**Exhibit 99.2**

** **

**MANAGEMENT’SRESPONSIBILITY FOR FINANCIAL REPORTING**

 

The consolidated financial statements ofMinera Andes, Inc. have been prepared by, and are the responsibility of theCompany’s management.

 

The consolidated financial statements areprepared in accordance with accounting principles generally accepted in Canadaand reflect management’s best estimates and judgments on information currentlyavailable. In the opinion of management, the accounting practices utilized areappropriate in the circumstances and the consolidated financial statementsfairly reflect the financial position and results of operations of the Companywithin reasonable limits of materiality.

 

Management has developed and is maintaining asystem of internal controls to obtain reasonable assurance that the Company’sassets are safeguarded, transactions are authorized, and financial informationis reliable. All internal control systems have inherent limitations, includingthe possibility of circumvention and overriding of controls, and, therefore,can provide only reasonable assurance as to financial statement preparation andsafeguarding of assets.

 

The Board of Directors is responsible forensuring management fulfills its responsibilities. The Audit Committee meetswith the Company’s management and external auditors to discuss the results ofthe audit and to review the annual consolidated financial statements prior tothe Audit Committee’s submission to the Board of Directors for approval. TheAudit Committee also reviews the quarterly financial statements and recommendsthem for approval to the Board of Directors, reviews with management thesystems of internal control and security, and approves the scope of theexternal auditors audit and non-audit work. The Audit Committee is composedentirely of directors not involved in the daily operations of the Company andthus is considered to be free from any relationship that could interfere withthe exercise of independent judgment as a Committee member.

 

The consolidated financial statements havebeen audited by KPMG LLP, Chartered Accountants and their report outlines thescope of their examination and gives their opinion on the consolidatedfinancial statements.

 

 

Date March 29, 2010

 
| //signed// Robert R. McEwen           |   |
|---------------------------------------|--------|
| Robert R. McEwen                      |   |
| President and Chief Executive Officer |   |
|                                  |   |
| //signed// Henry A. John              |   |
| Henry A. John                         |   |
| Chief Financial Officer               |   |

 

1

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**MINERA ANDES INC.**

**CONSOLIDATED STATEMENTS OFOPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)**

**(U.S. Dollars)**

** **
| ** **                                                               | ** ** | **Year Ended**              | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                               | ** ** | ** **                  | ** ** | **December 31,** | ** ** |
| ** **                                                               | ** ** | **December 31,  2009** | ** ** | **2008  (restated Note 2(a))** | ** ** |
| ** **                                                               | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Income on Investment in Minera  Santa Cruz                               |       | $                           | 10,587,297 |   | $ | 5,416,051 |   |
| Less amortization of  deferred costs                                     |       | (1,238,674                  | )          | (720,000 | ) |
| Net income on Investment in  Minera Santa Cruz (Note 5)                  |       | 9,348,623                   |       | 4,696,051 |   |
| Professional fees                                                        |       | 2,596,739                   |       | 2,238,517 |   |
| General and administrative                                               |       | 3,483,870                   |       | 2,798,878 |   |
| Expenses before under-noted                                              |       | 6,080,609                   |       | 5,037,395 |   |
| Foreign exchange (gain)  loss                                            |       | (350,193                    | )          | 1,220,061 |   |
| Interest and other income                                                |       | (29,822                     | )          | (406,866 | ) |
| Interest expense and  accretion of debt discount (Note 6)                |       | 1,143,970                   |       | 2,817,118 |   |
| Project loan interest expense  (Note 5)                                  |       | 2,616,302                   |       | 2,625,927 |   |
| Project loan interest  income (Note 5)                                   |       | (2,616,302                  | )          | (2,625,927 | ) |
| Write-off of mineral  properties and deferred exploration costs (Note 4) |       | 12,057                      |       | 3,817 |   |
| Total expenses                                                           |       | 6,856,621                   |       | 8,671,525 |   |
| Net income (loss) before  taxes                                          |       | 2,492,002                   |       | (3,975,474 | ) |
| Income tax recovery (Note  12)                                           |       | 1,622,770                   |       | — |   |
| Net income (loss) and other  comprehensive income (loss)                 |       | $                           | 4,114,772  |   | $ | (3,975,474 | ) |
| Basic income (loss) per  common share (Note 7e)                          |       | $                           | 0.02       |   | $ | (0.02 | ) |
| Diluted income (loss) per  common share (Note 7e)                        |       | $                           | 0.02       |   | $ | (0.02 | ) |
| Weighted average number of  shares, basic                                |       | 236,517,659                 |       | 189,696,255 |   |
| Weighted average numer of  shares, diluted                               |       | 237,796,838                 |       | 189,696,255 |   |

 
| Approved by the Board of Directors:      |   |                      |
|------------------------------------------|--------|---------------------------|
|                                     |   |                      |
| /s/ Robert R. McEwen                     |   | /s/ Allan J. Marter       |
| Robert R. McEwen, President, Chief       |   | Allan J. Marter, Director |
| Executive Officer and Executive Chairman |   |                      |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

2

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**MINERA ANDES INC.**

**CONSOLIDATED BALANCE SHEETS**

**(U.S. Dollars)**

 
| ** **                                                  | ** ** | **As  at**                  | ** **  |
|-------------------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                                  | ** ** | ** **                  | ** **  | **December 31,** | ** ** |
| ** **                                                  | ** ** | **December 31,  2009** | ** **  | **2008****(restated Note 2(a))** | ** ** |
| ** **                                                  | ** ** | ** **                  | ** **  | ** ** | ** ** |
| **ASSETS**                                                  |       |                        |        |   |   |
| Current:                                                    |       |                        |        |   |   |
| Cash and cash equivalents                                   |       | $                           | 18,872,312  |   | $ | 3,409,593 |   |
| Receivables and prepaid  expenses                           |       | 251,508                     |        | 315,962 |   |
| Project loan interest  receivable (Note 5)                  |       | 7,599,982                   |        | 4,983,680 |   |
| Total current assets                                        |       | 26,723,802                  |        | 8,709,235 |   |
| Project loan receivable  (Note 5)                           |       | 31,850,000                  |        | 31,850,000 |   |
| Mineral properties and  deferred exploration costs (Note 4) |       | 19,255,127                  |        | 16,390,524 |   |
| Investment in Minera Santa  Cruz (Note 5)                   |       | 88,722,287                  |        | 80,343,647 |   |
| Equipment, net                                              |       | 19,418                      |        | 31,456 |   |
| Total assets                                                |       | $                           | 166,570,634 |   | $ | 137,324,862 |   |
| **LIABILITIES**                                             |       |                        |        |   |   |
| Current:                                                    |       |                        |        |   |   |
| Accounts payable and  accrued liabilities                   |       | $                           | 2,748,875   |   | $ | 3,211,013 |   |
| Project loan interest  payable (Note 5)                     |       | 7,599,982                   |        | 4,983,680 |   |
| Bank loan (Note 6)                                          |       | —                      |        | 16,455,267 |   |
| Related party payable (Note  5)                             |       | —                      |        | 11,270,000 |   |
| Total current liabilities                                   |       | 10,348,857                  |        | 35,919,960 |   |
| Project loan payable (Note  5)                              |       | 31,850,000                  |        | 31,850,000 |   |
| Total liabilities                                           |       | 42,198,857                  |        | 67,769,960 |   |
|                                                        |       |                        |        |   |   |
| **SHAREHOLDERS’  EQUITY**                              |       |                        |        |   |   |
| Share capital (Note 7):                                     |       |                        |        |   |   |
| Common shares, no par  value, unlimited number authorized   |       |                        |        |   |   |
| Issued December 31,  2009—262,908,851 shares      |       | 149,217,538                 |        | 99,652,302 |   |
| Issued December 31,  2008—190,158,851 shares      |       |                        |        |   |   |
| Contributed surplus                                         |       | 19,158,795                  |        | 18,020,608 |   |
| Accumulated deficit                                         |       | (44,004,556                 | )           | (48,118,008 | ) |
| Total shareholders’ equity                             |       | 124,371,777                 |        | 69,554,902 |   |
| Total liabilities and  shareholders’ equity            |       | $                           | 166,570,634 |   | $ | 137,324,862 |   |

 

Commitmentsand contingencies (Note 8)

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

3

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**MINERA ANDES INC.**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

**(U.S. Dollars)**

** **
| ** **                                                                               | ** ** | **Common Stock** | ** **  | **Contributed** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------|-------------|-----------------|------------|-----------------|------------|-------------|------------|
| ** **                                                                               | ** ** | **# Shares**     | ** **  | **$**           | ** ** | **Surplus**     | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balance, December 31,  2007                                                         |       |             | 180,974,912 |            | $          | 88,512,349      |       | $           | 16,007,350 |   | $ | (44,053,179 | ) | $ | 60,466,520 |   |
| Private placement (Note 7b  (i.))                                                        |       | 7,778,023        |        | 11,799,405      |       | —          |       | —      |       | 11,799,405 |   |
| Private placement (Note 7b  (i.))                                                        |       | 427,000          |        | 663,836         |       | —          |       | —      |       | 663,836 |   |
| Exercise of stock options  (Note 7c)                                                     |       | 260,000          |        | 202,157         |       | —          |       | —      |       | 202,157 |   |
| Exercise of warrants                                                                     |       | 718,916          |        | 313,804         |       | —          |       | —      |       | 313,804 |   |
| Fair value of warrants  granted for private placement (Note 7c)                          |       | —           |        | (1,293,340      | )          | 1,293,340       |       | —      |       | — |   |
| Fair value of agent’s  options and warrants granted for private placement (Note 7c) |       | —           |        | (159,959        | )          | 159,959         |       | —      |       | — |   |
| Agent option valuation on  exercise of options (Note 7c)                                 |       | —           |        | 164,674         |       | (164,674        | )          | —      |       | — |   |
| Warrant valuation on  exercise of options (Note 7c)                                      |       | —           |        | 83,413          |       | (83,413         | )          | —      |       | — |   |
| Share issue costs (Note  7b(i.))                                                         |       | —           |        | (634,037        | )          | —          |       | (89,355     | )          | (723,392 | ) |
| Stock-based compensation  (Note 7c)                                                      |       | —           |        | —          |       | 808,046         |       | —      |       | 808,046 |   |
| Net loss for the year                                                                    |       | —           |        | —          |       | —          |       | (3,975,474  | )          | (3,975,474 | ) |
| Balance, December 31,  2008                                                         |       | 190,158,851      |        | 99,652,302      |       | 18,020,608      |       | (48,118,008 | )          | 69,554,902 |   |
| Private placement (Note 7b  (vi.))                                                       |       | 40,000,000       |        | 31,950,960      |       | —          |       | —      |       | 31,950,960 |   |
| Share issue costs, private  placement                                                    |       | —           |        | (385,518        | )          | —          |       | (1,320      | )          | (386,838 | ) |
| Proceeds from short form  prospectus financing (Note 7b (vii.))                          |       | 30,705,000       |        | 20,995,311      |       | —          |       | —      |       | 20,995,311 |   |
| Short form prospectus  finanacing share issue costs                                      |       | —           |        | (1,157,881      | )          | (280,958        | )          | —      |       | (1,438,839 | ) |
| Fair value of warrants  granted for short form prospectus financing (Note 7b (vii.))     |       | —           |        | (3,544,663      | )          | 3,544,663       |       | —      |       | — |   |
| Exercise of stock options  (Note 7c)                                                     |       | 2,045,000        |        | 1,006,707       |       | —          |       | —      |       | 1,006,707 |   |
| Fair value of stock options  exercised (Note 7c)                                         |       | —           |        | 700,320         |       | (700,320        | )          | —      |       | — |   |
| Stock-based compensation  (Note 7c)                                                      |       | —           |        | —          |       | 197,572         |       | —      |       | 197,572 |   |
| Warrant valuation on expiry  of options                                                  |       |             |        |            |       | (1,622,770      | )          |        |       | (1,622,770 | ) |
| Net income for the year                                                                  |       | —           |        | —          |       | —          |       | 4,114,772   |       | 4,114,772 |   |
| Balance, December 31,  2009                                                         |       |             | 262,908,851 |            | $          | 149,217,538     |       | $           | 19,158,795 |   | $ | (44,004,556 | ) | $ | 124,371,777 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

4

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**MINERA ANDES INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(U.S. Dollars)**

 
| ** **                                                                            | ** ** | **Year Ended**              | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                            | ** ** | ** **                  | ** ** | **December 31,** | ** ** |
| ** **                                                                            | ** ** | **December 31,  2009** | ** ** | **2008  (restated Note 2(a))** | ** ** |
| ** **                                                                            | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Operating Activities:                                                                 |       |                        |       |   |   |
| Net income (loss) for the  year                                                       |       | $                           | 4,114,772  |   | $ | (3,975,474 | ) |
| Adjustments to reconcile  net income (loss) to net cash used in operating activities: |       |                        |       |   |   |
| Net income from Investment  in MSC (Note 5 and 10)                                    |       | (9,348,623                  | )          | (4,696,051 | ) |
| Loss on disposal of assets                                                            |       | 2,568                       |       | — |   |
| Project loan interest  expense (Note 5)                                               |       | 2,616,302                   |       | 2,625,927 |   |
| Project loan interest  income (Note 5)                                                |       | (2,616,302                  | )          | (2,625,927 | ) |
| Accretion of debt discount  (Note 6)                                                  |       | 1,044,733                   |       | 1,863,437 |   |
| Write-off of deferred  exploration costs                                              |       | 12,057                      |       | 3,817 |   |
| Depreciation                                                                          |       | 4,702                       |       | 5,037 |   |
| Stock-based compensation  (Note 7)                                                    |       | 197,571                     |       | 713,729 |   |
| Recovery of income tax  (Note 12)                                                     |       | (1,622,770                  | )          | — |   |
| Change in:                                                                            |       |                        |       |   |   |
| Receivables and prepaid  expenses                                                     |       | 64,770                      |       | 24,711 |   |
| Accounts payable and  accrued liabilities                                             |       | (36,001                     | )          | (543,355 | ) |
| Cash used in operating  activities                                                    |       | (5,566,221                  | )          | (6,604,149 | ) |
|                                                                                  |       |                        |       |   |   |
| Investing Activities:                                                                 |       |                        |       |   |   |
| Purchase of equipment                                                                 |       | (4,594                      | )          | (11,719 | ) |
| Mineral properties and  deferred exploration                                          |       | (2,867,612                  | )          | (8,403,206 | ) |
| Changes in due to related  party, MSC cash call                                       |       | (11,270,000                 | )          | (5,635,000 | ) |
| Investment in Minera Santa  Cruz (Note 5)                                             |       | 575,750                     |       | (11,310,317 | ) |
| Cash used in investing activities                                                     |       | (13,566,456                 | )          | (25,360,242 | ) |
|                                                                                  |       |                        |       |   |   |
| Financing Activities:                                                                 |       |                        |       |   |   |
| Shares, warrants, and  subscriptions issued for cash, less issue costs                |       | 52,127,301                  |       | 12,255,811 |   |
| Bank loan interest  (payable) receivable (Note 6)                                     |       | (31,905                     | )          | 17,038 |   |
| Repayment of bank loan  (Note 6)                                                      |       | (17,500,000                 | )          | — |   |
| Cash provided by financing  activities                                                |       | 34,595,396                  |       | 12,272,849 |   |
| Increase (decrease) in cash  and cash equivalents                                     |       | 15,462,719                  |       | (19,691,542 | ) |
| Cash and cash equivalents,  beginning of year                                         |       | 3,409,593                   |       | 23,101,135 |   |
| Cash and cash equivalents,  end of year                                               |       | $                           | 18,872,312 |   | $ | 3,409,593 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

5

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**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**1.****             ****NATURE OFOPERATIONS AND BASIS OF PRESENTATION**

 

Minera Andes Inc.(“Minera Andes” or the “Company”) is in the business of acquiring, exploringand evaluating mineral properties, and based on the results of such evaluation,either developing these properties further (by way of joint venture orotherwise) or disposing of them.

