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MANAGEMENT DISCUSSION AND ANALYSIS









For the Year Ending

December 31, 2006

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Augusta Resource
Corporation

General

The following Management’s Discussion and Analysis (“MD&A”)
  of Augusta Resource Corporation and its subsidiaries, (the “Company”,
  “Augusta”, “we”, “us”, “our”)
  should be read in conjunction with the accompanying audited Consolidated Financial
  Statements and Annual Information Form for the year ended December 31, 2006
  and with the audited restated Consolidated Financial Statements for the year
  ended December 31, 2005, all of which are available at the SEDAR website at
  www.sedar.com. This MD&A report is current as at March 1, 2007.

As discussed herein this MD&A has been amended to give
effect to a restatement of the 2005 annual and quarterly results as well as the
results for the first quarter of 2006 as described in Restatement below and in
the Restatement note of the audited Consolidated Financial Statements for the
year ended December 31, 2006.

All financial information in this MD&A is prepared in accordance
  with Canadian generally accepted accounting principles (“GAAP”)
  and presented in Canadian dollars unless otherwise indicated. To expand the
  shareholder base of Augusta, the Company on August 10, 2006, graduated to the
  senior Canadian exchange, the Toronto Stock Exchange (“TSX”) under
  the symbol AZC and on November 30, 2006, the Company listed on the American
  Stock Exchange (“AMEX”) also under the symbol AZC. As a requirement
  of the AMEX listing the Company must prepare a reconciliation between Canadian
  and United States (“US”) GAAP which is included in the audited Consolidated
  Financial Statements (Note 16). Following recent guidance by the Securities
  and Exchange Commission regarding the accounting treatment for warrants issued
  in a currency other than the functional currency of the Company we have had
  to restate our 2005 US GAAP results (see Note 16 (b)). The new guidance for
  US GAAP specifies that the Company’s 3,750,000 warrants issued in 2005,
  at an exercise price of US $0.16, be accounted for as a liability on a fair
  value basis. As the fair value of these warrants had increased to $4,575,445
  by the 2005 year end from $465,163 on the issue date, the Company recorded a
  charge to earnings of $4,110,282, or $0.13 per share. Also the initial fair
  value amount of $465,163, which had been recorded as an increase in contributed
  surplus was reclassified to liabilities.

Restatement

In the second quarter of 2006, during the preparation of the
Form 40-F filing document, a requirement of the AMEX listing, the Company
discovered non-cash errors relating to its financial statements for the first
quarter ended March 31, 2006 as well as for the each quarter of 2005. In the
previously released financial statements the Company had not properly accounted
for the convertible debenture issued on June 1, 2005. Canadian Institute of
Chartered Accountants (CICA) Handbook Section 3860, Financial Instruments 
Disclosure and Presentation, requires that the proceeds received from the
issuance of convertible debt be allocated between its equity and debt
components. The Company had treated all the proceeds as debt. Further, upon
review of the option pricing model (Black-Scholes) used for valuing stock
options and warrants issued during 2005, the Company concluded that the time
period used to calculate the volatility assumption required adjustment. Refer to
the Companys 2006 Consolidated Financial Statements (Note 2) for more
details.

Forward-Looking Statements

Certain of the statements made and information contained herein
and in the documents incorporated by reference may contain forward-looking
statements or information within the meaning of the United StatesPrivate Securities Litigation Reform Act of 1995and forward looking
statements or information within the meaning of the Securities Act(Ontario). Forward- looking statements or information include statements
regarding the expectations and beliefs of management. Forward looking statements
or information include, but are not limited to, statements or information with
respect to known or unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the Company, or
industry

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results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements or information. Forward-looking statements or information are subject
to a variety of risks and uncertainties which could cause actual events or
results to differ from those reflected in the forward-looking statements or
information, including, without limitation, risks and uncertainties relating to
the Companys plans at its Rosemont Property and other mineral properties, the
interpretation of drill results and the estimation of mineral resources and
reserves, the geology, grade and continuity of mineral deposits, the possibility
that future exploration, development or mining results will not be consistent
with the Companys expectations, metal recoveries, accidents, equipment
breakdowns, title matters, labor disputes or other unanticipated difficulties
with or interruptions in production and operations, the potential for delays in
exploration or development activities or the completion of feasibility studies,
the inherent uncertainty of production and cost estimates and the potential for
unexpected costs and expenses, commodity price fluctuations, currency
fluctuations, failure to obtain adequate financing on a timely basis, the effect
of hedging activities, including margin limits and margin calls, regulatory
restrictions, including environmental regulatory restrictions and liability, the
speculative nature of mineral exploration, dilution, competition, loss of key
employees, and other risks and uncertainties. Should one or more of these risks
and uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in forward-looking
statements. Accordingly, readers are advised not to place undue reliance on
forward-looking statements or information. We do not expect to update
forward-looking statements or information continually as conditions change, and
you are referred to the full discussion of the Companys business contained in
the Companys reports filed with the securities regulatory authorities in Canada
and the US. Readers are also advised to consider such forward-looking
statements, which speak only as of the date the statements were made, while
considering the risks set forth below under the section Risks and uncertainties.

Description of Business

We are engaged in the exploration and development of mineral
properties located in Pima County, Arizona and White Pine County, Nevada. Our
properties are in the exploratory and development stages and are thus
non-producing and consequently do not generate any operating income or cash
flows from operations. The Company depends entirely on equity and debt capital
to finance its activities.

Overview of Performance

Property in Pima County, Arizona

On June 1, 2005, the Company announced that it had entered into
an Option Agreement to purchase 100% of the Rosemont Ranch copper deposits in
Pima County, Arizona, subject to a 3% Net Smelter Royalty (NSR). The property
(which includes patented and unpatented claims, fee land and surface grazing
rights that in aggregate total approximately 14,880 acres (6,026 hectares) is
approximately 50 kilometers southeast of Tucson, situated near a number of large
porphyry type producing copper mines operated by Phelps Dodge and Asarco. The
property contains three known potentially open-pit mine-able
copper/molybdenum/silver (Cu-Mo-Ag) skarn deposits on patented mining claims.

The Option Agreement required the cash payment of US
$20,800,000 payable over a three year period. After making the initial payment
of $8,439,226 (US $6,666,666) in June 2005, the Company completed the remaining
payments, after a reduction for early payment provisions of

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approximately $470,000, of $16,114,985 (US $ 13,733,582) on March
  31, 2006 and thereby acquired a 100% working interest in the property subject
  to a 3% NSR.

On January 24, 2006 the Company announced its 2006 Rosemont
Deposit Mineral Resource Statement which included results from the 2005 15-hole,
8,352 meters diamond drilling program on the Rosemont Copper/Molybdenum/Silver
deposit. The results of this drilling were integrated with approximately 56,100
meters of previous drilling, conducted by other companies prior to Augustas
involvement, to estimate the mineral resources. The Canadian National Instrument
(NI) 43-101 compliant report was filed with Canadian regulators on February 16,
2006. As detailed in filing, the estimated mineral resources totalled 442
million tons of measured and indicated material grading 0.51% Cu and 0.015% Mo
at a 0.20% Cu cutoff. An additional 145 million tons of inferred mineral
resources are estimated at a grade of 0.45% Cu and 0.015% Mo using the same
cutoff. These results showed significant improvement (excluding satellite
deposits) when compared with the historic resource reported by Anamax (Pincock,
Allen and Holt  1977). The modeling and mineral resource estimation work was
performed by or under the direction of Mr. William Rose, P.E., WLR Consulting
Inc.s (WLRCs) Principal Mining Engineer and an independent Qualified Person
under the standards set forth by Canadian NI 43-101.

WLRC and the other qualified persons who worked on this study
recommended that Augusta proceed with the completion of a pre-feasibility study
of the Rosemont project and the calculation of mineral reserves. These
evaluations should include the possible treatment of low-grade oxide
mineralization to supplement traditional sulfide milling and concentration.

The table below summarizes the reported measured, indicated and
inferred resource estimates:

Table 1: Measured Resources

Cutoff
    Tons** (thousands)
    %Cu
    %Mo
    %Cu Eq.*
    lbs Cu (millions)
    lbs Mo (millions)
    lbs Cu Eq.* (millions)0.20% Cu 0.25% Cu 0.30% Cu
    94,000 87,000 80,000
    0.55 0.58 0.60
    0.015 0.015 0.015
    0.77 0.79 0.82
    1,040 1,000 970
    28 26 24
    1,440 1,380 1,310


Table 2: Indicated Resources

Cutoff
    Tons** (thousands)
    %Cu
    %Mo
    %Cu Eq.*
    lbs Cu (millions)
    lbs Mo (millions)
    lbs Cu Eq.* (millions)0.20% Cu 0.25% Cu 0.30% Cu
    348,000 311,000 277,000
    0.50 0.54 0.57
    0.015 0.016 0.016
    0.72 0.77 0.80
    3,500 3,350 3,160
    104 100 90
    5,010 4,800 4,450


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Table 3: Total Combined Measured and Indicated Resources

Cutoff
    Tons** (thousands)
    %Cu
    %Mo
    %Cu Eq.*
    lbs Cu (millions)
    lbs Mo (millions)
    lbs Cu Eq.* (millions)0.20% Cu 0.25% Cu 0.30% Cu
    442,000 398,000 357,000
    0.51 0.55 0.58
    0.015 0.016 0.016
    0.73 0.78 0.81
    4,540 4,350 4,130
    132 126 114
    6,450 6,180 5,760


Table 4: Inferred Resources

Cutoff
    Tons** (thousands)
    %Cu
    %Mo
    %Cu Eq.*
    lbs Cu (millions)
    lbs Mo (millions)
    lbs Cu Eq.* (millions)0.20% Cu 0.25% Cu 0.30% Cu
    145,000 116,000 96,000
    0.45 0.51 0.56
    0.015 0.016 0.017
    0.67 0.74 0.80
    1,300 1,170 1,070
    43 37 33
    1,930 1,710 1,540


* Copper equivalent based on three-year trailing average prices
of $1.25/lb Cu and $18/lb Mo.

