Leading by Example: Annual Report

leading by example
2011
annual report
From the CEO & CFO Company Prole Corporate Governance Social and Environmental Responsibility Financial Statements Management Discussion and Analysis Investor Information
TABLE OF CONTENTS
leading by example
April, 2012 To Shareholders, We are pleased to provide Rio Altos rst Letter to Shareholders with this Annual Report. The board of directors is proud of the achievements made these past months by the Companys employees, contractors and advisors in Peru and Canada and hope you agree that collectively our team has done an outstanding job. Our primary objective for 2011 was straightforward to put the La Arena gold oxide deposit into production with minimal shareholder dilution. This was achieved.
FROM THE CEO & CFO
Derivative objectives were principally related to production goals, expanding mineral resources, increasing the knowledge, experience and independence of the board of directors, strengthening the management team, improving community and stakeholder relationships and increasing the value of our and your investment. These objectives were achieved and are described in this Annual Report. The following describes our objectives for 2012 and how we intend to achieve them.
Objectives for 2012:

Production objectives to produce 150,000 to 160,000 ounces of gold at a cash cost of $500 to $550 per ounce and a total cost (cash cost plus corporate overhead and taxes) of about $600 to $650 per ounce and, to expand daily production capacity by mid-year from 24,000 tonnes per day (tpd) of ore to pad to 36,000 tpd of ore to pad at a cash cost of approximately $25 million. Gold production for Q1 2012 was 55,973 ounces, so we are well on our way to achieving the gold production objective. Thus far operating costs are in-line with predictions, but higher than anticipated ination or other unforeseen events may affect production costs. Tax charges are more difcult to forecast, are generally not controllable and are less predictable. Production expansion work is underway and remains on target for completion in mid-year. It is too early to determine whether the $25 million capital expenditure goal will be met, but todate costs have been tracking as planned. Resource and reserve expansion objectives to increase sulphide ore reserves (as part of the feasibility study for the copper/gold sulphide deposit) from the current 187.3 Mt @ 0.38 % Cu and 0.29 g/t Au; to increase sulphide mineral resources in both the indicated and inferred resource categories; to replace by drilling, gold reserves and resources mined from the La Arena Gold Mine; and to discover and delineate more gold oxide deposits within the La Arena land package. We plan to spend approximately $20 million during 2012 on drilling the sulfide ore body, the oxide ore body and other oxide exploration targets. This spending should help us achieve our resource and reserve expansion objectives. On March 5, 2012, we announced the assay results from some recent drilling within the sulde ore body. These results were encouraging and we believe it is possible to increase the current sulphide reserves and to signicantly add to the indicated and inferred resources.
We continue to drill within and adjacent to the oxide deposits presently identied at La Arena and will announce results as they are available. Our exploration team has identied other gold oxide prospects within our mining concessions that we would like to test in 2012. Access to these oxide prospects depends on obtaining permission from the owner of the surface rights and on receiving permits for proposed drilling or trenching. We cant predict what the cost or timing will be for surface access or for receipt of permits, but we will make reasonable efforts to obtain what is needed to test these prospects. It is more difcult to provide specic objectives for non-quantiable activities such as community relations, business development activities, strengthening the management team and increasing the value of your investment. Our good working relationship with the communities affected by our activities allows us to operate as we do. Our active business development program allows us to identify and evaluate many possible property acquisitions. Our talented and motivated management team and board has driven our business success. Community & Sustainable Development objectives In 2011, we completed the rst stage of construction of a 300 pupil school at La Arena for children from kindergarten to high school level. This school is of the highest quality and includes a book library and computer laboratory of 30 computers. Two additional stages of construction remain to be completed over the next two years. We intend to continue our focus on initiatives of social responsibility and community relations with the La Arena community and those communities in close proximity to the La Arena mining operations. The objectives for 2012 include: Education; Commence the second stage of construction of the school incorporating kitchen and mess facilities and an administration block for teachers Provide support services and facilities for the operation and maintenance of the new school facilities including support to students and teachers Health; Provide financial and technical support for the construction and operation of a new health center for the La Arena community Undertake various health campaigns with local and surrounding communities Training; Provide reading and writing classes for adults outside of school hours using the facilities of the new school Provide evening technical classes to workers within the La Arena operations covering various facets of mining activities using the facilities of the new school Management team objectives Many of you may not know, but apart from four full-time people and one part time person, in Vancouver and four expatriates, in Peru, Rio Alto is managed by and run by Peruvians. This is something that we are especially proud of. To complete the feasibility study for and construction of the sulphide copper-gold deposit we will need to add people to our technical team.
FROM THE CEO & CFO
2012 objectives include: to supplement our current management team to manage the sulphide copper-gold feasibility study; and To conduct a review of and change compensation packages to ensure that key people are retained and motivated. Business acquisition objectives Business acquisition opportunities are plentiful in the market today. In the recent past explorers and junior producers were able to attract investment funding and generally tapped into the equity markets in order to nance and sustain their efforts. We believe that 2012 will be a difcult year for nancing exploration and development projects in the resource sector.
FROM THE CEO & CFO
In anticipation of this we have concentrated on putting the La Arena Gold Mine into production so that we could fund future exploration and development from operating cash ow. Now that the mine has attained and maintained commercial levels of production and the mine expansion is progressing as planned we are reviewing business acquisition opportunities. Focusing on production at the La Arena Gold Mine and exploring and developing the mining concessions we currently hold are the Companys top two priorities. Finding other accretive business acquisition opportunities has become the third priority. 2012 objectives include: To assess and begin exploring approximately 80,000 hectares of ground in Colombia to determine whether our earn-in and option agreement should be exercised; To focus on the search for accretive precious metals opportunities; and To fund development or acquisitions in a manner that results in the least amount of share dilution and generates the best value for our shareholders We urge you to read Rio Altos audited consolidated nancial statements and managements discussion and analysis of the results of operations and nancial condition included within this Annual Report. We also recommend that you read the Companys current Annual Information Form, Information Circular and other documents led within the Companys SEDAR prole at www.sedar.com. We would like to close this letter by expressing our appreciation to you our shareholders for your continued support, our board of directors for their counsel and guidance, our management team, employees and staff for their enthusiasm, dedication and hard work and nally to our outside expert advisors. Sincerely,
Alex Black
DIrector, PresIdent & CEO
Anthony Hawkshaw
ChIef FInancIal OffIcer & DIrector
Rio Alto is a gold producer in Peru with 27,000 ha of mining concessions including the 21,000 ha La Arena gold/gold-copper project located in a highly mineralized area which includes Barricks 1mm oz/yr Lagunas Norte mine. La Arena is located in northern Peru, in La Libertad Department, at an altitude of 3,400m above sea level and has excellent access to infrastructure, including a national highway, airstrip, national power grid, exploration camp and abundant water supply.
COMPANY PROFILE
As per the NI 43-101 Technical Report prepared by Kirk Mining Consultants with an effective date of September 30, 2011, La Arena has Measured & Indicated resources of 3.9 M oz Au & 2.0 Bn lbs Cu with additional inferred resources of 2.2 M oz Au & 2.1 Bn lbs Cu. Gold production in La Arena gold oxide mine commenced in May of 2011, with a total of 51,300 ounces produced in 2011 and a projected150,000 to 160,000 ounces in 2012. Current mine production of 24,000 tpd of ore to pad is planned to increase to 36,000 tpd by the second half of 2012. Rio Alto is also focused on acquiring, exploring and developing gold and copper resources and advanced stage exploration projects. The Company has assembled an experienced team with a proven history of developing, nancing, and operating mining projects. With a strategy of mine development in the short term and an exploration strategy to discover additional mineral resources Rio Alto is positioned to generate signicant value for its shareholders. Our strategy is to grow responsibly as a mining company, providing superior returns to shareholders. Rio Alto is headquartered in Vancouver and its shares are listed on the TSX (RIO), in the Lima Bolsa (RIO), in the OTCQX (RIOAF) and in Frankfurt (MS2).
BOARD OF DIRECTORS
Dr. Klaus Zeitler Chairman of Board, Director Alex Black Director, President & CEO Anthony Hawkshaw Director & CFO Victor Gobitz Colchado Director & COO Dr. Roger Norwich Director Drago Kisic Wagner Director Sidney Robinson Director Ram Ramachandran Director
We strive to earn and retain the trust of our shareholders through high standards of corporate governance. We have rigorous oversight and regulations in place, and we work to embed those practices in our culture.
CORPORATE GOVERNANCE
Our board is accountable to shareholders

Our Board of Directors supervises the management of our business and affairs to enhance shareholder value. Regular assessment of the board ensures it has the appropriate number of members and diverse expertise to make effective decisions. The board provides well informed strategic direction and oversight, emphasizing long-term sustainability over shortterm nancial performance. Our core values guide that strategic direction and oversight, as well as the boards relationship with management and accountability to shareholders.
Our Governance Structure

The board and its committees act independently. Every board and committee meeting includes in-camera sessions without management present. Currently the Company has the following committees: Audit Committee Corporate Governance and Compensation Committee Health, Safety and Community Committee
Social and environmental responsibility is a core value for Rio Alto and the company makes every effort to carry out its operations in a way that is respectful of the surrounding communities and the environment. Our commitment is to promote a work environment where the health and safety of people are always our rst priorities.
SocIal and EnvIronmental ResponsIbIlIty
Social Responsibility
The Company and its subsidiaries employ 474 people and support an additional 1,078 people hired through subcontractors. Rio Alto recognizes the importance of contributing responsibly and is developing a number of sustainable local development initiatives. We work along with the community in projects supporting basic infrastructure, education, health and sustainable development, among others. The Company has assisted members of the communities directly affected by the planned development of the La Arena Gold Oxide Mine by: helping them to establish a company, Consorcio La Arena SA, that acts as a hiring agent for the provision of skilled and unskilled workers to the project development; completing the design of a new school and completed its construction; providing a service to bus children to school; and commencing various training programs, such as, safety training and driver education. The Company has 10 full-time employees in charge of co-ordinating community relations.
SocIal and EnvIronmental ResponsIbIlIty
Environmental Impact
Development of the La Arena Project, like most human activities, affects the environment. Evaluation and mitigation of this impact is a priority. Rio Alto monitors air and water quality, noise levels, soil conditions and geotechnical conditions to ensure that our activities are in compliance with the highest standards. The results of our monitoring programs are reported to government authorities every quarter. Peruvian legislation includes a comprehensive system of laws and regulations designed to protect the environment and the countrys culture heritage. The Company engages consultants as needed and has 11 full-time employees to ensure compliance with Peruvian legislation. In summary, the current and future operations of the Company, including development and mining activities, are subject to extensive federal, provincial and local laws and regulations governing environmental protection, including protection and remediation of the environment and other matters. We meet and exceed these requirements.
For the seven month nancial year ended December 31, 2011 and the year ended May 31, 2011
CONSOLIDATED FINANCIAL STATEMENTS
rio alto mining limited
INDEPENDANT AUDITORS REPORT
To the shareholders of Rio Alto Mining Limited, We have audited the accompanying consolidated financial statements of Rio Alto Mining Limited, which comprise the consolidated balance sheets as at December 31, 2011, May 31, 2011 and June 1, 2010, the consolidated statements of loss and comprehensive loss, changes in equity, and cash flows for the seven months ended December 31, 2011 and the year ended May 31, 2011, and a summary of signicant accounting policies and other explanatory information.
Grant Thornton LLP Suite 1600, Grant Thornton Place 333 Seymour Street Vancouver, BC V6B 0A4 T +1 604 687 2711 F +1 604 685 6569 www.GrantThornton.ca
Managements responsibility for the nancial statements

Management is responsible for the preparation and fair presentation of these consolidated nancial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated nancial statements that are free from material misstatement, whether due to fraud or error.
Auditors responsibility
Our responsibility is to express an opinion on these consolidated nancial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated nancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated nancial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the companys preparation and fair presentation of the consolidated nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the companys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated nancial statements. We believe that the audit evidence we have obtained in our audits is sufcient and appropriate to provide a basis for our audit opinion.

As at December 31, 2011, May 31, 2011 & June 1, 2010 Expressed in United States dollars
Opinion
In our opinion, the consolidated nancial statements present fairly, in all material respects, the financial position of Rio Alto Mining Limited as at December 31, 2011, May 31, 2011 and June 1, 2010, and its nancial performance and its cash ows for the seven months ended December 31, 2011 and the year ended May 31, 2011 in accordance with International Financial Reporting Standards. Vancouver, Canada March 29, 2012
Chartered accountants
CONSOLIDATED BALANCE SHEETS
Notes December 31, May 31, June 1, 2011 2011 2010 (Note 28) Assets Current Cash and cash equivalents 26 $ 25,906,840 $ 11,526,062 $ 5,440,298 Accounts receivable 7 2,130,487 537,025 84,449 Subscriptions receivable - - 582,704 Promissory note receivable 8 - - 116,532 Inventory 9 14,906,568 3,910,479 Prepaid expenses 10 1,099,213 2,554,024 157,585 IGV receivable 11 25,635,346 13,999,942 397,637 69,678,454 32,527,532 6,779,205 Deferred financing costs - - 23,924 Deferred taxes 16 1,950,040 - 144,150 Plant and equipment 12 62,082,283 47,285,624 259,989 Mineral properties and development costs 13 63,795,817 78,131,239 Investment in La Arena S.A. 14 - - 16,854,480 Total Assets $ 197,506,594 $ 157,944,395 $ 24,061,748 Liabilities and equity Current Accounts payable and accrued liabilities 15 $ 27,481,351 $ 8,264,506 $ 502,789 Due to related parties - - 72,248 Income taxes payable 16 1,962,143 - Deferred revenue 19 4,250,823 1,790,292 Derivative liability 19 934,144 2,136,078 34,628,461 12,190,876 575,037 Long-term debt 17 3,000,000 - Asset retirement obligation 18 15,685,312 14,800,000 Deferred revenue 19 25,258,707 8,625,953 Derivative liability 19 3,624,954 10,292,004 82,197,434 45,908,833 575,037 Equity Share capital 21 127,537,357 125,972,274 39,006,847 Share option and warrant reserve 21 10,420,216 8,163,945 2,396,484 Translation reserve 4,521,962 4,521,962 Deficit (27,170,375) (26,622,619) (17,916,620) 115,309,160 112,035,562 23,486,711 Total Equity and Liabilities $ 197,506,594 $ 157,944,395 $ 24,061,748 Commitments and contingencies (Note 25) Subsequent events (Note 29) Approved on behalf of the Board of Directors:

As at December 31, 2011, May 31, 2011 & June 1, 2010 Expressed in United States dollars
Ram Ramachandran
Anthony Hawkshaw
DIRECTOR DIRECTOR
See accompanying notes to the consolidated nancial statements
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
Notes Seven months ended Year ended December 31, 2011 May 31, 2011 General and administrative expenses 22 $ (5,963,472) $ (8,745,472) Exploration expense - (37,084) Operating loss (5,963,472) (8,782,556) Unrealized gain on derivative liability 19 7,868,984 1,648,876 Cost relating to gold prepayment agreement (1,542,451) (1,022,282) Accretion of asset retirement obligation 18 (847,416) Foreign exchange loss (48,137) (385,376) Other income 3,021 36,204 Loss before income taxes (529,471) (8,505,134) Provision for income tax expense 16 (18,285) (200,865) Net loss for the period (547,756) (8,705,999) Other comprehensive loss - 4,521,962 Comprehensive loss for the period $ (547,756) $ (4,184,037) Basic and diluted loss per share $ (0.00) $ (0.06) Weighted average number of common shares outstanding 168,978,823 140,245,551

For the seven months ended December 31, 2011 and the year ended May 31, 2011 Expressed in United States dollars
CONSOLIDATED STATEMENTS OF CASH FLOWS
Notes Seven months ended Year ended December 31, 2011 May 31, 2011 Operating Activities Loss for the period $ (547,756) $ (8,705,999) Items not affecting cash: Amortization 65,455 58,561 Share-based compensation 3,126,259 4,893,723 Unrealized gain on derivative liability (7,868,984) (1,648,876) Accretion expense 847,416 Deferred financing costs - 24,478 Deferred taxes recovery (1,950,040) 200,865 Other 37,897 Changes in non-cash working capital items 26 (16,684,154) (3,291,583) Net cash used in operating activities (22,973,907) (8,468,831) Financing Activities Proceeds from issuing share capital - 84,907,189 Proceeds from exercise of options and warrants 695,095 8,634,881 Subscription receipts receivable - 582,704 Proceeds from gold prepayment agreement 19 25,500,000 24,500,000 Operating loan 17 3,000,000 Share issue costs - (5,702,905) Net cash provided by financing activities 29,195,095 112,921,869 Investing Activities Mineral property expenditures 26(c) Cash received from pre-production gold sales 26(c) Purchase of property, plant and equipment 26(c) Investment in La Arena Acquisition of La Arena Cash acquired in La Arena acquisition Net cash provided by (used in) investing activities

(41,280,540) 65,214,108 (15,773,978) - - - 8,159,590
(1,244,417) (18,729,507) (35,511,237) (48,846,789) 5,533,627 (98,798,323) 5,654,715 5,440,298 431,049
Increase in cash & cash equivalents during the period 14,380,778 Cash and cash equivalents, beginning of the period 11,526,062 Effect of foreign exchange on cash & cash equivalents - Cash & cash equivalents, end of the period 26 $ 25,906,840
$ 11,526,062
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Share Share Capital Option & Warrant Translation Note Shares Amount Reserve Reserve
Decit
Total

As at December 31, 2011 and May 31, 2011 Expressed in United States dollars
Balance, June 1, 2010 Shares issued for private placements Share issue costs related to private placements Shares issued on conversion of warrants Shares issued on exercise of options Share-based compensation Net loss for the year Balance, May 31, 2011 Shares issued on conversion of warrants Shares issued on exercise of options Share-based compensation Net loss for the period Balance, December 31, 2011 21(a) 21(a) 21(c) 21(b) 21(b) 21(c) 21(b) 21(b)
108,035,575 $ 39,006,847 $ 2,396,484 $ 50,326,257 - 8,468,250 1,727,500 - - - 126,270 1,062,500 - - - 169,746,352 84,907,189 (5,702,905) (2,087,483) 8,027,350 1,821,276 - - - 400,906 1,164,177 - - - - - - (1,213,745) 4,893,723 - - (152,145) (717,843) 3,126,259 - -
- $(17,916,620) $ 23,486,711 - - - - - 4,521,962 - - - - - - - - - - (8,705,999) - - - - (547,756) 84,907,189 (5,702,905 ) 8,027,350 607,531 4,893,723 4,521,962 (8,705,999 ) 248,761 446,334 3,126,259 (547,756 )
Fair value of broker warrants for private placement 21(a)
2,087,483
Other comprehensive loss
168,557,582 $ 125,972,274 $ 8,163,945 $ 4,521,962 $(26,622,619) $112,035,562
Other comprehensive loss
$ 127,537,357 $10,420,216
$ 4,521,962
$(27,170,375) $115,309,160
1 N ATURE OF OPERATIONS AND CONTINUANCE OF OPERATIONS

In November 2011, the Company changed its fiscal year end from May 31 to December 31. The change was made to allow it to provide its continuous disclosure information on a comparable basis with its peer group and to align its year end with the year end of La Arena S.A., a wholly-owned subsidiary that carries on the principal business of Rio Alto. The La Arena Gold Mine achieved commercial production in January 2012; therefore, now is an appropriate time to proceed with the change. During the transition year, the Companys balance sheet is as of December 31, 2011 and the statement of loss and comprehensive loss and cash ows are for the seven month period from June 1, 2011 to December 31, 2011. Rio Alto Mining Limited is the parent company of a consolidated group, (Rio Alto, or the Company). Rio Alto is incorporated under the laws of the Province of Alberta, with its registered office at Suite 1000 - 250 2nd Street S.W., Calgary, Alberta, T2P 0C1 and its head office at Suite 1950 - 400 Burrard Street, Vancouver, BC, V6C 3A6. On February 9, 2011 the Company completed the purchase of 100 per cent of La Arena S.A. (La Arena) (Note 6). Throughout the year ended May 31, 2011 La Arena was in the development stage. The La Arena gold oxide mine commenced preproduction in May 2011 and had achieved commercial production levels at the end of December 2011.
2 B ASIS OF PRESENTATION AND STATEMENT OF COMPLIANCE WITH IFRS

These consolidated nancial statements are the rst annual nancial statements of the Company prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). IFRS comprises IFRSs, International Accounting Standards (IAS) and interpretations issued by the IFRS Interpretations Committee (IFRIC) and the former Standing Interpretations Committee (SIC). As these nancial statements represent the Companys initial presentation of results and nancial position under IFRS, they are prepared in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards. The date of transition to IFRS is June 1, 2010 (the Transition Date). The Company has applied the policies IFRS on a retrospective basis subject to certain optional exemptions and certain mandatory exceptions applicable to rst time adopters. The Companys consolidated nancial statements were previously prepared in accordance with accounting principles generally accepted in Canada (Canadian GAAP). Canadian GAAP differs in certain areas from IFRS. Note 28 contains reconciliations and explanations of the effect of the transition from Canadian GAAP to IFRS on the consolidated balance sheets as at May 31, 2011 and June 1, 2010 and the statements of loss and comprehensive loss for the year ended May 31, 2011. The preparation of nancial statements in accordance with IFRS requires the application of use of certain critical accounting estimates and judgments when applying the Companys accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are signicant to the nancial statements are described in Note 3. The date the Board of Directors approved these consolidated nancial statements for issue was March 29, 2012.
NOTES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3 SIGNIFICANT JUDGEMENTS, ESTIMATES AND ASSUMPTIONS

The preparation of the Companys consolidated nancial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated nancial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are continually evaluated and are based on managements experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results could differ from these estimates by a material amount. Matters that require management to make significant judgments, estimates and assumptions in determining carrying values include, but are not limited to:
A Mineral reserves
Proven and probable mineral reserves are the economically mineable parts of the Companys measured and indicated mineral resources demonstrated by at least a preliminary feasibility study. The Company estimates its proven and probable mineral reserves and measured and indicated and inferred mineral resources based on information compiled by appropriately qualied persons. The estimation of future cash ows related to proven and probable mineral reserves is based upon factors such as assumptions related to foreign exchange rates, commodity prices, future capital requirements, metal recovery factors and production costs along with geological assumptions and judgments made in estimating the size and grade of ore bodies. Changes in proven and probable mineral reserves or measured and indicated and inferred mineral resource estimates may impact the carrying value of mineral properties, plant and equipment, asset retirement obligations, recognition of deferred tax amounts and amortization.
B Purchase price allocation

