FAWN& BUCK OPTION AND JOINT VENTURE AGREEMENT

A.

North Bay holds a 100% interest in four mineral claims covering a total of ###-###-#### hectares located in the Omineca Mining Division, British Columbia (the “Property”) , as more particularly described in Schedule “A” hereto; and

B.

North Bay has agreed to grant Silver Quest the sole and exclusive right and option to acquire an undivided seventy-five percent (75%) right, title and interest in and to the Property whereupon a Joint Venture shall automatically be formed between the parties in accordance with the terms and conditions of this Agreement.

(a)

“Affiliate” has the meaning given to that term in the Securities Act (British Columbia);

(b)

“Agreement” means this Agreement, including the recitals and the Schedules, all as amended, from time to time;

(c)

“Claims” means the mineral claims set forth in Schedule “A” and any amended or relocated mineral claims therefore;

(d)

“Commercial Production” means, and is deemed to have been achieved, when the concentrator processing ores, for other than testing purposes, has operated for a period of 60 consecutive production days at an average rate of not less than 80% of design capacity or, if a concentrator is not erected on the Property, when ores have been produced for a period of 60 consecutive production days at the rate of not less than 80% of the mining rate specified in a feasibility study recommending placing the Property in commercial production;

(e)

“Diluted Interest Royalty” means the royalty retained by North Bay or Silver Quest, as the case may be, in accordance with Section 2.2 of Schedule “B” and calculated as more fully described in Schedule “C”;

(f)

“Effective Date” means the date of the Bulletin issued by the TSX Venture Exchange stating that the Venture Exchange has accepted this Agreement for filing;

(g)

“Expenditures” means, without duplication, all costs and expenses actually and directly incurred by a party on the Property including without limiting the generality of the foregoing, monies expended in doing geophysical, geochemical and geological surveys, drilling, drifting and other underground work, assaying and metallurgical testing and engineering, in acquiring Facilities, equipping the Property for and commencing Commercial Production, in paying the fees, wages, salaries, travelling expenses, and fringe benefits (whether or not required by law) of all persons engaged in work with respect to and for the benefit of the Property and which are attributable to such person’s work on the Property, in paying for the food, lodging and other reasonable needs of such persons while engaged in such work at the Property and including all costs at prevailing charge out rates for any personnel who from time to time are engaged directly in work on the Property, such rates to be in accordance with industry standards;

(h)

“Facilities” means all buildings, facilities, structures, fixtures and improvements brought onto or erected upon or attached to the Property;

(i)

“Joint Venture” means the joint venture which may be formed pursuant to Section 7;

(j)

“Joint Venture Assets” means, after the formation of the Joint Venture, the Property and all other assets of the Joint Venture;

(k)

“Joint Venture Interest” means the percentage undivided interest of each of North Bay and Silver Quest in the Joint Venture, which interest shall, at all times, correspond with and represent their respective percentage undivided interest in the Property and vice versa;

(l)

“Letter of Intent” means the letter from North Bay to Silver Quest respecting the rights and obligations set out herein dated October 2, 2009;

(m)

“Lien” means any lien, security interest, mortgage, charge, encumbrance, or other claim of a third party, whether registered or unregistered, and whether arising by agreement, statute or otherwise;

(n)

“Management Committee” means the committee established by the parties on the formation of the Joint Venture as described in Section 3 of Schedule “B”;

(o)

“MEMPR” means the Ministry of Energy, Mines and Petroleum Resources of the Government of the Province of British Columbia;

(p)

“MTO” means “Mineral Titles Online”, the web-based system of mineral titles administered and maintained by MEMPR;

(q)

“Operator” means the party responsible for carrying out, or causing to be carried out, all work in respect of the Property during the Option Period and the Joint Venture;

(r)

“Option” means the option granted to Silver Quest by North Bay in accordance with Section 3.1;

(s)

“Party” means a party to this Agreement and “Parties” means all parties to this Agreement;

(t)

“Permitted Encumbrances” means:

 

(i)

liens for taxes, assessments and governmental charges which are not due or the validity of which is being diligently contested in good faith by or on behalf of the affected Party,

 

(ii)

liens incurred or created in the ordinary course of business as security in favor of the person(s) who is/are providing financing or conducting the development or operation of the Property to which such liens relate for either Party’s proportionate share of the costs and expenses of such development or operation,

 

(iii)

mechanics', builders' and materialmen's liens in respect of services rendered or goods supplied for which payment is not due,

