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Effective Date 5/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 20-F

(Mark One)

[   ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended May 31, 2012

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[   ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

For the transition period from _____________ to ___________________

Commission file number: 000-26296

Petaquilla Minerals Ltd.
(Exact name of Registrant as specified in its charter)

Not Applicable
(Translation of Registrant's name into English)

Province of British Columbia, Canada
(Jurisdiction of incorporation or organization)

Suite 1230, 777 Hornby Street, Vancouver, British Columbia, Canada V6Z 1S4
(Address of principal executive offices)

Mr. Ezequiel Sirotinsky, Chief Financial Officer
Telephone (604) 694-0021, facsimile (604) 694-0063, email: esirotinsky@petaquilla.com
Suite 1230, 777 Hornby Street, Vancouver, British Columbia, Canada V6Z 1S4
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Form 20-F_Fiscal Year Ended 2012 May 31 Page 1




Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class
None
Name of each exchange on which registered
  Not applicable  

Securities registered or to be registered pursuant to Section 12(g) of the Act.

Common Shares without Par Value
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

Not Applicable
(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

221,863,781 common shares, without par value, as at May 31, 2012

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

[   ] Yes [ X ] No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

[   ] Yes [ X ] No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[ X ] Yes [   ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[ X ] Yes [   ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [   ] Accelerated filer [ X ] Non-accelerated filer [   ]

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP [   ] International Financial Reporting Standards as issued Other [   ]
  By the International Accounting Standards Board [ X ]  

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

[   ] Item 17 [   ] Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[   ] Yes [ X ] No 

Form 20-F_Fiscal Year Ended 2012 May 31 Page 2




PETAQUILLA MINERALS LTD.
SECURITIES AND EXCHANGE COMMISSION
FORM 20-F
TABLE OF CONTENTS
Page No.

 

  GLOSSARY OF MINING TERMS 8
  CAUTIONARY NOTE REGARDING RESOURCE AND RESERVE ESTIMATES 10
  CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION 10
  CURRENCY PRESENTATION 11
  INTRODUCTION 12
PART I   12
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 12
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 12
ITEM 3. KEY INFORMATION 12
3.A. Selected Financial Data 12
3.B. Capitalization and Indebtedness 14
3.C. Reasons for the Offer and Use of Proceeds 14
3.D. Risk Factors 14
  Mining operations and projects are vulnerable to supply chain disruptions and our operations and development projects could be adversely affected by shortages of, as well as lead times to deliver, strategic spares, critical consumables, mining equipment or metallurgical plant equipment. 14
  We face uncertainty and risks in our exploration and project evaluation activities. 14
  We face many risks related to the development of our mining projects that may adversely affect our results of operations and profitability. 15
  We may require additional funding in order to continue our operations. 16
  Our consolidated financial statements are prepared on a going concern basis. 16
  Our level of indebtedness could adversely affect our business. 16
  We face many risks related to our operations that may adversely affect our cash flows and overall profitability. 17
  Mineral prices can fluctuate dramatically and have a material adverse effect on our results of operations. 17
  We face risks related to operations in foreign countries. 18
  The requirements of the Ley Petaquilla may have an adverse impact on us. 18
  Our operations are subject to environmental and other regulation. 19
  Our directors and officers may have conflicts of interest in connection with other mineral exploration and development companies. 20
  Environmental protestors are present in Panama. 20
  Our common shares are subject to penny stock rules, which could affect trading in our shares. 20

 

Form 20-F Fiscal Year Ended 2012 May 31 Page 3

 




  U.S. investors may not be able to enforce their civil liabilities against us or our directors, controlling persons and officers. 20
  If we have been or are characterized as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes, our U.S. Holders may be subject to adverse U.S. federal income tax consequences. 20
  We face competition from companies with greater financial resources and operational capabilities. 21
  We may not pay dividends on our common shares in the foreseeable future. 21
ITEM 4. INFORMATION ON THE COMPANY 21
4.A. History and Development of the Company 21
  Molejon Property – Panama 22
  Principal Capital Expenditures and Divestitures Over Last Three Fiscal Years 23
  Current Principal Capital Expenditures and Divestitures 23
  Public Takeover Offers 23
  Lomero-Poyatos Property – Spain 24
4.B. Business Overview 24
  Molejon Property – Panama 24
  Lomero-Poyatos Property – Spain 25
4.C. Organizational Structure 25
4.D. Property, Plants and Equipment 25
  Mineral Concession Lands 25
  Introduction 25
  Property Location - Panama 25
  Location, Access & Physiography 30
  Plant and Equipment 30
  Mine Operations 33
  Mineral Recoveries 33
  Commodity Price 34
  Exploration and Advancement of the Molejon Property 36
  Title 36
  Cerro Petaquilla Concession – Panama 36
  Molejon Property – Panama 36
  Exploration History 37
  Summary of Exploration History and Ownership 37
  Resource and Reserve Estimates 39
  Regional and Local Geology 41
  Mineralization 41
  Doing Business in Panama 42
  Property Location - Spain 44
  Summary of Exploration History and Ownership 46
  Resource and Reserve Estimates 46
  Geology and Mineralization 46
  Outlook – 2013 47
ITEM 4A. UNRESOLVED STAFF COMMENTS 47
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 47

 

Form 20-F_Fiscal Year Ended 2012 May 31 Page 4

 




5.A. Operating Results 47
  Year Ended May 31, 2012, Compared to Year Ended May 31, 2011 (prepared in accordance with IFRS) 48
  Year Ended May 31, 2011, Compared to Year Ended May 31, 2010 (both originally prepared in accordance with generally accepted accounting principles in Canada) 49
  Year Ended May 31, 2010, Compared to Year Ended May 31, 2009 (both originally prepared in accordance with generally accepted accounting principles in Canada) 50
5.B Liquidity and Capital Resources 52
  May 31, 2012, Compared with May 31, 2011 52
  May 31, 2011, Compared with June 1, 2010 53
5.C. Research and Development, Patents and Licenses, etc. 53
5.D. Trend Information 53
5.E. Off-Balance Sheet Arrangements 54
5.F. Tabular Disclosure of Contractual Obligations 55
  Commitments 55
  Long-Term Debt 56
  Bank Loans 56
  Finance Lease Obligations 57
  Convertible Loan 57
  Secured Notes 58
  Convertible Secured Notes 58
  Community Support Obligation 59
  Asset Retirement Obligation 59
5.G. Safe Harbour 60
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 60
6.A. Directors and Senior Management 60
6.B. Compensation 62
  Cash and Non-Cash Compensation – Directors and Officers 62
  Option Grants to Directors and Officers During Fiscal Year Ended May 31, 2012 63
  Options Acquired Upon Acquisition of Iberian Resources Corp. During Fiscal Year Ended May 31, 2012 63
  Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values 64
  Defined Benefit or Actuarial Plan Disclosure 65
  Termination of Employment, Change in Responsibilities and Employment Contracts 65
  Directors 65
6.C. Board Practices 65
6.D. Employees 66
6.E. Share Ownership 66
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 68
7.A. Major Shareholders 68
7.B. Related Party Transactions 69
7.C. Interests of Experts and Counsel 70
ITEM 8. FINANCIAL INFORMATION 70
8.A. Consolidated Statements and Other Financial Information 70

 

Form 20-F Fiscal Year Ended 2012 May 31 Page 5

 




8.B. Significant Changes 70
ITEM 9. THE OFFER AND LISTING 70
9.A. Offer and Listing Details 70
9.B. Plan of Distribution 72
9.C. Markets 73
9.D. Selling Shareholders 73
9.E. Dilution 73
9.F. Expenses of the Issue 73
ITEM 10. ADDITIONAL INFORMATION 73
10.A. Share Capital 73
10.B. Memorandum and Articles of Association 73
10.C. Material Contracts 75
10.D. Exchange Controls 75
10.E. Taxation 77
  Material Canadian Federal Income Tax Consequences 77
  Dividends 77
  Capital Gains 77
  Material United States Federal Income Tax Consequences 78
  U.S. Holders 78
  Distributions on our Common Shares 79
  Disposition of our Common Shares 79
  Passive Foreign Investment Company 80
  Foreign Tax Credit 80
  Information Reporting and Backup Withholding 81
10.F. Dividends and Paying Agents 81
10.G. Statements by Experts 81
10.H. Documents on Display 81
10.I. Subsidiary Information 81
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 81
  Credit risk 81
  Liquidity risk 82
  Market risk 82
  Currency risk 82
  Interest rate risk 82
  Price risk 82
  Qualitative information about market risk 82
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 83
PART II   83
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 83
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 83

 

Form 20-F_Fiscal Year Ended 2012 May 31 Page 6

 




ITEM 15. CONTROLS AND PROCEDURES 83
  Management’s Annual Report on Internal Control over Financial Reporting 84
  Attestation Report of our External Auditor 84
  Changes in Internal Control over Financial Reporting 84
  Inherent Limitations on Effectiveness of Controls 84
ITEM 16. [RESERVED] 85
16.A. AUDIT COMMITTEE FINANCIAL EXPERT 85
16.B. CODE OF ETHICS 85
16.C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 85
16.D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 86
16.E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 86
16.F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 86
16.G. CORPORATE GOVERNANCE 86
16.H. MINE SAFETY DISCLOSURE 86
PART III   87
ITEM 17. FINANCIAL STATEMENTS 87
ITEM 18. FINANCIAL STATEMENTS 152
ITEM 19. EXHIBITS 152
  SIGNATURES 154

 

Form 20-F Fiscal Year Ended 2012 May 31 Page 7

 




GLOSSARY OF MINING TERMS

The following is a glossary of some of the terms used in the mining industry and referenced herein:

cut-off grade the deemed grade of mineralization, established by reference to economic factors, above which material is included in mineral deposit calculations and below which material is considered waste. May be either an external cut-off grade, which refers to the grade of mineralization used to control the external or design limits of an open pit based upon the expected economic parameters of the operation, or an internal cut-off grade, which refers to the minimum grade required for blocks of mineralization present within the confines of an open pit to be included in mineral deposit estimates
diamond drill a machine designed to rotate under pressure an annular diamond-studded cutting tool to produce a more or less continuous solid sample (drill core) of the material that is drilled
epithermal a term applied to those mineral deposits formed in and along fissures or other openings in rocks by deposition at shallow depths from ascending hot solutions
indicated mineral resource that part of a Mineral Resource for which quantity, grade or quality, densities, shape and physical characteristics, can be estimated with a level of confidence sufficient to allow the appropriate application of technical and economic parameters, to support mine planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough for geological and grade continuity to be reasonably assumed
inferred mineral resource that part of a Mineral Resource for which quantity, grade or quality can be estimated on the basis of geological evidence and limited sampling and reasonably assumed, but not verified, geological and grade continuity. The estimate is based on limited information and sampling gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes
measured mineral resource that part of a Mineral Resource for which quantity, grade or quality, densities, shape and physical characteristics are so well established that they can be estimated with confidence sufficient to allow the appropriate application of technical and economic parameters, to support production planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough to confirm both geological and grade continuity
mineral deposit, deposit or mineralized material a mineralized body which has been physically delineated by sufficient drilling, trenching and/or underground work and found to contain a sufficient average grade of metal or metals to warrant further exploration and/or development expenditures. Such a deposit does not qualify under standards of the Securities Exchange Commission as a commercially mineable ore body or as containing ore reserves, until final legal, technical and economic factors have been resolved
mineral reserve the economically mineable part of a Measured or Indicated Mineral Resource demonstrated by at least a Preliminary Feasibility Study. This Study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified. A Mineral Reserve includes diluting materials and allowances for losses that may occur when the material is mined
mineral resource a concentration or occurrence of diamonds, natural solid inorganic material or natural solid fossilized organic material including base and precious metals, coal and industrial minerals in or on the Earth’s crust in such form and quantity and of such a grade or quality that it has reasonable prospects for economic extraction. The location, quantity, grade, geological characteristics and continuity of a Mineral

 

Form 20-F_Fiscal Year Ended 2012 May 31 Page 8

 




  Resource are known, estimated or interpreted from specific geological evidence and knowledge
open pit mining the process of mining an ore body from the surface in progressively deeper steps. Sufficient waste rock adjacent to the ore body is removed to maintain mining access and to maintain the stability of the resulting pit
ore a natural aggregate of one or more minerals which, at a specified time and place, may be mined and sold at a profit, or from which some part may be profitably separated
ounces troy ounces
oz/tonne troy ounces per metric tonne
ppb parts per billion
ppm parts per million
porphyry deposit a disseminated mineral deposit often closely associated with porphyritic intrusive rocks;
preliminary feasibility study a comprehensive study of the viability of a mineral project that has advanced to a stage where the mining method, in the case of underground mining, or the pit configuration, in the case of an open pit, has been established and an effective method of mineral processing has been determined, and includes a financial analysis based on reasonable assumptions of technical, engineering, legal, operating, economic, social and environmental factors and the evaluation of other relevant factors which are sufficient for a Qualified Person, acting reasonably, to determine if all or part of the Mineral Resource may be classified as a Mineral Reserve
probable mineral reserve the economically mineable part of an Indicated mineral resource and, in some circumstances, a Measured Mineral Resource demonstrated by at least a Preliminary Feasibility Study. Such Study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified
proven mineral reserve the economically mineable part of a Measured Mineral Resource demonstrated by at least a Preliminary Feasibility Study. Such study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting, that economic extraction is justified
qualified person an individual who is an engineer or geoscientist with at least five years of experience in mineral exploration, mine development or operation or mineral project assessment, or any combination of these; has experience relevant to the subject matter of the mineral project and the technical report; and is a member or licensee in good standing of a professional association
stockwork a rock mass so interpenetrated by small veins of ore that the whole must be mined together. Stockworks are distinguished from tabular or sheet deposits, (i.e. veins or beds), which have a small degree of thickness in comparison with their extension in the main plane of the deposit
tonne body, metric ton (2,204 pounds)

 

Form 20-F_Fiscal Year Ended 2012 May 31 Page 9

 




CAUTIONARY NOTE REGARDING RESOURCE AND RESERVE ESTIMATES

The terms “mineral reserve”, “proven mineral reserve” and “probable mineral reserve” are Canadian mining terms as defined in accordance with Canadian National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) and the Canadian Institute of Mining, Metallurgy and Petroleum (the “CIM”) - CIM Definition Standards on Mineral Resources and Mineral Reserves, adopted by the CIM Council, as amended. These definitions differ from the definitions in United States Securities and Exchange Commission (“SEC”) Industry Guide 7 under the United States Securities Act of 1993, as amended (the “Securities Act”). Under the United States Security and Exchange Commission (“SEC”) Industry Guide 7 standards, a “final” or “bankable” feasibility study is required to report reserves, the three-year historical average price is used in any reserve or cash flow analysis to designate reserves and the primary environmental analysis or report must be filed with the appropriate governmental authority.

In addition, the terms “mineral resource”, “measured mineral resource”, “indicated mineral resource” and “inferred mineral resource” are defined in and required to be disclosed by NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7 and are normally not permitted to be used in reports and registration statements filed with the SEC. Investors are cautioned not to assume that any part or all of mineral deposits in these categories will ever be converted into reserves. “Inferred mineral resources” have a great amount of uncertainty as to their existence and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimates of inferred mineral resources may not form the basis of feasibility or pre-feasibility studies, except in rare cases. Investors are cautioned not to assume that all or any part of an inferred mineral resource exists or is economically or legally mineable. Disclosure of “contained ounces” in a resource is permitted disclosure under Canadian regulations; however, the SEC normally only permits issuers to report mineralization that does not constitute “reserves” by SEC Industry Guide 7 standards as in place tonnage and grade without reference to unit measures.

Accordingly, information contained in this Annual Report contains descriptions of our mineral deposits that may not be comparable to similar information made public by U.S. companies subject to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations there under.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Annual Report on Form 20-F contains forward-looking information and forward-looking statements as defined in applicable securities laws. These statements relate to future events or our future performance. All statements other than statements of historical fact are forward-looking statements.

Forward-looking statements include, but are not limited to, statements with respect to the future price of gold, silver and other minerals, the estimation of mineral reserves and resources, the realization of mineral reserve estimates, the timing and amount of estimated future production, costs of production, capital expenditures, costs and timing of the development of new deposits, success of exploration activities, permitting time lines, currency exchange rate fluctuations, requirements for additional capital, completion of a plant capacity expansion, government regulation of mining operations, government approval to commence mining at Lomero-Poyatos Mine, fiscal 2013 plans, combined ore on two leach pads, planned recovery rate, production through the on/off leach operation will progressively increase, throughput will increase beginning in the second quarter of fiscal 2013, additional tpd processing capacity, expectation on the spin-out of Panama Development and Infrastructure Ltd., environmental risks, unanticipated reclamation expenses, title disputes or claims, limitations on insurance coverage.

Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “plans”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate” or “believes”, or variations of such words and phrases or state that certain actions, events or results “may”, “could”, “would”, “might” or “will be taken”, “occur” or “be achieved”.

Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking statements, including but not limited to: risks related to international operations; risks related to joint venture operations; actual results of current exploration activities; conclusions of economic evaluations; changes in project parameters as plans continue to be refined; future prices of gold and silver; possible

Form 20-F_Fiscal Year Ended 2012 May 31 Page 10




variations in ore reserves, grade or recovery rates; failure of plant, equipment or processes to operate as anticipated; accidents, labor disputes and other risks of the mining industry; delays in obtaining governmental approvals or financing or in the completion of development or construction activities, as well as those factors discussed in the section entitled “Risk Factors” in this Annual Report on Form 20-F. Although we have attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements.

Statements in this Annual Report on Form 20-F regarding expected completion dates of feasibility studies, anticipated mining or metal production operations, projected quantities of future metal production and anticipated production rates, operating efficiencies, costs and expenditures are forward-looking statements. Actual results could differ materially depending upon the availability of materials, equipment, required permits or approvals and financing, the occurrence of unusual weather or operating conditions, the accuracy of reserve estimates, lower than expected ore grades or the failure of equipment or processes to operate in accordance with specifications. Additional information about these and other assumptions, risks and uncertainties that may affect our future financial performance are set out in Item 3.D. – Key Information – Risk Factors.

Forward-looking statements in this Annual Report on Form 20-F are as of September 11, 2012. We do not undertake to update any forward-looking statements that are incorporated by reference herein, except in accordance with applicable securities laws.

CURRENCY PRESENTATION

This Annual Report on Form 20-F contains references to United States dollars and Canadian dollars. Unless otherwise indicated, all dollar amounts referred to herein are expressed in United States dollars and all financial information presented has been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Canadian dollars are referred to as “CAD$”.

Form 20-F_Fiscal Year Ended 2012 May 31 Page 11




INTRODUCTION

Petaquilla Minerals Ltd. is organized under the British Columbia Business Corporations Act. As used in this Annual Report on Form 20-F (the “Annual Report”), the terms “Petaquilla”, “we”, “us” and “our” refer to Petaquilla Minerals Ltd. and our subsidiaries unless otherwise indicated or if the context otherwise requires.

Our principal corporate offices are located at Suite 1230, 777 Hornby Street, Vancouver, British Columbia, Canada V6Z 1S4. Our telephone number is 604-694-0021.

We file reports and other information with the SEC located at 100 F Street NE, Washington, D.C. 20549; you may obtain copies of our filings with the SEC by accessing its Electronic Data Gathering Analysis and Retrieval (“EDGAR”) System located at www.sec.gov. Further, we file reports under Canadian regulatory requirements on the System for Electronic Document Analysis and Retrieval of the Canadian Securities Administrators (“SEDAR”); you may access our reports filed on SEDAR by accessing the following website: www.sedar.com.

The information set forth in this Annual Report is as at August 29, 2012, unless an earlier or later date is indicated.

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

This Form 20-F is being filed as an annual report under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as such, there is no requirement to provide information under this item.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

This Form 20-F is being filed as an annual report under the Exchange Act, and as such, there is no requirement to provide information under this item.

ITEM 3. KEY INFORMATION

3.A. Selected Financial Data

Our selected financial data for the fiscal years ended May 31, 2012, and 2011, was derived from our consolidated annual financial statements, prepared in accordance with IFRS as issued by the IASB.

The consolidated financial statements for the year ended May 31, 2012, and its comparative periods were prepared in accordance with IFRS as issued by the IASB, and audited by Ernst & Young, LLP, Chartered Accountants, as indicated in the audit report covering such periods included elsewhere in this Annual Report. Our selected financial data should be read in conjunction with the consolidated financial statements and other financial information included elsewhere in this Annual Report.

Subject to certain transition elections disclosed in Note 33 of the consolidated financial statements for the year ended May 31, 2012, we have consistently applied the same accounting policies in our opening IFRS statement of financial position at June 1, 2010, and throughout all periods presented, as if these policies had always been in effect. Note 33 of the consolidated financial statements further discloses the impact of the transition to IFRS on our reported financial position, financial performance and cash flows, including the nature and effect of significant changes in accounting policies from those used in our consolidated financial statements for the year ended May 31, 2011.

We have not declared any dividends on our common shares since incorporation and do not anticipate that we will do so in the foreseeable future. Our present policy is to retain future earnings for use in our operations and expansion of our business.

The following tables summarize our selected consolidated financial information for the periods indicated and is extracted from the more detailed consolidated financial statements and related notes included herein. The following tables should be ready in conjunction with “Item 5 – Operating and Financial Review and Prospects”, and the consolidated financial statements included in Item 17. Results for the periods presented are not necessarily indicative of results for future periods.

Form 20-F_Fiscal Year Ended 2012 May 31 Page 12




SELECTED FINANCIAL DATA, DERIVED FROM OUR CONSOLIDATED ANNUAL FINANCIAL
STATEMENTS, PRESENTED IN ACCORDANCE WITH IFRS AS ISSUED BY THE IASB

    Year Ended Year Ended  
    May 31, 2012 May 31, 2011  
    ($) ($)  
  Total revenue 94,297,396 71,708,685  
  Net income (loss) 22,419,634 (3,843,516)  
  Basic and diluted earnings (loss) per share (1) 0.10 (0.01)  
  Total assets 186,251,191 128,733,415  
  Total long-term debt (2) 10,443,250 14,689,811  
  Shareholders’ equity 55,929,263 10,398,510  
  Cash dividends declared per share n/a n/a  
  Capital stock (number of issued and outstanding common shares) 221,863,781 176,429,501  
    As at May 31, 2012 As at May 31, 2011  
  Cash and cash equivalents 1,975,660 5,712,792  
  Short term investments 340,000 200,000  
  Inventories 29,523,783 13,886,081  
  Working capital (41,775,106) (23,848,920)  
  Long-term debt (2) 10,443,250 14,689,811  
  Shareholders’ equity 55,929,263 10,398,510  
  Total assets 186,251,191 128,733,415  
    As at June 1, 2010    
  Cash and cash equivalents 4,625,649    
  Short term investments -    
  Inventories 4,742,031    
  Working Capital (89,616,869)    
  Long-term debt (2) 76,432,676    
  Shareholders’ equity (deficiency) (25,246,279)    
  Total assets 90,258,202    

(1) The effect of potential share issuances pursuant to the exercise of options and warrants would be anti-dilutive and, therefore, basic and diluted losses per share are the same.
(2) Includes bank loans, finance lease obligations, convertible loan, secured notes and convertible secured notes. See note 15 to our consolidated financial statements for year ended May 31, 2012.

Form 20-F_Fiscal Year Ended 2012 May 31 Page 13




3. B. Capitalization and Indebtedness

This Form 20-F is being filed as an annual report under Exchange Act, and as such, there is no requirement to provide information under this item.

3. C. Reasons for the Offer and Use of Proceeds

This Form 20-F is being filed as an annual report under Exchange Act, and as such, there is no requirement to provide information under this item.

3. D. Risk Factors

The following is a brief discussion of those distinctive or special characteristics of our operations and industry, which may have a material impact on, or constitute risk factors in respect of, our financial performance. However, there may be additional risks unknown to us and other risks, currently believed to be immaterial, that could turn out to be material. These risks, either individually or simultaneously, could significantly affect our business and financial results.

We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. Investors should carefully consider the risks described below before investing in our securities. The occurrence of any of the following events could harm us. If these events occur, the trading price of our common shares could decline, and investors may lose part or even all of their investment.

Mining operations and projects are vulnerable to supply chain disruptions and our operations and development projects could be adversely affected by shortages of, as well as lead times to deliver, strategic spares, critical consumables, mining equipment or metallurgical plant equipment.

Our operations and development projects could be adversely affected by shortages of, as well as lead times to deliver, strategic spares, critical consumables and processing equipment. In the past, we and other gold mining companies have experienced shortages in critical consumables, particularly as production capacity in the global mining industry has expanded in response to increased demand for commodities, and we have experienced increased delivery times for these items. These shortages have also resulted in unanticipated increases in the price of certain of these items. Shortages of strategic spares, critical consumables or mining equipment, which could occur in the future, could result in production delays and production shortfalls, and increases in prices result in an increase in both operating costs and the capital expenditure to maintain and develop mining operations. We and other gold mining companies, individually, have limited influence over manufacturers and suppliers of these items. In certain cases there are only limited suppliers for certain strategic spares, critical consumables and processing equipment and they command superior bargaining power relative to us, or we could at times face limited supply or increased lead time in the delivery of such items. If we experience shortages, or increased lead times in delivery of strategic spares, critical consumables or processing equipment our results of operations and our financial condition could be adversely affected.

We face uncertainty and risks in our exploration and project evaluation activities.

Exploration activities are speculative in nature and project evaluation activities necessary to determine whether a viable mining operation exists or can be developed are often unproductive. These activities also often require substantial expenditure to establish the presence, and to quantify the extent and grades (metal content), of mineralized material through exploration drilling. Once mineralization is discovered it can take several years to determine whether adequate ore reserves exist. During this time, the economic feasibility of production may change owing to fluctuations in factors that affect revenue, as well as cash and other operating costs, including:

  • future metal and other commodity prices;

  • anticipated tonnage, grades and metallurgical characteristics of the ore to be mined and processed;

  • anticipated recovery rates of gold from the ore; and

  • anticipated capital expenditure and cash operating costs.

These estimates depend upon the data available and the assumptions made at the time the relevant estimate is made.

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Resource estimates are not precise calculations and depend on the interpretation of limited information on the location, shape and continuity of the occurrence and on the available sampling results. Further exploration and studies can result in new data becoming available that may change previous resource estimates which will impact upon both the technical and economic viability of production of the relevant mining project. Changes in the forecast prices of commodities, exchange rates, production costs or recovery rates may change the economic status of resources resulting in revisions to previous resource estimates. These revisions could impact depreciation and amortization rates, asset-carrying values provisions for closedown, restoration and environmental clean-up costs. These estimates depend upon the data available and the assumptions made at the time the relevant estimate is made.

We undertake revisions to our resource estimates based upon actual exploration and production results, new information on geology and fluctuations in production, operating and other costs and which could adversely affect the life-of-mine plans and consequently the total value of our mining asset base. Resource restatements could negatively affect our results, financial condition and prospects, as well as our reputation. The increased demand for gold and other commodities, combined with a declining rate of discovery, has resulted in existing reserves being depleted at an accelerated rate in recent years. We, therefore, face intense competition for the acquisition of attractive mining properties.

From time to time, we evaluate the acquisition of exploration properties and operating mines, either as stand-alone assets or as part of companies. Our decisions to acquire these properties have historically been based on a variety of factors including estimates of and assumptions regarding the extent of resources, cash and other operating costs, gold prices and projected economic returns and evaluations of existing or potential liabilities associated with the relevant property and our operations and how these factors may change in the future. All of these factors are uncertain and could have an impact upon revenue, cash and other operating issues, as well as the uncertainties related to the process used to estimate resources.

As a result of these uncertainties, the exploration programs and acquisitions engaged in by us may not result in the expansion or replacement of the current production with new resources or operations. Our operating results and financial condition are directly related to the success of our exploration and acquisition efforts and our ability to replace or increase existing resources. If we are not able to maintain or increase our resources, our results of operations and our financial condition and prospects could be adversely affected.

We face many risks related to the development of our mining projects that may adversely affect our results of operations and profitability.

The profitability of mining companies depends, in part, on the actual costs of developing and operating mines, which may differ significantly from estimates determined at the time a relevant mining project was approved. The development of mining projects may also be subject to unexpected problems and delays that could increase the cost of development and the ultimate operating cost of the relevant project. Our decision to develop a mineral property is based on estimates made as to the expected or anticipated project economic returns. These estimates are based on assumptions regarding:

  • future gold prices;

  • anticipated tonnage, grades and metallurgical characteristics of ore to be mined and processed;

  • anticipated recovery rates of gold extracted from the ore; and

  • anticipated capital expenditure and cash operating costs.

Actual cash operating costs, production and economic returns may differ significantly from those anticipated by such estimates.

There are a number of uncertainties inherent in the development and construction of an extension to an existing mine, or in the development and construction of any new mine. In addition to those discussed above, these uncertainties include the:

  • timing and cost of the construction of mining and processing facilities, which can be considerable;

  • availability and cost of skilled labor, power, water and transportation facilities;

  • need to obtain necessary environmental and other governmental permits and the time to obtain such permits; and

  • availability of funds to finance construction and development activities.

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New mining operations could experience unexpected problems and delays during development, construction and mine start-up. In addition, delays in the commencement of mineral production could occur. Finally, operating cost and capital expenditure estimates could fluctuate considerably as a result of changes in the prices of commodities consumed in the construction and operation of mining projects. Accordingly, our future development activities may not result in the expansion or replacement of current production with new production, or one or more new production sites or facilities may be less profitable than currently anticipated or may not be profitable at all. Our operating results and financial conditions are directly related to the success of our project developments. A failure in our ability to develop and operate mining projects in accordance with, or in excess of, expectations could negatively affect our results of operations and our financial condition and prospects.

We may require additional funding in order to continue our operations.

We have been producing since January 8, 2010, when we achieved commercial production at the Molejon gold property. Considering our increase in cash margin, our improvements in throughput and production capacity at our Molejon gold processing plant, in addition to the initiation of our on/off leach operation during fiscal 2012, the risk of our requiring additional funding in order to continue our operations has been mitigated. In addition, our net income for the year ended May 31, 2012, reflects a positive trend in the finance and operational performance of our company. This positive trend will enable us to manage our cash flow from operations to comply with operational requirements and also with our planned exploration and development programs. Alternative sources of funding, depending on market conditions and the potential desire of investors to increase their participation in our company’s business or other projects, may become available and could be considered. However, there can be no assurance that funding from these sources will be sufficient in the future to satisfy our operational requirements, debt repayments and cash commitments. This is dependent on market expectations and on our performance, production and results.

We have an accumulated deficit as at May 31, 2012, of $122,969,497; however, during the year ended May 31, 2012, we obtained an operating margin of $34,932,034, which considered on an accumulated basis together with that obtained during fiscal 2011, we have accumulated a total of $54,973,287.

Our consolidated financial statements are prepared on a going concern basis.

Our consolidated financial statements for the year ended May 31, 2012, have been prepared on a going concern basis, which assumes that we will be able to realize our assets at the amounts recorded and discharge our liabilities in the normal course of business in the foreseeable future. Our management believes that based on our planned fiscal 2013 projections, we have sufficient cash flow to operate for the next twelve months.

Our level of indebtedness could adversely affect our business.

Although this risk could affect our financial situation, it has been managed appropriately and such management has enabled us to payout all of our Notes and Convertible Notes during the year ended May 31, 2012.

Due to new acquisitions and our growth strategy, we may incur additional indebtedness in the future. A significant increase in our debt levels may have important consequences for us, including, but not limited to the following:

  • Our ability to obtain additional financing for working capital, capital expenditures, general corporate and other purposes or to fund future operations may not be available on terms favorable to us or at all;

  • A significant amount of our operating cash flow is dedicated to the payment of interest and principal on our indebtedness, thereby diminishing funds that would otherwise be available for our operations and for other purposes;

  • Increasing our vulnerability to current and future adverse economic and industry conditions;

  • A substantial decrease in net operating cash flows or increase in our expenses could make it more difficult for us to meet our debt service requirements, which could force us to modify our operations;

  • Our leveraged capital structure may place us at a competitive disadvantage by hindering our ability to adjust rapidly to changing market conditions or by making us vulnerable to a downturn in our business or the economy in general;

Form 20-F_Fiscal Year Ended 2012 May 31 Page 16




  • We may have to offer debt or equity securities on terms that may not be favorable to us or to our shareholders;

  • Limiting our flexibility in planning for, or reacting to, changes and opportunities in our business and our industry; and

  • Our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay the principal or interest due in respect of our indebtedness.

We face many risks related to our operations that may adversely affect our cash flows and overall profitability.

Gold mining is susceptible to numerous events that may have an adverse impact on our mining business, our ability to produce gold and meet our production targets. These events include, but are not limited to:

  • environmental hazards, including discharge of metals, pollutants or hazardous chemicals;

  • industrial accidents;

  • fires;

  • labor disputes;

  • mechanical breakdowns;

  • electrical power interruptions;

  • encountering unexpected geological formations;

  • unanticipated ground conditions;

  • ingresses of water;

  • process water shortages;

  • failure of mining pit slopes, water dams, waste stockpiles and tailings dam walls;

  • legal and regulatory restrictions and changes to such restrictions;

  • safety-related stoppages;

  • other natural phenomena, such as floods, droughts or inclement weather conditions, potentially exacerbated by climate change.

Mineral prices can fluctuate dramatically and have a material adverse effect on our results of operations.

Our revenues are primarily derived from the sale of gold and the market price for gold fluctuates widely. These fluctuations are caused by numerous factors beyond our control including:

  • speculative positions taken by investors or traders in gold;

  • changes in the demand for gold as an investment;

  • changes in the demand for gold used in jewelery and for other industrial uses, including as a result of prevailing economic conditions;

  • changes in the supply of gold from production, disinvestment, scrap and hedging;

  • financial market expectations regarding the rate of inflation;

  • strength of the US dollar (the currency in which the gold price trades internationally) relative to other currencies;

  • changes in interest rates;

  • actual or expected sales or purchases of gold by central banks and the International Monetary Fund;

  • gold hedging and de-hedging by gold producers;

  • global or regional political or economic events; and

  • the cost of gold production in major gold producing countries.

On September 11, 2012, the afternoon fixing price of gold on the London Bullion Market was $1,737 per ounce. The price of gold is often subject to sharp, short-term changes resulting from speculative activities. While the overall supply of and demand for gold can affect its market price, because of the considerable size of above-ground stocks of the metal in comparison to other commodities, these factors typically do not affect the gold price in the same manner or degree that the supply of and demand for other commodities tends to affect their market price. In addition, the recent shift in gold demand from physical demand to investment and speculative demand may exacerbate the volatility of gold prices.

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A sustained period of significant gold price volatility may adversely affect our ability to evaluate the feasibility of undertaking new capital projects or continuing existing operations or to make other long-term strategic decisions. If revenue from gold sales falls below the cost of production for an extended period, we may experience losses and be forced to curtail or suspend some or all of our capital projects or existing operations. In addition, we would have to assess the economic impact of low gold prices on our ability to recover any losses that may be incurred during that period and on our ability to maintain adequate cash reserves.

We face risks related to operations in foreign countries.

Currently our properties are located in Panama, Spain and Portugal. Panama is a country with a developing mining sector but with no other commercially producing mines. Consequently, we are subject to, and our mineral exploration and mining activities may be affected in varying degrees by, certain risks associated with foreign ownership including inflation, political instability, political conditions and government regulations. Any changes in regulations or shifts in political conditions are beyond our control and may adversely affect our business. Operations may be affected by government regulations with respect to restrictions on production, restrictions on foreign exchange and repatriation, price controls, export controls, restriction of earnings distribution, taxation laws, expropriation of property, environmental legislation, water use, mine safety and renegotiation or nullification of existing concessions, licenses, permits, and contracts.

Failure to comply strictly with applicable laws, regulations and local practices relating to mineral rights applications and tenure could result in loss, reduction or expropriation of entitlements, or the imposition of additional local or foreign parties as joint venture partners with carried or other interests. The occurrence of these various factors and uncertainties cannot be accurately predicted and could have an adverse effect on our operations or profitability.

As part of our strategy to manage this kind of country risk, we are looking to diversify our project portfolio. During the first quarter of fiscal 2012, a majority of our shareholders approved the acquisition of Iberian Resources Corp. ("Iberian"). Iberian owns 100% of the Lomero-Poyatos Project through its wholly-owned Spanish affiliate, Corporacion de Recursos Iberia S.L. The Lomero-Poyatos Project is located about 85 kilometers northeast of Seville, in the northeast part of the Iberian Pyrite Belt. Iberian also owns several other exploration licenses in Iberia through its wholly-owned Spanish and Portuguese affiliates Sulfuros Complejos Andalucia Mining S.L. and Almada Mining S.A.

