Document:

Trelawney Mining and Exploration Inc.

Consolidated

Financial Statements

For the years ended

December 31, 2010 and 2009

  

 

  

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

The accompanying consolidated financial statements of Trelawney Mining and Exploration Inc. are the responsibility of management and have been approved by the Board of Directors.

The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. When alternative accounting methods exist, management has chosen those it deems most appropriate in the circumstances. Financial statements are not precise since they include certain amounts based on estimates and judgments. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects.

The Company maintains systems of internal controls that are designed by management to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and to produce reliable accounting records for financial reporting purposes.

The Board of Directors is responsible for reviewing and approving the financial statements and ensuring that management fulfills its responsibilities for financial reporting and internal control. The Board exercises this responsibility through the Audit Committee of the Board. The Audit Committee consists of directors not involved in the daily operations of the Company. The Audit Committee meets with management and the external auditors to satisfy itself that management’s responsibilities are properly discharged and to review the financial statements prior to their presentation to the Board of Directors for approval. The Audit Committee is responsible for engaging and reappointing the external auditors.

The external auditors conduct an independent audit of the consolidated financial statements in accordance with Canadian generally accepted auditing standards in order to express their opinion on these financial statements. Those standards require that the external auditors plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement.

	
/s/ Greg Gibson

	
, President and CEO

	  	
/s/ Andres Tinajero  

	
, VP of Finance & CFO

	
Greg Gibson

	  	  	
Andres Tinajero  

	  

  

 

  

INDEPENDENT AUDITORS’ REPORT

To the Shareholders of

Trelawney Mining and Exploration Inc.

 

We have audited the accompanying consolidated financial statements of Trelawney Mining and Exploration Inc., which comprise the consolidated balance sheet as at December 31, 2010 and the consolidated statements of operations and comprehensive loss and deficit and cash flows for the year then ended, 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 Canadian generally accepted accounting principles, 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 audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit 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, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes 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 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 Trelawney Mining and Exploration Inc. as at December 31, 2010 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.

 

Other matter

 

The financial statements of Trelawney Mining and Exploration Inc. for the year ended December 31, 2009 were audited by another auditor who expressed an unmodified opinion on those statements on February 12, 2010.

 

	
Toronto, Canada

	
/s/ ERNST & YOUNG LLP

	
March 15, 2011

	
Chartered accountants

	  	
Licensed Public Accountants

  

 

  

Trelawney Mining and Exploration Inc.

Consolidated Balance Sheets

(Expressed in Canadian Dollars)

	  	 	
December 31,

	 	 	
December 31,

	 
	
As at,

	 	
2010

	 	 	
2009

	 
	
Assets

	 	 	 	 	 	 
	
Current Assets

	 	 	 	 	 	 
	
Cash and cash equivalents (Note 12)

	 	$	54,219,416	 	 	$	10,593,347	 
	
Marketable securities (Note 5)

	 	 	87,375	 	 	 	32,500	 
	
GST and other receivables

	 	 	772,525	 	 	 	76,854	 
	
Prepaid expenses

	 	 	211,817	 	 	 	8,937	 
	  	 	 	55,291,133	 	 	 	10,711,638	 
	
Restricted cash (Note 12)

	 	 	586,198	 	 	 	47,350	 
	
Deposits (Note 13)

	 	 	539,000	 	 	 	-	 
	
Capital assets (Note 3)

	 	 	5,663,559	 	 	 	-	 
	
Mineral properties and deferred costs (Note 4)

	 	 	30,300,790	 	 	 	10,821,403	 
	  	 	$	92,380,680	 	 	$	21,580,391	 
	  	 	 	 	 	 	 	 	 
	
Liabilities

	 	 	 	 	 	 	 	 
	
Current Liabilities

	 	 	 	 	 	 	 	 
	
Accounts payable and accrued liabilities (Note 7)

	 	$	2,791,245	 	 	$	794,941	 
	
Short term portion of capital lease obligations (Note 8)

	 	 	318,193	 	 	 	-	 
	  	 	 	3,109,438	 	 	 	794,941	 
	
Property Option Payable  (Note 4.d)

	 	 	-	 	 	 	1,000,000	 
	
Capital lease obligations (Note 8)

	 	 	660,648	 	 	 	-	 
	
Provision for mine closure  (Note 9)

	 	 	443,114	 	 	 	 	 
	  	 	 	4,213,200	 	 	 	1,794,941	 
	
Shareholders’ equity

	 	 	 	 	 	 	 	 
	
Capital stock (Note 10)

	 	 	97,953,082	 	 	 	19,222,646	 
	
Contributed surplus (Note 11)

	 	 	7,359,551	 	 	 	5,983,119	 
	
Deficit

	 	 	(17,145,153	)	 	 	(5,420,315	)
	  	 	 	88,167,480	 	 	 	19,785,450	 
	  	 	$	92,380,680	 	 	$	21,580,391	 

Approved by the Board:

	/s/ James Fairbairn  	
, Director

	  	/s/ Patrick Mohan  	
, Director

	  
	
James Fairbairn

	  	  	
Patrick Mohan

	  	  

See notes to the consolidated financial statements

  

 

  

 

Trelawney Mining and Exploration Inc.

Consolidated Statements of Operations and Comprehensive Loss and Deficit

(Expressed in Canadian Dollars)

	
Years ended,

	 	
December 31,

2010

	 	 	
December 31,

2009

	 
	
Administrative Expenses

	 	 	 	 	 	 
	
Management and consulting fees (Note 7)

	 	 	470,244	 	 	 	515,113	 
	
Promotion and travel

	 	 	559,666	 	 	 	117,593	 
	
Office and general

	 	 	891,268	 	 	 	220,276	 
	
Professional fees (Note 7)

	 	 	357,368	 	 	 	114,537	 
	
Stock-based compensation (Note 10)

	 	 	3,238,460	 	 	 	686,300	 
	
Shareholders’ information

	 	 	554,805	 	 	 	94,260	 
	
Salaries and benefits (Note 7)

	 	 	2,847,789	 	 	 	-	 
	  	 	 	8,919,600 	 	 	 	1,748,079	 
	
Write-down of mineral properties and deferred costs (Note 5)

	 	 	2,923,113	 	 	 	798,022	 
	
Unrealized gain on marketable securities (Note 5)

	 	 	(20,875	)	 	 	(22,750	)
	
Net Loss and comprehensive loss before income taxes

	 	 	11,821,838	 	 	 	2,523,351	 
	
Future income tax expense (recovery) (Note 14)

	 	 	(97,000	)	 	 	118,000	 
	
Net loss and comprehensive loss

	 	 	11,724,838	 	 	 	2,641,351	 
	
Deficit at beginning of year

	 	 	5,420,315	 	 	 	2,778,964	 
	
Deficit, end of year

	 	$	17,145,153	 	 	$	5,420,315	 
	  	 	 	 	 	 	 	 	 
	
Net loss per share – basic and diluted

	 	 	13.8	¢	 	 	9.7	¢
	
Weighted average # of shares outstanding - basic

	 	 	85,156,280	 	 	 	27,170,287	 
	
Weighted average # of shares outstanding –diluted

	 	 	85,156,280	 	 	 	27,170,287	 

See notes to the consolidated financial statements

  

 

  

 

Trelawney Mining and Exploration Inc.

Consolidated Statements of Cash Flow

(Expressed in Canadian Dollars)

	
Years ended, 

	 	
December 31,

2010

	 	 	
December 31,

2009

	 
	
Operations

	 	 	 	 	 	 
	
Net loss

	 	$	(11,724,838	)	 	$	(2,641,351	)
	
Adjustments to reconcile net loss to cash flow from operating activities:

	 	 	 	 	 	 	 	 
	
Stock-based compensation

	 	 	3,238,460	 	 	 	686,300	 
	
Write-down of mineral properties and deferred costs

	 	 	2,923,113	 	 	 	798,022	 
	
Amortization

	 	 	21,363	 	 	 	-	 
	
Gain on marketable securities

	 	 	(20,875	)	 	 	(22,750	)
	
Gain on sale of capital asset

	 	 	(22,800	)	 	 	-	 
	
Accretion expense

	 	 	7,193	 	 	 	-	 
	
Future income tax expense (recovery)

	 	 	(97,000	)	 	 	118,000	 
	
Net change in non-cash operating working capital items:

	 	 	 	 	 	 	 	 
	
Prepaid expenses

	 	 	(202,880	)	 	 	(405	)
	
GST recoverable

	 	 	(695,671	)	 	 	(57,103	)
	
Accounts payable and accruals

	 	 	1,527,249	 	 	 	681,563	 
	  	 	 	(5,046,686	)	 	 	(437,724	)
	
Financing

	 	 	 	 	 	 	 	 
	
Issuance of share capital

	 	 	72,783,408	 	 	 	12,557,660	 
	  	 	 	72,783,408	 	 	 	12,557,660	 
	
Investing

	 	 	 	 	 	 	 	 
	
Additions to capital assets

	 	 	(5,098,787	)	 	 	-	 
	
Additions to mineral properties and deferred costs

	 	 	(16,866,376	)	 	 	(1,851,383	)
	
Payment of property option payable

	 	 	(1,000,000	)	 	 	-	 
	
Payment of capital lease obligation

	 	 	(67,642	)	 	 	-	 
	
Deposits

	 	 	(539,000	)	 	 	-	 
	
Restricted cash

	 	 	(538,848	)	 	 	(47,349	)
	  	 	 	(24,110,653	)	 	 	(1,898,732	)
	
Net increase (decrease) in cash and cash equivalents

	 	 	43,626,069	 	 	 	10,221,203	 
	
Cash and cash equivalents, beginning of year

	 	 	10,593,347	 	 	 	372,144	 
	
Cash and cash equivalents, end of year

	 	$	54,219,416	 	 	$	10,593,347	 

See notes to the consolidated financial statements

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

1.     Nature of Operations

Trelawney Mining and Exploration Inc. (Trelawney or the Company) was incorporated under the laws of the Province of Ontario, Canada.  Its principal business activities are that of mineral exploration Company in Ontario.  On April 16, 2009 the Company filed Articles of Amendment to change its name from Trelawney Resources Inc. to Trelawney Mining and Exploration Inc. These articles also authorized a five for one share consolidation of the Company’s issued and outstanding shares. All shares and per share amounts reflect this share consolidation.

Trelawney is in the process of exploring its mineral properties and has not yet determined whether the properties contain economically recoverable reserves.  The recovery of expenditures on mineral properties and the related deferred exploration costs is dependent upon the existence of economically recoverable mineralization, the ability of Trelawney to obtain financing necessary to complete the exploration and the development of the mineral properties, and upon future profitable production or alternatively, on the sufficiency of proceeds from disposition.

2.     Summary of Significant Accounting Policies

Basis of presentation

These consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles (“GAAP”) in Canada. The Canadian dollar is both the functional and reporting currency of the Company. Summarized below are those policies considered particularly significant to the Company.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its Canadian wholly-owned subsidiary Terex Resources Limited (“TRL”).

Mineral Properties and Deferred Costs

The cost of mineral properties and their related exploration and development costs are deferred until the properties are placed into production, sold or abandoned. These costs will be amortized over the estimated useful life of the properties following the commencement of production. Cost includes both the cash consideration as well as the fair market value of any securities issued on the acquisition of mineral properties. Properties acquired under option agreements or joint ventures, whereby payments  are made at the sole discretion of the Company, are recorded in the accounts at such time as the payments are made. The proceeds from property options granted reduce the cost of the related property and any excess over cost is applied to income.

Capital Assets

Capital assets are recorded at cost less accumulated amortization. Amortization is computed using the straight-line method at the following annual rates:

	
Buildings

	
10 years

	
Computer equipment

	
3 years

	
Furniture and fixtures

	
4 - 5 years

	
Mining equipment

	
8 -10 years

	
Various equipment

	
3 years

	
Vehicles

	
4 years

Revenue Recognition

Trelawney recognizes interest revenue as earned over the passage of time on a monthly basis.

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

2.     Summary of Significant Accounting Policies (continued)

Impairment of Long-lived Assets

The Company reviews long-lived assets such as capital assets and mineral properties and related expenditures for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When indicators of impairment exist, and the carrying value is greater than the net recoverable value, an impairment loss is recognized to the extent that the fair value is below the carrying value. Mineral properties are written off (i.e. the carrying amount reduced to nil) if the property’s rights are allowed to lapse or if the property is, or is intended to be, abandoned.

Asset Retirement Obligations

The Company recognizes the fair value of the retirement obligation associated with mineral properties and capital assets in the period in which this liability arises and when reasonable estimates of this fair value can be made.  The fair value of the liability is calculated as the present value of the expected future costs of retirement.  The obligation is recorded as a long-term liability with a corresponding increase to the carrying amount of mineral properties.  Increases in the liability amount of the asset retirement obligation resulting from the passage of time are recorded as accretion expense in the consolidated statement of operations and comprehensive loss and deficit.  Actual expenditures incurred upon settlement of the obligation are charged against the liability to the extent it has been recorded.

Income Taxes

Trelawney follows the liability method of accounting for income taxes.  Under this method, future tax liabilities and assets are recognized for the estimated tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases.  Future tax liabilities and assets are measured using substantively enacted tax rates.  The effect on the future tax liabilities and assets of a change in tax rates is recognized in the period that the change occurs.  When the future realization of income tax assets does not meet the test of being more likely than not to occur, a valuation allowance in the amount of the potential future benefit is taken and no net asset is recognized.

Use of Estimates

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results may differ from those estimates.  Areas where management uses subjective judgment include, but are not limited to, fair value of financial instruments, recoverability of mineral properties and related deferred costs, asset retirement obligation, future income taxes and the valuation of warrants and options. Management believes that these estimates are reasonable.

Stock-based compensation

Trelawney uses the fair value method in accounting for stock-based compensation.  Under this method, stock-based payments are measured at the fair value of the equity instruments issued, and are amortized over the vesting period.  The offset to the recorded cost is to contributed surplus.  The contributed surplus balance is reduced as the options are exercised and the amount initially recorded for the value of the options in contributed surplus is credited to share capital along with the proceeds received on exercise.

Other Stock-based Payments

The Company accounts for other stock-based payments based on the fair value of services granted or the equity instruments issued in exchange for the receipt of goods and services from non-employees by using the stock price and other measurement assumptions at the measurement date, whichever is the more reliably measured.

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009 

 

 

2.     Summary of Significant Accounting Policies (continued)

Flow-through Shares

The resource expenditure deductions for income tax purposes related to exploratory and development activities funded by flow-through shares arrangements are renounced to investors in accordance with tax legislation.  The future income taxes relating to the temporary difference that will arise when the qualifying expenditures are incurred are recorded at the time of filing the renunciation with the tax authorities.  The recognition of the future income tax liability will result in a corresponding reduction to the carrying value of the shares issued.

Cash and Cash Equivalents

Cash and cash equivalents include short-term investments having a remaining maturity at the date of purchase of less than or equal to 90 days.

Loss per Share

Loss per share is calculated based on the weighted average number of shares issued and outstanding during the quarter or year, as appropriate.  In the years when the Company reports a net loss, the effect of potential issuances of shares under options and warrants would be anti-dilutive and, therefore, basic and diluted losses per share are the same.  When diluted loss per share is calculated, only those options and warrants with average exercise prices “in-the-money” are included.

