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2012 Annual Report

www.lydianinternational.co.uk


Lydian International Limited is a gold-focused mineral exploration and development company, specialising in exploring and developing precious metal assets in Eastern Europe, primarily in the Caucasus region. Lydian continues to focus primarily on the exploration and development of its Amulsar Project, a 100% owned Lydian discovered gold project, located in Armenia. In addition, Lydian is also carrying out exploration work at its Kela Project, an early-stage gold prospect in the Guria region of Georgia, and continuing to build and maintain a promising pipeline of other early stage projects. Lydian has a strong social agenda and a thorough understanding of the complex political environment in the regions in which it operates. Lydian is committed to developing its projects responsibly, with an emphasis on social and environmental awareness and care. The Company maintains strict environmental compliance and seeks to employ leading practices to minimise the environmental impact of its activities. Lydian also regularly engages local communities in order to deliver relevant and sustainable social development initiatives.


Table of Contents

Chief Executive Officer’s Statement ________________________________ 4 Management’s Discussion and Analysis ____________________________ 6 Financial Results of Operations ____________________________________ 12 Appendix 1 __________________________________________________________ 26 Appendix 2 __________________________________________________________ 27 Report of Management ____________________________________________ 33 Independent Auditors’ Report _____________________________________ 34 Financial Statements _______________________________________________ 35 Consolidated Income Statements ________________________________ 35 Consolidated Statements of Comprehensive Income ___________ 35 Consolidated Statements of Financial Position ___________________ 36 Consolidated Statements of Changes in Equity __________________ 37 Consolidated Statements of Cash Flows __________________________ 39 Notes to Consolidated Financial Statements _____________________ 40

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Chief Executive Officer’s Statement Tim Coughlin, CEO

With total costs for gold mines around the world averaging around US $1150 an ounce, and Amulsar’s total costs expected to fall between US $700-$800 an ounce, we believe that the Amulsar project is comparatively well-positioned in terms of true-margin and resilience in the face of gold price fluctuations. After approximately 20,000 metres of drilling completed by your Company in 2012, the estimated mineral resources at Amulsar now stand at an impressive 1.8 million ounces of Measured category resources, 0.6 million ounces of Indicated Category Resources and 1.7 million ounces of Inferred Category Resources. Recent exploration drilling at Amulsar, has identified further resource potential both laterally and below the currently proposed pit-shells, and/but also in the proposed locations of the crushing and conveying facilities.

I am pleased to have this opportunity to share my perspective on the past year, and our vision for your Company going forward, in this Chief Executive Officer’s Statement. Lydian delivered a strong operational performance in 2012. Some highlights of the Company’s achievements in 2012 included completing a feasibility study for the Amulsar Project and making significant advances in our understanding of the geology and expanding the resource and reserve potential of the Amulsar Project. The feasibility study for Amulsar confirmed the favorable economics of the project and included an estimated pre-tax net present value (NPV) of US $646 million at a 5% discount rate, generating an internal rate of return (IRR) of 27.7%, based on a US $1200 gold price. This estimate was based on mineral reserves of only 2.3 million ounces. Using the same reserve number, but a US $1500 gold price, the NPV exceeds US $1 billion. Cash costs were estimated at a competitive US $468.5, with the all-important total costs (including taxes and royalties and making assumptions about likely future gold prices) estimated to range between US $700 and US $800 an ounce.

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As a result of these encouraging results, your Company has determined that the heap leach facility proposed in the feasibility study is going to be too small to accommodate the current estimated tonnage potential of the planned operations. Furthermore, the new mining licence granted to the company in October 2012 allows a further four year construction period for the project. As a result of these factors, the Company decided to re-examine its original mine design and carry out additional mine planning in order to ensure that its final development plans maximise the value of the Amulsar Project. In this regard, we have engaged independent consultants to prepare an updated feasibility study based on a revised layout, which we expect to be able to release in the third quarter of 2013. The Company initiated development work at Amulsar in 2013 with a view to commencing production in late 2015. To meet this ambition, Lydian assembled in 2012 a highly experienced team of mine-builders, sustainability & mine-site environmental, health & safety, and logistics and supply specialists. The Amulsar site now has a mine-site culture rather than exploration culture, and earthworks and civil engineering works have now commenced. Lydian is committed to helping its local communities and to leaving positive sustainable impacts that will benefit the region and serve as a long-standing legacy


Chief Executive Officer’s Statement Tim Coughlin, CEO

well after the planned Amulsar mine has been closed and rehabilitated. We are immensely proud of our work on the environment and socially in the region and grateful for the continued support of the local community in Armenia. The Company is preparing an Environmental and Social Impact Assessment (ESIA) in line with Equator Principles (i.e. the World Bank’s best practice measures), both as part of our commitment to best practices and in order to meet the requirements of our shareholders and so as to be able to raise international financing for the construction and operation of the Amulsar project. The ESIA is expected to be available this year. While Lydian has been making significant operations progress and adding to the intrinsic value of its projects, the market has taken a different view of the exploration/development sectors as a whole. This view

weighed heavily on the Company’s market valuation in 2012 and into 2013. Mining sector market capitalisations decreased on average by 40% across the board, and the market was largely indiscriminate in terms of its sell-off of resource sector stocks. However, having raised capital in March 2012, Lydian remained relatively strong throughout the year and relative to its peers, finished flat and in the midfield by December 2012. On the investor side, we believe that 2013 will be about differentiating ourselves and trying to ensure that, in terms of investor interest, Lydian captures its fair share of the predicted “flight to quality”. After all, by any measurement, the Amulsar project stacks up as one of the World’s most robust and exciting new gold projects.

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Management’s Discussion & Analysis Consolidated Financial Condition and Results of Operations for the three and twelve month periods ended December 31, 2012

The following is Management’s Discussion and Analysis (“MD&A”) of the consolidated financial condition and results of operations of Lydian International Limited (“Lydian” or the “Company”) for the three and twelve month periods ended December 31, 2012. This discussion should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2012, prepared in accordance with the International Financial Reporting Standards (“IFRS”). The information provided herein supplements, but does not form part of, the consolidated financial statements. This discussion covers 2012 as well as the subsequent period up to the date of this MD&A, March 21, 2013. All monetary figures are expressed in British Pounds unless otherwise indicated.

Business Overview The Company is a gold-focused mineral exploration and development company specialising in emerging and transitional environments. Currently the Company is focused on Eastern Europe, primarily in the Caucasus region, exploring and developing precious metal assets. The Company’s main project is a gold exploration and development project (the “Amulsar Project”) located in Armenia. In addition,

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the Company holds a licence covering an early-stage gold prospect (the “Kela Project” formerly the “Zoti Project”) in the Guria region of Georgia. The Company’s principal objective is to continue its exploration and development of the Amulsar Project. The Company will continue the ongoing exploration drilling and mine development program at the Amulsar Project. On December 18, 2012, the Company filed the Amulsar Technical Report (as defined below) on Sedar, which amended the previously filed feasibility study. The Company has since engaged the authors of the Amulsar Technical Report to, among other things, further update the report to reflect certain proposed changes in the site layout, production schedule and crusher configurations for the Amulsar Project. The revised feasibility study is expected to be completed in the third quarter of 2013. The Company also plans to conduct detailed engineering studies to finalise mine design and to allow the completion of the construction approval process for the Amulsar Project. In addition, the Company is currently developing a comprehensive environmental and social impact assessment (ESIA) in accordance with applicable requirements.


Management’s Discussion & Analysis Consolidated Financial Condition and Results of Operations for the three and twelve month periods ended December 31, 2012

Developing the Amulsar Project into a profitable gold mining operation will depend upon the Company’s ability to raise sufficient project financing, acquire all permits and complete construction. The Company currently does not have any commercial operations or revenue. The Company expects that its current assets are sufficient to finance the Amulsar Project to and through the completion of the revised feasibility study and the necessary detailed engineering stages and pay all amounts that are currently due to Newmont Overseas Exploration Limited (“Newmont”) pursuant to the purchase agreement (the “Newmont Purchase Agreement”) dated February 26, 2010 between the Company and Newmont on December 31, 2012, and payable by December 31, 2013.

On November 20, 2012, the Company announced that drilling suggested new resource potential both laterally and below the currently proposed pit-shells. The Company also announced that it had decided to re-examine its original mine design and carry out additional mine planning and that it retained SNC-Lavalin to complete a new feasibility-level (±15% cost contingency) crusher trade-off study. In addition, the Company announced that Golder Associates Inc. had updated its heap leach site alternatives analysis and identified additional potential valley-fill and conventional heap leach pad locations that could host more capacity than the currently permitted location.

