---





Consolidated Financial Statements



For the Years Ended December 31, 2011 and 2010

---

MANAGEMENT REPORT

Managements Responsibility for Consolidated Financial
Statements

The accompanying consolidated financial statements of Augusta
Resource Corporation (the Company) are the responsibility of Management. The
consolidated financial statements have been prepared by management in United
States dollars in accordance with International Financial Reporting Standards
and include certain estimates that reflect managements best judgments.

The Companys Board of Directors has approved the information
contained in the consolidated financial statements. The Board of Directors
fulfills its responsibilities regarding the financial statements mainly through
its Audit Committee, which has a written mandate that complies with the current
requirements of Canadian securities legislation and the United States
Sarbanes-Oxley Act of 2002 and complies with the Audit Committee requirements of
the NYSE-Amex. The Audit Committee meets at least on a quarterly basis.

Managements Assessment of Internal Control over Financial
Reporting

Management is also responsible for establishing and maintaining
adequate internal control over the Companys financial reporting. The internal
control system was designed to provide reasonable assurance to the Companys
management regarding the preparation and presentation of the consolidated
financial statements.

Internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

Management has assessed the effectiveness of the Companys
internal control over financial reporting as at December 31, 2011. In making its
assessment, Management has used the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) framework in Internal ControlIntegrated
Frameworkto evaluate the effectiveness of the Companys internal control
over financial reporting. Based on our evaluation, management has concluded that
the Companys internal control over financial reporting was effective as at that
date.

Ernst & Young LLP, a registered public accounting firm, was
appointed by a vote of shareholders at the Companys last annual meeting to
audit and provide independent opinions on both the consolidated financial
statements and the Companys internal control over financial reporting as at
December 31, 2011, as stated in their Auditors Report. Ernst & Young LLP
has provided such opinions.

|Raghunath Reddy                                 | Gilmour Clausen                    
|----------------------------------------------- | -----------------------------------
|Senior Vice-President & Chief Financial Officer | President & Chief Executive Officer
|                                                |                                    
|March 19, 2012                                  |                                    
|Vancouver, Canada                               |                                    

- 2 -

---

INDEPENDENT AUDITORS REPORT OF REGISTERED PUBLIC ACCOUNTING
FIRM

To the Board of Directors and Shareholders of Augusta Resource Corporation

We have audited the accompanying consolidated financial
statements of Augusta Resource Corporation, which comprise the
consolidated statements of financial position as at December 31, 2011 and 2010,
and January 1, 2010, and the consolidated statements of comprehensive profit,
changes in equity and cash flows for the years ended December 31, 2011 and 2010,
and a summary of significant accounting policies and other explanatory
information.

Managements responsibility for the consolidated financial
statements

Management is responsible for the preparation and fair
presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards as issued by the International
Accounting Standards Board, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or
error.

Auditors responsibility

Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We conducted our audits
in accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we comply with ethical requirements and plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditors judgment, including
the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk
assessments, the auditors consider internal control relevant to the entitys
preparation and fair presentation of the consolidated financial statements in
order to design audit procedures that are appropriate in the circumstances. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, evaluating the
appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements.

We believe that the audit evidence we have obtained in our
audits is sufficient and appropriate to provide a basis for our audit
opinion.

Opinion

In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of Augusta Resource
Corporationas at December 31, 2011 and 2010, and January 1, 2010, and its
financial performance and its cash flows for the years ended December 31, 2011
and 2010, in accordance with International Financial Reporting Standards as
issued by the International Accounting Standards Board.

- 3 -

---

Other matter

We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Augusta Resource
Corporations internal control over financial reporting as of December 31,
2011, based on the criteria established in Internal Control  Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 19, 2012 expressed an unqualified opinion
on Augusta Resource Corporations internal control over financial
reporting.



|Vancouver, Canada | /s/ Ernst & Young LLP
|----------------- | ---------------------
|March 19, 2012    | Chartered Accountants

- 4 -

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

To the Board of Directors and Shareholders of Augusta
Resource Corporation

We have audited Augusta Resource Corporations internal control over financial reporting as of December 31, 2011,
based on criteria established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Augusta Resource Corporations management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting included in the
accompanying Managements Assessment of Internal Control over Financial
Reporting. Our responsibility is to express an opinion on  Augusta Resource Corporations internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys assets that could have a
material effect on the financial statements.

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

In our opinion, Augusta Resource Corporation maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2011, based on the COSO criteria.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the consolidated
financial statements of Augusta Resource Corporation, which comprise the
consolidated statements of financial position as at December 31, 2011 and 2010,
and January 1, 2010, and the consolidated statements of comprehensive profit,
changes in equity and cash flows for the years ended December 31, 2011 and 2010
of Augusta Resource Corporation and our report dated March 19, 2012, expressed an unqualified
opinion thereon.

|Vancouver, Canada | /s/ Ernst & Young LLP
|----------------- | ---------------------
|March 19, 2012    | Chartered Accountants

- 5 -

---

Augusta Resource
CorporationConsolidated Statements of Financial Position(in
U.S. dollars)

|                                               |  |         |  |   | December 31, |   |   | December 31, |   |   | January 1,  |  
|---------------------------------------------- |  | ------- |  | - | ------------ | - | - | ------------ | - | - | ----------- | -
|                                               |  | Notes   |  |   | 2011         |   |   | 2010         |   |   | 2010        |  
|ASSETS                                         |  |         |  |   |              |   |   | (Note 3      | ) |   | (Note 3     | )
|Current assets                                 |  |         |  |   |              |   |   |              |   |   |             |  
|Cash and cash equivalents                      |  |         |  | $ | 31,016,782   |   | $ | 31,505,341   |   | $ | 6,247,217   |  
|Short-term investments                         |  |         |  |   | 286,991      |   |   | -            |   |   | -           |  
|Accounts receivable                            |  | 4       |  |   | 1,373,269    |   |   | 110,402      |   |   | 18,476      |  
|Due from related parties                       |  | 12      |  |   | 37,898       |   |   | 6,142        |   |   | 252,444     |  
|Current portion of other assets                |  | 6       |  |   | 750,000      |   |   | 626,793      |   |   | 250,000     |  
|Prepaids and other                             |  |         |  |   | 463,862      |   |   | 135,235      |   |   | 313,714     |  
|                                               |  |         |  |   | 33,928,802   |   |   | 32,383,913   |   |   | 7,081,851   |  
|Non-current assets                             |  |         |  |   |              |   |   |              |   |   |             |  
|Deposits on long-lead equipment                |  | 5       |  |   | 78,213,911   |   |   | 63,504,206   |   |   | 39,206,559  |  
|Development costs                              |  | 7       |  |   | 119,014,472  |   |   | 83,528,996   |   |   | 48,844,541  |  
|Property, plant, and equipment                 |  | 5       |  |   | 10,793,397   |   |   | 10,053,089   |   |   | 8,524,691   |  
|Mineral properties                             |  | 7       |  |   | 24,592,564   |   |   | 25,693,861   |   |   | 26,670,935  |  
|Other assets                                   |  | 6       |  |   | 1,890,463    |   |   | 2,235,076    |   |   | 2,235,877   |  
|                                               |  |         |  | $ | 268,433,609  |   | $ | 217,399,141  |   | $ | 132,564,454 |  
|                                               |  |         |  |   |              |   |   |              |   |   |             |  
|LIABILITIES AND SHAREHOLDERS' EQUITY           |  |         |  |   |              |   |   |              |   |   |             |  
|Current liabilities                            |  |         |  |   |              |   |   |              |   |   |             |  
|Accounts payable and accrued
      liabilities |  | 8, 12   |  | $ | 5,466,015    |   | $ | 5,100,819    |   | $ | 12,386,174  |  
|Warrants liability                             |  | 9d, 10d |  |   | 1,110,481    |   |   | 9,489,886    |   |   | 1,860,205   |  
|Current portion of long-term debt              |  | 9, 17a  |  |   | 44,984,760   |   |   | -            |   |   | 42,177,512  |  
|                                               |  |         |  |   | 51,561,256   |   |   | 14,590,705   |   |   | 56,423,891  |  
|Non-current liabilities                        |  |         |  |   |              |   |   |              |   |   |             |  
|Deferred income tax liability                  |  | 4, 15   |  |   | 1,211,000    |   |   | -            |   |   | -           |  
|Long-term debt                                 |  | 9       |  |   | -            |   |   | 40,864,215   |   |   | 3,590,439   |  
|Total liabilities                              |  |         |  |   | 52,772,256   |   |   | 55,454,920   |   |   | 60,014,330  |  
|Shareholders' equity                           |  |         |  |   |              |   |   |              |   |   |             |  
|Share capital                                  |  | 10      |  |   | 217,557,562  |   |   | 183,663,391  |   |   | 114,398,952 |  
|Reserves                                       |  |         |  |   | 22,113,694   |   |   | 17,958,798   |   |   | 18,360,560  |  
|Deficit                                        |  |         |  |   | (24,009,903  | ) |   | (39,677,968  | ) |   | (60,209,388 | )
|                                               |  |         |  |   | 215,661,353  |   |   | 161,944,221  |   |   | 72,550,124  |  
|                                               |  |         |  | $ | 268,433,609  |   | $ | 217,399,141  |   | $ | 132,564,454 |  
|Commitments                                    |  | 14      |  |   |              |   |   |              |   |   |             |  

On Behalf of the Board of Directors

|/S/ Richard W.
      Warke |  | /S/
      Gilmour Clausen
|-------------------------- |  | -------------------------
|Richard W. Warke, Director |  | Gilmour Clausen, Director

- 6 -

---

Augusta Resource
CorporationConsolidated Statements of Comprehensive Profit(in
U.S. dollars)

|                                                      |  | Notes  |  |   | 2011        |   |   | 2010        |  
|----------------------------------------------------- |  | ------ |  | - | ----------- | - | - | ----------- | -
|                                                      |  |        |  |   |             |   |   | (Note 3     | )
|EXPENSES                                              |  |        |  |   |             |   |   |             |  
|Salaries and benefits                                 |  |        |  | $ | 1,927,387   |   | $ | 1,692,925   |  
|Stock-based compensation                              |  | 10     |  |   | 3,450,300   |   |   | 1,139,468   |  
|Exploration and project investigation                 |  |        |  |   | 1,522,686   |   |   | -           |  
|Legal, accounting and audit                           |  |        |  |   | 797,540     |   |   | 1,505,182   |  
|Travel                                                |  |        |  |   | 260,437     |   |   | 223,968     |  
|Consulting                                            |  |        |  |   | 112,688     |   |   | 230,422     |  
|Filing and regulatory fees                            |  |        |  |   | 250,439     |   |   | 120,338     |  
|Recruiting fees                                       |  |        |  |   | 38,031      |   |   | 55,500      |  
|Office and administration                             |  |        |  |   | 327,679     |   |   | 226,925     |  
|Rent                                                  |  |        |  |   | 208,845     |   |   | 168,211     |  
|Investor relations                                    |  |        |  |   | 112,204     |   |   | 118,325     |  
|Directors' fees                                       |  |        |  |   | 199,600     |   |   | 134,094     |  
|Insurance                                             |  |        |  |   | 283,909     |   |   | 168,379     |  
|Membership and conferences                            |  |        |  |   | 22,522      |   |   | 12,148      |  
|Amortization                                          |  |        |  |   | 257,344     |   |   | 181,499     |  
|Fiscal and
      advisory services                    |  |        |  |   | 18,329      |   |   | 15,363      |  
|Loss from operations                                  |  |        |  |   | (9,789,940  | ) |   | (5,992,747  | )
|Interest and other income/expenses                    |  |        |  |   | 1,023,999   |   |   | 669,718     |  
|Other expenses                                        |  |        |  |   | (594,512    | ) |   | (706,311    | )
|Gains (loss) on shares and warrants                   |  |        |  |   | 2,624,251   |   |   | (2,339,567  | )
|Foreign exchange gains                                |  |        |  |   | 26,672      |   |   | 612,840     |  
|Interest and finance charges                          |  |        |  |   | (14,168     | ) |   | (14,419     | )
|Gain on sale of interest                              |  | 4      |  |   | 23,602,763  |   |   | 28,301,906  |  
|Profit before taxes                                   |  |        |  |   | 16,879,065  |   |   | 20,531,420  |  
|Deferred income tax expense                           |  | 4, 15a |  |   | (1,211,000  | ) |   | -           |  
|Net comprehensive
      profit for the year           |  |        |  | $ | 15,668,065  |   | $ | 20,531,420  |  
|                                                      |  |        |  |   |             |   |   |             |  
|Earnings per share                                    |  |        |  |   |             |   |   |             |  
|- Basic                                               |  |        |  | $ | 0.11        |   | $ | 0.17        |  
|- Diluted                                             |  |        |  | $ | 0.11        |   | $ | 0.16        |  
|Weighted average number of shares
      outstanding - |  |        |  |   |             |   |   |             |  
|- Basic                                               |  |        |  |   | 141,422,942 |   |   | 123,283,762 |  
|- Diluted                                             |  |        |  |   | 145,227,236 |   |   | 125,533,471 |  

