Falco Resources Ltd.

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CONSOLIDATED FINANCIAL STATEMENTS (Expressed in Canadian Dollars)

FOR THE YEARS ENDED JUNE 30, 2021 AND 2020

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Independent auditor’s report

To the Shareholders of Falco Resources Ltd.

Our opinion

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Falco Resources Ltd. and its subsidiary (together, the Company) as at June 30, 2021 and 2020 and July 1, 2019, and its financial performance and its cash flows for the years ended June 30, 2021 and 2020 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS).

What we have audited

The Company’s consolidated financial statements comprise:

the consolidated balance sheets as at June 30, 2021 and 2020 and July 1, 2019;
the consolidated statements of loss and other comprehensive loss for the years ended June 30, 2021 and 2020;
the consolidated statements of cash flows for the years ended June 30, 2021 and 2020;
the consolidated statements of changes in equity for the years ended June 30, 2021 and 2020; and
the notes to consolidated financial statements, which include significant accounting policies and other explanatory information.

Basis for opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements.

PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l. 1250 René-Lévesque Boulevard West, Suite 2500, Montréal, Quebec, Canada H3B 4Y1 T: +1 514 205 5000, F: +1 514 876 1502

“PwC” refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership.

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Material uncertainty related to going concern

We draw attention to note 1 to the consolidated financial statements, which describes events or conditions that indicate the existence of a material uncertainty that may cast significant doubt about the Company's ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Other information

Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis.

Our opinion on the consolidated financial statements does not cover the other information, and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of management and those charged with governance for the consolidated financial statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

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Auditor’s responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit 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 Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

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We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

The engagement partner on the audit resulting in this independent auditor’s report is Nochane Rousseau.

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Montréal, Quebec September 27, 2021

1 FCPA auditor, FCA, public accountancy permit No. A122718

Falco Resources Ltd. Consolidated Balance Sheets

(Expressed in Canadian Dollars)

	June 30, 2021 June 30, 2020 July 1, 2019
Assets Current assets Cash Accounts receivable (Note 6) Prepaid expenses and other assets Non-current assets Restricted cash (Note 7) Property, plant and equipment (Note 9) Other non-current assets (Note 12) Total assets Liabilities Current liabilities Accounts payable and accrued liabilities (Note 11) Convertible Debenture (Note 14) Derivative warrant liabilities (Note 15) Secured Loan (Note 13) Non-current liabilities Contract Liability (Note 12) Convertible Loan (Note 13) Deferred income taxes (Note 19) Derivative warrant liabilities (Note 15) Total liabilities Equity Share capital (Note 16) Warrants (Note 17) Contributed surplus Deficit Total equity Total liabilities and equity	$ $ $ (Note 28 – adjusted) (Note 28 – adjusted) 4,149,395 3,630,751 1,115,750 1,227,540 733,686 2,102,343 256,291 202,144 163,156
	5,633,226 4,566,581 3,381,249 905,000 905,000 905,000 104,331,782 87,698,607 78,719,551 1,728,528 1,728,528 1,728,528
	106,965,310 90,332,135 81,353,079
	112,598,536 94,898,716 84,734,328
	8,416,198 4,224,616 4,122,023 9,910,064 - - 177,944 - - - 15,900,000 10,000,000
	18,504,206 20,124,616 14,122,023
	33,674,978 29,724,143 26,115,576 17,617,185 - - 1,260,577 1,283,000 1,313,000 733,889 - -
	53,286,629 31,007,143 27,428,576
	71,790,835 51,131,759 41,550,599
	116,543,819 116,134,936 111,934,936 744,306 744,306 744,306 14,977,066 14,495,976 13,698,058 (91,457,490) (87,608,261) (83,193,571)
	40,807,701 43,766,957 43,183,729

	112,598,536 94,898,716 84,734,328

Going concern (Note 1), Commitments (Note 27) and Subsequent events (Note 30)

Equity is solely attributable to Falco Resources Ltd. shareholders

Approved on behalf of the Board of Directors:

“Luc Lessard” Director “Paola Farnesi” Director

The accompanying notes are an integral part of these consolidated financial statements.

Falco Resources Ltd.

Consolidated Statements of Loss and Comprehensive Loss For the years ended June 30, 2021 and 2020

(Expressed in Canadian Dollars)

Falco Resources Ltd. Consolidated Statements of Loss and Comprehensive Loss For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)
	2021 2020
Expenses Consulting and compensation (Note 22) Professional fees Share-based compensation (Note 18) Office and administrative Exploration and evaluation (Note 10) Refundable tax credits Investor and shareholder relations Travel Depreciation (Note 9) Cost recoveries (Note 22) Operating loss Interest income Interest expense (Note 14) Transaction costs (Note 8) Gain on sale of royalty (Note 22) Unrealized gain on derivative warrant liabilities (Note 15) Foreign exchange loss Loss before income taxes Deferred income tax recovery (Note 19) Net loss and comprehensive loss Net loss per common share Basic and diluted (Note 20) Weighted average number of common shares outstanding Basic and diluted (Note 20)	$ $ (Note 28 – adjusted) 2,604,636 2,841,095 1,681,544 591,396 604,354 655,166 427,644 355,078 506,593 516,306 (123,032) (206,705) 253,431 154,471 8,351 133,155 33,807 36,438 (1,025,725) (990,689)
	(4,971,603) (4,085,711) 53,128 70,826 (368,175) (231,856) - (197,265) 70,790 - 1,348,482 - (4,274) (684)
	(3,871,652) (4,444,690) 22,423 30,000
	(3,849,229) (4,414,690)
	(0.02) (0.02) 226,597,663 212,620,575

The net loss and the comprehensive loss are solely attributable to Falco Resources Ltd. shareholders.

The accompanying notes are an integral part of these consolidated financial statements.

Falco Resources Ltd.

Consolidated Statements of Cash Flows For the years ended June 30, 2021 and 2020

(Expressed in Canadian Dollars)

	2021 2020
Operating activities Net loss Adjustments for: Share-based compensation (Note 18) Depreciation (Note 9) Interest expense Unrealized gain on derivative warrant liabilities Deferred income tax recovery (Note 19) Payment of transaction costs related to the Silver Stream Agreement (Note 12) Changes in non-cash working capital items: Accounts receivable Prepaid expenses and other assets Accounts payable and accrued liabilities Net cash flows used in operating activities Investing activities Investments in property, plant and equipment Cash acquired through the acquisition of Golden Queen (Note 8) Net cash flows (used in) provided by investing activities Financing activities Proceeds from the issuance of the Convertible Debenture (Note 14) Net proceeds from the issuance of Secured Loans (Note 13) Proceeds from the exercise of stock options (Note 18) Payment of transaction costs (Note 14) Net cash flows provided by financing activities Increase in cash Cash, beginning of year Cash, end of year Supplemental disclosure (Note 24)	$ $ (Note 28 – adjusted) (3,849,229) (4,414,690) 604,354 655,166 33,807 36,438 310,685 - (1,348,482) - (22,423) (30,000) - (354,532) (493,854) 157,835 (54,147) (38,988) 1,224,953 797,168
	(3,594,336) (3,191,603)
	(5,735,631) (4,088,426) - 4,776,161
	(5,735,631) 687,735
	10,000,000 - - 5,018,869 259,474 - (410,863) -
	9,848,611 5,018,869
	518,644 2,515,001
	3,630,751 1,115,750
	4,149,395 3,630,751

The accompanying notes are an integral part of these consolidated financial statements.

Falco Resources Ltd.

Consolidated Statements of Changes in Equity For the years ended June 30, 2021 and 2020

(Expressed in Canadian Dollars)

	Number
	of shares	Share		Contributed
	outstanding	capital	Warrants	surplus	Deficit	Total
		$	$	$	$	$
Balance – July 1, 2020
(Note 28– Adjusted)	226,147,296	116,134,936	744,306	14,495,976	(87,608,261)	43,766,957
Net loss and comprehensive loss	-	-	-	-	(3,849,229)	(3,849,229)
Share-based compensation (Note 18)	-	-	-	630,499	-	630,499
Exercise of options (Note 18)	933,901	408,883	-	(149,409)	-	259,474
Balance– June 30, 2021	227,081,197	116,543,819	744,306	14,977,066	(91,457,490)	40,807,701
Balance – July 1, 2019
(Note 28– Adjusted)	207,878,736	111,934,936	744,306	13,698,058	(83,193,571)	43,183,729
Net loss and comprehensive loss	-	-	-	-	(4,414,690)	(4,414,690)
Acquisition of Golden Queen (Note 8)	18,268,560	4,200,000	-	-	-	4,200,000
Share-based compensation (Note 18)	-	-	-	797,918	-	797,918
Balance– June 30, 2020	226,147,296	116,134,936	744,306	14,495,976	(87,608,261)	43,766,957

The accompanying notes are an integral part of these consolidated financial statements

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

1. Nature of activities and going concern

Falco Resources Ltd. (“Falco” or the “Company”) was incorporated under the Business Corporations Act (British Columbia) on March 16, 2010 and was continued under the Canada Business Corporations Act on June 12, 2015. The Company’s common shares trade under the symbol “FPC” on the TSX Venture Exchange. The Company’s registered office is 1100, avenue des Canadiens-de-Montréal, Suite 300, Montréal, Québec, Canada.

The Company is in the business of exploring, evaluating and developing its mineral properties in the Rouyn-Noranda district of the Province of Québec (Canada) for base and precious metals.

On April 29, 2021, the Company filed on SEDAR an updated technical report, “Feasibility Study Update, Horne 5 Gold Project”, dated effective March 18, 2021 (the “Updated Feasibility Study”) pursuant to National Instrument 43-101, Standards of Disclosure for Mineral Projects and relating to its Horne 5 Deposit in Rouyn-Noranda (the “Horne 5 Project” or “Horne 5 Deposit”).

These consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business as they come due. In assessing whether the going concern assumption is appropriate, management of the Company (“Management”) takes into account all available information about the future, which is at least, but not limited to twelve months from the end of the reporting period. As at June 30, 2021, the Company had negative working capital of $12,870,980 (including a cash balance of $4,149,395), an accumulated deficit of $91,457,490 and had incurred a loss of $3,849,229 for the year ended June 30, 2021. As the Company is in the development stage for the Horne 5 Project, it has not recorded any revenues from operations and has no source of operating cash flow, with the exception to the silver stream agreement (the “Silver Stream Agreement”) signed with Osisko Gold Royalties Ltd (“Osisko Gold”) on February 27, 2019 (Note 12). Osisko Gold, through the Silver Stream Agreement and the Convertible Loan (see Note 13) and Osisko Development Corp. (“Osisko Development”) (a subsidiary of Osisko Gold) which owns 18.2% interest in Falco, are considered companies with significant influence over the Company and therefore are related parties pursuant to IAS 24 Related Party Disclosure .

The working capital as at June 30, 2021 will not be sufficient to meet the Company’s obligations, commitments and budgeted expenditures through June 30, 2022. Management is aware, in making its assessment, of material uncertainties related to events and conditions that may cast a significant doubt upon the Company's ability to continue as a going concern as described in the preceding paragraph, and accordingly, the appropriateness of the use of accounting principles applicable to a going concern. These consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities, expenses and balance sheet classifications that would be necessary if the going concern assumption was not appropriate. These adjustments could be material.

The duration and full financial effect of the COVID-19 pandemic is unknown at this time, as are the measures taken by governments, companies and others to attempt to reduce the spread of COVID-19. Any estimate of the length and severity of these developments is therefore subject to significant uncertainty, and accordingly estimates of the extent to which COVID-19 may materially and adversely affect the Company in future periods are also subject to significant uncertainty. The Company is monitoring developments in order to be in a position to take appropriate action.

The Company’s ability to continue future operations and fund its planned development activities at the Horne 5 Deposit is dependent on Management’s ability to secure third parties’ approvals and additional financing in the future. Any funding shortfall may be met in the future in a number of ways, including, but not limited to, achieving the next milestones of the Silver Stream Agreement and the issuance of debt or equity instruments. While Management has been successful in securing financing in the past (see Notes 12, 13, 14 and 30), there can be no assurance that it will be able to do so in the future or that these sources of funding or initiatives will be available to the Company or that they will be available on terms which are acceptable to the Company. If Management is unable to obtain new funding, the Company may be unable to continue its operations, and amounts realized for assets might be less than the amounts reflected in these consolidated financial statements.

2. Basis of presentation

The accompanying consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). The accounting policies, methods of computation and presentation applied in these consolidated financial statements are consistent with those of the previous financial year except as described in Notes 4 and 28.

The Board of Directors (the “Board”) has approved the audited consolidated financial statements on September 27, 2021.

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

3. Summary of significant accounting policies

The significant accounting policies used in the preparation of these consolidated financial statements are as follows:

(a) Basis of measurement

The consolidated financial statements are prepared under the historical cost convention using the accrual basis of accounting, except for certain financial instrument and cash flow information.

(b) Basis of consolidation

On March 27, 2020, the Company acquired all of the issued and outstanding common shares of Golden Queen Mining Consolidated Ltd. (“Golden Queen”) (see Note 8). The financial statements of Golden Queen are included in the consolidated financial statements from the date that control was obtained. The accounting policies of Golden Queen are aligned with the policies adopted by the Company.

Inter-company balances and transactions, and any unrealized income and expenses arising from inter-company transactions, are eliminated in preparing the consolidated financial statements.

(c) Foreign currency translation

(i) Functional and presentation currency

The consolidated financial statements are presented in Canadian dollars, which is Falco’s functional currency.

(ii) Transactions and balances

Foreign currency transactions are translated into the functional currency at the rate of exchange prevailing on the date of each transaction or valuation when items are re-measured. Monetary assets and liabilities denominated in currencies other than the operation’s functional currencies are translated into the functional currency at exchange rates in effect at the balance sheet date. Foreign exchange gains and losses resulting from the settlement of those transactions and from period-end translations are recognized in the consolidated statement of loss.

Non-monetary assets and liabilities are translated at historical rates, unless such assets and liabilities are carried at market value, in which case, they are translated at the exchange rate in effect at the date of the balance sheet.

(d) Financial instruments

Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. A financial liability is derecognized when extinguished, discharged, terminated, cancelled or expired.

Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is an unconditional and legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

All financial instruments are required to be measured at fair value on initial recognition. The fair value is based on quoted market prices, unless the financial instruments are not traded in an active market. In this case, the fair value is determined by using valuation techniques like the Black-Scholes option pricing model or other valuation techniques.

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

3. Summary of significant accounting policies (continued)

(d) Financial instruments (continued)

Measurement after initial recognition depends on the classification of the financial instrument. The Company has classified its financial instruments in the following categories depending on the purpose for which the instruments were acquired and their characteristics:

(i) Financial assets

Debt instruments

For the subsequent measurement, there are two measurement categories into which the Company classifies its debt instruments:

i. Amortized cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognized directly in profit or loss and presented in other gains/(losses), together with foreign exchange gains and losses. Impairment losses are presented as a separate line item in the consolidated statement of loss and comprehensive loss.
ii. Fair value through profit or loss (“FVPL”): Assets that do not meet the criteria for amortized cost (or fair value through other comprehensive income (“FVOCI”), which is not currently used by the Company) are measured at FVPL. A gain or loss on a debt investment that is subsequently measured at FVPL is recognized in the consolidated statement of loss and comprehensive loss and presented net within other gains/(losses) in the period in which it arises.

(ii) Financial liabilities

Financial liabilities are initially recognized at the amount required to be paid, less, when material, a discount to reduce to fair value. These liabilities are measured at amortized cost using the effective interest method.

(iii) Derivative financial instruments

Derivative financial instruments are financial assets or financial liabilities classified as FVPL unless designated in a qualifying hedging relationship. Derivative financial instruments are carried in the consolidated statement of financial position at fair value with changes in fair value recognized in the consolidated statement of loss and comprehensive loss.

The Company’s financial instruments consist of the following:

Category Financial assets at amortized cost Financial liabilities at amortized cost Financial liabilities through profit or loss	Financial instrument Cash Restricted cash Accounts receivable Accounts payable and accrued liabilities Convertible Debenture Convertible Loan Derivative warrant liabilities

(e) Impairment of financial assets carried at amortized cost

‐ At each reporting date, the Company assesses, on a forward looking basis, the expected credit losses associated with its debt instruments carried at amortized cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk.

For trade receivables, the Company applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognized from initial recognition of the receivables. The Company assumes that there is no significant increase in credit risk for instruments that have a low credit risk.

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

3. Summary of significant accounting policies (continued)

(f) Cash

Cash includes bank demand deposits that can be redeemed at any time without penalties.

(g) Refundable tax credits for mining exploration and evaluation expenditures

The Company is entitled to a refundable tax credit on qualified mining exploration and evaluation expenditures incurred in the province of Québec. The credit is accounted for in the consolidated statement of loss and comprehensive loss.

(h) Property, plant and equipment

Property, plant and equipment is stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition, the development and construction of the assets and that have been incurred up until the time that the assets are in the condition necessary to be used or operated in the manner intended by Management. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost can be measured reliably. The carrying amount of a replaced asset is derecognized when replaced. Repairs and maintenance costs are charged to the consolidated statement of loss and comprehensive loss during the period in which they are incurred.

Depreciation is calculated to amortize the cost of the property, plant and equipment less their residual values over their estimated useful lives using the declining balance method at the following rates per annum:

Office and other equipment 20-55%

The Company allocates the amount initially recognized in respect of an item of property, plant and equipment to its significant parts (major components) and depreciates separately each such part. Residual values, method of depreciation and useful lives of the assets are reviewed annually and adjusted if appropriate.

Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds with the carrying amount of the asset and are included in the consolidated statement of loss and comprehensive loss.

Borrowing costs that are directly attributable to the acquisition or construction of a qualifying asset are capitalized as part of the cost of the asset. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use. Capitalization of borrowing costs ceases when the asset is completed and ready for its intended use. All other borrowing costs are recognized as financial expenses in the consolidated statement of loss and comprehensive loss as incurred.

(i) Exploration and evaluation assets and expenditures

Exploration and evaluation assets are comprised of the acquisition and other costs required to initially secure the legal rights to explore an area. Exploration and evaluation expenditures are costs incurred during the initial search for mineral resources before the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.

All expenditures relating to exploration and evaluation are expensed as incurred until the property reaches the development stage. Costs related to exploration and evaluation include claim renewal fees, topographical, geological, geochemical and geophysical studies, exploration drilling, trenching, sampling and research costs specific to a mining project and other costs related to the evaluation of the technical feasibility and commercial viability of extracting a mineral resource. The various costs are expensed on a property-by-property basis pending determination of the technical feasibility and commercial viability of extracting a mineral resource.

Upon determination of technical feasibility and commercial viability of extracting a mineral resource, the related exploration and evaluation assets are tested for impairment and transferred to Construction in progress in property, plant and equipment. These amounts, plus all subsequent mine development costs are capitalized. Costs are not amortized until the project is ready for use as intended by Management.