The requirements of the Ley Petaquilla may have an adverse impact on us.

Our operations in Panama are governed primarily by Law No. 9 of the Legislative Assembly of Panama (the “Ley Petaquilla”), a project-specific piece of legislation enacted in February 1997 to deal with the orderly development of the Cerro Petaquilla Concession.

The Ley Petaquilla granted a mineral exploration and exploitation concession to Minera Petaquilla, S.A. (formerly named Minera Petaquilla, S.A. (“MPSA”)), a Panamanian company formed in 1997 to hold the Cerro Petaquilla Concession covering approximately 136 square kilometers in north-central Panama. Although we no longer hold an interest in the copper deposits therein, we continue to hold the rights to the Molejon gold deposit and, as the Cerro Petaquilla Concession encompasses this deposit, the Ley Petaquilla governs our exploration activities.

The Ley Petaquilla contains fiscal and legal stability clauses necessary in order to obtain project financing and includes tax exemptions on income, dividends and imports. The Ley Petaquilla also provides for an increase in the annual available infrastructure tax credit, higher depreciation rates for depreciable assets which cannot be used in the infrastructure tax credit pool, and a favorable depletion allowance.

In order to maintain the Cerro Petaquilla Concession in good standing, MPSA must pay to the Government of Panama an annual rental fee of $1.00 per hectare during the first five years of the concession, $2.50 per hectare in the ninth to the tenth years of the concession and $3.50 per hectare thereafter. Initially the annual rental was approximately $13,600 payable by MPSA and funded pro rata by its shareholders. The current annual rental is approximately $34,000. The concession was granted for a 20 year term with up to two 20 year extensions permitted, subject to the requirement to begin mine development and to make a minimum investment of $400 million in the development of the Cerro Petaquilla Concession.

Under the Ley Petaquilla, MPSA was required to begin mine development by August 2001. However, MPSA was able to defer commencing development operations by one month for every month that the price of copper remained below $1.155 per pound for up to a further five years (i.e. until August 2006 at the latest). In September 2005, the multi-phase Petaquilla Mine Development Plan (the “Plan”) submitted to the Government of Panama by our Company and MPSA was approved by Ministerial Resolution. The Molejon gold mineral deposit forms part of the

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Cerro Petaquilla Concession and the first phase of the Plan focus on the advancement of the Molejon gold deposit by us as commenced in 2006. Subsequent phases of the Plan are the responsibility of MPSA.

The Ley Petaquilla also requires MPSA to (i) deliver an environmental report to the General Directorate of Mineral Resources of the Ministry of Commerce and Industries (“MICI”) for evaluation; (ii) submit, prior to extraction, an environmental feasibility study specific to the project area in which the respective extraction will take place; (iii) submit annually a work plan comprising the projections and approximate costs for the respective year to the MICI; (iv) post letters of credit in support of required compliance and environmental protection guarantees; (v) annually pay surface canons; (vi) annually pay royalties for extracted minerals; (vii) annually present to the MICI detailed reports covering operations and employment and training; (viii) create and participate in the administration of a scholarship fund to finance studies and training courses or professional training for the inhabitants of the communities neighboring the Cerro Petaquilla Concession in the provinces of Coclé and Colon; and (ix) maintain all mining and infrastructure works and services of the project, always complying with the standards and regulations of general application in force that pertain to occupational safety, health and construction.

For reference, a copy of Law No. 9, as passed by the Legislative Assembly of Panama on February 26, 1997, was provided with our Form 20-F for the fiscal year ended May 31, 2009, as Exhibit 4.V.

Our operations are subject to environmental and other regulation.

Our current or future operations, including development activities and commencement of production on our properties, require permits from various governmental authorities and such operations are and will be subject to laws and regulations governing prospecting, development, mining, production, exports, taxes, labor standards, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety, community services and other matters. Companies engaged in the development and operation of mines and related facilities generally experience increased costs and delays in production and other schedules as a result of the need to comply with applicable laws, regulations and permits. Other than the Molejon gold mine, there can be no assurance that approvals and permits required to commence production on our various properties will be obtained. Additional permits and studies, which may include environmental impact studies conducted before permits can be obtained, may be necessary prior to operation of the properties in which we have interests and there can be no assurance that we will be able to obtain or maintain all necessary permits that may be required to commence construction, development or operation of mining facilities at these properties on terms which enable operations to be conducted at economically justifiable costs.

Our potential mining and processing operations and exploration activities in Panama are subject to various federal and provincial laws governing land use, the protection of the environment, prospecting, development, production, exports, taxes, labor standards, occupational health, waste disposal, toxic substances, mine safety, community services and other matters. Such operations and exploration activities are also subject to substantial regulation under these laws by governmental agencies and may require that we obtain permits from various governmental agencies. We believe that we are in substantial compliance with all material laws and regulations that currently apply to corporate activities. There can be no assurance, however, that all permits which may be required for construction of mining facilities and conduct of mining operations will be obtainable on reasonable terms or that such laws and regulations would not have a material adverse effect on any mining project that we might undertake.

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

Amendments to current laws, regulations and permits governing operations and activities of mining companies, or more stringent implementation thereof, could have a material adverse impact on the Company and cause increases in capital expenditures or production costs or reductions in levels of production at producing properties or abandonment or delays in development of new mining properties. See Note 30 to the consolidated financial statements for the year ended May 31, 2012.

To the best of our knowledge, we are currently operating in compliance with all applicable environmental regulations except as to matters under mitigation as requested by the government of Panama.

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Our directors and officers may have conflicts of interest in connection with other mineral exploration and development companies.

Some of our directors and officers may also serve as directors and/or officers and/or shareholders of other companies involved in natural resource exploration and development. Consequently, it is possible that conflicts of interest may arise between these individuals’ duties as directors and officers of our company and their duties with respect to other corporations. For example, certain corporate opportunities may come to the attention of such individuals where such opportunities would be attractive to both our company and another corporation for which the individual serves as a director, officer or is a shareholder. Any decision made by any of such directors and officers involving our company should be made in accordance with their duties and obligations to deal fairly and in good faith with a view to the best interests of our company and its shareholders. In addition, each of the directors is required to declare and refrain from voting on any matter in which such directors may have a conflict of interest in accordance with the procedures set forth in the Business Corporations Act (British Columbia) and other applicable laws.

Environmental protestors are present in Panama.

Various independent environmental groups or individuals would like to prevent the operation of mining in Panama. Our operations could be significantly disrupted or suspended by activities such as protests or blockades that may be undertaken by such groups or individuals. Although these protests or blockades could happen, we have in place a contingency plan to ensure the continuity of our operations and activities at our Molejon mine.

Our common shares are subject to penny stock rules, which could affect trading in our shares.

Our common shares are classified as “penny stock” as defined in Rule 15g-9 promulgated under the Exchange Act. In response to perceived abuse in the penny stock market generally, the Exchange Act was amended in 1990 to add new requirements in connection with penny stocks. In connection with effecting any transaction in a penny stock, a broker or dealer must give the customer a written risk disclosure document that (a) describes the nature and level of risk in the market for penny stocks in both public offerings and secondary trading, (b) describes the broker's or dealer's duties to the customer and the rights and remedies available to such customer with respect to violations of such duties, (c) describes the dealer market, including “bid” and “ask” prices for penny stock and the significance of the spread between the bid and ask prices, (d) contains a toll-free telephone number for inquiries on disciplinary histories of brokers and dealers and (e) defines significant terms used in the disclosure document or the conduct of trading in penny stocks. In addition, the broker-dealer must provide to a penny stock customer a written monthly account statement that discloses the identity and number of shares of each penny stock held in the customer’s account and the estimated market value of such shares. The extensive disclosure and other broker-dealer compliance related to penny stocks may result in reducing the level of trading activity in the secondary market for our common shares, thus limiting the ability of our shareholders to sell their shares.

U.S. investors may not be able to enforce their civil liabilities against us or our directors, controlling persons and officers.

Our company, our officers and some of our directors are residents of countries other than the United States, and all of our assets are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or enforce in the United States against such persons judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of United States federal securities laws or state securities laws.

We believe that a judgment of a United States court predicated solely upon civil liability under United States securities laws would probably be enforceable in Canada if the United States court in which the judgment was obtained has a basis for jurisdiction in the matter that was recognized by a Canadian court for such purposes. However, there is doubt whether an action could be brought in Canada in the first instance on the basis of liability predicated solely upon such laws.

If we have been or are characterized as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes, our U.S. Holders may be subject to adverse U.S. federal income tax consequences.

A non-U.S. corporation generally is considered a PFIC for U.S. federal income tax purposes for any tax year if either (1) at least 75% of its gross income is passive income or (2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. We have not made a determination as to whether we are considered a PFIC for the current tax year or any prior tax years.

In general, if we are a PFIC in any tax year in which a U.S. Holder (as defined in “Item 10 – Additional

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Information—E. Taxation—Material United States Federal Income Tax Consequences”) owns our common shares, any gain recognized on a sale by such U.S. Holder of its common shares and any “excess distributions” (as specifically defined in the U.S. Internal Revenue Code of 1986, as amended) paid to such U.S. Holder on its common shares must be ratably allocated to each day in such U.S. taxpayer’s holding period for the common shares. The amount of any such gain or excess distribution allocated to prior years of such U.S. Holder’s holding period for the common shares generally will be subject to U.S. federal income tax at the highest tax applicable to ordinary income in each such prior year, and the U.S. taxpayer will be required to pay interest on the resulting tax liability for each such prior year, calculated as if such tax liability had been due in each such prior year. For more information, see “Item 10 – Additional Information—E. Taxation—Material United States Federal Income Tax Consequences—Passive Foreign Investment Company”.

We face competition from companies with greater financial resources and operational capabilities.

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

We may not pay dividends on our common shares in the foreseeable future.

We have paid no dividends on our common shares since incorporation and do not anticipate paying dividends in the foreseeable future. Payment of any future dividends will be at the discretion of our company’s board of directors after taking into account many factors, including our operating results, financial condition and current and anticipated cash needs.

ITEM 4. INFORMATION ON THE COMPANY

 

4. A. History and Development of the Company

We are a corporation organized under the laws of the Province of British Columbia, Canada. Our legal and commercial name is Petaquilla Minerals Ltd. We were incorporated on October 10, 1985, under the name Adrian Resources Ltd. by registration of our Memorandum and Articles of Association with the British Columbia Registrar of Companies pursuant to the Company Act (British Columbia) (the “BCCA”). The BCCA was replaced by the Business Corporations Act (British Columbia) (the “BCA) in March 2004 and we are now governed by the BCA. Our name was changed from Adrian Resources Ltd. to Petaquilla Minerals Ltd. on October 12, 2004.

Our principal office is located at Suite 1230, 777 Hornby Street, Vancouver, British Columbia, Canada, V6Z 1S4. The telephone number for our principal office is (604) 694-0021 and the facsimile number is (604) 694-0063.

We have nineteen subsidiaries as detailed below:

(i)     

We own all of the issued shares of Adrian Resources (BVI) Ltd., which was incorporated in the British Virgin Islands on December 17, 1999.

(ii)     

Adrian Resources (BVI) Ltd. owns all of the issued shares of Petaquilla Minerals, S.A., which was incorporated in the Republic of Panama on April 28, 1992, and holds title to certain of our exploration concessions in the Republic of Panama. Although originally incorporated under the name Adrian Resources, S.A., the name of such subsidiary was changed to Petaquilla Minerals, S.A on February 3, 2005.

(iii)     

Petaquilla Minerals, S.A. owns all of the issued shares of Petaquilla Gold, S.A., a Panamanian corporation formed on August 11, 2005. Petaquilla Gold, S.A. holds the Molejon gold property interest and other potential gold deposits within the Cerro Petaquilla Concession lands.

(iv)     

Petaquilla Minerals, S.A. owns all of the issued shares of Instituto Petaquilla, S.A., a Panamanian corporation which was formed on April 23, 2007, to conduct training and education programs for our personnel.

(v)     

Petaquilla Minerals, S.A. owns all of the issued shares of Brigadas Verdes, S.A., a Panamanian corporation which was formed on March 27, 2007, to coordinate and manage reforestation activities.

(vi)     

Petaquilla Minerals, S.A. owns all of the issued shares of Compañìa Minera Belencillo, S.A., a Panamanian

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corporation formed on September 21, 2005, and which holds 100% interests in Zones 1 and 2 of the Rio Belencillo Concession. On May 7, 2005, we entered into an option agreement with Gold Dragon Capital Management Ltd. (“Gold Dragon”) whereby Gold Dragon could earn a 100% interest in the concession lands by the expenditure of $500,000 over two years on mutually agreed upon property expenditures. On March 8, 2012, we entered into an agreement with Madison Minerals Inc. and its Panamanian subsidiary, Madison Enterprises (Latin America) S.A. (collectively referred as “Madison”) to acquire Madison’s 31% interest in Compañía Minera Belencillo, S.A. (“Minera Belencillo”), an entity formed in Panamá to oversee and manage exploration projects within the Belencillo concession. We issued 175,438 common shares to Madison on March 8, 2012 and have committed to issue a further 250,000 common shares upon commencement of commercial production at the Belencillo concession. As a result of the additional 31% interest, Minera Belencillo became a 100% wholly-owned subsidiary of our Company.

(vii)     

Petaquilla Gold, S.A. owns 50.2% of the shares of Petaquilla Infraestructura, S.A. (formerly named Petaquilla Power & Water, S.A.), a Panamanian corporation formed on September 21, 2006, primarily for the purposes of (i) designing, constructing, operating, maintaining and installing equipment and networks for the generation, transmission and commercialization of electrical energy; and (ii) developing projects for the production, distribution and commercialization of potable water.

 

(viii)     

Petaquilla Gold, S.A. also owns all of the issued shares of Aqua Azure, S.A., a Panamanian corporation which was formed on October 10, 2006, to purchase, sell, lease, manage, commercialize and hold investment in various moveable goods.

 

(ix)     

We own all of the issued shares of Iberian Resources Corp., which is incorporated in British Columbia, Canada. Iberian Resources Corp. and its directly held subsidiaries of Sulfuros Complejos Andalucia Mining  S.L., incorporated in Spain, Almada Mining S.A., incorporated in Portugal, and Corporacion Recursos Iberia S.L., incorporated in Spain, were acquired by us on September 1, 2011.

 

(x)     

We own 30% of the issued shares of Azuero Mining Development, S.A., incorporated in Panama. Azuero Mining Development, S.A., in turn, owns 100% of the issued shares of Azuero Mining (BVI) S.A.(formerly Vintage Mining (BVI) Ltd.), incorporated in the British Virgin Islands.

 

(xi)     

We own 47.78% of the issued shares of Panamanian Development and Infrastructure Ltd., formerly Petaquilla Infrastructure Ltd., incorporated in British Columbia, Canada, on May 29, 2009.

 
(xii)     

We own all of the issued shares of Petaquilla Infraestructura Ltd., which was incorporated in the British Virgin  Islands on February 21, 2008.

 
(xiii)     

Petaquilla Infraestructura Ltd. owns all of the issued shares of Panama Desarrollo de Infraestructuras, S.A., formerly  Petaquilla Hidro, S.A., a Panamanian corporation formed on October 10, 2008.

 

 

(xiv)     

Panama Desarrollo de Infraestructuras, S.A. owns all of the issued shares of Petaquilla Security, S.A., a Panamamanian corporation formed on April 25, 2007.

 

 

(xv)     

Panama Desarrollo de Infraestructuras, S.A. owns all of the issued shares of Panama Central Electrica, S.A., a Panamanian corporation formed on February 16, 2009.

 

We are engaged in the acquisition, exploration, exploration management and sale of mineral properties, with the primary aim of developing them to a stage where they can be exploited at a profit. We are currently active in the production and sale of gold from our open pit mine at our Molejon gold project, which achieved commercial production status on January 8, 2010, as well as the exploration of a number of our adjacent mineral concessions in the Republic of Panama. On September 1, 2011, we also acquired properties in Spain and Portugal, most notably the Lomero-Poyatos mine in Andalucia, Spain, with the goal of bringing this former mine back into production and the Banjas Project in Porto, Portugal.

Molejon Property – Panama

Our interest in the Molejon deposit was acquired in 1992 and 1993 through two separate series of transactions and in 2005 by way of an agreement amongst the shareholders of MPSA. Specifically, in June 2005, the shareholders of MPSA agreed to separate the gold deposit and other precious metal mineral deposits that might be developed within the Cerro Petaquilla Concession from the copper mineral deposits within the concession. The agreement provided for us, through our subsidiary, Petaquilla Gold, S.A., to own a 100% interest in the Molejon gold deposit, as well as all other gold and precious metal mineral deposits that might be developed within the Cerro Petaquilla Concession, subject to a graduated 5% - 7% Net Smelter Return (currently at 7% as gold price is above $550), based on the future gold price at the time of production, payable to others.

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In September 2005, the multi-phase Petaquilla Mine Development Plan (the “Plan”) submitted to the Government of Panama by us and MPSA was approved by Ministerial Resolution. The Molejon gold mineral deposit forms part of the Cerro Petaquilla Concession lands and the first phase of the Plan focused on the advancement of the Molejon gold deposit by us commencing in 2006. Subsequent phases of the Plan are the responsibility of MPSA, the joint venture company in which we no longer hold an interest.

Principal Capital Expenditures and Divestitures Over Last Three Fiscal Years

  May 31, 2012 May 31, 2011 June 1, 2010  
         
Mining and Plant Equipment 60,492,988 67,070,155 65,762,205  
Other Facilities and Equipment 17,936,487 13,439,311 8,871,114  
Pre-Stripping 5,899,451 5,823,718 -  
Provision for Closure and Reclamation 8,399,591 8,220,185 4,067,556  
Iberia – Land & Equipment 444,528 - -  
         
Total 93,173,045 94,553,369 78,700,875  
         

Current Principal Capital Expenditures and Divestitures

We have either ongoing or anticipated capital expenditures during our fiscal year ending May 31, 2013. With respect to the planned exploration and advancement of our Molejon property, we anticipate capital expenditures of approximately $35,000,000 during the fiscal year ending May 31, 2013. Capital expenditures related to our plant expansion comprise approximately $5,000,000 of this amount and we anticipate financing this portion through a long term debt facility. We also anticipate capital expenditures of approximately $23,000,000 for the infrastructure division of our company, which will focus on our on/off leach pad project, and various other earthworks and construction projects, during the fiscal year ended May 31, 2013. With respect to our planned exploration and advancement of our Lomero-Poyatos property, we anticipate capital expenditures of approximately $80,000,000 for drilling and digging, construction of an on-site processing plant and for energy and water costs. However, such expenditures are subject to further consideration and to our ability to obtain sufficient cash flow from operations or adequate financing. There is no assurance that we will be successful in obtaining such cash flow or financing.

Public Takeover Offers

During the 12 month period ended May 31, 2012, and during the current fiscal year, we did not receive any public takeover offers from third parties in respect to our company’s shares.

As part of our growth strategy, following high level discussions and subsequent technical, legal and financial due diligence, we entered into a binding letter of intent on April 5, 2011, with a private British Columbian company, Iberian Resources Corp. (“Iberian), pursuant to which we proposed to acquire all of the outstanding shares of Iberian. After further negotiations and due diligence by both parties, we entered into a definitive agreement with Iberian and Petaquilla Holdings Ltd. (the “Amalgamation Agreement”) on May 18, 2011. The proposed transaction had been unanimously approved by Iberian’s shareholders and was then subsequently subject to the approval of our shareholders at our special meeting held August 31, 2011. At our shareholders’ meeting, a majority of our shareholders approved an ordinary resolution to issue and reserve up to 50,000,000 of our common shares, which represented approximately 28.3% of our issued and outstanding shares as at July 27, 2011, or such number of our common shares necessary to complete our proposed acquisition of Iberian as contemplated by the Amalgamation Agreement as consideration for the acquisition of all of the outstanding securities of Iberian including approximately (i) 44,635,255 of our common shares to be issued as consideration for all of the issued and outstanding common shares of Iberian as of the effective date; (ii) 1,640,420 of our common shares issuable to each holder of Iberian warrants outstanding as of the effective date upon due and valid exercise thereof; and (iii) 3,357,313 of our common shares issuable to each holder of Iberian options outstanding as of the effective date upon due and valid exercise thereof, pursuant to the terms set out in the Amalgamation Agreement. On September 1, 2011, our acquisition of Iberian was completed by way of a three-cornered amalgamation between our Company, Iberian and Petaquilla Holdings Ltd., a wholly-owned subsidiary of our company incorporated for the purpose of the amalgamation.

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Iberian holds 100% of the Lomero-Poyatos project through its wholly-owned Spanish affiliate, Corporacion de Recursos Iberia S.L. Iberian also holds several other exploration licenses in Iberia through its wholly-owned Spanish and Portuguese affiliates.

Lomero-Poyatos Property – Spain

Lomero-Poyatos was a former sulphide (pyrite) mine that provided a source of sulphur for sulphuric acid production, with an estimated historical production of a least 2.6 million tonnes of massive sulphide (pyrite) ore. Although pyrite is the predominant sulphide, the sulphide mineralization is significantly enriched in gold, with some copper-enrichment in the central part of the deposit, and some zinc-lead enrichments towards the eastern and western margins of the deposit. We are currently investigating the deposit as a potential gold producer, with base-metal by-products and it is at the exploration stage. We aim to bring the Lomero-Poyatos into production and will begin our operations with the dewatering of galleries, construction of a water treatment plant, and initiation of development drilling in our 2013 fiscal year.

4. B. Business Overview

Molejon Property – Panama

We currently have no significant properties in Canada and we are not actively exploring, or seeking to acquire interests in, mineral properties in Canada. Our primary focus has been the exploration of the Molejon gold deposit, and, commencing January 8, 2010, the production thereof and sale of gold, and the exploration of other mineral properties in the Republic of Panama. For the year ended May 31, 2010, during which we had two production quarters, we generated revenues of $27,542,363 from our commercial production operations. Gold sold during our 2010 fiscal year totaled 24,250 ounces. For the year ended May 31, 2011, we generated revenues of $71,708,685 from our commercial production operations. Gold equivalent sold during our 2011 fiscal year totaled 54,617 ounces. For the year ended May 31, 2012, we generated revenues of $94,297,396 from our commercial production operations. Gold equivalent sold during our 2012 fiscal year totaled 62,870 ounces.

The Republic of Panama, through the Ministry of Commerce and Industry, is the regulatory body overseeing the Cerro Petaquilla Concession and potential future development thereof. Law No. 9, the Ley Petaquilla, passed by the Legislative Assembly of Panama on February 26, 1997, is a project-specific piece of legislation dealing with the orderly development of the Cerro Petaquilla Concession, including the Molejon gold deposit. The Ley Petaquilla could be amended by the government of Panama through the enactment of a subsequent law but no such law has been enacted since the Ley Petaquilla legislation was adopted in February 1997. At such time, the Ley Petaquilla granted a mineral exploration and exploitation concession to MPSA, a Panamanian company which was formed in 1997 to hold the 136 square kilometer Cerro Petaquilla Concession. Our Molejon property comprises approximately 10% of the Cerro Petaquilla lands.

The Ley Petaquilla contains fiscal and legal stability clauses necessary in order to obtain project financing and includes tax exemptions on income, dividends and imports. The Ley Petaquilla also provides for an increase in the annual available infrastructure tax credit, higher depreciation rates for depreciable assets, which cannot be used in the infrastructure tax credit pool, and a favorable depletion allowance.

There were no competing bidders for the concession at the time the Ley Petaquilla was enacted and the concession was granted for an initial 20-year term with two 20-year extensions permissible subject to the requirements to begin mine development and to make a minimum required investment. In 2005, we and our former partners in MPSA delivered the Plan to the Government of Panama and the Plan was approved by Ministerial Resolution in September 2005. Development of the Molejon gold mineral deposit by us, which commenced in 2006 forms the first phase of the Plan. Subsequent phases of the Plan will be the responsibility of MPSA.

Such government approval of the Plan resulted in the extension of the land tenure for an initial 20-year period which commenced September 2005, subject to MPSA meeting certain other ongoing development and operational conditions. In addition, pursuant to the Ley Petaquilla, in order to maintain the Cerro Petaquilla Concession in good standing, we and MPSA must continue to meet certain obligations.

The Ley Petaquilla comprises the agreement between the Republic of Panama and MPSA and its affiliates and it identifies each party’s rights and obligations. The majority of our obligations require that the Republic of Panama be provided with a variety of reports, studies and work plans, payment of surface canons, access and use of port installations, evidence of bonding, etc. An example of an obligation that requires government approvals concerns the environment and states that an Environmental Feasibility Study specific to the project area in which the

Form 20-F_Fiscal Year Ended 2012 May 31 Page 24




respective extradition will take place must be submitted to the General Direction of Mineral Resources of the Ministry of Commerce and Industries. Said study shall be evaluated and its approval, modification or rejection shall be defined within a term of 45 days counted as of the date of its presentation to the General Direction of Mineral Resources. After the end of this term, if there is no statement from the General Direction of Mineral Resources, the Environmental Feasibility Study shall be considered approved. For complete disclosure of Panama’s requirements, please refer to Law No. 9 as passed by the Legislative Assembly of Panama on February 26, 1997, or the English translation thereof, attached as Exhibits 4.V. and 4.W. to our Form 20-F for the fiscal year ended May 31, 2009.

Lomero-Poyatos Property – Spain

Following our acquisition of the Lomero-Poyatos property in September 2011, our focus for this property has been to attain the required environmental, technical and economic permits, which have been approved by the Andalusian Autonomous Government, the regional government body of Andalusia, Spain. We were granted a Unified Environmental Authorization in December 2011 and all instructions and recommendations from the Andalusian Autonomous Government have since been approved and sanctioned. We are presently awaiting administrative authorization to commence operations at Lomero-Poyatos and will begin with the dewatering of galleries, construction of a water treatment plant, and development drilling. During our 2012 fiscal year, we also brought our technical report on the property into compliance with National Instrument 43-101. We estimate that we will invest approximately $80 million during the next twelve months, raised from precious metal sales and through proposed debt financing, in the reopening of the Lomero-Poyatos mine, and in various investments, developments, and renewable resources in the area surrounding Lomero-Poyatos.

4. C. Organizational Structure

Exhibit 8 to this Annual Report on Form 20-F sets out our corporate structure and the mineral properties held by each of our subsidiaries.

4. D. Property, Plants and Equipment

With the exception of our Molejon gold project, which has reached commercial production, all of our other properties are in the exploration stage and are without a known body of commercial ore. Commercial production at the Molejon gold mine commenced January 8, 2010, when an average of 70% of design capacity was maintained continuously for a period of 30 days with metallurgical recoveries approaching forecast levels.

Mineral Concession Lands

Introduction

We brought our Molejon gold project located on the Cerro Petaquilla Concession to commercial production on January 8, 2010. We also hold the rights to 842 square kilometers of virtually unexplored land surrounding the known deposits of the Cerro Petaquilla Concession.

Property Location - Panama

Our concession lands are located approximately 120 kilometers west of Panama City and 10 kilometers from the Caribbean coast within the Donoso District of the Province of Colon in the Republic of Panama.

Form 20-F_Fiscal Year Ended 2012 May 31 Page 25




Figure 1
Mineral Property Location Map

The Molejon deposit is fully contained within the Petaquilla Zone 3 Concession, part of the Petaquilla Block of claims that is bound by the Petaquilla Zone 1 to the north, Petaquilla Zone 4 to the east, San Juan Zone 6 to the south, and Rio Belencillo Zone 2 to the west. Other deposits with gold mineralization identified in the area include the Botija Abajo and Brazo mineralized zones.

Form 20-F_Fiscal Year Ended 2012 May 31 Page 26

 




Figure 2
Petaquilla Concessions and Molejon Mine Location Map
Mineral Concesssions Granted by Law Number 9 (Ley Petaquilla)

Form 20-F_Fiscal Year Ended 2012 May 31 Page 27

 




Figure 3
Concession Map


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Figure 3 is a diagram focusing primarily on the 136-square kilometer Cerro Petaquilla Concession with our Molejon gold deposit area cross-hatched in red:

Figure 4
Cerro Petaquilla Concession

Figure 5
Molejon Mine Access Map


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The Cerro Petaquilla Concession is largely held by MPSA although, pursuant to the Molejon Gold Project Agreement dated June 2, 2005 (the “Molejon Gold Project Agreement”), the full text of which was filed as Exhibit 4.T. to our Annual Report on Form 20-F for the fiscal year ended May 31, 2009, we hold the rights to the Molejon gold deposit found within the concession lands as well as to other gold and precious metal mineral deposits that might be developed within Cerro Petaquilla Concession. This concession contains a large copper-gold porphyry system and our epithermal gold deposit, Molejon, amenable to open pit mining. To date, exploration has identified eight copper-gold porphyry deposits along with our Molejon gold deposit.

Our activities are focused on the Molejon gold deposit and the first phase of the Plan submitted by us and MPSA and approved by the government of Panama in 2005. In addition, we intend to perform further exploration on other identified gold targets within the Cerro Petaquilla Concession and those within our wholly-owned properties surrounding the Cerro Petaquilla Concession.

Location, Access & Physiography

The Cerro Petaquilla Concession is located 20 kilometers inland from the Caribbean coast and elevation within the concession boundaries ranges between 70 meters and 350 meters above sea level. The Cerro Petaquilla Concession falls within the rainfall shadow of the Continental Divide and the terrain is generally rugged and covered with heavy rainforest vegetation. The climate of the Cerro Petaquilla Concession is characteristic of tropical rainforests. Precipitation is high throughout the year with annual rainfall averaging at least 4,700 mm in the concession area. The heaviest precipitation is evenly distributed from May to December and the months of January to April are typically the driest months.

The Molejon gold property within the Cerro Petaquilla Concession is accessible by road or helicopter. We constructed a 28-kilometre Llano Grande–Coclesito dirt road from Coclesito, a village of approximately 700 inhabitants, to the mine site. As part of the Llano Grande-Coclesito Road Improvement Project, we also constructed two bridges to span the San Juan River. This road replaces a network of trails, which was the previous access, and the new road portion will ultimately be upgraded to rural paved status as part of ongoing development work. While the road has initially been designed to provide access to the mine site, it will ultimately comprise part of a future expansion of the national road network connecting communities with the region. Thirty kilometers of gravel road connects Coclesito with La Pintada, a town of 5,000 people on the country's paved highway network, and the Pan-American Highway to the south. This road will also be upgraded to rural paved status as part of ongoing development work.

Plant and Equipment

We constructed a gold-processing surface plant at our Molejon gold project, where ore treatment utilizes a three stage crushing plant followed by milling in three parallel ball mills. Subsequent gold recovery is done by a carbon-in-pulp leaching operation as well as a five stage carbon-in-column process. Carbon elution and electro winning of the gold is performed to produce a gold dore product that is sent for further refinement. Detoxification of the tailings is followed by storage in the site’s 40 hectare high-density polyethylene lined tailings facility.

During our 2012 fiscal year, Petaquilla Gold, S.A., our wholly-owned subsidiary which holds the rights to the Molejon deposit and which conducts our mining operations in Panama, was certified in full compliance with the International Cyanide Management Code (the “Cyanide Code”) by the International Cyanide Management Institute (“ICMI”). The ICMI was established to administer the Cyanide Code, promote its adoption, evaluate its implementation, and manage the certification process. The Cyanide Code is a voluntary industry program covering the manufacture, transport and use of cyanide in the gold mining industry.

ICMI received and accepted a Detailed Audit Findings Report prepared by an independent professional third-party auditor, who evaluated our Molejon Gold Mine against the ICMI’s Verification Protocol and found it in full compliance with the Cyanide Code’s Principles and Standards of Practice.

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Figure 6
Molejon Gold Project – Molejon Gold Plant

Figure 7 Figure 8
Molejon Gold Project - Aerial view of Main Zone Molejon Gold Project – Aerial view of NW Zone Pit

 

 
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Figure 9
Molejon Gold Project – Crushing and Conveying

Figure 10 Figure 11
Leaching Tanks Carbon Column Systems

 

 
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Figure12 Figure 13
Tailings Thickener View of Tailings Pond


Mine Operations

Mining at our Molejon gold project, which is divided into three principal regions namely the Northwest Zone, Tajo Abierto Zone and Main Zone, is completely open pit in nature and currently performed under contract. Current production at the pit is conducted through a combination of mechanized mining and blasting.

Mineral Recoveries

During our fiscal year ended May 31, 2012, we mined 3,217,378 tons of ore (May 31, 2011 – 1,670,354) with a content of 1.34 (May 31, 2011 – 1.60) g/t of gold, totaling 138,152 (May 31, 2011 – 86,161) ounces of gold before recovery. In addition, we mined a total of 2,453,201 (May 31, 2011 – 2,119,067) tons of waste. Total tons of rock mined during the fiscal year ended May 31, 2012 was 5,670,579 (May 31, 2011 – 3,789,421).

At the plant, during our fiscal year ended May 31, 2012, we milled 608,984 (May 31, 2011 - 694,179) tons of ore, with a content of 3.44 (May 31, 2011 – 2.86) g/t of gold. The stated capacity of the plant is 2,500 tons per day resulting in annual capacity of 912,500. Total recovery for the 2012 fiscal year was 90%, the same as in the 2011 fiscal year and total gold produced was 68,002 (May 31, 2011 - 55,566) ounces.

For the year ended May 31, 2012, we produced 68,002 gold ounces (May 31, 2011 – 55,566 gold ounces) and sold a total of 62,870 gold equivalent ounces as compared to 54,617 gold equivalent ounces sold during our 2011 fiscal year. As at May 31, 2012, we also held 95,897 (May 31, 2011 – 25,088) stockpiled gold ounces for our leach pad project.

As at May 31, 2012, our stockpiled ore consisted of:

  • 746,553 tonnes at 1.81 g/t Au, equating 43,390 oz Au; and

  • 2,964,825 tonnes at 0.55 g/t Au, equating 52,507 oz Au

  • Total: 3,711,378 tonnes @ 0.80 g/t Au = 95,897 oz Au

As at May 31, 2011, our stockpiled ore consisted of :

  • 115,186 tonnes at 1.72 g/t Au, equating 6,376 oz Au; and

  • 987,798 tonnes at 0.59 g/t Au, equating 18,712 oz Au

  • Total : 1,102,984 tonnes @ 0.71 g/t Au = 25,088 oz Au

Our planned leach recovery for the low grade ore stockpiles is 81.4%. Estimates of recoverable gold are calculated from the quantities of ore in measured tonnes added to the stockpile, the grade of ore in the stockpile based on assay data, and a recovery percentage based on ore type. Based on our work performed we believe our stockpiled amounts are recoverable based on current and expected market gold prices and costs required to convert the stockpiled ore into marketable gold ounces.

The following table reflects our production and operating results from open pit mining operations at Molejon during our 2012 fiscal year:

Form 20-F_Fiscal Year Ended 2012 May 31 Page 33

 




  Q4 Q3 Q2 Q1 Total
  2012 2012 2012 2012 2012
Gold mined – ounces 31,590 36,304 37,056 33,203 138,153
Gold stockpiled – ounces (*) 95,897 84,572 63,878 43,213 95,897
Gold produced - ounces 17,725 14,163 18,100 18,014 68,002
Gold equivalent produced – ounces 18,122 14,427 18,496 18,458 69,503
Gold equivalent sold - ounces 15,546 13,040 16,297 17,987 62,870
Average realized gold price ($ per ounce) $1,617 $1,622 $1,717 $1,600 $1,640
Cash cost per ounce of gold sold ($ per ounce) $612 $616 $546 $537 $574

(*) Total ounces of gold stockpiled as at the end of each period.

The following table reflects our production and operating results from open pit mining operations at Molejon during our 2011 fiscal year:

  Q4 Q3 Q2 Q1 Total
  2011 2011 2011 2011 2011
Gold mined – ounces 25,302 18,566 24,330 17,963 86,161
Gold stockpiled – ounces (*) 25,088 14,618 9,803 7,216 25,088
Gold produced - ounces 16,735 12,825 15,268 10,738 55,566
Gold equivalent produced – ounces 17,240 13,020 15,451 10,864 56,575
Gold equivalent sold - ounces 14,843 14,064 13,320 12,390 54,617
Average realized gold price ($ per ounce) $1,472 $1,377 $1,328 $1,206 $1,348
Cash cost per ounce of gold sold ($ per ounce) $525 $627 $640 $729 $625

(*) Total ounces of gold stockpiled as at the end of each period.