See accompanying notes to the consolidated financial
statements

- 7 -

---

Augusta Resource
CorporationConsolidated Statements of Cash Flows(in U.S.
dollars)

|                                                                   |  | Notes  |  |   | 2011        |   |   | 2010        |  
|------------------------------------------------------------------ |  | ------ |  | - | ----------- | - | - | ----------- | -
|                                                                   |  |        |  |   |             |   |   | (Note 3     | )
|Cash flows used in operating activities                            |  |        |  |   |             |   |   |             |  
|Net comprehensive profit for the year                              |  |        |  | $ | 15,668,065  |   | $ | 20,531,420  |  
|Items not involving cash                                           |  |        |  |   |             |   |   |             |  
|Amortization                                                       |  |        |  |   | 257,344     |   |   | 181,499     |  
|Unrealized foreign exchange losses
      (gains)                   |  |        |  |   | 185,411     |   |   | (655,938    | )
|Accretion income                                                   |  |        |  |   | (352,075    | ) |   | (481,487    | )
|Stock-based compensation                                           |  |        |  |   | 3,450,300   |   |   | 1,139,468   |  
|Deferred income tax expense                                        |  | 4, 15a |  |   | 1,211,000   |   |   | -           |  
|(Gains) losses on shares and warrants                              |  |        |  |   | (2,624,251  | ) |   | 2,339,567   |  
|Gain on sale of interest                                           |  | 4      |  |   | (23,602,763 | ) |   | (28,301,906 | )
|Other                                                              |  |        |  |   | 722         |   |   | -           |  
|                                                                   |  |        |  |   | (5,806,247  | ) |   | (5,247,377  | )
|Changes in working capital items                                   |  | 11     |  |   | (925,568    | ) |   | 688,794     |  
|Cash used in
      operating activities                            |  |        |  |   | (6,731,815  | ) |   | (4,558,583  | )
|Financing activities                                               |  |        |  |   |             |   |   |             |  
|Shares issued for cash                                             |  | 10     |  |   | 24,949,124  |   |   | 71,413,613  |  
|Share issue costs                                                  |  |        |  |   | (115        | ) |   | (2,008,928  | )
|Deferred financing costs                                           |  |        |  |   | -           |   |   | (1,476,732  | )
|Joint venture partner's contribution                               |  | 4      |  |   | 31,409,649  |   |   | 34,719,193  |  
|Loan from related party                                            |  | 12     |  |   | -           |   |   | 3,000,000   |  
|Repayment of loan from related party                               |  | 12     |  |   | -           |   |   | (3,000,000  | )
|Proceeds from long-term debt                                       |  | 9      |  |   | -           |   |   | 43,990,000  |  
|Repayment of long-term debt                                        |  | 9      |  |   | -           |   |   | (46,782,262 | )
|Cash provided by
      financing activities                        |  |        |  |   | 56,358,658  |   |   | 99,854,884  |  
|                                                                   |  |        |  |   |             |   |   |             |  
|Investing activities                                               |  |        |  |   |             |   |   |             |  
|Mineral property expenditures                                      |  |        |  |   | -           |   |   | (80,904     | )
|Deposits on long-lead equipment                                    |  |        |  |   | (16,360,396 | ) |   | (31,867,522 | )
|Development cost expenditures                                      |  |        |  |   | (31,110,944 | ) |   | (36,878,254 | )
|Property, plant and equipment expenditures                         |  |        |  |   | (1,217,732  | ) |   | (2,121,874  | )
|Advances to joint venture                                          |  | 4      |  |   | (1,329,453  | ) |   | -           |  
|Proceeds from long-term receivable and other assets                |  |        |  |   | 347,100     |   |   | 250,000     |  
|Proceeds from sale of short-term
      investments                 |  |        |  |   | 133,852     |   |   | -           |  
|Proceeds from sale of fixed assets                                 |  |        |  |   | 8,000       |   |   | -           |  
|Purchases of short-term investments                                |  |        |  |   | (514,986    | ) |   | -           |  
|Cash used in
      investing activities                            |  |        |  |   | (50,044,559 | ) |   | (70,698,554 | )
|                                                                   |  |        |  |   |             |   |   |             |  
|Effect of exchange rate changes on cash and cash
      equivalents |  |        |  |   | (70,843     | ) |   | 660,377     |  
|(Decrease) increase in cash and cash
      equivalents             |  |        |  |   | (488,559    | ) |   | 25,258,124  |  
|Cash and cash
      equivalents, beginning of year                 |  |        |  |   | 31,505,341  |   |   | 6,247,217   |  
|Cash and cash equivalents, end of year                             |  |        |  | $ | 31,016,782  |   | $ | 31,505,341  |  
|                                                                   |  |        |  |   |             |   |   |             |  
|Supplemental cash flow information on
      non-cash transactions  |  | 11     |  |   |             |   |   |             |  

See accompanying notes to consolidated financial
statements

- 8 -

---

Augusta Resource
CorporationConsolidated Statements of Changes in Equity(in
U.S. dollars except for shares)

Common Shares without
      
      
      
      
      
      
      
      
      TotalPar Value
      
      
      
      
      
      
      
      
      Shareholders'Shares
      
      
      Amount
      
      
      Reserves
      
      
      Deficit
      
      
      EquityBalance at January 1 , 2010
      
      106,768,816
      
      $
      114,398,952
      
      $
      18,360,561
      
      $
      (60,209,388
      )
      $
      72,550,125Shares and warrants issued pursuant to private placement
      
      10,905,590
      
      
      24,652,808
      
      
      -
      
      
      -
      
      
      24,652,808Shares and warrants issued pursuant to equity
        offering
      
      11,820,000
      
      
      31,908,315
      
      
      -
      
      
      -
      
      
      31,908,315Share issue costs
      
      -
      
      
      (2,008,928
      )
      
      -
      
      
      -
      
      
      (2,008,928
      )Restricted shares issued
      
      466,665
      
      
      341,900
      
      
      (377,578
      )
      
      -
      
      
      (35,678
      )Proceeds from exercise of compensation options and warrants
      
      3,414,066
      
      
      8,789,783
      
      
      -
      
      
      -
      
      
      8,789,783Proceeds from exercise of stock options
      
      2,220,565
      
      
      5,580,561
      
      
      (2,243,688
      )
      
      -
      
      
      3,336,873Stock-based compensation expense
      
      -
      
      
      -
      
      
      1,036,822
      
      
      -
      
      
      1,036,822Stock-based compensation capitalized
      
      -
      
      
      -
      
      
      1,182,681
      
      
      -
      
      
      1,182,681Net comprehensive
        profit
      
      -
      
      
      -
      
      
      -
      
      
      20,531,420
      
      
      20,531,420Balance at December 31, 2010
      
      135,595,702
      
      $
      183,663,391
      
      $
      17,958,798
      
      $
      (39,677,968
      )
      $
      161,944,221Share issue costs
      
      -
      
      
      (115
      )
      
      -
      
      
      -
      
      
      (115
      )Shares issued on vesting of restricted share
        units
      
      111,665
      
      
      408,818
      
      
      (408,818
      )
      
      -
      
      
      -Proceeds from exercise of stock options
      
      1,535,230
      
      
      5,178,020
      
      
      (1,831,800
      )
      
      -
      
      
      3,346,220Proceeds from exercise of warrants
      
      5,452,795
      
      
      27,252,895
      
      
      -
      
      
      -
      
      
      27,252,895Restricted shares issued
      
      465,000
      
      
      1,054,553
      
      
      (514,553
      )
      
      -
      
      
      540,000Stock-based compensation expense
      
      -
      
      
      -
      
      
      3,450,300
      
      
      -
      
      
      3,450,300Stock-based compensation capitalized
      
      -
      
      
      -
      
      
      3,459,767
      
      
      -
      
      
      3,459,767Net comprehensive profit
      
      -
      
      
      -
      
      
      -
      
      
      15,668,065
      
      
      15,668,065Balance at December 31, 2011
      
      143,160,392
      
      $
      217,557,562
      
      $
      22,113,694
      
      $
      (24,009,903
      )
      $
      215,661,353


See accompanying notes to consolidated financial
statements

- 9 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are
      in U.S. dollars unless otherwise noted)

|1. | NATURE OF OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Augusta Resource Corporation (the Company) is a
      development stage enterprise engaged in the exploration and development of
      mineral properties in North America. The Company is incorporated under the
      Canada Business Corporations Act and its registered office is Suite 400,
      837 West Hastings Street, Vancouver, British Columbia V6C 3N6. The Company
      is domiciled in Canada and its shares are listed on the Toronto Stock
      Exchange and NYSE Amex Equities. The Companys most significant asset is
      the Rosemont copper project (Rosemont) near Tucson, Arizona. The
      realization of the Companys investment in Rosemont is dependent upon
      various factors, including, but not limited to, the ability to obtain the
      necessary financing to complete the development of Rosemont, future
      profitable operations, or, alternatively, the ability to dispose of the
      property at amounts sufficient to recover capitalized
  expenditures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The Company incurred a net comprehensive profit of $15.67
      million for the year ended December 31, 2011 (2010  net profit of $20.53
      million) and had an accumulated deficit of $24.01 million as at December
      31, 2011 (December 31, 2010 - $39.68 million; January 1, 2010 - $60.21
      million). The net comprehensive profit realized during the years ended
      December 31, 2011 and 2010 was due primarily to non-cash gains from the
      sale of a 3.84% interest (December 31, 2010  4.11% interest) in the
      Rosemont project to Rosemonts joint venture partner. The Company
      generates minimal revenue from its operations and does not expect to
      generate any significant revenue until Rosemont commences commercial
      production. Historically, operating losses and Rosemont development
      expenditures have been funded primarily from proceeds of equity and debt
      issues. The $43 million Red Kite loan and accrued interest are due on
      April 21, 2012 (Note 9d) and a term sheet, subject to completion of due
      diligence, regulatory approval and final legal documentation, have been
      signed which extends the due date for up to one additional year (Note
      17a). Planned 2012 activities include significant Rosemont expenditures
      which will be partly funded from its current cash reserves. The Company is
      currently in discussions with external parties for debt/equity financing
      in order to fund its current obligation until the Company receives all of
      the major permits and project financing are in place. The Companys
      failure to meet its ongoing obligations on a timely basis or to raise the
      additional funds to meet ongoing permitting and other business
      expenditures could result in the delay in the development of Rosemont and
      may lead to an impairment charge on Rosemonts assets.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|2. | SUMMARY OF SIGNIFICANT ACCOUNTING
  POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|(a) | Statement of compliance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The consolidated financial statements of the Company have
      been prepared in accordance with International Financial Reporting
      Standards (IFRS) as issued by the International Accounting Standards
      Board (IASB). Previously, the Company prepared its annual financial
      statements in accordance with Canadian Generally Accepted Accounting
      Principles (Canadian GAAP). These financial statements for the year
      ended December 31, 2011 are the first the Company has prepared in
      accordance with IFRS. The consolidated financial statements were
      authorized for issue in accordance with a resolution from the Board of
      Directors on March 15, 2012.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(b) | Basis of presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The consolidated financial statements have been prepared
      on the historical cost basis except for certain financial instruments,
      which are measured at fair value, as explained in the accounting policies
      set out in Note 13. In addition, these consolidated financial statements
      have been prepared using the accrual basis of accounting, except for cash
      flow information. The comparative figures presented in these consolidated
      financial statements are in accordance with IFRS.                                                                                                                                                                                     

- 10 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

|    | The preparation of financial statements in conformity
      with IFRS requires management to make judgments, estimates and assumptions
      that affect the application of policies and reported amounts of assets and
      liabilities, income and expenses. Actual results may differ from these
      estimates. The Company used estimates in determining the fair value of its
      Ely receivable, warrant liability, and stock-based compensation expense.
      The most significant judgements in preparing the consolidated financial
      statements related to the determination of the Companys functional
      currency and the determination that the Rosemont project is in the
      development stage.  
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The preparation of these consolidated financial
      statements resulted in changes to the accounting policies as compared with
      the most recent annual financial statements prepared under Canadian GAAP.
      The accounting policies set out below have been applied consistently to
      all periods presented in these consolidated financial statements. They
      also have been applied in preparing an opening IFRS balance sheet at
      January 1, 2010, for the purposes of the transition to IFRS, as required
      by IFRS 1, First Time Adoption of International Financial Reporting
      Standards(IFRS 1). The impact of the transition from Canadian GAAP
      to IFRS is explained in Note 3.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Certain comparative figures have been reclassified to
      conform to the basis of presentation adopted in the current
year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(c) | Basis of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The consolidated financial statements of the Company
      include the following significant
subsidiaries:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Name
      of Subsidiary
    Place
      of
    PercentageIncorporation
    OwnershipRosemont Copper Company
    USA
    100%Cobre Verde Development Corporation
    USA
    100%


|    | The Company consolidates all of its subsidiaries on the
      basis that it controls these subsidiaries through its ability to govern
      their financial and operating policies. The Company also proportionally
      consolidates its 92.05% interest in the Rosemont joint venture, which is
      held by Rosemont Copper Company (RCC), the Companys wholly-owned
      subsidiary. All intercompany transactions and balances are eliminated on
      consolidation.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(d) | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Cash and cash equivalents consist of deposits in banks
      and guaranteed investment certificates (GIC) with an original maturity
      of three months or less, when purchased. The Companys cash and cash
      equivalents are invested with major financial institutions and are not
      invested in any asset-backed deposits or investments.                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(e) | Related party transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Parties are considered to be related if one party has the
      ability, directly or indirectly, to control the other party or exercise
      significant influence over the other party in making financial and
      operating decisions. Related parties may be individuals or corporate
      entities. A transaction is considered to be a related party transaction
      when there is a transfer of resources, services or obligations between
      related parties.   

- 11 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

|(f) | Property, plant, and equipment                                                                                                                                                              
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                             
|    | Property, plant, and equipment (PPE) is stated at cost,
      less accumulated depreciation. Depreciation is primarily calculated on a
      straight line basis over the following terms:

| | Land                    | N/A               
| | ----------------------- | ------------------
| | Water rights            | Unit-of-production
| | Buildings               | 10 years          
| | Computer hardware       | 5 years           
| | Furniture and equipment | 5 years           
| | Vehicles                | 5 years           

|    | Water rights are amortized on a unit-of-production basis
      over the estimated proven and probable ore reserves upon commencement of
      commercial production. Furniture and equipment is amortized on a
      straight-line basis. When debt is incurred to finance the purchase of
      plant and equipment, the interest and financing costs associated with such
      debt are capitalized. Upon commencement of commercial production, the
      interest and financing costs are amortized on a units-of-production basis
      over the useful life of the related asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | An item of PPE is derecognized upon disposal or when no
      future economic benefits are expected to arise from the continued use of
      the asset. Any gain or loss arising on disposal of the asset, determined
      as the difference between the net disposal proceeds and the carrying
      amount of the asset, is recognized in profit or loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Where an item of plant and equipment comprises major
      components with different useful lives, the components are accounted for
      as separate items of plant and equipment. Expenditures incurred to replace
      a component of an item of plant and equipment that is accounted for
      separately, including major inspection and overhaul expenditures are
      capitalized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(g) | Impairment of assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | At the end of each reporting period, the Company assesses
      each cash generating unit to determine whether there is any indication
      that those assets are impaired. If any such indication exists, the
      recoverable amount of the asset is estimated in order to determine the
      extent of the impairment, if any. The recoverable amount is the higher of
      fair value less costs to sell and value in use. Fair value is determined
      as the amount that would be obtained from the sale of the asset in an
      arms length transaction between knowledgeable and willing parties. In
      assessing value in use, the estimated future cash flows are discounted to
      their present value using a discount rate that reflects current market
      assessments of the time value of money and the risks specific to the
      asset. If the recoverable amount of an asset is estimated to be less than
      its carrying amount, the carrying amount of the asset is reduced to its
      recoverable amount and the impairment loss is recognized in profit or loss
      for the period. For an asset that does not generate largely independent
      cash inflows, the recoverable amount is determined for the cash generating
      unit to which the asset belongs.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Where an impairment subsequently reverses, the carrying
      amount of the asset (or cash generating unit) is increased to the revised
      estimate and its recoverable amount, but to an amount that does not exceed
      the carrying amount that would have been determined had no impairment loss
      been recognized for the asset (or cash generating unit) in prior years. A
      reversal of an impairment loss is recognized immediately in profit or
      loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