Financial instruments and financial risk

The Company’s financial instruments consist primarily of monetary assets and liabilities, the fair value of which approximate their carrying value due to the short-term nature of these instruments.

Financial assets are classified into one of four categories:

•        Held-for-trading (“HFT”);

•        Held-to-maturity (“HTM”);

•        Available for sale (“AFS”); and,

•        Loans and receivables.

The classification is determined at initial recognition and depends on the nature and purpose of the financial asset.

(i) HFT financial assets

Financial assets are classified as HFT when the financial asset is held for trading or it is designated as HFT upon initial recognition. A financial asset is classified as held for trading if:

	 	
• 

	
it has been acquired principally for the purpose of selling in the near future;

	 	
• 

	
it is a part of an identified portfolio of financial instruments that the Company manages and has an actual pattern of short-term profit-taking; or

	 	
• 

	
it is a derivative that is not designated and effective as a hedging instrument.

Held for trading financial assets are measured at fair value, and changes therein are recognized in profit or loss. The Company has classified its cash and cash equivalents and marketable securitues as HFT financial assets.

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

2.     Summary of Significant Accounting Policies (continued)

(ii) HTM financial assets

If the Company has the positive intent and ability to hold debt securities to maturity, then such financial assets are classified as held-to-maturity.  HTM investments are recognized on a trade-date basis and are initially measured at fair value, including transaction costs. The Company does not have any assets classified as HTM investments.

(iii) AFS financial assets

Non-derivative financial assets, including investments in securities, are classified as AFS and are stated at fair value. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses on AFS securities, are recognized in other comprehensive income and presented within accumulated other comprehensive income in shareholders’ equity.  As a result, the assets’ carrying values approximate their fair values.

Impairment losses and interest calculated using the effective interest method are recognized directly in profit or loss rather than equity. When an investment is derecognized or is determined to be impaired, the cumulative gain or loss previously recognized in accumulated other comprehensive income is included in profit or loss for the period.

The fair value of AFS monetary assets denominated in a foreign currency is translated at the spot rate at the statement of financial position date. The change in fair value attributable to foreign exchange translation differences of the asset is recognized in other comprehensive income.

(iv) Loans and receivables

Trade and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are initially recognized at the transaction value plus any directly attributable transaction costs.  Subsequently, loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. The impairment loss of receivables is based on a review of all outstanding amounts at period end. Bad debts are written off during the year in which they are identified.

Other financial liabilities

Other financial liabilities are initially measured at fair value, net of transaction costs, and are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis. The Company has classified accounts payable and accrued liabilities as other financial liabilities.

Transaction Costs

The Company expenses transaction costs relating to its financial instruments.

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

3.     Capital Assets

	
As at

	 	
December 31, 2010

	 	 	
December 31, 2009

	 
	  	 	
Cost

	 	 	
Accumulated

Amortization

	 	 	
Cost

	 	 	
Accumulated

Amortization

	 
	
Buildings

	 	$	1,939,809	 	 	$	149,045	 	 	$	-	 	 	$	-	 
	
Computer equipment

	 	 	205,496	 	 	 	35,514	 	 	 	-	 	 	 	-	 
	
Furniture and fixtures

	 	 	146,308	 	 	 	21,120	 	 	 	-	 	 	 	-	 
	
Mining equipment

	 	 	3,050,555	 	 	 	167,916	 	 	 	-	 	 	 	-	 
	
Various Equipment

	 	 	317,900	 	 	 	30,681	 	 	 	-	 	 	 	-	 
	
Vehicles

	 	 	505,685	 	 	 	97,917	 	 	 	-	 	 	 	-	 
	  	 	$	6,165,753	 	 	$	502,194	 	 	$	-	 	 	$	-	 
	
Net book value

	 	$	5,663,559	 	 	 	 	 	 	$	-	 	 	 	 	 

During the year ended December 31, 2010, the Company capitalized amortization of $480,831 (2009 - $Nil) to mineral properties and deferred costs as the respective equipment has been used in the exploration of the Company’s properties.

Capital assets include assets (primarily vehicles and mining equipment) held under capital leases of $1,046,483 (2009 - $Nil).  Related amortization of assets held under capital leases included in accumulated depreciation was $37,050 (2009 - $Nil)

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

4.      Mineral Properties and Deferred Costs

The following table summarizes the Company’s mineral properties and deferred expenditures:

	  	 	
31-Dec-10

	 
	  	 	
Opening Balance

	 	 	
Additions

	 	 	
Disposals

	 	 	
Net

	 
	  	 	
($)

	 	 	
($)

	 	 	
($)

	 	 	
($)

	 
	  	 	 	 	 	 	 	 	 	 	 	 	 
	
Chester 1

	 	 	2,864,020	 	 	 	13,342,083	 	 	 	-	 	 	 	16,206,103	 
	
Dorset Au

	 	 	2,922,351	 	 	 	762	 	 	 	(2,923,113	)	 	 	-	 
	
Chester 2 - Young Shannon

	 	 	2,694,744	 	 	 	3,179,647	 	 	 	-	 	 	 	5,874,391	 
	
Chester 3 - Jack Rabbit (Cote Lake)

	 	 	1,132,931	 	 	 	5,306,805	 	 	 	-	 	 	 	6,439,736	 
	
Mishi

	 	 	486,469	 	 	 	4,939	 	 	 	-	 	 	 	491,408	 
	
Massey

	 	 	687,888	 	 	 	33,894	 	 	 	-	 	 	 	721,782	 
	
Hiawatha

	 	 	18,000	 	 	 	288,000	 	 	 	-	 	 	 	306,000	 
	
Chesbar

	 	 	15,000	 	 	 	-	 	 	 	-	 	 	 	15,000	 
	
Chester/Yeo

	 	 	-	 	 	 	171,908	 	 	 	-	 	 	 	171,908	 
	
Benneweis

	 	 	-	 	 	 	78,243	 	 	 	(34,000	)	 	 	44,243	 
	
Other

	 	 	-	 	 	 	30,219	 	 	 	-	 	 	 	30,219	 
	  	 	 	10,821,403	 	 	 	22,436,500	 	 	 	(2,957,113	)	 	 	30,300,790	 
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	  	 	
31-Dec-09

	 
	  	 	
Opening Balance

	 	 	
Additions

	 	 	
Disposals

	 	 	
Net

	 
	  	 	
($)

	 	 	
($)

	 	 	
($)

	 	 	
($)

	 
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Chester 1

	 	 	-	 	 	 	2,864,020	 	 	 	-	 	 	 	2,864,020	 
	
Dorset Au

	 	 	2,903,724	 	 	 	18,627	 	 	 	-	 	 	 	2,922,351	 
	
Chester 2 - Young Shannon

	 	 	-	 	 	 	2,694,744	 	 	 	-	 	 	 	2,694,744	 
	
Chester 3 - Jack Rabbit (Cote Lake)

	 	 	-	 	 	 	1,132,931	 	 	 	-	 	 	 	1,132,931	 
	
Mishi

	 	 	468,211	 	 	 	18,258	 	 	 	-	 	 	 	486,469	 
	
Massey

	 	 	589,085	 	 	 	98,803	 	 	 	-	 	 	 	687,888	 
	
Hiawatha

	 	 	-	 	 	 	18,000	 	 	 	-	 	 	 	18,000	 
	
Chesbar

	 	 	-	 	 	 	15,000	 	 	 	-	 	 	 	15,000	 
	
Martin - Murgor

	 	 	798,022	 	 	 	-	 	 	 	(798,022	)	 	 	-	 
	  	 	 	4,759,042	 	 	 	6,860,383	 	 	 	(798,022	)	 	$	10,821,403	 

 

4.a - Chester 1 Property

On June 26, 2009, Trelawney signed a letter of agreement with Treelawn Investment Corp. (“Treelawn”) to acquire up to a 70% interest in two leased mining claims (151 hectares), which hosts the Chester Gold Mine in Chester Township, northern Ontario.

Pursuant to the terms of the Letter Agreement the Company can acquire an initial 50% interest in the Property (the “First Option”), in exchange for:

	
- 

	
$35,000 (paid) in cash;

	
- 

	
4,000,000 (issued) common shares of the Company;

	
- 

	
1,000,000 (issued) common purchase warrants of the Company exercisable into common shares of the Company for five years from the date of issuance at an exercise price of $0.17;

	
- 

	
Within 12 months following the signing of the Option Agreement, the Company shall obtain the necessary work permits and commence a work program on the Property (completed);

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

4.     Mineral Properties and Deferred Costs (continued)

	
- 

	
On or before the 18th month anniversary of obtaining the work permits, the Company shall have brought the Property into commercial production; and

	
- 

	
On or before the sixth month anniversary of achieving commercial production, the Company shall issue an additional 1,000,000 Common Shares to Treelawn.

After exercising the First Option, the Company can acquire an additional 10% interest in the Property (the “Second Option”) by issuing an additional 1,000,000 Common Shares to Treelawn on the date which is the later of: Treelawn receiving $2.5 million from its share of the net profits from commercial production from the Property and the Property achieving 12 months of continuous commercial production.

The Company can acquire an additional 10% interest in the Property on the date that is 12 months from the exercise of the Second Option by issuing an additional 1,000,000 Common Shares to Treelawn.

As of December 31, 2010 the Company is in the process of exercising the first option, with remaining commitments to fully exercise the first option of bringing the property into production on or before the 18th month anniversary and issuing 1,000,000 common shares six months after achieving commercial production.

4.b  - Dorset Au Property

The Company earned a 50% interest in the Dorset property (5 claims totaling 18 units) located about 60 km west of Wawa, Ontario.  Trelawney can earn an additional 20% by completing a feasibility study, making cash payment of $100,000, and issuing 500,000 common shares.

During the year ended December 31, 2010, the Company wrote off costs associated with the property as management does not intend to continue exploring this property and it does not hold title to the land.

4.c - Chester 2 Property - Young Shannon Property

On August 20, 2009, the Company signed an acquisition agreement with Metallum Resources Inc. (“Metallum”) to acquire 100% of Metallum’s 92.5% interest in the Young-Shannon Property adjacent to the Chester Property in exchange for 5,000,000 common shares of Trelawney and a 1% NSR royalty payable when the monthly average gold price exceeds US$1,000 per ounce.  An additional 3% NSR, for a total of 4%, is payable to the proprietary owners on the 11 patented and 2 unpatented mining claims.  The Young-Shannon Property consists of 11 patented and 18 unpatented mining claims.

As of December 31, 2010 the Company has met all commitments to exercise this option agreement.

4.d - Chester 3 Property - Jack Rabbit Property

On December 21, 2009, Trelawney and Treelawn entered into a term sheet (the “Letter Agreement”), pursuant to which Treelawn has granted the Company the right to acquire up to a 92.5% interest in certain mining claims located in Chester Township, Ontario.

Pursuant to the terms of the Letter Agreement the Company can acquire an initial 50% interest in the Property (the “First Option”), in exchange for:

	
- 

	
3,000,000 common shares (“Common Shares”) of the Company;

	
- 

	
on or before the end of every three month period following the signing of a definitive option agreement (the “Effective Date”), the Company shall pay Treelawn the amount of $18,000 for a period of three years, for a total consideration of $216,000;

	
- 

	
on or before the Effective Date the Company shall pay Treelawn the amount of $1,000,000;

	
- 

	
on or before the first anniversary of the Effective Date the Company shall pay Treelawn the amount of $1,000,000; and

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

4.     Mineral Properties and Deferred Costs (continued)

	
- 

	
on or before the end of the 18th month anniversary following the Effective Date, the Company shall have made $500,000 in expenditures on the Property;

	
- 

	
on or before the end of the 18th month anniversary following the Effective Date, the Company shall issue an additional 4,000,000 Common Shares to Treelawn; and

	
- 

	
in the event the Company fails to exercise the First Option, the Company shall pay Treelawn the amount of $1,000,000.  As of December 31, 2009 the Company accrued the $1,000,000 and classified it as a long term payable as the payment is not required until 30 days after the first anniversary of the effective date, which would be due fiscal 2011, in the event that the Company does not exercise it’s First Option.  The Company has since paid the $1,000,000 thus eliminating the liability.

After exercising the First Option the Company shall grant to Treelawn a 1.5% net smelter return royalty (the “Royalty”) on the Property.  During the 48 months following the grant of the Royalty the Company shall have the right to purchase 0.5% of the Royalty from Treelawn for sum of $1,000,000.

Twelve months following the exercise of the First Option and provided the Company has expended $500,000 on the Property, the Company can earn an additional 25% interest in the Property (the “Second Option”) by issuing an additional 4,000,000 Common Shares to Treelawn.

The Company can acquire a final 17.5% interest in the Property on the date that is 12 months from the exercise of the Second Option and provided the Company has expended an additional $500,000 on the Property by issuing an additional 4,000,000 Common Shares to Treelawn.

As of December 31, 2010 the Company is in the process of exercising the first option, with remaining commitments to fully exercise the first option of eight payments of $18,000 for a total of $144,000 and the issuance of 4,000,000 shares within 18 months of the effective date.

4. e - Hiawatha Property

The Company acquired 70% right in the Hiawatha Property on December 30, 2009.  The property is located in Lizar Township, Ontario.  The Company must pay $40,000 and issue 400,000 common shares.

As of December 31, 2010 the Company has met all commitments to exercise this option agreement.

4. f - Mishi Property

Trelawney has 100% interest in 4 claim blocks totaling 328 claim units in the Mishibishu Lake area, 65 kilometers northeast of Wawa, Ontario.

4. g - Massey Property

Trelawney has 100% interest in 37 claim units located in the Salter Township, 80 kilometers west of Sudbury, Ontario.

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

4.     Mineral Properties and Deferred Costs (continued)

4. h -Murgor Option – Mishibishu Lake Property

On May 31, 2006, Trelawney entered into an option agreement to acquire up to 75% interest in the Murgor’s Mishibishu Lake Property.  In order to acquire a 50% interest in the property, Trelawney must satisfy the following obligations:

	  	 	 	 	 	
Common

	 	 	
Exploration

	 
	  	 	
Cash

	 	 	
Shares

	 	 	
Expenditures

	 
	
2006 (paid)

	 	$	10,000	 	 	 	150,000	 	 	$	-	 
	
2007 (paid)

	 	 	20,000	 	 	 	100,000	 	 	 	100,000	 
	
2008 (paid)

	 	 	25,000	 	 	 	100,000	 	 	 	200,000	 
	
2009

	 	 	35,000	 	 	 	100,000	 	 	 	300,000	 
	
2010

	 	 	50,000	 	 	 	150,000	 	 	 	400,000	 
	
2011

	 	 	60,000	 	 	 	150,000	 	 	 	500,000	 
	  	 	$	200,000	 	 	 	750,000	 	 	$	1,500,000	 

In order to acquire an additional 25% interest, Trelawney must exercise the 50% option above, issue 400,000 common shares and obtain a feasibility study.  The property, which is comprised of 14 claims totaling 114 units, is subject to a 1% net smelter return on 1 claim totaling 1 unit.

 

The property was returned to the vendor and written-off in the fourth quarter of 2009.