On October 23, 2012, September 24, 2012 and August 21, 2012 the Company released drill results showing the Company’s progress in meeting its goal of testing resource extension along-strike and at depth, and providing sufficient evidence to convert inferred category resources to measured and indicated categories.

On October 17, 2012, the Company announced that Mr. Huw Williams resigned from the Company’s board of directors.

On October 2, 2012, the Company announced that it had entered into a new mining licence agreement with the Government of Armenia.

Fourth Quarter and Recent Highlights •

On March 5, 2013, the Company announced an updated mineral resource estimate for its Amulsar project as summarised below.

On February 19, 2013, the Company released a geological update, including that it is planning to carry out a 40,000 metre drill program in 2013, a significant component of which will be aimed at testing newly identified targets.

On February 11, 2013, the Company announced that Dr. Geoffrey Cowley, a metallurgical engineer, had been appointed as a non-executive director of the Company replacing Peter Mullens who resigned from the Company’s board of directors.

On January 14, 2013, the Company announced the remaining results from its 2012 drill program for thirty holes, and included 111 metres at 1.1 g/t gold outside the current pit-shell at Arshak and 89 metres at 1 g/t gold below the current pit shell at Erato.

On December 17, 2012, the Company announced that SNC-Lavalin had considered ten different crushing and screening plant configurations and a preferred configuration consisting of one primary gyratory crusher, two secondary doubledeck screens, two secondary cone crushers, three tertiary double-deck screens and three tertiary cone crushers was selected.

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Management’s Discussion & Analysis Consolidated Financial Condition and Results of Operations for the three and twelve month periods ended December 31, 2012

Recent Developments Update of Mineral Resource On November 19, 2012, the Company announced a corrected mineral reserve estimate as set out in the technical report (the “Amulsar Technical Report”) titled “Lydian International Ltd., Amulsar Resource Update and Heap Leach Feasibility Study” dated September 3, 2012, amended November 26, 2012

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and prepared by KD Engineering, under the direction of Mr. Joseph M. Keane, P.E; Golder Associates, under the direction of Mr. Richard Kiel, P.E and Mr. Pete Lemke, P.E; Independent Mining Consultants, under the direction of Mr. Herb Welhener; and Wardell Armstrong International, under the guidance of Mr. John Eyre, FRICS MIMMM MIQ CEnv. The mineral reserve estimate was established by tabulating the undiluted tonnes and grades of


Management’s Discussion & Analysis Consolidated Financial Condition and Results of Operations for the three and twelve month periods ended December 31, 2012

proven and probable material within the designed final pit that is scheduled as ore to the crusher over the mine life. A floating cone algorithm (independently verified by Whittle optimisations) was used to determine the final pit design and internal phase designs. The floating cone optimisation algorithm is a commonly used and accepted industry tool for providing guidance to mine design.

assumed to be 0.15 g/t gold head grade and 1.5 g/t silver head grade. These dilution grades are significantly below the average grades of blocks surrounding scheduled undiluted ore, which are 0.21 g/t gold and 2.2 g/t silver (when surrounding inferred material is zeroed).The estimated proven and probable reserves total approximately 2.26 million ounces of gold, as described in the table on page 10.

The table opposite details the mineral reserves as per the feasibility schedule, with a dilution factor of 7%. The average grade of the dilution material is

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Management’s Discussion & Analysis Consolidated Financial Condition and Results of Operations for the three and twelve month periods ended December 31, 2012

DiluteD ORe ReseRves

Category Proven Probable Proven and Probable

Ore ktonnes 51,143 43,751

Contained Gold Silver g/t g/t 0.801 3.37 0.692 3.15

Recoverable Gold Silver g/t g/t 0.713 1.31 0.609 1.08

Contained Metal Gold Silver oz. oz. 1,317,000 5,541,000 973,000 4,435,000

Recoverable Metal Gold Silver oz. oz. 1,172,000 2,154,000 857,000 1,526,000

94,894

0.750

0.665

2,290,000

2,029,000

3.27

1.21

9,976,000

3,680,000

Note: The above numbers may not calculate exactly due to rounding. On March 5, 2013, the Company announced an updated independent mineral resource estimate for the Amulsar Project, as summarised below. At a cut-off grade of 0.35 g/t Au, the mineral resources are estimated at 52.4 Mt at 1.05 g/t Au (1.77 million ounces) of Measured category resources, 18.1 Mt at 1.02 g/t Au (0.59 million ounces) of Indicated category resources and 58.0 Mt at 0.93 g/t Au (1.73 million ounces) of Inferred category resources from the contiguous Tigranes, Artavasdes, Arshak areas and from the Erato area. MeAsuReD Gold Cut-off Grade (g/t) 0.30 0.35 0.40

Tonnes (x 1000) 59,600 52,400 46,200

Gold Cut-off Grade (g/t) 0.30 0.35 0.40

Tonnes (x 1000) 21,500 18,100 15,400

Gold Cut-off Grade (g/t) 0.30 0.35 0.40

Tonnes (x 1000) 70,100 58,000 49,900

Gold (g/t) 0.96 1.05 1.14

Contained Gold (ounces) 1,838,000 1,769,000 1,693,000

Gold (g/t) 0.91 1.02 1.14

Contained Gold (ounces) 629,000 593,000 565,000

Gold (g/t) 0.82 0.93 1.02

Contained Gold (ounces) 1,847,000 1,734,000 1,636,000

iNDiCAteD

iNFeRReD

The mineral reserve and mineral resource estimates were prepared in accordance with Canadian Securities Administrators National Instrument 43-101 Standards of Disclosure for Mineral Projects (“NI 43-101”) and the Canadian Institute of Mining (“CIM”) definitions for mineral resources. The independent updated mineral resource estimate for the Amulsar Project was prepared by AMC Consultants (UK) Limited (“AMC”), under the supervision of Mr. G. David Keller, P.Geo. (APGO#1235) of AMC, a “qualified person”, as defined in National Instrument 43-101, and was developed from an additional 19,867 metres of combined diamond and reverse circulation drilling, which was completed in 2012 (for a total of 109,650 metres). Resource estimation has been completed using the geostatistical technique, Localised Multiple Indicator Kriging (“Localised MIK”). Localised MIK is a form of Multiple Indicator Kriging (“MIK”) where the grades are ‘mapped’ directly into selective mining unit (“SMU”) sized blocks from a MIK estimate. Specific gravity measurements were averaged, with average values applied to appropriate block model units for the estimation of mineral resources.

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Management’s Discussion & Analysis Consolidated Financial Condition and Results of Operations for the three and twelve month periods ended December 31, 2012

The CIM requirement for “reasonable prospects for economic extraction” generally implies that quantity and grade estimates meet certain economic thresholds and that mineral resources are reported at an appropriate cutoff grade, taking into account extraction scenarios and processing recovery. AMC concluded that the Amulsar gold project is amenable to open pit extraction. To assist with determining a reasonable reporting cut-off grade, AMC considered economic parameters , including a gold price assumption of US$1200/oz gold, based on which AMC considers that resource blocks above a grade of 0.30g/t Au show reasonable prospects for economic extraction from an open pit mine, and can therefore be reported as a mineral resource.

exploration update and Activities Amulsar Project The Company’s Amulsar Project area covers a region of high-sulphidation, epithermal-type gold mineralisation located in Southern Armenia and was discovered by Lydian in 2006. The exploration licences for the Amulsar Project are held 100% by Geoteam CJSC, a wholly-owned indirect subsidiary of the Company. On October 2, 2012, the Company announced that it had entered into a new mining licence agreement with the Government of Armenia. The main focus for 2013 is the continued development of the Project. This includes obtaining the final major permit for a new proposed heap leach site, undertaking a revised feasibility study, commissioning detailed engineering designs and undertaking development works on the ground such as haul roads and starting work on the waste dump. During 2013, the Company also intends to complete 40,000 metres of further drilling with the aim of testing resource extensions along-strike and at depth (70% of the drilling is aimed at areas below our current resource pits) with a view to providing sufficient evidence to convert current inferred category resources to measured and indicated categories. Kela Project The Kela Project (previously referred to by the Company as the “Zoti Project”) is an early-stage gold prospect known in the Guri region of the Ozurgeti province in Georgia. On October 11, 2011, the Company announced that its 100% owned subsidiary, Georgian Resource Company LLC, acquired a 40 year combined exploration-mining licence over the Kela Project. In 2012, the Company carried out surface exploration activities at the Kela Project. The Company is focussed on the continued exploration and development of the Amulsar Project and, as a result, does not currently plan to dedicate significant resources or available funds to the Kela Project in the short term.