** Tons refer to short tons (2000 lbs).

On March 27, 2006 the Company commenced a 20,000 meter diamond
drill program on the Rosemont deposit. The program objectives included
increasing the current, measured and inferred resource, better definition of
near surface oxide-copper, silver and gold mineralization and acquire
geotechnical data to support slope design.

In early May 2006, the Company announced positive results from
metallurgical test work that would impact production and process techniques at
Rosemont. The new findings had a major positive impact on flow sheet design and
the financial performance of the project. On June 14, 2006 the Company released
the results of the Preliminary Assessment and Economic Evaluation for the
Rosemont Deposit (PA), which demonstrated that the Rosemont
copper/molybdenum/silver deposit may be developed as a low cost open pit mine
with potentially robust project economics. With the positive project economics
noted in the PA and the continued buoyant market for these strategic metals,
management decided to move the Rosemont project to full feasibility study.

Augusta also obtained a sustainable water supply source for Rosemont
  when it signed two contracts with the Central Arizona Water Conservation District
  (“CAWCD”) at the end of June. The CAWCD operates the Central Arizona
  Project canal system (“CAP”). Later in the third quarter the Company
  filed a “Plan of Operations” for the Rosemont project with the US
  Forest Service, the first formal step in the permitting process. The CAWCD contracts
  are significant to this activity because they address the water supply question
  ahead of the Environmental Impact Statement (“EIS”) review process,
  which removes a significant amount of uncertainty regarding project impacts
  to the region. In addition to the CAWCD contract for a sustainable water supply,
  Arizona state law allows for a mining company to drill wells as needed to supply
  process water for mineral processing operations under a mineral extraction permit
  from the Arizona Department of Water Resources.

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In August, the Company commenced the feasibility study on
Rosemont with M3 Engineering and Technology Corporation of Tucson, Arizona being
awarded the contract after a due bid and selection process. To lead the project
internally, the Company appointed Mr. Lance Newman as VP, Metallurgical
Operations and Mr. Mark Stevens as Chief Project Geologist. Both Mr. Newman and
Mr. Stevens are seasoned members of the team with proven track records in
project development and operations.

With five drill rigs on the property, the Company completed the
20,000 meter drill program in late September 2006. Initial assay results were
announced in July, followed up by more results in September. After the remaining
assays had been processed in the first half of the fourth quarter, the full set
of drill results was published in early December 2006.

These drill results are now being incorporated in the resource
  estimate which Augusta will publish in early March 2007. While the statement
  was originally scheduled for completion before the end of the year, it is now
  expected for publication in March due to third party assay processing delays.

The Company continues to work with consultants to advance the
  NI 43-101 compliant feasibility study, which is now expected for publication
  in the second quarter 2007 as a result of the delay in completing the updated
  resource statement. Metallurgical test work has largely been completed, and
  engineering is now 90% complete. The feasibility study will evaluate the project
  economics associated with solvent extraction and electrowinning (“SX/EW”)
  oxide copper processing and sulfide concentrate production.

Concurrent with completing the feasibility study at Rosemont,
the Company is preparing a final comprehensive Plan of Operations for submission
to the US Forest Service early in the second quarter of 2007. Using this plan as
a basis for permitting, Augusta will then move through the National
Environmental Policy Act (NEPA) permitting process, whereby the US Forest
Service initiates an EIS and public review process. It normally takes anywhere
from 12 to 18 months to complete the draft EIS and the initial public review
process. Another three to six months are typically required to respond to public
comments and prepare the final EIS, after which the US Forest Service will issue
a Record of Decision either approving the plan or providing recommendations
for modifications to the plan.

In January 2007, the Pima County Board of Supervisors passed a
resolution opposing the development of mineral resources at Rosemont. This was
done prior to Augustas completion of its final feasibility study and final
comprehensive Plan of Operations, which will be filed early in the second
quarter of 2007 as stated above. The resolution also requested that all public
land in the County be considered for withdrawal from mineral entry. In February
2007, the US Forest Service responded to the Pima County Administrators request
to challenge the validity of Augustas mining claims for the Rosemont deposit.
In the public letter, Forest Supervisor Jeanine A. Derby states the following:

*“Your argument for claim validity challenge was based
  primarily on the fact that the company intends to use many of the claims for
  mill tailings and waste rock placement. I have received opinions on this topic
  from our Office of General Counsel and also from our Regional Geologist in Albuquerque.
  Both opinions state that it is not common practice, nor is it Forest Service
  policy, to challenge mining claim validity, except when a) proposed operations
  are within an area withdrawn from mineral entry, b) when a patent application
  is filed, and c) when the agency deems that the proposed uses are not incidental
  to prospecting, mining, or processing operations*

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For operations proposed in accordance with our regulations,
and where the above situations do not exist, there is no basis for pursuing a
validity exam. The placement of waste rock and mill tailings on the Forest are
considered to be activities connected to the mining and mineral processing per
regulation 36CFR228 subpart A, and as such they are authorized activities
regardless of whether they are on or off mining claims.

The Company notes that the permits and permit review procedures
  to develop Rosemont are the responsibility of federal and state agencies. These
  procedures are well developed and allow for public and County input, however
  the County does not have jurisdiction over mining. The Company remains committed
  to work with local groups and officials in order to provide for the most effective
  design and mitigation of impacts. The Company is advancing a very progressive
  plan that considers conservation/open land protection, water protection, water
  miser design, advanced reclamation technologies and minimal viewscape impairment.

The US Forest Service is the official lead agency responsible
  for the process of reviewing potential project impacts and identifying relevant
  mitigation plans resulting from the Plan of Operations. The US Forest Service
  issues the final EIS and “Record of Decision” after pubic review
  and comment. These documents and findings are then considered by other federal
  and state agencies as they review the permits required to initiate mineral development
  on the property. The Company continues to work with local interests to address
  relevant factual concerns and issues as part of the NEPA process.

Subsequent to the Record of Decision, the Company will file a
final Plan of Operations (incorporating any necessary modifications). It is then
that permits would be issued allowing the Company to commence construction. Upon
completion of this process, Augusta expects to receive approval to construct the
mine in 2009 and to produce copper at Rosemont in 2010.

With approximately C$10 million in cash on hand as at December
31, 2006, the Company has commenced discussions with various financial
intermediaries in preparation for an expected release of a positive feasibility
study and the subsequent Board of Directors decision to proceed with the
development of Rosemont. The objective is to initially secure sufficient funding
to cover expenditures through to the expected completion of the permitting
process.

To December 31, 2006 expenditures related to the Rosemont
mineral property totalled $25,017,429 and deferred development expenditures
totalled $15,471,679.

Properties in White Pine County, Nevada

On December 2, 2004, the Company announced the signing of an
agreement to acquire a 100% interest in the Mount Hamilton gold project, located
in White Pine County, Nevada. The project approximately 50 kilometers west of
Ely, Nevada and is accessible from Highway 50 over good all-weather gravel
roads. The White Pine Mining District has a long history of silver and gold
mining, dating back to the first gold discovery in 1865. Mount Hamilton has
multiple exploration targets including surface bulk mineralization as well as
high-grade vein style mineralization. Six separate high priority areas have been
identified.

The Company purchased the Mount Hamilton property by
purchasing, effective May 6, 2005, 100% of the shares of DHI Minerals Ltd.,
which owned 100% of DHI Minerals (U.S.) Ltd., holder of the property. The terms
of the acquisition include the payment of US $3,000,000 payable in cash over two
years (Net present value of $3,103,438, based on an annual discount rate of
15%), 3,750,000 common shares at US $0.16 ($0.19) per share, fair market value
at the date of the transaction of $720,000 and 3,750,000 warrants to purchase
common shares with an exercise price of US $0.16 per share for a period of two
years, fair market value at the date of the transaction of $465,163. The entire
purchase consideration of $6,537,601, including a deferred

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tax provision of $2,200,000 and finders fees valued at $49,000,
was allocated to the mining property acquired. A portion of the DHI Minerals Ltd
shares are being held in escrow pending completion of the final US $1,500,000
payment of the note payable.

