activities through the issue of flow-through shares. The Company renounces the deductions to investors and
accordingly records share issue costs related to the future tax liability of the temporary difference arising from the renunciation. As a result, share capital is reduced and future income tax
liabilities are increased by the estimated tax benefits when renounced by the Company to the investors, except to the extent that the Company has unused tax benefits on loss carry-forwards and tax
pools in excess of book value available for deduction against which a valuation allowance has been provided. In these circumstances, the future tax liability reduces the valuation allowance, if any,
and the reduction is recognized in earnings.

Adoption of New Accounting Standards

Inventories

The Canadian Institute of Chartered Accountants Handbook (CICA Handbook) Section 3031 establishes standards for the determination of inventory cost and its subsequent
recognition as an expense, including any write-down to net realizable value. In addition, in certain circumstances, write-downs of inventory previously recognized may be reversed. The
Company adopted this standard prospectively in accordance with the transitional provisions. On adoption of the new standard on January 1, 2008, an adjustment to supplies inventory of $3,529 was
recognized to reclassify items not meeting the definition of inventory, including major spare parts and insurance spares, to property, plant and equipment. A related increase to the 2008 opening
deficit of $403, net of taxes was recognized to adjust for accumulated amortization.

Further,
upon adoption of this standard the Company changed its valuation of supplies inventory from the lower of cost and replacement cost to the lower of cost and net realizable value. The change in
valuation had no impact on the Company's consolidated financial statements.

Prior
periods presented have not been restated as a result of the adoption of the standard.

Goodwill and Intangible Assets

In February 2008, the CICA issued Section 3064, "Goodwill and Intangible Assets", replacing Section 3062, "Goodwill and Other Intangible
Assets", and Section 3450, "Research and Development Costs". Section 3064 establishes standards for the recognition, measurement, presentation and disclosure of goodwill
subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. This new section is effective for years beginning on or after October 1, 2008. The adoption of
this standard did not have a material impact on the Company's consolidated financial statements.

Credit Risk and the Fair Value of Financial Assets and Financial Liabilities

Effective January 1, 2009, the Company adopted Emerging Issues Committee ("EIC") abstract 173 ("EIC-173"),Credit Risk and the Fair
Value of Financial Assets and Financial Liabilities. The abstract clarifies that an entity should take into account its own credit risk and counterparty credit risk in
determining the fair value of financial assets and financial liabilities, including derivative instruments. The Company's adoption of this abstract had no effect on the Company's consolidated
financial statements.

Mining Exploration Costs

Effective January 1, 2009, the Company adopted EIC-174,Mining Exploration Costs, which clarifies guidance
related to capitalization of exploration costs and impairment of capitalized costs. The Company's adoption of this abstract had no effect on the Company's consolidated financial statements.

Future Accounting Standards

Impact of International Financial Reporting Standards ("IFRS")

The Canadian Accounting Standards Board has confirmed January 1, 2011 as the date that International Financial Reporting Standards ("IFRS") will replace Canadian GAAP for
publicly accountable enterprises. As a result, the Company will report under IFRS for interim and annual periods beginning January 1, 2011, with comparative information for 2010 restated under
IFRS. Adoption of IFRS as Canadian GAAP will require the Company to make certain accounting policy choices and could materially impact our reported financial position and results of operations.

36

---



Business Combinations

In January 2009, the CICA issued Section 1582,Business Combinations, replacing Section 1581 of the same name.
The new section will apply prospectively to business combinations for which the acquisition date is on or after January 1, 2011. Section 1582, which provides the Canadian equivalent to
International Financial Reporting Standard 3,Business Combinations (January 2008), establishes standards for the accounting for a business
combination. Section 1582 requires business acquisitions (including non-controlling interests and contingent consideration) to be measured at fair value on the acquisition date,
generally requires acquisition-related costs to be expensed, requires gains from bargain purchases to be recorded in net (loss) earnings, and expands the definition of a business. As
Section 1582 will apply only to future business combinations, it will not have a significant effect on the Company's consolidated financial statements prior to such acquisitions.

Consolidated Financial Statements and Non-controlling Interests

In January 2009, the CICA issued Section 1601,Consolidated Financial Statements, and Section 1602, Non-controlling Interests, which together replace the existing Section 1600,Consolidated Financial
Statements, and provide the Canadian equivalent to International Accounting Standard 27,Consolidated and Separate Financial Statements
(January 2008). The new sections will be applicable to the Company on January 1, 2011. Section 1601 establishes standards for the preparation of
consolidated financial statements, and Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements
subsequent to a business combination. The Company is assessing the impact, if any, of the adoption of these new sections on its consolidated financial statements.

3.  ACQUISITION OF CADISCOR RESOURCES INC.

In May 2009, the Company acquired all of the outstanding common shares of Cadiscor in an all-equity transaction. Prior to the acquisition, the Company
advanced to Cadiscor $7.5 million, consisting of a $5.4 million 12% convertible debenture, and a $2.1 million 12% debenture, the proceeds of which would be used by Cadiscor to
bring the Sleeping Giant gold mine in Quebec back into production.

The
results of Cadiscor's operations have been included in these consolidated financial statements since the date of acquisition.

