EX-99.1 12 exhibit99-1.htm CONSOLIDATED FINANCIAL STATEMENTS Filed by sedaredgar.com - Continental Minerals Corporation - Exhibit 99.1


CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED
DECEMBER 31, 2007, 2006 AND 2005

(Expressed in Canadian Dollars, unless otherwise stated)

  KPMG LLP Telephone (604) 691-3000
  Chartered Accountants Fax (604) 691-3031
  PO Box 10426 777 Dunsmuir Street Internet www.kpmg.ca
  Vancouver BC V7Y 1K3    
  Canada    

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of Continental Minerals Corporation

We have audited Continental Minerals Corporation (the "Company's") internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company'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 section entitled Internal Controls over Financial Reporting Procedures included in item 15 of the Company's Annual Report on Form 20-F. Our responsibility is to express an opinion on the effectiveness of 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, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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.

KPMG LLP, a Canadian limited liability partnership is the Canadian
member firm of KPMG International, a Swiss cooperative.

Board of Directors of Continental Minerals Corporation
June 25, 2008

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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control-Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2007 and 2006 and the related consolidated statements of operations, comprehensive loss, deficit and cash flows for each of the years in the three-year period ended December 31, 2007 and our report dated June 25, 2008 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Chartered Accountants

Vancouver, Canada
June 25, 2008


  KPMG LLP Telephone (604) 691-3000
  Chartered Accountants Fax (604) 691-3031
  PO Box 10426 777 Dunsmuir Street Internet www.kpmg.ca
  Vancouver BC V7Y 1K3    
  Canada    

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of Continental Minerals Corporation

We have audited the accompanying consolidated balance sheets of Continental Minerals Corporation (the "Company") as of December 31, 2007 and 2006 and the related consolidated statements of operations, comprehensive loss, deficit and cash flows for each of the years in the three-year period ended December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits 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 the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as at December 31, 2007 and 2006 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007 in conformity with Canadian generally accepted accounting principles.

As discussed in note 3 to the consolidated financial statements, the Company changed its method of accounting for financial instruments and derivatives in 2007.

Canadian generally accepted accounting principles vary in certain significant respects from US generally accepted accounting principles. Information relating to the nature and effect of such differences is presented in note 13 to the consolidated financial statements.

KPMG LLP, a Canadian limited liability partnership is the Canadian
member firm of KPMG International, a Swiss cooperative.


Board of Directors of Continental Minerals Corporation
June 25, 2008

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 25, 2008 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ KPMG LLP

Chartered Accountants

Vancouver, Canada

June 25, 2008

2


CONTINENTAL MINERALS CORPORATION
Consolidated Balance Sheets
(Expressed in Canadian Dollars)

    December 31     December 31  
    2007     2006  
             
Assets            
             
Current assets            
   Cash and cash equivalents $  33,040,579   $  1,791,802  
   Amounts receivable   211,864     227,598  
   Amounts due from related parties (note 9)   –     643,055  
   Prepaid expenses and deposits   668,407     168,078  
    33,920,850     2,830,533  
             
Mineral property interests (note 5)   117,287,309     112,747,309  
Property and equipment (note 6)   548,280     523,327  
Investments (note 4(b))   1     1  
  $  151,756,440   $  116,101,170  
             
             
Liabilities and Shareholders' Equity            
             
Current liabilities            
   Accounts payable and accrued liabilities $  1,912,150   $  3,581,150  
   Amounts due to related parties (note 9)   345,420     –  
   Loan from related party (note 9)   –     1,500,000  
   Current portion of long-term payable (note 5(a)(iii))   991,300     578,650  
   Convertible promissory note (note 7)   –     11,034,366  
    3,248,870     16,694,166  
             
Long-term payable (note 5(a)(iii))   991,300     1,735,950  
Future income tax liabilities (note 11)   25,510,000     26,948,000  
             
Shareholders' equity            
   Share capital (note 8(b))   175,044,539     107,421,628  
   Convertible promissory note - conversion right (note 7)   –     695,932  
   Contributed surplus (notes 8(e))   10,680,085     4,322,759  
   Deficit   (63,718,354 )   (41,717,265 )
    122,006,270     70,723,054  
Commitments (notes 4(a), 5, and 8(f))            
Subsequent events (notes 5(a)(iii) and 8(d))            
             
  $  151,756,440   $  116,101,170  

See accompanying notes to the consolidated financial statements

Approved by the Board of Directors

/s/ Gerald Panneton /s/ Zhi Wang
   
Gerald Panneton Zhi Wang
Director Director


CONTINENTAL MINERALS CORPORATION
Consolidated Statements of Operations
(Expressed in Canadian Dollars except for number of shares)

    Years ended December 31  
    2007     2006     2005  
Expenses                  
 Amortization $  6,272   $  –   $  –  
 Conference and travel   1,511,724     843,510     277,471  
 Exploration (schedule)   16,170,355     19,226,242     6,113,320  
 Exploration - stock-based compensation (note 8(d))   205,162     660,279     230,524  
 Foreign exchange (gain) loss   (1,988,158 )   263,329     153,176  
 Insurance   164,075     131,880     99,614  
 Interest   309,045     916,021     –  
 Interest income   (858,891 )   (56,668 )   (142,887 )
 Legal, accounting and audit   533,765     860,049     294,393  
 Loss on extinguishment of promissory note (note 7)   475,000     –     –  
 Office and administration   2,080,201     2,387,458     730,431  
 Operations and administration - stock-based compensation (note 8(d))   2,336,326     1,950,259     584,797  
 Shareholder communications   387,122     353,977     197,350  
 Trust and filing   103,457     124,617     42,598  
Loss before non-controlling interest   21,435,455     27,660,953     8,580,787  
Non-controlling interest   –     (944,880 )   –  
Loss for the year $  21,435,455   $  26,716,073   $  8,580,787  
                   
Basic and diluted loss per share $  (0.18 ) $  (0.51 ) $  (0.22 )
                   
Weighted average number of common shares outstanding   116,675,784     52,849,728     39,516,486  

See accompanying notes to the consolidated financial statements

Consolidated Statement of Comprehensive Loss      
(Expressed in Canadian Dollars)      
    Year ended December 31, 2007  
Loss for the year $  21,435,455  
Other comprehensive loss   –  
Total Comprehensive Loss $  21,435,455  

See accompanying notes to the consolidated financial statements

Consolidated Statements of Deficit                  
(Expressed in Canadian Dollars)                  
    Years ended December 31  
    2007     2006     2005  
Deficit, beginning of year $  (41,717,265 ) $  (15,001,192 ) $  (6,420,405 )
Adjustment for adoption of new accounting standards (note 3(a))   (565,634 )   –     –  
    (42,282,899 )   (15,001,192 )   (6,420,405 )
Loss for the year   (21,435,455 )   (26,716,073 )   (8,580,787 )
Deficit, end of year $  (63,718,354 ) $  (41,717,265 ) $  (15,001,192 )

See accompanying notes to the consolidated financial statements


CONTINENTAL MINERALS CORPORATION
Consolidated Statements of Cash Flows
(Expressed in Canadian Dollars)

    Years ended December 31  
Cash provided by (used for)   2007     2006     2005  
                   
Operating activities                  
 Loss for the year $  (21,435,455 ) $  (26,716,073 ) $  (8,580,787 )
 Items not involving cash                  
     Accretion, net of interest   –     230,298     –  
     Amortization   269,222     140,381     2,806  
     Debt interest paid by issuance of common shares   156,274     151,233     –  
     Accrued loan interest   –     10,520     –  
     Foreign exchange loss (gain)   (2,905,000 )   178,000     –  
     Loss on extinguishment of convertible promissory note   475,000     –     –  
     Non-controlling interest   –     (944,880 )   –  
     Stock-based compensation   2,541,488     2,610,538     815,321  
 Changes in non-cash operating working capital                  
     Amounts receivable   15,734     (664 )   (155,037 )
     Prepaid expenses   (500,329 )   (107,104 )   57,767  
     Accounts payable and accrued liabilities   (1,669,000 )   2,672,005     101,647  
     Due (to) from related parties   988,475     (501,256 )   (239,556 )
Cash used for operating activities   (22,063,591 )   (22,277,002 )   (7,997,839 )
                   
Investing activities                  
 Acquisition of property and equipment   (294,175 )   (524,545 )   (14,030 )
 Acquisition of Great China Mining Inc. (net of cash paid) (note 5(a))   –     1,303,179     –  
 Acquisition of Highland Mining Inc. (net of cash acquired) (note 5(a))   –     –     (999,905 )
Cash provided by (used for) investing activities   (294,175 )   778,634     (1,013,935 )
                   
Financing activities                  
 Issuance of common shares, net of issue costs   67,181,543     6,280,926     5,624,710  
 Issuance (repayment) of convertible promissory note   (12,075,000 )   11,500,000     –  
 Loan (repayment) from related party   (1,500,000 )   1,500,000     –  
Cash provided by financing activities   53,606,543     19,280,926     5,624,710  
                   
Increase (decrease) in cash and cash equivalents   31,248,777     (2,217,442 )   (3,387,064 )
Cash and cash equivalents, beginning of year   1,791,802     4,009,244     7,396,308  
                   
Cash and cash equivalents, end of year $  33,040,579   $  1,791,802   $  4,009,244  
                   
Components of cash and cash equivalents are as follows:                  
 Cash $  19,291,814   $  1,679,686   $  647,588  
 Bankers acceptances and term deposits   13,748,765     112,116     3,361,656  
  $  33,040,579   $  1,791,802   $  4,009,244  
                   
Supplementary information                  
Taxes paid $  –   $  –   $  –  
Interest paid $  152,651   $  367,695   $  –  
                   
Non-cash financing and investing activities                  
                   
Fair value of stock options transferred from contributed surplus to share                  
 capital on options exercised $  285,094   $  874,476   $  2,997,539  
Shares issued for interest payment on convertible promissory note $  156,274   $  –   $  –  
Shares, options and warrants issued and to be issued pursuant to the acquisition                  
 of Great China Mining Inc. and acquisition of related properties $  –   $  82,376,136   $  –  
Long-term payable related to acquisition of surrounding properties $  –   $  2,314,600   $  –  
Future Income Tax related to acquisition of surrounding properties $  –   $  26,770,000   $  –  

