edgewater exploration ltd. · to the audit committee of edgewater exploration ltd. we have audited...

EDGEWATER EXPLORATION LTD.

CONSOLIDATED FINANCIAL STATEMENTS(Expressed in Canadian Dollars)

DECEMBER 31, 2012 AND 2011

PricewaterhouseCoopers LLPPricewaterhouseCoopers Place, 250 Howe Street, Suite 700, Vancouver, British Columbia, Canada V6C 3S7T: +1 604 806 7000, F: +1 604 806 7806, www.pwc.com/ca

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

April 18, 2013

Independent Auditor’s Report

To the Audit Committee of Edgewater Exploration Ltd.

We have audited the accompanying consolidated financial statements of Edgewater Exploration Ltd. (the“Company”), which comprise the consolidated balance sheet as at December 31, 2012 andDecember 31, 2011 and the consolidated statements of loss and comprehensive loss, changes inshareholders’ equity and cash flows for the years then ended, and the related notes, which comprise asummary of significant accounting policies and other explanatory information.

Management’s responsibility for the consolidated financial statementsManagement is responsible for the preparation and fair presentation of these consolidated financialstatements in accordance with International Financial Reporting Standards, and for such internal controlas management determines is necessary to enable the preparation of consolidated financial statementsthat are free from material misstatement, whether due to fraud or error.

Auditor’s responsibilityOur 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. Thosestandards require that we comply with ethical requirements and plan and perform our audits to obtainreasonable assurance about whether the consolidated financial statements are free from materialmisstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures inthe 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 controlrelevant to the entity’s preparation and fair presentation of the consolidated financial statements in orderto design audit procedures that are appropriate in the circumstances, but not for the purpose of expressingan opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating theappropriateness of accounting policies used and the reasonableness of accounting estimates made bymanagement, as well as evaluating the overall presentation of the consolidated financial statements.

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

2

OpinionIn our opinion, the consolidated financial statements present fairly, in all material respects, the financialposition of the Company as at December 31, 2012 and December 31, 2011 and its financial performanceand its cash flows for the years then ended in accordance with International Financial ReportingStandards.

signed “PricewaterhouseCoopers LLP”

Chartered Accountants

EDGEWATER EXPLORATION LTD.CONSOLIDATED BALANCE SHEETS(Expressed in Canadian Dollars)AS AT DECEMBER 31

Note 2012 2011

ASSETS

CurrentCash $2,962,326 $550,428Trade and other receivables 3 1,486,655 2,944,251Short-term investment 4 854,519 4,900,000Prepaid expenses 123,577 193,457

5,427,077 8,588,136

Non-currentExploration and evaluation assets 5 29,411,631 19,818,630Deposits for exploration and evaluation 5(b) 283,601 -Available-for-sale investments 39,523 39,621Reclamation deposits 6 1,610,911 2,516,382Property and equipment 7 249,163 155,787

$37,021,906 $31,118,556

LIABILITIES AND SHAREHOLDERS’ EQUITY

CurrentTrade and other payables 8 $2,200,509 $1,132,358Current provision for government grants 9 48,580 150,653Current provision for reclamation 10 94,587 90,240

2,343,676 1,373,251

Non-currentDeferred revenue 11 3,210,342 -Provision for government grants 9 352,473 281,254Provision for reclamation 10 588,385 676,369

6,494,876 2,330,873Shareholders’ equity

Share capital 30,087,781 27,011,669Share-based payments reserve 4,232,215 3,299,403Warrants reserve 5,983,853 5,844,908Accumulated other comprehensive loss 13 (565,074) (362,123)Accumulated deficit (9,211,745) (7,006,174)

30,527,030 28,787,683$37,021,906 $31,118,556

Nature of operations and basis of presentation 1Commitments 15Subsequent events 19

On behalf of the Board:

“George Salamis” Director “Danny Lee” Director

The accompanying notes are an integral part of these consolidated financial statements.

EDGEWATER EXPLORATION LTD.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY(Expressed in Canadian Dollars)FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

Common shares

Number Amount

Share-basedpayments

reserveWarrantsreserves

Accumulatedother

comprehensiveloss

Accumulateddeficit Total

Balance – January 1, 2012 67,282,187 $27,011,669 $3,299,403 $5,844,908 $(362,123) $(7,006,174) $28,787,683

Issued for cash (Note 12(b)(i)) 6,969,000 2,146,750 - - - - 2,146,750Issued for finder’s fees(Note 12(b)(i)) 18,000 5,940 - - - - 5,940

Issued for cash (Note 11) 2,436,250 758,027 - 138,945 - - 896,972Share-based compensation(Note 12(d)) - - 1,000,507 - - - 1,000,507Issued upon exercise of options(Note 12(d)) 977,000 165,394 (67,694) - - - 97,700

Net loss for the year - - - - - (2,205,571) (2,205,571)Foreign currency translation(Note 13) - - - - (202,951) - (202,951)

Balance – December 31, 2012 77,682,437 $30,087,781 $4,232,215 $5,983,853 $(565,074) $(9,211,745) $30,527,030

Common shares

Number Amount

Share-basedpayments

reserveWarrantsreserves

Accumulatedother

comprehensiveloss

Accumulateddeficit Total

Balance – January 1, 2011 49,770,500 $15,485,415 $1,487,121 $4,522,666 - $(3,687,189) $17,808,013

Issued for cash (Note 12(b)(ii)) 13,750,000 8,481,867 - 1,795,201 - - 10,277,068Issued for finder’s fees(Note 12(b)(ii)) 96,687 87,020 - - - - 87,020Issued for finder’s fees(Note 12(c)) 565,000 371,580 - - - - 371,580Issued upon exercise of options(Note 12(d)) 250,000 35,929 (10,928) - - - 25,000Issued upon exercise of warrants(Note 12(e)) 2,850,000 2,549,860 - (472,960) - - 2,076,900Share-based compensation(Note 12(d)) - - 1,823,210 - - - 1,823,210

Net loss for the year - - - - - (3,318,985) (3,318,985)Foreign currency translation(Note 13) - - - - (362,123) - (362,123)

Balance – December 31, 2011 67,282,187 $27,011,669 $3,299,403 $5,844,907 $(362,123) $(7,006,174) $28,787,683


EDGEWATER EXPLORATION LTD.CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(Expressed in Canadian Dollars)FOR THE YEARS ENDED DECEMBER 31

2012 2011

EXPENSESAccounting and audit fees $ 167,597 $ 229,908Amortization 65,263 75,194Consultants 220,242 247,947Director fees 71,835 76,572Due diligence costs 23,225 129,513Finance costs 24,575 321,258Foreign exchange loss (gain) (79,311) 42,636Insurance 54,209 53,529Investor relations, marketing and conferences 254,157 560,651Legal 97,162 134,730Management fees 379,402 308,002Office costs 170,782 235,576Rent 113,454 109,576Property maintenance 210,277 145,547Share-based compensation 447,130 921,979Taxes, interest and penalties - 116,313Travel 14,828 13,885Trust and regulatory fees 17,243 63,128

2,252,070 3,785,944

OTHER INCOMEForgiveness of government grants - (248,367)Finance income (46,499) (218,592)

Net loss for the year 2,205,571 3,318,985

OTHER COMPREHENSIVE LOSSForeign currency translation 202,951 362,123

Comprehensive loss for the year $ 2,408,522 $ 3,681,108

Loss per share – basic and diluted $ 0.03 $ 0.06

Weighted average number of shares outstanding:Basic and diluted 72,599,289 59,038,324


EDGEWATER EXPLORATION LTD.CONSOLIDATED STATEMENTS OF CASH FLOWS(Expressed in Canadian Dollars)FOR THE YEARS ENDED DECEMBER 31

2012 2011

CASH PROVIDED BY (USED IN):

Cash flows from operating activities:Net loss for the year $ (2,205,571) $ (3,318,985)Non-cash items:

Forgiveness of government grants - (248,367)Accretion of finance costs 24,575 321,258Finance income (46,499) (218,592)Share-based compensation 447,130 921,979Unrealized foreign exchange (5,876) (55,551)Amortization 65,263 75,194

Changes in non-cash working capital:Trade and other receivables 1,457,596 (2,356,304)Prepaid expenses 69,879 14,478Current portion for government grants (102,073) -Current portion for reclamation 4,347 -Trade and other payables (745,077) (528,513)

