Consolidated Financial Statements

(Expressed in United States dollars)



NEVSUN RESOURCES LTD.



Years ended December 31, 2006 and 2005



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[financials001.jpg]



MANAGEMENTS RESPONSIBILITY FOR FINANCIAL REPORTING

The accompanying consolidated financial statements of Nevsun Resources Ltd. are the responsibility of management.

The financial statements have been prepared by management in conformity with Canadian generally accepted accounting principles.  These statements include some amounts that are based on managements best estimates and judgments.  Management has determined such amounts on a reasonable basis in order to ensure that the consolidated financial statements are presented fairly, in all material respects.  Financial information used elsewhere in this annual report is consistent with that in the financial statements.

The Company maintains a system of internal control which provides management with reasonable assurance that assets are safeguarded and that reliable financial records are maintained.

The Board of Directors carries out its responsibility for the financial statements principally through its Audit Committee, consisting solely of outside directors.  The Audit Committee meets periodically with management, as well as the external auditors, to review the financial statements and to satisfy itself that each party is properly discharging its responsibilities.

The external auditors, KPMG LLP, have been appointed by the shareholders to render their opinion on the financial statements.  The auditors have full and free access to the Audit Committee and their report is included herein.





John A. Clarke

John A. Clarke

Chief Executive Officer





Cliff T. Davis

Cliff T. Davis

Chief Financial Officer

March 16, 2007





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AUDITORS' REPORT TO THE SHAREHOLDERS

We have audited the consolidated balance sheets of Nevsun Resources Ltd. as at December 31, 2006 and 2005 and the consolidated statements of operations and deficit and cash flows for the years then ended. 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.  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, 2006 and 2005 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.





KPMG LLP

Chartered Accountants



Vancouver, Canada

March 16, 2007

















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NEVSUN RESOURCES LTD.

Consolidated Balance Sheets

(Expressed in United States dollars)



Years ended December 31, 2006 and 2005







|                                       |                                           |            |            |               |            |              |  | 
|-------------------------------------- | ----------------------------------------- | ---------- | ---------- | ------------- | ---------- | ------------ |  | 
|                                       |                                           |            |            | 2006          |            | 2005        
|                                       |                                           |            |            |               |            |             
|Assets                                 |                                           |            |            |               |            |             
|                                       |                                           |            |            |               |            |             
|Current assets:                        |                                          
|                                       | Cash and cash equivalents                 | $          | 24,300,748 | $             | 24,442,266
|                                       | Short-term investments                    |            | 9,911      |               | 497,311   
|                                       | Accounts receivable and prepaids (note 3) |            | 3,581,435  |               | 2,690,617 
|                                       | Inventories (note 4)                      |            | 7,715,533  |               | 2,189,621 
|                                       |                                           |            |            |               |            | 29,819,815  
|                                       |                                           |            |            |               |            |             
|Other asset (note 5)                   |                                           | 2,226,721  |            | -            
|                                       |                                           |            |            |              
|Property, plant and equipment (note 6) |                                           | 11,292,690 |            | 86,618,832   
|                                       |                                           |            |            |               |            |             
|                                       |                                           |            | $          | 49,127,038    | $          | 116,438,647 
|                                       |                                           |            |            |               |            |             
|Liabilities and Shareholders Equity  
|                                       |                                           |            |            |               |            |             
|Current liabilities:                   |                                           |            |            |               |            |             
|                                       | Bank loan                                 | $          | 3,120,496  | $             | -         
|                                       | Accounts payable and accrued liabilities  |            | 8,620,506  |               | 7,261,233 
|                                       |                                           |            |            | 11,741,002    |            | 7,261,233   
|                                       |                                           |            |            |               |            |             
|Long-term liabilities (note 8)         |                                           |            | 3,903,360  |               | 3,306,725 
|                                       |                                           |            |            |               |            |             
|Shareholders equity:                  |                                           |            |            |               |           
|                                       | Share capital (note 9)                    |            |            | 222,748,798   |            | 187,062,851 
|                                       | Contributed surplus (note 9(c))           |            | 8,410,121  |               | 7,159,426 
|                                       | Deficit                                   |            |            | (197,676,243) |            | (88,351,588)
|                                       |                                           |            |            | 33,482,676    |            | 105,870,689 
|                                       |                                           |            |            |               |            |             
|                                       |                                           |            | $          | 49,127,038    | $          | 116,438,647 



Nature of business (note 1)

Commitments and contingencies (notes 6, 7, 8, 9 and 11)







See accompanying notes to consolidated financial statements.



Approved on behalf of the Board:



Gary E. German

Robert J. Gayton

Director

Director

Gary E. German

Robert J. Gayton



1



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NEVSUN RESOURCES LTD.

Consolidated Statements of Operations and Deficit

(Expressed in United States dollars)



Years ended December 31, 2006 and 2005







|                                                                              |                                                                 |            |               |              |              |  |  |  |  | 
|----------------------------------------------------------------------------- | --------------------------------------------------------------- | ---------- | ------------- | ------------ | ------------ |  |  |  |  | 
|                                                                              |                                                                 |            |               | 2006         | 2005        
|                                                                              |                                                                
|Revenue                                                                       | $                                                               | 23,155,913 | $             | -           
|                                                                              |                                                                 |            |               |              |             
|Operating costs and expenses:                                                 |                                                                 |            |               |             
|                                                                              | Cost of sales before depreciation, depletion and amortization   |            | 30,649,288    |              | -           
|                                                                              | Depreciation, depletion and amortization                        |            | 10,955,029    | 26,316      
|                                                                              | Exploration                                                     |            | 6,295,565     | 7,370,028   
|                                                                              | General and administrative                                      |            | 4,158,386     | 3,789,213   
|                                                                              | Impairment of long-lived assets and other (notes 6, 7 and 8(b)) |            | 80,862,608    | -           
|                                                                              |                                                                 |            |               |             
|                                                                              |                                                                 |            |               |             
|Loss from operations                                                          |                                                                 |            | (109,764,963) | (11,185,557)
|                                                                              |                                                                 |            |               |              |             
|Foreign exchange gain (loss)                                                  |                                                                 |            | (172,365)     | 357,713     
|Investment income                                                             |                                                                 |            | 530,867       | 409,887     
|Mineral property royalty income                                               |                                                                 | 81,806     | 565,767      
|                                                                              |                                                                 |            |               |              |             
|Loss for the year                                                             |                                                                 |            | (109,324,655) | (9,852,190) 
|                                                                              |                                                                 |            |               |              |             
|Deficit, beginning of year                                                    |                                                                 |            | (88,351,588)  | (78,499,398)
|                                                                              |                                                                 |            |               |              |             
|Deficit, end of year                                                          |                                                                 | $          | (197,676,243) | $            | (88,351,588)
|                                                                              |                                                                 |            |               |              |             
|Basic and diluted loss per share                                              | $                                                               | (1.03)     | $             | (0.12)      
|Weighted average number of common shares outstanding, basic and fully diluted | 106,616,144                                                     | 84,202,756
|                                                                              |                                                                 |            |              





See accompanying notes to consolidated financial statements



1



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NEVSUN RESOURCES LTD.

Consolidated Statements of Cash Flows

(Expressed in United States dollars)



Years Ended December 31, 2006 and 2005







|                                                 |                                                                                         |                                               |               |                         |              |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------- | --------------------------------------------- | ------------- | ----------------------- | ------------ |  |  |  |  |  | 
|                                                 |                                                                                         |                                               |               | 2006                    | 2005        
|Cash provided by (used for):                     |                                                                                         |                                               |              
|                                                 |                                                                                         |                                               |               |                         |             
|Operations:                                      |                                                                                         |                                               |               |                         |             
|                                                 | Loss for the year                                                                       | $                                             | (109,324,655) | $                       | (9,852,190) 
|                                                 | Items not involving the use of cash:                                                    |                                               |               |                        
|                                                 |                                                                                         | Depreciation, depletion and amortization      |               | 10,955,029              | 26,316      
|                                                 |                                                                                         | Accretion of interest                         |               | 215,086                 | -           
|                                                 |                                                                                         | Stock-based compensation                      |               | 1,724,647               | 1,829,847   
|                                                 |                                                                                         | Impairment of long-lived assets and other     |               | 80,862,608              | -           
|                                                 |                                                                                         | Consulting fees paid by common shares         |               | -                       | 152,853     
|                                                 |                                                                                         | Interest and unrealized foreign exchange gain |               | 64,537                  | (15,321)    
|                                                 | Changes in non-cash working capital:                                                    |                                               |               |                        
|                                                 |                                                                                         | Accounts receivable and prepaids              |               | (890,818)               | (2,383,115) 
|                                                 |                                                                                         | Other asset                                   |               | (2,226,721)             | -           
|                                                 |                                                                                         | Inventories                                   |               | (5,525,912)             | (2,189,621) 
|                                                 |                                                                                         | Accounts payable and accrued liabilities      |               | 1,359,273               | 858,156     
|                                                 |                                                                                         |                                               |               | (22,786,926)            | (11,573,075)
|                                                 |                                                                                         |                                               |               |                         |             
|Investments:                                     |                                                                                         |                                               |               |                         |             
|                                                 | Expenditures on property, plant and equipment                                           |                                               | (16,122,347)  | (37,627,543)           
|                                                 | Construction hold back                                                                  |                                               | -             | (2,192,500)            
|                                                 | Short-term investment sales proceeds                                                    | 497,311                                       | 26,016,770   
|                                                 | Short-term investment purchases                                                         | (9,911)                                       | -            
|                                                 |                                                                                         |                                               |               | (15,634,947)            | (13,803,273)
|                                                 |                                                                                         |                                               |               |                         |             
|Financing:                                       |                                                                                         |                                               |               |                         |             
|                                                 | Bank loan                                                                               |                                               | 3,120,496     | -                      
|                                                 | Issuance of common shares, net of issue costs                                           |                                               | 35,159,859    | 47,247,862             
|                                                 |                                                                                         |                                               |               | 38,280,355              | 47,247,862  
|                                                 |                                                                                         |                                               |               |                         |             
|                                                 |                                                                                         |                                               |               |                         |             
|Increase (decrease) in cash and cash equivalents |                                                                                         | (141,518)                                     | 21,871,514   
|                                                 |                                                                                         |                                               |               |                         |             
|Cash and cash equivalents, beginning of year     |                                                                                         | 24,442,266                                    | 2,570,752    
|                                                 |                                                                                         |                                               |               |                         |             
|Cash and cash equivalents, end of year           | $                                                                                       | 24,300,748                                    | $             | 24,442,266             
|                                                 |                                                                                         |                                               |               |                         |             
|Non-cash investing and financing transactions:   |                                                                                         |                                               |              
|                                                 | Property, plant and equipment additions included in accounts payable                    | $                                             | -             | $          
  5,304,176
|                                                 | Stock-based compensation capitalized to property, plant, and equipment (note 9(c))      |                                               | 52,136        | 268,896                
|                                                 | Reclassification of contributed surplus to share capital upon exercise of stock options |                                               | 526,088       | -                      
|                                                 | Asset retirement increase in property, plant and equipment (note 8)                     | 748,902                                       | 2,939,372    
|                                                 | Capitalized interest and unrealized foreign exchange gain                               | 6,450                                         | 15,801       
|                                                 |                                                                                         |                                               |               |                         |             