- 12 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

|(h) | Mineral properties and development
    costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Mineral properties consist of payments to acquire
      property rights and leases. Mineral properties are assessed for impairment
      if (i) sufficient data exists to determine technical feasibility and
      commercial viability, and (ii) facts and circumstances suggest that the
      carrying amount exceeds the recoverable amount.                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Development costs incurred on a mineral property are
      deferred once management has determined that, based on a feasibility
      study, a property is capable of economical commercial production as a
      result of having established proven and probable reserves. Development
      costs are carried at cost less accumulated depletion and accumulated
      impairment charges. Exploration expenditures incurred prior to determining
      that a property has economically recoverable reserves are expensed as
      incurred.                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The Company reviews the carrying values of mineral
      properties and development costs regularly with a view to assessing
      whether there has been any impairment in value, or whenever events or
      changes in circumstances that indicate the carrying value may not be
      recoverable. In the event the estimated discounted cash flows expected
      from its use or eventual disposition is determined to be insufficient to
      recover the carrying value of the property, the carrying value is written
      down to the estimated recoverable amount.                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Once a mine has achieved commercial production, mineral
      properties and development costs are depleted on a units-of-production
      basis over the life of the mine.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(i) | Decommissioning, restoration and similar
      liabilities (asset retirement obligation)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The Company records the present value of estimated costs
      of legal and constructive obligations required to restore the site in the
      period in which the obligation is incurred. The nature of these
      restoration activities include dismantling and removing structures,
      rehabilitating mines and tailings dam, dismantling facilities, closure of
      plant and waste sites and restoration, reclamation and re-vegetation of
      affected areas.                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The future obligations for mine closure activities are
      estimated by the Company using mine closure plans or other similar studies
      which outline the requirements that will be carried out to meet the
      obligations. Since the obligations are dependent on the laws and
      regulations of the countries in which the mines operate, the requirements
      could change as a result of amendments in the laws and regulations
      relating to environmental protection and other legislation affecting
      resource companies.                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | As the estimate of the obligations is based on future
      expectations, a number of assumptions and judgments are made by management
      in the determination of closure provisions. The closure provisions are
      more uncertain the further into the future the mine closure activities are
      to be carried out.                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The present value of decommissioning and site restoration
      costs are recorded as a long-term liability. The provision is discounted
      using a nominal, risk free pre-tax discount rate. Charges for accretion
      and restoration expenditures are recorded as operating activities. In
      subsequent periods, the carrying amount of the liability is accreted by a
      charge to the statement of comprehensive profit to reflect the passage of
      time and the liability is adjusted to reflect any changes in the timing of
      the underlying future cash flows.                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Changes to the obligation resulting from any revisions to
      the timing or amount of the original estimate of undiscounted cash flows
      are recognized as an increase or decrease in the decommissioning
      provision, and a corresponding change in the carrying amount of the
      related long-lived asset. Where rehabilitation is conducted systematically
      over the life of the operation, rather than at the time of closure, or
      provision is made for the estimated outstanding continuous rehabilitation
      work at each balance sheet date and the cost is charged to the statement
      of comprehensive profit.

- 13 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

|    | The Company had no asset retirement obligations as of
      December 31, 2011, December 31, 2010, and January 1, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(j) | Earnings per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | The Company presents basic and diluted earnings per share
      data for its common shares, calculated by dividing the earnings (loss)
      attributable to common shareholders of the Company by the weighted average
      number of common shares outstanding during the period.                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(k) | Foreign currencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | The financial statements for each the Companys
      subsidiaries are measured using the currency of the primary economic
      environment in which the subsidiary operates (the functional currency).
      The consolidated financial statements are presented in U.S. dollars, which
      is the Companys presentation currency.                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Foreign currency transactions are translated into the
      functional currency using the exchange rates prevailing at the dates of
      the transactions. Foreign exchange gains and losses resulting from the
      settlement of such transactions and from the translation of monetary
      assets and liabilities denominated in foreign currencies at exchange rates
      prevailing on the balance sheet date are recognized in the statement of
      comprehensive profit or unless they are attributable to the net investment
      in a foreign operation.                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Translation differences on assets and liabilities carried
      at fair value are reported as part of the fair value gain or loss.
      Translation differences on non-monetary assets and liabilities such as
      equities held at fair value through profit or loss are recognized in
      profit or loss as part of the fair value gain or loss. Translation
      differences on non-monetary assets such as equities classified as
      available-for-sale financial assets are included in accumulated other
      comprehensive income or loss (AOCI), a component of equity.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | On consolidation, statement of operation items are
      translated from the functional currency into U.S. dollars at average
      exchange rates. Balance sheet items are translated into U.S. dollars at
      the exchange rate prevailing at the balance sheet date. Exchange gains and
      losses on translation are recorded in the statement of comprehensive
      profit.                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | On consolidation, exchange differences arising from the
      translation of any net investment in foreign entities are taken into AOCI.
      When the foreign operation is sold or any borrowings forming part of the
      net investment is repaid, a proportionate share of such exchange
      differences is recognized in the statement of comprehensive
  profit.                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(l) | Borrowing costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Interest and financing costs on debt or other liabilities
      that are directly attributable to the acquisition, construction and
      development of a qualifying asset are capitalized to the asset. Where the
      funds used to finance a project are from general borrowings, the amount
      capitalized is calculated using a weighted average of rates applicable to
      the relevant general borrowings during the period.                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | On commencement of commercial production, the interest
      and financing costs are amortized over the life of the mine. All other
      borrowing costs are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                        

- 14 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

|(m) | Interest in joint venture                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The Company conducts its business relating to the
      Rosemont property through a joint venture which the joint venture
      participants are bound by a contractual agreement establishing joint
      control over the assets of the joint venture. The Company records its
      proportionate share of the jointly controlled assets, liabilities, revenue
      and operating expenses of the joint venture.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(n) | Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The fair value method of accounting is used for
      stock-based awards issued to employees and non- employees. Under this
      method, stock options, restricted shares and restricted share units issued
      to employees are recorded at their estimated fair value on the grant date
      and are charged either to the statement of comprehensive profit or loss or
      capitalized to development costs over the vesting period with a
      corresponding credit to reserves. For stock-based awards issued to
      non-employees, the awards are measured at the date on which the services
      are provided. If the stock options are exercised, the proceeds are
      credited to share capital and the fair value of the options exercised is
      reclassified from reserves to share capital. Restricted shares are issued
      from treasury at date on the grant and are fair valued at the date of
      grant. The fair value is either charged to the statement of comprehensive
      profit or loss or capitalized to development costs over the vesting
      period. On the vesting date, the fair value is transferred from reserves
      to share capital. For options subject to vesting, the Company calculates
      the fair value of each vesting period as separate awards with individual
      expected lives and amortizes the calculated expense for the award on a
      straight-line basis over the vesting period of the award. The forfeiture
      rate is reviewed on a quarterly basis to determine the appropriate
      forfeiture rate based on past, present and expected forfeitures.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(o) | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Current income taxes is the expected tax payable or
      receivable on the local taxable income or loss for the year, using local
      tax rates enacted or substantively enacted at the balance sheet date, and
      includes any adjustments to taxes payable or receivable in respect of
      previous years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Deferred income taxes are recorded using the balance
      sheet method whereby deferred tax is recognized in respect of temporary
      differences between the carrying amounts of assets and liabilities for
      financial reporting purposes and the amounts used for taxation purposes.
      Deferred income tax is measured at the tax rates that are expected to be
      applied to temporary differences when they are realized or settled, based
      on the laws that have been enacted or substantively enacted by the balance
      sheet date. Deferred income tax is not recognized for temporary
      differences which arise on the initial recognition of assets or
      liabilities in a transaction that is not a business combination and that
      affects neither accounting, nor taxable profit or loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | A deferred income tax asset is recognized for unused tax
      losses, tax credits and deductible temporary differences, to the extent
      that it is probable that future taxable profits will be available against
      which they can be utilized. Deferred income tax assets are reviewed at
      each reporting date and are reduced to the extent that it is no longer
      probable that the related tax benefit will be
realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

- 15 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

|(p) | Financial assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | All financial assets are initially recorded at fair value
      and designated upon inception into one of the following four categories:
      held to maturity, available for sale, loans and receivables or at fair
      value through profit or loss (FVTPL).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Financial assets such as the warrants recorded in other
      assets are classified as FVTPL are measured at fair value with unrealized
      gains and losses recognized through earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Financial assets classified as loans and receivables and
      held to maturity assets are measured at amortized cost. The Companys
      accounts receivable are classified as loans and receivables. Financial
      assets classified as available for sale are measured at fair value with
      unrealized gains and losses recognized in other comprehensive profit
      except for losses in value that are considered other than temporary which
      are recognized in earnings. At December 31, 2011, December 31, 2010, and
      January 1, 2010, the Company has not classified any financial assets as
      available for sale.                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Transactions costs associated with FVTPL financial assets
      are expensed as incurred, while transaction costs associated with all
      other financial assets are included in the initial carrying amount of the
      asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(q) | Financial liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | All financial liabilities are initially recorded at fair
      value and designated upon inception as FVTPL or other financial
      liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Financial liabilities classified as other financial
      liabilities are initially recognized at fair value less directly
      attributable transaction costs. After initial recognition, other financial
      liabilities are subsequently measured at amortized cost using the
      effective interest rate method. The effective interest rate method is a
      method of calculating the amortized cost of a financial liability and of
      allocating interest expense over the relevant period. The effective
      interest rate is the rate that discounts estimated future cash payments
      through the expected life of the financial liability, or, where
      appropriate, a shorter period. The Companys accounts payable and accrued
      liabilities and long-term debt are classified as other financial
      liabilities.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Financial liabilities classified as FVTPL include
      warrants with an exercise price denominated in a currency other than the
      issuers functional currency. Derivatives, including separated embedded
      derivatives are also classified as FVTPL and recognized at fair value with
      changes in fair value recognized in earnings unless they are designated as
      effective hedging instruments. Fair value changes on financial liabilities
      classified as FVTPL are recognized in statement of comprehensive
      profit.                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(r) | New standards, amendments and interpretations not
      yet effective                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Certain new standards, interpretations and amendments to
      existing standards have been issued by the IASB or International Financial
      Reporting Interpretations Committee (IFRIC) that are mandatory for
      accounting periods beginning after January 1, 2010, or later periods. Some
      updates that are not applicable or are not consequential to the Company
      may have been excluded from the list below.                                                                                                                                                                                                                                                                                                                                                                                                                   

- 16 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

Accounting standards effective
January 1, 2012

Financial instruments
disclosureIn October 2010, the IASB issued amendments to IFRS 7 
Financial Instruments: Disclosuresthat improves the disclosure
requirements in relation to transferred financial assets. The amendments are
effective for annual periods beginning on or after July 1, 2011, with earlier
adoption permitted. The Company does not anticipate this amendment to have a
significant impact on its consolidated financial statements.

Income taxesIn December
2010, the IASB issued an amendment to IAS 12  Income taxesthat provide
a practical solution to determining the recovery of investment properties as it
relates to the accounting for deferred income taxes. This amendment is effective
for annual periods beginning on or after January 1, 2012, with earlier adoption
permitted. The Company does not anticipate this amendment to have a significant
impact on its consolidated financial statements.

Accounting standards anticipated to
be effective January 1, 2013

Financial instrumentsIFRS 9,
Financial Instruments: Classification and Measurement, effective for
annual periods beginning on or after January 1, 2013, with early adoption
permitted, introduces new requirements for the classification and measurement of
financial instruments. Management anticipates that this standard will be adopted
in the Company's financial statements for the period beginning January 1, 2013,
and has not yet considered the potential impact of the adoption of IFRS 9.

ConsolidationIFRS 10,
Consolidated Financial Statements,requires an entity to consolidate an
investee when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns
through its power over the investee. Under existing IFRS, consolidation is
required when an entity has the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. IFRS 10
replaces SIC-12, ConsolidationSpecial Purpose Entitiesand parts of IAS
27, Consolidated and Separate Financial Statements.

Joint venturesOn May 12,
2011, the IASB issued IFRS 11, Joint Arrangements. IFRS 11 eliminates the
Companys choice to proportionately consolidate jointly controlled entities and
requires such entities to be accounted for using the equity method and proposes
to establish a principles-based approach to the accounting for joint
arrangements which focuses on the nature, extent and financial effects of the
activities that an entity carries out through joint arrangements and its
contractual rights and obligations to assets and liabilities, respectively, of
the joint arrangements. The Company is currently evaluating the impact IFRS 11
is expected to have on its consolidated financial statements.

Disclosure of interest in other
entitiesIFRS 12, Disclosure of Interest in Other Entities,establishes disclosure requirements for interests in other entities, such as
joint arrangements, associates, special purpose vehicles, and off balance sheet
vehicles. The standard carries forward existing disclosures and also introduces
significant additional disclosure requirements that address the nature of, and
risks associated with, an entitys interests in other entities. Management
anticipates that this standard will be adopted in the Company's financial
statements for the period beginning January 1, 2013, and has not yet considered
the potential impact of the adoption of IFRS 12.

- 17 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

|   | Fair value measurement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | IFRS 13, Fair Value Measurement, effective for
      annual periods beginning on or after January 1, 2013, with early adoption
      permitted, sets out a single IFRS framework for measuring fair value and
      new required disclosures about fair value measurements. Management
      anticipates that this standard will be adopted in the Company's financial
      statements for the period beginning January 1, 2013, and has not yet
      considered the potential impact of the adoption of IFRS 13.                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Presentation of financial statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | IAS 1, Presentation of Financial Statements,
      effective for annual periods beginning on or after July 1, 2012, was
      amended to require entities to group items within other comprehensive
      income that may be reclassified to profit or loss. Management anticipates
      that this standard will be adopted in the Company's financial statements
      for the period beginning January 1, 2013, and has not yet considered the
      potential impact of the adoption of IAS 1.                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|3. | FIRST TIME ADOPTION OF IFRS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | These consolidated financial statements, for the year
      ended December 31, 2011, are the first the Company has prepared in
      accordance with IFRS. For periods up to and including the year ended
      December 31, 2010, the Company prepared its consolidated financial
      statements in accordance with Canadian GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Accordingly, the Company has prepared consolidated
      financial statements which comply with IFRS applicable for periods ending
      on or after December 31, 2011, together with the comparative period data
      as at and for the year ended December 31, 2010, as described in the
      accounting policies. In preparing these consolidated financial statements,
      the Companys opening statement of financial position was prepared as at
      January 1, 2010, the Companys date of transition to IFRS. This note
      explains the principal adjustments made by the Company in restating its
      Canadian GAAP statement of financial position as at January 1, 2010 and
      its previously published Canadian GAAP financial statements as at and for
      the year ended December 31, 2010.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The Company has adopted IFRS with a transition date of
      January 1, 2010. Under IFRS 1, First-time Adoption of IFRS, the
      IFRS are applied retrospectively at the transition date with all
      adjustments to assets and liabilities as stated under Canadian GAAP taken
      to retained earnings or deficit unless certain exemptions are
    applied.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The guidance for first time adoption of IFRS is set out
      in IFRS 1. IFRS 1 provides for certain mandatory exceptions and optional
      exemptions for first time adopters of IFRS. The Company is applying the
      following exemptions on first-time adoption of
IFRS:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| |  | to not account for business combinations that occurred
      prior to January 1, 2010, using the principles of IFRS 3, Business
      Combinationsand instead retain the accounting treatment applied under
      Canadian GAAP; and                 
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                      
| |  | to charge all foreign currency translation differences,
      previously recognized as a separate component of equity, to deficit as at
      the transition date including those foreign currency differences which
      arise on adoption of IFRS.