 

(iv)

easements, rights of way, servitudes and other similar rights in land (including without limitation rights of way and servitudes for highways and other roads, railways, sewers, drains, gas and oil pipelines, gas and water mains, electric light, power, telephone, telegraph and cable television conduits, poles, wires and cables) which do not materially impair the use of the Property affected thereby,

 

(v)

the right reserved to or vested in any municipality or government or other public authority by the terms of any lease, license, franchise, grant or permit or by any statutory provision, to terminate any such lease, license, franchise, grant or permit or to require annual or other periodic payments as a condition of the continuance thereof,

 

(vi)

rights of general application reserved to or vested in any governmental authority to levy taxes on the Property or the income therefrom, and governmental requirements and limitations of general application as to production rates on the operations of the Property, and

(vii)

statutory exceptions to title, and the reservations, limitations, provisos and conditions in any original grants from the Crown of any of the minerals within, upon or under the Property;

(u)

“Program” means a written description, prepared by the Operator, outlining all Expenditures which the Operator contemplates incurring on the Property including a detailed description of all work which the Operator proposes to carry out on the Property pursuant to such Program;

(v)

“Property” has the meaning set forth in Recital A, together with any and all substitute or successor title thereto;

(w)

“Representative” means the individual appointed from time to time by a Party to act as such Party’s representative on the Management Committee;

Schedule “A”

Description of the Property

Schedule “B”

Joint Venture

Schedule “C”

Diluted Interest Royalty

(a)

it is a corporation duly incorporated and organised and validly existing under the laws of the State of Delaware;

(b)

it has full corporate power, authority and capacity to enter into this Agreement and to carry out its obligations under this Agreement;

(c)

it has been duly authorized to enter into, and to carry out its obligations under, this Agreement and no obligation of it in this Agreement conflicts with or will result in the breach of any term in:

(d)

it has duly executed and delivered this Agreement, which binds it in accordance with its terms;

(e)

with respect to the Claims:

 

(i)

to the best of its knowledge and belief the Claims were properly applied for and confer upon North Bay exclusive prospecting rights to the Property;

 

(ii)

to the best of its knowledge and belief all required location and validation work was properly performed;

 

(iii)

to the best of its knowledge and belief location notices and certificates were properly recorded and filed with the appropriate governmental agencies;

 

(iv)

to the best of its knowledge and belief all assessment work required to hold the Claims has been performed and all applicable governmental fees have been paid;

 

(v)

to the best of its knowledge and belief all affidavits of assessment work, evidence of payment of applicable governmental fees, and other filings required to maintain the Claims in good standing have been properly and timely recorded or filed with appropriate governmental agencies; and

 

(vi)

to the best of its knowledge and belief there are no conflicting mineral dispositions;

(f)

there are no outstanding agreements or options to acquire or purchase the Property or any interest in or any portion thereof and no person, firm or corporation has any proprietary or possessory or royalty interest in the Property other than Silver Quest pursuant to this Agreement;

(g)

the Property is properly and accurately described in Schedule “A” hereto;

(h)

North Bay has a 100% registered and beneficial interest in the Property and North Bay is in exclusive possession of the mineral rights for the Property and has the exclusive right to explore and exploit the Property;

(i)

to the best of its knowledge and belief the Property is free and clear of all Liens, defects in title and third party interests other than any royalties created by statute in favour of the Crown or any agency of the Crown;

(j)

to the best of its knowledge and belief there has been no known spill, discharge, deposit, leak, emission or other release of any contaminant, pollutant, dangerous or toxic substance, hazardous waste or material substance on, into, under or affecting the Property and no such contaminant, pollutant, dangerous or toxic substance, hazardous waste or material substance is stored in any type of container on, in or under the Property;

(k)

to the best of its knowledge and belief there are no pending or threatened actions, suits, claims or proceedings regarding North Bay or the Property and there are no outstanding notices, orders, assessments, directives, rulings or other documents issued in respect of the Property by any governmental authority;

(l)

to the best of its knowledge and belief no reclamation, rehabilitation, restoration or abandonment obligations exist with respect to the Property; and

(m)

North Bay has delivered to Silver Quest all information concerning title to the Property in its possession or control.