See accompanying notes to consolidated financial statements.



3





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NEVSUN RESOURCES LTD.

Notes to Consolidated Financial Statements

(Expressed in United States dollars, unless otherwise stated)



Years ended December 31, 2006 and 2005







1.

Nature of business:

Nevsun Resources Ltd. and its subsidiaries (collectively, Nevsun or the Company) are in the mining business in Africa.

The Companys continuing operations and the underlying value and recoverability of amounts shown for its exploration stage mineral properties are entirely dependent upon the availability of the necessary financing to complete the exploration and development of such mineral property interests, and upon future profitable production or proceeds from the disposition of its mineral property interests.  Future profitable production is primarily dependent on the quality of ore resources, future metal prices, operating and environmental costs, fluctuations in currency exchange rates, political risks and varying levels of taxation.  While the Company actively tries to manage these risks, many of these factors are beyond its control.  The Company has not entered into derivative financial instruments to manage foreign exchange or commodity price exposure.

2.

Significant accounting policies:

(a)

Basis of presentation:

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) and include the accounts of the Company and its subsidiaries.  All material intercompany balances and transactions have been eliminated on consolidation.

As the United States dollar is the principal currency of the Companys business, these consolidated financial statements are expressed in United States dollars.

(b)

Use of estimates:

The preparation of financial statements requires management to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant areas requiring the use of estimates and assumptions relate to the determination of impairment of long-lived assets, determination of mineral reserves, valuation of stock-based compensation, determination of reclamation and environmental obligations and future income tax asset valuation reserves among others.  Actual results could differ from those estimates.

(c)

Cash equivalents:

Cash equivalents are comprised of highly liquid investments having original terms to maturity of 90 days or less when acquired.

(d)

Short-term investments:

Short-term investments include minor portfolio investments as well as financial instruments which have terms to maturity of three to twelve months when acquired and are recorded at the lower of cost and quoted market value determined on an aggregate portfolio basis.





4



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NEVSUN RESOURCES LTD.

Notes to Consolidated Financial Statements

(Expressed in United States dollars, unless otherwise stated)



Years ended December 31, 2006 and 2005







2.

Significant accounting policies (continued):

(e)

Inventories:

Materials and supplies are valued at the lower of average cost and replacement value.

Stockpiled ore is carried at average production cost per tonne.  Amortized mine development costs are not included in the cost of stockpiled ore, work in progress or finished goods inventories.  Costs associated with stockpiled ore are charged to cost of goods sold based on tonnes removed from inventory and processed through the mill.

Work in progress and finished goods inventories are stated as the lower of average cost and net realizable value.

(f)

Exploration:

Exploration costs are charged to earnings as they are incurred until the decision to proceed with development of the related property is made.

(g)

Property, plant and equipment:

(i)

Plant and equipment

Plant and equipment is recorded at cost.  Plant and equipment associated with mining operations are depreciated over the estimated lives of the assets on a units of production basis or declining balance basis, as appropriate.  All other equipment is amortized over the life of the assets using the declining balance method at rates of 20% to 30% per annum, as appropriate.

(ii)

Mineral properties

Costs related to the acquisition of mineral properties are capitalized on a property-by-property basis. Additional costs related to mineral properties are capitalized when it has been established that a mineral deposit is commercially mineable by the Company and a decision has been made to proceed with development. Development expenditures, including finance related costs, are capitalized as incurred until commencement of production.   Pre-production expenditures, including stripping costs prior to commencement of production, and revenue are capitalized until the commencement of commercial production.

Such capitalized acquisition costs and deferred development expenditures are written down to their estimated fair value when either there is little prospect of further work on a property being carried out by the Company, or a property is abandoned, or the future discounted cash flows related to the property are estimated to be less than the carrying value of the property.

Mineral properties and deferred costs are, upon commencement of commercial production, amortized over the estimated life of the property on a units of production basis.







5



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NEVSUN RESOURCES LTD.

Notes to Consolidated Financial Statements

(Expressed in United States dollars, unless otherwise stated)



Years ended December 31, 2006 and 2005







2.

Significant accounting policies (continued):

(iii)

Stripping costs

The Company has adopted CICA Emerging Issues Committee Abstract 160 (EIC160) Stripping Costs Incurred in the Production Phase of a Mining Operation effective January 1, 2006.  EIC160 requires that stripping costs should be accounted for as variable production costs that should be included in the costs of the inventory produced during the period that the stripping costs are incurred.  EIC160 allows for the capitalizing ofstripping costs in cases where such activities result in the betterment of a mineral property.

The Company has treated all stripping costs as variable production costs and has, therefore, expensed all such mining costs at the Tabakoto property since commencement of commercial production.

(iv)

Reclamation and closure costs

Upon environmental disturbance that the Company is legally required to remediate, the Company records a liability for the estimated fair value of liabilities for reclamation and closure activities and the resulting costs are capitalized to the corresponding asset.  The fair value of the reclamation and closure liability is estimated using the expected cash flow approach discounted at a credit-adjusted risk free interest rate.  The capitalized amount is amortized on the same basis as the related asset.  The liability is adjusted for the accretion of the discounted obligation and any changes in the amount or timing of the underlying future cash flows.

(v)

Impairment of long-lived assets

The Company assesses the impairment of long-lived assets, which consist primarily of property, plant and equipment, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.  An impairment loss is recognized when the carrying amount of an asset to be held for use exceeds the sum of the undiscounted cash flows expected from its use and disposal; the impairment loss recognized will be the amount by which the carrying amount of the asset exceeds its fair value.

At each reporting period, the Company reviews the carrying value of its long-lived assets.  These reviews include an analysis of the expected future cash flows to be generated by the project to determine if such cash flows exceed the projects current carrying value.  The determination of future cash flows is dependant on a number of factors, including future metal prices, the amount of reserves, the cost of bringing the project into production, production schedules, and estimates of production costs.  Additionally, the reviews take into account factors such as political, social and legal and environmental regulations.  These factors may change due to changing economic conditions or the accuracy of certain assumptions.  The Company uses its best efforts to fully understand all of the aforementioned to make an informed decision based upon historical and current facts surrounding the projects.

(h)

Share capital:

The Company records proceeds from share issuances net of issue costs.  Common shares issued for consideration other than cash are valued based on their market value at the date the agreement to issue shares was concluded.



6



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NEVSUN RESOURCES LTD.

Notes to Consolidated Financial Statements

(Expressed in United States dollars, unless otherwise stated)



Years ended December 31, 2006 and 2005







2.

Significant accounting policies (continued):

(i)

Foreign currency translation:

The Companys foreign subsidiaries are considered to be integrated foreign operations for accounting purposes.  Accordingly, transactions and account balances originally stated in currencies other than the United States dollar have been translated into United States dollars as follows:

·

Revenue and expense items at the rate of exchange in effect on the dates they occur;

·

Non-monetary assets and liabilities at historical exchange rates;

·

Monetary assets and liabilities at the exchange rate at the balance sheet date; and

·

Exchange gains and losses are recorded as income or expense in the period in which they occur.

(j)

Financial instruments:

The fair values of cash and cash equivalents, short-term investments, accounts receivable, bank loan and accounts payable and accrued liabilities approximate their carrying values due to the immediate or short-term maturity of these financial instruments. The fair value of long-term liabilities is estimated to approximate its carrying value as long-term liabilities are carried at the current estimate of fair value of the related obligations.

(k)

Stock-based compensation:

The Company has a stock option plan that is described in note 9(c).  The Company records all stock-based liabilities incurred using the fair value method.  Under the fair value method, stock-based compensation is measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable and is amortized on a straight-line basis over the vesting period.  The offset to the recorded cost is to contributed surplus.  Consideration received on the exercise of stock options is recorded as share capital and the related contributed surplus is transferred to share capital.

