LAW 394 Mining Law. Section 1 Instructors: Alan Monk and Don Collie TOTAL MARKS: 100. TIME ALLOWED: 2 HOURS and 15 minutes reading time

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1 THIS EXAMINATION CONSISTS OF 8 PAGES (THE BODY OF THE EXAMINATION), PLUS SCHEDULES A AND B (WHICH COMPRISE AN ADDITIONAL 19 PAGES). PLEASE ENSURE THAT YOU HAVE A COMPLETE PAPER THE UNIVERSITY OF BRITISH COLUMBIA FACULTY OF LAW FINAL EXAMINATION DECEMBER 2012 LAW 394 Mining Law Section 1 Instructors: Alan Monk and Don Collie TOTAL MARKS: 100 TIME ALLOWED: 2 HOURS and 15 minutes reading time ****************** NOTE: 1. THIS IS AN OPEN BOOK EXAMINATION 2. ANSWER ALL QUESTIONS 3. REFER TO LEGISLATION, REGULATIONS (INCLUDING SECTION NUMBERS) AND CASE LAW, WHERE APPLICABLE. THIS EXAMINATION CONSISTS OF 17 QUESTIONS

2 LAW 394, Section 1 Page 2 of 28 MARKS 5 1. Your client, Mr. Pidgeon, staked a placer claim and a month later a third party, Mr. Rock, staked a mineral claim over the same piece of land near Smithers, British Columbia using the Mineral Titles Online system. Mr. Pidgeon has set up a sluice box (a device used for placer mining) on the bank of the river. Mr. Rock, through his exploration efforts, has become convinced that there a substantial deposit of copper and gold beneath the river (and Mr. Pidgeon s sluice box). Mr. Rock has commenced drilling operations on the bank of the river right next to Mr. Pidgeon s sluice box, making it difficult for Mr. Pidgeon to operate. Mr. Pidgeon has come to you and asked if Mr. Rock had the right to stake a mineral claim over the same piece of land and whether there is any way he can stop Mr. Rock from interfering with his placer mining operation. Please advise Mr. Pidgeon regarding the applicable Mineral Tenure Act (BC) provisions Ms. Peacock, P.Geo., has staked through the Mineral Titles Online system a mineral claim on bare land (i.e., there are no buildings or structures, and no operations on this land whatsoever) in an area outside of Kamloops, British Columbia. The land (i.e., the surface) is owned by Ajax Corporation solely as an investment; the mineral rights were retained by the Government of British Columbia. Ms. Peacock has come to you and asked if she can commence exploration right away or if there is anything she needs to do first and whether she could have any liability to Ajax Corporation as a result of exploring on its land. Please advise her, but limit your answer to the Mineral Tenure Act (BC) requirements Your client calls and says she has just learned that the BC Government has decided to create a park in the area which includes your client s mineral claims. She asks you if she will receive compensation for the claims when the park is created, since she will no longer be able to explore or mine them, and if so, roughly how much compensation will she receive? Is the Rock Resources v. BC case (Tab 10 of the course materials) relevant to your answer and why? 5 4. Joe Prospector staked a mineral claim near Kamloops, British Columbia, under the Mineral Tenure Act (BC) on the Mineral Titles Online system. About 10% of the mineral claim is covered by a pre-existing legacy claim held by Ajax Corporation (which is in good standing). About 2% of the claim is occupied by Ms. Smith s house and surrounding property, in which Ms. Smith has resided for the past 40 years and continues to reside. The remainder of the land within the mineral claim is owned by the Government of BC. Can Joe Prospector explore the whole claim, part

3 LAW 394, Section 1 Page 3 of 28 (Question 4, continued) of the claim or none of the claim? Please explain referring to the relevant sections of the Mineral Tenure Act (BC) Your client, Ms. Goldfinger, is the recorded holder of a mineral claim located near Kamloops, British Columbia that is 10 hectares in size and named Finger 1. Ms. Goldfinger has held this mineral claim for 10 years. This year, it had an expiry date of November 1, Prior to November 1, 2012, Ms. Goldfinger registered a Statement of Exploration and Development in respect of drilling performed on the claim during the prior 12 month period, as required by section 29 of the Mineral Tenure Act and section 8(2)(a) of the Mineral Tenure Act Regulation. The Statement of Exploration and Development stated that $9,000 was spent on exploration by diamond drilling on the Finger 1 claim. On November 20, 2012, an employee of Ministry of Energy, Mines and Natural Gas filed a complaint under section 40(1)(b) of the Mineral Tenure Act, alleging that Ms. Goldfinger knowingly made a false statement in the Statement of Exploration and Development because a recent survey on an adjoining claim that is being converted to a lease shows the drill hole was located on the adjacent claim, not on the Finger 1 claim. The Gold Commissioner obtained a report under section 40(5)(b) that confirmed the drill hole was not on the Finger 1 claim. The Chief Gold Commissioner then sent the report and a copy of the complaint from the employee of the Ministry to Ms. Goldfinger, along with a letter indicating that he intends to cancel the Finger 1 claim under section 40(7)(b) of the Mineral Tenure Act (BC), and referring to the requirements of section 8(1) of the Mineral Tenure Act Regulation, but has asked Ms Goldfinger to provide any submissions for his consideration within 30 days. Ms. Goldfinger has asked you to prepare her submissions, claiming that she thought she was drilling on the Finger 1 claim, and it was therefore just an honest mistake that should not result in her claim being cancelled. Briefly outline what argument you would make to the Chief Gold Commissioner Your client, Metal Mouth Resources Inc., a BC incorporated company, plans to develop a small gold mine (a mineral mine) with 65,000 tonnes of mineral ore production a year in an area that has not been an operating mine in the past. Please describe any permit and Environmental Assessment Act (British Columbia) requirements Refer to the attached Option Agreement attached as Schedule A to this exam (Note: you do not have to read the entire agreement to answer the questions!). Today, the CEO of your client Major Mining Corp.