(1,036,305) (5,393,403)

Cash flows from investing activities:Purchase of property and equipment (159,514) (113,594)Cash payment made to Lundin Mining Corporation - (6,932,600)Deposits on mining interest expenditures (283,601) -Reclamation spending (87,901) -Finance income 46,499 218,592Return of reclamation deposits 887,744 -Repayment of government grants (44,562) -Redemption of short-term investment 4,045,481 5,100,000Proceeds from sale of royalty interest 3,668,962 -Exploration and evaluation assets (7,745,332) (9,848,414)

327,776 (11,576,016)

Cash flows from financing activities:Shares issued for cash, net of share issuance costs 3,049,662 10,364,086Shares issued on warrant and option exercises 97,700 2,101,900

3,147,362 12,465,986

Effect of exchange rate on cash (26,935) (45,248)

Increase (decrease) in cash 2,411,898 (4,548,681)

Cash – beginning of year 550,428 5,099,109

Cash – end of year $ 2,962,326 $ 550,428

Supplemental Disclosure on Non-cash Investing and Financing ActivitiesFair value of warrants issued $ 138,945 $ 1,795,201Shares issued for finder’s fees $ - $ 371,580Deposits on mining interest expenditures $ - $ 75,015Exploration and evaluation assets included in trade and other payables $ 1,813,228 $ 791,755Shares issued for finder’s fees on private placement $ - $ 87,019


EDGEWATER EXPLORATION LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in Canadian Dollars)FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Edgewater Exploration Ltd. and its subsidiaries (collectively, “Edgewater” or the “Company”) are in the mineralproperty exploration and development business in Ghana and Spain. Edgewater Exploration Ltd., the ultimate parent, isa public company that is listed on the TSX Venture Exchange (symbol: EDW) and the OTCQX (symbol: EDWZF).The Company is incorporated and domiciled in Canada and its head office is located at Suite 1820 – 999 West HastingsStreet, Vancouver, British Columbia, V6C 2W2.

These consolidated financial statements have been prepared in accordance with International Financial ReportingStandards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The Board of Directorsapproved the statements for issue on April 18, 2013.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The summary of significant accounting policies followed in the preparation of these consolidated financial statementsis as follows:

Statement of compliance

These consolidated financial statements have been prepared in accordance with International Financial ReportingStandards (“IFRS”) which include International Accounting Standards and Interpretations (“IFRIC” and “SIC”)adopted by the International Accounting Standards Board.

Basis of consolidation

The significant mining properties and entities of the Company are as follows:

Entity Property LocationDecember 31,

2012December 31,

2011

Subsidiaries (Consolidated)Cape Coast Resources Limited Enchi Project Ghana 100% 100%Mineira de Corcoesto, S.L. Corcoesto Project Spain 100% 100%

Subsidiaries are all entities (including special purpose entities) over which the Company has the power to govern thefinancial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Theexistence and effect of potential voting rights that are currently exercisable or convertible are considered whenassessing whether the Company controls another entity. The Company also assesses existence of control where it doesnot have more than 50% of the voting power but is able to govern the financial and operating policies by virtue of de-facto control.

The Company applies the acquisition method to account for business combinations. The consideration transferred forthe acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners ofthe acquiree and the equity interests issued by the Company. The consideration transferred includes the fair value of anyasset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities andcontingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.The Company recognizes any non-controlling interest in the acquiree on an acquisition- by-acquisition basis, either atfair value or at the non-controlling interest’s proportionate share of the recognized amounts of acquiree’s identifiablenet assets. Acquisition-related costs are expensed as incurred.

Goodwill is initially measured as the excess of the aggregate of the consideration transferred and the fair value of non-controlling interest over the net identifiable assets acquired and liabilities assumed. Inter-company transactions,balances, income and expenses on transactions between group companies are eliminated. Profits and losses resultingfrom inter-company transactions that are recognized in assets are also eliminated. Accounting policies of subsidiariesare consistent with the policies adopted by the Company.

Cash

Cash include cash on account, demand deposits and money market investments with maturities from the date ofacquisition of three months or less, which are readily convertible to known amounts of cash and are subject toinsignificant changes in value.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d.)

Short-term investments

Investments held for a period not exceeding one year or with an outstanding tenor to maturity not exceeding one yearare classified as short-term investments. Short-term investments are carried at face value with interest earned whileholding them reported as interest income in the statement of comprehensive loss.

Exploration and evaluation assets

Once a license to explore an area has been secured or an option agreement is signed and binding, expenditures onexploration and evaluation activities are capitalized to exploration and evaluation assets. Exploration expenditures relateto the initial search for deposits with economic potential and to detailed assessments of deposits or other projects thathave been identified as having economic potential. Management reviews the carrying value of capitalized explorationcosts at least annually. In the case of undeveloped projects, there may be only inferred resources to form a basis for theimpairment review. The review is based on a status report regarding the Company’s intentions for development of theundeveloped property.

Once an economically viable reserve has been determined for an area and the decision to proceed with development hasbeen approved, exploration and evaluation assets attributable to that area are first tested for impairment and thenreclassified to construction-in-progress within property, plant and equipment. Subsequent recovery of the resultingcarrying value depends on successful development or sale of the undeveloped project. If a project does not prove viable,all irrecoverable costs associated with the project, net of any impairment provisions, are written off.

Impairment of non-current assets

Non-current assets are evaluated at least annually by management for indicators that carrying value is impaired andmay not be recoverable. When indicators of impairment are present, the recoverable amount of an asset is evaluated atthe level of a cash generating unit (CGU), the smallest identifiable group of assets that generates cash inflows that arelargely independent of the cash inflows from other assets or groups of assets, where the recoverable amount of a CGUis the greater of the CGU’s fair value less costs to sell and its value in use. An impairment loss is recognized in profit orloss to the extent that the carrying amount exceeds the recoverable amount.

In calculating recoverable amount, the Company uses discounted cash flow techniques to determine fair value when itis not possible to determine fair value either by quotes from an active market or a binding sales agreement. Thedetermination of discounted cash flows is dependent on a number of factors, including future metal prices, the amountof reserves, the cost of bringing the project into production, production schedules, production costs, sustaining capitalexpenditures, and site closure, restoration and environmental rehabilitation costs. Additionally, the reviews take intoaccount factors such as political, social and legal, and environmental regulations. These factors may change due tochanging economic conditions or the accuracy of certain assumptions and, hence, affect the recoverable amount. TheCompany uses its best efforts to fully understand all of the aforementioned to make an informed decision based uponhistorical and current facts surrounding the projects. Discounted cash flow techniques often require management tomake estimates and assumptions concerning reserves and expected future production revenues and expenses.

Reserve estimates

The Company estimates its ore reserves and mineral resources based on information compiled by Qualified Persons asdefined in accordance with Canadian Securities Administrators National Instrument 43-101 Standards for Disclosure ofMineral Projects (NI 43-101). Reserves are used in the calculation of depreciation and amortization, impairmentassessment, assessment of life of mine stripping ratios and for forecasting the timing of payment of mine closure,reclamation and rehabilitation costs. There are numerous uncertainties inherent in estimating ore reserves, andassumptions that are valid at the time of estimation may change significantly when new information becomes available.Changes in the forecast prices of commodities, exchange rates, production costs or recovery rates may change theeconomic status of reserves and may, ultimately, result in the reserves being updated.



Income taxes

Income tax is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, inwhich case it is recognized in equity. Current tax expense is the expected tax payable on the taxable income for theyear, using tax rates enacted or substantively enacted at year end, adjusted for amendments to tax payable with regardsto previous years.

Deferred tax is recorded using the statement of financial position liability method, providing for temporary differences,between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxationpurposes. The following temporary differences do not result in deferred tax assets or liabilities: goodwill not deductiblefor tax purposes; the initial recognition of assets or liabilities that affect neither accounting or taxable loss; anddifferences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeablefuture. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carryingamount of assets and liabilities, using tax rates enacted or substantively enacted at the date of the statement of financialposition.

A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be availableagainst which the asset can be utilized. To the extent that the Company does not consider it probable that a future taxasset will be recovered, it does not recognize the asset. Deferred tax assets and liabilities are offset when there is alegally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxeslevied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a netbasis.