Applying the acquisition method to asset or business acquisitions requires each identiable asset and liability to be measured at its acquisition-date fair value. The determination of
NOTES
acquisition-date fair values requires that management make assumptions about future events and estimates about the future recoverability of assets. The assumptions and estimates used to determining the fair value of the net assets acquired require a high degree of judgment, and include estimates of mineral reserves or resources acquired, future metal prices, the amount of and the timing of the receipt of revenue and the disbursements for operating and capital costs, and discount rates. Changes in any of the assumptions or estimates used in determining the fair value of acquired assets and liabilities could impact the amounts assigned to assets and liabilities in the purchase price allocation.
through exploration activities, differences between estimated and actual costs of mining and differences in metal prices used in the estimation of mineral reserves. Signicant judgment is involved in the determination of useful life and residual values for the computation of amortization and no assurance can be given that the actual useful lives or residual values will not differ signicantly from current assumptions.
E Commencement of commercial production

The Company assesses the stage of each mine under construction to determine when a property reaches the stage when it is substantially complete and ready for its intended use. Criteria used to assess when a property has commenced commercial production including, among other considerations: The level of capital expenditures incurred relative to the expected costs to complete; The completion of a reasonable period of testing of the mine plant and equipment; The ability to produce saleable metals; The attainment of all relevant permits; The ability to sustain ongoing production; & Achievement of pre-determined production targets. When management determines that a property has commenced commercial production, costs deferred during development are reclassied to property, plant and equipment and amortized. Management determined that the La Arena Gold Mine achieved commercial production levels in late December 2011 and from January 1, 2012 commercial production had commenced.
D Inventories
Dor, work-in-process and mined ore are valued at the lower of average production cost or net realizable value. Dor represents a bar containing predominantly gold by value which must be rened offsite to return ne gold or silver in readily saleable form. Net realizable value is the estimated receipt from sale of the inventory in the normal course of business, less any anticipated costs to be incurred prior to its sale. The production cost of inventories is determined on a weighted average basis and includes cost of raw materials, direct labour, contract mining charges, overhead and depreciation, depletion and amortization of mineral properties. The recovery of gold and by-products from oxide ores is achieved through a leaching process at the La Arena Gold Mine. Under this method, ore is placed on leach pads where it is treated with a chemical solution that extracts gold contained in the ore. The majority of the gold in ore is recovered over a period of up to 30 days. The resulting gold rich or pregnant leach solution is further processed in a plant where the gold and silver are recovered in dor form. Operating costs at each stage of the process are deferred and included in workin-process inventory based on current mining and leaching costs. Costs are removed from inventory as ounces of dor are produced at the average cost per recoverable ounce of gold. Estimates of recoverable gold are calculated from the measured quantities of ore placed on the pad, the grade of ore placed on the leach pad (based on assay analysis), testing of leach solutions and a recovery percentage (based on testing of solution and ongoing monitoring of the rate of gold recovery). Consumable supplies and spare parts to be used in production are valued at the lower of weighted average cost or net realizable value.
C Amortization
Plant, equipment and other facilities used directly in mining activities are amortized using the unitsof- production (UOP) method over a period not to exceed the estimated life of the related ore body based on recoverable metals to be mined from proven and probable mineral reserves. Mobile and other equipment are amortized, net of residual value, on a straight-line basis, over their useful lives, which are not to exceed the estimated life of the related ore body. The calculation of the UOP rate and life of the ore body, and therefore the annual amortization expense, could be materially affected by changes in the underlying estimate of recoverable metals or other estimates. Changes in estimates may result from differences between actual future production and current forecasts of future production, expansion of mineral reserves
F Asset retirement obligation

The Company assesses its provision for reclamation and remediation on an annual basis or when new information or circumstances merit a re-assessment. Signicant estimates and assumptions are made in determining the provision for reclamation and remediation, including estimates of the extent and costs of the activities, technological changes, regulatory changes, foreign exchange rates, ination rates and discount rates. The provision for asset retirement obligations represents managements best estimate of the present value of the future reclamation and remediation obligation. Actual expenditures may differ from the recorded amount. Changes to the provision for reclamation and remediation are recorded with a corresponding change to the carrying value of the related asset. If the increase in the asset results in the asset exceeding the recoverable value, that portion of the increase in charged to expense.
G Deferred taxes
The Company recognizes the deferred tax benet of deferred tax assets to the extent their recovery is probable. Assessing the recoverability of deferred tax assets requires management to make signicant estimates of future taxable prot. In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions from deferred income assets.
a decrease in mineable resources or a change in foreign taxes or exchange rates), reviews are undertaken to evaluate the carrying value of the mining properties, mineral properties and plant and equipment considering, among other factors: the carrying value of each type of asset; the economic feasibility of continued operations; the use, value or condition of assets when not in operation; and changes in circumstances that affect decisions to reinstall or dispose of assets. Impairment is considered to exist if the recoverable amount is less than the carrying amount of the assets. Future cash ows used to assess recoverability are estimated based on expected future production, recoverability of resources, commodity prices, foreign exchange rates, operating costs, reclamation costs and capital costs. Managements estimate of future cash flows is subject to risks and uncertainties, including the discount rate assumption. It is possible that changes in estimates may occur, that affect managements estimate of the recoverability of the investments in long-lived assets. To the extent that the carrying amount of assets exceeds the recoverable amount, the excess is charged to expense. Fair value is determined with reference to estimates of future discounted cash ow or to recent transactions involving dispositions of similar properties. Management believes that the estimates applied in the impairment assessment are reasonable; however, such estimates are subject to signicant uncertainties and judgments. Although management has made its best estimate of these factors based on current and expected conditions, it is possible that the underlying assumptions could change signicantly and impairment charges may be required in future periods. Such charges could be material.
H Derivative liability
An option pricing model that considers changes in the US dollar price of gold is used to estimate the fair value of the nancial derivative embedded in the Companys Gold Purchase Agreement described in Note 19 to the Financial Statements. The principal assumption used in the option pricing model is the volatility, over time, of the US dollar price of gold. Changes in this assumption may signicantly affect the fair value estimate.
NOTES
I Share-based payments
Share-based payments are determined using the Black-Scholes Option Pricing Model based on estimated fair values of all share-based awards at the date of grant. The Black-Scholes Option Pricing Model utilizes assumptions such as expected price volatility, the expected life of the option and the number of options that may be forfeited. Changes in these input assumptions may affect the fair value estimate.
4 SIGNIFICANT ACCOUNTING POLICIES

These consolidated nancial statements have been prepared using the following signicant accounting policies:
A Foreign currencies
Functional and presentation currency The consolidated financial statements are presented in US dollars, which is also the functional currency of the parent company and each subsidiary. Change in reporting currency Effective May 31, 2011, the Company changed its reporting currency (currency of presentation) from the Canadian dollar to the United States (US) dollar. Prior to May 31, 2011, the Company reported its accounts in the Canadian dollar. The reason for the change was to present nancial statements in the currency of the Companys principal business activities. In accordance with IAS 21, Effect of Foreign Currency Rates the nancial statements for all periods presented were translated into the US dollar such that the Consolidated Statements of Profit or Loss and Cash Flows for each reporting period were translated into the reporting currency using the average exchange rates prevailing during each reporting period and assets and liabilities were translated using the exchange rate prevailing at consolidated balance sheet dates. Equity transactions were translated using the rates of exchange in effect at the dates of the transactions. The resulting translation adjustment is recorded in the translation reserve. Foreign currency transactions and balances Transactions in foreign currencies are translated to the respective functional currencies of the company using exchange rates prevailing at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the exchange rate at that date. An exchange gain or loss that arises on translation or settlement of a foreign currency-denominated monetary item is included in prot or loss.
J Impairment of long-lived assets

Annually, or more frequently as circumstances require (such as a substantive decrease in metal prices, an increase in operating costs,
Non-monetary items are not retranslated at yearend and are measured at historical cost (using the exchange rates at the transaction date), except for non-monetary items measured at fair value which are retranslated using the exchange rates at the date when fair value was determined. Change in functional currency The functional currency of La Arena is the US dollar. La Arena carries out the principal business of the Company, which led management to undertake a review of the functional currency of the Canadian parent company. It was determined that the currency exposure of the Canadian parent company is predominantly in US dollars. Effective June 1, 2011, the functional currency of the Canadian parent company was the US dollar. Prior to the change in functional currency on June 1, 2011, foreign exchange gains and losses arising from monetary items in foreign operations were considered to form part of the net investment in a foreign operation and were recognized in other comprehensive income and are included in the translation reserve. On disposal of part or all of the operations, a proportionate share of the related cumulative gains and losses previously recognized in the translation reserve would be recognized in profit or loss.
C Basis of consolidation
Subsidiaries are entities controlled by the Company. Control is the power to direct the nancial and operating policies of an entity to obtain benets from its activities. These consolidated nancial statements include the accounts of the Company and its subsidiaries as follows: Name Location Rio Alto S.A.C. Mexican Silver Mines (Guernsey) Limited Peru Guernsey Percentage ownership by the Company Dec 31, 2011 May 31, 2011 June 1, 2010 100% 100% 100% 100% 100% 100% 100% 100% Nil
La Arena S.A. (La Arena) Peru
NOTES
All inter-company transactions and balances are eliminated on consolidation.
D Revenue recognition
Upon entering commercial production, revenue from the sale of metals is recognized when all of the following conditions have been satised: The significant risks and rewards of ownership have been transferred; Neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold has been retained; The amount of revenue can be measured reliably; It is probable that the economic benefits associated with the transaction will flow to the Company; and The costs incurred or to be incurred in respect of the transaction can be measured reliably. Proceeds from the sale of metals produced prior to commercial production are credited to costs deferred during development.
B Basis of measurement
These consolidated nancial statements have been prepared on a historical cost basis except for derivative assets and liabilities, which are carried at fair value. Additionally these consolidated nancial statements have been prepared using the accrual basis of accounting except for cashow information.
E Loss per share

Basic loss per common share is calculated by dividing the loss for the period by the weighted average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share is calculated by adjusting the weighted average number of shares for the dilutive effect of options and warrants. The computation of diluted loss per share assumes the conversion, exercise or contingent issuance of securities only when such conversion would have a dilutive effect on earnings. It is assumed that outstanding options, warrants and similar items are exercised or converted into shares and that the proceeds that would be realized upon such exercise or conversion are used to purchase common shares at the average market price per share during the relevant reporting period. Diluted loss per share is not presented separately from basic loss per share because the conversion of outstanding potentially dilutive instruments would be anti-dilutive.
F Cash and cash equivalents

Cash and cash equivalents include cash on hand and short-term money market instruments that are readily convertible to known amounts of cash within ninety days of purchase.
G Plant and equipment

Plant and equipment are recorded at cost less accumulated amortization and impairment losses. Plant and equipment are amortized over the estimated useful lives of the related assets. Assets under construction are amortized over their estimated useful lives when they are substantially complete and available for their intended use. Repairs and maintenance not considered to be
major overhauls of plant and equipment are expensed as incurred. Costs incurred to enhance the service potential of plant and equipment are capitalized and amortized over the remaining useful life of the improved asset. When assets are retired or sold, the resulting gains or losses are reected in earnings. At the end of each earnings period management assesses the carrying values of plant and equipment. If management determines that the carrying value of an asset cannot be recovered, the asset is written down to recoverable value with the amount of the write down charged to prot or loss. Amortization is recorded on a straight-line basis at the following annual rates: Heap leach pad and pond Mobile and field equipment Plant and equipment Other mine assets Other assets Leasehold improvements (included in other assets) 20% 25% 20% 10% 20% 10% 25% term of lease
as the estimated selling price at the measurement date based on prevailing metal prices less future costs required to sell inventories. Production costs are included in work-in-process inventory based on costs incurred to the point of refining, including applicable amortization and depletion of mining interests, and removed at the average production cost per recoverable ounce of gold. The cost of nished goods includes the average cost of work-in-process inventories and applicable rening costs. Supplies are valued at the lower of landed average cost and net realizable value. Any write-down of inventory is recognized as an expense in prot or loss in the period the writedown occurs.
NOTES
incurred, except for development programs that extend the life or enhance the value of a property, which will be deferred and depleted over the useful life of the related assets. Mineral properties in commercial production include deferred stripping costs and asset retirement obligation costs related to the reclamation of the mineral property. A mineral property is derecognized upon disposal, or impaired when no future economic benets are expected to arise from continued use of the asset. Any gain or loss on disposal of the asset, determined as the difference between the proceeds received and the carrying amount of the asset is recognized in profit or loss. The validity of title to mineral property interests involves uncertainties such as the risk due to the difculty of determining the ownership of claims as well as the potential for conicts to arise due to ambiguous title conveyancing history characteristic of many mineral properties. The Company has investigated rights of ownership of all of the mineral licences in which it has an interest and, to the best of its knowledge, all agreements relating to such ownership rights are in good standing. However, such investigations do not provide a guarantee of title. Mineral licences may be subject to prior claims, agreements or transfers and rights of ownership may be affected by undetected defects. Mineral property interests are reviewed for impairment at each nancial statement preparation date or whenever events or circumstances indicate that the carrying value of such interests may not be recoverable. Impairment charges are recognized in the determination of prot or loss. Prospecting and initial exploration costs, incurred prior to the time the Company has obtained the legal right to explore are expensed as incurred.
I Mineral properties and development costs

Interests in mineral properties and areas of geological interest are recorded at cost. All direct costs relating to the acquisition and development of these interests are deferred on the basis of specic claims or areas of interest until the properties they relate to are placed into production, divested, surrendered, abandoned or deemed to be impaired. Deferred mineral property and evaluation costs include cash consideration paid, the assigned or fair value of any share or other non-cash consideration paid and the evaluation costs incurred. The recorded amount of deferred costs may not reect recoverable value, which is dependent on development programs, the nature of the mineral deposit, commodity prices, development and operating costs and the Companys ability to obtain adequate funding to bring projects into production. Once a property reaches commercial production deferred costs are amortized on a unit of production basis over the expected life of the propertys reserves. No depletion is charged against the property until commercial production commences. Cash ow from pre-production sales is credited against related deferred costs (see note 4.v.). Revenue from the sale of any mineral properties is credited against related deferred costs with any residual amounts recognized as a gain or loss. Deferred costs relating to property interests that are surrendered or abandoned are written off and recognized in the determination of prot or loss. Once a mineral property has been brought into commercial production, costs of any additional work on that property are expensed as
Amortization incurred prior to commercial production is capitalized as part of mineral properties and evaluation costs. Plant, plant equipment and other facilities are amortized on a UOP basis.
H Inventory
Dor, work-in-process and mined ore, including ore on leach pad and stockpile, are valued at the lower of average production cost and net realizable value. Net realizable value is calculated
J Asset retirement obligations

Asset retirement obligations encompass legal, statutory, contractual or constructive obligations associated with the retirement of a long lived tangible asset that result from the acquisition, construction, development or normal operation of a long lived asset. The retirement of a long-lived asset is reected by an otherthan-temporary removal from service, including sale of the asset, abandonment
or disposal in some other manner such as depletion of reserves. The Company recognizes the fair value of an estimated liability for the future cost of restoring exploration, development and mine sites with a corresponding increase to the carrying value of the related mineral property interest. The Company amortizes the amount added to mineral property interests using the amortization method established for the related asset. Changes in asset retirement obligations due to the passage of time are measured by an interest method of allocation whereby the change is recognized as an increase in the associated liability and by an accretion expense in prot or loss. Changes resulting from revisions to the timing or amount of the original estimate of undiscounted asset retirement obligation cash flows are recognized as an increase or decrease in the carrying amount of the asset retirement obligation with a corresponding increase or decrease in the carrying value of the related asset.
to an extension of an ore body or to a new ore body. Capitalized stripping costs are depleted based on the UOP method using proven and probable mineral reserves as the depletion base.
L Impairment of non-financial assets

For the purposes of assessing impairment, the recoverable amount of an asset, which is the higher of its fair value less costs to sell and its value in use, is estimated. If it is not possible to estimate the recoverable amount of an individual asset, the asset is included in the cashgenerating unit to which it belongs and the recoverable amount of the cash generating unit is estimated. As a result, some assets are tested individually for impairment and some are tested at the cash-generating unit level. A cash-generating unit is the smallest identiable group of assets that generates cash inows that are largely independent of the cash inows from other assets or group of assets. Cash-generating units to which goodwill has been allocated are tested for impairment at least annually. Intangible assets with an indenite useful life and an intangible asset not yet available for use are also tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment annually or whenever events or changes in circumstances indicate that the asset may be impaired such as decreases in metal prices, an increase in operating costs or taxes, a decrease in mineable and recoverable reserves or a change in foreign exchange rates. The Company also considers net book value of the asset, the ongoing costs required to maintain and operate the asset, and the use, value and condition of the asset. An impairment loss is recognized for the amount by which the assets or cash-generating units carrying amount exceeds its recoverable amount. To determine the value-in-use, management estimates expected future cash ows from each asset or cash-generating unit and determines a suitable interest rate in order to calculate the present value of those cash ows. Future cash ows used in the determination of value in use are estimated based on expected future production, recoverability of reserves, commodity prices, operating costs, reclamation costs and capital costs. Estimates of future cash ows are subject to risks and uncertainties. It is possible that changes in estimates could occur that may affect the recoverable amounts of assets, including the Companys investments in mineral properties. Fair value is determined with reference to estimates of discounted future cash ows or to recent transactions involving dispositions of similar properties. An impairment loss for a cash-generating unit is rst allocated to reduce the carrying amount of any goodwill allocated to that cash-generating unit. Any remaining impairment loss is allocated on a pro rata basis to the other assets in the cash-generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist or may have decreased. An impairment charge is reversed if the cash-generating units recoverable amount exceeds its carrying amount. Where an impairment loss subsequently reverses, the carrying amount of the asset or cash generating unit is increased to the revised estimate of its recoverable amount, however only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or cash generating unit in prior reporting periods.
NOTES
K Stripping costs
Stripping costs incurred during the development of a mine are capitalized in mineral properties. Stripping costs incurred subsequent to commencement of commercial production are variable production costs that are included in the cost of inventory produced during the period in which they are incurred, unless the stripping activity can be shown to give rise to future benets from the mineral property, in which case the stripping cost would be deferred. Future benets arise when stripping activity increases the future output of the mine by providing access
M Provisions
Liabilities are recognized when the Company has an obligation, either legal or constructive that has arisen as a result of a past event and it is probable that a future outow of resources will be required to settle the obligation. Provided that a reliable estimate can be made of the amount of the obligation, a provision for a liability of uncertain timing or amount is recorded. Provisions are measured at the present value of the outow of resources expected to be required to settle the obligation using a pre-tax rate that reects the current market assessments of the time value of money and the risk specic to the obligation. Any increase in a provision due to the passage of time is recognized as a financing expense.
N Income taxes
Tax expense recognized in profit or loss comprises the sum of deferred tax and current tax not recognized in other comprehensive income or directly in equity. Current income tax liabilities or assets are obligations to, or claims from, scal authorities relating to the current or prior reporting periods that are unsettled at the reporting date. Current tax is payable on taxable prot which differs from prot or loss in the nancial statements. Calculation of current tax is based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. Deferred taxes are calculated by applying the liability method to temporary differences between the carrying amounts of assets and liabilities and their tax bases. Deferred tax is not provided on the initial recognition of goodwill or on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting prot. Deferred tax on temporary differences associated with shares in subsidiaries and joint ventures is not provided if reversal of these temporary differences can be controlled by the Company and it is probable that reversal will not occur in the foreseeable future. Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply during the periods of realization, provided that such rates are enacted
or substantively enacted by the end of the reporting period. Deferred tax assets are recognized to the extent that it is probable that they will be able to be utilized to reduce future taxable income. Deferred tax assets and liabilities are offset when the Company has a right and intention to offset current tax assets and liabilities from the same taxation authority. Changes in deferred tax assets or liabilities are recognized as a component of tax income or expense in prot or loss, except where they relate to items that are recognized in other comprehensive income or directly in equity, in which case the related deferred tax is recognized in other comprehensive income or equity. Royalties and revenue-based taxes are accounted for under IAS 12 when they have the characteristics of an income tax. This is considered to be the case when such taxes are imposed under government authority and the amount payable is based on taxable incomerather than being determined on the basis of production or as a percentage of revenue after adjustment for temporary differences. For such arrangements, current and deferred tax is provided for on the same basis as described for other forms of taxation. Obligations arising from royalty arrangements that do not satisfy these criteria are recognized as current provisions and included in cost of sales.
reserve. For directors and employees, the charge is recognized over the option vesting period based on the best available estimate of the number of share options expected to vest. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from the previous estimate. No adjustment is made to any expense recognized in prior periods where options vested. For nonemployees the charge is recognized over the related service period. When stock options are exercised, the amount credited to the share options reserve is transferred to share capital. In the event stock options are forfeited prior to vesting, the amount related to such options that was recognized in prior periods is reversed. The fair value of any vested and expired stock options remains in the share option reserve.
NOTES
P Derivative instruments
Derivative instruments, including certain derivative instruments embedded in other contracts and instruments designated for hedging activities are recognized as either assets or liabilities in the balance sheet and measured at fair value. The Company has not used derivative instruments to hedge exposures to cash ow, market or foreign currency risks. Any change in the fair value of a derivative or an embedded derivative not designated as a hedging instrument is recognized as a gain or loss in the prot or loss.
O Share-based payments
The Company accounts for share-based payments using a fair value based method (Black-Scholes Option Pricing Model) with respect to all share-based payments made, to directors and employees. For directors and employees, the fair value of options is measured at the date of grant. Share-based payments to non-employees, whereby the Company receives goods or services as consideration for its equity instruments are, when determinable, recorded at the fair value of the goods or services received. If the fair value of the goods and services received are not determinable, then the fair value of the share based payment is used and is measured on the date services are received. The fair value of options granted as share-based payments is accrued and charged to prot or loss with a corresponding credit to share option
Q Share issue costs

Share issue costs include commissions, arrangement fees, professional and regulatory fees incurred in connection with the issue of shares. Share issue costs are charged to share capital.
R Related party transactions

Related party transactions are measured at the exchange amount negotiated between the parties.
S Non-derivative financial instruments