2.2

Silver Quest hereby represents and warrants that:

(a)

it is a corporation duly incorporated and organised and validly existing under the Business Corporations Act (British Columbia);

(b)

it has full corporate power, authority and capacity to enter into this Agreement and to carry out its obligations under this Agreement.  It is qualified to carry on business in British Columbia;

(c)

it has been duly authorized to enter into, and to carry out its obligations under, this Agreement and no obligation of it in this Agreement conflicts with or will result in the breach of any term in:

(d)

it has duly executed and delivered this Agreement, which binds it in accordance with its terms and

(e)

there is no action, suit, litigation, arbitration, investigation, inquiry or other proceeding in progress, or, to the best of Silver Quest’s knowledge, pending or threatened against or relating to Silver Quest or its material assets and there is no circumstance, matter or thing known to Silver Quest which might give rise to any such proceeding or to any governmental investigation relative to Silver Quest and there is not outstanding against Silver Quest any judgment, decree, injunction, rule or order of any court, government department, commission, agency or arbitrator.

First anniversary of the Effective Date

Second anniversary of the Effective Date

Third anniversary of the Effective Date

Fourth anniversary of the Effective Date

(a)

make available to Silver Quest and its representatives all available relevant technical data, geotechnical reports, maps, digital files and other data with respect to the Property in North Bay’s possession or control, including soil samples, and all records and files relating to the Property and permit Silver Quest and its representatives at their own expense to take abstracts therefrom and make copies thereof;

(b)

promptly provide Silver Quest with any and all notices and correspondence from government agencies in respect of the Property;

(c)

cooperate fully with Silver Quest in obtaining any surface and other rights on or related to the Property as Silver Quest deems desirable;

(d)

grant to Silver Quest, its employees, agents and independent contractors, the sole and exclusive right and option to:

 

(i)

enter upon the Property;

 

(ii)

have exclusive and quiet possession thereof;

 

(iii)

do such prospecting, exploration, development or other mining work thereon and thereunder as Silver Quest in its sole discretion may consider advisable;

 

(iv)

bring and erect upon the Property such equipment and facilities as Silver Quest may consider advisable; and

 

(v)

remove from the Property and dispose of material for the purpose of testing; and

(e)

except to the extent agreed to be done by Silver Quest, hereunder, comply with all requirements and obligations of the Property and not take any action which may adversely affect the interest of Silver Quest in the Property.

5.1

During the Option Silver Quest shall:

(a)

comply with the provisions of Section 3.1 hereof;

(b)

keep the Property free and clear of all Liens arising from its operations hereunder (except liens for taxes not yet due, other inchoate liens or liens contested in good faith by Silver Quest) and proceed with all diligence to contest or discharge any Lien that is filed;

(c)

pay or cause to be paid all workers and wage earners employed by it or its contractors on the Property, and pay for all materials, services and supplies purchased or delivered in connection with its activities on or with respect to the Property;

(d)

permit North Bay, or its representatives duly authorized by it in writing, at its own risk and expense, access to the Property at all reasonable times and to all exploration information and data, all maps, drill logs, assay results and program budgets, records and reports, in paper or electronic form, if any, prepared by Silver Quest in connection with work done on or with respect to the Property, and furnish North Bay within sixty (60) days of the completion of a Program (for greater certainty, a Program will not be completed until Silver Quest has received all exploration data and reports generated by service companies conducting the Program), with a report with respect to the work carried out by Silver Quest pursuant to such Program and material results obtained;

(e)

conduct all work on or with respect to the Property in a careful and minerlike manner and in compliance with all applicable federal, provincial and local laws, rules, orders and regulations, and indemnify and save North Bay harmless from any and all claims, suits, demands, losses and expenses including, without limitation, with respect to environmental matters, made or brought against it as a result of work done or any act or thing done or omitted to be done by Silver Quest on or with respect to the Property;

(f)

at the completion of each work program Silver Quest shall submit a Statement of Work to the MEMPR via MTO to apply the work expenditures towards the Claims to maintain them in good standing; and

(g)

maintain adequate insurance coverage in accordance with normal industry standards and practice .