Pursuant
to the acquisition agreement, Cadiscor shareholders received 0.33 common shares of the Company for each common share of Cadiscor. The Company issued approximately 14.5 million
common shares on closing at a price of $1.89 per share based on the volume weighted average closing stock price of the Company's common shares for the period from March 27, 2009 to
April 2, 2009.

In
addition, all of Cadiscor's outstanding stock options and warrants as at the date of acquisition were exchanged for equivalent instruments in the Company. Approximately 0.9 million stock
options and 1.4 million warrants were issued by the Company in the exchange. The Company recorded $1.0 million and $1.2 million as part of the purchase consideration, representing
the fair value of these stock options and warrants respectively. The Company also assumed the equity conversion option relating to the convertible debentures with an assigned fair value of
$1.4 million at the date of acquisition.

37

---



The
following table summarizes the preliminary fair value of the assets acquired and liabilities assumed as at the date of acquisition:

|                                                 
|-------------------------------------------------
|ASSETS                                           
|Current Assets                                   
|Cash and cash equivalents                        
|Taxes recoverable                                
|Inventories                                      
|Other assets                                     
|Future mining tax asset                          
|                                                 
|                                                 
|Mining interests                                 
|Reclamation deposit                              
|                                                 
|                                                 
|                                                 
|LIABILITIES                                      
|Current Liabilities                              
|Accounts payable and accrued liabilities         
|Current portion of obligation under capital lease
|                                                 
|                                                 
|Asset retirement obligation                      
|Long-term debt                                   
|Obligation under capital lease                   
|                                                 
|                                                 
|                                                 
|Net assets acquired                              
|                                                 
|TOTAL PURCHASE CONSIDERATION                     
|Common share capital                             
|Stock options                                    
|Purchase warrants                                
|Convertible rights on convertible debenture      
|Transaction costs                                
|                                                 
|Total purchase price                             
|                                                 

The above allocations and preliminary fair value of the assets acquired and liabilities assumed as at the date of acquisition have been adjusted at
year-end to reflect revisions to the previous interim reported balances relating to obligations which existed at the date of acquisition. The adjustments resulted in an increase in the
recognition of a future mining tax asset of $911, an increase in the asset retirement obligation of $1,753, accrued payables of $1,800, with a corresponding increase in the allocation to mining
interests.

4.  CONCENTRATE AWAITING SETTLEMENT

Concentrate awaiting settlement is comprised of:

|                                       |  | 2009 |  | 2008    |   | 
|-------------------------------------- |  | ---- |  | ------- | - | 
|                                      
|Concentrate awaiting settlement, gross |  | $   |  | $46,984 |   | 
|Refining and smelter treatment charges |  |     |  | (3,933  | ) | 
|                                      
|Concentrate awaiting settlement, net   |  | $   |  | $43,051 |   | 
|                                      

38

---



Concentrate awaiting settlement is comprised of concentrate from the LDI mine. The gross value of concentrate awaiting settlement represents the value of all
metals shipped to and received by third-party smelters which have not been outturned prior to year-end.

5.  INVENTORIES

Inventories consist of the following:

|                                  |  | 2009    |  | 2008    | 
|--------------------------------- |  | ------- |  | ------- | 
|                                 
|Supplies                          |  | $12,555 |  | $12,363 | 
|Gold inventory*                   |  | 4,890   |  |        | 
|Crushed and broken ore stockpiles |  | 7,861   |  | 4,227   | 
|                                 
|                                  |  | $25,306 |  | $16,590 | 
|                                 

Supplies inventory of $1,545 (2008  $31,247) were expensed during the year ended December 31, 2009.

The
Company recognized writedowns of obsolete supplies inventories of $nil (2008  $296) during the year ended December 31, 2009.

The
Company recognized writedowns of concentrate inventory of $nil (2008  $241) during the year ended December 31, 2009.

The
Company recognized write-ups of crushed and broken ore stockpiles of $3,634 (2008  $3,634 writedown) due to increasing commodity prices partially
offset by the strengthening of the Canadian dollar during the year ended December 31, 2009.

6.  OTHER ASSETS

Other assets consist of the following:

|               |  | 2009   |  | 2008   | 
|-------------- |  | ------ |  | ------ | 
|              
|Investments    |  | $     |  | $850   | 
|Prepaids       |  | 1,165  |  | 839    | 
|GST receivable |  | 781    |  | 1,475  | 
|QST receivable |  | 494    |  |       | 
|Other          |  | 55     |  | 29     | 
|              
|               |  | $2,495 |  | $3,193 | 
|              

For investments in shares of unrelated publicly listed companies, for which such holdings do not constitute a significant influence, the Company has elected to
classify the investments as held-for-trading for accounting purposes. Such investments are stated at fair value based on the closing market price of the companies' common stock
on the last trading day on or before the Company's reporting date. Any gain or loss in the value of the investments is recognized in the income statement at each reporting date.

Investments
in derivative instruments, consisting of warrants and options, are adjusted to fair value at each reporting date using the Black-Scholes option pricing model. Any resultant gain or loss is
recognized in the income statement at each reporting date. For each of the various instruments, the inputs to the Black-Scholes models include the closing price of the issuers' common stock on the
last trading day in the Company's reporting period, the exercise price of the instrument, the historical volatility for the issuers' common stock, and the expected life of the derivative instrument.