Under the terms of the acquisition the Company assumed the
underlying NSR and minimum advance royalty payments to Centennial Minerals
Company, LLC, payable prior to commercial production of US $100,000 per annum
commencing on November 19, 2005 and continuing until November 19, 2010 when the
annual payment amount increases to US $300,000 per annum. Upon commencement of
commercial production, a base rate of 3% NSR is payable, subject to an increase
whenever the price of gold is greater than US $400 per ounce. The NSR shall
increase by one half of one percent for each US $50 increment to a maximum of 8%
NSR. The Company has the option to purchase up to one and one half percentage
points of the NSR for US $2,000,000.

On May 11, 2006, the Company announced it had retained Pincock,
Allen & Holt, to conduct a pre-feasibility study at Mount Hamilton. The
study is evaluating the development of the Centennial Deposit as an open-pit
heap leach gold mine. The study is being expanded to assess run of mine heap
leaching methods. Additional metallurgical testing will be required to quantify
grade/recovery characteristics of run of mine leach versus crushed ore,
therefore final study results are not expected until the fourth quarter 2007.

On January 26, 2005, the Company announced the signing of
agreements to acquire the Shell Deposit in White Pine County, Nevada. Formal
agreements were entered into effective March 20, 2006. The Shell Deposit,
located nearby the Mount Hamilton property, was subject to past exploration
programs, with results indicating that the property hosted molybdenum and gold
mineralization. The Company is acquiring a 100% working interest, subject to an
underlying NSR ranging from 0.5% - 4.5%, for cash payment of US $120,000, and
annual advanceroyalty payments commencing at US $80,000 on first
anniversary increasing by US $20,000 per year until production commences.

In May 2006, the Company announced a 3,000 meter Phase I
Exploratory Drilling Program at the Shell Deposit. The drilling program
commenced in August.

As of the end of 2006, at the Mount Hamilton project, mineral
property expenditures totaled $6,801,978 and deferred development expenditures
were $378,670. Total mineral property expenditures on the Shell property were
$228,292 and deferred development expenditures were $188,434.

Property in Grant County, New Mexico

On March 1, 2005, the Company announced the signing of an
agreement to acquire the Lone Mountain project in New Mexico US. The agreement
required minimum exploration commitments of US $4,850,000 as well as payments of
US $1,000,000 cash and 325,000 common shares over a 3 year period. Virtually all
of the data from previous programs was acquired and an electronic database and
updated geological model completed.

On May 15, 2006 the Company announced that after completing a
detailed geological assessment that it had elected not to pursue its option to
purchase the Lone Mountain project. In the second quarter net capitalized
amounts totaling $309,550 were written-off.

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As of the end of the 2005, mineral property expenditures
totaled $271,236 and deferred development expenditures were $48,947.

Properties in the Coronation Diamond District, Nunavut,
Canada

As at December 31, 2005, the Company had paid $469,705 to acquire
  working interests in six properties in the Coronation Diamond District, incurred
  $215,949 in relation to deferred exploration expenditures related to these properties,
  issued 33,334 shares at a deemed price of $0.11 per share and 58,335 shares
  at $0.28 per share, and accrued an amount of $55,000 included in accounts payable,
  which is to be settled by the issuance of shares of the Company, subject to
  regulatory approval. In 2004, the Company had written off $296,799 in mineral
  properties and $212,355 in deferred development expenses as the relevant agreements
  were terminated. As the Company is no longer actively developing these properties,
  effective December 31, 2005, it wrote off the remaining costs, $247,907 in mineral
  properties and $3,594 in deferred development.

As at December 31, 2006, the Companys capitalized costs on its
mining assets were as follows:

|                                                        |   | Mineral Properties Cost |   |   | Deferred Development Expenses |  
|------------------------------------------------------- | - | ----------------------- | - | - | ----------------------------- | -
|                                                        |   | December 31             |   |   | December 31                   |  
|Mineral Properties and Deferred Development             |   | 2006                    |   |   | 2005                          |  
|Rosemont property                                       | $ | 25,017,429              |   | $ | 8,315,611                     |  
|Mt. Hamilton property                                   |   | 6,801,978               |   |   | 6,574,757                     |  
|Shell property                                          |   | 228,292                 |   |   | -                             |  
|Lone Mountain property                                  |   | -                       |   |   | 271,236                       |  
|                                                        | $ | 32,047,699              |   | $ | 15,161,604                    |  
|                                                        |   |                         |   |   |                               |  
|                                                        |   |                         |   |   |                               |  
|Mineral properties:                                     |   | 2006                    |   |   | 2005                          |  
|Balance, beginning of period                            | $ | 15,161,604              |   | $ | 285,064                       |  
|Acquisition costs                                       |   | 17,157,330              |   |   | 15,124,447                    |  
|Lone Mountain cost adjustment                           |   | (24,993                 | ) |   | -                             |  
|Write-offs                                              |   | (246,242                | ) |   | (247,907                      | )
|Balance, December 31, 2006 and 2005                     |   | 32,047,699              |   |   | 15,161,604                    |  
|                                                        |   |                         |   |   |                               |  
|                                                        |   |                         |   |   |                               |  
|Deferred development expenses:                          |   |                         |   |   |                               |  
|Balance, beginning of period                            |   | 3,035,560               |   |   | 19,785                        |  
|Work program expenditures (1)                           |   | 13,066,531              |   |   | 3,019,369                     |  
|Write-offs                                              |   | (63,308                 | ) |   | (3,594                        | )
|Balance, December 31, 2006 and 2005                     |   | 16,038,783              |   |   | 3,035,560                     |  
|                                                        |   |                         |   |   |                               |  
|                                                        |   |                         |   |   |                               |  
|Total Mineral Properties and Deferred
      Development | $ | 48,086,482              |   | $ | 18,197,164                    |  

|(1) | Includes geological, engineering and environmental work
      programs designed to advance exploration and development activities on the
      mineral property.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

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The Company regularly reviews the carrying values of its
mineral properties and deferred development expenditures with a view to
assessing whether there has been any impairment in value. As at December 31,
2006 this review concluded that no impairment in carrying value was
warranted.

Results of Operations

Comparison of the year ending December 31, 2006 and 2005
(restated)

|                               |   | Year
      Ended December 31 |   |   |            |  
|------------------------------ | - | ---------------------------- | - | - | ---------- | -
|                               |   | 2006                         |   |   | 2005       |  
|                               |   |                              |   |   | (restated) |  
|EXPENSES                       |   |                              |   |   |            |  
|Salaries,benefits and bonuses  | $ | 2,088,317                    |   | $ | 599,374    |  
|Stock based compensation       |   | 1,679,534                    |   |   | 1,039,794  |  
|Travel                         |   | 346,014                      |   |   | 75,245     |  
|Write-off of mining assets     |   | 309,550                      |   |   | 251,501    |  
|Office and sundry              |   | 253,354                      |   |   | 255,049    |  
|Filing and regulatory          |   | 235,366                      |   |   | 109,800    |  
|Investor relations             |   | 215,253                      |   |   | 69,308     |  
|Accounting and audit           |   | 159,352                      |   |   | 20,000     |  
|Consulting and communication   |   | 118,252                      |   |   | 53,379     |  
|Legal fees                     |   | 112,633                      |   |   | 16,921     |  
|Insurance                      |   | 80,975                       |   |   | -          |  
|Fiscal and advisory services   |   | 46,306                       |   |   | 33,497     |  
|Recruitment fees               |   | 45,228                       |   |   | 45,174     |  
|Administration                 |   | 17,500                       |   |   | 30,000     |  
|Amortization                   |   | 13,495                       |   |   | 1,594      |  
|Foreign exchange gain          |   | (83,078                      | ) |   | (180,699   | )
|Other expenses                 |   | 194,901                      |   |   | (8,847     | )
|                               |   |                              |   |   |            |  
|Loss from operations           |   | (5,832,952                   | ) |   | (2,411,090 | )
|Interest and other income      |   | 631,509                      |   |   | 57,433     |  
|Debt issuance costs            |   | (272,796                     | ) |   | (325,628   | )
|Loss on repayment of debenture |   | -                            |   |   | (390,000   | )
|Interest and finance charges   |   | (1,185,352                   | ) |   | (2,268,552 | )
|                               |   |                              |   |   |            |  
|NET LOSS                       | $ | (6,659,591                   | ) | $ | (5,337,837 | )
|                               |   |                              |   |   |            |  
|BASIC & DILUTED LOSS PER SHARE | $ | (0.11                        | ) | $ | (0.17      | )
|                               |   |                              |   |   |            |  
|WEIGHTED AVERAGE NUMBER        |   |                              |   |   |            |  
|OF SHARES OUTSTANDING          |   | 59,219,428                   |   |   | 32,282,246 |  

Loss from operations for the year ending December 31, 2006 was
$5,832,952, an increase of $3,421,862 from 2005. The net loss for 2006 was
$6,659,591 an increase of $1,321,754 from the prior year. Both increased loss
amounts reflect the increased corporate and project development activity that
the Company has undertaken over the past couple years.