The Company classies nancial assets as fair value through prot or loss, availablefor-sale nancial assets, held-to-maturity investments or as loans and receivable. The
Company classies nancial liabilities as either at fair value through profit or loss or at amortized cost using the effective interest method. Financial assets and nancial liabilities are recognized initially at fair value. Financial assets and nancial liabilities classied as fair value through prot or loss are remeasured at fair value at the end of each reporting period, with gains or losses recognized in other comprehensive income until the asset is derecognized or becomes impaired. Financial assets classied as available for sale are re-measured at fair value at the end of each reporting period with gains or losses recognized in other comprehensive income until assets are derecognized or become impaired. Loans and receivables, held-to-maturity investments and nancial liabilities that are not classied as fair value through prot or loss are subsequently measured at amortized cost using the effective interest method. The Companys nancial instruments consist of cash and cash equivalents, accounts receivable, subscriptions receivable, promissory note receivable, accounts payable and accrued liabilities, due to related parties, long-term debt and the derivative liability. Cash and cash equivalents, accounts receivable, subscriptions receivable and promissory note receivable are classied as loans and receivables and measured at amortized cost. Accounts payable and accrued liabilities, long-term debt
and due to related parties are classied as nancial liabilities not at fair value through prot or loss. Derivative liability is classied as fair value through prot or loss. Transaction costs, other than those related to nancial instruments classied as nancial assets and liabilities at fair value through prot or loss, are added to the fair value of the nancial asset and financial liability on initial recognition and amortized using the effective interest method.
T Valuation of Equity
Shares and warrants issued as units are measured using the residual value method whereby value is rst allocated to the warrant component based on its fair value with the residual value being attributed to the share component. The fair value of warrants is determined using the Black-Scholes Option Pricing Model. The fair value attributed to warrants is recorded in the warrant reserve. If a warrant is converted, the value attributed to the warrant is transferred to share capital, if a warrant expires, the value remains in the reserve.
NOTES
U Comprehensive income
Comprehensive income is the change in equity resulting from transactions and other events arising from sources other than the Companys shareholders and includes items that would not normally be included in profit or loss, such as unrealized gains and losses on available-forsale investments. Comprehensive income accounting recommendations require certain gains or losses that would otherwise be recorded as part of prot or loss to be presented in other comprehensive income until it is considered appropriate to recognize such gains or losses in prot or loss.
V Commercial production
Commercial production is the level of activities intended for a mine, or a mine and processing complex, to be capable of operating in the manner intended by management. Management considers a number of factors when determining the level of activity that represents commercial production for a particular project, including: a pre-determined percentage of design capacity for the mine and processing facilities; achievement of continuous production or other output measures; or factors such as recoveries, grades, or inventory build-ups. In a phased mining approach, management may consider achievement of specic milestones at each phase of completion. Management assesses the operations ability to sustain production over a period of approximately three to six months, depending on the complexity related to the stability of continuous operation. Commercial production is considered to have commenced, and amortization expense is recognized, at the beginning of the month after commercial production criteria have been met.
W Capitalized borrowing costs

The Company capitalizes borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets, which are assets that take a substantial period of time to get ready for their intended use or sale. Capitalization of borrowing costs ceases once the qualifying assets commence commercial production or are otherwise ready for their intended use or sale. Where funds are borrowed specically to nance a project, the amount capitalized represents the actual borrowing costs incurred. Where the funds used to finance a project form part of general borrowings, the amount capitalized is calculated using a weighted average of interest rates applicable to relevant general borrowings of the Company during the period, to a maximum of actual borrowing costs incurred. Investment income earned by temporarily investing specic borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. Capitalization of interest is suspended during extended periods in which active development is interrupted. All other borrowing costs are recognized in the income statement in the period in which they are incurred.
X Leased assets
When the Company is a lessee in an arrangement where it assumes substantially all of the risks and potential rewards of ownership of an asset, the related asset is recognized at the inception of the lease at the fair value of the leased asset or, if lower, the present value of the lease payments and any incidental payments. A corresponding amount is recognized as a finance lease liability. All other leases are operating leases and payments are recognized as an expense on a straight line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred.
provides a practical solution to determining the recovery of investment properties as it relates to the accounting for deferred income taxes. This amendment is effective for annual periods beginning on or after January 1, 2012, with earlier application permitted. The Company does not anticipate this amendment to have a signicant impact on its consolidated nancial statements.
Accounting standards effective January 1, 2013

Consolidation In May 2011, the IASB issued IFRS 10 Consolidated Financial Statements (IFRS 10), which supersedes SIC 12 and the requirements relating to consolidated nancial statements in IAS 27 - Consolidated and Separate Financial Statements. IFRS 10 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted under certain circumstances. IFRS 10 establishes control as the basis for an investor to consolidate its investees; and defines control as an investors power over an investee with exposure, or rights, to variable returns from the investee and the ability to affect the investors returns through its power over the investee. In addition, the IASB issued IFRS 12 Disclosure of Interests in Other Entities (IFRS 12), which combines and enhances the disclosure requirements for the Companys subsidiaries, joint arrangements, associates and unconsolidated structured entities. The requirements of IFRS 12 include reporting of the nature of risks associated with the Companys interests in other entities and the effects of those interests on the Companys consolidated nancial statements. Concurrently with the issuance of IFRS 10, IAS 27 and IAS 28 - Investments in Associates (IAS 28) were revised and reissued as IAS 27 - Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures to align with the new consolidation guidance. The Company is evaluating the effect that the above standards may have on its consolidated nancial statements. Joint arrangements In May 2011, the IASB issued IFRS 11 - Joint Arrangements (IFRS 11), which supersedes IAS 31 - Interests in Joint Ventures and SIC-13
NOTES
5 CHANGES IN ACCOUNTING STANDARDS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Financial instruments disclosure In October 2010, the IASB issued amendments to IFRS 7 - Financial Instruments: Disclosures that expand the disclosure requirements in relation to transferred nancial assets. The amendments are effective for annual periods beginning on or after July 1, 2011, with earlier application permitted. The Company does not anticipate these amendments to have a signicant impact on its consolidated nancial statements. Income taxes In December 2010, the IASB issued an amendment to IAS 12 - Income Taxes that
- Jointly Controlled Entities - Non-Monetary Contributions by Venturers. IFRS 11 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted under certain circumstances. Under IFRS 11, joint arrangements are classied as joint operations or joint ventures based on the rights and obligations of the parties to the joint arrangements. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (joint operators) have rights to the assets and obligations for the liabilities relating to the arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement (joint venturers) have rights to the net assets of the arrangement. IFRS 11 requires that a joint operator recognize its portion of assets, liabilities, revenues and expenses of a joint arrangement, while a joint venturer recognizes its investment in a joint arrangement using the equity method. The Company does not anticipate this amendment to have a signicant impact on its consolidated nancial statements. Fair value measurement In May 2011, as a result of the convergence project undertaken by the IASB and the US Financial Accounting Standards Board, to develop common requirements for measuring fair value and for disclosing information about fair value measurements, the IASB issued IFRS 13 - Fair Value Measurement (IFRS 13). IFRS 13 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. IFRS 13 denes fair value and sets out a single framework for measuring fair value, which is applicable to all IFRSs that require or permit fair value measurements or disclosures about fair value measurements. IFRS 13 requires that when using a valuation technique to measure fair value, the use of relevant observable inputs should be maximized while unobservable inputs should be minimized. The Company does not anticipate the application of IFRS 13 to have a material impact on its consolidated nancial statements. Financial statement presentation In June 2011, the IASB issued amendments to IAS 1 - Presentation of Financial Statements (IAS 1) that require an entity to group items presented in the Statement of Comprehensive
Income into two groups on the basis of whether they may be reclassied to earnings subsequent to initial recognition or not reclassied to earnings subsequent to initial recognition. For those items presented before taxes, the amendments to IAS 1 also require that the taxes related to the two separate groups be presented separately. The amendments are effective for annual periods beginning on or after July 1, 2012, with earlier adoption permitted. The Company does not anticipate the application of the amendments to IAS 1 to have a material impact on its consolidated nancial statements.
Stripping Costs in the Production Phase of a Surface Mine This new interpretation, issued by the International Accounting Standards Board in October 2011, claries when production stripping should lead to the recognition of an asset and how that asset should be measured, both initially and in subsequent periods. IFRIC 20 - Stripping Costs in the Production Phase of a Surface Mine (IFRIC 20) applies to the costs incurred to remove mine waste materials to gain access to mineral ore deposits during the production phase of a surface mine. The main features of IFRIC 20 are as follows: If the benefit from the stripping activity is realized in the form of inventory produced, the entity accounts for the costs in accordance with IAS 2 Inventories. If the benet is improved access to the ore, the entity recognizes the costs as an addition to an existing asset. The stripping activity asset is measured in the same way as the existing asset of which it is a part (at cost or revalued amount less depreciation or amortization and less impairment losses). Depreciation or amortization is calculated over the expected useful life of the identified component of the ore body that becomes more accessible as a result of the stripping activity. The interpretation is effective for annual periods beginning on or after January 1, 2013. The Company adopted the provisions of this interpretation in 2012. The application of IFRIC 20 does not have a material impact on the Companys consolidated nancial statements.
NOTES
Employee Benets In June 2011, the IASB issued amendments to IAS 19 - Employee Benefits (IAS 19) that introduced changes to the accounting for dened benet plans and other employee benets. The amendments include elimination of the option to defer, or recognize in full in earnings, actuarial gains and losses and instead mandates the immediate recognition of all actuarial gains and losses in other comprehensive income and requires use of the same discount rate for both the dened benet obligation and expected asset return when calculating interest cost. Other changes include modication of the accounting for termination benets and classication of other employee benets. The Company does not anticipate the application of the amended IAS 19 to have a material impact on its consolidated nancial statements.

Financial instruments The IASB intends to replace IAS 39 - Financial Instruments: Recognition and Measurement (IAS 39) in its entirety with IFRS 9 - Financial Instruments (IFRS 9) in three main phases. IFRS 9 will be the new standard for the financial reporting of financial instruments that is principlesbased and less complex than IAS 39. In November 2009 and October 2010, phase 1 of IFRS 9 was issued and amended, respectively, which addressed the classication and measurement of financial assets and financial liabilities. IFRS 9 requires that all financial assets be classified as subsequently measured at amortized cost or at fair value based on the Companys business model for managing nancial assets and the contractual cash ow characteristics of the nancial assets. Financial liabilities are classified as subsequently measured at amortized cost except for nancial liabilities classied as at fair value through prot and loss, nancial guarantees and certain other exceptions. In response to delays to the completion of the remaining phases of the project, on December 16, 2011, the IASB issued amendments to IFRS 9 which deferred the mandatory effective date of IFRS 9 from January 1, 2013 to annual periods beginning on or after January 1, 2015. The amendments also provided relief from the requirement to restate comparative financial statements for the effects of applying IFRS 9. The Company will monitor the evolution of this standard to evaluate the impact it may have on its consolidated nancial statements.
6 LA ARENA ACQUISITION
The Company had an agreement with IAMGOLD-Quebec Management Inc. (IMG) that provided for the Company to earn-in and purchase 100 per cent of all of the issued and outstanding shares of La Arena, a wholly-owned subsidiary of IMG. La Arena owns 100 per cent of the La Arena mineral project in Peru. The exercise price of the option to acquire 100 per cent of La Arena was $47,550,000, subject to adjustments, (the Exercise Price) which was to be paid in cash by June 15, 2011.
In addition to the Exercise price, the Company had the right to convert up to $30,000,000 of expenditures incurred on the La Arena Project by June 15, 2011 to earn up to a 38.7 per cent of the shares of La Arena. On February 9, 2011, the Company acquired 100 per cent of the shares of La Arena upon payment of $48,846,789 representing the Exercise Price and an amount of $1,296,789 to reimburse IMG for the cost of additional land purchases within the La Arena mineral project area and for metallurgical test work. This was accounted for as an asset acquisition. At February 9, 2011 the Company had earned 31.3% of the shares of La Arena.
7 ACCOUNTS RECEIVABLE
Accounts receivable consist of the following: Value-added tax receivable Income tax receivable Capital taxes receivable (ITAN) Other receivables December 31, 2011 $ 48,681 971,844 516,529 593,433 $ 2,130,487 May 31, 2011 $ 382,302 102,371 - 52,352 $ 537,025 June 1, 2010 $ 17,206 67,243 $ 84,449
8 PROMISSORY NOTE RECEIVABLE

On May 31, 2010, the Company sold its former Mexican subsidiary which, at the time, was the holder of a 100 per cent interest in the mineral interests of Providencia, Ral, Anillo de Fuego and Voladora. The purchaser, a former director and ofcer of the Company, agreed to pay the Company $116,532 for the Companys issued and outstanding shares of the subsidiary and a 1 per cent net smelter return royalty up to a maximum of C$1 million dollars. The purchaser issued a promissory note to the Company for the sale price of $116,532 that would bear interest at 15 per cent per annum on the outstanding principal after the maturity date of May 31, 2011. The promissory note was paid on May 31, 2011.
NOTES
The following table sets forth the allocation of the purchase price to assets and liabilities acquired, based on estimates of fair value. Purchase Price Equity investment in La Arena prior to acquisition $ 54,092,691 Payment to acquire common shares of La Arena not already owned 48,846,789 $ 102,939,480 Purchase price allocation Cash $ 5,533,627 Prepaid expenses and deposits 7,262,532 Value added tax receivable 9,767,514 Property, plant and equipment 27,463,703 Mineral property 60,624,560 Current liabilities (7,712,456) $ 102,939,480
9 INVENTORY
Inventory consists of the following: Dor Work in progress Ore on leach pad Stockpile Supplies inventory December 31, 2011 $ 771,858 917,349 2,257,839 8,700,641 2,258,881 $ 14,906,568 May 31, 2011 $ 371,871 1,236,351 2,004,537 - 297,720 $ 3,910,479 June 1, 2010 $ $ -
10 PREPAID EXPENSES
Prepaid expenses consist of the following: December 31, 2011 Prepayment for construction & development services at La Arena $ 924,642 Other 174,571 $ 1,099,213 May 31, 2011 $ 2,349,303 204,721 $ 2,554,024 June 1, 2010 $ 157,585 $ 157,585
11 IGV RECEIVABLE
Under Peruvian law a tax, the Impuesto General a las Ventas (IGV), is imposed at a rate of 18 per cent of the value of any goods or services purchased. IGV is generally refundable within the year in which it is paid. Refund applications may only be made by companies that are trading within Peru and collecting IGV from customers, by exporters or by companies that have an agreement with the tax authority for the early collection of IGV. The Company entered commercial production in 2012 and will be eligible for refunds of IGV.
12 PLANT AND EQUIPMENT

Plant and equipment consists of:
NOTES
Construction in Process
Heap Leach Mobile and Pad and Pond Field Equipment
Plant and Equipment
Other Mine Assets
Other Assets
Total
Costs June 1, 2010 $ 127,649 $ - $ - $ - $ - $ 162,986 $ 290,635 Additions 46,733,069 - - 461,251 47,194,320 May 31, 2011 46,860,718 - - - - 624,237 47,484,955 Additions and reclassifications (26,577,448) 29,898,824 2,689,698 7,987,534 6,523,701 (12,218) 20,510,091 December 31, 2011 $ 20,283,270 $ 29,898,824 $ 2,689,698 $ 7,987,534 $ 6,523,701 $ 612,019 $ 67,995,046 Accumulated amortization June 1, 2010 $ 12,793 $ - $ - $ - $ - $ 17,853 $ 30,646 Amortization 90,539 - - - - 78,146 168,685 May 31, 2011 103,332 - - - - 95,999 199,331 Reclassication (103,332) - 103,332 - - - Amortization - 4,288,323 55,610 1,197,503 154,847 17,149 5,713,432 December 31, 2011 $ - $ 4,288,323 $ 158,942 $ 1,197,503 $ 154,847 $ 113,148 $ 5,912,763 Net book value June 1, 2010 $ 114,856 $ - $ - $ - $ - $ 145,133 $ 259,989 May 31, 2011 $ 46,757,386 $ - $ - $ - $ - $ 528,238 $ 47,285,624 December 31, 2011 $ 20,283,270 $ 25,610,501 $ 2,530,756 $ 6,790,031 $ 6,368,854 $ 498,871 $ 62,082,283
13 MINERAL PROPERTIES AND DEVELOPMENT COSTS

On February 9, 2011 the Company completed the purchase of La Arena. The La Arena Project is wholly- owned by La Arena and consists of 44 mining concessions totaling approximately 20,673 hectares located about 480km north-northwest of Lima, Peru. The La Arena Project has two separate deposits, a gold oxide deposit and copper/gold sulphide deposit. The Company is developing the gold oxide project and commenced pre-production in May 2011. A feasibility study on the economic viability of developing the copper sulphide is underway.
NOTES
Mineral property expenditures relate to La Arena Project, are summarized as follows:
Opening, June 1 Acquisition during the period (Note6) Concessions and property payments Mineral property development costs Capitalized depreciation Pre-production revenue Pre-production cost Asset retirement obligation (Note18) Foreign currency translation Closing
Seven months ended December 31, 2011 Gold Oxide Copper Sulphide $34,519,489 - - 29,492,877 4,657,734 (71,620,823) 19,898,935 - - $ 16,948,212 $ 43,611,750 - - 4,283,148 - - - - - $ 47,894,898 Total
Year ended May 31, 2011 Gold Oxide Copper Sulphide $ Total
$ 78,131,239 $ - - 18,031,960 - 275,325 33,776,025 980,738 4,657,734 - (71,620,823) - 19,898,935 - - 14,800,000 - 431,466 $ 64,843,110 $ 34,519,489
- $ 42,592,600 60,624,560 - 275,325 - 980,738 - - - 14,800,000 1,019,150 1,450,616 $ 43,611,750 $ 78,131,239
Accumulated amortization Opening June 1 $ - $ - $ - $ - $ - $ Amortization for the period (1,047,293) - (1,047,293) - - Closing (1,047,293) - (1,047,293) - - Net book value $ 15,900,919 $ 47,894,898 $ 63,795,817 $ 34,519,489 $ 43,611,750 $ 78,131,239
14 INVESTMENT IN LA ARENA
On February 9, 2011 the Company acquired the 68.7 per cent of the shares of La Arena that it did not previously own (Note 6). Prior to February 9, 2011, the Company accounted for its investment in La Arena using the equity method. The Companys investment in La Arena consisted of:
15 ACCOUNTS PAYABLE & ACCRUED LIABILITIES

Accounts payable and accrued liabilities consists of the following: Trade payables Payroll and related benefits Other payables December 31, 2011 $ 23,697,405 3,095,319 688,627 $ 27,481,351 May 31, 2011 $ 7,109,299 536,209 618,998 $ 8,264,506 June 1, 2010 $ 27,632 475,157 $ 502,789
NOTES
Feb 9, 2011 Jun 1, 2010 Opening balance $ 16,854,480 $ Acquisition of RAML by MSM (Note 6) - 5,828,248 Funds invested: Office & camp costs 245,316 598,380 Engineering and construction 2,934,722 3,720,397 Pre-construction 21,548,126 470,518 Payroll 2,757,044 292,861 Value added taxes 514,951 390,251 Concessions and property payments 1,600,679 1,014,433 Development advance 1,153,852 4,097,597 Foreign currency translation 1,001,705 441,795 Reversal of future income tax 5,481,816 Reallocated to purchase price (54,092,691) $ - $16,854,480
Substantially all of the trade payables relate to development and construction activities at La Arena Project. The nancial liabilities are non-interest bearing and are normally settled within 30 days.
16 INCOME TAXES
The current and deferred tax expense reected in the consolidated statements of loss and comprehensive loss is as follows: urrent income tax expense Peru C Deferred tax recovery Seven months ended December 31, 2011 $ (1,968,325) 1,950,040 $ (18,285) Year ended May 31, 2011 $ (200,865) $ (200,865)
Income taxes differ from the amount that would be determined by applying the combined federal and provincial statutory income tax rate of 26.5% in the seven month period ended December 31, 2011 to loss before income taxes. The differences are the result of:
Loss before income taxes Income tax (recovery) provision using statutory tax rates (140,310) Current tax expense: Difference in foreign tax rates 4,377 Non-deductible items 707,236 Deferred tax expense: Change in tax rates 365,973 Change in unrecognized deductible temporary items (918,991) Income tax expense (recovery) $ 18,285
Seven months ended December 31, 2011 $ (529,471)
Year ended May 31, 2011 $ 8,505,134 (2,253,860) (26,929) 859,883 (474,704) 2,096,475 200,865
Signicant components of the Companys taxes payable are: As at December 31, 2011 As at May 31, 2011 As at June 1, 2010 Income taxes payable Peru $ (1,962,143) $ - $ Net asset(liability) $ (1,962,143) $ - $ -
The signicant components of the Companys deferred tax assets and liabilities are as follows:
NOTES
December 31, 2011 May 31, 2011 June 1, 2010 Deferred tax assets not recognized: Non-capital losses carried forward $ 4,038,108 $ 8,060,056 $ 1,445,270 Mineral properties 504,596 - 395,453 Share issue costs 1,482,966 - Other - - 13,800 $ 6,025,670 $ 8,060,056 $ 1,854,523
The Company recognized a deferred tax asset comprised of the following items: Inventory Mineral properties and development costs Plant and equipment Net asset As at December 31, 2011 As at May 31, 2011 As at June 1, 2010 $ 1,007,141 $ - $ 3,535,078 (2,592,179) 1,950,040 - - - 144,150 144,150
The Company has unrecognized non-capital losses that may be carried forward amounting to $13.4 million that expire between 2012 and 2031. The Company is subject to various taxes and a royalty on mining activities and has obtained legal and other independent advice in the determination of its tax liability. There can be no guarantee that the tax authority will concur with such determination and may assess the Company for additional taxes.
17 LONG TERM DEBT

In addition to the Gold Prepayment Agreement and Gold Purchase Agreement with Red Kite Explorer Trust (RKE) discussed in note 19, RKE has granted the Company a credit facility for $3 million, that was drawn in September, 2011. The credit facility bears interest at 3-month LIBOR plus 6 per cent compounded annually and matures in October 2014. As security, the Company has granted RKE a charge over the shares of La Arena S.A. and substantially all of the Companys assets.
18 ASSET RETIREMENT OBLIGATION

Asset retirement obligation comprises:
19 DEFERRED REVENUE AND DERIVATIVE LIABILITY

On October 15, 2010 the Company entered into a $25 million Gold Prepayment Agreement with RKE. Concurrently the Company also entered into a Gold Purchase Agreement with RKE. On October 20, 2011, the Company expanded the prepayment facility to $50 million with an amendment of each of the Gold Prepayment Agreement (the Agreement) and Gold Purchase Agreement. Each drawdown of the prepayment facility is allocated between deferred revenue and a derivative liability. An option pricing model that considers gold price volatility is used to estimate the fair value of the nancial derivative embedded in the Companys Gold Purchase Agreement. The deferred revenue portion is the drawdown less the amount allocated to the derivative liability. At December 31, 2011 the entire $50 million prepayment facility had been drawn.
Dec 31,2011 May 31,2011 Jun 1,2010 - $ $ -
Opening balance $ 14,800,000 $ Estimated liabilities incurred Accretion expense -
14,800,000 - -
A Gold Prepayment Agreement Deferred revenue