The following is a summary of the Company’s cumulative outstanding mineral property commitments by property to acquire the maximum potential interests under its current property agreements:

	  	 	
Chester 1

	 	 	
Chester 2

	 	 	
Chester 3

	 
	
Maximum interest

	 	 	70	%	 	 	92.5	%	 	 	92.5	%
	
Cash payments

	 	$	-	 	 	$	-	 	 	$	144,000	 
	
Shares to be issued

	 	 	3,000,000	 	 	 	-	 	 	 	12,000,000	 
	
Exploration obligations

	 	
- obtain necessary work

permits

	 	 	 	-	 	 	 	-	 
	  	 	
- achieve commercial 

production for 12 

continuous months

	 	 	 	-	 	 	 	-	 
	
Royalties

	 	 	-	 	 	
4% NSR

	 	 	
1.5% NSR

	 

5.     Marketable Securities

Marketable securities are comprised of 725,000 (December 31, 2009 – 325,000) shares of various public companies.  As at December 31, 2010, these held-for-trading investments have been measured at their fair value of $87,375 (December 31, 2009 – $32,500). The impact to the consolidated financial statements of this revaluation to market value resulted in a gain of $20,875 (2009 – $22,750) as market values of these securities increased during the year.

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

6.     Financial Risk Factors

Fair Value of Financial Instruments

The Company has designated its cash and cash equivalents and marketable securities as held for trading, which are measured at fair value.  Fair value of marketable securities is determined based on transaction value and is categorized as Level 1 measurement. GST recoverable and other receivables is classified for accounting purposes as loans and receivables, which are measured at amortized cost which approximates fair value.  Accounts payable and accrued liabilities are classified for accounting purposes as other financial liabilities, which are measured at amortized cost which also approximates fair value.  Fair value of accounts payable and accrued liabilities are determined from transaction values which were derived from observable market inputs. Fair values of accounts payable and accrued liabilities are based on Level 2 measurements.

The Company has determined the fair value of its financial instruments as follows:

(i) The carrying values of cash and cash equivalents, other receivables, accounts payable and accrued liabilities, approximate their fair values due to the short-term nature of these instruments.

(ii) Investments and capital assets are carried at amounts in accordance with the Company’s accounting policies.

 

Fair value estimates are made at a specific point in time, based on relevant market information and information about financial instruments.  These estimates are subject in and involve uncertainties and matters of significant judgment, therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.

A summary of the Company's risk exposures as it relates to financial instruments are reflected below:

A)          Credit Risk

The Company is not exposed to major credit risk attributable to customers. Additionally, the majority of the Company's cash and cash equivalents are held with a high rated Canadian financial institution in Canada.

B) Market Risk

i.)    Interest Rate Risk

The Company does not have any interest bearing debt other than capital lease obligations which are not subject to interest rate risk. The Company invest cash surplus to its operational needs in investment-grade short term deposits certificates issued by the bank where it keeps its Canadian Bank accounts. The Company periodically assesses the quality of its investments with this bank and is satisfied with the credit rating of the bank and the investment grade of its short term deposits certificates.

ii.)   Market Price Risk

Market risk arises from the possibility that changes in market prices will affect the value of the financial instruments of the Company. The Company is exposed to fair value fluctuations on its investments. The Company's other financial instruments (cash, accounts receivable, accounts payable and accrued liabilities) are not subject to price risk.

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

6.     Financial Risk Factors (continued)

iii.)   Commodity Price Risk

 

The price of the common shares in the capital the Company ("Common Shares"), its financial results, exploration and development activities have been, or may in the future be, adversely affected by declines in the price of gold and/or other metals.  Gold prices fluctuate widely and are affected by numerous factors beyond the Company's control such as the sale or purchase of commodities by various central banks, financial institutions, expectations of inflation or deflation, currency exchange fluctuations, interest rates, global or regional consumptive patterns, international supply and demand, speculative activities and increased production due to new mine developments, improved mining and production methods and international economic and political trends.  The Company's revenues, if any, are expected to be in large part derived from mining and sale of precious and base metals or interests related thereto.  The effect of these factors on the price of precious and base metals, and therefore the economic viability of any of the Company's exploration projects, cannot accurately be predicted.

 

iv.)   Liquidity risk

The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due.  As at December 31, 2010, the Company had current assets of $55,291,133 (December 31, 2009 - $10,711,638) and current liabilities of $3,109,438 (December 31, 2009 - $794,941).  All of the Company’s financial liabilities and receivables have contractual maturities of less than 90 days and are subject to normal trade terms.  Current working capital of the Company is $52,181,695 (December 31, 2009 - $9,916,697).

Sensitivity Analysis

The sensitivity analysis shown in the notes below may differ materially from actual results. Interest rate risk on cash equivalents is minimal as these have fixed interest rates.

Based on management’s knowledge and experience of the financial markets, the Company believes the following movements are reasonably possible over a one year period:

	
(i) 

	
Cash and cash equivalents include short-term money market mutual fund units that are subject to floating interest rates. As at December 31, 2010, if interest rates had fluctuate by 1% with all other variables held constant, the loss for the year ended December 31, 2010 would be changed by $548,000, as a result of a change in interest income from cash and cash equivalents.

	
(ii) 

	
The Company's investments are subject to fair value fluctuations. As at December 31, 2010, if the fair value of investments had fluctuated by 10% with all other variables held constant, net loss for the year ended December 31, 2010 would have changed by $9,000.

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

7.     Related Party Transactions

Certain corporate entities that are related to the Company’s officers and directors provide consulting services     to Trelawney. Transactions were conducted in the normal course of operations and are measured at the exchange amounts.

These expenditures are summarized as follows:

	
For the years ended December 31,

	 	
2010

	 	 	
2009

	 
	
Management and consulting fees

	 	$	934,000	 	 	$	349,834	 
	
Directors Fees

	 	 	443,000	 	 	 	110,000	 
	
Legal fees

	 	 	245,595	 	 	 	120,311	 
	
Deferred exploration expenditures

	 	 	268,400	 	 	 	54,193	 

Included in accounts payable and accrued liabilities is $473,000 (2009 - $80,587) in amounts due to related parties.

On November 5, 2010, the Company entered into an agreement to purchase a mill for $300,000 from Canada Lithium Corporation, a Company for which two directors of Trelawney are also directors.

On June 2, 2010, the Company entered into two property option agreements with Crown Gold Corporation, a Company for which a director of Trelawney is also a director.  As part of the property agreements, Trelawney paid $120,000 to Crown Gold Corporation and received 400,000 shares of Crown Gold Corporation.

In May and November 2010, the Company sold $81,800 of equipment to Lakeshore Gold Inc., a Company for which a director of Trelawney is also a director.

8.     Capital Lease Obligations

	  	 	
December 31, 2010

	 	 	
December 31, 2009

	 
	
Total minimum lease payments

	 	$	1,078,330	 	 	$	-	 
	
Less: amount representing interest

	 	 	99,489	 	 	 	-	 
	
Capital lease obligations

	 	 	978,841	 	 	 	-	 
	
Less: current portion

	 	 	318,193	 	 	 	-	 
	  	 	$	660,648	 	 	$	-	 
	  	 	 	 	 	 	 	 	 
	
Future minimum lease payments by year, and in the aggregate, are as follows:

	 	 	 	 	 
	
2011

	 	 	378,366	 	 	 	 	 
	
2012

	 	 	378,366	 	 	 	 	 
	
2013

	 	 	308,655	 	 	 	 	 
	
2014

	 	 	12,943	 	 	 	 	 
	
Totals

	 	$	1,078,330	 	 	 	 	 

Equipment under capital lease includes vehicles and mining equipment.  The capital leases are issued at a rate of interest of between 3.84% and 6.6% and mature before June 2014.  During the year ended December 31, 2010 $13,789 (2009 - $Nil) of interest from capital leases was charged to operations.

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

9.     Provision for mine closure

The following table summarizes the changes in mine closure costs during the period:

	  	 	
December 31, 2010

	 	 	
December 31, 2009

	 
	
Opening Balance

	 	$	-	 	 	$	-	 
	
Initial recognition

	 	 	435,921	 	 	 	-	 
	
Accretion expense

	 	 	7,193	 	 	 	 	 
	
Ending Balance

	 	$	443,114	 	 	$	-	 

As at December 31, 2010, management estimated that the total amount of the estimated cash flows required to settle the Company’s assets retirement obligation for the Chester 1 property is $528,055. It is expected that this amount will be incurred in three years. The credit adjusted, risk free interest rates used to discount estimated cash flows for liabilities incurred was 6.6% representing the Company’s incremental borrowing rate.

The Company’s estimates of future asset retirement obligations are based on reclamation standards that meet or exceed regulatory requirements. Elements of uncertainty in estimating these amounts include potential changes in regulatory requirements, decommissioning and reclamation alternatives and amounts to be recovered from other parties. The provision for reclamation is provided against the Chester 1 project and is based on the project plan approved by the Government of Ontario.

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

10.   Capital Stock

Share Capital

The Company is authorized to issue an unlimited number of common shares without par value.  The issued and outstanding common shares consist of the following:

	  	 	
No. of Shares

	 	 	 	 
	
Balance at December 31, 2008

	 	 	17,930,529	 	 	$	6,212,174	 
	
Issuance of common shares for cash:

	 	 	 	 	 	 	 	 
	
Private placement FT units - $0.20/unit

	 	 	11,115,000	 	 	 	2,223,000	 
	
Private placement Units - $0.17/unit

	 	 	4,173,234	 	 	 	709,450	 
	
Private placement Units - $0.11/unit

	 	 	2,000,000	 	 	 	220,000	 
	
Private placement FT units - $0.60/unit

	 	 	4,605,000	 	 	 	2,763,000	 
	
Private placement Units - $0.50/unit

	 	 	15,296,600	 	 	 	7,648,300	 
	
Issuance of shares for property

	 	 	9,100,000	 	 	 	3,848,000	 
	
Issuance of shares for debt*

	 	 	268,828	 	 	 	21,812	 
	
Finder’s fee

	 	 	60,000	 	 	 	6,600	 
	
Fair market value assigned to warrants issued

	 	 	-	 	 	 	(3,208,000	)
	
Costs of issuances

	 	 	 	 	 	 	 	 
	
Cash commissions paid

	 	 	-	 	 	 	(1,006,090	)
	
Finder’s fee

	 	 	-	 	 	 	(6,600	)
	
Fair market value assigned to broker warrants

	 	 	-	 	 	 	(462,000	)
	
Future tax benefit on cost of issuance

	 	 	-	 	 	 	253,000	 
	
Balance at December 31, 2009

	 	 	64,549,191	 	 	$	19,222,646	 
	
Issuance of common shares for cash:

	 	 	 	 	 	 	 	 
	
Private placement shares - $1.05/share

	 	 	14,238,095	 	 	 	14,950,000	 
	
Private placement shares - $2.20/share

	 	 	18,652,000	 	 	 	41,034,400	 
	
Private placement flow-through shares - $2.50/share

	 	 	6,440,000	 	 	 	16,100,000	 
	
Exercise of stock options

	 	 	581,000	 	 	 	315,150	 
	
Exercise of purchase warrants

	 	 	11,728,591	 	 	 	4,970,818	 
	
Issuance of shares for property

	 	 	4,300,000	 	 	 	4,182,000	 
	
Fair value of contributed surplus transferred on exercise of options and warrants exercised

	 	 	-	 	 	 	2,456,028	 
	
Future tax liability pursuant to flow through shares renunciation**

	 	 	-	 	 	 	(1,244,000	)
	
Cost of issuance

	 	 	 	 	 	 	 	 
	
Cash commissions paid

	 	 	-	 	 	 	(4,586,960	)
	
Fair market value assigned to broker warrants

	 	 	-	 	 	 	(594,000	)
	
Future tax benefit on cost of issuance**

	 	 	-	 	 	 	1,147,000	 
	
Balance at December 31, 2010

	 	 	120,488,877	 	 	 	97,953,082	 

*On April 15, 2009, Trelawney settled trade debts owing by the Company through the issuance of shares for debt.

** Net – 2010 - $(97,000)

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

10.   Capital Stock (continued)

Private Placements

 

Details of private placements completed during the year ended December 31, 2010, is as follows:

 

	
Date of issuance

	 	
March 30, 2010

	 	 	
December 7,

2010

	 	 	
December 7,

2010

	 	 	
Total

	 
	
Number of shares issued

	 	 	14,238,095	 	 	 	18,652,000	 	 	 	6,440,000	 	 	 	39,330,095	 
	
Price of issue

	 	$	1.05	 	 	$	2.20	 	 	$	2.50	 	 	 	 	 
	
Gross proceeds

	 	$	14,950,000	 	 	$	41,034,400	 	 	$	16,100,000	 	 	$	72,084,400	 
	
Number of common share broker warrants

	 	 	854,286	 	 	 	-	 	 	 	-	 	 	 	-	 
	
Exercise price per purchase warrant and broker warrant

	 	$	1.05	 	 	 	-	 	 	 	-	 	 	 	 	 
	
Expiry date of warrants

	 	
March 30, 2012

	 	 	 	-	 	 	 	-	 	 	 	 	 

 

Details of private placements completed during the year ended December 31, 2009, is as follows:

	
Date of issuance

	 	
May 27,

2009

	 	 	
August 21,

2009

	 	 	
August 27,

2009

	 	 	
December

22, 2009

	 	 	
December

22, 2009

	 	 	
Total

	 
	
Number of units issued

	 	 	2,000,000	 	 	 	11,115,000	 	 	 	4,173,234	 	 	 	15,296,600	 	 	 	4,605,000	 	 	 	37,189,834	 
	
Price of issue

	 	$	0.11	 	 	$	0.20	 	 	$	0.17	 	 	$	0.50	 	 	$	0.60	 	 	 	 	 
	
Gross proceeds

	 	$	220,000	 	 	$	2,223,000	 	 	$	709,450	 	 	$	7,648,300	 	 	$	2,763,000	 	 	$	13,563,750	 
	
Number of common shares issued

	 	 	2,000,000	 	 	 	11,115,000	 	 	 	4,173,234	 	 	 	15,296,600	 	 	 	4,605,000	 	 	 	17,288,234	 
	
Number of common share purchase warrants

	 	 	-	 	 	 	5,557,500	 	 	 	2,086,617	 	 	 	7,648,300	 	 	 	-	 	 	 	15,292,417	 
	
Number of common share broker warrants

	 	 	-	 	 	 	-	 	 	 	-	 	 	 	1,393,112	 	 	 	-	 	 	 	1,393,112	 
	
Exercise price per purchase warrant and broker warrant

	 	 	-	 	 	$	0.30	 	 	$	0.30	 	 	
$0.70 and $0.50

	 	 	 	-	 	 	 	-	 
	
Expiry date of warrants

	 	 	-	 	 	
August 27, 2010

	 	 	
August 27, 2010

	 	 	
December 22, 2011

	 	 	 	-	 	 	 	-	 

Stock Options

Trelawney established a stock option plan to provide additional incentive to its officers, directors, employees and consultants in their effort on behalf of the Company in the conduct of its affairs.  The stock option plan provides that the total number of shares which may be issued thereunder is limited to 10% (December 31, 2009 - 9%) of the aggregate number of shares outstanding.  Under the terms of the plan, options vest immediately and expire on the fifth anniversary from the date of issue unless otherwise specified.  As at December 31, 2010 the Company had 4,994,888 (2009 – 2,509,427) options available for issuance.