10

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Specifically the increase in salaries and benefits reflects the
hiring of three senior employees in 2005 and the hiring of seven employees in
2006 five of which were senior, these personnel increases effectively quadrupled
the employee base of the Company over the two year period. The 2006 amounts also
include bonuses. The 2005 hires were for a new President & CEO, VP
Exploration and VP Projects and Environment. These positions are all based in
Colorado. Gil Clausen, the President & CEO and Mike Clarke, VP Exploration
commenced their engagements in April 2005. In September 2005 James Sturgess, VP
Projects and Environment was hired. An administrative/secretarial person has
also been engaged for this office. In August 2006, both Marlo Hamer-Jackson,
Manager Investor Relations and Corporate Communications and Tracey Brix-Nielsen,
Controller were added to the management team in Vancouver with Bruce Nicol,
Senior VP and Chief Financial Officer, joining in September. Lance Newman VP,
Metallurgical Operations and Mr. Mark Stevens, Chief Project Geologist also
joined the Denver office in August 2006. The Vancouver employees also have
responsibilities with other publicly traded unrelated companies which results in
a sharing of common costs including salaries.

The stock based compensation expense at $1,679,534 reflects the
pro-rata expense for the issue of 1,885,000 stock options to corporate
directors, officers and employees in 2006 as well as the pro-rata expense for
the issue of stock options in 2005 and 2004. The fair value determination was
effected by the share price volatility and overall increase in the share price
over the two year period.

Reflecting the increase in the number of employees as well as
corporate and operational activity in general, a number of the expense
categories increased. These include travel as well as office and sundry in
support of the increased employee base; filing and regulatory, accounting and
audit, consulting and communications, legal fees and fiscal and advisory
services in support of the TSX and AMEX listings, increased disclosure and
accounting and reporting complexities (as a result of the listings and increased
corporate activity) and for investor relations a concerted effort to actively
market the Company to institutional and other shareholders and potential
shareholders.

During 2006 the Company determined, after completion of a
geological assessment, that it would not complete the option agreement to
purchase the Lone Mountain property in New Mexico. As a result capitalized costs
totaling $309,550 were written-off in the second quarter. In 2005 the Company
wrote-off the capitalized costs related to the Coronation Diamond District
properties in Nunavut, Canada resulting in $251,501 being charged to the
statement of operations for the year.

During 2006 the Company incurred $80,975 for insurance expense
for Directors and Officers Insurance coverage along with liability coverage
for the Rosemont Ranch.

Recruitment fees for the year ended December 31, 2006 were
incurred for the search for 2 positions in the Denver office and in 2005 for the
search for a candidate for the President and CEOs position. In 2006 the Company
hired Mr. Mark Stevens as Chief Project Geologist as well as an executive
assistant for the Denver office using the services of a recruitment agency. In
2005 the Company hired Mr. Gil Clausen as President and CEO using such
services.

The foreign exchange gain of $83,078 during the year ended
December 31, 2006 is a decrease of $97,621 over the foreign exchange gain
recorded during the year ended December 31, 2005. The gains reflect an overall
weakening of the US dollar during the relevant periods or at the time US dollar
denominated obligations were discharged.

Other expenses capture operational net expenditures pertaining
to the working ranch acquired with the acquisition of the Rosemont property.

11

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The increase in interest income to $631,509 during the period
resulted from the substantial increase in bank balances and short term
investments resulting from the equity funds raised in March 2006.

Debt issue costs of $272,796 relate to costs incurred on the
issuance of the convertible debenture in June 2005, one-half of which was repaid
on December 1, 2005 ($3,000,000) and the remainder on June 1, 2006. In 2005, the
December repayment included the issuance of shares at a discount which resulted
in the recognition of a loss of $390,000.

Interest and finance charges to December 31, 2006 are
$1,185,352 compared with $2,268,552 in the prior year. The 2006 amount is
comprised of $795,968 of accretion interest and an accrual of $112,500 at 9% on
the convertible debenture, $268,177 of accretion interest, at 15%, on the Mount
Hamilton note and $8,707 of bank charges and interest. The 2005 amount is
comprised of the accretion of $1,701,348 of interest expense as well as the
accrual of $292,500 at 9% interest due on the convertible debenture. In
addition, the Company accrued $271,315 in discount interest based upon a
borrowing rate of 15% on the US $2,500,000 notes payable issued as part of the
consideration to purchase Mount Hamilton.

12

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Comparison of the year ending December 31, 2005 (restated)
and 2004

|                               |   | Year Ended December 31 |   |   |            |  
|------------------------------ | - | ---------------------- | - | - | ---------- | -
|                               |   | 2005                   |   |   | 2004       |  
|                               |   | (restated)             |   |   |            |  
|EXPENSES                       |   |                        |   |   |            |  
|Salaries, benefits and bonuses | $ | 599,374                |   | $ | 180,981    |  
|Stock based compensation       |   | 1,039,794              |   |   | 41,250     |  
|Travel                         |   | 75,245                 |   |   | -          |  
|Write-off of mining assets     |   | 251,501                |   |   | 509,154    |  
|Office and sundry              |   | 255,049                |   |   | 2,562      |  
|Filing and regulatory          |   | 109,800                |   |   | 23,184     |  
|Investor relations             |   | 69,308                 |   |   | -          |  
|Accounting and audit           |   | 20,000                 |   |   | 7,000      |  
|Consulting and communication   |   | 53,379                 |   |   | -          |  
|Legal fees                     |   | 16,921                 |   |   | 48,243     |  
|Fiscal and advisory services   |   | 33,497                 |   |   | -          |  
|Recruitment fees               |   | 45,174                 |   |   | -          |  
|Administration                 |   | 30,000                 |   |   | 30,000     |  
|Amortization                   |   | 1,594                  |   |   | -          |  
|Foreign exchange gain          |   | (180,699               | ) |   | (4,816     | )
|Other expenses                 |   | (8,847                 | ) |   | -          |  
|                               |   |                        |   |   |            |  
|Loss from operations           |   | (2,411,090             | ) |   | (837,558   | )
|Interest and other income      |   | 57,433                 |   |   | -          |  
|Debt issuance costs            |   | (325,628               | ) |   | -          |  
|Loss on repayment of debenture |   | (390,000               | ) |   | -          |  
|Interest and finance charges   |   | (2,268,552             | ) |   | (28,499    | )
|                               |   |                        |   |   |            |  
|NET LOSS                       | $ | (5,337,837             | ) | $ | (866,057   | )
|                               |   |                        |   |   |            |  
|BASIC & DILUTED LOSS PER SHARE | $ | (0.17                  | ) | $ | (0.06      | )
|                               |   |                        |   |   |            |  
|WEIGHTED AVERAGE NUMBER        |   |                        |   |   |            |  
|OF SHARES OUTSTANDING          |   | 32,282,246             |   |   | 13,973,134 |  

Loss from operations for the year ending December 31, 2005 was
$2,411,090. This was $1,573,532 higher than the loss of $837,558 incurred for
the year ending December 31, 2004. The net loss for the year ending 2005 was
$5,337,837, $4,471,780 higher than the prior year. The significant increase in
the 2005 expenditures and charges reflects the transition from a relatively
inactive company to one which was making significant acquisitions and
expenditures on the properties acquired. In the previous year, managements
efforts were directed at identifying prospective properties whereas efforts in
2005 were directed at securing and exploring the acquired properties. In 2005
senior employees were hired and offices were established in Denver, Colorado and
Tucson, Arizona. Overall corporate and operational activity increased
significantly in 2005.

Reflecting this greater activity, corporate complexity, and
efforts to increase awareness of the Company with the shareholder/investing
community; filing and regulatory, investor relations, accounting and audit,
consulting and communication, legal fees and fiscal and advisory services

13

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all increased. Reflecting the increase in personnel; salaries,
benefits and bonuses, travel, office and sundry and recruitment fees all
increased.

The share based compensation expense of $1,039,794 is the
result of 2,910,000 stock options being issued to corporate directors, officers
and employees during the year as well as a charge for the pro rata portion of
options issued in 2004. . The large non-cash expense has increased as a result
of the number of options granted and the rise in the companys stock price
during the period. This amount alone accounted for 63% of the increase in the
loss from operations for 2005.

Impairment determinations for the Coronation Diamond District
properties in Nunavut, Canada resulted in $251,501 being written off during 2005
and $509,154 during 2004. Exchange gains of $180,699 in 2005 reflect the
weakening of the US dollar relative to the Canadian dollar and the resulting net
decrease in US dollar denominated monetary liabilities.

The increase in interest income to $57,433 during the period
resulted from increased bank balances from equity funds raised during the period
and the investment of these funds in short term investments. The debt issuance
costs arose on the issuance of the $6,000,000 convertible debenture. The Company
amortized $325,628 of debt issue costs during 2005. The loss of $390,000 on the
repayment of the debenture resulted from the debenture being partially repaid
with common shares with a fair market value 15% above the share conversion rate
agreed with the Company. This 15% discount received on repayment was consistent
with the original agreement terms.