 

The Company’sassets are comprised primarily of (i) a 49% equity interest in MineraSanta Cruz S.A. (“MSC”) which owns the San José gold/silver mine in the SantaCruz province of Argentina (the San José Mine”); (ii) the Los AzulesCopper Project, and (iii) interests in exploration stage properties in theSan Juan, the Santa Cruz and the Chubut provinces of Argentina.

 

The San José Mineis a joint venture between the Company and Hochschild Mining plc pursuant towhich title to the assets is held by MSC, an Argentinean corporation.  MSC is owned, as to 49%, by Minera Andes S.A.(“MASA”), an indirect wholly-owned subsidiary of Minera Andes and, as to 51%,by Hochschild Mining (Argentina) Corporation S.A., a subsidiary of HochschildMining plc (together with its affiliates and subsidiaries, “Hochschild”).  The San José Mine entered into production in2008 and is operated by Hochschild.

 

The operation of the SanJosé Mine is subject to a number of risks. To the extent that cash fromoperations is insufficient for any reason including, a decline in the price ofgold and silver, cost-overruns, lower than expected sales or production, orwork stoppages, we may be called upon as a shareholder of MSC to makeadditional investments There is no assurance that we could satisfy such cashcalls if they are required. Although the San José Mine has been in productionsince 2008, we have not received any cash flows from its operations. TheCompany’s failure to meet its ongoing obligations on a timely basis couldresult in the loss or substantial dilution of the Company’s interests in MSC. Ourshare of earnings (investment income) or losses from the San José Mine isincluded in our consolidated statement of operations and the balance of theinvestment is adjusted on the consolidated balance sheet by a like amount. Ourinvestment income or losses consist of our 49% share of the net profit or netloss of the operations of the San José Mine, accounted for on an equity basis.

 

Our share ofearnings (investment income) or losses from the San José Mine is included inour consolidated statement of operations and the balance of the investment isadjusted on the consolidated balance sheet by a like amount. Our investmentincome or losses consist of our 49% share of the net profit or net loss of theoperations of the San José Mine, accounted for on an equity basis.

 

The Los AzulesCopper Project (“Los Azules”) is a 100% owned advanced-stage explorationproject located in San Juan Province, Argentina.

 

Under the terms ofan option agreement between Minera Andes and Xstrata Copper (“Xstrata”) (andtheir respective affiliates) dated November 2, 2007 (the “Option Agreement”),Minera Andes had the right to earn-in and acquire a 100% interest in certainXstrata properties (the “Xstrata Properties”) adjacent to Minera Andes’properties (“Earn-in Option”) upon satisfaction of certain conditions,including delivery of a scoping study/preliminary assessment. The Companyexercised the Earn-in Option on May 29, 2009.

 

The OptionAgreement also provided that Xstrata would have a one-time option to back-in toa 51% interest in Los Azules (the “Back-in Right”) upon, among other things,payment to the Company of an amount equal to three times the amount of MineraAndes’ direct exploration expenditures on Los Azules since November 25,2005.  Xstrata had until October 1,2009, to notify Minera Andes if it would exercise the Back-in Right. Xstratadid not exercise the Back-in Right, and consequently, Xstrata has transferredthe Xstrata Properties to an Argentine subsidiary of Minera Andes.

 

Certain of theXstrata Properties formerly held by Xstrata and transferred to the Companypursuant to the Option Agreement remain subject to an underlying optionagreement between Xstrata and Solitario Argentina S.A. (“Solitario”), wherebySolitario has the right to back-in up to 25% of the properties covered by theunderlying option agreement (the “Solitario Agreement”), exercisable bySolitario upon the satisfaction of certain conditions within 36 months ofXstrata exercising the option. The Solitario Agreement is the subject of adispute between Xstrata; and, Solitario and its parent company TNR Gold Corp.(together “TNR”) Xstrata in the Supreme Court of British Columbia. The disputesurrounds the validity of the 36-month time limit described above. If TNR issuccessful, the Company’s interest in certain of the Xstrata Properties may bereduced by up to 25%. Minera Andes is not a party to the litigation.

 

As at December 31,2009, the Company had an accumulated deficit of $44.0 million and workingcapital 

 

6

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**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**1.****             ****NATURE OFOPERATIONS AND BASIS OF PRESENTATION — continued**

 

of approximately$16.4 million.

 

With the exceptionof its interest in the San José Mine, the Company is in the process ofexploring its other properties and has not yet determined whether theseproperties, including Los Azules, contain reserves that are economicallyrecoverable. The amounts shown on the Company’s balance sheet as mineralproperties and deferred exploration costs represent net costs incurred to date,less amounts recovered from third parties and/or written off, and do notnecessarily represent present or future values. The recoverability of amountsshown on the balance sheet for mineral properties and deferred explorationcosts depend upon the existence of economically recoverable reserves, securingand maintaining title and beneficial interest in the properties, obtaining thefinancing required to explore and develop the properties, entering intoagreements with others to explore and develop the mineral properties, and uponfuture profitable production or proceeds from disposition of the mineralproperties. In the future, the Company’s ability to continue its exploration anddevelopment activities, will depend in part on the Company’s ability togenerate material revenues or to obtain financing through issuance of equitysecurities, debt financing, joint venture arrangements or other means.

 

**2.     SIGNIFICANT ACCOUNTING POLICIES AND BASISOF PRESENTATION**

 

These consolidated financial statements have been prepared by theCompany in accordance with Canadian generally accepted accounting principles(“Canadian GAAP”) using the following significant accounting policies:

 

**a. Restatement of previously issued financial statements**

 

These consolidated financial statements have beenrestated as at and for the year ended December 31, 2008 to correct anunderstatement of future tax expense related to interest income with MSC.  The restatement has the effect of decreasingthe net investment in MSC by $0.7 million, decreasing income on investment inMSC for the year ended December 31, 2008 by $0.3 million and increasingthe opening accumulated deficit by $0.4 million.

 

The impact of this restatement on the consolidatedfinancial statements is as follows:

 
| ** **                                                                                                       | ** ** | **As Previously  Reported** | ** **  | **Restatement** | ** ** | **As Restated** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|-----------------|------------|----------------------|------------|
| Balance Sheet as at  December 31, 2008                                                                      |       |                             |        |            |       |                 |       |
| Investment in Minera Santa  Cruz                                                                                 |       | $                                | 81,034,075  |            | $          | (690,428             | )          | $ | 80,343,647 |   |
| Accumulated deficit                                                                                              |       | $                                | (47,427,580 | )               | $          | (690,428             | )          | $ | (48,118,008 | ) |
|                                                                                                             |       |                             |        |            |       |                 |       |
| Consolidated Statements of  Operations and Other Comprehensive Income for the year ended  December 31, 2008 |       |                             |        |            |       |                 |       |
| Net income on investment  in Minera Santa Cruz                                                                   |       | $                                | 4,997,193   |            | $          | (301,142             | )          | $ | 4,696,051 |   |
| Net loss and other  comprehensive loss                                                                           |       | $                                | (3,674,332  | )               | $          | (301,142             | )          | $ | (3,975,474 | ) |
| Basic loss per common  share                                                                                     |       | $                                | (0.02       | )               | $          | —               |       | $ | (0.02 | ) |

 

**b.  Basis ofPresentation and Principles of Consolidation**

These consolidated financial statements include the accounts of theCompany and all of its subsidiaries and investments, including its principalsubsidiaries, MASA, Andes Corporation Minera S.A. (“ACMSA”) and Minera Andes(USA) Inc. (“MUSA”) as well as other non-significant subsidiaries.  As stated above, MASA holds the Company’sinterest in MSC.

 

Our investment in MSC, is accounted for by the equity method, wherebythe Company records its investment and its share of the earnings and losses ofMSC.  All significant intercompanytransactions and balances have been eliminated from the consolidated financialstatements.

 

**c.  ForeignCurrency Translation**

The statements are reported and calculated in U.S. dollars, which isthe currency in which the majority of the Company’s transactions areincurred.  Our consolidated operationsare integrated and balances denominated in currencies other than U.S. dollarsare translated into U.S. dollars using the temporal method. This methodtranslates foreign currency monetary assets at the exchange rates prevailing atthe balance sheet date. Non-monetary assets and liabilities denominated inforeign currencies are translated using the rate of exchange at the transactiondate; and foreign exchange gains and losses are included in the statement ofoperations.  Canadian dollars are shownas C$.

 

**d.  Cash andCash Equivalents**

Cash and cash equivalents include cash, and those short-term moneymarket instruments that are readily convertible to cash with an original termof less than 90 days.

 

7

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**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**2.****             ****SIGNIFICANTACCOUNTING POLICIES — continued**

 

**e.  MineralProperties and Deferred Exploration Costs**

Mineralproperties consist of exploration and mining concessions, options andcontracts. Acquisition and leasehold costs and exploration costs arecapitalized and deferred until such time as the property is put into productionor the properties are disposed of either through sale or abandonment. If putinto production, the cost of acquisition and exploration are amortized over thelife of the property, based on the current production and estimated economicreserves.  Proceeds received from thesale of any interest in a property are first credited against the carryingvalue of the property, with any excess included in operations for the period. If a property is abandoned, theproperty and deferred exploration costs are written off to operations.  On an annual basis, we evaluate the futurerecoverability of our mineral properties and deferred exploration costs.  Long-lived assets, includingmineral properties and equipment are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. Impairment is considered to exist if the total estimated futureundiscounted cash flows are less than the carrying amount of the assets. Anyasset impairment is calculated and recorded based on discounted estimatedfuture cash flows. Future cash flows are estimated based on expected futureproduction, commodity prices, operating costs and capital costs.

 

**f. Investments**

Investments, over which we exert significant influence, are accountedfor using the equity method.  Under thismethod, our share of earnings and losses is included in the statement ofoperations and the balance of the investment is adjusted by a like amount.  Where there has been a loss in value, that isother than a temporary decline, the carrying value is reduced to estimated netrealizable value.

 

Expenses related to theconstruction of a mining facility, interest expense on debt, debt discount, andother legal and consulting expenses are capitalized until the mining facilityis placed into commercial production. Once in commercial production, expenses related to the mining facility,interest expense on debt, debt discount and other legal and consulting expensesare expensed as incurred.

 

**g.  Equipmentand Depreciation**

Equipment is recorded at cost, and depreciation is provided on adeclining—balance basis over estimated useful lives.

 

**h. Accounting for Income Taxes**

Income taxes are calculated using the asset and liability method ofaccounting for income taxes. Under the asset and liability method, future taxassets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases and for taxlosses and other deductions carried forward.

 

Future income tax assets and liabilities are calculated using enactedor substantively enacted tax rates expected to apply when the asset is realizedor the liability settled. A reduction in respect of the benefit of a future taxasset (a valuation allowance) is recorded against any future tax asset if it isnot more likely than not to be realized. The effect on future tax assets andliabilities of a change in tax rates is recognized in income in the period inwhich the change is substantively enacted.

 

**i.  Basicand Diluted Income (Loss) per Common Share**

Basic income (loss) per share is calculated by dividing net income(loss) applicable to common shareholders by the weighted-average number ofcommon shares outstanding for the year.

 

For the year ended December 31, 2009, potentially dilutive commonshares relating to options

 

8

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**2.****       ****SIGNIFICANTACCOUNTING POLICIES - continued**

 

**i.  Basicand Diluted Income (Loss) per Common Share — continued**

 

outstanding at year end totaling 1,279,179 were included in thecomputation of earnings per share. 23,315,273 options and warrants were notincluded in the computation because their effect was anti-dilutive. For theyear ended December 31, 2008, all options and warrants have been excludedas it would be anti-dilutive.

 

**j.  Measurement Uncertainty**

The preparation of consolidated financial statements in conformity withCanadian GAAP requires that the Company’s management make estimates andassumptions about future events that affect the amounts reported in theconsolidated financial statements and related notes to the financialstatements. Actual results may differ from those estimates.

 

Significant estimates used in the preparation of these consolidatedfinancial statements include, but are not limited to, the recoverability ofmineral properties and deferred exploration expenses, investments,  long-lived assets, asset retirement obligations,stock-based compensation, income taxes, the recording of liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenditures during thereporting period.  Actual results coulddiffer from management’s best estimates.

 

**k.  Stock-Based Compensation**

The Company has a stockoption plan as described in Note 7(c). The value of stock options grantedis estimated on the date of grant using the Black-Scholes option-pricing model.The Black-Scholes option-pricing model requires the input of subjectiveassumptions, including the expected term of the option and stock pricevolatility.