4 LAW 394, Section 1 Page 4 of 28 (Question 7, continued) ( MMC ), Mr. Freud, calls you up about its option agreement dated February 1, 2009 between MMC and Prospector Inc. (the Option Agreement ). (a) Mr. Freud provides you with the following facts: To date, MMC (which is the Optionee under the Option Agreement) has spent all the amounts for exploration expenditures on the Property (as defined in the Option Agreement) set forth in section 2.2 (a)(i), (ii) and (iii) and has made all cash payments to Prospector Inc. (which is the Optionor under the Option Agreement) set forth in section 2.2(b)(i), (ii), (iii) and (iv), within the time frames required by the Option Agreement. All that is left for MMC to earn the Option is to carry out Expenditures (as defined in the Option Agreement) of $1,400,000 before February 1, 2013 (in accordance with section 2.2(a)(iv) of the Option Agreement) and to make a cash payment of $100,000 to the Optionor on or before February 1, 2013 (in accordance with section 2.2(b)(v) of the Option Agreement). MMC has incurred exploration Expenditures of $1,000,000 to date towards the $1,400,000 Expenditure requirement to be made on or before February 1, 2013, but two days ago a forest fire swept through the area, destroying the exploration camp and its drills. Mr. Freud believes it will take 6 months to rebuild the camp and to buy new drills so exploration can continue. Mr. Freud goes on to say that the company has only $150,000 left in the bank and MMC is currently conducting a private placement financing, which should be completed by March 1, 2013 and will bring an additional $1,000,000 into MMC s bank account. Mr. Freud wants to discuss with you what options MMC has under the circumstances. What would you recommend? (b) When does title to the Property transfer under the Option Agreement upon the Effective Date of the Agreement or upon completion of all option payments under section 2.2? Based on this, would you recommend that MMC record the Option Agreement (or a memorandum of the Option Agreement) against the claims that comprise the Property? (c) After you have answered Mr. Freud s questions in (a) and (b) above, Mr. Freud calls you back and informs you that the board of directors of MMC has decided to terminate the Option Agreement under 13.1 of the Option Agreement, and the board wants MMC

5 LAW 394, Section 1 Page 5 of 28 (Question 7, continued) exploration personnel to stake claims just outside of the Property boundary for itself. The board of directors of MMC has decided to stake mineral claims just outside the Property boundary as a result of its review of the data the Optionor had provided them on the Property and the surrounding area when entering into the Option Agreement. Is this allowed? How would you advise MMC? 4 8. You receive an from Walter White, the VP Exploration of your client, Crystal Method Minerals Inc. ( CMMI ). CMMI is looking for third party partners to do a possible option and/or joint venture transaction on CMMI s 100% owned Pinkman Property in New Mexico. Mr. White tells you that CMMI has been approached for this purpose by Winnebago Mining Company, which is interested in looking at CMMI s proprietary data relating to the Pinkman Property. You ask whether the parties have yet entered into a written confidentiality agreement relating to CMMI s proprietary data and other confidential information. Mr. White replies by telling you that he has was told by someone he knows in the industry that when you are the party disclosing confidential information, there s an argument that you re better off not having a written confidentiality agreement. How do you respond to Mr. White? Is his point valid? Why or why not? 5 9. You are the lawyer representing Gandolfini Mining Ltd. ( GML ), which entered into a Confidentiality Agreement a few months ago with Satriani Minerals Corporation ( SMC ). Pursuant to that Agreement, SMC provided certain confidential information and data to GML. As a result of GML s review of that information and data, GML has decided to enter into an option and joint venture agreement with SMC. Carmela Gandolfini, the CEO of GML, has told you that she s very happy with the terms of the existing Confidentiality Agreement, and that she doesn t want those terms to be compromised or watered down as a result of the parties entering into an Option and Joint Venture Agreement. As a result of these instructions from your client, what would you be looking to do when you receive the first draft of the Option and Joint Venture Agreement from SMC s legal counsel? You are on the telephone with Bud Fox, who is the President and CEO of your client, Gekko Gold Mines Ltd. ( GGML ). GGML is a reporting issuer in several Canadian provinces, and its common shares are listed on the TSX Venture Exchange. Unfortunately, since the financial meltdown in 2008, GGML s share price has declined precipitously, from $4.55 a share

6 LAW 394, Section 1 Page 6 of 28 (Question 10, continued) in early 2008, to a paltry $0.12 per share today. GGML is a typical junior mining issuer, in that it has no material sources of revenue or cash flow, and thus it relies on periodic equity financings in order to raise the money it needs to carry out day-to-day operations and fund its exploration activities. GGML s management has determined that in order for it to meet its minimum earn-in requirements under its existing option agreements, it needs to raise $1,000,000 in equity financing for the upcoming financial year and exploration season. But Mr. Fox tells you that the problem they re up against is share dilution. What is share dilution in this context? What effect does share dilution typically have on a company s existing shareholders? When faced with share dilution in a context such as this, what other financing or strategic alternatives might a company like GGML consider or pursue? In the context of Canadian mining equity finance, what do the terms hard dollars versus soft dollars refer to, respectively? What is the difference between the two, and why is this distinction important? Ann Wilson is the President and CEO of your client, Dreamboat Annie Exploration Ltd. ( DAEL ). She s you to ask you about an informal, in-house preliminary economic assessment ( PEA ) that was prepared by her sister Nancy Wilson, who is the Vice-President, Exploration of DAEL. This in house PEA consists of some economic analysis and modelling that Nancy Wilson did, based on an inferred mineral resource that DAEL publicly disclosed a year ago for the first time on DAEL s Mushroom copper-gold property near Duncan, B.C. Ann Wilson wants to know if DAEL would be permitted to publicly disclose this in house PEA prepared by her sister Nancy, or alternatively whether DAEL is required to disclose it, on the basis that it might constitute material undisclosed information under Canadian securities laws. What is your answer? Is this in-house PEA publicly disclosable? Why or why not? Peart Minerals Ltd. ( PML ) has an option agreement with Lifeson Gold Inc. ( LGI ) pursuant to which PML has ability to earn a 60% interest in LGI s Tom Sawyer Property, located in the Southern United States. On December 3, 2012, both PML and LGI issued press releases announcing for the first time a mineral resource on the Tom Sawyer Property. Under the option agreement, PML is the operator, and at this point, because PML has not yet earned its 60% interest, the exploration taking place on the property is solely funded by PML. Thus LGI has not spent any money