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Financial Results of Operations

selected Financial information The financial information has been prepared in accordance with International Financial Reporting Standards (IFRS). All monetary amount references in this document are to British Pounds unless otherwise indicated.

statement of Operations The following is a summary of selected information for the three and twelve month periods ended December 31, 2012 and comparative financial information for the corresponding periods in the Company’s previous financial year. British Pounds Interest income Total expenses Net income (loss) loss per share (basic and diluted)

Three months ended December 31 2012 (£) 2011 (£) 35,895 14,226 1,578,416 1,615,208 (1,542,521) (1,600,982) (0.01) (0.02)

Twelve months ended December 31 2012 (£) 2011 (£) 2010 (£) 220,007 44,297 25,073 6,640,881 5,999,185 5,912,122 (6,420,874) (5,954,888) (5,887,049) (0.05) (0.06) (0.08)

During the twelve month periods ended December 31, 2012 and 2011, the Company had no revenues. Its only income was bank interest and income from the sale of shares of Tigris Resource Limited in September 2012. In the twelve month period ended December 31, 2012, the Company recorded a loss of £6,420,874 (5 pence per share) compared to £5,954,888 (6 pence per share) during the corresponding period in 2011. There were several changes in the Company’s cost structure in 2012 compared to 2011, the most significant of which were: a £175,710 increase in interest income; a £559,485 increase in salaries and other compensation paid to employees; a £521,580 decrease in expenses relating to funds allocated to employee benefit reserves in respect of option vesting; a £638,259 increase in administrative expenses; and a £164,431 increase in expenses relating to services and consumables used. The main changes in the Company’s cost structure in fourth quarter of 2012 compared with the same period in 2011 were as follows; a £42,501 increase in employee salaries and benefit expenses; a £107,704 increase in administrative expenses; a £69,411decrease in interest expenses; £11,718 increase in depreciation expenditures. There were no extraordinary transactions or significant end of reporting period adjustments during the twelve month period ended December 31, 2012. On December 9, 2010, the Company entered into an option agreement (the “Geoteam Option Agreement”) to purchase the remaining 5% non-controlling interest (the “non-controlling interest”) of the Company’s 95% indirectly owned subsidiary, Geoteam CJSC (“Geoteam”). On September 24, 2012, the Company completed the acquisition of the non-controlling interest pursuant to the terms of the Geoteam Option Agreement. As a result of the acquisition, the Company now indirectly owns 100% of the Amulsar Project through its 100% indirect ownership of Geoteam. The purchase price for the non-controlling interest was satisfied by the Company in full by paying to the vendor CAD $500,000 in cash on December 22, 2010, and issuing 2,000,000 Ordinary Shares. The 2,000,000 Ordinary Shares were issued in installments of 500,000, 250,000, 250,000, 250,000 and 750,000 on January 18, 2011, June 27, 2011, December 20, 2011, June 25, 2012 and September 24, 2012, respectively. During the twelve month period ended December 31, 2012, there were fluctuations between the British Pound, Canadian Dollar, Euro, Armenian Dram, Georgian Lari and the U.S. Dollar. This resulted in changes to the value of the Company’s exploration assets as reported in British Pounds. Details of these changes are set out below. The Company attempts to protect itself from variations in exchange rates by holding its cash in currencies roughly in proportion to the Company’s anticipated expenditures in those currencies.

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Financial Results of Operations

income tax expense There was no tax payable by the Company in the twelve month period ended December 31, 2012 and the same period in 2011. As at December 31, 2012, the Company had taxation losses of £2,103,315 (December 31, 2011£5,986,965) that had not been recognised, as there is insufficient evidence of taxable profit in the near future. As a result of the liquidation of Kosovo Resource Company, a taxation loss of £4,911,725 was written off as of November 16, 2012.

summary of Operating Cash Flows, investing and Financial Activities The following table summarises the Company’s cash flow for the three and twelve month periods ended December 31, 2012 and comparative financial information for the corresponding interim periods in the Company’s previous financial year. British Pounds

Three months ended December 31 2012 (£) 2011 (£)

Net cash provided (used) by operating activities Net cash used by investing activities Net cash provided (used) by financing activities

Twelve months ended December 31 2012 (£) 2011 (£) 2010 (£)

(1,536,668) (3,284,688)

(1,189,170) (2,419,468)

(6,490,355) (12,869,969)

(4,671,986) (7,645,787)

(2,606,805) (6,466,916)

1,168,203

1,482,534

31,586,505

3,539,646

24,344,997

The increase of cash outflows in investing activities in 2012 compared with 2011 relates mainly to payments made by the Company to Newmont in the amount of £3,245,307 pursuant to the Newmont Purchase Agreement, and in the amount of £1,870,083 for the purchase of two D10T bulldozers and RC drill rigs.

summary of Balance sheet Data The following table summarises the Company’s financial position as at the dates indicated:

Current assets Property and equipment Intangible assets Exploration and evaluation assets Other non-current assets Other long-term financial assets total Assets Current liabilities Non-current liabilities Equity total liabilities and equity

As at December 31, 2012 (£) 20,539,443 2,360,999 122,886 29,640,711 2,105,903 54,769,942 3,651,766 522,383 50,595,793 54,769,942

As at December 31, 2011 (£) 8,712,341 476,012 95,522 23,739,005 1,371,935 126,600 34,521,415 7,002,493 28,800 27,490,122 34,521,415

As at December 31, 2010 (£) 17,237,596 402,587 59,350 16,497,640 686,274 34,883,447 3,313,826 2,648,561 28,921,060 34,883,447

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Financial Results of Operations

During the fourth quarter of 2012, the cash and cash equivalents of the Company decreased by £3,393,342 as a result of payments of exploration drilling services, payments to vendors for Amulsar Project development costs, payments to vendors for supply of services and goods, and payments to employees. As at December 31, 2012, the Company’s cash and cash equivalents was £20,113,998 compared to £8,301,907 on December 31, 2011. The Company’s net amount of exploration and evaluation assets (EEA) increased by £5,901,706 in the twelve months period ended December 31, 2012. The increase of EEA is mainly related to the cost of exploration drilling and development of the Amulsar Project, including payments of state duties, the cost of samples, laboratory assays and environmental studies and other costs and costs associated with surface exploration studies carried out in Georgia. In the twelve month period ended December 31, 2012, the net amount of property, plant and equipment increased by £1,884,987, which was mainly a result of purchase of items for support of exploration and development of the Amulsar Project. During the same period other current assets increased by £15,011. During the fourth quarter of 2012, the net amount of property, plant and equipment increased by £1,503,470, balance of evaluation and exploration assets increased by £3,594,494, non-current refundable taxes increased by £593,446, non-current accrued payables increased by £366,382 in result of deferred VAT for import of equipment in to Armenia. During the same period share capital of the Company increased by £1,655,450 in result of exercised share options.

exploration and evaluation Assets Exploration and evaluation costs are costs incurred directly in exploration and evaluation as well as the cost of mineral licences as per IFRS 6. Exploration and evaluation costs incurred during the three and twelve month periods ended December 31, 2012 were £3,233,017 and £8,027,932, respectively, compared to £2,526,100 and £7,647,810, in the corresponding periods in 2011. These exploration and evaluation costs were related to exploration work on the Company’s exploration projects. The cumulative amount of such costs as at December 31 of 2012 and 2011 are as follows: Project Armenia • Amulsar Georgia • Kela total

Cumulative as at December 31, 2012

Cumulative as at December 31, 2011

29,311,305

23,535,396

329,406 29,640,711

203,609 23,739,005

The increase in exploration and evaluation assets for the Amulsar Project in the twelve month period ended December 31, 2012 from the same period in 2011 relates primarily to the cost of exploration drilling, development of the project, payments of state duties, the cost of samples laboratory assays, payment for the extension of the exploration licence area and the cost of environmental studies related to the project.