Share capital

The Company records proceeds from share issuances net of issue costs and any tax effects. The Company recordsproceeds from the exercise of stock options and warrants as share capital in the amount for which the option or warrantenabled the holder to purchase a share in the Company. Share capital issued for non-monetary consideration is recordedat an amount based on fair market value. The proceeds from the issue of units is allocated between common shares andcommon share purchase warrants on a pro-rata basis on a relative fair value basis, wherein, the fair value of thecommon shares is based on the market close on the date the units are issued; and the fair value of the common sharepurchase warrants is determined using the Black-Scholes pricing model.

Loss per share

The Company presents basic loss per share for its common shares, calculated by dividing the loss attributable tocommon shareholders of the Company by the weighted average number of common shares outstanding during the year.Diluted loss per share does not adjust the loss attributable to common shareholders or the weighted average number ofcommon shares outstanding when the effect is anti-dilutive.

Significant judgments, estimates and assumptions

The preparation of the Company’s financial statements in conformity with IFRS requires management to makejudgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures ofcontingent assets and liabilities at the date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Estimates and assumptions are continually evaluated and are based onmanagement’s experience and other factors, including expectations of future events that are believed to be reasonableunder the circumstances. Actual results could differ from these estimates. The areas that require management to makesignificant judgments, estimates and assumptions in determining carrying values include, but are not limited to:

i. Depreciation, depletion and amortization

Property and equipment is depreciated over their useful lives, net of residual value, using the declining balance method.Significant judgment is involved in the determination of depreciation rates used, useful life and residual values for thecomputation of depreciation and no assurance can be given that actual useful lives and residual values will not differsignificantly from current assumptions.



ii. Impairment of exploration and evaluation assets

The carrying value of E&E assets is reviewed each reporting period to determine whether there is any indication ofimpairment. If the carrying amount of an asset exceeds its recoverable amount, the asset is impaired and an impairmentloss is recognized in the consolidated statement of operations. The assessment of fair values require the use of estimatesand assumptions for recoverable production, long-term commodity prices, discount rates, NAV multiples, foreignexchange rates, future capital requirements and operating performance. Changes in any of the assumptions or estimatesused in determining the fair value of goodwill or other assets could impact the impairment analysis.

iii. Provision for reclamation

The Company assesses its provision for reclamation on an annual basis or when new material information becomesavailable. Mining and exploration activities are subject to various laws and regulations governing the protection of theenvironment. In general, these laws and regulations are continually changing and the Company has made, and intendsto make in the future, expenditures to comply with such laws and regulations. Accounting for reclamation andremediation obligations requires management to make estimates of the future costs the Company will incur to completethe reclamation and remediation work required to comply with existing laws and regulations at each mining operation.

Actual costs incurred may differ from those amounts estimated. Also, future changes to environmental laws andregulations could increase the extent of reclamation and remediation work required to be performed by the Company.Increases in future costs could materially impact the amounts charged to operations for reclamation and remediation.The provision represents management’s best estimate of the present value of the future reclamation and remediationobligation. The actual future expenditures may differ from the amounts currently provided.

Financial instruments

Financial assets

Financial assets are classified into one of four categories:

Fair value through profit or loss (“FVTPL”); Held-to-Maturity (“HTM”); Loans and receivables; and Available for sale (“AFS”).

Financial assets at fair value through profit or loss (“FVTPL”)

A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated assuch upon initial recognition. Financial assets are designated as at FVTPL if the Company manages such investmentsand makes purchase and sale decisions based on their fair value in accordance with the Company’s risk managementstrategy. Attributable transaction costs are recognized in the statement of comprehensive loss when incurred. FVTPLare measured at fair value, and changes are recognized in the statement of loss and comprehensive loss.

Held to maturity (“HTM”)

These assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that theCompany’s management has the positive intention and ability to hold to maturity. These assets are measured atamortized costs using the effective interest method. If there is objective evidence that the asset is impaired, determinedby reference to external credit ratings and other relevant indicators, the financial asset is measured at the present valueof estimated future cash flows. Any changes to the carrying amount of the investment, including impairment losses, arerecognized in the statement of loss and comprehensive loss.



Loans and receivables

Loans and receivables are financial assets with fixed or determinable payments that are not quoted on an active market.Such assets are initially recognized at fair value plus any direct attributable transaction costs. Subsequent to initialrecognition loans and receivables are measured at amortized cost using the effective interest method, less anyimpairment losses. This category includes cash, trade and other receivables, short-term investment, and restrictedreclamation deposits.

Available for sale (“AFS”)

Non-derivative financial assets not included in the above categories are classified as available-for-sale. They are carriedat fair value with changes in fair value recognized directly in equity. Where a decline in the fair value of an available-for-sale financial asset constitutes objective evidence of impairment, the amount of the loss is removed from equity andrecognized in the statement of loss and comprehensive loss.

Financial liabilities

Financial liabilities are classified into one of two categories:

Fair value through profit or loss; and Other financial liabilities

Fair value through profit or loss

This category comprises of derivatives, or liabilities acquired or incurred principally for the purpose of selling orrepurchasing it in the near term. They are carried in the balance sheet at fair value with the changes in fair valuerecognized in the statement of loss and comprehensive loss.

Other financial liabilities

This category includes trade and other payables and provision for government grants, all of which are recognized atamortized cost using the effective interest method.

Impairment of financial assets

Financial assets are assessed for indicators of impairment at the end of each reporting year. Financial assets areimpaired when there is objective evidence that, as a result of one or more events that occurred after the initialrecognition of the financial assets, the estimated future cash flows of the investments have been impacted.

For all financial assets objective evidence of impairment could include:

significant financial difficulty of the issuer or counterparty; or default or delinquency in interest or principal payments; or it becoming probable that the borrower will enter bankruptcy or financial re-organization.

For certain categories of financial assets, such as receivables, assets that are assessed not to be impaired individuallyare subsequently assessed for impairment on a collective basis. The carrying amount of financial assets is reduced bythe impairment loss directly for all financial assets with the exception of receivables, where the carrying amount isreduced through the use of an allowance account. When a receivable is considered uncollectible, it is written off againstthe allowance account. Subsequent recoveries of amounts previously written off are credited against the allowanceaccount. Changes in the carrying amount of the allowance account are recognized in the statement of loss andcomprehensive loss.

If, in a subsequent year, the amount of the impairment loss decreases and the decrease can be related objectively to anevent occurring after the impairment was recognized, the previously recognized impairment loss is reversed through thestatement of comprehensive loss to the extent that the carrying amount of the investment at the date the impairment isreversed does not exceed what the amortized cost would have been had the impairment not been recognized.



Share-based payments

The Company grants stock options to certain directors, employees, and consultants of the Company. Each tranche in anaward is considered a separate award with its own vesting year and grant date fair value. Fair value of each tranche ismeasured at the date of grant using the Black-Scholes option pricing model. Compensation expense is recognized overthe tranche’s vesting year by increasing share-based payments reserve based on the number of awards expected to vest.The number of awards expected to vest is reviewed at least annually, with any impact being recognized immediately.Consideration received on the exercise of stock options is recorded as share capital and the related share-basedpayments reserve is transferred to share capital.

Currency translation

Items included in the financial statements of each of the group’s entities are measured using the currency of the primaryeconomic environment in which the entity operates (‘the functional currency’). The functional currency of EdgewaterExploration Ltd. (parent), Cape Coast Resources Limited, and Rio Narcea Gold Mines, S.L. is the Canadian dollar, USdollar, and Euro respectively. The presentation currency of the consolidated financial statements is the Canadian dollar.

At the entity level, monetary assets and liabilities denominated in foreign currencies are translated into the functionalcurrency at the exchange rate in effect at the balance sheet date and non-monetary assets and liabilities are translated atthe exchange rates in effect at the date of the transaction. Revenues and expenses are translated at rates approximatingthe exchange rates in effect at the time of the transactions. All exchange differences are charged or credited to thestatement of comprehensive loss in the year in which they arise. Assets and liabilities denominated in foreigncurrencies other than the Canadian dollar are translated into the presentation currency at the exchange rate in effect atthe balance sheet date. Revenues and expenses are translated at rates approximating the exchange rates in effect at thetime of the transactions. All exchange differences are charged or credited to comprehensive loss or income.

Basis of measurement

The financial statements have been prepared under the historical cost convention, except for the revaluation of certainfinancial assets and financial liabilities to fair value.

