EXHIBIT 99.3

REPORT OF
INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

TO
THE SHAREHOLDERS OF SOUTHWESTERN RESOURCES CORP.

We have
audited the consolidated balance sheets of Southwestern Resources Corp. as at
December 31, 2004 and 2003 and the consolidated statements of loss and deficit,
shareholders' equity and cash flows for each of the years in the three year
period ended December 31, 2004, and for the period from inception to December
31, 2004. 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. These 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, 2004 and 2003
and the results of its operations and its cash flows for each of the years in
the three year period ended December 31, 2004 and for the period from inception
to Dec-ember 31, 2004 in accordance with Canadian generally accepted accounting
principles.

The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over finan-cial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly we express no such opinion.



INDEPENDENT
REGISTERED CHARTERED ACCOUNTANTSVancouver, British
ColumbiaFebruary 25, 2005

COMMENTS BY
INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS ON CANADA-UNITED STATES OF AMERICA
REPORTING DIFFERENCE

The
standards of the Public Company Accounting Oversight Board (United States)
require the addition of an explanatory paragraph (following the opinion
paragraph) when there are changes in accounting principles that have a material
effect on the comparability of the Company's financial statements, such as the
change described in note 3 to the financial statements. Our report to the
Shareholders, dated February 25, 2005, is expressed in accordance with Canadian
reporting standards which do not require a reference to such changes in
accounting principles in the report of the Independent Registered Chartered
Accountants when the change is properly accounted for and adequately disclosed
in the financial statements.



INDEPENDENT
REGISTERED CHARTERED ACCOUNTANTSVancouver, British
ColumbiaFebruary 25, 2005



Southwestern
Resources Corp.
 
 EXHIBIT 99.4




CONSOLIDATED
BALANCE SHEETSAN
EXPLORATION STAGE COMPANY

AS AT
      DECEMBER 31(C$ in thousands)
    
    2004
    
    2003*(note
      3)*AssetsCURRENTCASH AND CASH
      EQUIVALENTS (note 4)
    
    $
    49,119
    
    $
    23,539EXPLORATION
      ADVANCES AND OTHER RECEIVABLES
    
    
    764
    
    
    27649,883
    
    
    23,815PROPERTY,
      PLANT AND EQUIPMENT(note 6)
    
    
    682
    
    
    392MINERAL
      PROPERTIES (note 7)
    
    
    23,587
    
    
    15,526INVESTMENTS
      (note 8)
    
    
    7,827
    
    
    5,331NOTE
      RECEIVABLE (note 5)
    
    
    200
    
    
    200$
    82,179
    
    $
    45,264LiabilitiesCURRENTACCOUNTS
      PAYABLE
    
    $
    50
    
    $
    45ACCRUED
      CHARGES
    
    
    1,573
    
    
    3561,623
    
    
    401COMMITMENTS
      (note 15)Shareholders’
      EquitySHARE CAPITAL
      (note 10)AUTHORIZEDUNLIMITEDISSUED42,786,000
      SHARES (2003 – 39,122,000)
    
    
    149,476
    
    
    107,635CONTRIBUTED
      SURPLUS
    
    
    14,880
    
    
    2,503DEFICIT
    
    
    (83,800
    )
    
    (65,275
    )80,556
    
    
    44,863$
    82,179
    
    $
    45,264


*See
accompanying notes to consolidated financial statements*

APPROVED
BY THE BOARD



**JOHN G.
PATERSON**





Southwestern
Resources Corp.


CONSOLIDATED
STATEMENTS OF LOSS AND DEFICITAN EXPLORATION
STAGE COMPANY

FOR THE YEARS
      ENDED DECEMBER 31
    
    **Cumulative
      from inception to December 31 2004**
    
    2004
    
    2003
    
    2002*(C$ in
      thousands except per share amounts)*
    
    
    
    
    
    (note3)
    
    (note3)ExpensesGENERAL AND
      ADMINISTRATIVE (note 13)
    
    $
    27,491
    
    $
    3,177
    
    $
    2,420
    
    $
    2,326GENERAL
      EXPLORATION
    
    
    12,277
    
    
    1,648
    
    
    1,345
    
    
    1,667MINERAL
      PROPERTY COSTS WRITTEN OFF (note 7)
    
    
    36,685
    
    
    3,193
    
    
    1,906
    
    
    4,479FOREIGN
      EXCHANGE (GAIN) LOSS
    
    
    (2,070
    )
    
    324
    
    
    987
    
    
    128AMORTIZATION
    
    
    803
    
    
    36
    
    
    42
    
    
    59LOSS BEFORE
      UNDERNOTED ITEMS
    
    
    (75,186
    )
    
    (8,378
    )
    
    (6,700
    )
    
    (8,659
    )INTEREST AND
      OTHER INCOME
    
    
    13,743
    
    
    1,127
    
    
    445
    
    
    383GAIN ON
      SHARES ISSUED BY AFFILLIATED COMPANIES (note 8)
    
    
    5,183
    
    
    537
    
    
    174
    
    
    1,295GAIN ON SALE
      OF INVESTMENT (note 8)
    
    
    148
    
    
    108
    
    
    40
    
    
    –LOSS ON SALE
      OF PROPERTY, PLANT AND EQUIPMENT
    
    
    (115
    )
    
    –
    
    
    –
    
    
    (115
    )WRITE DOWN OF
      INVESTMENTS
    
    
    (4,596
    )
    
    –
    
    
    –
    
    
    (976
    )EQUITY IN
      OPERATIONS OF AFFILIATED COMPANIES (note 8)
    
    
    (6,654
    )
    
    458
    
    
    (1,280
    )
    
    (5,315
    )STOCK-BASED
      COMPENSATION (note 3)
    
    
    (13,590
    )
    
    (12,377
    )
    
    (728
    )
    
    (485
    )NET LOSS FOR
      THE YEAR
    
    
    (81,067
    )
    
    (18,525
    )
    
    (8,049
    )
    
    (13,872
    )DEFICIT AT
      BEGINNING OF YEAR
    
    
    –
    
    
    (65,275
    )
    
    (57,226
    )
    
    (43,354
    )LOSS ON SALE
      OF OWN SHARES
    
    
    (2,733
    )
    
    –
    
    
    –
    
    
    –DEFICIT AT
      END OF YEAR
    
    $
    (83,800
    )
    $
    (83,800
    )
    $
    (65,275
    )
    $
    (57,226
    )LOSS PER
      SHARE – BASIC AND DILUTED
    
    
    
    
    $
    (0.44
    )
    $
    (0.23
    )
    $
    (0.44
    )WEIGHTED-AVERAGE
      NUMBER OF SHARES OUTSTANDING
    
    
    
    
    
    41,816
    
    
    35,422
    
    
    31,708


See
accompanying notes to consolidated financial statements



Southwestern
Resources Corp.