Cash cost per ounce of gold equivalent sold for fiscal years 2012 and 2011 has been determined as follows:

  May 31, 2012 May 31, 2011
Production costs ($000) 44,064 39,157
Less royalties ($000) (6,717) (4,995)
Less contribution from the PDI-MECO joint-venture ($000) (1,249) -
Cash operating costs ($000) 36,098 34,162
Gold equivalent sold (oz) 62,870 54,616
Cash cost per ounce of gold equivalent sold ($/oz) $574 $625


Commodity Price

During our 2012 fiscal year, gold ranged from a low of $1,483/ounce (London Fix; July 1, 2011) to a high of $1,895/ounce (London Fix; September 5/6, 2011). Our average realized gold price per ounce is shown in the table above with the below charts reflecting gold prices for both the 2011 and 2012 calendar years.

Form 20-F_Fiscal Year Ended 2012 May 31 Page 34

 






Commercial production at our Molejon mine commenced on January 8, 2010, and we have, therefore, completed three fiscal years since production began. Reserve estimates and gold production data are used as the primary basis for calculation of mineral property cost depletion for the relevant years as follows:

Fiscal year Gold production Estimated remaining reserves
  (ounces poured) (total recovered ounces)
2010 56,185 428,815
2011 55,566 559,756
2012 68,002 491,754


The base estimated reserves used in the calculation were as follows:


  Ounces
Opening estimated reserves 485,000
Gold ounces produced during 2010 (56,185)
Remaining reserves as at May 31, 2010 428,815

 

Form 20-F_Fiscal Year Ended 2012 May 31 Page 35

 




   
Remaining reserves as at May 31, 2010 428,815
Gold ounces produced during 2011 (55,566)
Additional reserves in the Behre Dolbear April 2011 report 186,507
Remaining reserves as at May 31, 2011 559,756
Remaining reserves as at May 31, 2011 559,756
Gold ounces produced during 2012 (68,002)
Remaining reserves as at May 31, 2012 491,754


Our mineral reserves and resources were determined using a cut-off grade of 0.1 g/t of gold, and a gold price of $1,250. For complete details of resources and reserves as at January 2011, please refer to our revised Molejon Project NI 43-101Technical Report completed by Behre Dolbear & Company (USA), Inc. in May 2012 (effective date of September 2011).

Exploration and Advancement of the Molejon Property

During the year ended May 31, 2012, pre-stripping activities at the mine progressed and were in line with our updated mine plan. Total pre-stripping work, which has been divided into five stages, will provide access to 4,100,000 tons of ore representing approximately 261,000 ounces of contained gold for the simultaneous feeding of our processing plant and our on/off leach operation. As at the end of fiscal 2012, stages one through three of the pre-stripping plan had been completed and stages four through five were in progress. As a result, at the end of fiscal 2012, from a total of approximately 105,000 contained gold ounces that had been mined, 81,000 contained gold ounces had been processed and 24,000 contained gold ounces had been stockpiled for future production.

Construction of tailings pond no. 1 progressed significantly during fiscal 2012 and the construction of a third tailings pond was initiated in parallel with the final stages of the completion of tailings pond no. 1. Tailings pond no. 2 was commissioned during fiscal 2011.

As part of our planned expansion of our production system at our Molejon gold mine facility, during our third quarter of fiscal 2012, our infrastructure subsidiary commissioned its new Metso Crusher 125 mobile crushing system, which increased its aggregate production and in-pit crushing operations by approximately 10,000 tonnes per day during our fourth quarter of fiscal 2012. This additional crushing capacity has supported the expansion of our Molejon gold plant with a fourth ball mill, which arrived on site and is currently being assembled. With this fourth ball mill plus two additional leach tanks and two additional Carbon-in-Pulp tanks, throughput will increase beginning in the second quarter of fiscal 2013, during which we anticipate the additional 1,000 tpd processing capacity to result in an approximate 30% increase in our monthly gold equivalent production and bring total processing capacity to approximately 4,000 tpd.

During our 2012 fiscal year, our infrastructure subsidiary also received additional heavy equipment through its facilities with Global Bank and Caterpillar and is currently providing Molejon gold mining operations with an increased daily mining rate of 40,000 tonnes.

Title

Cerro Petaquilla Concession – Panama

Prior to October 18, 2006, we owned, through our indirect share ownership of MPSA, a 52% interest in the Cerro Petaquilla Concession. Specifically, our 52% ownership of MPSA was held through our then wholly-owned subsidiary of Georecursos Internacional, S.A. (“Georecursos”). On October 18, 2006, we entered into a Plan of Arrangement with Petaquilla Copper Ltd. (“Copper”), whereby we effectively transferred ownership of Georecursos to Copper and, thereby, our interest in the copper assets within the Cerro Petaquilla Concession lands to Copper.

We retain the rights to the Molejon gold deposit as well as to other gold and precious metal mineral deposits that may be developed within the Cerro Petaquilla Concession and continue to operate under the Ley Petaquilla as does MPSA.

Molejon Property - Panama

With the above noted and pursuant to the Molejon Gold Project Agreement, the shareholders of MPSA agreed to separate the gold deposit and other precious metal mineral deposits that might be developed from the copper mineral

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deposits within the Cerro Petaquilla Concession. Such agreement provides for us, through our subsidiary, Petaquilla Gold, S.A., to own a 100% interest in the Molejon gold deposit, as well as all other gold and precious metal mineral deposits that might be developed within the Cerro Petaquilla Concession, subject to a graduated 1% - 5% Net Smelter Return, based on the future gold price at the time of production, payable to shareholders of MPSA.

Pursuant to the contract law under which the Cerro Petaquilla Concession was granted by the government of the Republic of Panama, we with our then partners delivered the phased Plan to the government of Panama. In September 2005, the multi-phase Plan submitted to the Government of Panama by us and MPSA was approved by Ministerial Resolution. This approval resulted in the extension of the land tenure for an initial 20 year period which commenced in September 2005, subject to MPSA meeting certain other development and operational conditions on an ongoing basis. The land tenure provides for two additional 20-year terms that are also subject to MPSA meeting certain other ongoing development and operational conditions.

The Molejon gold mineral deposit, owned 100% by us, forms part of the Cerro Petaquilla Concession lands and the first phase of Plan focuses on the development of the Molejon gold deposit by us which commenced in 2006. The development of the Cerro Petaquilla copper deposit is included in subsequent phases of the Plan, and is the responsibility of MPSA.

Exploration History

Copper-gold-molybdenum porphyry mineralization was first discovered in the Petaquilla River region during a regional geological and geochemical survey by a UNDP team in 1968. The primary focus was on porphyry copper mineralization. Further exploration by several companies has since outlined three large deposits and a host of smaller ones, as well as epithermal gold mineralization. The table below summarizes the exploration history and ownership of the Petaquilla Concession and provides information about the amount of exploration carried out by each of the different companies involved in the project through the years until the discovery and development of the Molejon deposit.

Summary of Exploration History and Ownership

Year Party Exploration and Property History Description
1968 – 1969 United Nations
Development Program
(UNDP)
Regional geological and geochemical survey of central Panama by the UNDP; widespread silicification and copper mineralization discovered in the area of the Petaquilla and Botija deposits. Stream sediment sampling field magnetometry and preliminary drilling resulted in the discovery of the Petaquilla, Botija, Vega, and Medio deposits.
1969 – 1976 Panama Mineral
Resources Development
Company
(PMRD)
Panamanian government tendered Petaquilla Concession exploration rights to international bidding; concession awarded in 1971 to Panama Mineral Resources Development Company (PMRD), a consortium of seven Japanese copper companies. Approximately 14,000 metres of drilling at Petaquilla, Botija, Medio, and Vega; preliminary Resource and Reserve calculations based on prefeasibility report completed. Feasibility work updated; unsuccessful negotiations with the Panamanian government over terms of production; property abandoned in 1980 for 10 years.
1990 – 1992 Minnova Inc.
Property acquired by Minnova Inc. (now Inmet Mining Corporation) (80%) and Georecursos International, S.A. (20%). Exploration activity included regional lithogeochemical sampling.
1991 – 1992 Minnova - Geotec
Minnova and Geotec completed regional geochemical rock sampling covering the southeastern two-thirds of the original Petaquilla concession. Their work identified anomalous gold (>100 ppb) and arsenic (>12 ppm) values at Molejon area.
1992 – 1993 Adrian Resources Ltd.
(Adrian)
Our company, Adrian Resources Ltd. (now Petaquilla Minerals, Ltd.) was granted an option to earn 40% of Minnova’s interest through cash payments, work commitment, and production of a feasibility study. We subsequently acquired Georecurso’s interest, bringing our total interest to 52%, and started formal exploration at Molejon in 1993 with preliminary geological mapping and silt and rock sampling. Mapping of quartz vein and quartz breccias outcrops returned anomalous gold values between 1.0 and 8.0 g/t gold.
1992 – 1995 Adrian
We carried out grid-based soil sampling and magnetic surveying, geologic

 

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mapping of selected areas, and starting February 1994, drilling of approximately 394 diamond drill holes in Petaquilla, Botija, and other exploration targets. Activity included investigation of the Valle Grande deposit and discovery of epithermal gold mineralization at Molejon, as well as identification or investigation of several other targets (Botija Abajo, Brazo, Faldalito, Cuatro Crestas, Lata, Orca).
   
1994 – 1995 Adrian
Auger drilling completed at 25 metre intervals along lines spaced 50 metres apart in a 1,200 metre by 1,200 metre area. Prospect drilling and magnetic surveys were followed by a second phase of drilling in June 1994. This phase of drilling comprised 4,155.3 metres of drilling in 24 holes and led to the discovery of significant epithermal gold and silver mineralization hosted predominantly within quartz breccia and altered feldspar-quartz porphyry intrusive. We completed a further drilling program at Molejon in 1995 comprised of 10,504.4 metres in 94 drill holes.
   
1997 Minera Petaquilla, S.A.
Minera Petaquilla, S.A. (Minera Petaquilla) was formed by us, Inmet Mining Corporation, and Teck Corp. The Petaquilla Concession was granted by the Government of Panama to Minera Petaquilla through a Contract Law named “Ley Petaquilla, Contrato N° 9 del 26/02/97” covering a total of 13,600 ha. In May 1997, SGS Lakefield Research Ltd. conducted metallurgical test work on Molejon samples. This test work included preliminary flotation tests on six Molejon composite samples.
   
2004 Petaquilla Minerals Ltd.
On October 12, 2004, we changed our name to Petaquilla Minerals Ltd. to correspond with our Petaquilla project in Panama. On December 13, 2004, we entered into a letter of intent with Teck and Inmet. Under the letter of intent, we may obtain 100% of the Molejon gold deposit (a gold deposit within the Minera Petaquilla, S.A. project), subject to the Panamanian Government accepting a multi-phase mine development plan on terms acceptable to the us, Teck and Inmet. In December 2004, the Company resumed exploration within the Petaquilla project in Panama.
   
2005 Petaquilla Minerals Ltd.
Minera Petaquilla
We created two companies, a subsidiary in Panama named Petaquilla Gold, S.A. and Petaquilla Copper Ltd., to handle exploration, development, and operations of gold interests (Molejon) and copper deposits, respectively. Minera Petaquilla undertook a large trenching program comprised of 5,000 metres in 113 trenches during the summer of 2005. The trenches were often no more than 2 metres deep mostly on weathered material to fresh rock. Minera Petaquilla developed the mine plan (2005) that has been approved by the government.
   
2006 Petaquilla Minerals Ltd.
In 2006, we excavated 12,294 metres of new trenches and drilled 220 core holes on a 14,005 metre Phase II drill program, including 11,398 metres devoted to infill drilling to confirm resource estimates, 980 metres of condemnation drilling to establish the location of the plant site, and 1,627 metres devoted to exploration drilling.
   
2007 - 2009 Petaquilla Minerals Ltd.
Inmet Mining Corporation purchases all of the outstanding shares of Petaquilla Copper Ltd. and makes agreements with Teck creating Cobre Panama, which is the owner of Minera Panama S.A., formerly Minera Petaquilla, S.A. Currently, there are two companies operating under Law Number 9, Petaquilla Gold S.A. with a concessioned area of 1,186 ha and Minera Panama, S.A. holding the remainder of the concession, 12,414 ha. Phase II drilling at Molejon continued into 2007 to enable mine planning. The mine was developed and the processing plant constructed.
   
2008  
Autoridad Nacional del Ambiente (ANAM), environmental authorities in Panama, on November 26, 2008, issued Resolution DIEORA IA-809-2008, approving the Environmental Impact Study Category III, submitted by Petaquilla Gold, S.A., for the implementation of the Molejon Mining Project and other measures mandated by the ANAM.
   
2009  
In accordance with Contract Law Number 9 of February 26, 1997, the Ministry of Commerce and Industry of the Government of Panama issued a letter to us dated November 18, 2009, authorizing our subsidiary, Petaquilla Gold, S.A., to initiate

 

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commercial production at our Molejon gold mine located in the District of Donoso, Province of Colon, Republic of Panama.
   
2010 Petaquilla Minerals Ltd.
Commercial production commenced on January 8, 2010, when an average of 70% of design capacity was maintained continuously for a period of 30 days with metallurgical recoveries near forecast levels. Ore throughput at the process three-ball mills/carbon-in-pulp processing facility was 1,500 tpd with the operating rate planned at 2,200 tpd for the first year of production. Currently, a fourth ball mill plus two additional leach tanks and two additional Carbon-in-pulp tanks, throughput will increase 1,000 tpd beginning in the second quarter of fiscal 2013.


Resource and Reserve Estimates

Resource estimates have been produced at Molejon through the years by different companies including:

  • A study completed by SRK Consulting (Canada) Inc. on October 25, 2005

  • Subsequent audit of the 2006 drill program by AAT Mining Services released on April 10, 2007

  • Updated gold resource estimate by AAT Mining Services based on results obtained through September 2007

The below table shows a summary of historical resources and reserves as reported by different companies.

Year Source Historical Mineral Resource/Reserve Estimates
2005 Report: Independent Technical
Report and Resource Estimate of the
Molejon Gold Project, Colon
Province, Panama
Prepared by: SRK Consulting
(Canada) Inc.
Date: October 25, 2005
A National Instrument 43-1010 compliant study completed by SRK Consulting (Canada) Inc. established an Inferred Resource on the Molejon Project of 11.2 million tonnes grading 2.48 grams per tonne for total contained resource of 893,000 oz gold using a bottom cut-off grade of 0.5 grams per tonne gold.
2007 Report prepared by: AAT Mining
Services
Date: April 10, 2007
A National Instrument 43-1010 compliant report released following a subsequent audit of our 2007 drill program by AAT Mining Services, which outlined 447,879 ounces of Measured resources, 161,379 ounces of Indicated resources, and 506,294 ounces of Inferred resources.
   
2007 Report: Resource Estimate of the
Molejon Gold Deposit through
September 2007, Molejon Gold
Deposit, Colon Province, Panama
Prepared by: AAT Mining Services
Date: October 15, 2007
Updated gold resource estimate based on results obtained through September 2007. AAT Mining Services has estimated a total Measured resource of 593,327 ounces and an Indicated resource of 317,696 ounces at the Molejon Gold deposit. Additionally, an Inferred resource of 458,502 ounces at an average grade of 0.665 grams per tonne above a cutoff of 0.3 grams per tonne was estimated.
2011 Report: Molejon Project NI 43-101
Technical Report, Donoso District,
Colon Province, Republic of Panama
Prepared by: Behre Dolbear
Date: April 2011
Behre Dolbear has estimated total proven and probable reserves of 643,266 ounces at the Molejon Gold deposit.


We believe the above noted resource reports to be reliable and an accurate estimate of the resource at the time of their publication.

More recently, in May 2012, Behre Dolbear & Company (USA), Inc. (“Behre Dolbear”) released a report titled, “Molejon Project, NI 43-101 Technical Report, Donoso District, Colon Province, Republic of Panama” (the “May 2012 Behre Dolbear Report”), with an effective date of September 2011, in which the technical and economic analysis in the May 2012 Behre Dolbear Report was upgraded to the level required for a pre-feasibility study in order to support the establishment of mineral reserves.

Behre Dolbear determined the potential tonnes and grade of reserves in an optimized pit and generated mine plan. From this work, Behre Dolbear believes that Molejon has reserves that are economically minable. The May 2012 Behre Dolbear Report confirms 643,266 proven and probable ounces of gold reserves and 1,008,693 proven and probable ounces of silver reserves.

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Highlights of the May 2012 Behre Dolbear Report are shown below:

  • The Molejon deposit contains 31.6 million tonnes (Mt) of Measured plus Indicated mineral resources averaging 0.80 g/t gold and 1.74 g/t silver at a cut-off of 0.20 g/t gold.

  • In addition to the gold and silver mineralization, the authors have identified 61.4 Mt of waste material within their current pit design suitable for the production of aggregate construction products.

Measured and Indicated Mineral Resources
(as of January 1, 2011)
Category Gold Silver
  Tonnes
(000s)
Grade
(g/t)
Contained (oz) Tonnes
(000s)
Grade
(g/t)
Contained (oz)
Measured 14,743 1.09 514,500 11,417 2.23 819,100
Indicated 16,843 0.56 302,900 14,968 1.31 628,100
Total 31,586 0.80 817,400 26,385 1.74 1,447,200
Aggregate
Measured 0 N/A N/A N/A N/A N/A
Indicated 61,352 N/A N/A N/A N/A N/A
Total 61,352 N/A N/A N/A N/A N/A

 

Inferred Mineral Resources
(as of January 1, 2011)
  Tonnes (000s) Gold Silver
    Grade (g/t) Contained (oz) Grade (g/t) Contained (oz)
Gold and Silver Mineralization (at cut-off of 0.2 g Au/t)
Inferred 3,330 0.35 37,100 1.05 60,200
Aggregate
Inferred 0 N/A N/A N/A N/A

 

Proven and Probable Reserves
(as of January 1, 2011)
  Tonnes (000s) Gold Silver
    Grade (g/t) Contained (oz) Grade (g/t) Contained (oz)
Gold Mineralization
Proven 9,072 1.549 451,884 2.39 697,315
Probable 6,259 0.951 191,382 1.55 311,378
Total 15,330 1.305 643,266 2.05 1,008,693
Aggregate
Proven 0 N/A N/A N/A N/A
Probable 36,786 N/A N/A N/A N/A
Total 36,786 N/A N/A N/A N/A


The May 2012 Behre Dolbear Report indicates that under the current operating conditions of a 2,500tpd mill process and a 2.2Mt/yr heap leach operation, the life of mine as of January 1, 2011 was approximately 6 years which is expected to be extended by mineralized material from adjacent deposits currently being evaluated.

The Qualified Persons, who have prepared the technical information in the May 2012 Behre Dolbear Report, from Behre Dolbear are Robert D. Archibald, Betty L. Gibbs, Richard S. Kunter, Michael D. Martin and Baltazar Solano-Rico. All aforementioned Qualified Persons are independent of the Company.

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Regional and Local Geology

Panama is underlain by an island arc built upon late Cretaceous oceanic crust and is considered prospective for porphyry copper-gold-molybdenum deposits.

Andesitic tuffs and flows of presumed early to middle Tertiary age cover the majority of the Cerro Petaquilla Concession lying at the southern limit of a 400 square kilometer batholith, dated at 32.6+2 million years, which has intruded the older volcanic sequence. The core of the batholith is composed of quartz monzonite, grading outward to granodiorite and porphyritic granodiorite. The Petaquilla and Botija deposits are centered on porphyritic stocks and dykes lying peripheral to the southern margin of the batholith.

At the Botija deposit, the intrusive is medium-grained, crowded porphyry composed of 25% plagioclase phenocrysts, 15% hornblende phenocrysts and 5-10% quartz grains in a feldspar rich matrix. At the Petaquilla deposit, the intrusive is more obviously porphyritic, with a generally lower percentage of phenocrysts. Contact phases and dykes at each deposit are finer-grained varieties of the main intrusive. In particular, feldspar, hornblende, quartz porphyry dykes appear to be late stage phases of the granodiorite. Most of these porphyry dykes post-date the mineralization, indicating that they were introduced during the waning stages of hydrothermal alteration and mineralization. The youngest units encountered on the property are the unmineralized basalt and andesite dykes.

Copper-gold-molybdenum porphyry deposits have been identified and partially delineated at the Petaquilla and Botija deposits, which are centred four kilometres apart on an east-west trend within the Cerro Petaquilla Concession. Four types of well-developed alteration have been observed within the various intrusive units: potassic, phyllic, quartz-chloritic and propylitic. Potassic alteration is found near the core of the porphyry system and is not extensive. It is characterized by quartz, potassium feldspar, biotite, sericite and lesser amounts of anhydrite and magnetite. The majority of copper mineralization is hosted in the phyllic altered rock, which is composed of quartz and sericite with minor kaolinite and K-spar. Propylitic alteration, marked by chlorite, pyrite, calcite and epidote, marks the outer extent of alteration in a porphyry system. The phyllic and quartz-chlonite alteration zones are usually found between the potassic core and the peripheral propylitic zone, although either may be missing. Alteration of the andesitic volcanic units, characterized by prograde biotite hornfels and fine grained sulphide mineralization occurs when they are found to be proximal to the intrusive contact or within zones of intrusive dyking.

The Petaquilla deposit is largely hosted by porphyritic granodiorite below its intrusive contact with andesite forming a flat-lying to gently dipping sheet, trending east-west and dipping to the north. It has been drilled for 1,600 metres along strike and remains open along strike to the south, east and west and at depth.

The Valle Grande deposit is hosted dominantly by prophyritic granodiorite and, similar to the Petaquilla deposit, is a flat-lying sheet, trending northwest-southeast and dipping to the north. It has been drilled for 2,400 meters along strike and is considered to have limited expansion potential.

The Botija deposit trends east-west and dips 20-30 degrees to the north or northeast. It has been intersected by drilling along strike for 1,800 metres and up to 600 metres down dip. The Botija deposit remains open near the surface to the south, along strike to the east and the west, and in many places at depth both vertically and down dip to the north.

The general geology of the Molejon epithermal gold target is dominated by volcanic and subvolcanic intrusives, including massive andesite flows, feldspar-porphyritic andesite flows, andesitic tuffs and andesitic agglomerates. This volcanic package has been intruded by feldspar-quartz porphyry and feldspar porphyry units. A northeast trending fault is believed to be the major structural control for the emplacement of the hydrothermally altered quartz-carbonate breccia.

Mineralization

Mineralization at the nearby Petaquilla, Valle Grande and Botija deposits is largely concentrated within potassic or phyllic altered porphyritic intrusives of granodioritic composition. Volcanic-hosted copper mineralization, associated with strong biotite alteration, is widespread at the Petaquilla deposit and contributes significantly to its tonnage. Mineralization in each deposit consists of chalcopyrite and pyrite as disseminations, within quartz veinlets

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and filling brittle, irregular fractures. Pyrite content generally decreases with higher grade copper mineralization and increases towards the periphery of the deposits. Chalcopyrite occurs most commonly as very fine disseminations within an altered intrusive matrix or biotite hornfels. It is often associated with magnetite and/or chlorite or biotite altered mafic minerals, most notably in lower-grade sections of propylitic alteration. Stockwork quartz veinlets are best developed within potassic alteration, where they crosscut pervasive silicification. The irregular fracture-filling style of copper mineralization, which locally approaches a sulphide net, is largely confined to biotite-altered andesite at the Petaquilla deposit. This is cut in places by narrow quartz-chalcopyrite veins which have developed bleached selvages of biotite destruction. A fourth style of mineralization, consisting of chalcopyrite and pyrite coatings along steep, widely spaced cooling joints are confined to granodiorite along the eastern periphery of the Botija deposit.

Molybdenite is present mainly in quartz, carbonate, chalcopyrite veinlets hosted by granodiorite within the most intensely altered and mineralized portion of each deposit. Bornite occurs locally with chalcopyrite and contributes significantly to the copper grade in some sections, mainly within hornfelsed andesites in the Petaquilla deposit. Although leaching is widespread throughout the upper 10 to 30 metres of the deposits, supergene copper mineralization is not present in significant amounts. Magnetite is an important accessory in both deposits, disseminated throughout both the porphyritic intrusives and the intruded andesite.

At our Molejon deposit, epithermal gold-silver mineralization occurs within structurally controlled zones of hydrothermal quartz-carbonate breccia and the fractured and altered rocks marginal to the quartz-carbonate breccia. Assay boundaries of gold-silver mineralization are not sharply constrained by geological contacts. Highest grade mineralization usually occurs in the quartz-carbonate breccia but economic mineralization also occurs in feldspar-quartz porphyry, and more rarely in feldspar-porphyritic andesite flows.

Doing Business in Panama

The following briefly summarizes our understanding of the economic and political climate in Panama based on research and information compiled by us from various sources that we believe to be reliable.

With five successive elected civilian governments, the Central American nation of Panama has made notable political and economic progress since the 1989 U.S. military intervention that ousted the regime of General Manuel Noriega from power. Current President Ricardo Martinelli of the center-right Democratic Change (CD) party was elected in May 2009, defeating the ruling center-left Democratic Revolutionary Party (PRD) in a landslide. Martinelli was inaugurated to a five-year term on July 1, 2009. Martinelli’s Alliance for Change coalition also captured a majority of seats in Panama’s National Assembly. Panama’s service-based economy has been booming in recent years, largely because of the ongoing Panama Canal expansion project (slated for completion in 2014), but economic growth slowed in 2009 because of the global financial crisis and U.S. economic recession. Nevertheless, the economy rebounded in 2010 and 2011, with growth rates approaching 7% and 10%, respectively.

President Martinelli retains high approval ratings, but he has been criticized by some civil society groups for taking a heavy-handed approach toward governing and for not being more consultative. Administration headed by Mr. Martinelli has been diligently investing in critical sectors such as infrastructure and overall improvement. This has helped in Panama’s continued economic growth. Public investment in productive infrastructure and an expanding services sector that benefits from the country’s emerging role as a regional hub for trade, finance, and transportation support the increasing resilience and diversification of Panama’s economy. Real GDP per capita has grown an average of 7.2% per year since 2007, and it has doubled in nominal terms since 2005.

We note the risk assessment ratings for Panama by The Economist Intelligence Unit are in the mid-range, as shown below.

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Credit Risk Overview
Panama Risk Assessment
  Sovereign Currency Banking Political Economic Country
August 2012 Risk Risk Sector Risk Risk Structure Risk Risk
  BB BBB BBB BBB B BBB
Rating Band Characteristic
 
BBB Capacity and commitment to honour obligations currently, but somewhat susceptible to changes in economic climate.
 
BB Capacity and commitment to honour obligations currently but susceptible to changes in economic climate.
 
B Capacity and commitment to honour obligations currently, but very susceptible to changes in economic climate.


Sovereign risk - Stable. Panama’s debt dynamics are supported by firm GDP growth and established dollarisation. However, improvements in the BB rating are currently impaired by the administration’s decision to raise the fiscal deficit ceiling again.

Currency risk - Stable. Strong foreign direct investment inflows related to a raft of public and private capital projects support the Economist Intelligence Unit's stable outlook on Panama's BBB rating.

Banking sector risk - Stable. Low levels of non-performing loans, and high capitalization and liquidity levels underpin the banking sector rating.

Political risk - The ruling Cambio Democrático party, capitalizing on defections from other parties, benefits from a working majority. Social unrest remains a concern but should not have an adverse impact on creditworthiness.

Economic structure risk - Panama's reliance on services exports and on capital inflows to fund current-account deficits leaves it vulnerable should external conditions deteriorate more than currently expected, especially at a time of current-account deficit widening related to a heavy programme of public capital investment spending.

Mining has not historically been a significant factor in the Panamanian economy and, consequently, Panama does not have the infrastructure and trained personnel required for modern mining operations. The government of Panama has, however, included the development of mineral resources in its economic plan to diversify the Panamanian economy and has taken steps to put in place the legislative framework needed to foster development of these resources.

The Code of Mineral Resources of the Republic of Panama has been subject to substantial modifications, among which the most important are Law No. 3 of January 28, 1988, and Law No. 32 of February 9, 1996. The main purpose of such amendments was to simplify the procedure for filing the necessary petitions to obtain concessions, either for conducting mining exploration or mining extraction operations and property rights over the minerals

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extracted. These amendments grant total exemption from import taxes and customs duties for all equipment, spare parts and materials used in the development of any type of mining operations and there are no export taxes on mineral production.

During fiscal year 2012, through Law No. 13 of April 3, 2012, the Government of Panama made an amendment to the Code of Mineral Resources of the Republic of Panama. The main purpose of this amendment was to not allow foreign governments or any foreign official entity to hold any mining concession within the territory of Panama and to increase the royalty rate on the value received for all minerals of higher commercial value (e.g. gold and silver) mined from a concession, from 2% to 4% to be paid to the government of Panama. In order for this increase to be applied to the Company however, the Government must first modify Law No. 9, which remains unchanged as of the date of the financial statements for the year ended May 31, 2012.

The holder of an exploration concession has the exclusive right to obtain an exploitation concession for the subject area upon determining that the minerals covered by the concession may be produced in commercial quantities through a separate request to the Government of Panama.

Exploitation concessions generally permit the holder to carry out additional pre-development exploration, to construct all necessary production facilities and to extract, process, store, transport, market and export the minerals subject to the concession so long as production is ongoing.

In 1995, the Panamanian Tax Reform Law was enacted to simplify the corporate income tax rates applicable to income earned in Panama (Law No. 28 of June 20, 1995). Since June 1995, the corporate income tax rate has been 30%. In addition to corporate income tax, Panamanian law provides for a dividend tax. With the exceptions provided for in the Fiscal Code of the Republic of Panama, all corporations must retain 10% of the amounts they may distribute among their shareholders as dividends or share quotas. In case dividends are not distributed, or the entire amount distributed as dividend or share quota is less than 40% of the net profit of that fiscal period, minus taxes paid by the corporation, the corporation must cover 10% of the remainder.

The Fiscal Code of the Republic of Panama indicates certain expenses which may be deducted from the income tax, applicable to companies conducting mining activities. Additionally, the Code of Mineral Resources establishes certain expenses related to such activities that may be deducted from income tax as well.

There are currently no significant restrictions on repatriation from Panama of earnings to foreign entities other than the income tax and the dividends tax referred to above. There are currently no material currency exchange or foreign investment restrictions.

Based on our understanding of current Panamanian environmental laws and regulations, we do not anticipate that such laws will have an adverse material impact on the operations we may conduct in the future. Based on geochemical analysis and reporting, we anticipate that our Molejon gold project will meet or exceed the effluent and leachate requirements of Panamanian environmental laws and regulations. We use a carbon-in-pulp (“CIP”) floatation process, which allows in process cyanide destruction before effluent is discharged. Any acidity produced at the experimental pH is expected to be buffered by the receiving waters around the Molejon project, which have a pH between 7.4 and 7.8 and total alkalinity between 15 mg/L and 27 mg/L (as CaCO3). Results for both tails and waste rock leachate indicate that the Molejon project will have net acid neutralizing potential. The results of the continuous tests showed that the INCO SO2 cyanide destruction method is an efficient process for decreasing the total cyanide concentrations in our CIP leach pulp.

The foregoing laws of general application apply to our Panamanian mineral properties other than the Cerro Petaquilla Concession which is governed primarily by the Ley Petaquilla. Please refer to “Item 4 - Information on Our Company - B. Business Overview”.

Panama's currency, the Balboa, is at parity with the U.S. dollar. Exchange transactions are allowed in U.S. dollars and, as a result, foreign currency fluctuations may be material for us to the extent that fluctuations between the Canadian and U.S. dollar are material.

Property Location – Spain

Our Lomero-Poyatos project is located at 37°48’N / 6°56’W in Huelva Province of the Autonomous Community of Andalucia in Southern Spain, about 500 kilometers south of Madrid, 85 kilometers north-west

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of Seville, and 60 kilometers north-east of the port of Huelva, in the northeast part of the Iberian Pyrite Belt.

Figure 14
Lomero-Poyatos Project Location

Figure 15
Lomero-Poyatos Properties Location

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Summary of Exploration History and Ownership

Our subsidiary, Corporacion Recursos Iberia S.L. acquired an interest in the historic Lomero-Poyatos mine from the previous owner, Recursos Metalicos SL (RMSL) and commissioned Behre Dolbear International Limited to prepare a preliminary geological model and mineral resource estimate of the Lomero-Poyatos deposit based on available historic data. It is this work that forms the basis for our present NI 43-101 report on Lomero-Poyatos. Much of the historical data, including most of the drill-hole data, was generated by Cambridge Mineral Resource plc (CMR), a company that previously owned the property during the period 2001-2007.

The Lomero-Poyatos mine produced about 2.6 Mt of pyrite ore, mostly by underground mining methods, for use as sulphuric acid feedstock, but has been closed for about 20 years. The site consists of a sealed vertical shaft and headgear that would need refurbishing, the Lomero open-pit mine to the east of the shaft and the Poyatos open pit mine to the west of the shaft.

Resource and Reserve Estimates

In May 2012, Behre Dolbear International Limited (“Behre Dolbear International”), produced its report titled, “NI 43-101 Technical Report on the Lomero-Poyatos Au-Cu-Pb-Zn Mine in Andalusia, Spain” to update its report originally issued July 29, 2011. According to this report, the Lomero-Poyatos deposit, with the application of potential underground mining constraints, is estimated to have Inferred Mineral Resource of 6.07 Mt averaging 4.25 g/t of gold, 88.74 g/t of silver, containing 0.83 Moz Au, after the application of a minimum drill-hole intersection of 2m at 1 g/t Au. The estimate accounts for the mined out area and it assumes an average SG of 4.5 at a 1 g/t Au cutoff. The deposit also contains some minor copper, lead and zinc values but, due to increased precious metal prices, the Lomero-Poyatos deposit is considered primarily as a gold project with base-metal by-products.

The Lomero-Poyatos deposit is at the exploration stage and the mineral resource estimate is based on relatively wide-spaced drilling. It is recommended that a drilling programme comprising 20,000 metres of HQ drill core be carried out to provide true width intersections through the mineralized zone. The Phase 1 drill results should provide a regular 50m x 100m drill spacing that should be sufficient to upgrade the Inferred Mineral Resource estimate to the Indicated Resource category. It is proposed that a scoping study then be completed. Phase 2, a standard Pre-feasibility Study, will be contingent on the successful completion of and positive result from the Phase 1 Scoping Study. This study should include work to explore the economic viability of an open pit operation of lower-grade near surface mineralization. Phase 2 should include another 20,000 metres of in-fill drilling that should be sufficient to upgrade the Mineral Resource estimate to the Measured Mineral Resource category. Due to the uncertainty that may be attached to Inferred Mineral Resources, it cannot be assumed that all or any part of an Inferred Mineral Resource will be upgraded to an Indicated or Measured Mineral Resources as a result of continued exploration.

Behre Dolbear International also believes that we should continue to examine the economic viability of open pit operations of the lower-grade near-surface mineralization as previous studies of the deposit were completed at much lower metal pricing than is currently achievable. This could potentially expand the defined mineral resources at the property if these studies should show that this portion of the in-situ mineralization, which is currently excluded from the estimated mineral resource, could possibly become economically extractable.

The Qualified Person, who prepared the technical information in the Lomero-Poyatos report, from Behre Dolbear International, is Richard Fletcher and he is independent from our Company.

Geology and Mineralization

The Lomero-Poyatos mine is located in the north-east part of the Spanish/Portuguese (Iberian) pyrite belt, which extends about 230 kilometers between Seville, southern Spain, in the east to the Atlantic coast near Lisbon, Portugal, in the west. Lomero-Poyatos is a poly-metallic, massive-sulphide deposit that is located on the northern limb of the San Telmo anticline, which is an E-W trending fold structure adjacent to a major thrust fault. The deposit has an ENE (0.75°) strike and dips about 35° N.

At the surface there are two separate areas of mineralization – Lomero (east) and Poyatos (west) – that combine at depth to form a single deposit 900 metres in strike length. The average thickness of massive sulphide exceeds 20 metres. The mineralization is known to extend at least 500 metres down dip.

The mineral assemblage consists of pyrite, tenantite, sphalerite, galena, chalcopyrite, minor arsenopyrite, barite, pyrhotite and gold. There are some hematite-magnetite-rich bands.