39

---



7.  MINING INTERESTS

|                                                                     |  | 2009     |   | 2008     |   | 
|-------------------------------------------------------------------- |  | -------- | - | -------- | - | 
|                                                                    
|Plant and equipment, at cost                                         |  | $389,153 |   | $381,304 |   | 
|Underground mine development, at cost                                |  | 85,359   |   | 55,638   |   | 
|Accumulated amortization and impairment charges                      |  | (416,917 | ) | (412,418 | ) | 
|                                                                    
|                                                                     |  | 57,595   |   | 24,524   |   | 
|                                                                    
|Equipment under capital lease, at cost                               |  | 5,912    |   | 11,005   |   | 
|Accumulated amortization and impairment charges                      |  | (3,453   | ) | (7,851   | ) | 
|                                                                    
|                                                                     |  | 2,459    |   | 3,154    |   | 
|                                                                    
|Mining leases and claims, royalty interest, and development, at cost |  | 100,993  |   | 82,561   |   | 
|Accumulated amortization and impairment charges                      |  | (78,599  | ) | (78,599  | ) | 
|                                                                    
|                                                                     |  | 22,394   |   | 3,962    |   | 
|                                                                    
|Mining interests, net                                                |  | $82,448  |   | $31,640  |   | 
|                                                                    

The Company has not yet finalized the allocation of the acquisition price between the Sleeping Giant gold mine and the acquired exploration properties.

|                                                                                  |  | 2009 |  | 2008    |  | 2007    | 
|--------------------------------------------------------------------------------- |  | ---- |  | ------- |  | ------- | 
|                                                                                 
|Capital assets (including plant and equipment, and equipment under capital lease) |  | $269 |  | $34,466 |  | $44,430 | 
|Mining leases and claims, royalty interest, and development costs                 |  |     |  | 1,560   |  | 2,478   | 
|                                                                                 
|                                                                                  |  | $269 |  | $36,026 |  | $46,908 | 
|                                                                                 



8.  ASSET RETIREMENT OBLIGATIONS AND RECLAMATION DEPOSITS

Total estimated cash flows required to settle obligations for the restoration of the LDI and Sleeping Giant mining properties are approximately $12,921. The majority of the
obligation is to be paid at the end of the life of each mine. A discount rate of 4.5% has been utilized to determine the obligation recorded on the balance sheet. The asset retirement obligation may
change materially based on future changes in operations, costs of reclamation and closure activities, and regulatory requirements.

The
Company, in conjunction with the Ontario Ministry of Northern Development and Mines (the "Ministry") and the Ministère des Ressources naturelles et de la Faune
(the "Ministère"), has established trust funds (the "Funds") pursuant to the Company's mine closure plan for eventual clean-up and restoration of the LDI mine
site, the Shebandowan West Property, and the Sleeping Giant gold mine.

40

---



The
LDI mine closure plan requires a total amount of $8,400 to be accumulated in the Fund. At December 31, 2009, the Company had $8,406 (2008  $8,724) on
deposit with the Ministry including accrued interest of $876. All current amounts required have been contributed as at December 31, 2009.

The
Sleeping Giant gold mine closure plan requires a total amount of $1,920 to be accumulated in the Fund. At December 31, 2009, the Company had $1,769 on deposit with the
Ministère. All current amounts required have been contributed as at December 31, 2009.

The
Company also has an amount of $328 relating to the Shebandowan West Project on deposit in the form of a guaranteed investment certificate.

The
funds on deposit bear interest at current short-term deposit rates and will be returned to the Company once the mine closure is completed.

At
December 31, 2009, the asset retirement and the related mine restoration deposit are as follows:

|                                                      |  | 2009    |   | 2008   |   | 
|----------------------------------------------------- |  | ------- | - | ------ | - | 
|                                                     
|Asset retirement obligation, beginning of the year    |  | $8,455  |   | $8,878 |   | 
|Change in estimated closure costs                     |  | 4,111   |   | (527   | ) | 
|Accretion expense                                     |  | 355     |   | 104    |   | 
|                                                     
|Asset retirement obligation, end of the year  Note 2 |  | $12,921 |   | $8,455 |   | 
|Reclamation deposits                                  |  | 10,503  |   | 8,724  |   | 
|                                                     
|Excess (shortfall) of deposit over obligation         |  | ($2,418 | ) | $269   |   | 
|                                                     

9.  OBLIGATIONS UNDER CAPITAL LEASES

The following is a schedule of future minimum lease payments under capital leases together with the present value of the net minimum lease payments:

|                                                        |  | 2009  |   | 2008   |   | 
|------------------------------------------------------- |  | ----- | - | ------ | - | 
|                                                       
|2009                                                    |  | $    |   | $2,122 |   | 
|2010                                                    |  | 605   |   | 766    |   | 
|2011                                                    |  | 255   |   | 268    |   | 
|2012                                                    |  | 254   |   | 157    |   | 
|2013                                                    |  | 109   |   |       |   | 
|                                                       
|Total minimum lease payments                            |  | 1,223 |   | 3,313  |   | 
|Amounts representing interest at rates from 2.8%  5.9% |  | (89   | ) | (191   | ) | 
|                                                       
|Present value of minimum lease payments                 |  | 1,134 |   | 3,122  |   | 
|Less current portion                                    |  | (558  | ) | (1,992 | ) | 
|                                                       
|                                                        |  | $576  |   | $1,130 |   | 
|                                                       