CONSOLIDATED
STATEMENTS OF CASH FLOWSAN EXPLORATION
STAGE COMPANY

FOR THE YEARS
      ENDED DECEMBER 31
    
    **Cumulative
      from inception to December 31 2004**
    
    2004
    
    2003
    
    2002(C$ in
      thousands)Operating
      ActivitiesNET LOSS FOR
      THE YEAR
    
    $
    (81,067
    )
    $
    (18,525
    )
    $
    (8,049
    )
    $
    (13,872
    )ITEMS NOT
      INVOLVING CASHAMORTIZATION
    
    
    803
    
    
    36
    
    
    42
    
    
    59MINERAL
      PROPERTY COSTS WRITTEN OFF
    
    
    36,685
    
    
    3.193
    
    
    1,906
    
    
    4,479GAIN ON
      SHARES ISSUES BY AFFILIATED COMPANIES
    
    
    (5,183
    )
    
    (537
    )
    
    (174
    )
    
    (1,295
    )GAIN ON SALE
      OF INVESTMENT
    
    
    (173
    )
    
    (108
    )
    
    (40
    )
    
    –LOSS ON SALE
      OF PROPERTY, PLANT AND EQUIPMENT
    
    
    115
    
    
    –
    
    
    –
    
    
    115WRITE DOWN OF
      INVESTMENTS
    
    
    4,596
    
    
    –
    
    
    –
    
    
    976EQUITY IN
      OPERATIONS OF AFFILIATED COMPANIES
    
    
    6,654
    
    
    (458
    )
    
    1,280
    
    
    5,315STOCK-BASED
      COMPENSATION
    
    
    13,590
    
    
    12,377
    
    
    728
    
    
    485CHANGE IN
      NON-CASH OPERATING WORKING CAPITAL ITEMS(INCREASE)
      DECREASE IN EXPLORATION ADVANCES AND OTHER RECEIVABLES
    
    
    (454
    )
    
    (68
    )
    
    (34
    )
    
    48INCREASE
      (DECREASE) IN ACCOUNTS PAYABLE AND ACCRUED CHARGES
    
    
    366
    
    
    131
    
    
    19
    
    
    (40
    )CASH USED IN
      OPERATING ACTIVITIES
    
    
    (24,068
    )
    
    (3,959
    )
    
    (4,322
    )
    
    (3,730
    )Investing
      ActivitiesACQUISITION
      OF INVESTMENTS
    
    
    (9,466
    )
    
    (1,502
    )
    
    –
    
    
    (578
    )DISPOSITION
      OF INVESTMENTS
    
    
    120
    
    
    149
    
    
    –
    
    
    –DECREASE IN
      CASH DUE TO CHANGE IN ACCOUNTING FOR INVESTMENT IN CANABRAVA DIAMOND
      CORPORTATION
    
    
    (3,356
    )
    
    –
    
    
    –
    
    
    –MINERAL
      PROPERTY EXPENDITURES
    
    
    (68,952
    )
    
    (10,469
    )
    
    (4,912
    )
    
    (973
    )ADDITIONS TO
      PROPERTY, PLANT AND EQUIPMENT
    
    
    (3,240
    )
    
    (480
    )
    
    (78
    )
    
    (67
    )CASH USED IN
      INVESTING ACTIVITIES
    
    
    (84,894
    )
    
    (12,302
    )
    
    (4,990
    )
    
    (1,618
    )Financing
      ActivitiesSHARES
      ISSUED
    
    
    152,698
    
    
    41,841
    
    
    28,050
    
    
    360SHARES
      PURCHASED
    
    
    (13,436
    )
    
    –
    
    
    –
    
    
    (479
    )SHARES
      RESOLD
    
    
    8,694
    
    
    –
    
    
    –
    
    
    –NON-CONTROLLING
      INTEREST
    
    
    10,325
    
    
    –
    
    
    –
    
    
    –NOTE
      RECEIVABLE
    
    
    (200
    )
    
    –
    
    
    –
    
    
    (200
    )CASH PROVIDED
      BY (USED FOR) FINANCING ACTIVITIES
    
    
    158,081
    
    
    41,841
    
    
    28,050
    
    
    (319
    )INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE YEAR
    
    
    49,119
    
    
    25,580
    
    
    18,738
    
    
    (5,667
    )CASH AND CASH
      EQUIVALENTS BEGINNING OF YEAR
    
    
    –
    
    
    23,539
    
    
    4,801
    
    
    10,468CASH AND CASH
      EQUIVALENTS END OF YEAR
    
    $
    49,119
    
    $
    49,119
    
    $
    23,539
    
    $
    4,801CASH AND CASH
      EQUIVALENTS CONSIST OF:CASH
    
    
    
    
    $
    48,211
    
    $
    1,408
    
    $
    793SHORT-TERM
      INVESTMENTS
    
    
    
    
    
    908
    
    
    22,131
    
    
    4,008$
    49,119
    
    $
    23,539
    
    $
    4,801


Supplemental
Cash Flow Information(note 14)

See accompanying
notes to consolidated financial statements



Southwestern
Resources Corp.


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITYAN EXPLORATION
STAGE COMPANY

Common Shares
      Without Par Value
    
    Treasury
      Shares
    
    Contributed
    
    Deficit
      Accumulated During the Exploration
    
    Total
      Shareholders’FROM INCEPTION
      TO DECEMBER 31, 2004
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Surplus
    
    stage
    
    Equity*(C$ in
      thousands)*ISSUANCE OF
      COMMON SHARES FOR CASH
    
    
    4,392
    
    $
    541
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    541ISSUANCE OF
      COMMON SHARES FOR EXPLORATION EXPENDITURES
    
    
    600
    
    $
    75
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    75NET
      LOSS
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    (296
    )
    $
    (296
    )BALANCE,
      OCTOBER 31, 1991
    
    
    4,992
    
    $
    616
    
    
    –
    
    
    –
    
    
    –
    
    $
    (296
    )
    $
    320ISSUANCE OF
      COMMON SHARES FOR CASH
    
    
    4,378
    
    $
    884
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    884NET
      LOSS
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    (270
    )
    $
    (270
    )BALANCE,
      OCTOBER 31, 1992
    
    
    9,370
    
    $
    1,500
    
    
    –
    
    
    –
    
    
    –
    
    $
    (566
    )
    $
    934ISSUANCE OF
      COMMON SHARES FOR CASH
    
    
    3,350
    
    $
    815
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    815ISSUANCE OF
      COMMON SHARES FOR CASH PURSUANT TO PUBLIC OFFERING
    
    
    1,600
    
    $
    740
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    740ISSUANCE OF
      COMMON SHARES FOR CASH ON THE EXERCISE OF WARRANTS
    
    
    100
    
    $
    50
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    50NET
      INCOME
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    721
    
    $
    721BALANCE,
      OCTOBER 31, 1993
    
    
    14,420
    
    $
    3,105
    
    
    –
    
    
    –
    
    
    –
    
    $
    155
    
    $
    3,260ISSUANCE OF
      COMMON SHARES FOR CASH PURSUANT TO PUBLIC OFFERING
    
    
    4,200
    
    $
    14,957
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    14,957ISSUANCE OF
      COMMON SHARES FOR CASH ON THE EXERCISE OF WARRANTS
    
    
    570
    
    $
    1,367
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    1,367ISSUANCE OF
      COMMON SHARES FOR CASH
    
    
    1,880
    
    $
    3,330
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    3,330NET LOSS FOR
      THE 14 MONTHS ENDED DECEMBER 31, 1994
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    (1,027
    )
    $
    (1,027
    )BALANCE,
      DECEMBER 31, 1994
    
    
    21,070
    
    $
    22,759
    
    
    –
    
    
    –
    
    
    –
    
    $
    (872
    )
    $
    21,887ISSUANCE OF
      COMMON SHARES FOR CASH ON THE EXERCISE OF WARRANTS
    
    
    1,830
    
    $
    8,233
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    8,233ISSUANCE OF
      COMMON SHARES FOR CASH
    
    
    90
    
    $
    45
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    45NET
      LOSS
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    (1,317
    )
    $
    (1,317
    )BALANCE
      DECEMBER 31, 1995
    
    
    22,990
    
    $
    31,037
    
    
    –
    
    
    –
    
    
    –
    
    $
    (2,189
    )
    $
    28,848ISSUANCE OF
      COMMON SHARES FOR CASH PURSUANT TO PUBLIC OFFERING
    
    
    7,408
    
    $
    47,346
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    47,346ISSUANCE OF
      COMMON SHARES FOR CASH ON THE EXERCISE OF WARRANTS
    
    
    40
    
    $
    330
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    330ISSUANCE OF
      COMMON SHARES FOR CASH
    
    
    114
    
    $
    622
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    622NET
      LOSS
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    (1,315
    )
    $
    (1,315
    )BALANCE,
      DECEMBER 31, 1996
    
