Notes to the consolidated financial statements

a)

Basis of consolidation

The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All intercompany transactions and balances have been eliminated on consolidation.
 

b)

Use of estimates

The preparation of the consolidated financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions, which affect the reported amounts of assets and liabilities at that date of the financial statements and revenues and expenses for the periods reported. Management has made a number of significant estimates and valuation assumptions, including the useful lives of capital assets and determination of accruals. By their nature, these estimates are subject to measurement uncertainty and the effect of the consolidated financial statements of changes in such estimates in future periods could be significant. Actual results will likely differ from those estimates.
 

c)

Exploration and evaluation costs

Exploration and development costs are expensed as incurred. Exploration costs include value-added taxes incurred in foreign jurisdictions when recoverability of those taxes is uncertain. When it has been established that a mineral deposit is commercially mineable and a decision has been made to formulate a mining plan (which occurs upon completion of a positive economic analysis of the mineral deposit), the costs subsequently incurred to develop the mine on the property prior to the start of mining operations are capitalized. Capitalized amounts may be written down if future undiscounted cash flows, including potential sale proceeds, related to a mineral property are estimated to be less than the carrying value of the property.
 

d)

Mineral property acquisition costs

Mineral property acquisition costs are capitalized until the viability of the mineral interest is determined. Capitalized acquisition costs are expensed in the period in which it is determined that the mineral property has no future economic value.

Capitalized amounts may be written down if future cash flows, including potential sales proceeds, related to the property are estimated to be less than the carrying value of the property. Management reviews the carrying value of each mineral property interest periodically. Whenever events or changes in circumstances indicate the carrying value may not be recoverable, reductions in the carrying value of each property would be recorded to the extent the carrying value exceeds the estimated future cash flows.
 

e)

Foreign currency transactions and balances

All the operations of the group have a US dollar functional currency. Monetary assets and liabilities denominated in foreign currencies have been translated into United States dollars at the period end exchange rates. Non-monetary assets have been translated at the rates prevailing at the dates of acquisition. Revenue and expense items other than depreciation are translated at the average rates of exchange prevailing for the period. Any exchange gain or loss that arises on translation is included in the determination of net loss for the period.
 

f)

Property, plant and equipment

Property, plant and equipment are carried at cost, less depreciation and amortization. Depreciation and amortization of capital assets, that have been placed in service is calculated on a straight line basis over the following terms:

g)

Leases

Finance leases, which transfer to the TEAL Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income.

Operating lease payments are recognized as an expense in the income statement on a straight-line basis over the term of the lease agreement.
 

h)

Cash and cash equivalents

Cash equivalents include those short term money market instruments, which have an original term to maturity of three months or less when acquired.
 

i)

Revenue recognition

Revenue is recognized to the extent that it is probable that economic benefits will flow to the Company and the revenue can be reliably measured. Incidental revenue is set off against related project and exploration expenditure.

Interest

Revenue is recognized as the interest accrues.
 

j)

Impairment

The carrying value of assets is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If any such indication exists, the recoverable amount of the asset is estimated. Where the carrying value exceeds the estimated undiscounted cash flows from the use of the assets, such assets are written down to their recoverable amount.
 

k)

Income taxes

Income taxes are provided for in accordance with the liability method. Under the liability method of accounting for income taxes, future tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. If on the basis of available evidence, it is more likely than not that all or a portion of the future tax asset will not be realized, the future tax asset is reduced by a valuation allowance.
 

l)

Joint ventures

Joint venture arrangements in which the companies within the TEAL Group have a controlling stake are consolidated as though they are subsidiaries. Unincorporated joint ventures are accounted for net of joint venture partner contributions. Arrangements whereby the TEAL Group is incurring costs in order to earn a stake in a project are accounted for by expensing the costs until the interest is earned. The entity in which the interest is earned is then consolidated if the TEAL Group has control, equity accounted if the TEAL Group has significant influence, or proportionately consolidated if there is joint control.
 

m)

Loss per common share

Basic loss per share

The loss per common share is calculated as the consolidated loss for the period, divided by the weighted average number of common shares.

