ANNUAL REPORT 2010 - Energold · December 2010. The pr oceeds will fund the purchase of new drill...

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S O C I A L LY A N D E N V I R O N M E N TA L LY

R E S P O N S I B L E D R I L L I N G

Dear Shareholders,

A Year of Robust Growth and Expansion

Fiscal 2010 marked a period of robust growth for

Energold Drilling and substantial improvement over

2009 on a number of levels. We expanded our

international presence, increased our fleet and

breadth of drilling rigs and grew our client base to

include development projects and mine site drilling.

With demand rebounding significantly in 2010,

Energold remobilized a large portion of its fleet to

new and existing projects composed largely of major

and intermediate mining clients in South America and

Africa. As a result, 2010 revenues and meters drilled

more than doubled from the previous year. Energold

returned to profitability and we entered 2011 poised

for significant growth.

According to the Metals Economics Group, world-

wide exploration budgets declined by 42% in 2009.

In 2010, however, the market rebounded sharply

with exploration budgets up 44% and increasing

activity reported across all geographic markets.

Accordingly, Energold experienced a pivotal surge in

demand in the first quarter of 2010 followed by

new Company records for meters drilled in every

subsequent quarter.

Expanding our Services

Over the past two years, highly leveraged senior and

intermediate mining companies have gradually

increased their exploration spending. Energold has

responded by offering our senior and intermediate

clients more diversified drilling services. These

include underground drilling and more traditional

offerings such as reverse circulation drilling. We have

also extended individual contracts with clients as well

as the Company’s worldwide service offering in the

mine site and frontier drilling segments.

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L E T T E R T O T H E S H A R E H O L D E R S

Drilling Operations

Offices & Drilling Operations

CANADA

MEXICO

CENTRAL AMERICA

UNITED KINGDOM

NICARAGUA

GABON

DOMINICAN REPUBLIC

LIBERIA

BARBADOS

ALBANIA

GUINEA

COLOMBIA

SIERRA LEONE

BRAZIL

VIETNAM

GHANA

PERU

DEMOCRATIC REPUBLIC OF THE CONGO

CHILE

ZAMBIA

ARGENTINA

TANZANIA

SOUTH AFRICA

NAMIBIA

Pricing Remains Competitive

In the drilling industry, price usually follows demand.As demand increases, drilling rates increase and margins improve. The past year was an anomaly, however, as pricing remained competitive as demandgrew. A substantial portion of the drilling continuedto be the more competitively bid “brownfields”exploration that typically takes place on or near mine sites.

Market Trends in Our Favour

Exploration for precious metals currently representsthe industry’s largest drilling demand. However,demand for drilling services around certain specialtycommodities and base metals is increasing as well.We have also witnessed a shift in the type of drillingby the majors, with larger portions of their budgetsmoving gradually to more frontier-oriented programs.In the junior sector, a surge in financings in 2010 willlikely result in their frontier-oriented programsincreasing along with larger exploration budgets.These positive market shifts will assist in expandingEnergold’s core strength and niche market of higher-margin, socially and environmentally responsible frontier drilling services.

New Capital for Acquisitions

To further Energold’s aggressive growth strategy ofpenetrating new markets and drilling sectors, wecompleted a $17.25 million ‘Bought Deal’ financing inDecember 2010. The proceeds will fund the purchaseof new drill rigs and support the Company’s strategyof accretive acquisitions, allowing us to enter newmarkets faster and more aggressively. In March 2010,we acquired the assets and drilling operations ofEnvirodrill Ltd. of the United Kingdom, adding ninerigs and expand our operational expertise in Africa.This acquisition allowed the Company to set upquickly with a strong team on the ground and drillingcontracts in place. Subsequent to year end, Energoldacquired Dando Drilling International Ltd., also basedin the United Kingdom. The Dando team has a longtrack record worldwide of profitably designing andmanufacturing specialty/customized drilling rigs andassociated equipment for water well, mineral

exploration and geotechnical drilling companies. Our strategic objective with Dando is to profitablyexpand their core business and work with their teamof engineers to develop and supply next generationdrilling rigs for Energold. We also intend to capitalizeon Dando’s extensive experience and expertise tobuild a separate Energold division specializing inwater well drilling services.

Expanding our Drill Fleet

At December 31 2010 Energold held a total of 103 rigs, including 13 new surface rigs and oneunderground rig delivered in 2010. The Companycontinues to expand its rig fleet with a target of 120rigs by year-end 2011. Our focus includes expansionof Energold’s underground drilling segment, as wellas more conventional surface rigs. We continue toinnovate as well, with a prototype mobile surface rigin the design phase that will access depths beyond1,000 meters. We are also working on modificationsto increase the capability of the standard EGD HighlyMobile Surface Type II rigs.

After the Decline: Landing on our Feet

Our variable cost structure, whereby direct costs suchas drill crews, inventories and logistical fees fluctuatewith contract revenues, helped limit the impact of the early 2009 market decline on the Company’sfinances. When the market recovered in 2010,Energold had maintained a strong balance sheet,built ample working capital and taken on no long-term debt. Consequently, the Company continues tooperate from a position of strength. We are well positioned to take advantage of the continuing market recovery, and we remain the world’s premiersocially and environmentally sensitive drilling contractor.

Financial Results: a Return to Profitability

Revenues for 2010 totaled $54.6 million on 346,300meters of drilling, up from $23.7 million on 151,300meters in 2009. Energold achieved net earnings of$1.40 million in 2010, up from a net loss of $2.0 million in 2009. Despite rates per meter remainingrelatively stable through the year, gross margins

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improved from 14.7% in the first quarter of 2010 to21.1% for the year.

Revenues and meters drilled increased each quarterthroughout 2010. A Company record 103,400 meters were drilled in the fourth quarter of 2010, up106% from the 50,200 meters drilled in the fourthquarter of 2009. Revenues of $17.3 million in thefourth quarter were up 140% from $7.2 million in thefourth quarter 2009.

The improving economic environment helpedEnergold end the year with an industry leading balance sheet. With working capital of $61.5 million –including $28.2 million cash – and no long-term debt,the Company remains in a strong financial position tocarry out its growth strategy for 2011 and beyond.

Aggressive Growth Strategy

With a healthier economy emerging, we intend toexpand both organically and through potential acqui-sitions. Our latest acquisitions of Envirodrill Ltd. andDando Drilling International Ltd. have proved success-ful in expanding Energold’s footprint into West Africaand improving our engineering expertise towardsdeveloping the next generation of Energold rigs.

Prepared to Capitalize on Market Trends

We have reached these Company milestones duringa time when the worldwide supply for most metals isexpected to tighten due to a continuing lack of sig-nificant discoveries. With a modern drilling fleet inplace and operations in 20 countries across five conti-nents, we believe we have brought Energold to aposition where we can capitalize on these trends and

achieve our primary goals of strengthening our lead-ership position in frontier drilling and generatingincreasing value for our shareholders.

Accolades for our Team

The decline in 2009 and subsequent recovery in 2010presented a wide range of challenges for all our 1,200employees at Energold, from drillers in our many fieldoperations to office staff in Canada and overseas. Wewant to sincerely thank everyone for their continueddedication, resourcefulness and energy in making thepast year a remarkable success. Over the last severalyears, Energold has received numerous accoladesthat belong to each and every Energold employee.These awards include The PROFIT 100 – Canada'sFastest Growing Companies; The Vancouver Sun/Business BC Top 100 Companies in British Columbia;The BC Export Award for Top Professional andServices Company; The World Confederation ofBusinesses Award in the Dominican Republic; TheMining Journal Award for Exploration Equipment,and TSX Venture Top 50.

Finally, on behalf of the Board of Directors, I wouldlike to thank each of you, our long-standing shareholders, for your ongoing support.

Frederick W. Davidson

President and Chief Executive Officer

April 14, 2011

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HEAD OFFICE VANCOUVER CANADA

CHIHUAHUAMEXICO

MEXICO CITYMEXICO

MANAGUANICARAGUA

BOGOTACOLOMBIA

SANTO DOMINGODOMINICAN REPUBLIC

CHRISTCHURCHBARBADOS, W.I.

LIMAPERU

TALCACHILE

BUENOS AIRESARGENTINA

BELO HORIZONTEBRAZIL

BELEMBRAZIL

NAMI

LONDONUK

GABON

GUINEA

SIERRA LEONE

LIBERIA

GHANAD


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MADAGASCAR

N IBIA

JOHANNESBURGSOUTH AFRICA

TANZANIA

ZAMBIA

VIETNAM

Drilling Operations

Offices & Drilling Operations

ALBANIA

NADEMOCRATICREPUBLIC OFTHE CONGO

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I N T R O D U C T I O N

This Management’s Discussion and Analysis (MD&A”) of Energold Drilling Corp. (“Energold” or “the Company”) isdated April 14, 2011. This MD&A should be read in conjunction with the audited consolidated financial statementsof Energold Drilling Corp. and the notes thereto for the period ended December 31, 2010, which have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). All amounts referred to herein are in Canadian dollars unless otherwise specified. Additional information relating to the Company including material change notices, certifications of annual and interim filings and press releases are available on theCanadian System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com.

This document contains forward-looking statements. Please refer to “NOTE REGARDING FORWARD-LOOKINGSTATEMENTS.”

C O R P O R AT E O V E R V I E W

Energold is a diamond drilling contractor primarily serving the mining and mineral exploration industries in threegeographic segments: Mexico, the Caribbean and Central America; South America; Africa, Asia and other.Energold specializes in operating highly-portable drilling rigs which have a smaller environmental impact than conventional rigs and which are adaptable to meet the varied needs of its customers. These rigs are particularly successful in exploration in “frontier” areas, that for reasons of social and environmental impact are sensitive orwhere a lack of infrastructure makes it difficult to operate. The Company also holds mineral exploration propertiesin the Dominican Republic and Mexico, both directly and through the 6.87 million shares that it holds in IMPACTSilver Corp. (“IMPACT”). The Company’s interest in IMPACT is currently accounted for on an equity basis.

I N D U S T RY O V E R V I E W

Energold has traditionally been engaged by and seen demand for its services from three groups of customers: goldmining companies, base metal mining companies, and junior exploration companies. Each of these groups is influenced by distinct market forces. In the last few years, historically high prices for many commodities drove theindustry to record levels of activity. In the fourth quarter of 2008 demand for drilling services weakened significantlydue to the global recession and demand weakness persisted through most of 2009. We have seen an increasinglevel of interest for our services since the last part of 2009 and through 2010. Exploration for precious metals currently represents the largest demand; however, certain specialty commodities and base metals are also increasing the demand for drilling services.

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S


M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S

For the Three Months and Year Ended December 31, 2010

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E N E R G O L D ’ S W O R L D

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W O R L D W I D E E X P L O R AT I O N ENERGOLD KEY H IGHL IGHTS

• Record Revenues up 130% to $54.6 million

• Net Earnings at $1.4 million from net loss in 2009

• Generated EPS $0.04($0.06 in 2009)

• Gross margins improved to 21.1% from 14.7% in the first quarter 2010

• Drilled new Company record meters of 346,300, up 129% from 151,300 in 2009

• Expanded rig fleet to 103 rigs, up from 80 rigs in 2009

• Completed $17.25 million financing increasing cash position to $28.2

• Successfully acquired Envirodrill Ltd. (U.K.) and subsequent to year end, Dando International Drilling Inc. (U.K.), expanding foot print and technical expertise

From the trough of late 2008 and into 2009, worldwide

exploration budgets have rebounded strongly in

2010. The Metals Economics Group estimated that

global nonferrous mineral exploration expenditures for

2010 reached US$12.1 billion, up from $8 billion in 2009

and just shy of the US$14 billion peak reached in 2008

which demonstrates a significant improvement from

2009 levels. Spending in 2011 is expected to increase

23% year over year. Gold was the most favourable metal

accounting for 51% of global exploration spending and

reached a new high of $5.4 billion. Base metals also

bounced back to 33% of all spending.

Overall, a majority of major and intermediate mining

companies worldwide are conducting more of their own

brownfields and greenfields exploration programs.

Source: Jennings Capital, Metals Economics Group

Worldwide Financing Activity

Global financings have also recovered creating more

access to capital to major, intermediate and junior mining

companies. According to the Metals Economics Group,

in December 2010 alone, approximately US$5.5 billion

was raised by several junior and intermediate mining

companies. The appetitite for mining projects at several

stages spreads to the junior market as well since

US$10.4 billion was raised for base metal projects and

US$12.6 billion for gold related projects in 2010. With

continuing strong precious and base metal prices, it is

expected access to capital will be more easy to obtain as

compared to 2008 and 2009.