See accompanying notes to the consolidated financial statements


CONTINENTAL MINERALS CORPORATION
Consolidated Schedules of Exploration Expenses
(Expressed in Canadian Dollars)

    Years ended December 31  
Xietongmen Property, China   2007     2006     2005  
                   
Exploration Costs                  
   Amortization $  262,950   $  140,381   $  2,806  
   Assays and analysis   592,171     1,455,212     601,687  
   Drilling   2,476,029     5,559,219     2,909,216  
   Engineering   5,307,365     5,928,230     47,143  
   Environmental   1,759,826     786,757     –  
   Equipment rentals and leases   309,875     457,212     60,863  
   Freight   57,168     16,157     –  
   Geological   914,527     1,564,687     928,463  
   Graphics   37,175     90,413     41,464  
   Property and finders' fees   17,136     283,206     16,269  
   Site activities   2,286,371     1,307,752     927,943  
   Socioeconomic   1,738,148     997,989     248,432  
   Transportation   411,614     639,027     329,034  
Incurred during the year   16,170,355     19,226,242     6,113,320  
Non-cash stock based compensation   205,162     660,279     230,524  
    16,375,517     19,886,521     6,343,844  
Accumulated exploration expenses, beginning of year   29,603,097     9,716,576     3,372,732  
Accumulated exploration expenses, end of year $  45,978,614   $  29,603,097   $  9,716,576  

See accompanying notes to the consolidated financial statements


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

1. CONTINUING OPERATIONS
   

Continental Minerals Corporation ("Continental" or the "Company") is incorporated under the laws of the Province of British Columbia, Canada, and its principal business activity is the acquisition, exploration and development of mineral properties. The Company's mineral property interests are located in Tibet, China (note 5(a)).

 

The Company is in the process of exploring its mineral property interests and has not yet determined whether its mineral property interests contain economically recoverable mineral reserves. The underlying value and the recoverability of the amounts shown for mineral property interests, and property and equipment are entirely dependent upon the existence of economically recoverable mineral reserves, the ability of the Company to obtain the necessary financing to complete the exploration and development of the mineral property interests, and future profitable production or proceeds from the disposition of the mineral property interests.

 

2.

SIGNIFICANT ACCOUNTING POLICIES

 

(a)

Basis of presentation

 

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.

 

All material intercompany balances and transactions have been eliminated.

 

(b)

Cash and cash equivalents

 

Cash and cash equivalents consist of cash and highly liquid investments, having maturity dates of three months or less from the date of acquisition, that are readily convertible to known amounts of cash.

 

(c)

Mineral property interests

 

Exploration expenses incurred prior to the determination of the feasibility of mining operations and option payments, until such time as the option is exercised or an interest in the property is earned, are expensed as incurred.

 

Mineral property acquisition costs subsequent to exercising the option or earning an interest in the property, and exploration and development expenditures incurred subsequent to the determination of the feasibility of mining operations, are deferred until the property to which they relate is placed into production, sold, allowed to lapse or abandoned. Mineral property acquisition costs include



CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

the cash consideration and the fair market value of common shares issued for mineral property interests. These costs are amortized over the estimated life of the property following commencement of commercial production, or written off if the property is sold, allowed to lapse or abandoned or when an impairment in value is determined to have occurred.

   

Administrative expenditures are expensed in the period incurred.

   
(d)

Property and equipment

   

Property and equipment are primarily used in the Company's exploration activities and are stated at cost less accumulated amortization. Amortization of equipment related to the Company's exploration activities is included within exploration expenses. Amortization of equipment not specifically related to the Company's exploration activities is included in the consolidated statements of operations. Amortization is provided on a straight-line basis at various rates ranging from 10% to 50% per annum representing the estimated useful lives of the related equipment.

   
(e)

Share capital

   

Share capital is recorded based on proceeds from share issuances net of issue costs. Shares issued for consideration other than cash are valued at their quoted market price on the date the agreement to issue the shares was reached and announced for business combinations and the date of issuance for other non-monetary transactions.

   
(f)

Stock-based compensation

   

The Company has a share purchase option plan, which is described in note 8(d). All stock-based payments are accounted for using a fair value based method and the related compensation expense is included in operations, with an offset to contributed surplus.

   

Consideration received on the exercise of stock options is recorded as share capital and the related contributed surplus is transferred to share capital.

   
(g)

Foreign currency translation

   

All of the Company's foreign operations are considered integrated.

   

Monetary assets and liabilities of the Company and its integrated foreign operations are translated into Canadian dollars ("CAD") at exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical exchange rates unless such items are carried at market, in which case they are translated at the exchange rates in effect on the balance sheet date. Revenues and expenses are translated at the rates in effect at the date of transaction. Gains or losses on translation are recorded in the consolidated statements of operations.



CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

(h)

Earnings (loss) per share

   

Basic earnings (loss) per share is calculated by dividing earnings (loss) available to common shareholders by the weighted average number of shares outstanding during the year. For all periods presented, earnings (loss) available to common shareholders equals reported earnings (loss). Diluted earnings (loss) per share is calculated using the treasury stock method. Under the treasury stock method, the weighted average number of common shares outstanding for the calculation of diluted earnings (loss) per share assumes that the proceeds to be received on the exercise of dilutive stock options or warrants are applied to repurchase common shares at the average market price for the year. For all years presented, the impact of stock options and warrants, if any, has been excluded as they would be anti-dilutive.

   
(i)

Use of estimates

   

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as at the balance sheet date, and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates relate to the determination of potential impairments of investments, property and equipment and mineral property interests, valuation of income tax assets and liabilities, determination of fair values assigned to the net assets acquired and liabilities assumed on acquisitions, determination of reclamation obligations and determination of fair values of stock options and warrants. Actual results could differ from those estimates.

   
(j)

Segment disclosures

   

The Company operated in a single reportable operating segment – the acquisition, exploration and development of mineral properties.

   
(k)

Income taxes

   

The Company uses the asset and liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are computed based on differences between the carrying amounts of existing assets and liabilities on the balance sheet and their corresponding tax values, using the enacted or substantively enacted income tax rates expected to apply to taxable income in the years in which those temporary difference are expected to be recovered or settled. Future income tax assets also result from unused loss carry forwards. Future income tax assets are recognized to the extent that they are considered more likely than not to be realized. The valuation of future income tax assets is adjusted, if necessary, by the use of a valuation allowance to reduce the asset to its estimated realizable amount.



CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

(l)

Asset retirement obligations
  

The Company recognizes statutory, contractual or other legal obligations related to the retirement of tangible long-lived assets when such obligations are incurred, if a reasonable estimate of fair value can be made. These obligations are measured initially at fair value and the resulting costs capitalized to the carrying value of the related asset. In subsequent periods, the liability is adjusted for any changes in the amount or timing and for the discounting of the underlying future cash flows. The capitalized asset retirement cost is amortized to operations over the life of the related asset. As at the end of reported period, the Company did not have any asset retirement obligations.
  
(m)

Impairment of long-lived assets
  

The Company periodically reviews and evaluates its long-lived assets, including mineral properties, plant and equipment, for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to its estimated undiscounted future cash flows expected to be generated by the asset. Measurement of an impairment loss is based on the excess of the estimated fair value of the asset over its carrying value.
  

At each reporting period and whenever events or circumstances indicate that an asset's fair value may not be at least equal to its carrying value, management of the Company reviews the net carrying value. These reviews involve consideration of the fair value of each property to determine whether a permanent impairment in value has occurred and whether any asset write down is necessary.
  
(n)

Variable interest entities
  

Pursuant to Accounting Guideline 15, "Consolidation of Variable Interest Entities" ("AcG15"), the Company is required to consolidate variable interest entities ("VIEs"), where it is the VIEs primary beneficiary. VIEs are entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The primary beneficiary is the party that has exposure to a majority of the expected losses and/or expected residual returns of the VIE. For the year ended December 31, 2005, the Company concluded that the Xietongmen joint venture was a variable interest entity requiring consolidation. For the years ended December 31, 2007 and 2006, the Company has determined that it has no variable interest entities.
  
(o)

Comparative figures
  

Certain of the prior years' comparative figures have been reclassified to conform with the presentation adopted in the current year.


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

3.

CHANGES IN ACCOUNTING POLICIES

 

(a)

Newly Adopted Accounting Standards

 

 

Effective January 1, 2007, the Company adopted the following new accounting standards issued by the Canadian Institute of Chartered Accountants ("CICA") relating to financial instruments. These new standards have been adopted on a retrospective basis with no restatement to prior period financial statements.

 

(i)

Section 3855 – Financial Instruments – Recognition and Measurement, and Section 3861 – Financial Instruments – Disclosure and Presentation

 

These standards set out criteria for the recognition and measurement of financial instruments and their disclosure for fiscal years beginning on or after October 1, 2006. These standards require all financial instruments within its scope, including derivatives, to be included on a Company's balance sheet and measured either at fair value or, in certain circumstances when fair value cannot be reliably determined, at cost or amortized cost. Changes in fair value are to be recognized in the statements of operations or comprehensive income (loss).

 

All financial assets and liabilities are recognized when the entity becomes a party to the contract creating the asset or liability. As such, any of the Company's outstanding financial assets and liabilities at the effective date of adoption are recognized and measured in accordance with the new requirements as if these requirements had always been in effect. Any changes to the fair values of assets and liabilities prior to January 1, 2007 are recognized by adjusting opening deficit or opening accumulated other comprehensive income (loss).

 

All financial instruments are classified into one of the following five categories: held for trading, held-to-maturity, loans and receivables, available-for-sale financial assets, or other financial liabilities. Initial and subsequent measurement and recognition of changes in the value of financial instruments depends on their initial classification:

 

-

Held-to-maturity investments, loans and receivables, and other financial liabilities are initially measured at fair value and subsequently measured at amortized cost. Amortization of premiums or discounts and losses due to impairment are included in net income (loss).