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

10.   Capital Stock (continued)

A summary of stock options issued and outstanding is as follows:

	  	 	
December 31, 2010

	 	 	
December 31, 2009

	 
	  	 	
Weighted

	 	 	 	 	 	
Weighted

	 	 	 	 
	  	 	
Average

	 	 	 	 	 	
Average

	 	 	 	 
	  	 	
Exercise

	 	 	
Number of

	 	 	
Exercise

	 	 	
Number of

	 
	  	 	
Price

	 	 	
Options

	 	 	
Price

	 	 	
Options

	 
	
Outstanding at beginning of year

	 	$	0.39	 	 	 	3,300,000	 	 	$	0.75	 	 	 	650,000	 
	
Transaction during the year:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Granted

	 	 	0.92	 	 	 	4,605,000	 	 	 	0.33	 	 	 	2,810,000	 
	
Exercised

	 	 	0.54	 	 	 	(581,000	)	 	 	-	 	 	 	-	 
	
Forfeited

	 	 	0.52	 	 	 	(270,000	)	 	 	0.94	 	 	 	(160,000	)
	
Outstanding at end of year

	 	 	0.72	 	 	 	7,054,000	 	 	 	0.39	 	 	 	3,300,000	 
	
Exercisable at end of year

	 	$	0.72	 	 	 	6,904,000	 	 	$	0.39	 	 	 	3,229,333	 

The following table provides additional information about outstanding stock options at December 31, 2010:

	  	 	
No.

of

Options

Outstanding

	 	 	
Weighted

Average

Remaining

Life

(Years)

	 	 	
Weighted

Average

Exercise

Price

	 	 	
No. of

Options

Currently

Exercisable

	 	 	
Weighted

Average

Exercise Price –

Exercisable

Options

	 
	
$ 0.26 - $0.37

	 	 	2,600,000	 	 	 	3.70	 	 	$	0.33	 	 	 	2,600,000	 	 	$	0.33	 
	
$ 0.525 - $0.75

	 	 	2,537,000	 	 	 	4.05	 	 	$	0.74	 	 	 	2,537,000	 	 	$	0.74	 
	
$ 1.00 - $1.25

	 	 	1,917,000	 	 	 	4.12	 	 	$	1.21	 	 	 	1,767,000	 	 	$	1.22	 
	
 0.26 - $1.00

	 	 	7,054,000	 	 	 	3.94	 	 	$	0.72	 	 	 	6,904,000	 	 	$	0.71	 

Stock-based Compensation

The following table summarizes the assumptions used with the Black-Scholes valuation model for the determination of the stock-based compensation costs for the stock options issued during the year ended December 31, 2010:

 

	
Grant date

	 	
Vesting of

prior year

Options

	 	 	
Jan. 19,

2010

	 	 	
March 2,

2010

	 	 	
April 12,

2010

	 	 	
April 30,

2010

	 	 	
Sept. 24,

2010

	 	 	
Nov. 5,

2010

	 	 	
Total

	 
	
No. of options

	 	 	-	 	 	 	2,525,000	 	 	 	275,000	 	 	 	1,530,000	 	 	 	50,000	 	 	 	200,000	 	 	 	25,000	 	 	 	4,605,000	 
	
Exercise price

	 	 	-	 	 	$	0.75	 	 	$	0.53	 	 	$	1.25	 	 	$	1.10	 	 	$	1.00	 	 	$	1.92	 	 	 	 	 
	
Expected life in years

	 	 	-	 	 	 	5	 	 	 	5	 	 	 	5	 	 	 	5	 	 	 	5	 	 	 	5	 	 	 	 	 
	
Volatility

	 	 	-	 	 	 	104.86	%	 	 	104.32	%	 	 	109.85	%	 	 	109.19	%	 	 	108.90	%	 	 	108.32	%	 	 	 	 
	
Risk-free interest rate

	 	 	-	 	 	 	2.60	 	 	 	2.53	 	 	 	3.06	 	 	 	2.99	 	 	 	2.11	 	 	 	2.05	 	 	 	 	 
	
Dividend yield

	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	 	 
	
Vesting

	 	
25% per quarter

	 	 	 	100	%	 	 	100	%	 	 	100	%	 	 	100	%	 	
1/3 per year

	 	 	 	100	%	 	 	 	 
	
Fair value of options granted

	 	 	-	 	 	$	1,466,000	 	 	$	112,000	 	 	$	1,469,000	 	 	$	43,000	 	 	$	154,000	 	 	$	38,000	 	 	$	3,282,000	 
	
Stock-based compensation expense

	 	$	42,700	 	 	$	1,466,000	 	 	$	112,000	 	 	$	1,469,000	 	 	$	43,000	 	 	$	67,760	 	 	$	38,000	 	 	$	3,238,460	 

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

10.   Capital Stock (continued)

The following table summarizes the assumptions used with the Black-Scholes valuation model for the determination of the stock-based compensation costs for the stock options issued during the year ended December 31, 2009:

 

	
Grant date

	 	
August 27,

2009

	 	 	
September 22,

2009

	 	 	
Totals

	 
	
No. of options

	 	 	910,000	 	 	 	1,900,000	 	 	 	2,810,000	 
	
Exercise price

	 	$	0.26	 	 	$	0.37	 	 	 	 	 
	
Expected life in years

	 	 	5	 	 	 	5	 	 	 	 	 
	
Volatility

	 	 	105.32	%	 	 	105.41	%	 	 	 	 
	
Risk-free interest rate

	 	 	2.65	%	 	 	2.57	%	 	 	 	 
	
Dividend yield

	 	 	-	 	 	 	-	 	 	 	 	 
	
Vesting

	 	 	100	%	 	 	100	%	 	 	 	 
	
Fair value of options granted

	 	$	184,000	 	 	$	502,300	 	 	$	686,300	 
	
Stock-based compensation expense

	 	$	184,000	 	 	$	502,300	 	 	$	686,300	 

Warrants

	
Month of Expiry

	 	
No. of Warrants

	 	 	
Exercise Price

	 
	
March 2012

	 	 	768,857	 	 	$	1.05	 
	
December 2011

	 	 	4,706,500	 	 	$	0.70	 
	
December 2011

	 	 	335,867	 	 	$	0.50	 
	
August 2014

	 	 	1,000,000	 	 	$	0.17	 
	  	 	 	6,811,224	 	 	 	 	 

The following table summarizes the assumptions used with the Black-Scholes valuation model during the year ended December 31, 2010:

	
Grant date

	 	
March 30, 2010

	 	 	
Totals

	 
	
No. of warrants

	 	 	854,286	 	 	 	854,286	 
	
Exercise price

	 	$	1.05	 	 	 	 	 
	
Expected life in years

	 	 	2	 	 	 	 	 
	
Volatility

	 	 	129.67	%	 	 	 	 
	
Risk-free interest rate

	 	 	1.73	%	 	 	 	 
	
Dividend yield

	 	 	-	 	 	 	 	 
	
Fair value of warrants

	 	$	594,000	 	 	$	594,000	 

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

10.   Capital Stock (continued)

The following table summarizes the assumptions used with the Black-Scholes valuation model during the year ended December 31, 2009:

	
Grant date

	 	
August

21, 2009

	 	 	
August

26, 2009

	 	 	
August

27, 2009

	 	 	
August

27, 2009

	 	 	
December

22, 2009

	 	 	
December

22, 2009

	 	 	
Totals

	 
	
No. of warrants

	 	 	1,625,000	 	 	 	3,592,500	 	 	 	2,426,617	 	 	 	1,000,000	 	 	 	7,648,300	 	 	 	1,393,112	 	 	 	17,685,529	 
	
Exercise price

	 	$	0.30	 	 	$	0.30	 	 	$	0.30	 	 	$	0.17	 	 	$	0.70	 	 	$	0.50	 	 	 	 	 
	
Expected life in years

	 	 	1	 	 	 	1	 	 	 	1	 	 	 	1	 	 	 	2	 	 	 	2	 	 	 	 	 
	
Volatility

	 	 	138.98	%	 	 	139.79	%	 	 	139.79	%	 	 	139.79	%	 	 	117.28	%	 	 	117.28	%	 	 	 	 
	
Risk-free interest rate

	 	 	1.25	%	 	 	1.20	%	 	 	1.19	%	 	 	1.19	%	 	 	1.36	%	 	 	1.36	%	 	 	 	 
	
Dividend yield

	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	 	 
	
Fair value of warrants

	 	$	174,000	 	 	$	478,000	 	 	$	305,000	 	 	$	161,000	 	 	$	2,251,000	 	 	$	462,000	 	 	$	3,831,000	 

11.   Contributed Surplus

	
 

Year ended

	 	
December 31,

 2010

	 	 	
December 31,

2009

	 
	
Balance at beginning of year

	 	$	5,983,119	 	 	$	1,465,819	 
	
Stock-based compensation expense

	 	 	3,238,460	 	 	 	686,300	 
	
Fair market value of warrants issued

	 	 	594,000	 	 	 	3,831,000	 
	
Fair market value transferred on warrants and options exercised

	 	 	(2,456,028	)	 	 	-	 
	
Balance at end of year

	 	$	7,359,551	 	 	$	5,983,119	 

12.   Cash and Cash Equivalents

Cash and cash equivalents consist of cash on deposit with the banks in general interest bearing accounts totalling $50,775,660 (2009 - $1,593,347) and interest-generating money-market accounts with no stipulated terms of maturity, of $3,439,360 (2009- $9,000,000).

Restricted cash balances consist of short-term cash on deposit with banks in interest-generating money-market accounts, of $586,198 (2009 - $47,350).

The following chart discloses the Company’s cash and cash equivalents and cash that is restricted as a result of cash held by its Canadian bank in interest bearing deposits that secure letters of credit issued regarding the Chester project and credit cards:

	  	 	
December 31, 2010

	 	 	
December 31, 2009

	 
	  	 	$	 	 	$	 
	
General purpose

	 	 	 	 	 	 	 	 
	
Cash

	 	 	50,780,221	 	 	 	1,593,347	 
	
Cash equivalents

	 	 	3,439,195	 	 	 	9,000,000	 
	
Total cash and cash equivalents

	 	$	54,219,416	 	 	$	10,593,347	 
	  	 	 	 	 	 	 	 	 
	
Restricted

	 	 	 	 	 	 	 	 
	
Cash equivalents (1)

	 	 	586,198	 	 	 	47,350	 
	
Total restricted cash

	 	$	586,198	 	 	$	47,350	 

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

12.   Cash and Cash Equivalents (continued)

 

	
(1)

	
This cash is made up of $505,694 restricted in connection with the Company’s ARO obligations. It has issued a letter of credit in the amount of $505,694 to the Ministry of Northern Development, Mines and Forestry in satisfaction of its requirements under the approved site development. This cash equivalent is restricted by a non-revocable letter of credit that can only be lifted by the Ministry of Northern Development, Mines and Forestry.  The remaining $80,504 is restricted in connection with the Company’s credit cards.

13.   Deposits

As at December 31, 2010 the Company had deposits of $539,000 (December 31, 2009 - $nil) comprised of a  $300,000 deposit in connection with the purchase of the mill from Canada Lithium (Note 8) and $239,000 in deposits relating to certain leased equipment.

14.   Future Income Taxes

The Company’s income tax provision differs from the amount resulting from the application of the Canadian statutory income tax rate.  A reconciliation of the combined Canadian federal and provincial income tax rates with the Company’s effective tax rates for the year ended December 31, 2010 and 2009 is as follows:

	  	 	
2010

	 	 	
2009

	 
	  	 	
$

	 	 	
$

	 
	
Loss before income taxes

	 	 	(11,821,838	)	 	 	(2,523,351	)
	
Combined Statutory rate

	 	 	31.00	%	 	 	33.00	%
	
Estimated recovery of income taxes

	 	 	(3,665,000	)	 	 	(833,000	)
	  	 	 	 	 	 	 	 	 
	
Permanent differences

	 	 	1,004,000	 	 	 	311,000	 
	
Other

	 	 	1,000	 	 	 	-	 
	
Change in valuation allowance

	 	 	2,049,000	 	 	 	512,000	 
	
Difference between current and future tax rates

	 	 	514,000	 	 	 	128,000	 
	
Future income tax expense (recovery)

	 	 	(97,000	)	 	 	118,000	 

The Canadian statutory income tax rate of 31% (2009 - 33%) is comprised of the federal income tax rate at approximately 18% (2009 – 19%) and the provincial income tax rate of approximately 13% (2009 – 14%).

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

14.   Future Income Taxes (continued)

The net future tax liability as at December 31, 2010 and 2009 is comprised of the following:

	  	 	
2010

	 	 	
2009

	 
	  	 	
$

	 	 	
$

	 
	
Future income tax assets

	 	 	 	 	 	 
	
Share issuance costs

	 	 	1,074,000	 	 	 	219,000	 
	
Other

	 	 	-	 	 	 	2,000	 
	
Capital Assets

	 	 	124,000	 	 	 	-	 
	
Operating losses carried forward

	 	 	2,578,000	 	 	 	654,000	 
	  	 	 	3,776,000	 	 	 	875,000	 
	
Less : valuation allowance

	 	 	(2,561,000	)	 	 	(512,000	)
	
Net future tax assets

	 	 	1,215,000	 	 	 	363,000	 
	  	 	 	 	 	 	 	 	 
	
Future tax liabilities

	 	 	 	 	 	 	 	 
	
Deferred exploration expenses

	 	 	(1,214,000	)	 	 	(363,000	)
	
Other

	 	 	(1,000	)	 	 	-	 
	
Net future tax liabilities

	 	 	(1,215,000	)	 	 	(363,000	)
	  	 	 	 	 	 	 	 	 
	
Net future tax liability

	 	 	-	 	 	 	-	 

As at December 31, 2010, the unamortized balance, for income tax purposes, of the share issuance fees amounts to approximately $4,294,100 (2009 - $876,400) and will be deductible over the next four years.

As at December 31, 2010, the Company has $25,464,500 (2009 - $9,361,900) of unused CEE, CDE and FED expenses available to offset future taxable income. The tax benefits pertaining to these expenses are available to carry forward indefinitely.

The Company also has $10,310,100 (2009 - $2,615,700) in non-capital losses carry-forward for which no benefit has been recognized in the accounts.  These losses expire as follows:

 

	 	 	 	 
	  	 	
$

	 
	
2014

	 	 	319,500	 
	
2015

	 	 	918,700	 
	
2026

	 	 	747,700	 
	
2027

	 	 	159,400	 
	
2028

	 	 	60,800	 
	
2029

	 	 	1,295,500	 
	
2030

	 	 	6,808,500	 
	  	 	 	10,310,100	 

 

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

15. Capital Management

 

The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support the acquisition, exploration and development of mineral properties. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company's management to sustain future development of the business. The Company defines capital to include its shareholders’ equity. In order to carry out the planned exploration and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. The Company will continue to assess new properties and seek to acquire an interest in additional properties if it feels there is sufficient geologic or economic potential and if it has adequate financial resources to do so. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There were no changes in the Company's approach to capital management during the year ended December 31, 2010. The Company is not subject to externally imposed capital requirements.

The Company considers its capital to be shareholders’ equity, which is comprised of capital stock, contributed surplus, and deficit, which as at December 31, 2010 totaled $88,167,480 (December 31, 2009 - $19,785,450).