847,416 37,896 The deferred revenue is comprised of:
NOTES
Foreign exchange
Seven months ended December 31, 2011 10,416,245 25,500,000 (6,406,715) - $29,509,530 (4,250,823) 25,258,707
Year ended May 31, 2011 $ 10,423,042 (6,797) 10,416,245 (1,790,292) 8,625,953
$ 15,685,312 $14,800,000
In July 2011, the Company submitted to the Peruvian government a reclamation and closure plan for the La Arena gold mine. The estimated undiscounted closure obligation is $34.7 million. The reclamation and closure plan was approved in February 2012 and as a result the Company is required to post a bond of $3,186,480 in January 2013. The reclamation and closure activities include land and water rehabilitation, demolition of buildings and mine facilities, on-going care and maintenance and other costs. The majority of the work will be done in 2017 2019, with care and maintenance expected to continue until 2024.
Opening $ Amounts drawn Deliveries to recognize the deferred revenue Foreign exchange translation Closing Less current portion Long-term portion $
$ $
Since the Company drew $50 million under the Agreement it was required to deliver a notional amount of 61,312 ounces of gold. The actual monthly delivery of gold ounces may vary by 5 per cent from the amounts stated above for every $100 dollar change in the gold price from a base price of $1,150 per ounce, subject to limits at $1,450 or $950 per ounce such that at a price of $1,450 or more the monthly delivery would be 85 per cent of the stated amount and 115 per cent of the stated amount if the price was $950 or less. The ounces to be delivered based on $50 million drawdown are as follows: Average gold price per ounce $950 or lower $950 to $1,050 $1,050 to $1,150 $1,150 to $1,250 $1,250 to $1,350 $1,350 to $1,450 $1,450 or higher Ounces to be delivered Based on $50 million drawdown 70,509 67,443 64,378 61,312 58,246 55,181 52,115 Remaining commitment at December 31, 2011 56,705 54,240 51,774 49,309 46,844 44,378 41,913
As at December 31, 2011, the gold price is $1,575 per ounce and the remaining committed ounces at that price would be 41,913 ounces. The Company may prepay gold ounces remaining to be delivered under the Agreement, in whole or in part, at any time without penalty in either ounces of gold or the equivalent in cash at the then prevailing gold price. In the seven months ended December 31, 2011, the Company delivered 10,203 ounces of gold, settling 12,003 ounces of the notional obligation.
The table summarizes the delivery requirements in notional ounces of gold:
NOTES
Ounces per month July 2011 to March 2012 575 April 2012 to October 2012 1,366 November 2012 to October 2014 1,941 Total ounces to be delivered
Based on Drawdown Obligation settled in the $50 million As at of the seven months ended As at draw down May 31, 2011 facility December 31, 2011 December 31, 2011 5,175 9,560 46,577 61,312 5,175 4,025 26,864 36,064 - 5,535 19,713 25,248 (5,175) (6,828) - (12,003) 2,732 46,577 49,309
B Gold Purchase Agreement Derivative liability

The derivative liability is comprised of: Seven months ended December 31, 2011 12,428,082 - (7,868,984) 4,559,098 (934,144) 3,624,954 $ Year ended May 31, 2011 14,076,958 (1,648,876) 12,428,082 (2,136,078) 10,292,004
Opening balance $ Initial valuation of derivative liability Change in fair market value of derivative liability Closing $ Less current portion Long-term portion $
$ $
On October 15, 2010 the Company entered into a Gold Purchase Agreement with RKE whereby RKE agrees to buy up to 622,210 ounces of gold less any amounts purchased under the Gold Prepayment Agreement based on the lower of prices quoted on either the London Gold Market AM Fixing Price as published by the London Bullion Market Association or the Comex (1st Position) Settlement Price over dened periods of time. In October 2011, this agreement was amended whereby the number of ounces that RKE agrees to buy now includes all of the ounces within the two existing gold oxide pits, which is estimated to be 634,600 ounces, less any amounts purchased under the Gold Prepayment Agreement. The Gold Purchase Agreement is accounted for as a written call option as RKE has the right, but not the obligation to purchase the gold. An option pricing model that considers gold price volatility is used to estimate the fair value of the nancial derivative relating to the written option. Subsequent changes in this fair value are reected in prot or loss. At December 31, 2011, based on current reserves the Company remains obligated to sell 544,017 ounces of gold to RKE. Included in statement of operations for the seven months ended December 31, 2011 and the year ended May 31, 2011 are expenses of $1,442,391 and $1,022,282, respectively, relating to the negotiation and documentation of the Gold Prepayment Agreement and the Gold Purchase Agreement.
20 CAPITAL MANAGEMENT
The Company has no externally imposed capital requirements. The objectives of the Companys capital risk management program are to safeguard the Companys ability to continue as a going concern, to provide returns to shareholders, protect shareholder value, provide benets for other stakeholders, and ensure the growth of the business. The Company considers the items in equity as capital and manages its capital structure by issuing treasury shares, engaging in commodity-backed transactions, potential sales of assets, the incurrence of debt or the return of capital to shareholders in light of economic conditions and the characteristics of the Companys assets. The Companys capital structure reects the Companys focus on growth in a capital intensive industry with lengthy development times as well as the risks associated with exploration and development activities due to factors that are beyond the Companys control including, without limitation, the receipt of necessary permits, the availability of nancial and human resources and the volatility of commodity prices. The adequacy of the Companys capital structure is assessed on an on-going basis and is adjusted as necessary and as nancial markets permit in order to fund exploration and development programs. Exploration and development activities may be delayed or accelerated as circumstances or events change.
21 EQUITY
A Share capital
Authorized share capital consists of an unlimited number of common shares of which 169,746,352 were issued and outstanding at December 31, 2011 (May 31, 2011 168,557,582, June 1, 2010 108,035,575). The Company also has authorized an unlimited number of preferred shares of which none have been issued. There were no common shares issued in the seven months ended December 31, 2011 except for shares issued upon the exercise of options and warrants as described in note (b) and (c) below. During the seven months ended December 31, 2011 there were 1,188,770 common shares issued upon the exercise of options and warrants. During the year ended May 31, 2011 the Company issued common shares as follows: Price per Cash Non-cash Issue Date Shares issued share Proceeds transaction costs transaction costs (i) June 2, 2010 10,200,000 C$0.76 $ 7,451,222 November 30, 2010 7,626,575 C$1.68 12,480,798 December 1, 2010 3,906,382 C$1.68 6,562,066 December 2, 2010 533,300 C$1.68 895,854 January 20, 2011 28,060,000 C$2.05 57,517,249 For the year ended May 31, 2011 50,326,257 $ 84,907,189 $ (521,587) (968,941) (459,344) (31,355) (3,721,678) $ (2,087,483)
NOTES
$ (5,702,905)
$ (2,087,483)
i. Non-cash transaction costs consisted of 1,683,600 broker warrants entitling the underwriters to purchase an equal number of common shares at C$2.05 per common share expiring January 20, 2013. The fair value of the broker warrants was recorded as share issue costs.
B Share-based payments
The Company has a shareholder approved stock option plan under which it is authorized to grant options to executive ofcers and directors, employees and consultants enabling them to acquire from treasury up to that number of shares equal to 10 per cent of the issued and outstanding common shares of the Company. Under the plan, the exercise price of each option is determined by the directors, subject to regulatory approval, if required, and equals or exceeds the market price of the Companys stock on the date of grant. The options can be granted for a maximum term of 10 years and vest as determined by the board of directors. The Black-Scholes Option Pricing Model is used to estimate the fair value of options granted. Vesting periods range from immediate vesting to vesting over a 3-year period. Stock option transactions are summarized as follows: Outstanding, May 31, 2010 Granted Exercised Cancelled Outstanding, May 31, 2011 Granted Exercised Cancelled Outstanding, December 31, 2011 Options exercisable December 31, 2011 Number of Options 5,545,000 3,665,000 (1,727,500) (100,000) 7,382,500 4,240,000 (1,062,500) (50,000) 10,510,000 7,392,500 Weighted Average Exercise Price (C$) 0.32 1.75 0.34 0.30 1.02 3.07 0.42 0.80 1.91 1.42
Stock options outstanding at December 31, 2011 are as follows: Weighted Remaining Number of Average Exercise Contractual Options Price (C$) Grant Date Date of Expiry Life (months) 50,000 265,000 100,000 50,000 200,000 2,125,000 180,000 935,000 1,050,000 500,000 250,000 385,000 180,000 250,000 2,940,000 1,050,000 10,510,000 $0.30 April 22, 2008 May 7, 2012 $0.25 May 7, 2007 May 7, 2012 $0.25 May 11, 2007 May 11, 2012 $1.25 July 4, 2007 July 4, 2012 $0.30 July 28, 2008 May 7, 2012 $0.30 July 24, 2009 July 24, 2014 $0.70 March 15, 2010 March 15, 2015 $1.50 September 20, 2010 September 20, 2015 $1.80 September 20, 2010 September 20, 2015 $1.90 November 5, 2010 November 5, 2015 $2.00 December 6, 2010 December 6, 2015 $2.39 March 11, 2011 March 11, 2016 $2.15 May 11, 2011 May 11, 2016 $2.29 August 1, 2011 August 1, 2016 $3.08 November 18, 2011 November 16, 2016 $3.22 November 18, 2011 November 16, 2016 $1.91 4 4 4 6 7 31 39 45 45 47 48 51 53 56 59 59 46
NOTES
Stock options outstanding as at May 31, 2011 are as follows: Weighted Remaining Number of Average Exercise Contractual Options Price (C$) Grant Date Date of Expiry Life (months) 200,000 50,000 795,000 100,000 50,000 200,000 2,255,000 50,000 180,000 37,500 50,000 1,050,000 1,050,000 500,000 250,000 385,000 180,000 7,382,500 $0.30 July 4, 2007 May 7, 2012 $0.30 April 22, 2008 May 7, 2012 $0.25 May 7, 2007 May 7, 2012 $0.25 May 11, 2007 May 11, 2012 $1.25 July 4, 2007 July 4, 2012 $0.30 July 28, 2008 May 7, 2012 $0.30 July 24, 2009 July 24, 2014 $0.35 September 17, 2009 September 17, 2014 $0.70 March 15, 2010 March 15, 2015 $0.75 June 15, 2010 June 30, 2011 $0.80 August 9, 2010 August 1, 2011 $1.50 September 20, 2010 September 20, 2015 $1.80 September 20, 2010 September 20, 2015 $1.90 November 5, 2010 November 5, 2015 $2.00 December 6, 2010 December 6, 2015 $2.39 March 11, 2011 March 11, 2016 $2.15 May 11, 2011 May 11, 2016 $1.02 11 11 11 12 13 14 38 40 46 1 2 52 52 54 55 58 60
Options issued to employees are measured at the grant date. Options issued to non-employees, where the fair value of the goods or services is not determinable, are measured by way of reference to the equity instruments granted and measured at the date the goods or services are rendered. The assumptions used to value the options granted during the period are as follows: Seven months Year ended Dec 31, 2011 May 31, 2011
i) Warrants are recorded at their fair value using a Black Scholes Option Pricing model. There were no warrants issued in the seven months ended December 31, 2011. Warrants issued in the years ended May 31, 2011 and the related fair values and assumptions are as follows: Grant Date Number of warrants Exercise Risk-free Weighted avg. price (C$) interest rate expected life (yrs) Volatility $2.05 1.61% 2.0 Fair value
Jan 20, 2011 1,683,600
105% $2,087,483
NOTES
Number of options 4,240,000 3,665,000 Fair value $ 9,078,393 $ 4,179,822 Weighted average Exercise price (C$) $3.07 $1.75 Risk-free interest rate 1.47% 1.99% Dividend yield 0% 0% Expected life (years) 5 4.7 Volatility 110% 120%
ii) Warrants outstanding at December 31, 2011 were as follows: Expiry Date June 25, 2012 Number of Warrants 1,557,330 1,500,000 3,057,330 Conversion Price C$ $ 2.05 $ 0.30 $ 1.19 Warrant reserve $ 1,935,337 150,748 $ 2,086,085
January 20, 2013
C Warrants
Warrant transactions are summarized as follows:
Warrants outstanding at May 31, 2011 were as follows: Number of Warrants 1,683,600 1,500,000 3,183,600 Conversion Price C$ $ 2.05 $ 0.30 $ 1.23 Warrant reserve $ 2,087,483 150,748 $ 2,238,231
Expiry Date Weighted January 20, 2013 Number of Avg. Exercise Warrants Price C$ June 25, 2012 $ 0.88 2.05 0.95 1.26 1.23 2.05 1.19
Outstanding, May 31, 2010 10,603,765 Granted 1,683,600 Converted (8,468,250) Expired (635,515) Outstanding, May 31, 2011 3,183,600 Converted (126,270) Outstanding, December 31, 2011 3,057,330
22 GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses comprise of: Share-based compensation (note 21(b)) Salaries Office and miscellaneous Travel Investor relations Accounting and audit Legal fees Consulting Directors fees Regulatory and transfer agent fees Amortization Insurance Seven months ended December 31, 2011 $ 3,126,259 896,872 727,030 186,313 143,631 327,829 131,150 131,161 144,500 65,736 65,455 17,536 5,963,472 $ Year ended May 31, 2011 4,893,723 1,504,381 505,854 392,354 326,043 293,074 229,423 187,349 182,084 144,043 58,561 28,583 8,745,472
23 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Fair values
The financial assets and liabilities are recognized on the balance sheet at fair value in a hierarchy that is based on signicance of the inputs used in making the measurements. The levels in the hierarchy are: Level 1 Quoted prices in active markets for identical assets or liabilities; Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly as prices or indirectly derived from prices; and Level 3 Inputs for the asset or liability that are not based on observable market data. The carrying values of cash and cash equivalents, accounts receivable, subscriptions receivable, promissory note receivable, accounts payable and accrued liabilities and due to related parties approximate their fair values due to their short term to maturity and convertibility into cash. The derivative liability is measured at fair value and is classified as Level 3 and is detailed in note 19. An option pricing model that considers changes in the US dollar price of gold is used to estimate the fair value of the nancial derivative embedded in the Companys Gold Purchase Agreement described in note 19 to the Financial Statements. The principal assumption used in the option pricing model is the volatility, over time, of the gold price.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its nancial obligations as they fall due. The Company manages liquidity risk through forecasting its cash ows from operations and anticipating investing and nancing activities. Senior management is actively involved in the review and approval of planned expenditures. Management believes that the ability to fund operations through cash generated from operations and additional nancing, should be sufcient to meet the ongoing capital and operating requirements. At December 31, 2011, the Companys working capital of $34,513,649 was sufficient to meet its short-term business requirements. The Companys revenues are from the mining and sale of mineral products; however, the economics of developing and producing mineral products are affected by many factors including the cost of operations, variations in the grade of ore mined and the price of metals. In the normal course of business the Company enters into contracts and performs business activities that give rise to commitments for future minimum payments, as summarized in Note 25.
NOTES
Credit risk
The Companys credit risk is primarily attributable to its liquid nancial assets and dor and would arise from the non-performance by counterparties of contractual nancial obligations. The Company limits its exposure to credit risk on liquid assets by maintaining its cash with high-credit quality nancial institutions and shipments of dor are insured with reputable underwriters. Management believes the risk of loss of the Companys liquid financial assets and dor to be minimal. The Companys maximum exposure to credit risk at December 31, 2011 is as follows: Cash and cash equivalents Accounts receivable December 31, 2011 25,906,840 1,750,487 27,657,327 May 31, 2011 11,526,062 537,025 12,063,087
Currency risk
The Company operates in Canada and Peru and is exposed to foreign exchange risk arising from transactions denominated in foreign currencies. The operating results and the financial position of the Company are reported in United States dollars. The fluctuations of the operating currencies in relation to the United States dollar will have an impact upon the reported results of the Company and may also affect the value of the Companys assets and liabilities. The Companys financial assets and liabilities are denominated in United States, Canadian dollars and Peruvian Nuevo Sol set out in the following table: United States Dollar Canadian Dollar Peruvian Nuevo Sol Total Financial assets Cash and cash equivalents $ 24,600,414 $ 415,862 $ 890,564 $ 25,906,840 Accounts receivable - 53,760 2,076,727 2,130,487 IGV receivable - - 25,635,346 25,635,346 24,600,414 469,622 28,602,637 53,672,673 Financial liabilities Accounts payable & accrued liabilities 223,140 304,316 26,953,895 27,481,351 Net nancial assets (liabilities) $ 24,377,274 $ 165,306 $ 1,648,742 $ 26,191,322
NOTES
The Companys reported results will be affected by changes in the US dollar to Canadian dollar and US dollar to Nuevo Sol exchange rate. As of December 31, 2011, a 10 per cent appreciation of the Canadian dollar relative to the US dollar would have decreased net nancial assets by approximately US$240,000. A 10 per cent depreciation of the US Dollar relative to the Canadian dollar would have had the equal but opposite effect. A 10 per cent appreciation of the Nuevo Sol relative to the US dollar would have decreased net nancial assets by approximately US$115,500 and a 10 per cent depreciation of the Nuevo Sol would have had an equal but opposite effect. The Company has not entered into any agreements or purchased any instruments to hedge possible currency risk.
The Company monitors commodity prices to determine whether changes in operating or development plans are necessary. The future gold production, with the exception of the Red Kite Gold Prepayment Agreement (Note 19) is un-hedged in order to provide shareholders with full exposure to changes in the market gold price. A 10 per cent increase in the price of gold would result in a US$455,909 decrease to the unrealized gain and a 10 per cent decrease in the price of gold would have an equal but opposite effect. A 10 per cent increase in the price of gold would result in a US$455,909 increase to the derivative liability and a 10 per cent decrease in the price of gold would have an equal but opposite effect. Depending on the price of metals, the Company may determine that it is impractical to continue commercial production. Metals prices have fluctuated widely in recent years and are affected by many factors beyond the Companys control including changes in international investment patterns and monetary systems, economic growth rates, political developments, the extent of sales or accumulation of reserves by governments, and shifts in private supplies of and demands for metals. The supply of metals consists of a combination of mine production, recycled material and existing stocks held by governments, producers, nancial institutions and consumers. If the market price for metals falls below the Companys full production costs and remains at such level for any sustained period of time, the Company will experience losses and may decide to discontinue operations or development of properties.
Interest risk
The Company invests its cash in instruments that are redeemable at any time without penalty, thereby reducing its exposure to interest rate uctuations. The Company holds a loan from RKE that is subject to interest at Libor + 6% (note 17). The Company is subject to rate uctuations from Libor. Other interest rate risks arising from the Companys operations are not considered material.
24 SEGMENT REPORTING
The Company operates in two operating segments in two geographic areas, being the mining, acquisition and development of mineral properties, in Latin America and the corporate segment in Canada. The La Arena Gold Mine in Peru was acquired and developed in fiscal 2011 and achieved commercial production levels December 2011. All of the Companys revenue is generated in Peru. Segmented disclosure and Company-wide information is as follows:
Commodity price risk

The Company is exposed to price risk with respect to commodity prices. The ability of the Company to develop its mineral properties and future protability of the Company are directly related to the market price of gold and copper.
As at ended December 31, 2011 Canada Peru Total Mineral properties & development costs $ - $ 63,795,817 $ 63,795,817 Plant and equipment, net 115,722 61,966,561 62,082,283 Other assets 8,314,128 63,314,366 71,628,494 $ 8,429,850 $ 189,076,744 $ 197,506,594 As at ended May 31, 2011 Canada Peru Total Mineral properties & development costs $ - $ 78,131,239 $ 78,131,239 Plant and equipment, net 61,579 47,224,045 47,285,624 Other assets 8,879,286 23,648,246 32,527,532 $ 8,940,865 $ 149,003,530 $ 157,944,395 As at ended June 1, 2010 Canada Peru Total Investment in La Arena $ - $ 16,854,480 $ 16,854,480 Equipment, net 5,930 254,059 259,989 Other assets 5,948,681 998,598 6,947,279 $ 5,954,611 $ 18,107,137 $ 24,061,748
NOTES
Seven months ended December 31, 2011 Corporate Mine Development Total Operating expense $ (5,133,911) $ (764,109) $ (5,898,020) Amortization (8,499) (56,956) (65,455) Unrealized gain on derivative liability 7,868,984 - 7,868,984 Other loss (2,980,640) 545,660 (2,434,980) Provision for income taxes - (18,285) (18,285) $ (254,066) $ (293,690) $ (574,756) Year ended May 31, 2011 Corporate Mine Development Total Operating expense $ (8,074,587) $ (649,408) $ (8,723,995) Amortization (5,300) (53,261) (58,561) Unrealized gain on derivative liability 1,648,876 - 1,648,876 Other loss (1,178,651) (192,803) (1,371,454) Provision for income taxes (147,490) (53,375) (200,865) $ (7,757,152) $ (948,847) $ (8,705,999)
25 COMMITMENTS AND CONTINGENCIES

The following table summarizes the maturities of the Companys financial liabilities and commitments: December 31, 2011 Within 1 year 2 to 5 years Over 5 years
Total May 31, 2011
Accounts payable $ 27,481,352 $ - $ - $ 27,481,352 $ 8,264,506 Deferred revenue (note 19) 4,250,823 25,258,707 - 29,509,530 10,416,245 Derivative liability (note 19) 934,144 3,192,617 432,337 4,559,098 12,428,082 Office leases 258,287 750,169 35,626 1,044,082 1,082,975 Asset retirement - 3,186,480 31,553,520 34,740,000 34,740,000 obligation (note 18) Long-term debt (note 17) - 3,000,000 - 3,000,000 Total $ 32,924,606 $ 35,387,973 $ 32,021,483 $100,334,062 $ 63,005,438
26 SUPPLEMENTAL CASH FLOW INFORMATION

There were no income taxes or interest paid in the seven months ended December 31, 2011 or in the year ended May 31, 2011.
A Cash and cash equivalents include cash in bank accounts as follows:

United States dollars Canadian dollars Peruvian Nuevo Sol December 31, 2011 $ 24,600,414 415,862 890,564 25,906,840 $ May 31, 2011 10,836,279 522,635 167,148 11,526,062 $ June 1, 2010 2,654,500 2,431,709 354,089 5,440,298
B Changes in non-cash working capital include the following increases(decreases):

Seven months ended Year ended December 31, 2011 May 31, 2011 Accounts receivable $ (1,593,462) $ (452,576) Promissory note receivable - 116,532 Inventory (8,958,553) (3,910,479) Prepaid expenses 1,454,811 4,866,093 IGV (11,635,404) (3,834,791) Accounts payable & accrued liabilities 2,086,311 (4,114) Income taxes payable 1,962,143 Related parties - (72,248) $ (16,684,154) $ (3,291,583)
iii. P reproduction gold sales of $71,620,823 were included in mineral properties, of which $6,406,715 was a non-cash delivery of gold to settle the gold prepayment. iv. Included in inventory non cash costs were $2,037,537 of depreciation and depletion.
27 RELATED PARTY TRANSACTIONS