10.  SENIOR CREDIT FACILITIES

|                                                                                               |  | 2009 |  | 2008   |   | 
|---------------------------------------------------------------------------------------------- |  | ---- |  | ------ | - | 
|                                                                                              
|Equipment company credit facilities consisting of $nil and US$nil
(2008  $2,000 and US$2,000) |  | $   |  | $4,448 |   | 
|Less: financing costs (net of amortization)                                                    |  |     |  | (18    | ) | 
|                                                                                              
|                                                                                               |  |     |  | 4,430  |   | 
|Less current portion                                                                           |  |     |  | (4,430 | ) | 
|                                                                                              
|                                                                                               |  | $   |  | $     |   | 
|                                                                                              

The Company's senior credit facilities were comprised of Canadian and US dollar loan facilities with an equipment company, which were repaid in full
in 2009.

41

---



11.  RELATED PARTY TRANSACTIONS

Kaiser-Francis Oil Company ("Kaiser-Francis") is a major shareholder of the Company. The Company had the following related party transaction:

On
March 29, 2006, the Company issued convertible notes through a private placement of convertible notes and common share purchase warrants. In addition, the Company exercised its option to
issue a second tranche of convertible notes on June 23, 2006. The Offerings were to Kaiser-Francis and an institutional investor. The debt portion of the notes was fully repaid by
December 2008. On January 13, 2009, 1,501,638 shares were issued relating to the final December 1, 2008 convertible note principal and interest payment. The warrants issued
and outstanding are disclosed in Note 12(b).

12.  SHAREHOLDERS' EQUITY





|                            |                                                      | 2009       |             | 2008    |       
|--------------------------- | ---------------------------------------------------- | ---------- | ----------- | ------- | ------
|                            |                                                      | Warrants   |             | Amount  |       
|                           
|Balance beginning of period |                                                      | 13,489,898 |             | $14,092 |       
|                            | Issued pursuant to unit offering, net of issue costs |            | 9,200,000   |         | 2,243 
|                            | Issued pursuant to acquisition of Cadiscor           |            | 1,445,997   |         | 1,168 
|                            | Warrants exercised                                   |            | (1,115,997  | )       | (866  
|                            | Warrants expired                                     |            | (10,733,233 | )       | (6,053
|                           
|Balance, end of period      |                                                      | 12,286,665 |             | $10,584 |       
|                           

|
|

|Number of Warrants |  | Exercise Price |  | Expiry Date        |  |  | 
|------------------ |  | -------------- |  | ------------------ |  |  | 
|                   |  |                | 
|1,805,016          |  | US$10.73       |  | March 29, 2010     |  |  | 
|951,649            |  | US$7.85        |  | June 23, 2010      |  |  | 
|330,000            |  | $2.12          |  | December 31, 2010  |  |  | 
|9,200,000          |  | $4.25          |  | September 30, 2011 |  |  | 
|                   |  |                | 
|12,286,665         |  |                |  |                    |  |  | 
|                   |  |                | 



42

---











2009

2008

2007Options

Weighted-
Average
Exercise
Price

Options

Weighted-
Average
Exercise
Price

Options

Weighted-
Average
Exercise
PriceOutstanding, beginning of year

1,461,100

$5.10

356,433

$9.89

360,133

$10.24Issued pursuant to acquisition of Cadiscor

917,400

2.42







Granted

1,180,000

3.16

1,110,000

3.60

132,500

9.05Exercised

(85,800
)
1.32





(5,000
)
3.42Cancelled/forfeited

(414,900
)
6.26

(5,333
)
10.82

(131,200
)
10.25Outstanding, end of year

3,057,800

3.50

1,461,100

5.10

356,433

9.89Options exercisable at end of year

1,217,967

$3.96

263,099

$10.23

191,600

$10.76


43

---





Exercise Price

Expiry Dates

Options Outstanding at Dec. 31, 2009

Options Exercisable at Dec. 31, 2009$  1.32

June 17, 2013

226,050

226,050$  1.85

March 17, 2013

24,750

24,750$  2.20

September 30, 2016

750,000

250,000$  2.85

July 18, 2017

200,000

$  3.03

September 10, 2011

429,000

429,000$  3.22

December 14, 2017

940,000

$  3.39

July 31, 2017

40,000

$  4.75

February 27, 2011

7,500

7,500$  4.83

July 20, 2016

20,000

6,667$  5.22

June 9, 2016

20,000

6,667$  6.47

May 21, 2016

180,000

60,000$  7.85

August 26, 2014

30,000

30,000$  8.40

June 20, 2014

35,000

35,000$  8.83

December 14, 2013

10,000

10,000$  8.87

January 14, 2015

7,500

5,000$  9.03

March 1, 2015

2,000

1,333$10.18

April 15, 2015

30,000

20,000$11.90

June 23, 2012

106,000

106,0003,057,800

1,217,967




|                                                      | 2009        |   | 2008       |   | 2007       |   | 
|----------------------------------------------------- | ----------- | - | ---------- | - | ---------- | - | 
|                                                     
|Net loss available to common shareholders             | $(30,014    | ) | $(160,679  | ) | $(28,680   | ) | 
|                                                     
|Weighted average number of shares outstanding         | 102,630,908 |   | 82,839,706 |   | 55,792,203 |   | 
|Effect of dilutive securities                         |            |   |           |   |           |   | 
|                                                     
|Weighted average diluted number of shares outstanding | 102,630,908 |   | 82,839,706 |   | 55,792,203 |   | 
|                                                     
|Diluted net loss per share                            | $(0.29      | ) | $(1.94     | ) | $(0.51     | ) | 
|                                                     



44

---





13.  INSURANCE RECOVERY

The Company previously filed a claim with its insurance company relating to losses incurred in connection with the failure of the primary crusher in 2002. During 2004, the
Company received $7,148 as in interim payment against this claim and in July 2008 a settlement in the amount of $14,500 was received for the remainder of this claim. In 2008, the amount of
$13,800 has been included as income from mining operations and $700 received for legal costs has been included as a reduction of general and administration expenses.