Diluted loss per share

Diluted loss comprises loss as used in calculating basic loss per share. The loss figure is divided by the weighted average number of common shares, adjusted for any financial instruments or other contracts that entitle the holder thereof to ordinary shares, to arrive at diluted loss per share. No diluted loss per share is calculated if all share issuances are anti-dilutive.
 

n)

Asset retirement obligation

Asset retirement obligation relates to TEAL’s legal obligation to remove exploration equipment and other assets from its mineral property sites and to perform other site reclamation work. Site closure costs are capitalized when incurred and reviewed for impairment on an annual basis.
 

o)

Stock based compensation

The TEAL Group accounts for stock appreciation rights granted to directors, officers, employees and non-employees of the group as equity settled using the fair value method of accounting. The fair value of share appreciation rights at their grant dates are determined using the Black-Scholes option pricing model, as required by generally accepted accounting principles and expensed over the vesting period.
 

p)

Employee benefits

The TEAL Group contributes to a defined contribution pension scheme, which contributions are made to a separately administered fund.
 

q)

Comparative amounts

Certain prior year amounts have been reclassified to conform with the current year’s presentation.
 

r)

Inventory

Inventory is valued at the lower of cost or net realizable value with due allowance being made for obsolete and slow moving items. Net realizable value is the estimated selling price in the ordinary course of business, less estimated cost of completion and the estimated costs necessary to make the sale. Raw materials are valued at weighted average cost.
 

a)

Mwambashi Copper Project (TEAL 70%)

The Mwambashi Copper Project is situated within a large scale prospecting licence number 72. Korea Zinc Company, Limited (KZC) has a right to 30% participating interest in the project. Funding is mandatory for both parties, except with respect to declared “project areas” set aside for specific evaluation and development, in which case a party may withdraw or dilute its interest by failing to fund. The Mwambashi Copper Project was declared a “project area” in the previous financial year. Neither of the parties’ participating interests have been diluted to date, although negotiations are in process between the parties that may affect the current respective participating interests.
 

b)

Copperbelt Joint Venture Exploration Area (TEAL 70%)

The area consists of five large scale prospecting licences (one of which contains the Mwambashi Copper Project above) and is subject to a joint venture agreement with KZC granting them a 30% participating interest. Neither of the parties’ interests have been diluted to date, although negotiations are in process between the parties that may affect the current respective participating interests.
 

c)

Kafue Joint Venture Exploration Area (TEAL 51%)

The area consists of three exclusive exploration licences and each is subject to a separate joint venture agreement with Billiton Development (Zambia) Limited (BHP), a subsidiary of BHP Billiton plc. TEAL has met the vesting requirements with regard to two of the licences. It is TEAL’s intention to continue with further exploration work on these licences. BHP is required to make a participation decision with regards to these two licences. Should they elect to participate they will have to contribute their 49% share of expenditure. Meanwhile TEAL is continuing with exploration activities to meet its vesting requirements with regards to the third licence.
 

d)

Kalumines Copper-Cobalt Project (TEAL 60%)

The Kalumines Copper-Cobalt Project consists of one mining licence held by TEAL’s 60% owned subsidiary Kasonta – Lupoto Mines s.p.r.l (Kalumines). The remaining 40% is held by Gécamines which contributed all of the mining rights to the area. TEAL is responsible for conducting and funding a feasibility study on Kalumines to retain its interest. Thereafter TEAL must arrange all financing for the development of a mine should a development decision be taken.

Includes 393,335 rights granted to non-executive directors, which is exercisable from date of grant. Of these, 20,000 vested rights have been exercised during the year.