Property and equipment

Property and equipment is carried at cost, less accumulated depreciation and accumulated impairment losses. Costcomprises the fair value of consideration given to acquire or construct an asset and includes the direct chargesassociated with bringing the asset to the location and condition necessary for putting it into use, along with the futurecost of dismantling and removing the asset.

When parts of an item of property and equipment have different useful lives, they are accounted for as separate items(major components) of property and equipment. The cost of major overhauls of parts of property and equipment isrecognized in the carrying amount of the item if it is probable that the future economic benefits embodied within thepart will flow to the Company, and its cost can be measured reliably. The carrying amount of the replaced part isderecognized. The costs of the day-to-day servicing of property and equipment are recognized in profit or loss asincurred.

Equipment associated with mining operations is depreciated over the estimated useful lives of the assets either on aunits-of-production basis or declining balance basis at a rate of 20% per annum. All other equipment is amortized overthe estimated useful life of the assets using the declining balance method at rates of 20% to 55% per annum, asappropriate. Leasehold improvements are amortized on a straight-line basis over the term of the lease. Land is notsubject to depreciation. Depreciation methods and useful lives are reviewed at each reporting date and adjusted asrequired.



Provision for reclamation

The Company holds provisions for close down and restoration costs which include the remediation of disturbed areas.Close down and restoration costs are a normal consequence of mining. Although the ultimate cost to be incurred isuncertain, the Company estimates their respective costs based on estimates made by independent third parties.Estimated close down and restoration costs are provided for in the accounting year when the obligation arising from therelated disturbance occurs, whether this occurs during the mine development or during the production phase, based onthe net present value of estimated future costs. Provisions for close down and restoration costs do not include anyadditional obligations which are expected to arise from future disturbance. The cost estimates are updated periodicallyduring the life of the operation to reflect known developments, e.g., revisions to cost estimates and to the estimatedlives of operations, and are subject to formal review at regular intervals.

The initial closure provision together with other movements in the provisions for close down and restoration costs,including those resulting from new disturbances, updated cost estimates, changes to the estimated lives of operationsand revisions to discount rates are capitalized within exploration and evaluation costs. These costs are then depreciatedover the lives of the assets to which they relate. The amortization or “unwinding” of the discount applied in establishingthe net present value of provisions is charged to the income statement in each accounting year. The amortization of thediscount is shown as a finance cost. Where rehabilitation is conducted systematically over the life of the operation,rather than at the time of closure, provision is made for the estimated outstanding continuous rehabilitation work ateach statement of financial position date and the cost is charged to the statement of loss and comprehensive loss.

Clean-up costs result from environmental damage that was not a necessary consequence of mining, includingremediation, compensation and penalties. Provision is made for the estimated present value of the costs ofenvironmental cleanup obligations outstanding at the statement of financial position date. These costs are charged tothe income statement. Movements in the environmental cleanup provisions are presented as an operating cost.Remediation procedures may commence soon after the time the disturbance, remediation process and estimatedremediation costs become known, but can continue for many years depending on the nature of the disturbance and theremediation techniques.

Other provisions and liabilities are recognized in the year when it becomes probable that there will be a future outflowof funds resulting from past operations or events and the amount of cash outflow and timing can be reliably estimated.The timing of recognition and quantification of the liability requires the application of judgment to existing facts andcircumstances, which can be subject to change. A change in estimate of a recognized provision or liability would resultin a charge or credit to net income in the year in which the change occurs, with the exception of close down andrestoration costs described above.

If the effect of the time value of money is material, provisions are determined by discounting the expected future cashflows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to theliability. Contingent liabilities are possible obligations whose existence will only be confirmed by future events notwholly within the control of the Company. Contingent liabilities are not recognized in the financial statements but aredisclosed unless the possibility of an outflow of economic resources is considered remote.

Comprehensive loss

Comprehensive income/loss is the change in the Company’s shareholders’ equity that results from transactions andother events from other than the Company’s shareholders and includes items that would not normally be included in netearnings, such as exchange differences arising from translation of foreign subsidiaries’ financial statements intopresentation currency. Certain gains and losses are recorded as part of net earnings to be presented in other“comprehensive income” until it is considered appropriate to recognize into net earnings.

Provision for government grants

Provision for government grants relates to loans granted by governmental authorities in Spain for the exploration ofmineral deposits. If the government deems these projects as unsuccessful, the loans will be forgiven and credited to therelated exploration and evaluation costs or the statement of comprehensive loss as subsidy revenue. Provision forgovernment grants are measured at their fair value on initial recognition. After initial measurement, provision forgovernment grants are measured at their amortized cost using the effective interest method with the unwinding of thediscount being recognized as finance costs on the statement of loss and comprehensive loss for the year.



Accounting standards issued but not yet effective

The IASB issued the following pronouncements that are effective for the Company’s fiscal years beginning January 1,2013, or later and may affect the Company’s future financial statements.

• IFRS 9, Financial Instruments• IFRS 10, Consolidated Financial Statements• IFRS 11, Joint Arrangements• IFRS 12, Disclosure of Interests in Other Entities• IFRS 13, Fair Value Measurement• IAS 32, Financial Instruments Presentation• IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine

These new and revised accounting standards have not yet been adopted by the Company, and the Company has not yetcompleted the process of assessing the impact that they may have on its financial statements.

3. TRADE AND OTHER RECEIVABLES

2012 2011

Value added tax and other receivables $1,295,957 $667,505Due from Kinross Gold Corporation (Note 5(a)) 190,698 2,019,611Government grant (Note 5(b)) - 257,135

$1,486,655 $2,944,251

4. SHORT-TERM INVESTMENT

Guaranteed investment certificate (“GIC”) with a principal value of $854,519 (2011 - $4,900,000) is held with aCanadian chartered bank as at December 31, 2012. The GIC is redeemable at any time without penalty, earns aninterest rate of 1.35% per annum, and matures on July 24, 2013.

5. EXPLORATION AND EVALUATION ASSETS

Ghana Spain Total

Balance – January 1, 2011 $1,256,087 $6,960,170 $8,216,257Acquisition costs 304,062 - 304,062Exploration and evaluation costs 9,403,383 4,515,784 13,919,167Revaluation of reclamation costs - 53,473 53,473Government grant - (257,135) (257,135)Foreign exchange (143,409) (254,174) (397,584)Cost recovery (2,019,611) - (2,019,611)

Balance – December 31, 2011 8,800,512 11,018,118 19,818,630Exploration and evaluation costs 2,794,877 8,887,293 11,682,170Non-repayable government grant - (192,765) (192,765)Proceeds from sale of Lundin Option (Note 11) - (458,620) (458,620)Foreign exchange (191,754) 131,438 (60,315)Cost recovery (1,377,468) - (1,377,468)

Balance – December 31, 2012 $10,026,168 $19,385,463 $29,411,631


5. EXPLORATION AND EVALUATION ASSETS (cont’d.)

a) Enchi Gold Property, Ghana

On May 5, 2010, the Company entered into an option agreement with Kinross Gold Corporation (“Kinross”), pursuantto which the Company acquired an option to earn an undivided 51% interest in Kinross’ legal and beneficial ownershipin the Enchi Gold Project, Ghana, West Africa (the “Enchi Project”), representing a 45.9% direct interest in the Projectafter taking into account the 10% project interest held by the Government of Ghana. To earn 51% of Kinross’ownership in the Enchi Project licenses (45.9% direct interest in the Enchi Project), Edgewater was required to spend atotal of $5.0 million on work expenditures on the Project within 26 months of the closing of the transaction(completed). Edgewater has earned and vested in a 51% interest in Kinross’ ownership of the Enchi Project and a jointventure company (“JVCO”) is being formed. The initial share ownership in JVCO will be as follows:

Edgewater 45.9%Kinross 44.1%Ghana Government 10.0%

Upon the formation of the JVCO, Kinross and Edgewater will share all future exploration and developmentexpenditures pro-rata. Edgewater will continue to be the Operator as long as the Company holds the largest equitystake in JVCO, in addition to the exploration expenditures required mentioned above. As consideration, Edgewaterissued to Kinross 2,500,000 common share purchase warrants exercisable at $0.50 per common share and 2,500,000common share purchase warrants (collectively the “Enchi Warrants”) exercisable at $1.00 per common share. TheEnchi Warrants are exercisable until September 21, 2015 and are only exercisable by Kinross if Edgewater is able todelineate at least 3.0 million National Instrument 43-101 compliant ounces of gold in the Measured and Indicatedresource categories on the Enchi Project. The existence of a National Instrument 43-101 compliant Measured andIndicated resource is not determinable at this time. The Company measured the fair value of the Enchi Warrants at$3,235,946. For accounting purposes the Enchi Warrants will be recognized when there is sufficient evidence todemonstrate that the conditions above have been met. The fair value of the Enchi Warrants was determined using theBlack-Scholes pricing model with a risk free rate of 2.65%, a volatility factor of 111%, a dividend yield of Nil, and anexpected life of 5 years.