20,000

0

40,000

60,000

80,000

100,000

120,000

$0

$50.00

$100.00

$150.00

$200.00

$250.00

19

95

19

96

19

97

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99

20

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Q1

20

09

Q2

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20

10

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20

10

Q3

20

10

Q4

20

10

$16

$14

$12

$10

$8

$6

$4

$2

$0

Global Mineral Exploration Spending

(US$ billions, excluding uranium)

Meters Drilled

$8.4

$12.1

$14.4

$5.1

$1.9

$5.1

$7.5

$11.4

$16.0+

Revenue Per Meter

20,000

0

40,000

60,000

80,000

100,000

120,000

$0

$50.00

$100.00

$150.00

$200.00

$250.00

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

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20

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20

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20

10

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20

10

Q3

20

10

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20

10

$16

$14

$12

$10

$8

$6

$4

$2

$0

Global Mineral Exploration Spending

(US$ billions, excluding uranium)

Meters Drilled

$8.4

$12.1

$14.4

$5.1

$1.9

$5.1

$7.5

$11.4

$16.0+

Revenue Per Meter

EGD METERS DRILLED V. REVENUE PER METER

Senior and intermediate base metal and gold mining companies have been successful in raising substantialamounts of capital and while exploration budgets were dramatically reduced in early 2009, we have seen anincrease in activity each month from the beginning of 2009 to present. It is expected that with greater amounts ofcash and financial flexibility, these companies will further increase the demand for drilling services through 2011.The junior explorers have also been able to raise substantial amounts of funding in the last year and are re-entering the market looking for drill rigs. As demand has continued to increase throughout 2010 we are beginning to see drilling price increases and we expect this to continue in 2011. The industry is also starting toreach capacity and as a result the costs related to certain inputs are starting to inflate.

O V E R A L L P E R F O R M A N C E

Energold drilled 103,400 meters in the fourth quarter, up 106% from 50,200 meters in the last quarter of 2009 and346,300 meters during the current year compared to 151,300 meters in 2009. While traditionally one of the slowest quarters, the fourth quarter maintained the current trend and continues to strengthen as the Company drilled an increasing number of meters in each quarter through 2010 and is on track to continue this trend through 2011.

Revenues in the fourth quarter of 2010 were $17.3 million, up 140% from $7.2 million in the fourth quarter of 2009 andup 5% from $16.4 million in the third quarter of 2010 demonstrating the general recovery we are seeing in the industryas a whole. Average revenue per meter increased to $167 in the fourth quarter of 2010 from $144 in the fourth quarterof 2009 despite a stronger Canadian dollar.

Gross margin1 percentage remains sensitive to the character of the projects the Company drills and to the utilization of itsdrilling rigs. Gross margin percentage was 18.6% in the fourth quarter of 2010, and 21.1% for the year. Margins are stilllower than the Company has earned in prior years as pricing remained under pressure during the year and the Company’soverall mix of drilling currently includes a greater portion of highly competitive mine site drilling than in the past. As demand for drilling increases, and as a percentage especially in the frontier areas, the Company expects to seeincreasing average prices and improving margins.

The Company had net earnings of $0.7 million in the fourth quarter of 2010 ($0.02 per share – basic and diluted) compared to a net loss of $0.6 million ($0.02 per share – basic and diluted) in the fourth quarter of 2009. Net earningsfor the year were $1.5 million ($0.04 per share – basic and diluted) compared to a net loss of $1.9 million ($0.06 per share– basic and diluted) for 2009.

On December 23, 2010, the Company closed a bought deal private placement financing. A total of 4,662,162 units of the Company at a price of $3.70 per unit for an aggregate gross proceeds of $17.25 million were issued pursuant to anunderwriting agreement between the Company and each of Jennings Capital Inc., as lead underwriter, Clarus SecuritiesInc., TD Securities Inc. and Beacon Securities Limited. Each unit consists of one common share and one half of one common share purchase warrant. Each unit warrant is exercisable to acquire one common share of the Company at $4.50 per share at any time until the 23rd of December 2012.

The underwriters were paid a cash commission equal to 6.0% of the aggregate gross proceeds of the offering. The underwriters were also granted non-transferable compensation options to purchase 279,729 units, consisting of oneshare and one half share purchase warrant. Each compensation option entitles the holder to acquire one unit at an exercise price of $3.70 at any time until December 23, 2012. All securities issued under the offering are subject to a four-month hold period expiring on April 24, 2011.

Energold has an extremely strong balance sheet with a working capital position of $61.5 million and cash and cash equivalents of $28.2 million at December 31, 2010. The majority of these funds are denominated in U.S. and Canadiandollars and held with Canadian Chartered Banks.

1. Gross margin and gross margin percentage are non-GAAP measures. See “NON-GAAP MEASURES.”



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S E L E C T F I N A N C I A L A N D O P E R AT I N G I N F O R M AT I O N

Three months ended Year ended

Dec 31 Dec 31 Dec 31 Dec 312010 2009 % Change 2010 2009 % Change

Revenue ($000s) 17,252 7,199 +140% 54,592 23,719 +130%Gross margin ($000s) 3,216 1,147 +180% 11,530 5,675 +103%Gross margin percentage 18.6% 15.9% 21.1% 23.9%

Net earnings (loss) ($000s) 661 (559) +218% 1,449 (1,951) +174%Earnings (loss) per share

– basic and diluted ($) 0.02 (0.02) +200% 0.04 (0.06) +166%

Meters drilled 103,396 50,159 +106% 346,328 151,333 +129%

Dec 31 Sept 30 June 30 Mar 31 Dec 31 Sept 30 June 30 Mar 31

2010 2010 2010 2010 2009 2009 2009 2009

Drill rig fleet 103 100 94 91 80 79 78 78Cash and cash

equivalents ($000s) 28,225 9,298 11,093 12,825 18,460 19,436 19,917 22,867Total assets ($000s) 95,274 75,005 72,148 70,116 68,913 69,225 71,122 70,386Total liabilities ($000s) 13,310 11,198 9,817 9,327 7,463 7,281 6,962 6,873Shareholders’ equity

($000s) 81,964 63,808 62,331 60,789 61,449 61,944 64,159 63,512

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O U T L O O K A N D B U S I N E S S S T R AT E G Y

Drilling

Demand for drilling services worldwide is continuingto increase. However, the Company cautions thatactual results may vary substantially from all forward-looking information in this MD&A. The Company hasseen drilling activity and revenues increase each quar-ter in 2009 and this trend continued throughout 2010.The positive trend is expected to continue as pricesfor gold and other precious metals maintain relativelyhigh. Lower levels of demand in 2009 compared to2008 increased competitive pressures. Consequently,pricing and margins were lower in 2009 and the lowerpricing environment has carried forward into 2010.

The Company’s mix, or types of drilling programs alsochanged in both the current and prior year. In 2008 asignificant portion of the drilling was completed in frontier areas and these programs typically commandhigher margins. In 2009 frontier drilling representedonly a small portion of the Company’s contracts. As demand strengthened throughout 2010 a smallportion of the Company’s work returned to frontierdrilling and as a result the Company expects to beable to increase drilling rates in 2011. The Company’sclient mix also changed substantially during the sameperiod, as major and intermediate producers dominated the drilling market during 2010. Duringthe year a favourable investment market, especiallyfor those companies involved in commodities,enabled a number of “juniors” to complete financ-ings and once again initiate exploration programs.The Company expects that as a result a larger percentage of its drilling will be for juniors with lowersensitivity to pricing and more focus on performance.

Energold remains open to exploring opportunisticacquisitions. However, the Company’s primary focuscontinues to be on organic growth through new rigdevelopment and expansion into new markets. TheCompany is seeing renewed interest in its traditionalmarkets as well as in new markets such as West Africa.Certain markets rebounded quickly in the first half of2010 and in those markets rig utilization approachedtraditional levels. Other markets are responding moreslowly to the improving economic climate and thusthe Company is redeploying a number of its rigs fromthese areas to service the more active markets.

The Company specializes in highly portable drillsallowing it to take on the less competitively bid frontier drilling. Building on those contracts theCompany has been adding more conventional rigs as demand requires. Energold has determined tocontinue to expand at an aggressive rate identifyingwhat it believes are markets which it can dominateboth geographically and technically. With a modernfleet of drilling rigs and continued expansion into newoperating regions, Energold has laid the seeds for future growth in five continents. The Companycurrently has drilling rigs deployed in 20 countriesaround the world and is reacting to the strongerdemand for drilling services.

Mexico, the Caribbean and Central America

This is currently the strongest market for theCompany with over 35 rigs located in the region.Originally pioneered with its “S” style rigs, which stillconstitute the majority of the fleet, the Company isintroducing underground rigs and larger conventionalrigs to meet our clients’ demands. The market isespecially strong and in particular in Mexico wherethe Company has a regional office in Mexico City with a major depot in Chihuahua to service field operations. The Company expects to add five to tenrigs in this market in 2011.

South America

The Company is working in Brazil, Colombia, Peru,Chile and Argentina with approximately 30 drill rigs.While one of our strongest markets in South Americain 2008 was Peru, it suffered one of the most dramat-ic declines in 2009. This market is once again startingto grow and for 2011 looks extremely strong.Demand in Brazil remains strong, although operatingcosts there are high and regulations complex. As aresult rates per meter tend to be higher and marginsare fairly tight. Argentina, our most successful newmarket in the region, experienced very rapid growthin 2010. In each of these markets our primary rig isthe “S” style rig servicing some of the more difficultand remote programs, and for 2011 the Companyanticipates adding a further eight to twelve rigs intothis market.



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Africa/other

On March 8, 2010 Energold announced the strategicacquisition of the assets and drilling operations ofEnvirodrill Ltd. of the United Kingdom. Envirodrill hasa proven track record of successfully completing complex drilling programs in West Africa andMadagascar and brought strong technical and operational expertise to the Energold team. Throughthis purchase, the Company acquired nine diamondand reverse circulation drill rigs, related supportequipment, inventories and existing contracts. Inaddition to purchasing the drilling assets, Energoldretained the drilling operational team and enteredinto a management services agreement to allow theCompany to utilize administrative and logistics personnel and existing facilities.

The addition of these new managers, drilling crewsand equipment to the Energold team has gone verywell to date. The acquisition allowed Energold to setup quickly with a strong team on the ground anddrilling contracts in place in West Africa andMadagascar which are strong, growing markets in which there is great opportunity. The Companysubsequently added additional rigs and combinedwith other rigs in Southern Africa and now has over30 rigs on the continent. While most of the latestadditions are “S” style rigs the Company has a mix ofrigs from reverse circulation to conventional rigs aswell as multi-purpose rigs in the market. TheCompany expects to add a further ten to twelve rigsinto this general market in 2011 comprised of a mixture of rig types that are necessary to service thelocal markets.

With the Envirodrill transaction the Company addeddrilling rigs and support equipment valued at $1.3million, inventories valued at $0.4 million andassumed leases payable of $0.5 million.Consideration for these assets included Energoldcommon shares valued at $0.3 million and cash of$0.8 million. Energold recognized an accountinggain of $0.1 million on the transaction.

In addition to the nine rigs acquired via the Envirodrilltransaction, Energold took delivery of five new surface drilling rigs in the first half of 2010, and onenew underground rig and eight new surface drillingrigs in the second half bringing the rig count to 103 atDecember 31, 2010. The Company is continuing amodification program to increase the capability of itsstandard Series II and Series III rigs. Subsequent tothe year-end additional surface rigs are being addedwhere utilization rates reach historic percentages orto service specific demand. The Company has alsocontinued programs with certain clients that requirebigger rigs in addition to our traditional man portableunits and is mobilizing a further three rigs that areconventional in nature.

The Company is developing additional technical ability in complementary activities including under-ground drilling. Included in the 2010 total rig countare six underground rigs. The expansion into under-ground drilling was in response to certain clients’requests that we provide full service to their opera-tions. The underground rigs are similar to our existingsurface rigs, using approximately 90% of the sameequipment and supplies as our surface rigs. This sub-stantially reduces crew training time and inventoryrequirements.

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In January 2011, the Company acquired the sharesand have taken over the business operations ofDando Drilling International Ltd. (“Dando”), head-quartered in the United Kingdom. The Dando teamhas a long and proven track record of profitablydesigning and manufacturing specialty/customizeddrilling rigs and associated equipment for water well, mineral exploration and geotechnical drillingcompanies operating throughout the world. Dandohas also supplied water well drilling services to manyinternational institutions.

Through this purchase, Energold has acquired all theoutstanding shares of Dando for Pound Sterling(“GBP”) 50,000 (CDN$80,000) and assumed certaincreditor debt and transaction costs.

Energold retained the key employees and providedstock and/or stock options incentive compensation inEnergold that collectively consists of restricted shares(CDN$160,000) and 150,000 share options priced atmarket (CDN$4.19 per share). With the acquisition ofDando, the Energold Group has added a staff of 30 comprised of senior management, engineers,administrative and hourly production employees.

Energold’s strategic objective is to profitably expandDando’s core business; source additional rigs tobroaden Energold’s scope of services to selected customers in appropriate geographic regions; workwith Dando’s team of engineers to develop and supply next generation drilling rigs for Energold, andcapitalize on Dando extensive experience and expertise to build a separate water well drilling services division for Energold.

The Dando team will provide Energold with anexpanded core nucleus of operations and experiencethat will enable the Energold Group to broaden itsscope of services offered to customers and expand its geographic coverage to take advantage of thegrowing global opportunities in the drilling industry.

R E S U LT S O F O P E R AT I O N S

Three Months Ended December 31, 2010 Comparedto the Three Months Ended December 31, 2009

Net earnings for the fourth quarter ended December31, 2010 were $0.7 million ($0.02 per share – basicand diluted), compared to a net loss of $0.6 million

($0.02 per share – basic and diluted) in the fourthquarter of 2009.