In terms of an agreement dated March 6, 1997 among Zambia Consolidated Copper Mines Limited (now ZCCM-IH), Avmin Limited, a subsidiary of ARM, Konnoco Zambia Limited (Konnoco) and the Government of Zambia, Konnoco acquired the Konkola North Copper Project in consideration of an initial payment on signing of US$500,000, additional payments which have been made, totalling US$500,000 upon the commencement of a feasibility study and the commitment to pay a further US$7,500,000 upon the taking of a development decision after the completion of a final feasibility study. Konnoco undertook to spend certain amounts to complete a pre-feasibility study, which the Company has done, and produce a feasibility study within a further 24 to 48 months. In terms of an amending agreement dated September 19, 2005, the parties agreed to extend the date on which Konnoco was required to produce a final feasibility study until the earlier of the date that is 24 months following the closing of the Offering and November 30, 2007.

Should a feasibility study be completed and a mine development decision be taken by Konnoco,then TEAL will be obligated to subscribe for that number of new Konnoco shares so as to equity finance one third of the total financing requirements for mine development and, as well, settle all inter-Company loans between Konnoco and TEAL. Thereafter, ZCCM-IH has the right to a 15% or 20% equity interest in Konnoco, of which 5% shall be a free-carried interest. ZCCM-IH’s residual 10% or 15% respectively, “paying” equity interest will obligate ZCCM-IH to fund its share of equity to develop a mine, although ZCCM-IH may elect to be debt funded by TEAL at an interest rate of LIBOR plus 4.5% (should ZCCM-IH elect to have a 15% interest) or a fixed rate of 20% (should ZCCM-IH elect to have a 20% interest).
 

In terms of an agreement made May 6, 2003 between TEAL Mining (DRC) s.p.r.l (TEAL Mining), a wholly-owned subsidiary of the Company, and Gécamines, Gécamines agreed to contribute all of the mining rights to the area located within the Kasonta-Lupoto Polygon (an area now known as Permits d’Exploitation No. 2590) to Kalumines, a corporation owned 60% by TEAL Mining and 40% by Gécamines. On August 18, 2005, Gécamines and TEAL Mining agreed that TEAL Mining would submit a feasibility study before May 2007, which is a condition to TEAL Mining’s right to maintain its interest in Kalumines. Thereafter, TEAL Mining must arrange all financing for the development of a mine should a development decision be taken. Royalty payments of between 3% and 4.5% of gross sales must be made upon the commencement of production. TEAL Mining has the right to appoint a majority of members to the board of Kalumines and to any management committee established.
 

The Company is committed to future minimum annual rent payments under operating lease agreements over the next five years as follows:

d)

Commitments in respect of capital expenditure

Discussions with the broad-based Namibian stakeholder grouping, EVI Mining Company Limited (‘EVI’), to enable EVI to acquire a 10% equity interest in TEAL’s wholly-owned Namibian affiliate company, Avdale Namibia (Pty) Limited, will be proressed to a conclusion over the coming months.
 

The group has secured a one year bridging loan facility with Standard Chartered Bank for US$20,000,000 which is being guaranteed by TEAL’s major shareholder, ARM and is repayable on May 23, 2008. Subsequent to year-end, ARM has agreed to increase the guarantee to $50 million, subject to South African Reserve Bank approval, which will ensure that TEAL has a facility in place beyond the end of the 2008 financial year or until long-term funding is arranged, TEAL is currently negotiating the terms including an extension beyond the one-year time-frame, with Standard Chartered Bank.

The funds will be directed mainly towards work supporting studies on TEAL’s major projects thereby creating sufficient flexibility for the company to maximize value from its existing portfolio, specifically: the Konkola North copper mine and Kalumines mine and smelter copper projects, as well as the Otjikoto Gold Project. Appropriate funding to refinance the bridging facilities and fund the developmental expenditure at Konkola North, Kalumines and Otjikoto will be arranged after the completion of each of the respective final feasibility studies.

b)

Acquisition of subsidiaries