7 LAW 394, Section 1 Page 7 of 28 (Question 1 3, continued) directly on the Tom Sawyer property in the past three years. LGI s flagship property is its Snow Dog property in Central Newfoundland. In LGI s disclosure documents filed with Canadian securities regulators, the Tom Sawyer Property is listed under the heading other properties, after the Snow Dog property. You act for LGI. Alex Lee, LGI s President, telephones you to ask whether LGI is required to prepare and file a technical report under National Instrument in connection with the aforementioned December 3, announcement. What is your answer, and why? In October, 1995, Bre-X Minerals Ltd. announced via press release for the first time that its Busang Property in Indonesia contained mineral reserves in the neighbourhood of 10 million ounces of gold, and that there could potentially be as much as 30 million ounces. If the current version of National Instrument had been in force at the time that Bre-X made the aforementioned public disclosure, would Bre-X have been required to prepare and file a technical report on its Busang Property as a result of that announcement? If so, would there have been any specific statutory requirements relating to the authorship of that report? Why does a typical feasibility-stage technical report have a number of qualified persons ( QPs ) listed as authors or co-authors, while a typical grassroots exploration-stage technical report will very often only have one QP listed as the author? In section 3.1 of National Instrument , it states that in written scientific or technical disclosure, an issuer must disclose the relationship to the issuer of the qualified person who prepared, supervised or approved the disclosure. What is meant by the words relationship to the issuer, and what would be a real-life example of such disclosure of that relationship? In September of 2012, the former CEO of Southwestern Resources Ltd., John Paterson, pleaded guilty to fraud, in connection with falsifying assay results. It turned out that Mr. Paterson, who was acting as the company s

8 LAW 394, Section 1 Page 8 of 28 (Question 17, continued) in-house qualified person at the time, had received drilling assay results from assay laboratories, and then inflated the results in subsequent company press releases. Excerpts from a media article summarizing the key facts of the case are contained at Schedule B to this exam. (a) Why do you think this fraud was able to occur, despite the fact that, for example, sections 3.2 and 3.3 of National Instrument would seem to be designed to prevent such fraud from occurring? (b) It is noted in the media articles relating to the trial and conviction of Mr. Paterson that while the fraud was still ongoing and undetected, investors, analysts and board members were pushing for the company to produce a pre-feasibility study, but that Mr. Paterson engaged in a series of ploys to delay this. Can you think of a reason related to National Instrument why Mr. Paterson would have wanted to avoid going to the feasibility stage?

9 LAW 394, Section 1 Page 9 of 28 Schedule A Option Agreement (Note: you do not have to, and are not expected to, read this entire agreement in order to answer questions 7 (a), (b) and (C)!) THIS AGREEMENT is dated for reference as of the 1st day of February, 2009 (the Effective Date ). AMONG: PROSPECTOR INC., a company existing under the laws of the Province of British Columbia and having a head office at 14 Eaglewood Drive, West Vancouver, B.C. V5H 5G1 (hereinafter referred to as the Optionor ) AND: MAJOR MINING CORP., a company existing under the laws of the Province of British Columbia and having an office at Suite Hastings Street, Vancouver, British Columbia, V6C 2Z2 ( hereinafter referred to as the Optionee ) WHEREAS: (A) The Optionor is the owner of a 100% undivided right, title and interest in and to the Property (as defined below); (B) The Optionor wishes to grant an exclusive option to the Optionee to acquire a 100% undivided right, title and interest in and to the Property (the Option ); and (C) It is the intention of the parties hereto that, upon exercise of the Option and provided that the Optionee is not in default, the Optionee will have been deemed to have earned a 100% interest in and to the Property in accordance with the terms and conditions herein subject to the Royalty (as defined below) in favour of the Optionor. NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the covenants and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency which is hereby acknowledged, the parties agree as follows:

10 LAW 394, Section 1 Page 10 of DEFINITIONS (a) In this Agreement, except as otherwise expressly provided or as the context otherwise requires: Agreement means this Agreement, including the Schedules hereto, as amended or supplemented from time to time. Commencement of Commercial Production means: (a) if a concentrator is located on the Property, the last day of a period of 40 consecutive days in which, for not less than 30 days, such concentrator processed ore from the Property at 70% of its rated concentrating capacity; or (b) if no concentrator is located on the Property, the last day of the first period of 30 consecutive days during which ore has been shipped from the Property on a reasonably regular basis for the purpose of earning revenues; but no period of time during which ore or concentrate is shipped from the Property for testing purposes, and no period of time during which milling operations are undertaken as initial tune up, will be taken into account in determining the date of Commencement of Commercial Production. Expenditures mean the sum of all costs of acquisition and maintenance of the Property, all exploration and development expenditures and all other costs and expenses of whatsoever kind or nature including those of a capital nature, incurred or chargeable before the date of Commencement of Commercial Production by the Optionee with respect to the exploration and development of the Property and placing the Property into commercial production. Net Smelter Return or NSR shall be determined by multiplying: (a) the quantity of gold, silver or other metals or minerals contained in the ore or concentrates derived from the Property and actually sold or disposed of during any year to a purchaser (except such of the same as are removed from the Property for the purpose of making assays or