(l)

Loss per share:

Basic loss per share is calculated by dividing the loss available to common shareholders by the weighted average number of common shares outstanding in the period.  For all periods presented, the loss available to common shareholders equals the reported loss.  Diluted loss per share is calculated by the treasury stock method.  Under the treasury stock method, the weighted average number of common shares outstanding for the calculation of diluted loss per share assumes that the proceeds to be received on the exercise of dilutive share options and warrants are used to repurchase common shares at the average market price during the period.

In the Companys case, diluted loss per share is the same as basic loss per share as the effects of including all outstanding options and warrants would be anti-dilutive.



7



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NEVSUN RESOURCES LTD.

Notes to Consolidated Financial Statements

(Expressed in United States dollars, unless otherwise stated)



Years ended December 31, 2006 and 2005







2.

Significant accounting policies (continued):

(m)

Income taxes:

The Company uses the asset and liability method of accounting for income taxes.  Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Future tax assets and liabilities are measured using substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Future income tax assets also result from unused loss carry forwards, resource related pools and other deductions.  The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of substantive enactment.  To the extent that the realization of future income tax assets is not considered to be more likely than not, a valuation allowance is provided.

(n)

Revenue Recognition:

Sales are recognized and revenues are recorded when metal is delivered and title transfers, the rights and obligations of ownership pass to the customer, and collection of the revenue is reasonably assured.

(o)

Comparative Figures:

Certain comparative figures have been reclassified to conform with the presentation adopted in the current year.

3.

Accounts receivable and prepaids:



20062005Fuel duty  receivable$2,368,278$1,116,461Deposits and other1,213,1571,574,156$$


4.

Inventories:



20062005Materials and supplies$3,529,265$2,189,621Stockpiled ore1,238,002-Work in progress1,135,036-Finished goods1,813,230-$$


5.

Other asset:

The other asset represents fuel duty receivable expected to be collected during 2008.





8



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NEVSUN RESOURCES LTD.

Notes to Consolidated Financial Statements

(Expressed in United States dollars, unless otherwise stated)



Years ended December 31, 2006 and 2005







6.

Property, plant and equipment:



20062005Tabakoto, Mali:Mineral property acquisition$2,509,582$2,382,792Construction in progress-60,157,215Plant and equipment76,496,296-Deferred stripping8,926,6588,926,658Reclamation and closure3,688,4992,939,37291,621,03574,406,037Less accumulated depreciation(10,504,833)-81,116,20274,406,037Less provision for impairment (see note below)(81,116,202)--74,406,037Other mineral properties (note 7)10,790,71810,926,732Other plant and equipment:Cost less accumulated amortization $661,502 (2005 - $246,255)501,9721,286,063$11,292,690$86,618,832




The Tabakoto gold mine is located in southwestern Mali. The Company has an 80% interest and the Government of Mali owns the remaining 20%. A portion of the mining licensed area, outside of the Companys current mine plan, is subject to annual payments of $75,000, a 5% net profits interest and a 1% net smelter royalty.

In February, the Company commenced commissioning of the mine for production and commercial production commenced in Q2 2006.  Full commissioning of the mine was completed in Q3 2006.   Depreciation of property, plant and equipment commenced in Q2 2006.

As a result of poor operating results, primarily due to lower than expected mined grade, together with a complete review of forward planning for the Tabakoto mine operation, the Company carried out an evaluation for impairment in value of the Tabakoto property, plant and equipment.  Such impairment tests necessarily require the use of judgment on several variables including estimates of achievable grade, mining rate, processing recovery, costs associated with all aspects of these operations, and future world commodity prices for the life of mine period.  As a result of applying these estimates and in compliance with accounting guidelines the Company has recorded an impairment provision equal to the entire carrying value of the Tabakoto property, plant and equipment ($81,116,202), which combined with other directly related items (note 8(b)), resulted in a total charge to the Consolidated Statements of Operations and Deficit of $80,862,608.







9



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NEVSUN RESOURCES LTD.

Notes to Consolidated Financial Statements

(Expressed in United States dollars, unless otherwise stated)



Years ended December 31, 2006 and 2005







7.

Mineral properties:

The following schedule provides an historical record for the past two years of acquisition and exploration expenditures on the Companys mineral properties:

|                                   |   |                  |   |                 |   |                  |   |           |   |            
|---------------------------------- | - | ---------------- | - | --------------- | - | ---------------- | - | --------- | - | -----------
|                                   |   | Segala 
    Mali |   | Bisha 
 Eritrea |   | Augaro 
 Eritrea |   | Other     |   | Total      
|                                   |   |                  |   |                 |   |                  |   |           |   |            
|Balance December 31, 2004          | $ | 10,626,633       | $ | 121,002         | $ | 123,546          | $ | -         | $ | 10,871,181 
|Acquisition costs                  |   | -                |   | 25,774          |   | 29,777           |   | -         |   | 55,551     
|Exploration/development:           |   |                  |   |                 |   |                  |   |           |   |            
|Assays                             |   | 63               |   | 487,912         |   | 118,514          |   | -         |   | 606,489    
|Consulting engineers and personnel |   | 17,306           |   | 2,092,843       |   | 188,909          |   | 54,351    |   | 2,353,409  
|Drilling and geophysics            |   | -                |   | 1,725,546       |   | 230,316          |   | -         |   | 1,955,862  
|Equipment                          |   | -                |   | 182,044         |   | 51,086           |   | -         |   | 233,130    
|Line cutting and surveying         |   | -                |   | 278,290         |   | 70,714           |   | -         |   | 349,004    
|Transportation and field           |   | -                |   | 391,513         |   | 55,863           |   | 527       |   | 447,903    
|Administration                     |   | 10,468           |   | 782,927         |   | 184,673          |   | 52,916    |   | 1,030,984  
|Stock-based compensation           |   | 1,362            |   | 199,020         |   | 51,347           |   | 33,948    |   | 285,677    
|Diamond permit                     |   | -                |   | -               |   | -                |   | 107,570   |   | 107,570    
|Incurred during the year           |   | 29,199           |   | 6,165,869       |   | 981,199          |   | 249,312   |   | 7,425,579  
|Expensed during 2005               |   | (29,199)         |   | (6,140,095)     |   | (951,422)        |   | (249,312) |   | (7,370,028)
|Balance December 31, 2005          |   | 10,626,633       |   | 146,776         |   | 153,323          |   | -         |   | 10,926,732 
|Acquisition costs                  |   |                  |   | 21,446          |   | 27,511           |   |           |   | 48,957     
|Exploration/development:           |   |                  |   |                 |   |                  |   |           |   |            
|Assays                             |   |                  |   | 117,717         |   | 11,200           |   | -         |   | 128,917    
|Consulting engineers and personnel |   | 108,670          |   | 3,393,946       |   | 91,193           |   | 36,954    |   | 3,630,763  
|Drilling and geophysics            |   |                  |   | 440,448         |   | 105,979          |   | -         |   | 546,427    
|Equipment                          |   |                  |   | 38,407          |   | 25,918           |   | -         |   | 64,325     
|Line cutting and surveying         |   |                  |   | 83,780          |   | 19,280           |   | -         |   | 103,060    
|Transportation and field           |   |                  |   | 194,859         |   | 7,219            |   | -         |   | 202,078    
|Finance and Administration         |   |                  |   | 1,329,132       |   | 111,145          |   | 94,089    |   | 1,534,366  
|Stock-based compensation           |   |                  |   | 71,245          |   | 7,046            |   | 3,662     |   | 81,953     
|Diamond permit                     |   |                  |   | -               |   | -                |   | 3,676     |   | 3,676      
|Incurred during the year           |   | 108,670          |   | 5,690,980       |   | 406,491          |   | 138,381   |   | 6,344,522  
|Write-down during 2006             |   | -                |   | (4,137)         |   | (180,834)        |   | -         |   | (184,971)  
|Expensed during 2006               |   | (108,670)        |   | (5,669,534)     |   | (378,980)        |   | (138,381) |   | (6,295,565)
|Balance December 31, 2006          | $ | 10,626,633       | $ | 164,085         | $ | -                | $ | -         | $ | 10,790,718 







(a)

Segala, Mali:

The Company has an 80% interest in the Segala property that is located adjacent to the Companys Tabakoto property in southwestern Mali.  The remaining 20% interest is held by the Government of Mali.

















10



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NEVSUN RESOURCES LTD.

Notes to Consolidated Financial Statements

(Expressed in United States dollars, unless otherwise stated)



Years ended December 31, 2006 and 2005







7.

Mineral properties (continued):

(b)

Eritrea:

During 1999, the Company entered into an agreement in respect to properties, including a portion of the Bisha property, located in the southwestern part of Eritrea. The agreement provides for annual cash payments of $35,000 until feasibility plus a payment of $300,000 on delivery of a bankable feasibility study and issuance of a mining license, as well as a 1.5% net smelter return royalty upon commercial production.

The Company holds an expanded Bisha exploration license comprising 224 square kilometers.  The Bisha exploration license, which is due to expire May 13, 2007, will either be converted to a mining license arrangement or be extended until it may be converted to a mining license.  All other exploration licenses in Eritrea have been allowed to expire and related property costs written off, totalling $180,834.