 

- 

Available-for-sale financial assets are measured at fair value. Changes in fair values of available-for-sale financial assets are included in other comprehensive income (loss) until the gain or loss is recognized in income when the asset is sold or deemed to be permanently impaired.

 

- 

Held for trading financial instruments are measured at fair value. All changes in fair value are included in net earnings (loss) in the period in which they arise.



CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

All derivative financial instruments are measured at fair value, even when they are part of a hedging relationship. Changes in fair value are included in net income (loss) in the period in which they arise, except for hedge transactions which qualify for hedge accounting treatment in which case gains and losses are recognized in accumulated other comprehensive income.

At January 1, 2007, upon adoption of this standard, the Company designated the liability component of the convertible promissory note (note 7) as held for trading, and its carrying value was adjusted to its fair value of $11,600,000 (using estimates of discounted cash flows) with a charge to opening deficit of $565,634.

  (ii)

Section 3865 – Hedges

     
 

This new standard specifies the circumstances under which hedge accounting is permissible and how hedge accounting may be performed. The Company has not designated any agreements as hedges.

     
  (iii)

Section 1530 – Comprehensive Income (Loss)

     
 

Comprehensive income (loss) is the change in the Company's net assets that results from transactions, events, and circumstances from other than the Company's shareholders. This standard requires certain gains and losses that would otherwise be recorded as part of net earnings to be presented in other "comprehensive income (loss)" until it is considered appropriate to recognize into net earnings (loss). This standard requires the presentation of comprehensive income (loss), and its components in a separate financial statement that is displayed with the same prominence as the other financial statements. Accumulated other comprehensive income is presented as a new category in shareholders’ equity.

     
 

As at year ended December 31, 2007, the Company had no accumulated other comprehensive income or losses and for the year ended December 31, 2007, comprehensive loss equals net loss.

     
  (iv)

Section 1506 – Accounting Changes

     
 

This standard establishes criteria for changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and correction of errors. Changes in accounting policies are only permitted when required by a primary source of generally accepted accounting principles or when the change will result in more reliable and more relevant information.



CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

(b)

Accounting Standards Issued But Not Yet Effective

     
(i)

Section 1535 – Capital Disclosures

     

This standard requires disclosure of an entity's objectives, policies and processes for managing capital, quantitative data about what the entity regards as capital and whether the entity has complied with any capital requirements and, if it has not complied, the consequences of such non-compliance. This standard is effective for the Company for interim and annual periods beginning on or after January 1, 2008. The Company is currently evaluating the effects of adopting this standard.

     
(ii)

Financial Instruments – Disclosure (Section 3862) and Presentation (Section 3863)

     

These standards replace CICA Handbook Section 3861, "Financial Instruments – Disclosure and Presentation". They expand current disclosure requirements in order to enable users of financial statements to evaluate the significance of financial instruments for an entity's financial position and performance, including disclosures relating to fair value. In addition, disclosure is required of qualitative and quantitative information regarding exposure to risks arising from financial instruments, including specified minimum disclosures of credit risk, liquidity risk and market risk. The quantitative disclosures must provide information on the extent to which the entity is exposed to risk, based on information provided internally to the entity’s key management personnel. This standard is effective for the Company for interim and annual periods beginning on or after January 1, 2008. The Company expects that its financial statements disclosures will be expanded to incorporate the new additional requirements.

     
(iii)

Amendments to Section 1400 – Going Concern

     

CICA Handbook Section 1400, "General Standards of Financial Statement Presentation", was amended to include requirements to assess and disclose an entity's ability to continue as a going concern. The new requirements are effective for interim and annual financial statements for the fiscal years beginning on or after January 1, 2008. The Company is currently evaluating the impact of this amended standard.

     
(iv)

International Financial Reporting Standards ("IFRS")

     

In 2006, the Accounting Standards Board ("AcSB") published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with IFRS over an expected five year transitional period. In February 2008, the AcSB announced that 2011 is the changeover date for publicly-listed companies to apply IFRS. The changeover is effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The transition date of January 1, 2011 will require the restatement of comparative amounts reported by the Company for the year ending December 31, 2010. While the Company has begun assessing the adoption of IFRS for 2011, the



CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

financial reporting impact of the transition to IFRS cannot be reasonably estimated at this time.

4. INVESTMENTS

      December 31     December 31  
      2007     2006  
  Investment in Gibraltar preferred shares (note 4(a)) $  26,764,784   $  26,764,784  
  Redeemable preferred shares of the Company (note 8(f))   (26,764,784 )   (26,764,784 )
  Investment in net smelter returns royalty (note 4(b))   1     1  
    $  1   $  1  

(a)

Investment in Gibraltar preferred shares

   

During 2001, the Company completed an arrangement agreement (the "Arrangement") whereby the Company transferred its principal mineral property interest at that time, the Harmony Gold Property, to Gibraltar Mines Ltd. ("Gibraltar"), a subsidiary of Taseko Mines Limited ("Taseko"), a public company with certain directors in common with Continental.

   

Pursuant to the Arrangement, the Company received 12,483,916 series A preferred shares of Gibraltar. As the Arrangement was between companies with common management and directors, the preferred shares were valued at the net book value of the assets transferred, net of cash consideration received, as follows:


  Mineral property interests $  28,811,296  
  Land and equipment   8,488  
  Reclamation deposits   175,000  
  Cash consideration   (2,230,000 )
  Value attributable to Gibraltar preferred shares $  26,764,784  

The Gibraltar preferred shares issued pursuant to the Arrangement are redeemable non-dividend-paying preferred shares, which generally are non-voting, except that the holders may vote in certain events if Gibraltar proposes to sell the Harmony Project for proceeds of less than $20 million. The holders also vote as a class, pursuant to the provisions of the British Columbia Business Corporations Act (formerly the Company Act), in the event Gibraltar proposes to alter, modify or abrogate the stated special rights.

Gibraltar is obligated to redeem the shares on the sale of all or substantially all (80%) of the Harmony Gold Property excluding options or joint ventures which do not result in the certain or


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

immediate transfer of 80% of Gibraltar's interest in the Harmony Gold Property, or upon the commencement of commercial production at the Harmony Gold Property (an "HP Realization Event"). The commencement of commercial production generally means the operation of a mine or milling facility at the Harmony Gold Property at 75% of rated capacity for any 20 days in a 30 consecutive day period. On the occurrence of an HP Realization event, Gibraltar must redeem the Gibraltar preferred shares by distributing that number of Taseko common shares ("Taseko Shares") equal to the paid-up amount (as adjusted) divided by a deemed price per Taseko Share, which will vary dependent on the timing of such HP Realization Event. As at December 31, 2007, the conversion rate of the Taseko Share price for the purposes of an obligatory redemption based on an HP Realization Event was $5.14 and will increase by $0.25 per year each July 21st. If there is no HP Realization Event on or before October 16, 2011, the Gibraltar preferred shares will be redeemed by Gibraltar for that number of Taseko Shares valued at the greater of $10.00 and the weighted average trading price of Taseko Shares for the immediately preceding 20 trading days.

   

The initial paid-up amount for the Gibraltar preferred shares is $62.77 million, subject to reduction prior to redemption for certain stated events. The amount will be reduced to the extent that the actual net proceeds of disposition of the Harmony Gold Property is less than $62.77 million, or to the extent that the fair market value of Gibraltar's interest in a mine at the Harmony Gold Property is determined to be less than $62.77 million. The paid-up amount (as adjusted) will be increased in the event Gibraltar receives consideration by way of granting an option to a third party which forfeits such option and also in the event of any reduction of the paid-up amount (as adjusted), such amount will be credited to the account should the proceeds of disposition exceed the reduced paid- up amount (as adjusted) by an amount greater than the reduction. In no event will the paid-up amount (as adjusted) exceed $62.77 million nor be less than $20 million. Net proceeds of disposition shall mean the fair value of all consideration received by Gibraltar as a consequence of a sale of the Harmony Gold Property, net of Gibraltar's reasonable costs of disposition, costs incurred by Gibraltar after the effective date in connection with the Harmony Gold Project, and a reasonable reserve for Gibraltar's taxes arising in consequence of the sale or other disposition of the Harmony Gold Project.

   

The Gibraltar preferred shares also require that Gibraltar not sell the Harmony Gold Property except pursuant to an HP Realization Event, but options and joint ventures are permitted as long as the third party expends funds on the Harmony Gold Property. Gibraltar may not alter the rights of these shares without the consent of the holders.

   
(b)

Investment in net smelter returns royalty

   

Pursuant to an assignment agreement dated September 30, 1995, the Company transferred its rights to certain mineral properties located in Peru to El Misti Gold Ltd. (subsequently renamed Andean American Mining Corp.), a company with common directors at the time, in exchange for common shares of El Misti Gold Ltd. pursuant to an option granted to a company affiliated with a former director, and a 1% net smelter returns royalty, to a maximum of $2 million, from revenues earned from the properties. The common shares of El Misti Gold Ltd. were sold in 1997. The investment in the net smelter returns royalty was assigned a nominal value of $1.



CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

5. MINERAL PROPERTY INTERESTS

  Xietongmen Property   December 31     December 31  
      2007     2006  
               
  Balance, beginning of the year $  112,747,309   $  1,903,525  
  Acquired during the year:            
     Acquisition of Great China Mining Inc. (ii)   –     75,212,559  
     Future income tax related to acquisition of            
            Great China Mining Inc. (ii)   –     25,070,000  
     Acquisition of surrounding properties (iii)   –     8,546,225  
     Future income tax related to acquisition of            
             surrounding properties (iii)   –     1,595,000  
  Accumulated mining permit costs (iv)   3,405,000     315,000  
  Future income tax related to accumulated mining permit costs   1,135,000     105,000  
  Balance, end of the year $  117,287,309   $  112,747,309  

(a)

Xietongmen Property

     
(i)

Initial option agreements

     

In 2004, the Company reached an agreement (the "Option Agreement") with China NetTV Holdings Inc. (subsequently renamed Great China Mining Inc., "GCMI"), pursuant to which the Company had acquired the right to earn a 50%, increasable to 60%, interest in GCMI's Xietongmen copper-gold property ("Xietongmen Property"), via the acquisition of Highland Mining Inc. ("Highland"), the British Virgin Islands parent company of Tibet Tian Yuan Minerals Exploration Ltd. ("Tian Yuan"), a "wholly foreign-owned enterprise" in China, which owns 100% of the Xietongmen Property. The Xietongmen Property is located approximately 240 kilometres west of Lhasa.