    
    30,552
    
    $
    79,335
    
    
    –
    
    
    –
    
    
    –
    
    $
    (3,504
    )
    $
    75,831ISSUANCE OF
      COMMON SHARES FOR CASH
    
    
    2
    
    $
    11
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    11OWN SHARES
      PURCHASED FOR CASH PURSUANT TO SHARE PURCHASE PROGRAM
    
    
    –
    
    
    –
    
    
    -158
    
    $
    (384
    )
    
    –
    
    
    –
    
    $
    (384
    )NET
      LOSS
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    (3,820
    )
    $
    (3,820
    )BALANCE,
      DECEMBER 31, 1997
    
    
    30,554
    
    $
    79,346
    
    
    -158
    
    $
    (384
    )
    
    –
    
    $
    (7,324
    )
    $
    71,638ISSUANCE OF
      COMMON SHARES FOR CASH
    
    
    42
    
    $
    28
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    28OWN SHARES
      PURCHASED FOR CASH PURSUANT TO SHARE PURCHASE PROGRAM
    
    
    –
    
    
    –
    
    
    -1,838
    
    $
    (3,787
    )
    
    –
    
    
    –
    
    $
    (3,787
    )OWN SHARES
      RESOLD
    
    
    –
    
    
    –
    
    
    600
    
    $
    1,212
    
    $
    426
    
    
    –
    
    $
    1,638NET
      LOSS
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    (7,339
    )
    $
    (7,339
    )BALANCE,
      DECEMBER 31, 1998
    
    
    30,596
    
    $
    79,374
    
    
    (1,396
    )
    $
    (2,959
    )
    
    –
    
    $
    (14,663
    )
    $
    62,178OWN SHARES
      PURCHASED FOR CASH PURSUANT TO SHARE PURCHASE PROGRAM
    
    
    –
    
    
    –
    
    
    -1,636
    
    $
    (3,896
    )
    
    –
    
    
    –
    
    $
    (3,896
    )OWN SHARES
      RESOLD
    
    
    –
    
    
    –
    
    
    720
    
    $
    1,675
    
    $
    (426
    )
    
    –
    
    $
    1,249LOSS ON SALE
      OF OWN SHARES
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    (61
    )
    $
    (61
    )NET
      LOSS
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    (10,642
    )
    $
    (10,642
    )BALANCE,
      DECEMBER 31, 1999
    
    
    30,596
    
    $
    79,374
    
    
    -2,312
    
    $
    (5,180
    )
    
    –
    
    $
    (25,366
    )
    $
    48,828ISSUANCE OF
      COMMON SHARES FOR CASH
    
    
    68
    
    $
    147
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    147OWN SHARES
      PURCHASED FOR CASH PURSUANT TO SHARE PURCHASE PROGRAM
    
    
    –
    
    
    –
    
    
    -1,432
    
    $
    (3,275
    )
    
    –
    
    
    –
    
    $
    (3,275
    )NET
      LOSS
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    (2,338
    )
    $
    (2,338
    )BALANCE,
      DECEMBER 31, 2000
    
    
    30,664
    
    $
    79,521
    
    
    -3,744
    
    $
    (8,455
    )
    
    –
    
    $
    (27,704
    )
    $
    43,362ISSUANCE OF
      COMMON SHARES FOR CASH
    
    
    2,254
    
    $
    3,000
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    3,000OWN SHARES
      PURCHASED FOR CASH PURSUANT TO SHARE PURCHASE PROGRAM
    
    
    –
    
    
    –
    
    
    -1,030
    
    $
    (1,633
    )
    
    –
    
    
    –
    
    $
    (1,633
    )LOSS ON SALE
      OF OWN SHARES
    
    
    –
    
    
    –
    
    
    3,800
    
    $
    8,541
    
    
    –
    
    
    –
    
    $
    8,541NET
      LOSS
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    (15,650
    )
    $
    (15,650
    )BALANCE,
      DECEMBER 31, 2001
    
    
    32,918
    
    $
    82,521
    
    
    -974
    
    $
    (1,547
    )
    
    –
    
    $
    (43,354
    )
    $
    37,620ISSUANCE OF
      COMMON SHARES FOR CASH
    
    
    178
    
    $
    364
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    364OWN SHARES
      PURCHASED FOR CASH PURSUANT TO SHARE PURCHASE PROGRAM
    
    
    –
    
    
    –
    
    
    -342
    
    $
    (459
    )
    
    –
    
    
    
    
    $
    (459
    )STOCK-BASED
      COMPENSATION
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    485
    
    
    –
    
    $
    485NET
      LOSS
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    (13,872
    )
    $
    (13,872
    )BALANCE,
      DECEMBER 31, 2002
    
    
    33,096
    
    $
    82,885
    
    
    -1,316
    
    $
    (2,006
    )
    $
    485
    
    $
    (57,226
    )
    $
    24,138ISSUANCE OF
      COMMON SHARES FOR CASH
    
    
    7,342
    
    $
    28,046
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    28,046SHARES
      CANCELLED
    
    
    -1,316
    
    $
    (3,296
    )
    
    1,316
    
    $
    2,006
    
    $
    1,290
    
    
    –
    
    
    –STOCK-BASED
      COMPENSATION
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    728
    
    
    –
    
    $
    728NET
      LOSS
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    (8,049
    )
    $
    (8,049
    )BALANCE,
      DECEMBER 31, 2003
    
    
    39,122
    
    $
    107,635
    
    
    –
    
    
    –
    
    $
    2,503
    
    $
    (65,275
    )
    $
    44,863ISSUANCE OF
      COMMON SHARES FOR CASH
    
    
    3,664
    
    $
    41,841
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    41,841STOCK-BASED
      COMPENSATION
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    12,377
    
    
    
    
    $
    12,377NET
      LOSS
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    
    –
    
    $
    (18,525
    )
    $
    (18,525
    )BALANCE,
      DECEMBER 31, 2004
    
    
    42,786
    
    $
    149,476
    
    
    –
    
    
    –
    
    $
    14,880
    
    $
    (83,800
    )
    $
    80,556








Southwestern
Resources Corp.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER
31, 2004 AND 2003(All tabular amounts are in thousands of dollars)

1.
DESCRIPTION OF BUSINESS

Southwestern
Resources Corp. (“Southwestern” or the “Company”) is a development stage junior
mining company engaged in the identification, acquisition, evaluation,
exploration and development of mineral properties, especially those with the
potential to host gold, silver and base metals, primarily in Peru and China.
Operations are conducted either directly or through agreements with third
parties. The Company has not determined whether these properties contain mineral
reserves which are economically recoverable. The recoverability of amounts
capitalized as mineral properties is dependent upon the discovery of
economically recoverable reserves, and the ability of the Company to obtain
necessary financing to complete the development and attainment of future
profitable production from the properties or proceeds from disposition.

2.
SIGNIFICANT ACCOUNTING POLICIES

a)
Basis of Presentation

The
consolidated financial statements are prepared based upon Canadian generally
accepted accounting principles. Information with respect to generally accepted
accounting principles in the United States is provided in note 16.

These
consolidated financial statements include the accounts of Southwestern Resources
Corp. and the following significant wholly owned subsidiaries:

Southwestern Gold
(Bermuda) LimitedMinera del Suroeste S.A.C. – PeruCanadian Southwest
Gold Inc.

All
intercompany transactions and balances have been eliminated.

b) Cash
and Cash Equivalents

Cash and
cash equivalents includes those short-term money market instruments which, on
acquisition, have a term to maturity of three months or less.

c)
Investments

Investments in
corporations in which the Company exercises significant influence are accounted
for using the equity method, whereby the investment is initially recorded at
cost and is adjusted to recognize the Company’s share of earnings or losses and
reduced by dividends and distributions received. Other investments are accounted
for using the cost method. Impairments in value, other than those that are
temporary in nature, are recorded as a charge to operations.

d)
Financial Instruments

The
Company’s financial assets and liabilities are cash and cash equivalents,
exploration advances and other receivables, note receivable, investments and
accounts payable and accrued charges. The fair values of these financial
instruments are estimated to be their carrying values due to their short-term or
demand nature except for investments whose fair value is disclosed in note 8.

e)
Mineral Properties

Acquisition costs
of mineral properties together with direct exploration and development
expenditures thereon are capitalized. When production is attained, these costs
will be amortized. When capitalized expenditures on individual mineral
properties exceed the estimated net realizable value, the properties are written
down to the estimated value. Costs relating to properties abandoned are written
off when the decision to abandon is made.