The IFRS 1 elections, identified above,
and the significant accounting policies, set out in Note 2, have been applied in
preparing these consolidated financial statements and selected comparative
information presented below. The following tables reconcile the Companys
consolidated statements of financial position, statements of comprehensive
profit (loss) and statements of cash flow, with those prepared in accordance
with Canadian GAAP and as previously reported to those prepared and reported in
these consolidated financial statements in accordance with IFRS.

- 18 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

Consolidated Statements of Financial PositionAs at December 31, 2010

|                                           |  |               |  |   | Canadian    |   |   | Adoption    |   |   |             |  
|------------------------------------------ |  | ------------- |  | - | ----------- | - | - | ----------- | - | - | ----------- | -
|                                           |  | Notes         |  |   | GAAP        |   |   | Adjustments |   |   | IFRS        |  
|ASSETS                                     |  |               |  |   |             |   |   |             |   |   |             |  
|Current                                    |  |               |  |   |             |   |   |             |   |   |             |  
|Cash and cash equivalents                  |  |               |  | $ | 31,505,341  |   | $ | -           |   | $ | 31,505,341  |  
|Accounts receivable                        |  |               |  |   | 110,402     |   |   | -           |   |   | 110,402     |  
|Due from related parties                   |  |               |  |   | 6,142       |   |   | -           |   |   | 6,142       |  
|Current portion of other assets            |  |               |  |   | 626,793     |   |   | -           |   |   | 626,793     |  
|Prepaids and deposits                      |  |               |  |   | 135,235     |   |   | -           |   |   | 135,235     |  
|Total current assets                       |  |               |  |   | 32,383,913  |   |   | -           |   |   | 32,383,913  |  
|Deposits on long-lead equipment            |  | 3f, g         |  |   | 60,893,443  |   |   | 2,610,763   |   |   | 63,504,206  |  
|Development costs                          |  | 3c,e, f, g, h |  |   | 97,239,008  |   |   | (13,710,012 | ) |   | 83,528,996  |  
|Property, plant, and equipment             |  | 3f, g         |  |   | 9,177,096   |   |   | 875,993     |   |   | 10,053,089  |  
|Mineral properties                         |  | 3f, g         |  |   | 24,688,364  |   |   | 1,005,497   |   |   | 25,693,861  |  
|Other assets                               |  |               |  |   | 2,235,076   |   |   | -           |   |   | 2,235,076   |  
|Total assets                               |  |               |  | $ | 226,616,900 |   | $ | (9,217,759  | ) | $ | 217,399,141 |  
|                                           |  |               |  |   |             |   |   |             |   |   |             |  
|LIABILITIES                                |  |               |  |   |             |   |   |             |   |   |             |  
|Current                                    |  |               |  |   |             |   |   |             |   |   |             |  
|Accounts payable and accrued liabilities   |  |               |  | $ | 5,100,819   |   | $ | -           |   | $ | 5,100,819   |  
|Warrants liability                         |  | 3d            |  |   | -           |   |   | 9,489,886   |   |   | 9,489,886   |  
|Total current liabilities                  |  |               |  |   | 5,100,819   |   |   | 9,489,886   |   |   | 14,590,705  |  
|Deferred gain                              |  | 3f            |  |   | 27,866,378  |   |   | (27,866,378 | ) |   | -           |  
|Long-term debt                             |  | 3d            |  |   | 42,033,327  |   |   | (1,169,112  | ) |   | 40,864,215  |  
|Total liabilities                          |  |               |  |   | 75,000,524  |   |   | (19,545,604 | ) |   | 55,454,920  |  
|SHAREHOLDERS' EQUITY                       |  |               |  |   |             |   |   |             |   |   |             |  
|Share capital                              |  | 3a,d          |  |   | 196,827,289 |   |   | (13,163,898 | ) |   | 183,663,391 |  
|Reserves                                   |  | 3c,d          |  |   | 18,652,492  |   |   | (693,694    | ) |   | 17,958,798  |  
|Accumulated other comprehensive loss       |  | 3b            |  |   | (5,534,505  | ) |   | 5,534,505   |   |   | -           |  
|Deficit                                    |  | 3a to h       |  |   | (58,328,900 | ) |   | 18,650,932  |   |   | (39,677,968 | )
|Total shareholders' equity                 |  |               |  |   | 151,616,376 |   |   | 10,327,845  |   |   | 161,944,221 |  
|                                           |  |               |  |   |             |   |   |             |   |   |             |  
|Total liabilities and shareholders' equity |  |               |  | $ | 226,616,900 |   | $ | (9,217,759  | ) | $ | 217,399,141 |  

- 19 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

Consolidated Statements of Financial PositionAs at January 1, 2010

|                                           |  |             |  |   | Canadian    |   |   | Adoption    |   |   |             |  
|------------------------------------------ |  | ----------- |  | - | ----------- | - | - | ----------- | - | - | ----------- | -
|                                           |  | Notes       |  |   | GAAP        |   |   | Adjustments |   |   | IFRS        |  
|ASSETS                                     |  |             |  |   |             |   |   |             |   |   |             |  
|Current                                    |  |             |  |   |             |   |   |             |   |   |             |  
|Cash and cash equivalents                  |  |             |  | $ | 6,247,217   |   | $ | -           |   | $ | 6,247,217   |  
|Accounts receivable                        |  |             |  |   | 18,476      |   |   | -           |   |   | 18,476      |  
|Due from related parties                   |  |             |  |   | 252,444     |   |   | -           |   |   | 252,444     |  
|Current portion of other assets            |  |             |  |   | 250,000     |   |   |             |   |   | 250,000     |  
|Prepaids and deposits                      |  |             |  |   | 313,714     |   |   | -           |   |   | 313,714     |  
|Total current assets                       |  |             |  |   | 7,081,851   |   |   | -           |   |   | 7,081,851   |  
|Deposits on long-lead equipment            |  | 3f, g       |  |   | 36,595,796  |   |   | 2,610,763   |   |   | 39,206,559  |  
|Development costs                          |  | 3c,e,f,g, h |  |   | 63,411,000  |   |   | (14,566,459 | ) |   | 48,844,541  |  
|Property, plant, and equipment             |  | 3f, g       |  |   | 7,739,911   |   |   | 784,780     |   |   | 8,524,691   |  
|Mineral properties                         |  | 3f, g       |  |   | 25,665,438  |   |   | 1,005,497   |   |   | 26,670,935  |  
|Other assets                               |  | 3f, g       |  |   | 2,144,664   |   |   | 91,213      |   |   | 2,235,877   |  
|Total assets                               |  |             |  | $ | 142,638,660 |   | $ | (10,074,206 | ) | $ | 132,564,454 |  
|                                           |  |             |  |   |             |   |   |             |   |   |             |  
|LIABILITIES                                |  |             |  |   |             |   |   |             |   |   |             |  
|Current                                    |  |             |  |   |             |   |   |             |   |   |             |  
|Accounts payable and accrued liabilities   |  |             |  | $ | 12,386,174  |   | $ | -           |   | $ | 12,386,174  |  
|Warrants liability                         |  | 3d          |  |   | -           |   |   | 1,860,205   |   |   | 1,860,205   |  
|Current
      portion of long-term debt    |  |             |  |   | 42,177,512  |   |   | -           |   |   | 42,177,512  |  
|Total current liabilities                  |  |             |  |   | 54,563,686  |   |   | 1,860,205   |   |   | 56,423,891  |  
|Long-term debt                             |  |             |  |   | 3,590,439   |   |   | -           |   |   | 3,590,439   |  
|Total liabilities                          |  |             |  |   | 58,154,125  |   |   | 1,860,205   |   |   | 60,014,330  |  
|SHAREHOLDERS' EQUITY                       |  |             |  |   |             |   |   |             |   |   |             |  
|Share capital                              |  | 3a, d       |  |   | 123,386,017 |   |   | (8,987,066  | ) |   | 114,398,952 |  
|Reserves                                   |  | 3c, d       |  |   | 17,513,815  |   |   | 846,746     |   |   | 18,360,560  |  
|Accumulated other comprehensive loss       |  | 3b          |  |   | (5,534,505  | ) |   | 5,534,505   |   |   | -           |  
|Deficit                                    |  | 3a to h     |  |   | (50,880,792 | ) |   | (9,328,596  | ) |   | (60,209,388 | )
|Total shareholders' equity                 |  |             |  |   | 84,484,535  |   |   | (11,934,411 | ) |   | 72,550,124  |  
|                                           |  |             |  |   |             |   |   |             |   |   |             |  
|Total liabilities and shareholders' equity |  |             |  | $ | 142,638,660 |   | $ | (10,074,206 | ) | $ | 132,564,454 |  

- 20 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

Consolidated Statements of Comprehensive Profit
(Loss)For the year ended December 31, 2010

|                                             |  |       |  |   | Canadian   |   |   | Adoption    |   |   |            |  
|-------------------------------------------- |  | ----- |  | - | ---------- | - | - | ----------- | - | - | ---------- | -
|                                             |  | Notes |  |   | GAAP       |   |   | Adjustments |   |   | IFRS       |  
|                                             |  |       |  |   |            |   |   |             |   |   |            |  
|                                             |  |       |  |   |            |   |   |             |   |   |            |  
|EXPENSES                                     |  |       |  |   |            |   |   |             |   |   |            |  
|Salaries and benefits                        |  |       |  | $ | 1,692,925  |   | $ | -           |   | $ | 1,692,925  |  
|Stock-based compensation                     |  | 3c    |  |   | 1,229,926  |   |   | (90,458     | ) |   | 1,139,468  |  
|Legal, accounting and audit                  |  |       |  |   | 1,505,182  |   |   | -           |   |   | 1,505,182  |  
|Travel                                       |  |       |  |   | 223,968    |   |   | -           |   |   | 223,968    |  
|Consulting and advisory services             |  |       |  |   | 230,422    |   |   | -           |   |   | 230,422    |  
|Filing and regulatory fees                   |  |       |  |   | 120,338    |   |   | -           |   |   | 120,338    |  
|Recruiting fees and relocation costs         |  |       |  |   | 55,500     |   |   | -           |   |   | 55,500     |  
|Office and administration                    |  |       |  |   | 226,925    |   |   | -           |   |   | 226,925    |  
|Rent                                         |  |       |  |   | 168,211    |   |   | -           |   |   | 168,211    |  
|Investor relations                           |  |       |  |   | 118,325    |   |   | -           |   |   | 118,325    |  
|Directors' fees                              |  |       |  |   | 134,094    |   |   | -           |   |   | 134,094    |  
|Insurance                                    |  |       |  |   | 168,379    |   |   | -           |   |   | 168,379    |  
|Memberships and conferences                  |  |       |  |   | 12,148     |   |   | -           |   |   | 12,148     |  
|Amortization                                 |  |       |  |   | 181,499    |   |   | -           |   |   | 181,499    |  
|Fiscal and advisory services                 |  |       |  |   | 15,363     |   |   | -           |   |   | 15,363     |  
|Loss from operations                         |  |       |  |   | (6,083,205 | ) |   | 90,458      |   |   | (5,992,747 | )
|Interest and other income                    |  |       |  |   | 669,718    |   |   | -           |   |   | 669,718    |  
|Other expenses                               |  |       |  |   | (706,311   | ) |   | -           |   |   | (706,311   | )
|Gains (losses) on shares and warrants        |  | 3d    |  |   | 118,462    |   |   | (2,458,029  | ) |   | (2,339,567 | )
|Gain on sale of interest                     |  | 3f    |  |   | -          |   |   | 28,301,906  |   |   | 28,301,906 |  
|Foreign exchange gains                       |  |       |  |   | 612,840    |   |   | -           |   |   | 612,840    |  
|Loan interest and
      finance charges      |  | 3h    |  |   | (50,684    | ) |   | 36,265      |   |   | (14,419    | )
|Net comprehensive (loss) profit for the year |  |       |  | $ | (5,439,180 | ) | $ | 25,970,600  |   | $ | 20,531,420 |  

- 21 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

Consolidated Statements of Cash Flows
  For the year ended December 31, 2010

|                                                             |  |       |  |   | Canadian    |   |   | Adoption   |   |   |             |  
|------------------------------------------------------------ |  | ----- |  | - | ----------- | - | - | ---------- | - | - | ----------- | -
|                                                             |  | Notes |  |   | GAAP        |   |   | Adjustment |   |   | IFRS        |  
|Cash used in operating activities                            |  | 3h    |  | $ | (4,570,537  | ) | $ | 11,954     |   | $ | (4,558,583  | )
|Cash provided by financing activities                        |  |       |  |   | 99,854,884  |   |   | -          |   |   | 99,854,884  |  
|Cash used in investing activities                            |  | 3h    |  |   | (70,936,600 | ) |   | (11,954    | ) |   | (70,948,554 | )
|Proceeds received from discontinued operations               |  |       |  |   | 250,000     |   |   | -          |   |   | 250,000     |  
|Effect of exchange rate changes in cash and cash equivalents |  |       |  |   | 660,377     |   |   | -          |   |   | 660,377     |  
|Increase in cash and cash equivalents                        |  |       |  |   | 25,258,124  |   |   | -          |   |   | 25,258,124  |  
|Cash and cash equivalent, beginning of year                  |  |       |  |   | 6,247,217   |   |   | -          |   |   | 6,247,217   |  
|Cash and cash
      equivalents, end of year                 |  |       |  | $ | 31,505,341  |   | $ | -          |   | $ | 31,505,341  |  

Consolidated Statements of Changes in EquityAs at December 31, 2010

AccumulatedOtherComprehensiveNotes
    
    
    Share
      Capital
    
    
    Reserves
    
    
    Loss
    
    
    Deficit
    
    
    TotalReported under Canadian GAAP
    
    
    
    $
    196,827,289
    
    $
    18,652,492
    
    $
    (5,534,505
    )
    $
    (58,328,900
    )
    $
    151,616,376Share issue costs
    
    3a
    
    
    (9,515,465
    )
    
    -
    
    
    -
    
    
    9,515,465
    
    
    -Exploration andevaluation costs
    
    3e
    
    
    -
    
    
    -
    
    
    -
    
    
    (21,448,188
    )
    
    (21,448,188
    )Functional currency
    
    3b, f
    
    
    -
    
    
    -
    
    
    5,534,505
    
    
    5,328,904
    
    
    10,863,409Stock-based compensation
    
    3c
    
    
    -
    
    
    876,008
    
    
    -
    
    
    (639,094
    )
    
    236,914Share purchase warrants
    
    3d
    
    
    (3,648,433
    )
    
    (1,569,702
    )
    
    -
    
    
    (2,586,652
    )
    
    (7,804,787
    )Borrowing costs
    
    3h
    
    
    -
    
    
    -
    
    
    -
    
    
    178,591
    
    
    178,591Gain on sale of interest
    
    3f
    
    
    -
    
    
    -
    
    
    -
    
    
    28,301,906
    
    
    28,301,906Reported under IFRS
    
    
    
    $
    183,663,391
    
    $
    17,958,798
    
    $
    -
    
    $
    (39,677,968
    )
    $
    161,944,221


- 22 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

Consolidated Statements of Changes in EquityAs at January 1, 2010

AccumulatedOtherComprehensiveNotes
    
    
    Share
      Capital
    
    
    Reserves
    
    
    Loss
    
    
    Deficit
    
    
    TotalReported under Canadian GAAP
    
    
    