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

3. Summary of significant accounting policies (continued)

(j) Impairment of non-financial assets

The carrying value of non-financial assets is reviewed regularly and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flows (“cash-generating units” or “CGUs”). The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use (being the present value of the expected future cash flows of the relevant asset or CGU). An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount.

The Company evaluates impairment losses at each reporting date for potential reversals when events or circumstances warrant such consideration.

(k) Current and deferred income tax

The tax expense for the period comprises current and deferred tax. Tax is recognized in the consolidated statement of loss and comprehensive loss, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively.

Mining taxes represent Canadian provincial tax levied on mining operations and are classified as income tax since such taxes are based on a percentage of mining profits.

Current income taxes

The current income tax charge is the expected tax payable on the taxable income for the year, using the tax laws enacted or substantively enacted at the balance sheet date in the jurisdictions where the Company operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Tax on income in interim periods is accrued using the tax rate that would be applicable to expected total annual earnings.

Deferred income taxes

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax assets and liabilities are measured using enacted or substantively enacted tax rates (and laws) that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available

against which the temporary differences can be utilized.

Deferred income tax assets and liabilities are presented as non-current and are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

(l) Share capital and warrants

Common shares are classified as equity. Incremental costs directly attributable to the issuance of shares or warrants are recognized as a deduction from the proceeds in equity in the period where the transaction occurs.

When warrants are issued for which a fixed number of shares can be purchased, they are classified as equity. Proceeds from unit placements are allocated between shares and warrants issued. Warrants that are part of units are assigned a value based on the residual value of the unit after deducting the fair value of the common shares.

When warrants are issued for which a variable number of shares can be purchased (Note 15), these instruments are classified as derivative liabilities and measured at fair value with changes in fair value recognized in the consolidated statement of loss and comprehensive loss at each period-end.

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

3. Summary of significant accounting policies (continued)

(m) Leases

Leases are recognized as a right-of-use asset (presented under non-current other assets on the consolidated balance sheet) and a corresponding liability at the date at which the leased asset is available for use by the Company. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

(n) Share-based payments

The Company offers a share option plan (the “Option Plan”) for its directors, officers, employees and consultants. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. Fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model. Compensation expense is recognized over the tranche’s vesting period by increasing contributed surplus based on the number of awards expected to vest. The number of awards expected to vest is reviewed at least annually, with any impact being recognized immediately.

In situations where equity instruments are issued to non-employees and some or all of the goods or services received by the entity as consideration cannot be specifically identified, they are measured at fair value of the share-based payment. Otherwise, share-based payments are measured at the fair value of goods or services received.

Any consideration paid on exercise of share options is credited to share capital. The contributed surplus resulting from sharebased compensation is transferred to share capital when the options are exercised. For cash-settled share-based compensation plans, fair values are determined at each reporting date and periodic changes are recognized as compensation costs, with a corresponding change to liabilities.

(o) Flow-through shares

The Company finances some exploration and evaluation expenditures through the issuance of flow-through shares. The resource expenditure deductions for income tax purposes are renounced to investors in accordance with the appropriate income tax legislation. The difference (“premium”) between the amount recognized in common shares and the amount the investors pay for the shares is recognized as a deferred gain, under deferred premium on flow-through shares, which is reversed to the consolidated statement of loss and comprehensive loss, under other income – premium on flow-through shares, when eligible expenditures have been made. The Company recognizes a deferred tax liability for flow-through shares and a deferred tax expense, at the moment the eligible expenditures are incurred.

Pursuant to the related subscription agreements, the Company has committed to use the proceeds received from the issuance of flow-through shares for Canadian resource property exploration expenditures.

(p) Revenue from Contracts with Customers

Deferred revenue arises on upfront payments received by the Company in consideration for future commitments as specified in its streaming agreement (the “Contract Liability”).

The accounting for a streaming arrangement is dependent on the facts and terms of each agreement. The Company identified significant financing components related to its streaming agreement resulting from the difference in the timing of the upfront consideration received and the promised goods delivered. Interest expense on the Contract Liability (Note 12) is recognized in finance costs. The interest rate is determined based on the rate implicit in the streaming agreement at the date of inception. The initial consideration received from the streaming arrangements is considered variable, subject to changes in the total silver ounces to be delivered in the future. Changes to variable consideration will be reflected in the consolidated statement of loss and comprehensive loss.

At each financial reporting date, the Company will accrue interest on the financing component of the Contract Liability. The interest accrued will increase the balance of the Contract Liability with an offset charged to borrowing costs as part of the property, plant and equipment (Note 9). This interest accrual is not a contractual obligation but is intended to allocate the cost of the Silver Stream Agreement over the period it is outstanding. This accrual is a non-cash item and as such is not reported on the consolidated statement of cash flows. Upon commencement of production, the Contract Liability including the accrued interest will be brought into revenue over the life of mine.

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

3. Summary of significant accounting policies (continued)

(q) Revenue from Contracts with Customers (continued)

Incremental costs directly attributable to obtaining a contract with a customer are capitalized as other non-current assets. Upon commencement of production, the other non-current assets will be expensed over the life of mine. Such costs are subject to impairment when the remaining amount of consideration to be received exceeds the costs that relate directly to providing the goods that have not been recognized as expenses.

(r) Earnings (loss) per share

The calculation of earnings (loss) per share (“EPS”) is based on the weighted average number of common shares outstanding for each period. The basic EPS is calculated by dividing the profit or loss attributable to the equity owners of Falco by the weighted average number of common shares outstanding during the period.

The computation of diluted EPS assumes the conversion, exercise or contingent issuance of securities only when such conversion, exercise or issuance would have a dilutive effect on the income per share. It also includes shares issued and held in escrow. The treasury stock method is used to determine the dilutive effect of the warrants and share options. When the Company reports a loss, the diluted net loss per common share is equal to the basic net loss per common share due to the anti-dilutive effect of the outstanding warrants and share options.

(s) Segment reporting

The operating segments are reported in a manner consistent with the internal reporting provided to the Chief Executive Officer (“CEO”) who fulfills the role of the chief operating decision-maker. The CEO is responsible for allocating resources and assessing performance of the Company’s operating segments. The Company manages its business under a single operating segment, consisting of acquiring, exploring and developing mineral properties in Canada.

4. Accounting standard adopted and accounting standards issued but not yet effective

The IASB has made amendments to IAS 1, Presentation of Financial Statements (“IAS 1”) which use a consistent definition of materiality throughout IFRS and the Conceptual Framework for Financial Reporting, clarify when information is material and incorporate some of the guidance in IAS 1 about immaterial information. In particular, the amendments clarify that information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity. Materiality depends on the nature or magnitude of information, or both. An entity assesses whether information, either individually or in combination with other information, is material in the context of its financial statements taken as a whole. The Company adopted IAS 1 on July 1, 2020, which did not have a significant impact on the consolidated financial statements disclosures.

The Company has not yet adopted certain standards, interpretations to existing standards and amendments which have been issued but have an effective date later than July 1, 2021. Many of these updates are not currently relevant to the Company and are therefore not discussed herein.

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

5. Critical accounting estimates and judgements

The preparation of financial statements in conformity with IFRS requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company also makes estimates and assumptions concerning the future. The determination of estimates requires the exercise of judgement based on various assumptions and other factors such as historical experience and current and expected economic conditions. Actual results could differ from those estimates.

Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The more significant areas requiring the use of Management estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, relate to the going concern assumption, the impairment of nonfinancial assets, the income taxes and the accounting for streaming arrangements.

(i) Going concern

The assessment of the Company’s ability to execute its strategy by funding future working capital requirements involves judgement. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances (Note 1).

(ii) Impairment of non-financial assets

Asset groups are reviewed for an indication of impairment at each balance sheet date or when a triggering event is identified.

For property, plant and equipment, factors which could trigger an impairment review include, but are not limited to, evidence that the asset’s value has declined during the period, significant changes with adverse effect on the Company have occurred during the period, evidence is available of obsolescence or physical damage of an asset and the carrying amount of the Company’s net assets exceed its market capitalization. In assessing impairment in regards to property, plant and equipment, Management estimates the recoverable amount of each CGU based on discounted future cash flows.

Assessment of impairment of non-financial assets requires the use of judgements when assessing whether there are any indicators that could give rise to the requirement to conduct a formal impairment test on the Company’s non-financial assets. Changes in the judgements used in determining the fair value of the non-financial assets could impact the impairment analysis.

For the years ended June 30, 2021 and 2020, Management has determined that there are no indications that the nonfinancial assets may not be recoverable.

(iii) Income taxes

The Company is subject to income taxes in some jurisdictions in Canada. Significant judgement is required in determining the total provision for income taxes. The Company is also subject to regular tax audits. Where the final tax outcome of tax audits is different from the amounts that were initially recorded, such differences could impact the current and deferred income tax assets and liabilities in the period in which such determination is made.

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

5. Critical accounting estimates and judgements ( continued )

(iv) Accounting for streaming arrangements

The Company entered into the Silver Stream Agreement and received $25,000,000 on February 27, 2019, which was used for the development of the Horne 5 Project (see also Note 12). The treatment of the deposit as a contract liability is a key judgment and is based on the expected delivery of the Company’s future production.

Management exercised judgment in applying IFRS 15, Revenue from Contracts with Customers to this contract. To determine the transaction price for the Silver Stream Agreement, the Company made estimates with respect to the timing and value of future deliveries in order to determine the 13% interest rate implicit in the agreement.

On January 31, 2020 and November 27, 2020, the Company and Osisko agreed to amend the Silver Stream Agreement, whereby Osisko agreed to postpone by one year each of the deadlines granted to Falco to achieve milestones set as condition precedent to Osisko funding the remaining staged payments and certain other deadlines. Further to these contract modifications, the Company revised the implied interest rate of the Silver Stream Agreement from 13% to 12.8% and then from 12.8% to 12.4% to align the modified timing of cash flows to the revised production schedule.