 

The fair value of stockoptions granted is recognized as a charge to operations on a straight linebasis over the applicable vesting period, with an offset to contributedsurplus. Where stock options are granted in exchange for services directlyrelated to specific mineral properties, the expense is capitalized against themineral property. The amount of compensation cost recognized at any date atleast equals the value of the vested portion of the options at that date. Whenstock options are exercised, the consideration paid by employees is credited toshare capital. See Note 7(c) for details of assumptions used in thecalculations.

 

Agent’s warrants, stock options and otherequity instruments issued as purchase consideration in non-cash transactions,other than as consideration for mineral properties, are recorded at fair valuedetermined by management using the Black-Scholes option pricing model. The fair value of the shares issued as purchase consideration for mineralproperties is based upon the trading price of those shares on the TSX on thedate of the agreement to issue shares as determined by the Board of Directors.

 

**l.  ReclamationObligations**

The Company’s explorationactivities are subject to various governmental laws and regulations relating tothe protection of the environment. These environmental regulations arecontinually changing and are generally becoming more restrictive. The Companyhas made, and intends to make in the future, expenditures to comply with suchlaws and regulations. The Company has recorded a liability for the estimatedfuture cost of reclamation. However, these estimates are subject to changebased on changes in circumstances and any new information that becomesavailable.  This policy is directed onlyat the Company’s properties. The asset retirement obligation related to theinvestment in MSC is recorded on the financial statements of MSC.

 

9

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**2.****             ****SIGNIFICANTACCOUNTING POLICIES - continued**

 

**m.   Warrants**

Proceeds from unit placements are allocated between shares and warrantsissued according to their relative fair value.  The value of the sharecomponent is credited to share capital and the value of the warrant componentis credited to contributed surplus, a separate component of shareholdersequity. Upon exercise of the warrants, consideration paid by the warrant holdertogether with the amount previously recognized in contributed surplus isrecorded as an increase to share capital.

 

**n.  Financial Instruments**

Effective January 1, 2008, the Company adopted Section 3862, “FinancialInstruments — Disclosures”, and Section 3863, “Financial Instruments —Presentation”, of the Handbook.  Sections3862 and 3863, which apply to financial years beginning on or after October 1,2007, replace section 3861, “Financial Instruments — Disclosures andPresentation”.  Sections 3862 and 3863increase the disclosure currently required, in order to enable users toevaluate the significance of financial instruments for an entity’s financialposition and performance, including disclosures about fair value. In addition,disclosure is required of qualitative and quantitative information aboutexposure to risks arising from financial instruments, including specifiedminimum disclosures about credit risk, liquidity risk and market risk.  The quantitative disclosures must provideinformation about the extent to which the entity is exposed to risk, based oninformation provided internally to the entity’s key management personnel.  The impact of adopting these sections isincluded in Note 11.

 

**3.****             ****CHANGESIN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS**

 

**a.  Accounting Policies Implemented Effective January 1,2009**

 

**Goodwilland Intangible Assets**

In February 2008, the CICA issued Section 3064, “Goodwill andIntangible Assets”, which establishes revised standards for recognition,measurement, presentation and disclosure of goodwill and intangible assets,other than the initial recognition of goodwill or intangible assets acquired ina business combination. Concurrent with the introduction of this standard, theCICA withdrew EIC-27, “Revenues and Expenses During the Pre-operating Period”.The changes are effective for interim and annual financial statements beginningJanuary 1, 2009.  The adoption ofthis accounting policy did not have any impact on the Company’s consolidatedfinancial statements for the year ended December 31, 2009.

 

**CreditRisk and Fair value of Financial Assets and Liabilities**

InJanuary 2009 the EIC issued EIC-173. In this EIC, the Committee reached aconsensus that in determining the fair value of financial assets and financialliabilities an entity should take into account the credit risk of the entityand the counterparty. This standard did not impact the Company.

 

10

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**3.****             ****CHANGESIN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS — continued**

 

**a.  AccountingPolicies Implemented Effective January 1, 2009 — continued**

 

**MiningExploration Costs**

OnMarch 27, 2009, the Emerging Issues Committee of the CICA issued EIC-174, “MiningExploration Costs”, which provides guidance on capitalization of explorationcosts related to mining properties in particular, and on impairment oflong-lived assets, in general.  The Company applied this new abstractcommencing in the period ended March 31, 2009; however, there was noimpact on the financial statements as a result of applying this abstract.

 

**Financial instruments**

In June 2009, the CICA amended Handbook Section 3862 —Financial Instruments — Disclosures to include additional disclosurerequirements about fair value measurements of financial instruments and toenhance liquidity risk disclosure requirements for publicly accountableenterprises. The amendments are applicable for the Company’s annualconsolidated financial statements for its fiscal year ending December 31,2009.

 

In June 2009, the CICAamended Handbook Section 3855 to clarify the application of the effectiveinterest method after a debt instrument has been impaired and when an embeddedprepayment option is separated from its host debt instrument at initialrecognition for accounting purposes. The amendments are effective January 1,2011. Early adoption is permitted.

 

On July 1, 2009 the Company adopted amendments to Handbook Section 3855— Financial Instruments — Recognition and Measurement which provides additionalguidance on the classification of embedded derivatives. The adoption of thisamendment did not result in a material impact on the Company’s consolidatedfinancial statements.

 

**b.  RecentAccounting Pronouncements**

 

**BusinessCombinations**

InJanuary 2009, the Accounting Standards Board (AcSB) issued the followingnew Handbook sections: 1582 — Business Combinations, 1601 — Consolidations, and1602 — Non-Controlling Interests. These standards are to be appliedprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after January 1,2011. The Company has not yet determined the impact of the adoption of thesestandards on its consolidated financial statements.

 

11

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**4.****             ****MINERALPROPERTIES AND DEFERRED EXPLORATION COSTS**

 

**2009COSTS BY PROPERTY — for the year ended December 31, 2009**

 
| ** **                   | ** ** | **San Juan**   | ** ** | **Santa  Cruz**     | ** ** | **Chubut** | ** ** | ** ** | ** ** |
|------------------------------|------------|----------------|------------|---------------------|------------|------------|------------|------------|------------|
| **Description**              | ** ** | **Los Azules** | ** ** | **San Juan Cateos** | ** ** | **Cateos** | ** ** | **Cateos** | ** ** | **Total** | ** ** |
| Balance, beginning of year   |       | $              | 13,320,948 |                | $          | 353,200    |       | $          | 2,706,376  |   | $ | 10,000 |   | $ | 16,390,524 |   |
| Assays and analytical        |       | 1,188          |       | 19,835              |       | 22,663     |       | —     |       | 43,686 |   |
| Consulting fees              |       | 80,513         |       | 4,871               |       | 27,927     |       | 879        |       | 114,190 |   |
| Depreciation                 |       | 3,411          |       | 491                 |       | 2,616      |       | —     |       | 6,519 |   |
| Drilling                     |       | —         |       | —              |       | 4,332      |       | —     |       | 4,332 |   |
| Equipment Rental             |       | 459,587        |       | —              |       | 344,110    |       | —     |       | 803,697 |   |
| Geology                      |       | 683,386        |       | 53,088              |       | 324,621    |       | 2,733      |       | 1,063,828 |   |
| Legal                        |       | 134,166        |       | —              |       | —     |       | —     |       | 134,166 |   |
| Maintenance                  |       | 6,675          |       | 898                 |       | 8,920      |       | —     |       | 16,493 |   |
| Materials and supplies       |       | 94,886         |       | 13,977              |       | 66,056     |       | —     |       | 174,920 |   |
| Project overhead             |       | 42,459         |       | 8,245               |       | 25,708     |       | 235        |       | 76,647 |   |
| Property and mineral  rights |       | 164,618        |       | 11,465              |       | 43,768     |       | 5,248      |       | 225,098 |   |
| Telephone                    |       | 1,421          |       | 1,369               |       | 10,035     |       | —     |       | 12,825 |   |
| Travel                       |       | 53,544         |       | 7,734               |       | 58,154     |       | 201        |       | 119,634 |   |
| Wages and benefits           |       | 47,289         |       | 6,329               |       | 26,830     |       | 177        |       | 80,625 |   |
| Write-off of deferred  costs |       | —         |       | —              |       | (2,585     | )          | (9,472     | )          | (12,057 | ) |
| Balance, end of year         |       | $              | 15,094,092 |                | $          | 481,503    |       | $          | 3,669,531  |   | $ | 10,000 |   | $ | 19,255,127 |   |

 

**2008COSTS BY PROPERTY — for the year ended December 31, 2008**

 
| ** **                   | ** ** | **San Juan**   | ** ** | **Santa  Cruz**     | ** ** | **Chubut** | ** ** | ** ** | ** ** |
|------------------------------|------------|----------------|------------|---------------------|------------|------------|------------|------------|------------|
| **Description**              | ** ** | **Los Azules** | ** ** | **San Juan Cateos** | ** ** | **Cateos** | ** ** | **Cateos** | ** ** | **Total** | ** ** |
| Balance, beginning of year   |       | $              | 6,034,844  |                | $          | 341,100    |       | $          | 1,951,937  |   | $ | 10,000 |   | $ | 8,337,881 |   |
| Assays and analytical        |       | 125,567        |       | —              |       | 12,163     |       | —     |       | 137,730 |   |
| Construction and trenching   |       | 10,178         |       | —              |       | —     |       | —     |       | 10,178 |   |
| Consulting fees              |       | 282,926        |       | —              |       | 6,463      |       | 890        |       | 290,279 |   |
| Depreciation                 |       | 12,135         |       | —              |       | 662        |       | —     |       | 12,797 |   |
| Drilling                     |       | 3,644,050      |       | —              |       | —     |       | —     |       | 3,644,050 |   |
| Equipment Rental             |       | 799,953        |       | —              |       | 346,974    |       | —     |       | 1,146,927 |   |
| Geology                      |       | 1,330,233      |       | 6,085               |       | 133,840    |       | 1,541      |       | 1,471,699 |   |
| Geophysics                   |       | —         |       | —              |       | 9,377      |       | —     |       | 9,377 |   |
| Insurance                    |       | 5,775          |       | —              |       | 315        |       | —     |       | 6,090 |   |
| Legal                        |       | 120,367        |       | 1,788               |       | 3,685      |       | —     |       | 125,840 |   |
| Maintenance                  |       | 12,649         |       | —              |       | 7,611      |       | —     |       | 20,260 |   |
| Materials and supplies       |       | 361,880        |       | 3,724               |       | 116,025    |       | —     |       | 481,629 |   |
| Project overhead             |       | 184,793        |       | 69                  |       | 10,712     |       | —     |       | 195,574 |   |
| Property and mineral  rights |       | 20,789         |       | —              |       | 45,359     |       | —     |       | 66,148 |   |
| Telephone                    |       | 9,831          |       | —              |       | 4,171      |       | —     |       | 14,002 |   |
| Travel                       |       | 192,480        |       | 434                 |       | 40,049     |       | —     |       | 232,963 |   |
| Wages and benefits           |       | 172,498        |       | —              |       | 18,420     |       | —     |       | 190,918 |   |
| Write-off of deferred  costs |       | —         |       | —              |       | (1,386     | )          | (2,431     | )          | (3,817 | ) |
| Balance, end of year         |       | $              | 13,320,948 |                | $          | 353,200    |       | $          | 2,706,376  |   | $ | 10,000 |   | $ | 16,390,524 |   |

 

12

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**4.****             ****MINERALPROPERTIES AND DEFERRED EXPLORATION COSTS - continued**

 

**San Juan Project**

 

The San Juan Project comprises fourproperties, which includes Los Azules in southwestern San Juan province. Atpresent, these lands are not subject to a royalty; however, the government ofSan Juan has not waived its rights to retain up to 3% “mouth of mine” royaltyfrom production (See Note 8a). Land holding costs for 2010 are estimated at$0.04 million.

 

**SantaCruz Projects**

 

The Company currentlycontrol 3 (2008 — 9) cateos and 37 (2008 — 36) manifestations of discovery inthe Santa Cruz province. Land holding costs for 2010 are estimated at $0.01million. The Company have been actively exploring in the region since 1997. Theproperties have been acquired on the basis of geologic and geochemicalreconnaissance.

 

**5.****             ****INVESTMENT IN MINERA SANTA CRUZ (MSC) — San José Mine**

 

MSCis owned, as to 49%, by MASA, an indirect wholly-owned subsidiary of MineraAndes Inc. and, as to 51%, by Hochschild.

 

The Company’s interestin, and the affairs of, MSC are governed by an Option and Joint VentureAgreement dated March 15, 2001 between MASA and Hochschild, as amended byagreements dated May 14, 2002, August 27, 2002 and September 10,2004, the (“OJVA”).

 

Under the OJVA theCompany is entitled to appoint one of the three members of the Board ofDirectors of MSC and Hochschild is entitled to appoint the balance of themembers of the Board of Directors of MSC. The OJVA grants the Company a “veto” in respect of certain and verylimited matters regarding the affairs of MSC and the operation of the San JoséMine. Although the Company is permitted to vote against or otherwise disagreewith decisions made by Hochschild in respect of the San José Mine, manydecisions have been made, notwithstanding the Company’s express disagreement.

 

In particular, theCompany has a limited, if any, ability to control the timing or amount of cashcalls and decisions made in that regard may have an adverse affect on itsoperations and financial position as there can be no assurance that if made,the Company will have the funds available to satisfy any such cash call whendue and that its interest in the San José Mine will not be reduced as a result.