    $
    123,386,017
    
    $
    17,513,815
    
    $
    (5,534,505
    )
    $
    (50,880,792
    )
    $
    84,484,535Share issue costs
    
    3a
    
    
    (7,506,538
    )
    
    -
    
    
    -
    
    
    7,506,538
    
    
    -Exploration andevaluation costs
    
    3e
    
    
    -
    
    
    -
    
    
    -
    
    
    (21,448,188
    )
    
    (21,448,188
    )Functional currency
    
    3b, f
    
    
    -
    
    
    -
    
    
    5,534,505
    
    
    5,328,904
    
    
    10,863,409Stock-based compensation
    
    3c
    
    
    -
    
    
    1,097,798
    
    
    -
    
    
    (729,552
    )
    
    368,246Share purchase warrants
    
    3d
    
    
    (1,480,527
    )
    
    (251,053
    )
    
    -
    
    
    (128,623
    )
    
    (1,860,203
    )Borrowing costs
    
    3h
    
    
    -
    
    
    -
    
    
    -
    
    
    142,325
    
    
    142,325Reported under IFRS
    
    
    
    $
    114,398,952
    
    $
    18,360,560
    
    $
    -
    
    $
    (60,209,388
    )
    $
    72,550,124


Notes to the IFRS reconciliations are as follows:

|a) | IFRS requires that all share issue costs be recorded
      against share capital. Share issue costs were previously charged to
      deficit under Canadian GAAP and as a result an entry was made to
      re-classify share issue costs to share capital. The total amount
      reclassified as at the date of transition was $7,506,538 and at December
      31, 2010 was $9,515,465.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|b) | In accordance with IFRS 1 optional exemptions, the
      Company elected to transfer the cumulative translation differences,
      recognized as a separate component of equity, to deficit at the date of
      transition. In electing to take this IFRS 1 exemption, the Company has
      reclassified $5,534,505 previously recorded to accumulated other
      comprehensive loss under Canadian GAAP to deficit as at the date of
      transition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|c) | The Company applied IFRS 2, share-based payments on all
      share-based payments. Under Canadian GAAP, the Company valued each grant
      using the Black-Scholes option pricing model and amortized the total cost
      over the vesting period. Per IFRS 2, the Company has adjusted its policy
      and is accounting for each vesting period as a separate grant, which
      resulted in changing the amortization schedules. Further, under Canadian
      GAAP, forfeitures were recorded as they occur; however, under IFRS,
      expected forfeitures are estimated and recorded. Estimated forfeitures are
      trued-up to actual forfeitures at each reporting period. As a result, the
      amounts recorded in reserves for share-based payments have increased by
      $1,097,798 as at the date of transition and $876,008 as at December 31,
      2010. The following table summarizes the amounts capitalized and expensed
      with a corresponding credit to reserves:

Development
    
    
    (Expense)
    
    
    ReservesDeficit
    
    
    Costs
    
    
    Recovery
    
    
    TotalJanuary 1, 2010
    $
    (554,344
    )
    $
    (368,247
    )
    $
    (175,207
    )
    $
    1,097,798December 31,
      2010
    $
    (729,552
    )
    $
    (236,914
    )
    $
    90,458
    
    $
    876,008


- 23 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

|d) | In accordance with IAS 32, share purchase warrants with
      an exercise price denominated in a currency other than the issuers
      functional currency are considered a derivative instrument and classified
      as a liability. The share purchase warrants are fair valued at each
      balance sheet date with the corresponding change in value reported in
      statement of comprehensive profit.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The following table summarizes the cumulative adjustments
      resulting from the reclassification and the exercise of the share purchase
      warrants.                                                                                                                                                                                                                                                      

Long-term
    
    
    CurrentDebt
    
    
    Liability
    
    
    Share Capital
    
    
    Reserves
    
    
    Deficit
    
    
    ExpenseJanuary 1, 2010
    $
    -
    
    $
    1,860,205
    
    $
    (1,480,528
    )
    $
    (251,052
    )
    $
    -
    
    $
    (128,625
    )December 31,
      2010
    $
    (1,169,112
    )
    $
    9,489,886
    
    $
    (3,648,433
    )
    $
    (1,569,702
    )
    $
    (128,623
    )
    $
    (2,458,029
    )


|   | For the year ended December 31, 2010 the amount charged
      to gains (losses) on warrants and shares was a loss of $2,458,029, with a
      corresponding increase to deficit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|e) | In accordance with IFRS 6, the Company has elected to
      expense all exploration costs incurred prior to the determination of the
      commercial viability of its exploration and evaluation projects. These
      amounts were previously capitalized under Canadian GAAP and have been
      re-classified to deficit in the periods presented. The total amount
      re-classified was $21,448,188 at the date of transition and at December
      31, 2010.                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|f) | In accordance with IAS 31, gains realized on dilution of
      the Companys interest in Rosemont are recognized in the statement of
      comprehensive profit. Previously, these gains totalling $27,866,378 were
      deferred under Canadian GAAP. As a result of the joint venture partners
      4.11% interest in Rosemont at December 31, 2010, and IFRS adjustments that
      affected Rosemonts carrying value, the total amount reclassified to
      deficit at the date of transition and at December 31, 2010 were $Nil and
      $28.3 million, respectively.                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|g) | In accordance with IAS 21, each entity determines its
      functional currency. The entity which holds the Rosemont project that had
      previously been Canadian dollar functional currency under Canadian GAAP
      has changed its functional currency to U.S. dollars under IFRS. As a
      result, the carrying value of the Rosemonts non-current assets increased
      $10,863,409 with a corresponding credit to accumulated other comprehensive
      income. In addition, the $5,328,904 foreign exchange loss on a US
      denominated loan was reversed with a corresponding credit to
    deficit.                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|h) | In accordance with IAS 23, borrowing costs are
      capitalized if they are directly attributable to the acquisition,
      development or construction of a qualifying asset. A portion of the
      borrowing costs with respect to the Sumitomo loan that had previously been
      expensed under Canadian GAAP have been capitalized to development costs
      under IFRS with a corresponding credit to deficit. The total amount
      capitalized was $142,325 at the transition date and $178,591 at December
      31, 2010. For the year ended December 31, 2010 the amount credited to
      interest and financing charges was $36,265.

4.          INTERESTS IN
JOINT VENTURE

On September 16, 2010, RCC and United
Copper & Moly LLC (UCM or Rosemont Joint Venture Partner) executed an
Earn-In Agreement (EI Agreement) whereby UCM can earn up to a 20% interest in
the unincorporated Rosemont joint venture (Rosemont JV) by funding $176
million of Rosemont expenditures. Under the terms of the EI Agreement, UCM will
contribute cash into the Rosemont JV as follows: Tranche 1 - a maximum $70
million for permitting, engineering, deposits on long-lead equipment purchases
and on-going support activities (collectively Pre-Construction Costs) until
such time as the material permits are granted and Tranche 2 - $106 million for
construction costs. Once UCM has earned its 20% interest in the Rosemont JV,
Rosemont expenditures will be shared pro-rata 80/20. UCM contributed $33.8
million or 3.84% earned interest during 2011 (2010  $36.2 million contribution
or 4.11% earned interest). As at December 31, 2011 and
2010, UCMs interest in the Rosemont JV was 7.95% and 4.11% interest,
respectively. For the year ended December 31, 2011, the Company recognized an
after-tax gain of $22.4 million (2010 - $28.3 million), net of a $1.2 million
(2010 - $Nil) deferred tax expense from the sale of a 3.84% (2010  4.11%)
interest in Rosemont.

- 24 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

Under the EI Agreement, the Company
will contribute the Rosemont property to the Rosemont JV at a fair value of $704
million and UCM will contribute up to $176 million in cash to earn its
respective interest in the joint venture.

The following is a summary of selected
financial information of the Rosemont JV on a 92.05% (December 31, 2010 
95.89%) basis:

| |                                                  |   | December 31, |   |   | December 31, |  
| | ------------------------------------------------ | - | ------------ | - | - | ------------ | -
| |                                                  |   | 2011         |   |   | 2010         |  
| | Cash and cash equivalents                        | $ | 1,435,479    |   | $ | 6,146,804    |  
| | Other current assets                             |   | 299,086      |   |   | 67,735       |  
| | Non-current assets                               |   | 225,220,065  |   |   | 180,324,861  |  
| | Liabilities                                      |   | (4,834,501   | ) |   | (2,673,152   | )
| | Deficit                                          |   | 1,253,378    |   |   | 396,259      |  
| |                                                  | $ | 223,373,507  |   | $ | 184,262,507  |  
| |                                                  |   |              |   |   |              |  
| | Statement of Cash Flows                          |   |              |   |   |              |  
| | Cash used in operating activities                | $ | (846,166     | ) | $ | (396,259     | )
| | Cash provided by financing activities            |   | 31,846,749   |   |   | 34,719,073   |  
| | Cash used in investing activites                 |   | (35,711,908  | ) |   | (28,176,010  | )
| | (Decrease) increase in cash and cash equivalents |   | (4,711,325   | ) |   | 6,146,804    |  
| | Cash and cash equivalents, beginning of year     |   | 6,146,804    |   |   | -            |  
| | Cash and cash
      equivalents, end of year     | $ | 1,435,479    |   | $ | 6,146,804    |  

For the year ended December 31, 2011,
the Rosemont JV incurred operating expenses of $0.9 million (2010 $0.4 million)
based on the percentages noted above.

During the year ended December 31,
2011, the Company made advances to the joint venture totalling $16.9 million
(2010 - $26.6 million) for deposits on long-lead equipment. Included in accounts
receivable as at December 31, 2011 is a $1.3 million receivable from UCM for
their share of advances made by the Company to the joint venture.

- 25 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

|5. | PROPERTY, PLANT, AND EQUIPMENT AND DEPOSITS ON
      LONG-LEAD EQUIPMENT
|-- | ------------------------------------------------------------------------

| |                               |   |           |   |   |           |   |   |          |   |   |           |   |   | Furniture |   |   |           |   |   |            |  
| | ----------------------------- | - | --------- | - | - | --------- | - | - | -------- | - | - | --------- | - | - | --------- | - | - | --------- | - | - | ---------- | -
| |                               |   |           |   |   | Water     |   |   |          |   |   |           |   |   | and       |   |   |           |   |   |            |  
| | Cost                          |   | Land      |   |   | Rights    |   |   | Vehicles |   |   | Buildings |   |   | Equipment |   |   | Computers |   |   | Total      |  
| |                               |   |           |   |   |           |   |   |          |   |   |           |   |   |           |   |   |           |   |   |            |  
| | As at January 1, 2010         | $ | 3,949,372 |   | $ | 4,135,071 |   | $ | 276,890  |   | $ | 170,678   |   | $ | 78,958    |   | $ | 92,507    |   | $ | 8,703,476  |  
| | Additions                     |   | 1,573,834 |   |   | 22,427    |   |   | 110,055  |   |   | 291,759   |   |   | 12,884    |   |   | 53,398    |   |   | 2,064,357  |  
| | Sale of interest              |   | (227,261  | ) |   | (171,067  | ) |   | (15,921  | ) |   | (8,305    | ) |   | (3,779    | ) |   | (6,004    | ) |   | (432,337   | )
| | As at December
      31, 2010 | $ | 5,295,945 |   | $ | 3,986,431 |   | $ | 371,024  |   | $ | 454,132   |   | $ | 88,063    |   | $ | 139,901   |   | $ | 10,335,496 |  
| |                               |   |           |   |   |           |   |   |          |   |   |           |   |   |           |   |   |           |   |   |            |  
| | As at December 31, 2010       | $ | 5,295,945 |   | $ | 3,986,431 |   | $ | 371,024  |   | $ | 454,132   |   | $ | 88,063    |   | $ | 139,901   |   | $ | 10,335,496 |  
| | Additions                     |   | 510,923   |   |   | (48,684   | ) |   | 67,059   |   |   | 331,815   |   |   | 156,761   |   |   | 228,679   |   |   | 1,246,553  |  
| | Disposals                     |   | -         |   |   | -         |   |   | (12,980  | ) |   | -         |   |   | -         |   |   | -         |   |   | (12,980    | )
| | Sale of interest              |   | (127,228  | ) |   | (131,603  | ) |   | (12,772  | ) |   | (18,260   | ) |   | (3,304    | ) |   | (7,144    | ) |   | (300,311   | )
| | As at December
      31, 2011 | $ | 5,679,640 |   | $ | 3,806,144 |   | $ | 412,331  |   | $ | 767,687   |   | $ | 241,520   |   | $ | 361,436   |   | $ | 11,268,758 |  

| |                               |   |      |  |   |        |  |   |          |   |   |           |   |   | Furniture |   |   |           |   |   |         |  
| | ----------------------------- | - | ---- |  | - | ------ |  | - | -------- | - | - | --------- | - | - | --------- | - | - | --------- | - | - | ------- | -
| |                               |   |      |  |   |        |  |   |          |   |   |           |   |   | and       |   |   |           |   |   |         |  
| | Accumulated Depreciation      |   | Land |  |   | Rights |  |   | Vehicles |   |   | Buildings |   |   | Equipment |   |   | Computers |   |   | Total   |  
| |                               |   |      |  |   |        |  |   |          |   |   |           |   |   |           |   |   |           |   |   |         |  
| | As at January 1, 2010         | $ | -    |  | $ | -      |  | $ | 74,905   |   | $ | 31,842    |   | $ | 30,421    |   | $ | 41,617    |   | $ | 178,785 |  
| | Depreciation                  |   | -    |  |   | -      |  |   | 67,504   |   |   | 11,183    |   |   | 16,073    |   |   | 20,981    |   |   | 115,741 |  
| | Sale of interest              |   | -    |  |   | -      |  |   | (5,860   | ) |   | (1,770    | ) |   | (1,913    | ) |   | (2,576    | ) |   | (12,119 | )
| | As at December
      31, 2010 | $ | -    |  | $ | -      |  |   | 136,549  |   | $ | 41,255    |   | $ | 44,581    |   | $ | 60,022    |   | $ | 282,407 |  
| |                               |   |      |  |   |        |  |   |          |   |   |           |   |   |           |   |   |           |   |   |         |  
| | As at December 31, 2010       | $ | -    |  | $ | -      |  | $ | 136,549  |   | $ | 41,255    |   | $ | 44,581    |   | $ | 60,022    |   | $ | 282,407 |  
| | Depreciation                  |   | -    |  |   | -      |  |   | 60,265   |   |   | 16,706    |   |   | 76,672    |   |   | 53,681    |   |   | 207,324 |  
| | Disposals                     |   | -    |  |   | -      |  |   | (4,289   | ) |   | -         |   |   | -         |   |   | -         |   |   | (4,289  | )
| | Sale of interest              |   | -    |  |   | -      |  |   | (4,712   | ) |   | (1,420    | ) |   | (1,936    | ) |   | (2,013    | ) |   | (10,081 | )
| | As at December
      31, 2011 | $ | -    |  | $ | -      |  | $ | 187,813  |   | $ | 56,541    |   | $ | 119,317   |   | $ | 111,690   |   | $ | 475,361 |  

| | Net Book Value:         |   |           |  |   |           |  |   |         |  |   |         |  |   |         |  |   |         |  |   |            | 
| | ----------------------- | - | --------- |  | - | --------- |  | - | ------- |  | - | ------- |  | - | ------- |  | - | ------- |  | - | ---------- | 
| | As at January 1, 2010   | $ | 3,949,372 |  | $ | 4,135,071 |  | $ | 201,985 |  | $ | 138,836 |  | $ | 48,537  |  | $ | 50,890  |  | $ | 8,524,691  | 
| | As at December 31, 2010 |   | 5,295,945 |  |   | 3,986,431 |  |   | 234,475 |  |   | 412,877 |  |   | 43,482  |  |   | 79,879  |  |   | 10,053,089 | 
| | As at December 31, 2011 | $ | 5,679,640 |  | $ | 3,806,144 |  | $ | 224,518 |  | $ | 711,146 |  | $ | 122,203 |  | $ | 249,746 |  | $ | 10,793,397 | 