Pursuant to the current laws of Eritrea, the Government of Eritrea has a right to a 10% carried interest in each mining license and has an option to acquire up to a further 20% contributing interest.   During 2005, the Government advised the Company that it may alter its mining laws to allow it to increase its contributing interest to 30%.  To the date of these financial statements no such change has been effected.

(c)

Other:

Included in other mineral properties are costs related to a diamond permit in Mali (note 7(d)) and the Kubi property in Ghana (note 7(e)).

(d)

Diamond permit, Mali:

During 2004, the Company was granted a diamond permit by the Government of Mali.  The permit to explore for diamonds covers an area of approximately 175 square kilometers and includes all of the Tabakoto and Segala mining licensed areas.

(e)

Kubi, Ghana:

The Kubi property is located in southwestern Ghana and is subject to an agreement with AngloGold Ashanti (Ashanti) for the surface rights to the Kubi project.  During 2004, the agreement with Ashanti was amended whereby Ashanti paid $100,000 as an advance royalty on remaining amounts of gold to be recovered. Ashanti also paid an additional $387,415 representing escrowed funds plus interest relating to the original 1999 agreement. Ashanti is required to make royalty payments for every recovered ounce of gold, of a minimum of $5 per ounce plus 20% of the excess of the spot price of gold over $325 per ounce.

During 2005 and early 2006 Ashanti continued mining the Kubi project and paid royalties to the Company of $565,767 and $81,806 respectively.

(f)

Mineral properties - contingencies:

The Company has investigated ownership and access rights of all of the mineral properties in which it has an interest and, to the best of its knowledge, has satisfactory ownership and access rights.  However, properties may be subject to undetected prior claims or agreement transfers.  In addition, the Companys ability to explore and exploit these mineral properties is subject to ongoing approval of local governments.



11



---

NEVSUN RESOURCES LTD.

Notes to Consolidated Financial Statements

(Expressed in United States dollars, unless otherwise stated)



Years ended December 31, 2006 and 2005









8.

Long-term liabilities:



20062005Asset retirement obligation (note 8(a))Balance, beginning of year$2,939,372$-Additional liabilities748,9022,939,372Accretion of interest215,086-Balance, end of year3,903,3602,939,372Minority interest of Government of Mali regarding Tabakoto and Segala (note 8 (b))-367,353$3,903,360$3,306,725




(a)

The Companys asset retirement obligations consist of costs accrued based on the current best estimate of mine reclamation and closure activities that will be required at the Tabakoto site upon completion of mining activity.  These activities include costs for earthworks, including land recontouring and revegetation, water treatment and demolition.  The Companys provision for future site closure and reclamation costs is based on known legal requirements.  It is not currently possible to estimate the impact on operating results, if any, of future legislative or regulatory developments.  Management used a credit adjusted risk-free discount rate applicable to Mali of 6.5% and an inflation factor of 3.0% in preparing the Companys asset retirement obligations.  Although the ultimate amount to be incurred is uncertain, based on development, legal requirements and estimated costs as at December 31, 2006, the total undiscounted liability for asset retirement obligations is estimated to be approximately $4,700,000.  The cash expenditures are expected to occur over a period of time extending several years into the future.

(b)  As a result of the significant losses of the Tabakoto operation and the exploration costs expensed in recent years on Segala, the Company has reduced the Government of Malis interest to nil, absorbing the disproportionate share of minority interest losses.  Amounts due to the Government will only become payable if the Tabakoto operation generates sufficient profits to recover the impairment charge.















12



---

NEVSUN RESOURCES LTD.

Notes to Consolidated Financial Statements

(Expressed in United States dollars, unless otherwise stated)



Years ended December 31, 2006 and 2005







9.

Share capital:

(a)

Authorized:

250,000,000 common shares without par value

(b)

Issued:

Number of sharesShare amountBalance, December 31, 200476,511,322$139,662,136Common shares issued for cash (iii and iv)25,778,00046,708,800Exercise of options (note 9(c))395,000312,558Exercise of warrants (note 9(d))227,500226,504Debt settlement75,000152,853Balance, December 31, 2005102,986,822187,062,851Common shares issued for cash (i and ii)12,500,00033,947,105Allocation from contributed surplus, upon exercise of stock options (note 9(c))-526,088Exercise of options (note 9(c))752,5001,066,292Exercise of warrants (note 9(d))50,000146,462Balance, December 31, 2006116,289,322$222,748,798




During the year ended December 31, 2006, the Company completed two private placements as follows:

(i)

2,500,000 common shares at CDN$4.00 per share.

(ii)

10,000,000 units at CDN$3.00 per unit. Total cash share issue costs were $1,780,101.  Each unit consisted of one common share and one-half of one transferable share purchase warrant. Each whole transferable share purchase warrant entitles the holder to purchase one common share at a price of CDN$4.00 per share until October 31, 2009 (note 9(d)).    If the volume weighted average closing price of the Companys common shares on the TSX exceeds CDN$5.00 for ten consecutive trading days, the Company may give notice to the holders of the warrants that the warrants will expire if not exercised in 30 days.



During the year ended December 31, 2005, the Company completed two separate sales of units to a syndicate of underwriters as follows:

(iii)

8,000,000 units at CDN$2.50 per unit. Each unit consisted of one common share and one-half of one transferable share purchase warrant. Each whole transferable share purchase warrant entitles the holder to purchase one common share at a price of CDN$3.25 per share until June 29, 2008 (note 9(d)).

(iv)

17,778,000 units at CDN$2.25 per unit.  Each unit consisted of one common share and one-half of one transferable share purchase warrant.  Each whole transferable share purchase warrant entitles the holder to purchase one common share at a price of CDN$3.00 per share until October 25, 2008 (note 9(d)).



13



---

NEVSUN RESOURCES LTD.

Notes to Consolidated Financial Statements

(Expressed in United States dollars, unless otherwise stated)



Years ended December 31, 2006 and 2005







9.

Share capital (continued):

(c)

Stock options:

The Companys shareholders replaced the stock option plan adopted in 1996 with an amended version on April 26, 2006.  The stock option plan is designed to attract and retain individuals and to reward them for current and expected future performance.  The maximum term of the options granted is ten years.  The vesting periods of stock options granted vary with terms determined by the board of directors.  Under the amended stock option plan adopted in April 2006, the Company has been authorized by its shareholders to grant stock options of up to ten percent (10%) of the number of common shares issued and outstanding.

The Company has recorded the fair value of all options granted since January 1, 2003 using the Black-Scholes model with the following weighted average assumptions:  expected life of option 5 years, (2005 5 years) stock price volatility 79% (2005 - 83%), no dividend yield and a risk free interest rate yield of 3% (2005  3%).  The fair value is particularly impacted by the Companys stock price volatility, determined using data from the previous five years.

Stock-based compensation values recorded are as follows:

20062005Stock-based compensation cost:Capitalized to mine under construction$52,136$268,896Expensed - exploration (note 7)81,953285,677Expensed - administration1,642,6941,544,170$1,776,783$2,098,743Contributed surplus:Balance, beginning of year$7,159,426$5,060,683Grant of options1,776,7832,098,743Transfer to share capital on exercise of options(526,088)-Balance, end of year$8,410,121$7,159,426






Number of optionsWeighted average exercise price (CDN$)Outstanding, December 31, 20044,332,000$2.45Granted2,915,0002.05Expired(305,000)3.38Exercised(395,000)0.93Outstanding, December 31, 20056,547,0002.32Granted1,565,0003.08Expired(270,000)3.33Exercised(752,500)1.61Outstanding, December 31, 20067,089,500$2.49


The weighted average exercise price of options granted during the year at grant date was CDN$3.08 (US $2.64) per share.





14



---

NEVSUN RESOURCES LTD.

Notes to Consolidated Financial Statements

(Expressed in United States dollars, unless otherwise stated)



Years ended December 31, 2006 and 2005







9.

Share capital (continued):

Details of outstanding options at December 31, 2006:

TypeNumber of optionsRange of exercise
 price (CDN$)Average remaining
 life in yearsVested (exercisable)140,000$0.154.1 yearsVested (exercisable)2,512,500$0.75 to $1.722.1 yearsVested (exercisable)1,235,000$2.16 to $2.363.1 yearsVested (exercisable)760,000$3.10 to $3.211.4 yearsVested (exercisable)847,000$4.812.1 yearsVested (exercisable)100,000$7.331.9 yearsUn-vested1,495,000$3.07 to $3.204.8 yearsTotal7,089,500




(d)

Warrants:

Number of warrantsAverage exercise price (CDN$)Balance, December 31, 20045,227,500$9.62Warrants exercised(227,500)1.25Warrants issued (note 9(b))12,889,0003.08Balance, December 31, 200517,889,0005.01Warrants exercised(50,000)3.25Warrants issued (note 9(b))5,000,0004.00Balance, December 31, 200622,839,000$4.79




ExpiryNumber of warrantsExercise Price (CDN$)June 29, 20083,950,000$3.25October 25, 20088,889,000$3.00December 19, 20085,000,000$10.00October 31, 20095,000,000$4.0022,839,000




(e)

Shares reserved for issuance (fully diluted):

Number of sharesIssued and outstanding at December 31, 2006116,289,322Reserved for options (note 9(c))7,089,500Reserved for warrants (note 9(d))22,839,000Shares reserved for issuance (fully diluted) at December 31, 2006146,217,822








15



---

NEVSUN RESOURCES LTD.

Notes to Consolidated Financial Statements

(Expressed in United States dollars, unless otherwise stated)



Years ended December 31, 2006 and 2005







10.