Net earnings for the fourth quarter ended December31, 2010 were impacted by the following factors:

• Revenues increased to $17.3 million in the fourthquarter of 2010, up from $7.2 million in the fourthquarter of 2009. The increase in revenues is aresult of the significant increase in drilling activityin 2010 as compared to 2009. Average revenueper meter increased to $167 in the fourth quarterof 2010 as compared to $144 in the fourth quarterof 2009. The increase in revenue per meter is aresult of general price increases as well as anincrease in higher priced frontier drilling. TheCanadian dollar strengthened against the U.S.dollar by 4% in the fourth quarter of 2010 as compared to the fourth quarter of 2009 whichdampened the effect of higher U.S. dollar rates onrevenues.

• Gross margin increased to $3.2 million in thefourth quarter of 2010, up 180% from $1.1 millionin the fourth quarter of 2009. Gross margin percentage was 18.6% in the fourth quarter of2010 compared to 15.9% in the fourth quarter of2009. Gross margin percentage increased in thefourth quarter of 2010 as compared to the fourthquarter of 2009; however gross margins remainbelow historical levels. Pricing in the fourth quarterof 2010 improved but operating costs are tradi-tionally higher in the fourth quarter. In additionmany of the Company’s operations adjusted forobsolete supplies during the fourth quarter whichincreased the cost of sales. As worldwide drillingdemand increases through 2011 it is expectedthat prices for drilling services will rise.

• Indirect and administrative expenses increased to$3.0 million in the fourth quarter of 2010, up from$1.8 million in the fourth quarter of 2009. As a percentage of revenue, indirect and administrativeexpenses fell from 25.2% in 2009 to 17.7% in2010. Office salaries and services increased by$0.2 million in the fourth quarter of 2010 as compared to the fourth quarter of 2009 as a resultof the significantly higher level of business activity.Non-cash stock based compensation expense was$0.6 million in the fourth quarter of 2010 up from



12


2 0 1 0 A N N U A L R E P O R T

$0.2 million in the fourth quarter of 2009.Management fees and consulting increased to$0.3 million in 2010 from $0.1 million in 2009 dueto compliance and international reporting require-ments.

• A foreign exchange loss of $0.5 million was recog-nized in the fourth quarter of 2010 as compared toa foreign exchange loss of $0.3 million in thefourth quarter of 2009. The Canadian dollarstrengthened against the U.S. dollar in the fourthquarters of 2010 and 2009 which gave rise to theforeign exchange losses on U.S. dollar denominat-ed cash and accounts receivable. Future foreignexchange fluctuations will result in gains or lossesas the Company translates its non-Canadian dollardenominated assets and liabilities into Canadiandollars and may have a significant impact onfuture net earnings.

• Current and future income taxes increased by $0.6million in the fourth quarter of 2010 compared tothe same period in 2009.

Other comprehensive income in the fourth quarter of2010 was $0.8 million, up from other comprehensiveloss of $0.2 million in the fourth quarter of 2009.Other comprehensive income and loss is related tounrealized gains or losses on short-term investmentsheld net of taxes.

Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009

Net earnings for the year ended December 31, 2010were $1.4 million ($0.04 per share – basic and diluted), compared to net loss of $2.0 million ($0.06per share – basic and diluted) in the comparable period of 2009.

Net earnings for the Year ended December 31, 2010were impacted by the following factors:

• Revenues increased to $54.6 million for 2010, up130% from $23.7 million for the year 2009. Theincrease in revenues is a result of significantlyhigher levels of drilling activity. Average revenueper meter increased slightly to $158 for the year ascompared to $157 in 2009.

• Gross margin increased to $11.5 million for 2010,up from $5.7 million in 2009. Gross margin per-centage for the year 2010 was 21.1% compared to23.9% in 2009. With only marginally higher pricesper meter, the gross margin percentage for theyear 2010 was lower than 2009 primarily as a resultof mobilization expenses for rigs and rising inputcosts incurred in 2010 as well as many of theCompany’s operations adjusted for obsolete sup-plies which increased the cost of sales. Whileaverage cost per meter remained steady, pricingin 2010 remained under pressure until later in theyear as most of the 2010 contracts were based ondrilling demand in 2009. As worldwide drillingdemand increases into 2011 it is expected thatprices for drilling services will increase.

13


• Indirect and administrative expenses increased to $9.2 million in 2010, up from $5.5 million in 2009.Management fees and consulting and office salaries and services increased to $4.2 million 2010 as compared to$2.8 million in 2009 as a result of the increased business activity, and international reporting and compliancerequirements. Non-cash stock based compensation expense was $1.0 million in 2010 and $0.2 million in 2009.

• A foreign exchange loss of $0.7 million was recognized in 2010 compared to a foreign exchange loss of $2.3 million in 2009. In 2009 and 2010 the Canadian dollar strengthened against the U.S. dollar which gave rise tothe foreign exchange loss on U.S. dollar denominated cash and accounts receivable. Future foreign exchangefluctuations will result in gains or losses as the Company translates its non-Canadian dollar denominated assetsand liabilities into Canadian dollars and may have a significant impact on future net earnings.

• Current and future income taxes increased to $2.2 million in 2010, up from $0.5 million in 2009.

• In March 2010 the Company acquired nine drilling rigs with related support equipment and inventories, as well as existing drilling contracts, and management and operating personnel from Envirodrill Ltd. (UK). Theacquisition was treated as a business combination. The total consideration of $1,058,293 was paid in cash and107,224 shares of the Company. The value of the net assets acquired was $1,151,023.

• In July 2010, pursuant to a binding letter agreement dated June 29, 2007 and upon the transfer of the LaParcela concession in the Dominican Republic, the Company acquired 5 million shares in a Canadian controlledprivate corporation (“CCPC) at a price of $0.40 per share. This represents a 25% interest in the CCPC and hasbeen treated as an equity investment in the accounts of the Company. Subsequent to the year-end the CCPCentered into a letter agreement for a proposed transaction whereby the CCPC would be acquired by a publiccompany on a basis to be mutually agreed. If this occurs, the Company will carry its equity investment as a short-term available for sale investment.

Other comprehensive income in 2010 was $0.9 million, up from other comprehensive income of $0.2 million in2009. Other comprehensive income and loss is related to unrealized gains or losses on short-term investments heldnet of taxes.

Three Months Ended December 31, 2010 Compared to the Three Months Ended September 30, 2010

Net earnings for the fourth quarter ended December 31, 2010 were $0.7 million ($0.02 per share – basic and diluted), compared to net earnings of $0.8 million ($0.02 per share – basic and diluted) in the third quarter of 2010.



14


2 0 1 0 A N N U A L R E P O R T

Net earnings for the fourth quarter ended December 31, 2010 were impacted by the following factors:

• Revenues increased to $17.3 million in the fourth quarter of 2010, up 5% from $16.4 million in the third quarterof 2010. The increase in revenues is a result of increased drilling activity and higher drilling rates. Average revenue per meter increased to $167 in the fourth quarter of 2010 as compared to $160 in the third quarter of 2010.

• Gross margin decreased to $3.2 million in the fourth quarter of 2010, down from $4.0 million in the third quarter of 2010. The gross margin percentage was 18.6% in the fourth quarter of 2010 compared to 24.7% inthe third quarter of 2010. The margins for the fourth quarter are generally lower as crews take extended breaksfor the holidays resulting in demobilization costs and lower productivity. In addition many of the Company’soperations adjusted for obsolete supplies during the fourth quarter which increased the cost of sales.

• Indirect and administrative expenses were $3.0 million in the fourth quarter of 2010, up from $2.2 million in thethird quarter of 2010. Stock based compensation expense increased to $0.6 million compared with $0.1 millionin the third quarter due to the issue of stock options during the period. Management fees and consulting was$0.3 million compared to $0.1 million in the prior quarter due to an increase in compliance and internationalreporting requirements. Other individual categories of indirect and administrative expenses were marginally different between the quarters.

• A foreign exchange loss of $0.5 million was recognized in the fourth quarter of 2010 as compared to a foreignexchange loss of $0.4 million in the third quarter of 2010. The Canadian dollar strengthened against the U.S.dollar in the third quarter and again in the fourth quarter of 2010 which gave rise to the foreign exchange losson U.S. dollar denominated cash and accounts receivable. Future foreign exchange fluctuations will result ingains or losses as the Company translates its non-Canadian dollar denominated assets and liabilities intoCanadian dollars and may have a significant impact on future net earnings.

• Current and future income taxes decreased to $0.6 million in the fourth quarter of 2010, down from $0.7 millionin the third quarter of 2010.

Other comprehensive income in the fourth quarter of 2010 was $0.8 million, up from other comprehensive gain of$0.5 million in the third quarter of 2010. Other comprehensive income and loss relate to unrealized gains and losses on short-term investments net of taxes.

O T H E R F I N A N C I A L I N F O R M AT I O N

Summary of Quarterly Results

The following table presents our unaudited quarterly results of operations for each of the last eight quarters. All figures are in thousands of Canadian dollars except earnings per share:

For the three months ended ($000’s except per share amounts)

Dec 31 Sept 30 June 30 Mar 31 Dec 31 Sept 30 June 30 Mar 312010 2010 2010 2010 2009 2009 2009 2009

Revenue 17,252 16,359 12,909 8,072 7,199 6,408 6,262 3,851Net earnings (loss) 661 839 1,306 (1,357) (559) (1,580) (215) 403Earnings per share – Basic* 0.02 0.02 0.04 (0.04) (0.02) (0.05) (0.01) 0.01Earnings per share – Diluted* 0.02 0.02 0.04 (0.04) (0.02) (0.05) (0.01) 0.01Cash and cash equivalents 28,225 9,298 11,093 12,825 18,460 19,436 19,917 22,867

Total assets 95,274 75,005 72,148 70,116 68,913 69,225 71,122 70,386

Total liabilities 13,310 11,198 9,817 9,327 7,463 7,281 6,962 6,873

*Per share numbers have been rounded to two decimal places

15


Liquidity and Capital Resources

The Company’s financial position at December 31, 2010 remains strong with $28.2 million in cash and cash equivalents(December 31, 2009 - $18.5 million) and net working capital of $61.5 million (December 31, 2009 - $46.5 million).

Cash flows from operations before changes in non-cash working capital2 were $0.3 million during the three monthsended December 31, 2010, an increase from $(0.5) million during the three months ended December 31, 2009.During the three months ended December 31, 2010, the Company used $0.3 million in cash for investing activities.These funds were mainly used to purchase drill rigs and increase the Company’s investment in IMPACT SilverCorp., offset by cash inflows from the sale of short-term investments. The Company received gross proceeds of$17.3 million for shares issued in a private placement in December 2010.

In the opinion of management, the working capital at December 31, 2010, together with the expected future cashflows from operations, is sufficient to support the Company’s normal operating requirements on an ongoing basis.

Outstanding Share Data

The following common shares and stock options of the Company were outstanding at April 14, 2011:

# of Shares Exercise Price Expiry Date

Issued and outstanding common shares at April 14, 2010 39,862,069

Stock options outstanding 898,950 $2.01 October 1, 2014

Stock options outstanding 118,750 $2.30 May 7, 2015

Stock options outstanding 1,245,000 $3.45 October 20, 2015

Stock options outstanding 150,000 $4.19 January 12, 2016

Warrants outstanding 2,331,081 $4.50 December 23, 2012

Agent units outstanding (Note 1) 279,729 $3.70 December 23, 2012

Fully diluted at April 14, 2010 44,885,579

Note 1. Each unit is comprised of one common share and on-half of a non-transferrable common share purchase warrant. Each whole warrant is exercisable at $4.50 to purchase one common share of the Company.

Of the 2,412,700 stock options outstanding, 1,484,575 have vested at April 14, 2010.

E Q U I T Y H O L D I N G S

IMPACT Silver Corp. (IPT: TSX.V) (“IMPACT”)

Energold owns 6.87 million shares or 11.22% of the issued and outstanding shares of IMPACT at December 31,

2010. Energold, through mutual management at the executive level and its shareholding and directorships in

IMPACT, exercises significant influence over IMPACT and, as a result, the investment is accounted for using the

equity method of accounting. At December 31, 2010 this investment is carried on the Company’s balance sheet at

$5.3 million, however the market value (based on quoted trading price at year-end) of the IMPACT shares held by

Energold at December 31, 2010 equalled $12.0 million. Energold provides surface and underground diamond

drilling exploration services for IMPACT.

2. Cash flows from operations before changes in non-cash working capital is a non-GAAP measure which the Company believes provides a better indicator of the Company’s ability to generate cash flows from its drilling operations. See “NON-GAAP MEASURES.”



16


2 0 1 0 A N N U A L R E P O R T

IMPACT is a natural resource mining and develop-

ment company, primarily engaged in the acquisition,

exploration, development and mining of mineral

properties located in Mexico and the Dominican

Republic. IMPACT currently produces concentrates

containing silver, lead, zinc and gold at the Royal

Mines of Zacualpan in the State of Mexico with a

processing plant rated at 500 tonnes per day (“tpd”).

IMPACT also owns a semi-portable 200 tpd process-

ing plant for use at its Capire project in the Mamatla

Mineral District. In the first quarter of 2010 IMPACT

completed the purchase of a third processing plant

with a capacity of 200 tpd at the “Veta Grande Silver

Project” in Zacatecas, Mexico.

IMPACT has grown from an exploration company into

a significant silver producer with production levels

increasing year-over-year. IMPACT has acquired

control of two entire mineral districts in central

Mexico; the 423 km2 Royal Mines of Zacualpan Silver

District and the 200 km2 Mamatla Mineral District

immediately southwest of Zacualpan. IMPACT also

controls the Veta Grande Silver Project in the

Zacatecas Silver District, Mexico.