 

13

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**5.****             ****INVESTMENT IN MINERA SANTA CRUZ (MSC) — San José Mine — continued**

 

The investment in MSC is comprised of thefollowing:

 
| ** **                                                                          | ** ** | **As at**                   | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                          | ** ** | ** **                  | ** ** | **December 31,** | ** ** |
| ** **                                                                          | ** ** | **December 31,  2009** | ** ** | **2008  (restated Note 2(a))** | ** ** |
| ** **                                                                          | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Investment in MSC, beginning  of year January 1:                               |       | $                           | 80,343,647 |   | $ | 64,337,279 |   |
| Income from equity investment                                                       |       | 6,620,750                   |       | 1,965,238 |   |
| Amortization of pre 2008  capitalized interest on MSC loans                         |       | 1,320,992                   |       | 798,000 |   |
|                                                                                |       |                        |       |   |   |
| Interest expensed by MSC  and included in equity method pickup, net of income taxes |       | 2,645,555                   |       | 2,652,813 |   |
| Income on Investment in  MSC                                                        |       | 10,587,297                  |       | 5,416,051 |   |
| Less:                                                                               |       |                        |       |   |   |
| Amortization of deferred  costs                                                     |       | (1,238,674                  | )          | (720,000 | ) |
| Advances returned during  the year                                                  |       | (575,750                    | )          | — |   |
| Derecognition of deferred  costs                                                    |       | (394,233                    | )          | — |   |
| Plus:                                                                               |       |                        |       |   |   |
| Advances during the year                                                            |       | —                      |       | 11,310,317 |   |
|                                                                                |       |                        |       |   |   |
| Investment in MSC, end of  year                                                     |       | $                           | 88,722,287 |   | $ | 80,343,647 |   |

 
| ** **                                                                              | ** ** | **Year  Ended**             | ** **  |
|-----------------------------------------------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                                                              | ** ** | ** **                  | ** **  | **December 31,** | ** ** |
| ** **                                                                              | ** ** | **December 31,  2009** | ** **  | **2008  (restated Note 2(a))** | ** ** |
| Summary of MSC’s financial  information from operations:                           | ** ** | ** **                  | ** **  | ** ** | ** ** |
| Sales                                                                                   |       | $                           | 147,103,219 |   | $ | 111,255,558 |   |
| Net income - MSC                                                                        |       | 13,511,735                  |        | 4,010,689 |   |
| Minera Andes Inc. portion  (MAI) - 49%                                                  |       | 6,620,750                   |        | 1,965,238 |   |
| Equity adjustments:                                                                     |       |                        |        |   |   |
| Interest expensed by MSC  and included in the equity method pickup, net of income taxes |       | 2,645,555                   |        | 2,652,813 |   |
| Amortization of pre 2008  capitalized interest on MSC loans                             |       | 1,320,992                   |        | 798,000 |   |
|                                                                                    |       |                        |        |   |   |
| Income on Investment in  MSC                                                            |       | 10,587,297                  |        | 5,416,051 |   |
| Less amortization of MAI  deferred capitalized costs                                    |       | (1,238,674                  | )           | (720,000 | ) |
|                                                                                    |       |                        |        |   |   |
| Net income on investment  in MSC                                                        |       | $                           | 9,348,623   |   | $ | 4,696,051 |   |

 

14

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**5.****             ****INVESTMENT IN MINERA SANTA CRUZ (MSC) — San José Mine — continued**

 

The Company’s share of earnings and lossesfrom our investment in MSC is included in the consolidated statement ofoperations and is equal to 49% of the above net income of $13.5 million for theyear ended December 31, 2009, and $4.0 million for the year ended December 31,2008.

 

As at December 31, 2008 there was a cash call of $11.3 million,which was paid in February 2009.

 

Project financing for theSan José Mine has been primarily provided pursuant to a letter agreement dated October 10,2006 (as amended by agreements dated October 17, 2006, October 24,2006, January 5, 2007, January 25, 2007, February 26, 2007, February 28,2007, March 29, 2007, April 26, 2007 and June 29, 2007, the “Project****Loan Letter Agreement”) between the Company, MSC and byassignment, Hochschild Mining Holdings Limited (the “Hochschild Lender”), anaffiliate of Hochschild Mining plc.

 

Under the Project Loan Letter Agreement, the Hochschild Lender and theCompany agreed to provide MSC with an unsecured bridge loan in the aggregateamount of $20 million (the “Bridge Loan”). The Project Loan Letter Agreement provides that the Bridge Loan was tobe structured as loans to MSC by each of the Company and the Hochschild Lender,in each case, in amounts proportionate to the shareholdings of the Company andHochschild in MSC.

 

The Project Loan LetterAgreement, further provides that the loan to be made by the Company to MSCwould be structured as (i) a loan by the Hochschild Lender to the Company(the “Project Loan Payable”); and (ii) a corresponding loan by the Companyto MSC (the “Project Loan Receivable”). As a result, the Bridge Loan was made by way of (i) a loan by theHochschild Lender to MSC in an amount equal to 51% of the amount of the BridgeLoan; (ii) a loan by the Hochschild Lender to the Company in an amountequal to 49% of the amount of the Bridge Loan; and (iii) a correspondingloan by the Company to MSC in the same amount and on the same terms as thepreceding loan by the Hochschild Lender to the Company. Both the Project LoanPayable and the Project Loan Receivable bear interest at the same rate and uponthe same terms (including repayment).

 

The Project Loan LetterAgreement also provides for a permanent secured project loan in the aggregateamount of $65 million (the “Project Loan”), structured in the same manneras the Bridge Loan, and replacing the Bridge Loan, to be documented indefinitive agreements, which, have not yet been entered into.

 

Amounts advanced under the Project Loan Letter Agreement by theHochschild Lender to the Company and then by the Company to MSC are currentlyunsecured except that, as security for the loan made by the Hochschild Lenderto the Company, the Company has pledged to the Hochschild Lender, its right tothe repayment of the corresponding loans made by the Company to MSC.

 

The Hochschild Lender andMSC have agreed****that until the definitiveagreements are finalized, no payment of interest or principal will be due.

 

The Project Loan currently bears fixed interest at LIBOR plus 2.50% asof the inception of the loan.  Theinterest rates are 7.86% on $9.8 million and 8.21% on $22.1 million. It hasbeen agreed that once the definitive agreements are finalized, interest willincrease to LIBOR plus 2.85% and will be subject to interest rate fluctuations.

 

15

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**5.****             ****INVESTMENT IN MINERA SANTA CRUZ (MSC) — San José Mine — continued**

 

As at December 31,2009, and December 31, 2008, the entire Project Loan ($65 million), hadbeen advanced. The Company’s 49% share of the Project Loan was $31.85million.  Therefore, the Company hasrecorded the Project Loan Payable and the Project Loan Receivable in offsettingamounts. The project loan receivable/payable was advanced to MSC by Hochschildon the Company’s behalf. The related interest income/expense will be paid tothe Hochschild Lender by MSC on the Company’s behalf. Please refer to thesubsequent events (Note 14).

 

**6.****             ****BANK LOAN**

 

At December 31, 2009,the Company had no bank loans outstanding. During the year the Company repaidthe amounts owing under an amended and restated credit agreement dated as of October 22,2007 (the “Macquarie Credit Agreement”) with Macquarie Bank Limited (“Macquarie”),under which Macquarie made two non-revolving term loans to the Company, in theaggregate principal amount $17.5 million. The first non-revolving term loan was in the principal amount of $7.5million (the “First Loan”) of which $5.9 millionwas for the development of the San José Mine and $1.6 million was for generalpurposes. The second non-revolving term loan was in the aggregate principalamount of $10 million (the “Second Loan” and together with the First Loan, the “BankLoan”) of which $8.6 million was for the developmentof the San José Mine and $1.4 million was for general purposes.

 

The commercial terms of theloans included a facility fee of 1.5% of the principal amount and interest ofLIBOR plus 2% on the First Loan and LIBOR plus 2.75% on the Second Loan. Inaddition, the Company issued Macquarie share purchase warrants to acquire4,227,669 common shares of the Company at an exercise price of C$2.06 pershare. On March 7, 2009, the 4,227,669 purchase warrants expiredunexercised.

 

In addition, the Companyissued Macquarie share purchase warrants to acquire 4,066,390 common shares ofthe Company at an exercise price of C$2.41 per share. On September 30,2009, the 4,066,390 purchase warrants were not exercised and expired.

 

On March 4, 2009, the Company repaidall amounts owing by it to Macquarie Bank Limited in respect of the Bank Loanin the aggregate principal amount of $17.5 million.

 

On the repayment of the Bank Loan, theunamortized debt accretion of $0.6 million was recognized as an accretionexpense on the settlement of the debt in the statement of operations.

 

During the year ended December 31,2009, interest expense on the Bank Loan was $1.1 million, of which $0.1 millionwas paid in cash, $0.4 million was accreted interest and $0.6 million wasaccreted interest related to the debt settlement. For the year ended December 31,2008, interest expense incurred on the Bank Loan was $1.0 million, and accretedinterest expense related to the debt discount of $1.9 million was expensed.

 

16

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**7.****             ****SHARECAPITAL**

 

**a.  Authorized**

 

The Company authorized capital of anunlimited number of common shares, with no par value, and an unlimited numberof preferred shares, with no par value.

 

**b.  Changes to Share Capital — Issued, Allotted,and/or Subscribed**

 

i.  On December 19,2007, the Company announced proposed financing for a brokered private placementof units for gross proceeds of C$35.0 million ($32.4 million), which wascompleted in three closings. (See ii., iii., and iv.)

** **

**ii. **On December 21, 2007 the first closing was completed pursuant towhich 13,880,645 units at a price of C$1.55 per unit were issued raising grossproceeds of C$21.515 million ($21.6 million). Eachunit consisted of one common share and one-half of one common share purchasewarrant. Each whole common share purchase warrant entitled the holder topurchase oneadditional common share at an exercise price of C$2.00 per share until December 21,2009. The securities were subject to a four-month hold period. Thefair value of the purchase warrants was calculated using the Black-Scholesoption pricing model with the following assumptions: dividend yield — Nil; riskfree interest rate — 3.85%; expected volatility of 58.79% and an expected lifeof 24 months. The fair value of the warrants calculated to be $3.1 million wasrecorded as a capital transaction with a corresponding entry to contributedsurplus.

 

Scotia Capital Inc. (“Scotia”) acted as agent inrespect of the first closing while Shoreline Pacific LLC acted in the U.S.(together, the “Agents”).The Agents received acash commission of 5% of the gross proceeds from the first closing or C$1.1million ($1.1 million). The Agents also received 694,031 agent’s compensationoptions (“Agent’s Options”) equal to 5% of the aggregate number of units soldat the first closing.  Each Agent’sOption upon exercise entitles the holder to acquire one unit at an exerciseprice of C$1.70 per unit until December 21, 2009. Upon the exercise of theAgent’s Option the Agent would have also received a one-half purchase warrant(694,031, or 347,015 whole warrants), which one full purchase warrant wouldhave entitled the holder to acquire one unit at an exercise price of C$2.00 perunit. The fair value of the Agents Options was calculated using theBlack-Scholes option pricing model with the following assumptions: dividendyield — Nil; risk free interest rate — 3.85%; expected volatility of 58.79% andan expected life of 24 months. The fair value of the Agents’ Options,calculated to be $0.4 million and the fair value of the agent warrantscalculated to be $0.1 million were recorded as capital transactions with acorresponding entry to contributed surplus.

** **

**Atotal of 13,880,645 common shares were issued at the first closing of theprivate placement, and 6,940,322 common shares were reserved for issuance onthe exercise of the common share purchase warrants and the exercise of 694,031units comprising the Agent’s Options. The Agent purchase warrants would have beenreserved upon the exercise of the Agent’s Options, if the holder becameentitled to the purchase warrant.**OnDecember 21, 2009, the 13,880,645 warrants and 694,031 agent’s optionswere not exercised and expired.

 

iii.  On January 29,2008, the second closing was completed at which 7,778,023 units at a price ofC$1.55 per unit were issued raising gross proceeds of C$12.1 million ($11.8million).

** **

**Each unit consisted of one common share and one-half of onecommon share purchase warrant. Each whole common share purchase warrant entitledthe holder to purchase one additional common share at an exercise price ofC$2.00 per share until December 21, 2009. The securities were subject to afour-month hold period.**The fair value of the purchasewarrants was calculated using the Black-Scholes option pricing model with thefollowing assumptions: dividend yield — Nil; risk free interest rate — 3.17%;expected volatility of 57.07% and an expected life of 24 months. The fair valueof the warrants, calculated to be $1.2 million was recorded as a capitaltransaction with a corresponding entry to contributed surplus.

 

17

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**7.****             ****SHARECAPITAL - continued**

 

**b.  Changes to Share Capital — Issued, Allotted,and/or Subscribed — continued**

 

**Scotia acted as agent in respect of the securities issuedat the second closing in Canada while Shoreline Pacific LLC acted in the U.S.(together the “Agents”). The non-brokered component of the second closing wascompleted with Canaccord Capital Company (the “Finder”). The Agents and theFinder received a 5% commission being $0.6 million which was recorded to shareissue costs and reduced share capital.**

** **

**The Agents and the Finder also received 388,901 Agent’scompensation options (“Agent’s Options”) equal to 5% of the aggregate number ofunits sold at the second closing. Each Agent’s Option upon exercise entitledthe holder to acquire one unit at an exercise price of C$1.70 per unit until December 21,2009.** Upon the exercise of the Agent’s Option theAgent would have then received a one-half purchase warrant (388,901, or 194,450whole warrants), which one full purchase warrant would have entitled the holderto acquire one unit at an exercise price of C$2.00 per unit. The fair value ofthe Agents Options was calculated using the Black-Scholes option pricing modelwith the following assumptions: dividend yield — Nil; risk free interest rate —3.17%; expected volatility of 57.07% and an expected life of 24 months. Thefair value of the Agents’ Options, calculated to be $0.2 million was recordedas a capital transaction with a corresponding entry to contributed surplus.

** **

A total of 7,778,023 common shares were issued at thesecond closing of the private placement, and 3,889,011 common shares werereserved for issuance on exercise of the common share purchase warrants and theexercise of 388,901 units comprising the Agent’s Options.  TheAgent purchase warrants would have reserved upon the exercise of the Agent’sOptions, when the holder became entitled to the purchase warrant. On December 21,2009, the 7,778,023 warrants and 388,901 agent’s options were not exercised andexpired.

 

iv.  The third and final closing of the PrivatePlacement was completed on February 11, 2008, at which time 427,000 unitsat a price of C$1.55 per unit were sold for gross proceeds of C$0.7 million($0.7 million). The final closing was non brokered private placement. Each unitconsisted of one common share and one-half of one common share purchasewarrant. Each whole common share purchase warrant purchase entitled the holderto purchase one additional common share at an exercise price of C$2.00 pershare until December 21, 2009.  Thesecurities were subject to a four month hold period. The fair value of thepurchase warrants was calculated using the Black-Scholes option pricing model withthe following assumptions: dividend yield — Nil; risk free interest rate —3.08%; expected volatility of 53.81% and an expected life of 24 months. Thefair value of the warrants, calculated to be $0.05 million was recorded as acapital transaction with a corresponding entry to contributed surplus.