 

(i)

in good standing with respect to the filing of assessment work for a period of twenty-four (24) months from the date of termination, and free and clear of all Liens arising from its operations hereunder,

 

(ii)

in a safe and orderly condition, and

 

(iii)

in a condition which is in compliance with all rules and orders of governmental authorities with respect to reclamation and rehabilitation of all disturbances resulting from Silver Quest’s use and occupancy of the Property;

(b)

deliver to North Bay, within ninety (90) days of a written request therefor, a report on all work carried out by Silver Quest on the Property (limited to factual matters only) together with copies of all sample location maps, drillhole assay logs, assay results and other technical data compiled by Silver Quest with respect to the Property;

(c)

within two business days of the termination date, initiate the transfer of record title to the Property to North Bay (Free Miner Certificate # 110043840, Client # 204090) by completing the “Bill of Sale – Initiation” documentation and filing such documentation on the MEMPR MTO system and shall forthwith thereafter advise North Bay by telephone or email that such transfer was initiated; and

(d)

have the right (and, if requested by North Bay within ninety (90) days of the effective date of termination, the obligation) to remove from the Property all facilities erected, installed or brought upon the Property by or at the instance of Silver Quest.

 

North Bay –

 

North Bay Resources Inc

 

2120 Bethel Road

 

Lansdale, PA 19446 USA

 

Attn: Perry Leopold

 

Fax No.: 215 ###-###-####

 

Silver Quest -

 

Attn: Mr. Randy Turner

 

Fax No.: 604 ###-###-####

(a)

by personal service on a Party at the address of such Party set out above, in which case the item so served shall be deemed to have been received by that Party when personally served;

(b)

by facsimile transmission to a Party to the fax number of such Party set out above, in which case the item so transmitted shall be deemed to have been received by that Party when transmitted; or

(c)

except in the event of an actual or threatened postal strike or other labor disruption that may affect mail service, by mailing first class registered post, postage prepaid, to a Party at the address of such Party set out above, in which case the item so mailed shall be deemed to have been received by that Party on the fifth day following the date of mailing.

Area (ha)

598000

Mineral

BUCK

20100126

38.74

606724

Mineral

FAWN

20100627

174.2886

606728

Mineral

MALAPUT E-W

20100627

96.8958

617183

Mineral

BUCK 2

20100810

96.8601

Deemed Expenditures:

$500,000

$1,500,000

Joint Venture Interest

25%

75%

(b)

B is an amount equal to North Bay’s or Silver Quest’s, as the case may be,

(c)

C is an amount equal to the Parties’ total deemed Expenditures under Section 2.1 of this Schedule “B”, plus all of the Parties’ Expenditures made after the formation of the Joint Venture.

(a)

create, or permit to remain, any material Liens, upon any Joint Venture Asset, except for any Liens which are customary in the circumstances of a mining joint venture;

(b)

abandon, sell or otherwise dispose of the Property, or any material part thereof, other than the Operator’s right to dispose of or allow Claims to lapse pursuant to Section 8;

(c)

settle any suit, claim or demand with respect to the Joint Venture involving an amount in excess of $500,000;

(a)

the Operator materially defaults in its obligations as operator hereunder and fails to commence and diligently prosecute measures to remedy such default within thirty (30) days after the non-Operator shall have given written notice to the Operator of such default specifying in such notice the nature of the default;

(b)

the Joint Venture Interest of the Operator becomes less than fifty percent (50%); or

(c)

pursuant to Section 5.1 of this Schedule “B”, the Operator fails to submit a Program requiring minimum Expenditures of at least Fifty Thousand Dollars ($50,000) to the Management Committee within six (6) months of the completion of the previous Program;

(d)

an attachment in respect to any material liability of the Operator is made on the Property which is not related to the business of the Joint Venture,

(f)

admits in writing its inability to pay its debts as they become due other than indebtedness (“non-recourse financing”) for money borrowed or guaranteed where the recourse of the holder thereof is restricted to realization upon specific assets none of which consist of any Interest, and where failure to pay the indebtedness does not result in the creation of an unsecured obligation of the Operator,

(h)

consents to the appointment of a receiver (other than a receiver appointed under non-recourse financing) for all or a substantial part of its assets,

(i)

files a petition in bankruptcy or for a reorganization or an arrangement under applicable bankruptcy, insolvency or creditors’ relief laws, or otherwise seeks the relief therein provided, or

(k)

a Court order is pronounced in respect of the Operator, appointing a receiver or trustee for all or a substantial part of its property (except for property, other than the Property, securing non-recourse financing), or approving a petition in bankruptcy or for a reorganization under applicable bankruptcy, insolvency or creditors’ relief laws or for any judicial modification or alteration of the rights of creditors.