Southwestern
Resources Corp.


Expenditures of a
general reconnaissance nature along with some of the costs of maintaining
foreign exploration offices are written off to general exploration during the
year.

f)
Joint Ventures

The
Company holds a significant portion of its interests in mineral properties
through joint venture agreements. The Company accounts for its joint venture
operations using the proportionate consolidation method whereby the Company’s
share of assets, liabilities, revenues and expenses of the joint venture is
included with those of the Company.

g)
Property, Plant and Equipment

Capital
assets are recorded at cost. Amortization is computed using the
declining-balance method based on annual rates as follows:

OFFICE AND
      OTHER EQUIPMENT
    
    
    20
    %COMPUTER
      EQUIPMENT
    
    
    30
    %VEHICLES
    
    
    30
    %


h)
Foreign Currency Translation

All
foreign currencies are translated into Canadian dollars using weighted-average
rates for the year for items included in the consolidated statements of loss and
deficit, the rate in effect at the balance sheet date for monetary assets and
liabilities, and historical rates for other assets included in the consolidated
balance sheets. Translation gains or losses are included in the determination of
income.

i )
Future Income Taxes

The
Company accounts for income taxes using the asset and liability method. Under
this method, future income taxes are recorded for the temporary differences
between the financial reporting basis and tax basis of the Company’s assets and
liabilities. These future taxes are measured by the provisions of currently
substantively enacted tax laws. Management believes that it is not sufficiently
likely that the Company will generate sufficient taxable income to allow the
realization of future tax assets and therefore the Company has fully provided
for these assets.

j ) Use
of Estimates

The
preparation of financial statements in conformity with Canadian generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results may differ from those estimates.

k)
Stock Options

The fair
value of all stock-based awards is estimated using the Black-Scholes model at
the date of grant and is expensed to operations over each award's vesting
period.

l )
Earnings (Loss) per Share

Basic
earnings (loss) per share is computed by dividing net income or loss (the
numerator) by the weighted-average number of outstanding common shares for the
period (the denominator). In computing diluted earnings per share, an adjustment
is made for the dilutive effect of the exercise of stock options and warrants
using the Treasury Stock Method. In all periods presented, fully diluted loss
per share is not presented, as it is anti-dilutive.

m)
Prior Year’s Comparatives

Certain of
the comparative figures have been reclassified to conform with the current
year’s presentation.



Southwestern
Resources Corp.


3.
CHANGE IN ACCOUNTING POLICY

Effective
January 1, 2004, the Company adopted the amended recommendations of the Canadian
Institute of Chartered Accountants (the “CICA”) for accounting for “Stock-Based
Compensation and Other Stock-Based Payments.” Under the CICA's amended
recommendations, the fair value of all stock-based awards is estimated using the
Black-Scholes model at the date of grant and is expensed to operations over each
award's vesting period.

Previously, the
Company used the intrinsic value method for valuing stock-based compensation
awards granted to employees and directors where compensation expense was
recognized for the excess, if any, of the quoted market price of the Company's
common shares over the common share exercise price on the day that the options
were granted, and provided note disclosure of pro forma net income as if the
fair value based method had been used on stock options granted after January 1,
2002. The amended recommendations applied retroactively, with restatement of
prior periods, and for the year ended December 31, 2003, had the effect of
increasing net loss by $321,000, and increasing deficit and contributed surplus
by $684,000. For the year ended December 31, 2002, the effect was an increase in
the Company’s net loss and deficit by $363,000.

For the
year ended December 31, 2004, the total compensation expense related to the fair
value of stock options was $12,377,000 (2003 – $728,000; 2002 – $485,000). These
fair values were determined using the Black-Scholes options pricing model with
the following weighted-average assumptions; no dividends are to be paid;
expected volatility of 47% (2003 – 96%; 2002 – 44%); risk-free interest rates of
5% (2003 – 5%; 2002 – 5%) and expected life of 3.5 years (2003 – 5 years; 2002 –
5 years).

The fair
value computed using the Black-Scholes model is only an estimate of the
potential value of the individual options and the Company is not required to
make any payments for such transactions.

4.
CASH AND CASH EQUIVALENTS

Cash and
cash equivalents of $49.1 million (2003 – $23.5 million) consist of highly
liquid money market instruments with credit ratings which expose the Company to
minimal credit risk.

5.  NOTE
RECEIVABLE

As at
December 31, 2004, the Company had in place an unsecured promissory note
receivable from Superior Diamonds Inc. (“Superior”), a company with directors in
common, in which Southwestern has an equity investment in the amount of $200,000
due January 15, 2007 and bearing interest at a rate of 6% per annum. Interest
income of $12,500 (2003 – $14,000) was recorded in 2004.

6.
PROPERTY, PLANT AND EQUIPMENT

2004
    
    2003Cost
    
    **Accumulated
      Amortization**
    
    Net Book
      Value
    
    Net Book
      ValueOFFICE AND
      OTHER EQUIPMENT
    
    $
    693
    
    $
    543
    
    $
    150
    
    $
    136COMPUTER
      EQUIPMENT
    
    
    771
    
    
    604
    
    
    167
    
    
    120VEHICLES
    
    
    892
    
    
    527
    
    
    365
    
    
    136$
    2,356
    
    $
    1,674
    
    $
    682
    
    $
    392


Amortization
relating to exploration related assets has been allocated to mineral properties
in the amount of $153,823 (2003 – $70,465).



Southwestern
Resources Corp.
 
 
 7. MINERAL
PROPERTIES
 a)


**December
      31, 2004**
    
    December 31,
      2003PERUPORACOTA
    
    $
    4,265
    
    $
    4,265LIAM
    
    
    3,501
    
    
    2,566BAMBAS
      WEST
    
    
    690
    
    
    676PUNO
    
    
    –
    
    
    561ANTAY
    
    
    660
    
    
    –OTHER
    
    
    1,667
    
    
    1,903TOTAL
      PERU
    
    
    10,783
    
    
    9,971CHINABOKA
    
    
    12,219
    
    
    3,760OTHER
    
    
    585
    
    
    107TOTAL
      CHINA
    
    
    12,804
    
    
    3,867ARGENTINA/TECKA
    
    
    –
    
    
    1,688TOTAL
    
    $
    23,587
    
    $
    15,526
  b) For
the year ended December 31, 2004, the significant expenditures were as
follows:
 Boka
    
    Antay
    
    Liam
    
    Other
    
    TotalBALANCE,
      BEGINNING OF PERIOD
    
    $
    3,760
    
    $
    –
    
    $
    2,566
    
    $
    9,200
    
    $
    15,526PROPERTY
      ACQUISITION AND MAINTENANCE
    
    
    2,463
    
    
    241
    
    
    550
    
    
    173
    
    
    3,427ANALYTICAL
    
    
    320
    
    
    35
    
    
    15
    
    
    33
    
    
    403GEOPHYSICS
    
    
    17
    
    
    48
    
    
    –
    
    
    30
    
    
    95GEOLOGY
    
    
    1,183
    
    
    242
    
    
    268
    
    
    615
    
    
    2,308DRILLING
    
    
    4,192
    
    
    –
    
    
    –
    
    
    52
    
    
    4,244RESEARCH
    
    
    51
    
    
    42
    
    
    41
    
    
    119
    
    
    253PROJECT
      ADMINISTRATION
    
    
    233
    
    
    52
    
    
    61
    
    
    178
    
    
    524PROPERTY
      COSTS WRITTEN OFF
    
    
    –
    
    
    –
    
    
    –
    
    
    (3,193
    )
    