11 LAW 394, Section 1 Page 11 of 28 by: tests, including, without limitation, reasonable pilot plant tests) after the date on which the Property comes into commercial production. (b) the appropriate one or more of: (i) (ii) (iii) in the case of gold, the Annual Average London Final Fix; or in the case of silver, the Annual Average Silver Price; or in the case of other metals or minerals, the Annual Average Price; less the aggregate of all Optionee during such year, Deductible Amounts paid or incurred by the where: Annual Average London Final Fix means the arithmetic mean of the London Final Fix per ounce or gram of gold, as quoted by Metals Week during the year in question; Annual Average Silver Price means the arithmetic mean of the weekly Handy & Harman price per ounce or gram of silver, as quoted by Metals Week during the year in question; Annual Average Price means the arithmetic mean of the weekly price per unit for the relevant metal or mineral, as quoted by Metals Week and calculated separately during the year in question; provided, however, that if any such fix or price ceases to be so published or the basis of determining the same is changed in any material manner that is adverse to either or both the parties, hereto, either party hereto may require the designation of a fix, price and/or publication in substitution for the relevant one designated above, and if within 30 days after so requiring such substitution the parties hereto have not agreed upon a substitute publication or quotation, the same shall be designated by the Optionee and such designation shall be final and binding upon the parties hereto under again changed in accordance with the provisions of this proviso; and

12 LAW 394, Section 1 Page 12 of 28 Deductible Amounts means all costs or expenses paid or incurred by or for the account of the Optionee during the year in question with respect to: (a) insurance, security costs, freight, trucking, handling and/or weighing, sampling and assaying (including, without limitation, umpire assays and representation) of the ore or concentrates ex headframe in the case of ores and ex mill or other treatment facility in the case of concentrates or other products; (b) (c) (d) all costs, charges, deductions or deductions incurred or paid by the Optionee with respect to marketing or sale of the ore or concentrates; any deduction, charge or penalty charged or deducted by the purchaser of the ore or concentrates and relating to the chemical composition or physical attributes of the ore or concentrates; and any federal, state or municipal assessment, tax or levy relating to the ore or concentrates, including, without limitation, one of a sales or value-added nature, assessed against or payable by the Optionee (other than taxes computed upon the basis of the Optionee s consolidated net income); provided, however, that in determining the amount of Net Smelter Return for any period and for the purpose of allowing for delays in receipt of payment for the ore or concentrates from a purchaser of the ore or concentrates, the Optionee may treat any sale or disposition of metals or minerals other than gold or silver (unless sold as a component of the ore or concentrates sold primarily for its content of metals or minerals other than gold or silver and payment therefor is part of such delayed payment) as having occurred up to 120 days subsequent to the date of the actual sale or disposition referred to in paragraph (a) of the definition of Net Smelter Return. Option means the option to acquire a 100% right, title and interest to and in the Property.

13 LAW 394, Section 1 Page 13 of 28 Option Period means the period during the term of this Agreement from the date hereof to and including the date of exercise of the Option. Property means the mineral claims described in Schedule A attached hereto, any mineral claims acquired pursuant to Section 14.1 and any leases or other mineral tenures into which such mineral claims are converted from time to time. Royalty means the amount of royalty from time to time payable to the Optionor pursuant to Section GRANT AND EXERCISE OF OPTION 2.1 Subject to the terms of this Agreement, the Optionor hereby grants to the Optionee the sole and exclusive right and option to acquire 100% of Optionor s right, title and interest in and to the Property, free and clear of all charges and encumbrances. 2.2 This Agreement and the Option will terminate if the Optionee has failed to do any of the following: (a) carry out Expenditures totalling $3,000,000 on the Property in the following amounts and by the times described any amounts expended in any period in excess of the amount required to be expended shall be carried forward into the subsequent period or periods: (I) $300,000 on or before February 1, 2010; (ii) $500,000 on or before February 1, 2011; (iii) $800,000 on or before February 1, 2012; and (iv) $1,400,000 on or before February 1, 2013; (b) make cash payments to the Optionor in the following amounts and by the times described: (i) $25,000 on signing of this Agreement by the Optionee; (ii) $50,000 on or before February 1, 2010;

14 LAW 394, SecUon 1 Page 14 of 28 (iii) $50,000 on or before February 1, 2011; (iv) $75,000 on or before February 1, 2012; and (v) $100,000 on or before February 1, VESTING OF INTEREST 3.1 Upon fulfilling all of the payment requirements set forth in Section 2.2, the Optionee will have been deemed to have exercised the Option hereunder and be deemed to legally and beneficially own a 100% right, title and interest in and to the Property, subject to the Royalty. 4.0 TITLE TRANSFER 4.1 Upon Optionee exercising the Option by satisfying all of the requirements set forth in Section 2.2, the Optionor shall execute such documentation as the Optionee may prepare and reasonably request be executed to evidence a 100% interest of the Optionee in the Property and the Optionor shall initiate a transfer of the Property to the Optionee on Mineral Titles Online. 5.0 ASSIGNMENT OF OPTION 5.1 Subject to Section 5.2, each party shall have the right to assign, transfer, convey or otherwise dispose of all or part of its rights and interests in this Agreement, provided that as a condition precedent to such assignment, (i) the assignee shall execute a counterpart of this Agreement and thereby agree to be bound by the contractual terms hereof in the same manner and to the same extent as though a party hereto in the first instance; (ii) the assignor shall not be relieved or discharged of any of its obligations or liabilities hereunder and the other parties may continue to look to it for the performance thereof, and (iii) the assignor will subject any further assignment, transfer, conveyance or disposition of its rights and interests in this Agreement to the restrictions set out in this Section If any of the parties hereto wish to assign, transfer, convey or otherwise dispose of all or part of its rights and interests in this Agreement pursuant to Section 5.1, it may do so only with the written consent of the other parties, such consent not to be unreasonably withheld.