14.  FINANCIAL INSTRUMENTS

The Company has exposure to the following risks from its use of financial instruments: credit risk, market risk, currency risk, interest rate risk, commodity price risk and
liquidity risk.

Credit Risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company's
exposure arises principally from its short term interest bearing deposits and concentrate awaiting settlement. Historically, the Company has not experienced any losses related to individual customers.
The Company's short term investments matured November 2009 and the Company's concentrate awaiting settlement relating to the LDI mine has been fully realized by December 31, 2009. The
Company invests its cash, cash equivalents and short-term investments primarily with a major Canadian bank.

The
carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:

|                                |  | 2009    |  | 2008    | 
|------------------------------- |  | ------- |  | ------- | 
|                               
|Cash and cash equivalents       |  | $98,255 |  | $2,532  | 
|Short term investments          |  |        |  | 40,536  | 
|Concentrate awaiting settlement |  |        |  | 43,051  | 
|                               
|                                |  | $98,255 |  | $86,119 | 
|                               

Market Risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk is comprised of
currency, interest rate, and commodity price risks. In addition, the Company is exposed to market risk relating to fluctuations in the share price of the Company's common shares as a result of the RSU
plan, which is mark-to-market at each period end.



45

---





|                                         |  | US$   |   | 
|---------------------------------------- |  | ----- | - | 
|                                        
|Cash                                     |  | $233  |   | 
|Accounts payable and accrued liabilities |  | (58   | ) | 
|Obligations under capital leases         |  | (399  | ) | 
|                                        
|                                         |  | $(224 | ) | 
|                                        





|               |  | 2009  |  | 2008  | 
|-------------- |  | ----- |  | ----- | 
|              
|US LIBOR       |  |      |  | 0.44% | 
|Canadian LIBOR |  |      |  | 2.05% | 
|US prime rate  |  | 3.25% |  | 3.25% | 
|              



46

---





Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to monitor
the timing of sales and receivables, to ensure sufficient cash flows are generated from operations to meet the current debt requirements.
Where insufficient liquidity may exist, the Company may pursue various debt and equity instruments for short-term financing of its operations.

The
table below analyzes the Company's financial liabilities which will be settled into relevant maturity groupings based on the remaining balances at December 31, 2009 to the contractual
maturity date.

|                                 |  | Total  |  | In less than 1 year |  | Between 1 year and 2 years |  | Between 2 years and 5 years | 
|-------------------------------- |  | ------ |  | ------------------- |  | -------------------------- |  | --------------------------- | 
|                                
|Obligations under capital leases |  | $1,134 |  | $558                |  | $468                       |  | $108                        | 
|                                

The Company also has asset retirement obligations in the amount of $12,921 that would become payable at the time of the closures of its LDI and Sleeping Giant
mines. Deposits established by the Company to offset these future outlays amount to $10,503. As a result, a shortfall of $2,418 is required to be funded prior to closure of the mines. Refer to
note 8 for additional disclosure regarding these amounts. The majority of the asset retirement costs are expected to be incurred within one year of mine closure and application must be made to
receive funds on deposit. Therefore, the timing of cash inflows may vary from the actual timing of outflows.

Management
monitors consolidated cash flow, in detail, on a daily basis, monthly through month-end reporting, quarterly through forecasting and yearly through the budget process. Based on
the financial liabilities due and noted above, the Company expects to have sufficient operating cash flow exceeding the amounts due.

Fair Values

The Company's financial instruments consist of cash and cash equivalents, concentrate awaiting settlement, accounts payable and accrued liabilities, obligations under capital
leases, mine closure obligations, RSUs, and equity instruments other than the common shares of the Company which are issued and outstanding.

Cash
and cash equivalents are stated at fair value. The carrying value of concentrate awaiting settlement and accounts payable approximate their fair values due to the immediate or
short-term maturity of these financial instruments.

The
fair value of the obligations under capital leases approximate their carrying value due to the interest rate implicit in the leases approximating interest rates available at this time for similar
lease terms. The fair value of RSUs and equity instruments are determined as described in note 12.

15.  CAPITAL DISCLOSURE

The Company's objective is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.

Management
defines capital as the Company's outstanding debt and total shareholder's equity. The board of directors does not establish quantitative return on capital criteria for management but rather
promotes year over year sustainable profitable growth.

47

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In
order to maintain or adjust the capital structure, the Company may issue new shares, issue new debt, and issue new debt to replace existing debt with different characteristics.

There
were no changes in the Company's approach to capital management during the year. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.