During the year ended December 31, 2012, the Company signed a joint venture agreement with Kinross. All futureexploration and development expenditures will effectively be shared between the Company and Kinross 51% and 49%respectively. The parties’ respective 51-49 interests are subject to a 10% carried interest held by the Government ofGhana. Efforts are currently underway to form a joint venture company. During the year ended December 31, 2012, theCompany recognized contributions from Kinross of $1,377,468 in which relates to their share of the 2012 Enchiexploration budget. Of this balance, $190,698 (2011 - $2,019,611) was classified as a receivable as at December 31,2012. These costs have been treated as a cost recovery on the Enchi Project.

Government of Ghana's rights to increase its participation

Under Act 703, the Government of Ghana has the right to acquire a special share or “golden share” in our GhanaianJVCO at any time for no consideration or such consideration as the Government of Ghana and such JVCO might agree,and a pre-emptive right to purchase all gold and other minerals produced. A “golden share” carries no voting rights anddoes not participate in dividends, profits or assets. To date, the Government of Ghana has not sought to exercise any ofthese rights at our properties.

b) Corcoesto Gold Property, Spain

On September 15, 2010, the Company purchased all of the outstanding shares of Rio Narcea Gold Mines S.L (“RioNarcea”), a wholly-owned Spanish subsidiary of Lundin Mining Corporation (“Lundin”) for US$8,000,000. Rio Narceaowns a 100% interest in the Malpica-Tuy Gold project including the Corcoesto Gold Deposit in north-west Spain aswell as an additional 7 gold and gold-copper projects in south-west Spain. On July 20, 2012, Rio Narcea changed itslegal name to Mineira de Corcoesto, S.L. (“MDC”). Lundin retains a 1.5% Net Smelter Return Royalty upon thecommencement of commercial production from Corcoesto subject to Edgewater having the right to re-purchase 1.0% ofthe royalty at any time for US$1,500,000. Edgewater sold this right to an arms-length party during 2012 for grossproceeds of US$500,000 (Note 11). During the year ended December 31, 2012, the Company paid to Lundin $Nil(2011 - $6,932,600) in relation to the MDC acquisition. During the year ended December 31, 2012, the Companyexpensed financing costs of $Nil (2011 - $298,079) that relates to the remaining purchase price payable to Lundin.


5. EXPLORATION AND EVALUATION ASSETS (cont’d.)

During the year ended December 31, 2012, the Company signed a contract with Tetra Tech Company (“Tetra Tech”) tocomplete a National Instrument 43-101 compliant Feasibility Study for the Corcoesto Gold Project. An advancepayment of $283,601 was paid to Tetra Tech during the year. The advance will be applied against the final invoices ofthe feasibility study. On March 8, 2013, the Company terminated its contract with Tetra Tech. The Company iscurrently working with Tetra Tech to settle the outstanding amounts. Subsequent to year-end, the Company appointedMicon International for completing the Feasibility Study.

During the year ended December 31, 2012, the Company entered into a mandate letter with two lenders for up to $120million of project financing to develop the Corcoesto Gold Project. The lending group is comprised of Credit SuisseAG and Barclays Bank PLC. The mandate letter has preliminary approval of each of the proposed lenders with finalapproval subject to completion of lenders’ due diligence, final credit approval and negotiation, Bankable FeasibilityStudy and execution of a loan agreement. The key terms of the mandate letter include $120 million of senior debt for aterm of up to seven years. The interest rate is LIBOR (London Interbank Offer Rate) based, loan repayments arequarterly, and there is a prepayment provision of a portion of excess free cash flow. The funding under this facility willbe subject to the customary conditions precedent for a financing of this type including the issuance of a mine permitand the necessary permits required for construction and equity investment by Edgewater. There is no certainty that thetransaction contemplated in the mandate letter will be successfully completed.

Subsequent to the year ending December 31, 2012, the Company engaged Micon International, KD Engineering, and asubsidiary of Golder Associates to prepare and deliver a definitive feasibility study and feasibility-level engineeringdesign for the Corcoesto Gold Project. The feasibility study has been underway for several months and the new leadengineering firm, Micon, will incorporate all data previously generated for the study. Edgewater expects the study to becompleted Q3 2013. During the year ended December 31, 2012, the Company received a non-repayable governmentgrant of $192,765 (2011 - $257,135) from the Spain government. An offsetting reduction of an equal amount wasapplied against exploration and evaluation assets.

6. RECLAMATION DEPOSITS2012 2011

Opening balance $2,516,382 $2,526,484Return of reclamation deposits (887,744) -Foreign exchange (17,727) (10,102)Ending balance $1,610,911 $2,516,382

During the year ending December 31, 2012, reclamation deposits amounting to $887,744 (equivalent to €685,199) werereturned to the Company by the Spanish government. The funds were returned as restoration work on several of theareas has been completed.

7. PROPERTY AND EQUIPMENT

Officeequipment

Computerhardware

Computersoftware

Fieldequipment

LeaseholdImprovements Land Total

Year ended December 31, 2011At January 1, 2011 $42,715 $19,187 $37,710 $7,467 $10,309 $ - $117,388Additions 25,269 19,907 5,115 54,850 - 9,831 114,972Depreciation (20,340) (8,776) (19,846) (25,318) (2,293) - (76,573)At December 31, 2011 47,644 30,318 22,979 36,999 8,016 9,831 155,787

At December 31, 2011Cost 76,243 41,757 48,410 62,587 11,056 9,831 249,884Accumulated depreciation (28,598) (11,440) (25,431) (25,588) (3,039) - (94,096)Net book value 47,644 30,318 22,979 36,999 8,017 9,831 155,787

Year ended December 31, 2012At January 1, 2012 47,644 30,318 22,979 36,999 8,017 9,831 155,787Additions 21,171 7,801 - 74,433 - 55,235 158,639Depreciation (21,697) (10,187) (12,598) (18,489) (2,292) - (65,264)At December 31, 2012 47,119 27,930 10,381 92,943 5,725 65,066 249,164

At December 31, 2012Cost 97,414 49,558 48,410 137,020 11,056 65,066 408,523Accumulated depreciation (50,295) (21,627) (38,029) (44,077) (5,331) - (159,360)Net book value $47,119 $27,930 $10,381 $92,943 $5,725 $65,066 $249,163


8. TRADE AND OTHER PAYABLES

2012 2011

Trade payables $1,951,515 $926,313Due to related parties 51,258 83,045Accrued expenses 197,736 123,000

$2,200,509 $1,132,358

Amounts due to related parties relate to expense reimbursement claims and consulting invoices incurred in the normalcourse of operations. The amounts outstanding are unsecured and will be settled in cash. No guarantees have been givenor received. These related party payables have no interest or specific repayments terms. All related party transactionswere recorded at the amount agreed upon by the related parties.

9. PROVISION FOR GOVERNMENT GRANTS

2012 2011

Opening balance $431,907 $671,805Forgiveness of grants - (248,367)Installment payment (47,319) -Foreign exchange 2,036 -Accretion expense 14,428 8,469

401,052 431,907Less: current portion (48,579) (150,653)Ending balance $352,473 $281,254

Beginning January 1, 2013, the Company will commence paying back the government grants in 10 semi-annualinstalments. The principal balance of €338,355 will be paid in two instalments per year of €33,835 each on January 1st

and July 1st. Interest will be applied on the remaining balance based on the annual average Euribor rate in which will bepaid by the Company at each payment interval. The Company paid the instalment corresponding to January 1, 2013during the year ending December 31, 2012.