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Financial Results of Operations

The following table represents expenditures capitalised at the Amulsar Project during the twelve month period ended December 31, 2012 and the corresponding period in 2011. Year ended December 31, 2012 £ 3,080,457 1,862,511 529,722 683,909 533,400 147,857 116,850 486,683 15,690 430,920 7,887,999

(1) Project Development Drilling costs Laboratory analyses Capitalised salaries Supplies and materials Capitalised depreciation and amortisation Land rents Plant hiring State duties and fees Other

Year ended December 31, 2011 £ 1,762,746 2,930,740 898,785 425,842 548,457 90,112 32,235 432,672 130,039 170,752 7,424,380

(1)Engineering design, Bankable Feasibility Study, consulting, etc. The Company’s expenditures relating to the Kela Project in 2012 totaled £139,933, which mainly relate to surface exploration work, geological consultancy and sample analyses. In Armenia, the Company’s exploration activities are financed mainly in US dollars, which are converted into Armenian Drams by the Company’s Armenian subsidiary and then into British Pounds for the group accounts. The cumulative totals are affected by currency fluctuations between British Pounds, US Dollars and Armenian Drams. There was a significant devaluation of the Armenian Dram in 2012 and 2011. As a result, the cumulative expenditures in Armenia shown above differ from the actual expenditures made in U.S. Dollars. In November 2012, the Company completed the winding up of its former subsidiary, Kosovo Resource Company, through a members’ voluntary liquidation process. The Company no longer has any operations in Kosovo.

summary of Quarterly Results The following is a summary of results from the Company’s eight most recently completed quarters:

Net sales or total revenues Net income (loss) Loss per share (basic and diluted)

Q4 2012 (£) (1,542,521) 0.01

Q3 2012 (£) (1,916,592) 0.02

Q2 2012 (£) (1,370,306) 0.01

Q1 2012 (£) (1,591,455) 0.01

Net sales or total revenues Net income (loss) Loss per share (basic and diluted)

Q4 2011 (£) (1,600,982) 0.02

Q3 2011 (£) (1,402,189) 0.01

Q2 2011 (£) (1,598,306) 0.02

Q1 2011 (£) (1,353,411) 0.01

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Financial Results of Operations

Outstanding share Data A summary of outstanding shares options and warrants is set out below.

Ordinary Shares Other options Warrants

As at March 21, 2012 Number 130,172,926 4,695,000 -

As at December 31, 2012 Number 126,861,168 4,780,000 3,311,758

As at December 31, 2011 Number 104,075,686 4,987,000 3,311,758

The Company has one class of issued equity shares, being Ordinary Shares.

Management and staffing During the twelve month period ended December 31, 2012 and subsequently prior to the date of this MD&A, the following changes in the key management and staffing of the Company occurred: •

In August 2012, Didier Fohlen, Senior Vice President, Sustainability & Governance, commenced his employment with the Company;

In October 2012, Mr. Huw Williams resigned from the Company’s board of directors; and

In February 2013 Dr. Geoffrey Cowley was appointed as a director of the Company replacing Mr. Peter Mullens who resigned as a director.

liquidity and Capital Resources Lydian had working capital of £16,887,677 as at December 31, 2012 compared to £1,709,848 on December 31, 2011. The Company had total assets of £54,769,942 at December 31, 2012 compared to £34,521,415 on December 31, 2011, which include deferred exploration expenditures of £29,640,711 (£23,739,005 on December 31, 2011). The Company’s principal source of liquidity as at December 31, 2012 was cash and cash equivalents of £20,113,998 compared to £8,301,907 on December 31, 2011. This increase in the cash and cash equivalents balance was primarily the result of an amount received by the Company in connection with the issuance of shares (described below) pursuant to a bought deal financing, a related private placement financing and the exercise of stock options for aggregate gross proceeds of £31,586,505 offset by £6,490,355 used in operating activities and £12,869,969 cash used in capital expenditures, property, equipment and intangible assets, exploration costs and a payment to Newmont. Cash surplus to the Company’s requirements was invested in bank money market deposits. It is management’s opinion, based on the Company’s current liquidity position and estimates of project expenses, that the Company’s liquid assets will be sufficient to discharge liabilities and fund the above-noted expenditures in connection with the Amulsar Project and the Kela Project. The future exploration and development of the Amulsar Project and the Kela Project will require the Company to raise additional capital through a combination of equity and debt or other financing options. The Company is conducting a revised bankable feasibility study, for which the financial numbers are expected to be completed in the third quarter of 2013, and intends to conduct engineering studies to evaluate potential development scenarios for the Amulsar Project, including its future capital requirements.

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Financial Results of Operations

The Company’s liquidity is affected by a number of key factors and risks. Reference is made to the “Risks and Uncertainties” section of the MD&A for a discussion of these factors and their impact on the Company’s liquidity. The Company has made certain expenditure commitments to the licensing authorities for the Company’s projects. Should these expenditure targets not be met, the applicable licences will not automatically be forfeited, but any shortfall will be considered by the applicable regulatory authority as a factor in whether to renew such licences.

Contractual Obligations The Company has contractual obligations as follows:

Operating lease obligations Purchase obligations Total contractual obligations

Total (£) 2,707,097 2,707,097

Up to 1 year (£) 263,729 263,729

1-5 years (£) 941,286 941,286

More than 5 years (£) 1,502,082 1,502,082

taxes Paid in Armenia Summary of payments to the Armenian State Budgets The following information is provided as part of an initiative by Publish What You Pay (a global civil society coalition) to achieve transparency of oil, gas and mining company payments to agencies and representatives of those governments as a first step towards a more accountable system for the management of natural resources. Amounts paid in Armenian Drams to Armenian Government

Fee for licences area extension State duty on mining licence Concession fee Social Insurance Funds employer Social Insurance Funds individual Customs duty Property tax Income tax Non resident withholding tax VAT Nature protection fee Total Equivalent GBP

12 months to December 31, 2012 10,000,000 57,799,655 14,887,344 3,459,798 416,800 132,313,366 13,000,000 5,957,025 23,590 237,857,578 373,192

12 months to December 31, 2011 8,700,000 11,200,000 20,097,500 39,988,100 10,962,000 11,431,179 419,500 108,320,000 14,000,000 40,956,121 509,235 266,583,635 445,770

2012 Annual Report | Lydian International | 17


Financial Results of Operations

Financial and Other instruments The Company’s financial instruments consist of cash and cash equivalents, accounts receivable and accounts payable. The net fair value of the financial assets and financial liabilities approximates their carrying value. The Company’s exposure to changes in market interest rates relates primarily to the Company’s cash deposits. The Company maintains a balance between the liquidity of cash assets and the interest rate return thereon. The carrying amount of financial assets, net of any provisions for losses, represents the Company’s maximum exposure to credit risk.

significant transactions, Contracts and Off Balance sheet Arrangements Significant contracts existing as of December 31, 2012 are described below. On April 23, 2010, the Company purchased from Newmont all of Newmont’s interest in the former joint venture between the Company and Newmont known as the Caucasus Venture, including all of Newmont’s interest in the Amulsar gold property in Armenia. The consideration was a mixture of committed and contingent payments.  The committed payments included the issuance by Lydian of three million Ordinary Shares to Newmont on the closing of the transaction and three payments of US$5 million, of which: the first was paid in 2010, the second was due on December 31, 2011 and paid on March 13, 2012, together with interest owing thereon; and the third became due on December 31, 2012. The Company has notified Newmont that it has decided to defer making this third installment payment until no later than December 31, 2013. This deferred payment amount of US$5 million will bear interest at the rate of 10% per annum commencing December 31, 2012 until it is paid. In addition, the Company agreed to pay Newmont, following the start of commercial production at the Amulsar Project, a 3% Net Smelter Royalty (NSR). However, at any time prior to the date that is 20 days following commencement of commercial production, Lydian may at its option elect to buy out the 3% NSR and instead pay to Newmont the aggregate sum of US$20 million, without interest, in 20 equal quarterly installments of US$1 million commencing on the first day of the third calendar month following the start of commercial production.  Furthermore, the Company has a one-time option prior to the commencement of Commercial Production to prepay these quarterly installments in a single cash payment using an annual discount rate of 10%. This equates to a single payment of approximately US$15.6 million. These potential post production payment(s) do not constitute an “obligation or a constructive obligation”, as the triggering event of commercial production has not yet occurred.  Therefore, these potential payments are not shown on the balance sheet. The Company does not have any other off-balance sheet type arrangements.

Risks and uncertanties The following risks and uncertainties, among others, should be considered when evaluating the Company and its outlook.