16.  COMMITMENTS







17.  REVENUE FROM METAL SALES

|                                     |  | Total    |   | Palladium |   | Platinum |   | Gold    |   | Nickel  |   | Copper  |   | Other Metals |   | 
|------------------------------------ |  | -------- | - | --------- | - | -------- | - | ------- | - | ------- | - | ------- | - | ------------ | - | 
|                                    
|2009                                 |  |          |   |           |   |          |   |         |   |         |   |         |   |              |   | 
|Year ended December 31               |  | $       |   | $        |   | $       |   | $      |   | $      |   | $      |   | $           |   | 
|Revenue  before pricing adjustments |  |          |   |           |   |          |   |         |   |         |   |         |   |              |   | 
|Pricing adjustments:                 |  |          |   |           |   |          |   |         |   |         |   |         |   |              |   | 
|Commodities                          |  | 4,384    |   | 2,977     |   | 1,139    |   | 204     |   | (58     | ) | 132     |   | (10          | ) | 
|Foreign exchange                     |  | (566     | ) | (428      | ) | (129     | ) | (90     | ) | 63      |   | 29      |   | (11          | ) | 
|                                    
|Revenue  after pricing adjustments  |  | $3,818   |   | $2,549    |   | $1,010   |   | $114    |   | $5      |   | $161    |   | $(21         | ) | 
|                                    
|2008                                 |  |          |   |           |   |          |   |         |   |         |   |         |   |              |   | 
|Year ended December 31               |  |          |   |           |   |          |   |         |   |         |   |         |   |              |   | 
|Revenue  before pricing adjustments |  | $148,428 |   | $71,989   |   | $24,598  |   | $12,442 |   | $23,466 |   | $13,326 |   | $2,607       |   | 
|Pricing adjustments:                 |  |          |   |           |   |          |   |         |   |         |   |         |   |              |   | 
|Commodities                          |  | (38,633  | ) | (23,992   | ) | (7,296   | ) | (93     | ) | (4,765  | ) | (2,076  | ) | (411         | ) | 
|Foreign exchange                     |  | 15,696   |   | 8,291     |   | 2,840    |   | 2,017   |   | 1,419   |   | 907     |   | 222          |   | 
|                                    
|Revenue  after pricing adjustments  |  | $125,491 |   | $56,288   |   | $20,142  |   | $14,366 |   | $20,120 |   | $12,157 |   | $2,418       |   | 
|                                    
|2007                                 |  |          |   |           |   |          |   |         |   |         |   |         |   |              |   | 
|Year ended December 31               |  |          |   |           |   |          |   |         |   |         |   |         |   |              |   | 
|Revenue  before pricing adjustments |  | $201,367 |   | $95,146   |   | $29,183  |   | $12,315 |   | $46,862 |   | $15,589 |   | 2,272        |   | 
|Pricing adjustments:                 |  |          |   |           |   |          |   |         |   |         |   |         |   |              |   | 
|Commodities                          |  | 8,756    |   | 3,443     |   | 4,516    |   | 1,825   |   | (1,621  | ) | 180     |   | 413          |   | 
|Foreign exchange                     |  | (14,191  | ) | (6,783    | ) | (2,723   | ) | (1,177  | ) | (2,653  | ) | (765    | ) | (90          | ) | 
|                                    
|Revenue  after pricing adjustments  |  | $195,932 |   | $91,806   |   | $30,976  |   | $12,963 |   | $42,588 |   | $15,004 |   | $2,595       |   | 
|                                    

Historically, the Company delivered all of its concentrate to one customer under the terms of an agreement. There was no production in 2009 from the LDI mine due
to the mine being on care and

48

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maintenance.
In 2008, due to a maintenance shutdown at the primary customer, temporary arrangements were made to smelt and refine the Company's concentrate at another customer.

Although
the Company sells its refined metals to a limited number of customers, it is not economically dependent upon them as there are other markets throughout the world for the Company's metals.

18.  INTEREST AND OTHER COSTS (INCOME)

|                                                        |  | 2009    |   | 2008   |   | 2007    |   | 
|------------------------------------------------------- |  | ------- | - | ------ | - | ------- | - | 
|                                                       
|Interest on convertible notes payable                   |  | $      |   | $672   |   | $2,763  |   | 
|Accretion expense relating to convertible notes payable |  |        |   | 3,372  |   | 12,947  |   | 
|Interest on senior credit facilities                    |  | 82      |   | 649    |   | 1,845   |   | 
|Interest on capital leases                              |  | 84      |   | 173    |   | 379     |   | 
|Interest on advance purchase facility                   |  |        |   | 64     |   | 446     |   | 
|Other interest and financing costs, net                 |  | (121    | ) | 548    |   | 927     |   | 
|Loss (gain) on investments                              |  | (676    | ) | 609    |   |        |   | 
|                                                       
|                                                        |  | (631    | ) | 6,087  |   | 19,307  |   | 
|Interest income                                         |  | (1,326  | ) | (2,644 | ) | (674    | ) | 
|                                                       
|                                                        |  | $(1,957 | ) | $3,443 |   | $18,633 |   | 
|                                                       

19.  CONTINGENCIES

From time to time, the Company is involved in litigation, investigations, or proceedings related to claims arising out of its operations in the ordinary course of business. In
the opinion of the Company's management, these claims and lawsuits in the aggregate, even if adversely settled, will not have a material effect on the Company's consolidated financial statements.