These estimates are subject to variability and may have an impact on the timing and amount of revenue recognized.

6. Accounts receivable

	June 30, 2021 June 30, 2020
Sales taxes Refundable tax credits Other	$ $ 802,943 198,674 148,731 166,322 275,866 368,690
	1,227,540 733,686

7. Restricted cash

On June 27, 2017, the Company closed a $5,000,000 revolving credit facility (the "Credit Facility") with National Bank of Canada (the "Lender"), which is secured by a hypothec in favour of the Lender over a collateral account maintained by the Company. The Credit Facility can be used to secure the Company's obligations in favour of Hydro-Québec (“HQ”) in connection with certain electrical and engineering work to be performed with respect to the development of the Horne 5 Project, and, subject to third party consent, for other purposes consented to by the Lender. The Credit Facility provides the Company with access to standby letters of credit and letters of guarantee issued by the Lender to HQ on the Company's behalf. The Credit Facility is uncommitted, meaning that the Lender can at its sole discretion (i) terminate the Company's right to make requests for the issuance of letters of credit on same day notice, and (ii) decline a request from the Company for the issuance of a letter of credit. On July 4, 2017, the Company provided $905,000 as collateral against a standby letter of credit in favour of HQ, reducing the amount available under the Credit Facility by the same amount.

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

8 . Acquisition of Golden Queen

On March 27, 2020, the Company acquired all of the issued and outstanding common shares of Golden Queen, which was completed by way of a statutory plan of arrangement under the provisions of the Business Corporations Act (British Columbia) (the “Arrangement“). Under the terms of the Arrangement, each former shareholder of Golden Queen received 1.35 of a common share of Falco in exchange for each common share of Golden Queen held immediately prior to the Arrangement. The Company issued 18,268,560 common shares and incurred $197,265 of transaction costs related to this acquisition.

The transaction has been accounted for as an asset acquisition as Golden Queen does not meet the definition of a business under IFRS 3 Business Combinations . As such, IFRS 2 Share-based Payment has been applied. The assets acquired and liabilities assumed were recognized at their estimated fair value at the acquisition closing date, i.e. March 27, 2020. Acquisitionrelated transaction costs ($197,265) were expensed in the consolidated statement of loss and comprehensive loss. The following table shows the purchase price allocation between the assets acquired and liabilities assumed, based on the fair value of the total consideration paid at the transaction closing date.

	$
Fair value of consideration paid:
Common shares	4,200,000
	4,200,000
Allocation of consideration paid to net assets acquired:
Cash	4,776,161
Other current assets	40,016
Currentliabilities	(616,177)
	4,200,000

9. Property, plant and equipment

Mining equipment Land and buildings	Mining equipment Land and buildings	Mining equipment Land and buildings	Mining equipment Land and buildings	Mining equipment Land and buildings	Mining equipment Land and buildings	Construction inprogress Office and other equipment Total	Construction inprogress Office and other equipment Total	Construction inprogress Office and other equipment Total	Construction inprogress Office and other equipment Total	Construction inprogress Office and other equipment Total
$ $ 17,870,703 18,566,701						$ $ $ 42,151,378 457,744 79,046,526
	44,038 -			467,286			4,080,676		- -	4,592,000
		-			-		4,423,494			4,423,494
17,914,741 19,033,987						50,655,548 457,744 88,062,020

	400,000		2,098,629				7,447,573	15,538		9,961,740
		-			-		6,705,242		-	6,705,242
18,314,741 21,132,616						64,808,363 473,282 104,729,002
- - - -						- 326,975 326,975 - 36,438 36,438
- -						- 363,413 363,413
- -						- 33,807 33,807
- -						- 397,220 397,220
17,914,741 19,033,987 18,314,741 21,132,616						50,655,548 94,331 87,698,607 64,808,363 76,062 104,331,782

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

10 . Exploration and evaluation expenditures

The Company has extensive land holdings in the Abitibi Greenstone Belt. Falco owns mining claims and contractual rights in or in relation to mining concessions covering approximately 70,000 hectares of land in the Rouyn-Noranda mining camp located in Québec, Canada. During the year ended June 30, 2021 and 2020, the Company incurred exploration and evaluation expenses totaling $506,593 and $516,306 (Note 28 – adjusted), respectively.

11. Accounts payable and accrued liabilities

	June 30, 2021 June 30, 2020
Trade payables and accrued liabilities Short-term payable on the purchase of property Amount payable to First Quantum (Note 27) Interest payable on the Secured Loan (Note 13)	$ $ 6,469,298 2,044,381 946,900 946,900 1,000,000 - - 1,233,335
	8,416,198 4,224,616

In September 2014, the Company entered into a five-year option agreement with the City of Rouyn-Noranda (the “City”) to acquire surface rights above or near the Horne 5 Deposit. This option agreement was extended for an additional five years in January 2020. On June 29, 2017, the Company exercised part of this option agreement, purchasing a property for $2,946,900. On December 14, 2020, the City and Falco agreed to extend the payment date of the remaining amount payable of $946,900 to January 1, 2022.

12. Contract Liability

On February 27, 2019, the Company and Osisko Gold (the “Parties”) completed the Silver Stream Agreement, whereby Osisko Gold agreed to provide the Company with staged payments totaling up to $180 million, toward the funding of the development of the Horne 5 Project, payable as follows:

First deposit of $25,000,000 on closing of the Silver Stream Agreement, net of any amounts owing by the Company to Osisko Gold;
Second deposit of $20,000,000 upon the Company receiving all necessary material third-parties’ approvals, licenses, rights of way, and surface rights (see also Note 30);
Third deposit of $35,000,000 following receipt of all material permits required for the construction of a mine at the Horne 5 Project, a positive construction decision for the Horne 5 Project, and raising a minimum of $100,000,000 in equity, joint venture or any other non-debt financing for the construction of the mine;
Fourth deposit of $60,000,000 upon the total projected capital expenditure for the Horne 5 Project having been demonstrated to be financed; and
Optional fifth deposit of $40,000,000 at the sole election of Osisko Gold to increase the stream percentage, payable concurrently with the fourth deposit.

Under the terms of the Silver Stream Agreement, Osisko Gold will purchase 90% of the payable silver from the Horne 5 Project, increasing to 100% of the payable silver from the Horne 5 Project in the event the optional fifth deposit is paid. In exchange for the silver delivered under the Silver Stream Agreement, Osisko Gold will pay the Company ongoing payments equal to 20% of the spot price of silver on the day of delivery, subject to a maximum payment of USD$6.00 per silver ounce. The silver produced from the Horne 5 Project and properties within a 5 km area of interest will be subject to the Silver Stream Agreement.

The Silver Stream Agreement was subject to a right of first refusal in favor of Glencore Canada Corporation (“Glencore Canada”), which right was not exercised.

Falco’s obligations towards Osisko Gold with respect to the Silver Stream Agreement is secured by a deed of hypothec for a maximum of $600 million; such first ranking was subordinated in favour of the security granted to Glencore Canada as part of the Convertible Debenture transaction (see Note 14).

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

12. Contract Liability ( continued )

On January 31, 2020, and on November 27, 2020, the Parties amended the Silver Stream Agreement, whereby Osisko Gold agreed to postpone by one year each of the deadlines granted to Falco to achieve milestones set as condition precedent to Osisko Gold funding the remaining staged payments and certain other deadlines.

As of June 30, 2021 and June 30, 2020, the Company incurred $1,728,528 of transaction costs relating to the Contract Liability, which is accounted for as other non-current assets on the consolidated balance sheet.

The breakdown of the Contract Liability is as follows:

	$
First deposit of the Contract Liability	25,000,000
Interest on the Contract Liability’s financing component	1,115,576
Balance at June 30, 2019	26,115,576
Interest onthe ContractLiability’sfinancing component	3,608,567
Balance at June 30, 2020	29,724,143
Interest on the Contract Liability’s financing component	3,950,835
Balance at June 30, 2021	33,674,978

Under IFRS 15, the Silver Stream Agreement is considered to have a significant financing component. As such, interest is accrued and added to the Contract Liability. The Contract Liability will begin to be gradually recognized as part of revenues over the life of the mine once deliveries under the Silver Stream Agreement begin. The Company therefore records notional noncash interest, which is subject to capitalization to property, plant and equipment as borrowing costs, at each financial reporting date based on the implied interest rate that was determined at the time that the Silver Stream Agreement was consummated and/or modified. This interest accrual is not a contractual obligation but is intended to allocate the cost of the Silver Stream Agreement over the period it is outstanding. This accrual is a non-cash item and as such is not reported on the consolidated statement of cash flows.

13. Loan with Osisko Gold

On February 22, 2019, Falco closed a secured senior loan agreement with Osisko Gold (the “Secured Loan”) for $10,000,000 (the “Principal Amount”). On November 22, 2019, the Secured Loan was amended, increasing the Principal Amount by $5,900,000 (the “Increased Principal Amount”) to $15,900,000 (the “Amended Principal Amount”) and the maturity date was extended from December 31, 2019 to December 31, 2020. Osisko Gold was entitled to set-off from the Increased Principal Amount a sum of $881,131, representing the then current accounts payable owing to Osisko Gold by the Company, so that, on a net basis, Osisko Gold made an amount of $5,018,869 available to Falco for withdrawal. Under the terms of the Secured Loan, interest is payable on the Amended Principal Amount at a rate per annum that is equal to 7%, compounded quarterly and accrued interest is payable upon repayment of the Amended Principal Amount.