Mineral Resources The Company’s mineral resources are estimates, and no assurance can be given that the estimated resources are accurate or that the indicated level of gold will be produced. Such estimates are, in large part, based on interpretations of geological data obtained from drill holes and other sampling techniques. Actual mineralisation

18 | Lydian International | 2012 Annual Report


Financial Results of Operations

or formations may be different from those predicted. Further, it may take many years from the initial phase of drilling before production is possible, if at all, and during that time the economic feasibility of exploiting a discovery may change. Mineral resource estimates for properties that have not commenced production are based, in many instances, on limited and widely spaced drill hole information, which is not necessarily indicative of the conditions between and around drill holes. Accordingly, such mineral resource estimates may require revision as more drilling information becomes available or as actual production experience is gained. It should not be assumed that all or any part of the Company’s mineral resources constitutes or will be converted into reserves. Metal Prices Even if the Company’s exploration program is successful on its mineral projects, there are many factors beyond the control of the Company that may affect the marketability of any minerals discovered. Metal prices have historically fluctuated widely and are affected by numerous factors beyond the Company’s control, including international, economic and political trends, expectations for inflation, currency exchange fluctuations, interest rates, global or regional consumption patterns, speculative activities and worldwide production levels. The effect of these factors cannot accurately be predicted. Price Volatility of Other Commodities The Company’s profitability is also affected by the market prices of commodities, which are consumed or otherwise used in connection with the operations, such as diesel fuel, natural gas, electricity and cement. Prices of such commodities are also subject to volatile price movements over short periods of time and are affected by factors that are beyond the Company’s control. Foreign Operations The Company’s significant exploration and development project is located in Armenia. Such a project could be adversely affected by exchange controls, currency fluctuations, taxation and laws or policies of Armenia affecting foreign trade, investment or taxation. Changes in mining or investment policies or shifts in political attitude in Armenia may adversely affect the Company’s business. Operations may be affected by governmental regulations with respect to restrictions on production, price controls, export controls, income taxes, expropriation of property, maintenance of claims, environmental legislation, land use, land claims of local people, water use and mine safety. The factors cannot be accurately predicted. Foreign Exchange The Company operates internationally and is therefore exposed to foreign exchange risks arising from foreign currency fluctuations. The Company raises finance in Canadian Dollars, accounts in British Pounds and incurs expenses mainly in six currencies – the Euro, the British Pound, the U.S. Dollar, the Canadian Dollar, the Armenian Dram and the Georgian Lari. The Company’s risk management policy is to hold cash in the Euro, British Pound, the U.S. Dollar and the Canadian Dollar, broadly in line with its currency expenditure forecasts. The Company does not currently hedge its foreign exchange exposure. Counterparty Risk The Company does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. We do not anticipate a loss for non-performance by any counterparty with whom we have a commercial relationship.

2012 Annual Report | Lydian International | 19


Financial Results of Operations

Taxation Risk The Armenia tax system could impose substantial burdens on the Company. The Company is subject to a broad range of taxes imposed at federal, regional and local levels. Laws related to these taxes have been in force for a relatively short period relative to tax laws in more developed market economies and few precedents with regard to the interpretation of these laws have been established. No assurances can be made that any new tax laws introduced by the Government of Armenia will not result in the Company having to pay significantly higher taxes, which could have a materially adverse effect on the Company’s business. Environmental Risks and Hazards All phases of the Company’s operations are subject to environmental regulations in the various jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. There is no assurance that future changes in environmental regulations, if any, will not adversely affect the Company’s operations. Environmental hazards may exist on the properties in which the Company holds interests which are unknown to the Company at present and which have been caused by previous or existing owners or operators of the properties. Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed and may include corrective measures requiring capital expenditures, installation of additional equipment or remedial actions. Parties engaged in the exploration or development of mineral properties may be required to compensate those suffering loss or damage by reason of the exploration activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations. Amendments to current laws, regulations and permits governing operations and activities of exploration companies, or more stringent implementation thereof, could have a material adverse impact on the Company and cause increases in exploration expenses. Exploration Exploration is highly speculative in nature and exploration projects involve many risks that even a combination of careful evaluation, experience and knowledge may not eliminate. If a site with gold or other precious metal mineralisation is discovered (and this may not happen), it may take several years from the initial phases of drilling until production is possible, if at all. Substantial expenditures are normally required to locate and establish mineral reserves and to construct mining and processing facilities. While the discovery of an ore body may result in substantial rewards, few properties that are explored are ultimately developed into producing mines. Political The majority of the Company’s operations are carried out in Eurasia and, as such, the Company’s operations are exposed to various levels of political risks and uncertainties. These risks and uncertainties vary from country to country and include, but are not limited to: terrorism; corruption; crime; hostage taking or detainment of personnel; military repression; extreme fluctuations in currency exchange rates; high rates of inflation; labour unrest; the risks of war or civil unrest; expropriation and nationalisation; renegotiation or nullification of existing concessions, licences, permits and contracts; absence of reliable regulatory and judiciary process; changes in taxation policies; restrictions on foreign exchange and repatriation; changing political conditions; currency controls and governmental regulations that favour or require the awarding of contracts to local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. Any changes in mining or investment policies

20 | Lydian International | 2012 Annual Report


Financial Results of Operations

or shifts in political attitude in Eurasia may adversely affect the Company’s operations and financial condition. Failure to comply with applicable laws, regulations and local practices relating to mineral right applications and tenure could result in loss, reduction or expropriation of entitlements. Insurance The Company’s business is subject to a number of other risks and hazards, including adverse environmental conditions, industrial accidents, labour disputes, unusual or unexpected geological conditions, ground or slope failures, cave-ins, changes in the regulatory environment and natural phenomena such as inclement weather conditions, floods, hurricanes and earthquakes. Such occurrences could result in damage to mineral properties or production facilities, personal injury or death, environmental damage to the Company’s properties or the properties of others, monetary losses and possible legal liability. Although the Company maintains insurance to protect against certain risks in such amounts as it considers to be reasonable, its insurance will not cover all the potential risks associated with Company’s operations. The Company may also be unable to maintain insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. The Company might also become subject to liability for pollution or other hazards which may not be insured against or which the Company may elect not to insure against because of premium costs or other reasons. Losses from these events may cause the Company to incur significant costs that could have a material adverse effect upon its financial performance and results of operations. Government Laws and Regulations The activities of the Company are subject to various laws governing prospecting, development, production, taxes, labour standards, occupational health and safety requirements, environmental standards including toxic substances, air quality, land use and water quality and use, land claims of local people and other matters. Although the Company currently carries out its operations in accordance with all applicable rules and regulations, no assurance can be given that new rules and regulations will not be enacted or that existing rules and regulations will not be applied in a manner that could limit or curtail production or development. The Company’s operations and development activities are subject to receiving and maintaining permits from appropriate governmental authorities. There is no assurance that the Company will be successful in obtaining or maintaining the necessary licences and permits to continue its exploration and development activities in the future. Difficulty in Obtaining Future Financing The further development and exploration of mineral properties in which the Company holds an interest or which the Company acquires may depend upon the Company’s ability to obtain financing through joint ventures, debt financing, equity financing or other means. There is no assurance that the Company will be successful in obtaining required financing as and when needed. Volatile precious metals markets and/or capital markets may make it difficult or impossible for the Company to obtain debt financing or equity financing on favorable terms or at all. Failure to obtain additional financings on a timely basis may cause the Company to postpone development plans, forfeit rights in its properties or reduce or terminate its operations. Reduced liquidity or difficulty in obtaining future financing could have an adverse impact on the Company’s future cash flows, earnings, results of operations, and financial condition and could result in a default under its agreement with Newmont pursuant to which the Company’s subsidiary acquired a 100% interest in the Venture.

2012 Annual Report | Lydian International | 21


Financial Results of Operations

Related Party transactions Related parties include the Board of Directors, close family members and enterprises which are controlled by these individuals as well as certain persons performing similar functions. On December 9, 2010, the Company entered into an option agreement (the “Geoteam Option Agreement”) to purchase the remaining 5% non-controlling interest (the “non-controlling interest”) of the Company’s 95% indirectly owned subsidiary, Geoteam CJSC (“Geoteam”) that was held by Hayk Aloyan, a director and manager of Geoteam. On September 24, 2012, the Company completed the acquisition of the non-controlling interest pursuant to the terms of the Geoteam Option Agreement. As a result of the acquisition, the Company now indirectly owns 100% of the Amulsar gold project through its 100% indirect ownership of Geoteam. The purchase price for the noncontrolling interest was satisfied by the Company in full by paying to Mr. Aloyan CAD $500,000 in cash on December 22, 2010, and issuing 2,000,000 Ordinary Shares. The 2,000,000 Ordinary Shares were issued in installments of 500,000, 250,000, 250,000, 250,000 and 750,000 on January 18, 2011, June 27, 2011, December 20, 2011, June 25, 2012 and September 24, 2012, respectively. From July 2011 up to September 2012 the Company owned 1,000,000 ordinary shares of Tigris Resources Limited. During the year ended December 31, 2012 the Company recorded a total of £18,575 receivable as compensation for payments made on behalf of Tigris Resources Limited or services rendered to it. The directors and key management are the directors of Lydian International Limited. The remuneration of directors and key management was as follows:

Aggregate emoluments Fair value of granted share options vest

Twelve months ended December 31, 2012 (£) 452,343 478,648

Twelve months ended December 31, 2011 (£) 339,747 926,357

The following table sets out the number of stock options awarded to directors of the Company under the Company’s stock option plan during the twelve month periods ended December 31, 2012 and 2011. Date of grant December 3, 2012 May 2, 2011

Number of options 1,200,000 1,500,000

Exercise price CAD$2.12(GBP1.33) CAD$2.52(GBP1.59)

Expiry December 3, 2015 May 2, 2016

There were no other share based payments during reportable periods.