20.  INCOME TAXES

The provision for income and mining taxes differs from the amount that would have resulted by applying the combined Canadian Federal and Ontario statutory income tax rates of
approximately 33% (2008  33.5%, 2007  36.1%).

|                                                     |                                                           | 2009    |       | 2008     |        | 2007     |        |  
|---------------------------------------------------- | --------------------------------------------------------- | ------- | ----- | -------- | ------ | -------- | ------ | -
|                                                    
|Income tax recovery using statutory income tax rates |                                                           | $(8,837 | )     | $(54,574 | )      | $(10,692 | )      |  
|Increase (decrease) in taxes resulting from:         |                                                           |         |       |          |        |          |        |  
|                                                     | Resource allowance deemed income                          |         | 315   |          | 4,335  |          | 77     |  
|                                                     | Non-taxable portion of capital losses (gains)             |         | (141  | )        | 491    |          | (1,196 | )
|                                                     | Losses not tax benefited                                  |         | 8,587 |          | 47,922 |          | 9,968  |  
|                                                     | Non-deductible expenses                                   |         | 314   |          | 362    |          | 158    |  
|                                                     | Losses incurred in foreign entities, taxed at lower rates |         |      |          | 8      |          | 569    |  
|                                                     | Ontario Harmonization Transitional tax                    |         | 1,966 |          |       |          |       |  
|                                                     | Ontario mining taxes                                      |         |      |          | (778   | )        | 177    |  
|                                                     | Other                                                     |         | 1     |          | 4      |          | 2      |  
|                                                     | Difference in statutory tax rates                         |         | 76    |          |       |          |       |  
|                                                     | Quebec mining duties                                      |         | 956   |          |       |          |       |  
|                                                    
|Income and mining tax expense (recovery)             |                                                           | $3,237  |       | $(2,230  | )      | $(937    | )      |  
|                                                    

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The details of the Company's income and mining tax expense (recovery) are as follows:

|                                       |  | 2009   |   | 2008    |   | 2007   |   | 
|-------------------------------------- |  | ------ | - | ------- | - | ------ | - | 
|                                      
|Current income tax expense (recovery): |  |        |   |         |   |        |   | 
|Income taxes                           |  | $2,281 |   | $      |   | $     |   | 
|Mining taxes                           |  | (82    | ) | (109    | ) |       |   | 
|                                      
|                                       |  | 2,199  |   | (109    | ) |       |   | 
|                                      
|Future income tax expense (recovery):  |  |        |   |         |   |        |   | 
|Income taxes                           |  |       |   | (1,452  | ) | (1,114 | ) | 
|Mining taxes                           |  | 1,038  |   | (669    | ) | 177    |   | 
|                                      
|                                       |  | $1,038 |   | $(2,121 | ) | $(937  | ) | 
|                                      
|                                       |  | $3,237 |   | $(2,230 | ) | $(937  | ) | 
|                                      

Future tax assets (liabilities) consist of the following temporary differences:

|                                           |                                                     | 2009  |         | 2008 |         |  
|------------------------------------------ | --------------------------------------------------- | ----- | ------- | ---- | ------- | -
|                                          
|Long-term future income tax asset:         |                                                     |       |         |      |         |  
|                                           | Mining interests, net                               |       | $36,108 |      | $58,370 |  
|                                           | Deferred financing costs                            |       | 2,316   |      | 1,664   |  
|                                           | Asset retirement obligation                         |       | 1,998   |      | 2,185   |  
|                                           | Future mining tax liability                         |       |        |      | 6       |  
|                                           | Other assets                                        |       | 174     |      | 217     |  
|                                           | Non-capital loss carry-forwards                     |       | 44,228  |      | 22,369  |  
|                                           | Ontario corporate minimum tax credits               |       | 327     |      | 327     |  
|                                           | Capital loss carry-forwards                         |       | 10      |      | 5       |  
|                                           | Obligations under capital leases                    |       | 191     |      | 233     |  
|                                           | Valuation allowance for capital loss carry-forwards |       | (85,352 | )    | (85,334 | )
|                                          
|Net future income tax asset, long-term     |                                                     |      |         | 42   |         |  
|                                          
|Future income tax liability, long-term:    |                                                     |       |         |      |         |  
|                                           | Long-term debt                                      |       |        |      | (36     | )
|Net future income tax liability, long term |                                                     |      |         | (36  | )       |  
|                                          
|Net future income tax asset, long-term     |                                                     | $    |         | $6   |         |  
|                                          
|Future income tax liability, current:      |                                                     |       |         |      |         |  
|                                           | Deferred financing costs                            |       |        |      | (6      | )
|                                          
|Future tax liability, current              |                                                     |      |         | (6   | )       |  
|                                          
|Future income tax assets (liabilities)     |                                                     | $    |         | $   |         |  
|                                          
|Future mining tax liability, current:      |                                                     |       |         |      |         |  
|                                           | Inventories                                         |       | $      |      | $38     |  
|                                           | Valuation allowance                                 |       |        |      | (38     | )
|                                          
|Future mining tax liability, current       |                                                     |      |         |     |         |  
|                                          
|Future mining tax liability, long-term:    |                                                     |       |         |      |         |  
|                                           | Mining interests, net                               |       | 9,366   |      | 8,953   |  
|                                           | Provision for mine closure costs                    |       | 496     |      | 496     |  
|                                           | Mine restoration obligation                         |       | 729     |      | 719     |  
|                                           | Valuation allowance                                 |       | (10,718 | )    | (10,168 | )
|                                          
|Future mining tax liability, long-term     |                                                     | $(127 | )       | $   |         |  
|                                          

At December 31, 2009, the Company had capital loss carry-forwards of approximately $1,528 (2008  $1,600), which are
available to reduce capital gains of future years.