On November 17, 2020, the Company entered into a binding agreement with Osisko Gold in order to extend the maturity date of the Secured Loan from December 31, 2020 to December 31, 2022 (the “Maturity Extension”). Together with capitalized interest, the principal amount outstanding under the Secured Loan as of November 17, 2020 was $17,596,136. In consideration for the Maturity Extension, the Secured Loan was also amended to become convertible (the “Convertible Loan”) after the first anniversary of the closing date into common shares of the Company (“Common Shares”) at a conversion price of $0.55 per Common Share. The Convertible Loan bears interest at a rate of 7% per annum, compounded quarterly. Falco’s obligations towards Osisko Gold with respect to the Convertible Loan is secured by a deed of hypothec for a maximum of $25,000,000 over all of the assets of Falco other than the Horne 5 Project and ranks after the security granted to Glencore Canada as part of the Convertible Debenture transaction (see Note 14).

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

13. Loan with Osisko Gold ( continued )

In consideration for the Maturity Extension, the Company issued to Osisko Gold 10,664,324 Common Share purchase warrants of the Company (“Warrants”), each Warrant is exercisable for one Common Share at an exercise price of $0.69 up to 24 months from the date of issuance of the Warrants. The terms of the Warrants provide for a cashless exercise feature, under which the number of Common Shares to be issued will be based on the number of Common Shares for which Warrants are exercised multiplied by the difference between the market price of a Common Share and the exercise price divided by the market price at the time of the exercise. Osisko Gold may utilize the cashless exercise feature at its sole discretion. The Warrants (and the underlying Common Shares) are subject to a hold period of four months from the date of issuance of the Warrants, in accordance with applicable Canadian securities laws.

On November 17, 2020, the principal amount outstanding under the Secured Loan totaling $17,596,136 was considered extinguished pursuant to IFRS 9. On November 17, 2020, the Warrants, recognized as derivative warrant liabilities, were measured at their estimated fair value of $1,027,814 (see Note 15) with the residual amount attributed to the debt host of the Convertible Loan ($16,568,322) and a nil residual amount to the conversion option equity component. For the year ended June 30, 2021, transaction costs incurred on the Convertible Loan totaled $46,963 and were expensed as professional fees in the consolidated statement of loss and comprehensive loss.

Transactions affecting the Loan with Osisko Gold during the year ended June 30, 2021 were as follows:

	$
Principal owing at June 30, 2020	15,900,000
Interest owing at June 30,2020 (Note11)	1,233,335
Balance, at June 30, 2020	17,133,335
Derivative warrant liabilities	(1,027,814)
Interest	1,511,664
Balance June 30, 2021	17,617,185

The Convertible Loan’s principal amount is directly attributable to the acquisition or construction of a qualifying asset, as such these borrowing costs are capitalized to property, plant and equipment. During the year ended June 30, 2021, $1,511,664 in interest expense has been capitalized to property, plant and equipment in the consolidated balance sheet.

14. Convertible Debenture

On October 27, 2020, the Company entered into an agreement with Glencore Canada for a $10,000,000 senior secured convertible debenture (the “Convertible Debenture”). The Convertible Debenture has an initial term to maturity of 12 months and bears interest at a rate of 7% per annum, compounded quarterly. Accrued interest will be capitalized quarterly by adding the interest to the principal of the Convertible Debenture, unless the Company elects at its sole discretion to settle in cash any accrued interest. In certain circumstances, Falco has the right to extend this maturity date by an additional six months.

The Convertible Debenture can be converted into Common Shares within 10 days of the Maturity Date at Glencore Canada’s sole option at a conversion price of $0.41 per Common Share.

Falco issued to Glencore Canada 12,195,122 Warrants for which each Warrant is exercisable for one Common Share at an exercise price of $0.51 up to 12 months from the date of issuance of the Warrants. The terms of the Warrants provide for a cashless exercise feature, under which the number of Common Shares to be issued will be based on the number of Common Shares for which warrants are exercised multiplied by the difference between the market price of a Common Share and the exercise price divided by the market price at the time of the exercise. Glencore Canada may utilize the cashless exercise feature in its sole discretion. The Warrants (and the underlying Common Shares) are subject to a hold period of four months from the date of issuance of the Warrants, in accordance with applicable Canadian securities laws.

The Convertible Debenture is secured by first ranking security on all assets owned by Falco. Glencore Canada will release the security upon the settlement of the Convertible Debenture and the repayment of interest. So long as Glencore Canada owns (or is deemed to own) a minimum equity interest of 5% in the Company, it will have the right to maintain its pro-rata interest in Falco by participating in equity financings and other dilutive instruments.

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

14. Convertible Debenture ( continued )

On October 27, 2020, the derivative warrant liabilities were measured at their estimated fair value of $1,232,501 (see Note 15), with the residual amount attributed to the debt host of the Convertible Debenture ($8,767,499) and a nil residual amount to the conversion option equity component. For the year ended June 30, 2021, transaction costs incurred on the Convertible Debenture totaled $468,620, for which $57,757 was expensed as professional fees in the consolidated statement of loss and comprehensive loss and $410,863 was capitalized to the Convertible Debenture.

Transactions affecting the Convertible Debenture during the year ended June 30, 2021 were as follows:

	$
Balance at June 30, 2020	-
Debt component	8,767,499
Transaction costs	(410,863)
Interest	1,553,428
Balance June 30, 2021	9,910,064

A portion of the Convertible Debenture’s principal amount is directly attributable to the acquisition or construction of a qualifying asset, as such a portion of these borrowing costs are capitalized to property, plant and equipment. During the year ended June 30, 2021, $1,242,743 in interest costs have been capitalized to property, plant and equipment in the consolidated balance sheet. During the year ended June 30, 2021, $310,685 in interest costs have been expensed in the consolidated statement of loss and comprehensive loss.

15. Derivative warrant liabilities

In accordance with IFRS, a contract to issue a variable number of shares fails to meet the definition of equity and must instead be classified as derivative liabilities and measured at fair value with changes in fair value recognized in the consolidated statement of loss and comprehensive loss at each period-end. The derivative liabilities will ultimately be converted into Common Shares when the Warrants are exercised, or will be extinguished on the expiry of the outstanding Warrants, and will not result in the outlay of any cash by the Company. Immediately prior to exercise, the Warrants are remeasured at their estimated fair value. Upon exercise, the intrinsic value is transferred to share capital (the intrinsic value is the share price at the date the Warrant is exercised less the exercise price of the Warrant). Any remaining fair value is recorded through the consolidated statement of loss and comprehensive loss as part of the change in estimated fair value of derivative warrant liabilities.

The following table details the changes in the Company’s derivative warrant liabilities:

	October	27, 2020	November	17, 2020
	Warrants		Warrants		Total
	Number	$	Number	$	Number	$
Balance at June 30, 2020	-	-	-	-	-	-
Issuance of derivative warrant liabilities
to Glencore Canada (Note 14)	12,195,122	1,232,501	-	-	12,195,122	1,232,501
Issuance of derivative warrant liabilities
to Osisko Gold (Note 13)	-	-	10,664,324	1,027,814	10,664,324	1,027,814
Revaluation of derivative warrant liabilities	-	(1,054,557)	-	(293,925)	-	(1,348,482)
Classified as currentliability	12,195,122	177,944	-	-	12,195,122	177,944
Classified as long-term liability	-	-	10,664,324	733,889	10,664,324	733,889
Balance at June 30, 2021	12,195,122	177,944	10,664,324	733,889	22,859,446	911,833

During the year ended June 30, 2021, $1,384,482 of net unrealized gain on the derivative warrant liabilities has been recorded in the statement of loss and comprehensive loss.

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

15. Derivative warrant liabilities ( continued )

The following weighted average assumptions were used to estimate the fair value of the derivative warrant liabilities at each reporting date and at their issuance date.

	June 30,	Date of
	2021	issuance
Risk-free interest rate	0.44%	0.24%
Expected life of Warrants	0.8 years	1.5 years
Annualized volatility	58%	82%
Dividend rate	-	-
Weighted average fair value per Warrant	$0.04	$0.099

These derivative warrant liabilities are Level 3 recurring fair value measurements. The key Level 3 input used by Management to estimate the fair value is the expected volatility.

16. Share capital

Authorized: Unlimited number of Common Shares without par value Issued and fully paid: 227,081,197 Common Shares

17. Warrants

The following table details the changes in the Warrants for the years ended June 30, 2021 and 2020:

	Number of Warrants Weighted Average Exercise Price
Balance – June 30, 2019 Balance – June 30, 2020 Issued (Notes 15) Balance – June 30, 2021 Warrants subject to cashless exercise	$ 6,402,222 0.77
	6,402,222 0.77 22,859,446 0.59
	29,261,668 0.63
	22,859,446 0.59

The Warrants outstanding at June 30, 2021, are as follows:

Exercise price ($)	Number of warrants Expiry date Weighted average remaining contractual life (years)
0.51 0.75 1.15 0.69	12,195,122 October 27, 2021 0.33 6,052,222 November 28, 2021 0.41 350,000 October 4, 2022 1.26 10,664,324 November 17, 2022 1.41 29,261,668

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

18. Share-based compensation

Restricted, deferred and performance share units

The Company has a long-term incentive plan (the “LTI Plan”) for the benefit of the Company’s employees and consultants. The LTI Plan provides for the issuance of Common Shares from treasury, in the form of Restricted Share Units (“RSUs”), Deferred Shares Units (“DSUs”) and Performance Share Units (“PSUs”). The RSUs, DSUs or PSUs can be settled in cash or whole Common Shares, at the discretion of the Company. The maximum number of shares reserved for issuance should not exceed 2,500,000 Common Shares. There were no outstanding RSUs, DSUs or PSUs as at June 30, 2021 and 2020.