Critical Accounting estimates and Policies Critical judgements in applying the Company’s accounting policies In the application of the Company’s accounting policies, the directors are required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The most significant critical judgments that members of management have made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements are the policies on exploration and evaluation assets and functional currencies.

22 | Lydian International | 2012 Annual Report


Financial Results of Operations

In particular, management is required to assess exploration and evaluation assets for impairment with reference to the indicators provided in IFRS 6. Note 14 to the Company’s Consolidated Financial Statements as of December 31, 2012 discloses the carrying values of such assets. As part of this assessment, management considered whether indicators of impairment exist at December 31, 2012. The recoverability of exploration and evaluation costs is dependent on a number of factors common to the natural resource sector. These include the extent to which the Company can establish economically recoverable reserves on its properties, the availability of the Company to obtain necessary financing to complete the development of such reserves and future profitable production or proceeds from the disposition thereof. The Company will use the evaluation work of professional geologists, geophysicists and engineers for estimates in determining whether to commence or continue mining and processing. These estimates generally rely on scientific and economic assumptions, which in some instances may not be correct, and could result in the expenditure of substantial amounts of money on a deposit before it can be determined whether or not the deposit contains economically recoverable mineralisation. The functional currency for the Company and each of the Company’s subsidiaries is the currency of the primary economic environment in which each entity operates. The Company has determined the functional currency of the parent company is the Canadian dollar and the functional currencies of its material subsidiaries, Geoteam CJSC and Georgia Resource Company LLC, are the Armenian Dram and Georgian Lari, respectively. 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 which determined the primary economic environment. Key sources of estimation uncertainty The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The most significant sources of estimation uncertainty that members of management have identified in the application of accounting policies are as follows: There are tax matters that have not yet been confirmed by taxation authorities. While management believes that VAT input amounts are recoverable and the provision for income taxes is adequate, these amounts are subject to measurement uncertainty. Adjustments required, if any, to these provisions will be reflected in the period where it is determined that adjustments are warranted. Equity-settled awards, including share options and warrants, are measured at fair value at the date of grant and recognised over the vesting period, based on the Company’s estimate of equity-settled awards that will eventually vest, along with a corresponding increase in equity. Fair value is measured using the Black-Scholes Option Pricing Model taking into consideration management’s best estimate of the expected life of the option, the expected share price volatility, the risk free rate, the expected dividend yield and the estimated number of shares that will eventually vest. Changes in accounting policies During three and twelve month periods ended December 31, 2012 there were no changes in the Company’s accounting policies.

2012 Annual Report | Lydian International | 23


Financial Results of Operations

Disclosure Controls and internal Controls over Financial Reporting Disclosure controls and procedures are designed to provide reasonable assurance that material information is gathered and reported to senior management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to permit timely decisions regarding public disclosure. Management is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”). ICFR is a process designed by or under the supervision of the Chief Executive Officer and Chief Financial Officer, and affected by the Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Company used the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organisations of the Treadway Commission (COSO) for the design of the Company’s ICFR. All internal control systems have inherent limitations and therefore our ICFR can only provide reasonable assurance and may not prevent or detect misstatements due to error or fraud. The Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation of the design and operating effectiveness of the Company’s disclosure controls and procedures and ICFR as of December 31, 2012, that disclosure controls and procedures and ICFR were effective. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation, nor were there any significant deficiencies or material weaknesses in the Company’s internal controls requiring corrective actions. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The Company continues to review and document its disclosure controls and procedures, including internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that its systems evolve with its business. In order to ensure that its disclosure is reported in accordance with applicable requirements, the Company has implemented an internal procedure that requires all of its press releases to be reviewed by counsel. There have been no other significant changes in the Company’s ICFR that occurred during the year ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s ICFR.

Management’s Responsibility For Financial statements The information provided in this report, including the financial statements, is the responsibility of management. In the preparation of these statements, estimates are sometimes necessary to make a determination of future values for certain assets or liabilities. Management believes such estimates are based on careful judgments and have been properly reflected in the accompanying financial statements. Management maintains a system of internal controls to provide reasonable assurance that the Company’s assets are safeguarded and to facilitate the preparation of relevant and timely information.

24 | Lydian International | 2012 Annual Report


Financial Results of Operations

information On incurred expenses Material costs incurred in the twelve month periods ended December 31, 2012 and 2011 were as follows: Cost type (1)Exploration and evaluation deferred expenditures Employees benefit and expenses Administrative and other expenses Services and consumables used Interest expenses EEA write off Depreciation and amortisation Other costs

2012 (ÂŁ) 8,027,932 3,044,924 1,950,594 848,388 349,651 71,315 376,009 14,668,813

2011 (ÂŁ) 7,647,810 3,007,019 1,312,335 683,957 547,743 165,215 102,172 180,744 13,647,620

(1)These expenditures are capitalised as exploration and evaluating assets.

2012 Annual Report | Lydian International | 25


Appendix 1 Cautionary Note Regarding Forward-Looking Statements

This MD&A contains “forward-looking statements” that involve a number of risks and uncertainties. Forwardlooking statements include, but are not limited to, statements with respect to the future price and the estimation of mineral reserves and resources, the realisation of mineral estimates, the timing and amount of estimated future production, costs of production, capital expenditures, costs and timing of the development of new deposits, success of exploration activities, permitting timelines, currency fluctuations, requirements for additional capital, government regulation of mining operations, environmental risks, unanticipated reclamation expenses, title disputes or claims, limitations on insurance coverage and timing and possible outcome of pending litigation. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects”, or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts���, “intends”, “anticipates”, or “does not anticipate”, or “believes”, or variations of such words and phrases or that state that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved. Forward-looking statements are based on the opinions and estimates of management as of the date such statements are made and they involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any other future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among others: the actual results of current exploration activities; actual results of current reclamation activities; conclusions of economic evaluations; changes in project parameters as plans continue to be refined; future prices of mineral resources; fluctuations in metal prices, as well as those risk factors discussed or referred to in this MD&A under the heading “Risks and Uncertainties” and other documents filed from time to time with the securities regulatory authorities in all provinces and territories of Canada and Jersey. Although the Company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Such

26 | Lydian International | 2012 Annual Report

statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions about: • • • • • • • • • •

general business and economic conditions; the supply and demand for, deliveries of, and the level and volatility of prices of gold; the timing of the receipt of regulatory and governmental approvals for the Company’s projects; the availability of financing for the Company’s development of its properties on reasonable terms; the ability to procure equipment and operating supplies in sufficient quantities and on a timely basis; the ability to attract and retain skilled staff; exploration timetables; planned development and production timetables; market competition; and the accuracy of the Company’s resource estimate (including, with respect to size, grade and recoverability) and the geological, operational and price assumptions on which it is based.

The Company undertakes no obligation to update forwardlooking statements if circumstances or management’s estimates or opinions should change except as required by securities regulatory requirements. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. Cautionary Note to United States Investors Concerning Estimates of Measured, Indicated and Inferred Resources: This MD&A uses the terms “Measured”, “Indicated” and “Inferred” Resources. United States investors are advised that while such terms are recognised and required by Canadian regulations, the U.S. Securities and Exchange Commission (“SEC”) does not recognise them. “Inferred Mineral Resources” have a great amount of uncertainty as to their existence and as to their economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Mineral Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of Inferred Mineral Resources may not form the basis of feasibility or other economic studies. United States investors are cautioned not to assume that all or any part of Measured or Indicated Mineral Resources will ever be converted into Mineral Reserves. United States investors are also cautioned not to assume that all or any part of an Inferred Mineral Resource exists, or is economically or legally mineable.