Except for the housing loan, amounts owing to or from related parties are non-interest bearing, unsecured and due on demand. The transactions were in the normal course of operations A The following related party transactions and balances for the seven months ended December 31, 2011 are: Seven months ended Dec 31, 2011 Nil
Related party Somji Consulting
Nature of the relationship A company controlled by a former director of the Company, who resigned his position in February, 2011. Directors of the Company
Nature of the transaction Management fees, bonuses, ofce rent & administrative services. Directors fees, management fees and travel allowances. Expensed into general and administrative costs, legal fee Ofce rent
Year ended May 31, 2011 $ 809,124
NOTES
C Non cash transactions included in the statements of cash ow include:

i. Additions to plant and equipment were $20,510,091, of which $15,773,978 was paid in cash and the remaining amount was in accounts payable at the end of the period. ii. Additions to mineral properties were $58,332,694, of which $41,280,540 was paid in cash, $12,394,420 was included in accounts payable at December 31, 2011. Non-cash charges capitalized were $4,657,734 related to depreciation of plant and equipment which is recapitalized to mineral properties during the pre-production phase.
Various individuals Davis LLP
158,100
181,894
A law rm in which the Companys corporate secretary is a partner. His term as a director ended in September 2011. A public company and a private company with a director in common with the Company. A company whose President, CEO and director is also the chairman and a director of the Company A key employee who works in the management of mine operations
107,187
257,455
Prize Mining & Philippine Metals Amerigo Resources
4,415
31,586
Reimbursement of shared ofce expense Housing loan
1,499
23,127
Individual
380,000
Nil
B Key management are those personnel, other than the directors, having the authority and responsibility for planning, directing and controlling the Company and includes the Chief Executive Ofcer and Chief Financial Ofcer. Remuneration for key management is: For the seven months ended December 31, 2011 For the year ended May 31, 2011 Salaries (i) $ 281,817 $ 442,147 Benefits (i) 5,537 7,165 Bonuses (i) 440,000 218,935 Share options (ii) 268,463 439,952 $ 995,817 $ 1,108,199
(i) The salaries, benets and bonuses are included in general and administrative expenses and mineral properties and evaluation properties. (ii) The options are included in administrative expenses as share-based compensation expense.
NOTES
C The housing loan is secured by 450,000 shares of the Company, and bears interest at 1.5%. The repayment term of the loan is one year. In addition to the housing loan, included in accounts receivable at the end of the period is $5,039 (May 31, 2011 - $27,320; June 1, 2010 - $46,315) from related parties. Included in accounts payable at the end of the period is $9,834 (May 31, 2011 - $214,759; June 1, 2010 $72,248) from related parties.
First-time adoption & exemptions applied
Upon transition to IFRS, IFRS 1 mandates certain exceptions to IFRS and permits certain exemptions from full retrospective application. The Company has applied the mandatory exceptions and elected certain optional exemptions. Mandatory exceptions: a. Financial assets and liabilities that have been de-recognized before January 1, 2005 under previous Canadian GAAP have not been recognized under IFRS. b. The Company used estimates under IFRS that are consistent with those applied under Canadian GAAP Optional exemptions applied: a. The Company elected not to apply IFRS 2 Share-based Payments to equity instruments that were fully vested prior to June 1, 2010. The adjustment to equity arising from the application of IFRS 2 to awards not vested as at the date of transition is $713,901. b. IFRS1 allows a rst time adopter to exempt themselves from the retrospective application of IAS 21 The Effect of Changes in Foreign Exchange Rates for cumulative translation differences that existed at the date of transition to IFRS. The Company elected to apply this exemption and in accordance with IFRS 1, the Company recognized $1,322,219 of cumulative translation differences from translating the Companys Canadian operations prior to June 1, 2010 in opening retained earnings at June 1, 2010.
28 TRANSITION TO IFRS
The Companys IFRS accounting policies presented in Note 4 have been applied in preparing the nancial statements for the period ended December 31, 2011, the comparative information and the opening consolidated statement of nancial position at the Transition Date of June 1, 2010. The Company has applied IFRS 1, First-time Adoption of International Financial Reporting Standards in preparing these IFRS consolidated nancial statements.The effects of the transition to IFRS on equity, loss and comprehensive income (loss) and reported cash ows are presented in this section and are further explained in the notes that accompany the tables presented below. There was no signicant impact on the consolidated statements of cash ows as a result of adopting IFRS.
Presentation differences
Some nancial statement line items are described differently under IFRS than they were under Canadian GAAP. Although the nature and amount of assets and liabilities included in these line items are unchanged the descriptions are different. These line items (with Canadian GAAP descriptions in brackets) are: Deferred income tax (Future income tax) Share option and warrant reserve (Contributed surplus) Translation reserve (Accumulated other comprehensive income) There are no material differences between the cash ow statements presented under IFRS and Canadian GAAP. Adjustments required in transitioning from Canadian GAAP (GAAP) to IFRS are set out in the following tables:
Reconciliation of consolidated balance sheets
GAAP Assets
As at June 1, 2010 As at May 31, 2011 Effect of Effect of transition to IFRS IFRS GAAP transition to IFRS IFRS
Note
NOTES
Current Cash and cash equivalents $ 5,440,298 $ 5,440,298 $ 11,526,062 $ 11,526,062 Account receivable 84,449 84,449 537,025 537,025 Subscription receivable 582,704 582,704 - Promissory note receivable 116,532 116,532 - Inventory - - 3,910,479 3,910,479 Prepaid expenses 157,585 157,585 2,554,024 2,554,024 IGV receivable 397,637 397,637 13,999,942 13,999,942 6,779,205 6,779,205 32,527,532 32,527,532 Deferred financing costs 23,924 23,924 - Deferred income tax - 144,150 144,150 - Plant and equipment 259,989 259,989 47,285,624 47,285,624 Mineral properties & evaluation costs - - 88,374,786 (10,243,547) 78,131,239 Investment in La Arena S.A. a 19,530,771 (2,676,291) 16,854,480 - $ 26,593,889 $ (2,532,141) $ 24,061,748 $ 168,187,942 $ (10,243,547) $ 157,944,395
Liabilities and equity Current Accounts payable and accrued liabilities $ 502,789 $ 502,789 $ 8,264,506 $ 8,264,506 Due to related parties 72,248 72,248 - Deferred revenue - - 1,790,292 1,790,292 Derivative liability - - 2,136,078 2,136,078 575,037 - 575,037 12,190,876 - 12,190,876 Asset retirement obligation - - 14,800,000 14,800,000 Deferred income tax liability a 2,532,141 (2,532,141) - 10,243,547 (10,243,547) Deferred revenue - - 8,625,953 8,625,953 Derivative liability - - 10,292,004 10,292,004 3,107,178 (2,532,141) 575,037 56,152,380 (10,243,547) 45,908,833 Equity Share capital 39,006,847 39,006,847 125,972,274 125,972,274 Share option reserve b 2,396,484 2,396,484 7,450,044 713,901 8,163,945 Translation reserve c 1,322,219 (1,322,219) - 5,844,181 (1,322,219) 4,521,962 Deficit b, c (19,238,839) 1,322,219 (17,916,620) (27,230,937) 608,318 (26,622,619) 23,486,711 - 23,486,711 112,035,562 - 112,035,562 $ 26,593,889 $ (2,532,141) $ 24,061,748 $ 168,187,942 $ (10,243,547) $ 157,944,395
Reconciliation of consolidated statement of loss and comprehensive loss:

Year ended May 31, 2011 Effect of GAAP transition to IFRS IFRS
NOTES
General & administrative expenses Note Accounting and audit $ 293,074 $ 293,074 Amortization 58,561 58,561 Consulting 187,349 187,349 Directors fees 182,084 182,084 Insurance 28,583 28,583 Investor relations 326,043 326,043 Legal fee 229,423 229,423 Office and miscellaneous 505,854 505,854 Regulatory & transfer agent fees 144,043 144,043 Salaries 1,504,381 1,504,381 Share-based compensation b 4,179,822 713,901 4,893,723 Travel 392,354 392,354 Operating loss (8,031,571) (713,901) (8,745,472) Other items Foreign exchange gain (loss (385,376) (385,376) Exploration expense (37,084) (37,084) Interest income and other income 36,204 36,204 Unrealized gain on revaluation of derivative liability 1,648,876 1,648,876 Costs relating to gold prepayment (1,022,282) (1,022,282) Loss before income taxes (7,791,233) (713,901) (8,505,134) Provision for income taxes (200,865) (200,865) Net loss for the period $ (7,992,098) $ (713,901) $ (8,705,999) Translation adjustment 4,521,962 4,521,962 Comprehensive loss for the period $ (3,470,136) $ (713,901) $ (4,184,037)
Notes to Reconciliation
A Deferred taxes IFRS prohibits the recognition of a deferred tax asset or liability arising on initial recognition of an asset or liability if the acquisition is not a business combination and neither accounting prot nor taxable profit were affected. Under Canadian GAAP, temporary differences on initial recognition of an asset or liability are recorded. Accordingly, as at June 1, 2010 on adoption of IFRS, the Company reversed the deferred tax liability resulting from the acquisition of La Arena with an associated reduction of Investment in La Arena S.A. At May 31, 2011, the Company reversed the deferred liability on the acquisition of La Arena with an associated reduction of Mineral Properties and evaluation costs. B Share-based compensation Under Canadian GAAP, stock option grants may be valued as one pool and recognized over the vesting period. IFRS requires a graded approach in valuing and recognizing share-based compensation. The impact on the year ended May 31, 2011 was $713,901, respectively. At the Transition Date, all options were fully vested and therefore there was no impact on the opening retained earnings. C Cumulative translation differences In accordance with IFRS 1, the Company recognized $1,322,219 of cumulative translation differences from translating the Companys Canadian operations prior to June 1, 2010 in opening retained earnings at June 1, 2010.
NOTES
29 SUBSEQUENT EVENTS
A Subsequent to December 31, 2011, the Company received $2,663,238 on the issuance 1,580,373 share pursuant to the exercise of 486,033 options and the conversion of 1,094,340 warrants. B Subsequent to December 31, 2011, the Company delivered 3,971 ounces of gold to RKE in partial settlement of the Gold Prepayment Agreement. This settles all obligations to December 2012. C Subsequent to December 31, 2011, the Company agreed to a five-year option and purchase agreement with a private, arms length Colombian company to acquire up to an 80 per cent interest in the company, which holds approximately 150,000 hectares of exploration prospects within Colombia. During the rst year of the agreement the Company committed to spend $2 million on exploration, land holding and administration costs. Expenditures todate amounted to $366,000. After the first year of the agreement, the Company may elect to continue funding expenditures up to a maximum of $10 million over the five-year term to acquire 80 per cent of the company. D Subsequent to December 31, 2011, the Company granted a total of 200,000 options to a new officer of the Company. The options vest 25% every three months commencing three months after the grant date. The options are exercisable at $3.75 for a period of five years pursuant to the Companys stock option plan.
For the seven month nancial year ended December 31, 2011
MANAGEMENT DISCUSSION AND ANALYSIS
rio alto mining limited
MDA
The following managements discussion and analysis (MD&A) of the nancial condition and results of operations of Rio Alto Mining Limited (the Company or Rio Alto) together with its subsidiaries is as of December 31, 2011. It is intended to be read in conjunction with the Companys audited consolidated nancial statements (the Financial Statements) for the seven month nancial year ended December 31, 2011 and year ended May 31, 2011 and other corporate lings, including the Companys Annual Information Form for the seven month nancial year ended December 31, 2011, available at www.sedar.com (SEDAR). The Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and the Financial Statements and MD&A are presented in United States dollars. This MD&A, dated March 29, 2012, contains forward-looking information and forward looking statements. Readers are referred to the cautionary statement regarding forward-looking information under the heading Cautionary Statement on Forward Looking Information, which forms part of this MD&A. Management is responsible for the Financial Statements referred to in this MD&A, and provides ofcers disclosure certications led with securities commissions on SEDAR. Additional information about Rio Alto may be found at the Companys website at www.rioaltomining.com or within the Companys SEDAR prole at www.sedar.com.
COmpAny OvERvIEw
The Company was formed in 1987 under the laws of British Columbia, Canada. Following a continuation under the laws of Alberta, Canada and a number of name changes, the Company became Rio Alto in July 2009. The principal business of the Company is the development of the La Arena gold oxide/copper-gold project (the La Arena Project) in northwestern Peru. In the nal quarter of scal 2011 the Company commenced pre-production activities at a dump leach gold mine (the La Arena Gold Mine) located within the La Arena Project and commenced a feasibility study on the copper-gold deposit within the La Arena Project. Commercial production levels were achieved at the La Arena Gold Mine in late December 2011. The Company changed its fiscal and financial year end from May 31 to December 31 in November 2011; consequently, the audited consolidated financial statements are as at and for the seven month nancial year ended December 31, 2011. The change was made to allow it to provide its continuous disclosure information on a comparable basis with its peer group and to align its year end with the year end of La Arena S.A. (La Arena), a wholly-owned subsidiary that carries on the principal business of Rio Alto. The La Arena Gold Mine approached commercial production levels in November 2011, and it was a logical time to proceed with the change. Rio Alto has three wholly-owned subsidiaries La Arena and Rio Alto S.A.C. each incorporated under the laws of Peru and Mexican Silver Mines (Guernsey) Limited incorporated under the laws of Guernsey. On February 9, 2011 the Company completed the purchase of 100 per cent of La Arena, which held mining rights over approximately 21,000 hectares in Peru, including the La Arena Project. The La Arena Project is approximately 1,000 hectares and contains two mineral deposits a gold oxide deposit that hosts the La Arena Gold Mine and an adjacent copper-gold sulphide deposit. The Company is a producing, reporting issuer in British Columbia, Ontario and Alberta and its common shares trade on the TSX and the Bolsa de Valores de Lima under the symbol RIO, the OTC QX under the symbol RIOAF and on the Frankfurt Stock Exchange under the symbol A0MSLE.
ObjECTIvES AnD HIghlIghTS FOR 2011

Rio Altos objectives for 2011 were to: Complete construction and development of the La Arena Gold Mine with a capacity of 10,000 tonnes of ore per day (tpd); Expand production capacity from 10,000 tpd of ore to 24,000 tpd of ore; Produce, during construction and development, between 50,000 and 60,000 ounces of gold; Make advance deliveries of gold under the Companys gold prepayment agreement; Mine and place on the leach pad ore containing 100,000 ounces of gold; Replace ounces of gold mined by exploration to increase gold oxide resources; Advance work on a feasibility study of the copper-gold sulphide deposit; Review project and corporate development opportunities; and Complete the foregoing objectives without diluting shareholders. All but one of the 2011 objectives were achieved. Rio Alto mined in excess of 100,000 ounces of gold, but only placed ore containing 80,000 ounces on the leach pad. The other ounces mined are in stockpiles of ore and will be leached in 2012. By December 31, 2011 the 24,000 tpd of ore to pad design capacity had been achieved. The La Arena Gold Mine started pre-production on May 6, 2011 and produced 51,396 ounces of gold in the period ended December 31, 2011.
At this time Rio Alto has made monthly deliveries under the Gold Prepayment Agreement through to December 2012. Exploration drilling during the year within and around the Calaorco Pit of the La Arena Gold Mine added more than 400,000 ounces of in situ gold in measured and indicated resources.
MDA
Feasibility study work on the copper-gold sulphide deposit is underway and drilling associated with this work has effectively signicantly increased the previous indicated and inferred sulphide resources. During the year, management reviewed several corporate development opportunities. None of the opportunities were considered attractive enough to pursue during the seven months ended December 31, 2011. However, subsequent to year end, the Company agreed to a ve-year option and purchase agreement with a private, arms length Colombian company to acquire up to an 80 per cent interest in the company, which holds approximately 150,000 hectares of exploration prospects within Colombia. Funds needed for mine development were not obtained by issuing shares or other dilutive nancial instruments. Development funds were provided from pre-production revenue, drawing upon a $3 million operating loan facility payable by October 2014 and expanding the amount available under the Gold Prepayment Agreement (Prepayment Agreement) from $25 to $50 million.
Development at La Arena Project is ongoing, with $78.8 million incurred on development activities and capital expenditures in the seven months ended December 31, 2011 (including $4.7 million of capitalized depreciation), of which $57.0 million was paid in cash, and the remainder in accounts payable as at December 31, 2011. The Company realized $65.2 million from metal production during the period. The Company had a loss of approximately $0.5 million in the seven months ended December 31, 2011 compared to a loss of $8.7 million for the year ended May 31, 2011. Included in the seven months results were an unrealized gain of $7.9 million on the Gold Purchase Agreement (Purchase Agreement), $1.5 million of costs relating to the Prepayment Agreement, a $0.8 million asset retirement obligation accretion charge and general and administrative expenses of $6.0 million.
C ontinue to improve the community relations, environment, and safety teams; and C omplete these objectives without diluting shareholders. During early 2012 the production expansion program of the La Arena Gold Mine started. One of the key elements of the program is to build a tunnel for 100-tonne trucks under the highway that runs through the La Arena Project area. Permission for this tunnel was received on February 6, 2012. The estimated cost of expanding production to 36,000 tpd of ore to pad is $25 million most of which will be spent during the rst half of 2012. Exploration continues with 5 diamond drill (DD) rigs and 2 reverse circulation (RC) drilling rigs on site. The drilling plan is for approximately 60,000 meters of DD and 25,000 meters of RC for an estimated total cost of $19.5 million during the year. On February 17, 2012 the Company presented a new resource report in respect of the La Arena Project, with estimates based on drilling completed up to September 30, 2011. The report estimated a measured and indicated resource of 100.7 million tonnes of oxide mineral grading 0.46 grams per tonne gold (containing 1,484,000 ounces of gold) and an indicated sulphide mineral resource of 312.7 million tonnes grading 0.29% copper (containing 2 billion pounds of copper) and 0.24 grams per tonne gold (containing 2.4 million ounces of gold). Ongoing drill results will be announced over the course of the year and work on the copper-gold deposit feasibility study will be advanced.
ObjECTIvES FOR 2012

Rio Altos objectives for 2012 are to: Further expand capacity at the La Arena Gold Mine to 36,000 tpd of ore to the leach pad; Replace mined gold oxide resources through exploration; Produce between 150,000 and 160,000 ounces of gold; Expand the copper-gold sulphide resource and reserve through exploration; Infill drill the first five years of anticipated copper-gold sulphide production as part of the feasibility study; Advance the copper-gold sulphide feasibility study toward completion; Review project and corporate development opportunities;
MInE DEvElOpmEnT ACTIvITIES

In calendar 2011 the La Arena Gold Mine was in the pre-production phase during which revenues were netted against development costs. As part of the development program and commencing in March 2011 ore and waste was mined. From March 2011 to December 31, 2011 ore mined was 3.7 million tonnes and waste mined was 4.2 million tonnes. Of the ore mined, 1.1 million tonnes of lower grade ore was stockpiled for future processing. The following table sets out the materials mined: Dry Metric Dry Metric Dry Metric Tonnes Ore Tonnes Waste to Month Tonnes of Ore Au g/t Au Ozs Stockpiled Au g/t Au Ozs of Waste Ore Ratio March April May June July August September October November December Total/Avg. 21,095 174,677 57,881 197,444 360,214 512,567 227,299 336,351 291,277 241,053 2,519,858 0.66 0.50 0.58 0.53 0.43 0.60 1.19 1.52 1.70 1.99 1.00 447 - 2,786 - 2,954 - 3,352 - 5,002 - 9,869 35,215 8,682 91,655 16,480 269,003 15,883 345,737 15,415 402,283 80,869 1,143,894 - - 41,346 - - 163,079 - - 311,833 - - 272,716 - - 290,860 0.18 200 323,175 0.41 1,194 230,344 0.68 5,844 637,954 0.58 6,430 953,519 0.70 9,010 957,546 0.62 22,678 4,182,371 1.96 0.93 1.98 1.38 0.81 0.59 0.72 1.05 1.50 1.49 1.14
MDA
One of Rio Altos objectives for the 2011 was to mine and place ore containing 100,000 ounces of gold on the leach pad. It became apparent in July that engineering delays would result in the late completion of the leach pad expansion restricting irrigation capacity. As a result, 1.1 million tonnes of material with a weighted average grade of 0.62 Au g/t was stockpiled and will be placed on the pad in the future. Ore placed on pad amounted to 2.5 million tonnes with a weighted average grade of 1.00 Au g/t. Consequently, ore placed on the pad containing approximately 81,000 ounces fell 19,000 ounces short of the objective. This is partially compensated for by the approximately 23,000 ounces of gold that has been mined and will be leached in 2012 now that the Phase 2 leach pad expansion is complete. Total mined ore amounted to 3.7 million tonnes with a weighted average grade of 0.88 Au g/t. Waste mined was 4.2 million tonnes resulting in a waste to ore ratio of 1.14:1. Another objective was to pour, during construction, 50,000 to 60,000 ounces of gold. This objective was achieved with gold production being a little over 51,000 ounces. A related objective was to make deliveries in satisfaction of the Companys Prepayment Agreement in advance of the scheduled delivery dates. At December 31, 2011 deliveries totaling 10,203 ounces of gold had been made. These deliveries satised delivery requirements to August 2012. Subsequent to year end, further deliveries were made that satised delivery requirements to December 2012. The following table sets out gold ounce production, sales and prepayment deliveries in 2011:
Ounces of gold To Settle Month Refined Sold Prepayment May June July August September October November December Total 2,660 2,171 - - 3,277 2,789 6,108 5,619 7,515 6,537 7,109 6,132 12,490 9,761 12,237 4,859 51,396 37,868 489 489 489 978 978 2,729 4,053 10,203
At December 31, 2011 there were 3,325 ounces of gold in the Companys account at a renery, which were delivered to the Company in January 2012. Also in inventory at December 31, 2011 were approximately 3,841 ounces of gold contained within solution and upon carbon within the processing circuit at the La Arena Gold Mine. Subsequent to the yearend and to the date of this MD&A, Rio Alto made additional deliveries in satisfaction of the Prepayment Agreement amounting to 3,971 ounces of gold. Future gold delivery requirements in respect of this agreement will, depending on the price of gold at the time of delivery, fall within a range between 37,941 ounces and 51,331 ounces as follows:
production rates. During these months operating costs per tonne of ore mined (including the cost of mining and depositing waste material) were $8.69 per tonne. Mine productivity and operating costs will continue to be adversely affected by the ongoing expansion program until its completion in mid-2012. Mine site costs, per tonne of ore, by functional area for November and December 2011 were:
Costs by Function
Mining (5.50) Processing (0.99) Mine Administration (0.63) Maintenance (0.39) Planning & Geology (0.37) Security (0.25) Laboratory (0.11) Other (0.44)
MDA
Gold ounces to be delivered Maximum Notional Minimum Gold price Less $1,150 More than than $950 $1250 $1,450 Monthly Dec. 2012 to Oct. 2014 2,232 1,941 1,650 Total 51,331 44,636 37,941
The major cost elements for mining include equipment rental, diesel, materials (mostly blasting materials) and labour. Processing costs are dominated by materials (chemicals), diesel generated electrical power and labour. Other costs elements include services and health, safety and community relations costs. The mine site cost elements for November and December of 2011 were:
La Arena Gold Mine Costs