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Outlook 2013

For our locations in Panama during our 2013 fiscal year, we are focusing on the continued gold production at our Molejon gold project, the continued expansion of our surface gold production plant at our Molejon gold project, the continued exploration on our Oro Del Norte, Botija Abajo and Palmilla concessions.

With respect to the planned exploration and advancement of our Molejon property, we anticipate capital expenditures of approximately $35,000,000 during the fiscal year ending May 31, 2013. Capital expenditures related to our plant expansion comprise approximately $5,000,000 of this amount and we anticipate financing this portion through a long term debt facility. We also anticipate capital expenditures of approximately $23,000,000 for the infrastructure division of our company, which will focus on our on/off leach pad project, and various other earthworks and construction projects, during the fiscal year ended May 31, 2013.

With respect to our planned exploration and advancement of our Lomero-Poyatos property, we anticipate capital expenditures of approximately $80,000,000 for drilling and digging, construction of an on-site processing plant and for energy and water costs. However, such expenditures are subject to further consideration and to our ability to obtain sufficient cash flow from operations or adequate financing. There is no assurance that we will be successful in obtaining such cash flow or financing.

Environmental, technical and economic permits have been approved by the Andalusian Autonomous Government and we are presently awaiting administrative authorization to commence operations at our Lomero-Poyatos Project. Upon receipt of governmental approval, and closing of our proposed high yield debt offering announced by us during our first quarter of fiscal 2013, we expect to commence mining at our Lomero-Poyatos mine in November 2012, with the objective of initiating commercial on-site production by May 31, 2014. During the second quarter of fiscal 2013, we have plans to start the dewatering of galleries, the construction of a water treatment plant, and the initiation of development drilling. We anticipate capital expenditures with respect to Lomero-Poyatos to be approximately $80,000,000 during our 2013 fiscal year. Expenditures related to the Lomero-Poyatos mine are principally for funding the requirements of a full feasibility study including drilling and metallurgical test-work, process flow-sheet and engineering design, and the construction of water treatment plant and a floatation circuit. However, such expenditures are subject to further consideration and to our ability to obtain sufficient financing.

As we announced on July 17, 2012, we intend to offer on a private placement basis $210 million aggregate principal amount of senior secured notes due in 2017. Our intention is to use the net proceeds from the offering to finance capital expenditures related to our Lomero-Poyatos mine in Spain and Molejon mine in Panama, to fund a cash investment in Panama Desarrollo de Infraestructuras, S.A., in connection with the spin-off of PDI mentioned below, to terminate our obligations under existing prepaid forward mineral contracts, to repay a portion of existing indebtedness, general corporate purposes and to pay related fees and expenses. There is no assurance that we will be successful in obtaining such financing.

During the fiscal year ended May 31, 2012, we put a plan in place to spin-off Panama Development and Infrastructure Ltd. (“PDI”) from its operations and distribute to our shareholders, one share of PDI for every four shares of our Company held by them. The completion of the transaction is subject to the regulatory and shareholder approval and is expected to take place during the first half of the fiscal year 2013.

Item 4A. UNRESOLVED STAFF COMMENTS

On July 30, 2012 we received a SEC Staff’s letter that we replied on August 17, 2012. On September 11, 2012 we received an additional SEC Staff’s letter requesting clarification on some matters discussed within our reply dated August 17, 2012 and in connection with the information disclosed within Note 27 to our Consolidated Financial Statements for the year ended May 31, 2011. We are currently compiling the information requested by the SEC Staff in order to reply to their last letter dated September 11, 2012.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

5. A. Operating Results


We are in the business of the acquisition and exploration of mineral properties, with the primary aim of developing them to a stage where they can be exploited at a profit. At that stage, our operations would, to a significant extent,


Form 20-F_Fiscal Year Ended 2012 May 31 Page 47

 




be dependent on the prevailing market prices for any of the minerals produced by such operations. We currently have one gold producing mine in Panama.

During the year ended May 31, 2012, we were primarily engaged in gold production at our Molejon property in Panama since bringing the Molejon gold project to commercial production on January 8, 2010. Our future mineral exploration and mining activities may be affected in varying degrees by Panama's political stability and government regulation, all of which are beyond our control. Please refer to "Item 3 - Key Information – 3.D. Risk Factors”.

Year Ended May 31, 2012, Compared to Year Ended May 31, 2011 (prepared in accordance with IFRS)

For our 2012 fiscal year, our consolidated financial statements have been prepared in accordance with IFRS issued by the IASB and all amounts are expressed in United States dollars unless otherwise indicated. Our operating results reflect ongoing administrative costs, net of interest and other income, revenue from the sale of gold, production and operating expenses and amortization and depletion.

Operating Margin

During the year ended May 31, 2012 operating margin was $34.9 million compared to $20 million obtained during fiscal 2011. This improvement of 74% in the operating margin was due to the following reasons:

  • Gold sales and production costs

During the year ended May 31, 2012 gold equivalent sales totaled 62,870 ounces, corresponding to an increase of 15% compared with the same period of fiscal 2011 (54,616 ounces). Gold sales and production costs were $94.3 million and $44.1 million (2011 - $71.7 million and $39.2 million), respectively, corresponding to an average sales price of $1,640 and cash cost per ounce sold of $574. These figures represent an increase of 22% in average sales price compared to the same period of previous fiscal 2011 ($1,348) and a decrease of 8% in average cash cost per ounce sold for the same period ($625).

  • Depreciation and depletion

Depreciation of production equipment and depletion of mineral properties was $15.3 million for the year ended May 31, 2012 compared to $12.5 million for the same period of fiscal 2011. The increase by 22% was mainly due to the acquisition of new equipment for Molejon Gold Mine and PDI Panama and in addition to the 22% increase in gold produced that originated a higher depletion charge of the mineral properties compared to the same period of fiscal 2011.

Earnings (loss) from Operations

During the year ended May 31, 2012 Earnings from Operations at $8.7 million increased by 238% compared to the same period of fiscal 2011, mainly due to a 74% increase in Operating Margin and due to a 1% decrease in expenses. The mentioned decrease in expenses was largely due to:

  • A decrease of $2.5 million in other operating expenses related to professional fees in connection with the Forward Gold Purchase Agreement signed with Deutsche Bank in fiscal year 2011.

The mentioned decrease was offset by:

  • An increase of $4.1 million in general and administrative expenses. General and administrative expenses were $14.2 million for the year ended May 31, 2012 compared to $10.1 million for the same period of fiscal 2011. This increase was mainly due to an increase of $0.9 million in accounting and legal fees, $0.5 million in investor relationship activities, $1.1 million in wages & benefits and $0.9 million in office administration expenditures.

Net income (loss)

Net income for the year ended May 31, 2012 increased by 683% to $22.4 million compared to a net loss of $(3.8) million for the same period of fiscal 2011. Following is a variance analysis showing the main reasons for this increase:

Form 20-F_Fiscal Year Ended 2012 May 31 Page 48

 




 
Variance
  ($ millions) %
Net loss for the year ended May 31, 2011 (3.8) -
  • Increase in Operating Margin
  • 14.9 74%
  • Decrease in Expenses
  • 0.2 (1%)
  • Increase in Finance expense, net
  • (1.6) 307%
  • Increase in Other non-operating income (expenses) (*)
  • 12.7 425%
    Net income for the year ended May 31, 2012 22.4 683%


    (*) The increase in other non-operating income (expenses) during the year ended May 31, 2012 was mainly due to the decrease of $10.7 million in the mark to market valuation of warrants denominated in other currencies than United State Dollars and the decrease of $5.0 million in the mark to market valuation of the secured notes and convertible secured notes of the Company. In Note 21 to the Consolidated Financial Statements a breakdown of Other non-operating income (expenses) account has been disclosed.

    Year Ended May 31, 2011, Compared to Year Ended May 31, 2010 (both originally prepared in accordance with generally accepted accounting principles in Canada)

    For our 2011 fiscal year, our consolidated financial statements were originally prepared in accordance with generally accepted accounting principles in Canada and all amounts are expressed in United States dollars unless otherwise indicated. Our operating results reflect ongoing administrative costs, net of interest and other income, revenue from the sale of gold, production and operating expenses and amortization and depletion.

    During fiscal year 2011 revenue of $71,708,685 increased by 160% compared to $27,542,363 during previous fiscal year 2010. The specific reasons and factors contributing to the material change in revenues between fiscal year 2011 and 2010 were as follows: During fiscal year 2011 the quantity of gold sold increased by 122% compared to previous fiscal year 2010.

    During fiscal year 2011, we sold 53,865 ounces of gold compared to 24,250 ounces of gold for fiscal year 2010.

    This material increase in the total quantity of gold sold during fiscal year 2011 compared to fiscal year 2010, was due to commercial production at Molejon Project started during January 2010, and for this reason, fiscal year 2010 considers only five months of commercial production within its revenues. Fiscal year 2011 considered a complete fiscal year of twelve months of revenue.

    Regarding the average realized gold price, during fiscal year 2011 we obtained an average of $1,348 compared to an average of $1,115 during fiscal 2010.

    During fiscal year 2011 cost of sales of $39,157,086 increased by 141% compared to $16,237,588 during previous fiscal year 2010. This material increase in the total cost of sales was mainly due to the increase of the total ounces of gold sold during fiscal year 2011 compared to fiscal year 2010 due to twelve months of commercial production in 2011 versus five months in 2010.

    Amortization of production equipment and depletion of mineral properties were $(11,335,717) for the year ended May 31, 2011, compared to $(4,839,420) for the year ended May 31, 2010. During the pre-operating period, which ceased on January 8, 2010, amortization of production equipment was capitalized to mineral properties up until the start of commercial production on January 8, 2010. Depletion of mineral resources commenced on the date of commercial production and is being charged over the life of the mine using the unit-of-production method.

    During the year ended May 31, 2011, other income increased by $18,451,666 to $1,909,919 compared to $(16,541,747) for the year ended May 31, 2010. The increase in other income is largely due to a decrease in the mark-to-market loss on convertible and senior secured notes of $10,066,219. The mark-to-market loss on convertible and senior secured notes was $(6,023,189) for the year ended May 31, 2011, compared to $(16,089,408) for the year ended May 31, 2010. There was also a decrease of $196,571 in interest on long-term debt. Interest on long-term debt was $(305,003) for the year ended May 31, 2011, compared to $(501,574) for the year ended May

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 49

     




    31, 2010. The decrease in interest on long-term debt is due to the termination of some capital leases during the year ended May 31, 2011. Other income was also impacted by an increase of $3,153,394 in deferred services. During the year ended May 31, 2011, the agreement for deferred services between us and Minera Panama, S.A. expired, and as a consequence of this termination and subsequent to our receipt of a legal opinion of counsel, the outstanding balance regarding the obligation derived from this contract was recorded as other income. There was also an increase of $5,243,309 in gain on disposal and dilution derived from the disposal of Vintage Mining Corp. by Azuero Mining Development, S.A.

    Expenses for the year ended May 31, 2011, increased by $7,650,281 to $(24,555,971) compared to $(16,905,690) for the year ended May 31, 2010. The increase in expenses is primarily due to an increase of $2,473,358 in transaction fees on our forward gold sale agreement. Transaction fees on our forward gold sale agreement were $2,473,358 for the year ended May 31, 2011, compared to $Nil for the year ended May 31, 2010. This increase was due to the costs associated with our Deutsche Bank Forward Gold Purchase Agreement, which were expensed in accordance with our accounting policy. There was also an increase of $4,965,003 in exploration and development costs. Exploration and development costs were $9,269,306 for the year ended May 31, 2011, compared to $4,304,303 for the year ended May 31, 2010. This increase was due to the increased exploration activity on our Oro del Norte property, located near our Molejon Project. We also incurred an increase in donations and community relations of $170,961. Donations and community relations for the year ended May 31, 2011, were $1,411,440 compared to $1,240,479 for the year ended May 31, 2010. This increase was due to our commitment to fund Fundacion Petaquilla, which promotes a sustainable development culture and administers social programs in the area around our Molejon property. Office administration expenses increased $811,497. Office administration costs were $2,421,243 for the year ended May 31, 2011, compared to $1,609,746 for the year ended May 31, 2010. This increase was primarily due to the increased activity in our subsidiaries of Petaquilla Gold and Panama Desarrollo De Infraestructuras, S.A. over 2010 requiring additional administrative support. Consulting fees were $983,667 for the year ended May 31, 2011, compared to $663,796 for the year ended May 31, 2010. This increase is mainly due to the engagement of consultants for our projects to transition to International Financial Reporting Standards for our 2012 fiscal year and to optimize processes at our Molejon mine. Lastly, investor relations and shareholder information expenses increased $340,623. Investor relations and shareholder information expenses were $843,313 for the year ended May 31, 2011, compared to $502,690 for the year ended May 31, 2010. This increase is mainly due to filing fees related to our private placement in our 2011 fiscal year and to an increase in investor relationship activities during the year ended May 31, 2011.

    Our increase in expenses was partially offset by a decrease in stock based compensation expenses of $379,898. Stock based compensation expenses were $971,208 for the year ended May 31, 2011, compared to $1,351,106 for the year ended May 31, 2010. The decrease was due to a lower amount of stock options issued during fiscal year 2011. Travel expenses also decreased $249,373. Travel expenses were $657,616 for the year ended May 31, 2011, compared to $906,989 for the year ended May 31, 2010. Travel expenses were higher in the prior year due to a significant number of Shareholder and board activities. There was also a decrease in debt issuance costs of $613,244. Debt issuance costs were $Nil for the year ended May 31, 2011, compared to $613,244 for the year ended May 31, 2010. This reduction corresponds to our reduction in debt. Accounting and legal expenses decreased by $119,678. Accounting and legal expenses totaled $1,655,679 for the year ended May 31, 2011, compared to $1,775,357 for the year ended May 31, 2010.

    The net loss and comprehensive loss for the year ended May 31, 2011, was $(3,937,326) or $(0.03) per basic and diluted share compared to a net loss and comprehensive loss of $(26,982,082) or $(0.25) per basic and diluted share for the year ended May 31, 2010.

    Year Ended May 31, 2010, Compared to Year Ended May 31, 2009 (both originally prepared in accordance with generally accepted accounting principles in Canada)

    For our 2010 fiscal year, our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada and all amounts are expressed in United States dollars unless otherwise indicated. Our operating results reflect ongoing administrative costs, net of interest and other income, revenue from the sale of gold, production and operating expenses and amortization and depletion. Commercial production at the Molejon Gold mine commenced on January 8, 2010.

    Metal sales were $27,542,935 and cost of sales was $(16,237,588) during the year ended May 31, 2010. Prior to the attainment of commercial production, all revenue and operating costs associated with the commissioning of the mill

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    were capitalized as part of mineral properties. The revenue and cost of sales recognized in the current year represent operations from January 8, 2010.

    Amortization of production equipment and depletion of mineral properties were $(4,839,420) for the year ended May 31, 2010, compared to $Nil for the year ended May 31, 2009. During the pre-operating period, amortization of production equipment was capitalized to mineral properties up until the start of commercial production on January 8, 2010. Depletion of mineral resources commenced on the date of commercial production and is being charged over the life of the mine using the unit-of-production method.

    During the year ended May 31, 2010, other income decreased by $21,045,592 to $(16,541,747) compared to $4,503,845 for the year ended May 31, 2009. The decrease in other income is largely due to a gain on sale of equity investment of $Nil during the year ended May 31, 2010, related to the sale of Petaquilla Copper Ltd. (“Copper”) shares compared to $40,604,938 for the year ended May 31, 2009. There was also a dilution gain of $Nil for the year ended May 31, 2010, compared to $2,238,492 for the year ended May 31, 2009, related to our investment in Copper. The dilution gain resulted from the difference between our carrying cost of Copper and the amount paid up for each Copper share issued. The decrease in the dilution gain is due to the sale of Copper in the second quarter of fiscal 2009. There was also a mark-to-market loss on senior secured notes of $(15,849,408) resulting from an increase in the fair value of the senior secured notes (“Notes”) due to mark-to-market accounting during the year ended May 31, 2010, compared to $(14,939,298) for the year ended May 31, 2009. There was also interest on long term debt of $501,574 for the year ended May 31, 2010, compared to $37,382 for the year ended May 31, 2009, due to the fact that interest on capital lease obligations was capitalized as part of mineral properties up until the start of commercial production on January 8, 2010.

    This decrease in other income was partially offset by a redemption loss on senior secured notes of $(240,000) for the year ended May 31, 2010, compared to $(13,130,982) for the year ended May 31, 2009, related to partial early redemption of the senior secured notes during that period. There was also a foreign exchange loss of $(93,159) for the year ended May 31, 2010, compared to $(8,157,720) for the year ended May 31, 2009. This primarily resulted from the significant decrease in the Canadian dollar, impacting the majority of our liabilities which are denominated in United States dollars coupled with a significant increase in U.S. denominated liabilities (senior secured notes) which occurred during fiscal 2009, prior to our adoption of the U.S. dollar as our functional currency. There was also an equity loss of $Nil for the year ended May 31, 2010, compared to $(2,396,011) for the year ended May 31, 2009, related to our investment in Copper. The equity loss reflects our portion of the losses that are attributed to our percentage ownership in Copper. The decrease in the equity loss is due to the sale of Copper in the second quarter of fiscal 2009.

    Expenses for the year ended May 31, 2010, decreased by $8,698,021 to $(16,905,690) compared to $(25,603,711) for the year ended May 31, 2009. The decrease in expenses is primarily due to a decrease of $5,785,581 in debt issuance costs. Debt issuance costs were $613,244 for the year ended May 31, 2010, compared to $6,398,825 for the year ended May 31, 2009, as less debt was issued during the current period. In addition, there was a decrease of $3,457,559 in exploration and development costs. Exploration and development costs were $4,304,303 for the year ended May 31, 2010, compared to $7,761,862 for the year ended May 31, 2009. This was due to the change in activities from exploration and development of the Molejon property in the prior period to pre-operations, mill commissioning and production during the current period. Approximately 77% of the exploration and development costs incurred in the current fiscal year relate to work performed on the Oro del Norte property, located near Molejon. As well, there was a decrease of $577,274 in office administration. Office administration costs were $1,609,746 for the year ended May 31, 2010, compared to $2,187,020 for the year ended May 31, 2009. This was due to the fact that during the 2010 fiscal year insurance costs and other administrative expenses were capitalized to mineral properties during the pre-operating period and were then included as production costs after the commencement of commercial production.

    The decreases in expenses were partially offset by an increase of $511,855 in wages and benefits. During the year ended May 31, 2010, we incurred $3,428,470 in wages and benefits compared to $2,916,615 for the year ended May 31, 2009. The increase is related to termination costs incurred during the current fiscal year as well as additional senior personnel hired to develop our infrastructure business. In addition, there was an increase of $452,652 in stock-based compensation. Stock-based compensation was $1,351,106 for the year ended May 31, 2010, compared to $898,454 for the year ended May 31, 2009, due to a larger number of options, some of which vested immediately, being issued in the current fiscal year. During the current year, 5,365,000 options were granted compared to 1,370,000 granted during the prior fiscal year. There was also an increase of $291,208 in donations and community relations. Donations and community relations was $1,240,479 for the year ended May 31, 2010, compared to $949,271 for the year ended May 31, 2009. This was due to an agreement reached with the government to fund the

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    charity Petaquilla Fundacion by a minimum of $100,000 per month. There was also an increase of $293,548 in consulting fees. During the year ended May 31, 2010, we incurred $663,796 in consulting fees compared to $370,248 for the year ended May 31, 2009. The increase is largely due to financial consultants hired to facilitate the refinancing of our debt facilities.

    The net loss and comprehensive loss for the year ended May 31, 2010, was $(26,982,082) or $(0.25) per basic and diluted share compared to a net loss and comprehensive loss of $(25,748,582) or $(0.22) per basic and diluted share for the year ended May 31, 2009.

    5. B. Liquidity and Capital Resources


    May 31, 2012 Compared with May 31, 2011

    During the year ended May 31, 2012 gold equivalent production at 69,503 ounces represented an increase of 23% compared to fiscal 2011; meanwhile gold equivalent sold at 62,870 ounces represented an increase of 15% compared to the same period. Although this improvement in production and sales increased the level of revenue and profits of the Company by 32% and 683%, respectively, and generated a positive cash flow from operations of $21.9 million, the capital requirements for different projects, like the expansion of the capacity of Molejon Gold Plant, the pre-stripping activities, the on/off leach operation, and the acquisition of Iberian Resources Corp., produced the application of the positive cash flow derived from operations. Although these capital requirements, as of the end of fiscal 2012 cash position at $12 million stayed at similar levels as at the end of fiscal 2011, showing the ability of the Company to increase production, continue developing the Molejon Mine and increasing its production capacity, using both sources of capital, cash flow from operations and financing.

    During the fourth quarter of fiscal 2012, the Company entered into two new transactions with Deutsche Bank. On February 24, 2012, the Company entered into a convertible non-revolving term loan agreement for proceeds of CAD$6,000,000. On the same date, the Company entered into a Forward Silver Purchase Agreement in amount of $11,300,000 (see Notes 15 and 17, respectively, to the Consolidated Financial Statements for the year ended on May 31, 2012).

    Working capital is defined as current assets less current liabilities and provides a measure of the Company’s ability to settle liabilities due within one year. Although there was a 75% increase in the working capital deficiency during fiscal 2012, the Company managed this increase in the deficiency in its working capital needs through short term financing borrowed from financial institutions in Panama and long term financing entered with Deutsche Bank as mentioned above.

    Total assets of the Company as of May 31, 2012 increased by 45% compared to those at the end of fiscal 2011, while total liabilities of the Company as of May 31, 2012 increased by 10% compared to May 31, 2011. As at May 31, 2012, the Company’s equity was at $55.9 million, 438% higher than that as at the end of fiscal year 2011. This increase is derived from the acquisition of Iberian Resources Corp (see Note 11 to the audited consolidated financial statements for the year ended May 31, 2012) as well as the net income of $22.4 million earned during the year ended May 31, 2012.

    Net cash flow from operations during the year ended May 31, 2012 amounted to $21.9 million. This compares to a net cash outflow from operations of $0.9 million during fiscal 2011, before considering the inflow in amount of $45 million from the presale of gold in accordance with the forward gold purchase agreement signed with Deutsche Bank during the year ended May 31, 2011.

    As of May 31, 2012, the Company has accumulated a deficit of $(122,969,497) (May 31, 2011 - $(148,563,397)). However, during the year ended May 31, 2012, the Company has earned a net income of $22.4 million. This represents an increase in net income of $26.2 million compared to the net loss of $(3.8) million for the year ended May 31, 2011. This significant improvement was derived mainly from an increase of $14.9 million in the operating margin, a decrease of $0.2 million in the expenses of the Company, an increase in finance expense of $1.6 million and an increase in non-operating income (expenses) of $12.7 million.

    The increase in finance expense is derived mainly from the financing related to the acquisition of heavy mining equipment by PDI through leases obligations and the expansion capacity of the Molejon Plant by Petaquilla Gold SA, both Panamanian subsidiaries.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 52

     




    The operating cash flow and profitability of the Company are affected by various factors, including the amount of gold produced and sold, the market price of gold, operating costs, interest rates, environmental costs, the level of exploration activity, labour risk, the risk of business disruption due to environmentalist activities and political risk. The Company seeks to manage the risks associated with its business; however, many of the factors affecting these risks are beyond the Company’s control.

    Management believes that based on the Company’s planned fiscal 2013 projections, including the expected grow for gold prices, the Company has sufficient cash flow to operate for the next twelve months.

    May 31, 2011, Compared with June 1, 2010

    As at May 31, 2011, our financial situation improved significantly as compared to June 1, 2010. Cash on hand plus short and long term investments increased by $1,287,143 to $5,912,792 at May 31, 2011, compared to $4,625,649 as at June 1, 2010. This represents an increase of 28% in our cash position. In addition, our liquidity ratio as at May 31, 2011, improved significantly compared to June 1, 2010, resulting in a reduction in working capital deficiency of $65,767,949. As at May 31, 2011, our working capital deficit was $23,848,920 compared to $89,616,869 as at June 1, 2010, representing a reduction of 73% in our working capital deficiency. Working capital is defined as current assets less current liabilities and provides a measure of our ability to settle liabilities that are due within one year with assets that are also expected to be converted to cash within one year.

    Our total liabilities as at May 31, 2011, increased by $2,830,424 to $118,334,905 compared to $115,504,481 as at June 1, 2010. This represents a 2.5% increase in our obligations. Further, as at May 31, 2011, our total assets increased $38,475,213 to $128,733,415, compared to $90,258,202 as at June 1, 2010, representing a 43% increase. Shareholders’ equity (deficiency), as at May 31, 2011, increased 141% to $10,398,510 compared to a shareholders’ equity (deficiency) of $(25,246,279) as at June 1, 2010. This significant improvement in terms of equity was due to the completion of our private placement offering and the exercise of warrants and options during the year ended May 31, 2011, partially offset by the net comprehensive loss of $3,393,944 for the year ended May 31, 2011.

    As at May 31, 2011, we had $3,124,437 outstanding in secured notes (“Notes”) and $3,970,105 outstanding in convertible secured notes (“Convertible Notes”). The Notes bore interest at an annual rate of 15% and had maturity dates five years from the dates of issuance (May 21, 2008, July 9, 2008, and October 3, 2008) with a 20% premium on principal to be paid at maturity. The Convertible Notes bore interest at an annual rate of 15% and were originally written to mature two years from the date of issuance (March 25, 2009) at 110% of the principal.

    On February 8, 2011, we redeemed 12,008 Notes at 120% of their principal value plus interest for a total payment of $12,008,345 and 18,347 Convertible Notes at 110% of their principal value plus interest for a total payment of $18,347,276. These payments were financed by the private placement completed during the year ended May 31, 2011. On December 30, 2010, January 7, 2011, January 26, 2011, and January 31, 2011, we issued a total of 32,000,000 common shares at a price of CAD$1.00 per shares, raising gross proceeds of CAD$32,000,000.

    Our operating cash flow and profitability are affected by various factors, including the amount of gold produced and sold, the market price of gold, operating costs, interest rates, environmental costs, the level of exploration activity, labor risk, the risk of business disruption due to environmentalist activities and political risk. We seek to manage the risks associated with our business; however, many of the factors affecting these risks are beyond our control.

    5.C. Research and Development, Patents and Licenses, etc.


    We do not undertake any research or development activities. Please refer to prior Item 5.A. and Item 5.B for a discussion of our exploration expenditures incurred in connection with the exploration of our mineral properties.


    5.D. Trend Information


    Commercial production at our Molejon gold mine commenced January 8, 2010, when an average of 70% of design capacity was maintained continuously for a period of 30 days with metallurgical recoveries approaching forecast levels. The following table provides production numbers for our two production quarters in fiscal 2010 (combined)


    Form 20-F_Fiscal Year Ended 2012 May 31 Page 53

     




    as well as each quarter in fiscals 2011 and 2012:

      Q4 Q3 Q2 Q1 Total Total
      2011 2011 2011 2011 2011 2010 (**)
    Gold mined – ounces 25,302 18,566 24,330 17,963 86,161 33,832
    Gold stockpiled – ounces (*) 25,088 14,618 9,803 7,216 25,088 2,823
    Gold produced – ounces 16,735 12,825 15,268 10,738 55,566 27,914
    Gold equivalent produced –            
    ounces 17,240 13,020 15,451 10,864 56,575 28,240
    Gold equivalent sold – ounces 14,843 14,064 13,320 12,390 54,617 24,513
    Average realized gold price            
    ($ per ounce) $1,472 $1,377 $1,328 $1,206 $1,348 $1,115
    Cash cost per ounce of gold sold ($ per ounce) $525 $627 $640 $729 $625 $590
    (*) Total ounces of gold stockpiled as at the end of each period.

    (**) Financial information has been prepared in accordance with Canadian GAAP.

      Q4 Q3 Q2 Q1 Total
      2012 2012 2012 2012 2012
    Gold mined – ounces 31,590 36,304 37,056 33,203 138,153
    Gold stockpiled – ounces (*) 95,897 84,572 63,878 43,213 95,897
    Gold produced – ounces 17,725 14,163 18,100 18,014 68,002
    Gold equivalent produced – ounces 18,122 14,427 18,496 18,458 69,503
    Gold equivalent sold - ounces 15,546 13,040 16,297 17,987 62,870
    Average realized gold price ($ per ounce) $1,617 $1,622 $1,717 $1,600 $1,640
    Cash cost per ounce of gold sold ($ per ounce) $612 $616 $546 $537 $574
    (*) Total ounces of gold stockpiled as at the end of each period. 

    Overall, the above reflects an upward trend in gold production annually and generally unstable global economic conditions, especially in the United States and Europe, have driven the rising global demand for gold.

    Over the past few years, average gold prices have increased and, as global economic and other market conditions remain uncertain, market experts have forecasted strong gold prices through 2012/2013; however, there is uncertainty as to how long the trend will continue.

    The monthly average gold price during our fiscal 2012 year equaled $1,666.

    5. E. Off-Balance Sheet Arrangements

     

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    We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

    5. F. Tabular Disclosure of Contractual Obligations

    Commitments

    As at May 31, 2012, we had the following contractual obligations:

              More than 5  
      Less than 1 Year 2 Years 3 Years 4 - 5 Years Years Total
      ($) ($) ($) ($) ($) ($)
    Accounts payable and accrued liabilities 44,211,407 - - - - 44,211,407
    Office lease 81,937 31,659 7,915 - - 121,511
    Obligation under financing lease 3,188,555 3,188,555 3,188,555 3,679,923 - 13,245,588
    Long-term debt 4,867,678 540,699 531,858 456,320 - 6,396,555
    Fundacion Petaquilla (1) 1,440,000 1,440,000 1,440,000 - - 4,320,000
    Community support obligation (1) - - - 2,880,000 - 2,880,000
    Closure and reclamation obligation 5,000 5,000 105,000 1,069,663 9,431,381 10,616,044
    Total 53,794,577 5,205,913 5,273,328 8,085,906 9,431,381 81,791,105
    (1)     

    We have committed to funding of $120,000 per month to Fundacion Petaquilla, an organization which promotes a sustainable development culture and administers social programs in the area around the Molejon property for a contractual term ending in fiscal 2016. Thereafter, we have committed to funding a similar amount for the life of the Molejon mine.

    Further, pursuant to the Forward Gold Purchase Agreement effected August 17, 2010, as amended on September 23, 2010, we have an obligation to Deutsche Bank AG, London Branch, to provide them with a specified number of ounces of gold in the future. The following table summarizes our future gold delivery requirements on an annual basis:

    Delivery obligations for fiscal years 2013 to 2016 Total ounces of gold
    Total delivery requirements for fiscal year 2013 17,820
    Total delivery requirements for fiscal year 2014 17,235
    Total delivery requirements for fiscal year 2015 10,800
    Total delivery requirements for fiscal year 2016 3,600

    Pursuant to the Forward Silver Purchase Agreement effected February 24, 2012, as amended on March 14, 2012, we have an obligation to Deutsche Bank AG, London Branch, to provide them with a specified number of ounces of silver in the future. The following table summarizes our future silver delivery requirements on an annual basis:

    Delivery obligations for fiscal years 2013 to 2017 Total ounces of silver
    Total delivery requirements for fiscal year 2013 146,900
    Total delivery requirements for fiscal year 2014 175,400
    Total delivery requirements for fiscal year 2015 125,600
    Total delivery requirements for fiscal year 2016 48,800
    Total delivery requirements for fiscal year 2017 12,600

     

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 55

     




    Long-Term Debt

      May 31,   May 31,   June 1,  
      2012   2011   2010  
      ($)   ($)   ($)  
    Bank loans 4,340,745   2,276,233   115,700  
    Finance lease obligations 1,023,090   5,319,036   4,576,261  
    Convertible loan 5,079,415   -   -  
    Secured notes due to related parties -   3,124,437   20,672,235  
    Secured notes due to third parties -   -   5,974,396  
    Convertible secured notes due to related parties -   3,970,105   44,653,602  
    Convertible secured notes due to third parties -   -   440,482  
      10,443,250   14,689,811   76,432,676  
    Less: Current portion            

    Bank loans

    (4,332,315 ) (435,733 ) (35,465 )

    Finance lease obligations

    (221,340 ) (1,468,561 ) (4,136,032 )

    Convertible loan

    (373,987 ) -   -  

    Secured notes

    -   (217,984 ) (26,646,631 )

    Convertible secured notes

    -   (276,983 ) (45,094,084 )
      (4,927,642 ) (2,399,261 ) (75,912,212 )
      5,515,608   12,290,550   520,464  


     

      Finance lease      
      obligations   Bank loans  
      ($)   ($)  
    Balance at June 1, 2010 4,576,261   115,700  

    New facilities during the year

    4,848,492   2,235,520  

    Principal payments

    (4,105,717 ) (74,990 )
    Balance at May 31, 2011 5,319,036   2,276,230  

    Transferred to liabilities held for distribution to owners

    (10,610,418 ) (1,824,465 )

    New facilities during the year

    9,471,104   4,371,462  

    Principal payments

    (3,156,632 ) (482,482 )
             
    Balance at May 31, 2012 1,023,090   4,340,745  

    Bank Loans

    During the year ended May 31, 2010, the Company entered into a $115,700 bank loan for the purchase of vehicles which is due in May 2013. The vehicle loan, which is collateralized by the vehicles purchased and owned by the Company, is repayable at $3,733 per month including annual interest of 10%.

    During the year ended May 31, 2011, the Company arranged with Global Bank of Panama, a bank loan financing of $2.3 million for the payment of advances to suppliers of heavy equipment for its subsidiary Panama Desarrollo de Infraestructuras, S.A. (“PDI S.A.”), of which $2.2 million was drawn in 2011. As of May 31, 2102, the loan has been fully utilized (May 31, 2011 - $0.1 million). Total principal and interest payments on these leases for the year amount to $0.4 million and $0.1 million, respectively. The loan is collateralized by a $2.3 million cash term deposit

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 56

     




    that earns interest at 5% per annum, and has an expiration date longer than one year to secure this arrangement. As of May 31, 2012, the outstanding obligation relating to this facility is $1.8 million (May 31, 2011 - $2.1 million).

    On September 1, 2011 Banco Bilbao Vizcaya Argentaria (Panama) S.A. ("BBVA") approved a Credit Line Facility in the amount of $6.9 million. This facility will be used for the acquisition of heavy equipment by Petaquilla Gold S.A. in connection with the expansion of the production capacity at its Molejon Gold Mine. This credit facility will accrue interest at the LIBOR rate plus a spread of 3.75%, with a minimum of 6.50%. The equipment will serve as collateral throughout the term of the facility (four years) and will be registered with the Public Registry of the Republic of Panama. As of May 31, 2012, $2.3 million of this facility has been drawn and is outstanding, while $4.6 million of the facility remains available.

    During the year ended May 31, 2012, the Company through its subsidiary Petaquilla Gold S.A., entered into a working capital credit facility with Lafise Bank of Panama for an amount up to $2 million. This credit facility will accrue interest of 7.75% per annum and the term of each loan within the credit facility will be 180 days. At May 31, 2012, the outstanding obligation relating to this facility is $2 million (May 31, 2011 - $nil).

    Finance Lease Obligations

    During the year ended May 31, 2011, the Company through its subsidiary PDI S.A., entered into two finance leases through a credit Line Leasing Facility with Global Bank of Panama for a total value of $4.8 million. The leases will accrue interest of 6.25% per annum for a period of five years to maturity. Total principal and interest payments on these leases for the year amount to $0.9 million and $0.3 million, respectively. At May 31, 2012, the outstanding obligation relating to these finance leases is $3.8 million (May 31, 2011 - $4.7 million).

    During the year ended May 31, 2012, the Company through its subsidiary PDI S.A., entered into five finance leases through a Credit Line Leasing Facility with Global Bank of Panama for a total value of $5 million. The leases will accrue interest of 6.25% per annum for a period of five years to maturity. Total principal and interest payments on these leases for the year amount to $0.6 million and $0.2 million, respectively. At May 31, 2012, the outstanding obligation relating to these finance leases is $4.4 million (May 31, 2011 - $nil). As a condition of the leases, the equipment will serve as collateral throughout the term of the lease and will be registered with the Public Registry of the Republic of Panama. At May 31, 2012 the credit line has been fully utilized (May 31, 2011 - $5 million).