The Company's objective when managing capital is to obtain adequate levels of funding to support its exploration activities, to obtain corporate and administrative functions necessary to support organizational functioning and obtain sufficient funding to further the identification and development of precious metals deposits.

The Company raises capital, as necessary, to meet its needs and take advantage of perceived opportunities and, therefore, does not have a numeric target for its capital structure.  Funds are primarily secured through equity capital raised by way of private placements.  There can be no assurance that the Company will be able to continue raising equity capital in this manner.

Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.

The Company invests all capital that is surplus to its immediate operational needs in short term, liquid and highly rated financial instruments, such as cash, and short term guarantee deposits, all held with major Canadian financial institutions.

  

 

  

Trelawney Mining and Exploration Inc.

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2010 and 2009

 

 

16. Commitments and Contractual Obligations

As part of its mineral property option agreements the Company is committed to make certain payments of cash and shares in order to exercise its options on the various properties (Note 5).

The Company’s activities are subject to environmental regulation (including regular environmental impact assessments and permitting) in each of the jurisdictions in which its mineral properties are located.  Such regulations cover a wide variety of matters including, without limitation, prevention of waste, pollution and protection of the environment, labour relations and worker safety.  The Company may also be subject under such regulations to clean-up costs and liability for toxic or hazardous substances which may exist on or under any of its properties or which may be produced as a result of its operations.  It is likely that environmental legislation and permitting will evolve in a manner which will require stricter standards and enforcement.  This may include increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a higher degree of responsibility for companies, their directors and employees.

The Company has not determined and is not aware whether any provision for such costs is required and is unable to determine the impact on its financial position, if any, of environmental laws and regulations that may be enacted in the future due to the uncertainty surrounding the form that these laws and regulations may take.

 

As part of its 2010 flow through funding, the Company is committed to spending $16,100,000 (2009 - $985,000) on Canadian exploration costs by December 31, 2011.TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

Management’s discussion and analysis (MD&A) is current to March 15, 2011 and is management’s assessment of the operations and the financial results together with future prospects of Trelawney Mining and Exploration Inc. (“Trelawney”, “Corporation”, or the “Company”). This MD&A should be read in conjunction with our audited consolidated financial statements and related notes for the year ended December 31, 2010, prepared in accordance with Canadian generally accepted accounting principles. All figures are in Canadian dollars unless stated otherwise. This discussion contains forward-looking statements that are not historical in nature and involves risks and uncertainties. Forward-looking statements are not guarantees as to Trelawney’s future results as there are inherent difficulties in predicting future results. Accordingly, actual results could differ materially from those expressed or implied in the forward-looking statements. The Company has adopted National Instrument/ 51-102F1 as the guideline in presenting the MD&A. This MD&A should be read in conjunction with the most recent Annual Information Form (“AIF”) on file with the provincial securities regulatory authority. Additional information relevant to the Company’s activities, including the Company’s Annual Report and audited consolidated financial statements can be found on SEDAR at www.sedar.com.

TABLE OF CONTENTS

 

	
1.

	
Description of Business

	
2

	
2.

	
Developments during and subsequent to the year ended December 31, 2010

	
2

	
3.

	
Overall Performance

	
9

	
4.

	
Results of Operations

	
10

	
5.

	
Summary of Quarterly Results

	
13

	
6.

	
Related-party Transactions

	
15

	
7.

	
Additional Disclosure for Venture Companies without Significant Revenue

	
16

	
8.

	
Financial Instruments and other Instruments

	
19

	
9.

	
Status Trelawney’s Transition to International Financial Reporting Standards (“IFRS”)

	
22

	
10.

	
Cautionary Note Regarding Forward Looking Statements

	
26

	
11.  

	
Management’s Responsibility for Financial Information

	
26

  

1

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

 

1.   Description of Business

The Company is a Tier 2 junior exploration company listed on the TSX Venture Exchange (“TSXV”), and on the Frankfurt exchange (“Frankfurt”), engaged in the acquisition and exploration of mineral properties with a primary interest in gold. The Company was formed under the Business Corporations Act (Ontario) as Zenda Gold Corp. on July 4, 1996 by articles of amalgamation. The amalgamation was completed between Galinée Mattagami Mines Limited, a public company, and Paramount Gold Corporation, a private company. On November 1, 1999 the Company amended its articles to change its name to “Zenda Capital Corp.”. On November 8, 2004 the Company amended its articles to change its name to “Terex Resources Inc.”  On November 6, 2006, the Company amended its articles to change its name to “Trelawney Resources Inc.”. On April 15, 2009, the Company changed its name to “Trelawney Mining and Exploration Inc.”

The profitability and operating cash flow of the Company is affected by various factors, including the market price of gold, operating costs, interest rates, regulatory and environmental compliance, general and administrative costs, the level of exploration and development expenditures and other discretionary costs. While Trelawney seeks to manage the level of risk associated with its business, many of the factors affecting these risks are beyond the Company’s control.

The Company is currently focusing its exploration efforts in Chester Township, Porcupine Mining Division, in central Ontario, with a goal of becoming a new mid-tier gold mining company. The Company is a reporting issuer in Alberta, British Columbia and Ontario.

As at March 15, 2011, the directors and officers of the Company were:

	
Greg Gibson

	
CEO, President and Director

	
Andres Tinajero

	
Vice President Finance & CFO

	
David Beilhartz

	
Vice President Exploration

	
Lisa McCormack

	
Corporate Secretary

	
Chris Irwin

	
Director

	
Patrick Mohan

	
Director

	
George Cole

	
Director

	
James Fairbairn

	
Director

David Beilhartz, P.Geo. is a “Qualified Person” for the Company under the definition of National Instrument 43-101.

2.   Developments during and subsequent to the year ended December 31, 2010

Financing Developments

On December 7, 2010 the Company closed its previously announced “bought deal” private placement (the “Offering”), led by RBC Capital Markets and Jennings Capital Inc., with a syndicate including Raymond James Ltd. and Stifel Nicolaus Canada Inc. (collectively, the “Underwriters”).

  

2

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

The Company issued an aggregate of 18,652,000 common shares (“Common Shares”) at a price of $2.20 per Common Share and 6,440,000 flow through common shares (“FT Shares”) at a price of $2.50 per FT Share, for aggregate gross proceeds of $57,134,400.

 

The Company paid the Underwriters a cash commission equal to 6% of the gross proceeds of the Offering.

The net proceeds of the Offering will be utilized for continued exploration and development of the Company’s properties in Chester Township and for general working capital purposes.

On March 30, 2010, the Company closed its previously announced “bought deal” private placement (the “Offering”), led by Jennings Capital Inc., with a syndicate including Raymond James Ltd. and Stonecap Securities Inc. (collectively, the “Underwriters”).

The Company issued an aggregate of 14,238,095 common shares (“Common Shares”) at a price of $1.05 per Common Share for aggregate gross proceeds of $14,950,000.

The Company paid the Underwriters a cash commission equal to 6% of the gross proceeds of the Offering and issued broker warrants exercisable to purchase that number of Common Shares equal to 6% of the aggregate number of Common Shares sold pursuant to the Offering. Each Broker Warrant is exercisable at a price of $1.05 per Common Share until March 30, 2012.

For the period from January 1, 2010 to December 31, 2010, 581,000 options and 11,728,591 warrants have been exercised for proceeds of $5,285,968.

For the period from January 1, 2011 to March 15, 2011, 109,900 options and 931,867 warrants have been exercised for proceeds of $728,509.

Exploration Developments

The company continues its exploration efforts on its Chester Project located 20 km southwest of Gogama, Ontario. Progress continues on the construction of the infrastructure on the Chester 1 Mine site. Main office and workshop buildings have been constructed with significant progress on completion of the short powerline. All major infrastructure is on schedule to be in place upon receipt of the final permits to commence the underground exploration program.

Construction continues on the camp and exploration facility located at the logistics facility which will house the company's work force and act as the main base for all exploration activities.

Drilling continues at Cote Lake on 100-metre step-outs from the original discovery line section 93+00E. To date the company has released drill results for line sections 89E to 96E, as per company press releases.

  

3

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
   

Exploration Activities

The Company is focused on exploring and developing its gold and copper properties located just South of Gogama, Ontario. The Company has received the advanced exploration permits which allow for the refurbishing of the Chester Mine underground and taking of a first bulk sample. In February the company purchased the equipment necessary to establish the mine infrastructure at the Chester mine site, including surface and underground electrical distribution system, ventilation and mine air heating system, compressors and furnished warehouse, work shop and office. The dewatering permit for the Chester Mine was also granted in February. In early July, the company received acknowledgement of receipt for the filing of its Advanced Exploration Closure Plan for the Chester Project from the Mineral Development and Lands Branch of the Ministry of Northern Development, Mines and Forestry. Pursuant to the approval for filing of the Closure Plan the company began the rehabilitation of the ramp portal and underground at the Chester 1 Mine.

During the first quarter of 2010, the company announced the discovery of the Cote Lake deposit. The results of several drill holes from the discovery include the following highlights: 107 metres of 8.2 g/t gold (hole E10-04), 191 metres of 1.88 g/t gold (E10-09), 292 metres of 0.88 g/t gold (E10-26), and 137 metres of 5.33 g/t gold.  Additional results can be viewed in the company press releases and the Cote Lake Deposit Drilling table below. (Jack Rabbit “Cote Lake” section)

 

Chester 1 Property

In June 2009, Trelawney signed a letter of agreement with Treelawn Investment Corp. (“Treelawn”) to acquire up to a 70% interest in two leased mining claims (151 hectares) which host the Chester Gold Mine in Chester Township, northern Ontario.  The mine has a historical mineral resource of 159,000 tons grading 0.43 oz /ton gold (NI-43-101 non-compliant).  The mine was developed to a depth of 550 feet in the 1980’s, but not put into production.  Underground development includes a decline ramp, over 2300 feet of lateral drifting on three levels, and 300 feet of raises on ore.

Pursuant to the terms of the Letter Agreement the Company can acquire an initial 50% interest in the Property (the “First Option”), in exchange for:

	
  

	
-

	
$35,000 (paid) in cash;

	
  

	
-

	
4,000,000 (issued) common shares of the Company;

	
  

	
-

	
1,000,000 (issued) common shares warrants of the Company exercisable into common shares of the Company for five years from the date of issuance at an exercise price of $0.17;

	
  

	
-

	
Within 12 months following the signing of the Option Agreement, the Company shall obtain the necessary work permits and commence a work program on the Property (completed);

	
  

	
-

	
On or before the 18th month anniversary of obtaining the work permits, the Company shall have brought the Property into commercial production; and

	
  

	
-

	
On or before the sixth month anniversary of achieving commercial production, the Company shall issue an additional 1,000,000 Common Shares to Treelawn.

Results from a five-hole drilling program were released in January 2010. The objective of the program was to determine the presence of the downdip extension of Chester 1 gold-mineralized structure below the underground mine development down to a vertical depth of 300 metres. One hole (CM09-05) was abandoned due to poor ground conditions. The other four holes all intersected gold mineralization with highlighted grades of 0.66 metres of 36.67 g/t gold in hole CM09-01 and 1.10 metres of 7.8 g/t gold and 1.1 metres of 3.26 g/t gold in hole CM09-03. A new parallel zone was discovered in the hanging wall with 0.43 metres of 54.05 g/t gold in hole CM09-02.

  

4

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

Chester 2 Property - Young Shannon

In August 2009, the Company signed an acquisition agreement with Metallum Resources Inc. (“Metallum”) to acquire 100% of Metallum’s 92.5% interest in the Young-Shannon Property adjacent to the Chester Property in exchange for 5,000,000 common shares of Trelawney (issued) and a 1% net smelter return royalty (“NSR”) on the property payable when the monthly average gold price exceeds US$1,000 per ounce.  The Young-Shannon Property consists of 11 patented and 18 unpatented mining claims. A 3% NSR, is also payable to the proprietary owners of the 11 patented mining claims. There is also a 1.5% NSR to Ed Blanchard and Ike Burns on the 18 unpatented mining claims.  The property has a historical indicated mineral resource of 220,000 tons grading 0.354 oz/ton gold and an inferred mineral resource of 725,000 tons grading 0.16 oz/ton gold on the property’s C-Prime gold deposit (NI 43-101 non-compliant).  In September, Trelawney commissioned and received an updated NI 43-101 geological report on the Young Shannon property. Exploration drilling continues on the west end of this property as Cote Lake deposit occurs on the boundary with the adjacent Emerald Isle claims, which are part of the Jack Rabbit property.

Chester 3 Property - Jack Rabbit (“Cote Lake”)

Trelawney and Treelawn Group Inc. entered into a term sheet (the “Letter Agreement”), pursuant to which Treelawn has granted the Company the right to acquire up to a 92.5% interest in certain mining claims located in Chester Township, Ontario.

Pursuant to the terms of the Letter Agreement the Company can acquire an initial 50% interest in the Property (the “First Option”), in exchange for:

	
-

	
3,000,000 (issued) common shares (“Common Shares”) of the Company;

	
-

	
on or before the end of every three month period following the signing of a definitive option agreement (the “Effective Date”), the Company shall pay Treelawn the amount of $18,000 for a period of three years, for a total consideration of $216,000 (paid $36,000 as at June 30, 2010);

	
-

	
on or before the Effective Date the Company shall pay Treelawn the amount of $1,000,000 (paid);

	
-

	
on or before the first anniversary of the Effective Date the Company shall pay Treelawn the amount of $1,000,000; and

	
-

	
on or before the end of the 18th month anniversary following the Effective Date, the Company shall have incurred $500,000 (completed) in expenditures on the Property;

	
-

	
on or before the end of the 18th month anniversary following the Effective Date, the Company shall issue an additional 4,000,000 Common Shares to Treelawn; and

	
-

	
in the event the Company fails to exercise the First Option, the Company shall pay Treelawn the amount of $1,000,000.

After exercising the First Option the Company shall grant to Treelawn a 1.5% net smelter return royalty (the “Royalty”) on the Property. During the 48 months following the grant of the Royalty the Company shall have the right to purchase 0.5% of the Royalty from Treelawn for sum of $1,000,000.

Twelve months following the exercise of the First Option and provided the Company has expended $500,000 on the Property, the Company can earn an additional 25% interest in the Property (the “Second Option”) by issuing an additional 4,000,000 Common Shares to Treelawn.

  

5

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

The Company can acquire a final 17.5% interest in the Property on the date that is 12 months from the exercise of the Second Option and provided the Company has expended an additional $500,000 on the Property by issuing an additional 4,000,000 Common Shares to Treelawn.

Exploration continues to intersect long intervals of low grade gold mineralization on the Emerald Isle claims of the Jack Rabbit property and adjoining Young Shannon property. Drilling highlights on this new large tonnage gold target include: 107 metres of 8.2 g/t gold and 191 metres of 1.88 g/t gold. Average grades range from 1-2 g/t gold over intervals of up to and locally greater than 200 meters. To date the company has released drill results for line sections 89E to 96E. Details of the results can be found in the company press releases. Drilling continues at Cote Lake on 100-metre step-outs from the original discovery line section 93+00E. At December 31, 2010 a total of 47 holes had been completed on the Cote Lake Deposit, for a total of approximately 23,500 metres drilled. Results from 47 drill holes have been press released.

Highlights from the Cote Lake Deposit drilling to date are provided in the following table.