IMPACT is currently undertaking a three-part process

of exploration, development and mine production at

the Royal Mines of Zacualpan Silver District and

adjacent Mamatla Mineral District. IMPACT has three

specific objectives aligned to each activity area. The

first objective is to enhance immediate economically

recoverable throughput until the current maximum

rated capacity of 500 tpd at the Guadalupe Mill is

achieved. In the fourth quarter of 2010 the

Guadalupe mill processed an average of 365 tpd.

With the addition of ore from the Noche Buena Mine

the Guadalupe Mill is expected to be processing near

capacity in 2011.

The second objective is to continue exploration and

prepare new sources of ore for mine development

which will justify expansion of our current facility or

the construction of new processing plants within the

Zacualpan and Mamatla Districts. The third objective

is to continue the reconnaissance exploration

program designed to evaluate the longer term

potential of these 500-year-old mining districts.

IMPACT continued to make progress towards each of

these three objectives 2010.

On March 4, 2010, IMPACT announced that mining

had commenced at the Noche Buena Mine. Fourth

quarter production from Noche Buena was 66 tpd.

Production from Noche Buena was limited because

heavy rainfall washed out roads between the Noche

Buena Mine and the processing plant. The roads have

been repaired and Noche Buena production is

planned to increase to 80 – 120 tpd as multiple

mining faces are developed. The Guadalupe

processing plant was upgraded in the first quarter of

2010 to accommodate the additional Noche Buena

production and is being further modified with

additional flotation cells to enhance recoveries.

The Noche Buena Mine is the third new mine that has

been taken from discovery to production by the

IMPACT team since 2006. From the time first assays

were received from the discovery drill hole in January

2009 to production in March 2010, approximately

fifteen months elapsed. This ability to fast track

new mines into production is a cornerstone of

IMPACT’s plan to rapidly grow silver production in the

Zacualpan and Mamatla Districts.

Early in the new year IMPACT announced a

program of development of the Capire Volcangenic

Massive Sulphide deposit in the Mamatla District.

The program involves the installation of a

200 tpd pilot plant and commencement of a starter

pit on a higher grade section of the deposit.

Exploration will be continued on the extension of

the deposit and a number of additional targets in

the vicinity.

IMPACT is a reporting issuer in British Columbia and

Alberta and trades on the TSX Venture Exchange as a

Tier 1 Issuer under the symbol IPT and on the

Frankfurt Stock Exchange under the symbol IKL.

For more information on IMPACT visit its website at

www.impactsilver.com and SEDAR at www.sedar.com.

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S A F E T Y, S O C I A L A N D E N V I R O N M E N TA L P O L I C Y

Exploration and drilling create a physical change within the area of work. The Company believes in its responsibility

to ensure that it minimizes the environmental impact of its efforts. The development of our drills is a direct

successful offshoot of the need to explore with a light footprint using a drill pad of very limited size, which does not

require the construction of roads and complex access.

The equipment, however, is only a part of the equation. Our employees and contract personnel are aware and

continually reminded that environmental issues and safety cannot be compromised. The Company has published

safety, social, and environmental policies related to its operations and is currently implementing an ISO 14001

program throughout the Company.

We work as part of the community, whose members must be kept informed of our activities and their concerns

addressed. Wherever possible, the local community should participate in the benefits that may flow from the

Company’s activities. The use of local personnel as drillers, driller’s helpers and workers fosters direct involvement

in the programs conducted by the Company. For instance during 2009, as part of its overall community programs

in Mexico the Company drilled and equipped three water wells for remote communities without adequate clean

water. In Haiti the Company participated in the construction of the almost 50 meter long Elizabeth foot bridge in

Limbe Municipality.

The Company has published specific policies and regulations to address the above, as well as our ongoing concern

for safety. A research program on equipment safety has been completed and the Company has commenced a

retrofit program for safety upgrades on its rigs. Work being conducted by or on behalf of the Company must be

well planned, safe and with a concern for the environment and communities surrounding us. The Company devel-

oped and published a driller’s safety manual for its staff and maintains a safety and environmental audit program.

C O N T R A C T D R I L L I N G R I S K FA C T O R S

The Company is faced with a number of risks with respect to its contract drilling operations. Contract drilling is a

highly competitive industry, where numerous competitors may tender bids for contracts. The Company’s ability

to continue to secure profitable contracts on an ongoing basis is not assured. Like every business operating

internationally, the Company faces numerous risks in its day-to-day business operations which are highlighted in the

headings below and briefly summarized.

Cyclical Industry Risks

The contract drilling industry is reliant on demand from two primary categories of commodities, gold and base

metals, while certain industrial minerals may also be tested. Under favourable market conditions, rising commodity

prices normally spur an increased demand for drilling services; however, cyclical downturns in commodity prices

can have the opposite effect and the Company could be exposed to an investment in drilling equipment and

supplies which might not be able to be utilized to their full capacity.

Reliance on Key Accounts

From time to time, the Company may be dependent on a small number of customers for a significant portion of its

overall drilling revenues and net earnings.



18


2 0 1 0 A N N U A L R E P O R T

Workforce Availability

Drilling is as much an art as a science and it takes considerable time and experience for an individual to become awell-qualified driller. As the drilling industry transitions to a cyclical upturn there may be a shortage of qualifieddrillers. The Company is addressing this issue in a number of ways. In certain countries, it is developing and training a local work force. It is also hiring overseas and developing incentive programs to retain drillers. If theCompany cannot hire or train a sufficient quantity of drillers, it may result in lower rig utilization and revenues.

Extreme Weather Conditions

The Company operates in a variety of locations and areas in the world, some of which are subject to extremeweather conditions which can have a significant impact on operations.

Foreign Countries and Regulatory Requirements

Contract drilling, mineral exploration and mining activities may be affected in varying degrees by political instabilityand government regulations relating to the mining industry and foreign investors therein. Any changes in regulations or shifts in political conditions are beyond the control of the Company and may adversely affect its own,or its clients’ business outlook. Operations may be affected in varying degrees by government regulations withrespect to restrictions on production, price controls, export controls, income taxes, mine safety, environmental legislation, and expropriation of property.

Environmental and Other Regulatory Requirements

The current or future operations of the Company and its clients involving contract drilling, exploration, developmentactivities, production and mining on their properties require permits from various federal, state, and local govern-mental authorities. Such operations are and will be governed by laws and regulations governing prospecting,development, mining, production, exports, taxes, labour standards, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety and other matters. Regulatory requirements and environmental standards are subject to constant evaluation and may be significantly changed, which could significantlyadversely affect the business of the Company and its clients in any jurisdiction in which the Company operates.

Permits and Licenses

The operations of the Company and its clients may require licenses and permits from various governmental authorities. There can be no assurance that the Company or its clients will be able to obtain all necessary licensesand permits that they may require to carry out contract drilling or exploration, development and mining operationson their mineral properties.

Mineral Exploration and Development Risks

In addition to these risks with respect to its contract drilling operations, the Company could face certain additionalrisks to those already identified above, with respect to its mineral exploration activities, if it were to resume suchactivities on an active basis. While the Company retains a core legacy of mineral concession exploration propertiesin the Dominican Republic from its historic roots as a mineral exploration company, it does not currently have anyplans to resume exploration activities on these mineral property concessions for its own account. Rather, theCompany intends to realize value with respect to these mineral property concessions by various means, includingthe possible sale or optioning of such property concessions to others, as the Company deems advisable. TheCompany believes that current exploration efforts by other mineral exploration companies in the DominicanRepublic are enhancing the future value of these mineral exploration concessions and that further opportunities torealize value for these concessions will come available to the Company in the future.

19


As the Company’s management has had considerable prior experience in mining operations, it understands thatthe exploration for and development of mineral deposits is a speculative venture necessarily involving substantialrisks. Management understands that very few properties which are explored will result in the discoveries of commercially viable mineral deposits which will ultimately be developed into a profitable commercial mining operation. It is for this reason that the Company has chosen to reduce its business risk to its shareholders by usingits mining knowledge and know how to provide contract drilling services to the mining and mineral exploration sectors, thus providing an essential service available to mining and mineral exploration companies with a contractdrilling service offered in a cost effective and environmentally friendly manner.

F I N A N C I A L I N S T R U M E N T S A N D M A N A G E M E N T O F F I N A N C I A L R I S K

Financial Assets and Liabilities

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable,short-term investments and accounts payable and accrued liabilities. For cash and cash equivalents, restrictedcash, accounts receivable, and accounts payable and accrued liabilities, carrying value is considered to be fair valuedue to the short-term nature of these instruments. The fair value of short-term investments is determined by quoted prices in active markets for identical assets at the balance sheet date. At December 31, 2010 all short-terminvestments held were classified as Level 1 and cash and cash equivalents were classified as Level 2 on the fair valuehierarchy of Handbook Section 3862 – Financial Instruments - Disclosures.

Financial Instrument Risk Exposure

The Company’s financial instruments are exposed to a number of financial and market risks including credit, liquidity, currency and interest rate risks. The Company may, or may not, establish from time to time active policiesto manage these risks. The Company does not currently have in place any active hedging or derivative tradingpolicies to manage these risks since the Company’s management does not believe that the current size, scale andpattern of cash flow of its operations would warrant such hedging activities.

Credit Risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the otherparty to incur a financial loss. Financial instruments that potentially subject the Company to credit risk include cash



20

Become a Social & Environmental Citizen

Energold Drilling Corp. is committed to making a positive impact

socially and environmentally within the communities we work in world-

wide. We understand the importance of being a Social & Environmental

Citizen and operating our business in mutual cooperation with all stake-

holders and communities. This reinforces our long-term commitment of

maintaining a viable business by providing employment and develop-

ment opportunities, minimizing our impact on the environment, and

increasing the standard of living in these impoverished communities.


2 0 1 0 A N N U A L R E P O R T

and cash equivalents, restricted cash, accounts receivable and short-term investments. The Company deposits itscash and cash equivalents with high credit quality financial institutions as determined by ratings agencies, with themajority deposited with a Canadian Tier 1 Bank. The Company provides credit to its customers in the normalcourse of its operations. The Company diversifies its credit risk by dealing with a large number of customers in various countries.

The Company’s maximum exposure to credit risk at the reporting date is the carrying value of its cash and cashequivalents, restricted cash, accounts receivable and short-term investments.

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its obligations as they fall due. The Companymanages liquidity by maintaining cash and cash equivalent balances available to meet its anticipated operationalneeds. The Company has not been required to establish committed credit facilities but will do so as necessary.Liquidity requirements are managed based on expected cash flow to ensure that there is adequate capital to meetshort-term and long-term obligations. The Company has in place a planning and budgeting process to helpdetermine the funds required to support the Company’s normal operating requirements on an ongoing basis andits growth plans. At December 31, 2010 the Company’s accounts payable and accrued liabilities were $7.8 million,of which $7.6 million falls due for payment within twelve months of the balance sheet date. The Company has minimal long-term commitments.

Currency Risk

The Company operates on an international basis on five continents and therefore, currency risk exposures arisefrom transactions denominated in foreign currencies. The majority of its international sales contracts are denomi-nated in US dollars. Thus its currency risk arises primarily with respect to the US dollar. However, the Company alsoincurs operating costs in local currencies in various countries in which it carries on active business operations. TheCompany has elected not to actively manage our currency risk at this time.

At December 31, 2010 the Company is exposed to currency risk through cash and cash equivalents, accountsreceivable, and accounts payable and accrued liabilities held in U.S. dollars, Mexican pesos and Brazilian reais.Based on these foreign currency exposures at December 31, 2010, a 5% depreciation or appreciation of all theabove currencies against the Canadian dollar would result in an approximate $0.57 million decrease or increase inthe Company’s net earnings.

21


Haiti Bridge Infrastructure Project

As an example of our contributions, we assisted in building a bridge

in Haiti in liaison with Newmont Mining. The community had limited

transportation access to the other side of the river. Energold decided

to step in and donate the material to build the towers for the bridge,

the main cable anchors, and the time to drill and install the anchors. This

project provided a direct benefit to the local community in terms of em-

ployment and infrastructure development. We thank all relevant stake-

holders involved especially Newmont Mining amongst notable others.

Interest Rate Risk

Interest rate risk is the risk that the fair values andfuture cash flows of the Company will fluctuatebecause of changes in market interest rates. TheCompany is exposed to interest rate risk on its cashand cash equivalents. The Company did not have anyborrowings outstanding as at December 31, 2010.

Changes in Accounting Policies – Adoption ofNew Accounting Policies

In January 2009, the Canadian Institute of CharteredAccountants (“CICA”) issued Section 1582 –Business Combinations to replace Section 1581.Prospective application of the standard is effectiveJanuary 1, 2011, with early adoption permitted. Thisnew standard effectively harmonizes the businesscombinations standard under Canadian GAAP with International Financial Reporting Standards(“IFRS”). The new standard revises guidance on thedetermination of the carrying amount of the assetsacquired and liabilities assumed, goodwill andaccounting for non-controlling interests at the time of the business combination.

The CICA concurrently issued Section 1601 –Consolidated Financial Statements and Section 1602– Non-Controlling Interests, which replace Section1600 – Consolidated Financial Statements. Section1601 provides revised guidance on the preparation ofconsolidated financial statements and Section 1602addresses accounting for non-controlling interests inconsolidated financial statements subsequent to abusiness combination. These standards are effectiveJanuary 1, 2011, unless they are early adopted at thesame time as Section 1582 – Business Combinations.We have chosen to early adopt Sections 1582, 1601and 1602 effective January 1, 2010. There is no effecton previous business combinations.