15 LAW 394, Section 1 Page 15 of REPRESENTATIONS AND WARRANTIES 6.1 The Optionor hereby represents and warrants to the Optionee that: (a) (b) (c) (d) (e) (f) (g) The Optionor is a company duly incorporated, organized and validly existing under the laws of the Province of British Columbia; the Property has been accurately described in Schedule A hereto, the mineral claims comprising the Property have been validly staked, located and recorded in the name of the Optionor and are in good standing pursuant to all applicable laws, and all taxes, rents, charges and assessments with respect thereto have been paid or satisfied in full as of the Effective Date; to the best of Optionor knowledge, any and all previous work conducted on the Property was conducted in accordance with all applicable environmental laws, orders and rulings, and there are no outstanding assessments or liabilities relating to past work conducted on the Property which are now, or in the future may be, payable by any party; the Optionor has the full power and authority to carry on its business and to enter into this Agreement and any agreement or instrument referred to or contemplated by this Agreement; neither the execution and delivery of this Agreement nor any of the agreements referred to herein or contemplated hereby, nor the consummation of the transactions hereby contemplated conflict with, result in the breach of or accelerate the performance required by, any agreement to which the Optionor is a party; the execution and delivery of this Agreement has been duly authorized by all necessary corporate action on the part of the Optionor and will not violate or result in the breach of the laws of any jurisdiction applicable or pertaining thereto or of either of their constating documents, and there is no consent, approval or condition precedent to the performance of this Agreement that has not been obtained, as of the Effective Date; the Optionor has made available to the Optionee all material information in its respective possession or control relating to the Property and will continue to make available to Optionee all information in its possession or control relating to the Property; and

16 LAW 394, Section 1 Page 16 of 28 (h) the Optionor possesses all such permits, authorizations and approvals and rights that are necessary to engage in the transactions contemplated by this Agreement and the Optionee has no reasonable basis to conclude that the Optionor will not be able to obtain any license, permit, authorization, approval, and right that may be required to perform their respective obligations herein. 6.2 The Optionee hereby represents and warrants to the Optionor that: (a) (b) (c) the Optionee is a company duly incorporated, organized and validly existing under the laws of the Province of British Columbia; the Optionee has the full power and authority to carry on its business and to enter into this Agreement and any agreement or instrument referred to or contemplated by this Agreement; and the execution and delivery of this Agreement has been duly authorized by all necessary corporate action on the part of the Optionee and will not violate or result in the breach of the laws of any jurisdiction applicable or pertaining thereto or of either of their constating documents, and there is no consent, approval or condition precedent to the performance of this Agreement that has not been obtained, as of the Effective Date. 6.3 The representations and warranties contained in Section 6.1 are provided for the exclusive benefit of the Optionee and a breach of any one or more of them may be waived by the Optionee in writing, in whole or in part, at any time without prejudice to its rights in respect of any other breach of the same or any other representation or warranty. 6.4 The representations and warranties contained in Section 6.2 are provided for the exclusive benefit of the Optionor and a breach of any one or more of them may be waived by the Optionor in whole or in part at any time without prejudice to their rights in respect of any other breach of the same or any other representation or warranty. 7.0 RIGHT OF ENTRY 7.1 Throughout the Option Period, the directors, officers, employees, contractors and agents of Optionee will have the sole and exclusive right in respect of the Property to: (a) enter thereon;

17 LAW 394, Section 1 Page 17 of 28 (b) have exclusive and quiet possession thereof; (c) do such prospecting, exploration, development and/or other mining work thereon and thereunder as Optionee in its sole discretion may determine advisable; (d) bring upon and erect upon the Property buildings, plant, machinery and equipment as Optionee may deem advisable; and (e) remove therefrom and dispose of reasonable quantities of ores, mineral and metals for the purpose of obtaining assays or conducting other tests. 8.0 OBLIGATIONS OF The Parties DURING OPTION PERIOD 8.1 During the Option Period the Optionee will: (a) (b) (c) maintain in good standing those mineral claims comprised in the Property that are in good standing on the date hereof by the doing and filing of assessment work or the making of payments in lieu thereof, by the payment of taxes and rentals and the performance of all other actions which may be necessary in that regard and in order to keep such mineral claims free and clear of all liens and other charges arising from the Optionee s activities thereon except those at the time contested in good faith by the Optionee. The Optionee shall provide proof of compliance with tax and assessment filings and any filing fees or taxes to the Optionor at least 15 days prior to the due date of any such filing or payment requirement. The Optionee shall also promptly provide the Optionor with copies of any notices received by it from any party respecting the Property; permit the directors, officers, employees and designated consultants of the Optionor, at their own risk and cost access to the Property and to all technical records and other factual and engineering data relating to the Property which is in the possession of the Optionee at all reasonable times. The Optionor agrees to indemnify the Optionee against and to save the Optionee harmless from all costs, claims, liabilities and expenses that the Optionee may incur or suffer as a result of any injury (including injury causing death) to any director, officer, employee or designated consultant of the Optionor while on the Property; while exploration and development is carried out, furnish the Optionor with quarterly progress reports and with a final report within 60 days following the conclusion of each program. The final report shall show the exploration and

