The Kalana Permit

The Permit in respect of the Kalana Gold Mine and Concession held by SOMIKA covers an area of 387 km 2 in southwest Mali, of which the Kalana Gold Mine accounts for an area of 2.0 km 2. The property is a developed mine site consisting of an underground mine operation, open pit workings, a gravity plant and related infrastructure. The Kalana Gold Mine was actively mined from 1985 to 1991 and was placed on care and maintenance until operations were resumed by SOMIKA in January, 2004.

The Permit is unique in Mali, as under Malian law exploitation permits are normally only granted in respect of areas covered by a complete approved feasibility study. Additionally, exploration permits are normally granted for a limited time (usually three years, twice renewable for three year terms), with a set amount of minimum required spending and on the basis that the area covered by the permit halveseach time the Permit is renewed. The Permit, on the other hand, is a combined exploitation permit that is derived from the legislation passed originally passed to enable the Soviet aided state company, SOGEMORK, to develop the Kalana Gold Mine. The original permit was created in 1984 for a period of 15 years, renewable at five year intervals thereafter up to a maximum 30 year term. In April 2003, during its first renewal period, the Permit was transferred to Avnel Gold,Limited (a 100% owned subsidiary of Avnel Gold Mining Limited) and was simultaneously reinstated for a new term of 30 years. Should the exploitation of the mineral deposit, or subsequent mineral finds not be completed at the end of this 30 year period, the Permit may be renewed at the discretion of the Malian Government, and on terms negotiated at such time, for additional 10 year terms until the deposit is exhausted.

History of the Kalana Permit

The Kalana region has a long history of gold extraction with artisanal miners exploiting the alluvial placers. The first report of gold at Kalana was in 1931 by a geologist conducting regional exploration when a high-grade quartz-gold vein was found in an artisanal working.

The Permit area was initially explored between 1967 and 1982 by two Malian national companies as part of a Soviet Technical Assistance Program to Mali. As a result of this exploration, a decision was taken to develop the Kalana Gold Mine as a small underground operation using a recovery process based on crushing, milling and gravity concentration. Production commenced in 1985 and a total of 227,000 tonnes of ore was treated at an average head grade of 13 g/t to produce 81,000 ounces of gold by 1991. Upon the break-up of the former Soviet Union, personnel, financial and technical resources were withdrawn and the mine was placed on care and maintenance. In February 1992, the Malian national company holding the Permit was dissolved and the Permit reverted to the Malian Government.

In 1994, the Malian Government embarked on a privatization program with the assistance of the World Bank. In connection with this program, the Malian Government developed and commissioned an electricity supply infrastructure specifically for the Kalana Gold Mine in 1995.Under the privatization program, a joint venture of Ashanti Gold Fields Co. Ltd. (“ Ashanti”) and Johannesburg Consolidated Investments Ltd. (“JCI”) was awarded the tender and issued the Permit in 1995 and conducted exploration activities at Kalana between 1995 and 1996. JCI withdrew from the joint venture in 1996. Thereafter, Ashanti reached an agreement with Nelson Gold Corporation (“Nelson Gold”) in respect of the development, operation and acquisition of a majority interest in the Permit, subject to approval of the Malian Government. At this time, Mr. Roy Meade, Chief Executive Officer of Avnel, and Mr. Howard Miller, a director of Avnel, held the positions of Chief Executive Officer and Executive Director of Nelson Gold, respectively. Elliott and a sister trust to Fern were also significant shareholders of Nelson Gold. Commencing in 1997, Nelson Gold completed a bankable feasibility study on the Kalana Gold Mine. The Malian Government did not ratify this agreement between Nelson Gold and Ashanti.

On March 18, 1999, the Malian Government issued a parliamentary decree cancelling the transfer of the Permit to the Ashanti-JCI joint venture as it had failed to meet its contractual commitment to put the Kalana Gold Mine into production within the prescribed three-year term.

The Malian government re-issued an international invitation to tender for the Permit in July 1999. Nelson Gold submitted a tender at this time, but was unsuccessful. However, the successful company did not meet its initial financial commitments, as a result of which the tender was cancelled and a Permit was never issued.

In July 2000, Nelson Gold changed its business objectives away from mining and sold to Elliott Associates, L.P. for $100,000 its intellectual property in the various feasibility studies which it had undertaken in respect of the Kalana Gold Mine. In September 2001, Elliott Associates L.P. formed Avnel Gold,Limited specifically to tender for the Kalana Gold Mine.

Acquisition of the Permit by Avnel

On October 3, 2001, a tender comprising a technical bid and financial bid for the Permit was submitted by Avnel Gold, Limited to the Malian Government. The technical bid was based on the bankable feasibility study completed by Nelson Gold in August of 1999, which relied on Nelson Gold’s own work as well as a number of prior studies.

The tender contemplates the refurbishment of the existing Kalana Gold Mine to enable re-commencement of underground mine production at a rate of 60,000 tonnes of ore per year processed in a gravity circuit, with the possibility of increasing the tonnage of ore mined and processed to 175,000 tonnes per year processed through a gravity and a carbon in leach (“CIL”) circuit, conditional on increased gold prices and reconfirmation of the prior operators’ data and independent assessments.

Avnel Gold,Limited originally lost the tender to another company. Management of Avnel was subsequently informed by the Malian Government that the successful bidder had defaulted on its financial obligations, and that its tender rights were cancelled. As a result, the Malian Minister of State Domain formally awarded the tender to Avnel Gold,Limited on December 23, 2002.

The financial terms of Avnel’s tender, as accepted by the Malian Minister of State Domain, include the payment of (i) a $500,000 entry fee, payable on signing of the Foundation Agreement (paid by Avnel in March 2003); (ii) $800,000 for the tangible assets, payable upon the signing of the Accord de Cession (paid by Avnel in March 2003); (iii) $1,200,000 for the reserves, payable in instalments, with $300,000 payable on signature of the Deed of Transfer (paid by Avnel in March 2003), $300,000 payable at the end of the first year after signature of the Deed of Transfer (paid by Avnel in February 2004) and $600,000 at the end of the second year after signature of the Deed of Transfer (payable in February 2005 for which an extension to June 2005 was granted, and payment was made in May 2005).

The terms of the tender also require Avnel to make an equity contribution to SOMIKA of $1,685,000, composed of a cash payment of $350,000 and $1,335,000 deemed to have been expended by Avnel on the completion of the feasibility study. Avnel was also required to bear 50% of the care and maintenance costs of the Kalana Gold Mine and Permit area from the date of the award of tender up to the date of signature of the Foundation Agreement. This amounted to $45,000 which was paid by Avnel in February 2003.

Date	Document	Download Options
April 7th, 2003	Mine Permit was issued by the Government of Mali