Income taxes:

At December 31, 2006, the Company has available losses for income tax purposes in Canada totalling approximately $14,400,000 and loss carry forwards in foreign jurisdictions of approximately $31,100,000 which, if not utilized to reduce income in future periods, expire through 2026.  Access to the loss carry forwards in the future may be restricted.

Substantially all of the difference between the actual income tax expense of nil and the expected statutory corporate income tax recovery relates to losses not recognized.

As at December 31, 2006, the tax effect of the significant components within the Companys future tax asset, are as follows:



20062005Property, plant and equipment$68,902,000$25,658,000Loss carry forwards11,377,0003,762,000Fixed assets and other(7,513,000)(1,424,000)72,766,00027,996,000Valuation allowance(72,766,000)(27,996,000)Net future income tax asset$-$-




11.

Commitments and contingencies:

In connection with the Tabakoto power generation and fuel supply, the Company has operating supply agreements with approximate minimum annual payment obligations as follows:

2007 - $6,700,000; 2008 - $7,500,000; 2009 - $7,500,000; 2010 - $5,500,000; 2011 - NIL.

In addition the Tabakoto mining contract has a minimum remaining termination provision of $4,800,000 that declines evenly over the remaining life of contract, expiring in December 2009.

The Company has guaranteed the bank loan of a subsidiary to the extent of $3,120,496.  The loan bears interest of 10% and is due in September 2007.

12.

Segmented information:

The Company conducts its business as a single operating segment being the mining business in Africa.  All mineral properties and equipment are situated in Africa.  All investment revenues were earned from international sources.







16



---









MANAGEMENT'S
DISCUSSION & ANALYSIS - ANNUAL FISCAL 2006



Introduction

This MD&A has been
prepared by management and approved by the Board of Directors. The following
discussion of performance, financial condition and future prospects should be
read in conjunction with the consolidated financial statements of the Company
and notes thereto for the year ended December 31, 2006. The information
supplements but does not form part of those financial statements. This
discussion covers the quarter and the subsequent period up to the date of the
filing of this MD&A.  All dollar amounts are stated in United States
dollars.

Forward
Looking Statements

This report contains
forward-looking statements concerning anticipated developments on the
Company's mineral properties in Mali and Eritrea and in the Company's other
operations; planned exploration and development activities; the adequacy of the
Company's financial resources; financial projections, including, but not
limited to, estimates of capital and operating costs, production, grades,
processing rates, life of mine, metal prices, exchange rates, reclamation costs,
net present value, internal rates of return and payback; and other events or
conditions that may occur in the future.  Forward-looking statements are
frequently, but not always, identified by words such as "expects,"
"anticipates," "believes," "intends," "estimates,"
"potential," "possible," "budget" and similar expressions, or
statements that events, conditions or results "will," "may," "could"
or "should" occur or be achieved.  Information concerning the
interpretation of drill results and mineral resource and reserve estimates also
may be deemed to be forward-looking statements, as such information constitutes
a prediction of what mineralization might be found to be present if and when a
project is actually developed.  Forward-looking statements are statements
about the future and are inherently uncertain, and actual achievements of the
Company or other future events or conditions may differ materially from those
reflected in the forward-looking statements due to a variety of risks,
uncertainties and other factors, including, without limitation, those described
in this MD&A.



The Company's
forward-looking statements are based on the beliefs, expectations and opinions
of management on the date the statements are made and the Company assumes no
obligation to update such forward-looking statements in the future.  For
the reasons set forth above, investors should not place undue reliance on
forward-looking statements.

General

Nevsun owns and
operates the Tabakoto Mine in Mali, West Africa.  The mine has been
developed within a combined 100 sq km land package (83 sq km of mining licenses
and 17 sq km of adjoining exploration licenses) that contains the Tabakoto
deposit, the Segala deposit and a number of gold exploration targets. The
exploration targets may provide production growth opportunities for the Tabakoto
plant.



The Company's
operations also include the exploration and development of the Bisha Project in
Eritrea, Northeast Africa.  Nevsun continues to advance the Bisha project
with publication of the feasibility study on October 12, 2006, and the delivery
of a Social and Environmental Impact Assessment (SEIA) to the Government of
Eritrea in December, 2006.  An update to the SEIA is expected in early Q2
2007.





---

2





Mineral
Property Developments

Tabakoto
- Mali

The Company operates an
open pit gold mine and processing plant at Tabakoto.  Commissioning of the
milling section of the process plant was completed in Q2 2006 and commissioning
of the three stage crushing plant was completed in Q3 2006.



The first gold pour was
made at Tabakoto in late March and the first gold shipment was made in mid-May.
 The date of the first gold shipment is considered by the Malian government
to be the start of operations and accordingly the Company has adopted the same
trigger date for purposes of profit and loss measurement.



During the fourth
quarter Tabakoto produced approximately 15,600 ounces for a total of
approximately 38,000 ounces in the first seven-and-a-half months of operations;
mill throughput for the quarter was 171,183 tonnes (476,792 tonnes since
commencement of production). The average grade achieved for the quarter was 3.9
g/t and for the year was 3.0 g/t.  The operating results for the year are
outlined in the table below.



All of the Tabakoto
future production remains unhedged.  As a result, the Company continues to
have full exposure to any possible future benefits of higher gold prices as well
as the risk of lower prices. The weighted average realized price per ounce for
the quarter was $617 and for the year was $619.  Cash costs per ounce for
the quarter were $671 and for the year were $634.  Costs per ounce are
significantly higher than planned due to much lower than forecast output of
ounces.





|                                      |               |                                         |                              |                       |                       |           
|------------------------------------- | ------------- | --------------------------------------- | ---------------------------- | --------------------- | --------------------- | ----------
|                                      | 2006
      Q1 | 2006
      Q2
      (
      pre-prod'n) | 2006
      Q2
      (prod'n) | 2006
      Q3(prod'n) | 2006
      Q4(prod'n) | Total     
|Key
      Operating Statistics(1)     |               |                                         |                              |                       |                       |           
|Gold
      production (ounces)        | nil           | nil                                     | 10,350                       | 12,039                | 15,587                | 37,976    
|Gold
      sold (ounces)              | nil           | nil                                     | 9,574                        | 11,360                | 17,042                | 37,976    
|Realized
      price per ounce (2)    | nil           | nil                                     | $621                         | $621                  | $617                  | $619      
|                                      |               |                                         |                              |                       |                       |           
|Total
      cash costs(3)             | 3,555,217     | 1,575,807                               | 3,733,209                    | 9,883,124             | 10,463,410            | 29,210,767
|Total
      production costs(4)       | 3,555,217     | 1,625,109                               | 6,521,820                    | 12,220,910            | 16,007,631            | 39,930,686
|Cash
      cost per ounce(3)          |               |                                         | $361                         | $821                  | $671                  | $634      
|Production
      cost per ounce(4)    |               |                                         | $630                         | $1,015                | $1,027                | $915      
|                                      |               |                                         |                              |                       |                       |           
|Other                                 |               |                                         |                              |                       |                       |           
|tonnes
      to mill                  |               |                                         | 162,147                      | 143,462               | 171,183               | 476,792   
|Average
      grade (grams per tonne) |               |                                         | 1.99                         | 2.96                  | 3.9                   | 3.0       
|Average
      recovery rate           |               |                                         | 94%                          | 94%                   | 88%                   | 92%       



1
As 2006 is Nevsun's first year of production, there are no comparative figures
for previous year periods

2
Per ounce weighted average, before Government 6% royalty

3Total cash costs are calculated in accordance with the Gold Institute
Production Cost Standard

4
Includes total cash costs plus amortization and accretion



Production costs
include all mining expenses for the quarter.  The variation in cash cost
per ounce from Q2 to Q3 is a result of two compounding factors: (1) as disclosed
in Q1 & Q2 quarterly financial statements, stripping costs incurred were
expensed from the start of stockpiling at the beginning of the year. Hence there
were less strip costs per ounce of production for the short producing period of
approximately one half of Q2; and (2) Q3 encountered a significant gold
production shortfall, thereby increasing the cost per ounce. Q3 milling was only
88% of the tonnage over a period twice as long.



---

3







Tabakoto
Write-down

In February 2007, the
Company completed a review of all aspects of its Mali operations, including the
geological model, mine plan and operating costs.  The principal purpose of
the review was to take into account the negative gold grade variances being
observed between the original pre-production mining model for Tabakoto and the
gold grades achieved during the actual mining operations.  Based on its
review, management has reduced the life of mine of Tabakoto by two hundred
thousand ounces.  The reduction results from a reduced grade for the
project.  The current projected grade through the end of the project is 3.9
g/t.



In March 2007,
management also reviewed the carrying value of the Tabakoto Mine and related
assets as part of its annual financial reporting process.  In preparing its
discounted cash flow analysis management used gold prices that declined over the
next three years from $625/oz to $500/oz for revenues based on budgeted costs
for the remainder of the life of mine. The Company concluded that in accordance
with generally accepted accounting principles, a provision was required for
impairment of the entire carrying value of the Tabakoto property ($81,116,202),
which combined with other directly related items, resulted in a total charge to
the consolidated statements of operations and deficit of $80,862,608.