    Also during the year, the Company through its subsidiaries Petaquilla Gold S.A. and PDI S.A., entered into six finance lease arrangements with Caterpillar Credito, S.A. de C.V. Sucursal Panama ("Caterpillar Financial") for a total value of $4.5 million. These leases will accrue interest of 6% per annum for a period of five years to maturity. Total principal and interest payments on these leases for the year amount to $1.1 million and $0.1 million, respectively. At May 31, 2012, the outstanding obligation relating to these finance leases is $3.4 million (May 31, 2011 - $nil). As of May 31, 2012, deposits have been set up for an additional $4,997,526 (May 31, 2011 -$3,509,817, June 1, 2010 - $816,461) in equipment purchases.

    Convertible Loan

    On February 24, 2012, the Company entered into a convertible non-revolving term loan agreement (“the convertible loan”) with Deutsche Bank AG, London Branch (“Deutsche Bank”) for proceeds of CAD $6,000,000. The Company paid Deutsche Bank a loan structuring fee (“Structuring Fee”) of CAD $90,000 ($90,635) and received net proceeds of CAD $5,910,000 on March 14, 2012. The convertible loan bears interest at an annual rate of 6.35% and matures on February 24, 2016. At the option of the lender, the Convertible Loan can be converted into common shares of the Company at a conversion per share of CAD $0.6121, which was calculated based on the five-day volume weighted average share price of the Company’s common shares on March 14, 2012.

    As the convertible loan is denominated in Canadian dollars, the Company is required to issue a variable number of its common shares upon conversion of the Convertible Loan by Deutsche Bank. In accordance with IAS 32, Financial Instruments – Presentation, the conversion option is considered to be a derivative and recorded at fair value. The fair value of the conversion option was determined to be $2,911,885 on initial recognition, using Black Scholes option pricing model with the following assumptions:

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 57

     




       
    Expected dividend yield Nil
    Expected stock price volatility 85.22%
    Risk-free interest rate 1.52%
    Expected life of options 3.95 years

    The Structuring Fee was allocated to the loan and the conversion feature based on their relative fair values on initial recognition. $43,679 of the costs attributable to the conversion option was included within Finance expenses in the Company’s statement of operations and comprehensive income (loss).

    $3,083,455 of the proceeds was attributed to the Convertible Loan upon initial recognition. The loan is carried at amortized cost and is being accreted to its maturity value based on an effective interest rate of 26.6%.

    As at May 31, 2012, the fair value of the conversion feature is determined to be $2,044,932 resulting in a gain of $866,963.

    The Convertible Loan is guaranteed, on a joint and several basis, by all of the assets of the Company and of the Company’s subsidiaries.

    Secured Notes

    During the years ended May 31, 2008 and 2009, the Company issued 60,000 secured notes (the “Notes”) with an aggregate principal amount of $60,000,000. The notes bear interest at an annual rate of 15%. Each Note has 382 share purchase warrants attached which entitle the holder to purchase one common share for each warrant at CAD$0.65 for the warrant period ending May 21, 2013.

    On October 1, 2008, the Company issued an additional 20,000 Notes under the indenture for net proceeds of $15,874,958. These Notes contained the same terms and conditions as the previous issue under the indenture with the exception of share purchase warrants attached. These Notes did not include any warrants.

    The Notes have a maturity date of five years from date of issuance with a 20% premium on principal to be paid at maturity. The Company has the right to redeem the Notes at any time for 120% of the principal amount plus any accrued or unpaid interest on the Notes.

    The Notes contain an embedded derivative as a result of the call and put options. The Company is unable to fair value the embedded derivative component separately and thus has classified the combined contract as a financial liability at fair-value-through-profit and loss.

    On March 14, 2012, the Company redeemed all outstanding notes for $3,204,099. The notes were valued at $3,220,319 on the date, resulting in accounting gain of $16,220 on redemption.

    Convertible Secured Notes

    On March 25, 2009, the Company issued $40 million of convertible secured notes (“Convertible Notes”). The Convertible Notes bear interest at an annual rate of 15%, of which the first year is prepaid. The Company has the right to redeem the Convertible Notes at any time for 110% of the principal amount plus any accrued or unpaid interest. Each Convertible Note in the principal amount of $1,000 is convertible into one common share at CAD$ 2.25 per share.

    The Convertible Notes contained an embedded derivate as a result of the call option. The Company is unable to fair value the embedded derivative component separately and thus has classified the combined contract as a financial liability at fair-value-through-profit and loss.

    On March 14, 2012, the Company redeemed all outstanding Convertible Notes for $4,071,316. The notes were valued at $4,091,926 on the date, resulting in accounting gain of $20,610 on redemption.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 58

     




    Community Support Obligation

    Upon adoption of IFRS at June 1, 2010, the Company has determined it has a constructive obligation with respect to future community support payments. The Company has recognized a liability for the present value of the estimated future payments and will recognize accretion expense due to the passage of time.

        May 31,     May 31,     June 1,  
        2012     2011     2010  
    Assumptions for community support obligations:                  
                       
    Risk free rate from US Department of Treasury:                  

    5 year rate

      0.67 %   -     -  

    Average of 5 year rate and 7 year rate

      -     2.03 %   -  

    7 year rate

      -     -     2.74 %
    Monthly payments $ 120,000   $ 120,000   $ 100,000  
    Length of term   June 1, 2012 to     June 1, 2011 to     June 1, 2010 to  
        May 31, 2017     May 31, 2017     May 31, 2017  

    A reconciliation of the community service obligation is as follows:

      ($)  
    Balance at June 1, 2010 7,635,659  

    Accretion expense included in finance costs

    196,679  

    Payment of obligation

    (1,200,000 )

    Revision in estimates and liabilities incurred

    1,495,751  
     
    Balance at May 31, 2011 8,128,089  

    Accretion expense included in finance costs

    111,922  

    Payment of obligation

    (1,440,000 )

    Revision in estimates and liabilities incurred

    278,781  
     
    Balance at May 31, 2012 7,078,792  

    Asset Retirement Obligation

    The Company’s provision for closure and reclamation relates to site restoration and clean-up costs for its operating Molejon mine located in Panama. The present value of the obligations relating to the operating mine is currently estimated at $11,062,579 at May 31, 2012, which reflects payments that are expected to be made during fiscal 2016 and 2017 (the present value at May 31, 2011 was $9,630,851).

    The undiscounted value of this liability, the inflation adjusted cash flow required to settle this obligation, is approximately $12,037,968 at May 31, 2012 (May 31, 2011 - $11,788,652). An inflation rate assumption of 1.96% has been used to estimate future costs (2011 – 1.91%; 2010 – 1.69%). A discount rate of 1.31% (2011 – 2.71%; 2010 – 2.74%) was used in determining present value at May 31, 2012. Accretion expense of $212,375 has been charged to the consolidated statement of operations and comprehensive income for the year ended May 31, 2012 (May 31, 2011 - $133,632) to reflect an increase in the carrying amount of the obligations. A reconciliation of the provision for closure and reclamation is as follows:

      ($)  
    Balance at June 1, 2010 4,816,121  

    Accretion expense included in finance costs

    133,632  

    Change in provision

    4,777,030  

    Revision in estimates

    (95,932 )

     

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 59

     




         
    Balance at May 31, 2011 9,630,851  

    Accretion expense included in finance costs

    212,375  

    Change in provision

    409,407  

    Revision in estimates

    809,946  
       
    Balance at May 31, 2012 11,062,579   

     

    5. G. Safe Harbour

    The safe harbour provided in Section 27A of the Securities Act and Section 21E of the Exchange Act (“statutory safe harbours”) apply to forward-looking information provided pursuant to Item 5.E. and Item 5.F. above.

    ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     

    6. A. Directors and Senior Management

    The following information regarding our directors and members of senior management, including names, business experience, offices held and outside principal business activities, are at May 31, 2012:

    Rodrigo Esquivel

    Mr. Rodrigo Esquivel (born July 5, 1963) was appointed our President on September 1, 2010. Mr. Esquivel is a lawyer with over 20 years of professional practice in Panama. He is a partner in and founder of Esquivel, Fernandez & Associates. Formerly he held such positions as Executive Vice President of Exploraciones Geotecnologicas, S.A., Director and General Manager of Forestal Nacional, S.A., Advisor to the Panamanian Ministry of Finance and Treasury, Deputy Director General of Income Tax (IRS), Director of the Fiscal Lottery, Legal Adviser of the Ministry of Health, Vice Minister of Health, Deputy Director of Social Security and Executive Director of the Water Supply Institute.

    Raul Ferrer

    Mr. Raul Ferrer (born January 8, 1973) was appointed to our board of directors (the “Board of Directors”) on November 6, 2009. Mr. Ferrer is a leading financial advisor to a number of businesses operating in Panama. He is a former financial investments director with the Panamanian equity investment firm, Wall Street Securities.

    Richard Fifer

    Mr. Richard Fifer (born January 23, 1957) is a Panamanian citizen and a U.S.-trained geologist. He has served on our Board of Directors from March 1993 to November 1998, July 2002 to July 2003, and from November 12, 2003, to the present and as our Executive Chairman of the Board of Directors from September 1, 2010, to the present. In addition, he served as our Chief Executive Officer from December 14, 2004, to March 23, 2005, and from April 14, 2007, to September 15, 2009. In 2006, he co-founded Petaquilla Copper Ltd and served as its Chief Executive Officer until the company was sold in 2008. Under the Ministry of Foreign Affairs Panama, he served as Plenipotentiary Ambassador for Special Missions of the Republic of Panama from March 2002 to September 2003. He also served as Governor of the Province of Cocle, Panama, and as National Security Advisor to the Republic of Panama from September 1999 to January 2002. He is a former Chairman and President of Corporación de Desarrollo Minero (Codemin), Panama's state mining company. Since 1994, he has been President of Geoinfo, S.A., a Panamanian company that provides geographic mapping technology and solutions. Mr. Fifer holds degrees in Geology from the University of Utah, in Geophysical Engineering Studies from Rice University and in Advanced Finance Studies from Tulane University. He is a geologist by training.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 60

     




    David Kaplan

    Mr. David Kaplan (born April 28, 1970) was appointed to our Board of Directors on November 6, 2009, and as our Corporate Secretary on December 22, 2009. He has served on the Board of Directors of Coronet Metals Inc., a mineral exploration firm, since June 1, 2011. He is presently co-head of Lascaux Resource Capital, an asset management company focused on metals and mining. He is a former key member of LIM Advisors LLC, a multi-strategy investment group, where he managed a portfolio of metal and energy futures and securities for a commodity hedge fund. He is a also a former Vice-President of Gerald Metals Inc., financial analyst and trader with Glencore Ltd., and graduate of the Wharton School of the University of Pennsylvania.

    Pedro Pablo Permuy

    Mr. Pedro Pablo Permuy (born November 18, 1964) was appointed to our Board of Directors on January 18, 2012. He is Senior Vice President - Government Relations and Communications of the ABSi Corporation, a company which provides information technology solutions and consulting services, and a member of its executive management team responsible for all federal, state and local governmental relations, and public relations and communications programs and initiatives of the company and its subsidiaries. He also manages business development efforts, laying essential groundwork with renewable energy project sponsors, stakeholders, private and public partners and parties interested in deal and project development.

    Joao Manuel

    Mr. Joao Manuel (born November 6, 1952) was appointed our Chief Executive Officer on November 6, 2009, after having served as our Chief Operating Officer since December 1, 2008. He also served as our President from November 6, 2009, until September 1, 2010. Before joining us, Mr. Manuel held the position of Chief Financial Officer of Copper, which was also a reporting issuer listed on the Toronto Stock Exchange. Mr. Manuel has over 20 years of management experience in large, multinational corporations worldwide, including General Electric Company, ITT Europe Ltd. and Nokia Consumer Electronics. He is a former Managing Director of Inapa France S.A. and Chief Financial Officer and Deputy Chief Executive Officer of the Inapa Group, Europe’s fourth largest paper merchant with operations in eight countries.

    Ezequiel Sirotinsky

    Mr. Ezequiel Sirotinsky (born November 24, 1971), a Certified Public Accountant, was appointed our Chief Financial Officer on November 29, 2010. Mr. Sirotinsky was formerly Director of Finance for Silver Standard Resources, Inc., where he was responsible for the administration and finance aspects of their Mina Pirquitas Project in Argentina, and Administrative and Finance Manager for AngloGold Ashanti Limited’s Cerro Vanguardia Project, a gold and silver mine, where, among other responsibilities, he was involved in reporting and accounting management, treasury and cash management, risk management, business planning and strategy development, and tax planning.

    Lázaro Rodriguez

    Mr. Lázaro Rodriguez (born March 9, 1971) was appointed our Chief Operating Officer on April 8, 2010, after having served as our Vice President of Security (2007) and Vice President of Operations (2008-2010). Prior to joining us, Mr. Rodriguez was president and general manager of a physical security company and director and general manager of a voice, data, and video wireless network implementation company, both in Panama. He has also served as an external advisor to the National Council for Public Security and National Defense (Panama) responsible for strategy in the areas of public safety and maritime security. This followed Mr. Rodriguez’s position as Commander of the Special Operations Unit in Panama’s National Maritime Service, where he was responsible for the planning, development and execution of rescue operations, anti-drug trafficking campaigns and research.

    Andrew J. Ramcharan

    Dr. Andrew J. Ramcharan (born March 29, 1972) was appointed our Executive Vice President – Corporate Development on May 7, 2012. He was formerly with IAMGOLD Corporation as Manager – Corporate Development (M&A), with SRK Consulting as Manager Technical Services, and with Resource Capital Funds as a geological /

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 61

     




    mining analyst. Dr. Ramcharan is a graduate of the Colorado School of Mines, the University of Loeben, and Harvard University’s Continuing Education program. He is a Professional Engineer, a Qualified Person and an expert on National Instrument 43-101 with his Ph D. thesis on global reporting codes.

    No family relationships exist between our directors and members of senior management. We have no arrangements or understandings with any major shareholder, customer, supplier or other, pursuant to which any such individual has been selected as a director or member of senior management.

    6. B. Compensation

    During the fiscal year ended May 31, 2012, we paid cash compensation to our directors and officers as described below. No other funds were set aside or accrued by us during the fiscal year ended May 31, 2012, to provide pension, retirement or similar benefits for our directors or officers pursuant to any existing plan provided or contributed to by us or our subsidiaries under applicable Canadian laws. We are required, under applicable securities legislation in Canada, to disclose to our shareholders details of compensation paid to our directors and executive officers. The following fairly reflects all material information regarding compensation paid to our directors and executive officers and disclosed to our shareholders under applicable Canadian law.

    Cash and Non-Cash Compensation - Directors and Officers

    The following table sets forth all annual and long-term compensation for services provided to us during the fiscal year ended May 31, 2012, by individuals who were our directors and executive officers as at May 31, 2012:

    Short Term Compensation Long Term Compensation
            Awards Payouts  
     
    Name and Principal
    Position
    Salary
    ($)
    Bonus
    ($)
    Other
    Annual
    Compen-
    sation
    ($)
    Common
    Shares
    Under
    Options
    granted
    (#)
    Restricted
    Shares or
    Restricted
    Share Units
    ($)
    Long-
    Term
    Incentive
    Plans
    ($)
    All Other
    Compen-
    sation
    ($)
     
    Rodrigo Esquivel
    President
    $240,000 nil nil nil n/a n/a nil
     
    Raul Ferrer
    Director
    $67,000 nil nil nil n/a n/a nil
     
    Richard Fifer
    Director, Executive
    Chairman of the Board of
    Directors
    $744,000 50,000 nil nil n/a n/a nil
     
    David Kaplan
    Director, Corporate
    Secretary
    $35,000 nil nil nil n/a n/a nil
     
    Pedro Pablo Permuy
    Director
    $54,203 nil nil 350,000 n/a n/a nil
     
    Joao Manuel
    Chief Executive Officer
    $480,000(1) nil nil 250,000 n/a n/a nil
     
    Andrew Ramcharan (2)
    Executive Vice President,
    Corporate Development
    $12,273(1) nil nil 500,000 n/a n/a nil
     
    Lazaro Rodriguez
    Chief Operating Officer
    $120,000 nil nil 150,000 n/a n/a nil
     
    Ezequiel Sirotinsky
    Chief Financial Officer
    $153,000 21,600 nil 50,000 n/a n/a nil

     

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 62

     




    Short Term Compensation Long Term Compensation
            Awards Payouts  
     
    Name and Principal
    Position
    Salary
    ($)
    Bonus
    ($)
    Other
    Annual
    Compen-
    sation
    ($)
    Common
    Shares
    Under
    Options
    granted
    (#)
    Restricted
    Shares or
    Restricted
    Share Units
    ($)
    Long-
    Term
    Incentive
    Plans
    ($)
    All Other
    Compen-
    sation
    ($)
                   
    (1)

    Amount shown is in Canadian dollars

    (2)

    Appointed May 7, 2012

    Option Grants to Directors and Officers During Fiscal Year Ended May 31, 2012

    The table below sets forth stock options granted by us during the year ended May 31, 2012, to our then directors and officers.

    Name Common
    Shares
    Under
    Options
    Granted
    % of Total
    Options
    Granted in
    Fiscal Year (2)
    Exercise Price
    or Base Price
    ($/Share) (3)
    Market Value of
    Common Shares
    Underlying Options
    on Date of Grant
    Expiration Date
      (#)(1)   (CAD$) ($/Share)  
    Rodrigo Esquivel nil n/a n/a n/a n/a
    Raul Ferrer nil n/a n/a n/a n/a
    Richard Fifer nil n/a n/a n/a n/a
    David Kaplan nil n/a n/a n/a n/a
    Pedro Pablo Permuy 350,000 22.95% $0.34 nil May 8, 2017
    Joao Manuel 250,000 16.39% $0.34 nil May 8, 2017
    Andrew Ramcharan 500,000 32.79% $0.34 nil May 8, 2017
    Lazaro Rodriguez 150,000 9.84% $0.34 nil May 8, 2017
    Ezequiel Sirotinsky 50,000 3.28% $0.34 nil May 8, 2017
    (1)

    All stock options vest over a period of 21 months

    (2)

    Percentage of all stock options granted during the year ended May 31, 2012.

    (3)

    The exercise price of stock options is set at not less than the Volume Weighted Average Trading Price for the five trading days immediately preceding the date of the stock option grant.

    Options Acquired Upon Acquisition of Iberian Resources Corp. During Fiscal Year Ended May 31, 2012

    The table below sets forth stock options acquired by our company on September 1, 2011, upon the acquisition of Iberian Resources Corp. as had been previously granted by Iberian to individuals who also served as our directors and officers as at May 31, 2012.

    Name Common
    Shares Under
    Options
    Granted
    Exercise Price
    or Base Price
    ($/Share) (1)
    Expiration Date
      (#) ($)  
    Rodrigo Esquivel 51,392 $0.60 January 20, 2013
    Gold Consulting, S.A. (2) 51,392 $0.60 January 20, 2013
    Joao Manuel 51,392 $0.60 January 20, 2013
    Rodrigo Esquivel 100,000 $0.14 May 6, 2013

     

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 63

     




    Gold Consulting, S.A. (2) 400,000 $0.14 May 6, 2013
    David Kaplan 100,000 $0.14 May 6, 2013
    Joao Manuel 100,000 $0.14 May 6, 2013
    Pedro Pablo Permuy 100,000 $0.14 May 6, 2013
    Gold Consulting, S.A. (2) 67,929 $0.14 June 1, 2013
    Joao Manuel 67,929 $0.14 June 1, 2013
    Rodrigo Esquivel 212,023 $0.10(3) February 28, 2016
    Gold Consulting, S.A. (2) 212,023 $0.10(3) February 28, 2016
    Joao Manuel 212,023 $0.10(3) February 28, 2016

     

    (1)

    Amount shown is in United States dollars unless otherwise indicated

    (2)

    Beneficially held by Richard Fifer

    (3)

    Amount shown is in Canadian dollars

    Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

    The following table sets forth details of all exercises of stock options during the year ended May 31, 2012, by our directors and executive officers and the value of unexercised options as of May 31, 2012:

    Name Common Shares
    Acquired on
    Exercise
    (#)
    Aggregate Value
    Realized
    (1)
    (CAD$)
    Unexercised Options at
    Fiscal Year-End
    (#)(2)
    Exercisable/
    Unexercisable
    Value of Unexercised In-the-
    Money Options at Fiscal
    Year-End
    ($)(2) (3)
    Exercisable/
    Unexercisable
     
    Rodrigo Esquivel nil nil 400,000 / 0 72,000 / 0
      nil nil 50,000 / 0 nil / nil
      nil nil 50,000 / 0 nil / nil
      nil nil 37,500 / 12,500 nil / nil
      nil nil 51,392 / 0 nil / nil
      nil nil 100,000 / 0 27,408 / 0 (4)
      nil nil 212,023 / 0 65,727 / 0
     
    Raul Ferrer nil nil 400,000 / 0 72,000 / 0
      nil nil 50,000 / 0 nil / nil
      nil nil 50,000 / 0 nil / nil
      nil nil 37,500 / 12,500 nil / nil
     
    Richard Fifer nil nil 600,000 / 0 108,000 / 0
      nil nil 100,000 / 0 nil / nil
      nil nil 100,000 / 0 nil / nil
      nil nil 350,000 / 0 nil / nil
      nil nil 350,000 / 50,000 nil / nil
      nil nil 37,500 / 12,500 nil / nil
      nil nil 51,392 / 0 nil / nil
      nil nil 400,000 / 0 109,631 / 0 (4)
      nil nil 67,929 / 0 18,618 / 0 (4)
      nil nil 212,023 / 0 65,727 / 0
     
    David Kaplan nil nil 400,000 / 0 72,000 / 0
      nil nil 50,000 / 0 nil / nil
      nil nil 50,000 / 0 nil / nil
      nil nil 37,500 / 12,500 nil / nil
      nil nil 100,000 / 0 27,408 / 0 (4)
     
    Pedro Pablo Permuy nil nil 87,500 / 12,500 nil / nil
      nil nil 0 / 350,000 nil /24,500
      nil nil 100,000 / 0 27,408 / 0 (4)
     
    Joao Manuel nil nil 300,000 / 0 nil / nil
      50,000 24,000 300,000 / 0 54,000/ nil
      nil nil 50,000 / 0 nil / nil
      nil nil 50,000 / 0 nil / nil
      nil nil 37,500 / 12,500 nil / nil
      nil nil 0 / 250,000 nil /17,500
      nil nil 51,392 / 0 nil / nil

     

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 64

     




    Name Common Shares
    Acquired on
    Exercise
    (#)
    Aggregate Value
    Realized (1)
    (CAD$)
    Unexercised Options at
    Fiscal Year-End
    (#)(2)
    Exercisable/
    Unexercisable
    Value of Unexercised In-the-
    Money Options at Fiscal
    Year-End
    ($)(2) (3)
    Exercisable/
    Unexercisable
      nil nil 100,000 / 0 27,408 / 0 (4)
      nil nil 67,929 / 0 18,618 / 0 (4)
      50,000 29,000 162,023 / 0 65,727 / 0
     
    Andrew Ramcharan nil nil 0 / 500,000 nil /35,000
     
    Lazaro Rodriguez nil nil 50,000 / 0 nil / nil
      nil nil 25,000 / 0 nil / nil
      nil nil 25,000 / 0 nil / nil
      nil nil 0 / 150,000 nil /10,500
     
    Ezequiel Sirotinsky nil nil 87,500 / 12,500 nil / nil
      nil nil 21,875 / 3,125 nil / nil
      nil nil 21,875 / 3,125 nil / nil
      nil nil 0 / 50,000 nil /3,500
     
    (1)     

    Aggregate value realized calculated using the closing price of our common shares on the Toronto Stock Exchange on date of exercise less exercise price of stock options exercised multiplied by number of options exercised. Amount shown is in Canadian dollars.

    (2)     

    The figures relate solely to stock options.

    (3)     

    Value of unexercised in-the-money options calculated using the closing price of our common shares on the Toronto Stock Exchange on May 31, 2012, which was $0.41, less the exercise price of in-the-money stock options, is shown in Canadian dollars.

    (4)     

    Value of unexercised in-the-money options that bear United States dollar exercise prices have had the exercise price converted to Canadian dollars at an exchange rate of US$1 = CAD$1.03, the conversion rate as at May 31, 2012, for the purpose of this calculation.

    Defined Benefit or Actuarial Plan Disclosure

    We do not provide retirement benefits for our directors and officers nor do we provide compensation pursuant to any bonus or profit-sharing plan.

    Termination of Employment, Change in Responsibilities and Employment Contracts

    We have entered into formal agreements with our directors, our executive officers and with six key employees that establish financial arrangements that would be in effect in the event of a change of control of our company. Each agreement provides for, in the event of the termination of the engagement of such persons following a change of control of our company, the payment of an amount equal to three times the annual compensation being paid to such person as at the time of the change of control.

    Directors

    With the exception of directors whom also serve as officers, we have arrangements in place in which directors are entitled to receive an attendance fee of $1,000 per meeting of our Board of Directors and an attendance fee of $800 per committee meeting during our most recently completed financial year and subsequently up to and including the date of this Annual Report. In addition, directors are entitled to reimbursement of actual expenses incurred in the performance of their duties as directors.

    Further, with the exception of directors whom also serve as officers, directors are entitled to an annual retainer of $24,000.

    6. C. Board Practices

    Our Board of Directors is responsible for the stewardship of our business and affairs. Its main role is to oversee corporate performance and to ensure that management has the talent, professionalism and integrity necessary to successfully carry out our strategic plan and achieve our corporate objectives. Directors are elected at each annual meeting of our shareholders and serve until our next annual meeting, at which time directors may stand for re-election, or until their successors are elected or appointed.

    During the year ended May 31, 2012, we did not nor did any of our subsidiaries have any arrangement to provide benefits to our directors upon termination of employment.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 65

     




    From November 6, 2009, to March 12, 2012, our Audit Committee consisted of Raul Ferrer, David Kaplan and David Levy. On January 18, 2012, Pedro Pablo Permuy was added to our Audit Committee and David Levy was removed on March 12, 2012. Each Audit Committee member is financially literate and is appointed by our board of directors to hold office until removed by our board of directors or until our next annual general meeting, at which time the appointments expire and such individuals are eligible for re-appointment. The Audit Committee reviews our interim financial statements and annual audited consolidated financial statements, liaises with our auditors, and recommends to our board of directors whether or not to approve such financial statements. Our Audit Committee must convene a meeting to consider any matters our auditor believes should be brought to the attention of our board of directors or our shareholders.

    Our Audit Committee operates pursuant to a charter adopted by our board of directors. Our Audit Committee is responsible primarily for monitoring: (i) the integrity of our financial statements; (ii) compliance with legal and regulatory requirements; and (iii) the independence and performance of our internal and external auditors.

    From November 6, 2009, to date, our Compensation Committee has consisted of Raul Ferrer, Richard Fifer and David Kaplan. The Compensation Committee is appointed by our board of directors and is responsible for reviewing and approving annual salaries, bonuses and other forms and items of compensation for board members, committee members and our senior officers. Except for plans that are, in accordance with their terms or as required by law, administered by our board of directors or another particularly designated group, the Compensation Committee also administers and implements all of our stock option and other stock-based and equity-based benefit plans, recommends changes or additions to those plans and reports to our board of directors on compensation matters. Our Chief Executive Officer does not vote upon or participate in the deliberations regarding his compensation.

    Since November 6, 2009, our Corporate Governance Committee has consisted of Raul Ferrer, Richard Fifer and David Kaplan with David Kaplan acting as coordinator for meetings of the Corporate Governance Committee. The primary function of our corporate governance committee is to assist our board of directors in developing our approach to corporate governance issues and monitoring performance against the defined approach.

    6.D. Employees

    As at May 31, 2012, we had 2 staff working at our principal office located in Vancouver, Canada; we had one permanent employee and one contract staff member working at our office located in Toronto, Canada, one employee in Spain, two employees in Portugal and approximately 1,250 employees at our various locations in Panama. Our office in Panama City had approximately 30 permanent employees and 9 professional services contracts in force, in the administration, presidency, accounting, investor relations, logistics, legal and IT departments. Our geological exploration team in Petaquilla Minerals, S.A., including administration, digitalization, laboratory, maintenance, etc. staff contained approximately 150 team members and our Molejon gold plant site had approximately 360 employees. Our infrastructure division, Panama Desarrollo de Infraestructuras, S.A. had approximately 700 employees.

    Our subsidiary company, Petaquilla Gold, S.A. has a labour contract with union employees at our Molejon gold plant. A single union, Sindicato de los Trabajadores de las Empresas Mineras Petaquilla, negotiates the labor contract on our workers’ behalf. We have not experienced any disruptions of our operations as a result of any labor disagreements to date.

    6.E. Share Ownership

    As at August 27, 2012, the following table sets forth the share ownership of those persons listed in subsection 6.B. above and includes the details of all options or warrants to purchase our shares held by such persons:

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 66

     




    Name Number of
    Common Shares
    Held at
    August 27, 2012
    Number of
    Common Shares
    Subject to Options
    or Warrants at
    August 27, 2012
    Beneficial
    Percentage
    Ownership
    (1)
    Exercise
    Price
    (CAD$)
    (2)
    Expiry Date
        400,000   $0.23 November 18, 2014
        50,000   $0.87 January 5, 2015
        50,000   $0.57 March 25, 2015
    Rodrigo Esquivel nil 50,000 * $1.11 December 21, 2015
        51,392   $0.60 (3) January 20, 2013
        100,000   $0.14 (3) May 6, 2013
        212,023   $0.10 February 28, 2016
     
        400,000   $0.23 November 18, 2014
        50,000   $0.87 January 5, 2015
    Raul Ferrer  nil 50,000  * $0.57 March 25, 2015
        50,000   $1.11 December 21, 2015
     
        600,000   $0.23 November 18, 2014
        100,000   $0.87 January 5, 2015
        100,000   $0.57 March 25, 2015
        350,000   $0.53 April 30, 2015
    Richard Fifer 4,369,283 400,000 2.99% $0.75 November 1, 2015
        50,000   $1.11 December 21, 2015
        400,000   $0.14 (3) May 6, 2013
        67,929   $0.14 (3) June 1, 2013
        51,392   $0.60 (3) January 20, 2013
        212,023   $0.10 February 28, 2016
     
        400,000   $0.23 November 18, 2014
        50,000   $0.87 January 5, 2015
    David Kaplan 445,716 50,000 * $0.57 March 25, 2015
        50,000   $1.11 December 21, 2015
        100,000   $0.14 (3) May 6, 2013
     
        100,000   $0.75 November 1, 2015
    Pedro Pablo Permuy nil 350,000 * $0.34 May 8, 2017
        100,000   $0.14 (3) May 6, 2013
     
        300,000   $0.52 December 1, 2013
        300,000   $0.23 November 18, 2014
        50,000   $0.87 January 5, 2015
        50,000   $0.57 March 25, 2015
    Joao Manuel 65,000 50,000 * $1.11 December 21, 2015
        250,000   $0.34 May 8, 2017
        100,000   $0.14 (3) May 6, 2013
        67,929   $0.14 (3) June 1, 2013
        51,392   $0.60 (3) January 20, 2013
        162,023   $0.10 February 28, 2016
     
    Andrew Ramcharan nil 500,000 * $0.34 May 8, 2017
     
        25,000   $0.87 January 5, 2015
    Lazaro Rodriguez nil 25,000 * $0.57 March 25, 2015
        150,000   $0.34 May 8, 2017
     
    Ezequiel Sirotinsky nil 100,000
    25,000
    25,000
    50,000
    * $0.75
    $1.00
    $0.93
    $0.34
    November 1, 2015
    November 29, 2015
    April 6, 2016
    May 8, 2017
               
    (1)     

    Indicates less than 1%

     

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 67

     




    (2)

    Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares owned by a person and the percentage ownership of that person, common shares subject to options and warrants held by that person that are currently exercisable or exercisable within 60 days of August 27, 2012, are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. This table has been prepared based on 221,863,781 common shares outstanding as of August 27, 2012.

    (3)

    Amount shown is in United States dollars

    On June 23, 1994, we adopted a stock option plan (the "Option Plan") which authorized our Board of Directors to grant incentive stock options to our directors, officers and employees or our associated, affiliated, controlled or subsidiary companies, in accordance with the terms of the Option Plan and the rules and policies of the Toronto Stock Exchange. Under the terms of the Option Plan, the aggregate number of our common shares reserved for issuance under the Option Plan at any time could not exceed 4,950,968. The aggregate number of common shares reserved for issuance under the Option Plan to any person may not exceed 5% of the number of our outstanding common shares. On July 24, 2002, our Board of Directors amended the Option Plan to increase the number of shares reserved for issuance thereunder from 4,950,968 to 7,436,158.

    On December 8, 2006, we adopted a new stock option plan (the “New Plan”) authorizing our Board of Directors to grant incentive stock options to directors, executive officers, employees or consultants of our company or of our subsidiaries in accordance with the terms of the Option Plan and as may be acceptable pursuant to the policies of the Toronto Stock Exchange. Under the terms of the New Plan, the aggregate number of our common shares reserved for issuance under the New Plan at any time may not exceed 10,000,000. The approval of our disinterested shareholders must be obtained before (a) the number of common shares under option to insiders within any 12-month period; or (b) the number of common shares issuable to insiders at any time, when combined with all of our security-based compensation arrangements, may exceed 10% of our issued and outstanding common shares. The approval of our disinterested shareholders must also be obtained for the reduction in the exercise price, or extension of the term, of options previously granted to insiders.

    At our annual general meeting of shareholders held on November 18, 2008, our shareholders approved an amended and restated stock option plan (the “Amended Plan”) increasing the maximum number of shares that may be the subject of options at any given time from 10,000,000 to 10,700,000 common shares. The Amended Plan also allows for cashless exercises by option holders in the event of a bona fide takeover offer of our company.

    At our annual general meeting of shareholders held on November 29, 2010, our shareholders approved an amended and restated stock option plan (the “2010 Amended Plan”) increasing the maximum number of shares that may be the subject of options at any given time from 10,700,000 to 12,500,000 common shares. The 2010 Amended Plan continues to allow for cashless exercises by option holders in the event of a bona fide takeover offer of our company.

    The exercise price of options issued under our Amended Plan will not be lower than the “market price” as defined in the Toronto Stock Exchange Company Manual, being the volume weighted average trading price on the Toronto Stock Exchange for the shares for the five trading days immediately preceding the date on which the option is granted. Options granted must be exercised no later than 10 years after the date of grant or such lesser period as may be determined by our Board of Directors. Our Board of Directors may at its discretion in granting any option set a vesting period whereby the option may only be exercisable in pre-determined installments.

    ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     

    7. A. Major Shareholders

    We are a publicly-held corporation with our shares held by residents of Canada, the United States of America and other countries. To the best of our knowledge, as at August 29, 2012, we have one shareholder who may beneficially own, directly or indirectly, or control more than 5% of our common shares, as follows:

      (a)

    On January 31, 2012, Sprott Inc. filed a Schedule 13G/A report with the SEC stating beneficial ownership of 15,489,442 of our common shares.

    However, we have no knowledge of their ownership, directly or indirectly, as at September 11, 2012. For these purposes, “beneficial ownership” means the sole or shared power to vote or direct the voting or to dispose or direct

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 68

     




    the disposition of any security.

    As at August 29, 2012, there were 221,863,781 of our common shares issued and outstanding. Based on the records of our registrar and transfer agent, Computershare Trust Company of 510 Burrard Street, Vancouver, British Columbia, Canada, as at July 31, 2012, there were a total of 216 holders of our common shares, of which 45 were resident in Canada holding an aggregate 137,966,245 common shares, 117 were resident in the United States holding an aggregate 78,474,345 common shares and 54 holders holding an aggregate of 5,423,191 common shares were not resident in either Canada nor the United States. The shareholdings of United States holders represented approximately 35.37% of our total issued and outstanding common shares of 221,863,781 as at July 31, 2012.

    To the extent known to our management, we are not directly or indirectly owned or controlled by another corporation(s), by any foreign government or by any other natural or legal person(s) severally or jointly. Further, we do not know of any arrangements that may, at a subsequent date, result in a change of control of our company.

    Major shareholders do not have different voting rights from other shareholders.

    7. B. Related Party Transactions

    We incurred the following fees and expenses in the normal course of operations in connection with companies controlled by key management, directors or officers during the years ended May 31, 2012, and 2011. Related party transactions have been measured at the amount of consideration established and agreed to by the transacting parties.

    • We paid fees of $1,001,492 to a company controlled by the Executive Chairman during the year ended May 31, 2012 (May 31, 2011 - $929,000) for compensation related matters included within general and administrative expenses.