     

In December 2005, the Company earned its 50% interest in Highland by paying option payments totalling US$2.0 million; and funding Highland US$5 million to allow it to conduct further exploration on the Xietongmen Property. The Company recorded $999,905 in 2005 as an acquisition cost, which represents the second of the two option payments required to earn its 50% interest in Highland.

     

Upon acquisition of 50% of Highland, the Company could increase its interest in Highland to 60% (the "Second Option") by funding a further US$3 million in exploration expenditures on the Xietongmen Property within the ensuing year. In early 2006, the Company completed its obligations under the Second Option, and consequently, earned an additional 10% of the common shares of Highland to bring the total it had earned in Highland to 60%.



CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

  (ii)

Acquisition of Great China Mining Inc.

     
 

On December 15, 2006, the Company acquired 100% of the issued and outstanding common shares and options of GCMI, thereby effectively acquiring the remaining 40% of the Xietongmen Property that it did not already own. The results of operations of Great China Mining Inc. have been included in the consolidated financial statements of the Company commencing December 15, 2006.


  The aggregate purchase price was $78,716,301, calculated as follows:      
     Issuance of 36,011,384 Continental common shares $  77,424,475  
     Issuance of 136,607 Continental common share purchase options   166,661  
     Termination costs paid in cash   161,000  
     Termination costs paid through the issuance of 40,000 Continental common      
                           share purchase options   34,000  
     Related transaction costs   930,165  
    $  78,716,301  

The value of the 36,011,384 Continental common shares issued to the former GCMI shareholders was determined based on the closing market price of Continental's common shares on the date the shares were issued and the acquisition closed.

The estimated fair value of the assets acquired and liabilities assumed at the date of acquisition is as follows:

  Cash $  3,537,265  
  Amounts receivable   26,346  
  Prepaid expenses   4,305  
  Plant and equipment   6,922  
  Mineral property interests   100,282,559  
  Accounts payable   (71,096 )
  Future income tax liability   (25,070,000 )
    $  78,716,301  

Consideration for the acquisition of GCMI included the issuance of 136,607 common share options of Continental. These options are exercisable until December 21, 2008 at a price of US$1.05 per share. The fair value of these options was estimated at $166,661 (note 8(e)) using a Black-Scholes option pricing model with the following assumptions: risk free interest rate – 4%; expected life – 2 years; expected volatility – 66%; and expected dividends – nil.

Termination costs of certain former GCMI personnel included the issuance of 40,000 common share purchase options of Continental, exercisable until December 15, 2008 at a price of $2.10 per share. The fair value of these options was estimated at $34,000 using a


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

 

Black-Scholes option pricing model with the following assumptions: risk free interest rate – 4%; expected life – 2 years; expected volatility – 66%; and expected dividends – nil.

     
  (iii)

Acquisition of Surrounding Properties

     
 

At the time of the acquisition of GCMI, the Company also effectively acquired a 100% interest in three mineral property interests, from vendors which included a director and principal shareholder of GCMI, totaling approximately 109 square kilometers (the "Surrounding Properties"), lying within an area of interest near the original Xietongmen Property. The Company acquired two of these mineral properties, named Donggapu and Zemodoula, by acquiring their two Cayman Islands holding companies, Top Mining Limited and Skyland Mining Limited. The Company acquired the third property, named Banongla, by Tian Yuan directly purchasing the Banongla exploration license. During 2007, the Company combined all these exploration licenses into one single license, held by Tian Yuan.

     
 

The aggregate purchase price of the Surrounding Properties was $8,546,225, calculated as follows:


  Issuance of 1,500,000 common shares of Continental $  3,225,000  
  Issuance of 1,500,000 warrants   1,560,000  
  Cash – US$3,250,000   3,761,225  
    $  8,546,225  

The aggregate purchase price has been allocated as follows:

  Mineral property interests $  10,141,225  
  Future income tax liability   (1,595,000 )
    $  8,546,225  

Cash payments for the acquisition of these three mineral property interests, totaling US$3.25 million ($3,761,225) were and are to be paid as follows: US$1.25 million ($1,446,625) was paid on December 15, 2006, the closing date of the acquisition, and US$500,000 is due on each of the next four anniversaries of the closing, which has been recorded as a liability. The payment due December 15, 2007, was delayed until early 2008, as the vendors were restructuring their banking affairs. This payment was made subsequent to the year end on February 4, 2008. Accordingly, at December 31, 2007, US$ 1,000,000 ($991,300) is included in current liabilities and US$ 1,000,000 ($991,300) is presented as a long-term payable. This long-term payable is non-interest bearing and is unsecured.

Consideration for the acquisition of interests in the three mineral properties included the issuance of 1,500,000 common share purchase warrants of Continental, exercisable until December 15, 2008 at a price of $1.59 per share. The fair value of these warrants was


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

estimated at $1,560,000 (note 8(e)) using a Black-Scholes option pricing model with the following assumptions: risk free interest rate – 4%; expected life – 2 years; expected volatility – 66%; and expected dividends – nil.
     
(iv)

Post-Acquisition Agreements

     

Following the acquisition of GCMI, a former director of GCMI agreed to provide consulting services to assist the Company in securing the necessary mining permits for commercial mining at the Xietongmen Property prior to March 31, 2010 (the "Permits Consulting Agreement"). Upon receipt of all necessary permits, the Company has agreed to issue 2,500,000 units consisting of one common share and one warrant, with each warrant exercisable at $1.59 for one year from the date of receipt of the mining permits.

     

As at the date of entering into the Permits Consulting Agreement with the former director, and at December 31, 2006 and 2007, it was not determinable when the Company would ultimately receive the necessary mining permits for the Xietongmen Property. At December 31, 2007, the fair value of these 2,500,000 units, prorated over the expected period of service, has been estimated at $3,720,000 and has been charged to mineral property interests. An estimated future income tax liability of $1,240,000 has also been recorded. The fair value of the Continental common shares issuable upon receipt of permits was estimated using the price at December 31, 2007 of $1.59 (2006 – using the price at December 31, 2006 of $2.15). The fair value of the share purchase warrants issuable upon receipt of permits was estimated using a Black-Scholes option pricing model with the following assumptions: risk free interest rate – 4%; expected life – 1 year; expected volatility – 66%; and expected dividends – nil (note 8(e)).

     

Under a separate option agreement, the same former director of GCMI was granted 700,000 options of the Company, for his services as a director and co-Chairman. One third of these options vest each year, over a three year period starting December 15, 2006. Each option is exercisable at $1.61 and expires on the earlier of 90 days following the date the individual ceases to be a director of the Company, or February 28, 2011. Stock-based compensation expense related to these options was estimated at $368,395 (2006 – $12,632). The fair value of these options was estimated using a Black-Scholes option pricing model with the following assumptions: risk free interest rate – 4%; expected life – 2 years; expected volatility – 66%; and expected dividends – nil.

     
(b)

Harmony Gold Property

     

The Company owned a 100% interest in the Harmony Gold Property, located in the Skeena Mining District on Graham Island, Queen Charlotte Islands (Haida Gwaii), British Columbia.

     

On October 16, 2001, the Company completed the sale of its Harmony Gold Property and related assets to Gibraltar, a British Columbia company with certain directors in common with the Company, for 12,483,916 tracking preferred shares of Gibraltar and $2.23 million cash. The tracking preferred shares are designed to track and capture the value of the Harmony Gold property



CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

and will be convertible into common shares of Gibraltar's parent company Taseko Mines Limited ("Taseko"), upon a realization event such as a sale to a third party or the commencement of commercial production at the Harmony Gold Property (note 4(a)).

6. PROPERTY AND EQUIPMENT

      December 31, 2007     December 31, 2006  
            Accumulated     Net book           Accumulated     Net book  
      Cost     amortization     value     Cost     amortization     value  
                                       
  Leasehold                                    
  improvements $  47,848   $  28,846   $  19,002   $  47,848   $  10,769   $  37,079  
  Computers   170,383     81,842     88,541     78,840     20,399     58,441  
  Field                                    
  equipment   185,884     118,186     67,698     126,182     36,638     89,544  
  Furniture   26,013     17,871     8,142     17,600     5,996     11,604  
  Vehicles   530,562     165,665     364,897     396,044     69,385     326,659  
    $  960,690   $  412,410   $  548,280   $  666,514   $  143,187   $  523,327  

7. CONVERTIBLE PROMISSORY NOTE

On August 29, 2006, the Company issued to Taseko Mines Limited ("Taseko"), a public company with certain directors in common with Continental, a $11.5 million convertible promissory note (the "Note").

Taseko had the right to convert any or the entire principal then outstanding under the one year Note, plus a 5% premium into the Company's common shares at $2.05 per share if the Note was exercised within the first six months or, at $2.25 per share if exercised in the second six months. Taseko also received the right to participate in the Company's future financings (the "Participation Right") and in such event could redeem the Note at 105% of the $11.5 million principal amount of the Note and use the proceeds to subscribe for securities offered under such future financing. In addition, upon conversion of the Note, or its redemption in the event that the Participation Right was exercised, Taseko would acquire a right of first refusal (the "Pre-Emptive Right") for up to five years, during which time Taseko may purchase up to 50% of any equity or convertible securities, except certain normal course securities offerings and strategic alliances, offered by the Company in a subsequent financing until a maximum of 19.9% of the Company's then outstanding shares, on a fully diluted basis, are held by Taseko. If Taseko fails to exercise the Pre-Emptive Right in regards to any offered securities under a future financing, the Pre-Emptive Right thereupon expires.