The Company will
continue to operate the Tabakoto Mine as a marginal gold operation with an
option on rising gold prices. For 2007, the Company has budgeted for the
following operations results:



|                            |        
|--------------------------- | -------
|Tonnes to be
      milled   | 706,000
|Grade                       | 4.04   
|Recovery                    | 90%    
|Ounces to be
      produced | 82,000 



Mineral
Property Developments

Segala
- Mali

The Company is
reviewing its strategy for Segala, which is located approximately 4km from
Tabakoto.  The Company is considering test mining of the Segala deposit in
the near term.  A trial mining program would enable management to determine
whether Segala should be operated as a stand alone project at the end of life of
the Tabakoto open pit, or as additional feed for Tabakoto in the current cost
and gold price environment.  Management has determined it is not necessary
to adjust the carrying value of Segala without the additional information the
above noted work will provide.



Bisha
- Eritrea

On October 12, 2006,
the Company released its feasibility study results for the Bisha project in
Eritrea.  Management believes the results of the study demonstrate that
Bisha is a world-class mining project.  AMEC Americas Ltd., based in
Vancouver, Canada, performed the feasibility work.  The 43-101 compliant
Technical Report is accessible on SEDAR at www.SEDAR.com.



In addition, as
previously reported January 17, 2007, the Government of Eritrea has been
actively reviewing the Feasibility Study, the Social and Environmental Impact
Assessment (SEIA), and the draft Environmental Management Plan for the Bisha
project. These documents were prepared on behalf of the Company by AMEC Americas
for the purpose of licensing the Bisha Project. The Government of Eritrea
engaged an international mining consultancy to complete a due diligence review
of these documents, and Nevsun requested Endeavour Financial to arrange a
further independent review to be completed on behalf of prospective project
financing partners.



Since January 2007 with
the two due diligence reviews in progress, the Company has continued
constructive discussion with the Government of Eritrea regarding the development
of a mining agreement with a view to taking the Bisha Project into production.
These discussions are still



---

4





progressing.
In early February H.E. Tesfai Ghebreselassie, the Minister of Energy and Mines
of Eritrea, outlined the continuing strong government support for exploration
and mine development in Eritrea, including the Bisha Project, in a presentation
at the Indaba Conference in Cape Town.



In parallel with the
mining agreement discussions, Nevsun is progressing with the selection review
for an EPCM (engineering, procurement, construction and management) contractor
for the Bisha Project. The Company has also sought competitive quotes for the
procurement of the project's major capital long lead items. The main critical
long lead items include the crusher, SAG and ball mills, mill motors and mining
fleet. The Company is considering ordering the most critical long lead items
shortly so as to enhance a timely completion for the overall project. Funding
for this procurement and for starting the detailed engineering design component
of an EPCM contract for the 2m tonne per year Bisha mining and milling
operations was the focus of the private placement financing of October, 2006.



A summary of the Bisha
project is provided below:



Highlights of
Feasibility Study:



Bisha is a high grade
gold, silver and base metal-rich volcanogenic massive sulphide (VMS) deposit.
The feasibility study indicates that the ore can be mined and processed using
industry standard technology. The study indicates that the existing road
infrastructure in Eritrea will be suitable for the project. Project
infrastructure development will require construction of a power plant at the
project site and construction of a concentrate storage and loadout facility at
the port of Massawa, Eritrea.



Metal
Production (Life of Mine)

-

1.06
million oz gold

(all
payable)

-

747
million lb copper

-

1,092
million lb zinc

-

10
million oz silver



Production
Schedule

-
+10 years open pit mine modeled at 2 Mt/year of ore production

-

years
1 and 2, average 447,000 oz Au per year

-
years 3 to 5 average 173 million lb Cu per year plus precious metal credits

-

years
6 to 10 average 218 million lb Zn plus 39 million lb Cu per year plus precious
metal credits



Base Case
Financial Analysis (after tax):

Rate
of Return

-
26% (Au $435/oz Cu $1.44/lb prior to 2015 and $1.28 thereafter, Zn$0.57/lb, Ag
$6.50/oz)

Cumulative
cash flow

-

$356
million

NPV
(10% discount)

-

$135
million

Payback

-

2.6
years    (pre-production capital payback)

Capital
Cost Estimate

-

$196
million pre-production

Expansion
Capital Estimate

-

$61
million + $31 million in two phases, funded from operations

Operating
Costs

-

$31.64/tonne
ore milled through life of mine



All metal prices used
for the base case analysis were independently developed and provided to AMEC by
a recognized independent minerals marketing consultant.





---

5





Recent
Prices Case Financial Analysis (after tax):

Utilizing recent metal
prices over life of mine (Au $650/oz, Cu $3.00/lb, Zn $1.50/lb, Ag $13/oz)



Rate
of Return

-

65%

Cumulative
cash flow

-

$1,943
million

NPV
(10% discount)

-

$897
million

Payback

-

1.2
years    (pre-production capital payback)



Location and Access

Bisha is located in a
sparsely populated area of western Eritrea, approximately 40 km from the nearest
regional town of Akurdet and 150 km from the capital city of Asmara. The major
port city of Massawa is approximately 340 km by road, which can be accessed in
less than 8 hours.



The Deposit

The Bisha deposit is
configured in three distinct layered zones - a 35m thick surface oxide zone
having a high gold and silver content immediately overlying a 30m thick copper
enriched supergene zone which itself overlies a primary sulphide zone containing
both zinc and copper. Significant byproduct gold and silver are recoverable from
both the supergene and primary ores.







Mineral Reserves

A full description of
the Bisha mineral reserves may be found in the Company's Annual Information
Form for the fiscal year ended December 31, 2006. The following is a summary of
the proven and probable reserve with grades for each metal in each ore type.



|          |            |                |                |              |             
|--------- | ---------- | -------------- | -------------- | ------------ | ------------
|          | Tonnes     | Au
      (g/t) | Ag
      (g/t) | Cu
      (%) | Zn
      (%)
|Oxide     | 4,016,000  | 7.99           | 32.85          | -            | -           
|Supergene | 6,350,000  | 0.83           | 35.98          | 4.40         | -           
|Primary   | 9,713,000  | 0.76           | 54.00          | 1.14         | 7.21        
|Total     | 20,079,000 |                |                |              |             



All of the Company's
estimates of reserves are prepared in accordance with Canadian National
Instrument 43-101 and the Canadian Institute of Mining and Metallurgy
Classification System.  These standards may differ from the requirements of
the United States Securities and Exchange Commission.  For a discussion of
the differences between Canadian and U.S. standards in disclosure of mineral
reserves, see "Information Concerning Preparation of Reserve and Resource
Estimates" and "Glossary and Defined Terms" in the Company's Annual
Information Form for the fiscal year ended December 31, 2006.



---

6







ProcessingProcessing of the three ore types will utilize a common crushing and
SAG/ball grinding circuit, but will require three different extraction and
processing circuits. After grinding, gold and silver will be extracted from the
oxide ore by conventional cyanide leaching and recovered by the carbon in pulp
process. Later in the project the supergene and primary ores will be processed
by a conventional flotation process to recover copper and zinc as concentrates
for direct sale to smelters. The tailing systems will be common for all three
ore types.



The feasibility study
envisages the mining and processing of each zone in succession starting with the
surface oxide zone.  Before the oxide ore is exhausted the copper flotation
process equipment will be installed and commissioned so that a smooth transition
can be made from oxide ore to the supergene ore treatment.  Similarly,
before the supergene ore is exhausted, the additional flotation equipment
required to recover the zinc from the primary ore will be installed and
commissioned to permit a smooth transition from supergene to primary ore. No
interruption to production is anticipated or required when transitioning from
one ore type to another.



In the first two years
of production, gold and silver will be extracted together.  Production of
copper concentrate will begin with a minor amount in Year 2, significant
quantities for Years 3 to 5, and smaller quantities in Years 6 to 10.  Zinc
concentrate production occurs only in Years 6 to 10.



Capital Costs

|                                                        |     
|------------------------------------------------------- | ----
|Pre-production
      Capital Costs(millions $):         |     
|Pre-strip
      mining and mining equipment             | $23 
|Oxide
      ore processing facilities                   | $45 
|Site
      development, utilities, and facilities       | $31 
|Tailings
      facilities                               | $10 
|Freight,
      temp facilities, etc                     | $22 
|Engineering
      procurement & construction management | $22 
|Subtotal                                                | $153
|Owner's
      costs, staff, overheads, etc              | $13 
|Working
      capital                                   | $12 
|Contingency                                             | $18 
|TOTAL                                                   | $196



Future Capital Costs
for Supergene and Primary Ores (millions $):

|                                                        |     |                            
|------------------------------------------------------- | --- | ---------------------------
|Copper
      flotation plant and port facilities        | $61 | Funded
      from cash flow
|Zinc
      flotation plant and expanded port facilities | $31 | Funded
      from cash flow
|TOTAL                                                   | $92 |                            



Operating Costs

|                                     |              |             |                                                                       
|------------------------------------ | ------------ | ----------- | ----------------------------------------------------------------------
|Life
      of Mine Operating Costs :
|Mining                               | $135
      M | 21
      %  | $
        6.75 /t                                                     
|Process                              | $365
      M | 58
      %  | $
      18.17 /t                                                      
|G&A
      (incl. royalties)          | $135
      M | 21
      %  | $
        6.72 /t                                                     
|Total                                | $635
      M | 100
      % | $
      31.64 /t   (including fuel & power of $236M;  $11.75
      /t)