Deposits on long-lead
equipment

| | As at January 1, 2010   | $ | 39,206,559 |  
| | ----------------------- | - | ---------- | -
| | Additions               |   | 26,613,307 |  
| | Sale of interest        |   | (2,315,660 | )
| | As at December 31, 2010 |   | 63,504,206 |  
| | Additions               |   | 17,568,862 |  
| | Sale of interest        |   | (2,859,157 | )
| | As at December 31, 2011 | $ | 78,213,911 |  

- 26 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

|6. | OTHER ASSETS
|-- | ------------

Computer Software,Long-Term
    
    
    Other
    
    
    FVTPL
    
    
    net ofReceivable
    
    
    Assets
    
    
    Securities
    
    
    Amortization
    
    
    TotalAs at January 1, 2010
    $
    2,386,333
    
    $
    -
    
    $
    8,331
    
    $
    94,187
    
    $
    2,488,851Annual Payment
    
    (250,000
    )
    
    -
    
    
    -
    
    
    -
    
    
    (250,000
    )Interest accretion
    
    481,488
    
    
    -
    
    
    -
    
    
    -
    
    
    481,488Amortization
    
    -
    
    
    -
    
    
    -
    
    
    (64,259
    )
    
    (64,259
    )Additions
    
    -
    
    
    -
    
    
    118,462
    
    
    87,327
    
    
    373,018Total other assets at December 31, 2010
    
    2,617,821
    
    
    -
    
    
    126,793
    
    
    117,255
    
    
    2,861,869Less:FVTPL Securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    (126,793
    )Current portion of long-term receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    (500,000
    )As at December
      31, 2010
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,235,076Total other assets at December 31, 2010
    $
    2,617,821
    
    $
    -
    
    $
    126,793
    
    $
    117,255
    
    $
    2,861,869Annual payment
    
    (500,000
    )
    
    -
    
    
    -
    
    
    -
    
    
    (500,000
    )Interest accretion
    
    352,074
    
    
    -
    
    
    -
    
    
    -
    
    
    352,074Amortization
    
    -
    
    
    -
    
    
    -
    
    
    (97,730
    )
    
    (97,730
    )Additions
      (disposals)
    
    -
    
    
    135,830
    
    
    (126,793
    )
    
    15,213
    
    
    24,250Total other assets at December 31, 2011
    
    2,469,895
    
    
    135,830
    
    
    -
    
    
    34,738
    
    
    2,640,463Less:Current portion of long-term receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    (750,000
    )As at December
      31, 2011
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,890,463


Long-term receivable

On February 28, 2008, the Company
completed the sale of its interest in the Mount Hamilton, Shell and Monte Cristo
properties for consideration of $6.6 million of which $1.6 million was paid on
closing and the remaining $5 million (Ely Receivable) was payable in annual
instalments of $1 million (Annual Payment) over a five year period and share
purchase warrants (the Warrants) to purchase up to 3 million shares of Ely
Gold & Minerals Inc. (Ely) for eighteen months at a price of Cdn$0.50 per
share. The fair value of the consideration was $3.6 million comprising $3.5
million fair value of the Ely Receivable which was calculated using a 15%
discount rate, and $0.1 million fair value for the Warrants calculated using the
Black-Scholes Option Pricing model and based on the following assumptions:
expected life of 0.66 years; annualized volatility of 40%, a risk free rate of
1.11% and no dividends. The first Annual Payment of $1 million due on February
28, 2009 was received. On August 28, 2009, the warrants expired unexercised and
the carrying value was written-off.

- 27 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

On November 16, 2009, the Company
agreed to extend the Annual Payment for two additional years. The scheduled
Annual Payments as at December 31, 2011 are as follows:

Due Date
    
    AmountJune 1, 2012
    $
    750,000June 1, 2013
    
    750,000June 1, 2014
    
    750,000June 1, 2015
    
    1,000,000Total receivable
    
    3,250,000Current portion
    
    (750,000
    )Long-term portion
    $
    2,500,000


|   | The fair value of the long-term portion of the receivable
      at December 31, 2011 was $1.7 million (December 31, 2010 - $2.1
      million).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | In consideration for the extension, Ely paid the Company
      $0.04 million and granted 2 million Warrants exercisable into Ely common
      shares at a price of Cdn$0.25 per common share and expires on May 16,
      2011. These Warrants were exercised on May 13, 2011. The fair value of the
      Warrants on the grant date was $0.01 million and was based on the
      following assumptions: expected life of 1.5 years, expected volatility of
      40%, risk free interest rate of 1.34% and no dividends. The Company
      classified these Warrants as FVTPL derivatives with changes in the fair
      value recognized in the statement of comprehensive profit. For the
      year ended December 31, 2011, the Company recorded a $0.13 million
      realized loss (December 31, 2010 - $0.1 million unrealized gain) on the
      Warrants.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|7. | MINERAL PROPERTIES AND DEVELOPMENT COSTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Mineral properties consist
of:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| | As at January 1, 2010           | $ | 26,670,935 |  
| | ------------------------------- | - | ---------- | -
| | Sale of interest - Note 4       |   | (1,057,978 | )
| | Acquisition costs               |   | 63,991     |  
| | Capitalized
      interest      |   | 16,913     |  
| | As at December 31, 2010         | $ | 25,693,861 |  
| | Sale of interest -
      Note 4 |   | (1,101,297 | )
| | As at December 31, 2011         | $ | 24,592,564 |  

The Company purchased 100% of Rosemont
in Pima County, Arizona located approximately 50 kilometres southeast of Tucson
and near a number of large porphyry type producing copper mines. The property
remains subject to a 3% net smelter royalty. The Rosemont property comprises
17,500 acres (7,080 hectares) of patented and unpatented claims, fee land and
surface grazing rights. On September 16, 2010, the Company entered into the EI
Agreement with UCM, whereby UCM can earn up to a 20% interest in Rosemont by
funding up to $176 million of pre-construction and construction costs (Note
4).

- 28 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

Development costs consist of:

| | As at January 1, 2010                                         | $ | 48,844,541  |  
| | ------------------------------------------------------------- | - | ----------- | -
| | Permitting, engineering and on-going support activities       |   | 31,298,677  |  
| | Sale of interest - Note 4                                     |   | (2,802,972  | )
| | Capitalized loan interest and financing charges               |   | 4,782,613   |  
| | Capitalized stock-based compensation expense                  |   | 1,406,137   |  
| | As at December 31, 2010                                       |   | 83,528,996  |  
| | Permitting, engineering and on-going
      support activities |   | 30,903,710  |  
| | Sale of interest - Note 4                                     |   | (3,538,517  | )
| | Capitalized loan interest and financing
      charges         |   | 4,120,546   |  
| | Capitalized
      stock-based compensation expense            |   | 3,999,737   |  
| | As at December 31, 2011                                       | $ | 119,014,472 |  

|8. | ACCOUNTS PAYABLE AND ACCRUED
  LIABILITIES
|-- | ------------------------------------------

| |                                        |   | December 31, |  |   | December 31, |  |   | January 1, | 
| | -------------------------------------- | - | ------------ |  | - | ------------ |  | - | ---------- | 
| | Due within the
      year              |   | 2011         |  |   | 2010         |  |   | 2010       | 
| | Trade payables and accrued liabilities | $ | 636,596      |  | $ | 1,272,632    |  | $ | 1,109,581  | 
| | Project related
      payables         |   | 4,829,419    |  |   | 3,828,187    |  |   | 11,276,593 | 
| |                                        | $ | 5,466,015    |  | $ | 5,100,819    |  | $ | 12,386,174 | 

|9. | LONG-TERM DEBT
|-- | --------------

| |                               |   | December 31, |   |   | December 31, |  |   | January 1,  |  
| | ----------------------------- | - | ------------ | - | - | ------------ |  | - | ----------- | -
| |                               |   | 2011         |   |   | 2010         |  |   | 2010        |  
| | Long-term promissory note (a) | $ | -            |   | $ | -            |  | $ | 1,547,384   |  
| | ASARCO production payment (b) |   | -            |   |   | -            |  |   | 2,600,000   |  
| | Loan facility (c)             |   | -            |   |   | -            |  |   | 41,620,567  |  
| | Red Kite loan (d)             |   | 44,984,760   |   |   | 40,864,215   |  |   | -           |  
| | Total debt                    |   | 44,984,760   |   |   | 40,864,215   |  |   | 45,767,951  |  
| | Current portion               |   | (44,984,760  | ) |   | -            |  |   | (42,177,512 | )
| | Long-term portion             | $ | -            |   | $ | 40,864,215   |  | $ | 3,590,439   |  

|a) | Long-term promissory note                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | On February 20, 2007, the Company entered into an
      agreement to purchase 53-acre parcel of land located 15 kilometres south
      of Tucson. The property will be used for a water-well field, pump station,
      and as a possible water recharge location. The purchase agreement required
      an immediate cash payment of $0.99 million as well as the assumption of a
      promissory note, bearing interest at 8%, for $2.22 million. The promissory
      note, which is secured by a trust deed on the property, requires five
      equal payments for principal and interest of $0.56 million on the February
      20 anniversary date. On February 20, 2010 the third payment of $0.56
      million was made. On April 23, 2010, the Company made a $1.0 million
      payment to settle the outstanding promissory note.

- 29 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

|b) | ASARCO production payment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | On January 16, 2009, the Company reached an agreement
      with ASARCO LLC (ASARCO) to settle a lawsuit ASARCO had filed against
      the Company on August 8, 2007, in the ASARCO Chapter 11 bankruptcy
      proceeding in the Southern District of Texas, Corpus Christi Division. The
      proceeding sought the return of Rosemont, which the Company acquired in
      2006 from a real-estate development company that had purchased the
      Rosemont from ASARCO in 2004. On March 26, 2009, the Company was granted
      an Order of Dismissal by the United States Bankruptcy Court with each
      party to bear its own fees, costs and expenses.                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | As part of the settlement, the Company made a $0.25
      million cash payment to ASARCO, which was paid in the first quarter of
      2009, and specified annual production payments (production payments)
      over an eight year period once Rosemont reaches commercial production. The
      Company also has the right of a pre- production, pre-payment option for
      the production payments at the net present value of the aggregate annual
      payments, using an 18% discount rate, as mutually agreed with
    ASARCO.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | On September 24, 2010, the Company exercised its
      pre-production, pre-payment option to settle the Companys obligation with
      a one-time payment of $2.68 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|c) | Loan facility                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | On June 17, 2008, the Company announced that RCC had
      entered into a $40 million loan agreement (Loan Facility) with Sumitomo
      Corporation of America (Sumitomo), a wholly-owned subsidiary of Sumitomo
      Corporation. The Loan Facility could be drawn by RCC over a twelve month
      period to June 30, 2009 to fund major equipment purchase contracts ($27
      million) and general working capital ($13 million). Repayment of the Loan
      Facility was for the principal amount plus interest at a rate of 3-month
      LIBOR plus 1.5%. There were no other fees associated with the Loan
      Facility. The Loan Facility was guaranteed by the Company and secured
      against RCCs assets, including the deposits on long-lead time equipment
      that are on order and matured on June 17, 2010. In exchange for the loan,
      the Company granted Sumitomo certain rights to negotiate a minority
      ownership interest in Rosemont, which expired unexercised.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | On April 23, 2010, the Company settled the Loan Facility
      and accrued interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|d) | Red Kite loan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | On April 21, 2010, the Company completed a $43 million
      senior secured loan (the Loan) and copper concentrate off-take agreement
      with Red Kite Explorer Trust (Red Kite). The proceeds from the Loan were
      used in part to retire the Sumitomo loan facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The Loan bears interest at 3-month LIBOR plus 4.50%
      (December 31, 2011  4.87%; December 31, 2010  4.78%) compounded
      quarterly and matures on the earlier of April 21, 2012 or the date of
      closing of a Rosemont senior debt financing facility. The Loan can be
      repaid without penalty at any time prior to maturity, and the Company has
      a one-time option, expiring on October 22, 2011, to extend the maturity
      date by one year for a fee of 2% of the Loan amount. The one-time option
      was cancelled in exchange for Red Kites consent to execute the EI
      Agreement with UCM (Note 4).                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Under the terms of the off-take agreement, the Company
      will supply Red Kite with 16.125% of Rosemonts copper concentrates
      production per year when Rosemont commences commercial production and ends
      when 483,750 dry metric tonnes have been delivered to Red Kite. The
      off-take agreement includes market pricing and competitive payables for
      metals including benchmarked treatment and refining charges.
  The Loan is collateralized against the Companys assets,
      including the shares of the Companys subsidiary which holds the Rosemont
  assets.                                                                                                                                                                                                                                                                                                                                                                                                               

- 30 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

|    | As part of the loan agreement, the Company paid an
      origination fee of 2% of the Loan amount and issued to Red Kite 1,791,700
      warrants exercisable at Cdn$3.90 per share and expires on April 22, 2013
      (Note 17a). The warrants are a derivative instrument under IAS 32 and are
      fair valued at each balance sheet date with any changes in the fair value
      reported in the statement of comprehensive profit and loss. As at December
      31, 2011, the warrants have a fair value of $1.11 million (December 31,
      2010 - $3.96 million).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Company also incurred financing costs of $3.89
      million, which includes the fair value of share purchase warrants, and
      were netted against the Loan. The Loan is accreted to its face value over
      the term of the Loan using the effective interest method.                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The Company required Red Kites consent to execute the EI
      Agreement between RCC and UCM and, in exchange for the consent, the
      Company agreed to pay Red Kite $0.93 million for accrued interest to
      October 1, 2010 and to cancel the one-time option to extend the maturity
      date for one additional year.                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | For the years ended December 31, 2011 and 2010, the
      Company recorded interest of $4.13 million and $2.68 million,
      respectively, which were calculated based on an effective interest rate of
      9.62%, and capitalized to development costs.                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Subsequent to December 31, 2011, the Company extended the
      maturity date of the Loan to the earlier of April 14, 2013 or the closing
      of senior debt financing (Note 17a).                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10. | SHARE CAPITAL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|a) | Authorized:                
      Unlimited number of common shares without par value 
|-- | --------------------------------------------------------------------------------------
|   |                                                                                       
|b) | Issued:                        
      See Consolidated Statements of Changes in
Equity

|c) | Stock options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Company has a stock option plan providing for the
      issuance of options that, combined with the RSU Plan (as defined below),
      shall not at any time exceed 10% of the total number of issued and
      outstanding common shares of the Company on grant date. The Company may
      grant options to directors, officers, employees, consultants and other
      personnel of the Company or its subsidiaries. The exercise price of each
      option cannot be lower than the market price of the shares on the closing
      price of the Companys common shares on the Toronto Stock Exchange the day
      before the grant date. Options generally vest ratably over periods of up
      to three years and may expire within 5 years but no later than 10 years
      from the date of grant as determined by the Board of
  Directors.