50

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At
December 31, 2009, the Company and its subsidiaries had non capital losses of approximately $175,760 (2008  $85,900), the tax benefits of which have
not been recognized in the financial statements. These amounts will expire during the periods 2015 to 2029.

At
December 31, 2009, the Company and its subsidiaries had undepreciated capital cost allowance of approximately $207,571 (2008  $256,000) available to
offset future taxable income.

21.  STATEMENT OF CASH FLOWS

2009

2008

2007Cash provided by (used in):Concentrate awaiting settlement

$43,051

$36,037

$2,963Inventories and stockpiles

(8,296
)
4,220

(4,486
)Other assets

1,257

(630
)
39Accounts payable and accrued liabilities

(6,002
)
(6,761
)
(769
)Taxes payable

2,468

(576
)
83$32,478

$32,290

$(2,170
)


2009

2008

2007Interest paid on senior credit facilities

$73

$446

$1,249Interest paid on obligations under capital leases

$84

$173

$393Income and mining taxes paid

$

$143

$263


22.  SEGMENT INFORMATON

The Company is Canadian-based and is in the business of exploring and mining Platinum Group Metals ("PGMs"), gold and certain base metals. Its operations are organized into
three reportable segments: LDI palladium mine, Sleeping Giant gold mine, and corporate and other. The two mines include activities related to exploration, evaluation and development, mining, milling
and the sale of mineral concentrates. The corporate and other segment includes general corporate expenses and other projects not allocated to the other segments. The Company's revenue by significant
product type is disclosed in Note 17. The Company's segments are summarized in the following table.

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As
at and during the year ended December 31, 2009, segmented information is presented as follows:

|                                |  | As at December 31, 2009 |  | As at December 31, 2008 | 
|------------------------------- |  | ----------------------- |  | ----------------------- | 
|                                |  | LDI
mine                |  | Sleeping
Giant
mine     | 
|                               
|Cash and cash equivalents       |  | $689                    |  | $576                    | 
|Concentrate awaiting settlement |  |                        |  |                        | 
|Inventories                     |  | 19,649                  |  | 5,657                   | 
|Other current assets            |  | 708                     |  | 1,510                   | 
|Mining interests                |  | 31,815                  |  | 50,300                  | 
|Other non-current assets        |  | 8,406                   |  | 1,769                   | 
|                               
|Total assets*                   |  | $61,267                 |  | $59,812                 | 
|                               

|                                               |  | Year ended
December 31, 2009 |   | Year ended
December 31, 2008 |   | Year ended
December 31, 2007 |   |         
|---------------------------------------------- |  | ---------------------------- | - | ---------------------------- | - | ---------------------------- | - | --------
|                                               |  | LDI
mine                     |   | Sleeping
Giant
mine          |   | Corporate
and other          |   | Total   
|                                              
|Revenue  after pricing adjustments            |  | $3,818                       |   | $                           |   | $                           |   | $3,818  
|Amortization                                   |  | 217                          |   | 25                           |   | 27                           |   | 269     
|Asset impairment charge                        |  |                             |   |                             |   |                             |   |        
|Insurance recovery                             |  |                             |   |                             |   |                             |   |        
|Operating expenses                             |  | 9,672                        |   | 109                          |   |                             |   | 9,781   
|                                              
|Loss from mining operations                    |  | (6,071                       | ) | (134                         | ) | (27                          | ) | (6,232  
|Other expenses                                 |  |                              |   |                              |   |                              |   |         
|General and administration                     |  | 298                          |   | 606                          |   | 8,117                        |   | 9,021   
|Exploration                                    |  | 11,419                       |   | 1,671                        |   | 144                          |   | 13,234  
|Other                                          |  | 379                          |   | (7                           | ) | (2,082                       | ) | (1,710  
|                                              
|Loss before taxes                              |  | (18,167                      | ) | (2,404                       | ) | (6,206                       | ) | (26,777 
|Income and mining tax expense (recovery)       |  | 2,280                        |   | 955                          |   | 2                            |   | 3,237   
|                                              
|Net loss and comprehensive loss for the period |  | $(20,447                     | ) | $(3,359                      | ) | $(6,208                      | ) | $(30,014
|                                              

|
|

|                              |  | Year ended
December 31, 2009 |  | Year ended
December 31, 2008 |  | Year ended
December 31, 200 | 
|----------------------------- |  | ---------------------------- |  | ---------------------------- |  | --------------------------- | 
|                              |  | LDI
mine                     |  | Sleeping
Giant
mine          |  | Corporate
and other         | 
|                             
|Additions to mining interests |  | $886                         |  | $10,079                      |  | $329                        | 
|                             

23.  COMPARATIVE FIGURES

Certain of the prior period figures have been reclassified to conform to the presentation adopted in 2009.

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