---

7





Summary
of Production, Costs and After Tax Cash Flow



|                                                                                                   |              |       |           |                        |      |      |                        |     |     |     |     |  |  |  |  |  |  |  |  | 
|-------------------------------------------------------------------------------------------------- | ------------ | ----- | --------- | ---------------------- | ---- | ---- | ---------------------- | --- | --- | --- | --- |  |  |  |  |  |  |  |  | 
|                                                                                                   | Years        | 1     | 2         | 3                      | 4    | 5    | 6                      | 7   | 8   | 9   | 10 
|Project
      phase:                                                                               | Construction | Oxide | Supergene | Primary               
|Gold
      Production                                                                              |              |       |           |                        |      |      |                        |     |     |     |    
|Thousands
      of ounces                                                                          |              | 471   | 424       | See
      note 2 below
|Cost/oz
       ($)  (note 1)                                                                       |              | 150   | 150       |                        |      |      |                        |     |     |     |    
|Copper
      Production                                                                            |              |       |           |                        |      |      |                        |     |     |     |    
|Millions
      of pounds                                                                           |              |       |           | 176                    | 163  | 184  | 57                     | 40  | 39  | 43  | 45 
|Cost/lb
      Cu ($)  (note 3)                                                                     |              |       |           | 0.25                   | 0.27 | 0.26 | See
      note 4 below
|Zinc
      Production                                                                              |              |       |           |                        |      |      |                        |     |     |     |    
|Millions
      of pounds                                                                           |              |       |           |                        |      |      | 174                    | 241 | 225 | 216 | 236
|Cost/lb
      - see note 4 below                                                                   |              |       |           |                        |      |      | See
      note 4 below
|                                                                                                   |              |       |           |                        |      |      |                        |     |     |     |    
|                                                                                                   | Years        | 1     | 2         | 3                      | 4    | 5    | 6                      | 7   | 8   | 9   | 10 
|Base
      Case :                                                                                  |              |       |           |                        |      |      |                        |     |     |     |    
|(Au
      $435/oz, Cu $1.44/lb prior to 2015 and $1.28 thereafter, Zn $0.57/lb, Ag
      $6.50/oz)
|After
      tax cash flow (millions $)                                                             |              | 94    | 98        | 94                     | 96   | 87   | 30                     | 29  | 24  | 32  | 48 
|Less
      capital expenditure                                                                     | (196)        | (6)   | (50)      | (5)                    |      | (28) | (3)                    |     |     |     |    
|                                                                                                   |              |       |           |                        |      |      |                        |     |     |     |    
|Recent
      commodity prices :                                                                    |              |       |           |                        |      |      |                        |     |     |     |    
|(Au
      $650/oz, Cu $3.00/lb, Zn $1.50/lb, Ag $13/oz)                                           
|After
      tax cash flow (millions $)                                                             |              | 178   | 170       | 279                    | 274  | 292  | 191                    | 209 | 197 | 202 | 239
|Less
      capital expenditure                                                                     | (196)        | (6)   | (50)      | (5)                    |      | (28) | (3)                    |     |     |     |    

Notes:

1.

The
operating cost per ounce for gold is after taking silver production as a credit.

2.

The
gold produced from the supergene and primary is taken as a byproduct credit to
copper and zinc.

3.

The
operating cost per pound for copper from the supergene is after taking silver
and gold as credits.

4.

The
operating cost per pound during the primary phase has not been presented in the
table so as to avoid potential misinterpretation regarding allocations of
credits.  Depending upon metal prices at the time there may be greater
emphasis on zinc or copper credits. If copper, gold & silver were regarded
as byproducts in the zinc phase, the operating cost of zinc would be $0.06 per
pound (base case).



Environmental

The update to the
Social and Environmental Impact Assessment (SEIA), which is being carried out by
AMEC Americas Limited, includes socially responsible consultative studies and
activities which are compliant with the April 2006 IFC Performance Standards on
Social and Environmental Sustainability. Progress details may be viewed on the
Company's web site: http://www.nevsun.com/socialresponsibility.html,



Government Support

The Government of
Eritrea has been supportive to the Company in the advancement of this project.
The Government is in the process of reviewing the feasibility study and has
engaged its own independent engineer to assist. The Government has sought
appropriate third party assistance for the preparation of a mining and
stabilization agreement, including anticipated requirements of banks. The
Company is in discussion with the Government regarding the terms of a mining and
stabilization agreement.  The awarding of a mining license for Bisha
requires the completion of both the feasibility and the Environmental and Social
Impact Assessment.



Finance and Timing

Endeavour Financial is
advising the Company in the financing of the Bisha project. Following a site
visit in March 2006 by representatives of several multilateral financial
institutions, Endeavour engaged an independent technical consultant (ITC) to
commence a third party due diligence on behalf of the interested financial
institutions. The ITC visited site in June 2006, and is now actively engaged in
reviewing the feasibility study.





---

8





The
Company anticipates completion of the mining agreement and the issue of a mining
license in Q2 2007. This would permit targeting Q2 2007 for the completion of
finance negotiations for the initial capital. Construction is expected to take
approximately two years depending on major equipment deliveries, allowing
commencement of production in mid- 2009.



Opportunities on
Bisha Outside of the Feasibility Study

As with most projects
at the feasibility study stage, both risks and opportunities exist. Comments on
many of the risks of the industry can be found above in our forward looking
statements paragraph, and in our Annual Information Form under the heading
"Risk Factors". Opportunities that could significantly enhance the project
include:

(1)
 expansion of mining to an underground operation as the Bisha deposit is
open at depth;

(2)
 metal prices - the Bisha reserves were estimated using a copper metal
price of $1.05/lb and a zinc metal price of $0.50/lb.  The deposit is open
to depth below the pit bottom outlined in the feasibility study.  Higher
metal prices should permit mining to greater depths with the possibility of
extending the mine life;

(3)
development of additional deposits already identified through exploration (Harena
and Northwest Zone);

(4)
AMEC has identified additional indicated primary sulphide resources that have
not been included in the estimate of reserves (which mostly lie within the waste
envelop of the Bisha open pit). Approximately 4.7 million tonnes of 1.15% copper
plus precious metal credits were identified after the start of the development
of the mining study.  The Company has disclosed the above under news
release dated January 10, 2006;

(5)
a near surface hanging wall copper zone has been discovered at the western
margin of the open pit, as defined by drill intersections of 2.11% Cu over 19.6
m and 2.64% Cu over 12.0 m. This zone may have the potential to be added to the
overall resource in the future. The Company has disclosed this in its news
release dated April 25, 2006.

Selected
Annual Information

Fiscal
Years Ended (audited)

|                                  |  |                         |                         |                        
|--------------------------------- |  | ----------------------- | ----------------------- | -----------------------
|                                  |  | December
      31, 2006 | December
      31, 2005 | December
      31, 2004
|Revenue                           |  | $
      23,155,913      | $
      -               | $
      -              
|Net
      loss for the year       |  | $
      (109,324,655)   | $
      (9,852,190)     | $
      (12,451,947)   
|Loss
      per share              |  |                         |                         |                        
|(basic
      & fully diluted)     |  | $
      (1.03)          | $
      (0.12)          | $
      (0.17)         
|Total
      assets                |  | $
      49,127,038      | $
      116,438,647     | $
      69,913,297     
|Total
      long term liabilities |  | $
      3,903,360       | $
      3,306,725       | $
      2,590,975      



Results
of Operations

The loss for the year
of $109,324,655 (2005 - $9,852,190) includes the provision for impairment on
long-lived assets for $80,862,608, as more fully described earlier in this
MD&A, and reflects the commencement of the Tabakoto Mine operations during
2006, resulting in revenue of $23,155,913, cost of sales of $30,649,288 and
depreciation, depletion and amortization of $10,955,029. As 2006 was the first
year of mining operations for the Company, there were no similar results for
2005.



Other significant
expenses for the year include exploration of $6,295,565 (2005 - $7,370,028).
For both  2006 and 2005 the exploration costs pertained almost entirely to
activities in Eritrea. General and administrative expenses for 2006 were
$4,158,386 (2005 - $3,789,213), an increase mainly due to additional accounting
and audit fees and the increase in stock-based compensation (2006 - $1,642,694;
2005 - $1,544,170). The loss for the year also includes a foreign exchange
loss of $172,365 (2005 - gain $357,713), investment income of $530,867 (2005
- $409,887), and royalty income of $81,806 (2005 - $565,767).



---

9







Summary
of Quarterly Financial Results

Selected consolidated
financial information for the most recent eight quarters (unaudited):

|                                                   |                      |                     |                     |                    
|-------------------------------------------------- | -------------------- | ------------------- | ------------------- | -------------------
|                                                   | 2006
      4th       | 2006
      3rd      | 2006
      2nd      | 2006
      1st     
|Revenue                                            | $
      10,159,467   | $
      7,051,059   | $
      5,945,387   | $
      -          
|Net
      loss                                     | $
      (90,697,043) | $
      (7,705,074) | $
      (4,914,874) | $
      (6,007,664)
|Loss
      per share
      (basic & fully diluted) | $
      (0.85)       | $
      (0.07)      | $
      (0.05)      | $
      (0.06)     
|                                                   | 2005
      4th       | 2005
      3rd      | 2005
      2nd      | 2005
      1st     
|Revenue                                            | $
      -            | $
      -           | $
      -           | $
      -          
|Net
      loss                                     | $
      (2,872,810)  | $
      (1,223,634) | $
      (2,734,080) | $
      (3,021,666)
|Loss
      per share
      (basic & fully diluted) | $
      (0.03)       | $
      (0.01)      | $
      (0.04)      | $
      (0.04)     



Variations in the
losses for the most recent eight quarters reflect the impact of a combination of
four main factors; provision for impairment, mine operating costs, exploration
expenses and stock-based compensation:



(1)

provision
for impairment recorded in Q4 2006 in the amount of $80,862,608 was a result of
a thorough evaluation by the Company.  The mine continues to be a marginal
operation with an option on gold prices.