    • We paid for goods and services provided to the Molejon mine of $598,663 during the year ended May 31, 2012 (May 31, 2011 - $228,965, respectively) to companies controlled by the Chairman.

    • We paid fees of $50,000 during the year ended May 31, 2012 (year ended May 31, 2011 - $18,800) for services to a company controlled by a director included within general and administrative expenses.

    • We paid legal fees of $218,267 (May 31, 2011 – nil) to a law firm where an officer is a partner and is included within general and administrative expenses.

    • We paid fees of $191,741 (May 31, 2011 – nil) for services to a company which shares a common officer and which is included within general and administrative expenses.

    • During the year ended May 31, 2012, we advanced $625,000 (2011 - $550,000) to Azuero Mining Development, S.A. (“Azuero”) (please refer to Note 10 of our consolidated financial statements for year ended May 31, 2012) for a total of $1,175,000 representing our 30% investment in Azuero as at May 31, 2012. By virtue of common directors, Azuero is a related party.

    At May 31, 2012, $190,551 was owed to related parties (May 31, 2011 - $126,858).

    Note 11 to the consolidated financial statements for our year ended May 31, 2012, provides a description of the Iberian asset acquisition. By virtue of common management and directors this is a related party transaction.

    Other than the above transactions, there were no material transactions in the year ended May 31, 2012, or proposed material transactions between us or any of our subsidiaries and:

    Enterprises that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, us;

    Associates;

    Individuals owning, directly or indirectly, an interest in our voting power that gives them significant influence over us, and close members of any such individual's family;

    a.

    key management personnel, that is, those persons having authority and responsibility for planning, directing and controlling our activities (or their wholly owned private companies), including directors and senior management of companies and close members of such individuals' families;

     

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 69

     




    b.

    enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (c) or (d) or over which such a person is able to exercise significant influence including enterprises owned by our directors or major shareholders and enterprises that have a member of key management in common with us.

    None of our officers or directors, or any associate of such person, was indebted to us at any time during the year ended May 31, 2012, or the year ended May 31, 2011.

    7. C. Interests of Experts and Counsel

    Not applicable.

    ITEM 8. FINANCIAL INFORMATION

     

    8.A. Consolidated Statements and Other Financial Information

    This Annual Report contains our consolidated financial statements for the years ended May 31, 2012, and May 31, 2011, which include an Independent Auditor’s Report of Registered Public Accounting Firm dated August 29, 2012, a Report of Independent Registered Public Accounting Firm dated August 29, 2012, Consolidated Statements of Operations and Comprehensive Income (Loss) for the Fiscal Periods ended May 31, 2012, and May 31, 2011, Consolidated Statements of Changes in Equity (Deficiency) for the years ended May 31, 2012, and May 31, 2011, Consolidated Statements of Cash Flows for the Years Ended May 31, 2012, and May 31, 2011, and Notes to the Consolidated Financial Statements.

    Dividend Distributions

    The timing, payment, form and amount of dividends paid on our common shares, if and when declared, is determined by our board of directors, based upon considerations such as our cash flow, results of operations and financial condition, the need for funds to finance ongoing operations and such other business matters as our board of directors considers relevant.

    8.B. Significant Changes

    Subsequent to May 31, 2012, the following events took place:

    (a)

    A total of 150,000 options expired related to grants made in 2007.

     

    (b)

    We filed a notice with the Toronto Stock Exchange for, and received approval to make, a Normal Course Issuer Bid to purchase up to 17,000,000 of our common shares.

     

    (c)

    We announced our intention to offer on a private placement basis $210 million senior secured notes due in 2017. The net proceeds from this offering are to be used to finance capital expenditures related to our Lomero- Poyatos mine in Spain and Molejon mine in Panama, to fund a cash investment in our infrastructure subsidiary in connection with its spin-off, to terminate our obligations under our existing prepaid forward minerals contracts, to repay a portion of our existing indebtedness, for general and corporate purposes and to pay related fees and expenses.

     

    (d)

    On June 25, 2012, a new credit line facility was approved by Lafise Bank of Panama, SA for our infrastructure subsidiary in the amount of $1.1 million, repayable over a term of 36 months at an annual interest rate of 7% per annum. The proceeds of the facility will be used towards the purchase of mobile crusher equipment.

     

    ITEM 9. THE OFFER AND LISTING

     

    9. A. Offer and Listing Details

    The high and low sale prices for our common shares on the Toronto Stock Exchange for each of the preceding six months, each fiscal quarter in each of the last two full financial years and subsequent period and each of the last five full financial years are as follows.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 70

     




        High (CAD$) Low (CAD$)
    August 2012   $0.40 $0.35
    July 2012   $0.425 $0.355
    June 2012   $0.445 $0.355
    May 2012   $0.435 $0.30
    April 2012   $0.455 $0.38
    March 2012   $0.60 $0.435
         
    June 1, 2012 – May 31, 2013    
    First Quarter (June 1, 2012 – August 31, 2012) $0.445 $0.35
        High (CAD$) Low (CAD$)
    June 1, 2011 – May 31, 2012 $0.94 $0.30
    Fourth Quarter (March 1, 2012 – May 31, 2012) $0.60 $0.30
    Third Quarter (December 1, 2011 – February 28, 2012) $0.72 $0.53
    Second Quarter (September 1, 2011 – November 30, 2011) $0.94 $0.60
    First Quarter (June 1, 2011 – August 31, 2011) $0.83 $0.59
         
    June 1, 2010 – May 31, 2011 $1.36 $0.30
    Fourth Quarter (March 1, 2011 – May 31, 2011) $1.15 $0.65
    Third Quarter (December 1, 2010 – February 28, 2011) $1.36 $0.96
    Second Quarter (September 1, 2010 – November 30, 2010) $1.22 $0.365
    First Quarter (June 1, 2010 – August 31, 2010) $0.54 $0.30
         
    June 1, 2009 – May 31, 2010 $0.98 $0.20
    Fourth Quarter (March 1, 2010 – May 31, 2010) $0.70 $0.37
    Third Quarter (December 1, 2009 – February 28, 2010) $0.98 $0.60
    Second Quarter (September 1, 2009 – November 30, 2009) $0.62 $0.20
    First Quarter (June 1, 2009 – August 31, 2009) $0.79 $0.45
          
    June 1, 2008 – May 31, 2009 $1.98 $0.285
    Fourth Quarter (March 1, 2009 – May 31, 2009) $0.73 $0.35
    Third Quarter (December 1, 2008 – February 28, 2009) $0.61 $0.285
    Second Quarter (September 1, 2008 – November 30, 2008) $1.30 $0.36
    First Quarter (June 1, 2008 – August 31, 2009) $1.98 $0.93
         
    May 1, 2008 – May 31, 2008 $2.32 $1.75
         
    May 1, 2007 – April 30, 2008 $3.42 $1.87

    The closing price of our common shares on the Toronto Stock Exchange on September 10, 2012, was CAD$0.62.

    The high and low sale prices for our common shares on the Over The Counter Bulletin Board for each of the preceding six months, each fiscal quarter in each of the last two full financial years and subsequent period and each of the last five full financial years are as follows:

      High Low
    August 2012 $0.409 $0.3551
    July 2012 $0.42 $0.346

     

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 71

     




    June 2012   $0.43 $0.3547
    May 2012   $0.437 $0.2944
    April 2012   $0.47 $0.3835
    March 2012   $0.6051 $0.443
         
    June 1, 2012 – May 31, 2013    
    First Quarter (June 1, 2012 – August 31, 2012) $0.43 $0.346
           
           
        High Low
    June 1, 2011 – May 31, 2012 $0.96 $0.2944
    Fourth Quarter (March 1, 2012 – May 31, 2012) $0.6051 $0.2944
    Third Quarter (December 1, 2011 – February 28, 2012) $0.7025 $0.51
    Second Quarter (September 1, 2011 – November 30, 2011) $0.96 $0.56
    First Quarter (June 1, 2011 – August 31, 2011) $0.8855 $0.60
         
    June 1, 2010 – May 31, 2011 $1.29 $0.30
    Fourth Quarter (March 1, 2011 – May 31, 2011) $1.17 $0.6968
    Third Quarter (December 1, 2010 – February 28, 2011) $1.29 $0.99
    Second Quarter (September 1, 2010 – November 30, 2010) $1.158 $0.37
    First Quarter (June 1, 2010 – August 31, 2010) $0.4856 $0.30
         
    June 1, 2009 – May 31, 2010 $0.94 $0.2099
    Fourth Quarter (March 1, 2010 – May 31, 2010) $0.66 $0.39
    Third Quarter (December 1, 2009 – February 28, 2010) $0.94 $0.571
    Second Quarter (September 1, 2009 – November 30, 2009) $0.54 $0.2099
    First Quarter (June 1, 2009 – August 31, 2009) $0.715 $0.4405
         
    June 1, 2008 – May 31, 2009 $1.99 $0.272
    Fourth Quarter (March 1, 2009 – May 31, 2009) $0.629 $0.2747
    Third Quarter (December 1, 2008 – February 28, 2009) $0.5035 $0.272
    Second Quarter (September 1, 2008 – November 30, 2008) $1.15 $0.305
    First Quarter (June 1, 2008 – August 31, 2009) $1.99 $0.914
          
    May 1, 2008 – May 31, 2008 $2.30 $1.82
         
    May 1, 2007 – April 30, 2008 $3.3555 $1.95

    The closing price of our common shares on the Over the Counter Bulletin Board on September 10, 2012, was $0.64.

    9.B. Plan of Distribution

    Not applicable.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 72

     




    9.C. Markets

    Our common shares traded on the Vancouver Stock Exchange from March 29, 1988, until August 21, 1998, when they were delisted from trading at our request. Our common shares have traded on the Toronto Stock Exchange since January 28, 1994. We trade our shares on the Toronto Stock Exchange under the trading symbol "PTQ". Our common shares traded on the NASDAQ Small Cap Market from February 5, 1996, until April 12, 1999, when they were delisted for failure to meet minimum bid requirements and began to be quoted on the Over the Counter Bulletin Board on April 13, 1999. Our shares are quoted on the Over the Counter Bulletin Board under the trading symbol "PTQMF". We commenced trading on the Frankfurt Stock Exchange under the trading symbol “P7Z” on October 24, 2005.

    9.D. Selling Shareholders

    Not applicable.

    9.E. Dilution

    Not applicable.

    9.F. Expenses of the Issue

    Not applicable.

    ITEM 10. ADDITIONAL INFORMATION

     

    10.A. Share Capital

    Not applicable.

    10.B. Memorandum and Articles of Association

    We were incorporated on October 10, 1985, pursuant to the Company Act (British Columbia), which has been replaced by the Business Corporations Act (British Columbia) (the "Act") and are registered with the Registrar of Companies for British Columbia under incorporation number 298967. We are not limited in our objects and purposes.

    With respect to our directors, our Articles provide that a director who is, in any way, directly or indirectly interested in an existing or proposed contract or transaction with us, or who holds any office or possesses any property whereby, directly or indirectly, a duty or interest might be created to conflict with his duty or interest as a director, shall declare the nature and extent of his interest in such contract or transaction or the conflict or potential conflict with his duty and interest as a director, as the case may be, in accordance with the provisions of the Act and shall abstain from voting in respect thereof.

    This prohibition does not apply to:

    (i)

    any such contract or transaction relating to a loan to us, which a director or a specified corporation or a specific firm in which he has an interest has guaranteed or joined in guaranteeing the repayment of the loan or any part of the loan;

     

    (ii)

    any contract or transaction made or to be made with, or for the benefit of a holding corporation or a subsidiary corporation of which a director is a director;

     

    (iii)

    any contract by a director to subscribe for or underwrite shares or debentures to be issued by us or our

     

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 73

     




    subsidiary, or any contract, arrangement or transaction in which a director is, directly or indirectly interested if all the other directors are also, directly or indirectly interested in the contract, arrangement or transaction;

    (iv)

    determining the remuneration of the directors;

     

    (v)

    purchasing and maintaining insurance to cover directors against liability incurred by them as directors; or

     

    (vi)

    the indemnification of any director by us.

    Our Articles also provide that our directors may from time to time on our behalf borrow such money in such manner and amount, on such security, from such sources and upon such terms and conditions as they think fit; issue bonds, debentures and other debt obligations, either outright or as security for any of our liabilities or obligations, or any other person; and mortgage, charge, whether by way of specific or floating charge, or give other security on the undertaking, or on the whole or any part of our property and assets (both present and future). Variation of these borrowing powers would require an amendment to our Articles which would, in turn, require the approval of our shareholders by way of a Special Resolution, as defined hereinafter. A “Special Resolution” means a resolution cast by a majority of not less than ¾ of the votes cast by our shareholders who, being entitled to do so, vote in person or by proxy at our general meeting of which notice as our Articles provide and not being less than 21 days notice specifying the intention to propose the resolution as a special resolution, has been duly given (or, if every shareholder entitled to attend and vote at the meeting agrees, at a meeting of which less than 21 days notice has been given), or a resolution consented to in writing by each of our shareholders who would have been entitled to vote in person or by proxy at our general meeting, and a resolution so consented to is deemed to be a special resolution passed at our general meeting.

    There is no requirement in our Articles or in the Act requiring retirement or non-retirement of directors under an age limit requirement, nor is there any minimum shareholding required for a director's qualification.

    Holders of our common shares are entitled to vote at meetings of shareholders, and a Special Resolution, as described above, is required to effect a change in the rights of shareholders. Holders of common shares are not entitled to pre-emptive rights. Holders of common shares are entitled, ratably, to our remaining property upon our liquidation, dissolution or winding up, and such holders receive dividends if, as, and when, declared by our directors. There are no restrictions on the purchase or redemption of common shares by us while there is an arrearage in the payment of dividends or sinking fund installments. There is no liability on the part of any shareholder to further capital calls by us nor any provision discriminating against any existing or prospective holder of our securities as a result of such shareholder owning a substantial number of common shares. There are no limitations on the rights to own securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights on the securities imposed by the Act or by our constating documents.

    We are required to give our registered shareholders not less than 21 days notice of any general meeting held by us unless all such shareholders consent to reduce or waive the period. In addition, we are obliged to give notice to registrants and intermediaries who hold common shares on behalf of the ultimate beneficial owners no fewer than 35 or more than 60 days prior to the date of the meeting. We then deliver, in bulk, proxy-related materials in amounts specified by the intermediaries. None of our common shares owned by registrants or intermediaries may be voted at our general meeting unless all proxy-related materials are delivered to the ultimate beneficial owners of such common shares. Such ultimate beneficial owner must then deliver a proxy to us within the time limited by us for the deposit of proxies in order to vote the common shares in respect of which such person is the beneficial owner.

    There is no provision in our Articles that would have an effect of delaying, deferring or preventing our change in control and that would operate only with respect to a merger, acquisition or corporate restructuring involving us (or any of our subsidiaries) other than a shareholder rights plan adopted by our board of directors effective March 7, 2006, and approved by our shareholders at the Annual and Special Meeting held on June 6, 2006, and again at our Annual General Meeting on November 29, 2009 (the “Shareholder Rights Plan”).

    The Shareholder Rights Plan is designed to ensure that all shareholders receive equal treatment and to maximize shareholder values in the event of a take-over bid or other acquisition that could lead to a change in control of our

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    company. It is not intended to deter take-over bids. Take-over bid contests for corporate control provide a singular opportunity for shareholders to obtain a one-time gain. After the acquisition of effective control, the opportunity for this one-time gain normally does not reoccur. As with most public companies, control of our company can probably be secured through the ownership of much less than 50% of the shares. Without a shareholder rights plan, it would be possible for a bidder to acquire effective control, over a relatively short period of time, through open market and private purchases, using various techniques permitted under the securities legislation in Canada, without making a bid available to all shareholders. Such acquisition of control would probably be an effective deterrent to other potential offerors. The person acquiring control would probably, over a period of time, be able to consolidate and increase its control without the price for control ever being tested through an open market auction. Shareholder rights plans are designed to prevent this occurrence by forcing all acquisitions of control into a public offer mode. A public offer will not necessarily achieve all of the objectives of ensuring the maximum value to shareholders. A take-over bid can be completed in a time period as short as 35 days. This is too short a time period to ensure that the directors can develop other competing alternatives. The Shareholder Rights Plan is intended to provide time to shareholders to properly assess any take-over bid and to provide the Board of Directors with sufficient time to explore and develop alternatives for maximizing shareholder value, including, if considered appropriate, identifying and locating other potential bidders.

    Our Memorandum of Incorporation and Articles of Petaquilla Minerals Ltd. are attached as Exhibit 1.A. to this Annual Report on Form 20-F.

    Our Shareholder Rights Plan was filed with the SEC on September 9, 2011 as Exhibit 2.A. to our Annual Report on Form 20-F for the year ended May 31, 2011.

    10.C. Material Contracts

    We have entered into formal agreements with our directors, our executive officers and with six key employees that establish financial arrangements that would be in effect in the event of a change of control of our company. Each agreement provides for, in the event of the termination of the engagement of such persons following a change of control of our company, the payment of an amount equal to three times the annual compensation being paid to such person as at the time of the change of control.

    10.D. Exchange Controls

    There are no governmental laws, decrees or regulations in Canada relating to restrictions on the export or import of capital, or affecting the remittance of interest, dividends or other payments to non-resident holders of our common shares. Any remittances of dividends to United States residents are, however, subject to a 15% withholding tax (5% if the shareholder is a corporation owning at least 10% of our outstanding common shares) pursuant to Article X of the reciprocal tax treaty between Canada and the United States. See “Item 10 – Additional Information – E. Taxation” below.

    Except as provided in the Investment Canada Act (the "Act"), which has provisions which govern the acquisition of a control block of voting shares by non-Canadians of a corporation carrying on a Canadian business, there are no limitations specific to the rights of non-Canadians to hold or vote our common shares under the laws of Canada or the Province of British Columbia or in our charter documents.

    Our management considers that the following general summary fairly describes those provisions of the Act pertinent to an investment in us by a person who is not a Canadian resident (a "non-Canadian").

    The Act requires a non-Canadian making an investment which would result in the acquisition of control of the Canadian business to notify the Investment Review Division of Industry Canada, the federal agency created by the Act; or in the case of an acquisition of a Canadian business, the gross value of the assets of which exceeds certain threshold levels or the business activity of which is related to Canada's cultural heritage or national identity, to file an application for review with the Investment Review Division.

    The notification procedure involves a brief statement of information about the investment on a prescribed form which is required to be filed with Industry Canada by the investor at any time up to 30 days following implementation of the investment. Once the completed notice has been filed, a receipt bearing the certificate date will be issued to the non-Canadian investor. The receipt must advise the investor either that the investment proposal is unconditionally non-reviewable or that the proposal will not be reviewed as long as notice of review is not issued

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 75

     




    within 21 days of the date certified under the receipt. It is intended that investments requiring only notification will proceed without government intervention unless the investment is in a specific type of business activity related to Canada's cultural heritage and national identity.

    If an investment is reviewable under the Act, an order for review must be issued within 21 days after the certified date on which notice of investment was received. An application for review in the form prescribed is required to be filed with Industry Canada prior to the investment taking place. Once the application has been filed, a receipt will be issued to the applicant, certifying the date on which the application was received. For incomplete applications, a deficiency notice will be sent to the applicant, and if not done within 15 days of receipt of application, the application will be deemed to be complete as of the date it was received. Within 45 days after the complete application has been received, the Minister responsible for the Investment Canada Act must notify the potential investor that the Minister is satisfied that the investment is likely to be of net benefit to Canada. If within such 45-day period the Minister is unable to complete the review, the Minister has an additional 30 days to complete the review, unless the applicant agrees to a longer period. Within such additional period, the Minister must advise either that he is satisfied or not satisfied that the investment is likely to be of net benefit to Canada. If the time limits have elapsed, the Minister will be deemed to be satisfied that the investment is likely to be of net benefit to Canada. The investment may not be implemented until the review has been completed and the Minister is satisfied that the investment is likely to be of net benefit to Canada.

    If the Minister is not satisfied that the investment is likely to be of net benefit to Canada, the non -Canadian must not implement the investment or, if the investment has been implemented, could be penalized by being required to divest himself of control of the business that is the subject of the investment. To date, the only types of business activities which have been prescribed by regulation as related to Canada's cultural heritage or national identity deal largely with publication, film and music industries. Because our total assets are less than the $5 million notification threshold, and because our business activities would likely not be deemed related to Canada's cultural heritage or national identity, acquisition of a controlling interest in us by a non-Canadian investor would not be subject to even the notification requirements under the Investment Canada Act.

    The following investments by non-Canadians are subject to notification under the Act:

    1.

    an investment to establish a new Canadian business; and

     

    2.

    an investment to acquire control of a Canadian business that is not reviewable pursuant to the Act.

    The following investments by a non-Canadian are subject to review under the Act:

    1.

    direct acquisition of control of Canadian businesses with assets of $5 million or more, unless the acquisition is being made by a World Trade Organization ("WTO") member country investor (the United States being a member of the WTO);

     

    2.

    direct acquisition of control of Canadian businesses with assets of $250,000,000 or more by a WTO investor;

     

    3.

    indirect acquisition of control of Canadian business with assets of $5 million or more if such assets represent more than 50% of the total value of the assets of the entities, the control of which is being acquired, unless the acquisition is being made by a WTO investor, in which case there is no review;

     

    4.

    indirect acquisition of control of Canadian businesses with assets of $50 million or more even if such assets represent less than 50% of the total value of the assets of the entities, the control of which is being acquired, unless the acquisition is being made by a WTO investor, in which case there is no review; and

     

    5.

    an investment subject to notification that would not otherwise be reviewable if the Canadian business engages in the activity of publication, distribution or sale of books, magazines, periodicals, newspapers, film or video recordings, audio or video music recordings or music in print or machine-readable form.

    Generally speaking, an acquisition is direct if it involves the acquisition of control of the Canadian business or of its Canadian parent or grandparent and an acquisition is indirect if it involves the acquisition of control of a non-Canadian parent or grandparent of an entity carrying on the Canadian business. Control may be acquired through the acquisition of actual voting control by the acquisition of voting shares of a Canadian corporation or through the acquisition of substantially all of the assets of the Canadian business. No change of voting control will be deemed to have occurred if less than one-third of the voting control of a Canadian corporation is acquired by an investor.

    A WTO investor, as defined in the Act, includes an individual who is a national of a member country of the World

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 76

     




    Trade Organization or who has the right of permanent residence in relation to that WTO member, a government or government agency of a WTO investor-controlled corporation, limited partnership, trust or joint venture and a corporation, limited partnership, trust or joint venture that is neither WTO-investor controlled or Canadian controlled of which two-thirds of its board of directors, general partners or trustees, as the case may be, or any combination of Canadians and WTO investors.

    The higher thresholds for WTO investors do not apply if the Canadian business engages in activities in certain sectors such as uranium, financial services, transportation services or communications.

    The Act specifically exempts certain transactions from either notification or review. Included among this category of transactions is the acquisition of voting shares or other voting interests by any person in the ordinary course of that person's business as a trader or dealer in securities.

    10.E. Taxation

    Material Canadian Federal Income Tax Consequences

    Through consultation with counsel, our management believes that the following general summary accurately describes all material Canadian federal income tax consequences applicable to a holder of our common shares who is a resident of the United States, that qualifies for benefits under the Canada-United States Convention (1980), as amended (the “Treaty”) and who is not a resident of Canada and who does not use or hold, and is not deemed to use or hold, his common shares of us in connection with carrying on a business in Canada (a "non-resident holder").

    This summary is based upon the current provisions of the Income Tax Act (Canada) (the "ITA"), the regulations thereunder (the "Regulations"), the current publicly announced administrative and assessing policies of Canada Revenue Agency and all specific proposals (the "Tax Proposals") to amend the ITA and Regulations announced by the Minister of Finance (Canada) prior to the date hereof. This summary assumes that the Tax Proposals will be enacted in their form as of the date of this Annual Report. This description, except for the Tax Proposals, does not take into account or anticipate any changes in law, whether by legislative, government or judicial action, nor does it take into account provincial, territorial, or foreign tax considerations which may differ significantly from those discussed herein.

    Dividends

    Dividends paid on our common shares to a non-resident holder will be subject to withholding tax. The Treaty provides that the normal 25% withholding tax rate under the ITA is reduced to 15% on dividends paid on shares of a corporation resident in Canada (such as our company) to beneficial owners of the dividends who are residents of the United States, and may also provide for a further reduction of this rate to 5% where the beneficial owner of the dividends is a corporation that is a resident of the United States which owns at least 10% of the voting shares of the corporation paying the dividend.

    No dividends have ever been paid by us.

    Capital Gains

    Under the ITA, a taxpayer's capital gain or capital loss from a disposition of a share of our company is the amount, if any, by which his proceeds of disposition exceed (or are exceeded by) the aggregate of his adjusted cost base of the share and reasonable expenses of disposition. One half of a capital gain (the "taxable capital gain") is included in income, and one half of a capital loss in a year (the "allowable capital loss") is deductible from taxable capital gains realized in the same year. The amount by which a shareholder's allowable capital loss exceeds his taxable capital gains in a year may be deducted from a taxable capital gain realized by the shareholder in the three previous or any subsequent year, subject to certain restrictions in the case of a corporate shareholder.

    A non-resident holder is not subject to tax under the ITA in respect of a capital gain realized upon the disposition of a share of a public corporation unless the share represents "taxable Canadian property" to the holder thereof. We are a public corporation for purposes of the ITA and a common share of our company will be taxable Canadian property to a non-resident holder if, at any time during the 60 month period immediately preceding the disposition, the non-resident holder, persons with whom the non-resident holder did not deal at arm's length, or the non-resident holder and persons with whom he did not deal at arm's length together owned not less than 25% of the issued shares of any

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    class of our shares and more than 50% of the fair market value of our shares are derived directly or indirectly from any one of, or any combination of, real or immoveable property situated in Canada, Canadian resource properties, timber resource properties or options in respect of any such properties. Our shares may also be taxable Canadian property to a holder if the holder acquired them pursuant to certain tax-deferred "rollover" transactions whereby the holder exchanged property that was taxable Canadian property for our shares.

    Where a non-resident holder who is an individual ceased to be resident in Canada, he will be subject to Canadian tax on any capital gain realized on disposition of our shares at that time.

    Where a non-resident holder realizes a capital gain on a disposition of our shares that constitute taxable Canadian property, the Treaty relieves the non-resident shareholder from liability for Canadian tax on such capital gains unless:

    (a) the non-resident holder is an individual who was resident in Canada for not less than 120 months during any period of 20 consecutive years preceding, and at any time during the 10 years immediately preceding, the disposition and the shares were owned by him when he ceased to be resident in Canada and are not a property that the individual was treated as having sold by reason of ceasing to be a resident of Canada, or are property substituted for property that was owned at that time, or

    (b) the shares formed part of the business property of a "permanent establishment" or pertained to a fixed base used for the purpose of performing independent personal services that the shareholder has or had in Canada within the year preceding the disposition.

    Material United States Federal Income Tax Consequences

    The following is a discussion of material U.S. federal income tax consequences that may be relevant with respect to the acquisition, ownership and disposition of our common shares by a U.S. Holder (as hereinafter defined). This discussion is applicable only to U.S. Holders (i) who are residents of the United States for purposes of the current Treaty (as defined above in “—Material Canadian Federal Income Tax Consequences”), (ii) whose common shares are not, for purposes of the Treaty, effectively connected with a permanent establishment in Canada and (iii) who otherwise qualify for the full benefits of the Treaty. This discussion does not address all potentially relevant U.S. federal income tax matters and it does not cover any state, local or foreign tax consequences. Accordingly, U.S. Holders and prospective U.S. Holders are urged to consult their own tax advisors about the specific U.S. federal, U.S. state, U.S. local, and foreign tax consequences to them of acquiring, holding and disposing of our common shares.

    The following discussion is based upon the U.S. Internal Revenue Code of 1986, as amended (the “Code”), regulations thereunder, published Internal Revenue Service (“IRS”) rulings, published administrative positions of the IRS and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis, at any time and that are subject to differing interpretations. This discussion does not consider the potential effects, both adverse and beneficial, of any proposed legislation that, if enacted, could be applied, possibly on a retroactive basis, at any time.

    U.S. Holders

    As used in this annual report, a “U.S. Holder” means a holder of our common shares that is (i) a citizen or individual resident of the United States, (ii) a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any state thereof (including the District of Columbia), (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if such trust was in existence on August 20, 1996 and validly elected to be treated as a United States person for U.S. federal income tax purposes or if (1) a court within the U.S. is able to exercise primary supervision over its administration and (2) one or more United States persons have the authority to control all of the substantial decisions of such trust.

    This summary does not address the tax consequences to U.S. Holders subject to specific provisions of U.S. federal income tax law, such as tax-exempt organizations, qualified retirement plans, individual retirement accounts and other tax-deferred accounts, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, U.S. Holders that own or are deemed to own 10% or more of our voting

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    shares, persons or entities that have a “functional currency” other than the U.S. dollar, shareholders subject to the alternative minimum tax, partnerships or other pass-through entities for U.S. federal income tax purposes, shareholders that hold common shares as part of a straddle, hedging or conversion transaction and shareholders that acquired their common shares through the exercise of employee stock options or otherwise as compensation for services.

    This summary is limited to U.S. Holders that own common shares as capital assets, within the meaning of Section 1221 of the Code. This summary does not address the consequences of the ownership, exercise or disposition of any options, warrants or other rights to acquire common shares.

    If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds our common shares, the tax treatment of a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner should consult its own tax advisors as to the U.S. tax consequences of being a partner in a partnership that acquires, holds, or disposes of our common shares.

    Distributions on Our Common Shares

    Subject to the discussion below under “Passive Foreign Investment Company”, U.S. Holders receiving dividend distributions (including constructive dividends) with respect to our common shares generally are required to include in gross income for U.S. federal income tax purposes the gross amount of such distributions (without reduction of any Canadian income or other tax withheld from such distributions), equal to the U.S. dollar value of such distributions on the date of receipt (based on the exchange rate on such date), to the extent that we have current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Dividends paid on our common shares will not generally be eligible for the dividends received deduction provided to corporations receiving dividends from certain U.S. corporations.

    With respect to non-corporate U.S. Holders, certain dividends received in taxable years beginning before January 1, 2013 from a qualified foreign corporation may be subject to reduced rates of taxation. A qualified foreign corporation includes a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States that the United States Treasury Department determines to be satisfactory for these purposes and that includes an exchange of information provision. The United States Treasury Department has determined that the Treaty meets these requirements, and we believe we may be eligible for the benefits of the Treaty. However, non-corporate U.S. Holders that do not meet a minimum holding period requirement during which they are not protected from a risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. U.S. Holders and prospective U.S. Holders should consult their own tax advisors regarding the application of this legislation to their particular circumstances.

    Non-corporate U.S. Holders will not be eligible for reduced rates of taxation on any dividends received from us in taxable years beginning prior to January 1, 2013, if we are a passive foreign investment company (a “PFIC”) in the taxable year in which such dividends are paid or in the preceding taxable year.

    The amount of any dividend paid in Canadian dollars or any other foreign currency will equal the U.S. dollar value of such foreign currency received calculated by reference to the exchange rate in effect on the date the dividend is received by the U.S. Holder, regardless of whether the foreign currency is converted into U.S. dollars. If the foreign currency received as a dividend is converted into U.S. dollars on the date they are received, the U.S. Holder generally will not be required to recognize foreign currency gain or loss in respect of the dividend income. If the foreign currency received as a dividend is not converted into U.S. dollars on the date of receipt, the U.S. Holder will have a basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the foreign currency will be treated as U.S. source ordinary income or loss.

    Disposition of Our Common Shares

    Subject to the discussion below under “Passive Foreign Investment Company,” U.S. Holders will recognize gain or loss upon the sale of our common shares equal to the difference, if any, between (i) the amount of cash plus the fair market value of any property received and (ii) the U.S. Holder’s tax basis in our common shares. Preferential tax rates apply to long-term capital gains of U.S. Holders that are individuals, estates or trusts. In general, gain or loss on the sale of our common shares will be long-term capital gain or loss if our common shares are held for more than one year. Deductions for capital losses are subject to significant limitations.

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    Passive Foreign Investment Company

    We have not determined whether or not we are a PFIC for the current tax year or any prior tax years. Since the determination of whether we are a PFIC is made annually, we may or may not be a PFIC in subsequent years due to changes in our assets and business operations. A U.S. Holder that holds stock in a foreign corporation during any year in which such corporation qualifies as a PFIC is subject to numerous special U.S. federal income taxation rules. The following is a discussion of these special rules as they apply to U.S. Holders of our common shares.

    In general, a foreign corporation is a PFIC for any taxable year in which either (i) 75% or more of its gross income is “passive income,” which includes interest, dividends and certain rents and royalties, or (ii) 50% or more of the value (determined based on a quarterly average) of its assets is attributable to assets that produce or are held for the production of passive income. If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income.

    If we are a PFIC for any taxable year during which a U.S. Holder holds our common shares, such U.S. Holder will be subject to special tax rules with respect to any “excess distribution” received and any gain realized from a sale or other disposition, including a pledge, of common shares. Distributions received in a taxable year that are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or such U.S. Holder’s holding period for the common shares will be treated as excess distributions. Under these special tax rules, (1) the excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the common shares, (2) the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and (3) the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. In addition, U.S. Holders will be required to file IRS Form 8621 if they hold our common shares in any year in which we are classified as a PFIC.

    If we are a PFIC for any taxable year during which a U.S. Holder holds our common shares and any of our non-U.S. subsidiaries is also a PFIC, a U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules. U.S. Holders are urged to consult their tax advisors about the application of the PFIC rules to any of our subsidiaries.

    In certain circumstances, in lieu of being subject to the excess distribution rules discussed above, a U.S. Holder may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market method, provided that such stock is regularly traded on a qualified exchange. No assurance can be given that the common shares will be “regularly traded” for purposes of the mark-to-market election. If a U.S. Holder makes an effective mark-to-market election, it will include in each year that we are a PFIC as ordinary income the excess of the fair market value of its common shares at the end of the year over its adjusted tax basis in the common shares. A U.S. Holder will be entitled to deduct as an ordinary loss in each such year the excess of its adjusted tax basis in the common shares over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. If a U.S. Holder makes an effective mark-to-market election, in each year that we are a PFIC any gain such U.S. Holder recognizes upon the sale or other disposition of its common shares will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount of previously included income as a result of the mark-to-market election.

    A U.S. Holder’s adjusted tax basis in the common shares will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If a U.S. Holder makes a mark-to-market election, it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the common shares are no longer regularly traded on a qualified exchange or the IRS consents to the revocation of the election. U.S. Holders are urged to consult their tax advisors about the availability and advisability of the mark-to-market election.

    Alternatively, a U.S. Holder can sometimes avoid the PFIC rules described above by electing to treat us as a “qualified electing fund” under Section 1295 of the Code. However, this option is not available to U.S. Holders because we do not intend to comply with the requirements necessary to permit U.S. Holders to make this election.

    Foreign Tax Credit

    A U.S. Holder that pays (or has withheld from distributions) Canadian or other foreign income tax with respect to the ownership of our common shares may be entitled, at the option of the U.S. Holder, to either receive a deduction or a tax credit for U.S. federal income tax purposes with respect to such foreign tax paid or withheld. Complex

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 80

     




    limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the proportionate share of a U.S. Holder’s U.S. federal income tax liability that such U.S. Holder’s “foreign source” taxable income bears to such U.S. Holder’s worldwide taxable income. In applying this limitation, a U.S. Holder’s various items of income and deduction must be classified, under complex rules, as either “foreign source” or “U.S. source.” In addition, this limitation is calculated separately with respect to specific categories of income including “passive category income” and “general category income.” Gain or loss recognized by a U.S. Holder on the sale or other taxable disposition of our common shares generally will be treated as “U.S. source” for purposes of applying the foreign tax credit rules. Dividends received by U.S. Holders on our common shares generally will be treated as “foreign source” and generally will be categorized as “passive income” for purposes of applying the foreign tax credit rules. The availability of the foreign tax credit and the application of the limitations with respect to the foreign tax credit are fact specific, and each U.S. Holder should consult their own financial advisor, legal counsel or accountant regarding the foreign tax credit rules.