- 31 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

The following table summarizes the
Companys stock options outstanding as at December 31, 2011 and 2010:

| |                                           |  |            |   |   | Weighted       | 
| | ----------------------------------------- |  | ---------- | - | - | -------------- | 
| |                                           |  |            |   |   | Average        | 
| |                                           |  | Number of  |   |   | Exercise Price | 
| |                                           |  | Shares     |   |   | (Cdn$)         | 
| | Outstanding as at January 1, 2010         |  | 8,475,800  |   | $ | 2.14           | 
| | Granted                                   |  | 365,000    |   |   | 2.97           | 
| | Exercised                                 |  | (2,220,565 | ) |   | 1.55           | 
| | Forfeited                                 |  | (66,667    | ) |   | 2.43           | 
| | Expired                                   |  | (550,000   | ) |   | 2.10           | 
| | Outstanding as at December 31, 2010       |  | 6,003,568  |   |   | 2.41           | 
| | Granted                                   |  | 2,558,500  |   |   | 4.24           | 
| | Exercised                                 |  | (1,535,230 | ) |   | 2.09           | 
| | Forfeited                                 |  | (363,334   | ) |   | 3.98           | 
| | Outstanding as at
      December 31, 2011 |  | 6,663,504  |   | $ | 3.10           | 

During the year ended December 31, 2011
a total of 1,535,230 stock options were exercised at a weighted average exercise
price of Cdn$2.09. The weighted average share price when the stock options were
exercised was Cdn$4.78.

On January 11, 2011, the Company issued
600,000 stock options with an exercise price of Cdn$3.68 per share to a
consultant and are subject to achieving certain conditions by a specified date.
On June 1, 2011, due to unmet vesting conditions, 200,000 stock options issued
to the consultant were forfeited resulting in a reversal of $0.23 million of
capitalized stock-based compensation expense.

The following table summarizes the
total amount of stock-based compensation relating to stock options recognized
for the years ended December 31, 2011 and 2010:

| |                                                    |   | 2011      |  |   | 2010      | 
| | -------------------------------------------------- | - | --------- |  | - | --------- | 
| | Stock-based compensation expense                   | $ | 2,145,138 |  | $ | 415,524   | 
| | Capitalized
      stock-based compensation expense |   | 2,630,189 |  |   | 619,398   | 
| |                                                    | $ | 4,775,327 |  | $ | 1,034,922 | 

The following assumptions were used in
the Black-Scholes Option Pricing Model to fair value of the stock options
granted during the years ended December 31, 2011 and 2010:

| |                                            | 2011          | 2010         
| | ------------------------------------------ | ------------- | -------------
| | Expected life (years)                      | 2.22 to 4.50  | 3.5          
| | Expected volatility                        | 85% -96%      | 90%  93%    
| | Expected dividend yield                    | 0%            | 0%           
| | Risk-free interest rate                    | 1.27% - 2.80% | 2.09% - 2.90%
| | Weighted average fair value of each option | $2.72         | $1.91        

The Company estimates the forfeiture
rate at less than 1.0% . The expected volatility reflects the assumption that
the historical volatility over a period similar to the life of the option is
indicative of future trends, which many or may not necessarily be the actual
outcome either.

- 32 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

The following table summarizes the
stock options outstanding as at December 31, 2011:

Options Outstanding
      
      
      Options ExercisableWeighted
      
      
      
      
      
      
      
      
      WeightedWeighted
      
      
      Average
      
      
      
      
      
      Weighted
      
      
      AverageAverage
      
      
      Remaining
      
      
      
      
      
      Average
      
      
      RemainingNumber of
      
      
      Exercise
      
      
      Contractual
      
      
      Number of
      
      
      Exercise
      
      
      ContractualOutstanding
      
      
      Price
      
      
      Life
      
      
      Exercisable
      
      
      Price
      
      
      LifeExercise Prices (Cdn$)
      
      Options
      
      
      (Cdn$)
      
      
      (Years)
      
      
      Options
      
      
      (Cdn$)
      
      
      (Years)$0.68 - $1.13
      
      1,550,003
      
      $
      0.73
      
      
      2.16
      
      
      1,106,661
      
      $
      0.74
      
      
      2.18$1.14 - $1.92
      
      25,000
      
      
      1.92
      
      
      3.38
      
      
      8,333
      
      
      1.92
      
      
      3.38$1.93 - $2.30
      
      721,667
      
      
      2.12
      
      
      0.19
      
      
      718,333
      
      
      2.12
      
      
      0.18$2.31 - $3.61
      
      723,334
      
      
      3.24
      
      
      3.84
      
      
      466,665
      
      
      3.36
      
      
      2.58$3.62 - $4.97
      
      3,643,500
      
      
      4.27
      
      
      4.50
      
      
      1,600,000
      
      
      4.27
      
      
      5.526,663,504
      
      $
      3.10
      
      
      3.41
      
      
      3,899,992
      
      $
      2.76
      
      
      3.23


|d) | Share Purchase Warrants                                                                                       
|-- | --------------------------------------------------------------------------------------------------------------
|   |                                                                                                               
|   | The following table summarizes the outstanding share
      purchase warrants as at December 31, 2010 and
2011:

ExercisePrice
    
    
    
    
    
    December 31,
    
    
    
    
    
    
    
    
    
    
    
    December 31,(Cdn$)
    
    
    Expiry Date
    
    
    2010
    
    
    Issued
    
    
    Exercised
    
    
    Expired
    
    
    2011Warrants (Note 17a)
    $
    3.90
    
    
    April 22, 2013
    
    
    1,791,700
    
    
    -
    
    
    -
    
    
    -
    
    
    1,791,700Warrants
    $
    3.90
    
    
    February 27, 2012
    
    
    5,452,795
    
    
    -
    
    
    (5,452,795
    )
    
    -
    
    
    -7,244,495
    
    
    -
    
    
    (5,452,795
    )
    
    -
    
    
    1,791,700


The $5.65 million fair value of the
exercised warrants was transferred from warrant liability to share capital.

Under IAS 32, Financial Instruments
Presentation, warrants having a strike price other than the functional
currency of the issuer are classified as a derivative liability and are fair
valued at each balance sheet date. For the years ended December 31, 2011 and
2010, the Company recorded a $2.82 million gain and $2.46 million gain,
respectively from changes in the fair value of the warrants.

As at December 31, 2011, the
outstanding warrants have a fair value of $1.11 million (December 31, 2010-$9.49
million; January 1, 2010 - $1.86 million) based on the following assumptions
used in the Black-Scholes Option Pricing Model:

| |                                       | December 31, | December 31,    
| | ------------------------------------- | ------------ | ----------------
| |                                       | 2011         | 2010            
| | Expected life (years)                 | 1.31         | 1.12  2.31     
| | Expected volatility                   | 59.38%       | 65.95% - 105.99%
| | Expected dividend yield               | 0%           | 0%              
| | Risk-free interest rate               | 0.95%        | 1.40%  1.67%   
| | Weighted average fair value of option | $0.62        | $1.31           

- 33 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

|e) | Restricted Share Units and Restricted Shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Restricted Share Units Plan (RSU Plan) and
      Restricted Shares was created to align the directors, employees, and
      consultants (collectively the Participants) interest with the
      shareholders interest. The fair value of the shares issued under the RSU
      Plan can either be paid out in cash or in common shares at the sole
      discretion of the Board.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Companys policy is to payout in common shares. The
      RSU Plan, combined with the stock option plan, shall not at any time
      exceed 10% of the total number of issued and outstanding common shares of
      the Company on grant date. The restricted shares are issued from treasury
      with vesting conditions, as determined by the Board, on grant date and the
      shares underlying the restricted share units are issued on the date
      vesting conditions are met. The fair value of the restricted shares and
      restricted share units is charged to the statement of comprehensive profit
      (loss) over its vesting period with a corresponding credit to reserves.
      The fair value of restricted shares issued to project Participants is
      capitalized to development costs. Upon vesting and the Companys issue of
      shares, the fair value is transferred to share capital.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | During the year ended December 31, 2011, the following
      transactions occurred:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | On March 29, 2011, the Company issued 5,000 restricted
      shares at a price of $5.00 (Cdn$4.90) per share and vests on March 29,
      2012.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | On February 25, 2011, the Company issued 300,000
      restricted shares to a consultant at a price of $5.40 (Cdn$5.30) per share
      of which 200,000 restricted shares are subject to vesting conditions. The
      first tranche of 100,000 restricted shares vested immediately. The second
      tranche of 100,000 restricted shares were forfeited as the vesting
      condition was not met and the third tranche of 100,000 restricted shares
      vest on the earlier of the receipt of a Record of Decision or January 31,
      2013. The forfeiture of the second tranche resulted in the Company
      reversing the capitalization of $0.18 million against development
      costs.                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | On February 10, 2011, the Company issued 260,000
      restricted shares and 195,000 restricted share units to its officers and
      directors at a price of $4.62 (Cdn$4.60) per share and vest on receipt of
      a Record of Decision.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

- 34 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

The following table summarizes the
number of unvested restricted shares and restricted share units as at December
31, 2010 and 2011:

December 31,
    
    
    
    
    
    
    
    
    
    
    
    December 31,Issue date
    
    2010
    
    
    Issued
    
    
    Forfeited
    
    
    Vested
    
    
    2011Restricted sharesFebruary 4, 2010
    
    336,665
    
    
    -
    
    
    -
    
    
    (84,661
    )
    
    252,004February 10, 2011
    
    -
    
    
    260,000
    
    
    -
    
    
    -
    
    
    260,000February 25, 2011
    
    -
    
    
    300,000
    
    
    (100,000
    )
    
    (100,000
    )
    
    100,000March 29, 2011
    
    -
    
    
    5,000
    
    
    -
    
    
    -
    
    
    5,000336,665
    
    
    565,000
    
    
    (100,000
    )
    
    (184,661
    )
    
    617,004Restricted share unitsFebruary 4, 2010
    
    211,667
    
    
    -
    
    
    (2,667
    )
    
    (111,665
    )
    
    97,335February 10, 2011
    
    -
    
    
    195,000
    
    
    (40,000
    )
    
    -
    
    
    155,000211,667
    
    
    195,000
    
    
    (42,667
    )
    
    (111,665
    )
    
    252,335Total
    
    548,332
    
    
    760,000
    
    
    (142,667
    )
    
    (296,326
    )
    
    869,339


The following table summarizes the
total stock-based compensation expense for restricted shares and restricted
share units for the years ended December 31, 2011 and 2010:

| |                                                    |   | 2011      |  |   | 2010      | 
| | -------------------------------------------------- | - | --------- |  | - | --------- | 
| | Stock-based compensation expense                   | $ | 1,306,271 |  | $ | 723,945   | 
| | Capitalized
      stock-based compensation expense |   | 1,368,470 |  |   | 460,638   | 
| |                                                    | $ | 2,674,741 |  | $ | 1,184,583 | 

|11. | SUPPLEMENTAL CASH FLOW
  INFORMATION
|--- | ------------------------------------

| | Changes in working capital items               |   |          |   |   |           |  
| | ---------------------------------------------- | - | -------- | - | - | --------- | -
| |                                                |   | 2011     |   |   | 2010      |  
| | Accounts receivable                            | $ | 66,996   |   | $ | (77,956   | )
| | Due from related parties                       |   | (26,599  | ) |   | 254,305   |  
| | Prepaids and other                             |   | (329,929 | ) |   | 179,409   |  
| | Accounts payable
      and accrued liabilities |   | (636,036 | ) |   | 333,036   |  
| |                                                | $ | (925,568 | ) | $ | 688,794   |  
| |                                                |   |          |   |   |           |  
| | Interest paid                                  | $ | -        |   | $ | 2,859,854 |  

Supplemental disclosure of non-cash
financing and investing activities

| |                                                        |   | 2011 |  |   | 2010      | 
| | ------------------------------------------------------ | - | ---- |  | - | --------- | 
| | Fair value of Ely share purchase warrants
      issued | $ | -    |  | $ | -         | 
| | Issued promissory note to acquire land                 |   | -    |  |   | 990,000   | 
| | Warrants issued pursuant to debt financing             |   | -    |  |   | 2,410,141 | 
| |                                                        | $ | -    |  | $ | 3,400,141 | 

- 35 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

|12. | RELATED PARTY TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | The Company shares rent, salaries and administrative
      services with companies related by common directors and officers (the
      Related Companies). As at December 31, 2011, included in due from
      related parties was $0.04 million (December 31, 2010 - $0.01 million;
      January 1, 2010 - $0.3 million) due from related companies.                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On July 1, 2010, the Company and the Related Companies
      formed a management services company (ManCo) to share personnel costs,
      office rent and other administration costs under a management services
      agreement. Each company holds an equal share in ManCo. For the years ended
      December 31, 2011 and 2010, ManCo charged the Company $1.20 million and
      $0.44 million, respectively for its share of salaries, rent and other
      administrative expenses.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On January 22, 2010, the Company borrowed $3.0 million
      from a company, related by common directors and officers, to complete a
      scheduled deposit on a long-lead equipment purchase. The amount borrowed
      bore interest at one-month LIBOR plus 4% and was repaid on March 12, 2010.
      Interest paid on the loan was $0.02 million and was capitalized to the
      related asset.                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Included in accounts payable as at December 31, 2011, was
      $Nil (December 31, 2010 - $0.07 million receivable; January 1, 2010 -
      $Nil) owing to an officer and other companies related to the officer for
      reimbursement of expenses.                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | The Company has identified its directors and certain
      senior officers as its key management personnel. The compensation costs
      for key management personnel for the years ended December 31, 2011 and
      2010 are as follows:                                                                                                                                                                                                                                                  

| |                                |   | 2011      |  |   | 2010      | 
| | ------------------------------ | - | --------- |  | - | --------- | 
| | Salaries and benefits          | $ | 2,137,313 |  | $ | 1,791,263 | 
| | Stock-based
      compensation |   | 4,205,072 |  |   | 931,444   | 
| |                                | $ | 6,342,385 |  | $ | 2,722,707 | 

|13. | FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | IFRS 7, Financial Instruments: Disclosures,
      establishes a fair value hierarchy that reflects the significance of the
      inputs used in making the measurements. The fair value hierarchy has the
      following levels:                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Level 1 - quoted prices (unadjusted) in active markets
      for identical assets or liabilities;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Level 2 - inputs other than quoted prices included in
      Level 1 that are observable for the asset or liability, either directly
      (i.e. as prices) or indirectly (i.e. derived from prices); and                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Level 3 - inputs for the asset or liability that are not
      based on observable market data (unobservable inputs).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | The Companys financial instruments include: cash and
      equivalents, accounts receivable, due from related parties, long-term
      receivable, derivative assets, accounts payable, warrants liability and
      long-term debt. The carrying value of cash and equivalents, accounts
      receivable, derivative assets, accounts payable and warrants liability
      approximates their fair values. The cash and cash equivalents, accounts
      receivable and  accounts payable are classified as
Level 1 on the fair value hierarchy. The derivative assets and warrants
liability are classified as level 3 on the fair value hierarchy.