(a)

to manage the Joint Venture and conduct, or cause to be conducted, all work performed under a Program in a good and workmanlike manner in accordance with good exploration, engineering, mining and accounting practice and in accordance with the terms of this Agreement;

(b)

to submit each Program to the Management Committee for approval by delivering the Program to the Representatives at least 30 days in advance of the meeting of the Management Committee at which such Program is to be considered;

(c)

subject to Section 3.8 of this Schedule “B”, to keep the Property in good standing and to pay all applicable payments, fees and taxes, and other similar governmental charges lawfully levied or assessed in respect of the Property, except that the Operator shall not be obliged, however, to make any such payment as long as such payment is being contested in good faith and the non-payment thereof does not adversely affect the Property;

(d)

subject to Sections 6, 7 and 8 of this Schedule “B”, to provide, purchase, lease or rent all plant, buildings, machinery, equipment, tools, appliances, materials, supplies and services required for a Program and to dispose of the same when no longer required or useful for the purposes of the Property and the Joint Venture;

(e)

to maintain and keep the Joint Venture Assets, or to cause the Joint Venture Assets to be maintained and kept, in good operating condition and repair in accordance with good exploration and mining practice;

(f)

to comply with all applicable statutes, regulations, by-laws, laws, orders and judgements and all directives, rules, consents, permits, orders, guidelines, approvals and policies of any applicable governmental authority affecting the Joint Venture;

(g)

to obtain and maintain such types and levels of property and liability insurance with respect to the Joint Venture as the Operator shall consider necessary from time to time, such coverage to include the non-Operator as a named insured to the extent of the non-Operator’s undivided interest in the Joint Venture from time to time;

(h)

to require the Operator’s contractors and subcontractors to take out and maintain such types and levels of property and liability insurance as the Operator shall consider necessary or advisable from time to time and to comply with the requirements of all applicable unemployment insurance and workers’ compensation legislation with respect to work or services to be provided by such contractors or subcontractors;

(i)

to advise the non-Operator of any accident or occurrence resulting in any material damage to or destruction of any Joint Venture Assets or material harm or injury to any individual;

(j)

to keep adequate data, information and records of the Operator’s management of the Joint Venture and to keep suitable accounts which reflect all financial aspects of the Joint Venture and once per year to make such available to the non-Operator, at the place designated by the Operator, within 10 days of receipt of a written request for disclosure by the non-Operator and to permit the non-Operator at reasonable times and upon notice in writing to the Operator to audit the Operator’s accounts and records relating exclusively to the operations of the Joint Venture for any calendar year within 12 months following the end of such calendar year at the non-Operator’s expense;

(k)

to provide the non-Operator with monthly reports on activities on the Property, including a report of expenditures in comparison to the budget, during periods of active field work or when mine operations are active, quarterly reports and a detailed annual report on the Operator’s management of the Joint Venture, including an accounting of all Expenditures made by the Operator under the current or previous Program;

(l)

to permit the non-Operator, at the non-Operator’s sole risk and expense and with prior notice to the Operator, access to the Property during normal working hours for the purpose of examining activities and work thereon and access to, and the right to inspect and copy all geological, geochemical, geophysical, engineering and environmental data, maps, available drill core, drill logs, surveys, analyses and other technical information acquired with respect to the Property in the course of the work of the Joint Venture, so long as such access shall not materially interfere with or impair such activities and work; and

(m)

to have all powers necessary to carry out, or cause to be carried out, all of the Operator’s obligations set out in this Agreement and to otherwise carry out, or cause to be carried out, all Programs approved by the Management Committee.

(a)

a reasonably detailed outline of all work which the Operator contemplates carrying out on the Property under such Program detailing the areas on the Property to be subject to such work and the time frame for each of the major elements of such work;

(b)

a reasonably itemised budget, broken down by month, of the projected Expenditures under the Program;

(c)

the budget shall include a contingency provision for costs not specifically itemized in the budget for the Program, which contingency provision shall be, at the Operator’s sole discretion, either a lump-sum dollar amount for the entire Program, or a dollar amount calculated as a percentage of the budgeted total cost for the itemized items and in either case need not be broken down by month, and

(d)

the estimated amount and date of each payment that the non-Operator would have to make to the Operator.

(a)

for less than One Million Dollars ($1,000,000), the Representatives shall then have 30 days to elect whether or not to participate in the Program; or

(b)

for more than One Million Dollars ($1,000,000), the Representatives shall then have 30 days to elect to participate in the Program, and a further 30 days to raise their share of the funding required.