Share options

The Option Plan provides that the Board may from time to time, at its discretion, grant to the directors, officers, employees and consultants, non-transferable options to purchase shares, provided that the number of shares reserved for issuance will not exceed 10% of the shares issued and outstanding, including any shares reserved under all other established share-based compensation arrangements. The maximum term of share options is 10 years and terms of vesting are at the discretion of the Board. The following table summarizes information about the movement of the share options during the last two years:

	Number of Options Weighted Average Exercise Price
Balance – June 30, 2019 Granted Forfeited Expired Balance – June 30, 2020 Granted Exercised Expired Forfeited Balance – June 30, 2021 Options exercisable – June 30, 2021	$ 13,881,357 0.52 100,000 0.30 (430,322) 0.96 (2,256,683) 0.60
	11,294,352 0.49 7,148,000 0.45 (933,901) 0.28 (432,784) 0.52 (1,941,767) 0.40
	15,133,900 0.49
	7,069,564 0.59

During the year ended June 30, 2021, share options were granted to directors, officers and key employees. The options have a five-year term and vest over a three-year period. During the year ended June 30, 2020, share options were granted to a consultant of the Company. The options have a five-year term and vest over a twelve-month period. The exercise price of the share options granted were based on the closing price of the share on the day prior to the grant date. The share options granted were accounted for at their fair value determined by the Black-Scholes option pricing model on the following weighted average assumptions:

	For the	year-ended June 30
	2021	2020
Risk-free interest rate	0.46%	0.28%
Expected life of options	4.8 years	2.0 years
Annualized volatility	70%	77%
Dividend rate	-	-
Weighted average fair value per option	$0.21	$0.11

The annualized volatility was based on historical data for the Company. The fair value of the share options is amortized over the vesting period, taking into account expected forfeitures. Share options issued are exercisable at the closing market price of the Common Shares on the day prior to their grant.

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

18. Share-based compensation ( continued )

Share options outstanding at June 30, 2021 are as follows:

Exercise	Number of options	Number of options	Weighted average remaining
price ($)	outstanding	exercisable	life (Years)
0.30	5,809,000	3,872,664	2.99
0.30	100,000	100,000	3.95
0.42	630,000	-	4.67
0.43	442,000	-	4.67
0.45	5,056,000	-	4.39
0.89	143,600	143,600	0.73
0.90	266,400	266,400	1.65
0.96	1,740,100	1,740,100	1.38
0.98	946,800	946,800	0.60
	15,133,900	7,069,564

For the year ended June 30, 2021, the share-based compensation costs amounted to $630,499 ($797,918 for the year ended June 30, 2020) of which $604,354 was charged to the consolidated statement of loss and comprehensive loss ($655,166 for the year ended June 30, 2020 (Note 28 – Adjusted)) and $26,145 was capitalized to construction in progress ($142,752 for the yearended June 30, 2020). The offsetting credit is recorded as contributed surplus.

19. Income taxes

A reconciliation of income taxes at statutory rates (26.5%) with the reported taxes for the year ended June 30, 2021 (26.6% for the year ended June 30, 2020), is as follows:

	2021 2020
Loss before income taxes Expected income tax recovery Non-deductible expenses, net Variation on derivative warrant liabilities Provincial mining duties Change in unrecognized deductible temporary differences Other, net Total income tax recovery	$ $ (Note 28 – adjusted) (3,871,652) (4,444,690) (1,026,000) (1,210,000) 208,000 222,000 (357,000) - (22,423) (30,000) 1,169,000 985,000 6,000 3,000
	(22,423) (30,000)

The significant components of the Company’s deferred tax assets and liabilities as at June 30, 2021 and 2020 are as follows:

	2021 2020
Deferred tax assets (liabilities) Provincial mining duties Exploration and evaluation assets Property, plant and equipment Share and debt issue costs Non-capital losses Deferred tax liability	$ $ (Note 28 – adjusted) (1,260,577) (1,283,000) 12,555,000 11,964,000 (12,268,000) (11,849,000) (399,000) (115,000) 112,000 -
	(1,260,577) (1,283,000)

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

19. Income taxes ( continued )

As a result of the Horne 5 Project’s positive preliminary economic assessment filed in June 2016 and the completion of its feasibility study, the Company’s intention is to proceed with the development of the Horne 5 Project. The Company intends to realize the carrying value of its assets and settle the carrying value of its liabilities through the use of its development properties and as such, has recorded a deferred tax liability with respect to provincial mining duties.

The significant components of deductible temporary differences, carry-forward of unused tax losses and carry-forward of unused tax credits that have not been included on the balance sheets as at June 30, 2021 are as follows:

	$	Expiry date range
Investment tax credit	71,000	2034
Non-capital losses	63,112,000	2038 to 2041
Income tax benefit from provincial	1,261,000	No expiry
mining duties

20. Net loss per share

As a result of the net loss for the years ended June 30, 2021 and 2020, all potentially dilutive Common Shares (Notes 17 and 18) are deemed to be antidilutive and thus diluted net loss per Common Share is equal to the basic net loss per Common Share for these periods.

21. Capital management

The capital structure of the Company as at June 30, 2021, consists of equity attributable to common shareholders comprising issued capital and equity reserves.

The Company manages and adjusts its capital structure based on available funds in order to support the acquisition, exploration and evaluation of mineral properties. The Board does not establish quantitative return on capital criteria for management, but rather relies on the expertise of Management to sustain future development of the business. The Company is not subject to any externally imposed capital requirements.

The properties in which the Company currently has interests are in the development or in the exploration and evaluation stage; as such, the Company is dependent on external financing to fund its activities. In order to carry out planned development, exploration and evaluation activities, and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as required. The Company will continue to assess new properties and seek to acquire an interest in additional properties if it feels they have sufficient geological and economic potential and if it has adequate financial resources to do so.

Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There have been no significant changes in the capital management objectives, policies and proceedings during the years ended June 30, 2021 and 2020. Changes in capital are described in the consolidated statement of changes in equity.

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

22. Key management and related party transactions

Key management personnel

Key management includes directors (executive and non-executive) and officers of the Company. The compensation paid or payable to key management for employee services is presented below for the years ended June 30, 2021 and 2020:

	2021 2020
Salaries and short-term employees benefits Share-based compensation	$ $ 1,810,051 1,741,148 576,844 763,427
	2,386,895 2,504,575

Related party transactions and balances, not otherwise disclosed, are summarized below:

During the year ended June 30, 2021, an amount of $1,085,000 ($1,520,000 during the year ended June 30, 2020) was invoiced by Osisko Gold for professional services and access to office space, of which $296,000 is included in accounts payable and accrued liabilities as at June 30, 2021 ($630,000 as at June 30, 2020). These services were rendered to the Company in the normal course of operations and were measured at the exchange amount, which is the amount established and agreed to by the related parties.

As at June 30, 2021, interest payable on the Convertible Loan amounted to $769,783 ($1,233,335 as at June 30, 2020). Interest incurred on the Convertible Loan for the year ended June 30, 2021 totaled $1,511,664 and was capitalized to property, plant and equipment in the consolidated balance sheet. Interest incurred on the Convertible Loan for the year ended June 30, 2020 totaled $992,347 ($177,420 was expensed to the statement of loss and comprehensive loss and $814,927 was capitalized to property, plant and equipment).

During the year ended June 30, 2021, $405,000 was invoiced by Osisko Development for professional services ($ nil for the year ended June 30, 2020). An amount of $464,000 is included in accounts payable and accrued liabilities as at June 30, 2021 ($ nil as at June 30, 2020).

During the year ended June 30, 2021, the Company provided professional services totaling $1,025,725 to associates of Osisko Gold ($895,000 for the year ended June 30, 2020), of which $250,000 is included in accounts receivable as at June 30, 2021 ($360,000 as at June 30, 2020). These services have been recorded as cost recoveries in the consolidated statement of loss and comprehensive loss.

On April 12, 2021, the Company announced that, pursuant to the exercise of a right of first refusal, it repurchased, a portfolio of net smelter return royalties varying from 1% to 2% from IAMGOLD Corporation (the “IAMGOLD NSR”) relating to, among others, properties known as Flavrian and Central Camp. Such properties are not part of the Horne 5 properties. In consideration for the IAMGOLD NSR, IAMGOLD received a cash amount of $629,210 (US$500,000).

On May 6, 2021, Falco announced that it concluded an agreement with Osisko Gold to sell the IAMGOLD NSR for cash consideration of $700,000 realizing a gain on the sale of royalty of $70,790.

The Company has commitments under certain management contracts and minimum commitments under those contracts are $1,090,000.

23. Fair value of financial instruments

The Company’s derivative warrant liabilities are measured at fair value in the consolidated balance sheet as at June 30, 2021 (see Note 15).

As at June 30, 2021 and June 30, 2020, the financial instruments that are not measured at fair value in the consolidated balance sheets are represented by cash, restricted cash, accounts receivable, accounts payable and accrued liabilities, the debt host of the Convertible Loan and the Convertible Debenture. The fair values of the cash, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their respective carrying values due to their short-term nature. The fair value of the Convertible Loan and the Convertible Debenture are $17,000,000 and $10,300,000, respectively (Level 3 measurement).

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

24. Supplemental disclosure – Consolidated statements of cash flows

		Year ended
		June 30, 2020
	Year ended	(Note 28 –
	June 30, 2021	Adjusted)
	$	$
Property, plant and equipment acquisitions included in accounts payable and
accrued liabilities
Beginning of year	2,697,827	1,459,782
End of year	6,082,865	2,697,827
Interest income received	53,128	70,826
Other non-current assets included in accounts payable and accrued liabilities
Beginning of year	-	354,532
End of year	-	-

25. Financial risks

The Company’s activities expose it to a variety of financial risks: market risks (including foreign currency risk), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s performance.