The Note provided for interest at the rate of 16% per annum payable monthly. Interest was payable in cash or, at Taseko's election, in the Company's common shares, based upon the higher of the five


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

day volume weighted average of the closing price of Company's common shares at the time the interest payment was due.

At issuance, the Company estimated the fair value of the conversion option at $695,932, using a Black-Scholes option pricing model with the following assumptions: risk free interest rate – 4%; expected life – 1 year; expected volatility – 62%; and expected dividends – nil. The residual value was classified as a liability.

On February 20, 2007, Taseko redeemed this Note for $12.075 million, and exercised its Participation Right to participate in a private placement of the Company for $12.075 million based on the terms of this Note, acquiring 7,318,181 units at a price of $1.65 per unit. Each unit was comprised of one common share and one share purchase warrant exercisable into one common share at $1.80 until February 20, 2008 (note 8(b)(ii)).

The continuity of the convertible note is as follows:

  Liability component:      
   Present value of convertible promissory note at issuance, August 29, 2006 $  10,804,068  
   Accretion, net of interest, for the year   230,298  
   Balance, December 31, 2006   11,034,366  
   Adjustment for adoption of new accounting standard (note 3(a)(i))   565,634  
   Balance, January 1, 2007   11,600,000  
   Conversion, February 20, 2007   (11,600,000 )
   Liability component, December 31, 2007   –  
         
  Equity component:      
   Conversion right   695,932  
   Conversion, February 20, 2007, to contributed surplus (note 8(e))   (695,932 )
   Equity component, December 31, 2007   –  
         
  Convertible promissory note, December 31, 2007 $  –  
         
  Loss on extinguishment      
   Liability component, February 20, 2007 $  11,600,000  
   Conversion, February 20, 2007   (12,075,000 )
   Loss on extinguishment of promissory note $  (475,000 )


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

8.

SHAREHOLDERS' EQUITY

 

(a)

Authorized share capital

 

At December 31, 2007, the Company's authorized share capital consisted of:

 

- 

an unlimited number of common shares without par value; and

 

-

an unlimited number of non-voting, redeemable preferred shares without par value.

 

Pursuant to the Arrangement with Gibraltar and the provisions of the redeemable preferred shares, as long as any redeemable preferred shares are outstanding, the Company may not, without the prior approval of the holders of the redeemable preferred shares, pay any dividends (other than stock dividends), redeem, purchase, or make any capital distribution in respect of common shares. In addition, the redeemable preferred shares are entitled to preference over common shares and any other shares ranking junior to the redeemable preferred shares with respect to the distribution of assets on liquidation, dissolution or wind up of the Company, or any other distribution of assets of the Company. This preference is limited to the Company's obligation to distribute the Gibraltar preferred shares (less a reserve for taxes related to the distribution), to the holders of the redeemable preferred shares, after which the holders of redeemable preferred shares will not be entitled to share in any further distribution of the Company's net assets. The Company may not dispose of its Gibraltar preferred shares.



CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

(b) Issued and outstanding common share capital and shares to be issued

      Number of     Dollar  
      common shares     Amount  
  Balance, December 31, 2004   37,629,851   $  10,843,269  
  Share purchase warrants exercised   5,620,000     3,558,000  
  Share purchase options exercised   4,056,334     2,066,710  
  Fair value of share options allocated to shares issued on exercise   –     2,997,539  
  Balance, December 31, 2005   47,306,185   $  19,465,518  
  Share purchase warrants exercised   5,640,000     5,470,100  
  Share purchase options exercised   685,933     810,826  
  Shares issued for debt interest   95,915     151,233  
  Shares issued for mineral property interest (i)   37,511,384     80,649,475  
  Fair value of share options allocated to shares issued on exercise   –     874,476  
  Balance, December 31, 2006   91,239,417   $  107,421,628  
  Private placement, net of share issuance costs (ii), (iii)   29,439,395     48,825,343  
  Share issued for interest on convertible promissory (note 7)   89,229     156,274  
  Share purchase warrants exercised (iii)   8,000,000     18,000,000  
  Share purchase options exercised   285,000     356,200  
  Fair value of share options allocated to shares issued on exercise   –     285,094  
  Balance, December 31, 2007   129,053,041   $  175,044,539  

Under agreements constituting part of the acquisition of GCMI (note 5(a)), twelve former shareholders of GCMI, holding an aggregate of 14,136,711 common shares, agreed to have their shares of the Company placed into escrow. Under the terms of the agreements, 380,000 shares are to be released from escrow each month, commencing January 2007.

  (i)

In December 2006, the Company issued 36,011,384 common shares as consideration for the acquisition of GCMI. Each common share was recorded at $2.15, being the closing share price of the Company on December 15, 2006, the closing date of the acquisition.

     
 

In December 2006, the Company issued 1,500,000 units in relation to the acquisition of Top Mining Limited and Skyland Mining Limited. The units consisted of one common share at $2.15 per share and one share purchase warrant. One million of these warrants were exercisable until December 15, 2008 at $1.59 per share and the remaining 500,000 of these warrants were exercisable until February 14, 2009 at $1.59 per share.

     
  (ii)

In February 2007, the Company completed a private placement of 19,439,395 units at a price of $1.65 per unit for gross proceeds of $32,075,000 ($30,825,343 net of issue costs). Each unit consisted of one common share and one common share purchase warrant exercisable to purchase an additional common share at a price of $1.80 until February 20, 2008. The warrants are subject to accelerated expiration which can be triggered at the election of the Company, on 30 days' notice, if the Company's common shares trade at a



CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

 

price of $2.25 for any ten-consecutive-day period. Subsequent to December 31, 2007, these warrants expired unexercised.

     
 

In connection with the financing, Taseko redeemed its convertible promissory note (note 7) for $12,075,000 and participated in this private placement by acquiring 7,318,181 units for $12,075,000.

     
  (iii)

On March 29, 2007, the Company completed a private placement of 10,000,000 units at a price of $1.80 per unit for gross proceeds of $18,000,000. Each unit consisted of one common share and one common share purchase warrant. Each warrant is exercisable for 0.8 of a common share at $2.25 per share until September 29, 2007, and at $2.75 per share thereafter until December 29, 2007. During the year ended December 31, 2007, the Company amended the exercise price of these common share purchase warrants to $2.25. These warrants were exercised in their entirety on November 29, 2007, for net proceeds to the Company of $18,000,000.


(c)

Warrants

   

The continuity of share purchase warrants is as follows:


  Note reference         8(b)(i)   8(b)(i)     8(b)(ii)   8(b)(iii)  
  Expiry date   July 12     Dec. 15     Feb. 14     Feb. 20     Dec. 29  
      2006     2008     2009     2008     2007  
  Exercise price $ 1.05   $ 1.59   $ 1.59   $ 1.80   $ 2.25  
  Balance, Dec. 31, 2004   7,000,000     –     –     –     –  
  Exercised   (1,360,000 )   –     –     –     –  
  Balance, Dec. 31, 2005   5,640,000     –     –     –     –  
  Issued   –     1,000,000     500,000     –     –  
  Exercised   (5,640,000 )   –     –     –     –  
  Balance, Dec. 31, 2006   –     1,000,000     500,000     –     –  
  Issued   –     –     –     19,439,395     8,000,000  
  Exercised   –     –     –     –     (8,000,000 )
  Balance, Dec. 31, 2007   –     1,000,000     500,000     19,439,395     –  

(d)

Share purchase option plan

   

The Company has a share option plan approved by the shareholders that allows it to grant options, subject to regulatory terms and approval, to its officers, directors, employees and consultants.

   

A share option plan was approved by the Board and by the shareholders in June 2006. The share option plan (the "2006 Rolling Option Plan") is based on the maximum number of eligible shares equaling a rolling percentage of up to 10% of the Company's outstanding common shares,



CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

calculated from time to time. Pursuant to the 2006 Rolling Option Plan, if outstanding options are exercised, or expire, or the number of issued and outstanding common shares of the Company increases, the number of options available to grant under the plan increases proportionately. The exercise price of each option is set by the Board of Directors at the time of grant but cannot be less than the market price (less permissible discounts). Options can have a maximum term of five years and typically terminate 90 days following the termination of the optionee's employment or engagement, except in the case of retirement or death. Vesting of options is at the discretion of the Board of Directors at the time the options are granted.

The continuity schedule of share purchase options, of which 3,985,437 were exercisable at December 31, 2007 (December 31, 2006 – 2,054,772) is as follows:

  Share purchase options outstanding         Weighted  
      Number of     average  
      options     exercise price  
  Balance, December 31, 2004   4,812,334   $  0.61  
     Granted   1,195,000     1.59  
     Exercised   (4,056,334 )   0.51  
     Expired or cancelled   (91,733 )   1.22  
  Balance, December 31, 2005   1,859,267   $  1.44  
     Granted   4,071,607     1.69  
     Exercised   (685,933 )   1.18  
     Expired or cancelled   (55,834 )   1.83  
  Balance, December 31, 2006   5,189,107   $  1.66  
     Granted   2,612,000     1.92  
     Exercised   (285,000 )   1.25  
     Expired or cancelled   (961,500 )   1.72  
  Balance, December 31, 2007   6,554,607   $  1.77  


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

The following table summarizes the Company's stock options outstanding at December 31, 2007

            Number of     Number of  
            options     options  
  Expiry date   Option price     outstanding     exercisable  
  February 29, 2008 $  1.61     20,000     –  
  December 15, 2008 $  2.10     40,000     13,333  
  December 21, 2008 $  1.21     136,607     136,607  
  February 27, 2009 $  1.61     50,000     50,000  
  April 30, 2009 $  2.01     1,260,000     935,500  
  November 30, 2009 $  1.61     250,000     250,000  
  September 30, 2010 $  1.68     148,000     –  
  February 28, 2011 $  1.61     2,900,000     2,133,333  
  February 28, 2011 $  1.68     350,000     –  
  February 29, 2012 $  2.01     1,400,000     466,664  
  Total         6,554,607     3,985,437  
  Weighted average option price       $  1.77   $  1.74  

Using an option pricing model with the assumptions noted below, the estimated fair values of all options granted during 2007, 2006 and 2005 have been reflected in the statement of operations as follows:

      December 31     December 31     December 31  
      2007     2006     2005  
  Exploration                  
   Engineering $  102,586   $  62,536   $  49,602  
   Environmental, socioeconomic and other   6,318     1,407     15,552  
   Geological   96,258     596,336     165,370  
  Exploration total   205,162     660,279     230,524  
  Operations and administration   2,336,326     1,950,259     584,797  
  Total compensation cost recognized in $  2,541,488   $  2,610,538   $  815,321  
  operations and credited to contributed surplus                  


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

The weighted average assumptions used to estimate the fair value of options during the years were:

    2007 2006 2005
  Risk-free interest rate 3.93% 4.15% 4%
  Expected life 3.86 years 1.65 years 1.46 years
  Vesting period 6 to 18 months 6 to 18 months 6 to 18 months
  Expected volatility 60% 69% 75%
  Expected dividend yield nil nil nil
  Weighted average fair value $ 0.84 $ 0.94 $ 0.77

Option pricing models require the input of highly subjective assumptions including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models may not necessarily provide a reliable measure of the fair value of the Company's share purchase options.