Interest and finance charges to December 31, 2005 are
$2,268,552 an increase of $2,240,053 over $28,499 during the year ended December
31, 2004. This increase is the result of the accretion of $1,701,348 of interest
expense as well as the accrual of $292,500 at 9% interest ($270,000 paid on
December 1, 2005) due on the $6,000,000 convertible debenture ($3,000,000 repaid
on December 1, 2005) issued by the Company. In addition the Company accrued
$271,315 in discount interest based upon a borrowing rate of 15% on the US
$2,500,000 notes payable.

Select Annual Information

|                                                    |   | 2006       |   |   | 2005 restated |   |   | 2004      |  
|--------------------------------------------------- | - | ---------- | - | - | ------------- | - | - | --------- | -
|Total revenue                                       | $ | nil        |   | $ | nil           |   | $ | nil       |  
|Total net loss                                      |   | (6,659,591 | ) |   | (5,337,837    | ) |   | (866,057  | )
|Total net loss and diluted net loss per
      share |   | (0.11      | ) |   | (0.17         | ) |   | (0.06     | )
|Total assets                                        |   | 58,538,531 |   |   | 20,807,850    |   |   | 1,365,194 |  
|Total long-term financial liabilities               |   | 2,216,369  |   |   | 3,692,267     |   |   | 32,997    |  
|Cash dividends declared per share                   |   | nil        |   |   | nil           |   |   | nil       |  

14

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Summary of Quarterly Results

Selected financial information for each of the eight most
recently completed quarters of fiscal 2006 and 2005 are as follows, the 2005
quarters have been restated:

Revenue
      Net
        loss
      Net
        loss per share basic & dilutedDec 2006
    Nil
    (1,242,765)
      (0.02)Sep 2006
    Nil
    (1,453,462)
      (0.02)Jun 2006
    Nil
    (2,436,883)
      (0.04)Mar 2006
    Nil
    (1,526,481)
      (0.04)Dec 2005
    Nil
    (2,527,247)
      (0.07)Sep 2005
    Nil
    (1,458,494)
      (0.04)Jun 2005
    Nil
    (861,062)
      (0.03)Mar 2005
    Nil
    (491,034)
      (0.02)


Liquidity

The Companys mineral exploration and development activities
have provided the Company with no sources of income and a history of losses,
working capital deficiencies and deficit positions. However, given the nature of
its business, the results of operations as reflected in the net losses and
losses per share do not provide meaningful interpretation of the Companys
non-financial performance and valuation.

The Companys working capital as at December 31, 2006 was
$6,760,921 compared with a working capital deficit of $1,553,214 as at December
31, 2005, an improvement of $8,314,135. During the year the Company raised
$44,848,497 through the issue of the Special Warrants and common shares net of
share issue expenses. These funds were used to repay the remaining convertible
debenture ($3,000,000) as well as part of the note payable issued on the
purchase of the Mount Hamilton property ($1,165,420). In addition, including the
payment of the remaining option amounts related to the Rosemont property,
expenditures for mineral properties were $17,138,774 while capitalized
expenditures on property development totaled $12,475,561, primarily related to
the Rosemont property. Cash used in operations totaled $3,431,316. In 2005 we
raised a net $14,648,139 in equity and through the convertible debenture
issuance during the year. These funds were used to invest in four mineral
properties in the US totalling $9,090,946 and on deferred development
expenditures during the year of $2,597,707. Cash used in operations totaled
$1,682,705.

The Companys cash position as at December 31, 2006 was
$9,686,886 compared with $2,252,044 as of December 31, 2005, an increase of
$7,434,842.

The Company has $3,492,997 of current liabilities, a decrease
of $661,861 from the prior year. The decrease relates primarily to the current
portion of the convertible debenture which was repaid June 1, 2006 partially
offset by an increase in the amount of note payable due in 2007 as well as an
increase in the accounts payable and accrued liabilities, reflecting the
increased activity of the Company.

The Company has $2,216,369 due in long-term liabilities as of
December 31, 2006 compared with $3,692,267 on December 31, 2005, a decrease of
$1,475,898 reflecting the reclassification of notes payable to current
liabilities. The remaining long-term liabilities primarily relate to the

15

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$2,200,000 future tax liability established on the acquisition
of DHI Minerals (U.S.) Ltd, owner of the Mount Hamilton property.

The current obligations of the Company are expected to be
funded through existing cash.

The following table lists as of December 31, 2006 information
  with respect to the Companys known contractual obligations.

Payments due by periodLess than 1
      
      
      1- 3
      
      
      3  5
      
      
      More than 5Contractual Obligations
      
      Total
      
      
      year
      
      
      years
      
      
      years
      
      
      yearsAccounts payable and accrued
      $
      1,792,788
      
      $
      1,792,788
      
      $
      -
      
      $
      -
      
      $
      -liabilities(1)Long-Term Debt Obligations (2)
      
      1,787,607
      
      
      1,787,607
      
      
      -
      
      
      -
      
      
      -Operating Lease Obligations (3)
      
      252,368
      
      
      106,250
      
      
      97,412
      
      
      48,706
      
      
      -Other Long-Term Liabilities Reflected
      
      2,200,000
      
      
      -
      
      
      -
      
      
      -
      
      
      2,200,000on the Company's Balance Sheet underCanadian GAAP(4)Total
      $
      6,032,763
      
      $
      3,686,645
      
      $
      97,412
      
      $
      48,706
      
      $
      2,200,000


(1)
    Represents accounts payable and accrued liabilities due
      within the next 12 months.(2)
    Represents amounts owed to various unrelated parties
      totaling $39,657. These amounts do not bear interest. Represents
      $1,747,950 in notes payable to Diamond Hill Investments Ltd. for the
      purchase of DHI Minerals (U.S.) Ltd. which owns the Mount Hamilton
      property.(3)
    Represents Glendale office rent of US $6,900 per month,
      under a 36 month lease agreement expiring on June, 2009 and US $939 per
      month for lodging premises in Tucson, under a 12 month lease agreement
      expiring on August 31, 2007.(4)
    Represents $2,200,000 in deferred tax liability on the
      acquisition of the Mount Hamilton property through DHI Minerals
  Ltd.


Capital Resources

The Companys primary capital assets are mineral properties,
which are discussed in detail in the section, Overview of Performance. The
Company has entered into several option agreements, which provide for further
acquisitions and exploration expenses to be incurred, however, these are option
agreements and the Company is not committed to completing these expenditures.

We will require additional capital to fund our business plan.
We have no revenue from operations and do not expect to generate any revenue
from operations in the foreseeable future.

During the next year the Company anticipates that it we will
require capital for the following:

| | • | Engineering, geological and environmental expenditures to
      advance Rosemont through the feasibility study period
$4,500,000.                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | Down payment for the purchase of land to be used for
      water pumping purposes including the ability to pump water into the Pima
      Mine Storage and Retrieval Facility to be accessed at a later time during
      production, the majority of which will be incurred before completion of
      the feasibility study, including the purchase of water
  $2,600,000.
| | • | On going direct administrative support of Rosemont
      project for the year $400,000.                                                                                                                                                                                                                                                                                     
| | • | Assuming a positive feasibility study and Board of
      Directors development decision additional 2007 expenditures are
      anticipated to include:                                                                                                                                                                                                                      
| |   | i)                                                                                                                                                                                                                                                                                                                                                                          
| |   | ii)                                                                                                                                                                                                                                                                                                                                                                         
| |   | iii)                                                                                                                                                                                                                                                                                                                                                                        

16

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| |   | iv)                                                                                   | additional employees to advance Rosemont development $500,000.
| | - | ------------------------------------------------------------------------------------- | --------------------------------------------------------------
| | • | Note payment related to the purchase of the Mount
      Hamilton property $1,800,000.
| | • | Exploration and option payments related to the
      Shell property $900,000.        
| | • | Ongoing administrative expenses for the Company
      $3,900,000.                    

While current cash reserves are expected to last through to
completion of the feasibility study we anticipate that it will require
additional capital of approximately $20,000,000 to fund the remainder of our
business activities for the year. The Company has commenced a process of
discussions with various financial intermediaries in preparation for the release
of the NI 43-101 compliant feasibility study in the second quarter of 2007 and
the subsequent Board of Directors decision to proceed with the development of
Rosemont. The objective is to secure sufficient initial funding to cover
expenditures through to the expected completion of the permitting process.

During the year we raised the following equity funding:

On March 17, 2006 the Company closed a brokered private
placement of 23,210,000 Special Warrants with gross proceeds of $44,099,000.
Each Special Warrant was convertible, without payment of additional
consideration, into a unit consisting of one common share (23,210,000 shares)
and one-half transferable common share purchase warrant (11,605,000 warrants).
Each whole warrant entitles the holder to acquire, at any time within two years,
one common share of the Company at a price of $3.10 expiring on March 17, 2007
and $4.10 expiring on March 17, 2008. Fair value of the share purchase warrants
is $6,687,143. The fair value of the warrants was calculated using the
Black-Scholes option pricing model for warrant valuation, assuming an average
volatility of 87% on the underlying shares, a risk free interest rate of 4%, a
two year term to expiry and no annual dividends.