 

Thethird closing was completed with Canaccord Capital Corporation as finder (the “Finder”).TheFinder received a cash commission of 5% being $0.03 million of the grossproceeds from the third closing which was recorded to share issue costs andreduced share capital.  The Finder alsoreceived 21,350 agent’s compensation options (“Agent’s Options”) equal to 5% ofthe aggregate number of units sold at the third closing.  Each Agent’s Option upon exercise entitledthe holder to acquire one unit at an exercise price of C$1.70 per unit until December 21,2009.  Upon the exercise of the Agent’sOption the Finder would have then also received a one-half purchase warrant(21,350, or 10,675 whole warrants), which one full purchase warrant****would have entitled the holder to acquire one unit at anexercise price of C$2.00 per unit.  Thefair value of the Agent Options was calculated using the Black-Scholes optionpricing model with the following assumptions: dividend yield — Nil; risk freeinterest rate — 3.08%; expected volatility of 53.81% and an expected life of 24months. The fair value of the Agents’ Options, calculated to be $7,006 wasrecorded as a capital transaction with a corresponding entry to contributedsurplus.

 

A total of 427,000 common shares were issuedpursuant to the final closing of the private placement, and

 

18

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**7.**              SHARE CAPITAL —continued

 

**b.  Changes to Share Capital — Issued, Allotted,and/or Subscribed - continued**

 

213,500 common shares were reserved forissuance on the exercise of the warrants and the exercise of the 21,350 unitscomprising the Agent’s Options. The Agent purchase warrants would have beenreserved upon the exercise of the Agent’s Options, when the holder becomesentitled to the purchase warrant. On December 21, 2009, the 427,000 commonshare purchase warrants, and 21,350 agent’s options were not exercised andexpired.

 

Legal and other fees that specifically relateto the second and third closings of $0.01 million were included in share issuecosts and reduced share capital.

 

v.  During2008, the Company issued 260,000 common shares upon the exercise of stockoptions at a weighted average exercise price of C$0.79 ($0.78) per share and718,916 shares upon the exercise of purchase warrants at a weighted averageexercise price of C$0.51 ($0.44) per share.

 

vi.  In February 2009, Mr. McEwen agreedto complete a private placement in two tranches totaling C$40 million designedto alleviate the Company’s financial pressures (the “McEwen Financing”). First,on February 18, 2009, Mr. McEwen purchased 18,299,970 common sharesof the Company at a price of C$1.00 per share for proceeds to the Company ofC$18.3 million ($14.5 million), of which $11.3 million was used to satisfy thecash call made in respect of the Company’s 49% interest in the San José Mine.

 

Second, on February 26,2009, Robert R. McEwen (“Mr. McEwen”) purchased 21,700,030 common sharesof the Company for C$21.7million ($17.4 million), by completing another privateplacement to repay the Bank Loan in the aggregate principal amount of $17.5million. The total share issue cost related to the McEwen Financing was $0.4million.

** **

**vii.  During the period**the Company entered into an agreement with a Canadian investment dealer(the “Lead Underwriter”) pursuant to which the Lead Underwriter and a syndicateof underwriters(collectively, the “Underwriters”)agreed to purchase for resale to the public and Minera Andes agreed to issue26,700,000 units, on a “bought deal” basis, at a price of C$0.75 per unit (the “Offering”)equivalent to C$20 million.  In addition,the Company agreed to grant the Lead Underwriter an option (the “Over-AllotmentOption”) to purchase additional units of Minera Andes to raise additional grossproceeds of up to 15% of the Offering, on the same terms and conditions as theOffering, exercisable any time, in whole or in part, up to 48 hours prior tothe closing date of the Offering.  TheOver-Allotment Option was exercised in full (4,005,000 units) and the totalgross proceeds to Minera Andes were C$23.0 million ($21.0 million). The Companyincurred C$1.5 million ($1.4 million) in share issue costs making the netproceeds of the Offering C$21.5 million ($19.6 million).  Each unit consisted of one (1) commonshare and one half of one common share purchase warrant, each whole warrant isexercisable at C$1.25 for a period of 5 years after closing. In the event thatthe volume weighted average trading price of the Company’s common shares on theToronto Stock Exchange “TSX” (or such other stock exchange or quotation systemon which the Company’s shares are listed and where a majority of the tradingvolume occurs), for a period of 20 consecutive trading days exceeds C$2.50, theCompany may, within five days after such an event, provide notice to thewarrant holders of early expiry and thereafter, the warrants will expire on thedate which is 30 days after the date of the notice to the warrant holders. Thefair value of the shares issued was C$19.1 million ($17.5 million) and thewarrants were valued at C$3.9 million ($3.5 million) using the Black-Scholesoption pricing model with a volatility of 66%, risk free interest rate of2.3%,expected life of 5 years, and a dividend rate of 0%. The fair value of thewarrants was recorded as a capital transaction with a corresponding entry tocontributed surplus.

 

19

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**7.**              SHARE CAPITAL —continued

 

**b.  Changes to Share Capital — Issued, Allotted,and/or Subscribed - continued**

 

Theunits issued under the Offering were offered by way of a short form prospectusfiled in all of the provinces of Canada, except Quebec by the Company on July 30,2009.

 

TheOffering closed on August 19, 2009, and was approved by the normalregulatory agencies, including the approval of the TSX.

 

**viii.  During the year ended December 31, 2009,the Company issued 2,045,000 common shares upon the exercise of stock optionsat a weighted average exercise price of C$0.55 ($0.48) per share.  Upon exercise $0.7 million being the fair valueof these options was transferred from contributed surplus to share capital. Nopurchase warrants were exercised for the year ended December 31, 2009.**

 

**c.  Stock Options**

** **

**The aggregate number of shares issuable upon exercise ofall options granted under the Minera Andes Stock Option Plan (the “Plan”) shallnot exceed 10% of the Company’s issued and outstanding common shares up to amaximum of 18,940,243 (2008 — 18,940,243) shares. Under the Plan, noparticipant may be granted an option to purchase shares, which exceeds thenumber of shares permitted to be issued under the Plan pursuant to the rules orpolicies of any stock exchange on which the common shares are then listed.Under the Plan, the exercise price of each option shall be determined by thedirectors and shall not be less than the closing price of the Company’s commonshares on the stock exchange on which the shares are listed on the last tradingday immediately preceding the day on which the options are granted.**

 

Options granted under the Plan will not betransferable and, if not exercised but subject to the authority of the Board toextend such time, will expire twelve (12) months following the date theoptionee ceases to be a director, officer, employee or consultant of theCompany by reason of death, or three (3) months after ceasing to be adirector, officer, employee or consultant of the Company for any reason otherthan death.

 

Stock options granted to a director, officer, employee, or consultantare exercisable for either a five or ten year period. Incentive stock optionsgranted either vest immediately or 33 1/3% at each twelve (12) month intervalfollowing the date of grant, or 25% at each six (6) month intervalfollowing the date of grant.

 

At December 31, 2009, 5,044,243 (December 31,2008 — 3,939,456) options were available for grant under the Plan.

 

A summary of the status of the Plan as of December 31,2009, and December 31, 2008, and changes during the periods ended is asfollows:

 

20

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**7.****             ****SHARE CAPITAL — continued**

 

**c.  Stock Options - continued**

 
| ** **                        | ** ** | **Year  Ended**             | ** ** | **Year  Ended**                   | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | **December 31,  2009** | ** ** | **December 31,  2008**       | ** ** |
| ** **                        | ** ** | **Options**                 | ** ** | **Weighted Avg.  Exercise Price** | ** ** | **Options** | ** ** | **Weighted Avg.  Exercise Price** | ** ** |
| Outstanding at beginning  of year |       | 10,985,000                  |       | C$                                | 1.15       |   | 10,215,000 |   | C$ | 1.13 |   |
| Granted                           |       | 620,000                     |       | 0.69                              |       | 1,400,000 |   | 1.20 |   |
| Exercised                         |       | (2,045,000                  | )          | 0.55                              |       | (260,000 | ) | 0.79 |   |
| Cancelled/Forfeited               |       | (625,000                    | )          | 1.31                              |       | — |   | — |   |
| Expired                           |       | (1,100,000                  | )          | 1.11                              |       | (370,000 | ) | 0.94 |   |
| Outstanding at end of year        |       | 7,835,000                   |       | C$                                | 1.27       |   | 10,985,000 |   | C$ | 1.15 |   |
|                              |       |                        |       |                              |       |   |   |   |   |
| Exercisable at end of year        |       | 6,990,000                   |       | C$                                | 1.33       |   | 10,385,000 |   | C$ | 1.16 |   |

 
| ** **                                                                 | ** ** | **Year Ended**             | ** ** | **Year Ended**             | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                 | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
| Weighted average  grant-date fair value of options granted during the year |       | C$                         | 0.42       |                       | C$         | 0.66 |   |
|                                                                            |            |                            |            |                            |            |  |  |

 

The weighted average remaining contractuallife of outstanding options is 2.15 years at December 31, 2009 (December 31,2008 — 2.7 years).

 

At December 31, 2009, options were held by directors, officers,employees and non-employees as follows:

 

21

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**7.****             ****SHARE CAPITAL — continued**

** **

**c.  Stock Options - continued**

 
| **Number of  Options** | ** ** | **Exercise  Price** | ** ** | **Expiry Date** | ** **               |
|------------------------|------------|---------------------|------------|-----------------|--------------------------|
|                   |       |                |       |            |                     |
| 960,000                |       | C$                  | 0.60       |            | December 28,  2010  |   |
| 4,560,000              |       | C$                  | 1.51       |            | December 27,  2011  |   |
| 250,000                |       | C$                  | 1.73       |            | September 4,  2012  |   |
| 100,000                |       | C$                  | 1.35       |            | February 13,  2013  | (1) |
| 195,000                |       | C$                  | 0.31       |            | March 21,  2013     |   |
| 850,000                |       | C$                  | 1.36       |            | May 23,  2013       | (2) |
| 300,000                |       | C$                  | 0.81       |            | September 11,  2013 | (3) |
| 200,000                |       | C$                  | 0.73       |            | March 1,  2014      | (4) |
| 200,000                |       | C$                  | 0.67       |            | March 13,  2014     | (5) |
| 220,000                |       | C$                  | 0.66       |            | September 30,  2014 | (6) |
| 7,835,000              |       |                |       |            |                     |   |

 

----

(1) On February 14, 2008,100,000 stock options were granted at an exercise price of C$1.35, of which25,000 options will vest every six months from the February 14, 2008,grant date to February 14, 2010.

 

(2) On May 23, 2008,900,000 stock options were granted at an exercise price of C$1.36, of which alloptions vested immediately. On August 30, 2009, an employee resigned andforfeited 10,000 options. On December 29, 2009, an employee resigned andforfeited 40,000 options.

 

(3) On September 11, 2008, 400,000 options were granted at an exercise price of C$0.81 to four newdirectors.  On February 2, 2009, adirector resigned and forfeited 100,000 options. The options will vest 1/3 on September 11,2009, 2010, and 2011.

 

(4) On March 1, 2009, 200,000 options weregranted at an exercise price ofC$0.73 to two new directors. The options will vest 1/3 on March 1,2010, 2011, 2012.

 

(5) On March 13,2009, 200,000 options were granted at an exercise price of C$0.67 to anemployee.  The options will vest 1/3 on March 13,2010, 2011, 2012.

 

(6) On September 30,2009, 220,000 options were granted at an exercise price of C$0.66 to two employeesand an independent contractor. The options will vest 1/3 on September 30,2010, 2011, 2012.

 

In connection withthe vesting of certain non-employees, employees and directors stock options,the Company recorded stock option compensation for year ended December 31,2009, of $0.2 million. The Company recorded stock option compensation of $0.7million to general and administrative expenses in the statement of operationsand $0.09 million was capitalized to mineral properties for the year ended December 31,2008.

 

**Thefair values of the stock options granted in 2009 were calculated using theBlack-Scholes option pricing model with the following range of assumptions:dividend yield — Nil; risk free interest rate — 1.87% to 2.4%;**

 

22

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars)**

 

**7.****             ****SHARE CAPITAL — continued**

** **

**c.  Stock Options - continued**

 

**expectedvolatility of 77.4% to 81.61% and an expected life of 48 to 60 months. The fairvalue of the stock options granted in 2008 was calculated using theBlack-Scholes option pricing model with the following range of assumptions:dividend yield — Nil; risk free interest rate — 2.90% to 3.34%; expectedvolatility of 57.85% to 70.09% and an expected life of 60 months.**

** **

A summary of the status of the Company’sstock options issued as agents compensation options as of December 31,2009, and December 31, 2008, is as follows:

 
| ** **                                                                   | ** ** | **Year Ended**                     | ** ** | **Year Ended**                   | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                   | ** ** | **December 31, 2009**         | ** ** | **December 31, 2008**       | ** ** |
| ** **                                                                   | ** ** | **Agent’s  Compensation  Options** | ** ** | **Weighted Avg.  Exercise Price  C$** | ** ** | **Agent’s  Compensation  Options** | ** ** | **Weighted Avg.  Exercise Price  C$** | ** ** |
| Outstanding at beginning of period                                           |       | 1,104,282                               |       | C$                                    | 1.70       |   | 694,031 |   | C$ | 1.70 |   |
| Granted                                                                      | ** ** | **—**                              |       |                                  | 0.00       |   | 410,251 |   |   | 1.70 |   |
| Expired                                                                      |       | (1,104,282                              | )          |                                  | 1.70       |   | — |   |   | 0.00 |   |
| Outstanding at end of period                                                 |       | —                                  |       | —                                |       | 1,104,282 |   | C$ | 1.70 |   |
|                                                                         |       |                                    |       |                                  |       |   |   |   |   |
| Exercisable at end of period                                                 |       | —                                  |       | —                                |       | 694,031 |   | C$ | 1.70 |   |
| Weighted average grant-date fair value of options  granted during the period | ** ** | ** **                              |       | (Nil                                  | )          | ** ** |   | C$ |  0.31 |   |
|                                                                              |            |                                         |            |                                       |            |  |  |  |  |  |  |  |

 

**d.****    ****Warrants**

 

The range of exercise prices on outstanding warrants is C$0.70 toC$1.25 with a weighted average contractual life of 4.2 years at December 31,2009.