- 36 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

Risks arising from financial
instruments and risk management

The Companys activities expose it to a
variety of financial risks, market risk (including foreign exchange risk),
credit risk, and liquidity risk. Reflecting the current stage of development of
Rosemont, the Companys overall risk management program focuses on facilitating
the Companys ability to continue as a going concern and seeks to minimize
potential adverse effects on the Companys ability to execute its business
plan.

Risk management is the responsibility
of the corporate finance function. Material risks are identified and monitored
and are discussed by senior management and with the audit committee of the Board
of Directors.

Foreign exchange risk

The Company is exposed to currency
risks on its Canadian dollar denominated working capital balances due to changes
in the USD/CAD exchange rate and the functional currency of the parent
company.

The Company issues equity in Canadian
dollars but the majority of its expenditures are in U.S. dollars. The Company
purchases U.S. dollars based on its near term forecast expenditures and does not
hedge its exposure to currency fluctuations.

The Company is exposed to currency risk
through the following assets and liabilities denominated in Canadian dollars:

| |                                          |   | December 31, |   |   | December 31, |   |   | January 1, |  
| | ---------------------------------------- | - | ------------ | - | - | ------------ | - | - | ---------- | -
| |                                          |   | 2011         |   |   | 2010         |   |   | 2010       |  
| | Cash and cash equivalents                | $ | 6,808,660    |   | $ | 9,391,768    |   | $ | 4,942,433  |  
| | Accounts receivable                      |   | 52,975       |   |   | 88,580       |   |   | 253,350    |  
| | Short-term investments                   |   | 286,991      |   |   | -            |   |   | -          |  
| | Prepaid expenses                         |   | -            |   |   | 53,336       |   |   | 9,966      |  
| | Accounts payable and accrued liabilities |   | (400,084     | ) |   | (1,004,191   | ) |   | (512,029   | )
| |                                          | $ | 6,748,542    |   | $ | 8,529,493    |   | $ | 4,693,720  |  

Based on the net Canadian dollar
denominated asset and liability exposures as at December 31, 2011, a 10% change
in the USD/CAD exchange rate will impact the Companys earnings by approximately
$0.60 million (2010 - $0.78 million; 2009 - $0.41 million).

Credit risk

Credit risk arises from cash and cash
equivalents held with banks and financial institutions, as well as credit
exposure on outstanding receivables. The maximum exposure to credit risk is
equal to the carrying value of the financial assets.

The Companys excess cash and cash
equivalents are held at a large Canadian chartered bank and a large US bank and
are invested in either short-term GICs or high interest saving accounts.
Management believes the risk of loss is remote.

- 37 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

The other asset relates to an Ely
receivable, which has a carrying value of $2.5 million and is payable over the
next four years to 2015. In the event that Ely does not make the required
payments (Note 6), the Company can take back the common shares of DHI Minerals
and DHI Minerals US or the properties in question. Should the Company reacquire
the DHI shares or properties, an asset impairment assessment may be
required.

Liquidity risk

Liquidity risk arises through excess of
financial obligations over available financial assets due at any point in time.
The Companys objective in managing liquidity risk is to maintain sufficient
readily available reserves in order to meet its liquidity requirements as they
become due. The Company achieves this through the management of its capital
structure and debt leverage.

Based on the Companys 2012 planned
permitting, engineering expenditures and on-going support activities at the
Rosemont project, the Company will require additional debt or equity financings
to meet its current obligations as they become due. In particular, the Red Kite
loan, along with the accrued interest, was originally due on April 21, 2012 have
been extended for up to one additional year (Note 17a).

Equity price risk

The Company is exposed to price risk
with respect to equity prices. Equity price risk is defined as the potential
adverse impact on the Companys earnings due to movements in individual equity
prices or general movements in the level of the stock market. The Companys
equity price risk also arises from the impact the share purchase warrants with a
Canadian dollar strike price will have on the statement of comprehensive profit
based on the volatility of Companys share price.

Capital risk management

The Companys objectives in managing
capital are to safeguard the Companys ability to continue as a going concern in
order to pursue the development of the Rosemont property and to maintain a
flexible capital structure which optimizes the costs of capital at an acceptable
risk level.

Similar to other mining companies in
the development stage, the Company is in discussions with certain parties to
provide funding for the Company to execute its business plan. On September 16,
2010, the Company entered into an EI Agreement with UCM to earn up to a 20%
interest in the Rosemont joint venture by contributing cash of up to $176
million into the joint venture to fund permitting, engineering and ongoing
Rosemont expenditures through to construction. The Updated 2009 Feasibility
Study estimated the capital cost of the mill and mining equipment and all
related construction costs at $897 million. Funding for the project could come
from a number of sources, including project financing, off-take agreements, sale
of future metal streams and from capital markets.

There are no externally imposed capital
requirements. In the management of capital, the Company includes the components
of shareholders equity, long term debt and current liabilities. The Company
manages the capital structure and makes adjustments in light of changes in
economic and market conditions (including receptivity of the capital markets to
new equity or debt issuances) and the risk characteristics of the underlying
assets. To maintain or adjust the capital structure, the Company may issue new
shares, issue new debt or dispose of assets and/or consider strategic alliances
including joint venture partners.

In order to facilitate the management
of its capital requirements, the Company prepares an annual budget that is
updated periodically to account for changes in the timing of expenditures and
market conditions. The annual budget is approved by the Board of Directors.

- 38 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

|    | The Companys investment policy is to invest its excess
      cash in highly liquid, short-term interest-bearing investments. The
      investments are selected based on the expected timing of expenditures from
      continuing operations. In order to maximize ongoing development efforts,
      the Company does not pay out dividends.                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The 2012 capital requirements will include scheduled
      deposits for long-lead equipment purchases, the ongoing cost of
      permitting, engineering and on-going support activities at the Rosemont
      project as well as for administration expenses. A portion of the Rosemont
      expenditures will be funded from the Companys existing cash reserves and
      if necessary, additional equity issues to meet its ongoing commitments and
      capital purchases.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|14. | COMMITMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The following table lists the known contractual
      obligations at December 31, 2011:                                                                                                                                                                                                                                                                                                                                                                                           

in thousands of U.S. dollars
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015
    
    
    After 2015
    
    
    TotalAccounts payable and accrued liabilities
    $
    5,466,015
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    5,466,015Long-term debt (Note 9a)
    
    44,984,760
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    44,984,760Deposits on long-lead equipment purchases
    
    59,462,491
    
    
    4,316,284
    
    
    -
    
    
    -
    
    
    -
    
    
    63,778,775Operating lease obligations
    
    207,568
    
    
    202,138
    
    
    184,458
    
    
    186,909
    
    
    143,078
    
    
    924,151$
    110,120,834
    
    $
    4,518,422
    
    $
    184,458
    
    $
    186,909
    
    $
    143,078
    
    $
    115,153,701


For purchase agreements related to
long-lead time equipment the Company has included or intends to include in such
agreements provisions which will allow it under certain circumstances and
conditions to assign/transfer/or sell the contracts to third parties. In the
event that the Company does not make the necessary progress payments through to
completion of the contract, amounts paid to-date are not refundable.

In February 2010, the Company signed a
definitive agreement with Silver Wheaton Corporation (Silver Wheaton) for the
sale of all of the Companys silver and gold produced from Rosemont. Silver
Wheaton will pay the Company upfront cash payments of $230 million and
production payments of $3.90 per ounce of silver and $450 per ounce of gold
delivered, or the prevailing market price, if lower, during the mine life. The
drawdown of the cash payments is subject to the Company receiving the Record of
Decision. The Company also signed an off-take agreement with Red Kite Explorer
Trust (Red Kite) for the sale of 16.125% of Rosemonts concentrate production
to a maximum of 483,270 dry metric tonnes delivered to Red Kite.

In September 2010, the Company,
pursuant to earn-in agreement with a Korean consortium to earn a 20% interest in
Rosemont, entered into an off-take agreement with the Korean consortium for the
sale of 30% of copper concentrate and 20% of copper cathode and molybdenum
concentrate produced annually from Rosemont.

- 39 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

|15. | INCOME TAXES
|--- | ------------

|a) | Income tax expense                                                                                                                                                                                                           
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                              
|   | The provision for income taxes reported differs from the
      amount computed by applying cumulative Canadian federal and provincial
      income tax rates to the loss before the tax provision due to the
      following:

| |                                                             |   | 2011       |   |   | 2010       |  
| | ----------------------------------------------------------- | - | ---------- | - | - | ---------- | -
| | Net comprehensive profit                                    | $ | 16,879,065 |   | $ | 20,531,420 |  
| | Statutory tax rate                                          |   | 26.5%      |   |   | 28.5%      |  
| |                                                             |   |            |   |   |            |  
| | Recovery of income taxes computed at statutory rates        |   | 4,473,000  |   |   | 5,851,453  |  
| | Difference in foreign tax rates                             |   | 2,619,000  |   |   | 2,834,319  |  
| | Current year tax losses not recognized                      |   | (41,000    | ) |   | (9,052,914 | )
| | Recognition of previously unrecognized tax
      attributes |   | (4,956,000 | ) |   | -          |  
| | Foreign exchange gain (loss)                                |   | 293,000    |   |   | (160,024   | )
| | Stock-based compensation                                    |   | 91,000     |   |   | (149,240   | )
| | Other permanent
      differences                           |   | (1,268,000 | ) |   | 676,406    |  
| | Deferred income tax expense                                 | $ | 1,211,000  |   | $ | -          |  

|b) | The significant components of the Company's deferred tax
      assets and liabilities are as follows:
|-- | -----------------------------------------------------------------------------------------------------

| |                                                      |  | December 31, |   |  | Recognized in |   |  | December 31, |  
| | ---------------------------------------------------- |  | ------------ | - |  | ------------- | - |  | ------------ | -
| |                                                      |  | 2010         |   |  | Profit (Loss) |   |  | 2011         |  
| |                                                      |  |              |   |  |               |   |  |              |  
| | Non-capital losses and other future tax              |  |              |   |  |               |   |  |              |  
| | deductions                                           |  | 16,465,000   |   |  | 5,441,000     |   |  | 21,906,000   |  
| | Working capital balances attributable to
      Joint |  |              |   |  |               |   |  |              |  
| | Venture                                              |  | (1,507,000   | ) |  | 2,730,000     |   |  | 1,223,000    |  
| | Long-term debt                                       |  | (750,000     | ) |  | 750,000       |   |  | -            |  
| | Mineral properties, deferred development and         |  |              |   |  |               |   |  |              |  
| | capital assets                                       |  | (14,208,000  | ) |  | (10,132,000   | ) |  | (24,340,000  | )
| | Deferred income
      tax liability                  |  | -            |   |  | (1,211,000    | ) |  | (1,211,000   | )

- 40 -

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|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

|c) | Deferred tax assets have not been recognized in respect
      of the following items:
|-- | -------------------------------------------------------------------------------------

| |                                                             |   | 2011      |  |   | 2010       | 
| | ----------------------------------------------------------- | - | --------- |  | - | ---------- | 
| | Non-capital losses and other future tax
      deductions    | $ | 7,538,000 |  | $ | 11,445,000 | 
| | Mineral properties, deferred development and capital assets |   | 50,000    |  |   | -          | 
| | Other assets                                                |   | 118,000   |  |   | 151,000    | 
| |                                                             | $ | 7,706,000 |  | $ | 11,596,000 | 

As at December 31, 2011, the Company
had deductible temporary differences for which deferred tax assets have not been
recognized because it is not probable that future profit will be available
against which the Company can utilize the benefits.

As of December 31, 2011, the Company
has Canadian loss carry forwards of approximately $25.4 million (2010 - $22.0
million) and US loss carry forwards of approximately $53.6 million (2010 - $47.4
million) available to reduce future years income for tax purposes. The Company
recognizes the benefit of tax losses only to the extent of anticipated future
taxable income in relevant jurisdictions. The tax loss carry forwards expire as
follows:

| | Expiry of Tax
      Losses |   | Amount     | 
| | -------------------------- | - | ---------- | 
| | December 31, 2014          | $ | 32,000     | 
| | December 31, 2015          |   | 2,395,000  | 
| | December 31, 2026          |   | 2,968,000  | 
| | December 31, 2027          |   | 8,574,000  | 
| | December 31, 2028          |   | 19,155,000 | 
| | December 31, 2029          |   | 14,835,000 | 
| | December 31, 2030          |   | 18,830,000 | 
| | December 31, 2031          |   | 11,309,000 | 
| |                            | $ | 78,098,000 | 

|d) | Unrecognized deferred tax liabilities                                                                                                                                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                              
|   | At December 31, 2011, the Company had a taxable temporary
      difference relating to investments in subsidiaries of $6,200,000 (2010 -
      $nil) that has not been recognized because the Company controls whether
      the liability will be incurred and it is satisfied that it will not be
      incurred in the foreseeable future.

|16. | SEGMENTED INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Company operates in one industry  mineral resource
      and development. The Company does not generate any revenue from its
      operations and the majority of non-current assets are in Canada and the
      U.S. As at December 31, 2011, the Companys non-current assets in Canada
      were $8.98 million (December 31, 2010 - $4.60 million; January 1, 2010 -
      $2.30 million) and in the U.S. were $225.53 million (December 31, 2010 -
      $180.42 million; January 1, 2010 - $123.20 million). Non-current assets
      for this purpose consist of deposits on long-lead equipment, development
      costs, property, plant and equipment, mineral properties and other
      assets.

- 41 -

---

|Augusta Resource Corporation                                  
|--------------------------------------------------------------
|Notes to the Consolidated Financial Statements                
|For the years ended December 31, 2011 and 2010                
|(All amounts are in
      U.S. dollars unless otherwise noted)

The following table summarizes the net
comprehensive profit (loss) by geographic location:

| |                          |   | 2011       |   |   | 2010       |  
| | ------------------------ | - | ---------- | - | - | ---------- | -
| | Canada                   | $ | (2,852,597 | ) | $ | (5,266,610 | )
| | U.S.                     |   | 18,520,662 |   |   | 25,798,030 |  
| | Net comprehensive profit | $ | 15,668,065 |   | $ | 20,531,420 |  

|17. | SUBSEQUENT EVENTS
|--- | -----------------
|    |                  
|    | a)               
|    |                  
|    | b)               
|    |                  
|    | c)               

- 42 -

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