  

6

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

Cote Lake Deposit Drilling

 

	
Section

	
Hole

	
From (m)

	
To (m)

	
Length (m)

	
Gold (g/t)

	
93+00E

	
E09-01

	
78.00

	
214.00

	
136.00

	
1.16

	
E09-03

	
68.11

	
114.70

	
46.59

	
1.14

	
147.50

	
219.07

	
71.57

	
1.99

	
411.51

	
465.00

	
53.49

	
0.52

	
E10-04

	
68.9

	
149.1

	
80.2

	
0.69

	
222.5

	
329.6

	
107.1

	
8.20

	
405.10

	
423.00

	
17.90

	
8.06

	
E10-05

	
71.20

	
128.50

	
57.30

	
2.49

	
185.50

	
364.30

	
178.80

	
1.45

	
E10-11

	
124.00

	
185.18

	
61.18

	
0.66

	
221.00

	
248.00

	
27.00

	
1.27

	
E10-12

	
101.06

	
209.00

	
107.94

	
0.90

	
E10-20

	
59.24

	
98.13

	
38.89

	
0.72

	
178.90

	
179.93

	
1.03

	
4.23

	
200.00

	
201.00

	
1.00

	
6.40

	
E10-26

	
241.56

	
533.60

	
292.04

	
0.88

	
E10-27

 

incl

incl

and incl

and incl

incl

	
182.50

	
209.50

	
26.50

	
0.38

	
335.40

	
610.00

	
274.60

	
2.99

	
349.90

	
486.90

	
137.00

	
5.33

	
368.45

	
369.95

	
1.50

	
61.93

	
368.95

	
369.45

	
0.50

	
91.50

	
407.80

	
408.95

	
1.15

	
102.63

	
457.05

	
458.05

	
1.00

	
87.63

	
94+00E

	
E10-07

	
48.80

	
100.52

	
51.72

	
0.40

	
E10-08

	
68.00

	
182.00

	
114.00

	
0.97

	
E10-09

	
95.09

	
285.75

	
190.66

	
1.88

	
E10-10

	
56.70

	
287.30

	
230.60

	
0.88

	
E10-22

	
0.72

	
1.50

	
0.78

	
6.12

	
9.93

	
10.57

	
0.64

	
2.48

	
35.67

	
55.40

	
19.73

	
0.30

	
112.00

	
179.24

	
67.24

	
0.32

	
92+00E

	
E10-13

	
99.01

	
211.40

	
112.39

	
1.65

	
281.00

	
299.00

	
18.00

	
1.08

	
E10-14

	
99.00

	
164.00

	
65.00

	
1.62

	
220.48

	
239.37

	
18.89

	
0.77

	
E10-18

incl.

	
10.17

	
11.00

	
0.83

	
6.04

	
55.00

	
139.00

	
84.00

	
0.69

	
55.00

	
91.00

	
36.00

	
1.27

	
330.00

	
333.10

	
3.10

	
2.43

	
E10-19

	
17.00

	
132.00

	
115.00

	
0.71

	
148.42

	
175.81

	
27.39

	
0.33

	
306.00

	
307.00

	
1.00

	
1.13

	
E10-27

	
182.50

	
209.50

	
26.50

	
0.38

	
335.40

	
610.00

	
274.60

	
2.99

	
349.90

	
486.90

	
137.00

	
5.33

	
368.45

	
369.95

	
1.50

	
61.93

	
368.95

	
369.45

	
0.50

	
91.50

	
407.80

	
408.95

	
1.15

	
102.63

	
457.05

	
458.05

	
1.00

	
87.63

	
E10-28

	
9.00

	
128.50

	
119.50

	
0.92

	
95+00E

	
E10-15

	
153.00

	
203.25

	
50.75

	
0.71

	
E10-16

	
32.51

	
33.85

	
1.34

	
5.98

	
57.00

	
62.35

	
5.35

	
0.71

	
105.50

	
106.00

	
0.50

	
6.47

	
134.50

	
337.00

	
202.50

	
0.87

	
E10-17

	
47.00

	
112.00

	
65.00

	
0.38

	
181.50

	
274.00

	
92.50

	
0.31

	
303.50

	
317.00

	
13.50

	
5.15

	
E10-21

	
90.80

	
127.50

	
36.70

	
0.91

	
255.00

	
256.00

	
1.00

	
36.10

	
E10-23

incl.

incl.

	
171.00

	
228.94

	
57.94

	
1.49

	
205.13

	
215.14

	
10.01

	
6.33

	
205.13

	
207.37

	
2.24

	
22.59

	
96+00E

	
 

 

E10-24

 

incl.

	
28.50

	
64.50

	
36.00

	
1.02

	
98.50

	
99.00

	
0.50

	
6.94

	
147.00

	
154.20

	
7.20

	
1.76

	
197.00

	
369.98

	
172.98

	
0.36

	
197.00

	
214.00

	
17.00

	
0.98

	
E10-25

	
397.00

	
398.00

	
1.00

	
1.39

	
403.00

	
404.00

	
1.00

	
1.63

	
91+00E

	
E10-29

incl.

	
394.00

	
585.00

	
191.00

	
1.27

	
394.00

	
533.00

	
139.00

	
1.62

	
90+00E

	
E10-31

	
493.50

	
629.45

	
136.95

	
0.79

 

  

7

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

	
  

	
-

	
True widths of intersections are unknown

	
  

	
-

	
Gold assays are uncut

On March 7, 2011, Trelawney Mining and Exploration Inc. announced the results of the initial Mineral Resource estimate for the Cote Lake Deposit on the Chester Project. The Mineral Resource estimate was audited by Roscoe Postle Associates Inc. (“RPA”) and reported in accordance with National Instrument 43‐101 requirements.

Roscoe Postle Associates Inc. has audited the Mineral Resource estimate for the Cote Lake Deposit prepared by Trelawney’s Consulting Geologist Jamie Lavigne, P.Geo. The estimate is all classified as Inferred Mineral Resource and totals 131 million tonnes averaging 1.00 g/t Au for 4.22 million ounces of contained gold at a cut‐off grade of 0.30 g/t Au.

Hiawatha Property

The Company acquired 70% right in the Hiawatha Property on December 30, 2009. The property consists of 6 patented and 4 unpatented claims covering 747ha located in Lizar Township, Sault Ste. Marie Mining Division, 120km ENE of Hemlo in South Central Ontario. Gold was initially discovered on the property in the mid 20’s. There were 3 major zones discovered in the 30’s: the North, South and West Zones. The North and South Zones were explored underground via a 100-metre vertical shaft and 2 levels at 45metres and 84metres below surface. Mineralization consists of native gold associated with sheared, silicified and altered zones; gold is present as fine grains within or adjacent to late quartz veins. Historic sampling highlights in the North Zone includes 2nd level channel samples of 95 g/t and 65 g/t Au over 0.9 m and surface grab samples of up to 153 g/t and 168 g/t Au. Historic sampling of a 425 m length of the South Zone on the 2nd level yielded >10 g/t Au for 40 of 78 samples taken across widths of 0.30-1.52m.

The Company paid $40,000 and issued 400,000 common shares to the property vendors.

Benneweis Property

In June 2010, Trelawney granted Crown the option to earn a 50% interest on Trelawney’s recently‐staked Benneweis property in exchange for Crown issuing 1.6 million common shares of Crown to Trelawney and Crown spending $2.5 million in exploration expenses over a five‐year period. As of September 30, 2010, 400,000 shares have been received. The Benneweis property is located east of the Chester Project and consists of 20 claims with 257 units located in Benneweis, Groves, Neville and St. Louis townships.

Chester 5 – Chester-Yeo Property

In June 2010, Trelawney signed an agreement with Crown Minerals Inc. (“Crown”) for Crown’s Chester / Yeo property. Trelawney purchased an 80% interest for a one‐time payment of $120,000 (paid) and Crown will retain a 20% carried interest until the completion of a positive pre‐feasibility study. The Chester/Yeo property is contiguous to and west of Trelawney’s Chester Project. The property consists of three claims with 14 units located approximately 1 kilometre west of Trelawney’s newly discovered Cote Lake deposit.

Abbie Lake Property

In July 2010 Trelawney signed an agreement with Upper Canada Explorations Limited (“Upper Canada”) whereby Trelawney granted to Upper Canada the option to acquire a 100% interest in Trelawney`s Abbie Lake property for a one time issuance of 100,000 shares of Upper Canada and a commitment to incur all necessary exploration and property maintenance costs. Upper Canada grants to Trelawney a 2% net smelter return royalty (the “Royalty”) on the Property. The Company shall have the right to purchase 1.5% of the Royalty from Trelawney for sum of $750,000.

  

8

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
 

Massey

Trelawney has exercised their option to obtain a 100% interest in the Massey Property. The Massey Property is located about 5 km northwest of the town of Massey and 85 km west of the mining and smelting facilities at Sudbury, Ontario. Massey is located on the Trans-Canada Highway #17. The property comprises 94 claim units totaling 1,474 hectares in Salter and May Townships, Sudbury Mining Division and contains the former producing Hermina #1 and #3 mines, as well as the Gutcher shaft and the adit zone of the Massey mine. The Hermina deposits are 1.7 km apart and are believed to be localized along a splay fault to the Murray Fault, a major regional structure. An estimated 18,535 tonnes of ore grading about 2.82% Cu were mined from the deposit intermittently between 1901 and 1970. The deposit is open in both directions along strike and down dip. Minor gold values were known to exist with the copper at Hermina but no systematic sampling for gold had ever been carried out.

The Gutcher shaft and the Massey Mine are contained within a large hematized, silicified, albitized and sericitized breccia complex adjacent to the Murray Fault; the area has many features in common with iron oxide-copper-gold (IOCG) deposits.

During May 2005, the Company carried out a program of surface and downhole induced polarization to further define drill targets on the property. The Company completed a 1,500 metre drilling program. A broad zone of copper mineralization was intersected that assayed 1.73% copper over 6.1 metres. On November 2, 2006, Trelawney signed a LOI with Citadel Gold Mines Inc. who could earn up to a 75% interest in the property by spending $1.2 million on exploration, making cash payments of $260,000 and issuing 1,150,000 common shares of Citadel. The agreement was finalized in January 2007. On December 5, 2008, Citadel notified the Company that it had terminated the agreement.

 

Mishi Property

The Mishibishu Lake Property (100% owned by the Company) consists of four claim blocks totaling, 372 claim units (13,000 acres) in the Mishibishu greenstone belt in the Wawa area, Sault Ste. Marie Mining Division in central Ontario. There is one operating mine and two former producing mines within the greenstone belt; the most notable is the Eagle River Mine currently operated by Wesdome Gold Mines Ltd. Recent work around the mine has discovered gold mineralization (146 g Au/t over 4.7 m and 50 g Au/t over 2.3 m). The other two operations are the former producing Magnacon mine and the Mishi pit. There is good infrastructure and support in Wawa and an operating mill is less than 25 km from all the properties. A prospecting and sampling program started in May 2008 and was completed over the summer months.

3.  Overall Performance

For the year ended December 31, 2010 the Company’s cash and cash equivalent position increased by $43,626,069 to $54,219,416 from $10,593,347 at December 31, 2009. This increase is due to private placements during the year and exercises of options and warrants amounting to net proceeds of $72,783,408 offset by operating expenses and capital and exploration expenditures.

  

9

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
   

The Company is engaged in the business of preliminary or early stage mineral exploration and mine development. The Company holds no interests in producing or commercial ore deposits. The Company has no production or other revenue. There is no operating history upon which investors may rely. Commercial development of any kind will only occur in the event that sufficient quantities of ore containing economic concentrations of gold or other mineral resources are discovered. If in the future a discovery is made, substantial financial resources will be required to establish ore reserves. Additional substantial financial resources will be required to develop mining and processing for any ore reserves that may be discovered. If the Company is unable to finance the establishment of ore reserves or the development of mining and processing facilities it will be required to sell all or a portion of its interest in such property to one or more parties capable of financing such development.

4.   Results of Operations

Selected Annual Information

	  	 	
Year Ended

December 31,

2010

	 	 	
Year Ended

December 31,

2009

	 	 	
Year Ended

December 31,

2008

	 
	  	 	
$

	 	 	
$

	 	 	
$

	 
	
Loss before income taxes

	 	 	11,821,838	 	 	 	2,523,351	 	 	 	849,547	 
	
Net loss

	 	 	11,724,838	 	 	 	2,641,351	 	 	 	586,547	 
	
Loss per weighted average share – basic and diluted

	 	$	0.138	 	 	$	0.10	 	 	$	0.01	 
	
Total Assets

	 	 	92,380,680	 	 	 	21,580,391	 	 	 	5,169,219	 

Three month period ended December 31, 2010

The Company incurred a net loss of $6,806,229 or $0.068 a share for the three month period ended December 31, 2010, compared with a net loss of $1,130,466 or $0.05 a share for the same period ended December 31, 2009.

The Company had stock-based compensation expense of $(48,240) for the three month period ended December 31, 2010, compared to $(132,700) for the same period in 2009. Stock-based compensation expenses are booked based on the valuation of options using the Black-Scholes model. The expense varies based on the number of options issued and the underlying assumptions used in the model. The negative expense is due to a year end adjustment on the valuation from the Black-Scholes Model.

For the three month period ended December 31, 2010, management and consulting fees decreased by $152,980 to $27,983 from $180,163 in the same period in 2009. The decrease is due to the fact that the Company has hired a large employee base in 2010 and thus has relied less on consultants. Consulting fees were unusually high in 2009 due to bonuses paid to various consultants.

Shareholder information costs increased in the three month period ended December 31, 2010 by $182,747 to $200,402 from 17,655 in the same period in 2009. This amount relates to the costs of issuing press releases, transfer agents, investor presentations, electronic dissemination of information and the timing difference between quarters. The increase is attributable to more press releases and investor presentations as the Company continues to promote itself to the investment public.

  

10

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

Professional fees increased by $42,027 to $89,997 during the three month period ended December 31, 2010 compared to $47,970 in the same period in 2009. The increase is attributable to higher legal fees on general corporate matters as the Company looks to advance its current mineral properties and seeks out potential new investments.

Promotion and travel expenses for the three month period ended December 31, 2010 increased by $138,589 to $173,766 from $35,177 in the same period in 2009. The increase is due to the Company ramping up its operations through advancing its current mineral properties, and thus, an increase in travel costs to progress and build awareness about its properties.

 

Total office and general costs increased in the three month period ended December 31, 2010, by $121,959 to $210,872 from $88,913 in 2009. The increase is attributable to insurance expenses and higher operating costs as the company has more staff and office space and prepares for production on the properties in fiscal 2011.

Total payroll costs increased in the three month period ended December 31, 2010, by $2,350,211 to $2,350,211 from $nil in 2009. The increase is due to Company hiring several office employees as it works towards bringing its Chester property into production and the payment of bonuses near year end.

The Company wrote-off the Dorset Au Property as management does not intend on further exploring the property and the Company does not hold title to the land. During the three month period ended December 31, 2010, the Company had written-off $2,923,113 in mineral properties and deferred exploration expenditures compared to $798,021 during the same period in 2009.

For the year ended December 31, 2010

The Company incurred a net loss of $11,724,838 or $0.138 a share for the year ended December 31, 2010, compared with a net loss of $2,641,351 or $0.097 a share for the same period ended December 31, 2009.