18 LAW 394, Section 1 Page 18 of 28 development performed and the results obtained and shall be accompanied by a statement of costs and copies of pertinent plans, assay maps, diamond drill records and other factual engineering data. All information and data concerning or derived from the exploration and development shall be kept confidential except as permitted under this Agreement; (d) deliver to the Optionor or on or before March 15 in each year a report (including up to date maps if there are any) describing the results of work done in the last completed calendar year, together with reasonable details of pre-production expenditures made; (e) do all work on the Property in a good and workmanlike fashion and in accordance with all applicable laws, regulations, orders and ordinances of any governmental authority; (f) indemnify and save the Optionor harmless in respect of any and all costs, claims, liabilities and expenses arising out of the Optionee s activities on the Property and, without limiting the generality of the foregoing will, during the currency of this Agreement, carry not less than $1,000,000 in third party liability insurance in respect of its operations on the Property for the benefit of the Optionee and the Optionor as their interests appear; provided that the Optionee will incur no obligation thereunder in respect of claims arising or damages suffered after termination of the Option if upon termination of the Option any workings on or improvements to the Property made by the Optionee is left in a safe condition; (g) (h) meet all reclamation bonding requirements; and deliver to the Optionor forthwith after receipt by the Optionee material data and results, assay results for samples taken from the Property, together with reports showing the location from which the samples were taken and the type of samples. 8.2 During the Option Period, if applicable, the Optionor will: (a) copy Optionee on all communications sent to or received from any party whatsoever in respect of the Property; and (b) not enter into any transactions regarding its interests in the Property without the prior consent of Optionee, such consent not to be unreasonably withheld.

19 LAW 394, Section 1 Page 19 of ROYALTY 9.1 The Optionee shall be entitled to a royalty of 2% of the Net Smelter Returns. It is intended that the royalty shall form part of the property and not be merely contractual in nature. The Royalty shall apply to any and all bulk samples from the Property. 9.2 The Royalty creates a direct real property interest in the Property and the precious metals in favour of the Optionor, provided such interest shall be satisfied in respect of any particular precious metals by the payment to the Optionor of the Royalty in respect thereof. The Royalty shall continue in perpetuity, it being the intent of the parties hereto that the Royalty will constitute a covenant running with the Property and the precious metals and all successions thereof. If any right, power or interest of either party pertaining to the Royalty would violate the rule against perpetuities, then such right, power or interest will terminate at the expiration of 20 years after the death of the last survivor of all the lineal descendants of Her Majesty, Queen Elizabeth II of England, living on the date of this Agreement. The Optionor will have the right from time to time to register or record notice of the Royalty against title to the Property or elsewhere, and the Optionee will cooperate with all such registrations and recordings and provide its written consent or signature to any documents and do such other things from time to time as are necessary or desirable to effect all such registrations or recordings or otherwise to protect the interests of the Optionor hereunder. 9.3 Installments of the Royalty payable under Section 9.1 will be paid by the Optionee as follows: (a) within 45 days after the end of each of the first three calendar quarters in each year and within 60 days of the end of the last calendar quarter in each year, the Optionee will pay to the Optionor an amount equal to 95% of the estimated Royalty, if any, for the year; and (b) on or before March 31 in each year the balance, if any, of Royalty payable in respect of the year last completed. 9.4 After Commencement of Commercial Production, the Optionee will, within 90 days after the end of each calendar quarter, furnish to the Optionor quarterly unaudited statements respecting operations on the Property, together with a statement of Net Smelter Return for the quarter last completed. 9.5 Forthwith after the end of each calendar year beginning with the year in which Commencement of Commercial Production occurs, the accounts of the Optionee

20 LAW 394, Section 1 Page 20 of 28 related to operations on the Property will be audited by the auditors of the Optionee, and the statement of operations, which will include the statement of the Royalty for the year last completed will be furnished to the Optionor not later than March 31 in each year. 9.6 The Optionor will have 90 days after receipt of such statements to question the accuracy thereof in writing and, failing such objection, the statements will be deemed to be correct and unimpeachable thereafter. 9.7 If the audited financial statements furnished pursuant to Section 9.5 disclose any overpayment of Royalty by the Optionee during the year, the amount of the overpayment will be debited against future installments of Royalty payable hereunder or will, if requested by the Optionee, be refunded by the Optionor forthwith FORCE MAJEURE 10.1 If the Optionee at any time is prevented or delayed from conducting exploration work to comply with the Expenditure requirements in Section 2.2(a) of this Agreement by reason of strikes, walk-outs, labour shortages, power shortages, fuel shortages, fires, wars, acts of God, governmental regulations restricting normal operations, shipping delays or any other reason or reasons beyond the control of the Optionee (and for greater certainty excluding factors related to a lack of funding), the time limited for the performance by the Optionee of its obligations hereunder will be extended by a period of time equal in length to the period of each such prevention or delay, provided however that nothing herein will discharge the Optionee from its obligations to timely pay the consideration under Section 2.2(b) The Optionee will within seven (7) days of a force majeure event as set forth in Section 10.1 give notice to the Optionor of such event and upon cessation of such event will furnish the Optionor with notice to that effect together with particulars of the number of days by which the obligations of the Optionee hereunder have been extended by virtue of such event of force majeure and all preceding events of force majeure CONFIDENTIALITY 11.1 Subject to Section 11.2 all information received or obtained by the Optionor or the Optionee hereunder or pursuant hereto shall be kept confidential and no part thereof may be disclosed or published without the prior written consent of the other except such information as may be required to be disclosed or published by law or