 

A summary of the status of the outstandingwarrants at December 31, 2009, and December 31, 2008, and changesduring the periods ended on those dates is:

 

23

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars)**

 

**7.****             ****SHARE CAPITAL — continued**

** **

**d.****    ****Warrants****- continued**

 
| ** **                                       | ** ** | **Year Ended**             | ** ** | **Year Ended**                          | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|
| ** **                                       | ** ** | **December 31, 2009** | ** ** | **December 31, 2008**              | ** ** |
| ** **                                       | ** ** | **Warrants**               | ** ** | **Weighted  Avg.  Exercise  Price  C$** | ** ** | **Warrants** | ** ** | **Weighted  Avg.  Exercise  Price  C$** | ** ** |
| Outstanding and exercisable at beginning of year |       | 21,039,665                 |       | C$                                      | 1.91       |   | 18,298,094 |   | C$ | 1.91 |   |
| Purchase warrants                                |       | 15,352,500                 |       | 1.25                                    |       | 4,102,511 |   | 2.00 |   |
| Expired warrants                                 |       | (19,336,892                | )          | 2.10                                    |       | (642,024 | ) | 1.67 |   |
| Exercised                                        | ** ** | **—**                 |       | —                                  |       | (718,916 | ) | 0.51 |   |
| Outstanding and exercisable at end of year       |       | 17,055,273                 |       | C$                                      | 1.20       |   | 21,039,665 |   | C$ | 1.99 |   |

 

At December 31, 2009, there were full warrants held for thepurchase of the Company’s common shares as follows:

 
| **Number of  Warrants** | ** ** | **Exercise  Price** | ** ** | **Expiry Date** | ** **           |
|-------------------------|------------|---------------------|------------|-----------------|----------------------|
|                    |       |                |       |            |                 |
| 1,702,773               |       | C$                  | 0.70       |            | March 22, 2010  |   |
| 15,352,500              |       | C$                  | 1.25       |            | August 19, 2014 |   |
| 17,055,273              |       |                |       |            |                 |

 

On March 7, 2009, 4,227,669 warrants at an exercise price ofC$2.06 expired. On September 30, 2009, 4,066,390 warrants at an exerciseprice of C$2.41 expired. On December 21, 2009, 11,042,833 warrants at anexercise price of C$2.00 expired.

 

24

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars)**

** **

**7.****             ****SHARE CAPITAL — continued**

** **

**e.****    ****Earningsper share**

 
| ** **                           | ** ** | **Year Ended**             | ** ** |
|--------------------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | **December 31, 2009** | ** ** |
|                                 |       |                       |       |
| Net income available to shareholders |       | $                          | 4,114,772  |   |
|                                 |       |                       |       |
| Weighted average shares outstanding  |       |                       |       |
| Basic                                |       | 236,517,659                |       |
| Effect of dilutive stock options     |       | 1,279,179                  |       |
| Effect of dilutive warrants          |       | —                     |       |
| Diluted                              |       | 237,796,838                |       |
| Stock options excluded from dilution |       | 6,260,000                  |       |
| Warrants excluded from dilution      |       | 17,055,273                 |       |
|                                 |       |                       |       |
| Net income per share                 |       |                       |       |
| Basic                                |       | $                          | 0.02       |   |
| Diluted                              |       | $                          | 0.02       |   |

 

In 2008, all warrants and stock options were anti-dilutive and as suchwere not included.

 

**8.****    ****COMMITMENTSAND CONTINGENCIES**

** **

**a.****  **Mineral rights inArgentina are owned by the federal government and administered by theprovinces.  The provinces can levy amaximum 3% “mouth of mine” (gross proceeds) royalty. The provinces of Mendozaand Neuquén have waived their right to this royalty.  The provinces of Río Negro, San Juan andChubut have not yet established a policy regarding the royalty.

 

**b.**   On December 2, 2003, the Companysigned an agreement that obligated it to pay N.A. Degerstrom, Inc. (thevendor of the original exploration properties), a royalty of $0.3 million, ifany of the properties owned at the date of signing the agreement, other thanthe properties comprising the San José Mine, meet certain conditions such asbankable feasibility or commercial production prior to December 2,2013.  As of December 31, 2009, nopayments are required to be made under that agreement.

** **

**c.**   As of December 31,2009, MSC signed agreements with third party providers relating to thedevelopment and operation of the San José Mine. Our 49% portion of these commitments is approximately $6.5 million.

 

**9****.  RELATED PARTY TRANSACTIONS**

 

The Company pays amanagement service fee to a related party, 2083089 Ontario Inc. (“208”) underthe terms of a management services agreement. 208 is a company controlled by Mr. McEwen, the chairman and chief executiveofficer of the Company and beneficial owner of more than 5% of our votingsecurities. Mr. McEwen is also the chief executive officer and director of208, which provides management services to a number of entities in which Mr. McEwenhas significant equity interests. The management service fees cover inter-alia,rent, personnel, office expenses, and other administrative services on a costrecovery basis. During the years ended December 31, 2009, and 2008, theCompanypaid $50,252 and $2,092, respectively, to 208.

 

MSC is also a related party of theCompany.  The Company owns 49% of MSC.See note 5.

 

25

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars)**

 

**10.  CAPITAL DISCLOSURES**

 

Minera Andes’ objectives when managingcapital are to:

 

a)     safeguard its ability to continue as a going concern;

b)    have sufficient capital to develop its mining projects and take theminto production; and

c)     meet external capital requirements on its credit facilities, whenrequired.

 

The Company manages its capital structure andmakes adjustments to it, in order to have the funds available to support theacquisition, exploration and development of mining interests.  The Board of Directors does not establishquantitative return on capital criteria for management, but rather relies onthe expertise of the Company’s management to sustain future development of thebusiness.

 

Theproperties in which the Company currently has an interest are in theexploration stage with the exception of the San José Mine, which is inproduction; as such the Company is dependent on external equity financing tofund its activities.  In order to carryout planned exploration and pay for administrative costs, the Company willspend its existing working capital and raise additional amounts as needed.  The Company will continue to assess newproperties and seek to acquire an interest in additional properties if it feelsthere is sufficient geologic or economic potential and if it has the adequatefinancial resources to do so. Management reviews its capital managementapproach on an ongoing basis and believes that this approach, given the size ofthe Company, is reasonable.

 

There were no changes in the Company’sapproach to capital management during the year ended December 31, 2009,and the year ended December 31, 2008. Neither the Company nor its subsidiaries are subject to externallyimposed capital requirements.

 

**11.**  **FINANCIAL INSTRUMENTS**

 

During the year ended December 31, 2009, and the year ended December 31,2008, the Company used a mixture of cash and debt to maintain an appropriatecapital structure and ensure sufficient liquidity to meet the needs of thebusiness. The Company has not executed any interest rate contracts or otherderivative financial instruments to manage the risks associated with itsoperations and, therefore, in the normal course of business the Company isinherently exposed to a number of risks related to changes in foreign currency exchangerates, interest rates, credit risk, liquidity risk and commodity pricefluctuations.

 

The Company holds certain financial instruments such as cash and cashequivalents, receivables, the Project Loan Receivable, the Project Loan Payableand related interest receivable and payable, accounts payable and accruals. Allfinancial instruments are classified into one of fivecategories: held-for-trading, held-to-maturity investments, loans andreceivables, available-for-sale financial assets or other financialliabilities.  All financial instruments are recorded in the balance sheeteither at fair value or at amortized cost. Subsequent measurement and changesin fair value will depend on their initial classification, as follows: held-for-trading financial assets are measured at fair value and changes infair value are recognized in net earnings.  Available-for-sale financialinstruments are measured at fair value with change in fair value recorded inother comprehensive income until the instrument is derecognized.

 

26

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars)**

 

**11.**  **FINANCIAL INSTRUMENTS — continued**

 

The Company has classified its cash and cash equivalents asheld-for-trading.  Receivables and Project Loan and interest receivablewere classified as loans and receivables.  Accounts payable and accruals,Project Loan and interest payable, bank loan and related party payable wereclassified as other financial liabilities.

 

The carrying value and fair value of the Company’s financial assets andliabilities as at December 31, 2009, and December 31, 2008, issummarized as follows:

 
| ** **            | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **            | ** ** | **Carrying Value**         | ** ** | **Fair Value**             | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| Held-for-trading      |       | $                          | 18,872,312 |                       | $          | 18,872,312 |   | $ | 3,409,593 |   | $ | 3,409,593 |   |
| Loans and receivables |       | $                          | 39,500,262 |                       | $          | 39,500,262 |   | $ | 36,847,761 |   | $ | 36,847,761 |   |
| Other liabilities     |       | $                          | 42,063,857 |                       | $          | 42,063,857 |   | $ | 67,679,960 |   | $ | 67,679,960 |   |

 

The fair value of the cash and cashequivalents, receivables, current Project Loan interest receivable, accountspayable and accruals, and current Project Loan interest payable,  andrelated party payable approximate their fair values due to their short term nature. The fair value of the non-current debt approximates the amortized cost as theinterest rates reflect the estimated market rates.

 

**RISK MANAGEMENT**

** **

**Foreign currency exchange risk**

 

The Company is exposed to foreign currency risk on fluctuations in itsCanadian denominated cash, accounts payable and accrued liabilities.  The net asset amount of Canadian dollarssubject to foreign currency fluctuations as at December 31, 2009, wasequal to $16.3 million.  As a result,every percentage change in the US/Canada exchange rate will affect its incomeby approximately $0.2 million, on a per annum basis.  As at December 31, 2009, the Companyalso had cash, accounts payable, and accrued liabilities denominated inArgentinean pesos.  However, theseamounts are typically only held (in the case of cash) or outstanding (in thecase of accounts payable and accrued liabilities) for a short period of time sothe foreign exchange risk is minimal. The Company does not use derivative instruments to mitigate such risks.

** **

**Interest rate risk**

 

Interest rate risk is the risk that the fair value or future cash flowsof a financial instrument will fluctuate because of changes in market interestrates. As at December 31, 2009, the Company had an outstanding balance of$31.9 million under the Project Loan Payable, plus accrued interest. TheProject Loan Payable consists of two loans which bear fixed interest at a rateof LIBOR plus 2.5% as of the inception of the loan (7.86% on $9.8 million and8.21% on $22.1 million). As the terms on the Project Loan Receivable are thesame as the terms of the Project Loan Payable there is no interest rate risk.

** **

**Credit risk**

 

Credit risk is the risk of financial loss to the Company if acounterparty to a financial instrument fails to meet its contractualobligations. Financial instruments that potentially subject the Company toconcentrations of credit risk consist of cash and cash equivalents, and theProject Loan Receivable and interest due thereon.

 

The Company’s cash and cash equivalents consist of deposit instrumentsthat are held with major financial institutions in Canada and are notconsidered a material credit risk to the Company.  The Company also

 

27

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars)**

**11.**  **FINANCIAL INSTRUMENTS — continued**

 

**Creditrisk -****continued**

 

holds US dollars in an account at a United States financial institutionand pesos in an international bank in Argentina.  Funds held in the US and Argentina are heldfor the purposes of meeting existing accounts payable and current payroll.  The credit risk of cash and cash equivalentsheld outside of Canada is not considered a material credit risk to the Company.

 

Management has determinedthat the credit risk associated with the Project Loan Receivable is mitigatedby positive cash flows anticipated from MSC, frequent receipt of financialinformation regarding the operations of MSC, MSC’s proven and probable reservereport, the present value of silver and gold, and financial support by itsmajority shareholder, Hochschild. Moreover, the Project Loan Receivable will not be collected until theProject Loan Payable is paid, and the Project Loan Payable will only be paid ifthe Project Loan Receivable is also paid. Management does not believe that the Project Loan Payable and ProjectLoan Receivable present significant credit risk, however, should MSC be unableto settle amounts due, the impact on the Company could be significant. The maximumexposure to a loss arising from the Project Loan Receivable is equal to itstotal carrying value on the balance sheet. The Company has not used derivative instruments to mitigate such risksassociated with credit risk.

 

**Liquidity risk**

 

The Company’s approach to managing theliquidity risk is to provide reasonable assurance that it can providesufficient capital to meet liabilities when due. The Company’s ability tosettle short-term and long-term liabilities when due is dependent on futureliquidity from capital sources or positive cash flows from its projects. At December 31,2009, the Company’s accounts payables and accrued liabilities wereapproximately $2.7 million all of which are due for payment within normal termsof trade which is generally 30 to 60 days. The Company regularly reviews itsreceivable balances and follows up on amounts past due. Should sufficient cashnot be available to settle liabilities, the Company also relies on equity,third-party and related party financing to manage its liquidity and thesettlement of liabilities.  The Companyhas not used any derivative or other financial instruments to mitigate thisrisk.

 

**Commodity price risk**

 

The Company’s profitability depends on metalprices for gold and silver and, if other projects enter into production, oncopper prices and other base metals. Gold, silver and copper prices areaffected by numerous factors such as the sale or purchase of gold and silver byvarious central banks and financial institutions, interest rates, exchange rates,inflation or deflation, fluctuations in the value of the US dollar and foreigncurrencies, global and regional supply and demand, and political and economicconditions of major gold, silver and copper-producing countries throughout theworld.  The Company has not and may notbe able to hedge in respect of gold and silver sales arising from its equityinvestment in MSC, nor does MSC hedge its sales. In the event that the Company’sother projects enter into production and revenue contracts are entered into inrespect of other commodities and base metals, including copper, the Companywill reconsider the relative merits of entering into commodity price hedges.