Appendix 2 Table of Drill results (Intersections greater than 1g/t gold) 2012 drilling programme at Amulsar

2012

Year

Drill Hole

Dip

Azimuth

DDA-272 DDA-273 DDA-274 DDA-275 DDA-276 DDA-277

-60 -60 -60 -60 -60 -60

120 130 160 90 290 110

Total Depth (m) 154.0 104.8 130.0 130.0 197.7 154.0

DDA-278

-60

101

254.8

DDA-279

-60

36

144.0

DDA-280

-60

30

135.8

DDA-281

-60

300

203.4

DDA-282 DDA-283 DDA-284

-60 -60 -60

113 115 130

99.8 65.1 250.9

DDA-285

-60

25

185.0

DDA-286 DDAG-287 DDA - 288 DDA - 289

-60 -90 -60 -60

215 0 120 120

63.9 25.0 20.7 240.1

DDA-290

-60

110

315.0

DDAG-291 DDAG-292 DDAG-293 DDAG-294 DDAG-295 DDAG-296 DDAG-297 DDAG-298 DDAG-299 DDAG-300 DDAG-301 DDAG-302 DDAG-303

-90 -90 -90 -90 -90 -90 -90 -90 -90 -90 -90 -90 -90

0 0 0 0 0 0 0 0 0 0 0 0 0

41.0 35.0 21.9 40.0 12 12 15 10 17.8 4.7 6 8.2 6.5

From (m)

To (m)

Intersection (m)

Gold (g/t)

71.0 124.0 53.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 164.0 197.7 (EOH) 37.7 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 49.0 51.0 2.0 1.2 88.0 96.0 8.0 1.0 104.0 127.0 23.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 39.0 72.0 33.0 0.9 77.0 81.5 4.5 1.2 94.5 96.5 2.0 1.1 107.5 110.5 3.0 1.5 119.3 123.3 4.0 1.0 83.5 85.5 2.0 1.2 105.5 144.0 38.5 1.0 167.0 172.0 5.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 3.0 16.0 13.0 1.5 123.0 160.0 37.0 1.0 2.0 40.0 38.0 1.0 GEOTECHNICAL DRILL HOLE BOGGED AND LOST NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 167.0 190.0 23.0 1.0 205.0 207.0 2.0 1.0 231.0 236.0 5.0 0.9 261.0 266.0 4.0 1.2 304.0 311.0 7.0 1.6 GEOTECHNICAL DRILL HOLE GEOTECHNICAL DRILL HOLE GEOTECHNICAL DRILL HOLE GEOTECHNICAL DRILL HOLE SOIL CORING (NO SAMPLING) SOIL CORING (NO SAMPLING) SOIL CORING (NO SAMPLING) SOIL CORING (NO SAMPLING) SOIL CORING (NO SAMPLING) SOIL CORING (NO SAMPLING) SOIL CORING (NO SAMPLING) SOIL CORING (NO SAMPLING) SOIL CORING (NO SAMPLING)

Cut-oямА 0.2g/t gold, maximum down-hole internal dilution 10m. All intersections are oxide gold, not true widths.

2012 Annual Report | Lydian International | 27


Appendix 2 Table of Drill results (Intersections greater than 1g/t gold) 2012 drilling programme at Amulsar

2012

Year

Drill Hole

Dip

Azimuth

DDAG-304 DDAG-305 DDA-306 DDA-307

-90 -90 -60 -60

0 0 110 110

Total Depth (m) 10.5 41.4 37.9 175.2

DDA-308

-60

110

226.9

DDAG-309 DDA-310

-90 -60

0 0

38.3 172.5

DDA-311

-60

30

217.0

DDA-312

-60

110

101.0

DDA-313

-60

110

265.0

DDAG-314 DDAG-315 DDA-316 DDAG-317 DDA-318

-90 -90 -90 -90 -63

0 0 0 0 180

36.0 50.0 111.1 27.1 97.0

DDA-319

-60

120

276.0

DDAG-320 DDAG-321

-90 -90

0 0

40.0 38.0

DDA-322

-60

125

320.1

DDA-323

-60

40

10.6

DDA-324

-60

220

106.4

DDA-325 DDAG-326 DDA-327 DDA-328 DDAG-329 DDA-330 DDA-331 DDA-332 DDA-333 DDA-334

-65 -90 -60 -63 -90 -60 -60 -60 -60 -60

25 0 110 5 0 210 110 300 265 30

72.5 43.0 86.6 45.7 166.1 297.1 134.0 100.0 327.8

From (m)

To (m)

Gold (g/t)

SOIL CORING (NO SAMPLING) GEOTECHNICAL DRILL HOLE BOGGED AND LOST NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 159.0 161.0 2.0 1.0 177.0 179.0 2.0 1.0 0.0 10.0 10.0 1.2 166.0 170.0 4.0 1.0 0.0 32.0 32.0 1.8 109.0 206.0 94.0 1.0 60.0 62.0 2.0 1.1 17.0 95.0 88.0 1.0 246.0 265 (EOH) 19.0 1.2 GEOTECH NO SIGNIFICANT INTERSECTIONS >1G/T GOLD GEOTECH NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 66.0 74.0 8.0 1.0 0 27.1 27.1 1.5 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 79.0 81.0 2.0 1.0 147.0 164.0 17.0 1.0 217.0 222.0 5.0 1.0 247.0 250.0 3.0 1.1 GEOTECH NO SIGNIFICANT INTERSECTIONS >1G/T GOLD GEOTECH NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 61.0 92.0 31.0 2.0 134.0 142.0 8.0 1.0 214.0 223.0 9.0 1.0 300.0 302.0 2.0 1.1 BOGGED AND LOST 39.0 44.0 5.0 1.2 64.0 66.0 2.0 1.0 87.0 90.0 3.0 1.1 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD GEOTECH NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD BOGGED AND LOST GEOTECH NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 37.0 92.0 55.0 1.0 155.0 201.0 46.0 1.4 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD BOGGED AND LOST 108.0 202.0 94.0 1.0

Cut-oямА 0.2g/t gold, maximum down-hole internal dilution 10m. All intersections are oxide gold, not true widths.

28 | Lydian International | 2012 Annual Report

Intersection (m)


Appendix 2 Table of Drill results (Intersections greater than 1g/t gold) 2012 drilling programme at Amulsar

2012

Year

Drill Hole

Dip

Azimuth

Total Depth (m)

DDA-335

-60

210

47.3

DDA-336

-60

110

146.1

DDA-337

-60

120

300.0

DDA-338 DDA-339

-60 -60

36 95

201.4 31.2

DDA-340

-60

115

259.0

DDA-341

-60

20

158.0

DDA-342

-60

225

150.0

DDA-343

-60

220

58.0

DDA-344 DDA-345

-60 -60

30 40

15.1 98.1

DDA-346

-60

210

23.2

DDA-347

-60

220

127.0

DDA-348

-60

310

275.9

DDA-349

-60

120

163.2

DDA-350

-60

115

274.5

DDA-351

-60

105

200.0

DDA-352

-60

170

117.0

DDA-353

-60

320

293.5

From (m)

To (m)

Intersection (m)

Gold (g/t)

0.0 35.0

20.0 20.0 1.0 40.0 5.0 1.2 BOGGED AND LOST NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 86.0 99.0 13.0 1.0 129.0 157 28.0 1.0 216.0 234.0 18.0 1.7 294.0 296.0 2.0 1.0 95.0 187.0 92.0 1.1 BOGGED AND LOST 23.0 106.0 83.0 1.0 181.0 201.0 20.0 1.0 246.0 249.0 3.0 1.2 252.0 257.0 5.0 1.0 63.0 92.0 29.0 1.0 135.0 138.0 3.0 1.0 104.0 118.0 14.0 1.0 45.0 53.0 8.0 2.0 BOGGED AND LOST BOGGED AND LOST NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 15.0 22.0 7.0 1.0 BOGGED AND LOST 52.0 112.0 60.0 1.4 13.0 15.0 2.0 1.2 68.0 70.0 2.0 1.1 183.0 185.0 2.0 1.2 215.0 223.0 8.0 1.0 255.0 275.9 (EOH) 20.9 1.2 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 0.0 46.0 46.0 1.0 103.0 112.0 9.0 1.0 178.0 239.0 61.0 1.1 256.0 261.0 5.0 1.1 139.0 161.0 22.0 1.0 184.0 193.0 9.0 1.0 2.0 4.0 2.0 1.2 23.0 63.0 40.0 1.0 90.0 93.0 3.0 1.1 28.0 48.0 20.0 1.0 69.0 74.0 5.0 1.0 82.0 101.0 19.0 1.1 208.0 212.0 4.0 1.0

Cut-oямА 0.2g/t gold, maximum down-hole internal dilution 10m. All intersections are oxide gold, not true widths.