21 LAW 394, Section 1 Page 21 of 28 regulation; provided that either party may disclose information to any person or persons with whom it proposes to contract pursuant to Section 4.1 and have agreed to hold the same in confidence, it being agreed that prior to such disclosure, the non-disclosing party shall receive notice thereof and a copy of the confidentiality agreement executed by the person or persons with whom the disclosing party proposes to contract pursuant to Section 4.1. Notwithstanding any other provision of this Agreement, the Optionee acknowledges that the geological data and information provided by the Optionor to the Optionee in connection with entering into this Agreement shall not be used for any purpose other than in connection with its activities under this Agreement Confidential information shall not include the following: (a) (b) (c) (d) information that, at the time of disclosure, is in the public domain; information that, after disclosure, is published or otherwise becomes part of the public domain through no fault of the recipient; information that the recipient can show already was in the possession of the recipient at the time of disclosure; or information that the recipient can show was received by it after the time of disclosure, from a third party who was under no obligation of confidence to the disclosing party at the time of disclosure Except as required by law or regulatory authority, no party hereto shall make any public announcements or statements concerning this Agreement or the Property without the prior approval of the other parties, not to be unreasonably withheld The text of any public announcements or statements including news releases which a party intends to make pursuant to the exception in Section 9.3 shall be made available to the other party not less than twenty-four (24) hours prior to publication and the disclosing party shall limit or amend such disclosure as may be requested by the non-disclosing parties to the extent such limitation or amendment allows the disclosing party to meet its legal obligations. No party may issue a release containing a factual error identified by the other parties.

22 LAW 394, Section 1 Page 22 of ARBITRATION 12.1 All questions or matters in dispute with respect to the interpretation of this Agreement will, insofar as lawfully possible, be submitted to arbitration pursuant to the terms hereof using final offer arbitration procedures It will be a condition precedent to the right of any party to submit any matter to arbitration pursuant to the provisions hereof, that any party intending to refer any matter to arbitration will have given not less than ten (10) days prior written notice of its intention so to do to the other party together with particulars of the matter in dispute On the expiration of such ten (10) day period, the party who gave such notice may proceed to commence procedure in furtherance of arbitration as provided in this Part The party desiring arbitration ( First Party ) will nominate in writing three (3) proposed arbitrators, and will notify the other party ( Second Party ) of such nominees, and the other party will, within ten (10) days after receiving such notice, either choose one (1) of the three (3) or recommend three (3) nominees of its own. All nominees of either party must be independent and at arm s length, and hold accreditation as either a lawyer, accountant or mining engineer with a minimum of ten (10) years experience in their given profession. If the First Party fails to choose one of the Second Party s nominees, then all six (6) names shall be placed into a hat and one name shall be randomly chosen by the president of the First Party and that person, if he/she is prepared to act, shall be the nominee. Except as specifically otherwise provided in this Part 12, the arbitration herein provided for will be conducted in accordance with the Commercial Arbitration Act (British Columbia). The parties shall thereupon each be obligated to proffer to the arbitrator within twenty-one (21) days of his/her appointment a proposed written solution to the dispute and the arbitrator shall within ten (10) days of receiving such proposals choose one of them without altering it except with the consent of both parties The expense of the arbitration will be paid as specified in the award The parties agree that the award of the arbitrator will be final and binding upon each of them.

23 LAW 394, Section 1 Page 23 of DEFAULT AND TERMINATION 13.1 The Optionee may terminate this Agreement at any time upon thirty (30) days prior written notice of such termination to Optionor Either party hereto may terminate this Agreement in the event of a material breach of any term or condition of this Agreement by the other party, which material breach is not corrected within sixty (60) days of the receipt by of written notice by the other party which describes such breach in reasonable detail If this Agreement is terminated, the Optionee shall: (a) (b) within sixty (60) days deliver to the Optionor copies of all reports, maps, plans, photographs and drill logs of the Optionor relating to the Property, provided that the Optionee do not make any representation or warranty concerning the accuracy or completeness thereof; and within ninety (90) days remove from the Property any machinery, buildings, structures, facilities, equipment and all other Property of every nature and description erected, placed or situated thereon by the Optionee; any Property not so removed at the end of the ninety (90) day period shall, at the written option of the Optionor delivered to the Optionee, become the Property of the Optionor If the Optionee is prevented from or delayed in performing its obligations in Section 13.3(a) or Section 13.3(b) by a force majeure event as set forth in Section 10, the relevant period of sixty (60) days and ninety (90) days respectively referred to therein shall be extended by the period of the force majeure event NOTICES 14.1 Each notice, demand or other communication required or permitted to be given under this Agreement ( Notice ) to the Optionor or the Optionee by the other shall be in writing and will be sent by personal delivery, fax or prepaid registered mail to the addresses of the parties as follows: (a) if to the Optionor: 14 Eaglewood Drive West Vancouver, B.C. V5H 5G1

24 808 LAW 394, Section 1 Page 24 of 28 Facsimile: (778) Attention: President and CEO (b) if to the Optionee: 1100 Hastings Street Vancouver, B.C. V6C 2Z2 Facsimile: (604) Attention: President and CEO 14.2 The date of receipt of such Notice will be the date of delivery or fax thereof if delivered or faxed during business hours, or, if given by registered mail as aforesaid, will be deemed conclusively to be the third day after the same will have been so mailed except in the case of interruption of postal services for any reason whatever, in which case the date of receipt will be the date on which the Notice is actually received by the addressee Either party may at any time, and from time to time, notify the other party in writing of a change of address and the new address to which Notices will be given to it thereafter until further change GENERAL 15.1 This Agreement is subject to the approval of the Board of Directors of the Optionee This Agreement will supersede and replace any other agreement or arrangement, whether oral or written, heretofore existing between the parties in respect of the subject matter of this Agreement No consent or waiver expressed or implied by either party in respect of any breach or default by the other in the performance of such other of its obligations hereunder will be deemed or construed to be a consent to or a waiver of any other breach or default The parties will promptly execute or cause to be executed all documents, deeds, conveyances and other instruments of further assurance which may be reasonably necessary or advisable to carry out fully the intent of this Agreement or to record wherever appropriate the respective interests from time to time of the parties in the Property.