The Company filed and obtained a receipt for a short form
prospectus, which qualifies the distribution of the common shares and warrants
underlying the Special Warrants effective April 28, 2006.

In consideration for their services, the agents received a cash
commission equal to 6% of the gross proceeds, totaling $2,645,940 from the
offering and 1,392,600 agents warrants exercisable into common shares which is
equal to 6% of the number of Special Warrants sold. Each agents warrant will
entitle the holder to acquire one common share of the Company at a price of
$3.10 expiring March 17, 2007 and $4.10 expiring March 17, 2008. Fair value of
the agents warrants is $1,030,524. The fair value of the warrants was
calculated using the Black-Scholes option pricing model for warrant valuation,
assuming an average volatility of 87% on the underlying shares, a risk free
interest rate of 4%, a two year term to expiry and no annual dividends.

The Company historically has relied upon equity subscriptions
to satisfy its capital requirements. The Company will continue to depend upon
equity capital to finance its activities. There are no assurances that capital
requirements will be met by this means of financing as inherent risks are
attached therein including commodity prices, financial market conditions, and
general economic factors. Management continues with its efforts to secure
additional financing arrangements for the Company and the support of its
creditors.

17

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Off Balance-Sheet Arrangements

The Company does not utilize off-balance sheet arrangements.

Transactions with Related Parties

During the year ending December 31, 2006, the Company incurred
expenses of $17,500 (2005 - $30,000) for administrative services provided by a
company in which a director of the Company has a 25% interest.

At December 31, 2006, $56,066 of accounts payable and accrued
liabilities (2005 - $17,675) and $17,643 of accounts receivable (2005 - $Nil) is
due to (from) related companies, which share office space and certain common
directors with the Company. Also, included in accounts receivable at December
31, 2006 is an amount of $44,134 (2005 - $1,369 accounts payable) due from a
company in which a director of the Company has a 25% interest. At December 31,
2006, $40,000 (2005 - $75,000) is due to the VP Administration of the Company
for salaries accrued in the current year.

Change of Auditors

On December 31, 2005, Deloitte & Touche, LLP of Vancouver,
British Columbia, the former auditor (the Former Auditor) of the Company
resigned as auditor and on January 5, 2006, Ernst & Young, LLP of Vancouver,
British Columbia were appointed as the successor Auditor (the Successor
Auditor) of the Company.

As Augusta has the majority of its mineral properties in the
US, the Companys Board of Directors decided to pursue seeking an additional
listing in the US. The Former Auditors informed the Augusta that they did not
wish to continue as the Companys Auditors as the Company was seeking a listing
in the US.

The Audit Committee considered the issues and recommended to
the Board of Directors acceptance of the resignation of the Former Auditor and
the appointment of the Successor Auditor, and the Board of Directors of the
Company considered and approved the acceptance of the resignation of the Former
Auditor and the appointment of the Successor Auditor.

None of the Former Auditors reports on any of Augustas
financial statements relating to the Companys financial periods commencing
January 1, 2003 contained any reservation.

There have been no reportable events (as defined in Section
4.11 of NI 51-102 of the Canadian securities regulatory authorities) in respect
of the Company for the period since January 1, 2003.

Proposed Transactions

There are no transactions that will materially affect the
performance of the Company.

Changes in Accounting Policies including Initial
Adoption

Effective January 1, 2004, the Company adopted the CICA
Handbook Section 3870, Stock-based Compensation and Other Stock-based
Payments, which requires fair value accounting for all stock options issued
during the year. Compensation expense for options granted is determined based on
the estimated fair values of the stock options at the time of grant, the cost of
which is

18

---

recognized over the vesting periods of the respective options.
This change in accounting policy was applied retroactively without restatement
of prior periods. On January 1, 2004, the Company increased the deficit by
$32,500 and increased contributed surplus by $32,500.

Financial Instruments and Other Instruments

The carrying values of cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities, notes and advances and
convertible debenture as reflected in the balance sheet approximate their fair
values. The Company has no significant concentrations of credit risk.

Share Capital information

As at the date of this report the Company had an unlimited
number of common shares authorized for issuance, with 72,749,067 issued and
outstanding. The Company had 4,801,167 outstanding stock options with 1,573,667
vested and available for exercise. The Company also had 18,947,600 in
outstanding warrants available to be exercised. [From December 31, 2006 to the
date of this report no options or warrants were exercised.]

Risks and uncertainties

An investment in the Company's common shares is highly
speculative and subject to a number of risks and uncertainties. Only those
persons who can bear the risk of the entire loss of their investment should
participate. An investor should carefully consider the risks described below and
the other information filed with the Canadian securities regulators before
investing in the Company's common shares. The risks described below are not the
only ones faced. Additional risks that the Company currently believe are
immaterial may become important factors that affect the Company's business. If
any of the following risks occur, or if others occur, the Company's business,
operating results and financial condition could be seriously harmed and
investors may lose all of their investment.

We
have a history of losses and anticipate that we will continue to incur losses
for the foreseeable future.

We have historically incurred losses as evidenced by the
consolidated statements of operations contained in the Consolidated Financial
Statements. We incurred losses of $6,659,591 $5,337,837 and $866,057 for the
years ended December 31, 2006, 2005 and 2004, respectively and have accumulated
losses of $22,142,776.

Our efforts to date are focused on acquiring, exploring and
advancing mineral properties to a development decision. All of our properties
are in the exploration stage and none have any known mineral reserves. We do not
anticipate that we will earn any revenue from our operations until our
properties are placed into production, which is not expected to be for several
years, if at all.

We
  will require additional capital to fund our business plans.

As of December 31, 2006, we had a working capital of
$6,760,921. We have no revenues from operations and do not expect to generate
any revenues from operations in the foreseeable future. Although we anticipate
the current cash balance will provide us with sufficient funding to complete the
feasibility study, our planned activities for the year anticipate expenditures
significantly in excess of our current cash reserves. We will require additional
capital to fund our business activities, including exploration and development
expenditures and property payments.

19

---

Managements current plan, assuming Board of Directors approval
of the Rosemont feasibility study and the continued development of the Rosemont
property, would require approximately $20 million additional funding post
development decision in 2007. Such funding may not be available on commercially
acceptable terms or at all. In such instance we may raise additional capital
through debt or equity financing, and possibly through joint ventures,
production sharing arrangements or other means. Our failure to meet our ongoing
obligations on a timely basis or raise additional funds that may be required
could result in delay or indefinite postponement of further exploration and
development of our property or the loss or substantial dilution of our property
interests (as existing or as proposed to be acquired).

We
have historically depended on distributions of our securities to fund our
working capital and funding requirements

Historically, the principal source of funds available to us has
been through the sale of common shares. During the years ended December 31,
2006, 2005 and 2004, we raised approximately $47,724,000, $11,220,000 and
$530,000, respectively, by issuing equity securities. Additional equity
financing would cause dilution to our existing shareholders.

In addition, as at December 31, 2006, we had outstanding 4,801,167
  common share purchase options at an average exercise price of $1.76 and 18,947,600
  purchase warrants at an average outstanding exercise price of $2.51. As a consequence
  of the passage of time since the date of their original sale and issuance, none
  of the Company's shares remain subject to any hold period restrictions in Canada
  as of December 31, 2006. The unrestricted resale of outstanding shares from
  the exercise of dilutive securities may have a depressing effect on the market
  for our common shares.

We
have no proven or probable reserves and we may never discover sufficient mineral
deposits to justify commercialization of any of our properties.

We have no probable or proven reserves on any of our
properties, and we have not completed a feasibility study on any of our
properties. Therefore, we cannot be certain that minerals will be discovered in
sufficient quantities and grade on any of our properties to justify commercial
operations. Whether a mineral deposit will be commercially viable depends on a
number of factors, some of which are: the particular attributes of the deposit,
such as size, grade and proximity to infrastructure; metal prices, which are
highly cyclical; and government regulations, including regulations relating to
prices, taxes, royalties, land tenure, land use, importing and exporting of
minerals, labour, wages, mine safety and environmental protection. If we are
unable to upgrade our mineralized material to proven and probable reserves in
sufficient quantities to justify commercial operations, we will be unable to
develop mines and our financial condition and results of operations could be
adversely affected.

We
have no history of production and may never place any of our properties into
production.

None of our properties are in commercial production, and we
have never recorded any revenues from mining operations. We expect to incur
losses unless and until such time as our properties enter into commercial
production and generate sufficient revenues to fund our continuing operations.
The development of mining operations on any of our properties will require the
commitment of substantial resources for operating expenses and capital
expenditures, which may increase in subsequent years as needed consultants,
personnel and equipment associated with advancing exploration, development and
commercial production of our properties are added. The

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amounts and timing of expenditures will depend on the progress
of ongoing exploration and development, the results of consultants analysis and
recommendations, the rate at which operating losses are incurred, the execution
of any joint venture agreements with strategic partners, our acquisition of
additional properties, and other factors, many of which are beyond our control.
We may not generate any revenues or achieve profitability.

***Our
exploration activities may not be commercially successful.***

Mineral exploration is highly speculative in nature, involves
many risks and is frequently nonproductive. Unusual or unexpected geologic
formations, and the inability to obtain suitable or adequate machinery,
equipment or labor are risks involved in the conduct of exploration programs. We
are currently conducting exploration and deposit definition drilling on two of
our properties. The success of mineral exploration is determined in part by the
following factors:

- the identification of potential mineralization based on superficial
  analysis;
- availability of exploration permits;
- the quality of our management and our geological and technical expertise;
  and
- the capital available for exploration.

Substantial expenditures are required to establish proven and
probable reserves through drilling and analysis, to develop metallurgical
processes to extract metal, and to develop the mining and processing facilities
and infrastructure at any site chosen for mining. Whether a mineral deposit will
be commercially viable depends on a number of factors, which include, without
limitation, the particular attributes of the deposit, such as size, grade and
proximity to infrastructure; metal prices, which fluctuate widely; and
government regulations, including, without limitation, regulations relating to
prices, taxes, royalties, land tenure, land use, importing and exporting of
minerals and environmental protection. We cannot assure you that any reserves or
mineralized material acquired or discovered will be in sufficient quantities to
justify commercial operations.

***Exploration,
development and mining involve a high degree of risk.***

Our operations will be subject to all the hazards and risks
normally encountered in the exploration, development and production of gold and
other base or precious metals, including, without limitation, seismic activity,
rock bursts, pit-wall failures, cave-ins, flooding and other conditions involved
in the drilling and removal of material, any of which could result in damage to,
or destruction of, mines and other producing facilities, damage to life or
property, environmental damage and legal liability. Milling operations, if any,
are subject to various hazards, including, without limitation, equipment failure
and failure of retaining dams around tailings disposal areas, which may result
in environmental pollution and legal liability.

The parameters used in estimating mining and processing
efficiency are based on testing and experience with previous operations. While
the parameters used have a reasonable basis, various unforeseen conditions can
occur that may materially affect the estimates. In particular, past operations
indicate that care must be taken to ensure that proper ore grade control is
employed and that proper steps are taken to ensure that the leaching operations
are executed as planned. The mining contracts for the mines include clauses
addressing these issues to help ensure planned requirements are met.
Nevertheless, unforeseen difficulties may occur in planned operations.

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We
may be adversely affected by fluctuations in copper, molybdenum, silver, gold
and other metal prices.

The value and price of our common shares, our financial
results, and our exploration, development and mining, if any, activities may be
significantly adversely affected by declines in the price of copper, molybdenum,
silver, gold and other metals. Mineral prices fluctuate widely and are affected
by numerous factors beyond our control such as interest rates, exchange rates,
inflation or deflation, fluctuation in the value of the United States dollar and
foreign currencies, global and regional supply and demand, and the political and
economic conditions of mineral producing countries throughout the world. The
price for metals fluctuate in response to many factors beyond anyones ability
to predict. The prices used in making the resource estimates are disclosed and
differ from daily prices quoted in the news media. The percentage change in the
price of a metal cannot be directly related to the estimated resource
quantities, which are affected by a number of additional factors. For example, a
10 percent change in price may have little impact on the estimated resource
quantities and affect only the resultant positive cash flow, or it may result in
a significant change in the amount of resources. Because mining occurs over a
number of years, it may be prudent to continue mining for some periods during
which cash flows are temporarily negative for a variety of reasons including a
belief that the low price is temporary and/or the greater expense incurred in
closing a property permanently.

Mineralized material calculations and life-of-mine plans using
significantly lower metal prices could result in material write-downs of our
investments in mining properties and increased amortization, reclamation and
closure charges.

In addition to adversely affecting our mineralized material estimates
  and financial condition, declining metal prices can impact operations by requiring
  a reassessment of the commercial feasibility of a particular project. Such a
  reassessment may be the result of a management decision related to a particular
  project. Even if the project is ultimately determined to be economically viable,
  the need to conduct such a reassessment may cause substantial delays in development
  or may interrupt operations, if any, until the reassessment can be completed.

***Title
to our properties may be subject to other claims.***

Although we believe we have exercised the commercially
reasonable due diligence with respect to determining title to properties we own,
control or have the right to acquire by option, there is no guarantee that title
to such properties will not be challenged or impugned. Our mineral property
interests may be subject to prior unrecorded agreements or transfers or native
land claims and title may be affected by undetected defects. There may be valid
challenges to the title of our properties which, if successful, could impair
development and/or operations. This may be exacerbated due to the large number
of title transfers historically involved with some of the properties.

Estimates
of mineralized materials are subject to geologic uncertainty and inherent sample
variability.

Although the estimated resources at our properties have been
delineated with appropriately spaced drilling, there is inherent variability
between duplicate samples taken adjacent to each other and between sampling
points that cannot be reasonably eliminated. There also may be unknown geologic
details that have not been identified or correctly appreciated at the current
level of delineation. This results in uncertainties that cannot be reasonably
eliminated from the estimation process. Some of the resulting variances can have
a positive effect and others can have

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a negative effect on mining and processing operations.
Acceptance of these uncertainties is part of any mining operation.

***Mineral
resources are only estimates which may be unreliable.***

Although the mineralized material figures included in this
document have been carefully prepared by independent engineers, these amounts
are estimates only, and we cannot be certain that any specified level of
recovery of copper, molybdenum, silver, gold or other mineral from mineralized
material will in fact be realized or that any of our properties or any other
identified mineral deposit will ever qualify as a commercially mineable (or
viable) ore body that can be economically exploited. Mineralized material, which
is not mineral reserves, does not have demonstrated economic viability. Any
material change in the quantity of mineralization, grade or stripping ratio, or
mineral prices may affect the economic viability of our properties. In addition,
we cannot be certain that metal recoveries in small-scale laboratory tests will
be duplicated in larger scale tests under on-site conditions or during
production. Until an unmined deposit is actually mined and processed the
quantity of mineral resources and reserves, if any, and grades must be
considered as estimates only.

***Government
regulation may adversely affect our business and planned operations.***

We believe our exploration projects currently comply with existing
  environmental and mining laws and regulations affecting its operations. Our
  mining, processing, development and mineral exploration activities, if any,
  are subject to various laws governing prospecting, mining, development, production,
  taxes, labor standards and occupational health, mine safety, toxic substances,
  land use, water use, land claims of local people and other matters. We cannot
  assure you that new rules and regulations will not be enacted or that existing
  rules and regulations will not be applied in a manner which could limit or curtail
  production or development. At present, there is no royalty payable to the United
  States on production from unpatented mining claims, although legislative attempts
  to impose a royalty have occurred in recent years.

Amendments to current laws, regulations and permits governing
  operations and activities of mining and exploration companies, or more stringent
  implementation thereof, could have a material adverse impact on our business
  and cause increases in exploration expenses, capital expenditures or production
  costs or reduction in levels of production at producing properties or require
  abandonment or delays in development of new mining properties.

***Our
operations are subject to environmental risks.***

All phases of our operations, if any, will be subject to
federal, state and local environmental regulation in the various jurisdictions
in which we operate. These regulations mandate, among other things, the
maintenance of air and water quality standards and land reclamation. They also
set forth limitations on the generation, transportation, storage and disposal of
solid and hazardous waste. Environmental legislation is evolving in a manner
which will require stricter standards and enforcement, increased fines and
penalties for non-compliance, more stringent environmental assessments of
proposed projects and a heightened degree of responsibility for companies and
their officers, directors and employees. We cannot be certain that future
changes in environmental regulation, if any, will not adversely affect our
operations, if any. Environmental hazards may exist on the properties on which
we hold and will hold interests which are unknown to us at present and which
have been caused by previous or existing owners or operators of the properties.

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Failure to comply with applicable laws, regulations and
permitting requirements may result in enforcement actions thereunder, including
orders issued by regulatory or judicial authorities causing operations to cease
or be curtailed, and may include corrective measures requiring capital
expenditures, installation of additional equipment, or remedial actions. Parties
engaged in mining operations or in the exploration or development of mineral
properties may be required to compensate those suffering loss or damage by
reason of the mining activities and may have civil or criminal fines or
penalties imposed for violations of applicable laws or regulations.

Production, if any, at our mines will involve the use of hazardous
  materials. Should these materials leak or otherwise be discharged from their
  containment systems then we may become subject to liability for hazards that
  it may not be insured against or for clean up work that may not be insured.

***Our
  stock price is subject to volatility***

During the year ended December 31, 2006, our share price ranged
  from $1.23 to $3.10 per share, first on the TSX Venture Exchange then commencing
  August 10, 2006 on the TSX. On November 30, 2006 the Company commenced trading
  on AMEX, the price range during 2006 was from US $1.89 to US $2.32. The market
  price of a publicly traded stock, especially a junior resource issuer, is affected
  by many variables not directly related to our exploration success, including
  the market for junior resource stocks, the strength of the economy generally,
  commodity prices, the availability and attractiveness of alternative investments,
  and the breadth of the public market for the stock. The effect of these and
  other factors on the market price of the common shares on the stock exchanges
  on which the Company trade, suggest the Company's shares will continue to be
  volatile.