    (3,193
    )$
    12,219
    
    $
    660
    
    $
    3,501
    
    $
    7,207
    
    $
    23,587
 
 For the
year ended December 31, 2003, the significant expenditures were as
follows:
 Boka
    
    Liam
    
    Other
    
    TotalBALANCE,
      BEGINNING OF PERIOD
    
    $
    469
    
    $
    968
    
    $
    10,804
    
    $
    12,241PROPERTY
      ACQUISITION AND MAINTENANCE
    
    
    4
    
    
    113
    
    
    (68
    )
    
    49ANALYTICAL
    
    
    215
    
    
    124
    
    
    37
    
    
    376GEOLOGY
    
    
    658
    
    
    494
    
    
    172
    
    
    1,324DRILLING
    
    
    1,684
    
    
    679
    
    
    118
    
    
    2,481RESEARCH
    
    
    8
    
    
    88
    
    
    39
    
    
    135PROJECT
      ADMINISTRATION
    
    
    722
    
    
    100
    
    
    4
    
    
    826PROPERTY
      COSTS WRITTEN OFF
    
    
    –
    
    
    –
    
    
    (1,906
    )
    
    (1,906
    )$
    3,760
    
    $
    2,566
    
    $
    9,200
    
    $
    15,526




Southwestern
Resources Corp.


c) The
Company conducts its exploration independently as well as through joint venture
agreements with third parties whereby a third party earns an interest in the
Company’s property by fulfilling terms as outlined in the agreement. The
majority of joint venture agreements are structured in such a way as to allow an
interested party to earn an interest in a project by making certain expenditures
on the Company’s properties over a period of time. The Company is also involved
in exploration through option or earn-in agreements whereby it provides 100% of
the funding in order to earn a controlling interest in a project owned by a
third party.

Peru

On
November 14, 2003, the Company executed a formal joint venture agreement with
Newmont Peru Limited (“Newmont”) under which Newmont can earn a 50% interest in
the Company's Liam Core Project in Peru by incurring US$5 million in exploration
expenditures over a three year period. Newmont has the option to earn an
additional 10% by producing a positive feasibility study, and a further 10% by
funding all of the costs to place the Property into commercial production.

In
addition, Newmont and Southwestern executed the Liam Regional Joint Venture
agreement under which both parties contributed exploration concessions covering
a total of 81,789 hectares. Southwestern is the operator of the Regional Joint
Venture and both parties will fund 50% of the initial US$5 million of
expenditures over a five year period.

In 2002,
the Company signed an agreement with Compania de Minas Buenaventura S.A.A.
(“Buenaventura”) to sell its 50% interest in the Poracota Property in Peru for
US$4.5 million. Under the terms of the agreement, Buenaventura made payments to
Southwestern of US$100,000 in 2002, US$200,000 in 2003, US$300,000 in February
2005 and is scheduled to pay US$3,900,000 in February 2006.

In
December 2004, the Company entered into a letter agreement with Anglo American
Exploration Peru S.A. (“Anglo”) under which Anglo can earn a 55% interest in the
Antay Project by spending US$5 million in exploration over a five year period.
Once vested, Anglo will have the option to earn an additional 15% interest in
the Project by producing, within the next five years, a bankable feasibility
study on any specific target identified during the first option period. In a
separate transaction, Anglo agreed to acquire US$5 million worth of Southwestern
shares over a five year period payable in US$1 million increments. The first and
second year subscriptions are a firm commitment. However, Anglo has the right to
elect not to subscribe in respect of the third, fourth and fifth year
subscriptions.

Expenditures
written off during 2004 relating to miscellaneous projects in Peru, including
the Puno Project ($561,000), amounted to $1,505,000. During 2003, $1,906,000 was
written off relating to the Central Zinc and Minaspata projects. The total
amount written off in 2002 was $4,479,000 which was comprised of $4,028,000
written off in Peru and $451,000 written off in Chile.

China

In
November 2002, Canadian Southwest Gold Inc. (“CSG”), a wholly owned subsidiary
of the Company, signed a joint venture agreement (the “JV Agreement”) with Team
209 of the Nuclear Industry of Yunnan Province, China (“Team 209”) regarding the
Boka Gold Project. Team 209 and CSG established a joint venture company (the “JV
Company”) to hold and operate the Boka Gold Project. As at December 31, 2004,
CSG had earned a 90% interest in the JV Company by contributing to that company
US$4,010,000 and making a payment of US$1.7 million to Team 209. Team 209 will
retain a 10% carried interest and CSG is the operator of the Project.

Argentina

In 2004,
the Company wrote off all expenditures relating to the Tecka Project in
Argentina. The total amount written off relating to this Project was
$1,688,000



Southwestern
Resources Corp.


8.
INVESTMENTSa)

2004Ownership
      %
    
    Carrying
      Value
    
    Quoted
      Market ValueSignificantly
      influenced affiliatesAURORA
      PLATINUM CORP.
    
    
    15.7
    
    $
    5,922
    
    $
    4,702SUPERIOR
      DIAMONDS INC.
    
    
    19.8
    
    
    618
    
    
    2,2616,540
    
    
    6,963OtherMAXY GOLD
      CORP.
    
    
    11.3
    
    
    970
    
    
    1,455JINSHAN GOLD
      MINES INC.
    
    
    2.1
    
    
    317
    
    
    671$
    7,827
    
    $
    9,089

2003Ownership
      %
    
    Carrying
      Value
    
    Quoted
      Market ValueSignificantly
      influenced affiliatesAURORA
      PLATINUM CORP.
    
    
    16.0
    
    $
    4,599
    
    $
    9,922SUPERIOR
      DIAMONDS INC.
    
    
    16.2
    
    
    5
    
    
    3,0514,604
    
    
    12,973OtherMAXY GOLD
      CORP.
    
    
    6.4
    
    
    410
    
    
    4,164JINSHAN GOLD
      MINES INC.
    
    
    2.2
    
    
    317
    
    
    3,235$
    5,331
    
    $
    20,372


In
December of 2004, the Company purchased by way of private placement 1,500,000
common shares of Superior at $0.40 per share for $600,000.

During the
first quarter of 2004, the Company sold its remaining shares of Consolidated
Jaba Inc., an investment it had written off in 2002, and recorded a gain of
$108,000. In December 2003, the Company disposed of 190,000 common shares of
Consolidated Jaba Inc. and recorded a gain of $40,445.



Southwestern
Resources Corp.


b) Details
of gains on shares issued by, and equity in operations of, affiliated companies
for the years ended 2004, 2003 and 2002 are as follows:

**For
      the year ended**
    
    For the year
      ended
    
    For the year
      ended**31-Dec-04**
    
    31-Dec-03
    
    31-Dec-02**Gain
      on shares issued by affiliated companies (i)**
    
    **Equity
      in operations of affiliated companies (ii)**
    
    Gain on
      shares issued by affiliated companies (i)
    
    Equity in
      operations of affiliated companies (ii)
    
    Gain on
      shares issued by affiliated companies (i)
    
    Equity in
      operations of affiliated companies (ii)AURORA
      PLATINUM CORP.
    
    **$**
    **385**
    
    **$**
    **597**
    
    $
    100
    
    $
    68
    
    $
    1,383
    
    $
    (184
    )SUPERIOR
      DIAMONDS INC.
    
    **$**
    **152**
    
    **$**
    **(139**
    **)**
    $
    74
    
    $
    (1,348
    )
    $
    (40
    )
    $
    (5,131
    )MAXY GOLD
      CORP.
    
    
    **–**
    
    
    **–**
    
    
    –
    
    
    –
    
    $
    (48
    )
    
    –**$**
    **537**
    
    **$**
    **458**
    
    $
    174
    
    $
    (1,280
    )
    $
    1,295
    
    $
    (5,315
    )






(i)
Gains on shares issued by affiliated companies arise when the ownership interest
of the Company in a significantly influenced or controlled entity is diluted as
a result of share issuances of the investee company. The Company does not
receive any cash proceeds (nor is required to make any payments) from these
transactions.