 

(i)

remain liable for its share, based on its Joint Venture Interest, of all costs, expenses and obligations arising out of operations conducted before the effective date of the withdrawal;

 

(ii)

secure by way of a letter of credit, or otherwise to the satisfaction of the Remaining Party, its share, based on its Joint Venture Interest, of the costs of reclaiming the Property, as estimated at the effective date of the withdrawal considering all applicable statutes, regulations, by-laws, laws, orders and judgements and with all directives, rules, consents, permits, orders, guidelines, approvals and policies of any governmental authority;

 

(iii)

continue, for a period of three years after the effective date of the withdrawal, to be bound by Section 10;

 

(iv)

execute and deliver such documents as may be necessary to transfer the Property to the Remaining Party;

 

(v)

remove, within 12 months of the effective date of the withdrawal, all buildings, machinery, equipment and supplies brought upon the Property by the Withdrawing Party that are not Joint Venture Assets; and

(b)

The Remaining Party shall become the owner of a 100% of the Withdrawing Party’s interest in and to the Property as of the effective date of the withdrawal.

(c)

The Joint Venture shall be terminated and the Management Committee shall be terminated, as of the effective date of the withdrawal.

1.

The Diluted Interest Royalty payable to a former Joint Venture Participant whose Joint Venture Interest was converted pursuant to Section 2.2 of Schedule “B” (a “Payee”) will, subject to reduction under paragraph 9, be equal to Two Percent (2.0%) of Net Returns and will be paid by the remaining Participant (the “Payor”) in accordance with the terms of this Schedule “C”.

2.

Net Returns will be calculated on a calendar quarterly basis and will be equal to Gross Revenue (as hereinafter defined) less Permissible Deductions (as hereinafter defined) for such quarter.

3.

 In this Schedule, the following words have the following meanings:

 

(a)

“Gross Revenue” means the aggregate of the following amounts (without duplication) accruing in each quarterly period following commencement of Commercial Production:

 

(i)

subject to paragraph 8(a), the revenue received by the Payor from arm’s length purchasers of all Mineral Products;

 

(ii)

the fair market value of all Mineral Products sold by the Payor in such a period to persons not dealing at arm’s length with the Payor; and

 

(iii)

any proceeds of insurance on Mineral Products;

 

(b)

“Mineral Products” means all ores, concentrates, minerals, diamonds, compounds or refined or semi-refined products produced from the Property;

 

(c)

“Permissible Deductions” means the aggregate of the following charges (to the extent that they are not deducted by any purchaser in computing payment) that are incurred with respect to the Mineral Products in each quarterly period:

 

(i)

sales charges levied by any sales agent on the sale of Mineral Products;

 

(ii)

transportation costs for Mineral Products from the Property to the place of beneficiation, processing or treatment, if applicable, and thence to the place of delivery of Mineral Products to a purchaser thereof, including shipping, freight, handling and forwarding expenses;

 

 

 

(iii)

all costs, expenses and charges of any nature whatsoever which are either paid or incurred by the Payor in connection with beneficiation or refining of Mineral Products after leaving the Property, including all smelter and refinery charges and all weighing, sampling, assaying, representation and storage costs, deductions from gross metal content and umpire charges, and any penalties charged by the processor, smelter, or refinery;

 

(iv)

all costs, expenses and charges of any nature whatsoever which are either paid or incurred by the Payor in connection with any valuation of Mineral Products or marketing of Mineral Products;

 

(v)

all insurance costs on Mineral Products and any government royalties, production taxes, severance taxes and sales and other taxes levied on Mineral Products or on the production value thereof (other than income taxes of the Payor); and

 

(vi)

all amounts payable pursuant to the Underlying Royalty.

4.

For greater certainty, and without limiting the generality of the foregoing, all charges deducted by an arm’s length purchaser of ores or concentrates whether for smelting, treatment, handling, refining, storage or any other operation on or service relating to the Mineral Products that occurs after the point of sale shall be considered to be legitimate deductions in arriving at the Net Returns amount.

5.

The Diluted Interest Royalty will be calculated and paid within 60 days after the end of each calendar quarter.  Smelter settlement sheets, if any, and a statement setting forth calculations in sufficient detail to show the payment’s derivation (the “Statement”) must be submitted with the payment.

6.