During the prior year, $248,367 of government grants was forgiven by the Spanish government. The grants forgivenrelate to the El Valle project in which the Company does not own any mining rights thereto therefore it has beenrecorded in the statement of loss and comprehensive loss.

10. PROVISION FOR RECLAMATION

2012 2011

Opening balance $766,609 $721,584Reclamation spending (87,901) -Effect of foreign exchange (3,196) (23,159)Change in pre-tax risk free rate - 53,473Accretion expense 7,460 14,711

682,972 766,609Less: current portion (94,587) (90,240)Ending balance $588,385 $676,369

Provision for reclamation relates to the environmental rehabilitation and restoration of the El Valle and Carlesproperties in Spain which had previously been owned by Rio Narcea prior to the Company’s acquisition. The provisionis recognized for the present value of the costs to be incurred for the restoration of the mining sites, which is estimatedto be completed no later than 2016.

The undiscounted reclamation obligations are estimated to be $770,873 (€585,325) (2011 - €580,632). The majority ofthe undiscounted asset retirement obligations were estimated by an independent third party during 2011. The presentvalue of the reclamation provision has been calculated using a pre-tax risk free discount rate as at December 31, 2012of 1.33% (2011 – 1.27%). It is possible that the Company’s estimate of its reclamation obligations could change due tochanges in laws and regulations and changes in cost estimates.


11. CORCOESTO GOLD PROJECT FINANCING

On September 25, 2012, the Company closed a US$5,000,000 transaction for the sale of royalty interests on theCompany's Corcoesto Gold Project and a non-brokered private placement to an arm's length party (the "Transaction").

The details of the transaction include:

The creation and sale of a 1.0% net smelter return ("NSR") royalty on production from the Corcoesto Gold Project(“NSR Sale”) for gross proceeds of $3,426,500 (US$3,500,000);

Lundin, the previous owner of the Corcoesto Gold Project, had retained a 1.5% NSR on the Corcoesto GoldProject and granted Edgewater the right to purchase two-thirds of the 1.5% royalty interest it held. Edgewater soldthis right to purchase 1.0% of the existing 1.5% NSR (“Lundin Option”) for gross proceeds of $489,500(US$500,000); and

A non-brokered private placement consisting of 2,436,250 units at a price of $0.40 per unit (“Corcoesto PrivatePlacement”) for gross proceeds of $974,500 (US$1,000,000). Each unit consists of one common share and onecommon share purchase warrant. Each warrant allows the holder to purchase one common share in Edgewater fora period of 12 months from closing at a price of $0.50 per share.

A 6.0% finder's fee totalling $292,350 was paid in cash to Haywood Securities Inc. on the transaction. The accountingtreatment for each of the above items is as follows:

The net proceeds on the NSR sale of $3,210,342 (which is net of costs of $216,158) were recorded as deferredroyalty on the balance sheet and will be amortized to revenue over the life of the mine based on a “units ofproduction” method.

The net proceeds on the sales of the Lundin Option of $458,620 (which is net of costs of $30,880) reduced thecarrying value of the Corcoesto Gold Project

The Company allocated $138,945 of the net proceeds to the fair value of the warrants issued in connection withthis financing, with the remaining $758,027 credited to share capital. The fair value of the warrants wasdetermined using the Black-Scholes pricing model with a risk free rate of 1.14%, a volatility factor of 66%, and anexpected life of the warrants of one year. Total share issue cost in connection with the Corcoesto PrivatePlacement amounted to $77,527.

12. SHARE CAPITAL

The authorized share capital of the Company is comprised of an unlimited number of common shares without parvalue.

a) Escrow Agreements

During the year ended December 31, 2012, 700,500 common shares (2011 – 1,401,000) were time released fromescrow. There is no balance remaining in escrow as at December 31, 2012. During the year ended December 31, 2012,30,000 common shares (2011 – 60,000) were released from escrow. There is no balance remaining in escrow as atDecember 31, 2012.


12. SHARE CAPITAL (cont’d.)

b) Private Placements

i) On May 10, 2012, the Company completed a non-brokered private placement financing consisting of6,969,000 common shares at a price of $0.33 per share for gross proceeds of $2,299,770. Share issue cost inconnection with the private placement amounted to $153,020 of which $128,086 were finder’s fees paid incash. A total of 18,000 common shares valued at $5,940 were also issued as finder’s fees. The fair value ofthe common shares issued was based on the closing stock price on the date of share issuance.

ii) During the year ending December 31, 2011, the Company completed a non-brokered private placementconsisting of 13,750,000 units (“Unit”) at a price of $0.80 per Unit for gross proceeds of $11,000,000. EachUnit consisted of one common share and one half of one common share purchase warrant. A total of6,875,000 warrants were issued in connection with the financing. Of this total, 6,515,000 warrants are subjectto expire on September 16, 2013 and the remaining 360,000 warrants are subject to expire on September 28,2013. Each whole warrant entitles the holder to purchase one common share of the Company at a price of$1.10 per share. The Company paid finder’s fees totaling $581,150 in cash and issued 96,687 common sharesin connection with the non-brokered private placement. The 96,687 common shares issued were valued at$87,018 which is based on the closing stock price on the date of issuance. Total share issuance costsrecognized for the placement was $722,932. The Company allocated $1,795,201 of the net proceeds to thefair value of the warrants issued in connection with this financing, with the remaining $8,481,867 allocated toshare capital. The fair value of the warrants was determined using the Black-Scholes pricing model with arisk free rate of 1.37% to 1.45%, a volatility factor of 90%, and an expected life of the warrants of two years.

c) Finder’s Fees

During the year ended December 31, 2011, the Company issued 565,000 common shares to Featherstone as finder’sfees in relation to the Enchi Property option agreement with Kinross (Note 5(a)). The common shares issued werevalued at $371,580 which was based on the closing stock price on the date of issuances.

d) Stock Options

The maximum number of stock options that the Company may grant under its current Stock Option Plan is 9,500,000.As at December 31, 2012, the Company has 1,188,000 stock options available for grant.

A summary of the Company’s stock options is presented below:

December 31, 2012

Exerciseprice

December 31,2011 Granted Exercised Forfeited Expired

December 31,2012 Expiry date

Remainingcontractuallife in years

Number ofoptionsvested

$0.10 977,000 - 977,000 - - - December 17, 2012 - -$0.10 300,000 - - - - 300,000 June 8, 2014 1.44 300,000$0.30 200,000 - - - - 200,000 April 5, 2015 2.26 200,000$0.61 1,300,000 - - - - 1,300,000 May 5, 2015 2.34 1,300,000$0.75 250,000 - - - 250,000 - May 12, 2015 - -$1.00 200,000 - - - - 200,000 June 1, 2015 2.42 200,000$0.85 400,000 - - - - 400,000 July 12, 2015 2.53 400,000$0.96 400,000 - - - 400,000 - August 1, 2015 - -$1.29 200,000 - - 100,000 100,000 - May 27, 2012 - -$1.15 250,000 - - - - 250,000 November 8, 2015 2.85 250,000$1.10 100,000 - - - - 100,000 January 10, 2016 3.03 100,000$0.85 250,000 - - - - 250,000 March 29, 2016 3.24 250,000$0.82 250,000 - - 10,000 15,000 225,000 April 14, 2016 3.29 225,000$0.85 2,025,000 - - 162,500 237,500 1,625,000 August 2, 2016 3.59 1,331,250$0.66 250,000 - - - - 250,000 November 8, 2016 3.86 187,500$0.80 150,000 - - - - 150,000 December 1, 2013 0.92 112,500$0.52 - 400,000 - - - 400,000 January 9, 2017 4.03 200,000$0.40 - 1,660,000 - - - 1,660,000 October 11, 2017 4.78 415,000$0.40 - 25,000 - - - 25,000 November 22, 2017 4.90 6,250

7,502,000 2,085,000 977,000 272,500 1,002,500 7,335,000 5,477,500$0.69 $0.42 $0.10 $1.01 $0.91 $0.65 Weighted average exercise price