 

28

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars)**

 

**12.  INCOME TAXES**

 

The tax effects of the temporary differences that give rise to theCompany’s future tax assets and liabilities are as follows:

 
| ** **                            | ** ** | **2009**   | ** ** | **2008  (restated Note 2(a))** | ** ** |
|---------------------------------------|------------|------------|------------|--------------------------------|------------|
| Net operating losses                  |       | $          | 3,426,000  |                           | $          | 2,605,000 |   |
| Capital losses                        |       | 918,000    |       | 1,097,000                      |       |
| Equipment                             |       | 4,000      |       | 2,000                          |       |
| Undeducted financing costs            |       | 719,000    |       | 539,000                        |       |
| Deferred exploration costs            |       | (376,000   | )          | (106,000                       | )          |
| Investment in Minera Santa Cruz       |       | (2,176,000 | )          | 1,847,250                      |       |
| Argentina deferal of interest expense |       | 2,366,000  |       | —                         |       |
| Valuation allowance                   |       | (4,881,000 | )          | (5,984,250                     | )          |
| Future tax assets (liabilities)       |       | $          | —     |                           | $          | — |   |

 

The provision for income taxes differ from the amount established usingthe statutory income tax rate of 33.00% (2008 - 33.50%) as follows:

 
| ** **                                                      | ** ** | **2009**   | ** ** | **2008  (restated Note 2(a))** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|--------------------------------|------------|
| Income benefit at Canadian statutory rate                       |       | $          | 822,000    |                           | $          | (1,214,250 | ) |
| Foreign income taxes at other than Canadian  statutory rate     |       | (275,000   | )          | 138,000                        |       |
| Non-deductible equity pickup                                    |       | 1,000      |       | —                         |       |
| Permanent difference                                            |       | (641,000   | )          | 1,607,625                      |       |
| Non-deductible stock option compensation                        |       | 65,000     |       | 221,000                        |       |
| Benefit of previously unrecognized tax pools                    |       | —     |       | (2,004,000                     | )          |
| Effect of statutory tax rate change                             |       | (570,770   | )          | 385,000                        |       |
| Decrease in valuation allowance                                 |       | (1,103,250 | )          | (2,228,375                     | )          |
| Expiry of tax losses and other                                  |       | 2,819,000  |       | 2,606,000                      |       |
| Unrealized foreign exchange differences                         |       | (1,747,000 | )          | —                         |       |
| FX (gains) losses on revaluation on future income tax  balances |       | (182,000   | )          | 664,000                        |       |
| Other                                                           |       | (810,750   | )          | (175,000                       | )          |
| Future income tax recovery                                      |       | $          | (1,622,770 | )                              | $          | — |   |

 

The Company’s future tax assets include approximately $0.7 million(2008: $0.5 million) related to deductions for share issue costs in excess ofamounts deducted for financial reporting purposes. If and when the valuationallowance related to these amounts is reversed, the Company will recognize thisbenefit as an adjustment to share capital as opposed to income tax expense inthe Statement of Operations.

 

29

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars)**

 

**12.  INCOME TAXES — continued**

 

The valuation allowance as at December 31, 2009 decreased by $1.1million (December 31, 2008 - increased by $0.7 million), representing thetax effect of the investment in Minera Santa Cruz and loss carry forwards. TheCompany evaluates its valuation allowance requirements based on projectedfuture operations.  When circumstanceschange and this causes a change in management’s judgment about therecoverability of future tax assets, the impact of the change on the valuationallowance is reflected in current income. As management of the Company does not currently believe that it is morelikely than not that the Company will receive the benefit of this asset, avaluation allowance equal to the future tax asset has been established at both December 31,2009 and December 31, 2008.

 

As at December 31, 2009, the Company has estimated net operatingloss carry-forwards available to reduce taxable income in future years asfollows:

 
| **Country** | ** ** | **Amount** | ** ** | **Expiration Dates** | ** **                  |
|-------------|------------|------------|------------|----------------------|-----------------------------|
|        |       |       |       |                 |                        |
| Argentina   |       | $          | 9,220,266  |                 | 2010 – 2014 and beyond |   |
|        |       |       |       |                 |                        |
| Canada      |       | $          | 795,941    |                 | 2010 – 2014            |   |

 

These consolidated financial statements do not reflect the potentialeffect on future income taxes of the application of these losses.

 

**13.  DIFFERENCES BETWEEN CANADIANAND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES**

 

As discussed in Note 2, these financial statements are prepared inaccordance with Canadian GAAP. Differences between Canadian GAAP and UnitedStates generally accepted accounting principles (“U.S. GAAP”) as they apply tothese financial statements are summarized as follows:

 

**a.     Mineral Properties andDeferred Exploration Costs**

 

The U.S. Securities and Exchange Commission staff has taken theposition that a U.S. registrant without proven and probable economic reserves,in most cases, could not support the recovery of the carrying value of deferredexploration costs. The Company’s investment in MSC has proven and probablereserves but MSC did not receive government approval of the EnvironmentalImpact Assessment (EIA) until the first quarter of 2006. Therefore, the Companypresented the effect of expensing all deferred exploration costs through December 31,2005 as a reconciling item between U.S. and Canadian GAAP. Commencing January 1,2006 there is a difference relating to the amortization of deferred explorationcosts, which for U.S. GAAP calculates using proven and probable reserves whileCanadian GAAP calculates using resources in addition to reserves.

 

**b.     Stock-Based Compensation**

 

In December 2004, the Financial Accounting Standards Board(“FASB”) issued Statement No. 123R, “Share-Based Payment,” (now“Accounting Standards Codification”, ASC 718, *Compensation-StockCompensation*) which requires companies to expense the fair value ofemployee stock options and other forms of stock-based compensation. Thisrequirement represents a significant change because share-based stock optionawards to employees, a predominate form of stock compensation for the Company,were not recognized as compensation expense under APB 25.

 

30

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars)**

 

**13.  DIFFERENCES BETWEEN CANADIANAND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES — continued**

 

**b.     Stock-Based Compensation — continued**

 

ASC 718 requires the cost of the award, as determined on the date ofgrant at fair value, to be recognized over the period during which an employeeis required to provide service in exchange for the award, usually the vestingperiod. The grant-date fair value of the award will be estimated using anoption-pricing model. The Company adopted the statement using themodified-prospective method on January 1, 2006. The Company currentlydiscloses the effect of expensing stock options under a fair value approachusing the Black-Scholes pricing model in Note 7(c) to these CondensedConsolidated Financial Statements.

 

For U.S. GAAP, prior to the adoption of ASC718, the Company continued to follow Accounting Principle Board Opinion No. 25“Accounting for stock issued to employees” and related interpretations toaccount for stock options issued to employees. In accordance with EmergingIssues Task Force (“EITF”) 00-23 Issue 31, variable accounting was requiredsince options issued with an exercise price denominated in a currency otherthan its functional currency is not considered fixed. Under variableaccounting, the intrinsic value of the options issued to employees wascalculated on each balance sheet date, with the adjustment charged to theStatement of Operations.

 

**c.     Warrants**

 

Under Canadian GAAPshare purchase warrants are accounted for as equity. Under US GAAP, as requiredby ASC 815-40 for fiscal years beginning after December 15, 2008, sharepurchase warrants denominated in a currency that is not the functional currencyof the Company are accounted for as a liability, with the change in fair valuerecorded in the statement of operations.

 

TheCompany had 17,055,273 warrants outstanding as at December 31, 2009.  On the date of transition the fair value of the warrants was $0.3 million. Accordingly,under US GAAP, this amount was recorded as a liability and the differencebetween this and carrying value of the warrants in contributed surplus underCanadian GAAP was recorded as a transitional adjustment within deficit.  At December 31, 2009 the fair value ofthe warrants outstanding was recalculated resulting in a liability of $5.7million with the change in fair value of $5.4 million recorded in the statementof operations.

 

Under US GAAP, asrequired by FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”). aFair Value level needs to be assigned to financial instruments.

 

The different fairvalue hierarchy levels have been defined as follows:

· Fair value level 1: determined using quotedprices (unadjusted) in active markets for identical assets or liabilities

· Fair value level 2: determined using inputsother than quoted prices included within level 1 that are observable for theasset or liability, either directly (i.e. as prices) or indirectly (i.e.derived from prices)

· Fair value level 3: determined using inputsfor the asset or liability that are not based on observable market data(unobservable inputs)

 

The share purchasewarrants are classified as Fair Value level 2.

 

The Company uses the Black Scholes option pricing model to calculatethe fair value of the warrants. The assumptions used to value the warrants fromthe 2009 issuance as at December 31, 2009 were as follows:

 
| Volatility:              |   | 67         | %      |
|--------------------------|--------|------------|--------|
| Risk-free interest rate: |   | 2.5        | %      |
| Expected life:           |   | 4.64 years |   |
| Dividend rate:           |   | 0          | %      |

 

The assumptions used to value the warrants issued in 2005 andoutstanding as at December 31, 2009 were as follows:

 

31

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars)**

** **

**13.  DIFFERENCES BETWEEN CANADIANAND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES — continued**

 

**c.     Warrants — continued**

 
| Volatility:              |   | 52         | %      |
|--------------------------|--------|------------|--------|
| Risk-free interest rate: |   | 1.5        | %      |
| Expected life:           |   | 0.22 years |   |
| Dividend rate:           |   | 0          | %      |

 

**d.     Bank Loan**

 

In December 2006, the FASB issued FASBStaff Position EITF 00-19-2 Accounting for Registration Payment Arrangements(now ASC 825-20, Financial Instruments, Capitalization of Interest), whichstates that the contingent obligation to make future payments or otherwisetransfer consideration under a registration payment arrangement shall berecognized and calculated separately in accordance with ASC 450, Contingencies,and SFAS No. 14, Reasonable Estimation of the Amount of a Loss. Prior toASC 825-20, under US GAAP, as the Company is required to maintain its listedCompany status as part of the loan covenant, in accordance with ASC 815-40,Derivatives and Hedging, the fair value of the first and second tranchewarrants was recorded as a liability. Subsequent to the initial measurement,the value of the warrants is recalculated on each balance sheet date or uponexercise of the warrants, based on the fair value of the warrants with theadjustment charged to the Statement of Operations and Accumulated Deficit.

 

For the year ended December 31, 2008 and2009, the accounting treatment for the third and fourth tranche warrants wasconsistent with Canadian GAAP (classified in equity rather than in liability)as a result of the application of ASC 825-20 and the Company’s change from adomestic filer to a foreign private issuer.

 

Under Canadian GAAP, the debt discount of $1.7million related to the third tranche warrants and $1.9 million related to thefourth tranche warrants granted to Macquarie in connection with a creditfacility was charged to contributed surplus.

 

Under U.S. GAAP, the fairvalue of the warrants is recognized on the Consolidated Balance Sheet asdeferred financing costs and is amortized on a straight line basis over theterm of the debt. This would result in a net increase of $nil (2008 - $0.9million as at December 31, 2009 in total assets under U.S. GAAP ascompared to Canadian GAAP.

 

**e.     Income taxes related to theabove adjustments:**

 

The income tax adjustment reflects the impact on income taxes on the USGAAP adjustments described above. Accounting for income taxes under CanadianGAAP and US GAAP is similar, except that income tax rates of enacted ofsubstantively enacted tax law must be used to calculate future income taxassets and liabilities under Canadian GAAP, whereas only income tax rates ofenacted tax law can be used under US GAAP. There were no material income tax differences on the above adjustments.

 

**f.      Income tax consequences ofstock-based employee compensation:**

 

Under Canadian GAAP, the income tax benefit attributable to stock-basedcompensation that is deductible in computing taxable income but is not recordedin the consolidated financial statements as in expense of any period (the“excess benefit”) is considered to be a permanent difference. Accordingly, suchamount is treated as an item that reconciles the statutory income tax rate tothe Company’s effective income tax rate. Under US GAAP, the excess benefit isrecognized as additional paid-in capital.

 

32

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars)**

 

**13.  DIFFERENCES BETWEEN CANADIANAND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES — continued**

 

**g.****    ****NewAccounting Pronouncements**

 

**(i)****   ****Accounting Policies ImplementedEffective January 1, 2009**

 

EffectiveDecember 31, 2009 the Company adopted the provisions of FASB issued SFAS No. 168,The FASB Accounting Standards Codification (“Codification”) and the Hierarchyof Generally Accepted Accounting Principles (“SFAS 168”) - a replacement ofFASB Statement No. 162, The Hierarchy of Generally Accepted AccountingPrinciples. Under the provisions of SFAS 168, the Codification will become thesource of authoritative U.S. GAAP recognized by the FASB to be applied bynongovernmental entities. The rules and interpretive releases of the SECunder authority federal securities laws are also sources of authoritative GAAPfor SEC registrants. On the effective date of SFAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All othernon-grandfathered non-SEC accounting literature not included in theCodification will become non-authoritative. The adoption of this standard didnot have a material effect on the Company’s consolidated financial statements.

 

InJune 2009, the FASB issued Accounting Standards Codification (“ASC”) Topic105, “Generally Accepted Accounting Principles” (“ASC 105”).  ASC 105 makes the FASB Accounting StandardsCodification the single source of authoritative U.S. accounting and reportingstandards, but it does not change accounting principles generally accepted inthe United States of America.  ASC 105was effective for interim and annual periods ending after September 15, 2009.Adoption of ASC 105 did not have a material impact on the Company’s financialcondition, results of operations or cash flows.

 

InFebruary 2008, the FASB staff issued Staff Position No. 157-2“Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”).  FSP FAS 157-2 delayed the effective date ofFAS 157 for non-financial assets and non-financial liabilities, except foritems that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually).  The provisions of FSP FAS 157-2 were adoptedby the Company on January 1, 2009 and did not have a material impact on theCompany’s financial position, results of operations or cash flows.

 

InApril 2009, the FASB issued FASB Staff Position 157-4, “Determining Fair Value Whenthe Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly”(“FSP 157-4”).  FSP 157-4 provides additionalguidance for estimating fair value in accordance with FAS 157 when the volumeand level of activity for the asset or liability have significantly decreased.  FSP 157-4 also includes guidance onidentifying circumstances that indicate a transaction isnot orderly.  FSP 157-4 is effectivefor interim and annual reporting periods ending after June 15, 2009. Theadoption of FSP 157-4 did not have a material impact on the Company’s financialposition, results of operations or cash flows.

 

In December 2007,the FASB issued SFAS No. 141(R), *“BusinessCombinations”*(now ASC 805,*Business Combinations*).The standardrequires the acquiring entity in a business combination to recognize all (andonly) the assets acquired and liabilities assumed in the transaction;establishes the acquisition date fair value as the measurement objective forall assets acquired and liabilities assumed; and requires the acquirer todisclose to investors and other users all of the information they need toevaluate and understand the nature and financial effect of the businesscombination. The guidance is effective for fiscal years beginning after December 15,2008.  The adoption of ASC 805 does nothave a material impact on the Company’s consolidated financial statements.