Mine productivity during development of the La Arena Gold Mine was hampered by various civil construction challenges, start up efforts, and by limited process plant and mining eet capacity. During November and December operations started to approach planned daily
Cost Elements
Equipment (2.36) Diesel (1.69) Labour (1.61) Materials (1.71) Service (0.71) Health / Safety / Comm. (0.61)
Equipment rental is for the mining eet which consists of 14 one hundred tonne trucks, two 18.5 cubic meter shovels, 2 blast hole drilling rigs and various support equipment for road maintenance, personnel movement and other services. Diesel is used to operate the mining eet, the support vehicles and electrical generators. Materials include blasting agents and chemicals used to leach and process dor. Services include blasting, assaying and security. Health, safety, environment and community relations include supplies, training and donations.
Costs are subject to inationary pressures. The 2011 Peruvian inflation rate was 4.1%. Rio Alto voluntarily granted a wage increase somewhat greater than the ination rate in order to promote good employee relations. Consequently, labour costs are likely to be somewhat higher during 2012 than in the recent past. The La Arena Gold Mine is supported from the Companys principal business ofce in Lima. For the seven month period ended December 31, 2011 Lima office costs amounted to $2.7 million consisting of: human resources $2.0 million; travel to the mine site $76,000; office rent and related charges $0.5 million; legal and audit $68,000; consulting and various other charges of $54,000. While approximately 60% of these costs have been capitalized in the past, it is expected that they will be expensed as general and administrative costs starting in January 2012, as commercial production has commenced. Operating costs may also be affected by changes in the Peruvian nuevo sol (sol or S/.) to US dollar exchange rate. From January 2009 to December 2011 the sol has consistently appreciated relative to the US dollar from S/.1 = $0.32 to S/.1 = $0.37. During that three-year period, the sol was at a low of S/.1 = $0.31 in March 2009, averaged S/.1 = $0.32 and finished 2011 at S/.1 = $0.37. Costs most affected, in the short term, by continued appreciation of the sol relative to the dollar are labour and diesel. In the
long term virtually all costs incurred in Peru would be affected. If during 2012 the sol appreciates by 5% relative to the dollar, diesel costs would likely increase by approximately $0.085 per tonne of ore mined and labour would likely increase by $0.081 per tonne of ore mined. Although operating costs would increase by continued sol appreciation, the Company has a S/.72.7 million ($25.6 million) Impuesto General a las Ventas (IGV) receivable from the Peruvian government that would also appreciate and partially offset the cash impact of the cost increase.
RESulTS OF OpERATIOnS
The following table provides selected annual information for the three most recent completed financial years ended December 31, 2011 and years ended May 31, 2011 and May 31, 2010:
(Thousands of US dollars, except per share amounts). Prepared using international nancial reporting standards. Balance sheet items prepared using international nancial reporting standards, Net loss and Loss per share using Canadian generally accepted accounting principles
MDA
For the seven months ended December 31,2011 $ 197,507 35,050 115,309 (548) -
For the year ended May 31,2011 $ 157,944 20,337 112,036 (8,706) (0.06)
For the year ended May 31,2010 $ 24,062 6,204 23,487 (13,415) (0.16)
Total assets Working capital Shareholders equity Net loss Loss per share from continuing operations
The Company had a loss of $0.5 million in the seven months ended December 31, 2011, an improvement of $8.6 million over the year ended May 31, 2011. The seven months ended December 31, 2011 included non-cash gains of $7.9 million arising from an unrealized gain on the gold derivative liability, offset by $1.5 million of costs related to the expansion of the Prepayment Agreement, $3.1 million for stock-based compensation expense, $2.8 million of general and administrative expenses, and $0.8 million for accretion expense related to the asset retirement obligation at La Arena. The year ended May 31, 2011 included non-cash gains of $1.6 million arising from an unrealized gain on the gold derivative liability, offset by $1.0 million of costs related to the establishment of the Prepayment Agreement, $4.9 million for stock-based compensation expense, $3.8 million of general and administrative expenses. The derivative liability relates to the Purchase Agreement described in the Commitments section of this MD&A and in Note 19 to the Financial Statements. The mechanics for the calculation of the liability generally result in an increased hypothetical liability and a corresponding unrealized loss if the price of gold increases during a reporting period. Should the price of gold decrease or should the volatility of the gold price decrease during a period the liability would decrease resulting in an unrealized and unrealizable gain. The economic reality is that when the price of gold increases the Company and its shareholders should benet despite increases in the derivative liability. Sales of gold from the Companys La Arena Gold Mine during fiscal 2011 resulted in a change in the Companys functional currency to the United States dollar, as the La Arena Gold Mine carries out the principal business of the Company. The functional currency of La Arena is the US dollar.
General and administration costs

General and administrative costs were $6.0 million for the seven months ended December 31, 2011, compared to $8.7 million in year ended May 31, 2011 and are comprised of costs of Vancouver ofce that provides services related to public company management and administration and thTe Lima ofce which supports the La Arena Project. The table below annualizes, where appropriate, the general and administration costs to compare consistent time periods and include the following: For the seven months For the year ended ended December 31, 2011 May 31, 2011 Annualized $ 3,126,259 456,872 440,000 744,566 327,829 186,313 143,631 131,150 131,161 144,500 65,736 65,455 5,963,472 $ 3,126,259 783,209 440,000 1,276,399 561,993 319,394 246,225 224,829 224,847 247,714 112,690 112,209 7,675,767 $ 4,893,723 666,381 832,000 534,437 293,074 392,354 326,043 229,423 187,349 182,084 144,043 58,561 8,745,472
MDA
Share-based compensation Salaries Target bonuses and severance Office and miscellaneous Accounting and audit Travel Investor relations Legal fees Consulting Directors fees Regulatory and transfer agent fees Amortization
The discussion below compares the annualized costs to the previously reported annual period. Variances beyond this are due to comparing seven months to twelve months. The decrease in general and administration expenses in the annualized period ended December 31, 2011 of $7.7 million compared to $8.7 million for the year ended May 31, 2011 is due primarily to decreased non-cash stock-based compensation costs and target bonuses and severance. Stock-based compensation expense was $3.1 million for the seven months ended December 31, 2011 (and would be the same on an annualized basis because options are granted once during the year, except that newly hired executives usually receive options as an incentive) compared to $4.9 million in the year ended May 31, 2011. Stock based compensation is comprised of the amortization of the fair value of granted options over the vesting period. In the year ended May 31, 2011, the Company granted 3.7 million options with a fair value of $4.2 million. In the seven months ended December 31, 2011, the Company issued 4.2 million options with a fair value of $9.1 million. The increase in fair value is due to share price appreciation and price volatility. Fair value is recognized over the periods in which the options vest which range from immediately to over a three year period. Generally, the options granted during the seven months ended December 31, 2011 have a longer vesting period, and therefore despite the significant increase in fair value, the amount recognized is spread over a longer period. Of the existing options, there is $6.2 million of fair value to be recognized in future periods. Salaries were $0.8 million in the annualized period ending December 31, 2011, approximately $0.1 million higher than for the year ended May 31, 2011 due to an increase in the number of employees to manage increased activities. Management bonuses for the seven months ended December 31, 2011 of $440,000 were awarded upon productivity targets being achieved. In the year ended May 31, 2011, the
Company had management bonuses of $450,000 related to the completion of the acquisition of La Arena and $388,000 for a severance related bonus payment to a former director and ofcer. Ofce and miscellaneous expenses for the seven month period ended December 31, 2011 of $1.3 million on an annualized basis increased by 138% from the year ended May 31, 2011 due to the relocation to a larger ofce space as corporate activities increased. Accounting and audit expense of $562,000 on an annualized basis increased by $269,000 due to costs related to work done in connection with the required conversion to International Financial Reporting Standards (IFRS), a change in the functional and reporting currency, increased annual costs due to the acquisition and development of La Arena Gold Mine and other complex transactions undertaken by the Company. Some of the costs are one-time costs; however, the complexity of the Companys accounting transactions and scope of activities have increased and will be reected in future periods accounting and audit expense. Directors fees were signicantly higher in 2011 for the annualized year ended December 31, 2011 compared to the year ended May 31, 2011, due to the appointment of three additional nonexecutive directors. Investor relations and regulatory and transfer agent fees were $359,000 on an annualized basis for the seven months ended December 31, 2011, an $111,000 decrease from the
year ended May 31, 2011 as management reduced promotional efforts to focus on mine development activities.
Other expense/income items

Other expense/income items amounted to a gain of $5.4 million in the seven months ended December 31, 2011 compared to $0.3 million in the comparable year ended May 31, 2011 due primarily to an increase of $6.2 million in the unrealized gain on the Purchase Agreement, offset by accretion expense related to the asset retirement obligation at the La Arena Gold Mine. For the seven For the months ended year ended December 31, 2011 May 31, 2011
MDA
Unrealized gain on derivative liability $ 7,868,984 $ 1,648,876 Cost relating to Prepayment Agreement (1,542,451) (1,022,282) Accretion expense (847,416) Foreign exchange loss (48,137) (385,376) Other income 3,021 36,204 $ 5,434,001 $ 277,422
related to the revaluation of the derivative liability related to the Purchase Agreement. Under the Purchase Agreement, RKE had the option to buy up to 622,210 ounces of gold based on the lower of prices quoted on either the London Gold Market AM Fixing Price as published by the London Bullion Market Association or the Comex (1st Position) Settlement Price over dened periods of time. With the expansion of the Purchase Agreement from $25 million to $50 million in October 2011, this Purchase Agreement was also amended whereby the number of ounces that RKE may buy includes all of the ounces of the produced from the Calaorco and Ethel Pits within the La Arena Gold Mine, which at December 31, 2011 is estimated to be 634,600 ounces. The Purchase Agreement is accounted for as a written call option as RKE has the right, but not the obligation to purchase the gold. An option pricing model that considers changes in the gold price was used to estimate the fair value of the nancial derivative relating to the written option. Subsequent changes, due to revised estimates, in fair value are reected in prot or loss. The derivative liability related to the Purchase Agreement is $4.6 million at December 31, 2011 compared to $12.4 million at May 31, 2011. The Company recognized an unrealized gain on the derivative liability related to the Purchase Agreement of $7.9 million in the seven months ended December 31, 2011. The gold price increased from $1,536 at May 31, 2011 to $1,575 at December 31, 2011, which generally results in an increase in the liability, however in the seven months ended December 31, 2011, the liability decreased signicantly due primarily to a reduction in the dened periods of time for the quoted market price to be established from an estimated 14 days to 7 days for 95% of the gold purchased by RKE. The gain of $1.6 million in the year ended May 31, 2011 was due to decreased volatility in the gold price between inception and May 31, 2011. At May 31, 2011, the Company recorded an asset retirement obligation of $14.8 million for the La Arena Gold Mine. The accretion related to this obligation was $0.8 million for the seven months
On October 15, 2010 the Company entered into a $25 million Prepayment Agreement with Red Kite Explorer Trust (RKE). Concurrently the Company also entered into a Purchase Agreement with RKE described in the Commitments section of this MD&A and in Note 19 to the Financial Statements and a $3 million Operating Loan Agreement. On October 20, 2011, the Company expanded the amount available under the Prepayment Agreement to $50 million with amendments to the Prepayment Agreement and the Purchase Agreement. Each drawdown of the Prepayment Agreement is allocated between deferred revenue and a derivative liability. An option pricing model that considers changes in the gold price is used to estimate the fair value of the nancial derivative embedded in the Companys Purchase Agreement. The deferred revenue portion is the drawdown less the amount allocated to the derivative liability. At December 31, 2011 the entire $50 million prepayment facility and the $3 million operating loan had been drawn down. In the seven months ended December 31, 2011, the Company had a $7.9 million unrealized gain
ended December 31, 2011. In July 2011, the Company submitted to the Peruvian government a closure plan for the La Arena gold mine. The estimated undiscounted value of the closure obligation is $34.7 million. The closure plan was approved in February 2012 and the Company is required to post a bond of approximately $3.2 million in January 2013. The reclamation and closure activities include land and water rehabilitation, demolition of buildings and mine facilities, on-going care and maintenance and other costs. The majority of the work is planned to be done in 2017 2019, with care and maintenance continuing until 2024.
income based on a sliding scale of rates ranging up to 8.40%. The tax liability would be determined and payable on a quarterly basis. As a tax on operating prot, normal operating costs excluding interest are deducted from revenue, an operating prot margin is determined and a progressive tax rate would be applied on the Operating Profit Margin Ratio. The Operating Profit Margin Ratio is determined by the following formula: Ratio = Operating Income / Mining Operating Revenue X 100. Where: Mining Operating Revenue equals revenue from the sale of mineral resources adjusted for nal settlement payments to account for weight, assay and nal metal pricing differences, and Operating Income equals Mining Operating Revenue less cost of goods sold and operating expenditures calculated for accounting purposes. Exploration expenditures must be allocated on a pro rata basis over the life of the producing mine to which they relate and are not deductible in the period in which they are incurred. Modied Royalty Based on Operating Income (MR) The MR revises the mining royalty enacted in 2004 that required a payment ranging from 1% to 3% of the commercial sales value of mineral resources. The MR is applied on the Companys operating income, rather than sales and is payable quarterly (the previous royalty was payable monthly). The amount payable is determined on a sliding scale with marginal rates ranging up to 12% applied to operating margin, subject to a minimum royalty of 1% of the sales value of mineral resources. As the Companys operating margin increases the marginal rate of the royalty increases. The basis of the royalty (operating income) and the effective royalty rate would be calculated by following the same rules used to determine the tax liability under the SMT. Under Peruvian law, workers in the mining industry are entitled to participate in a companys income before income tax. This participation amounts to 8% of income before income subject to income tax. The corporate income tax after deduction of worker participation is 30%. The following table sets out, for illustration purposes, the calculation of the total Peruvian tax burden under the assumptions illustrated and further assumes that a 45% operating prot margin was achieved: Per Cent of Revenue Mineral product sales proceeds 100.00% Costs: Supplies & services Salaries Depreciation of plant & equipment Amortization of intangibles Exploration related to sales proceeds Subtotal 55.00% Operating Margin 45.00% Modified Royalty 3.33% Special Mining Tax 4.80% Interest Expense 1.00% Tax Losses Applied 2.00% Income Before Worker Profit Share 33.87% Worker Profit Share 2.71% Income Before Income Tax 31.16% Income Tax 9.35% Net Income 21.81% Total Taxes 20.19% The integration of elements of the Peruvian tax system serves to align the Governments economic interest with mining companies interest; such that, as a companys net income increases the Government and the company share in the increase in virtually the same manner. The following chart, using the same assumptions as applied in the preceding table and varying the assumed operating prot margin, illustrates that as a companys operating margin increases the percentage of revenue resulting in net income increases and the total tax burden increases at virtually the same rate.
MDA
Peru Taxes
The Peruvian mining tax system was revised during 2011. The Company is subject to the revised system. On September 14, 2011 the executive branch of the Peruvian Government submitted three bills to the Congress for consideration and approval. On September 21, 2011 an amendment of the bills was submitted to Congress. These bills created two new forms of taxation on mining enterprises and one bill modied the existing royalty on sales of mineral resources. Of the two new forms of tax, one applies to Rio Alto. The modied royalty also applies to the Company. The two amended bills applicable to Rio Alto may be summarized as: Special Mining Tax (SMT) The SMT is applied on operating mining
50 45 40 35 TAXES % 30 25 20 15 10 5 0 15 25 35 45 55 65 75 85 95 OPERATING MARGIN ACHIEVED % Peru Government Net Income
MDA
LIquIDITy AnD CApITAl RESOuRCES

Liquidity risk is the risk that the Company will not be able to meet its nancial obligations as they fall due. The Company manages liquidity risk through forecasting its cash ows from operations and anticipating investing and nancing activities. Senior management and the board of directors review and approve planned expenditures. Management believes that the ability to fund operations through cash generated from operations is sufcient to meet the sustaining capital and operating requirements. Expansion of the La Arena Gold Mine and completion of the feasibility study for the copper-gold deposit will be funded from the Companys working capital. Development of the copper-gold sulphide project may, depending on the timing of the expenditures, require additional nancing. The Companys cash receipts are from the mining and sale of mineral products; however, the protability of developing and producing mineral products is affected by many factors including the cost of operations, variations in the grade of ore mined, metal recovered and the price of metals. Depending on the price of metals and other factors, the Company may determine that it is impractical to continue production. Metals prices have fluctuated widely in recent years and are affected by many factors beyond the Companys control including changes in international investment patterns, economic growth rates, political developments, sales or accumulation of metal reserves by governments, and shifts in private supplies of and demands for metals. The supply of metals consists of a combination of mine production, recycled material and existing stocks held by governments, producers, nancial institutions and consumers. If the market price for metals falls below the Companys full production cost and remains at such levels for any sustained period of time, the Company will experience losses and may decide to discontinue operations or development of other projects at one or more of its properties. The Companys cash balance at December 31, 2011 was $25.9 million, which was an increase of $14.4 million from the year ended May 31, 2011. Working capital of $35.0 million (including the IGV receivable of $25.6 million) at December 31, 2011 increased by $14.7 million from $20.3 million at May 31, 2011 due to the drawdown of $28.5 million from RKE, offset by operating and continued development costs. The increases in cash, cash equivalents and working capital were due to the following activities:
Operating Activities
Cash used in operating activities were $23.0 million in the seven months ended December 31, 2011 compared to $8.5 million in the year ended May 31, 2011. During the seven months ended December 31, 2011, the Company had a loss of $0.5 million, which after adjusting for non-cash items of $5.7 million resulted in cash outflows before changes in non-cash working capital of $6.3 million, which primarily reects general and administrative cost of $2.8 million and $1.5 million of cost relating to the Prepayment Agreement and current taxes of $2.0 million.
These were partially offset by a $2.5 million increase in accounts payable related to working capital items and current income taxes payable of $2.0 million. The outflows in the year ended May 31, 2011 included $3.8 million increase in the IGV receivable, related to development costs, increases in inventory of $3.9 million offset by $4.9 million related to a reduction in prepaid development costs. Under Peruvian law the Impuesto General a las Ventas (IGV) is a tax imposed at a rate of 18 per cent of the value of any goods or services purchased. IGV is generally refundable within the year in which it is paid. Refund applications may only be made by companies that are trading within Peru and collecting IGV from customers, by exporters or by companies that have an agreement with the tax authority for the early collection of IGV. Once the Company exports mineral production and les the necessary tax statements, it will be eligible for refunds of IGV. As at December 31, 2011, the Company has an IGV receivable of $25.6 million (May 31, 2011 $14.0 million, June 1, 2010 - $0.4 million).
common shares under private placements. An additional $0.6 million related to the receipt of subscriptions receivable outstanding at the beginning of the scal period that were received in scal 2011. Proceeds of $8.0 million were received on the conversion of 8,468,250 common share purchase warrants and $0.6 million were received on shares issued upon the exercise of 1,727,500 stock options. In the seven months ended December 31, 2011 proceeds of $0.3 million were received on the conversion of 126,270 common share purchase warrants and $0.4 million were received on shares issued upon the exercise of 1,062,500 stock options.
MDA
During the financial year ended May 31, 2011, the Company had a loss of $8.7 million, which after adjusting for non-cash charges of $3.5 million resulted in cash outows before changes in non-cash working capital of $5.2 million. The cash outows resulted primarily from cash general and administrative costs of $3.9 million and costs relating to the Gold Prepayment and related agreements of $1.0 million. Changes in non-cash working capital resulted in a $16.7 million cash outflow in the seven months ended December 31, 2011 compared to cash outflows of $3.3 million in the year ended May 31, 2011. The outflows in seven months ended December 31, 2011 included $9.0 million charged to inventory of metal, ore and supplies during the pre-production phase, which, along with development expenditures caused an $11.6 million increase in the IGV receivable related to value added tax on expenditures.
Investing Activities
In the seven month period ended December 31, 2011, investing activities provided net cash of $8.1 million due to preproduction cash receipts that were capitalized. Cash used in the year ended May 31, 2011 was $98.8 million. The investing activities in the seven months ended December 31, 2011 were to principally develop the La Arena Project and consisted of additions to mineral properties and plant and equipment. Additions to plant and equipment were $20.5 million, of which $15.8 million was paid in cash and the remaining amount was in accounts payable at the end of the period. Additions to mineral properties were $58.3 million, of which $41.3 million was paid in cash, $12.4 million was included in accounts payable at December 31, 2011, and $4.7 million was related to depreciation of plant and equipment which is capitalized to mineral properties during the pre-production phase. Mineral property additions included $20.4 million of pre-production costs. The preproduction revenues of $71.6 million on the sale of 48,071 ounces were included in mineral properties, of which $6.4 million was a non-cash delivery of gold partially to settle the Prepayment Agreement. All of the development work was for the La Arena Gold Mine, except $4.3 million related to the copper-gold sulphide project. In February 2011, Rio Alto exercised its option to acquire 100% of La Arena S.A.
Financing Activities
Net cash received from nancing activities during the seven months ended December 31, 2011 was $29.2 million compared to $112.9 million in the year ended May 31, 2011. On October 15, 2010 the Company entered into a $25 million Prepayment Agreement with RKE. Concurrently the Company entered into a Purchase Agreement with RKE described in the Commitments section of this MD&A and in Note 19 to the Financial Statements and a $3 million Operating Loan Agreement, as described in Note 17 to the Financial Statements. On October 20, 2011, the Company expanded the Prepayment Agreement to $50 million with amendments to the Prepayment Agreement and the Purchase Agreement. In the year ended May 31, 2011, the Company drew down $24.5 million and in the seven month period December 31, 2011 drew the remaining $25.5 million available under the Purchase Agreement and also drew the $3 million operating loan. Cost relating to this financing was $1.0 million in the year ended May 31, 2011 and $1.5 million in the seven months ended December 31, 2011. In the year ended May 31, 2011 proceeds of $79.2 million, net of share issue costs of $5.7 million were received on the issue of 50,326,257
upon a payment of $48.8 million. Cash acquired in this transaction was $5.5 million. Throughout the year ended May 31, 2011, the Company spent $55.4 million to develop the La Arena Gold Mine comprised of $18.7 million for capital assets and $36.7 million on property development.
SummARy OF QuARTERly RESulTS