International Financial Reporting Standards(“IFRS”)

In February 2008, the Canadian AccountingStandards Board confirmed that IFRS will replace current Canadian GAAP for publicly-accountable,profit-oriented enterprises effective January 1, 2011.

Accordingly, the Company will apply accounting policies consistent with IFRS beginning with its interim financial statements for the quarter endedMarch 31, 2011, with restatement of comparativeinformation presented. The conversion to IFRS fromCanadian GAAP will affect the Company’s reportedfinancial position and results of operations and willaffect the Company’s accounting policies, internalcontrol over financial reporting and disclosure controls and procedures.

In 2009 the Company began the process of identify-ing the differences between Canadian GAAP andIFRS and identifying how these differences may affectthe reporting of the Company’s reported financialposition and results of operations. The Company alsoassessed the available elections under IFRS 1, First-time adoption of International Financial ReportingStandards (“IFRS 1”) to determine the effect of eachelection on the Company. The Company has commenced quantifying the effects of the anticipatedchanges to the financial reporting on the Company’sIFRS opening balance sheet and is concurrentlypreparing draft IFRS-compliant model financial statements and making appropriate changes to busi-ness, reporting and system processes and training tosupport the preparation and maintenance of IFRScompliant financial data for the IFRS opening balancesheet at January 1, 2010 and going forward. TheCompany believes that it is in a position to ensure anefficient and effective transition to IFRS reporting bythe first IFRS reporting date.

First-time Adoption of IFRS

The adoption of IFRS requires the application of IFRS1 which provides guidance for an entity’s initial adop-tion of IFRS. IFRS 1 generally requires retrospectiveapplication of IFRS, effective at the end of its firstannual IFRS reporting period. However, IFRS 1 alsoprovides certain optional exemptions and mandatoryexceptions to this retrospective treatment. TheCompany has identified the following optionalexemptions that it expects to apply in its preparationof an opening IFRS statement of financial position asat January 1, 2010, the Company’s “Transition Date”:



22


2 0 1 0 A N N U A L R E P O R T

• To apply IFRS 2 Share-based Payments only toequity instruments that were issued afterNovember 7, 2002 and had not vested by theTransition Date.

• To apply IFRS 3 Business Combinations prospec-tively from the Transition Date, therefore notrestating business combinations that took placeprior to the Transition Date.

• To apply IFRS 21 The Effects of Changes inForeign Exchange Rates, therefore resetting trans-lation differences at the date of transition, deter-mined in accordance to previous GAAP, to zero.

IFRS 1 does not permit changes to estimates that

have been made previously. Accordingly, estimates

used in the preparation of the Company’s opening

IFRS statement of financial position as at the

Transition Date will be consistent with those made

under Canadian GAAP. If necessary, estimates will be

adjusted to reflect any difference in accounting policy.

The Company has not yet determined the full effects

of adopting IFRS on its financial statements. Included

below are highlights of the areas that are expected to

result in a change to significant accounting policies.

The list is not intended to be a complete list of areas

where the adoption of IFRS will require a change in

accounting policies, but to highlight the areas identi-

fied to have the most potential for significant

changes.

Property, Plant and Equipment

IFRS requires entities to componentize all assets and

record amortization on a component-by-component

basis. The Company is currently completing an

assessment on all long-lived assets for their major

components in order to determine if a difference will

exist between current Canadian GAAP values and

IFRS values. The Company does not anticipate a sig-

nificant difference between Canadian GAAP and IFRS

on transition as a result of this difference.

Share-based Payments

Share-based payments under IFRS are expensed

based on a graded vesting schedule, a forfeiture rate

must be applied and the definition of an employee

differs under Canadian GAAP and IFRS. The

Company does not anticipate a significant difference

between Canadian GAAP and IFRS on transition as a

result of this difference.

Investment in Associates

Under IFRS unrealized profits and losses on both

upstream transactions and downstream transactions

are eliminated only to the extent of the investor's

interest in the investee. Under Canadian GAAP, 100%

of unrealized profits and losses from downstream

transactions are eliminated. The Company is currently

completing an assessment in this area between

Canadian GAAP and IFRS on transition as a result of

this difference.

Deferred Income Taxes

There are a number of potential differences in the

calculation of deferred income taxes under IFRS

compared with Canadian GAAP. The Company is

currently completing the assessment of the deferred

income taxes under IFRS.

Other Important Considerations During the IFRS Transition Include:

Internal control over financial reporting (“ICFR”) – for

all accounting policy changes identified, the

Company will assess the impact on the ICFR design

and effectiveness implications and will ensure that

all changes in accounting policies include the

appropriate additional controls and procedures for

future IFRS reporting requirements.

Disclosure controls and procedures (“DC&P”) – for all

accounting policy changes identified an assessment

of DC&P design and effectiveness implication will be

analyzed to address any issues with respect to DC&P

during IFRS transition.

Updates on the progress of the conversion process

were provided regularly to the Company’s audit

committee and disclosed in the Company’s MD&A on

a quarterly basis throughout 2010.

23


D I S C L O S U R E C O N T R O L S A N D I N T E R N A L C O N T R O L O V E R F I N A N C I A L R E P O R T I N G

Disclosure Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that material information isgathered and reported to senior management, including the Chief Executive Officer and Chief Financial Officer, asappropriate to permit timely decisions regarding public disclosure.

Management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures as defined by the CanadianSecurities Administrators (CSA), as at December 31, 2010. Based on this evaluation, the Chief Executive Officerand the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed or submitted by the Company underCanadian securities legislation is recorded, processed, summarized and reported within the time periods specifiedin those rules.

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financialreporting. Any system of internal control over financial reporting, no matter how well designed, has inherent limita-tions and may not prevent or detect misstatements. Therefore even those systems determined to be effective canonly provide reasonable assurance with respect to financial statement preparation and presentation. Also, projectionsof any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

After reviewing our overall Company’s internal controls and financial reporting and disclosure systems, manage-ment is satisfied that as at December 31, 2010 the Company has designed overall controls and systems to meet theneeds of the Company, its shareholders, and other stakeholders who rely on the Company’s financial informationand reporting systems.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the year endedDecember 31, 2010 that have materially affected, or are reasonably likely to materially affect, its internal controlover financial reporting.

Approval

The Board of Directors oversees management’s responsibility for financial reporting and internal control systemsthrough an Audit Committee. This Committee meets periodically with management and the independent auditorsto review the scope and results of the annual audit and to review the financial statements and related financialreporting and internal control matters before the financial statements are approved by the Board of Directors andsubmitted to the shareholders of the Company. The Board of Directors of Energold has approved the financialstatements and the disclosure contained in this MD&A. A copy of this MD&A will be provided to anyone whorequests it.

N O N - G A A P M E A S U R E S

The Company uses both GAAP and non-GAAP measures to assess performance and believes the non-GAAP measuresprovide useful information to investors to help in evaluating the Company’s performance. Following are the non-GAAP measures the Company uses in assessing performance:

Gross margin: Calculated as Revenue from Drilling Contracts less Direct Drilling Costs.

Gross margin percentage: Calculated as (Gross margin divided by Revenue from Drilling Contracts) x 100.



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2 0 1 0 A N N U A L R E P O R T

Cash flows from operations before changes in non-cash working capital: Calculated as Cash flows from operationsless the changes in non-cash working capital (accounts receivable and prepaid expenses, due from IMPACT SilverCorp., income taxes receivable, inventories, accounts payable and accrued liabilities, income taxes payable,deferred revenue, and future income taxes).

The Company’s method of calculating these non-GAAP measures may differ from other entities and, accordingly,may not be comparable to measures used by other entities. Investors are cautioned, however, that these measuresshould not be construed as an alternative to measures determined in accordance with GAAP as an indicator of theCompany’s performance.

N O T E R E G A R D I N G F O R W A R D - L O O K I N G S TAT E M E N T S

This MD&A contains certain forward-looking statements and information relating to Energold that are based on thebeliefs of its management as well as assumptions made by and information currently available to Energold. Whenused in this document, the words “anticipate”, “believe”, “estimate”, “expect” and similar expressions, as theyrelate to the Company or its management, are intended to identify forward-looking statements. This MD&A contains forward-looking statements relating to, among other things, regulatory compliance, the sufficiency of current working capital, the estimated cost and availability of funding for the continued exploration and develop-ment of the Company’s exploration properties. Such statements reflect the current views of the Company withrespect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could causethe actual results, performance or achievements of the Company to be materially different from any future results,performance or achievements that may be expressed or implied by such forward-looking statements.

Additional Information

Additional information relating to Energold is on SEDAR at www.sedar.com.

On behalf of the board of directors,

Frederick W. DavidsonPresident and Chief Executive Officer

April 14, 2011

25


M A N A G E M E N T ’ S R E P O N S I B I L I T Y

The accompanying financial statements of Energold Drilling Corp. (“the Company”) have been prepared by

management in accordance with accounting principles generally accepted in Canada, and within the framework

of the summary of significant accounting policies in these consolidated financial statements, and reflect

management’s best estimate and judgment based on currently available information.

Management has developed and maintains a system of internal controls to provide reasonable assurance that the

Company’s assets are safeguarded, transactions are authorized and financial information is accurate and reliable.

The Audit Committee of the Board of Directors meets periodically with management and with the Company’s

independent auditors to review the scope and results of their annual audit and to review the consolidated financial

statements and related financial reporting matters prior to submitting the consolidated financial statements to the

Board of Directors for approval.

The consolidated financial statements have been audited by PricewaterhouseCoopers LLP on behalf of the

shareholders and their report follows.

F.W. Davidson President and Chief Executive Officer R. S. Younker Chief Financial Officer

April 14, 2011

26


M A N A G E M E N T ’ S R E S P O N S I B I L I T YF O R F I N A N C I A L R E P O R T I N G

A U D I T O R S ’ R E P O R T

To the Shareholders of Energold Drilling Corp.

We have audited the accompanying consolidated financial statements of Energold Drilling Corp., which comprise

the consolidated balance sheets as at December 31, 2010 and 2009 and the consolidated statements of earnings

and retained earnings and cash flows for the years 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.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We

conducted our audits in accordance with Canadian generally accepted auditing standards. 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 auditor’s 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 auditor considers 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

Energold Drilling Corp. as at December 31, 2010 and 2009 and its results of operations and cash flows for the years

then ended in accordance with Canadian generally accepted accounting principles.

Chartered Accountants

Vancouver, BC

April 14, 2011

2 0 1 0 A N N U A L R E P O R T

27

I N D E P E N D E N T A U D I T O R S ’ R E P O R T

C O N S O L I D AT E D B A L A N C E S H E E T S S TAT E M E N T 1

F I N A N C I A L S T A T E M E N T S


28

As at December 31 Canadian Dollars 2010 2009

ASSETSCurrent

Cash and cash equivalents $ 28,224,579 $ 18,460,268Restricted cash (Note 5) 252,981 2,218,750Accounts receivable and prepaid expenses 12,123,663 6,922,090Due from IMPACT Silver Corp. (Note 11c) 414,419 274,902Income taxes receivable 478,735 594,289Short-term investments 2,491,542 1,412,493Inventories (Note 6) 29,598,023 23,629,283Future income taxes (Note 16) 36,182 –

73,620,124 53,512,075

Investment in a private corporation (Note 8d) 2,000,000 –Investment in IMPACT Silver Corp. (Note 7) 5,289,922 3,660,757Resource properties (Note 8) 1,368,278 1,370,934Property, plant and equipment (Note 9) 9,817,298 7,664,099Goodwill 1,710,000 1,710,000Future income taxes (Note 16) 1,468,543 994,971

$ 95,274,165 $ 68,912,836

LIABILITIESCurrent

Accounts payable and accrued liabilities $ 7,170,082 $ 3,569,728Income taxes payable 505,178 69,444Deferred revenue – current portion 552,869 506,647Future income taxes (Note 16) 3,930,693 2,847,617

12,158,822 6,993,436Future income taxes (Note 16) 885,377 470,029Deferred revenue 98,694 –Leases payable 167,511 –

13,310,404 7,463,465SHAREHOLDERS' EQUITYShare capital (Notes10a) 56,257,452 41,062,153Contributed surplus (Note 10b) 2,079,783 1,137,831Warrants (Note 10c) 2,060,276 –Accumulated other comprehensive income (Note 10d) 1,021,140 152,785Retained earnings 20,545,110 19,096,602

81,963,761 61,449,371

$ 95,274,165 $ 68,912,836

Commitments (Note 12)Subsequent events (Note 18)

ON BEHALF OF THE BOARD:

“F.W. Davidson” Director “H.W. Sellmer” Director

The accompanying notes form an integral part of these financial statements.