In the event that final amounts required for the calculation of the Diluted Interest Royalty are not available within the time period referred to in Section 5 of this Schedule “C”, then provisional amounts will be estimated and the Diluted Interest Royalty paid on the basis of this provisional calculation.  Positive or negative adjustments will be made to the Diluted Interest Royalty payment payable for the succeeding quarter.

7.

Subject to the adjustment provisions of this Schedule “C”, all Diluted Interest Royalty payments will be considered final and in full satisfaction of all obligations of the Payor with respect thereto, unless the Payee delivers to the Payor a written notice (“Objection Notice”) describing and setting forth a specific objection to the calculation thereof within sixty (60) days after receipt by the Payee of the Statement.  If the Payee objects to a particular Statement as herein provided, Payee will, for a period of sixty (60) days after the Payor’s receipt of such Objection Notice, have the right, upon reasonable notice at a reasonable time, to have the Payor’s accounts and records relating to the calculation of the Diluted Interest Royalty in question audited by the auditors of the Payor.  If such audit determines that there has been a deficiency or excess in the payment made to the Payee, such deficiency or excess will be resolved by adjusting the next quarterly Diluted Interest Royalty payment due hereunder.  The Payee will pay all the costs and expenses of such audit unless a deficiency of five (5%) or more of the amount due is determined to exist in which case the Payor will pay the costs and expenses of such audit.  All books and records used and kept by the Payor to calculate the Diluted Interest Royalty due hereunder will be kept in accordance with Canadian generally accepted accounting principals.  Failure on the part of the Payee to make claim against the Payor for adjustment within such sixty (60) day period by delivery of an Objection Notice will conclusively establish the correctness and sufficiency of the Statement and Diluted Interest Royalty payments for such quarter, and forever preclude the filing of exceptions thereto or making of claims for adjustment thereon by the Payee.  Nothing herein will limit the Payee’s rights arising out of fraud.

8.

All profits and losses resulting from the Payor engaging in any commodity futures contract, forward sales contract, product loan, options contract, or any other type of derivatives contract or any combination thereof, and any other hedging transactions with respect to Mineral Products (collectively, “Hedging Transactions”) are specifically excluded from calculations of the payments on account of the Diluted Interest Royalty pursuant to this Schedule “C” (it being the intent of the parties that the Payee will not have any right to participate in such Hedging Transactions or to share in any profits or losses therefrom).  All Hedging Transactions by the Payor and all profits or losses associated therewith, if any, will be solely for the Payor’s account.  The amount of Gross Revenue derived from all Mineral Products subject to Hedging Transactions will be determined pursuant to the provisions of this paragraph 8, as set forth below and not by paragraph 3(a)(i):

 

(a)

the Gross Revenue for Mineral Products that are subject to Hedging Transactions will be determined using the price (the “Price”) that is:

 

(A)

for gold, the average price of gold, which will be calculated by dividing the sum of all London Bullion Market Association P.M. Gold Fix prices reported for the quarterly period in question by the number of days for which such prices were quoted; and

 

(B)

for all other Mineral Products, the spot price or average price or a valuation, as applicable, estimated by a mutually agreeable trade association or marketing group or entity recognized within the applicable industry as being knowledgeable with respect to current marketing conditions for the applicable Mineral Products;

 

(b)

unless otherwise specified above, the reference spot price to be used for a particular Hedging Transaction will be determined using the reference spot price published for the week containing the date that the Mineral Products subject to that Hedging Transaction are deemed to be sold;

 

(c)

Mineral Products subject to Hedging Transactions will be deemed to be sold, and revenues received therefrom, only on the date of final settlement of the amount of refined Mineral Products allocated to the account of the Payor by a third party refinery in respect of such transactions, and

 

(d)

the Payor will have no obligation to fulfill any Hedging Transaction which the Payor or any of its Affiliates may hold with Mineral Products.

9.

The Payee hereby irrevocably grants to the Payor the right to purchase for cancellation (the “Buy-Down Option”) One-half (1/2) of the Diluted Interest Royalty.  The purchase price shall be One Million Dollars ($1,000,000).  The Buy-Down Option may be exercised at any time prior to, or within Ninety (90) days following the commencement of Commercial Production on the Property.

10.

If the Payor determines that it would be advantageous to the efficient operation of a processing plant to process Ore by commingling Ore with ore from other properties, then prior to doing so, the Payor shall give the Payee sixty (60) days notice of its intention, and shall deliver to the Payee a detailed description of the commingling plan under which the commingling shall be conducted.