The following table provides selected information for the most recent quarters ended December 31, 2011:
(Thousands of US dollars, except per share amounts) Prepared using International nancial reporting standards. Prepared using Canadian generally accepted accounting principles.
MDA
For the four months ended For the three months ended, December 31, August 31, May 31, February 28, November 30, August 31, 2011 2011 2011 2011 2010 2010 $ 166,287 7,739 102,090 (10,263) (0.06) $ 157,944 20,337 112,036 (1,377) (0.01) $ 127,847 6,242 111,752 (2,587) (0.02) $ 51,285 14,462 44,690 (3,837) (0.03)
May 31, February 28, 2010 2010 $ 25,953 4,349 23,980 (1,216) (0.01)
Total assets $ 197,507 Working capital 35,050 Shareholders equity 115,309 Net income (loss) 9,715 Income (loss) per share from continuing operations 0.06
$ 29,442 $ 26,594 4,943 5,807 28,965 23,487 (904) (9,908) (0.01) (0.12)
In the past, expenses increased or decreased as a result of stock-based compensation expense, income tax provisions and gains/losses on the derivative liability relating to the Purchase Agreement. During the quarter ended December 31, 2011, the Company charged $2.8 million of stock based-compensation expense and realized a gain of $16.4 million on the derivative liability, for a net gain of $13.6 million. Excluding these three items the quarterly loss would have been $3.9 million, which is in-line with the loss of $3.8 million in the corresponding quarter November 30, 2010 of the prior year. Now that the La Arena Gold Mine is producing, income and expenses will, for the most part, be determined by metal prices and operations.
Commitments:
a. In the normal course of business the Company enters into contracts and performs business activities that give rise to commitments for future minimum payments. The following table summarizes the maturities of the Companys financial liabilities and commitments: December 31, 2011 Over 5 years Total
Within 1 year
2 to 5 years
Accounts payable $ 27,481,352 $ - $ - $ 27,481,352 Deferred revenue 4,250,823 25,258,707 - 29,509,530 Derivative liability 934,144 3,192,617 432,337 4,559,098 Office leases 258,287 750,169 35,626 1,044,082 Asset retirement obligation - 3,186,480 31,553,520 34,740,000 Operating loan - 3,000,000 - 3,000,000 Total $ 32,924,606 $ 35,387,973 $ 32,021,483 $ 100,334,062
b. Under the Prepayment Agreement, the Company is obligated to deliver gold to discharge its sales obligation. The monthly delivery obligation may vary depending on the price of gold at the time of delivery and will fall within a range between 37,941 and 51,331 ounces as described herein. As of March 29, 2012 the company has delivered 14,174 ounces of gold in satisfaction of the delivery commitments to November 2012. See Note 19 of the Consolidated Financial Statements for a description of the delivery terms under the Prepayment Agreement.
La Arena by a government approved independent engineering company and led within the prescribed time limit. The plan was approved by Peruvian authorities in 2012 and requires the posting of a bond or other financial assurance in the amount of approximately $3.2 million within the first 12 days of 2013. The estimated closure cost total is $34.7 million, consisting of $12.4 million of progressive closure expenditures to occur in approximately the 7th and 8th years of the life of the La Arena Gold Mine; $17.1 million of closure costs to occur in the 9th year of the mine life and approximately $5.2 million of post-closure monitoring costs during the five years subsequent to the mine closure. See Note 18 of the Consolidated Financial Statements, for a description of the Companys asset retirement obligation (ARO) and the assumptions used in determining the $14.8 million ARO recognized in the balance sheet. Refer to events subsequent to December 31, 2011 for commitments entered into after the seven month nancial year ended December 31, 2011.
MDA
c. The Company also entered into a Purchase Agreement with RKE whereby RKE agrees to buy up to all of the gold ounces from the Calaorco and Ethel pits based on the lower of prices quoted on either the London Gold Market AM Fixing Price as published by the London Bullion Market Association or the Comex (1st Position) Settlement Price over defined periods of time. See Note 19 to the Financial Statements for a description of the delivery terms under the Purchase Agreement. d. Rio Alto took down $3 million under the Operating Loan Facility with RKE on September 2, 2011. This obligation bears interest at a rate of 3-month LIBOR plus 6 per cent compounded annually and is due on or before October 2, 2014. e. Under Peruvian law La Arena was required to le, by July 20, 2011, an independently prepared mine closure plan for the La Arena Gold Mine. The closure plan was prepared for
RElATED PARTy TRAnSACTIOnS

Transactions with related parties, for the seven month period ended December 31, 2011, are described in Note 27 to the Financial Statements and are summarized below: With the exception of the housing loan, amounts owing to or from related parties are non-interest bearing, unsecured and due on demand. The transactions were in the normal course of operations. a. The following related party transactions and balances for the seven months ended December 31, 2011 are: Seven months ended Dec. 31, 2011 Nil Year ended May 31, 2011 $ 809,124
Related party Somji Consulting
Nature of the relationship A company controlled by a former director of the Company, who resigned his position in February, 2011. Directors of the Company
Nature of the transaction Management fees, bonuses, ofce rent & administrative services. Directors fees, management fees and travel allowances. Expensed in to general and administrative costs, legal fee Ofce rent
Various individuals
158,100
181,894
Davis LLP
A law rm in which the Companys corporate secretary is a partner. Resigned as a director in October 2011. A public company and a private company with a director in common with the Company. A company whose President, CEO and director is also a director of the Company A key employee who works in the management of mine operations
107,187
257,455
Prize Mining & Philippine Metals Amerigo Resources
4,415
31,586
Reimbursement of shared ofce expense Housing loan
1,499
23,127
Individual
380,000
Nil
b. Key management are those personnel, other than the directors, having the authority and responsibility for planning, directing and controlling the Company and includes the Chief Executive Ofcer and Chief Financial Ofcer. Remuneration for key management is: For the seven months For the year ended ended December 31, 2011 May 31, 2011 Salaries (i) $ Benefits (i) Bonuses (i) Share options (ii) $ 281,817 5,537 440,000 268,463 995,817 $ 442,147 7,165 218,935 439,952 $ 1,108,199
FInAnCIAl InSTRumEnTS
Use of derivatives
The Purchase Agreement described under Other Items and the Commitments sections of this MD&A is characterized as a written option for accounting purposes and is carried as a liability. Gains or losses arising from the periodic revaluation of the liability are credited to or charged against operations.A more detailed description of the accounting for this option is presented in Note 19 to the Financial Statements.
credit risk concentration with respect to these receivables is minimal.
Currency risk
The Company operates in Canada and Peru and is therefore exposed to foreign exchange risk arising from transactions denominated in foreign currencies. The operating results and the nancial position of the Company are reported in US dollars. Prior to June 2011 the functional currency of Rio Alto Mining Limited, the parent company, was the Canadian dollar. Sales of gold at the Companys La Arena Gold Mine during 2011 caused management to review the functional currency exposure of the parent company and management concluded that the currency exposure was the United States dollar. Therefore, the functional currency of the parent company was deemed to be the United States dollar. Fluctuations of operating currencies (the Canadian dollar and sol) in relation to the US dollar will have an impact upon the reported results of the Company and may also affect the value of the Companys assets and liabilities. The Company has not entered into any agreements or purchased any instruments to hedge possible currency risk.
Fair values
The carrying values of cash and cash equivalents, receivables, promissory note receivable, accounts payable and accrued liabilities and due to related parties approximate their fair values due to their short term to maturity. The derivative liability, embedded within the Purchase Agreement, is carried at fair value and is estimated by an option pricing model that considers changes in the price of gold. In the seven months ended December 31, 2011, the Company recognized a gain of $7.9 million related to the revaluation of the derivative liability. The IGV receivable is denominated in Peruvian Nuevo Soles (sol) and its carrying amount will vary as the sol to US dollar exchange rate changes; however, the IGV receivable partially hedges the Companys sol denominated operating costs.
MDA
(i) The salaries, benets and bonuses are included in general and administrative expenses and mineral properties and evaluation properties. (ii) The options are included in administrative expenses as share-based compensation expense.
c. Included in accounts receivable at the end of the period is $5,039 (May 31, 2011 - $27,320; June 1, 2010 - $46,315) from related parties. Included in accounts payable at the end of the period is $9,834 (May 31, 2011 - $214,759; June 1, 2010 - $72,248) from related parties.
Liquidity risk
Liquidity risk is managed by maintaining sufcient cash balances to meet current working capital requirements. The Companys cash and cash equivalents are invested in business accounts or guaranteed investment certicates with chartered banks that are available on demand.
Interest risk
The Company invests its cash in instruments that are redeemable at any time without penalty, thereby reducing its exposure to interest rate uctuations. Other interest rate risks arising from the Companys operations are not considered material.
Credit risk
The Companys credit risk is primarily attributable to its liquid nancial assets and dor and would arise from the non-performance by counterparties of contractual nancial obligations. The Company limits its exposure to credit risk on liquid assets by maintaining its cash with high-credit quality nancial institutions and shipments of dor are insured with reputable underwriters. Management believes the risk of loss of the Companys liquid nancial assets and dor to be minimal. Taxes receivable result from prepayments to the Peruvian and Canadian governments and management believes that the
Commodity Price risk

The Company is exposed to price risk with respect to commodity prices. The ability of the Company to operate and develop its mineral properties and its future protability are directly related to the market price of precious and base metals and oil. The Company monitors commodity prices to determine whether changes in operating or development plans are necessary. The future gold production, with the exception of the Purchase Agreement (Note 19) is unhedged in order to provide shareholders with exposure to changes in the market gold price.
CRITICAl ACCOunTIng ESTImATES

The preparation of the Companys consolidated nancial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated nancial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are continually evaluated and are based on managements experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results could differ from these estimates by a material amount. Matters that require management to make signicant judgments, estimates and assumptions in determining carrying values include, but are not limited to:
metal recovery factors and production costs along with geological assumptions and judgments made in estimating the size and grade of ore bodies. Changes in proven and probable mineral reserves or measured and indicated and inferred mineral resource estimates may impact the carrying value of mineral properties, plant and equipment, asset retirement obligations, recognition of deferred tax amounts and amortization.
B Purchase price allocation

Applying the acquisition method to asset or business acquisitions requires each identiable asset and liability to be measured at its acquisition-date fair value. The determination of acquisition-date fair values requires that management make assumptions about future events and estimates about the future recoverability of assets. The assumptions and estimates used to determining the fair value of the net assets acquired require a high degree of judgment, and include estimates of mineral reserves or resources acquired, future metal prices, the amount of and the timing of the receipt of revenue and the disbursements for operating and capital costs, and discount rates. Changes in any of the assumptions or estimates used in determining the fair value of acquired assets and liabilities could impact the amounts assigned to assets and liabilities in the purchase price allocation.
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C Amortization
Plant, equipment and other facilities used directly in mining activities are amortized using the units-of- production (UOP) method over a period not to exceed the estimated life of the related ore body based on recoverable metals to be mined from proven and probable mineral reserves. Mobile and other equipment are amortized, net of residual value, on a straight-line basis, over their useful lives, which are not to exceed the estimated life of the related ore body. The calculation of the UOP rate and life of the ore body, and therefore the annual amortization expense, could be materially affected by changes in the underlying estimate of recoverable metals or other estimates. Changes in estimates may result from differences between actual future production and current forecasts of future production, expansion of mineral reserves through exploration activities, differences between estimated and actual costs of mining and differences in metal prices used in the estimation of mineral reserves. Signicant judgment is involved in the determination of useful life and residual values for the computation of amortization and no assurance can be given that the actual useful lives or residual values will not differ signicantly from current assumptions.
A Mineral reserves
Proven and probable mineral reserves are the economically mineable parts of the Companys measured and indicated mineral resources demonstrated by at least a preliminary feasibility study. The Company estimates its proven and probable mineral reserves and measured and indicated and inferred mineral resources based on information compiled by appropriately qualied persons. The estimation of future cash ows related to proven and probable mineral reserves is based upon factors such as assumptions related to foreign exchange rates, commodity prices, future capital requirements,
D Inventories
Rened metal, dor and work-in-process inventories and mined ore are valued at the lower of average production cost or net realizable value. Dor represents a bar containing predominantly gold by value which must be rened offsite to return ne gold or silver in readily saleable form. Net realizable value is the estimated receipt from sale of the inventory in the normal course of business, less any anticipated costs to be incurred prior to its sale. The production cost of inventories is determined on a weighted average basis and includes cost of raw materials, direct labour, contract mining charges, overhead and depreciation, depletion and amortization of mineral properties. The recovery of gold and by-products from oxide ores is achieved through a leaching process at the La Arena Gold Mine. Under this method, ore is placed on leach pads where it is treated with a chemical solution that extracts gold contained in the ore. The majority of the gold in ore is recovered over a period of up to 30 days. The resulting gold rich or pregnant leach solution is further processed in a plant where the gold and silver are recovered in dor form. Operating costs at each stage of the process are deferred and included in work-in-process inventory based on current mining and leaching costs. Costs are removed from inventory as ounces of dor are produced at the average cost per recoverable ounce of gold. Estimates of recoverable gold are calculated from the measured quantities of ore placed on the pad, the grade of ore placed on the leach pad (based on assay analysis), testing of leach solutions and a recovery percentage (based
on testing of solution and ongoing monitoring of the rate of gold recovery). Consumable supplies and spare parts to be used in production are valued at the lower of weighted average cost or net realizable value.
F Asset retirement obligation

The Company assesses its provision for reclamation and remediation on an annual basis or when new information or circumstances merit a re-assessment. Signicant estimates and assumptions are made in determining the provision for reclamation and remediation, including estimates of the extent and costs of the activities, technological changes, regulatory changes, foreign exchange rates, ination rates and discount rates. The provision for asset retirement obligations represents managements best estimate of the present value of the future reclamation and remediation obligation. Actual expenditures may differ from the recorded amount. Changes to the provision for reclamation and remediation are recorded with a corresponding change to the carrying value of the related asset. If the increase in the asset results in the asset exceeding the recoverable value, that portion of the increase is charged to expense.
J Impairment of long-lived assets

Annually, or more frequently as circumstances require (such as a substantive decrease in metal prices, an increase in operating costs, a decrease in mineable resources or a change in foreign taxes or exchange rates), reviews are undertaken to evaluate the carrying value of the mining properties, mineral properties and plant and equipment considering, among other factors: the carrying value of each type of asset; the economic feasibility of continued operations; the use, value or condition of assets when not in operation; and changes in circumstances that affect decisions to reinstall or dispose of assets. Impairment is considered to exist if the recoverable amount is less than the carrying amount of the assets. Future cash ows used to assess recoverability are estimated based on expected future production, recoverability of resources, commodity prices, foreign exchange rates, operating costs, reclamation costs and capital costs. Managements estimate of future cash ows is subject to risks and uncertainties, including the discount rate assumption. It is possible that changes in estimates may occur that affect managements estimate of the recoverability of the investments in long-lived assets. To the extent that the carrying amount of assets exceeds the recoverable amount, the excess is charged to expense. Fair value is determined with reference to estimates of future discounted cash ow or to recent transactions involving dispositions of similar properties. Management believes that the estimates applied in the impairment assessment are reasonable; however, such estimates are subject to signicant uncertainties and judgments. Although management has made its best estimate of these factors based on current and expected conditions, it is possible that the underlying assumptions could change signicantly and impairment charges may be required in future periods. Such charges could be material.
E Commencement of commercial production

The Company assesses the stage of each mine under construction to determine when a property reaches the stage when it is substantially complete and ready for its intended use. Criteria used to assess when a property has commenced commercial production include, among other considerations: The level of capital expenditures incurred relative to the expected costs to complete; The completion of a reasonable period of testing of the mine plant and equipment; The ability to produce saleable metals; The attainment of relevant permits; The ability to sustain ongoing production; and Achievement of pre-determined production targets. When management determines that a property has commenced commercial production, costs deferred during development are reclassied to property, plant and equipment and amortized. Management determined that the La Arena Gold Mine achieved commercial production levels in January 2012.
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G Deferred income taxes

The Company recognizes the deferred tax benet of deferred income tax assets to the extent their recovery is probable. Assessing the recoverability of deferred tax assets requires management to make signicant estimates of future taxable prot. In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions from deferred income and resource tax assets.
H Derivative liability
An option pricing model that considers changes in the US dollar price of gold is used to estimate the fair value of the nancial derivative embedded in the Purchase Agreement described in Note 19 to the Financial Statements. The principal assumption used in the option pricing model is the volatility, over time, of the US dollar price of gold. Changes in this assumption may signicantly affect the fair value estimate.
I Share-based payments
Share-based payments are determined using the Black-Scholes Option Pricing Model based on estimated fair values of all share-based awards at the date of grant. The Black-Scholes Option Pricing Model utilizes assumptions such as expected price volatility, the expected life of the option and the number of options that may be forfeited. Changes in these input assumptions may affect the fair value estimate.
ChAngES In ACCOunTIng STAnDARDS

Financial instruments disclosure In October 2010, the IASB issued amendments to IFRS 7 - Financial Instruments: Disclosures that expand the disclosure requirements in relation to transferred nancial assets. The amendments are effective for annual periods beginning on or after July 1, 2011, with earlier application permitted. The Company does not anticipate these amendments to have a signicant impact on its consolidated nancial statements. Income taxes In December 2010, the IASB issued an amendment to IAS 12 - Income Taxes that provides a practical solution to determining the recovery of investment properties as it relates to the accounting for deferred income taxes. This amendment is effective for annual periods beginning on or after January 1, 2012, with earlier application permitted. The Company does not anticipate this amendment to have a signicant impact on its consolidated nancial statements.
in IAS 27 - Consolidated and Separate Financial Statements. IFRS 10 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted under certain circumstances. IFRS 10 establishes control as the basis for an investor to consolidate its investees; and defines control as an investors power over an investee with exposure, or rights, to variable returns from the investee and the ability to affect the investors returns through its power over the investee. In addition, the IASB issued IFRS 12 - Disclosure of Interests in Other Entities (IFRS 12), which combines and enhances the disclosure requirements for the Companys subsidiaries, joint arrangements, associates and unconsolidated structured entities. The requirements of IFRS 12 include reporting of the nature of risks associated with the Companys interests in other entities and the effects of those interests on the Companys consolidated nancial statements. Concurrently with the issuance of IFRS 10, IAS 27 and IAS 28 - Investments in Associates (IAS 28) were revised and reissued as IAS 27 - Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures to align with the new consolidation guidance. The Company is evaluating the effect that the above standards may have on its consolidated nancial statements. Joint arrangements In May 2011, the IASB issued IFRS 11 - Joint Arrangements (IFRS 11), which supersedes IAS 31 - Interests in Joint Ventures and SIC-13 - Jointly Controlled Entities - Non-Monetary Contributions by Venturers. IFRS 11 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted under certain circumstances. Under IFRS 11, joint arrangements are classied as joint operations or joint ventures based on the rights and obligations of the parties to the joint arrangements. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (joint operators) have rights to the assets and obligations for the liabilities relating to the arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement (joint venturers) have rights to the net assets of the arrangement. IFRS 11 requires that a joint operator recognize its portion of assets, liabilities, revenues and expenses of a joint arrangement, while a joint venturer recognizes its investment in a joint arrangement using the equity method. The Company does not anticipate this amendment to have a signicant impact on its consolidated nancial statements. Fair value measurement In May 2011, as a result of the convergence project undertaken by the IASB and the US Financial Accounting Standards Board, to develop common requirements for measuring fair value and for disclosing information about fair value measurements, the IASB issued IFRS 13 - Fair Value Measurement (IFRS 13). IFRS 13 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. IFRS 13 denes fair value and sets out a single framework for measuring fair value, which is applicable to all IFRSs that require or permit fair value measurements or disclosures about fair value measurements. IFRS 13 requires that when using a valuation technique to measure fair value, the use of relevant observable inputs should be maximized while unobservable inputs should be minimized. The Company does not anticipate the application of IFRS 13 to have a material impact on its consolidated nancial statements. Financial statement presentation In June 2011, the IASB issued amendments to IAS 1 - Presentation of Financial Statements (IAS 1) that require an entity to group items presented in the Statement of Comprehensive Income into two groups on the basis of whether they may be reclassied to earnings subsequent to initial recognition or not reclassied to earnings subsequent to initial recognition. For those items presented before taxes, the amendments to IAS 1 also require that the taxes
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Consolidation In May 2011, the IASB issued IFRS 10 Consolidated Financial Statements (IFRS 10), which supersedes SIC 12 and the requirements relating to consolidated nancial statements
related to the two separate groups be presented separately. The amendments are effective for annual periods beginning on or after July 1, 2012, with earlier adoption permitted. The Company does not anticipate the application of the amendments to IAS 1 to have a material impact on its consolidated nancial statements. Employee Benets In June 2011, the IASB issued amendments to IAS 19 - Employee Benefits (IAS 19) that introduced changes to the accounting for dened benet plans and other employee benets. The amendments include elimination of the option to defer, or recognize in full in earnings, actuarial gains and losses and instead mandates the immediate recognition of all actuarial gains and losses in other comprehensive income and requires use of the same discount rate for both the dened benet obligation and expected asset return when calculating interest cost. Other changes include modication of the accounting for termination benets and classication of other employee benets. The Company does not anticipate the application of the amended IAS 19 to have a material impact on its consolidated nancial statements. Stripping Costs in the Production Phase of a Surface Mine This new interpretation, issued by the International Accounting Standards Board in October 2011, claries when production stripping should lead to the recognition of an asset and how that asset should be measured, both initially
and in subsequent periods. IFRIC 20 - Stripping Costs in the Production Phase of a Surface Mine (IFRIC 20) applies to the costs incurred to remove mine waste materials to gain access to mineral ore deposits during the production phase of a surface mine. The main features of IFRIC 20 are as follows: If the benefit from the stripping activity is realized in the form of inventory produced, the entity accounts for the costs in accordance with IAS 2 Inventories. If the benet is improved access to the ore, the entity recognizes the costs as an addition to an existing asset. The stripping activity asset is measured in the same way as the existing asset of which it is a part (at cost or revalued amount less depreciation or amortization and less impairment losses). Depreciation or amortization is calculated over the expected useful life of the identied component of the ore body that becomes more accessible as a result of the stripping activity. The interpretation is effective for annual periods beginning on or after January 1, 2013. The Company adopted the provisions of this interpretation in 2012. The application of IFRIC 20 does not have a material impact on the Companys consolidated nancial statements.
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cash ow characteristics of the nancial assets. Financial liabilities are classied as subsequently measured at amortized cost except for nancial liabilities classied as at fair value through prot and loss, nancial guarantees and certain other exceptions. In response to delays to the completion of the remaining phases of the project, on December 16, 2011, the IASB issued amendments to IFRS 9 which deferred the mandatory effective date of IFRS 9 from January 1, 2013 to annual periods beginning on or after January 1, 2015. The amendments also provided relief from the requirement to restate comparative nancial statements for the effects of applying IFRS 9. The Company will monitor the evolution of this standard to evaluate the impact it may have on its consolidated nancial statements.
International Financial Reporting Standards

The Financial Statements are the Companys rst audited consolidated nancial statements prepared under International Financial Reporting Standards (IFRS). IFRS represent standards and interpretations approved by the International Accounting Standards Board (IASB) and are comprised of IFRSs, International Accounting Standards (IASs), and interpretations issued by the IFRS Interpretations Committee (IFRICs) or the former Standing Interpretations Committee (SICs). The Companys signicant accounting policies are described in note 3 of the Financial Statements. The Company implemented its conversion from Canadian GAAP to IFRS on June 1, 2010. There were no signicant issues noted during the reporting process for the Companys seven-month period ended December 31, 2011. The effects of the transition to IFRS on equity, total comprehensive income and reported cash ows are presented in below and are further explained in the notes that the accompany the tables.