December 31, 2011

Exerciseprice

December 31,2010 Granted Exercised



Numberof options

vested

$0.10 977,000 - - 977,000 December 17, 2012 0.95 977,000$0.10 250,000 - 250,000 - May 5, 2014 - -$0.10 300,000 - - 300,000 June 8, 2014 2.44 300,000$0.30 200,000 - - 200,000 April 5, 2015 3.26 200,000$0.61 1,300,000 - - 1,300,000 May 5, 2015 3.35 1,300,000$0.75 250,000 - - 250,000 May 12, 2015 3.36 250,000$1.00 200,000 - - 200,000 June 1, 2015 3.42 200,000$0.85 400,000 - - 400,000 July 12, 2015 3.53 400,000$0.96 400,000 - - 400,000 August 1, 2015 3.59 300,000$1.29 200,000 - - 200,000 May 27, 2012 0.41 100,000$1.15 250,000 - - 250,000 November 8, 2015 3.86 187,500$1.10 - 100,000 - 100,000 January 10, 2016 4.03 75,000$0.85 - 250,000 - 250,000 March 29, 2016 4.25 125,000$0.82 - 250,000 - 250,000 April 14, 2016 4.29 125,000$0.85 - 2,025,000 - 2,025,000 August 2, 2016 4.59 506,250$0.66 - 250,000 - 250,000 November 8, 2016 4.86 62,500$0.80 - 150,000 - 150,000 December 1, 2013 1.92 37,500

4,727,000 3,025,000 250,000 7,502,000 5,145,750$0.56 $0.84 $0.10 $0.69 Weighted average exercise price

During the year ended December 31, 2012, the Company granted 2,085,000 (2011 - 3,025,000) stock options with aweighted average exercise price of $0.42 (2011 - $0.84) per common share to management, employees, and consultantsof the Company. Expiry term of the stock options granted is 5 years (2011 - 2 to 5 years) from the grant date. The fairvalue of the stock options granted has been estimated at the grant date using the Black-Scholes option pricing modelwith the following assumptions:

2012 2011

Range of stock prices on grant dates $0.40 to $0.52 $0.58 to $1.10Weighted average risk-free interest rate 1.35% 1.94%Weighted average expected option life (in years) 5.00 4.85Weighted average expected stock volatility 107% 106%Weighted average expected dividend yield Nil Nil

During the year ended December 31, 2012, directors and a former director of the Company exercised 977,000 (2011 -250,000) stock options at an exercise price of $0.10 per common share. The total proceeds received by the Companyfrom the option exercise amounted to $97,700 (2011 - $25,000). The Company’s stock price on the date the stockoptions were exercised ranges from $0.38 to $0.51 (2011 - $0.90) per common share. The total fair value of stockoption compensation during the year was $1,000,507 (2011 - $1,823,210) of which $447,130 was expensed and$553,377 was capitalized into exploration and evaluation assets.



e) Share Purchase Warrants

A summary of the Company’s share purchase warrants is presented below:

December 31, 2012

Exerciseprice

December 31,2011 Issued Expired



$0.50 2,500,000 - - 2,500,000 June 21, 2015 2.47$1.00 2,500,000 - - 2,500,000 June 21, 2015 2.47$1.40 5,206,500 - - 5,206,500 September 21, 2013 0.72$1.10 624,780 - 624,780 - March 21, 2012 -$1.40 2,600,000 - - 2,600,000 October 7, 2013 0.77$1.10 6,515,000 - - 6,515,000 June 16, 2013 0.46$1.10 360,000 - - 360,000 June 28, 2013 0.49$0.50 - 2,436,250 - 2,436,250 September 25, 2013 0.73

20,306,280 2,436,250 624,780 22,117,750$1.13 $0.50 $1.10 $1.06 Weighted average exercise price

December 31, 2011

Exerciseprice

December 31,2010 Issued Exercised Expired



$0.10 165,000 - 135,000 30,000 - November 2, 2011 -$0.76 2,765,000 - 2,715,000 50,000 - June 21, 2011 -$0.50 2,500,000 - - - 2,500,000 June 21, 2015 3.47$1.00 2,500,000 - - - 2,500,000 June 21, 2015 3.47$1.40 5,206,500 - - - 5,206,500 September 21, 2013 1.73$1.10 624,780 - - - 624,780 March 21, 2012 0.22$1.40 2,600,000 - - - 2,600,000 October 7, 2013 1.77$1.10 - 6,515,000 - - 6,515,000 June 16, 2013 1.46$1.10 - 360,000 - - 360,000 June 28, 2013 1.49

16,361,280 6,875,000 2,850,000 80,000 20,306,280$1.07 $1.10 $0.73 $0.51 $1.13 Weighted average exercise price

During the year ended December 31, 2011, a total of 2,850,000 share purchase warrants were exercised at a weightedaverage exercise price of $0.73 per common share. The total proceeds received by the Company from the warrantsexercise amounted to $2,076,900.

13. ACCUMULATED OTHER COMPREHENSIVE LOSS

2012 2011

Opening balance $(362,123) $ -Foreign currency translation (202,951) (362,123)Ending balance $(565,074) $(362,123)


14. COMPENSATION OF KEY MANAGEMENT

Key management includes the Company’s senior management and members of the Board of Directors. Compensationof key management is as follows:

2012 2011

Salaries and other short-term benefits $1,163,002 $820,151Share-based payments 727,880 1,113,005

$1,890,882 $1,933,156

During the year ended December 31, 2012, the Company paid $127,563 (2011 - $128,430) for consulting and sharedadministration services provided by a company controlled by directors of the Company.

15. COMMITMENTS

a) The Company has a five-year office rental lease agreement which will expire in 2015. All lease costs of the Companyare expensed in the year incurred. The future lease obligation under this agreement is as follows:

2013 $ 131,3232014 $ 125,3642015 $ 69,239

b) The Company has several management consulting agreements in place with terms ranging up to two years. TheCompany may terminate these agreements for any reason (other than by the expiry of the term) with a lump sumpayment equal to the consultants’ annual compensation. The aggregate annual compensation for senior executivesof the Company is approximately $630,000.

16. GEOGRAPHIC INFORMATION

The Company’s business is the acquisition, exploration, evaluation, and development of mineral resource properties,which is currently conducted principally in Ghana and Spain. The Company is in the exploration stage and accordingly,has no reportable segment revenues for any of the years presented in these consolidated financial statements.

December 31, 2012 Canada Ghana Spain Total

Property and equipment $ 52,327 $ 52,327 $ 144,510 $ 249,163Exploration and evaluation assets $ - $ 10,026,168 $ 19,385,463 $ 29,411,631Loss for the year $ 1,873,681 $ 8,949 $ 322,941 $ 2,205,571

December 31, 2011 Canada Ghana Spain Total

Property and equipment $ 73,911 $ 36,375 $ 45,501 $ 155,787Exploration and evaluation assets $ - $ 8,800,512 $ 11,018,118 $ 19,818,630Loss for the year $ 2,801,175 $ 138,888 $ 378,922 $ 3,318,985

17. FINANCIAL INSTRUMENTS

(a) Financial Instruments by Category

The fair value of financial instruments is estimated using the following methods and assumptions for each class offinancial instruments.

Cash, short-term investment, and reclamation deposits – The carrying amounts are equal to the fair values.

Trade and other receivables and trade and other payables – The carrying amounts approximate fair values due tothe short maturity of these financial instruments.

Available-for-sale investments – The investments relate to shares of a Spanish private firm and accordingly, shareprice information for this stock is not readily available. Management estimates that the carrying value approximate fairvalue given available stock information to date.


17. FINANCIAL INSTRUMENTS (cont’d.)

Current provision for government grants and long-term provision for government grants – The provisions forgovernment grants bear interest and therefore it is management’s opinion that the carrying value approximates its fairvalue.

The following provides classification of each financial instrument as at December 31, 2012:

Loans andreceivables

Available-for-sale

Other financialliabilities

Financial assetsCash $ 2,962,326 $ - $ -Trade and other receivables $ 1,486,655 $ - $ -Short-term investment $ 854,519 $ - $ -Available-for-sale investments $ - $ 39,522 $ -Reclamation deposits $ 1,610,911 $ - $ -

Financial liabilitiesTrade and other payables $ - $ - $ 2,200,509Current provision for government grants $ - $ - $ 48,580Provision for government grants $ - $ - $ 352,472

The following provides classification of each financial instrument as at December 31, 2011:

Loans andreceivables

Available-for-sale

Other financialliabilities

Financial assetsCash $ 550,428 $ - $ -Trade and other receivables $ 2,276,746 $ - $ -Short-term investment $ 4,900,000 $ - $ -Available-for-sale investments $ - $ 39,621 $ -Reclamation deposits $ 2,516,382 $ - $ -

Financial liabilitiesTrade and other payables $ - $ - $ 1,132,358Current provision for government grants $ - $ - $ 150,653Provision for government grants $ - $ - $ 281,254

(b) Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. TheCompany ensures there is sufficient capital to meet short-term business requirements. One of management’s goals is tomaintain an optimal level of liquidity through the active management of the Company’s assets, liabilities, and cash flows.The Company prepares annual budgets which are approved by the Board of Directors and prepares cash flows andliquidity forecasts when appropriate. The Company’s cash is held as cash deposits or invested in guaranteed investmentcertificates which are available on demand to fund the Company’s short-term financial obligations. All current liabilitiesare due within the next 12 months.