Subsequent to year end, on May 1, 2008, the Company granted 4,739,000 options at an exercise price of $1.32 expiring on May 2, 2011, to various employees, directors and consultants.

Subsequent to year-end, a total of 180,834 options were cancelled.


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

(e) Contributed surplus

  Balance, December 31, 2004 $  2,727,254  
  Non-cash stock-based compensation   815,321  
  Share purchase options exercised, credited to share capital   (2,997,540 )
  Balance, December 31, 2005   545,035  
  Non-cash stock-based compensation   2,610,538  
  Options issued pursuant to acquisition of GCMI (note 5(a)(ii))   166,661  
  Warrants issued and to be issued pursuant to acquisition of GCMI   1,560,000  
  Increase in estimated fair value of warrants issued to a director on condition of   315,000  
  successfully obtaining the China Mining Permit (note 5(a)(iv))      
  Share purchase options exercised, credited to share capital   (874,475 )
  Balance, December 31, 2006   4,322,759  
  Non-cash stock-based compensation   2,541,488  
  Share purchase options exercised, credited to share capital   (285,094 )
  Conversion right, credited to contributed surplus upon extinguishment of the      
  convertible promissory note (note 7)   695,932  
  Increase in estimated fair value of warrants issued to a director on condition of   3,405,000  
  successfully obtaining the China Mining Permit (note 5(a)(iv))      
  Balance, December 31, 2007 $  10,680,085  

(f)

Redeemable preferred shares

   

The 12,483,916 redeemable preferred shares were issued to common shareholders pursuant to the Arrangement. The redeemable shares are non-voting, non-dividend-paying, and are redeemable by the Company in certain events such as the occurrence of an HP Realization Event, at which time Gibraltar will become obligated to redeem the Gibraltar preferred shares for Taseko Shares (note 4(a)). The Company will redeem the shares for the number of Taseko Shares received by the Company on redemption of the Gibraltar preferred shares, as adjusted for any taxes payable, pro- rata to holders of the redeemable preferred shares. After such distribution, the holders of the redeemable preferred shares will not be entitled to any further distributions and the redeemable preferred shares will be cancelled.

   

The redeemable preferred shares may not vote except on any proposal to alter their special rights and restrictions or in the event the Company proposes to sell the Harmony Gold Property (as one of the possible HP Realization Events) for less than $20 million.

   

These redeemable preferred shares have been presented as a financial liability due to the obligation of the Company to redeem the shares for Taseko Shares. As the Company has the obligation to redeem the redeemable preferred shares immediately after the Gibraltar preferred shares have been redeemed, the redeemable preferred shares and Gibraltar preferred shares have been offset. Accordingly, a net nil amount is reported on the consolidated balance sheet of the Company.



CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

9. RELATED PARTY BALANCES AND TRANSACTIONS

      December 31     December 31  
  Amounts due from (to) related parties   2007     2006  
     Hunter Dickinson Inc. (b) $  (141,323 ) $  643,055  
     C.E.C. Engineering Ltd. (f)   (36,458 )   –  
     Jack Yang/Sundecin Enterprises Inc. (g)   (27,371 )   –  
     Dickson Hall & Associates Ltd. (h)   (44,444 )   –  
     Qi Deng (i)   (30,000 )   –  
     Zhengxun Guo (j)   443     –  
     Gerald Panneton   (66,267 )   –  
    $  (345,420 ) $  643,055  
               
     Loan from Hunter Dickinson Inc. (c) & (d) $  –   $  (1,500,000 )

      Years ended December 31  
  Transactions:   2007     2006     2005  
  Hunter Dickinson Inc. – reimbursement for third                  
         party expenses and services rendered (a) $  2,753,314   $  3,517,910 $     1,296,586  
  Hunter Dickinson Inc. – interest (c) & (d)   55,126     10,521     –  
  Tibet Bojing (e)   227,614     197,310     –  
  Beijing Honglu (e)   461,450     52,550     –  
  C.E.C. Engineering (f)   169,762     4,928     –  
  Sundecin Enterprise Inc. (g)   147,753     –     –  
  Dickson Hall & Associates Ltd. (h)   271,336     209,057     –  
  Qi Deng (i)   279,956     184,953     –  
  Zhengxun Guo (j)   63,701     34,880     –  
  Xiaojun Ma (k)   35,435     6,833     –  
  Jinchuan Group Limited (l) – exercise of warrants                  
         (note 8(b)(iii))   18,000,000     –     –  
  Taseko Mines Limited – interest (m)   254,155     151,233     –  

  (a)

Hunter Dickinson Inc. ("HDI") is a private company owned equally by eight public companies, one of which is the Company. HDI has certain directors in common with the Company and provides geological, corporate development, administrative and management services to, and incurs third party costs on behalf of, the Company and its subsidiaries on a full cost recovery basis pursuant to an agreement dated December 31, 1996.

     
  (b)

Related party balances receivable or payable, in the normal course, are non-interest bearing and due on demand, and represent advances against current and future services rendered to, or costs incurred on behalf of, the Company by HDI.



CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

  (c)

On November 29, 2006, the Company signed a loan agreement with HDI pursuant to which the Company borrowed $1,500,000 from HDI, maturing on February 27, 2007, on an unsecured basis. The loan bears interest at 8% per annum.

       

On March 2, 2007, the Company repaid the loan on March 2, 2007 and paid $30,575 (2006 - $10,521) in interest.

       
  (d)

On January 18, 2007, the Company signed another loan agreement with HDI pursuant to which the Company borrowed US$2,500,000 from HDI, maturing on April 18, 2007, on an unsecured basis. The loan bore interest at 8% per annum.

       
 

The Company repaid the loan on March 2, 2007 and paid $24,551 in interest.

       
  (e)

During the year ended December 31, 2007, the Company paid $227,614 (2006 – $197,310; 2005 – $nil) and $461,445 (2006 – $52,550; 2005 – $nil) to Tibet Bojing Minerals Investment Limited ("Tibet Bojing") and Beijing Honglu Shengdi Consulting Services Limited ("Beijing Honglu"), two companies controlled by a director of the Company, for consulting services.

       
  (f)

During the year ended December 31, 2007, the Company paid $169,762 (2006 – $4,928; 2005 – $nil) to C.E.C. Engineering Ltd ("CEC Engineering"), a company controlled by a director of the Company, for engineering consulting services.

       
(g)

During the year ended December 31, 2007, the Company paid $147,753 (2006 – $nil; 2005 - $nil) to Sundecin Enterprises Inc., a company controlled by a director of the Company, for consulting services.

       
  (h)

During the year ended December 31, 2007, the Company paid $271,336 (2006 – $209,057; 2005 – $nil) to Dickson Hall & Associates, a company controlled by an officer of the Company, for consulting services.

       
  (i)

During the year ended December 31, 2007, the Company paid $279,956 (2006 – $184,953; 2005 – $nil) to Qi Deng, a director of Tian Yuan, the Company's main Tibetan subsidiary, for consulting and project management services.

       
  (j)

During the year ended December 31, 2007, the Company paid $63,701 (2006 – $34,880; 2005 – $nil) to Zhengxun Guo, a director of Tian Yuan, the Company's main Tibetan subsidiary, for administrative and managerial services.

       
  (k)

During the year ended December 31, 2007, the Company paid $35,435 (2006 – $6,833; 2005 – $nil) to Xiaojun Ma, a director of the Company, for administrative and managerial services.

       
  (l)

During the year ended December 31, 2007, Mr. Fuyu Wang was appointed as a director of the Company. Fuyu Wang is also a director of Jinchuan Group Limited ("Jinchuan"). Subsequent to his appointment as a director of the Company, Jinchuan exercised 8 million warrants, for net proceeds to the Company of $18,000,000 (note 8 (b)(iii)).



CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

  (m)

In February 2007, the Company redeemed the $11,500,000 convertible promissory note held by Taseko at 105% of the principal amount (note 7). Taseko and the Company are related by virtue of having certain directors in common. During the year ended December 31, 2007, the Company paid interest related to this convertible promissory note to Taseko of $254,155, of which $156,274 was paid to Taseko by the issuance of 89,229 common shares of the Company.


10. FINANCIAL INSTRUMENTS

a)

Fair Value of Financial Instruments

   

The carrying amounts of cash and cash equivalents, amounts receivable, and accounts payable and accrued liabilities approximate their fair values due to the short term to maturity of such instruments. The fair value of amounts due from or due to related parties are not determinable due to the related party nature and the lack of a market for such balances.