    Information Reporting and Backup Withholding

    In general, information reporting will apply to dividends in respect of our common shares and the proceeds from the sale, exchange or redemption of our common shares that are paid to U.S. Holders within the U.S. (and in certain cases, outside the U.S.), unless the U.S. Holder is an exempt recipient. A backup withholding tax may apply to such payments if a U.S. Holder fails to provide a taxpayer identification number or certification of other exempt status or fails to report in full dividend and interest income.

    Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a refund or a credit against the U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.

    10. F. Dividends and Paying Agents

    Not applicable.

    10. G. Statements by Experts

    Not applicable.

    10.H. Documents on Display

    Any documents referred to in this Annual Report may be inspected at our head office located at Suite 1230, 777 Hornby Street, Vancouver, British Columbia, Canada, V6Z 1S4, during normal business hours.

    10. I. Subsidiary Information

    Not applicable.

    ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Our financial instruments are exposed to certain financial risks, including credit risk, liquidity risk, currency risk, interest rate risk and price risk. We thoroughly examine the various financial instrument risks to which we are exposed and assess the impact and likelihood of those risks. Where material, these risks are reviewed and monitored by our Board of Directors. We do not acquire or issue derivative financial instruments for trading or speculative purposes.

    The following describes the types of risks that we are exposed to and our objectives and policies for managing those risk exposures:

    Credit risk
    Credit risk is the risk that the counterparty to a financial instrument will cause a financial loss for us by failing to discharge its obligations. Credit risk is primarily associated with accounts receivable; however it also arises on cash and cash equivalents and restricted cash. We reduce our credit risk due to accounts receivable by conducting sales transactions with counterparties of high credit worthiness. Payment for the majority of our gold sales is received prior to gold being credited to the customer’s account at the refinery. Sales during the period were to two customers, but there is no economic dependence risk as the metals produced by us can be sold to other potential customers. We have

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 81

     




    reduced our credit risk by investing our cash and cash equivalents and restricted cash in term deposits with financial institutions that operate globally. We do not have a significant concentration of credit risk and overall our risk has not changed significantly from the prior year.

    Liquidity risk
    Liquidity risk arises from our general and capital financing needs. We have in place a planning and budgeting process to help determine the funds required to ensure that we have the appropriate liquidity to meet our operating and growth objectives. Liquidity requirements are managed based on expected cash flows to ensure that there is sufficient capital in order to meet short-term obligations.

    At May 31, 2012, we held cash and cash equivalents of $1,975,660 (May 31, 2011 - $5,712,792; June 1, 2010 -$4,625,649) and had a working capital deficit of $41,775,106 (May 31, 2011 - $23,848,920; June 1, 2010 -$89,616,869).

    Our contractual maturities of financial liabilities are outlined in Note 28 of our consolidated financial statements included herein.

    Market risk

    (i) Currency risk
    Currency risk is the risk that the fair values or future cash flows of our financial instruments will fluctuate because of changes in foreign exchange rates. Financial instruments that impact our net earnings or other comprehensive income due to currency fluctuations include Canadian dollar denominated cash and cash equivalents, restricted cash, accounts receivable and accounts payable. As we conduct the vast majority of its activities in United States dollars, changes in the exchange rate between the Canadian dollar and the United States dollar have a minimal effect on our net earnings and other comprehensive income.

    During the year ended May 31, 2012, we recognized a loss of $84,238 on foreign exchange (May 31, 2011 – a loss of $72,928).

    Risk arises to our earnings through fluctuations in foreign exchange rates and the degree of volatility of these rates. We transact primarily in US dollar which is also our functional and presentation currency.

    (ii) Interest rate risk
    Interest rate risk is the risk that the fair value of future cash flows of ours will fluctuate because of changes in market interest rates. We are exposed to interest rate risk on our outstanding borrowings, cash and cash equivalents and restricted cash. Other current financial assets and liabilities are not exposed to interest rate risk because they are non-interest bearing. The operating credit line facility, bank loan financing for the payment of advances to suppliers, capital leases and long-term debt bear interest at a fixed rate and are also not exposed to interest rate risk.

    (iii) Price risk
    Price risk is the risk that the fair value or future cash flows of our financial instruments will fluctuate because of changes in market prices. The largest risk relates to metal prices for gold and silver. Gold and silver prices are affected by numerous factors such as the global and regional supply and demand, interest rates, exchange rates, inflation or deflation, fluctuations in the value of the US dollar and foreign currencies and the political and economic conditions of major producers throughout the world.

    Qualitative Information about Market Risk

    Our objectives of capital management are intended to safeguard our ability to support our normal operating requirements on an ongoing basis, continue the development and exploration of our mineral properties and support any expansionary plans.

    Our capital structure consists of long term debt, leases, convertible loan, advances from Deutsche Bank in connection with future production of gold and silver and equity attributable to common shareholders, comprised of issued capital, share-based payments reserve and deficit. We manage the capital structure and makes adjustments in light of changes in economic conditions and the risk characteristics of our assets.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 82

     




    We have historically relied on the issuance of shares, secured debt, convertible secured debt and leasing arrangements to fund our mineral exploration projects, development projects, and bring our Molejon gold project to commercial production. To pursue additional projects, we may require additional funding in the future where it may be exposed to various funding and market risks that could curtail its access to these funds.

    To effectively manage the entity’s capital requirements, we have in place a planning and budgeting process to help determine the funds required to ensure we have the appropriate liquidity to meet our operating and growth objectives and we continually monitor current market conditions to secure funding at the lowest cost of capital.

    ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

    Not applicable.

    PART II

    ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

    Not applicable.

    ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

    Effective March 7, 2006, our Board of Directors adopted a shareholder rights plan, which was approved by our shareholders at our Annual and Special Meeting held June 6, 2006, and subsequently at our Annual General Meeting held November 29, 2010.

    The Shareholder Rights Plan is designed to ensure that all shareholders receive equal treatment and to maximize shareholder values in the event of a take-over bid or other acquisition that could lead to a change in control of our company. It is not intended to deter take-over bids. Take-over bid contests for corporate control provide a singular opportunity for shareholders to obtain a one-time gain. After the acquisition of effective control, the opportunity for this one-time gain normally does not reoccur. As with most public companies, control of our company can probably be secured through the ownership of much less than 50% of our shares. Without a shareholder rights plan, it would be possible for a bidder to acquire effective control, over a relatively short period of time, through open market and private purchases, using various techniques permitted under the securities legislation in Canada, without making a bid available to all shareholders. Such acquisition of control would probably be an effective deterrent to other potential offerors. The person acquiring control would probably, over a period of time, be able to consolidate and increase its control without the price for control ever being tested through an open market auction. Shareholder rights plans are designed to prevent this occurrence by forcing all acquisitions of control into a public offer mode. A public offer will not necessarily achieve all of the objectives of ensuring the maximum value to shareholders. A take-over bid can be completed in a time period as short as 35 days. This is too short a time period to ensure that the directors can develop other competing alternatives. The Shareholder Rights Plan is intended to provide time to shareholders to properly assess any take-over bid and to provide our Board of Directors with sufficient time to explore and develop alternatives for maximizing shareholder value, including, if considered appropriate, identifying and locating other potential bidders.

    Our Shareholder Rights Plan was filed with the SEC on September 9, 2011 as Exhibit 2.A. to our Annual Report on Form 20-F for the year ended May 31, 2011.

    ITEM 15. CONTROLS AND PROCEDURES

    Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 83

     




    Under the supervision and with the participation of our Chief Executive Officer (serving as our principal executive officer) and Chief Financial Officer (serving as our principal financial officer), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report (the “Evaluation Date”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the SEC’s rules and forms, and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

    Management’s Annual Report on Internal Control over Financial Reporting

    Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements.

    All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

    A material weakness means a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of an issuer’s annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency means a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of an issuer’s financial reporting.

    The Chief Executive Officer and the Chief Financial Officer evaluated the design and effectiveness of internal controls over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee Sponsoring Organizations of the Treadway Commission (“COSO”) as at May 31, 2012. Based on this evaluation, as at May 31, 2012, we believe that our internal controls over financial reporting were designed and operating effectively to provide reasonable, but not absolute, assurance that the objectives of the control system are met.

    Attestation Report of our External Auditor

    The effectiveness of our internal control over financial reporting as of May 31, 2012, has been audited by our independent registered chartered accountants, Ernst & Young LLP, which also audited our consolidated financial statements for the year ended May 31, 2012. Ernst & Young LLP have expressed an unqualified opinion on the effectiveness of our internal control over financial reporting as of May 31, 2012, and their report is included on page 91 of this Annual Report.

    Changes in Internal Control over Financial Reporting

    During the period covered by this report, other than the changes discussed under Management’s Annual Report on Internal Control over Financial Reporting, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

    Inherent Limitations on Effectiveness of Controls

    Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 84

     




    ITEM 16. [RESERVED]

     

    16.A. AUDIT COMMITTEE FINANCIAL EXPERT

    We have not identified an Audit Committee Financial Expert among the three directors currently serving on our Audit Committee. Our current Audit Committee members are Raul Ferrer, David Kaplan and Pedro Pablo Permuy, each of whom, as a result of various professional backgrounds, is financially literate with an understanding of internal controls and procedures.

    16.B. CODE OF ETHICS

    Effective May 31, 2008, our Board of Directors adopted an updated Code of Business Ethics and Conduct that applies to, among other persons, our President and Chief Executive Officer, being our principal executive officer, and our Chief Financial Officer, being our principal financial officer, and our controller, as well as persons performing similar functions. As adopted, our Code of Business Ethics and Conduct sets forth written standards that are designed to deter wrongdoing and to promote:

    (1)

    honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

    (2)

    full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in other public communications made by us;

    (3)

    compliance with applicable governmental laws, rules and regulations;

    (4)

    the prompt internal reporting of violations of the Code of Business Ethics and Conduct to an appropriate person or persons identified in the Code of Business Ethics and Conduct; and

    (5)

    accountability for adherence to the Code of Business Ethics and Conduct.

    Our Code of Business Ethics and Conduct requires, among other things, that all of our personnel shall be accorded full access to our President and Chief Executive Officer and Chief Financial Officer with respect to any matter which may arise relating to the Code of Business Ethics and Conduct. Further, all of our personnel are to accorded full access to our Board of Directors if any such matter involves an alleged breach of the Code of Business Ethics and Conduct by our President and Chief Executive Officer or Chief Financial Officer.

    In addition, our Code of Business Ethics and Conduct emphasizes that all employees, and particularly managers and/or supervisors, have a responsibility for maintaining our financial integrity, consistent with generally accepted accounting principles, and federal, provincial and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to his or her immediate supervisor or to our Chairman of the Audit Committee or Chief Financial Officer or, if anonymity is preferred, to an independent whistle-blower hotline operated and controlled by a third party. It is against our policy to retaliate against any individual who reports in good faith the violation or potential violation of our Code of Business Ethics and Conduct by another.

    Our Code of Business Ethics and Conduct and our Whistle-Blower Policy were filed as Exhibits 11.A and 11.B to our Form 20-F for the period ended May 31, 2008. The full text of our Code of Business Ethics and Conduct and our Whistle-Blower Policy can be viewed on our website at www.petaquilla.com under “Corporate/Corporate Governance” and we will provide a copy of each document to any person without charge, upon request. Requests can be sent to: Petaquilla Minerals Ltd., Suite 1230, 777 Hornby Street, Vancouver, BC, Canada V6Z 1S4.

    16. C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

    The aggregate amounts billed by our auditors to us for (i) the period covered by the year ended May 31, 2012, and (ii) the period covered by the year ended May 31, 2011, for audit fees, audit-related fees, tax fees and all other fees are set forth below:

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 85

     




      Year Ended Year Ended
      May 31, 2012 May 31, 2011
      (CAD$) (CAD$)
    Audit Fees (1) $522,000 (5) $500,313
    Audit-Related Fees (2) $522,440 (5) $10,500
    Tax Fees (3) $49,990 (5) $20,873
    All Other Fees (4) - -
    Totals $1,094,430 (5) $531,686

     

    (1)

    “Audit Fees" represent the aggregate fees billed for professional services rendered by our principal accountant for the audit of our annual financial statements or services that are normally provided by our accountant in connection with statutory and regulatory filings or engagements.

    (2)

    “Audit-Related Fees" represent the aggregate fees billed for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees” above.

    (3)

    “Tax Fees" represent the aggregate fees for professional services rendered by our principal accountant for tax compliance, tax advice and tax planning.

    (4)

    “All Other Fees" represent the aggregate fees billed for products and services provided by our principal accountant, other than the services reported under “Audit Fees”, “Audit-Related Fees” and “Tax Fees” above.

    (5)

    Fees for the year ended May 31, 2012, are estimated.

    The Audit Committee has adopted procedures requiring Audit Committee review and approval in advance of all particular engagements for services provided by our independent auditor. Consistent with applicable laws, the procedures permit limited amounts of services, other than audit, review or attest services, to be approved by one or more members of the Audit Committee pursuant to authority delegated by the Audit Committee, provided the Audit Committee is informed of each particular service. All of the engagements (i.e. 100%) and fees for the year ended May 31, 2012, and the year ended May 31, 2011, were approved by the Audit Committee and all such engagements were completed by our independent auditor with no work performed by persons other than our independent auditor’s full-time, permanent employees. The Audit Committee reviews with our auditor whether the non-audit services to be provided are compatible with maintaining the auditor's independence. The Board determined that, starting in the fiscal year ended January 31, 2005, fees paid to our independent auditors for non-audit services in any year would not exceed the fees paid for audit services during the year. Permissible non-audit services are limited to fees for tax services, accounting assistance or audits in connection with acquisitions, and other services specifically related to accounting or audit matters such as audits of employee benefit plans.

    16. D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

    Not applicable.

    16. E.

    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

    Under the Normal Course Issuer Bid filed with the Toronto Stock Exchange for the period July 4, 2011 to July 3, 2012, we purchased 2,563,000 of our shares representing approximately 1.2% of our outstanding common shares as at July 5, 2012, for an average price of CAD$0.47 per share.

    16. F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

    Not applicable.

    16. G. CORPORATE GOVERNANCE

    Not applicable.

    16. H. MINE SAFETY DISCLOSURE

    As of the date hereof, we have nothing to disclose in response to the required information concerning mine safety violations or other regulatory matters under Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 86

     




    PART III

    ITEM 17. FINANCIAL STATEMENTS

    Please see the Financial Statements and Exhibits listed in Item 19 hereof and filed as part of this Annual Report on Form 20-F. These consolidated financial statements were prepared in accordance with IFRS as issued by the IASB for the year ended May 31, 2012, and May 31, 2011, and are expressed in United States dollars.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 87

     




    PETAQUILLA MINERALS LTD.

    CONSOLIDATED FINANCIAL STATEMENTS

    For the Year Ended May 31, 2012

    (Expressed in United States dollars)

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 88

     



    Management Report on Internal Control over Financial Reporting

    The management of Petaquilla Minerals Ltd. (“Petaquilla” or the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934. Petaquilla’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

    All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

    An internal control material weakness is a deficiency, or aggregation of deficiencies, such that the risk of material misstatements in financial statements will not be prevented or detected on a timely basis by employees in the normal course of their work. An internal control significant deficiency, or aggregation of deficiencies, is one that could result in a misstatement of the financial statements that is more than inconsequential.

    The Company’s management assessed the effectiveness of Petaquilla’s internal controls over financial reporting as of May 31, 2012.

    In making the assessment of internal control over financial reporting, the Company’s management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Petaquilla’s management believes that, as of May 31, 2012 (“the Evaluation Date”), the Company’s internal control over financial reporting was effective as of the Evaluation Date based on those criteria.

    During the period covered by this report, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

    The effectiveness of the Company’s internal control over financial reporting, as of May 31, 2012, has been audited by Ernst & Young LLP, Independent Registered Accountants, who also audited the Company’s consolidated financial statements for the year ended May 31, 2012, as stated in their report which appears on the following page.

    PETAQUILLA MINERALS LTD.

    By: /s/ Ezequiel Sirotinsky By: /s/ Joao Manuel
    Ezequiel Sirotinsky, Chief Financial Officer Joao Manuel, Chief Executive Officer
    (principal financial and accounting officer) (principal executive officer)

     

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 89

     




    INDEPENDENT AUDITORS’ REPORT OF
    REGISTERED PUBLIC ACCOUNTING FIRM

    To the Shareholders of
    Petaquilla Minerals Ltd.

    We have audited the accompanying consolidated financial statements of Petaquilla Minerals Ltd., which comprise the consolidated statements of financial position as at May 31, 2012 and 2011, and June 1, 2010, and the consolidated statements of operations and comprehensive income (loss), changes in equity (deficiency) and cash flows for the years ended May 31, 2012 and 2011, and a summary of significant accounting policies and other explanatory information.

    Management's responsibility for the consolidated financial statements

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

    Auditors’ responsibility

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

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

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 90

     




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

    Opinion

    In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Petaquilla Minerals Ltd. as at May 31, 2012 and 2011, and June 1, 2010, and its financial performance and its cash flows for the years ended May 31, 2012 and 2011 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

    Other matter

    We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Petaquilla Minerals Ltd.'s internal control over financial reporting as of May 31, 2012, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 29, 2012 expressed an unqualified opinion on Petaquilla Minerals Ltd.'s internal control over financial reporting.

    Vancouver, Canada, Chartered Accountants
    August 29, 2012.  

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 91

     




    REPORT OF INDEPENDENT REGISTERED
    PUBLIC ACCOUNTING FIRM

    To the Shareholders of
    Petaquilla Minerals Ltd.

    We have audited Petaquilla Minerals Ltd.’s internal control over financial reporting as of May 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Petaquilla Minerals Ltd.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

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

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

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 92

     




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

    In our opinion, Petaquilla Minerals Ltd.’s maintained, in all material respects, effective internal control over financial reporting as of May 31, 2012, based on the COSO criteria.

    Other matter

    We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position as at May 31, 2012 and 2011 and June 1, 2010 and the consolidated statements of operations and comprehensive income (loss), changes in equity (deficiency) and cash flows for the years ended May 31, 2012 and 2011 of Petaquilla Minerals Ltd. and our report dated August 29, 2012 expressed an unqualified opinion thereon.

    Vancouver, Canada, Chartered Accountants
    August 29, 2012.  

     

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 93

     



    PETAQUILLA MINERALS LTD.
    CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
    (Expressed in United States dollars)

     

      May 31, May 31, June 1,  
      2012 2011 2010  
        (Note 33) (Note 33)  
      ($) ($) ($)  
    Assets (Note 15)        
    Current assets        

    Cash and cash equivalents

    1,975,660 5,712,792 4,625,649  

    Short-term investments

    340,000 200,000 -  

    Receivables, prepaids and other (Notes 6 and 9)

    4,525,236 1,969,158 806,478  

    Inventories (Note 7)

    15,446,317 11,657,676 3,634,715  

    Assets held for distribution to owners (Notes 8 and 22)

    16,532,176 - -  
      38,819,389 19,539,626 9,066,842  
    Investments (Note 15) 2,300,000 2,400,000 -  
    Inventories (Note 7) 14,077,466 2,228,405 1,107,316  
    Other assets (Notes 9 and 11) 6,710,884 10,012,015 1,383,169  
    Exploration and evaluation assets (Note 12) 31,170,407 - -  
    Mineral property, plant and equipment (Note 13) 93,173,045 94,553,369 78,700,875  
     
    Total Assets 186,251,191 128,733,415 90,258,202  
     
    Liabilities        
    Current liabilities        

    Accounts payable and accrued liabilities (Notes 14 and 24)

    44,211,407 30,318,558 17,586,683  

    Current portion of long-term debt (Note 15)

    4,927,642 2,399,261 75,912,212  

    Current portion of other liabilities (Note 16)

    1,396,856 1,424,290 5,184,816  

    Current portion of deferred revenue (Note 17)

    14,216,977 9,246,437 -  

    Liabilities held for distribution to owners (Notes 8 and 22)

    15,841,613 - -  
      80,594,495 43,388,546 98,683,711  
    Long-term debt (Note 15) 5,515,608 12,290,550 520,464  
    Accounts payable (Note 14) - 1,866,667 -  
    Other liabilities (Note 16) 5,681,936 6,703,799 6,453,281  
    Share purchase warrants (Note 19) 499,826 11,064,020 5,030,904  
    Deferred revenue (Note 17) 26,750,484 33,390,472 -  
    Derivative obligation (Note 17) 217,000 - -  
    Provision for closure and reclamation (Note 18) 11,062,579 9,630,851 4,816,121  
      130,321,928 118,334,905 115,504,481  
     
    Shareholders’ equity (deficiency)        

    Equity (deficiency) attributed to shareholders of the

           

    Company

    48,454,407 7,891,354 (25,246,279 )

    Equity attributed to non-controlling interests

    7,474,856 2,507,156 -  
      55,929,263 10,398,510 (25,246,279 )
     
    Total liabilities and shareholders’ equity (deficiency) 186,251,191 128,733,415 90,258,202  

    Commitments and contingencies (Notes 28 and 30)
    Subsequent events (Note 32)

    On behalf of the Board:

    Richard Fifer, Director David Kaplan, Director

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

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 94

     



    PETAQUILLA MINERALS LTD.
    CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
    (Expressed in United States dollars)

     

      Year   Year  
      ended   ended  
      May 31,   May 31,  
      2012   2011  
          (Note 33)  
      ($)   ($)  
     
    Revenues (Notes 22 and 31) 94,297,396   71,708,685  
    Costs of operations        
    Production costs (Notes 22 and 24) (44,064,034 ) (39,157,086 )
    Depreciation and depletion (15,301,328 ) (12,510,346 )
      34,932,034   20,041,253  
    Expenses        

    General and administrative (Note 24)

    14,228,500   10,088,183  

    Donations and community relations

    1,542,860   1,707,190  

    Exploration and evaluation costs

    9,903,665   9,269,306  

    Share-based payments (Notes 19 and 24)

    514,799   919,856  

    Other operating expenses (Notes 17 and 19)

    -   4,385,816  
      (26,189,824 ) (26,370,351 )
     
    Earnings (loss) from operations 8,742,210   (6,329,098 )
     

    Finance income (expenses), net (Note 20)

    (2,174,462 ) (533,888 )

    Non-operating income (expenses) (Note 21)

    15,851,886   3,019,470  
      13,677,424   2,485,582  
     
    Net income (loss) 22,419,634   (3,843,516 )

    Net income (loss) attributed to:

           

    Shareholders of the Company

    20,626,200   (1,336,360 )

    Non-controlling interests

    1,793,434   (2,507,156 )
     
    Other comprehensive income (loss) (Note 11) (5,187,200 ) 449,572  
     
    Net Comprehensive income (loss) 17,232,434   (3,393,944 )

    Net Comprehensive income (loss) attributed to:

           

    Shareholders of the Company

    15,439,000   (886,788 )

    Non-controlling interests

    1,793,434   (2,507,156 )
     
    Basic earnings (loss) per share (Note 23) 0.10   (0.01 )
    Diluted earnings (loss) per share (Note 23) 0.10   (0.01 )
     

    Weighted average number of common shares outstanding - basic (Note 23)

    201,472,561   146,404,334  

    Weighted average number of common shares outstanding - diluted (Note 23)

    206,560,782   146,404,334  

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

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 95

     



    PETAQUILLA MINERALS LTD.
    CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIENCY)
    (Expressed in United States dollars)

     

      Number of
    Common
    Shares
        Share
    Capital



    ($)
      Treasury
    Shares (1)



    ($)
      Other Reserves




    ($)
      Share
    Purchase
    Warrants


    ($)
      Accumulated
    Other
    Comprehensive
    Loss

    ($)
      Accumulated
    Deficit



    ($)
        Attributed to
    Shareholders
    of the
    Company

    ($)
        Non-
    controlling
    Interests


    ($)
        Total Equity




    ($)
     
               

    Balance at June 1, 2010 (Note 33)

    125,281,951   102,535,295   (122,193 ) 16,190,925   1,319,147   - (145,169,453 )   (25,246,279 )   -   (25,246,279 )

    Non-brokered private placement, net of finders’ fees

    32,000,000   12,273,198   -   -   -   - -     12,273,198     -   12,273,198  

    Finders’ options issued

    -   -   -   -   1,031,232   - -     1,031,232     -   1,031,232  

    Issue of shares on exercise of share options

    593,750   225,614   -   -   -   - -     225,614     -   225,614  

    Reclassification of grant date fair value on exercise of share options

    -   276,184   -   (276,184 ) -   - -     -     -   -  

    Issue of shares on exercise of share purchase warrants

    18,553,800   11,988,810   -   -   -   - -     11,988,810     -   11,988,810  

    Reclassification of grant date fair value on exercise of share purchase warrants

    -   13,522,125   -   -   (922,103 ) - -     12,600,022     -   12,600,022  

    Share-based payments

    -   -   -   919,857   -   - -     919,857     -   919,857  

    Net loss

    -     -   -   -   -   -   (3,393,944 )   (5,901,100 )   2,507,156     (3,393,944 )

     

           

    Balance at May 31, 2011 (Note 33)

    176,429,501     140,821,226   (122,193 ) 16,834,598   1,428,276   -   (148,563,397 )   7,891,354     2,507,156     10,398,510  

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

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 96

     



    PETAQUILLA MINERALS LTD.
    CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIENCY)
    (Expressed in United States dollars)

     

      Number of
    Common
    Shares
        Share
    Capital



    ($)
      Treasury
    Shares (1)



    ($)
      Other Reserves




    ($)
      Share
    Purchase
    Warrants


    ($)
      Accumulated
    Other
    Comprehensive
    Loss

    ($)
      Accumulated
    Deficit



    ($)
        Attributed to
    Shareholders
    of the
    Company

    ($)
      Non-
    controlling
    Interests


    ($)
        Total Equity




    ($)
     
                                                   

    Balance at June 1, 2011

    176,429,501     140,821,226   (122,193 ) 16,834,598   1,428,276   -   (148,563,397 )   7,891,354   2,507,156     10,398,510  

    Issue of shares on acquisition of Iberian Resources Corp. (“Iberian”) (Note 11)

    44,635,225     34,784,409   -   -   -   -   -     34,784,409   -     34,784,409  

    Issue of share options on acquisition of Iberian (Note 11)

    -     -   -   1,905,969   -   -   -     1,905,969   -     1,905,969  

    Issue of share purchase warrants on acquisition of Iberian (Note 11)

    -     -   -   -   785,974   -   -     785,974   -     785,974  

    Treasury shares on acquisition of Iberian (Note 11)

    -     -   (8,634,926 ) -   -   -   -     (8,634,926 ) -     (8,634,926 )

    Treasury shares on dilution of investment in Azuero (Note 10)

    -     -   (1,420,255 ) (1,754,011 ) -   -   3,174,266     (3,174,266 ) 3,174,266     -  

    Issue of shares on acquisition of 31% of Minera Belencillo

    175,438     101,430   -   -   -   -   -     101,430   -     101,430  

    Issue of shares on exercise of share options

    300,000     44,373   -   -   -   -   -     44,373   -     44,373  

    Reclassification of grant date fair value on exercise of share options

    -     178,159   -   (178,159 ) -   -   -     -   -     -  

    Issue of shares on exercise of share purchase warrants

    354,867     65,050   -   -   -   -   -     65,050   -     65,050  

    Reclassification of grant date fair value on exercise of share purchase warrants

    -     212,361   -   -   (212,361 ) -   -     -   -     -  

    Shares forfeited

    (31,250 )   (41,655 ) -   15,342   -   -   -     (26,313 ) -     (26,313 )

    Treasury shares repurchased

    -   -   (1,242,446 ) -   -   -   -     (1,242,446 ) -     (1,242,446 )

    Share-based payments

    -     -   -   514,799   -   -   -     514,799   -     514,799  

    Cumulative translation adjustment from translation of foreign subsidiaries (Note 11)

    -     -   -   -   -   (5,187,200 ) -     (5,187,200 ) -     (5,187,200 )

    Net income

    -     -   -   -   -   -   22,419,634     20,626,200   1,793,434     22,419,634  

     

                                                 

    Balance at May 31, 2012

    221,863,781     176,165,353   (11,419,820 ) 17,338,538   2,001,889   (5,187,200 ) (122,969,497 )   48,454,407   7,474,856     55,929,263  

    (1) May 31, 2012 – 17,248,111 common shares (May 31, 2011 - 44,200 common shares)

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

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 97

     




    PETAQUILLA MINERALS LTD.
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    (Expressed in United States dollars)

     

      Year   Year  
      ended   ended  
      May 31,   May 31,  
      2012   2011  
      ($)   ($)  
    Cash flows from Operating Activities        

    Net comprehensive income (loss) for the year

    22,419,634   (3,843,516 )

    Items not affecting cash:

           

    Depreciation and depletion

    15,301,328   12,510,346  

    Depreciation included in general and administrative expenses

    656,284   345,889  

    Share-based payments

    514,799   919,856  

    Gain on disposal and dilution

    -   (4,793,737 )

    Loss from equity investment

    485,104   204,499  

    Gain resulting from Azuero exchanging the shares of Iberian for shares in Petaquilla, attributed to non-controlling interest

    (2,146,356 ) -  

    Unrealized loss on secured notes and convertible secured notes

    505,523   5,464,853  

    Unrealized (gain) loss on derivatives

    (14,696,157 ) 2,019,811  

    Finance expenses

    2,034,960   581,331  

    Amortization of financing fee and deferred revenue

    (9,107,952 ) (2,268,567 )

    Increase in community support obligation

    278,782   1,495,750  

    Unrealized foreign exchange gain

    (67,327 ) -  

    Non-cash gain on expiry of deferred service contract

    -   (4,002,438 )

    Change in non-cash working capital (Note 29)

    (1,890,870 ) 1,252,016  

    Payment of community support obligation

    (1,440,000 ) (1,200,000 )

    Cash advances from commodity forward contracts (Note 17)

    10,848,000   43,200,000  

    Finance expense paid

    (2,026,958 ) (7,758,123 )

    Finance income received

    196,541   -  
     

    Net cash provided by operating activities

    21,865,335   44,127,970  
    Cash flows from Financing Activities        

    Proceeds from exercise of share options and warrants

    109,423   12,214,428  

    Proceeds from issue of shares, net of share issuance costs

    -   29,922,006  

    Repurchase of treasury shares

    (1,242,446 ) -  

    Payment of finance lease obligations

    (2,692,503 ) (4,105,717 )

    Repayment of long-term debt

    (482,485 ) (74,987 )

    Proceeds from bank loans

    4,371,462   2,235,520  

    Gross proceeds from convertible loan

    6,042,296   -  

    Repayment of secured notes

    (7,312,245 ) (62,961,696 )
     
    Net cash used in financing activities (1,206,498 ) (22,770,446 )
     
    Cash flows from Investing Activities        

    Acquisition of Iberian, net of cash acquired

    (213,336 ) -  

    Change in restricted cash

    141,208   311,617  

    Purchase of investments

    (40,000 ) (2,600,000 )

    Deposits on equipment

    (4,997,526 ) (2,693,356 )

    Investment in exploration and evaluation assets

    (394,531 ) -  

    Investment in mineral properties, plant & equipment

    (18,913,462 ) (15,289,160 )
     
    Net cash used in investing activities (24,417,647 ) (20,270,899 )
     
    Impact of exchange rate changes on cash and cash equivalents 21,678   518  
     
    Change in cash and cash equivalents (3,737,132 ) 1,087,143  
    Cash and cash equivalents, beginning of year 5,712,792   4,625,649  
     
    Cash and cash equivalents, end of year 1,975,660   5,712,792  

    Supplemental cash flow information is contained in Note 29.

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

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 98

     



    PETAQUILLA MINERALS LTD.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE YEAR ENDED MAY 31, 2012 and 2011
    (Expressed in United States dollars)

     

    1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS

    Petaquilla Minerals Ltd. (“the Company” or “Petaquilla”), an entity incorporated and domiciled in British Columbia, Canada, is engaged in the mining and mineral exploration of gold-bearing mineral properties in Panama and other countries. Its Molejon Project in Panama is operated under the rules and regulations of Ley Petaquilla No. 9 of February 26, 1997. The Company commenced commercial production at its Molejon Gold Project on January 8, 2010, located on its 842 square kilometres of concessions in the Province of Colon, Panama. In addition, as of September 1, 2011 the Company has acquired 100% of the Lomero-Poyatos Project located in the northeast part of the Spanish/Portuguese (Iberian) Pyrite Belt and several other exploration licenses in Iberia.

    The Company is listed on the Toronto Stock Exchange under the symbol PTQ.TO. The Company’s registered office is at #1230 – 777 Hornby Street, Vancouver, BC, Canada, V6Z 1S4.

    These consolidated financial statements have been prepared on a going concern basis which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The operating cash flow and profitability of the Company are affected by various factors including: the amount of gold produced and sold, the market price of gold, operating costs, interest rates, environmental costs, and the level of expenditures related to exploration activity, and labour costs. Cash flows and profitability may also be impacted should the business be disrupted based on environmentalist activities or political unrest. The Company seeks to manage the risks associated with its business; however, many of the factors affecting these risks are beyond the Company’s control.

    2. BASIS OF PREPARATION AND FIRST TIME ADOPTION OF IFRS

    These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles as set out in the Handbook of the Canadian Institute of Chartered Accountants (“CICA Handbook”). In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards (“IFRS”), and require publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011. Accordingly, the Company has commenced reporting on this basis in the consolidated financial statements. The term “Canadian GAAP” refers to Canadian GAAP before the adoption of IFRS.

    The consolidated financial statements have been prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”). Subject to certain transition elections disclosed below, the accounting policies have been consistently applied in our opening IFRS balance sheet as at June 1, 2010 and throughout all periods presented, as if these policies had always been in effect. Note 33 discloses the impact of the transition to IFRS on the statements of financial position, operations and comprehensive income (loss) and cash flows, including the nature and effect of significant changes in accounting policies from those used in the consolidated financial statements for the year ended May 31, 2011.

    The policies applied in the consolidated financial statements are presented in Note 3 and are based on IFRS issued and outstanding as of August 28, 2012, the date the Board of Directors approved the consolidated financial statements.

    All amounts are presented in US dollars unless otherwise specified.

    3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    This summary of significant accounting policies described below has been applied consistently to all periods presented in these consolidated financial statements, unless otherwise stated. The exemptions we have taken in applying IFRS for the first time are set out in Note 33.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 99

     



    PETAQUILLA MINERALS LTD.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE YEAR ENDED MAY 31, 2012 and 2011
    (Expressed in United States dollars)

    Basis of preparation

    These consolidated financial statements have been prepared on the historical cost basis except for derivatives and certain other financial assets and liabilities which are measured at fair value. In addition, these consolidated financial statements have been prepared using the accrual basis of accounting, except for cash flow information.

    Basis of consolidation

    These consolidated financial statements include the accounts of the Company and all of its subsidiaries. Subsidiaries are entities controlled by the Company. Control exists when the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits for its activities. Subsidiaries are included in the consolidated financial results of the Company from the effective date of incorporation up to the effective date of disposal or loss of control. The principal subsidiaries of the Company and their geographic locations as at May 31, 2012 were as follows:

    Subsidiary Location Ownership
        Interest
     
    Petaquilla Gold, S.A. Panama 100%
      Petaquilla Minerals, S.A. Panama 100%
    Panama Desarrollo De Infraestructuras, S.A. Panama 100%
    Corporacion de Recursos Iberia S.L. Spain 100%
    Almada Mining S.A. Portugal 100%
    Azuero Mining Development, S.A. Panama 30%
         

    On June 2, 2011, the Company’s subsidiary, PDI entered into a 40% Joint Venture arrangement for the construction of the Molejon by-pass road for a third party (Note 22). The joint venture is a jointly controlled operation and as such Petaquilla accounts for the assets it controls and the liabilities it incurs, the expenses it incurs and the share of income that it earns from the sale of goods or services by the joint venture.

    On March 8, 2012, the Company entered into an agreement with Madison Minerals Inc. and its Panamanian subsidiary, Madison Enterprises (Latin America), S.A. (collectively referred to as “Madison”) to acquire Madison’s 31% interest in Compañia Minera Belencillo, S.A. (“Minera Belencillo”), an entity formed in Panamá to oversee and manage exploration projects within the Belencillo concession. The Company issued 175,438 common shares to Madison on March 8, 2012 and has committed to issue a further 250,000 common shares upon commencement of commercial production at the Belencillo concession. As a result of the additional 31% interest, Minera Belencillo became a 100% wholly-owned subsidiary of the Company.

    Non-controlling interest in the net assets of consolidated subsidiaries are identified separately from the Company’s equity. Non-controlling interest consists of the non-controlling interest at the date of the original issuance of shares, plus the non-controlling interest’s share of changes in equity since that date.