(c) Credit Risk

The Company’s credit risk is primarily attributable to its cash and accounts receivable. The risk exposure is limited totheir carrying values at the balance sheet date. Cash are held as cash deposits or invested in guaranteed investmentcertificates with counterparties that carry investment grade ratings as assessed by external rating agencies. TheCompany does not invest in asset-backed deposits or investments. Trade and other receivables consist primarily ofvalue added tax recoverable, amounts due from Kinross, and government grant receivable.

(d) Market Risks

The significant market risks to which the Company is exposed are foreign exchange risk, commodity price risk, interestrate risk, and investment risk.



i) Currency Risk

The Company’s functional currencies are the Canadian dollar (CAD$), US dollar (US$), and Euro. TheCompany incurs foreign currency risk from cash and receivable balances and the settlement of purchases thatare denominated in a currency other than the Canadian dollar. The Company is mainly exposed to the USdollar and Euro. The following table details the Company’s sensitivity to a 5% increase and decrease in theCanadian dollar against the above-noted foreign currencies. This percentage represents management’sassessment of the possible change in foreign exchange rates. The sensitivity analysis includes only outstandingforeign currency denominated monetary items and adjusts their translation at the year-end for a 5% change inforeign currency rates. As at the reporting date, the Company did not have any foreign exchange contracts inplace to mitigate these risks.

The Company is exposed to the following significant currency risks as at December 31, 2012:

CAD$ US$ EuroCash 218,262 2,306,022 338,559Trade and other receivables 259,194 - 932,013Short-term investment 854,519 - -Trade and other payables (518,271) (80,505) (495,892)Current provision for government grants - - (36,887)Provision for government grants - - (267,633)

813,703 2,225,517 470,161Equivalent in CAD$ 813,703 2,217,950 619,203

The impact to the Statement of Comprehensive Loss of a 5% fluctuation in exchange rates of the respectiveforeign currencies as at December 31, 2012 is as follows:

US$ EuroImpact of 5% fluctuation in exchange rates 110,898 30,960

The Company is exposed to the following significant currency risks as at December 31, 2011:

CAD$ US$ EuroCash 191,883 94,725 128,119Trade and other receivables 2,082,758 - 652,498Short-term investment 4,900,000 - -Trade and other payables (358,605) (152,382) (495,892)

6,816,036 (57,657) 284,725Equivalent in CAD$ 6,816,036 (58,793) 375,923

The impact to the Statement of Comprehensive Loss of a 5% fluctuation in exchange rates of the respectiveforeign currencies as at December 31, 2011 is as follows:

US$ EuroImpact of 5% fluctuation in exchange rates 2,940 26,313

ii) Commodity Price Risk

The Company is currently in the exploration stage and as a result, is not subject to commodity price risk fromfluctuations in the market prices of gold.

iii) Interest Rate Risk

The Company’s interest rate risk arises from the interest earned on cash and the interest charged on therepayable government grants (Note 9). Deposits are invested on a short-term basis to enable adequate liquidityfor payment of operational and capital expenditures. The Company’s other financial assets and liabilities arenot subject to interest rate risk since they do not bear interest.



iv) Investment Risk

The Company holds investments totaling $39,522 (2011 - $39,621) in the common shares of a Spanishprivate equity company, Cajamar Caja Rural, Sociedad Cooperativa de Credito (value of €30,009), whichgives rise to market risk and share price variance. The Company periodically monitors the value of theseshares in order to minimize this risk.

(e) Capital Management

The Company’s objectives in managing its capital resources are to safeguard the entity’s ability to continue as a goingconcern and maximize returns to shareholders in the context of the market. The Company satisfies its capitalrequirements through careful management of its cash resources and by utilizing equity issues, as necessary, based onthe prevailing economic conditions of both the industry and the capital markets and the underlying risks characteristicsof the related assets. The Company’s principal source of capital is from the issuance of common shares. To meet theobjectives, management monitors the Company’s ongoing capital requirements against net working capital and assessesadditional capital requirements on a case-by-case basis. The Company is not subject to any externally imposed capitalrequirements. The capital structure of the Company consists of equity attributable to common shareholders, comprisingof issued capital, share-based payments reserve, warrants reserve, accumulated other comprehensive loss, andaccumulated deficit.

(f) Fair Value Hierarchy

Level 1 - Quoted prices in active in active markets for identical assets or liabilities.

Level 2 - Inputs other than quotes prices included within Level 1 that are observable for the asset or liability, eitherdirectly or indirectly.

Level 3 - Inputs for the asset or liability that are not based on observable market data.

The following table illustrates the classification of the Company’s financial instruments within the fair value hierarchyas at December 31, 2012:

Level 1 Level 2 Level 3Short-term investment $ 854,519 $ - $ -Available-for-sale investments $ - $ - $ 39,522

The following table illustrates the classification of the Company’s financial instruments within the fair value hierarchyas at December 31, 2011:

Level 1 Level 2 Level 3Short-term investment $ 4,900,000 $ - $ -Available-for-sale investments $ - $ - $ 39,621


18. INCOME TAXES

The reconciliation of the income tax provision computed at statutory rates to the reported income tax provision for theyears ended December 31 is as follows:

2012 2011

Loss for the year before income taxes $ (2,205,571) $ (3,318,985)Effective statutory rate 25.0% 26.5%Expected income tax recovery (551,393) (879,531)Non-deductible expenses 114,624 250,848Change in future tax rates - 37,957Effect of tax rate difference between Canada and foreigncountries 16,595 7,691Other items 31,401 -Change in benefits not recognized and other 388,774 583,035

$ - $ -

Deferred income tax assets and liabilities reflect the net effects of temporary differences between the carrying amountof assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significantcomponents of the Company’s deferred income tax assets and liabilities as at December 31 are as follows:

2012 2011

Deferred income tax assets (liabilities) not recognized:Non-capital loss carry forwards $ 4,177,091 $ 3,714,879Undeducted share issue costs 271,169 319,516Provision for reclamation costs 204,892 229,983

$ 4,653,152 $ 4,264,378

The Company has non-capital losses of approximately $15.0 million (2011 - $13.0 million), which can be used toreduce taxable income in future years. Non-capital loss carry-forwards in Canada and Spain are $5.6 million and $9.3million respectively. These non-capital loss carry-forwards are subject to expire between 2013 and 2032.

In accordance with Spain legislation, income taxes cannot be considered definitive until they have been inspected andagreed by the Spanish tax authorities or before the relevant inspection year has lapsed. As a consequence of thedifferent fiscal legislation interpretation, additional liabilities could arise from such tax inspections. Management doesnot expect such tax liabilities, if it occurs, will significantly affect the accounts of the Company.

19. SUBSEQUENT EVENTS

a) Subsequent to the year ending December 31, 2012, the Company completed a $5,000,000 bought-deal privateplacement basis consisting of 11,112,000 common shares at a price of $0.45 per common share. The Companypaid the underwriters a cash commission equal to 6% of the gross proceeds of the offering as well as brokerwarrants equal to 6% of the common shares issued exercisable at $0.47 per common share for a 24 month period.All securities issued under the offering are subject to a four-month hold period expiring on June 14, 2013.

b) The Company engaged Micon International, KD Engineering, and a subsidiary of Golder Associates to prepareand deliver a definitive feasibility study and feasibility-level engineering design for the Corcoesto Gold Project.

c) The Company granted 350,000 stock options to an officer of the Company. The options are at an exercise price of$0.50 per share and valid for a period of five years from the date of grant.

edgewater exploration ltd. · to the audit committee of edgewater exploration ltd. we have audited...

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