25 LAW 394, Section 1 Page 25 of This Agreement will enure to the benefit of and be binding upon the parties and their respective successors and assigns, subject to the conditions hereof This Agreement will be construed in accordance with the laws of the Province of British Columbia and the laws of Canada applicable therein All sums of money referred to herein are expressed in United States currency unless otherwise provided herein Nothing herein will constitute or be taken to constitute the parties as partners or create any fiduciary relationship between them No modification, alteration or waiver of the terms herein contained will be binding unless the same is in writing, dated subsequently hereto, and fully executed by the parties Time will be of the essence in the performance of this Agreement The headings of the Parts and Sections of this Agreement are for convenience only and do not form a part of this Agreement, nor are they intended to affect the construction or meaning of anything herein contained or govern the rights and liabilities of the parties Time will be of the essence in the performance of this Agreement This Agreement may be executed in counterpart and delivered by facsimile. IN WITNESS WHEREOF this Agreement has been executed on behalf of each of the Optionor and each of the Optionee by their duly authorized officers on this 1st day of February, PROSPECTOR INC. Per: Joe Prospector Authorized Signatory MAJOR MINING CORP. Per: Sigmund Freud Authorized Signatory

26 ACE 2002/oct/ O/oct/17 GOOD LEO 2004Ioct/ /oct/12 GOOD SIMON 2007/oct/ /oct/24 GOOD APRIL 2008Idec/ dec128 GOOD LILY 2008/janhl2 2010/jan/12 GOOD SAMANTHA 2008/jan/ /jan/12 GOOD STEVIE 2009/mayI27 2OlOImay/27 GOOD CHANTELL 2009/sep/ /sep/28 GOOD TAMMY 2009/sep/ OIsepI28 GOOD (as at October 15, 2009) Mineral Claims Comprising the Property Tenure No. Claim Name Issue Date Good to date Status Area (ha) SCHEDULE A LAW 394, Section 1 Page 26 of 28

27 LAW 394, Section 1 Page 27 of 28 Schedule B - Relevant Excerpts from Vancouver Sun Article on Southwestern Resources Case (by David Baines, September 17, 2012) FORMER VANCOUVER GEOLOGIST PLEADS GUILTY TO MASSIVE ASSAY FRAUD CROWN PROSECUTORS SEEK 10-YEAR PRISON TERM FOR JOHN PATERSON, FORMER CEO OF SOUTHWESTERN RESOURCES Former Vancouver geologist and mining executive John Gregory Paterson, who created and distributed hundreds of bogus assay results to boost the share price of Toronto Stock Exchange-listed Southwestern Resources Corp., has pleaded guilty to four of nine counts of fraud. Paterson, 62, entered the guilty plea through defence lawyer Rod Anderson on Monday morning, just before an 83-day trial was scheduled to begin in Vancouver Provincial Court. In his opening statement, [Crown Counsel Ian] Hay told court how the fraud which rocked the mining community and the stock market when it was discovered in June 2007 started and ended. Paterson was the president, chief executive officer and largest shareholder of Southwestern in 2002 when it optioned a prospective gold property in China (the Boka project). Paterson assumed responsibility for the exploration program and served as the qualified person, who is responsible for compiling and disseminating information about the project, including assay results. Hay said Paterson received the first set of assay results directly from the lab in May 2003 and included what he purported to be the results in a news release. Hay said that, from May 2003 to February 2007, Paterson issued 25 consecutive releases reporting assay results on the Boka project. Problem was, they were not true: Every one contained false numbers created by John Paterson replacing the true numbers, Hay told court. He said that, of the 446 assay results that were reported, 433 were inflated values.

28 to pennies. END OF EXAMINATION Hay said Paterson also entered the same figures into the company s databases at the Hay said evidence will show Paterson engaged in a series of ploys to delay and lab had sent Paterson and found they didn t match the assays recorded on the At that juncture, company officials obtained copies of the original assay certificates the Because the results might influence the stock price, the company also filed a material change report on SEDAR, the national securities database. dissemination service. recommend the stock to investors. lenders require before they will finance this sort of project. manager, John Zhang, instructing him to perform certain tasks that could only frustrate Southwestern was able to speak to him again. defeat the verification process. He said Paterson sent s to the on-site project The release was circulated to company executives and board members, then sent to the TSX surveillance department and publicly distributed through an electronic project site and its Vancouver head office. These results formed the basis for later technical reports on the property, and those reports, in turn, were used by analysts to Investors and analysts, unaware of the fraud, pushed for a pre-feasibility study, which the delays. That month, Paterson resigned and, according to Hay, nobody at results had been manipulated, and disclosed the real values. The stock price plunged In November 2007, an independent mining consultant verified the reported assay public not to rely on previously issued assay results. company s databases. In July 2007, the company issued a news release warning the LAW 394, Section 1 Page 28 of 28 By June 2007, Southwestern executives and board members became concerned about