The Company had stock-based compensation expense of $3,238,460 for the year ended December 31, 2010, compared to $686,300 for the same period in 2009. Stock-based compensation expenses are booked based on the valuation of options using the Black-Scholes model. The expense varies based on the number of options issued and the underlying assumptions used in the model.

For the year ended December 31, 2010, management and consulting fees decreased by $44,869 to $470,244 from $515,113 in the same period in 2009. The decrease is due to the fact that the Company has hired a large employee base in 2010 and thus has relied less on consultants. Consulting fees were unusually high in 2009 due to bonuses paid to various consultants.

  

11

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
   

Shareholder information costs increased in the year ended December 31, 2010 by $460,545 to $554,805 from $94,260 in the same period in 2009. This amount relates to the costs of issuing press releases, transfer agents, investor presentations, electronic dissemination of information, TSX-V fees and the timing difference between quarters. The increase is attributable to more press releases and investor presentations as the Company continues to promote itself to the investment public.

Professional fees increased by $242,831 to $357,368 during the year ended December 31, 2010 compared to $114,537 in the same period in 2009. The increase is attributable to higher legal fees on general corporate matters as the Company looks to advance its current mineral properties and seeks out potential new investments.

Promotion and travel expenses for the year ended December 31, 2010 increased by $442,073 to $559,666 from $117,593 in the same period in 2009. The increase is due to the Company ramping up its operations through advancing its current mineral properties, and thus, an increase in travel costs to progress and build awareness about its properties.

Total office and general costs increased in the year ended December 31, 2010, by $670,992 to $891,268 from $220,276 in 2009. The increase is attributable to insurance expenses and higher operating costs as the company has more staff and office space and prepares for production on the properties in fiscal 2011.

Total payroll costs increased in the year ended December 31, 2010, by $2,847,789 to $2,847,789 from $nil in 2009. The increase is due to Company hiring several office employees as it works towards bringing its Chester property into production and the payment of bonuses near year end.

The Company wrote-off the Dorset Au Property as management does not intend on further exploring the property and the Company does not hold title to the land. During the year ended December 31, 2010, the Company had written-off $2,923,113 in mineral properties and deferred exploration expenditures compared to $798,021 during the same period in 2009.

  

12

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

5.   Summary of Quarterly Results

Selected financial information for the eight quarters as follows:

	  	 	
December 31,

2010

	 	 	
September 30,

2010

	 	 	
June 30,

2010

	 	 	
March 31,

2010

	 
	  	 	
$

	 	 	
$

	 	 	
$

	 	 	
$

	 
	
Total revenue

	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	
Net loss

	 	 	6,806,229	 	 	 	1,380,684	 	 	 	1,854,453	 	 	 	1,683,472	 
	
Loss per share – basic and diluted

	 	$	0.068	 	 	$	0.016	 	 	$	0.022	 	 	$	0.025	 

	  	 	
December 31,

2009

	 	 	
September 30,

2009

	 	 	
June 30,

2009

	 	 	
March 31,

2009

	 
	  	 	
$

	 	 	
$

	 	 	
$

	 	 	
$

	 
	
Total revenue

	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	
Net loss

	 	 	1,130,466	 	 	 	1,256,873	 	 	 	131,319	 	 	 	122,693	 
	
Loss per share– basic and diluted

	 	$	0.050	 	 	$	0.045	 	 	$	0.001	 	 	$	0.001	 

Working Capital

As at December 31, 2010, the Company had a net working capital of $52,181,695 compared to $9,964,047 as at December 31, 2009.

A summary of the Company’s cash position and changes in cash and cash equivalents for three months ended and year ended December 31, are provided below:

	  	 	
Three months ended

December 31,

	 	 	
Year ended

December 31,

	 
	  	 	
2010

	 	 	
2009

	 	 	
2010

	 	 	
2009

	 
	
Cash used in operating activities – gross

	 	$	(3,052,604	)	 	$	(241,853	)	 	$	(5,675,384	)	 	$	(1,061,780	)
	
Changes in non-cash operating working capital

	 	 	646,500	 	 	 	560,034	 	 	 	628,698	 	 	 	624,055	 
	
Cash provided by (used in) operating activities - net

	 	 	(2,406,104	)	 	 	318,181	 	 	 	(5,046,686	)	 	 	(437,725	)
	
Cash used in investing activities

	 	 	(6,523,581	)	 	 	(1,210,565	)	 	 	(24,110,653	)	 	 	(1,898,732	)
	
Cash provided by financing activities

	 	 	55,959,709	 	 	 	9,337,296	 	 	 	72,783,408	 	 	 	12,557,660	 
	
Increase in cash and cash equivalents

	 	 	47,030,024	 	 	 	8,444,912	 	 	 	43,626,069	 	 	 	10,221,203	 
	
Cash and cash equivalents, beginning of period

	 	 	7,189,392	 	 	 	2,195,785	 	 	 	10,593,347	 	 	 	372,144	 
	
Cash and cash equivalents, end of period

	 	$	54,219,416	 	 	$	10,640,697	 	 	$	54,219,416	 	 	$	10,593,347	 

 

  

13

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

Three months ended December 31, 2010 vs. December 31, 2009

Operating Activities

 

Cash flow used by operating activities before changes in non-cash working capital during the three months ended December 31, 2010 was $(3,052,604) compared to $(241,853) during the same period 2009.

Investing Activities

During the three months ended December 31, 2010, the Company spent $6,523,581 on capital assets and mineral properties and deferred costs, compared to $1,210,565 in the fourth quarter of 2009. These expenditures were incurred as the Company continues to acquire and advance its mineral properties and acquires assets that will assist the Company through the development stage of its Chester 1 property in fiscal 2011.

Financing Activities

During the three months ended December 31, 2010, cash flow provided in financing activities was $55,959,709 through shares issued on the December 7, 2010 private placement and exercise of options and warrants, compared to $9,337,296 in the fourth quarter of 2009. These financings were completed to allow the Company to acquire and advance its mineral properties and acquire assets that will assist the Company through the development stage of its Chester 1 property in the fourth quarter of 2010.

Year ended December 31, 2010 vs. December 31, 2009

Operating Activities

 

Cash flow used by operating activities before changes in non-cash working capital during the year ended December 31, 2010 was $5,675,384 compared to $1,061,780 during the same period 2009.

Investing Activities

During the year ended December 31, 2010, the Company spent $24,110,653 on capital assets and mineral properties and deferred costs, compared to $1,898,732 in the same period in 2009. These expenditures were incurred as the Company continues to acquire and advance its mineral properties and acquires assets that will assist the Company through the development stage of its Chester 1 property in fiscal 2011.

Financing Activities

Cash flow provided by financing activities during the year ended December 31, 2010 was $72,783,408 through shares issued in March and December private placements and exercise of options and warrants, compared to $12,557,660 in 2009. These financings were completed to allow the Company to acquire and advance its mineral properties and acquire assets that will assist the Company through the development stage of its Chester 1 property in the fourth quarter of 2010.

  

14

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
   

Liquidity Outlook

Trelawney had cash and cash equivalents of $54,219,416 available at December 31, 2010, an increase of $43,626,069 from the balance at December 31, 2009 of $10,593,347.

As noted above, the Company’s working capital increased by $42,217,648 to $52,181,695 from $9,964,047 at December 31, 2009.

The Company believes that between its current cash balances, it has the necessary funds available to meet its operating, investing and financing obligations and execute its current business plans.

6.   Related-party Transactions

Irwin Professional Corporation, a company controlled by Christopher Irwin, a Director, charged the company $329,095 (2009 - $145,311) in respect to legal fees and Directors Fees.

On November 5, 2010, the Company entered into an agreement to purchase a mill for $300,000 from Canada Lithium Corporation, a Company for which two directors of Trelawney are also directors.

On June 2, 2010, the Company entered into two property option agreements with Crown Gold Corporation, a Company for which a director of Trelawney is also a director. As part of the property agreements, Trelawney paid $120,000 to Crown Gold Corporation and received 400,000 shares of Crown Gold Corporation.

In May and November 2010, the Company sold $81,800 of equipment to Lakeshore Gold Inc., a Company for which a director of Trelawney is also a director.

  

15

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

7.   Additional Disclosure for Venture Companies without Significant Revenue

	  	 	
December 31, 2010

	 	 	
December 31, 2009

	 
	
Mineral Properties

	 	 	 	 	 	 
	
Capitalized mineral properties and deferred expenditures

	 	$	30,300,790	 	 	$	10,821,403	 
	
Corporate expenses

	 	$	11,821,838	 	 	$	2,523,351	 
	
Total assets

	 	$	92,380,680	 	 	$	21,580,391	 

	  	 	
December 31,

2010

	 	 	
December 31,

2009

	 
	
Mineral properties and deferred costs

	 	
Capitalized

	 	 	
Capitalized

	 
	
Acquisition costs

	 	$	4,552,804	 	 	$	4,599,530	 
	
Geological

	 	 	1,328,135	 	 	 	51,173	 
	
Drilling

	 	 	2,779,354	 	 	 	854,461	 
	
Assaying

	 	 	886,168	 	 	 	129,843	 
	
Consulting

	 	 	687,934	 	 	 	267,788	 
	
Travel

	 	 	754,205	 	 	 	236,877	 
	
Surveying

	 	 	-	 	 	 	11,599	 
	
Closure/rehab

	 	 	1,529,619	 	 	 	-	 
	
Development costs

	 	 	944,226	 	 	 	-	 
	
Underground dewatering

	 	 	1,231,338	 	 	 	-	 
	
Labour

	 	 	2,471,737	 	 	 	118,888	 
	
Other

	 	 	5,270,980	 	 	 	(207,798	)
	  	 	$	22,436,500	 	 	$	6,062,361	 

	
Corporate Expenses

	 	
December 31, 2010

	 	 	
December 31, 2009

	 
	  	 	 	 	 	 	 
	
Stock-based compensation

	 	$	3,238,460	 	 	$	686,300	 
	
Office and general

	 	 	891,268	 	 	 	220,276	 
	
Management and consulting

	 	 	470,244	 	 	 	515,113	 
	
Professional fees

	 	 	357,368	 	 	 	114,537	 
	
Promotion and travel

	 	 	559,666	 	 	 	117,593	 
	
Shareholder information

	 	 	554,805	 	 	 	94,260	 
	
Salaries and benefits

	 	 	2,847,789	 	 	 	-	 
	
Write-down of mineral properties

	 	 	2,923,113	 	 	 	798,021	 
	
Unrealized gain on marketable securities

	 	 	(20,875	)	 	 	(22,750	)
	  	 	$	11,821,838	 	 	$	2,523,351	 

	
Outstanding share data

	 	
December 31, 2010

	 	 	
December 31, 2009

	 
	  	 	 	 	 	 	 
	
Issued and outstanding common shares

	 	 	120,488,877	 	 	 	64,549,191	 
	
Outstanding options to purchase common shares

	 	 	7,054,000	 	 	 	3,300,000	 
	
Outstanding warrants to purchase common shares

	 	 	6,811,224	 	 	 	17,685,529	 

 

  

16

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
   

Disclosure of Outstanding Share Data, March 15, 2011

	  	  	
Authorized

	  	
Outstanding

	
Voting or equity securities issued and outstanding

	  	
Unlimited Common Shares

	  	
122,080,644 Common Shares

	 	 	 	 	 
	
Securities convertible or exercisable into voting or equity shares

	
  

	  	
  

	
a)    Options to acquire up to 6,794,100 common shares

b)    5,879,357 Warrants exercisable to acquire common shares of the Company, all expired during the year, unexercised.

 

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

 

Dividends

The Corporation has neither declared nor paid any dividends on its Common Shares. The Corporation intends to retain its earnings, if any, to finance growth and expand its operation and does not anticipate paying any dividends on its Common Shares in the foreseeable future.

 

Critical Accounting Estimates

 

Assessment of Recoverability of Mineral Property Costs

The cost of mineral properties and their related exploration and development costs are deferred until the properties are placed into production, sold or abandoned. These costs will be amortized over the estimated useful life of the properties following the commencement of production. Cost includes both the cash consideration as well as the fair market value of any securities issued on the acquisition of mineral properties. Properties acquired under option agreements or joint ventures, whereby payments are made at the sole discretion of the Company, are recorded in the accounts at such time as the payments are made. The proceeds from property options granted reduce the cost of the related property and any excess over cost is applied to income The Company’s recorded value of its exploration properties is based on historical costs that expect to be recovered in the future. The Company’s recoverability evaluation is based on market conditions for minerals, underlying mineral resources associated with the properties and future costs that may be required for ultimate realization through mining operations or by sale.

 

Assessment of Recoverability of Future Income Tax Assets

Trelawney follows the liability method of accounting for income taxes. Under this method, future tax liabilities and assets are recognized for the estimated tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Future tax liabilities and assets are measured using substantively enacted tax rates. The effect on the future tax liabilities and assets of a change in tax rates is recognized in the period that the change occurs. When the future realization of income tax assets does not meet the test of being more likely than not to occur, a valuation allowance in the amount of the potential future benefit is taken and no net asset is recognized. In preparing the consolidated financial statements, the Company is required to estimate its income tax obligations. This process involves estimating the actual tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. The Company assesses, based on all available evidence, the likelihood that the future income tax assets will be recovered from future taxable income and, to the extent that recovery cannot be considered “more likely than not,” a valuation allowance is established. If the valuation allowance is changed in a period, an expense or benefit must be included within the tax provision on the consolidated income statement.

  

17

  

 

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
    

 

Estimate of Stock Based Compensation and Associated Assumptions

The Company recorded stock-based compensation based on an estimate of the fair value on the grant date of stock options issued. This accounting required estimates of interest rate, life of options, stock price volatility and the application of the Black-Scholes option pricing model. See note 11 of the December 31, 2010, audited consolidated financial statements for a full disclosure.

 

Assessment of Recoverability of Receivables Including GST

The carrying amount of accounts receivables, and GST are considered representative of their respective values. The Company assesses the likelihood that these receivables will be recovered and, to the extent that recovery is considered doubtful a provision for doubtful accounts is recorded.

Capital Assets

Capital assets are recorded at cost less accumulated amortization. Amortization is computed using the straight-line method at the following annual rates:

	
Buildings

	
10 years

	
Computer equipment

	
3 years

	
Furniture and fixtures

	
4 - 5 years

	
Mining equipment

	
8 -10 years

	
Various equipment

	
3 years

	
Vehicles

	
4 years

Mineral Properties and Deferred Costs

Trelawney defers the costs of exploration on existing projects and carries them as assets until production commences. The amounts at which mineral properties and deferred exploration costs are recorded do not necessarily reflect present or future values. If a project is successful, the related mineral properties and deferred exploration costs are amortized over the estimated economic life of the project. If a project is unsuccessful, or if exploration has ceased because of continuation is not economically feasible, the mineral properties and the related deferred exploration costs are written off. Option payments received are applied against the mineral property or deferred exploration costs.

Impairment of Long-lived Assets

Trelawney reviews mineral properties and deferred costs for impairment on a periodic basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment losses on long-lived assets are recognized when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than their carrying value and, accordingly, all or a portion of such carrying value may not be recoverable. Impairment losses then are measured by comparing the fair value of assets to their carrying amounts.