Financial instruments The IASB intends to replace IAS 39 - Financial Instruments: Recognition and Measurement (IAS 39) in its entirety with IFRS 9 - Financial Instruments (IFRS 9) in three main phases. IFRS 9 will be the new standard for the nancial reporting of nancial instruments that is principles-based and less complex than IAS 39. In November 2009 and October 2010, phase 1 of IFRS 9 was issued and amended, respectively, which addressed the classication and measurement of nancial assets and financial liabilities. IFRS 9 requires that all nancial assets be classied as subsequently measured at amortized cost or at fair value based on the Companys business model for managing nancial assets and the contractual
First-time adoption and exemptions applied

Upon transition to IFRS, IFRS 1 mandates certain exceptions to IFRS and permits certain exemptions from full retrospective application. The Company has applied the mandatory exceptions and elected certain optional exemptions. Mandatory exceptions:
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a. Financial assets and liabilities that have been de-recognized before 1 January 2005 under previous Canadian GAAP have not been recognized under IFRS. b. The Company used estimates under IFRS that are consistent with those applied under Canadian GAAP (with adjustments for accounting policy differences). Optional exemptions applied: a. The Company elected not apply IFRS 2 Share-based Payments to equity instruments that were granted prior to the Transition Date. b. IFRS1 allows a rst time adopter to exempt themselves from the retrospective application of IAS 21 The Effect of Changes in Foreign Exchange Rates for cumulative translation differences that existed at the date of transition to IFRS. The Company elected to apply this exemption and in accordance with IFRS 1, the Company recognized $1,322,219 of cumulative translation differences from translating the Companys Canadian operations prior to June 1, 2010 in opening retained earnings at June 1, 2010.
Presentation differences
Some nancial statement line items are described differently under IFRS than they were under Canadian GAAP. Although the nature and amount of assets and liabilities included in these line items are unchanged the descriptions are difference. These line items (with Canadian GAAP descriptions in brackets) are: Deferred income tax liability (Future income tax liability) Share option and warrant reserve (Contributed surplus) Translation reserve (Accumulated other comprehensive income). Adjustments required in transitioning from Canadian GAAP (GAAP) to IFRS are set out in the following tables:
Reconciliation of consolidated balance sheet
GAAP Assets
As at June 1, 2010 As at May 31, 2011 Effect of Effect of transition to IFRS IFRS GAAP transition to IFRS IFRS
Note
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Current Cash and cash equivalents $ 5,440,298 $ 5,440,298 $ 11,526,062 $ 11,526,062 Account receivable 84,449 84,449 537,025 537,025 Subscription receivable 582,704 582,704 - Promissory note receivable 116,532 116,532 - Inventory - - 3,910,479 3,910,479 Prepaid expenses 157,585 157,585 2,554,024 2,554,024 IGV receivable 397,637 397,637 13,999,942 13,999,942 6,779,205 6,779,205 32,527,532 32,527,532 Deferred financing costs 23,924 23,924 - Deferred income tax - 144,150 144,150 - Plant and equipment 259,989 259,989 47,285,624 47,285,624 Mineral properties and evaluation costs - - 88,374,786 (10,243,547) 78,131,239 Investment in La Arena S.A. a 19,530,771 (2,676,291) 16,854,480 - $ 26,593,889 $ (2,532,141) $ 24,061,748 $ 168,187,942 $ (10,243,547) $ 157,944,395
Liabilities and equity Current Accounts payable & accrued liabilities $ 502,789 $ 502,789 $ 8,264,506 $ 8,264,506 Due to related parties 72,248 72,248 - Deferred revenue - - 1,790,292 1,790,292 Derivative liability - - 2,136,078 2,136,078 575,037 - 575,037 12,190,876 - 12,190,876 Asset retirement obligation - - 14,800,000 14,800,000 Deferred income tax liability a 2,532,141 (2,532,141) - 10,243,547 (10,243,547) Deferred revenue - - 8,625,953 8,625,953 Derivative liability - - 10,292,004 10,292,004 3,107,178 (2,532,141) 575,037 56,152,380 (10,243,547) 45,908,833 Equity Share capital 39,006,847 39,006,847 125,972,274 125,972,274 Share option reserve b 2,396,484 2,396,484 7,450,044 713,901 8,163,945 Translation reserve c 1,322,219 (1,322,219) - 5,844,181 (1,322,219) 4,521,962 Deficit b,c (19,238,839) 1,322,219 (17,916,620) (27,230,937) 608,318 (26,622,619) 23,486,711 - 23,486,711 112,035,562 - 112,035,562 $ 26,593,889 $ (2,532,141) $ 24,061,748 $ 168,187,942 $ (10,243,547) $ 157,944,395
Reconciliation of consolidated statement of loss and comprehensive loss

Year ended May 31, 2011 Effect of GAAP transition to IFRS IFRS General and administrative expenses Note Accounting and audit $ 293,074 $ 293,074 Amortization 58,561 58,561 Consulting 187,349 187,349 Directors fees 182,084 182,084 Insurance 28,583 28,583 Investor relations 326,043 326,043 Legal fee 229,423 229,423 Office and miscellaneous 505,854 505,854 Regulatory and transfer agent fees 144,043 144,043 Salaries 1,504,381 1,504,381 Share-based compensation b 4,179,822 713,901 4,893,723 Travel 392,354 392,354 Loss before other items (8,031,571) (713,901) (8,745,472) Other items Foreign exchange gain (loss) (385,376) (385,376) Exploration expense (37,084) (37,084) Interest income and other income 36,204 36,204 Unrealized gain on revaluation of derivative liability 1,648,876 1,648,876 Costs relating to gold prepayment (1,022,282) (1,022,282) Loss before income taxes (7,791,233) (713,901) (8,505,134) Provision for income taxes (200,865) (200,865) Net loss for the period $ (7,992,098) $ (713,901) $ (8,705,999) Translation adjustment 4,521,962 4,521,962 Comprehensive loss for the period $ (3,470,136) $ (713,901) $ (4,184,037)
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Notes to Reconciliation
a. Deferred income taxes IFRS prohibits the recognition of a deferred income tax asset or liability arising on initial recognition of an asset or liability if the acquisition is not a business combination and neither accounting profit nor taxable profit were affected at the time of the transaction. Under Canadian GAAP, temporary differences on initial recognition of an asset or liability are recorded. Accordingly, as at June 1, 2010 and at August 31, 2010 on adoption of IFRS, the Company reversed the deferred tax liability resulting from the acquisition of La Arena with an associated reduction in the Investment in La Arena S.A. At May 31, 2011, the Company reversed the deferred tax liability on the acquisition of La Arena S.A. with an associated reduction in mineral properties and evaluation costs. b. Share-based compensation Under Canadian GAAP, stock option grants may be valued as one pool and recognized over the vesting period. IFRS requires a graded approach in valuing and recognizing share-based
compensation. The impact on the three months ended August 31, 2010 and the year ended May 31, 2011 was nil and $713,901 respectively. At the Transition Date, all options were fully vested and therefore there was no impact. c. Cumulative translation differences (Translation reserve) In accordance with IFRS 1, the Company recognized $1,322,219 of cumulative translation differences from translating the Companys Canadian operations prior to June 1, 2010 in opening retained earnings at June 1, 2010.
holds approximately 150,000 hectares of exploration prospects within Colombia. During the first year of the agreement the Company committed to spend $2 million on exploration, land holding and administration costs. Expenditures to-date amounted to $366,000. After the rst year of the agreement, the Company may elect to continue funding expenditures up to a maximum of $10 million over the five-year term to acquire 80 per cent of the company. d. Subsequent to December 31, 2011, the Company granted a total of 200,000 options to a new officer of the Company. The options vest 25% every three months commencing three months after the grant date. The options are exercisable at $3.75 for a period of five years pursuant to the Companys stock option plan.
OFF BAlAnCE ShEET ARRAngEmEnTS

The Company has no off balance sheet arrangements.
PROpOSED TRAnSACTIOnS
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As at the date of this MD&A there are no proposed transactions being considered by the Company.
OuTSTAnDIng ShARES, WARRAnTS AnD OpTIOnS

As at the date of this MD&A, the Company has common shares, warrants convertible into common shares and options exercisable into common shares outstanding as follows: Number of common Shares May 31, 2011 Issued upon: Exercise of stock options Exercise of warrants December 31, 2011 Exercise of stock options Exercise of warrants Total as at March 29, 2012 168,557,582 1,062,500 126,270 169,746,352 486,033 1,094,340 171,326,725
EvEnTS SubSEquEnT TO DECEmbER 31, 2011

a. Subsequent to December 31, 2011, the Company received $2,663,238 from the issue of 1,580,373 common shares pursuant to the exercise of 486,033 options and the conversion of 1,094,340 warrants. b. Subsequent to December 31, 2011, the Company delivered 3,971 ounces of gold to RKE in partial settlement of the Agreement. This settles delivery requirements up to and including November 2012. c. Subsequent to December 31, 2011, the Company agreed to a ve-year option and purchase agreement with a private, arms length Colombian company to acquire up to an 80 per cent interest in the company, which
Number of Warrants Conversion Price Expiry Date 1,500,000 $0.30 June 25, 2012 462,990 $2.05 January 20, 2013 1,962,990 $0.71 Number of Options 50,000 100,000 2,125,000 180,000 830,667 1,050,000 450,000 250,000 385,000 120,000 243,300 2,940,000 1,050,000 200,000 9,973,967 Number of Weighted Avg. Underlying Shares Exercise Price (C$) Grant Date 50,000 100,000 2,125,000 180,000 830,667 1,050,000 450,000 250,000 385,000 120,000 243,300 2,940,000 1,050,000 200,000 9,973,967
Date of Expiry
$0.30 April 22, 2008 May 7, 2012 $0.25 May 7, 2007 May 7, 2012 $0.30 July 24, 2009 July 24, 2014 $0.70 March 15, 2010 March 15, 2015 $1.50 September 20, 2010 September 20, 2015 $1.80 September 20, 2010 September 20, 2015 $1.90 November 5, 2010 November 5, 2015 $2.00 December 6, 2010 December 6, 2015 $2.39 March 11, 2011 March 11, 2016 $2.15 May 11, 2011 May 11, 2016 $2.29 August 1, 2011 August 1, 2016 $3.08 November 18, 2011 November 16, 2016 $3.22 November 18, 2011 November 16, 2016 $3.75 January 23, 2012 January 23, 2017 $2.03
DISClOSuRE COnTROlS AnD PROCEDuRES

Internal Controls over Financial Reporting
The Companys management is responsible for establishing and maintaining internal control over financial reporting. Management has designed and established disclosure controls and procedures to ensure information that is disclosed in this MD&A and the Financial Statements was properly recorded, processed, summarized and reported. Any system of internal control over nancial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to nancial statement preparation and presentation. Management has used the Committee of Sponsoring Organizations of the Treadway Commission framework to evaluate the effectiveness of these disclosure controls and procedures to the end of the period covered by this report and management has concluded that as at December 31, 2011, the Companys internal control over nancial reporting was effective.
concluded that these controls and procedures provide reasonable assurance that material information relating to the Company is made known to management and reported as required.
BuSInESS RISk FACTORS

Natural resources exploration, development, production and processing involve a number of risks, many of which are beyond the Companys control. Without limiting the foregoing, such risks include: Changes in the market price for mineral products, which have uctuated widely in the past, will affect the future protability of the Companys operations and nancial condition. The Company has limited operating history and there can be no assurance of its ability to operate its projects protably. Mining is inherently dangerous and subject to conditions or elements beyond the Companys control, which could have a material adverse effect on the Companys business. Actual exploration, development, construction and other costs and economic returns may differ signicantly from those the Company has anticipated and there are no assurances that any future development activities will result in protable mining operations. Increased competition could adversely affect the Companys ability to attract necessary capital funding or acquire suitable producing properties or prospects for mineral exploration and development in the future. The Companys insurance coverage does not cover all of its potential losses, liabilities and damage related to its business and certain risks are uninsured or uninsurable. The Company depends heavily on limited mineral properties, and there can be no guarantee that the Company will successfully acquire other commercially mineable properties. The Companys activities are subject to environmental laws and regulations that may increase the cost of doing business or restrict operations.
T he Company requires numerous permits in order to conduct exploration, development or mining activities and delays in obtaining, or a failure to obtain, such permits or failure to comply with the terms of any such permits that have been obtained could have a material adverse impact on the Company. The Company may experience difficulty in attracting and retaining qualied management to meet the needs of its anticipated growth, and the failure to manage the Companys growth effectively could have a material adverse effect on its business and nancial condition. I nsofar as certain directors and officers of the Company hold similar positions with other mineral resource companies, conicts may arise between the obligations of these directors and ofcers to the Company and to such other mineral resource companies. T itle to the Companys mineral properties cannot be guaranteed and may be subject to prior unregistered agreements, transfers or claims or defects. T he Companys business is subject to potential political, social and economic instability in the countries in which it operates. C hanges in taxation legislation or regulations in the countries in which the Company operates could have a material adverse affect on the Companys business and nancial condition. C urrency exchange rate fluctuations may affect the cost of the Companys operations and exploration and development activities. T he Company has no dividend payment policy and does not intend to pay any dividends in the foreseeable future. Readers should also refer to other risk factors outlined in the Companys Annual Information Form dated March 29, 2012 as led on SEDAR.
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Disclosure Controls and Procedures

Management has established disclosure controls and procedures to ensure that information required to be disclosed in this MD&A and Financial Statements was properly recorded, processed, summarized and reported to the Companys Board and Audit Committee. Management has evaluated the effectiveness of the Companys disclosure controls and procedures as at December 31, 2011 and
SOCIAl AnD COmmunITy ISSuES

In recent years communities and nongovernmental organizations (NGOs) have become more vocal and active with respect to mining activities at or near their communities. These communities and NGOs have taken such actions as road closures, work stoppages, and law suits for damages. These actions relate not only to current activities, but often in respect of decades old mining activities by prior owners of mining properties. Such actions by communities and NGOs may have a material adverse effect on the Companys nancial position, cash ow and results of operations. During the latter part of September 2011, a group of approximately thirty people from the communities within the La Arena Gold Mines area of influence illegally blockaded the entrance to the mine preventing workers from entering or leaving. As a result, nearly ten effective development and construction working days were lost during September. The loss of productive time pushed completion of the leach pad and process plant expansion from October into November and also delayed pit development with a corresponding loss of waste and ore production. During the blockade it became clear that certain individuals had misinformed members of the community and had made unfounded accusations about the Company in order to further their own personal ambitions. Once a proper dialogue was re-established the blockade dissolved peacefully.
CAuTIOnARy STATEmEnT On FORwARD-LOOkIng InFORmATIOn

Certain information in this MD&A, including information about the Companys financial or operating performance and other statements expressing managements expectations or estimates of future performance and exploration and development programs or plans constitute forward-looking statements. Words such as expect, will, intend, estimate, anticipate, plan and similar expressions of a conditional or future oriented nature identify forward-looking statements. Forward-looking statements are, necessarily, based upon a number of estimates and assumptions. While considered by management to be reasonable in the context in which they are made, forward-looking statements are inherently subject to business risks and economic and competitive uncertainties and contingencies. The Company cautions readers that forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause Rio Altos actual nancial results, future performance and results of exploration and development programs and plans to be materially different than those estimated future results, performance or achievements and that forward-looking statements are not guarantees of future performance, results or achievements. Risks, uncertainties and contingencies and other factors that might cause actual performance to differ from forward-looking statements include, but are not limited to, changes in the worldwide price of precious metals and commodities, changes in the relative exchange rates for the dollar, the Canadian dollar, and the Peruvian Nuevo sol, interest rates, legislative, political, social or economic developments both within the countries in which the Company operates and in general, contests over title to property, the speculative nature of mineral exploration and development, operating or technical difculties in connection with the Companys operating, development or exploration programs, increasing costs as a result of ination or scarcity of human resources and input materials or equipment. Known and unknown risks inherent in the mining business include potential uncertainties related to title to mineral claims, the accuracy of mineral reserve and resource estimates, metallurgical recoveries, capital and operating costs and the future demand for minerals. Please see Business Risk Factors, elsewhere herein. Management continuously reviews its development plans and business running costs and, if necessary, revises them as business risk factors, uncertainties, contingencies and other factors change.
MDA
TEChnICAl AnD SCIEnTIFIC InFORmATIOn

All technical and scientific information contained in this MD&A regarding the La Arena Project has been taken from the La Arena Project, Peru Technical Report (Report) with effective date of September 30, 2011, prepared by Kirk Mining Consultants Pty Limited (Kirk Mining Consultants). A copy of the Report is available under the Companys SEDAR prole. Readers are encouraged to read the Report in its entirety, including all qualications, assumptions and exclusions that relate to the scientific and technical information set out in this MD&A. Technical and scientific information set out in this MD&A is subject to the qualifications, assumptions and exclusions set out in the Report. Readers are advised that mineral resources that are not mineral reserves do not have demonstrated economic viability. The Report was supplemented with information taken from the La Arena Project, Peru Technical Report with effective date of July 31, 2010, prepared by Coffey Mining Pty Ltd. (Coffey Mining). A copy of the report dated July 31, 2010 is available under the Companys SEDAR prole.
MDA
QuAlIFIED PERSOn REvIEw

The disclosure in this MD&A of scientific and technical information regarding the La Arena Project has been reviewed and veried by Linton Kirk BE(Mining), FAusIMM (CP) of Kirk Mining Consultants Pty Ltd, formerly of Coffey Mining. Mr. Kirk is a Qualified Person for the purposes of National Instrument 43-101.
APPROvAl
The Board of Directors has approved the disclosure in this MD&A. A copy of this MD&A, the Financial Statements and previously published nancial statements, management discussions and analysis as well as other information is available on the SEDAR website at www.sedar.com.
CORPORATE OffIce
Suite 1950 - 400 Burrard Street Vancouver, BC, Canada V6C 3A6 tel +1.604.628.1401
Market for SecurItIes

Our common shares are listed in the Toronto Stock Exchange and in the BVL under the symbol RIO, in the OTCQX under the symbol RIOAF and in the DB Frankfurt under the symbol MS2
Peru OffIce
Calle Esquilache 371, oficina 1402 San Isidro, Lima, Peru 27
Share InformatIon March 31, 2011

Recent price: CDN$4.39 Issued and outstanding: 171.3 M Options outstanding: 9.9 M Warrants outstanding: 1.9 M Fully diluted: 183 Million Market Capital: $752 Million
INVESTOR INFORMATION
tel +011.51.1.625.9900
Investor relatIons
Our annual reports, interim reports and other nancial and corporate information are available on our web site at www.rioaltomining.com, on www.sedar.com, or from our investor relations department: tel +1.877.628.1401 info@rioaltomining.com
Annual meetIng of shareholders

Thursday, May 10, 2012 11:00 AM Hyatt Regency Toronto 370 King Street West Toronto ON
Shareholder InquIrIes
If you have questions about changing your address, share registration or a lost share certicate, please contact: Computershare 3rd Floor, 510 Burrard Street Vancouver, BC V6C 3B9 tel 604.661.9412 fax 604.689.8144 www.computershare.com
AudItors
Grant Thornton LLP Chartered Accountants Suite 1600, Grant Thornton Place 333 Seymour St, Vancouver,BC V6B 0A4 tel 604.687.2711
TSX: RIO BVL: RIO OTCOX: RIOAF FRANKFURT: MS2 www.rioaltomining.com
There are a number of other risks and uncertainties associated with exploration, development and mining activities that may affect the reliability of such forward-looking information including those described in the Companys Annual Information Form ("AIF") led with the securities commission of certain provinces of Canada which is available on the Company's SEDAR prole atwww.sedar.com. There may be factors in addition to those described herein or in the AIF that cause actions, events or results to not be as anticipated, estimated or intended. Readers are cautioned not to place undue reliance on forwardlooking information due to the inherent uncertainty thereof. The Company does not undertake to update any forward-looking information except in accordance with applicable securities laws.

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FROM THE CEO & CFO

Objectives for 2012:

FROM THE CEO & CFO

FROM THE CEO & CFO

Our board is accountable to shareholders

Our Governance Structure

SocIal and EnvIronmental ResponsIbIlIty

SocIal and EnvIronmental ResponsIbIlIty

CONSOLIDATED FINANCIAL STATEMENTS

rio alto mining limited

INDEPENDANT AUDITORS REPORT

Managements responsibility for the nancial statements

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED FINANCIAL STATEMENTS

See accompanying notes to the consolidated nancial statements

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

CONSOLIDATED FINANCIAL STATEMENTS

See accompanying notes to the consolidated nancial statements

CONSOLIDATED STATEMENTS OF CASH FLOWS

CONSOLIDATED FINANCIAL STATEMENTS

(41,280,540) 65,214,108 (15,773,978) - - - 8,159,590

(1,244,417) (18,729,507) (35,511,237) (48,846,789) 5,533,627 (98,798,323) 5,654,715 5,440,298 431,049

See accompanying notes to the consolidated nancial statements

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

CONSOLIDATED FINANCIAL STATEMENTS

Fair value of broker warrants for private placement 21(a)

Other comprehensive loss

168,557,582 $ 125,972,274 $ 8,163,945 $ 4,521,962 $(26,622,619) $112,035,562

Other comprehensive loss

See accompanying notes to the consolidated nancial statements

1 N  ATURE OF OPERATIONS AND CONTINUANCE OF OPERATIONS

2 B  ASIS OF PRESENTATION AND STATEMENT OF COMPLIANCE WITH IFRS

3 SIGNIFICANT JUDGEMENTS, ESTIMATES AND ASSUMPTIONS

B Purchase price allocation

E Commencement of commercial production

F Asset retirement obligation

4 SIGNIFICANT ACCOUNTING POLICIES

J Impairment of long-lived assets

La Arena S.A. (La Arena) Peru

All inter-company transactions and balances are eliminated on consolidation.

E Loss per share

F Cash and cash equivalents

G Plant and equipment

I Mineral properties and development costs

J Asset retirement obligations

L Impairment of non-financial assets

Q Share issue costs

R Related party transactions

S Non-derivative financial instruments

W Capitalized borrowing costs

Accounting standards effective January 1, 2013

Accounting standards effective January 1, 2012

Accounting standards effective January 1, 2015

8 PROMISSORY NOTE RECEIVABLE

12 PLANT AND EQUIPMENT

Heap Leach Mobile and Pad and Pond Field Equipment

Plant and Equipment

Other Mine Assets

13 MINERAL PROPERTIES AND DEVELOPMENT COSTS

Mineral property expenditures relate to La Arena Project, are summarized as follows:

1 N ATURE OF OPERATIONS AND CONTINUANCE OF OPERATIONS

2 B ASIS OF PRESENTATION AND STATEMENT OF COMPLIANCE WITH IFRS

4 SIGNIFICANT ACCOUNTING POLICIES

23 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT