Luca Mining Corp. - Annual Report 2021

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TELSON MINING CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

(Expressed in thousands of Canadian dollars)

_________

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Independent Auditor’s Report

To the Shareholders of Telson Mining Corporation

Grant Thornton LLP Suite 1600 333 Seymour Street Vancouver, BC V6B 0A4 T +1 607 687 2711 F +1 604 685 6569

Opinion

We have audited the consolidated financial statement of Telson Mining Corporation (the “Corporation”), which comprise the consolidated statement of financial position as at December 31, 2020 and the consolidated statement of loss and comprehensive loss, consolidated statement of changes in (deficiency) equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly in all material respects, the financial position of Telson Mining Corporation as at December 31, 2020, and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRS”).

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 are independent of the Corporation in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Material uncertainty related to going concern

Without qualifying our opinion, we draw attention to Note 1 in the consolidated financial statements which indicates that the Corporation has not yet achieved profitable production and has a working capital deficit of $60,334 thousand and has accumulated losses of $100,752 thousand as at December 31, 2020. This condition, along with other matters as set forth in Note 1, indicate the existence of a material uncertainty that may cast significant doubt about the Corporation’s ability to continue as a going concern.

Other matter (Predecessor auditor’s report)

The consolidated financial statements, which comprise the statement of financial position as at December 31 2019, the statement of comprehensive loss, statement of changes in equity, and statement of cash flows for the year ended December 31, 2019, and notes to the consolidated financial statements, including a summary of significant accounting policies, were audited by another auditor who expressed an unmodified opinion with a Material Uncertainty Related to Going Concern paragraph on July 30, 2020.

Audit | Tax | Advisory © Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd

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Information other than the consolidated financial statements and auditor’s report thereon

Management is responsible for the other information. The other information comprises the Management Discussion and Analysis but does not include the consolidated financial statements and our auditor's report thereon.

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 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 these consolidated financial statements in accordance with International Financial Reporting Standards (“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 Corporation’s ability to continue as a going concern, disclosing, as applicable, matters related to a going concern and using the going concern basis of accounting unless management either intends to liquidate the Corporation or to cease operations, or has no realistic alternative to do so.

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

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 Corporation's internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

Audit | Tax | Advisory

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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 Corporation'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 Corporation 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 Group 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.

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 Robert J. Riecken.

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Vancouver, Canada April 30, 2021

Chartered Professional Accountants Licensed Public Accountants

Audit | Tax | Advisory

Telson Mining Corporation

Consolidated Statements of Financial Position

(Expressed in thousands of Canadian dollars)

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As at December 31, 2020 As at December 31, 2019
Assets
Current assets:
Cash $ 257 $ 145
Marketable securities (note 4) 4,271 4,653
Accounts receivable (note 5) 599 330
Prepaid expenses and deposits 1,759 416
Inventories (note 6) 5,980 7,355
12,866 12,899
Non-current assets:
Mineral interest and development assets (note 7) 16,585 12,335
Property, plant and equipment (note 8) 17,063 19,787
Accounts receivable long-term (note 5) 5,056 6,213
Other assets (note 10(e)) 1,354 -
40,058 38,335
Total assets $ 52,924 $ 51,234
Liabilities
Current liabilities:
Accounts payable and accrued liabilities $ 29,955 $ 30,561
Obligation under share purchase agreement (note 7(a)) 255 260
Current portion of lease liabilities (note 11) 1,355 1,457
Short-term debt (note 10) 27,650 24,954
Due to Nyrstar Mining Ltd. short-term (note 7(b) and 9) 13,985 11,905
73,200 69,137
Non-current liabilities:
Long-term debt (note 10) 531 -
Lease liabilities (note 11) 266 470
Provision for site reclamation and closure (note12) 5,638 5,758
6,435 6,228
Total liabilities $ 79,635 $ 75,365
Deficiency
Share capital (note 13) $ 65,317 $ 59,743
Share subscriptions received in advance - 795
Equity reserves (note 14) 10,591 6,423
Accumulated other comprehensive loss (1,867) (1,964)
Deficit (100,752) (89,128)
Total deficiency (26,711) (24,131)
Total liabilities and deficiency $ 52,924 $ 51,234
Going concern (note 1)
Commitments (note 22)
Contingencies (note 23)
Subsequent events (note 24)
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Approved by the Board of Directors on April 30, 2021, and signed on the Company’s behalf by:

"Ralph Shearing" Director	"Rory Godinho"
	Director

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

Telson Mining Corporation

Consolidated Statements of Loss and Comprehensive Loss

(Expressed in thousands of Canadian dollars, except shares and per share amounts)

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Years ended December 31,
2020 2019
Revenues
Gross sales $ 44,443 $ 31,026
Treatment and selling costs (21,286) (10,425)
23,157 20,601
Cost of Sales
Production cost $ 22,023 $ 18,156
Royalties 827 691
Accretion of provision for site reclamation and closure 342 1,589
Depreciation and amortization (note 7 and 8) 445 1,002
23,637 21,438
Mine operating loss (480) (837)
General Expenses:
Consulting fees, wages and benefits (note 17) $ 1,974 $ 2,362
Legal and professional fees 418 291
Office, rent and administration 1,092 1,534
Amortization of right-of-use assets (note 8 and 11) 112 187
Regulatory, transfer agent and shareholder information 28 27
Travel, promotion and investor relations 216 237
Share-based compensation (note 14(a) and 17) 42 45
Impairment of assets (note 8 and 11) 876 21,712
4,758 26,395
Other (income) expense:
Interest income and other expenses $ 2,535 $ -
Accretion of provision for site reclamation and closure 32 35
Change in fair value of marketable securities (note 4) (610) (526)
Interest expense 2,066 3,041
–
Change in fair value of contingent consideration (note 9) 1,307
–
Other expenses 1,393
Foreign exchange gain (337) (441)
6,386 2,109
Total loss before income tax $ (11,624) $ (29,341)
Income tax expense – 15
Net loss for the year $ (11,624) $ (29,356)
Other comprehensive loss
Items that will be reclassified subsequently to profit or (loss)
Foreign currency translation adjustment 97 (432)
Total items that may be reclassified subsequently to profit or (loss) 97 (432)
Total comprehensive loss for the year $ (11,527) $ (29,788)
Weighted average number of common shares outstanding
Basic and diluted 161,810,840 139,573,841
Loss per share (note 16)
Basic and diluted $ (0.07) $ (0.21)
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The accompanying notes form an integral part of these consolidated financial statements

Telson Mining Corporation

Consolidated Statements of Changes in Deficiency

(Expressed in thousands of Canadian dollars, except for number of common shares)

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Number of Share Share Equity Accumulated Deficit Total
common capital subscriptions reserves other
shares received in comprehensive
advance loss
Balance as at December 31, 2018 139,559,152 $ 59,739 $ – $ 6,380 $ (1,532) $ (59,772) $ 4,815
Stock options exercised 20,000 2 – – – – 2
Fair value of stock options allocated to
share capital issued on exercise – 2 – (2) – – -
Subscriptions received in advance – 795 – – – 795
Share-based compensation (note 14) – – – 45 – – 45
– – – –
Loss and comprehensive loss for the year (432) (29,356) (29,788)
Balance as at December 31, 2019 139,579,152 $ 59,743 $ 795 $ 6,423 $ (1,964) $ (89,128) $ (24,131)
Subscriptions received in advance – – 1,443 – – – 1,443
Shares issued on private placement, net of
issuance cost (note 13) 35,420,577 3,468 (2,238) – – – 1,230
Shares issued on debt settlement (note 13) 7,330,651 2,053 – – – 2,053
Finder's fees (note13) 361,239 33 – 6 – – 39
Stock options exercised 75,000 10 – – – – 10
Fair value of stock options allocated to
share capital issued on exercise (note 13) – 10 – (10) – – –
Fair value of warrants-debt reestructuring
(note 10d) – – – 2,492 – – 2,492
Fair value of warrants issued in private
placements (note13) – – – 10 – – 10
Fair value of warrants issued in financing
(note 13) – – – 1,628 – – 1,628
Share-based compensation (note 14) – – – 42 – – 42
Loss and comprehensive loss for the year – – – – 97 (11,624) (11,527)
Balance as at As at December 31, 2020 182,766,619 $ 65,317 $ – $ 10,591 $ (1,867) $ (100,752) $ (26,711)
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The accompanying notes form an integral part of these consolidated financial statements

Telson Mining Corporation Consolidated Statements of Cash Flows

(Expressed in thousands of Canadian dollars)

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Years ended December 31,
2020 2019
Cash (used in) provided by:
Operating activities:
Loss for the year $ (11,624) $ (29,356)
Items not involving cash:
Depletion and depreciation 445 1,002
Accretion and change of provision for site reclamation and closure 374 1,624
Amortization of right-of-use assets 112 187
Impairment of assets 876 21,712
Share-based compensation (note 14) 42 45
Accrued interest on debt 2,066 3,041
Revaluation of marketable securities (610) (526)
-
Change in fair value of contingent consideration 1,307
Income tax expense – 15
Fair value of warrants issued in private
placements 10 -
-
Fair value of warrants issued in financing 2,492
Changes in non-cash working capital:
Accounts receivable and other assets 867 (2,114)
Prepaid expenses and deposits (1,344) 363
Inventories 843 222
Accounts payable and accrued liabilities 692 8,183
Cash (used in) provided by operating activities (3,452) 4,398
Investing activities:
Plant and equipment, net 315 (2,511)
Mineral interest and development assets additions 300 (406)
Redeemed marketable securities 657 1,138
Cash used in investing activities 1,272 (1,779)
Financing activities:
Shares issued on private placement, net of issuance cost 2,673 795
Interest paid (127) (1,013)
Proceeds in connection to warrants and/or stock options exercised 10 2
Debt acquired 655 69
Repayment of right of use liabilities (359) (365)
-
Repayment of debt (900)
Cash provided by (used in) financing activities 2,852 (1,412)
Effect of foreign exchange rate changes on cash (560) (1,178)
Increase in cash 112 29
Cash, beginning of the year 145 116
Cash, end of the year $ 257 $ 145
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Supplemental cash flow information (note 15)

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

Telson Mining Corporation Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

1. NATURE OF OPERATIONS

Telson Mining Corporation, (the “Company” or “Telson”) was incorporated on April 11, 1986, under the laws of British Columbia, Canada. The Company’s head office address is Suite 1000 - 1111 Melville Street, Vancouver, British Columbia, V6E 3V6, Canada. The registered and records office address is 725 Granville Street, Suite 400, Vancouver, British Columbia, Canada, V7Y 1G5. The Company is listed for trading on the TSX Venture Exchange (“TSX-V”) under the symbol “TSN”.

a) Going concern

The Company’s principal business activity is the production of base metals and the acquisition, exploration and development of resource properties in Mexico, with a focus on the mine operation of Campo Morado and the development of Tahuehueto mine project (Note 7). Effective May 16, 2018 the Company completed commissioning of Campo Morado mine and declared commercial production. On February 23, 2021, the Company executed a letter of intent with Accendo Banco S.A. de C.V., Empress Royalty Corp., & Endeavour Financial (the “Accendo Syndicate”) to provide up to US$25 million of financing to complete the construction and ramp-up of Tahuehueto mining project, meet debt service obligations and working capital purposes (note 24). Notwithstanding, subsequent to year end financing and placing Campo Morado in commercial production there can be no assurances that the Company will meet its production targets and that realized metal prices will be sufficient to cover the cost of operations. In addition, the business of mineral development involves a high degree of risk and there can be no assurance that the Company’s current operations, including development programs, will result in profitable mining operations. The recoverability of the carrying value of mineral interests, and the Company’s continued ongoing existence is dependent upon the preservation of its interest in the underlying properties, the achievement of profitable operations, the ability of the Company to raise additional sources of funding, and/or, alternatively, upon the Company’s ability to dispose of some or all of its interests on an advantageous basis. These conditions may cast significant doubt upon the Company’s ability to continue as a going concern. The Company has a working capital deficit as at December 31, 2020 of $60,334 (2019- $56,238) and an accumulated deficit of $100,752 (2019 - $89,128). These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the payment of liabilities in the ordinary course of business.

In March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, economies, and financial markets globally, potentially leading to an economic downturn. It is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on the Company’s business or results of operations at this time.

2. BASIS OF PRESENTATION

(a) Statement of compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), effective for financial year ended December 31, 2020. IFRS include International Accounting Standards (“IAS”) and interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”).

These consolidated financial statements have been prepared on a historical cost basis except for certain financial instruments which are measured at fair value. In addition, these consolidated financial statements have been prepared using the accrual basis of accounting, except for the cash flow information.

These consolidated financial statements were approved and authorized for issuance by the Board of Directors of the Company on April 28, 2021.

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

2. BASIS OF PRESENTATION (continued)

(b) Basis of presentation and consolidation

These consolidated financial statements include the financial statements of Telson Mining Corporation, and entities controlled by the Company (its subsidiaries). The following is a list of subsidiaries and their geographical locations:

Subsidiary	Place of Incorporation	Beneficial Interest
Samarkand de Mexico, S.A. de C.V.	Mexico	100%
Sierra Soleada S.A. de C.V.	Mexico	100%
Real de la Bufa S.A. de C.V.	Mexico	100%
Minas de Campo Morado, S.A. de C.V.	Mexico	100%
Prestadora de Servicios Arcelia, S.A. de C.V.	Mexico	100%
Minas de Arcelia, S.A. de C.V.	Mexico	100%
Grupo Minero Mexicano Nyrstar, S.A. de C.V.	Mexico	100%
Grupo Minero HD,S.A. de C.V.	Mexico	100%

Control exists when the Company has power over an investee, exposure or rights, to variable returns from its involvement with the investee and the ability to use its power over the investee to affect the amount of the Company’s returns. All intercompany balances and transactions have been eliminated upon consolidation.

(c) Functional and presentation currency

The presentation currency of the Company’s financial statements is the Canadian dollar; therefore, references to $ means Canadian dollars, US$ are to US dollars and MXN$ to Mexican pesos.

The functional currency of Telson Mining Corporation, the parent entity, is the Canadian dollar. The US dollar was determined to be the functional currency of the primary economic environment in which the Mexican subsidiaries Real de la Bufa, S.A. de C.V. and Minas de Campo Morado, S.A. de C.V. operate, as most of the development, operational and sales activities are denominated or are influenced by the US dollar.

(d) Critical accounting estimates and judgments

The preparation of financial statements in conformity with IFRS, requires management to select accounting policies and make estimates and judgments that may have a significant impact on the consolidated financial statements. Estimates are continuously evaluated and are based on management’s experience and expectations of future events that are believed to be reasonable under the circumstances. Actual outcomes may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

The accounting judgements and estimates which have the most significant effect on these consolidated financial statements and the financial results are as follows:

Judgements

Going concern

These financial statements do not give effect to adjustments, if any, that would be necessary should the Company be unable to continue as a going concern. If the going concern assumption was not used, then the adjustments required to report the Company’s assets and liabilities on a liquidation basis could be material to these financial statements.

Telson Mining Corporation

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

2. BASIS OF PRESENTATION (continued)

(d) Critical accounting estimates and judgments (continued)

Functional currency

The functional currency for each of the Company’s subsidiaries is the currency of the primary economic environment in which the entity operates. Determination of functional currency may involve certain judgments to determine the primary economic environment and the Company reconsiders the functional currency of its entities if there is a change in events and conditions that determined the primary economic environment.

Judgement was required in determining that the US dollar is the appropriate functional currency of certain subsidiaries of the Company. This was determined by assessing the currency which influences sales prices for concentrate sales, labour and input costs. If the judgement was altered and a different functional currency was selected for certain subsidiaries of the Company, this could result in material differences in the amounts recorded in the consolidated statements of loss and comprehensive loss pertaining to foreign exchange gains or losses.

Economic recoverability, impairment and probability of future economic benefits of mineral property interests

Management has determined that mining interests, evaluation, development and related costs incurred which have been capitalized as mineral interests and development costs, are economically recoverable. Management uses several criteria in its assessments of economic recoverability and probability of future economic benefit including geologic and metallurgic information, history of conversion of mineral deposits to proven and probable reserves, scoping and feasibility studies, accessible facilities, existing permits and life of mine plans.

The Company assesses its mining interest and development assets, property, plant and equipment assets annually to determine whether any indication of impairment exists. Where an indicator of impairment exists, a formal estimate of the recoverable amount is made, which is considered to be the higher of the fair value less costs to sell and value in use. These assessments require the use of estimates and assumptions such as longterm commodity prices, discount rates, future capital requirements, exploration potential, mineral reserves, and operating performance. During the year ended December 31, 2019, there were indicators of impairment on the Campo Morado project and an impairment test was performed (note 7).

Commencement of commercial production

Costs associated with the commissioning of new assets, in the pre-commercial period before they are operating in the way intended by management, are capitalized, net of any pre-production revenues. Commercial production is deemed to have occurred when management determines that, amongst other items, the completion of operational commissioning of major mine components has been reached, operating results, which includes the grade and volume of material mined, are being achieved consistently for a period of time, and there are indicators that these operating results will continue, all of which involve management judgments.

Estimates

Key sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are:

Mineral reserves and mineral resource estimates

Mineral reserves are estimates of the amount of ore that can be economically and legally extracted from the Company’s mining interests. The Company estimates its mineral reserves and mineral resources based on information compiled by Qualified Persons as defined by Canadian Securities Administrators National Instrument 43-101 Standards for Disclosure of Mineral Projects. Such information includes geological data on the size, depth and shape of the mineral deposit, and requires complex geological judgments to interpret the data.

Telson Mining Corporation Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

2. BASIS OF PRESENTATION (continued)

(d) Critical accounting estimates and judgments (continued)

The estimation of recoverable reserves is based upon factors such as estimates of commodity prices, future capital requirements, and production costs along with geological assumptions and judgments made in estimating the size and grade that comprise the mineral reserves. Changes in the mining reserve or mineral resource estimates may impact the carrying value of mineral interests and development assets, property, plant and equipment, provision for site reclamation and closure, recognition of deferred income tax assets and depreciation and amortization charges.

Operating levels intended by management

Prior to reaching operating levels intended by management, costs incurred are capitalized as part of the costs of the related mineral property and proceeds from sales are offset against capitalized costs. Depletion of capitalized costs for a mineral property begins when operating levels intended by management have been reached. Management considers several factors in determining when a mineral property has reached the operating levels intended by management. The results of operations of the Company during the year ended December 31, 2020 and 2019, presented in these consolidated financial statements, have been impacted by management’s determination that its Tahuehueto property, classified as mineral interest and development assets on the statement of financial position, did not reach the operating levels intended by management. The Company is unable to determine with certainty the extent of project changes and operational modifications that would be required to more fully realize on the potential value of the existing resources and reserves.

Provision for site reclamation and closure costs.

The Company’s provision for site reclamation and closure costs is based on management’s best estimate of the present value of the future cash outflows required to settle the liability. In determining the liability, management makes estimates about the future costs, inflation, foreign exchange rates, risks associated with the cash flows, and the applicable risk-free interest rates for discounting future cash flows. Changes in any of these estimates could result in a change in the provision recognized by the Company. Also, the ultimate costs of environmental disturbance are uncertain and cost estimates can vary in response to many factors including changes to the relevant legal requirements, the emergence of new restoration techniques or experience at other mine sites.

Inventory valuation

Consumable parts and supplies, ore stockpiles and concentrates, are valued at the lower of cost and net realizable value. Estimates in the carrying values of inventories arise due to the nature of the valuation of ore stockpiles and concentrates based on an appropriate allocation of direct mining costs, direct labour and material costs, mine site overhead, and depletion and amortization.

Accounts receivable

The recoverability of accounts receivable which is included in the consolidated statements of financial position are initially recorded at fair value and subsequently at amortized cost using the effective interest rate method. Accounts receivable are presented net of allowances and discounts that the Company expects to realize from the sale of concentrate.

Provisions

Provisions recognized in the consolidated financial statements involve estimates on the occurrence of future events, which could result in a material outlay for the Company. In determining whether an outlay will be material, the Company considers the expected future cash flows based on facts, historical experience and probabilities associated with such future events. Uncertainties exist with respect to estimates made by management and as a result, the actual expenditure may differ from amounts currently reported.

Telson Mining Corporation

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

2. BASIS OF PRESENTATION (continued)

(d) Critical accounting estimates and judgments (continued)

Depreciation and amortization rate for property, plant, and equipment

Depreciation and amortization expenses are allocated based on estimated economic lives. Should the economic life, or depreciation rates differ from the initial estimate, an adjustment would be made in the consolidated statement of loss and comprehensive loss on a prospective basis.

Stock based compensation

The Company grants stock options to certain of its employees, directors, and consultants. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. The 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 based on the number of awards expected to vest. This number is reviewed annually, with any change in estimate recognized immediately in compensation expense with a corresponding adjustment to equity reserves.

Deferred tax assets and liabilities

Management judgment and estimates are required in assessing whether deferred tax assets and deferred tax liabilities are recognized in the consolidated statements of financial position. Judgements are made as to whether future taxable profits will be available in order to recognize deferred tax assets. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. These depend on estimates of future production and sales volumes, commodity prices, reserves, operating costs, and other capital management transactions. These judgments and estimates are subject to risk and uncertainty and changes in circumstances may alter expectations, which may impact the amount of deferred tax assets and deferred tax liabilities recognized on the consolidated statements of financial position and the benefit of other tax losses and temporary differences not yet recognized. The tax rate expected to be in effect when temporary differences reverse is 30% for Mexico.

3. SIGNIFICANT ACCOUNTING POLICIES

(a) Foreign currency

Transactions in foreign currencies are translated to the respective functional currencies of the entity at exchange rates in effect at the transaction dates.

At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated to the functional currency using the exchange rate on the reporting date. Non-monetary assets and liabilities measured at fair value are translated using the exchange rates at the date when fair value was determined. Non-monetary assets and liabilities measured at historical cost in a foreign currency are translated using exchange rates that were in effect at the transaction dates.

Foreign currency gains and losses arising on period-end revaluations are recognized in the consolidated statements of loss and comprehensive loss, except for differences arising on translation of a financial liability designated as a hedge of a net investment in a foreign operation, or qualifying cash flow hedges, which are recognized in other comprehensive income (loss).

For the purpose of the consolidated financial statements, assets and liabilities of entities that have functional currencies other than the Canadian dollar are translated to Canadian dollars at the reporting date using the exchange rate on that date. Revenue and expenses are translated at monthly average exchange rates that approximate those in effect at the transaction dates. Differences arising from these foreign currency translations are recognized in other comprehensive loss and presented within equity as currency translation reserve. When a foreign operation is disposed, the relevant exchange differences accumulated in the foreign

Telson Mining Corporation

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(a) Foreign currency (continued)

currency translation reserve are transferred to the consolidated statements of loss and comprehensive loss as part of the profit or loss on disposal.

(b) Cash

Cash consists of cash on hand and demand deposits.

(c) Inventories

Inventories of consumable parts and supplies are valued at weighted average cost, ore stockpiles and concentrates, are valued at the lower of cost and net realizable value. Costs allocated to consumable parts and supplies are based on last purchases and include all costs of purchase, conversion, and other costs in bringing these inventories to their existing location and condition. Costs allocated to ore stockpiles and concentrates are based on average costs, which include an appropriate share of direct mining costs, direct labour and material costs, and mine site overhead. If the carrying value exceeds the net realizable amount, a write down is recognized. The write down may be reversed in a subsequent period if the circumstances which caused it no longer to exist.

(d) Mineral interest and development assets

When economically viable reserves have been determined and the decision to proceed with development has been approved, the expenditures related to development and construction are capitalized as mineral interest and development assets and, in addition, any pre-commercial production is also capitalized, all of which is classified as a component of mineral interest and development asset.

During the development of a mine, prior to the commencement of production, costs incurred to remove overburden and other mine waste materials in order to access the resource body (“stripping costs”) are classified as a mineral interest and development asset and are capitalized to the related property and depleted over the productive life of the mine using the unit-of-production method. During the production phase of a mine, stripping costs are accounted for as variable production costs and included in the cost of inventory produced during the period except for stripping costs incurred to provide access to resources that will be producing in future periods and would not otherwise have been accessible, which are capitalized to the cost of mineral property interests and depleted on a unit-of-production method over the resources that directly benefit from the stripping activity.

The Company capitalizes of all direct costs related to the development of the Tahuehueto project to mineral interest and development assets, under IAS 16, as management determined that the technical feasibility and commercial viability had been established through the positive results associated with the pre-feasibility study, access to financing and board approval to start the development the project, thereby making it a development stage asset under IAS 16.

The Company capitalized all direct costs associated to the rehabilitation and testing of the mine at Campo Morado, net of any revenue earned during commissioning. Effective May 15, 2018, the Company completed the commissioning and testing of Campo Morado declaring commercial production. Furthermore, the Company used several criteria to assess whether the mine was in the condition necessary for it to be capable of operating in a manner intended by management. These criteria include, but are not limited to:

Completion of all major capital expenditures to bring the mine to the condition necessary for it to be capable of operating in the manner intended by management.
The passage of a reasonable period of rehabilitation and testing of the mine plant which demonstrates the ability to mine and mill consistently and without significant interruption at a pre-determined average rate of designed capacity.
6 -

Telson Mining Corporation

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(d) Mineral interest and development assets (continued)

The mining project’s ability to produce mineral concentrate within specifications, this includes the ability to produce concentrate that could be commercialized.
The mine project has all the necessary permits to be a producing mine; and
Mineral recoveries are at or near expected production levels.

(e) Property, plant, and equipment

i. Property, plant, and equipment

Property, plant, and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of property, plant and equipment consists of the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use and initial estimate of the cost of dismantling and removing the item and restoring the site on which it is located.

The cost of replacing a part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company, and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of day to day servicing of property and equipment are expensed in profit or loss as incurred.

The following table outlines the methods used to depreciate property, plant, and equipment:

1) Mine plant and infrastructure – Life of mine (estimated as 11 years)
2) Machinery and equipment – Straight line 4 years to 10 years
ii. Construction in progress

Construction in progress includes the purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for its intended use. Construction in progress includes advances on long-lead items. Construction in progress is not depreciated. Once the asset is complete and available for use, the costs of construction are transferred to the appropriate category of property, plant and equipment, and depreciation commences.

(f) Borrowing costs

Interest and other financing costs directly related to the acquisition, development and construction, and production of qualifying assets are capitalized in mineral interest and development assets until they are complete and available for use, at which time they are transferred to property, plant and equipment. Borrowing costs incurred after the asset has been placed into service as well as all other borrowing costs are charged to the consolidated statement of loss when incurred.

(g) Provisions

A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as a finance cost.

Telson Mining Corporation Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(h) Provision for site reclamation and closure

An obligation to incur rehabilitation and site restoration costs arises when environmental disturbance is caused by the exploration, development, or on-going production of a mineral property interest. Such costs arising from the decommissioning of plant and other site preparation work, discounted to their net present value, are provided for and capitalized at the start of each project, as soon as the obligation to incur such costs arises. These costs are charged to the statement of loss and comprehensive loss over the life of the operation through amortization and the unwinding of the discount in the provision. At the end of each period, the provision is remeasured to reflect changes in the estimated future cash flows underlying any initial estimates. Costs for restoration of subsequent site damage, which is created on an on-going basis during exploration and production are provided for at their estimated net present values and charged against earnings as extraction progresses.

(i) Impairment of non-financial assets

The carrying amounts of the Company’s non-financial assets, other than deferred tax assets if any, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated.

For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit” or “CGU”). The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

The Company’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs. An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss.

Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. A reversal of an impairment loss is recognized immediately in profit or loss.

(j) Financial Instruments

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. All financial instruments are initially recorded at fair value, adjusted for directly attributable transaction costs if not at fair value through profit or loss. The Company determines each financial instrument’s classification upon initial recognition. Measurement in subsequent periods depends on the financial instrument’s classification.

Classification

The Company classifies its financial instruments in the following categories: at fair value through profit and loss (“FVTPL”), at fair value through other comprehensive income (loss) (“FVTOCI”), or at amortized cost. The Company determines the classification of financial assets at initial recognition. The classification of debt instruments is driven by the Company’s business model for managing the financial assets and their contractual cash flow characteristics. Equity instruments that are held for trading are classified as FVTPL. For other equity

Telson Mining Corporation

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(j) Financial Instruments (continued)

instruments, on the day of acquisition the Company can make an irrevocable election (on an instrument-byinstrument basis) to designate them as at FVTOCI. Financial liabilities are measured at amortized cost, unless they are required to be measured at FVTPL (such as instruments held for trading or derivatives) or the Company has opted to measure them at FVTPL.

Measurement

Financial assets at FVTOCI

Financial assets at FVTOCI are elected investments in equity instruments and are initially recognized at fair value plus transaction costs. Subsequently they are measured at fair value, with gains and losses recognized in other comprehensive income (loss).

Financial assets and liabilities at amortized cost

Financial assets and liabilities at amortized cost are initially recognized at fair value plus or minus transaction costs, respectively, and subsequently carried at amortized cost.

Financial assets and liabilities at FVTPL

Financial assets and liabilities carried at FVTPL are initially recorded at fair value and transaction costs are expensed in the consolidated statements of Loss and comprehensive loss. Realized and unrealized gains and losses arising from changes in the fair value of the financial assets and liabilities held at FVTPL are included in the consolidated statements of net (loss) income in the period in which they arise. Where management has opted to recognize a financial liability at FVTPL, any changes associated with the Company’s own credit risk will be recognized in other comprehensive income (loss).

Impairment of financial assets at amortized cost

The Company recognizes a loss allowance for expected credit losses on financial assets that are measured at amortized cost.

At each reporting date, the Company measures the loss allowance for the financial asset at an amount equal to the lifetime expected credit losses if the credit risk on the financial asset has increased significantly since initial recognition. If at the reporting date, the financial asset has not increased significantly since initial recognition, the Company measures the loss allowance for the financial asset at an amount equal to the twelve month expected credit losses. The Company shall recognize in the consolidated statements of loss and comprehensive Loss, as an impairment gain or loss, the amount of expected credit losses (or reversal) that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognized.

Derecognition

Financial assets

The Company derecognizes financial assets only when the contractual rights to cash flows from the financial assets expire, or when it transfers the financial assets and substantially all of the associated risks and rewards of ownership to another entity. Gains and losses on derecognition are generally recognized in the consolidated statements of loss and comprehensive loss. However, gains and losses on equity instruments held that are classified as FVTOCI remain within OCI and are not reclassified to profit or loss.

Telson Mining Corporation

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(j) Financial Instruments (continued)

Financial liabilities

The Company derecognizes financial liabilities only when its obligations under the financial liabilities are discharged, cancelled, or expired. Generally, the difference between the carrying amount of the financial liability derecognized and the consideration paid and payable, including any non ‐ cash assets transferred or liabilities assumed, is recognized in the consolidated statements of loss and comprehensive loss.

(k) Income taxes

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purpose. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill.

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantially enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis, or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

(l) Share capital

Common shares are classified as equity (deficiency). Transactions costs directly attributable to the issue of common shares and share options are recognized as a deduction from equity (deficiency), net of any tax effect.

(m) Share-based compensation

The Company’s stock option plan allows employees, directors, officers, and consultants to acquire shares of the Company. The fair value of options granted is recognized as a share-based compensation expense with a corresponding increase in equity reserves. An individual is classified as an employee when the individual is an employee for legal or tax purposes (direct employee) or provides services similar to those performed by a direct employee. Consideration paid on the exercise of stock options is credited to capital stock and the fair value of the options is reclassified from equity reserves to share capital.

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 the fair value of the share-based payment. Otherwise, share-based payments are measured at the fair value of goods or services received.

10 -

Telson Mining Corporation

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(m) Share-based compensation (continued)

The fair value is measured at grant date and each tranche is recognized over the period during which the options vest. The fair value of the options granted is measured using the Black-Scholes option pricing model taking into account the terms and conditions upon which the options were granted. At each financial position reporting date, the amount recognized as an expense is adjusted to reflect the number of stock options that are expected to vest.

If options or warrants issued as share-based compensation expire unexercised, then the historical fair value of the share ‐ based compensation is transferred from equity reserves to deficit.

(n) Warrants issued in equity financial transactions

The Company uses the residual value method with respect to the measurement of shares and warrants issued as private placement units. The residual value method first allocates value to the more easily measurable component based on fair value and then the residual value, if any, to the less easily measurable component.

The fair value of the common shares issued in the private placements was determined to be the more easily measurable component and was valued at its fair value, as determined by the quoted bid price on the issuance date. The balance, if any, was allocated to the attached warrants. If the warrants are exercised the related reserves are reclassified from reserves to share capital.

(o) Earnings (loss) per share

The Company presents basic and diluted earnings (loss) per share (“EPS”) data for its common shares. Basic EPS is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period, adjusted for own shares held. Diluted EPS per share is calculated by dividing the earnings (loss) by the weighted average number of common shares outstanding assuming that the proceeds to be received on the exercise of dilutive stock options and warrants are used to repurchase common shares at the average market price during the period.

In the Company’s case, diluted loss per share is the same as basic loss per share, as the effect of outstanding share options and warrants on loss per share would be anti-dilutive.

(p) Revenue recognition

The Company applies the requirements of IFRS 15 Revenue from Contracts with Customers (“IFRS 15”). IFRS 15 utilizes a methodical framework for entities to follow in order to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.

The Company recognizes revenue from contracts with customers for the sale of metal concentrates at the point in time when it transfers control of the concentrates over to the customers, which occurs upon physical delivery. Revenues are measured based on 1) the market metal prices expected at time of the settlement, and 2) the estimates of the mineral contents (assays) and weights; both are subject to adjustment until the final settlement date. At the end of each reporting period, the amounts receivables are marked-to-market using the most upto-date market prices for the settlement. These variations between the sales price recorded at the initial recognition date and the actual final sales price recorded at the settlement date are caused by changes in market prices, assay results and weights. The settlement receivable is recorded at fair value each period until final settlement occurs, with changes in fair value recorded as a component of revenue. Revenue is also recorded net of treatment, penalties, and refining charges of the counterparties under the terms of the relevant sales agreements.

11 -

Telson Mining Corporation

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(p) Revenue recognition (continued)

Revenue and cost of sales from concentrate are recognized in mining interest and development assets when generated during commissioning of the plant or when generated from pre-commercial production; and to operations when generated from commercial production. Once recovery of concentrate has reduced the carrying value of the mineral interest and development asset to $nil, recoveries are recorded on the statement of loss and comprehensive loss as recovery of expenses.

(q) Leases

At inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Company assesses whether it has the right to obtain substantially all of the economic benefits from and to direct the use of the identified asset.

At commencement or on modification of a contract that contains a lease component, the Company allocates ‐ the consideration in the contract to each lease component on the basis of its relative stand alone prices.

The Company recognizes a right ‐ of ‐ use asset and a lease liability at the lease commencement date. The right ‐ of ‐ use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset, or the site on which it is located, less any lease incentives received.

The right ‐ of ‐ use asset is subsequently depreciated using the straight ‐ line method from the commencement date to the end of the lease term, unless the lease transfers ownership of the underlying asset to the Company by the end of the lease term or the cost of the right ‐ of ‐ use asset reflects that the Company will exercise a purchase option. In that case, the right ‐ of ‐ use asset will be depreciated over the useful life of the underlying asset, which is determined on the same basis as those of property and equipment. In addition, the right ‐ of ‐ use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rate. The Company determines its incremental borrowing rate by obtaining interest rates from various external financing sources and makes certain adjustments to reflect the terms of the lease and type of the asset leased.

Lease payments included in the measurement of the lease liability comprise the following:

i. fixed payments, including in ‐ substance fixed payments;
ii. variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;
iii. amounts expected to be payable under a residual value guarantee; and
iv. the exercise price under a purchase option that the Company is reasonably certain to exercise, lease payments in an optional renewal period if the Company is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Company is reasonably certain not to terminate early.

The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value guarantee, if the Company changes its assessment of whether it will exercise a purchase, extension or termination option, or if there is a revised in ‐ substance fixed lease payment. When the lease liability is remeasured in this way, a corresponding

12 -

Telson Mining Corporation

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(q) Leases (continued)

adjustment is made to the carrying amount of the right ‐ of ‐ use asset, or is recorded in the Statement of Operations and Comprehensive Income (Loss) if the carrying amount of the right ‐ of ‐ use asset has been reduced to zero.

Short ‐ term leases and leases of low ‐ value assets

The Company has elected not to recognize right ‐ of ‐ use assets and lease liabilities for leases of low ‐ value assets and short ‐ term leases, including office equipment. The Company recognizes the lease payments associated with these leases as an expense on a straight ‐ line basis over the lease term.

(r) Application of new and revised accounting standards

i. Accounting standards adopted during the year

There was no new standards effective January 1, 2020 that impacted the Company’s consolidated financial statements.

(s) Accounting standards and interpretations issued but not yet adopted

The following standards and interpretations, which may be applicable to the Company, have been issued but are not yet effective as of December 31, 2020.

Amendment to IAS 16, Property, Plant and Equipment (“IAS 16”)

On May 14, 2020, the IASB amended IAS 16 “Property, Plant and Equipment” to prohibit deducting from the cost of an item of property, plant and equipment any proceeds from selling items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Instead, an entity recognizes the proceeds from selling such items, and the cost of producing those items, in profit or loss. The amendments are effective for annual periods beginning on or after January 1, 2022 with early adoption permitted. The Company does not expect the amendments to IAS 16 to have a significant impact on its consolidated financial statements.

4. MARKETABLE SECURITIES

	Amount
Balance, December 31, 2018	$ 5,296
Redemption of marketable securities	(1,138)
Realized and unrealized gain	526
Foreign exchange movement	(31)
Balance,December 31,2019	$ 4,653
Redemption of marketable securities	(657)
Realized and unrealized gain	610
Foreign exchange movement	(335)
Balance, December 31, 2020	$ 4,271

The Company holds senior bond trusts which are classified as FVTPL and are recorded at fair value using the quoted market prices as at December 31, 2020 and are therefore classified as level 1 within the fair value hierarchy with an interest rate of 11% per annum, payable every six months. The investments are held in Mexico and their maturity date is in August 2023.

13 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

5. ACCOUNTS RECEIVABLE

	December 31, 2020	December 31, 2019
Trade receivables	$ 241	$ 130
Value added taxes and other taxes receivable	37	27
Other receivables	321	173
Total accounts receivable	$ 599	$ 330

The Company has a concentrate off-take agreement where the customer will purchase 100% of the metals concentrate produced at the Campo Morado (effective September 11, 2017) and Tahuehueto (effective December 7, 2017) mining properties.

During the year ended December 31, 2020, the Company reclassed valued added taxes receivable in Mexico to long term based on the expected timing of realization. As at December 31, 2020, the Company has $5,056 in valued added taxes receivable included in other assets.

6. INVENTORIES

	December 31, 2020	December 31, 2019
Materials and supplies	$ 4,593	$ 4,969
Concentrates	884	-
Stockpile ore	503	2,386
Total inventories	$ 5,980	$ 7,355

7. MINERAL INTEREST AND DEVELOPMENT ASSETS

a) Tahuehueto mining project

In 1997, the Company through a wholly owned subsidiary entered into a share purchase agreement (the “Real Agreement”) to purchase 90% of the issued and outstanding shares of Real de la Bufa, which holds a 100% interest in the Tahuehueto mineral property, located in the state of Durango, Mexico. In 2007, the Company converted into equity a portion of its inter-company debt with Real de la Bufa, thereby increasing its ownership to 99%. A portion of the Tahuehueto mineral property is subject to a 1.6% net smelter return royalty (“NSR”).

Pursuant to the Real Agreement, the Company is obligated to make final payments in the amount of $255 (December 31, 2019 – $260 (US$200,000)) to some of the Real de la Bufa’s shareholders.

On April 26, 2016, the Company signed an agreement with the local community and extended the surface access rights for 30 years. Under the terms of the agreement, the Company is obligated to make equal recurring yearly payments in the amount of US$46,540 which increase by a rate of 5% compounded annually.

Effective January 1, 2017, the Company commenced capitalization of all direct costs related to the development of the Tahuehueto project to mineral interest and development asset under IAS 16, as management determined that the technical feasibility and commercial viability had been established through the positive results associated with the pre-feasibility study, access to financing and board approval to start developing the project, thereby making it a development stage asset under IFRS.

b) Campo Morado mine

On June 13, 2017, the Company completed a definitive share purchase agreement (the “Campo Morado Agreement”) with Nyrstar Mining Ltd. and Nyrstar Mexico Resources Corp. (collectively “Nyrstar”) to purchase all the shares of Nyrstar’s Mexican subsidiary companies that make up and own 100% of the Campo Morado mine (“Campo Morado”), located in Guerrero State, Mexico.

14 -

Telson Mining Corporation

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

7. MINERAL INTEREST AND DEVELOPMENT ASSETS (continued)

b) Campo Morado mine (continued)

The total purchase price was US$20 million as follows: 1) US$0.8 million at signing of the agreement (paid), 2) US$2.7 million on or before September 12, 2017 (paid), and 3) US$16.5 million on or before June 13, 2018 (US$11 million paid).

The Campo Morado project is subject to a royalty between 2% and 3% of the net value of sales over the minerals extracted during the term of existence of the mining concession to the Servicio Geológico Mexicano (“SGM”).

As part of the Campo Morado Agreement, the seller retained the right to receive a variable purchase price on future zinc production on the first 10 million tonnes of ore processed by the Company at the Campo Morado mine when the price of zinc is at or above US$2,100 per tonne. This was accounted for as contingent consideration (note 9). Telson shall pay Nyrstar the greater of either:

a) US$20 per tonne of zinc sold if the zinc price received is over US$2,100 per tonne; or
b) a percentage that ranges between 0.5% and 4.25% of the net smelter revenues received from zinc when the price of zinc ranges between US$1,200 and US$2,500 from the Campo Morado mine.

The Company maintains the right under the Campo Morado Agreement to purchase 100% of the variable purchase price at any time for US$4 million.

Mineral properties are tested for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Management assesses the carrying values of its mineral properties for indication of impairment every reporting period. During 2019, management determined that there were indicators of impairment on the Company’s Campo Morado project due to the decline in zinc prices, and the Company having suspended operations at Campo Morado from August 2019 to January 2020 and March to April 2020. Since Campo Morado assets were fully impaired in 2019, there is no impairment determination in 2020 and during the year, indicators were not substantially improved to consider an impairment reversal.

As a result of the impairment indicators noted above, an impairment test was performed that determined that the recoverable amount of the Campo’s Morado cash generating unit (CGU), based on a VIU model (level 3 in the fair value hierarchy) exceeded the carrying value of the CGU, resulting in an asset impairment charge of $21,712 during the year ended December 31, 2019.

Capitalized cash flows are determined with reference to undiscounted risk adjusted cash flows and a discount rate of 20% based on characteristic of the CGU.

The discounted cash flow incorporates management’s best estimates of key assumptions which include discount rates, future commodity prices, production based on current estimates of recoverable reserves, consideration of mineral resources and future foreign exchange rates. The cash flows are for periods up to the date the mine is expected to cease production. An after-tax discount rate of 20% was used. The cash flow calculations were based on estimates of future production levels using expected tonnage, grades, recoveries and reserves and factors in historical data. Commodity prices used in the impairment assessment were determined by reference to external market participant sources. The key commodity prices for this assessment are the prices of zinc, lead, silver and gold as follows:

15 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

7. MINERAL INTEREST AND DEVELOPMENT ASSETS (continued)

b) Campo Morado mine (continued)

==> picture [443 x 145] intentionally omitted <==

----- Start of picture text -----

Zinc (US$ per lb) Lead (US$ per lb) Gold (US $ per oz) Silver (US$ per oz)
2021 1.00 0.87 1,742.74 19.11
2022 1.03 0.90 1,719.26 19.07
2023 1.08 0.92 1,639.21 19.07
2024 1.10 0.91 1,579.47 19.47
2025 1.09 0.91 1,563.33 17.75
2026 1.20 1.01 1,503.20 17.25
2027 1.23 1.02 1,528.00 18.84
2028 1.26 1.03 1,502.00 19.31
2029 1.31 1.05 1,537.50 18.06
onwards
----- End of picture text -----

Expected future cash flows used to determine the VIU in the impairment testing are inherently uncertain and could materially change over time. Should management’s estimate of the future not reflect actual events, future impairments on fixed assets may be identified. This may have a material effect on the Company’s consolidated financial statements. Although it is reasonably possible for a change in key assumptions to occur, the possible effects of a change in any single assumption may not fairly reflect the impact on the CGU’s fair value as the assumptions are inextricably linked.

c) Costs capitalized as mineral interest and development assets

For the years ended December 31, 2020 and December 31, 2019, the Company capitalized the following acquisition and developments costs:

		Tahuehueto
Balance as at December 31, 2019	$	12,335
Costs incurred:
Treatment charges and penalties		101
Freight and related costs		24
Depreciation capitalized		1,081
Amortization right of use of assetst\|	19
Assaying, data, and maps		3
Camp cost, equipment, and field supplies		655
Development costs		355
Fuel and consumables		90
Supplies, lubricants and other		23
Project general and office expenses		295
Permitting, environmental and community costs		170
Salaries and wages		204
Travel and accommodation		9
Royalties		13
Interest capitalized, net		2,837
Pre - commercial sales		(165)
Total additions for the year		5,714
Change of provision for site reclamation and closure		(88)
Foreign currencymovement		(1,376)
Balance, December 31, 2020	$	16,585

16 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

7. MINERAL INTEREST AND DEVELOPMENT ASSETS (continued)

c) Costs capitalized as mineral interest and development assets (continued)

	Tahuehueto	Campo Morado			Total
Balance as at December 31, 2018	$ 6,393	$ 23,829		$	30,222
Costs incurred:
Assaying, data, and maps	50		-		50
Camp cost, equipment, and field supplies	1,607		-		1,607
Development costs	3,146		-		3,146
Freight and related costs	198		-		198
Fuel and consumables	517		-		517
Supplies, lubricants and other	311		-		311
Project general and office expenses	654		-		654
Geological consulting services	3		-		3
Permitting, environmental and community costs	4		-		4
Salaries and wages	1,477		-		1,477
Travel and accommodation	99		-		99
Depreciation capitalized	861		-		861
Royalties	152		-		152
Interest capitalized, net	1,834		-		1,834
Pre - commercial sales	(4,696)		-		(4,696)
Total additions for the year	6,217		-		6,217
Depletion for the year	-	(642)			(642)
Change of provision for site reclamation
and closure	12	(849)			(837)
Impairment	-	(21,712)			(21,712)
Foreign currencymovement	(287)	(626)			(913)
Balance as at December 31, 2019	$ 12,335	$	-	$	12,335

Included in mineral interest and development assets is $2,837 (December 31, 2019- $1,834) of capitalized borrowing costs based on a capitalization rate of 100%.

17 -

Telson Mining Corporation

Notes to the Consolidated Financial Statements

(Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

8. PROPERTY, PLANT AND EQUIPMENT

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----- Start of picture text -----

Land Mine plant & Machinery & Construction Right of use Total
infrastructure equipment in progress assets
(Note 11) Cost Balance, December 31, 2018 $ 3,300 $ 2,228 $ 10,260 $ 1,851 $ 2,315 $ 19,954 Adjustment on initial - application of IFRS 16 - - - 689 689 Additions - - 842 1,684 - 2,526 Dispositions - - (15) - - (15) Balance, December 31, 2019 $ 3,300 $ 2,228 $ 11,087 $ 3,535 $ 3,004 $ 23,154 Additions - 72 160 1 271 504 Transfers - 2,182 (2,182) - - - Dispositions - - (39) - (1,669) (1,708) Balance December 31, 2020 $ 3,300 $ 4,482 $ 9,026 $ 3,536 $ 1,606 $ 21,950 Accumulated amortization Balance, December 31, 2018 $ - $ 83 $ 661 $ - $ 240 $ 984 Amortization for the year - 170 816 - 422 1,408 Balance, December 31, 2019 $ - $ 253 $ 1,477 $ - $ 662 $ 2,392 Amortization for the year - 113 1,202 - 323 1,638 Transfers - 104 (104) - - - Dispositions - - (24) - (440) (464) $ - $ 470 $ 2,551 $ - $ 545 $ 3,566
Foreign currency movement
Balance, December 31, 2019 (171) (111) (493) (94) (106) (975)
Balance, December 31, 2020 (118) 47 (1,180) (131) 61 (1,321)
Net book value
Balance, December 31, 2019 $ 3,129 $ 1,864 $ 9,117 $ 3,441 $ 2,236 $ 19,787
Balance December 31, 2020 $ 3,182 $ 4,059 $ 5,295 $ 3,405 $ 1,122 $ 17,063
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18 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

9. DUE TO NYRSTAR MINING LTD.

As at December 31, 2020 and 2019, the Company recorded the following amounts due to Nyrstar Mining Ltd:

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----- Start of picture text -----

Consideration Contingent Total
payable due to consideration
acquisition (Note 7(b))
Balance, December 31, 2018 $ 7,593 $ 4,057 $ 11,650
Accrued interest 875 - 875
Interest paid (35) - (35)
Foreign exchange adjustment (391) (194) (585)
Balance, December 31, 2019 $ 8,042 $ 3,863 $ 11,905
Accrued interest 1,061 - 1,061
Change in fair value of contingent
- 1,307 1,307
consideration
Foreign exchange adjustment (212) (76) (288)
Balance, December 31, 2020 $ 8,891 $ 5,094 $ 13,985
Consideration Contingent Total
payable due to consideration
acquisition (Note 7(b))
Current portion $ 8,891 $ 5,094 $ 13,985
Long term portion - - -
Balance, December 31, 2020 $ 8,891 $ 5,094 $ 13,985
Consideration Contingent Total
payable due to consideration
acquisition (Note 7(b))
Current portion $ 8,042 $ 3,863 $ 11,905
Long term portion - - -
Balance, December 31, 2019 $ 8,042 $ 3,863 $ 11,905
----- End of picture text -----

On June 13, 2017, The Company acquired Campo Morado mine for a total purchase price of US$20 million as follows: 1) US$0.8 million at signing of the agreement (paid), 2) US$2.7 million on or before September 12, 2017 (paid), and 3) US$16.5 million on or before June 13, 2018 (US$11 million paid).

On June 12, 2018, the Company renegotiated the terms for the remaining US$8.5 million balance of the Campo Morado Agreement and entered into a loan agreement with Nyrstar (“Campo Morado Loan Agreement”). On November 19, 2018, the Company reached an agreement with Nyrstar to amend the terms of the Campo Morado Loan Agreement to mainly reduce the monthly principal repayment from US$1.0 million to US$0.5 million, which also effectively extends the repayment period of the balance owing.

The main terms of the amended Campo Morado Loan Agreement are as follows:

a) Telson agreed to pay on or before November 23, 2018 an amount of US$500,000 as principal repayment plus any accrued interest. (Paid)
b) Telson will make monthly principal repayments of US$500,000 on the 13th day of each month starting on December 13, 2018 and up until October 2019, plus any accrued interest
c) The interest rate did not change and was kept at a fixed rate of 10% per annum and 12% for any amounts overdue
d) Along with the monthly principal repayments mentioned above, Telson will also pay:
19 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

9. DUE TO NYRSTAR MINING LTD. (continued)

70% of any monthly free cash flow generated by Telson; plus, any monthly excess cash balance above US$500,000; plus
50% of the monthly free cash flow generated by Telson on the Tahuehueto project once Telson declares commercial production.

Telson agreed to repay in full the balance of the Campo Morado Loan Agreement no later than October 31, 2019.

During June 2020, the Company entered into a letter agreement (the "Nyrstar Letter Agreement") with Nyrstar in which Nyrstar has provided Telson a conditional waiver to Telson's default status of the Campo Morado Loan Agreement.

Under the terms of the Nyrstar Letter Agreement, Telson acknowledges that it is in default of its obligations under the Nyrstar Loan Agreement and as an inducement for Nyrstar to enter into the Nyrstar Letter Agreement granting the waivers, Telson, with the consent of Trafigura Mexico, S.A. de C.V. (“Trafigura”) is consent, has agreed to accept Nyrstar into the Trust, thereby granting full security to Nyrstar, subordinate to Trafigura, and new secured lender(s) that may provide debt funding that fund the final Tahuehueto mine construction costs.

The Nyrstar Letter Agreement further provides,

Nyrstar's conditional approval and consent to allow Telson to avoid a cause for default by granting Telson a waiver, forgoing defaults under the Nyrstar Loan Agreement, and deferring interests and principal payments until June 30, 2021.
This waiver eliminates the Nyrstar Loan Agreements restriction on Telson for disposition of assets, if necessary, to generate cash to allow Telson to repay its loan obligations to Nyrstar.
Nyrstar agrees to restructure Telson's entire loan debt obligation under terms and conditions to be negotiated on good faith by both parties based on market conditions and updated cash flow projections which confirm either of Telson's projects financial viability if,
a. the Tahuehueto project is ramped up or,
b. the Campo Morado project successfully operates and shows monthly repayment of due obligations to Nyrstar and Trafigura on at least 6 consecutive months in amounts not less than an aggregate of $300,000 per month, on a pro rata basis based on outstanding amounts due under the Campo Morado Loan Agreement with Nyrstar and the Loan Agreement Campo with Trafigura.
c. If Telson successfully raises funding in a sufficient amount to fully fund the final construction and ramp up of the Tahuehueto project, which funding amount and requirements for effective ramp up to be independently verified by a mutually acceptable independent engineering consultant.

If Telson repays the total debt due to Nyrstar under the Nyrstar Loan Agreement, Nyrstar shall no longer be a beneficiary of the Trust.

On April 26, 2021, the Company exercised the option to buy back the variable purchase price obligation. See note 24 f).

20 -

Telson Mining Corporation

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

10. SHORT AND LONG-TERM DEBT

a) Line of Credit

On July 22, 2016, the Company entered into an agreement with Estrategica Corporativa en Finanzas, S.A.P.I. de C.V. (“Escorfin”), for a line of credit for up to $9.6 million (MXN$150M) (the “LOC”). The funds drawn down under the LOC accrue interest at a rate of 15% per year, payable monthly after a grace period of

12 months. Interest generated during the grace period will be subsequently paid in 12 consecutive monthly installments. Furthermore, the Company is required to pay back any cash advances in 24 equal consecutive monthly installments following a 36-month grace period and no later than July 28, 2022. The Company may repay any outstanding balance of the LOC at any time without penalty. In case of default any payment under the LOC, the Company will pay a moratorium interest rate of 30% per annum.

The funds from the LOC are to be applied towards the Company’s investment plan established in its completed Internal Scoping Study. The obligations of the Company under the LOC are secured by substantially all the Real de la Bufa’s assets, including certain mining concessions.

The Company has drawn down from its LOC a total amount of $3 million (MXN$46M) primarily to further its Tahuehueto project. The continuity of the outstanding long-term debt is as follows:

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----- Start of picture text -----

Amount
Balance, December 31, 2018 $ 3,380
Withdraw of line of credit 69
Accrued interest 471
Foreign exchange adjustment (28)
Balance, December 31, 2019 $ 3,892
Accrued interest 436
Foreign exchange adjustment (201)
Balance, December 31, 2020 $ 4,127
December 31, 2020 December 31, 2019
Current portion $ 4,127 $ 3,892
Long term portion - -
Balance $ 4,127 $ 3,892
----- End of picture text -----

As a result of the Company not being able to meet its contractual obligations, the Company is in default on the LOC balance which is presented within current liabilities. The Company is working with Escorfin to restructure the terms of the LOC, however there can be no assurance that these efforts will be successful. .

b) Loan Facility Campo

On September 11, 2017, the Company entered into a loan agreement (“Loan Agreement Campo”) with Trafigura in the amount of US$5 million for financing working capital to initiate the restart of continuous mining operations at the Campo Morado mining facility. The loan bears interest at an effective annual rate equivalent to LIBOR (3M) plus 5%, it has a three-year term with nine months grace period followed by thirty monthly repayments. In connection to the loan agreement the Company’s subsidiary, Minas de Campo Morado, S.A. de C.V., also entered into an Offtake agreement with Trafigura, (“Offtake Agreement Campo”) in which the Company will sell all its zinc and lead concentrates for a fifty-one-month term starting October 2017.

21 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

10. SHORT AND LONG-TERM DEBT (continued)

b) Loan Facility Campo ( continued)

Under the terms of the Loan Agreement Campo, the Company is subject to certain covenants, including to maintain a minimum current ratio of 1:1 without taking into consideration amounts due to Nyrstar Mining Ltd. The Company is not in compliance with the covenants as at December 31, 2020, and 2019 therefore the outstanding balance is presented within current liabilities. The loan is secured by all of the outstanding shares of Minas de Campo Morado, S.A. de C.V. The continuity of the loan is as follows:

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----- Start of picture text -----

Amount
Balance, December 31, 2018 $ 4,813
Principal repayments (215)
Accrued interest 397
Interest paid (201)
Foreign exchange adjustment (229)
Balance, December 31, 2019 $ 4,565
Accrued interest 621
Foreign exchange adjustment (173)
Balance, December 31, 2020 $ 5,013
December 31, 2020 December 31, 2019
Current portion $ 5,013 $ 4,565
Long term portion - -
Balance $ 5,013 $ 4,565
----- End of picture text -----

c) Loan Facility Real

On December 7, 2017, the Company entered into a loan agreement (“Loan Agreement Real”) with Trafigura Mexico, S.A. de C.V. in the amount of US$15 million for financing working capital, rehabilitation and operation of the Tahuehueto mining project. The Loan Facility is available in three tranches, the first tranche equivalent to US$7.5 million was received upon signing of the agreement. The second tranche equal to US$5 million was received on November 6, 2018. The third tranche for US$2.5 million was available in nine months after the signing of the agreement but shall not pass nine months after the signing of the agreement subject to securing additional funding of US$2.5 million in the form of equity and/or a loan and at least US$2 million of these funds are invested on capital expenditures. The loan bears interest at an effective annual rate equivalent to LIBOR (1 year) plus 6%, it has a three-year term with a twelvemonth grace period followed by twenty-four repayments. In connection to the loan agreement the Company’s subsidiary Real de la Bufa, S.A. de C.V., also entered into an Offtake agreement with Trafigura., (“Offtake Agreement Real”) in which the Company will sell all its zinc and lead concentrates for a sixty-month term, starting January 2018.

Under the terms of the Loan Agreement Real, the Company is subject to certain covenants, including the Company must maintain a minimum current ratio of 1:1 without taking into consideration amounts due to Nyrstar Mining Ltd. The Company is not in compliance with the covenants as at December 31, 2020 and 2019, therefore the outstanding balance is presented within current liabilities. The loan is secured by the Tahuehueto mining concessions and certain property plant and equipment. The continuity of the loan is as follows:

22 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

10. SHORT AND LONG-TERM DEBT (continued)

c) Loan Facility Real (continued)

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----- Start of picture text -----

Amount
Balance, December 31, 2018 $ 17,210
Interest paid (777)
Principal repayment (685)
Accrued interest 1,363
Foreign exchange adjustment (614)
Balance, December 31, 2019 $ 16,497
Accrued interest 1,118
Foreign exchange adjustment 769
Balance, December 31, 2020 $ 18,384
December 31, 2020 December 31, 2019
Current portion $ 18,384 $ 16,497
Long term portion - -
Balance $ 18,384 $ 16,497
----- End of picture text -----

d) Trafigura Waiver Agreement

On March 26, 2020, the Company entered into a letter agreement (the “Waiver Agreement”) with Trafigura which defines the terms under which Trafigura will provide Telson a waiver to certain terms of the loan agreements entered into between the companies as described below.

Under the terms of the Waiver Agreement, Telson acknowledges that it is in default of its loan obligations under the following two loan agreements (the “Loan Agreements”) entered into between Trafigura and Telson:

1) Loan Agreement Campo and,
2) Loan Agreement Real

Material terms of the Waiver Agreement are as follows:

1) Trafigura has provided their approval and consent to allow Telson to avoid a cause for default by granting Telson a waiver, forgoing defaults under the Loan Agreements, and deferring interests and principal payments until June 30, 2021.
2) This waiver also eliminates the Loan Agreements restriction on Telson for disposition of assets, if necessary, to generate cash to allow Telson to repay its Loan Agreements obligations to Trafigura.
3) Trafigura agrees to restructure the entire Loan Agreements obligation under terms and conditions to be negotiated on good faith by both parties based on market conditions and updated cash flow projections which confirm the projects financial viability, if
a. The Tahuehueto mining project is ramped up or,
b. Telson successfully raises funding in sufficient amounts to fully fund the final construction and ramp up of the Tahuehueto mining project, which funding amount and requirements for effective ramp up, to be independently verified by a mutually acceptable independent engineering consultant.
23 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

10. SHORT AND LONG-TERM DEBT (continued)

d) Trafigura Waiver Agreement (continued)

c. And subject to the fulfillment of the milestones outlined in section 7 below.
4) Telson agrees to undertake to conduct a process to market assets for potential sale (the "Transaction") in amounts to repay its Loan Agreements to Trafigura.
5) Telson will transfer all its assets in the Campo Morado and Tahuehueto mining projects to a trustee of the Trust Agreement (the "Trust") in order to secure the full repayment of the Loan Agreements. Should Telson repay the total debt due to Trafigura under the Loan Agreements, the Trust will be terminated, and all assets held within the Trust will return to Telson.
6) Telson undertakes to make every effort to,
a. Raise funding to repay the full amount of the Loan Agreements and at the same time to,
b. Progress the Transaction and should Telson not obtain sufficient funding to repay the Loan Agreements debt before June 30, 2021, Telson intends to perform the sale of one or more of its project assets, to generate sufficient funds to repay the Loan Agreements.
7) Milestones - Telson will take all reasonable commercial efforts to advance the Transaction, adhering to the time schedule outlined below and will provide Trafigura evidence that this process is advancing to the following schedule.
a. Before December 31, 2020, Telson shall have received at least three (3) letters of intent from potential buyers regarding the Transaction.
b. Before March 31, 2021, Telson shall have received at least three (3) binding offers from potential buyers regarding the Transaction.
c. It is recognized that a breach of the Waiver Agreement shall not have occurred should Telson fail to receive the letters of intent and binding offers as contemplated in the above sections as a result of market conditions which fail to generate bona fide interest in the purchase of the assets so long as Telson has in good faith made all commercially reasonable efforts to advance the Transaction and can provide evidence of such efforts.
d. No later than June 30, 2021, the corresponding sales and purchase agreement shall be executed between Telson and the relevant purchaser if Telson has not either, repaid its loan debt obligations or satisfied the conditions outlined within section 3 above.
8) In partial consideration of the waiver granted by Trafigura, Telson issued to Trafigura 12,000,00 share purchase warrants exercisable into one common share per share purchase warrant at an exercise price of $0.175 per share over a term of 36 months. If any of the Campo Morado mine or Tahuehueto mining project are sold and Telson repays its total debt under the Loan Agreements within the timeline proposed the share purchase warrants will expire and thereby be canceled. The fair value of the warrants is $2,492.

On November 12, 2020, the Company executed the Trust with Trafigura as mandated under the terms of the Waiver Agreement.

24 -

Telson Mining Corporation Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

10. SHORT AND LONG-TERM DEBT (continued)

e) Accendo Loan

On June 16, 2020, the Company signed a term sheet with Accendo Banco, S.A. Insititucion de Banca Multiple ("Accendo") whereby Accendo will, subject to final due diligence, provide Telson with a US$12 million Medium Term Loan Facility ("MTLF") for the purpose of funding construction at Telson's Tahuehueto mining project and general working capital purposes.

The main terms and conditions of Accendo's MTLF are as follows:

Loan facility amount - US$ 12 million
Repayment term - 3 years with a one-year grace period on principal
Repayable in 24 equal monthly payments starting 12 months after closing
Interest rate of 13.5% per annum
Secured by second ranking security interest over all assets of the Company
An arrangement fee of 2.5% of the facility amount payable from the proceeds upon first draw down at the closing
An origination fee of 2.5% of the facility amount payable from the proceeds upon first draw down at the closing
Telson issued, 15 million bonus warrants at an exercise price of $0.09 per share for a period of 48 months. The bonus warrants were issued in lieu of a work fee but subject to cancelation if the loan facility does not close. The warrant were valued using the Black-Scholes option pricing model and their value is $1,628. The assumption used for determining the value of the warrants were risk-free interest rate 0.33%, expected dividend yield $nil, stock price volatility 128% and expected life in years of 4.
The loan facility is subject to final due diligence of Accendo

Accendo has advanced the Company US$500,000 as of December 31, 2020. The 15 million bonus warrants issued in lieu of a work fee, were valued using the Black-Scholes pricing model (note 13 i.) and are included in other assets. The unamortized balance at December 31, 2020 is $1,354.

The continuity of the loan is as follows:

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----- Start of picture text -----

Amount
Balance, December 31, 2019 $ -
Loan 655
Accrued interest 46
Interest Paid (25)
Foreign exchange adjustment (19)
Balance, December 31, 2020 $ 657
December 31, 2020 December 31, 2019
Current portion $ 126 $ -
Long term portion 531 -
Balance $ 657 $ -
----- End of picture text -----

25 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

11. RIGHT OF USE ASSETS AND LEASE LIABILITIES

Telson’s leases are mainly real estate leases for office space.

The Company leases office space for its corporate offices located in Vancouver, BC, Canada and Mexico City. As at December 31, 2020, the Company recorded $2,075 of lease liability. The incremental borrowing annual rate for lease liability initially recognized as of January 1, 2019 was 8% to 15%.

The continuity of lease liabilities for the year ended December 31, 2020 is as follows:

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----- Start of picture text -----

Amount
Balance lease liabilities, January 1, 2019 $ 1,547
Lease liabilities recognized as of January 1, 2019 689
Lease payments (365)
Interest expense 177
Foreign exchange adjustment (121)
Balance lease liabilities, December 31, 2019 $ 1,927
New leases 303
Cancelation of leases (160)
Lease payments (359)
Interest expense 102
Interest paid (102)
Foreign exchange adjustment (90)
Balance, December 31, 2020 $ 1,621
December 31, 2020 December 31, 2019
Current portion $ 1,355 $ 1,457
Long term portion 266 470
Balance $ 1,621 $ 1,927
----- End of picture text -----

Future minimum lease payments (principal and interest) on the leases is as follows:

==> picture [456 x 114] intentionally omitted <==

----- Start of picture text -----

Amount
2021 $ 1,054
2022 359
2023 119
2024 62
Thereafter 41
Total minimum lease payments 1,635
Present value of minimum lease payments (14)
Lease obligations, December 31, 2020 $ 1,621
----- End of picture text -----

26 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

11. RIGHT OF USE ASSETS AND LEASE LIABILITIES (continued)

==> picture [457 x 394] intentionally omitted <==

----- Start of picture text -----

Machinery & Offices Vehicles Right of use
equipment assets
(Note 8)
Cost
Balance, January 1, 2019 $ 2,315 $ - $ - $ 2,315
Adjustment on initial application of
IFRS 16 - 536 153 689
Balance, December 31, 2019 2,315 536 153 3,004
Additions - 271 - 271
Dispositions (1,384) (285) - (1,669)
Balance, December 31, 2020 $ 931 $ 522 $ 153 $ 1,606
Accumulated amortization
Balance, January 1, 2019 $ 240 $ - $ - $ 240
Amortization for the year 234 142 46 422
Balance, December 31, 2019 $ 474 $ 142 $ 46 $ 662
Additions 176 106 41 323
Dispositions (334) (106) - (440)
Balance, December 31, 2020 $ 316 $ 142 $ 87 $ 545
Foreign currency movement
Balance, December 31, 2019 (61) (35) (10) (106)
Balance, December 31, 2020 86 (17) (8) 61
Net book value
Balance, December 31, 2019 $ 1,780 $ 359 $ 97 $ 2,236
Balance, December 31, 2020 $ 701 $ 363 $ 58 $ 1,122
----- End of picture text -----

The Company does not face a significant liquidity risk with regard to its lease liability. Lease liability is monitored within the Company treasury function. The lease liability matures in 2025.

There were no significant payments made for short-term or low value leases in the year ended December 31, 2020 (2019 -$nil).

12. PROVISION FOR SITE RECLAMATION AND CLOSURE

The Company recognizes a provision for site reclamation and closure, which reflects the present value of the estimated amount of cash flows required to satisfy the site reclamation and closure costs. The components of this obligation are mainly the costs associated with the reclamation of the infrastructure and buildings, roads and work sites on the property. The estimate of future site reclamation and closure obligations is subject to change based on amendments to applicable laws, management’s intentions, mine life and mining concessions renewals.

27 -

Telson Mining Corporation

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

12. PROVISION FOR SITE RECLAMATION AND CLOSURE (continued)

a) Tahuehueto mining project

A total present value of future estimated cash flows required to settle the site reclamation and closure obligation was estimated at $360 (December 31, 2019 – $448).

A provision for site reclamation and closure has been recognized in respect of the Tahuehueto mining project.

The key assumptions on which this estimate was based on are:

Undiscounted cash flow for site reclamation of $551 (MXP $8.6M), 2019 - $594 (MXP$8.6M)
Expected timing of future cash flows is based on estimated mine life of 9 years with reclamation occurring equally in years 10 and 11 (2019 - years 8 and 9);
Annual inflation rate 4.19% (2019 – 3.9%); and
Risk free interest rate 8.50% (2019 – 8.50%)

b) Campo Morado mine

On acquisition of Campo Morado a provision for site reclamation and closure has been recognized in respect of the Campo Morado mining operations. The key assumptions on which this estimate was based on are:

Undiscounted cash flow for site reclamation of $9,049 (MXP $141.6M), 2019 – $9,755 (MXP$141.6M);
Expected timing of future cash flows is based on estimated mine life of 11 years with reclamation occurring in years 12 to 17 (2019 – years 13 to 18);
Annual inflation rate 4.19% (2019 – 3.9%); and
Risk free interest rate 8.50% (2019 – 8.50%).

The present value of future estimated cash flows required to settle the site reclamation and closure obligation was estimated at $5,278 (December 31, 2019 – $5,310).

The following is a continuity of the obligation for site reclamation and closure:

==> picture [466 x 74] intentionally omitted <==

----- Start of picture text -----

December 31, 2020 December 31, 2019
Balance, beginning of the year $ 5,758 $ 5,015
Accretion expense 374 1,624
Change in estimate (114) (837)
Foreign exchange movement (380) (44)
Balance, end of the year $ 5,638 $ 5,758
----- End of picture text -----

13. SHARE CAPITAL

Common share transactions:

Year ended December 31, 2020

i. On October 15, 2020, the Company closed a debt settlement with Accendo in the amount of $660 in connection to a portion of Tahuehueto mining project’s suppliers debt. Accordingly, the Company issued 7,330,651 shares valued at $0.09 per share at the time the negotiation was done. Subsequently when the shares were issued the fair value of these shares were $0.28 per share and as a result the Company recorded a loss of $1,393. In connection with the financing with Accendo (note 10(e)), the Company, issued 15M bonus warrants that were issued in lieu of a work fee but subject to cancelation if the loan facility does
28 -

Telson Mining Corporation

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

13. SHARE CAPITAL (continued)

not close. As specified in Note 10, in partial consideration of the waiver granted by Trafigura, during the reporting year Telson issued to Trafigura 12,000,000 share purchase warrants exercisable into one common share at an exercise price of $0.175 per share. The warrants were valued using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate 0.24%, expected dividend yield $nil, stock price volatility 112% and expected life in years of 3, which resulted in a fair value of $2,492

ii. On February 4, 2020, the Company closed the first tranche of a non-brokered private placement offering, whereby gross proceeds of $1,946 were raised by the issuance of 19,458,422 units at a price of $0.10 per unit. Each unit is comprised of one common share and one half of one whole transferable share purchase warrant. Each whole share purchase warrant entitles the holder thereof to purchase one additional common ‐
share of the Company at $0.25 within twenty four (24) months from closing. The fair value of the warrants is $10.

Escorfin, a related party, acquired 5,853,796 units.

On May 27, 2020, the Company closed the second and final tranche of a non-brokered private placement offering, whereby gross proceeds of $197 were raised by the issuance of 1,965,990 units at a price of $0.10 per unit. Each unit is comprised of one common share and one half of one whole transferable share purchase warrant. Each whole share purchase warrant entitles the holder thereof to purchase one ‐ additional common share of the Company at $0.25 within twenty four (24) months from closing.

Escorfin, a related party, acquired 1,412,400 units.

In connection with the above private placement, the Company issued 361,239 units as finders fees. Each unit is comprised of one common share and one half of one whole transferable share purchase warrant. Each whole share purchase warrant entitles the holder thereof to purchase one additional common share ‐ of the Company at $0.25 within twenty four (24) months from closing. The finders’ warrants were recorded at a fair value of $6.

All securities issued under the private placement are subject to a hold period expiring four months and one day after the closing date.

iii. On July 10, 2020, the Company closed a non-brokered private placement offering, whereby gross proceeds of $1,400 were raised by the issuance of 13,996,145 units at a price of $0.10 per unit. Each unit is comprised of one common share and one half of one whole transferable share purchase warrant. Each whole share purchase warrant entitles the holder thereof to purchase one additional common share of the Company at ‐
$0.15 within twenty four (24) months from closing. All securities issued under the private placement are subject to a hold period expiring four months and one day after the closing date. The share issuance cost associated with both private placements is $64.
iv. During the year ended December 31, 2020, the Company issued 75,000 common shares for gross proceeds of $10 in connection with stock options exercised. The fair value of the options exercised was $10 and was transferred from the equity reserves and recorded against share capital.

Year ended December 31, 2019

i. During the year ended December 31, 2019, the Company issued 20,000 common shares for gross proceeds of $2 in connection with stock options exercised. The fair value of the options exercised was $2 and was transferred from the equity reserves and recorded against share capital.
29 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

13. SHARE CAPITAL (continued)

ii During the year ended December 31, 2019, the Company received gross proceeds of $795 in connection with a non ‐ brokered private placement that closed on May 27, 2020.

14. EQUITY RESERVES

a) Share-based compensation

The Company has a stock option plan (the “Plan”) providing for the issuance of stock options to directors, officers, employees and other service providers enabling them to acquire up to 10% of the issued and outstanding common stocks of the Company, on a rolling basis. Options may be granted at an exercise price of not less than a 25% discount of the market price on the date of the grant, or such higher price as determined by the Board of Directors. Stock options can be granted for a maximum term of 10 years. Vesting is not required but may be set on an individual basis as determined by the Board of Directors. The stock options granted vest as to 33.33% on the date of the grant and 33.33% every six months thereafter for a total vesting period of 12 months.

The continuity of the number of stock options issued and outstanding is as follows:

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----- Start of picture text -----

Number Weighted
of stock average
options exercise price
Outstanding, December 31, 2018 10,637,166 0.42
Cancelled (1,050,000) 0.80
Exercised (20,000) 0.13
Outstanding, December 31, 2019 9,567,166 0.39
Granted 350,000 0.19
Exercised (75,000) 0.13
Cancelled (1,150,000) 0.41
Outstanding, December 31, 2020 8,692,166 0.36
----- End of picture text -----

The weighted average share price at the date of exercise of the options exercised was $0.28.

As at December 31, 2020 and 2019, the number of stock options outstanding and exercisable were:

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Outstanding Exercisable
Remaining
Number of Exercise Number of
Expiry date contractual
options price options
life (years)
March 22, 2021 4,862,166 $ 0.13 0.22 4,862,166
November 11, 2022 3,030,000 $ 0.71 1.86 3,030,000
April 16, 2023 400,000 $ 0.77 2.29 400,000
April 23, 2023 50,000 $ 0.72 2.31 50,000
August 6, 2025 100,000 $ 0.20 4.60 33,000
September 16, 2025 250,000 $ 0.16 4.71 82,500
Outstanding, December 31, 2020 8,692,166 8,457,666
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Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

14. EQUITY RESERVES (continued)

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----- Start of picture text -----

Outstanding Exercisable
Remaining
Number of Exercise Number of
Expiry date contractual
options price options
life (years)
March 22, 2021 5,437,166 $ 0.13 1.22 5,437,166
November 11, 2022 3,680,000 $ 0.71 2.87 3,680,000
April 16, 2023 400,000 $ 0.77 3.29 400,000
April 23, 2023 50,000 $ 0.72 3.31 50,000
Outstanding, December 31, 2019 9,567,166 9,567,166
----- End of picture text -----

The Company uses the fair value method of accounting for all share-based payments to directors, officers, employees, and others providing similar services. During the year ended December 31, 2020 an amount of $42 (2019 - $45) was expensed as share-based compensation. The portion of share-based compensation recorded is based on the vesting schedule of the options.

During the year ended December 31, 2020, the Company granted a total of 350,000 (2019 – nil) stock options with a weighted average grant-date fair value of $0.19 (2019 - $nil) per option calculated as of the date of grant using the Black-Scholes option model. The fair value of the stock options granted during the year ended December 31, 2020 and 2019, were estimated using the Black-Scholes option valuation model with the following weighted average assumptions:

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2020 2019
Risk-free interest rate 0.36% N/A
Expected forfeiture rate Nil Nil
Stock price volatility 108% N/A
Expected life (in years) 4.65 N/A
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The expected volatility assumption is based on the historical and implied volatility of the Company’s common share price on the TSX Venture Exchange. The risk-free interest rate assumption is based on the Government of Canada benchmark bond yields and treasury bills with a remaining term that approximates the expected life of the stock options.

b) Share purchase warrants

The continuity of the number of share purchase warrants outstanding is as follows:

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----- Start of picture text -----

Warrants Exercise
outstanding price
Outstanding, December 31, 2019 and 2018 4,562,401 $1.25
Issued 44,890,909 0.16
Expired (4,562,401) 1.25
Outstanding, December 31, 2020 44,890,909 $0.16
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31 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

14. EQUITY RESERVES (continued)

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----- Start of picture text -----

Outstanding
Remaining
Expiry date Granted Exercise price contractual life
(years)
February 4, 2022 9,729,221 0.25 1.1
May 27, 2022 1,163,615 0.25 1.4
July 9, 2022 6,998,073 0.15 1.5
April 16, 2023 12,000,000 0.17 2.8
June 30, 2024 15,000,000 0.09 3.5
44,890,909 0.20
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15. SUPPLEMENTAL CASH FLOW INFORMATION

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December 31, 2020 December 31, 2019
Accounts payable and accrued liabilities included in $ (2,088) $ 3,884
mineral interest and development assets
Interest of long-term debt capitalized as mineral interest
2,837 1,834
and development assets
Depreciation capitalized as mineral interest and
development assets 1,081 626
Right of use of assets amortization capitalized 176 234
Change in estimate for site reclamation and closure (114) (837)
Fair value of stock options exercised 10 2
As at December 31, 2020 December 31, 2019
Interest paid (note 9 and 10) $ 127 $ 1,013
Income taxes paid $ - $ -
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16. LOSS PER SHARE

Basic loss per share amounts is calculated by dividing the net loss for the year by the weighted average number of common shares outstanding during the year.

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----- Start of picture text -----

As at December 31, 2020 December 31, 2019
Loss attributable to $ (11,624) $ (29,356)
common shareholders
Weighted average number of shares 161,810,840 139,573,841
Basic and diluted loss per share $ (0.07) $ (0.21)
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The Company incurred a net loss for the years ended December 31, 2020 and 2019, therefore all outstanding stock options and share purchase warrants have been excluded from the calculation of diluted loss per share since the effect would be anti-dilutive.

32 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

17. RELATED PARTY BALANCES AND TRANSACTIONS

a) Compensation of key management personnel:

Key management personnel include members of the Board, the Chief Executive Officer, President, Chief Financial Officer and the Vice President, Corporate Development. The net aggregate compensation paid, or payable and related party transactions are shown as follows:

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----- Start of picture text -----

December 31, 2020 December 31, 2019
Short-term benefits $ 585 $ 951
Other benefits - 89
Share-based compensation - 40
$ 585 $ 1,080
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Related party balances:

As at December 31, 2020, directors and officers or their related companies were owed $615 (December 31, 2019 – $611) included in accounts payable and accrued liabilities mainly in respect to reimbursement of expenses and labour obligations. These amounts are unsecured, non-interest bearing and have no specific terms of settlement.

As at December 31, 2020, directors and officers or their related companies owed the Company $nil (December 31, 2019 – $15) included in prepaid expenses and deposits.

b) Estrategica Corporativa en Finanzas, S.A.P.I. DE C.V. (“Escorfin”)

Effective November 6, 2018, the Company appointed Roberto Guzman to the Board of Directors. Roberto is also the president, director and shareholder of Escorfin (Note 10a). Escorfin is a private equity fund that specialize in real estate development, energy innovations, and tourism investment in Mexico.

The following summarizes the transactions and balances owing to Escorfin as at December 31, 2020.

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----- Start of picture text -----

December 31, 2020 December 31, 2019
Current portion of the debt $ 4,127 $ 3,892
Long term portion of the debt - -
Balance $ 4,127 $ 3,892
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Since November 6, 2018, the Company incurred interest in the amount of $934 (December 31, 2019 – $471) of which $nil was paid (December 31, 2019 – $nil).

Escorfin acquired the following units in the private placements:

Private placement July 10, 2020, 1,412,400 units. Private placement May 27, 2020 5,853,796 units.

33 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

18. INCOME TAXES

The reconciliation of income tax provision computed at statutory rates to the reported income tax provision is:

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----- Start of picture text -----

December 31, 2020 December 31, 2019
Loss before income taxes $ (11,624) $ (29,341)
27.00% 27.00%
Expected income tax expense (recovery) (3,138) (7,922)
Increase (decrease) in income tax expense resulting from:
Change in statutory, foreign tax, foreign exchange rates, 4,922 (1,445)
and other
Permanent differences 1,019 3,121
Share issuance costs (15) (14)
Share-based compensation 11 12
Change in deferred tax assets 287 1,939
Adjustment to prior years’ provision versus statutory (3,469) (9,387)
tax returns and inflationary adjustments
Change in unrecognized deductible temporary differences 383 15,650
Income tax expense (recovery) $ - $ 1,954
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Income tax expense (recovery) differs from the amount that would result from applying the Canadian federal and provincial income tax rates to earnings (loss) before income taxes .

The relevant deferred tax balances have been re-measured to reflect the combined Federal and Provincial (BC) general corporate income tax rate of 27%.

The significant components of the Company’s unrecognized temporary differences and tax losses are as follows:

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Expiry date
December 31, 2020 December 31, 2019 range
Mineral interest and equipment $ 125,805 $ 132,874 No expiry date
Intangible assets 2,888 4,130 No expiry date
Share issue costs 64 16 No expiry date
Allowable capital losses 2,252 2,250 No expiry date
Non-capital losses available for future period 195,138 184,852 2021 to 2040
Canada 25,472 17,725 2026 to 2040
Mexico 169,665 167,127 2021 to 2030
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19. FINANCIAL INSTRUMENTS

Fair value of financial instruments:

Financial instruments recorded at fair value on the consolidated statements of financial position are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The three levels of the fair value hierarchy are:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and
34 -

Telson Mining Corporation

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

19. FINANCIAL INSTRUMENTS (continued)

Level 3 – Inputs that are not based on observable market data.

Marketable securities are classified as level one and recorded at fair value using quoted market prices. The carrying value of cash, accounts receivable, accounts payable and accrued liabilities, obligation under share purchase agreement, and due to Nyrstar Mining Ltd. approximated their fair value because of the short-term nature of these instruments. The fair values of the Company’s long-term debt approximated their carrying value as their interest rates are comparable to market interest rates.

Trade receivables from provisional sales of metals concentrates include provisional pricing, and final price and assay adjustments. Derivative instruments are forward arrangements that were valued using pricing models, which require a variety of inputs, such as expected zinc and lead prices, and foreign exchange rates. The trade receivables from sales of concentrate are derivative instruments and are valued using observable market commodity prices and thereby classified within Level 2 of the fair value hierarchy.

The Company’s activities expose it to financial risks of varying degrees of significance, which could affect its ability to achieve its strategic objectives for growth and shareholder returns. The principal financial risks to which the Company is exposed are credit risk, liquidity risk, currency risk, interest rate risk and commodity price risk. The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework and reviews the Company’s policies on an ongoing basis.

a) Credit risk

Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. The Company’s cash and marketable securities are held through large Canadian, international, and foreign national financial institutions. The Company’s accounts receivable consists of trade receivables from concentrate sales and taxes receivable from federal government agencies. Trade receivables are held with one large international metals trading company. The Company mitigates this risk by transacting only with reputable financial institutions and requiring provisional payments of 90% of the value of the concentrate shipped to a single well-known buyer. The carrying amount of financial assets recorded in the financial statements represents the Company’s maximum exposure to credit risk. The Company believes it is not exposed to significant credit risk.

b) Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages liquidity risk through the management of its capital structure. To mitigate this risk, the Company has a planning and budgeting process in place to determine the funds required to support its ongoing operations and capital expenditures. The Company ensures that sufficient funds are raised from equity offerings or debt financings to meet its operating requirements, after taking into account existing cash and expected exercise of stock options and share purchase warrants. See Note 1 for further discussion.

c) Market risk

This is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Significant market risks to which the Company is exposed are as follows:

i) Foreign currency risk
35 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

19. FINANCIAL INSTRUMENTS (continued)

The Company is exposed to currency risk by having balances and transactions in currencies that are different from its functional currency. The Company operates in foreign jurisdictions, which use both the Mexican Peso (MXN$) and United States Dollar (US$). The Company does not use derivative instruments to reduce upward and downward risk associated with foreign currency fluctuations.

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Amounts Amounts
US Dollars Mexican Peso
Financial assets denominated in foreign
$ 735,427 $ 94,225,134
currencies
Financial liabilities denominated
(40,133,673) (381,183,021)
in foreign currencies
Net exposure $ (39,398,246) $ (286,957,887)
----- End of picture text -----

A 10% change in the US dollar exchange rate relative to the Canadian dollar would change the Company’s profit or loss by $1,197.

A 10% change in the Mexican peso relative to the Canadian dollar would change the Company’s profit or loss by $642.

ii) Interest rate risk

Interest rate risk is the risk arising from the effect of changes in floating interest rates applicable to the Company’s financial instruments. At December 31, 2020 and 2019, the Company’s long-term debt are at fixed and floating rates and the Company has not entered, into any financial derivatives or other financial instruments to hedge against this risk. The Company’s loan agreements bear interest at variable and fixed rates. Interest risk exposure is in relation to variable interest rates such as LIBOR (3M) and (1 year) rates and a variation of 1% on the interest rate would change comprehensive loss by approximately $238. Also, the Company is exposed to interest rate fluctuations on the interest rate offered on cash balances held at chartered financial institutions, however this risk is considered to be minimal.

d) Commodity price risk

The Company is exposed to commodity and equity price risk given its revenue is derived from the sale of metal concentrates, the prices for which have been historically volatile. Consequently, the economic viability of the Company’s mineral interest and development assets may be adversely affected by fluctuations in metals prices. For concentrate shipped and provisionally invoiced at the year ended December 31, 2020, a 1% change in zinc and lead prices would result in an increase/decrease of approximately $20 and $5 respectively in revenues and pre-production sales (note 7).

20. CAPITAL RISK MANAGEMENT

The Company manages common shares, stock options, and share purchase warrants as capital. The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to pursue the development of its mineral interest and development assets and to maintain a flexible capital structure which optimizes the costs of capital at an acceptable risk.

The Company manages its capital structure and make adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the

36 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

Telson Mining Corporation

20. CAPITAL RISK MANAGEMENT (continued)

Company may attempt to issue new shares, issue debt, acquire or dispose of assets, or adjust the amount of cash on hand.

In order to facilitate the management of its capital requirements, the Company prepares expenditure budgets that are updated as necessary depending on various factors, including successful capital deployment and general industry conditions.

In order to maximize ongoing development efforts, the Company does not pay out dividends. The Company’s investment policy is to keep its cash treasury on deposit in an interest bearing Canadian or Mexican chartered bank account. Cash consists of cash on hand with banks.

The Company expects its current capital resources will be sufficient to carry its current operations. Nevertheless, any additional development and exploration is subject to acquiring new financing through loans, issue new shares through equity offerings or sell assets. The Company is subject to certain capital requirements in connection with its long-term debt (note 10).

There has been no change to the Company’s approach to capital management during the years ended December 31, 2020 and 2019.

The Company is not subject to externally imposed capital requirements.

21. SEGMENTED INFORMATION

The Company is engaged in mining, exploration, and development of mineral properties in Mexico. The Company operates in one industry and has four operating segments. The operating segments are managed separately based on the nature of operations. Mining operations consists of the Campo Morado mine, which is currently operational and producing, and development stage asset for the Tahuehueto mining project.

Information by geographical areas is as follows:

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Canada Mexico Total
Current assets $ 296 $ 12,570 $ 12,866
Non-current assets
Mineral interest and development assets - 16,585 16,585
Property, plant, and equipment - 17,063 17,063
Other assets andlong term
accounts receivable 1,354 5,056 6,410
Total assets, December 31, 2020 $ 1,650 $ 51,274 $ 52,924
Current liabilities $ 15,047 $ 58,153 $ 73,200
Non-current liabilities 87 6,348 6,435
Total liabilities, December 31, 2020 $ 15,134 $ 64,501 $ 79,635
----- End of picture text -----

37 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

21. SEGMENTED INFORMATION (continued)

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----- Start of picture text -----

Canada Mexico Total
Current assets $ 62 $ 12,837 $ 12,899
Non-current assets
Mineral interest and development assets - 12,335 12,335
Property, plant, and equipment - 19,787 19,787
Other assets - 6,213 6,213
Total assets, December 31, 2019 $ 62 $ 51,172 $ 51,234
Current liabilities 12,982 56,155 69,137
Non-current liabilities - 6,228 6,228
Total liabilities, December 31, 2019 $ 12,982 $ 62,383 $ 75,365
----- End of picture text -----

During the year ended December 31, 2020 and 2019, the Company sold its commercial and pre-commercial production to one customer accounting for 100% of revenues and pre-commercial sales. As at December 31, 2020 trade receivables of $241 were receivable entirely from this one customer. Revenues and pre-commercial sales all were earned within Mexico.

Operating segments are as follows:

December 31, 2020	Campo Morado	Real de la Bufa	Other	Telson Mining	Total December 31, 2020
	Mexico	Mexico	Mexico	Canada
Revenue, net	$ 23,157	$ -	$ -	$ -	$23,157
Production costs and royalties	(22,850)	-	-	-	(22,850)
Accretion of provision for site reclamation and closure	(342)	-	-	-	(342)
Depreciation and amortization	(445)	-	-	-	(445)
Mine operating earnings	(480)	-	-	-	(480)
General expenses	(1,750)	(1,259)	-	(1,749)	(4,758)
Other income(expenses)	(1,721)	1,284	(211)	(5,738)	(6,386)
Net loss for theyear	$ (3,951)	$ 25	$ (211)	$ (7,487)	$ (11,624)

December 31, 2019	Campo Morado	Real de la Bufa	Other	Telson Mining	Total December 31, 2019
	Mexico	Mexico	Mexico	Canada
Revenue, net	$20,601	$ -	$ -	$ -	$20,601
Production costs and royalties	(15,601)	-	-	-	(15,601)
Accretion of provision for site reclamation and closure	(1,589)	-	-	-	(1,589)
Depreciation and amortization	(1,002)	-	-	-	(1,002)
Mine operating earnings	2,409	-	-	-	2,409
General expenses	(26,849)	(1,218)	(189)	(1,385)	(29,641)
Other income (expenses)	(1,919)	(137)	(250)	197	(2,109)
Income tax	-	-	(15)	-	(15)
Net loss for theyear	$ (26,359)	$ (1,355)	$ (454)	$ (1,188)	$ (29,356)

38 -

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

Telson Mining Corporation

For the Years Ended December 31, 2020 and 2019

22. COMMITMENTS

At December 31, 2020, the Company has the following commitments:

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----- Start of picture text -----

Within 1 year Between 1 More than Total
and 5 years 5 years December
31, 2020
Lease payments offices $ 131 $ 337 $ - $ 468
Lease payments machinery and equipment 876 230 - 1,106
Vehicles 48 16 - 64
Loans 42,548 - - 42,548
Provision for site reclamation and
- 5,638 5,638
closure
Other 59 178 657 894
$ 43,662 $ 761 $ 6,295 $ 50,718
----- End of picture text -----

Other commitments not included in the table above are as follows:

a) VPP – Variable Purchase Price

As part of the Campo Morado Agreement, Nyrstar retained the right to receive a variable purchase price (“VPP”) on future zinc production on the first 10 million tonnes of ore processed by the Company at the Campo Morado Mine when the price of zinc is at or above US$2,100 per tonne. Telson shall pay Nyrstar the greater of either:

i. US$20 per tonne of zinc sold if the zinc price received is over US$2,100 per tonne; or
ii. a percentage that ranges between 0.5% and 4.25% of the net smelter revenues received from zinc when the price of zinc ranges between US$1,200 and US$2,500 from the Campo Morado Mine.

The Company maintains the right under the Campo Morado Agreement to purchase 100% of the variable purchase price at any time for US$4 million.

In regards to the variable purchase price, the Company paid $nil in 2020 ($nil - 2019).

Subsequent to December 31, 2020, the Company agreed with Nyrstar to terminate the VPP by settling this obligation with common shares of the Company (note 24 (f)).

b) Royalties

The Campo Morado mine is subject to a royalty between 2% and 3% of the net value of liquidation over the minerals extracted during the term of existence of the mining concession to the Servicio Geológico Mexicano (“SGM”)

c) Off-take agreements

The Company has a concentrate off-take agreement with a third party whereby it will purchase 100% of the zinc and lead concentrate produced by the Campo Morado Mine up to December 2021.

The Company has a concentrate off-take agreement with a third party whereby it will purchase 100% of the zinc and lead concentrate produced by Tahuehueto project up to December 2022.

39 -

Telson Mining Corporation

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

23. CONTINGENCIES

In the normal course of business, the Company is aware of certain claims and potential claims. The outcome of these claims and potential claims is not determinable at this time, although the Company does not believe these claims and potential claims will have a material adverse effect on the Company’s results of operations or financial position.

Despacho Gefent y Asociasodos, S.C. Vs Minas de Campo Morado, S.A. de C.V. (formerly Nyrstar Campo Morado, S. A. de C. V.)

Despacho Gafent y Asociasodos, S.C. (“Gefent”) in June 2014, commenced a legal procedure against the Company’s subsidiary, Minas de Campo Morado, S. A. de C. V. (“MCM”) in relation to a breach of a service agreement. Gefent is suing MCM for approximately $1,916 (MXN$28.5 million) in fees not paid for services rendered. The Company is currently in negotiations with Gafent to settle the obligation. MCM has no assurance on the outcome of these negotiations and therefore the Company has provisioned the full amount of the claim which is recorded in accounts payable and accrued liabilities.

Servicio de Administracion Tributaria Vs Minas de Campo Morado, S.A. de C.V.

During the year 2019, the Servicio de Administracion Tributaria (SAT) performed an audit on the Company’s subsidiary, Minas de Campo Morado, S. A. de C. V., in relation to value added tax (“VAT”) and Impuesto Sobre la Renta (“ISR”) claimed for the years 2014 and 2015. As a result of the audit, the SAT determined a difference in taxes payable of approximately $1,825 (MXN$29 million) and possible reduction of accumulated tax losses for $10,090 (MXN$158 million), which the Company is challenging through a legal process. As the Company has no assurance on the outcome of this legal procedure, it has accrued the full amount of the taxes payable, which are included in accounts payable and accrued liabilities.

Servicio de Administracion Tributaria Vs Prestadora de Servicios Arcelia, S.A. de C.V.

During the year 2015, the Servicio de Administracion Tributaria (SAT) performed an audit on the Company’s subsidiary, Prestadora de Servicios Arcelia, S. A. de C. V. (PSA), in relation to value added tax (“VAT”) and Impuesto Empresarial Tasa Unica (“IETU”) claimed. As a result of the audit, the SAT determined a difference in taxes payable of approximately $1,825 (MXN$28 million), as a result the Company has accrued the full amount of the claim, which is included in accounts payable and accrued liabilities.

Reynaldo D. Mac Allister Vs Minas de Campo Morado, S.A. de C.V. and Prestadora de Servicios Arcelia, S.A. de C.V.

In July of 2013, Reynaldo D. Mac Allister (“Reynaldo”) commenced a legal procedure against Minas de Campo Morado, S.A. de C.V. and Prestadora de Servicios Arcelia, S.A. de C.V. claiming Reynaldo was dismissed without cause. Reynaldo is suing for damages caused by the dismissal and other related labour obligations owing to him for a total amount of approximately US$950,000. The Company is challenging this claim through a legal process and believes this case is without merit. An accrual of $100 has been made for this case, which is included in accounts payable and accrued liabilities.

Size Solutions, S.A. de C.V.

In March 2020, the Company terminated its business relationship with Size Solutions S.A. de C.V. (“Size”), a payroll service provider for Minas de Campo Morado, S.A. de C.V., and corporate offices in Mexico City. The Company received notice from Size of outstanding amounts payable by the Company as at December 31, 2019 in the amount of $5.5M (MXN$85.8 M). The Company has accrued $3.8M (MXN$59.1 million) in accounts

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Telson Mining Corporation

Notes to the Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise stated)

For the Years Ended December 31, 2020 and 2019

23. CONTINGENCIES (continued)

payable and accrued liabilities as at December 31, 2020 and is disputing the difference. The Company believes Size’s demand is without merit.

24. SUBSEQUENT EVENTS

a) On February 23, 2021, the Company, has executed a letter of intent with Accendo Banco S.A. de C.V., Empress Royalty Corp., & Endeavour Financial (the “Accendo Syndicate”) to provide up to US$25 million of financing (collectively the “Financing”) to complete the construction and ramp-up of Tahuehueto mining project, meet debt service obligations and working capital purposes. Also, Telson, Accendo Syndicate and Trafigura have executed a memorandum of understanding (“MOU”) that provides a non-binding framework with terms to be used by the parties to negotiate the potential entry into the definitive agreements of the proposed transactions including, the potential restructuring of Telson’s debt obligations to Trafigura and Nyrstar. The MOU includes an exclusivity period of 45 days after which if definitive agreements are not finalized it shall, unless mutually extended, be terminated and remain with no effect. Due to the fact that the negotiation has been delayed, an extension hasn’t been requested.
b) On February 26, 2021, the Company granted stock options to certain directors, officers, and insiders of up to an aggregate 4,700,000 shares in the capital stock of the Company. The options are exercisable on or before February 25, 2026 at a price of $0.30 per share. The Company also repriced 1,873,333 stock options originally granted as to; 1,423,333 exercisable at $0.71 till November 10, 2022, 400,000 exercisable at $0.72 till April 16, 2023 and 50,000 exercisable at $0.71 till April 23, 2023. These stock options have been repriced to $0.30 per share and expiry dates remain unchanged. The grant and repricing of the above options are subject to the acceptance of the TSX Venture Exchange and in the case of repricing options held by insiders subject to disinterested shareholder approval.
c) On March 22, 2021, a total of 1,266,667 stock options expired without being exercised.
d) On March 30, 2021, the Company closed non-brokered private placement for gross proceeds of $10.1 million. The Company issued 50,400,000 units (each, a “ Unit ”) of the Company at a price of $0.20 per Unit for aggregate gross proceeds of $10,080,000. Each Unit is comprised of one common share (a “ Common Share ”) and one-half of one common share purchase warrant (each whole such warrant, a “ Warrant ”). Each Warrant entitles the holder thereof to purchase one additional Common Share of the Company at a price of $0.30 per Common Share within 24 months from March 29, 2021 (the “ Closing Date ”). All securities issued under the Private Placement are subject to a hold period expiring four months and one day after the Closing Date.
e) On April 15, 2021, the Company entered into a royalty silver stream agreement with Empress Royalty Corp. Under the terms of the stream agreement, Telson will deliver to Empress silver credits purchased from a bullion bank in an amount equivalent to 100% of the first 1,250,000 ounces of payable silver contained within produced lead and zinc concentrates; thereafter, the Stream percentage silver credit delivery will step down to 20% of the payable silver from produced lead and zinc concentrates. All streaming obligations will fully terminate after 10 years. Empress, to secure the stream will advance Telson an initial US$2 million deposit and the remaining US$3 million deposit will be advanced upon closing the Accendo Banco Medium Term Loan Facility.
f) On April 21, 2021, the Company executed an agreement with Nyrstar to settle the US$4 million variable purchase price obligation under the Campo Morado Agreement with Nyrstar. As consideration it was agreed that the obligation was settled with 14,600,000 common shares of Telson valued at $0.345 per share.
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AI assistant

Luca Mining Corp. — Annual Report 2021

43638_rns_2021-04-30_933bce19-0fcd-4f5d-b5c0-568a5543df2b.pdf

TELSON MINING CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS

Independent Auditor’s Report

Opinion

Basis for opinion

Material uncertainty related to going concern

Other matter (Predecessor auditor’s report)

Information other than the consolidated financial statements and auditor’s report thereon

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

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

Telson Mining Corporation

Consolidated Statements of Financial Position

Telson Mining Corporation

Consolidated Statements of Loss and Comprehensive Loss

Telson Mining Corporation

Consolidated Statements of Changes in Deficiency

Telson Mining Corporation Consolidated Statements of Cash Flows

1. NATURE OF OPERATIONS

a) Going concern

2. BASIS OF PRESENTATION

(a) Statement of compliance

Telson Mining Corporation

2. BASIS OF PRESENTATION (continued)

(b) Basis of presentation and consolidation

(c) Functional and presentation currency

(d) Critical accounting estimates and judgments

Judgements

2. BASIS OF PRESENTATION (continued)

(d) Critical accounting estimates and judgments (continued)

Commencement of commercial production

Estimates

2. BASIS OF PRESENTATION (continued)

(d) Critical accounting estimates and judgments (continued)

Operating levels intended by management

Provision for site reclamation and closure costs.

Inventory valuation

Accounts receivable

Provisions

2. BASIS OF PRESENTATION (continued)

(d) Critical accounting estimates and judgments (continued)

Deferred tax assets and liabilities

3. SIGNIFICANT ACCOUNTING POLICIES

(a) Foreign currency

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(a) Foreign currency (continued)

(b) Cash

(c) Inventories

(d) Mineral interest and development assets

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(d) Mineral interest and development assets (continued)

(e) Property, plant, and equipment

(f) Borrowing costs

(g) Provisions

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(h) Provision for site reclamation and closure

(i) Impairment of non-financial assets

(j) Financial Instruments

Classification

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(j) Financial Instruments (continued)

Measurement

Financial assets at FVTOCI

Financial assets and liabilities at amortized cost

Financial assets and liabilities at FVTPL

Impairment of financial assets at amortized cost

Derecognition

Financial assets

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(j) Financial Instruments (continued)

Financial liabilities

(k) Income taxes

(l) Share capital

(m) Share-based compensation

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(m) Share-based compensation (continued)

(n) Warrants issued in equity financial transactions

(o) Earnings (loss) per share

Luca Mining Corp. Annual Report 2021