Risk management is carried out under policies approved by the Board. The Board provides principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment in excess liquidities.

(a) Market risks

Market risk is the risk of loss that may arise from changes in market factors such as foreign exchange rates and commodity prices.

(i) Foreign exchange risk

The Company is exposed to foreign exchange risk arising from currency exposures, primarily with respect to the US dollar.

The Company holds balances in cash and accounts payable and accrued liabilities denominated in US dollars and is therefore exposed to gains or losses on foreign exchange. The Company does not use derivatives to mitigate its exposure to foreign currency risk.

As at June 30, 2021 and 2020, the balances in foreign currencies were not significant and as such the impact of a change in foreign currencies would not be significant.

(b) Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge its obligation and cause the other party to incur a financial loss. Financial instruments that potentially subject the Company to credit risk consist of cash, restricted cash and other accounts receivable. The Company reduces its credit risk by holding its cash and restricted cash with Canadian chartered banks. In case of other accounts receivable, the Company performs credit analysis.

The carrying amount of bank balances and other accounts receivable represents the maximum credit exposure of the Company.

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

25. Financial risks ( continued )

(c) Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet the obligations associated with its financial liabilities. The Company manages the liquidity risk by continuously monitoring actual and projected cash flows, taking into account the requirements related to its investment commitments and mining properties and matching the maturity profile of financial assets and liabilities. The Board reviews and approves any material transaction out of the ordinary course of business, including proposals on mergers, acquisitions or other major investments or divestitures. As at June 30, 2021, cash is comprised of bank balances. As described in Note 1, the Company’s liquidity position as at June 30, 2021, will not be sufficient to meet the Company’s obligations, commitments and budgeted expenditures through June 30, 2022.

The following table summarizes the Company’s contractual commitments as at June 30, 2021:

==> picture [36 x 106] intentionally omitted <==

		Between one
	Less than	and three	More than
	one year	years	three years
	$	$	$
Accounts payable and accrued liabilities	8,416,198	-	-
Derivative warrant liabilities	-	-	-
Convertible Loan, including interest to maturity	-	20,300,000	-
Convertible Debenture, including interest to maturity	10,715,000	-	-

26. Segmented information

The chief operating decision-maker organizes and manages the business under a single operating segment, consisting of acquiring, exploring and developing mineral properties in Canada. All of the Company’s assets and expenses are attributable to this single operating segment. The Company's operations and assets are all located in Canada.

27. Commitments

Purchase agreement

As per the purchase agreement dated March 28, 2011, assigned to the Company in September 2012 and considering, amongst others, further transactions among Glencore Canada and BaseCore Metals LP (“Basecore”), BaseCore owns a 2% net smelter return (“NSR”) royalty on the Horne 5 Project.

Certain of the rights of Glencore Canada under this purchase agreement, are secured by a deed of hypothec in favour of Glencore Canada for a maximum amount of $100 million. Falco’s obligations towards BaseCore with respect to the royalty interest are secured by a deed of hypothec for a maximum of $45 million.

Furthermore, the Horne 5 Project is located adjacent to Glencore Canada’s operations and the Company is contractually bound to seek authorizations from time to time from Glencore Canada to perform certain activities, which may affect or impact their operations.

Hoisting systems

On March 24, 2017, the Company entered into an initial agreement for the engineering, procurement, supply, performance services and installation of the hoisting systems for the Horne 5 Project (the “Contract”). The hoisting systems will include a production hoist, an auxiliary hoist and a service hoist. The Contract is now estimated at $28,900,000, of which $8,225,000 was incurred and paid as at June 30, 2021 and can be terminated at any time, subject to the payment of the approved and executed work performed by the supplier at the termination date. These amounts are recorded in mining equipment.

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

27. Commitments ( continued )

City of Rouyn-Noranda

On September 12, 2017, the Company concluded the signing of a Memorandum of Understanding (the “MOU”) with the Commission scolaire de Rouyn-Noranda (the “School Board”) to acquire the Pavilion located on the site of the Horne 5 Project. As per the MOU, Falco became the owner of the Pavilion upon completion of a relocation program for the current Pavilion activities (the “Relocation Project”). As per the Relocation Project, the Company transferred the Pavilion’s activities to the Complexe La Source-Polymétier (the “Complexe”) and Falco funded and executed the expansion of the Complexe to accommodate these additional activities. Falco transferred the expanded Complexe to the School Board on June 28, 2018, completing the Relocation Project. The Company has no more obligations towards the School Board.

As the Complexe was constructed on property owned by the City and where sports and community activities were undertaken, Falco concluded an agreement with the City in December 2018, which was amended in August 2019, to finance and build infrastructure to relocate such activities for an amount not to exceed $2.5 million. The Company completed the first phase of construction activities in August 2020 at a cost of $800,000 and has partially completed the second phase of construction activities as at June 30, 2021 at a cost of $700,000. The Company completed its commitment to the City in September 2021.

Offtake Agreements

On October 27, 2020, Falco entered into agreements with Glencore Canada and its affiliated companies (“Glencore”) related to the Horne 5 Project. The agreements include life of mine copper and zinc concentrate offtake agreements (the “Offtake Agreements”). Under the terms of the Offtake Agreements, Glencore will purchase from Falco the copper and zinc concentrates produced during the life of mine of the Horne 5 Project.

First Quantum

In June 2021, Falco entered into an option agreement ( the “Agreement”) with First Quantum Minerals Ltd. (“First Quantum”) pursuant to which First Quantum granted the Company the sole and exclusive right to acquire an undivided 100% ownership interest (the “Option”) in the Norbec sites located in the vicinity of the City (the “Properties”). The Company paid $1,000,000 (the “Option Price”) to First Quantum on August 20, 2021, in the form of (i) a cash payment of $500,000 (the “Cash Payment”), and (ii) the issuance of 1,265,182 of Common Shares having an aggregate value of $500,000 (the “Consideration Shares”) based on the volume weighted average trading price of the Common Shares for the five trading-day period ending as of two business days before the date of the Cash Payment.

Upon the Company’s decision to exercise the Option, (i) First Quantum will transfer the Properties to Falco; (ii) the Company will assume historical and contingent environmental liabilities related to the Properties’ former mining site; and (iii) First Quantum will make cash payments to Falco representing the reimbursement of the Option Price, together with additional payments totaling $3,500,000 ($500,000 on the date of transfer of the Properties and $1,000,000 at each of the three consecutive anniversaries thereof). The Option is exercisable, subject to certain conditions, until December 31, 2022. First Quantum will retain a 2% NSR royalty on any production from the area represented by the mining concessions 177 and 517, which form a part of the Properties.

28. Change in accounting policy

At June 30, 2021, the Company voluntarily changed its accounting policy related to exploration and evaluation expenditures, which previously consisted in capitalizing all such expenditures. The Company believes that expensing as incurred exploration and evaluation expenditures subsequent to the acquisition of the legal rights to explore provides more reliable and relevant financial information while bringing the Company in line with its peers at the development stage with a similar accounting approach.

Under the new policy, the cost of rights in mining properties, initially paid or acquired through a business combination or an acquisition of assets continues to be capitalized to exploration and evaluation assets on the consolidated balance sheet and exploration and evaluation expenditures, subsequent to acquisition of the legal rights to explore, are expensed until the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Thereafter, the Company will capitalize development and construction expenditures incurred to develop and build the mine, prior to the start of mining operations.

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

28. Change in accounting policy ( continued )

Under IAS 8, Accounting Policies, changes in Accounting Estimates and Errors , the change in accounting policy was made retroactively and the comparative information was adjusted for all the periods presented, as if the policy had always been in place.

See the table below for impacts on the consolidated financial statements:

A) Adjustment to Consolidated Balance Sheet:

As at June 30, 2020	As previously reported Adjustments As adjusted
Assets Property, plant and equipment Exploration and evaluation assets Total assets Liabilities Deferred income taxes Total liabilities Equity Deficit Total equity Total liabilities and equity	$ $ $ 117,898,679 (30,200,072) 87,698,607 20,328,427 (20,328,427) -
	145,427,215 (50,528,499) 94,898,716
	9,321,000 (8,038,000) 1,283,000
	59,169,759 (8,038,000) 51,131,759
	(45,117,762) (42,490,499) (87,608,261)
	86,257,456 (42,490,499) 43,766,957
	145,427,215 (50,528,499) 94,898,716

As at July 1, 2019	As previously reported Adjustments As adjusted
Assets Property, plant and equipment Exploration and evaluation assets Total assets Liabilities Deferred income taxes Total liabilities Equity Deficit Total equity Total liabilities and equity	$ $ $ 108,919,623 (30,200,072) 78,719,551 21,170,821 (21,170,821) -
	136,105,221 (51,370,893) 84,734,328
	9,477,000 (8,164,000) 1,313,000
	49,714,599 (8,164,000) 41,550,599
	(39,986,678) (43,206,893) (83,193,571)
	86,390,622 (43,206,893) 43,183,729
	136,105,221 (51,370,893) 84,734,328

B) Adjustment to Consolidated Statement of Loss and Comprehensive Loss:

For the year-ended June 30, 2020	As previously reported Adjustments As adjusted
Expenses Share-based compensation Exploration and evaluation Refundable tax credits Write-off of exploration and evaluation assets Depreciation Deferred tax (recovery) expense Net loss and comprehensive loss Basic and diluted loss per share	$ $ $ 667,217 (12,051) 655,166 - 516,306 516,306 - (206,705) (206,705) 1,166,081 (1,166,081) - 10,301 26,137 36,438 (156,000) 126,000 (30,000)
	(5,131,084) 716,394 (4,414,690)
	(0.02) 0.00 (0.02)