(2)

mine
operating costs in Q4/2006 $10,950,206, Q3/2006 $10,370,541, Q2/2006 $5,773,324,
Q1/2006 $3,555,217. During Q1/2006 and the first half of Q2/2006 mine operating
costs represented stripping and stockpiling operations only. During Q3/2006 and
Q4/2006 the Tabakoto mine was in full commercial production.

(3)

exploration
expenditures in Q4/2006 $1,939,068, Q3/2006 $1,308,325, Q2/2006 $1,315,736,
Q1/2006 $1,732,169, Q4/2005 $2,096,150, Q3/2005 $831,510, Q2/2005 $2,251,697,
Q1/2005 $2,190,671 Exploration activities for the most recent eight quarters
consisted largely of the development of scoping and then feasibility studies for
the Bisha project. During Q1/2005 and Q2/2005 there was also an active ground
exploration program in Eritrea.

(4)

stock-based
compensation in Q4/2006 $512,610, Q3/2006 $401,228, Q2/2006 $419,734, Q1/2006
$309,122, Q4/2005 $510,118, Q3/2005 $299,393, Q2/2005 $268,094, Q1/2005
$466,565.



Liquidity and
Capital Resources

The
Company's working capital at December 31, 2006 was $23.9 million (2005 -
$22.5 million).  Subject to the risks described elsewhere in this
management, discussion and analysis and the consolidated financial statements,
these funds are sufficient for the next year, excluding development capital
required for the Bisha Project in Eritrea.

During
the year, the Company closed two equity financings.  In May 2006 the
Company closed a financing of $9 million (CDN$10 million) at a price of CDN$4.00
per share and in October 2006 the Company closed a further financing of $25
million (CDN$30 million) at a price of CDN$3.00 per unit. The October financing
included three year half warrants at CDN$4.00.

In
the prior year, the Company closed two equity financings.  In June 2005 the
Company closed a financing of CDN$20 million at a price of CDN$2.50 per unit and
in October 2005 the Company closed a further financing of CDN$40 million at a
price of CDN$2.25 per unit. Both financings included three year half warrants at
CDN$3.25 and CDN$3.00 respectively.

Nevsun has been
successful in raising funds in the equity market in the past, however there is
no guarantee that such funding will continue to be available.





---

10





Total
financing activities for the year was approximately $38 million (2005 - $47
million), of which approximately $30 million (2005 - $38 million) was used in
the Tabakoto construction and operations, $6 million (2005 - $7 million) on
Eritrea exploration and the remainder on general and administrative costs.



Contractual
obligations:

|                                    |            |                        |                 |                 |                   
|----------------------------------- | ---------- | ---------------------- | --------------- | --------------- | ------------------
|Contractual
      Obligations       | Total      | Less
      than 1 year | 1-3
      years | 4-5
      years | Over
      5 years
|Long-Term
      Liabilities         | 3,900,000  | -                      | -               | 3,900,000       | -                 
|Purchase
      Obligations          | 27,200,000 | 6,700,000              | 15,000,000      | 5,500,000       | -                 
|Total
      Contractual Obligations | 31,100,000 | 6,700,000              | 15,000,000      | 9,400,000       |                   



The long-term
liabilities are fully described in note 8 to the Company's financial
statements. Purchase obligations mainly relate to minimum supply contracts for
energy and fuel for the Tabakoto Mine.

Use
of Financial Instruments

The Company has not
entered into any specialized financial agreements to minimize its commodity
risk, investment risk or currency risk. There are no off-balance sheet
arrangements. The principal financial instruments affecting the Company's
financial condition and results of operations is currently its cash and
short-term investment portfolio. To minimize risk the funds are normally
diversified by country, industry and entity, all managed by independent
financial managers with ultimate oversight by the Company. Unrealized losses,
measured on a portfolio basis, are recorded while unrealized gains are deferred
until disposition. Foreign currency exposure is minimized by retaining all but a
small portion of both the cash and investment portfolio in United States dollar
denominated instruments. The United States dollar is the predominant currency
within the industry. The Company also contracts for goods and services mainly in
United States currency.

Critical
Accounting Estimates

Critical accounting
estimates used in the preparation of the financial statements include the
Company's estimate of recoverable value on its property, plant and equipment,
site reclamation and rehabilitation as well as the value assigned to stock-based
compensation expense. These estimates involve considerable judgment and are, or
could be, affected by significant factors that are out of the Company's
control.



The factors affecting
stock-based compensation include estimates of when stock options might be
exercised and the stock price volatility. The timing for exercise of options is
out of the Company's control and will depend, among other things, upon a
variety of factors including the market value of Company shares and financial
objectives of the holders of the options. The Company has used historical data
to determine volatility in accordance with Black-Scholes modeling, however the
future volatility is inherently uncertain and the model has its limitations.
While these estimates can have a material impact on the stock-based compensation
expense and hence results of operations, there is no impact on the Company's
financial condition.



The Company's
recoverability evaluation of its property, plant and equipment is based on
market conditions for minerals, underlying mineral resources associated with the
assets and future costs that may be required for ultimate realization through
mining operations or by sale.  The Company is in an industry that is
exposed to a number of risks and uncertainties, including exploration risk,
development risk, commodity price risk, operating risk, ownership and political
risk, funding and currency risk, as well as environmental risk. Bearing these
risks in mind, the Company has assumed recent world commodity prices will be
achievable, as will costs used in studies for construction and mining
operations. The Company has relied on reserve reports by independent



---

11





engineers
on the Bisha property in Eritrea and has evaluated the Mali properties
internally, also using the work of experts. All of these assumptions are
potentially subject to change, out of the Company's control, however such
changes are not determinable. Accordingly, there is always the potential for a
material adjustment to the value assigned to property, plant and equipment.



The Company has an
obligation to reclaim its properties after the minerals have been mined from the
site.  As a result the Company has recorded a liability for the fair value
of the reclamation and closure costs it expects to incur.  The Company
estimated applicable inflation and credit-adjusted risk-free rates as well as
expected reclamation and closure time frames. To the extent that the estimated
reclamation costs change, such changes will impact future accretion recorded.

Disclosure
Controls and Procedures

The Company's Chief
Executive Officer and Chief Financial Officer are responsible for establishing
and maintaining the Company's disclosure controls and procedures to provide
reasonable assurance that all relevant information is gathered and reported to
them on a timely basis so that the appropriate decisions can be made regarding
public disclosures.



The Chief Executive
Officer and Chief Financial Officer, after evaluating the effectiveness of the
Company's disclosure controls and procedures have concluded that, as at
December 31, 2006, the Company's disclosure controls and procedures were not
effective, due to the material weakness in the Company's internal control over
financial reporting described below under "Internal Control over Financial
Reporting".

Internal
Controls over Financial Reporting

The Company's Chief
Executive Officer and Chief Financial Officer are responsible for establishing
and maintaining internal control over financial reporting, and have designed
internal control over financial reporting or caused internal control over
financial reporting to be designed under their supervision in order to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the financial statements for external purposes in accordance to
Canadian generally accepted accounting principles (GAAP), including a
reconciliation to United States GAAP.



Due to its inherent
limitations, internal control over financial reporting may not prevent or detect
material misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.



The Chief Executive
Officer and Chief Financial Officer have commenced the evaluation of the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2006, pursuant to the requirements of Multilateral Instrument
52-109 and Rule 13a-15 under the U.S. Securities Exchange Act of 1934, as
amended.  In making its assessment of internal control over financial
reporting, management used the criteria issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.



Management has
concluded that, as of December 31, 2006, a material weakness existed in the
Company's internal control over financial reporting.  An internal control
material weakness is a significant deficiency, or aggregation of deficiencies,
that does not reduce to a relatively low level the risk that material
misstatements in financial statements will be prevented or detected on a timely
basis by employees in the normal course of their work.  Management has
concluded that a material weakness existed in the effectiveness of the
Company's internal control over financial reporting as at December 31, 2006
resulting in a lack of accuracy and timely submission of financial reporting
from its Tabakoto operations, including a lack of timely and accurate
reconciliations of certain balance sheet items.  Management has determined
that the material weakness was caused by personnel constraints within the
Company, evidenced by insufficient supervision by management.  Such
material weakness could result in a failure to detect



---

12





breakdowns
in the effective operation of underlying controls and could result in material
misstatements in the financial statements.



In the preparation of
the consolidated financial statements for the year ended December 31, 2006, the
Chief Executive Officer and Chief Financial Officer ensured additional
procedures were undertaken to compensate for the weakness described above.



Management has
concluded that it needs to assign specific control monitoring responsibilities
among senior executives to correct this material weakness and build capacity of
its staff in its operations.  Management plans to recruit and train staff
so as to remedy the above noted material weakness.



The Company is not a
"large accelerated filer" as defined in the rules promulgated by the U.S.
Securities and Exchange Commission.  Accordingly, this management internal
control report is not accompanied by an attestation report of the Company's
auditors.

Changes
in Internal Control Over Financial Reporting

No changes were made in
the Company's internal control over financial reporting during 2006 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial  reporting.

Changes
in Accounting Policy

There have been no
changes to accounting polices during 2006.





"John
A. Clarke"



John
A. Clarke

President
& CEO

March
22, 2007