(ii)
Equity in operations of affiliated companies represents the Company's share of
the net earnings or losses for the reporting period in a significantly
influenced company.

9.
INCOME TAXES

The
provision for income taxes reported differs from the amounts computed by
applying the cumulative Canadian federal and provincial income tax rates to the
loss before tax provision due to the following:

2004
    
    2003
    
    2002CANADIAN
      STATUTORY FEDERAL INCOME TAX RATE
    
    
    36
    %
    
    38
    %
    
    40
    %RECOVERY OF
      INCOME TAXES COMPUTED AT STATUTORY RATES
    
    **$**
    **6,625**
    
    $
    2,936
    
    $
    5,404EFFECT OF
      LOWER TAX RATES OF FOREIGN JURISDICTIONS
    
    
    (1,091
    )
    
    (530
    )
    
    (1,197
    )NON-DEDUCTIBLE
      EXPENSES
    
    
    (4,471
    )
    
    (155
    )
    
    (1,998
    )NON-TAXABLE
      PORTION OF CAPITAL TRANSACTIONS
    
    
    199
    
    
    (203
    )
    
    –VALUATION
      ALLOWANCE
    
    
    (1,262
    )
    
    (2,048
    )
    
    (2,209
    )INCOME TAX
      PROVISION
    
    **$**
    **–**
    
    $
    –
    
    $
    –


The
approximate tax effect of each type of temporary difference that gives rise to
the Company’s future income tax assets are as follows:

2004
    
    2003OPERATING
      LOSS CARRY-FOR WARDS
    
    $
    8,733
    
    $
    8,882TAX VALUE OF
      ASSETS IN EXCESS OF CARRYING VALUE
    
    
    3,899
    
    
    3,58512,632
    
    
    12,467LESS:
      VALUATION ALLOWANCE
    
    
    (12,632
    )
    
    (12,467
    )NET FUTURE
      INCOME TAX LIABILITY
    
    $
    –
    
    $
    –
At
December 31, 2004, the Company had the following loss carry-forwards available
for tax purposes:
Country
    
    Amount
    
    ExpiryCANADA
    
    $
    11,226
    
    
    2005-2011PERU
    
    
    17,232
    
    
    2005-2008MAURITIUS
    
    
    236
    
    
    none




Southwestern
Resources Corp.


10.
SHARE CAPITAL

a)
Issued and Outstanding

In June
2004, the Company received shareholder and regulatory approval for a two for one
stock split. The shares commenced trading on a split basis on June 15, 2004. All
share and per share numbers reflect this change.

On March
4, 2004, the Company received gross proceeds of $40,825,000 pursuant to the
issuance of 2,300,000 common shares at a price of $17.75 per share to a
syndicate of underwriters. Total share issue costs amounted to $2,301,609. The
Company is using the proceeds to fund its exploration programs in China and
Peru, to generate new projects and for working capital.

On August
28, 2003, the Company issued 3,064,750 common shares at a price of $5 per share
for gross proceeds of $15,323,750. Share issue costs relating to this
transaction amounted to $1,117,784. In a separate transaction, in September
2003, the Company cancelled 1,316,400 common shares it had acquired pursuant to
its normal course issuer bid. The cancellation of these shares resulted in a
gain of $1,290,000 that was credited to contributed surplus.

On
November 14, 2003, the Company closed a non-brokered private placement with
Newmont Mining Corporation of Canada Limited for the purchase of 900,000 common
shares of the Company at $7.50 per share for total proceeds of $6,750,000.

b)
Stock Options

Under the
Company's stock option plan there were 2,702,000 options outstanding and
exercisable at December 31, 2004. The options may be exercisable for a period of
up to five years and the exercise price cannot be less than the closing price on
the Toronto Stock Exchange on the trading day immediately preceding the grant of
the option. The Board of Directors determines the time during which any option
may vest.

**2004**
    
    
    
    2003**Number
      of Options (000’s)**
    
    **Weighted-Average
      Exercise Price**
    
    Number of
      Options (000’s)
    
    Weighted-Average
      Exercise PriceOUTSTANDING
      AT BEGINNING OF YEAR
    
    
    **2,274**
    
    **$**
    **2.13**
    
    
    3258
    
    $
    2.09GRANTED
    
    
    **1,793**
    
    **$**
    **17.35**
    
    
    182
    
    $
    5.46EXERCISED
    
    
    **(1,365**
    **)**
    **$**
    **2.41**
    
    
    (1166
    )
    $
    2.53OUTSTANDING
      AT END OF YEAR
    
    
    **2,702**
    
    **$**
    **12.08**
    
    
    2274
    
    $
    2.13


The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2004:

Exercise
      Price Range
    
    Number of
      Options (000’s)
    
    Weighted-Average
      Remaining Years of Contractual Life
    
    Weighted-Average
      Exercise Price$1.46-$3.50
    
    
    905
    
    
    2.2
    
    $
    1.61$10.00-$14.95
    
    
    168
    
    
    4.7
    
    $
    12.24$15.20-$18.38
    
    
    1,628
    
    
    4.3
    
    $
    17.882,702
    
    
    3.6
    
    $
    12.08




Southwestern
Resources Corp.


11.
RELATED PARTY TRANSACTIONS

During the
year ended December 31, 2004, the Company paid remuneration to directors and to
companies controlled by directors and officers in the amount of $808,781 (2003 –
$520,573; 2002 – $519,180). The Company received management fees, which are
recorded as other income, totalling $192,000 (2003 – $240,000; 2002 –$268,000)
from Aurora Platinum Corp. (“Aurora”), Lake Shore Gold Corp. and Superior. There
is also an amount of $17,006 due to Southwestern from the above mentioned
companies at December 31, 2004.

12.
SEGMENTED INFORMATION

Industry
Information

The
Company operates in one reportable operating segment, being the acquisition and
exploration of mineral properties.

Geographic
Information

The
Company's only sources of revenue in 2004, 2003 and 2002 arose from interest
earned on corporate cash reserves and from a note issued to Superior, and
management fees. The Company has non-current assets in the following geographic
locations:

2004
    
    2003
    
    2002PERU
    
    $
    11,099
    
    $
    10,175
    
    $
    10,333CHINA
    
    
    13,043
    
    
    3,907
    
    
    473CANADA
    
    
    8,154
    
    
    5,679
    
    
    6,612ARGENTINA
    
    
    –
    
    
    1,688
    
    
    1,686$
    32,296
    
    $
    21,449
    
    $
    19,10413. GENERAL
AND ADMINISTRATIVE
2004
    
    2003
    
    2002CONSULTING
    
    $
    869
    
    $
    534
    
    $
    536SHAREHOLDER
      INFORMATION
    
    
    367
    
    
    229
    
    
    462OFFICE
    
    
    700
    
    
    622
    
    
    521LEGAL AND
      ACCOUNTING
    
    
    268
    
    
    192
    
    
    150TRAVEL
    
    
    220
    
    
    207
    
    
    98SALARIES AND
      BENEFITS
    
    
    753
    
    
    636
    
    
    559TOTAL
    
    $
    3,177
    
    $
    2,420
    
    $
    2,32614.
SUPPLEMENTAL CASH FLOW INFORMATION
2004
    
    2003
    
    2002TAXES
      PAID
    
    $
    37
    
    $
    –
    
    $
    28INTEREST
      RECEIVED
    
    $
    917
    
    $
    211
    
    $
    115




15.
COMMITMENTS




With respect to its leasehold obligations, the Company has commitments
totalling $187,546 over two years (2005 –$132,386; 2006 – $55,160).



Southwestern
Resources Corp.


16.
DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (“GAAP”)

These
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Canada (“Canadian GAAP”), which
differ in certain respects from accounting principles generally accepted in the
United States (“US GAAP”). The material differences between Canadian and US GAAP
affecting the Company's consolidated financial statements are summarized as
follows:

**CONSOLIDATED
      BALANCE SHEETS****2004**
    
    2003TOTAL ASSETS
      UNDER CANADIAN GAAP
    
    **$**
    **82,179**
    
    $
    45,264UNREALIZED
      GAINS ON AVAILABLE-FOR-SALE SECURITIES (f)
    
    **$**
    **947**
    
    $
    6,672DECREASE IN
      MINERAL PROPERTY COSTS (a)
    
    **$**
    **(23,587**
    **)**
    $
    (15,526
    )CUMULATIVE
      EXCHANGE ADJUSTMENT (d)
    
    **$**
    **(147**
    **)**
    $
    (42
    )CUMULATIVE
      ADJUSTMENT TO EQUITY INVESTMENTS (f)
    
    **$**
    **(4,290**
    **)**
    $
    (2,676
    )TOTAL ASSETS
      UNDER US GAAP
    
    **$**
    **55,102**
    
    $
    33,692TOTAL
      LIABILITIES AND NON-CONTROLLING INTEREST UNDER CANADIAN AND US
      GAAP
    
    **$**
    **1,623**
    
    $
    401SHAREHOLDERS'
      EQUITY UNDER CANADIAN GAAP
    
    **$**
    **80,556**
    
    $
    44,863CUMULATIVE
      MINERAL PROPERTY ADJUSTMENT (a)
    
    **$**
    **(23,587**
    **)**
    $
    (15,526
    )CUMULATIVE
      COMPREHENSIVE INCOME (e)
    
    **$**
    **800**
    
    $
    6,630CUMULATIVE
      ADJUSTMENT TO EQUITY IN LOSS OF AFFILIATED COMPANIES (f)
    
    **$**
    **(4,290**
    **)**
    $
    (2,676
    )TOTAL
      SHAREHOLDERS' EQUITY UNDER US GAAP
    
    **$**
    **53,479**
    
    $
    33,291TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY UNDER US GAAP
    
    **$**
    **55,102**
    
    $
    33,692
**CONSOLIDATED
      STATEMENTS OF LOSS AND DEFICIT****Cumulative
      from inception to December 31,**
    
    Year ended
      December 31**2004**
    
    **2004**
    
    2003
    
    2002NET LOSS
      UNDER CANADIAN GAAP
    
    **$**
    **(81,067**
    **)**
    **$**
    **(18,525**
    **)**
    $
    (8,049
    )
    $
    (13,872
    )MINERAL
      PROPERTY EXPLORATION EXPENSE (a)
    
    
    **(23,587**
    **)**
    
    **(8,061**
    **)**
    
    (3,285
    )
    
    3,593STOCK-BASED
      COMPENSATION – CONSULTING (c)
    
    
    **(2,127**
    **)**
    
    **–**
    
    
    –
    
    
    –STOCK-BASED
      COMPENSATION – EMPLOYEES (c)
    
    
    **10,194**
    
    
    **9,510**
    
    
    321
    
    
    363ADJUSTMENT TO
      EQUITY IN LOSS OF AFFILIATED COMPANIES (f)
    
    
    **(4,290**
    **)**
    
    **(1,614**
    **)**
    
    1,152
    
    
    2,862ELIMINATION
      OF DILUTION GAIN (h)
    
    
    **(5,183**
    **)**
    
    **(537**
    **)**
    
    (174
    )
    
    (1,295
    )NET LOSS
      UNDER US GAAP BEFORE NON-CONTROLLING INTEREST
    
    
    **(106,060**
    **)**
    
    **(19,227**
    **)**
    
    (10,035
    )
    
    (8,349
    )NON-CONTROLLING
      INTEREST
    
    
    **485**
    
    
    **–**
    
    
    –
    
    
    –NET LOSS
      UNDER US GAAP
    
    **$**
    **(105,575**
    **)**
    **$**
    **(19,227**
    **)**
    $
    (10,035
    )
    $
    (8,349
    )LOSS PER
      SHARE
    
    
    
    
    **$**
    **(0**
    **)**
    $
    (0
    )
    $
    (0
    )




Southwestern
Resources Corp.


CONSOLIDATED
      STATEMENTS OF CASH FLOWS**Cumulative
      from inception to December 31**
    
    Year
      ended December 312004
    
    2004
    
    2003
    
    2002OPERATING
      ACTIVITIESOPERATING
      ACTIVITIES UNDER CANADIAN GAAP
    
    $
    (24,068
    )
    $
    (3,959
    )
    $
    (4,322
    )
    $
    (3,730
    )EXPLORATION
      (a)
    
    
    (68,952
    )
    
    (10,469
    )
    
    (4,912
    )
    
    (973
    )OPERATING
      ACTIVITIES UNDER US GAAP
    
    $
    (93,020
    )
    $
    (14,428
    )
    $
    (9,234
    )
    $
    (4,703
    )INVESTING
      ACTIVITIESINVESTING
      ACTIVITIES UNDER CANADIAN GAAP
    
    $
    (84,894
    )
    $
    (12,302
    )
    $
    (4,990
    )
    $
    (1,618
    )EXPLORATION
      (a)
    
    
    68,952
    
    
    10,469
    
    
    4,912
    
    
    973INVESTING
      ACTIVITIES UNDER US GAAP
    
    $
    (15,942
    )
    $
    (1,833
    )
    $
    (78
    )
    $
    (645
    )


a)
Exploration Expenses

Canadian
GAAP allows exploration costs to be capitalized during the search for a
commercially mineable body of ore. Under US GAAP, expenditures on mineral
property costs can only be deferred subsequent to the establishment of mining
reserves. Previously for US GAAP purposes the Company had expensed all costs
relating to the acquisition of exploration rights and exploration expenditures
in the period incurred. However, during the year ended December 31, 2004, the
Company adopted EITF 04-02 which had the effect of reducing its equity loss in
Aurora for the year ended December 31, 2004 by $1,534,740.

b)
Asset Retirement Obligations

In June
2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement
Obligations” (“SFAS 143”), which addresses financial accounting and reporting
for obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and (or) the normal operation of
a long-lived asset, except for certain obligations of leases. SFAS 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, an entity capitalizes the cost by increasing the carrying
amount of the related long-lived assets. Over time the liability is accreted to
its present value each period, and the capitalized cost is amortized over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. SFAS 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002, with earlier application encouraged.
The adoption of SFAS 143 does not have a material impact on the Company's
financial position.

c)
Accounting for Stock-Based Compensation

For US
GAAP purposes, the Company accounts for stock-based compensation to employees
and directors, under Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees” (“APB 25”), using the intrinsic value based method
whereby compensation cost is recorded for the excess, if any, of the quoted
market price at the date granted over the exercise price.

As
described in note 3, the Company accounts for stock-based awards made to
non-employees using a fair value based method in accordance with Section 3870 of
the CICA Handbook.

SFAS 123,
however, allows the Company to continue to measure the compensation cost of
employees and directors in accordance with APB 25. The Company has adopted the
disclosure-only provisions of SFAS 123.



Southwestern
Resources Corp.


The
following pro forma financial information presents the net loss for the year and
the loss per share had the Company adopted SFAS 123 for all stock options issued
to employees and directors.

FOR THE YEAR
      ENDED DECEMBER 31
    
    2004
    
    2003
    
    2002NET LOSS
      UNDER US GAAP
    
    **$**
    **(19,227**
    **)**
    $
    (10,035
    )
    $
    (8,349
    )ADDITIONAL
      STOCK-BASED COMPENSATION COST
    
    
    (9,510
    )
    
    (321
    )
    
    (363
    )PRO FORMA NET
      LOSS
    
    **$**
    **(28,737**
    **)**
    $
    (10,356
    )
    $
    (8,712
    )PRO FORMA
      BASIC LOSS PER SHARE
    
    **$**
    **(0.69**
    **)**
    $
    (0.29
    )
    $
    (0.27
    )


Using the
fair value method for stock-based compensation, additional costs of
approximately $9,510,000, $321,000 and $363,000 would have been recorded for the
periods ended December 31, 2004, 2003 and 2002 respectively. This amount is
determined using an option pricing model assuming no dividends are to be paid,
vesting occurring on the date of the grant, a weighted-average volatility of the
Company's share price of 47% (2003 – 96%; 2002 – 44%), an annual average risk
free interest rate of 5% (2003 – 5%; 2002 – 5%), and an expected life of 3.5
years (2003 – 5 years; 2002 – 5 years).

d )
Foreign Currency Translation

Under US
GAAP, assets and liabilities of subsidiaries not reporting in the parent
Company's functional currency are translated at rates of exchange prevailing at
each balance sheet date. Revenues and expenses of such subsidiaries are
translated at exchange rates prevailing on the dates on which such items are
recognized in operations. Gains and losses arising from translation of financial
statements are deferred and disclosed as a separate component of shareholders'
equity.

e)
Comprehensive income

Statement
No. 130 (“SFAS 130”), reporting “Comprehensive Income,” issued by the Financial
Accounting Standards Board establishes standards for the reporting and display
of comprehensive income and its components. SFAS 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement. The impact of SFAS
130 on the Company's financial statements is as follows:

COMPREHENSIVE
      INCOME**Cumulative
      from inception to December 31**
    
    Year
      ended December 312004
    
    2004
    
    2003
    
    2002NET LOSS
      UNDER US GAAP
    
    $
    (105,575
    )
    $
    (19,227
    )
    $
    (10,035
    )
    $
    (8,349
    )OTHER
      COMPREHENSIVE ITEMS:CUMULATIVE
      EXCHANGE ADJUSTMENT
    
    
    (147
    )
    
    (105
    )
    
    (87
    )
    
    (230
    )UNREALIZED
      GAINS (LOSSES) ON AVAILABLE-FOR-SALE SECURITIES (f)
    
    
    947
    
    
    (5,725
    )
    
    4,793
    
    
    (543
    )800
    
    
    (5,830
    )
    
    4,706
    
    
    (773
    )COMPREHENSIVE
      LOSS
    
    $
    (104,775
    )
    $
    (25,057
    )
    $
    (5,329
    )
    $
    (9,122
    )NET
      COMPREHENSIVE LOSS PER SHARE
    
    
    
    
    $
    (0.60
    )
    $
    (0.15
    )
    $
    (0.29
    )


f)
Investments

Statement
No. 115 (“SFAS 115”), “Accounting for Certain Investments in Debt and Equity
Securities,” classifies investments into three categories based on management's
intentions and anticipated maturity dates of the investments. Under these three
categories, the Company's investments categorized as “other” in note 8 would be
categorized as “available for sale securities.” Accordingly, these investments
would be carried at the quoted market value and the unrealized gains would be
shown as a separate component of shareholders' equity. The investmentsin
note 8 categorized as “significantly influenced affiliates” are accounted for
under the equity method for which there is no material difference under Canadian
and US GAAP, except that the underlying results of operations are adjusted to
conform with US GAAP prior to the calculation of the Company's share of equity
income (loss). The significant conforming adjustment to the affiliates' results
relates to the accounting for mineral property expenditures.



Southwestern
Resources Corp.


g)
Controlled Entities

The
Company operates in China through a majority held subsidiary. Under US GAAP,
such ventures are accounted for under the equity method as it is considered that
the Company cannot exercise sufficient control to warrant consolidation. Under
Canadian GAAP, it is considered that the rights of the minority do not
significantly impair the Company's right to control and direct the operations
and therefore the Company has consolidated, on a proportionate basis, the
results of operations and financial position. The Company has determined that
the effect of this difference on all periods disclosed is immaterial.

h)
Accounting for Sales of Shares by an Equity Investment

The
Company accounts for dilution gains and losses from the sale of shares by its
equity investments as income statement items for Canadian GAAP purposes. Under
US GAAP, dilution gains or losses that arise from a company in the development
stage are treated as a charge to equity. For US GAAP purposes, as the Company's
equity investments are considered development stage companies, the Company has
charged all dilution gains to a separate contributed surplus account in equity.

i) Rece
nt Accounting Pronouncements

In
December 2003, the FASB issued Interpretation No. 46-Revised (“FIN 46-R”),
“Consolidation of Variable Interest Entities,” an interpretation of ARB 51
(revised December 2003), which replaces FIN 46. FIN 46-R incorporates certain
modifications of FIN 46 adopted by the FASB subsequent to the issuance of FIN
46, including modifications to the scope of FIN 46. For all non-special purpose
entities (“SPE”) created prior to February 1, 2003, public entities will be
required to adopt FIN 46-R at the end of the first interim or annual reporting
period ending after March 15, 2004. For all entities (regardless of whether the
entity is an SPE) that were created subsequent to January 31, 2003, public
entities are already required to apply the provisions of FIN 46, and should
continue doing so unless they elect to adopt the provisions of FIN 46-R early as
of the first interim or annual reporting period ending after December 15, 2003.
If they do not elect to adopt FIN 46-R early, public entities would be required
to apply FIN 46-R to those post-January 31, 2003 entities as of the end of the
first interim or annual reporting period ending after March 15, 2004. Currently
the adoption of FIN 46-R has no effect on the Company’s financial position or
results of operations.

During
2004, the Emerging Issues Task Force (“EITF”) formed a committee (“Committee”)
to evaluate certain mining industry accounting issues, including issues arising
from the application of SFAS No. 141, “Business Combinations” (“SFAS 141”), to
business combinations within the mining industry and the capitalization of costs
after the commencement of production, including deferred stripping.

In March
2004, the EITF reached a consensus, based upon the Committee's deliberations of
EITF 04-02, whether Mineral Rights are Tangible or Intangible Assets, and
ratified by the FASB, that mineral interests conveyed by leases should be
considered tangible assets. On April 30, 2004, the FASB issued a FASB Staff
Position (“FSP”) amending SFAS 141 and SFAS 142 to provide that certain mineral
use rights are considered tangible assets and that mineral use rights should be
accounted for based on their substance. The FSP is effective for the first
reporting period beginning after April 29, 2004, with early adoption permitted.
The Company adopted this statement which had the effect of reducing the equity
loss in Aurora by $1,534,740.

During
2004, deliberations began on EITF Issue No. 04-6, "Accounting for Stripping
Costs Incurred during Production in the Mining Industry." Upon completion of
their deliberations they will issue EITF 04-6, which will represent an
authoritative US GAAP pronouncement for stripping costs. This EITF is expected
to be approved and issued in the first quarter 2005. The Company is not at the
production stage on any of its mineral properties and does not expect that the
adoption of EITF 04-6 will have an impact on the Company’s financial position or
results of operation.



Southwestern
Resources Corp.


In
December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which
establishes accounting standards for all transactions in which an entity
exchanges its equity instruments for goods and services. SFAS No. 123(R) focuses
primarily on accounting for transactions with employees, and carries forward
without change prior guidance for share-based payments for transactions with
non-employees. SFAS No. 123(R) eliminates the intrinsic value measurement
objective in APB Opinion 25 and generally requires the Company to measure the
cost of employee services received in exchange for an award of equity
instruments based on the fair value of the award on the date of the grant. The
standard requires grant date fair value to be estimated using either an
option-pricing model which is consistent with the terms of the award or a market
observed price, if such a price exists. Such cost must be recognized over the
period during which an employee is required to provide service in exchange for
the award. The standard also requires us to estimate the number of instruments
that will ultimately be issued, rather than accounting for forfeitures as they
occur. The Company is required to apply SFAS No. 123(R) to all awards granted,
modified or settled in the first reporting period under U.S. GAAP after June 15,
2005. The Company is determining the effect that this standard would have on the
financial position or results of operations in the future.



Southwestern
Resources Corp.