  

18

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

Asset Retirement Obligations

As at December 31, 2010, management estimated that the total amount of the estimated cash flows required to settle the Company’s assets retirement obligation for the Chester 1 property is $528,055. It is expected that this amount will be incurred in three years. The credit adjusted, risk free interest rates used to discount estimated cash flows for liabilities incurred was 6.6% representing the Company’s incremental borrowing rate. The Company’s estimates of future asset retirement obligations are based on reclamation standards that meet or exceed regulatory requirements. Elements of uncertainty in estimating these amounts include potential changes in regulatory requirements, decommissioning and reclamation alternatives and amounts to be recovered from other parties. The provision for reclamation is provided against the Chester 1 project and is based on the project plan approved by the Government of Ontario.

8.   Financial Instruments and other Instruments

 

Additional Capital

The exploration activities of the Company may require substantial additional financing. Failure to obtain sufficient financing may result in delaying or indefinite postponement of exploration and development of any of the Company’s properties. There can be no assurance that additional capital or other types of financing will be available if needed or that, if available, the terms of such financings will be favorable to the Company. In addition, low commodity prices may affect the Company’s ability to obtain financing.

 

Environmental and Permitting

All phases of the Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations, among other things, mandate the maintenance of air and water quality standards, land reclamation, transportation, storage and disposal of hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors, and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company’s operations.

 

Acquisition

The Company uses its best judgment to acquire mining properties for exploration and development in pursuit of such opportunities, the Company may fail to select appropriate acquisition candidates or negotiate acceptable agreements, including arrangements to finance the acquisitions and development, or integrate such opportunity and their personnel with the Company. The Company can not assure that it can complete any acquisition that it pursues or is currently pursuing, on favorable terms, or that any acquisition completed will ultimately benefit the Company.

Competition

The mining industry is intensely competitive in all of its phases, and the Company competes with many companies possessing greater financial resources and technical facilities than itself. Competition in the mining business could adversely affect the Company’s ability to acquire suitable producing properties or prospectus for mineral exploration in the future.

  

19

  

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

Financial Risk Factors

Fair Value of Financial Instruments

The Company has designated its cash and cash equivalents and marketable securities as held for trading, which are measured at fair value. Fair value of marketable securities is determined based on transaction value and is categorized as Level 1 measurement. GST recoverable and other receivables is classified for accounting purposes as loans and receivables, which are measured at amortized cost which approximates fair value. Accounts payable and accrued liabilities and property option payable are classified for accounting purposes as other financial liabilities, which are measured at amortized cost which also approximates fair value. Fair value of accounts payable and accrued liabilities and property option payable are determined from transaction values which were derived from observable market inputs. Fair values of accounts payable and accrued liabilities and property option payable are based on Level 2 measurements.

The Company has determined the fair value of its financial instruments as follows:

(i) The carrying values of cash and cash equivalents, other receivables, accounts payable and accrued liabilities, approximate their fair values due to the short-term nature of these instruments.

(ii) Investments and capital assets are carried at amounts in accordance with the Company’s accounting policies.

 

Fair value estimates are made at a specific point in time, based on relevant market information and information about financial instruments. These estimates are subject in and involve uncertainties and matters of significant judgment, therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

A summary of the Company's risk exposures as it relates to financial instruments are reflected below:

A) Credit Risk

The Company is not exposed to major credit risk attributable to customers. Additionally, the majority of the Company's cash and cash equivalents are held with a high rated Canadian financial institution in Canada.

B) Market Risk

i.) Interest Rate Risk

The Company does not have any interest bearing debt. The Company invest cash surplus to its operational needs in investment-grade short term deposits certificates issued by the bank where it keeps its Canadian Bank accounts. The Company periodically assesses the quality of its investments with this bank and is satisfied with the credit rating of the bank and the investment grade of its short term deposits certificates.

  

20

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

ii.) Market Price Risk

Market risk arises from the possibility that changes in market prices will affect the value of the financial instruments of the Company. The Company is exposed to fair value fluctuations on its investments. The Company's other financial instruments (cash, accounts receivable, accounts payable and accrued liabilities) are not subject to price risk.

	
iii.)

	
Commodity Price Risk

 

The price of the common shares in the capital the Company ("Common Shares"), its financial results, exploration and development activities have been, or may in the future be, adversely affected by declines in the price of gold and/or other metals.  Gold prices fluctuate widely and are affected by numerous factors beyond the Company's control such as the sale or purchase of commodities by various central banks, financial institutions, expectations of inflation or deflation, currency exchange fluctuations, interest rates, global or regional consumptive patterns, international supply and demand, speculative activities and increased production due to new mine developments, improved mining and production methods and international economic and political trends.  The Company's revenues, if any, are expected to be in large part derived from mining and sale of precious and base metals or interests related thereto.  The effect of these factors on the price of precious and base metals, and therefore the economic viability of any of the Company's exploration projects, cannot accurately be predicted.

	
iv.)

	
Liquidity risk

The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. As at December 31, 2010, the Company had current assets of $55,291,133 (December 31, 2009 - $10,711,638) and current liabilities of $3,109,438 (December 31, 2009 - $794,941). All of the Company’s financial liabilities and receivables have contractual maturities of less than 90 days and are subject to normal trade terms. Current working capital of the Company is $52,181,695 (December 31, 2009 - $9,916,697).

Sensitivity Analysis

The sensitivity analysis shown in the notes below may differ materially from actual results.

Based on management’s knowledge and experience of the financial markets, the Company believes the following movements are reasonably possible over a one year period:

	
  

	
(i)

	
Cash and cash equivalents include short-term money market mutual fund units that are subject to floating interest rates. As at December 31, 2010, if interest rates had fluctuate by 1% with all other variables held constant, the loss for the year ended December 31, 2010 would be changed by $548,000, as a result of a change in interest income from cash and cash equivalents.

	
  

	
(ii)

	
The Company's investments are subject to fair value fluctuations. As at December 31, 2010, if the fair value of investments had fluctuated by 10% with all other variables held constant, net loss for the year ended December 31, 2010 would have changed by $9,000.

  

21

  

 

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

 

Internal Control over Financial Reporting

Internal controls over financial reporting are procedures designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use, and transactions are properly recorded and reported. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance with respect to the reliability of financial reporting and financial statement preparation.

 

During the most recent year end there were no changes in the Company's internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Proposed Transactions

In the normal course of business, as and ongoing part of the exploration process, the Company investigates mineral properties which are submitted to the Board of Directors for consideration. As well there are transactions listed in the “Subsequent to the end of the year” section of the Financial Statements. However, the Company continues to evaluate, review and negotiate a number of other prospective projects.

 

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Corporation's President and Chief Executive Officer and Chief Financial Officer, on a timely basis so that appropriate decisions can be made regarding public disclosure. As at the end of the year covered by this management's discussion and analysis, management of the Corporation, with the participation of the President and Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the Corporation's disclosure controls and procedures as required by Canadian securities laws. Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period covered by this management's discussion and analysis, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Corporation's annual filings and interim filings (as such terms are defined under Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings) and other reports filed or submitted under Canadian securities laws is recorded, processed, summarized and reported within the time periods specified by those laws and that material information is accumulated and communicated to management of the Corporation, including the President and Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

9.   Status of Trelawney’s Transition to International Financial Reporting Standards (“IFRS”)

The AcSB has confirmed that IFRS will replace current Canadian GAAP for publicly accountable enterprises, effective for fiscal years beginning on or after January 1, 2011. Accordingly, the Company will report interim and annual financial statements (with comparatives) in accordance with IFRS beginning with the quarter ended March 31, 2011.

  

22

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

The Company has commenced the development of an IFRS implementation plan to prepare for this transition, and is currently in the process of analyzing the key areas where changes to current accounting policies may be required. While an analysis will be required for all current accounting policies, the initial key areas of assessment will include:

	
  

	
·

	
Exploration and development expenditures;

	
  

	
·

	
Property, plant and equipment (measurement and valuation);

	
  

	
·

	
Provisions, including asset retirement obligations;

	
  

	
·

	
Stock-based compensation;

	
  

	
·

	
Accounting for joint ventures;

	
  

	
·

	
Accounting for income taxes; and 

	
  

	
·

	
First-time adoption of International Financial Reporting Standards (IFRS 1).

 

As the analysis of each of the key areas progresses, other elements of the Company’s IFRS implementation plan will also be addressed, including: the implication of changes to accounting policies and processes; financial statement note disclosures on information technology; internal controls; contractual arrangements; and employee training.

 

The table below summarizes the expected timing of activities related to the Company’s transition to IFRS.

 

	
Initial analysis of key areas for which changes to accounting policies may be required.

	  	
Completed

	 	 	 
	
Detailed analysis of all relevant IFRS requirements and identification of areas requiring accounting policy changes or those with accounting policy alternatives.

	  	
Completed

	 	 	 
	
Assessment of first-time adoption (IFRS 1) requirements and alternatives.

	  	
Completed

	 	 	 
	
Final determination of changes to accounting policies and choices to be made with respect to first-time adoption alternatives

	  	
Completed

	 	 	 
	
Resolution of the accounting policy change implications on information technology, internal controls and contractual arrangements

	  	
Completed

	 	 	 
	
Management and employee education and training

	  	
Completed

	 	 	 
	
Quantification of the Financial Statement impact of changes in accounting policies

	
  

	
In progress

 

  

23

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

The Company continues to monitor the deliberations and progress on plans to converge to IFRS by accounting standard setting bodies and securities regulators in Canada.

The following provides a summary of the Company’s evaluation to date of potential changes to accounting policies in key areas based on the current standards and guidance within IFRS. This is not intended to be a complete list of areas where the adoption of IFRS will require a change in accounting policies, but is intended to highlight the areas the Company has identified as having the most potential for a significant change. The International Accounting Standards Board has a number of ongoing projects, the outcome of which may have an effect on the changes required to the Company’s accounting policies on adoption of IFRS. At the present time, however, the Company is not aware of any significant expected changes prior to its adoption of IFRS that would affect the summary provided below:

1) Exploration and Evaluation Expenditures

Subject to certain conditions, IFRS currently allows an entity to determine an accounting policy that specifies the treatment of costs related to the exploration for and evaluation of mineral properties. The Company expects to establish an accounting policy to expense all costs relating to exploration and test these balances for impairment on a quarterly basis.

The application of this policy on the adoption of IFRS will result in the expensing of all future costs of exploration and for comparative purposes.

2) Impairment of (Non-financial) Assets

IFRS requires a write down of assets if the higher of the fair market value and the value in use of a group of assets is less than its carrying value. Value in use is determined using discounted estimated future cash flows. Current Canadian GAAP requires a write down to estimated fair value only if the undiscounted estimated future cash flows of a group of assets are less than its carrying value.

The Company’s accounting policies related to impairment of non-financial assets will be changed to reflect these differences. However, the Company does not expect that this change will have an immediate impact on the carrying value of its assets. The Company will perform impairment assessments in accordance with IFRS at the transition date.

3) Share-based Payments

In certain circumstances, IFRS requires a different measurement of stock-based compensation related to stock options than current Canadian GAAP.

The Company does not expect changes to its accounting policies related to share-based payments that would result in a significant change in line items within its financial statements.

4) Asset Retirement Obligations (Decommissioning Liabilities)

IFRS requires the recognition of a decommissioning liability for legal or constructive obligations, while current Canadian GAAP only requires the recognition of such liabilities for legal obligations. A constructive obligation exists when an entity has created reasonable expectations that it will take certain actions.

  

24

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

The Company’s accounting policies related to decommissioning liabilities will be changed to reflect these differences. However, the Company does not expect this change will have an immediate impact on the carrying value of its assets.

5) Property and Equipment

IFRS contains different guidance related to recognition and measurement of property and equipment than current Canadian GAAP.

The Company will need to analyze and componentize specific assets and amortize each component separately, which are largely made up of assets at our mine site. The Company is in the process of reviewing its fixed asset ledger to ensure compliance with IFRS accounting but does not expect this difference to have a material impact upon the transition to IFRS.

Under IFRS 1 exemptions, adoption of IAS 16 “Property, Plant and Equipment” would require the Company to restate all property, plant and equipment balances from the date of acquisition until the transition date to IFRS of January 1, 2010. The applicable IFRS 1 election allows the Company to report property, plant and equipment in its opening balance sheet on the transition date at a deemed cost instead of actual cost. The Company will elect its deemed cost to be the net book value of the assets at the date of transition.

6) Income Taxes

In certain circumstances, IFRS contains different requirements related to recognition and measurement of future income taxes.

The Company does not expect any changes to its accounting policies related to income taxes that would result in a significant change to line items within its financial statements.

Subsequent Disclosures

Further disclosers of the IFRS transition process are expected as follows:

· The Company’s first financial statements prepared in accordance with IFRS will be the interim financial statements for the three months ending March 31, 2011, which will include notes disclosing transitional information and disclosure of new accounting policies under IFRS. The interim financial statements for the three months ending March 31, 2011, will also include the comparative period adjusted to comply with IFRS, and the Company’s transition date IFRS statement of financial position (at December 31, 2009).

  

25

  

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

10.   Cautionary Note Regarding Forward Looking Statements

This Management’s Discussion and Analysis includes "forward-looking statements", within the meaning of applicable securities legislation, which are based on the opinions and estimates of Management and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "budget", "plan", "continue", "estimate", "expect", "forecast", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe" and similar words suggesting future outcomes or statements regarding an outlook. Such risks and uncertainties include, but are not limited to, risks associated with the oil and gas industry (including operational risks in exploration development and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections in relation to production, costs and expenses; the uncertainty surrounding the ability of the Company to obtain all permits, consents or authorizations required for its operations and activities; and health safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the ability of Trelawney to fund the capital and operating expenses necessary to achieve the business objectives of Trelawney, the uncertainty associated with commercial negotiations and negotiating with foreign governments and risks associated with international business activities, as well as those risks described in public disclosure documents filed by the Company. Due to the risks, uncertainties and assumptions inherent in forward-looking statements, prospective investors in securities of the Company should not place undue reliance on these forward-looking statements. Statements in relation to "reserves" are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described can be profitably produced in the future.

 

Readers are cautioned that the foregoing lists of risks, uncertainties and other factors are not exhaustive. The forward-looking statements contained in this press release are made as of the date hereof and the Company undertakes no obligation to update publicly or revise any forward-looking statements or in any other documents filed with Canadian securities regulatory authorities, whether as a result of new information, future events or otherwise, except in accordance with applicable securities laws. The forward-looking statements are expressly qualified by this cautionary statement.

 

11.   Management’s Responsibility for Financial Information

 

Management is responsible for all information contained in this report. The unaudited consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include amounts based on management’s informed judgments and estimates. The financial and operating information included in this report is consistent with that contained in the unaudited consolidated financial statements in all material aspects.

 

Management maintains internal controls to provide reasonable assurance that financial information is reliable and accurate and assets are safeguarded.

 

External auditors, appointed by the shareholders, have examined the consolidated financial statements for the year ended December 31, 2010.

  

26

  

 

	
TRELAWNEY MINING AND EXPLORATION INC.

	
Management’s Discussion and Analysis

	
of Financial Condition and Results of Operation

	
December 31, 2010

	
  

 

The Audit Committee has reviewed the audited consolidated financial statements with management. The Board of Directors has approved the audited consolidated financial statements on the recommendation of the Audit Committee.

March 15, 2010

Andres Tinajero

Vice President Finance & CFO

  

27

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