***We
do not insure against all risks.***

Our insurance will not cover all the potential risks associated
with a mining companys operations. We may also be unable to maintain insurance
to cover these risks at economically feasible premiums. Insurance coverage may
not continue to be available or may not be adequate to cover any resulting
liability. Moreover, insurance against risks such as environmental pollution or
other hazards as a result of exploration and production is not generally
available to us or to other companies in the mining industry on acceptable
terms. We might also become subject to liability for pollution or other hazards
which may not be insured against or which we may elect not to insure against
because of premium costs or other reasons. Losses from these events may cause us
to incur significant costs that could have a material adverse effect upon our
financial condition and results of operations.

***We
compete with larger, better capitalized competitors in the mining industry.***

The mining industry is competitive in all of its phases. We
face strong competition from other mining companies in connection with the
acquisition of properties producing, or capable of producing, base and precious
metals. Many of these companies have greater financial resources, operational
experience and technical capabilities than us. As a result of this competition,
we may be unable to maintain or acquire attractive mining properties on terms it
considers acceptable or at all. Consequently, our revenues, operations and
financial condition could be materially adversely affected.

***We
are dependent on our key personnel.***

Our success depends on our key executives: Gil Clausen,
President; Mike Clarke, VP Exploration; James Sturgess, VP Projects and
Environment; Lance Newman, VP Metallurgical Operations and Richard Warke,
Chairman. The loss of the services of one or more of such key management
personnel could have a material adverse effect on the Company. Our ability to
manage exploration and development activities, and hence our success, will
depend in large part on the efforts of these individuals. We face intense
competition for qualified personnel, and we cannot be certain that we will be
able to attract and retain such personnel.

***Our
officers and directors may have potential conflicts of
interes**t*

Our directors and officers may serve as directors and/or
officers of other public and private companies and devote a portion of their
time to manage other business interests. This may result in certain conflicts of
interest. To the extent that such other companies may participate in ventures in
which we are also participating, such directors and officers may have a conflict
of

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interest in negotiating and reaching an agreement with respect
to the extent of each companys participation. The laws of Canada require the
directors and officers to act honestly, in good faith, and in the best interests
of the Company and its shareholders. However, in conflict of interest
situations, our directors and officers may owe the same duty to another company
and will need to balance the competing obligations and liabilities of their
actions. There is no assurance that our needs will receive priority in all
cases. From time to time, several companies may participate together in the
acquisition, exploration and development of natural resource properties, thereby
allowing these companies to: (i) participate in larger programs; (ii) acquire an
interest in a greater number of programs; and (iii) reduce their financial
exposure with respect to any one program. A particular company may assign, at
its cost, all or a portion of its interests in a particular program to another
affiliated company due to the financial position of the company making the
assignment. In determining whether or not we will participate in a particular
program and the interest therein to be acquired by it, it is expected that our
directors will primarily consider the degree of risk to which the Company may be
exposed and its financial position at the time.

***We
provide indemnity and protection to our directors and officers***

Section 7 of our By-Law No.1 states in part that:

> The Company shall indemnify a director or officer,
>       a former director or officer, or a person who acts or acted at the Companys
>       request as a director or officer of a body corporate of which the Company
>       is or was a shareholder or creditor... against all costs, charges and expenses,
>       including an amount paid to settle an action or satisfy a judgment . . .

Thus, we may be required to pay amounts to settle any such claims
  that may arise. The impact of any such possible future indemnity protection
  cannot be determined at this time.

*In
  the event that your investment in our shares is for the purpose of deriving
  dividend income or in expectation of an increase in market price of our shares
  from the declaration and payment of dividends, your investment will be compromised
  because we do not intend to pay dividends.*

We have never paid a dividend to our shareholders, and we intend
  to retain our cash for the continued development of our business. We do not
  intend to pay cash dividends on our common stock in the foreseeable future.
  As a result, your return on investment will be solely determined by your ability
  to sell your shares in a secondary market.

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Critical Accounting Policies

The Companys Consolidated Financial Statements have been
prepared assuming the Company will continue on a going-concern basis. The
Company has incurred losses since inception, and the ability of the Company to
continue as a going concern depends upon its ability to develop profitable
operations and to continue to raise adequate financing. The Company has financed
its capital requirements by issuing common stock, notes payable and other equity
securities. There is no certainty that the Company will be able to raise the
funds sufficient to support its business plan.

The preparation of financial statements in conformity with
Canadian GAAP requires management to make additional estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Significant areas requiring the use of management estimates and measurement
uncertainty include the assessment of valuation impairment of the mineral
properties and deferred development expenditures, the determination of the fair
value allocation between debt and equity for the convertible debenture issued in
June 2005 and the determination of the fair value of the stock based
compensation charged to operations.

The Company follows the practice of capitalizing all costs
related to acquisition, exploration and development of mineral properties and
mineral property projects until such time as mineral properties are put into
commercial production, sold or abandoned. If commercial production commences,
these capitalized costs will be amortized on a unit-of-production basis. If the
mineral properties or projects are abandoned, the related capitalized costs are
written-off. On an ongoing basis, the Company evaluates each property and
project on results to date to determine the nature of exploration, other
assessment and development work that is warranted in the future. If there is
little prospect of future work on a property or project being carried out within
a three year period from completion of previous activities, the deferred costs
related to that property or project are written down to the estimated amount
recoverable unless there is persuasive evidence that an impairment allowance is
not required. The amounts shown for mineral properties and for deferred
development expenditures represent costs incurred to date less write-downs, and
are not intended to reflect present or future values.

The Company followed the fair value approach in determining the
allocation between the debt and equity components of the convertible debenture.
With the final repayment of the obligation on June 1, 2006 the only remaining
impact on the balance sheet is that the equity valuation component totalling
$1,478,083 remains credited to contributed surplus. For stock based compensation
(including stock options) and for the valuation of warrants issued by the
Company, the Black-Scholes option pricing model is used to determine the fair
value of the particular instrument. This model is subject to various assumptions
including the expected life of the option and the volatility of the Companys
share price. The Company relies on historical information as the basis for these
assumptions.

The Companys functional and reporting currency is the Canadian
dollar. Translations undertaken in foreign currencies are translated into
Canadian dollars at exchange rates prevailing at the time the transaction
occurred. Monetary assets and liabilities denominated in foreign currencies are
translated into equivalent Canadian dollars at the exchange rates in effect at
the balance sheet date with any resulting gain or loss being recognized in the
consolidated statement of operation and deficit. The effect of fluctuations in
exchange rates between the dates of transactions and of settlements are
reflected in the statement of operation and deficit.

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Disclosure Controls and Procedures

The Chief Executive Officer (CEO) and Chief Financial Officer
(CFO) of the Company conducted an evaluation of the disclosure controls and
procedures as required by Multilateral Instrument 52-109 issued by the Canadian
Securities Administrators. They concluded that at December 31, 2006 the
Companys disclosure controls and procedures were effective in providing
reasonable assurance that material information regarding this annual report and
other disclosures was made known to them on a timely basis. In reaching this
conclusion, the Company recognizes that two factors must be and are present:

| | i)  | the Company is dependant upon its advisors and
      consultants (primarily legal counsel) to assist in recognizing,
      interpreting, understanding and complying with the various securities
      regulations disclosure requirements and
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ii) | an active Board and Management with open lines of
      communication.                                                                                                                                                                        

It should be noted that while the Companys CEO and CFO believe
that the Companys disclosure controls and procedures provide a reasonable level
of assurance and that they are effective, they do not expect that the disclosure
controls and procedures will prevent all errors and fraud. A control system, no
matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.

Internal Controls over Financial Reporting

The CEO and CFO of the Company are responsible for designing
  internal controls over financial reporting or causing them to be designed under
  their supervision in order to provide reasonable assurance regarding the reliability
  of financial reporting and the preparation of financial statements for external
  purposes in accordance with Canadian GAAP. During 2006 the Company realized
  that with the increasing complexity of our business and more demanding filing
  requirements of the TSX and US AMEX listing that additional financial personnel
  were needed. As a result the Company hired a new Controller on August 7 and
  a new CFO on September 1. In addition to establishing new internal controls
  and commencing a broader review of internal controls over financial reporting
  a project was initiated to replace the existing accounting system which had
  become outdated. The lack of functionality of the existing system as well as
  a cessation of support on the part of the software manufacturer contributed
  to material weaknesses related to segregation of duties and continuity of processing.
  A cross-over to the new system commenced January 1, 2007 with all invoices now
  being processed with the new software. With the new accounting system management
  is confident that material weaknesses related to segregation of duties issues
  can be mitigated. Management and the Board of Directors work to mitigate the
  risk of a material misstatement in financial reporting, however, there can be
  no assurance that this risk can be reduced to less than a remote likelihood
  of a material misstatement.

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