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

28. Change in accounting policy ( continued )

C) Adjustment to Consolidated Statement of Cash Flows:

	As previously
For the year-ended June 30, 2020	reported	Adjustments	As adjusted
	$	$	$
Cash flows used in operating activities	(4,245,136)	1,053,533	(3,191,603)
Cash flows provided by investing activities	1,741,268	(1,053,533)	687,735

29. Change in accounting policy – quarterly adjustments (unaudited supplementary information)

A) Adjustment to Consolidated Balance Sheet:

As at March 31, 2021	As previously reported Adjustments As adjusted
Assets Property, plant and equipment Exploration and evaluation assets Total assets Liabilities Deferred income taxes Total liabilities Equity Deficit Total equity Total liabilities and equity	$ $ $ 129,073,364 (30,200,072) 98,873,292 20,541,012 (20,541,012) -
	158,668,671 (50,741,084) 107,927,587
	9,327,000 (8,017,837) 1,309,163
	75,714,056 (8,017,837) 67,696,219
	(49,065,660) (42,713,247) (91,778,907)
	82,954,615 (42,713,247) 40,241,368
	158,668,671 (50,741,084) 107,927,587

As at December 31, 2020	As previously reported Adjustments As adjusted
Assets Property, plant and equipment Exploration and evaluation assets Total assets Liabilities Deferred income taxes Total liabilities Equity Deficit Total equity Total liabilities and equity	$ $ $ 123,813,649 (30,200,072) 93,613,577 20,470,723 (20,470,723) -
	157,137,918 (50,670,795) 106,467,123
	9,332,000 (8,060,539) 1,271,461
	72,262,285 (8,060,539) 64,201,746
	(46,905,703) (42,610,257) (89,515,960)
	84,875,633 (42,610,257) 42,265,376
	157,137,918 (50,670,795) 106,467,123

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

29. Change in accounting policy – quarterly adjustments (unaudited supplementary information) ( continued )

As at September 30, 2020	As previously reported Adjustments As adjusted
$ $ $ Assets Property, plant and equipment 120,526,953 (30,200,072) 90,326,881 Exploration and evaluation assets 20,410,064 (20,410,064) - Total assets 146,609,717 (50,610,136) 95,999,581 Liabilities Deferred income taxes 9,328,000 (8,051,780) 1,276,220 Total liabilities 61,016,924 (8,051,780) 52,965,144 Equity Deficit (45,829,174) (42,558,356) (88,387,530) Total equity 85,592,793 (42,558,356) 43,034,437 Total liabilities and equity 146,609,717 (50,610,136) 95,999,581 B) Adjustment to Consolidated Statement of Loss and Comprehensive Loss:	$ $ $ 120,526,953 (30,200,072) 90,326,881 20,410,064 (20,410,064) -
	146,609,717 (50,610,136) 95,999,581
	9,328,000 (8,051,780) 1,276,220
	61,016,924 (8,051,780) 52,965,144
	(45,829,174) (42,558,356) (88,387,530)
	85,592,793 (42,558,356) 43,034,437
	146,609,717 (50,610,136) 95,999,581

For the three-month period ended March 31, 2021	As previously reported Adjustments As adjusted
Expenses Exploration and evaluation Refundable tax credits Share-based compensation Depreciation Deferred tax (recovery) expense Net loss and comprehensive loss Basic and diluted loss per Share	$ $ $ - 91,977 91,977 - (30,049) (30,049) 132,749 1,810 134,559 2,109 6,550 8,659 5,000 (10,380) (5,380)
	(2,159,957) (59,908) (2,219,865)
	(0.01) (0.00) (0.01)

For the three-month period ended December 31, 2020	As previously reported Adjustments As adjusted
Expenses Exploration and evaluation Refundable tax credits Share-based compensation Depreciation Deferred tax (recovery) expense Net loss and comprehensive loss Basic and diluted loss per Share	$ $ $ - 81,350 81,350 - (26,746) (26,746) 157,908 1,223 159,131 2,110 4,832 6,942 4,000 (8,759) (4,759)
	(1,076,529) (51,900) (1,128,429)
	(0.00) (0.00) (0.00)

For the three-month period ended September 30, 2020	As previously reported Adjustments As adjusted
Expenses Exploration and evaluation Refundable tax credits Share-based compensation Depreciation Deferred tax (recovery) expense Net loss and comprehensive loss Basic and diluted loss per Share	$ $ $ - 112,323 112,323 - (36,649) (36,649) 97,188 718 97,906 2,812 5,244 8,056 7,000 (13,563) (6,563)
	(711,412) (68,073) (779,485)
	(0.00) (0.00) (0.00)

Falco Resources Ltd. Notes to Consolidated Financial Statements For the years ended June 30, 2021 and 2020 (Expressed in Canadian Dollars)

29. Change in accounting policy – quarterly adjustments (unaudited supplementary information) ( continued )

C) Adjustment to Consolidated Statement of Cash Flows:

For the three-month period ended	As previously
March 31, 2021	reported	Adjustments	As adjusted
	$	$	$
Cash flows used in operating activities	(1,936,848)	(106,704)	(2,043,552)
Cash flows used in investing activities	(2,443,316)	106,704	(2,336,612)
For the three-month period ended	As previously
December 31, 2020	reported	Adjustments	As adjusted
	$	$	$
Cash flows used in operating activities	(493,479)	(69,244)	(562,723)
Cash flows used in investing activities	(1,990,268)	69,244	(1,921,024)
For the three-month period ended	As previously
September 30, 2020	reported	Adjustments	As adjusted
	$	$	$
Cash flows used in operating activities	(571,470)	(99,422)	(670,892)
Cash flows used in investing activities	(1,022,420)	99,422	(922,998)

30. Subsequent events

i) On August 18, 2021, the Company closed a bought deal private placement, issuing 30,700,000 Units (the "Units") at a price of $0.40 per Unit (the "Offering"), representing aggregate gross proceeds to Falco of $12,280,000. Each Unit consists of one Common Share and one-half-of-one Warrant. Each Warrant will be exercisable to acquire one Common Share until July 31, 2025, at an exercise price of $0.55.

The expiry date of the Warrants may be accelerated by the Company at any time following the six-month anniversary of the closing date of the Offering if the volume-weighted average trading price of the Common Shares on the TSX-V is greater than $0.80 for any 10 consecutive trading days, at which time the Company may accelerate the expiry date.

ii) Additionally, on August 18, 2021, the Company received from Osisko Gold a partial advance payment of $10,000,000 on the second installment of $20,000,000 to be made under the Silver Stream Agreement.

AI assistant

Falco Resources Ltd. — Audit Report / Information 2021

46593_rns_2021-09-27_60fbb947-5fa0-47a3-91b0-b78ced3bbbd6.pdf

FALCO RESOURCES LTD.

Independent auditor’s report

Our opinion

What we have audited

Basis for opinion

Independence

Material uncertainty related to going concern

Other information

Responsibilities of management and those charged with governance for the consolidated financial statements

Auditor’s responsibilities for the audit of the consolidated financial statements

Falco Resources Ltd. Consolidated Balance Sheets

Going concern (Note 1), Commitments (Note 27) and Subsequent events (Note 30)

Approved on behalf of the Board of Directors:

Falco Resources Ltd.

Consolidated Statements of Loss and Comprehensive Loss For the years ended June 30, 2021 and 2020

Falco Resources Ltd.

Consolidated Statements of Cash Flows For the years ended June 30, 2021 and 2020

Falco Resources Ltd.

Consolidated Statements of Changes in Equity For the years ended June 30, 2021 and 2020

1. Nature of activities and going concern

2. Basis of presentation

3. Summary of significant accounting policies

(a) Basis of measurement

(b) Basis of consolidation

(c) Foreign currency translation

(ii) Transactions and balances

(d) Financial instruments

3. Summary of significant accounting policies (continued)

(i) Financial assets

Debt instruments

(ii) Financial liabilities

(iii) Derivative financial instruments

3. Summary of significant accounting policies (continued)

(f) Cash

(h) Property, plant and equipment

Office and other equipment 20-55%

(i) Exploration and evaluation assets and expenditures

3. Summary of significant accounting policies (continued)

(k) Current and deferred income tax

Current income taxes

Deferred income taxes

3. Summary of significant accounting policies (continued)

(m) Leases

(n) Share-based payments

(o) Flow-through shares

(p) Revenue from Contracts with Customers

3. Summary of significant accounting policies (continued)

(s) Segment reporting

4. Accounting standard adopted and accounting standards issued but not yet effective

5. Critical accounting estimates and judgements

(i) Going concern

(ii) Impairment of non-financial assets

(iii) Income taxes

5. Critical accounting estimates and judgements ( continued )

6. Accounts receivable

7. Restricted cash

8 . Acquisition of Golden Queen

9. Property, plant and equipment

10 . Exploration and evaluation expenditures

11. Accounts payable and accrued liabilities

12. Contract Liability

12. Contract Liability ( continued )

13. Loan with Osisko Gold

13. Loan with Osisko Gold ( continued )

14. Convertible Debenture

14. Convertible Debenture ( continued )

15. Derivative warrant liabilities

15. Derivative warrant liabilities ( continued )

16. Share capital

17. Warrants

18. Share-based compensation

Restricted, deferred and performance share units

Share options

18. Share-based compensation ( continued )

19. Income taxes

19. Income taxes ( continued )

20. Net loss per share

Falco Resources Ltd. Audit Report / Information 2021