For the Years Ended December 31 Canadian Dollars 2010 2009

Revenue from drilling contracts $ 54,591,578 $ 23,719,367Direct drilling costs 43,061,923 18,044,138

11,529,655 5,675,229Indirect and administrative expenses

Accounting, audit and legal 796,564 655,693Amortization 1,457,636 1,330,726Bad debt (recovery) expense 8,667 (1,034,992)Investor relations, promotion and travel 469,162 431,435Management fees and consulting 697,244 385,909Office, rent, insurance and sundry 1,249,282 1,032,355Office salaries and services 3,501,420 2,456,399Stock-based compensation 979,082 239,816

9,159,057 5,497,341

Earnings before the following 2,370,598 177,888

Other income (expenses)

Dilution gain on investment in IMPACT Silver Corp. (Note 7) 936,332 55,737Equity increase in IMPACT Silver Corp. (Note 7) 417,833 262,388Foreign exchange (loss) gain (693,042) (2,334,121)Gain on acquisition of assets 411,910 –Gain on disposal of assets 350,025 117,849Interest (164,699) 55,878Other income 29,076 261,067

1,287,435 (1,581,202)

Earnings (loss) before taxes 3,658,033 (1,403,314)Current and other income taxes (Note 16 ) (1,494,040) (317,501)Future income taxes (Note 16) (715,485) (230,078)

Net earnings (loss) 1,448,508 (1,950,893)Retained earnings – Beginning of year 19,096,602 21,047,495

Retained earnings – End of year $ 20,545,110 $ 19,096,602

Earnings (loss) per share – Basic $ 0.04 $ (0.06)Earnings (loss) per share – Diluted $ 0.04 $ (0.06)

Weighted average number of shares outstanding – Basic 34,869,083 34,132,281Weighted average number of shares outstanding – Diluted 35,176,417 34,350,781



2 0 1 0 A N N U A L R E P O R T

C O N S O L I D AT E D S TAT E M E N T S O F

S TAT E M E N T 2 E A R N I N G S ( L O S S ) A N D R E TA I N E D E A R N I N G S

29



C O N S O L I D AT E D S TAT E M E N T S

O F C O M P R E H E N S I V E I N C O M E ( L O S S ) S TAT E M E N T 3

30


Net earnings (loss) $ 1,448,508 $ (1,950,893)

Other comprehensive income (loss)Unrealized gain on available for sale short-term investments (net of taxes) 868,355 165,683

Total comprehensive income (loss) $ 2,316,863 $ (1,785,210)



Cash resources provided by (used in)

Operating activities

Net earnings (loss) $ 1,448,508 $ (1,950,893)Items not affecting cash

Amortization 1,457,636 1,330,726Bad debt expense (recovery) 8,667 (1,034,992)Dilution gain on investment in IMPACT Silver Corp. (936,332) (55,737)Equity decrease (increase) in IMPACT Silver Corp. (417,833) (262,388)Future income taxes 715,485 230,078Gain on acquisition of assets (411,910) –Loss on disposal of assets 3,083 16,239Gain on disposal of short-term investments (353,108) (134,088)Stock-based compensation 979,082 239,816Unrealized loss (gain) on foreign exchange 523,976 2,021,922Increase (decrease) in deferred revenue 98,694 (507,297)

Changes in non cash working capital (Note 13) (7,550,044) (429,146)

(4,434,096) (535,760)

Investing activities

Decrease (increase) in restricted cash 1,965,769 (50,325)Investment in a private corporation 2,000,000 –Investment in IMPACT Silver Corp. (275,000) –Proceeds on sale of assets 35,194 28,723Proceeds on sale of short-term investments 1,087,327 381,164Purchase of property, plant and equipment (2,895,171) (1,061,091)Purchase of short-term investments (2,404,574) (1,461,690)Resource property recoveries 2,656 67,000

(2,483,799) (2,096,219)

Financing activities

Share capital issued 16,955,746 18,000

16,955,746 18,000

Effect of exchange rate changes on cash and cash equivalents (273,540) (1,499,633)

Net increase (decrease) in cash and cash equivalents 9,764,311 (4,113,612)Cash and cash equivalents – Beginning of year 18,460,268 22,573,880

Cash and cash equivalents – End of year $ 28,224,579 $ 18,460,268

Supplementary cash flow information (Note 13)



2 0 1 0 A N N U A L R E P O R T

C O N S O L I D AT E D S TAT E M E N T S

S TAT E M E N T 4 O F C A S H F L O W S

31

December 31, 2010 Canadian Dollars

1 . N AT U R E O F O P E R AT I O N S

Energold Drilling Corp. (the “Company”) provides, directly and through its subsidiaries, contract diamond drilling servicesfor parties principally in Mexico, the Caribbean, Central America, South America, Africa and Asia.

The Company also holds mineral exploration properties in Latin America, primarily in the Dominican Republic and Mexico,both directly and through the 6.87 million shares that it holds in IMPACT Silver Corp. (“IMPACT”). The Company’s interestin IMPACT is currently accounted for on an equity basis.

2 . S I G N I F I C A N T A C C O U N T I N G P O L I C I E S

These consolidated financial statements have been prepared by the Company in accordance with Canadian generallyaccepted accounting principles “GAAP”.

a) Principles of consolidation

These consolidated financial statements include the accounts of the Company and all of its subsidiaries, including:

• Omniterra International Drilling Inc. (“OID”) (formerly Kluane International Drilling Inc.) and FMI Technologies Inc. located in Canada;

• Energold de Mexico S.A. de C.V. (“EDM”) and Silver Servicios de Personal, S. de R.L. de C.V. (“SSP”) located in Mexico;

• Energold Drilling Dominicana, S.A. (“EDD”) located in the Dominican Republic;

• Energold Drilling Peru, S.A.C. (“EDP”) located in Peru;

• Energold Perfuracoes Ltda. (“EPB”) located in Brazil;

• Energold de Chile S.A. (“EDC”) located in Chile;

• Energold de Colombia S.A.S. (“EDCOL”) located in Colombia;

• Energold de Argentina S.A. (“EDA”) located in Argentina; and

• E Global Drilling Corp. (“E Global”) located in Barbados

• Recursos de los Andes located in Peru

All intercompany transactions and balances have been eliminated.

b) Use of estimates

The preparation of consolidated financial statements in conformity with Canadian GAAP requires that the Company’s management make estimates and assumptions about future events that affect the amounts reported in the consolidatedfinancial statements and related notes to the financial statements. Actual results may differ from these estimates.

Significant areas requiring the use of management estimates include, but are not limited to, the recoverability of accountsreceivable, the net realizable value of inventory, the useful lives of property, plant and equipment for amortization purposes, the provision for current and future income taxes, the assumptions used in calculating stockbased compensationexpense and fair value of warrants issued in conjunction with the issuance of the Company’s common shares, the valuationof the investment in IMPACT Silver Corp., the valuation of the investment in private company, the assumptions used in calculating the fair value of goodwill for impairment testing purposes, the recoverability of resource properties, and the fairvalue of assets and liabilities acquired in business combinations.

c) Revenue recognition

Revenue from drilling contracts is recognized on the basis of actual meters drilled for each contract. Revenue from ancillary services is recorded when the services are rendered. Revenue is recognized when collection is reasonably assured.Contract prepayments are recorded as deferred revenue until performance is achieved and are credited against contractbillings in accordance with the contract terms.

N O T E S T O F I N A N C I A L S T A T E M E N T S


N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

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2 0 1 0 A N N U A L R E P O R T

d) Cash and cash equivalents

Cash and cash equivalents include cash, term deposits and short-term highly liquid money market investments with anoriginal term to maturity of three months or less and which are readily convertible to known amounts of cash.

e) Inventories

The principal components of inventories include drill tubes, drill rods, casings, drill bits, and consumable supplies andlubricants necessary to carry out drilling operations which are normally consumed during drilling operations either duringa single contract or over the course of a business year.

The Company maintains inventories in each country in which it operates of significant drilling equipment, parts, and supplies (including pumps, motors, generators, and water and hydraulic hoses), together with a base inventory of smallervalue parts and equipment necessary to allow its drilling staff to provide field support and maintenance to its man portabledrilling equipment.

Procurement, transportation and import duties are included in inventory cost.

The Company applies the following policies with respect to inventory accounting and valuation:

i) Higher value drilling equipment parts and supplies as well as consumable inventories are valued at landed cost on a first-in, first-out basis, based upon country of use, less an allowance for obsolescence (wear and tear) based upon management’s judgment of the expected remaining field service life of the equipment parts and supplies.

ii) Each drill has a base inventory of smaller value equipment parts and supply items which are valued at landed cost.

f) Investments

Investments in entities over which the Company exercises significant influence are accounted for using the equity method.The Company reviews and evaluates its investments for impairment annually or when events or changes in circumstancesindicate that the related carrying amounts may not be recoverable. A significant or prolonged decline in the fair value ofan investment below its carrying value that is considered to be other than temporary would be recognized by writing downthe investment.

g) Resource properties

The Company is in the process of exploring its resource properties and has not yet determined whether these propertiescontain ore reserves that are economically recoverable.

Resource exploration and development costs are capitalized on an individual prospect basis until such time as an economic ore body is defined or the prospect is abandoned. Management reviews and evaluates the carrying values of its resource properties for impairment on an annual basis or when events or changes in circumstances indicate that therelated carrying amounts may not be recoverable.

The recoverability of the amounts capitalized for the undeveloped resource properties is dependent upon the determina-tion of economically recoverable ore reserves, confirmation of the Company's interest in the underlying mineral claims, theability to obtain the necessary financing to complete their development, and future profitable production or proceeds fromthe disposition thereof.

Title to resource properties involves certain inherent risks due to the difficulties of determining the validity of certain claimsas well as the potential for problems arising from the frequently ambiguous conveyancing history characteristic of manyresource properties. The Company has investigated title to all of its mineral properties and, to the best of its knowledge,title to all of its properties are in good standing.

From time to time, the Company may acquire or dispose of properties pursuant to the terms of option agreements. Dueto the fact that options are exercisable entirely at the discretion of the optionee, the amounts payable or receivable are notrecorded. Option payments are recorded as resource property costs or recoveries when the payments are made orreceived. The Company does not accrue the estimated costs of maintaining its mineral interests in good standing.

h) Property, plant and equipment

Property, plant and equipment are valued at cost less accumulated amortization. Amortization is charged to operationsusing the declining balance method as follows:

• Exploration and drilling equipment – 20% per annum

• ehicles – 20% per annum

• Office furniture and equipment – 20% per annum

• Computer equipment – 30% per annum

One-half of the amortization is recorded in the year of acquisition. Costs for repairs and maintenance are charged to operations as incurred.

33

i) Goodwill

Business acquisitions are accounted for using the purchase method whereby assets and liabilities acquired are recorded at their fair values as of the date of acquisition and any excess of the purchase price over such fair value is recorded asgoodwill. Goodwill is identified and allocated to reporting units by preparing estimates of the fair value of each reportingunit and comparing this amount to the fair value of assets and liabilities in the reporting unit. Goodwill is not amortized.

The Company assesses goodwill impairment on at least an annual basis, or more frequently if events or circumstances indicate there may be impairment. To accomplish this assessment, the Company estimates the fair value of its reportingunits that include goodwill and compares those fair values to the reporting units’ carrying amounts. If the carrying value of a reporting unit exceeds its fair value, the Company compares the implied fair value of the reporting unit’s goodwill toits carrying amount, and any excess of the carrying amount over the fair value is charged to operations. Assumptionsunderlying the fair value estimates are subject to significant risks and uncertainties. The Company performed impairmenttests at December 31, 2010 and December 31, 2009 and determined there was no impairment in the carrying value.

j) Income taxes

The Company accounts for income taxes using the asset and liability method. Under this method, current income taxes are recognized for the estimated income taxes payable for the current period. Future income tax assets and liabilities arerecognized for temporary differences between the tax and accounting basis of assets and liabilities as well as for the benefit of losses available to be carried forward to future years for tax purposes that are more likely than not to be realized.

k) Earnings per share

Basic earnings per share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share are calculated by dividing net income available to common shareholders by the weighted average number of diluted common shares outstandingduring the year. Diluted common shares reflect the potential dilutive effect of exercising the stock options and warrantsbased on the treasury stock method.

l) Foreign currency translation

All amounts are presented in Canadian dollars. The Company has determined that all of its foreign subsidiaries are integrated operations; therefore local currencies are translated into Canadian dollars under the temporal method as follows:

• Monetary assets and liabilities at year-end rates,

• All other assets and liabilities at historical rates, and

• Revenue and expense and exploration and development items at the average rate of exchange prevailing during theperiod.

Exchange gains and losses arising from these transactions are reflected in income or expense in the year.

m) Comprehensive income

Comprehensive income consists of net income and other comprehensive income (“OCI”). OCI represents changes inshareholders’ equity during a period arising from transactions and other events with non-owner sources and includes unrealized gains and losses on financial assets classified as available-for-sale.

n) Financial instruments

The Company’s financial instruments comprise primarily cash and cash equivalents, restricted cash, accounts receivable,short-term investments and accounts payable and accrued liabilities. The Company has designated cash and cash equivalents and restricted cash as held-for-trading, which are measured at fair value. Accounts receivable are designatedas loans and receivables, which are measured at amortized cost. Short-term investments are designated as available-for-sale and measured at fair value as determined by reference to quoted market prices. Accounts payable and accrued liabilities are designated as other liabilities, which are measured at amortized cost.

o) Stock-based compensation and warrants

The Company accounts for stock options at fair value pursuant to CICA Handbook Section 3870, which establishes standards for the recognition, measurement and disclosure of stock-based compensation. Stock-based compensationexpense for stock options granted is determined based on the fair value of the options at the time of grant using the Black-Scholes option pricing model.