   

The fair values of the Company's investment in Gibraltar preferred shares, and the offsetting redeemable preferred shares of the Company (note 4), are not practicably determinable due to the nature of the amounts and the absence of a quoted market price for such instruments.

   

The fair value of the long-term payable is estimated to be $1,983,000, based on discounted future cash flows.

   
b)

Financial Instrument Risk Exposure and Risk Management

   

The Company is exposed in varying degrees to a variety of financial instrument related risks. The Board approves and monitors the risk management processes, inclusive of documented treasury policies, counterparty limits, controlling and reporting structures. The types of risk exposure and the way in which such exposure is managed is provided as follows:


  (i) Credit Risk

The Company’s credit risk is primarily attributable to its liquid financial assets. The Company limits exposure to credit risk on liquid financial assets through maintaining its cash and equivalents in high quality investments and with major financial institutions. Substantially all the Company's cash in Canada is held with one major financial institution and its subsidiaries. The Company does not have any financial assets that are invested in asset backed commercial paper.


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

  (ii) Liquidity Risk

The Company ensures that there is sufficient cash in order to meet its short term business requirements, after taking into account the Company’s holdings of cash and cash equivalents. The Company’s cash and equivalents are invested in business accounts and bankers acceptances, which are immediately available on demand for the Company’s use, and which are not invested in any asset backed deposits/investments.

For cash held in China, the repatriation of this cash in foreign currency is permitted upon the routine approval of the PRC State Administration for Foreign Exchange. The Company's Chinese subsidiary is required to obtain routine tax clearances from the authorities to remit services fees and royalties for large amounts.

The following are the contractual maturities of financial liabilities:

      Carrying     Contractual                          
  2007   amount     cash flow     2007     2008     2009     2010  
  Accounts                                    
  payable and                                    
  accrued                                    
  liabilities $ 1,912,150   $ 1,912,150     –   $ 1,912,150     –     –  
  Amounts due                                    
  to related                                    
  parties   345,420     345,420     –     345,420     –     –  
  Long-term                                    
  payable   1,982,600     1,982,600     –     991,300     495,650     495,650  
                                       
      Carrying     Contractual                          
  2006   amount     cash flow     2007     2008     2009     2010  
  Accounts                                    
  payable and                                    
  accrued                                    
  liabilities $ 3,581,150   $ 3,581,150   $ 3,581,150     –     –     –  
  Loan from                                    
  related party   1,500,000     1,500,000     1,500,000     –     –     –  
  Long-term                                    
  payable   2,314,600     2,314,600     578,650     578,650     578,650     578,650  
  Convertible                                    
  promissory                                    
  note   11,034,366     11,500,000     11,500,000     –     –     –  


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

  (iii) Price Risks

The significant price risk exposures to which the Company is exposed are foreign exchange risk, interest rate risk and commodity price risk. These are discussed further below:

Foreign exchange risk

A significant portion of the Company's administrative operations are in Canada.

While the Company incurs some of its exploration expenditures in Canadian dollars, a significant portion is incurred in Chinese Renminbi Yuan (“RMB”), and consequently are subject to exchange rate risk.

The Company typically holds a significant portion of its cash in Canadian dollars (“CAD”) and reports the results of its operations in Canadian dollars. The Company is exposed to exchange rate sensitivity, to the extent that the Canadian dollar fluctuates with the US dollar (“USD”) and the RMB.

The Company’s liabilities are typically denominated in Canadian dollars and RMB and the Company has no material commitments in other currencies. However, the Company has a US$2,000,000 liability as a result of the acquisition of the surrounding properties, payable in US dollars, at a rate of US$500,000 per year (note 5(a)(iii)) .

The Company currently does not engage in foreign currency hedging.

The exposure of the Company’s financial assets and financial liabilities to foreign exchange risk is as follows:

      As at     As at  
  The amounts are expressed in CAD   December 31,     December 31,  
  equivalents   2007     2006  
  Canadian dollars $  32,566,475   $  1,877,032  
  United States dollars   426,109     124,207  
  Chinese renminbi   259,859     661,216  
  Total financial assets $  33,252,443   $  2,662,455  
               
  Canadian dollars $  699,767   $  14,206,590  
  United States dollars   1,996,537     2,488,604  
  Chinese renminbi   1,408,867     1,734,922  
  Total financial liabilities $  4,105,171   $  18,430,116  


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

The following significant exchange rates applied during the year:

      2007     2006  
  USD to CAD            
  United States dollars – closing rate   1.0088     0.8515  
  United States dollars – average rate   0.9304     0.8818  
               
  RMB to CAD            
  Chinese renminbi – closing rate   7.39     6.70  
  Chinese renminbi – average rate   7.08     7.03  

Interest rate risk

The Company is subject to interest rate risk with respect to its investments in cash equivalents. The Company’s policy is to invest cash at floating rates of interest and cash reserves are to be maintained in cash equivalents in order to maintain liquidity, while achieving a satisfactory return for shareholders. Fluctuations in interest rates when the cash equivalents mature impact interest income earned.

Other than the US$2 million non-interest bearing debt related to the acquisition of the surrounding properties (note 5(a)(iii)), the Company has no debt, other than routine accounts payable.

Commodity price risk

While the value of Continental's resource properties relate to the price of copper and gold metals and their outlook, Continental currently does not have any operating mines and hence, does not have any hedging or other commodity based price risks in respect of its operational activities.

Copper and gold prices historically have fluctuated widely and are affected by numerous factors outside of the Company's control, including, but not limited to, industrial and retail demand, central bank lending, forward sales by producers and speculators, levels of worldwide production, short-term changes in supply and demand because of speculative hedging activities, and certain other factors related specifically to gold.


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

11. INCOME TAXES

As at December 31, 2007 and 2006, the estimated tax effect of the significant components within the Company's future tax assets (liabilities) were as follows:

      December 31     December 31  
      2007     2006  
  Resource pools and loss carry forwards – Canada $  10,102,000   $  8,036,000  
  Equipment   50,000     –  
  Other   314,000     313,000  
  Subtotal   10,466,000     8,349,000  
  Valuation allowance   (10,466,000 )   (8,349,000 )
  Future income tax assets   –     –  
  Mineral properties   (25,510,000 )   (26,948,000 )
  Net future income tax assets (liability) $  (25,510,000 ) $  (26,948,000 )

Income tax expense (recovery) differs from the amount which would result from applying the statutory Canadian income tax rates (2007 – 34.1%; 2006 – 34.1%) for the following reasons:

      Years ended  
      December 31     December 31     December 31  
      2007     2006     2005  
  Income tax at statutory rates $  (7,314,000 ) $  (9,067,000 ) $  (670,000 )
  Difference in foreign tax rates   2,098,000     1,772,000     –  
  Change in valuation allowance   2,117,000     7,079,000     –  
  Permanent differences   1,007,000     564,000     820,000  
  Other non-deductible items   1,354,000     (62,000 )   (150,000 )
  Change due to foreign exchange differences   757,000     117,000     –  
  Other   (19,000 )   (403,000 )   –  
    $  –   $  –   $  –  

For the year ended December 31, 2007, the difference between the Company's actual tax recovery of $nil and the expected recovery calculated by applying statutory rates to the loss for the year are due primarily to non-capital loss carry-forwards for which no benefit has been recognized and stock based compensation which is not deductible for tax purposes.

At December 31, 2007, the Company's tax attributes included Canadian resource pools totaling approximately $0.3 million (2006 – $0.3 million), which are available indefinitely to offset future taxable income, and financing costs totalling approximately $1.2 million (2006 – $0.9 million). Additionally, Canadian capital and non-capital losses carried forward of approximately $12.8 million (2006 – $8.6 million) expire in periods ranging from 1 to 20 years. At December 31, 2007, the Company had resource pools and losses carried forward totalling $44.5 million (2006 – $34.8 million).


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

12. SEGMENT DISCLOSURES

The Company considers itself to operate in a single reportable operating segment, being exploration and development of mineral properties. Geographic segment disclosures are as follows:

      For the years ended December 31  
      2007     2006     2005  
  Losses for the years                  
     Canada $  6,983,885   $  7,489,831   $  2,467,467  
     Cayman Islands   35,080     –     –  
     China   14,416,490     19,226,242     6,113,320  
  Total $  21,435,455   $  26,716,073   $  8,580,787  

      As at December 31  
      2007     2006  
  Current assets            
     Canada $  32,725,418   $  2,137,282  
     Cayman Islands   33,029     –  
     China   1,162,403     693,251  
  Total $  33,920,850   $  2,830,533  
               
  Property and equipment            
     Canada $  5,608   $  –  
     China   542,672     523,327  
  Total $  548,280   $  523,327  
               
  Mineral property interests            
     Canada $  –   $  –  
     China   117,287,309     112,747,309  
  Total $  117,287,309   $  112,747,309  


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

13.

DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"), which differ in certain material respects from those principles that the Company would have followed had its consolidated financial statements been prepared in accordance with United States generally accepted accounting principles ("US GAAP").