 

33

----

 

**MINERA ANDESINC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars****)**

 

**13.  DIFFERENCES BETWEEN CANADIANAND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES — continued**

 

**g.****    ****NewAccounting Pronouncements — continued**

 

In December 2007,the FASB issued SFAS No. 160, *“NoncontrollingInterests in Consolidated Financial Statements*” (now ASC 810, *Consolidation*). The standard requires all entities to reportnoncontrolling (minority) interests as equity in consolidated financialstatements. ASC 810 eliminates the diversity that currently exists inaccounting for transactions between an entity and noncontrolling interests byrequiring they be treated as equity transactions. The guidance is effectivefor fiscal years beginning after December 15, 2008.  The adoption of ASC 810 does not have amaterial impact on the Company’s consolidated financial statements.

 

In March 2008, theFASB issued SFAS No. 161, “*Disclosuresabout Derivative Instruments and Hedging Activities*— *An Amendment of FASB Statement No. 133”*(“SFAS161”) (now ASC 815, *Derivatives and Hedging*).ASC 815 requires enhanced qualitative disclosures about objectives andstrategies for using derivatives, quantitative disclosures about fair valueamounts of and gains and losses on derivative instruments, and disclosuresabout credit-risk-related contingent features in derivative agreements. ASC 815is effective for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008. The effects of the adoptionof this standard do not have a material impact on the Company’s consolidatedfinancial statements.

 

InJune 2008, the FASB ratified the consensus reached by the EITF in EITFIssue No. 07-5, “*Determining Whether anInstrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”(*now ASC 815-40 —Derivatives and Hedging). ASC 815-40 applies to any freestanding financialinstrument or embedded feature that has all of the characteristics of aderivative or freestanding instrument that is potentially settled in anentity’s own stock (with the exception of share-based payment awards within thescope of ASC 718. To meet the definition of “indexed to own stock,” aninstrument’s contingent exercise provisions must not be based on (a) anobservable market, other than the market for the issuer’s stock (ifapplicable), or (b) an observable index, other than an index calculated orcalculated solely by reference to the issuer’s own operations, and thevariables that could affect the settlement amount must be inputs to the fairvalue of a “fixed-for-fixed” forward or option on equity shares. ASC 815-40 iseffective for fiscal years beginning after December 15, 2008, and interimperiods within those fiscal years. The effects of the adoption of this standardare detailed above in the above “Warrants” section.

 

In June 2008, the EITF reached a consensus in EITF Issue No. 08-3,*“Accounting by Lessees for NonrefundableMaintenance Deposits”*(nowASC 840, *Leases*)*.*This issue addresses theaccounting for nonrefundable maintenance deposits paid by the lessee to thelessor. ASC 840 is effective for fiscal years beginning after December 15,2008, and interim periods within those fiscal years. Earlier application is notpermitted. Theadoption of ASC 840 does not have a material impact on the Company’s consolidatedfinancial statements.

 

34

----

 

**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars)**

 

**13.  DIFFERENCES BETWEEN CANADIANAND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES — continued**

 

**g.****    ****NewAccounting Pronouncements — continued**

 

EffectiveDecember 31, 2009, the Company adopted the provisions of ASC 855-10Subsequent Events, to establish general standards of accounting for and thedisclosure of events that occur after the balance sheet date but before thefinancial statements are issued or are available to be issued. The adoption ofASC 855-10 did not have a material impact on the Company’s consolidatedfinancial statements.

 

**(ii)****    ****FutureAccounting Pronouncements**

 

InJune 2009, the FASB issued amendments to ASC Subtopic 810-10-15-13,“Variable Interest Entities” (“ASC 810-10-15-13”) to improve financialreporting by enterprises involved with variable interest entities and toprovide more relevant and reliable information to users of financialstatements.  The amendment to ASC810-10-15-13 is effective as of the first fiscal year beginning after November 15,2009.  The Company does not believe thatadoption of the amendment to ASC 810-10-15-13 will impact its financialposition, results of operations or cash flows.

 

InJune 2009, the FASB issued FASB Statement No. 166, “Accounting forTransfer of Financial Assets — an amendment of FAS 140” (“FAS 166”) which seeksto enhance the information reported to users of financial statements byproviding greater transparency about transfers of financial assets, includingsecuritization transactions, and where companies have continuing exposure tothe risks related to transferred financial assets. FAS 166 was formally includedinto the FASB codification in December 2009, under ASC 860, “Transfers andServicing.”  The amendment is effectiveas of the first fiscal year beginning after November 15, 2009.  The Company does not believe that adoption ofFAS 166 will materially impact its financial position, results of operations orcash flows.

 

InJanuary 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06,“Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), whichprovides additional guidance to improve disclosures regarding fair valuemeasurements by adding two new disclosure requirements: (1) transfers inand out of Level 1 and 2 measurements and the reasons for the transfers, and (2) agross presentation of activity within the Level 3 roll-forward.  It also provides clarification on the levelof disaggregation of fair value measurements and disclosures on inputs andvaluation techniques.  The newrequirements and guidance are effective for periods beginning after December 15,2009, except for the Level 3 roll-forward which is effective for fiscal yearsbeginning after December 15, 2010. The Company does not believe that adoption of this guidance will have amaterial impact to its financial position, results of operations or cash flows.

 

**h.****    ****Restatementof Prior Year Figures**

 

In the year ended December 31, 2008 the Company has restated itsconsolidated financial statements per U.S. GAAP as the prior note for 2008 didnot reconcile the difference between Depreciation and Amortization methodscalculated on the Mineral Properties and Deferred Exploration Asset withinMSC.  As a result, the net loss for theyear, per U.S. GAAP, decreased by $4.0 million for the year ended December 31,2008. In addition, an error relating to the elimination of an intercompanyinterest item between the Company and MSC was corrected and the net loss forthe year, per U.S. GAAP, increased by $0.1 million. Both of these correctionsresulted a net increase in Total Assets of $3.9 million.

 

35

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**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars)**

 

**13.  DIFFERENCES BETWEEN CANADIANAND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES — continued**

 

**h.****    ****Restatementof Prior Year Figures - continued**

 

In addition, an error relating to the elimination of an intercompanyinterest item between the Company and MSC for the year ended December 31,2007 was corrected and as a result, the opening accumulated deficit, per U.S.GAAP, decreased by $0.4 million as at January 1, 2008, with acorresponding increase in Total Assets.

 
| ** **                                                                                                      | ** ** | **As Previously  Reported** | ** **  | **Restatement per  CAD GAAP  (Note 2(a))** | ** ** | **Restatement** | ** ** | **As Restated** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|--------------------------------------------|------------|-----------------|------------|-----------------|------------|
| Balance Sheet as at December 31, 2008                                                                      |       |                        |        |                                       |       |            |       |            |       |
| Shareholders’ equity                                                                                       |       | $                           | 18,593,092  |                                       | $          | (690,428        | )          | $               | 4,323,907  |   | $ | 22,226,571 |   |
| Total Assets                                                                                                    |       | $                           | 87,226,760  |                                       | $          | (690,428        | )          | $               | 4,323,907  |   | $ | 90,860,239 |   |
|                                                                                                            |       |                        |        |                                       |       |            |       |            |       |
| Consolidated Statements of Operations and Other  Comprehensive Loss for the period ended December 31, 2008 |       |                        |        |                                       |       |            |       |            |       |
| Net loss for the period                                                                                         |       | $                           | (18,113,531 | )                                          | $          | (301,142        | )          | $               | 3,919,598  |   | $ | (14,495,075 | ) |
| Basic loss per common share                                                                                     |       | $                           | (0.10       | )                                          | $          | —          |       | $               | 0.02       |   | $ | (0.08 | ) |

 

**i.****     ****Impacton Consolidated Financial Statements**

 

The impact of items (a) to (h) on the consolidated financial statementsis as follows:

 
| ** **                                                                          | ** ** | **As at**              | ** **  |
|-------------------------------------------------------------------------------------|------------|------------------------|-------------|
| ** **                                                                          | ** ** | **Dec. 31, 2009** | ** **  | **Dec. 31, 2008  (restated Note 13(h))** | ** ** |
| Shareholders’ equity, end of year, per Canadian  GAAP                          |       | $                      | 124,371,777 |   | $ | 69,554,902 |   |
| Adjustment for classification of warrants as  liability (Note 13)                   |       | (5,389,975             | )           | — |   |
| Adjustment to contributed surplus at transition  period for warrants (Note 13)      |       | (9,577,792             | )           | — |   |
| Adjustment to retained earnings at transition  period for warrants (Note 13)        |       | 9,312,341              |        | — |   |
| Adjustment for mineral properties and deferredexploration costs                     |       | (19,255,127            | )           | (16,390,524 | ) |
| Adjustment for mineral property and deferredexploration cost portion  of investment |       | (29,900,352            | )           | (30,937,807 | ) |
| Shareholders’ equity end of year, per U.S. GAAP                                |       | $                      | 69,560,872  |   | $ | 22,226,571 |   |

 
| ** **                                                  | ** ** | **Year  Ended**               | ** ** |
|-------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                  | ** ** | **Dec. 31,********2009** | ** ** | **Dec. 31, 2008  (restated Note 13(h))** | ** ** |
| Net income (loss) for the period, per Canadian  GAAP        |       | $                             | 4,114,772  |   | $ | (3,975,474 | ) |
| Adjustment for loss from  warrants                          |       | (5,389,975                    | )          | — |   |
| Adjustment for deferred exploration costs, net              |       | (2,864,603                    | )          | (8,052,643 | ) |
| Adjustment for investment                                   |       | 1,037,455                     |       | (2,466,958 | ) |
| Net loss for the period, per U.S. GAAP                      |       | $                             | (3,102,351 | ) | $ | (14,495,075 | ) |
| Basic and diluted net loss per common share, per  U.S. GAAP |       | $                             | (0.01      | ) | $ | (0.08 | ) |

 

36

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**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars)**

 

**13.  DIFFERENCES BETWEEN CANADIANAND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES — continued**

 

**i.****     ****Impacton Consolidated Financial Statements — continued**

 
| ** **                                              | ** ** | **As at**              | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|
| ** **                                              | ** ** | **Dec. 31, 2009** | ** ** | **Dec. 31, 2008  (restated Note 13(h))** | ** ** |
| Total liabilities, per Canadian GAAP                    |       | $                      | 42,198,857 |   | $ | 67,769,960 |   |
| Adjustment for classification of warrants as  liability |       | 5, 655,426             |       | — |   |
| Adjustment for the debt discount, net (Note 13d)        |       | —                 |       | 863,708 |   |
| Total liabilities, per U.S. GAAP                        |       | $                      | 47,854,283 |   | $ | 68,633,668 |   |

 
| ** **                                                                           | ** ** | **As at**              | ** **  |
|--------------------------------------------------------------------------------------|------------|------------------------|-------------|
| ** **                                                                           | ** ** | **Dec. 31, 2009** | ** **  | **Dec. 31, 2008  (restated Note 13(h))** | ** ** |
| Total assets, per Canadian GAAP                                                      |       | $                      | 166,570,634 |   | $ | 137,324,862 |   |
| Adjustment for mineral properties and deferredexploration costs                      |       | (19,255,127            | )           | (16,390,524 | ) |
| Adjustment for mineral property and deferred  exploration cost portion of investment |       | (29,900,352            | )           | (30,937,807 | ) |
| Adjustment for deferred financing costs, net (Note  13d)                             |       | —                 |        | 863,708 |   |
| Total assets, per U.S. GAAP                                                          |       | $                      | 117,415,155 |   | $ | 90,860,239 |   |

 

37

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**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars)**

 

**13.  DIFFERENCES BETWEEN CANADIANAND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES — continued**

 

**i.****     ****Impacton Consolidated Financial Statements — continued**

** **
| ** **                                                   | ** ** | **Year Ended**         | ** **  |
|--------------------------------------------------------------|------------|------------------------|-------------|
| ** **                                                   | ** ** | **Dec. 31, 2009** | ** **  | **Dec. 31, 2008  (restated)** | ** ** |
| ** **                                                   | ** ** | ** **             | ** **  | ** ** | ** ** |
| Cash flows used in operating activities under  Canadian GAAP |       | $                      | (5,566,221  | ) | $ | (6,604,149 | ) |
| Adjustment related to investment                             |       | 1,037,455              |        | (2,466,958 | ) |
| Adjustment related to mineral properties                     |       | (2,867,612             | )           | (8,403,206 | ) |
| Cash flows used in operating activities under U.S.  GAAP     |       | $                      | (7,396,378  | ) | $ | (17,474,313 | ) |
|                                                         |       |                   |        |   |   |
| Cash flows used in investing activities under  Canadian GAAP |       | $                      | (13,566,456 | ) | $ | (25,360,242 | ) |
| Adjustment related to investment                             |       | (1,037,455             | )           | 2,466,958 |   |
| Adjustment related to mineral properties                     |       | 2,867,612              |        | 8,403,206 |   |
| Cash flows used in investing activities under U.S.  GAAP     |       | $                      | (11,736,299 | ) | $ | (14,490,078 | ) |

 

**14.  SUBSEQUENT EVENTS**

 

On March 17, 2010, the Company received aSummons and Complaint in connection with a lawsuit commenced by affiliates ofHochschild Mining plc against MAI and a subsidiary in the State of New York.

 

The lawsuit pertains to the project financeloans made by Hochschild to MSC, as disclosed in Note 5.  Hochschild,among other claims, claims the Company refused to sign formal project loandocumentation and caused undue delay of the same.  Hochschild has demandedthat the Court order Minera Andes to sign formal loan documents for the projectfinance loans, prevent Minera Andes from interfering with the making ofpayments by Minera Santa Cruz in relation to the project finance loans, requireMinera Andes to repay to Hochschild the benefits that Minera Andes has receivedfrom the project finance loans and establish the priority of other shareholderloans owed by Minera Santa Cruz to Hochschild and Minera Andes.

 

The Company is reviewing in detail the claim byHochschild with its legal advisors and will respond accordingly.  Thislawsuit does not impact the Company’s financial statements for the year ended December 31,2009.  At this time, the Company is not able to estimate the impact ofthis claim for future periods.

 

38

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**MINERA ANDES INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2009 and 2008**

**(U.S. Dollars)**

 

**15.  COMPARATIVE FIGURES**

 

Certain financial statement line items from prior periods have beenreclassified to conform with the current year’s presentation. Thesereclassifications had no effect on the net loss and accumulated deficit aspreviously reported.

 

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