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2 0 1 0 A N N U A L R E P O R T

The proceeds from the issue of units is allocated between common shares and common share purchase warrants on a prorated basis on relative fair values as follows: the fair value of common shares is based on the market close on the datethe units are issued; and the fair value of the common share purchase warrants is determined using the Black- Scholes pricing model.

3 . C H A N G E S I N A C C O U N T I N G P O L I C I E S

Adoption of new accounting policies

In January 2009, the Canadian Institute of Chartered Accountants (“CICA”) issued Section 1582 – Business Combinationsto replace Section 1581. Prospective application of the standard is effective January 1, 2011, with early adoption permit-ted. This new standard effectively harmonizes the business combinations standard under Canadian GAAP withInternational Financial Reporting Standards (“IFRS”). The new standard revises guidance on the determination of the car-rying amount of the assets acquired and liabilities assumed, goodwill and accounting for non-controlling interests at thetime of the business combination.

The CICA concurrently issued Section 1601 – Consolidated Financial Statements and Section 1602 – Non- ControllingInterests, which replace Section 1600 – Consolidated Financial Statements. Section 1601 provides revised guidance on thepreparation of consolidated financial statements and Section 1602 addresses accounting for non-controlling interests inconsolidated financial statements subsequent to a business combination. These standards are effective January 1, 2011,unless they are early adopted at the same time as Section 1582 – Business Combinations. We have chosen to early adoptSections 1582, 1601 and 1602 effective January 1, 2010. There is no effect on previous business combinations.

4 . B U S I N E S S C O M B I N AT I O N

a) On March 8, 2010 the Company acquired nine drilling rigs with related support equipment and inventories, as well as existing drilling contracts, and management and operating personnel from Envirodrill (UK) Ltd. The acquired assets are primarily located in West Africa. Consideration for the acquired assets included cash, common shares of the Company and the assumption of leases related to certain acquired assets as detailed in the table below.

Fair value of assets and liabilities acquiredInventories $ 362,819Property, plant and equipment 1,271,681Leases payable (483,477)

Net assets acquired $ 1,151,023

ConsiderationCash paid or payable $ 795,594Common shares issued – 107,224 262,699

Total consideration $ 1,058,293

Gain on acquisition $ 92,730

5 . R E S T R I C T E D C A S H

Restricted cash represents funds held as follows:2010 2009

Funds held in trust pending investment in third party initial public offering (Note 8d) $ – $ 2,000,000

Other 252,981 218,750

$ 252,981 $ 2,218,750

6 . I N V E N T O R I E S

The cost of inventories recognized as an expense and included in direct drilling costs for the year ended December 31,2010 was $16,829,701 (2009 – $6,446,397).

35

7 . I N V E S T M E N T I N I M PA C T S I LV E R C O R P. ( I M PA C T )

At December 31, 2010 the Company owned 6,870,001 (2009 - 6,650,001) shares of IMPACT Silver Corp. The Company’sinterest in IMPACT decreased from 13.74% to 11.22% during the year ended December 31, 2010 as a result of theissuance of shares by IMPACT. The Company, through mutual management at the executive level and its shareholding and directorship in IMPACT, exercises significant influence over that company. As a result, the investment in IMPACT isaccounted for using the equity method. The dilution gain represents the fair value of the Company’s share of the consideration paid by the new investors in IMPACT in excess of the carrying value of the Company’s investment in IMPACT.Equity has been reduced by the elimination of 100% of the net profits realized on drilling services provided to IMPACT.Details of the investment in IMPACT are as follows:

Balance – December 31, 2008 $ 3,342,632Equity income for the period 159,409Reversal of profits on intercompany drilling revenues 102,979Dilution gain 55,737

Balance – December 31, 2009 $ 3,660,757Equity income for the period 417,543Reversal of losses on intercompany drilling revenues 290Dilution gain 936,332Purchase of shares 275,000

Balance – December 31, 2010 $ 5,289,922

Based upon year end TSX.V closing market prices of $1.74 and $1.17 per share, this investment has a quoted market value$11,953,802 at December 31, 2010 and $7,780,501 at December 31, 2009.

8 . R E S O U R C E P R O P E R T I E S

a) Details are as follows:

i) As at December 31, 2010:Deferred Sale of

Acquisition Exploration Resource AccumulatedCosts (net of Properties Write-off 2010

$ (recoveries) $ $ $ $

Dominican Republic ConcessionsActividades Mineras, S.A. (“AMSA”) 142,640 193,132 – – 335,772Casa Real, S.A. (“Casa”) 302,694 631,719 – – 934,413Energold DrillingDominicana, S.A. (“EDD”) 1,265,275 2,260,691 (684,074) (2,743,801) 98,091

1,710,609 3,085,542 (684,074) (2,743,801) 1,368,276

ii) As at December 31, 2009:

Deferred Sale of Acquisition Exploration Resource Accumulated

Costs (net of Properties Write-off 2009$ (recoveries) $ $ $ $

Dominican Republic ConcessionsAMSA 142,640 183,833 – – 326,473Casa 302,694 624,586 – – 927,280EDD 1,265,275 2,279,781 (684,074) (2,743,801) 117,181

1,710,609 3,088,200 (684,074) (2,743,801) 1,370,934



36


2 0 1 0 A N N U A L R E P O R T

b) AMSA

By agreement dated July 25, 1996 and subsequently amended, the Company acquired the right from MJD Agency Ltd. topurchase a 40% interest in the Dominican Republic company, AMSA for an exploration work commitment of $300,000which has been completed. The Company has the right to purchase another 20% for an additional $300,000 work commitment to be completed by July 25, 2011. All costs incurred to date with regard to the purchase of AMSA have beenrecorded as resource property costs. This agreement is subject to a 1% net smelter royalty.

c) Option agreements – Dominican Republic

In November 2007, the Company entered into an option agreement with a third party on the Majagual (EDD) concessionin the Dominican Republic. The third party has paid $125,000 and issued 300,000 shares to the Company. The third partyis required to pay $50,000 and issue 100,000 shares on the second through fourth anniversaries. In addition, the third partymust spend $500,000 on the property over a period of four years.

d) Purchase agreement – Dominican Republic

The Company entered into a binding letter of agreement, effective June 29, 2007 and amended December 21, 2007 andJune 30, 2008, with a Canadian controlled private corporation (“CCPC”) to transfer all of its rights and obligations in the La Parcela Concession, located in the Dominican Republic, in exchange for $2.0 million. The Company in turn agreedto invest in an initial public offering (“IPO”) to be undertaken by that CCPC. In July 2010 the Company completed thetransfer arrangements with respect to the La Parcela Concession and the CCPC agreed to the release of the $2.0 millionof restricted cash funds through an investment in shares of the CCPC at a price of $0.40 per share. The shares acquiredhave been treated as an equity investment. Subsequent to the year-end the CCPC entered into a letter agreement for aproposed transaction whereby the CCPC would be acquired by a public company on a basis to be mutually agreed. If thisoccurs, the Company will carry its equity investment as a shortterm available for sale investment.

9 . P R O P E R T Y, P L A N T A N D E Q U I P M E N T

2010 2009Accumulated Net Book Accumulated Net Book

Cost amortization Value Cost amortization Value$ $ $ $ $ $

Drilling Equipment 13,853,118 5,096,198 8,756,920 10,730,035 3,836,110 6,893,925

Exploration Equipment 48,294 45,298 2,996 48,294 45,199 3,095

Vehicles 1,048,056 324,769 723,287 707,406 229,806 477,600

Office Furniture and Equipment 800,634 466,539 334,095 674,341 384,862 289,479

15,570,102 5,932,804 9,817,298 12,160,076 4,495,977 7,664,099

1 0 . S H A R E C A P I TA L

a) Details are as follows:Number Amount

Authorized:Unlimited common shares without par value

Issued and outstanding:Balance – December 31, 2008 34,128,048 $ 41,035,907

Stock options exercised 15,000 18,000Fair value assigned to options exercised – 8,246

Balance – December 31, 2009 34,143,048 $ 41,062,153Stock options exercised 735,000 927,765Fair value assigned to options exercised – 419,920Share issued in relation to Envirodrill (Note 4) 107,224 262,699Shares issued in relation to private placement (i) 4,662,162 14,988,651Share issue costs – (1,403,646)

Balance – December 31, 2010 39,647,434 $ 56,257,542

37

i) On December 23, 2010, the Company completed a private placement and issued 4,662,162 units at a price of $3.70per unit for a total of $17.25 million. Each unit consists of one common share and one half of one common share purchase warrant. Each whole warrant entitles the holder to purchase one common share of the Company at an exercise price of $4.50 per share until December 23, 2012. The Company paid a cash commission of $1,035,000 andissued the agent an option to acquire 279,729 units, consisting of one share and one half of one share purchase warrant, at a price of $3.70 until December 23, 2012. All securities issued under this private placement are subject toa four-month hold period expiring on April 24, 2011.

The estimated fair value of the agent’s warrants totalled $2,060,276 and has been allocated to the warrant componentof the units. The fair value of the warrants was determined using the Black-Scholes Option Pricing model using the following assumption: risk-free interest rate of 1.69%; expected dividend yield of 0%; expected stock price volatility of60%; expected option life in years of 2.

The estimated fair value of the agent’s options totalled $382,701. This amount has been allocated to contributed surplus and share issue costs. The fair value of the warrants was determined using the Black- Scholes Option Pricingmodel using the following assumption: risk-free interest rate of 1.69%; expected dividend yield of 0%; expected stockprice volatility of 60%; expected option life in years of 2.

b) Contributed Surplus

Balance – December 31, 2008 $ 906,261Value assigned to stock options exercised 239,816Value assigned to expired warrants (8,246)

Balance – December 31, 2009 $ 1,137,831Fair value of stock options granted 979,081Value assigned to options exercised (419,920)Fair value of Compensation Options issued Note 10 a (i) 382,701


c) Warrants

Number Amount

Balance – December 31, 2009 – –Fair value of warrants issued - Note 10 a (i) 2,331,081 2,060,276

Balance – December 31, 2010 2,331,081 2,060,276

d) Accumulated other comprehensive income (loss)

Balance – December 31, 2008 $ (12,898)Unrealized (losses) on available-for-sale short-term investments 165,683

Balance – December 31, 2009 $ 152,785Unrealized gains on available-for-sale short-term investments 868,355


e) Stock options

The Company has established a stock option plan whereby the board of directors may, from time to time, grant options todirectors, officers, employees or consultants. Under the stock option plan 4,591,070 options have been authorized forissuance, of which 2,466,000 have been allocated as at December 31, 2010. Options granted must be exercised no laterthan five years from date of grant or such lesser period as determined by the Company’s board of directors. The exerciseprice of an option is not less than the closing price on the Exchange on the last trading day preceding the grant. The directors, subject to the policies of the TSX Venture Exchange, may determine and impose terms upon how each grant ofoptions shall become vested.



38


2 0 1 0 A N N U A L R E P O R T

A summary of the Company’s stock option plan at December 31, 2010 and the changes for the periods ended on thesedates is as follows:

Weighted AverageNumber Exercise Price

At December 31, 2008 713,000 $ 1.20Granted 1,155,000 2.01Exercised (15,000) 1.20Cancelled (20,000) 1.20

At December 31, 2009 1,833,500 1.71Granted 1,395,000 3.33Exercised (735,000) 1.26Cancelled (27,500) 2.01

At December 31, 2010 2,466,000 $ 2.75

The following table summarizes information about the stock options outstanding at December 31, 2010:

Exercise Price Per Share Expiry Date Options Outstanding Options Exercisable

$2.01 October 1, 2014 1,071,000 791,000$2.30 May 7, 2015 150,000 75,000$3.45 October 20, 2015 1,245,000 311,250

On October 1, 2009, the Company granted stock options under its Stock Option Plan to directors, officers, and employees exercisable for up to 1,155,000 shares of the Company, with an estimated value of $959,263 on the grant date.The options are exercisable on or before October 1, 2014 at a price of $2.01 per share. The options vest 25% on the dateof the grant and 12.5% every quarter thereafter.

On May 7, 2010, the Company granted stock options under its Stock Option Plan to employees exercisable for up to150,000 shares of the Company, with an estimated value of $140,443 on the grant date. The options are exercisable on orbefore May 7, 2015 at a price of $2.30 per share. The options vest 25% on the date of the grant and 12.5% every quarterthereafter.

On October 21, 2010, the Company granted incentive stock options under its Stock Option Plan to directors, officers,employees and consultants exercisable for 1,245,000 shares of the Company, with an estimated value of $1,752,213. Theoptions are exercisable on or before October 20, 2015 at a price of $3.45 per share. The options vest 25% on the date ofthe grant and 12.5% every quarter thereafter.

The Black Scholes Option Pricing Model is used to estimate the fair value of stock options for calculating stock-based compensation expense. The Company recognized a stock-based compensation expense and an increase to contributedsurplus based on a grading vesting schedule using the assumptions as follows:

Date Granted October 1, 2009 May 7, 2010 October 21, 2010Number of options granted 1,155,000 150,000 1,245,000

Risk-free interest rate 1.83% 2.19% 1.59%Expected dividend yield Nil Nil NilExpected stock price volatility 60% 60% 60.52%Expected option life in years 3 3 3

Option pricing models require the input of highly subjective assumptions including the expected price volatility. Changesin the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do notnecessarily provide a reliable single measure of the fair value of the Company’s stock options. The total fair value of stock-based compensation expense on stock options granted to employees and consultants of the Company for the year endedDecember 31, 2010 is $979,082 (2009 - $239,816).