    Intercompany transactions and balances with subsidiaries have been eliminated. Where necessary, adjustments are made to the financial statements of subsidiaries, associates and jointly controlled entities, prior to consolidation, to bring their accounting policies in line with those used by the Company.

    The Company’s significant accounting policies are as follows:

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 100

     



    PETAQUILLA MINERALS LTD.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE YEAR ENDED MAY 31, 2012 and 2011
    (Expressed in United States dollars)

    Revenue recognition

    Revenue from sale of metals:
    Revenue from the sale of metals is recognized when the significant risks and rewards of ownership have passed to the buyer, it is probable that economic benefits associated with the transaction will flow to the Company, the sales price can be measured reliably, the Company has no significant continuing involvement and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Refining and treatment charges are netted against revenues for sales of metals. Prior to commercial production, revenues and related expenses are recognized as a net decrease or increase to Mineral Properties, respectively. Revenue from the sale of bi-product from the extraction of gold is offset against production costs.

    The Company received a prepayment from Deutsche Bank for the sale of 66,650 ounces of gold and 525,500 ounces of silver to be produced and delivered to September 2015 and February 2017 respectively (Note 17). The prepayment, which is accounted for as deferred revenue, is recognized as revenue based on the settlement of delivered ounces in the applicable period.

    Revenue from construction contracts:
    The Company’s services are generally sold based on service orders or contracts with customers that include fixed or determinable prices based on daily, hourly, or per-job rates. If the outcome of such a contract can be reliably measured, revenue associated with the construction contract is recognized by reference to the stage of completion of the contract activity at year end (the percentage of completion method). The outcome of a construction contract can be estimated reliably when:

    • the total contract revenue can be measured reliably;

    • it is probable that the economic benefits associated with the contract will flow to the entity;

    • the costs to complete the contract and the stage of completion can be measured reliably; and

    • the contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared with prior estimates.

    When the outcome of a construction cannot be estimated reliably (principally during early stages of a contract), contract revenue is recognized only to the extent of costs incurred that are expected to be recoverable. In applying the percentage of completion method, revenue recognized corresponds to the total contract revenue (as defined below) multiplied by the actual completion rate based on the proportion of total contract costs (as defined below) incurred to date and the estimated costs to complete.

    Contract revenue corresponds to the initial amount of revenue agreed in the contract and any variations in contract work, claims and incentive payments to the extent that it is probable that they will result in revenue, and they are capable of being reliably measured. Contract costs include costs that relate directly to the specific contract and costs that are attributable to contract activity in general and can be allocated to the contract. Costs that relate directly to a specific contract comprise: site labour costs (including site supervision); costs of materials used in construction; depreciation of equipment used on the contract; costs of design, and technical assistance that is directly related to the contract.

    Cash and cash equivalents

    Cash and cash equivalents include cash and short-term highly liquid investments, with original maturities of three months or less, that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 101

     



    PETAQUILLA MINERALS LTD.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE YEAR ENDED MAY 31, 2012 and 2011
    (Expressed in United States dollars)

    Discontinued operations

    A discontinued operation is a component of the Company that either has been disposed of, or is classified as held for sale, and: (i) represents a separate major line of business or geographical area of operations; (ii) is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or (iii) is a subsidiary acquired exclusively with a view to resell.

    A component of the Company comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company.

    Assets and liabilities held for distribution to owners

    A non-current asset or disposal group of assets and liabilities (“disposal group”) is classified as held for distribution to owners when it meets the following criteria:

    (i)

    The non-current asset or disposal group is available for immediate distribution in its present condition subject only to terms that are usual and customary for distributions of such assets or disposal groups; and

     

    (ii)

    The distribution of the non-current asset or disposal group is highly probable. For the distribution to be highly probable:

     

    a.

    Actions to complete the distribution must have been initiated and should be expected to be completed within one year from the date of classification; and

        b.

    Actions required to complete the distribution should indicate that it is unlikely that significant changes to the distribution will be made or that the distribution will not be completed.

    Inventories and stockpiled ore

    Finished goods, work-in-process, and stockpiled ore are valued at the lower of average production cost and net realizable value. Net realizable value is calculated as the estimated price at the time of sale, based on prevailing and long-term metal prices, less estimated future production costs to convert the inventories into saleable form and estimated costs to sell.

    Ore extracted from the mine is stockpiled and subsequently processed into finished goods. Stockpiled ore that is not anticipated to be processed within one year is classified as long-term. Work-in-process inventory represents materials that are currently in the process of being converted to finished goods. Production costs are capitalized and include the cost of raw materials, direct labour, mine-site overhead expenses, amortization and depletion of mining assets, plus applicable refining costs and associated royalties.

    Supplies are valued at average cost. In the event that the net realizable value of the finished product, the production of which the supplies are being held for use in, is lower than the expected cost of the finished product, the supplies are written down to net realizable value.

    Exploration and evaluation expenditures

    Exploration and evaluation expenditures comprise costs that are directly attributable to:

    • Researching and analyzing existing exploration data;

    • Conducting geological studies, exploratory drilling and sampling;

    • Examining and testing extraction and treatment methods; and

    • Activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 102

     



    PETAQUILLA MINERALS LTD.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE YEAR ENDED MAY 31, 2012 and 2011
    (Expressed in United States dollars)

    Acquisition costs for exploration and evaluation stage properties are capitalized. Subsequent to completion of a positive economic analysis on a mineral property, capitalized acquisition costs are reclassified to Mineral Properties.

    Exploration and evaluation expenditures, including exploratory drilling and related expenditures, are capitalized as mineral property in the accounting period the expenditure is incurred when management determines that there are measured and indicated resources that would indicate a project is economically viable, the decision to proceed with development has been approved and the necessary permits are in place for its development. All other exploration and evaluation expenditures are expensed as incurred.

    The carrying values of capitalized amounts are reviewed annually, or when indicators of impairment are present.

    Mineral properties, plant and equipment

    Mineral properties are stated at cost less accumulated amortization / depletion and accumulated impairment charges. The costs associated with mineral properties include direct costs, acquired interests in production, development and exploration stage properties representing the fair value at the time they were acquired. Mineral properties include the capitalized costs of associated mineral properties after acquisition of the land.

    Stripping and pre-stripping costs are recorded at cost. Pre-stripping expenditures are capitalized until the commencement of production. Stripping costs incurred to expand operating capacity, or to expose new ore bodies or develop mine areas in advance of current production, are capitalized. Stripping costs related to current period production are charged to operations as incurred. When the property is placed into production, those capitalized costs are included in the calculation of the amortization of mine development costs. Property acquisition, stripping costs and tailings ponds are amortized by the units-of-production method based on estimated recoverable reserves.

    Plant and plant equipment is recorded at cost less accumulated amortization and amortized on a straight-line basis over the estimated economic useful life of the assets, which ranges from 1 to 8 years.

    Financial instruments

    The Company’s financial instruments consist of cash and cash equivalents, receivables, restricted cash, investments, accounts payable and accrued liabilities, obligations under finance leases, community support obligations, long-term debt, secured notes, convertible loans, convertible secured notes and share purchase warrants.

    All financial assets and liabilities are recognized when the Company becomes a party to the contract creating the item. On initial recognition, financial instruments are measured at fair value, which includes transaction costs. Measurement in subsequent periods depends on whether the financial instrument has been classified as “fair-value-through-profit and loss” (“FVTPL”), “available-for-sale”, “held-to-maturity”, “loans and receivables” or “other financial liabilities”. The classification depends on the nature and purpose of the financial instrument and is determined at the time of initial recognition. Financial liabilities are classified as either FVTPL or “other financial liabilities”. Financial liabilities are classified as FVTPL when the financial liability is either “held-for-trading” or it is designated as FVTPL.

    Financial assets and financial liabilities classified as FVTPL are measured at fair value, with changes in those fair values recognized in net earnings (loss). Financial assets classified as “available for sale” are measured at fair value, with changes in those fair values recognized in other comprehensive income. Financial assets classified as “held-to-maturity”, “loans and receivables” and “other financial liabilities” are measured at amortized cost.

    Cash and cash equivalents and restricted cash are classified as held for trading and are measured at fair value. Advances to suppliers and receivables, which consist of refundable government value added taxes and travel advances, are classified as loans and receivables.

    Accounts payable and accrued liabilities, obligations under finance leases, community support obligations and long-

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 103

     



    PETAQUILLA MINERALS LTD.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE YEAR ENDED MAY 31, 2012 and 2011
    (Expressed in United States dollars)

    term debt are classified as other financial liabilities.

    Secured notes, convertible secured notes, including the conversion feature in the convertible secured notes, and share purchase warrants are classified as FVTPL.

    Derivative instruments

    Derivative instruments, including embedded derivatives, are recorded at fair value through profit or loss and accordingly are recorded at fair value on the date of the statement of financial position. Unrealized gains and losses on derivatives held for trading are recorded as part of non-operating income (expenses) depending on the nature of the derivative. Fair value of derivative instruments are determined using valuation techniques with assumptions based on market conditions existing on the reporting date. Derivatives embedded in non-derivative contracts are recognized separately unless they are closely related to the host contract.

    Compound instruments

    The Company recognizes separately the components of a financial instrument that creates a financial liability of the Company and grants an option to the holder of the instrument to convert it into an equity instrument of the Company (provided the conversion option meets the definition of equity). An option to convert into an equity instrument is classified as a financial liability when either the holder or the issuer of the option has the choice over how it is settled. At the date of issue of the Convertible Secured notes, the fair value of the liability component was estimated using prevailing market interest rates for similar instruments. As the equity component is not fixed, the conversion feature is a financial liability classified as FVTPL.

    Financial and derivative instruments, including embedded derivatives, are recorded at fair value on initial recognition and at each subsequent reporting period. Any gains or losses arising from changes in fair value on derivatives are recorded in profit or loss for the period. Both the Secured and Convertible Secured Notes included embedded derivatives which cannot be separately valued and as such the entire agreements are considered to be classified as FVTPL and adjusted to their fair value at the end of each reporting period. All transaction costs related to these instruments were expensed in the period in which they were incurred.

    The Company’s share purchase warrants with Canadian dollar exercise prices are considered derivative liabilities and accordingly, they are recorded at fair value at each reporting period, with the gains or losses recorded in profit or loss for the period. The share purchase warrants attached to the Secured Notes were originally valued and recorded as equity on the issuance of the Notes; however they are now classified as FVTPL. All transaction costs related to these share purchase warrants were expensed in the period they were incurred.

    Provision for closure and reclamation

    The Company records a liability for the estimated future costs of reclamation and closure of operating mines, including statutory, legal or constructive obligations, discounted to net present value. The present value is determined using the pre-tax risk-free interest rate applicable for maturity periods that approximate the expected timing of future cash flows. Estimates of future costs represent management’s best estimate of expected future cash flows which incorporate assumptions on the effects of inflation and the effects of country and other specific risks associated with the related assets. The value of the obligation is accreted over time to reflect the unwinding of the discount, with the accretion expense included in finance costs.

    The estimated present value of the closure and reclamation cost obligation is re-measured at each period end for changes in estimates and circumstances. Changes in estimates and circumstances include changes in legal or regulatory requirements, increased obligations arising from additional mining and exploration activities, changes to cost estimates and changes to the pre-tax risk-free interest rate. Closure and reclamation cost obligations are recorded with a corresponding increase to the carrying amounts of related assets. Changes to the obligations are also accounted for as changes in the carrying amounts of related assets, except where a reduction in the obligation is

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 104

     



    PETAQUILLA MINERALS LTD.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE YEAR ENDED MAY 31, 2012 and 2011
    (Expressed in United States dollars)

    greater than the carrying amount of the related asset, in which case the related asset is reduced to nil and the remaining adjustment is recorded in earnings. Changes to the carrying amounts of related assets result in adjustments to future depreciation and depletion expense.

    Segment information

    The Company has determined that it operates in one reporting segment, the exploration, development and operation of mineral properties. The chief operating decision maker for the Company is determined to be the Chief Executive Officer of the Company who reviews the financial and operational performance of the reporting segment. Operation of mineral properties and extraction of gold occurs in Panama while exploration occurs in Panama and the Iberian Peninsula. All revenue and inventory in fiscal 2012 and 2011 were related to the reporting segment in Panama.

    Impairment of non-current assets

    At each reporting date, the Company reviews and evaluates its non-current assets, including Mineral Properties, Plant and Equipment, to determine whether there is an indication that those assets may be impaired. If any such indication exists, the recoverable amount of the relevant asset is estimated in order to determine the extent of impairment, if any.

    The recoverable amount of a mine site is the greater of its fair value less costs to sell and value in use. If the fair value less costs to sell of a mine site is not reliably determinable, the recoverable amount is determined to be the mine site’s value in use. The value in use is based on estimated future pre-tax cash flows for the mining properties, discounted to their present value using the pre-tax interest rate which reflects the current market assessment of the time value of money. Estimated cash flows are based on expected future production, metal selling prices, operating costs and capital costs. If the recoverable amount of a mine site is estimated to be less than its carrying amount, the carrying amount is reduced to its recoverable amount.

    Impairment losses are recognized in earnings in the period incurred. The allocation of impairment losses, if any, for a particular mine site to its mining property, plant and equipment is determined based on the relative book values of these assets at the date of impairment. When an impairment loss reverses in a subsequent period, the carrying amount of the related asset is increased to the revised estimate of recoverable amount to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset previously. Reversal of impairment losses are recognized in earnings in the period the reversal occurred.

    Share-based payments

    Share-based payments include share options granted to employees, officers, directors and non-employee consultants. The Company applies the fair value method of accounting for all share option awards. Under this method, the Company recognizes a share-based payments expense for all share options based on the fair value of the options on the date of grant using the Black-Scholes option pricing model and the estimated number of share options that will eventually vest. The fair value of the options is expensed over the vesting periods of the options with a corresponding increase to equity. Changes to the estimated number of share options that will eventually vest are revised when actual forfeitures differ from previous estimates. Options granted with graded vesting schedules are accounted for as separate grants with different vesting periods and fair values. Compensation cost attributable to awards to employees is measured at fair value at the grant date and recognized over the vesting period.

    Income taxes

    Income tax expense consists of current and deferred tax expense and is recognized in profit or loss. Current tax expense for each taxable entity is based on the local taxable income at the local statutory tax rate, enacted or substantively enacted, at the balance sheet date, adjusted for amendments to tax payable with regards to previous years.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 105

     



    PETAQUILLA MINERALS LTD.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE YEAR ENDED MAY 31, 2012 and 2011
    (Expressed in United States dollars)

    Deferred tax assets and liabilities are recognized for deferred tax consequences attributable to unused tax loss carry forwards, unused tax credits and differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled.

    The effect on deferred tax assets and liabilities of the change in tax rates is recognized in profit or loss in the period that substantive enactment occurs.

    A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. To the extent that the Company does not consider it probable that a deferred tax asset will be recovered, the deferred tax asset is reduced.

    Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax against current liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

    Earnings (loss) per share

    The Company uses the weighted average number of common shares issued and outstanding during the period in its calculation of earnings (loss) per share (“EPS”). Diluted earnings (loss) per share is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of shares outstanding for the effects of potential dilutive common shares, which comprise share options granted to employees and warrants. The dilutive effect of share options and warrants assumes that the proceeds to be received on the exercise of share options and warrants are applied to repurchase common shares at the average market price for the period. Share options and warrants are included in the calculation of dilutive EPS only to the extent that the market price of the common shares exceeds the exercise price of the share options or warrants, except where such conversion would be anti-dilutive. In a period when net losses are incurred, potentially dilutive stock options, warrants and the conversion feature on the convertible secured notes are excluded from the loss per share calculations, as the effect would be anti-dilutive.

    Foreign currency translation and transactions

    The functional currency of the parent entity and the presentation currency of the consolidated financial statements is the United States dollar (“U.S. dollar”). The functional currency of the Company’s Panama subsidiaries and Iberian Resources Corp. is also the U.S. dollar, while the functional currency of Iberian’s subsidiaries is the Euro. The functional currency of each entity is determined after consideration of the primary economic environment of the entity. Transactions denominated in foreign currencies have been translated into U.S. dollars at the approximate rate of exchange prevailing at the time of the transaction. Monetary assets and liabilities denominated in foreign currencies have been translated into U.S. dollars at the balance sheet date exchange rate. Foreign currency differences are recognized in comprehensive loss in the same period in which they arise.

    Borrowing costs

    Borrowing costs directly attributable to the development, construction and acquisition of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use, are capitalized to the cost of those assets until such time as the assets are substantially ready for their intended use. Qualifying assets include the costs of developing mineral properties.

    Borrowing costs are capitalized at the rate of interest applicable to the specific borrowings financing the assets under construction or, where financed through general borrowings, at a capitalization rate representing the average interest rate on such borrowings.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 106

     



    PETAQUILLA MINERALS LTD.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE YEAR ENDED MAY 31, 2012 and 2011
    (Expressed in United States dollars)

    All other borrowing costs are expense as incurred.

    Non-controlling interest

    Non-controlling interests exist in less than wholly-owned subsidiaries of the Company and represent the outside interest’s share of the carrying value of the subsidiaries. When the subsidiary company issues its own shares to outside interests, a dilution gain or loss arises as a result of the difference between the Company’s share of the proceeds and the carrying value of the underlying equity. If the change in ownership does not result in loss of control, it is accounted for as an equity transaction.

    Interest in joint ventures

    A joint venture can take the form of a jointly controlled entity, jointly controlled operation or jointly controlled asset. All joint ventures involve a contractual arrangement that establishes joint control. A jointly controlled entity is an entity in which the Company shares joint control over the strategic, financial and operating decisions with one or more venture partners through the establishment of a corporation, partnership or other entity. A jointly controlled operation involves the use of the assets and resources of the venture partners rather than the establishment of a corporation, partnership or other entity. The operation incurs its own expenses and liabilities and raises its own finances. A jointly controlled asset involves joint control of one or more of the assets acquired or contributed for the purpose of the joint venture. Each venture partner takes on a share of the output from the assets and bears an agreed share of the expenses.

    4. NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED

    Certain new standards, interpretations, amendments and improvements to existing standards were issued by the International Accounting Standards Board (“IASB”) or International Financial Reporting Interpretations Committee (“IFRIC”). The Standards impacted that are applicable to the Company are as follows:

    Financial instruments

    IFRS 9, Financial Instruments (“IFRS 9”) was issued by IASB in October 2010 and will replace IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”). IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. There are two measurement categories: amortized cost and fair value. All equity instruments are measured at fair value. A debt instrument is at amortized cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. Otherwise it is at fair value through profit or loss.

    In December 2011, the effective date of IFRS 9 was deferred to years beginning on or after January 1, 2015. The Company is currently evaluating the impact of this standard.

    Consolidation accounting

    IFRS 10, Consolidated Financial Statements (“IFRS 10”), was issued in May 2011 and will supersede the consolidation requirements in SIC-12, Consolidation – Special Purpose Entities (“SIC-12”), and IAS 27, Consolidated and Separate Financial Statements (“IAS 27”), effective for annual periods beginning on or after January 1, 2013, with early application permitted. IFRS 10 builds on existing principles by identifying the concept of control as a determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard also provides additional guidance to assist in the determination of control where this is difficult to assess. The Company is currently evaluating the impact of this standard.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 107

     



    PETAQUILLA MINERALS LTD.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE YEAR ENDED MAY 31, 2012 and 2011
    (Expressed in United States dollars)

    Joint ventures

    IFRS 11, Joint Arrangements (“IFRS 11”), was issued in May 2011 and will supersede existing IAS 31, Joint Ventures (“IAS 31”) effective for annual periods beginning on or after January 1, 2013, with early application permitted. IFRS 11 provides for the accounting of joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form (as is currently the case). The Standard also eliminates the option to account for jointly controlled entities using the proportionate consolidation method. The Company is currently evaluating the impact of this standard.

    Interests in other entities

    IFRS 12, Disclosure of Interests in Other Entities (“IFRS 12”), was issued in May 2011 and is a new and comprehensive standard on disclosure requirements for all forms of interest in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. The Company is currently evaluating the impact of this standard.

    Fair value measurement

    IFRS 13, Fair Value Measurements (“IFRS 13”) was issued in May 2011 and sets out, in a single IFRS, a framework for measuring fair value. IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This definition of fair value emphasizes that fair value is a market-based measurement, not an entity specific measurement. In addition, IFRS 13 also requires specific disclosures about fair value measurement. IFRS 13 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. The Company is currently evaluating the impact of this standard.

    Other comprehensive income

    IAS 1, Presentation of Items of Other Comprehensive Income (“OCI”) (“IAS 1”), was revised in June 2011 to change the disclosure of items presented in OCI, including a requirement to separate items presented in OCI into two groups based on whether or not they may be recycled to profit or loss in the future. The revision is effective for annual periods beginning on or after July 1, 2012 with early application permitted. The Company is currently evaluating the impact of this standard.

    Stripping costs

    IFRIC 20, Stripping Costs in the Production Phase of a Mine (“IFRIC 20”) was issued in October 2011. This interpretation provides guidance on the accounting for the costs of stripping activity in the production phase when two benefits accrue to the entity: usable ore that can be used to produce inventory and improved access to further quantities of material that will be mined in future periods. IFRIC 20 is applicable for annual periods beginning on or after January 1, 2013 with early adoption permitted. The Company is currently evaluating the impact of this standard.

    5. CRITICAL JUDGEMENTS AND USE OF ESTIMATES

    The preparation of consolidated financial statements in accordance with IFRS requires that the Company’s management make judgements and estimates and form assumptions that affect the amounts in the consolidated financial statements and related notes to those financial statements. Actual results could differ from those estimates. Judgements, estimates and assumptions are reviewed on an ongoing basis based on historical experience and other factors that are considered to be relevant under the circumstances. Revisions to judgements, estimates and assumptions are accounted for prospectively.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 108

     



    PETAQUILLA MINERALS LTD.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE YEAR ENDED MAY 31, 2012 and 2011
    (Expressed in United States dollars)

    Management has made critical judgements in the process of applying the Company’s accounting policies. Those that have the most significant effect on the amount recognized in the consolidated financial statements include, but are not limited to, the economic viability of mineral properties, net realizable value of stockpiled inventories, the functional currency of the Company and its subsidiaries and the appropriate classification of financial assets and liabilities on initial recognition and at subsequent dates.

    Significant assumptions about the future and other sources of estimation uncertainty that management has made at the reporting date, that could result in a material adjustment to the carrying amounts of assets and liabilities reported in the consolidated financial statements within the next financial year, in the event that actual results differ from assumptions made relate to, but are not limited, to the following:

    • Estimated net realizable value of inventories;

      Stockpiled ore is measured by estimating the number of tonnes added and removed from the stockpile, the number of contained gold ounces based on assay data, and the estimated recovery percentage based on the expected processing method. Stockpile tonnages are verified by periodic surveys conducted by management.

      The assumptions used in the valuation of in process inventory include estimates of gold contained in the ore stacked on leach pads, assumptions of the amount of gold stacked that is expected to be recovered from the leach pads, and the assumption of the gold price expected to be realized when the gold is recovered.

      The allocation of costs to ore in stockpile, ore on leach pads and in-process inventories and the determination of net realizable value involve the use of estimates. There is a high degree of judgment in estimating future costs, future production levels, gold and silver prices, and the ultimate estimated recovery of ore on leach pads. A difference in actual results can have a material impact on the carrying value of inventory.

    • Depletion and amortization of mining properties;

      Depreciation and depletion of mineral properties and mine infrastructure is calculated and charged to earnings on the unit-of-production (“UOP”) method based on proven and probable mineral reserves Changes to the mineral reserves and estimates of future capital expenditure will impact the depreciation and depletion charges recorded in the Company’s statement of operations and comprehensive income.

    • Proven and probable mineral reserves associated with mining properties;

      Proven and probable mineral reserves are estimates of the amount of ore that can be economically and legally extracted from the Company’s mining properties. This estimate requires significant judgment based on information compiled by appropriately qualified persons relating to the geological data on the size, depth and shape of the ore body, and requires complex geological judgments to interpret the data. The estimation of recoverable reserves is based upon factors such as estimates of foreign exchange rates, commodity prices, future capital requirements, and production costs along with geological assumptions and judgments made in estimating the size and grade of the ore body. Changes in the reserve or resource estimates may have an impact upon the carrying value of exploration and evaluation assets, mine properties, property, plant and equipment, provision for closure and reclamation, and depreciation and depletion charges.

    • Recoverability of mining properties;

      The Company assesses its cash-generating unit annually to determine whether any indication of impairment exists. Factors considered in the assessment of asset impairment include, but are not limited to, whether

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 109

     



    PETAQUILLA MINERALS LTD.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE YEAR ENDED MAY 31, 2012 and 2011
    (Expressed in United States dollars)

      there has been a significant decrease in the market price of the property; whether there has been a significant adverse change in the legal, regulatory, accessibility, title, environmental or political factors that could affect the property’s value; whether there has been an accumulation of costs significantly in excess of the amounts originally expected for the property’s acquisition, development or cost of holding; whether exploration activities produced results that are not promising such that no more work is being planned in the foreseeable future and whether the Company has the necessary funds to be able to maintain its interest in the mineral property.

      Where an indicator of impairment exists, a formal estimate of the recoverable amount is made, which is considered to be the higher of the fair value less costs to sell and value in use. These assessments require the use of estimates and assumptions such as long-term commodity prices, discount rates, future capital requirements, exploration potential and operating performance.

    • Estimated useful lives of property, plant and equipment;

      The carrying value of property, plant and equipment is considered in terms of the remaining useful life of the particular asset. These estimates are prepared by qualified specialists in accordance with their knowledge and experience in the mining industry. Re-assessment of the remaining useful life could cause a significant change in the carrying value recorded for property, plant and equipment and depreciation charges.

    • Acquisition of Iberian Resources Corp;

      During the year ended May 31, 2012, the Company, by way of issuance of common shares, acquired 100% interest in Iberian (Note 11). Significant judgement was applied in classifying the transaction as an acquisition of an asset as management determined that Iberian did not meet the definition of a business due to an absence of processes to convert inputs into outputs. Further estimates were applied in determining the fair value of the consideration transferred, fair value of net assets of Iberian, and the allocation of purchase price excess over the book value of Iberian net assets. A change in these estimates could result in a significant change to the cost of all assets, including the exploration and evaluation assets acquired from Iberian.

      The Company has determined that the functional currency of Iberian and its subsidiaries is the Euro as it is the currency of the primary economic environment which the entities operate. Determination of the functional currency may involve certain judgements which the Company will revisit if there is a change in events and conditions which determined the primary economic environment, such as entering into commercial production.

    • Deferred stripping

      Stripping costs incurred during the production phase of a mine are considered production costs and are included in the cost of inventory produced during the period in which stripping costs are incurred, unless the stripping activity can be shown to be a betterment of the mineral property. Betterment occurs when stripping activity increases future output of the mine by providing access to additional reserves. Stripping costs incurred to prepare the ore body for extraction are capitalized as mine development costs and are amortized on a UOP basis over the reserves to which they relate. The determination of whether costs pertain to the betterment of mineral properties requires significant judgment and a change in such estimates could have a significant impact on the Company’s statement of operations and comprehensive income.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 110

     



    PETAQUILLA MINERALS LTD.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE YEAR ENDED MAY 31, 2012 and 2011
    (Expressed in United States dollars)
    • Provision for closure and reclamation;

      The Company reviews the closure plan for the Molejon gold mine and assesses its provision annually. Significant estimates and assumptions are made in determining the provision for mine reclamation as there are numerous factors that will affect the ultimate liability payable. These factors include estimates of the extent and costs of reclamation activities, technological and regulatory changes, inflation rates (2012 – 1.96%; 2011 – 1.91%), and the discount rates (Note 18). These uncertainties may result in future actual expenditure differing from the amounts currently provided. The provision at the reporting date represents management’s best estimate of the present value of the future reclamation costs required.

      The Company also assesses the legal and constructive environmental obligations on its exploration properties annually and accrues for any required obligations. As at May 31, 2012, the only closure and reclamation obligation pertains to the Company’s Molejon gold mine.

    • Share-based compensation;

      The Company grants compensation benefits to its employees, directors and officers through a stock option plan. The amount recorded is not based on historical cost but is derived from the fair value of the options estimated on the date of the grant using the Black-Scholes option pricing model. The model requires that management makes assumptions over the expected volatility of the Company’s share price, expected forfeiture rate, and the appropriate risk-free rate of interest. The expected volatility is based on the historical volatility of Company’s share price. Historical data on the exercise, expiry, and cancellation of options is used to estimate forfeitures within the model. Whereas, the risk-free rate for the expected term of the option is based on the Government of Canada yield curve in effect at the time of the grant.

    • Contingencies;

      By their nature, contingencies will only be resolved when one or more uncertain future events occur or fail to occur. The assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events.

    • Convertible instruments;

      The Company from time to time may grant convertible instruments as part of its financing and capital raising transactions. The Company uses an option pricing model to estimate a value for these instruments. This model, and other models used to value the instruments require inputs such as expected volatility, expected life to exercise, and interest rates.

      A compound financial instrument is a debt security with an embedded conversion option and requires the separate recognition of the liability and equity component. The fair value of the liability portion of the compound financial instrument is determined using a market interest rate for an equivalent debt instrument. This amount is recorded as a liability and the remainder of the proceeds are allocated to the conversion option which is recognized under reserves. During the year ended May 31, 2012, the Company entered into a convertible loan agreement denominated in Canadian dollars (Note 15), requiring the use of the Black- Scholes option pricing model to calculate the fair value of the conversion option. Differences in estimates used as inputs to the model could result in a material impact on the Company’s consolidated financial statements.

    • Investment in Azuero Mining Development S.A. (“Azuero”)

      Control over an entity is established if there is a power to govern the financial and operating policies of an entity so as to obtain benefit from its activities. The Company applies the criteria in IAS 27, Consolidated and separate financial statements, to assess control over an entity.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 111

     



    PETAQUILLA MINERALS LTD.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE YEAR ENDED MAY 31, 2012 and 2011
    (Expressed in United States dollars)

      The Company’s investment interest in Azuero was diluted from 49% to 30% during the year ended May 31, 2012 (Note 10). Petaquilla’s management has determined that the Company is still able to exert control over Azuero as the Company’s directors and officers hold the majority of the representation on the Board of Azuero and thereby are able to influence its decision making process. The Company as a result consolidates the operations of Azuero. If control cannot be demonstrated, the Company would have to use the equity method of accounting for its investment in Azuero.

    • Disposal group held for distribution to owners

      On contemplation of disposal of a non-current asset or a disposal group, the Company assesses the classification and measurement guidance provided by IFRS 5, Non-current assets held for sale and discontinued operations. As at May 31, 2012, the Company has classified the assets and liabilities of Panama Development and Infrastructure Ltd. (“PDI”) as held for distribution to owners (Note 8).

      The separate classification of a disposal group requires significant judgement involving the assessment of whether the contemplated transaction will be completed within the 12 months from the date of classification and the likelihood of a significant change in or withdrawal of the disposal plan. The Company has determined that PDI met the relevant requirements of a disposal group being held for distribution to owners on March 1, 2012 and has therefore measured and classified PDI assets and liabilities as such. A change in the Company’s assumptions and the date of such classification could have a material impact on the consolidated statement of operations and comprehensive income.

    • Construction contracts

      The Company uses the percentage-of-completion method to account for the contract revenue entered into by PDI, the Company’s wholly owned subsidiary (Note 22). The stage of completion is measured by reference to contract costs incurred to date compared to the estimated total costs for the contract as it is the Company’s opinion that it appropriately represents the stage of completion of the construction contract. Change in such estimates could have a material impact on the Company’s consolidated financial statements.

      Significant assumptions are required to estimate the total contract costs and the recoverable variation works that affect the stage of completion and the contract revenue respectively. In making these estimates, the Company has relied on the work of relevant management experts. If the estimates of revenue or costs, including the Company’s contribution to the joint venture (entered into for the purpose of the construction contract), increase or decrease by 10%, the Company’s net income would have a corresponding increase/decrease of $73,000 approximately.

    • Fair value of derivatives

      Derivative instruments are valued using pricing models. These models require a variety of inputs, including but not limited to, contractual items, market prices, forward price curves, yield curves and credit spreads. These inputs are obtained from or corroborated with the market where possible. Changes in these assumptions could impact the carrying value of derivative instruments and the amount of unrealized gains or losses recognized in non-operating income (expenses) within the statement of operations and comprehensive income (loss).

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 112

     



    PETAQUILLA MINERALS LTD.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE YEAR ENDED MAY 31, 2012 and 2011
    (Expressed in United States dollars)

     

    6. RECEIVABLES, PREPAIDS AND OTHER

     

      May 31, May 31, June 1,  
      2012 2011 2010
      ($) ($) ($)  
     

    Trade and other receivables

    1,078,465 275,985 65,866
     

    Value added taxes receivables

    718,278 184,339 50,460

    Prepaid expenses

    1,429,026 1,138,977 690,152

    Prepaid transaction costs

    730,788 - -

    Deferred transaction fees paid to Deutsche Bank (Notes 9 and 17)

    568,679 369,857 -  
     
      4,525,236 1,969,158 806,478  

     

    7. INVENTORIES

     

      May 31,   May 31,   June 1,  
      2012   2011   2010  
      ($)   ($)   ($)  
     
    Materials and supplies 3,278,739   3,170,929   1,505,310  
      Work-in-process 3,671,072   364,012   404,870  
    Finished goods 1,511,783   1,852,339   1,433,777  
    Stockpiled ore 21,062,189   8,498,801   1,398,074  
      29,523,783   13,886,081   4,742,031  
    Less: Non-current stockpiled ore (14,077,466 ) (2,228,405 ) (1,107,316 )
     
      15,446,317   11,657,676   3,634,715  

     

    8. DISPOSAL GROUP HELD FOR DISTRIBUTION TO OWNERS

    During the year ended May 31, 2012, the Company put its plans in place to spin-out Panama Development and Infrastructure Ltd. (“PDI”) from its operations and distribute to its shareholders, one share of PDI for every four shares of Petaquilla held by the shareholders. PDI is an infrastructure entity which has been providing construction services to the Company’s Molejon gold mine.

    The completion of the transaction is subject to the regulatory and shareholder approval and is expected to take place in the first half of fiscal 2013.

    On March 1, 2012, PDI met the requirements of IFRS 5, Non-current assets held for sale and discontinued operations (“IFRS 5”), and the assets and liabilities of the entity have been presented as held for distribution to owners in the Company’s statement of financial position. As PDI does not represent a separate major line of business for the Company, its operations have not been treated as discontinued operations for the year ended May 31, 2012.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 113

     



    PETAQUILLA MINERALS LTD.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE YEAR ENDED MAY 31, 2012 and 2011
    (Expressed in United States dollars)

    The assets and liabilities of PDI as at May 31, 2012 are as follows:

      May 31,  
      2012
      ($)  
    Assets  
      Current assets  

    Receivables, prepaids and other

    2,493,869
     
    Plant and equipment 14,038,307  
     
    Assets of disposal group 16,532,176  
     
    Liabilities  
    Current liabilities  

    Accounts payable and accrued liabilities

    3,406,730

    Current portion of long-term debt

    2,745,569  
      6,152,299
    Long-term debt 9,689,314  
     
    Liabilities of disposal group 15,841,613  

     

    9. OTHER ASSETS

     

      May 31,   May 31,   June 1,  
      2012   2011   2010
      ($)   ($)   ($)  
     
    Restricted cash 113,883   255,091   566,708
      Deposits on equipment (Note 15) 4,997,526   3,509,817   816,461
    Other 132,129   -   -
    Investment in Iberian (Note 11) -   4,911,488   -
    Deferred transaction fees paid to Deutsche Bank (Note 17) 2,036,025   1,705,476   -  
      7,279,563   10,381,872   1,383,169
    Less: current portion          
    Deferred transaction fees paid to Deutsche Bank included in Receivables, prepaids and other (Note 17) (568,679 ) (369,857 ) -  
     
      6,710,884   10,012,015   1,383,169  

    Restricted cash

    The Company has restricted cash held in bank accounts and term deposits to guarantee credit cards and a performance bond for compliance with environmental laws in Panama.

    Form 20-F_Fiscal Year Ended 2012 May 31 Page 114

     



    PETAQUILLA MINERALS LTD.
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    FOR THE YEAR ENDED MAY 31, 2012 and 2011
    (Expressed in United States dollars)

     

    10. INVESTMENT IN AZUERO MINING DEVELOPMENT S.A.<