Had the Company followed US GAAP, certain items on the consolidated statements of operations and deficit, and balance sheets would have been reported as follows:


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

      Year ended     Year ended     Year ended  
      December 31     December 31     December 31  
      2007     2006     2005  
  Consolidated Statements of Operations                  
  Loss for the year under Canadian GAAP $  21,435,455   $  26,716,073   $  8,580,787  
  Adjustment under US GAAP                  
  Convertible promissory note –accretion expense (c)   -     (230,298 )   –  
  Loss on extinguishment of promissory note (c)   100,000              
  Stock based compensation expense (d)   (249,320 )   –     –  
  Loss for the year under US GAAP $  21,286,135   $  26,485,775   $  8,580,787  
                     
  Basic and diluted loss per share for the year under US                  
  GAAP $  (0.18 ) $  (0.50 ) $  (0.22 )

      As at December 31     As at December 31  
      2007     2006  
  Consolidated Balance Sheets            
  Total assets under Canadian GAAP $  151,756,440   $  116,101,170  
  Adjustment under US GAAP            
  Value of investment in Gibraltar shares (a)   13,513,886     13,513,886  
  Total assets under US GAAP $  165,270,326   $  129,615,056  
               
  Total liabilities under Canadian GAAP $  29,750,170   $  45,378,116  
  Adjustments under US GAAP            
  Value of redeemable preferred shares (a)   13,513,886     13,513,886  
  Convertible promissory note –conversion right (c)   -     695,932  
  Convertible promissory note –accretion expense (c)   -     (230,298 )
  Total liabilities under US GAAP $  43,264,056   $  59,357,636  
               
  Total shareholders' equity under Canadian GAAP $  122,006,270   $  70,723,054  
  Adjustments under US GAAP            
  Share capital (a) and (b)   20,379,837     20,379,837  
  Convertible promissory note –conversion right (c)   -     (695,932 )
  Contributed surplus - Conversion right, upon   (695,932 )   -  
  extinguishment of the convertible promissory note (c)            
  Contributed surplus (b)   342,309     342,309  
  Contributed surplus –stock-based compensation (d)   (249,320 )   -  
  Accumulated deficit (a), (b), (c) and (d)   (19,776,894 )   (20,491,848 )
  Total shareholders' equity under US GAAP $  122,006,270   $  70,257,420  


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

There are no material differences between Canadian GAAP and US GAAP in the consolidated statement of cash flows for the years ended December 31, 2007, 2006 and 2005. For all periods presented, comprehensive loss equals reported loss for US GAAP purposes.

A description of US GAAP and the rules prescribed by the United States Securities and Exchange Commission ("SEC") that result in material differences from Canadian GAAP follows:

  (a)

US GAAP requires mineral property exploration and land use costs to be expensed as incurred until commercially recoverable deposits are determined to exist within a particular property, as cash flows cannot be reasonably estimated prior to such determination. Accordingly, for all periods presented, the Company has expensed all mineral property exploration and land use costs for both Canadian GAAP and US GAAP purposes. However, included in the cost of the Harmony Gold Property that was acquired in fiscal 2001, were mineral property exploration costs that had been capitalized for Canadian GAAP purposes. As a result of capitalizing mineral property exploration costs for Canadian GAAP purposes, $13,250,898 of mineral property exploration costs included in the book value of the Harmony Gold Property at the date of its purchase in fiscal 2001 would have been previously expensed for US GAAP purposes. Accordingly, for US GAAP purposes, these costs would have been excluded from the value allocated to the Gibraltar Preferred shares and redeemable preferred shares of the Company (note 4) on the sale of the Harmony Gold Property.

In addition, US GAAP does not permit the offset of a financial asset and financial liability when more than two parties have an interest in the financial asset and liability, which is permitted under Canadian GAAP (note 8(f)). As such, the Gibraltar preferred shares and the redeemable preferred shares of the Company would be presented on the balance sheet at their gross value as a financial asset and a financial liability respectively under US GAAP.

  (b)

US GAAP does not permit accumulated deficit to be offset against share capital and contributed surplus after a special resolution of shareholders approving such an offset, which is permitted under Canadian GAAP. Accordingly, for US GAAP purposes, share capital would be increased by $7,128,939, contributed surplus would be increased by $342,309 and the accumulated deficit would be increased by $7,471,248 for December 31, 2007 and 2006 .
     
  (c)

On August 29, 2006, the Company issued an $11.5 million convertible promissory note of the Company ("the Note") (note 7). Under Canadian GAAP, the convertible promissory note is classified between its equity and debt components. Under US GAAP, the entire Note would be classified as debt.
     
 

Under Canadian GAAP, the accretion of the residual carrying value of the convertible instrument to the face value of the convertible instrument over the life of the instrument is charged to operations. Under US GAAP, the Note is stated at cost on its recognition and is not accreted.


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

 

During the 2006 fiscal year, the $695,932 attributed to the equity component of the instrument under Canadian GAAP was classified as debt for US GAAP purposes. In addition, $230,298, (2005 –nil) of accretion expense recorded under Canadian GAAP was reversed for US GAAP purposes resulting in an $11,500,000 carrying value as at December 31, 2006.
     
 

At January 1, 2007, upon adoption of CICA Section 3855 –Financial Instruments ,the Company designated the liability component of the convertible promissory note (note 3a(i)) as held for trading, and its carrying value was adjusted to its fair value of $11,600,000 with a charge to opening deficit of $565,634 for Canadian GAAP purposes. There is no requirement under US GAAP to adjust the carrying value of the promissory note to its fair value. Hence, the promissory note was carried at its original carrying value of $11,500,000 for US GAAP purposes.

On redemption, the loss under Canadian GAAP was $475,000 and under US GAAP, the loss was calculated as follows:

  Loss on extinguishment      
   Liability component, February 20, 2007 $  11,500,000  
   Conversion, February 20, 2007   (12,075,000 )
   Loss on extinguishment of promissory note $  (575,000 )

 

The redemption of the convertible promissory note for $12.075 million on February 20, 2007 did not have any effect on contributed surplus since there was no equity component recorded under US GAAP.
     
  (d)

In December 2004, Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123 (Revised 2006), "Share-Based Payment" ("SFAS 123R"), which is a revision of SFAS 123 "Accounting for Stock-Based Compensation". SFAS 123R supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. In calculating compensation to be recognized, SFAS 123R requires the Company to estimate future forfeitures. Prior to adoption of SFAS 123R, the Company's accounting for stock based compensation for US GAAP purposes was consistent with that used for Canadian GAAP. For Canadian GAAP purposes, the Company uses the fair value method to account for all stock option grants but accounts for forfeitures as they occur, as permitted by Canadian GAAP.
     
 

Based on the Company's estimated future forfeiture rates of stock options, the expense recognized for US GAAP purposes under SFAS 123R is $249,320 less (2006 - $nil, 2005 - $nil) than the amount recorded for Canadian GAAP purposes.


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

  (e)

Income taxes
     
 

Under Canadian GAAP, future tax assets and liabilities may be recorded at substantively enacted tax rates. Under US GAAP, deferred tax assets and liabilities are recorded at enacted tax rates. There were no significant differences between enacted and substantively enacted tax rates for the periods presented.
     
 

FASB Interpretation (“FIN”) No. 48: Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No.109, was adopted by the Company on June 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation requires that the Company recognize the impact of a tax position in the financial statements if the position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure. In accordance with the provisions of FIN 48, any cumulative effect resulting from the change in accounting principle is to be recorded as an adjustment to the opening balance of deficit. The adoption of FIN 48 did not result in a material impact on the Company’s consolidated financial position or results of operations.

  (f)

Accounts receivable comprise:

      As at December 31     As at December 31  
      2007     2006  
  GST receivable $  188,854   $  189,122  
  Advances and other receivables   23,011     38,476  
    $  211,965   $  227,598  

  (g)

Accounts payable and accrued liabilities comprise:

      As at December 31     As at December 31  
      2007     2006  
  Trade payables $  1,763,377   $  3,172,976  
  Business taxes payable   148,774     251,900  
  Interest payable   -     156,274  
    $  1,912,151   $  3,581,150  

  (h)

Impact of recent United States accounting pronouncements:
       
  i)

Statement of Financial Accounting Standards (“SFAS”) No. 157: Fair Value Measurements, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for the company beginning January 1, 2008. Management is analyzing the requirements of this new standard and believes that its adoption will not have any significant impact on the Company’s financial statements.


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

ii)

SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Included an amendment of SFAS No. 115. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement applies to all entities, including not-for-profit organizations. Most of the provisions of this Statement apply only to entities that elect the fair value option. SFAS No. 159 is effective for the company beginning January 1, 2008. Management is analyzing the requirements of this new standard but believes that its adoption will not have any significant impact on the Company's financial statements.

  iii)

FASB Staff Position (“FSP”) No. FIN 46 (R)-7, The Application of FASB Interpretation No. 46 (R) to Investment Companies, amends interpretation 46 (R) to provide an exception to the scope of the Interpretation for companies within the scope of the AICPA Audit and Accounting Guide (“Guide”). This FSP concludes that no additional consolidation guidance is necessary to the Guide. The Company’s preliminary assessment does not indicate that this FSP will have a significant impact on the financial statements.
     
  iv)

In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which requires recognition of the assets acquired, liabilities assumed and non-controlling interest arising in a business combination at their fair value as of the acquisition date. In addition, the costs of acquisition must be expensed. This statement will be effective for the Company’s 2009 fiscal year.
     
  v)

In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements-An Amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary (previously referred to as minority interests). SFAS 160 also requires that a retained non-controlling interest upon the deconsolidation of a subsidiary be initially measured at its fair value. Upon adoption of SFAS 160, the Company would be required to report any non-controlling interests as a separate component of stockholders' equity. The Company would also be required to present any net income allocable to non-controlling interests and net income attributable to the stockholders of the Company separately in its consolidated statements of operations. SFAS 160 is effective for the Company’s 2009 fiscal year, except for the presentation and disclosure requirements, which will be applied retroactively.
     
  vi)

In March 2008, the FASB issued FAS No. 161, “Disclosure about Derivative Instruments and Hedging Activities” (“FAS 161”). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities by requiring enhanced disclosures about how and why an entity uses derivatives instruments, how derivative instruments and related hedged items affect an entity’s operating results, financial position, and cash flows. FAS 161 is effective for the Company’s 2009 fiscal year. Early adoption is permitted. The Company is currently reviewing the provisions of FAS 161 and has not yet adopted the statement. However, as the provisions of FAS 161 are only related to disclosure of derivative and hedging activities, the Company does not believe the adoption of FAS 161 will have a material impact on its consolidated operating results, financial position or cash flows.


CONTINENTAL MINERALS CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2007, 2006 and 2005
(Expressed in Canadian Dollars, unless otherwise stated)
 

     
  vii)

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS No. 162"). The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. SFAS No. 162 is effective 60 days following the Securities and Exchange Commission's approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company is currently evaluating the impact of adoption of SFAS No. 162 but does not expect adoption to have a material impact on results of operations, cash flows or financial position.