39

1 1 . R E L AT E D PA R T Y T R A N S A C T I O N S

Related party transactions are recorded at the exchange amount which is the amount of consideration paid or received asagreed by the parties. Related party transactions not disclosed elsewhere are as follows:

a) During the year ended December 31, 2010, the Company paid directors fees in the amount of $50,100 (2009 -$211,733) and accrued directors fees of $49,300 (2009 - $nil).

b) During the year ended December 31, 2010, legal fees in the amount of $400,047 (2009 - $126,878) were accruedor paid to a firm related to a director.

c) During the year ended December 31, 2010, fees in the amount of $1,946,218 (2009 – $2,132,053) were charged to IMPACT for contract drilling services performed in Mexico. At December 31, 2010 $414,419 (2009 - $274,902) was due from IMPACT for contract drilling, exploration and administrative services provided by the Company. These services were provided in the normal course of business at similar rates offered to any other mining company. Monies owed to the Company are unsecured, non-interest bearing and without specific repayment terms. Management anticipates that the amount will be repaid within one year and accordingly it has been classified as current. The loss of $290 at December 31, 2010 (2009 – loss of $102,979) on drilling services provided to IMPACT has been eliminated from these financial statements.

1 2 . C O M M I T M E N T S

a) The Company has signed a lease for office premises until May 31, 2013. Lease obligations, net of operating costs,are $242,385 per year during this period.

b) In May 2008, the Company signed a lease for warehouse premises which commenced August 1, 2008 and endsJuly 31, 2011. Lease obligations, net of operating costs, are $43,009 per year for the first year, $44,058 per year for the second year, and $46,156 per year for the third year.

c) As part of the acquisition of the Envirodrill assets (Note 4) the Company assumed leases related to a limited number of these assets. At December 31, 2010 the lease obligations total $325,070 of which $157,559 is current and $167,511 is long-term. The lease agreements terminate between 2011 and 2013 at interest rates between 6.97% and 16.35%.

1 3 . A D D I T I O N A L I N F O R M AT I O N T O T H E S TAT E M E N T S O F C A S H F L O W S

Changes in non cash working capital:

2010 2009

Accounts receivable and prepaid expenses $ (5,672,170) $ 2,772,863Due from IMPACT Silver Corp. (151,545) 513,968Income taxes receivable 90,624 (248,542)Inventories (5,968,740) (3,316,695)Accounts payable and accrued liabilities 3,548,540 (228,245)Income taxes payable 444,095 (347,540)Deferred revenue 118,056 484,570Future income taxes 41,096 (59,525)

Total non-controlling interest – EDP $ (7,550,044) $ (429,146)

Income taxes paid:

2010 2009

Income taxes paid $ 793,642 $ 991,673



40


2 0 1 0 A N N U A L R E P O R T

1 4 . C A P I TA L M A N A G E M E N T

The Company’s objectives when managing capital are to safeguard its ability to continue as a going concern, to providean adequate return to shareholders, to meet external capital requirements on credit facilities and to support any growthplans.

In the management of its capital, the Company includes its cash and cash equivalent balances. The Company monitorscapital based on the debt to debt-plus-equity ratio. Debt is total debt shown on the balance sheet, less cash and cashequivalents. Debt-plus-equity is calculated as debt shown on the balance sheet, plus total shareholders’ equity whichincludes accumulated other comprehensive income (loss), share capital, warrants, contributed surplus and retained earnings.

The Company’s policy is to keep its debt to debt-plus-equity ratio at a manageable level consistent with the current business cycle and the business opportunities outlook foreseen by the Company. As a general guideline, the Company’spolicy will be to keep its debt to debt-plus-equity ratio to a minimal level, except in unusual circumstances such as a majoracquisition. Currently the Company is in full compliance with its capital risk management policies. The Company’s Boardof Director’s approves management’s annual capital expenditures plans and reviews and approves any material debt borrowing plans proposed by the Company’s management.

To effectively manage the entity’s capital requirements, the Company has in place a planning and budgeting process tohelp determine the funds required to ensure the Company has the appropriate liquidity to meet its operating and growthobjectives. The Company ensures that there are sufficient cash and cash equivalents to meet its short-term businessrequirements, taking into account its anticipated cash flows from operations and its holdings of cash and cash equivalents.

1 5 . F I N A N C I A L I N S T R U M E N T S

Financial assets and liabilities

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, shortterminvestments and accounts payable and accrued liabilities. For cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued liabilities, carrying value is considered to be fair value due to the short-termnature of these instruments. The fair value of short-term investments is determined by quoted prices in active markets foridentical assets at the balance sheet date. At December 31, 2010 all short-term investments held were classified as Level1 and cash and cash equivalents were classified as Level 2 on the fair value hierarchy of Handbook Section 3862 – FinancialInstruments - Disclosures.

Financial instrument risk exposure

The Company’s financial instruments are exposed to a number of financial and market risks including credit, liquidity, currency and interest rate risks. The Company may, or may not, establish from time to time active policies to manage theserisks. The Company does not currently have in place any active hedging or derivative trading policies to manage theserisks since the Company’s management does not believe that the current size, scale and pattern of cash flow of its operations would warrant such hedging activities.

Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other partyto incur a financial loss. Financial instruments that potentially subject the Company to credit risk include cash and cashequivalents, restricted cash, accounts receivable and short-term investments. The Company deposits its cash and cashequivalents with high credit quality financial institutions as determined by ratings agencies, with the majority depositedwith a Canadian Tier 1 Bank. The Company provides credit to its customers in the normal course of its operations. TheCompany diversifies its credit risk by dealing with a large number of customers in various countries.

The Company’s maximum exposure to credit risk at the reporting date is the carrying value of its cash and cash equivalents, restricted cash, accounts receivable and short-term investments.

41

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its obligations as they fall due. The Company managesliquidity by maintaining cash and cash equivalent balances available to meet its anticipated operational needs. TheCompany has not been required to establish committed credit facilities but will do so as necessary. Liquidity requirementsare managed based on expected cash flow to ensure that there is adequate capital to meet short-term and long-term obligations. The Company has in place a planning and budgeting process to help determine the funds required to supportthe Company’s normal operating requirements on an ongoing basis and its growth plans. At December 31, 2010 theCompany’s accounts payable and accrued liabilities were $7.8 million, of which $7.6 million falls due for payment withintwelve months of the balance sheet date. The Company has minimal long-term commitments (Note 12).

Currency risk

The Company operates on an international basis on five continents and therefore, currency risk exposures arise from transactions denominated in foreign currencies. The majority of its international sales contracts are denominated in U.S.dollars. Thus its currency risk arises primarily with respect to the U.S. dollar. However, the Company also incurs operatingcosts in local currencies in various countries in which it carries on active business operations. The Company has elected notto actively manage our currency risk at this time.

At December 31, 2010 the Company is exposed to currency risk through cash and cash equivalents, accounts receivable,and accounts payable and accrued liabilities held in U.S. dollars, Mexican pesos and Brazilian reais. Based on these foreigncurrency exposures at December 31, 2010, a 5% depreciation or appreciation of all the above currencies against theCanadian dollar would result in an approximate $0.57 million decrease or increase in the Company’s net earnings.

Interest rate risk

Interest rate risk is the risk that the fair values and future cash flows of the Company will fluctuate because of changes inmarket interest rates. The Company is exposed to interest rate risk on its cash and cash equivalents. The Company did nothave any borrowings outstanding as at December 31, 2010.

1 6 . I N C O M E TA X E S

Income tax expense differs from the amount that would result from applying the Canadian federal and provincial incometax rates to earnings before income taxes. These differences result from the following items:

2010 2009

Earnings before income taxes $ 3,658,033 $ (1,403,314)Canadian federal and provincial income tax rates 28.50% 30.0%

Income tax expense (recovery) based on the above rates 1,042,539 (420,994)Increase (decrease) due to:

Non-deductible expenses 1,194,140 134,082Foreign exchange and other 52,374 207,687Losses and temporary differences for which no

future income tax asset has not been recognized – 525,623Withholding tax 211,017 168,231Previously unrecognized tax assets (142,722) –Change in tax rate 31,806 116,419Difference between foreign and Canadian tax rates (179,629) (183,469)

Income tax expense $ 2,209,526 $ 547,579



42


2 0 1 0 A N N U A L R E P O R T

The components of future income taxes are as follows:2010 2009

Future income tax assetsNon-capital losses 1,732,911 1,538,148Property, Plant and Equipment 556,984 361,740Resource Property costs 521,457 649,382Other 923,992 310,084

Total future tax assets 3,735,345 2,859,354Valuation allowance (1,041,703) (1,029,497)

Net future income tax assets 2,693,642 1,829,857

Future income tax liabilitiesInvestments 727,025 361,373Property, Plant and Equipment 867,359 361,420Inventories 3,738,453 2,823,334Other 672,149 606,405

Future income tax liabilities 6,004,986 4,152,532

Future income tax liability, net $ 3,311,345 $ 2,322,675

This is represented on the balance sheet as:2010 2009

Current future income tax assets $ (36,182) $ –Long-term future income tax assets (1,468,544) (994,971)Current future income tax liabilities 3,930,694 2,847,617Long-term future income tax liabilities 885,377 470,029

$ 3,311,345 $ 2,322,675

The Company has non-capital loss carry-forwards of $7,173,272 that may be available for tax purposes. The loss carry-forwards are in respect of operations in Barbados, Canada, Chile, and Colombia and expire as follows:

2015 $ 2,4322018 121,0732026 79,4462029 3,811,1602030 2,228,496No expiry 930,665

$ 7,173,272

A full valuation allowance has been recorded against the net potential future income tax assets associated with a portionof deductible temporary differences in Canada and the Dominican Republic as their utilization is not considered more likely than not at this time.

43



1 7 . S E G M E N T E D I N F O R M AT I O N

Details at December 31 are as follows:

2010 2009

Revenue by geographic areaMexico, Caribbean, Central America $ 25,811,338 $ 13,326,868South America 18,833,560 7,434,622Africa, Asia and Other 9,946,680 2,957,877

$ 54,591,578 $ 23,719,367

Net income (loss) by geographic areaMexico, Caribbean, Central America $ 3,409,465 $ 2,449,311South America 884,652 (286,219)Africa, Asia and Other 930,694 608,652Canada (3,776,303) (4,722,637)

$ 1,448,508 $ (1,950,893)

Assets by geographic areaMexico, Caribbean, Central America $ 28,264,943 $ 20,308,428South America 22,125,033 18,814,309Africa, Asia and Other 9,171,467 5,383,433Canada 35,712,721 24,406,666

$ 95,274,164 $ 68,912,836

Property, plant and equipment by geographic areaMexico, Caribbean, Central America $ 4,373,113 $ 2,876,244South America 1,923,061 1,807,968Africa, Asia and Other 2,615,624 1,656,698Canada 905,500 1,323,189

$ 9,817,298 $ 7,664,099

Amortization by geographic areaMexico, Caribbean, Central America $ 629,985 $ 504,774South America 327,223 299,891Africa, Asia and Other 237,818 224,823Canada 262,610 301,238

$ 1,457,636 $ 1,330,726

Property, plant and equipment additions by geographic areaMexico, Caribbean, Central America $ 2,083,999 $ 590,176South America 442,316 926,361Africa, Asia and Other 1,204,433 637,121Canada (155,079) (1,092,565)

$ 3,575,669 $ 1,061,093

Goodwill by geographic areaSouth America $ 1,710,000 $ 1,710,000

1 8 . S U B S E Q U E N T E V E N T S

On January 19, 2011, the Company completed the acquisition of Dando Drilling International Ltd. ("Dando"), located inthe United Kingdom. Dando manufactures drilling rigs and associated equipment for water well, mineral exploration andgeotechnical drilling. Energold acquired all the outstanding shares of Dando for Pounds Sterling 50,000 (CDN $80,000)and assumed certain creditor debt and transaction costs.. The Company retained key employees and provided stock and/ or stock options incentive compensation, consisting of 38,835 restricted shares with a value of CDN $160,000 and150,000 share options at CDN $4.19 per share.

44

M A N A G E M E N T

Frederick W. Davidson

President, CEO, Director

Richard S. Younker

CFO

Craig A. Geier

VP Corporate Development

James H. Coleman

Chairman, Director

Michael J. Beley

Director

H. Walter Sellmer

Director

Wayne D. Lenton

Director

H E A D O F F I C E

1100 – 543 Granville Street

Vancouver BC Canada V6C 1X8

Telephone 604.681.9501

Fax 604.681.6813

Email [email protected]

Website www.energold.com

A U D I T O R S

PricewaterhouseCoopers LLP

250 Howe Street 7th Floor

Vancouver BC V6C 3S7

S O L I C I T O R S

Boughton Law Corporation

700 – 595 Burrard Street

P.O. Box 49290

Vancouver BC V7X 1S8

MacLeod Dixon LLP

Canterra Tower

3700 – 400 Third Avenue SW

Calgary AB T2P 4H2

T R A N S F E R A G E N T

Computershare Investor Services

510 Burrard Street

Vancouver BC V6C 3B9

PHOTOGRAPHY BY THE ENERGOLD TEAM

DESIGN AND LAYOUT SPEAK DESIGN INC VANCOUVER TORONTO

TSX.V EGD

W W W . E N E R G O L D . C O M

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