2012 Annual Report | Lydian International | 29


Appendix 2 Table of Drill results (Intersections greater than 1g/t gold) 2012 drilling programme at Amulsar

2012

Year

Drill Hole

Dip

Azimuth

Total Depth (m)

DDA-354

-60

225

249.5

DDA-355

-60

300

290.9

DDA-356

-60

30

16.1

DDA-357

-60

300

14.1

DDA-358

-60

115

230.6

DDA-359

-60

290

107.0

DDA-360

-60

120

295.1

DDA-361

-60

300

84.7

DDA-362

-60

205

105.8

DDA-363 DDA-364

-60 -60

305 210

148.5 88.3

DDA-365

-60

310

161.5

DDA-366

-60

110

124.5

-60

290

351.5

DDA-367

Including -60

300

302.4

DDA-368 Including 300 0

DDAG-369

-60 -90

302 297.8

DDA-370

-60

100

404.5

DDAG-371

-70

180

208.7

DDA-372

-60

290

255.4

DDA-373

-60

300

306.1

From (m)

To (m)

141.0 163.0 189.0 97.0 115.0

Gold (g/t)

154.0 13.0 1.0 167.0 4.0 1.0 192.0 3.0 1.0 101.0 4.0 1.0 121.0 6.0 1.0 BOGGED AND LOST 0.0 14.1 (EOH) 14.1 1.8 BOGGED AND LOST 78.0 176.0 98.0 1.9 33.0 38.0 5.0 1.1 BOGGED AND LOST 12.0 14.0 2.0 1.2 131.0 191.0 60.0 1.0 0.0 68.0 68.0 1.2 0.0 19.0 19.0 1.0 46.0 67.0 21.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 3.0 6.0 3.0 1.0 23.0 44.0 21.0 1.6 128.0 130.0 2.0 5.6 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 63.0 82.0 19.0 1.0 100.0 105.0 5.0 1.8 158.0 173.0 15.0 1.0 240.0 329.0 89.0 1.0 301.0 323.0 22.0 3.2 11.0 18.0 7.0 1.3 38.0 40.0 2.0 1.1 111.0 183.0 72.0 1.1 140.0 167.0 27.0 2.3 258.0 276.0 18.0 1.0 GEOTECH NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 155.0 174.0 19.0 1.0 230.0 240.0 10.0 1.0 342.0 380.0 38.0 1.0 401.0 404.5 (EOH) 3.5 1.0 GEOTECH NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 160.0 165.0 5.0 1.1 232.0 240.0 8.0 1.0 19.0 35.0 16.0 1.2 60.0 67.0 7.0 1.0 293.0 304.0 11.0 1.0

Cut-oямА 0.2g/t gold, maximum down-hole internal dilution 10m. All intersections are oxide gold, not true widths.

30 | Lydian International | 2012 Annual Report

Intersection (m)


Appendix 2 Table of Drill results (Intersections greater than 1g/t gold) 2012 drilling programme at Amulsar

2012

Year

Drill Hole

Dip

Azimuth

Total Depth (m)

RCA-456

-60

30

186.0

RCA-457

-60

30

190.0

RCA-458

-90

300

167.0

RCA-459

-60

210

150.0

RCA-460

-60

30

150.0

RCA-461

-60

30

168.0

RCA-462

-60

210

150.0

RCA-463

-60

320

162.0

RCA-464

-60

210

138.0

RCA-465

-60

210

240.0

RCA-466

-60

210

113.0

RCA-467

-60

210

162.0

RCA-468

-60

30

150.0

RCA-469 RCA-470

-60 -60

30 210

150.0 55.0

RCA-471

-60

300

132.0

RCA-472 RCA-473 RCA-473A RCA-474 RCA-475 RCA-476 RCA-477 RCA-478

-60 -60 -70 -90 -60 -60 -60 -60

290 30 35 0 170 155 120 245

156.0 18.0 122.0 92.0 125.0 107.0 136.0 203.0

From (m)

To (m)

Intersection (m)

Gold (g/t)

24.0 27.0 3.0 1.1 124.0 135.0 11.0 1.0 159.0 163.0 4.0 1.0 171.0 173.0 2.0 1.0 121.0 123.0 2.0 1.4 157.0 184.0 27.0 2.4 11.0 15.0 4.0 1.0 55.0 60.0 5.0 1.1 66.0 70.0 4.0 1.0 4.0 19.0 15.0 1.0 72.0 78.0 6.0 1.0 106.0 111.0 5.0 0.9 0.0 11.0 11.0 1.2 99.0 101.0 2.0 1.0 110.0 114.0 4.0 1.0 32.0 48.0 8.0 1.1 51.0 62.0 11.0 1.0 66.0 70.0 4.0 1.0 82.0 84.0 2.0 1.0 111.0 133.0 22.0 1.0 105.0 110.0 5.0 1.3 11.0 13.0 2.0 1.1 69.0 95.0 26.0 1.0 2.0 124.0 122.0 0.9 24.0 49.0 25.0 1.0 88.0 90.0 2.0 1.0 70.0 129.0 59.0 1.0 66.0 111.0 45.0 1.0 59.0 79.0 20.0 1.0 96.0 124.0 28.0 1.2 94.0 110.0 16.0 1.0 118.0 120.0 2.0 1.1 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD BOGGED AND LOST 17.0 29.0 12.0 1.0 85.0 114.0 29.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD BOGGED AND LOST NO SIGNIFICANT INTERSECTIONS >1G/T GOLD BOGGED AND LOST NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 38.0 50.0 12.0 1.3 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD

Cut-oямА 0.2g/t gold, maximum down-hole internal dilution 10m. All intersections are oxide gold, not true widths.

2012 Annual Report | Lydian International | 31


Appendix 2 Table of Drill results (Intersections greater than 1g/t gold) 2012 drilling programme at Amulsar

Year

Drill Hole

Dip

Azimuth

RCA-479 RCA-480 RCA-481

-60 -60 -60

110 230 120

Total Depth (m) 197.0 203.0 23.0

RCA-482

-60

210

157.0

RCA-483

-60 -60

2012

RCA-484

30 220 Including 305

120.0 143.0

RCA-485

-60

125

RCA-486

-60

210

139.0

RCA-487

-60

210

70.0

RCA-488

-60

240

198.0

RCA-489

-60

315

203.0

RCA-490

-60

300

185.0

RCA-491 RCA-492 RCA-493

-60 -60 -60

210 25 210

119.0 133.0 42.0

RCA-494

-60

215

146.0

RCA-495 RCA-496

-60 -60

125 250

225.0 96.0

RCA-497

-60

120

240.0

RCA-498

-60

210

145.0

RCA-499

-60

315

258.0

RCA-500

-60

120

131.0

From (m)

To (m)

Gold (g/t)

NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 154.0 171.0 17.0 1.0 BOGGED AND LOST 102.0 104.0 2.0 1.2 126.0 128.0 2.0 1.1 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 17.0 128.0 111.0 1.1 39.0 75.0 36.0 2.7 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 1.0 13.0 12.0 1.1 43.0 48.0 5.0 1.0 79.0 114.0 35.0 1.8 3.0 6.0 3.0 1.3 13.0 15.0 2.0 1.1 32.0 37.0 5.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 164.0 168.0 4.0 1.0 179.0 182.0 3.0 1.0 0.0 21.0 21.0 1.1 112.0 121.0 9.0 1.2 139.0 153.0 14.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 25.0 30.0 5.0 1.1 2.0 32.0 30.0 1.0 29.0 48.0 19.0 1.1 90.0 92.0 2.0 1.1 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 35.0 38.0 3.0 1.2 47.0 51.0 4.0 1.0 77.0 79.0 2.0 1.0 125.0 146.0 21.0 1.0 149.0 151.0 2.0 1.0 54.0 59.0 5.0 1.2 18.0 28.0 10.0 1.0 54.0 58.0 4.0 1.0 124.0 126.0 2.0 1.2 144.0 146.0 2.0 2.3 157.0 187.0 30.0 1.0 191.0 196.0 5.0 1.1 3.0 6.0 3.0 1.5

Cut-oямА 0.2g/t gold, maximum down-hole internal dilution 10m. All intersections are oxide gold, not true widths.

32 | Lydian International | 2012 Annual Report

Intersection (m)


Report of Management As of March 23, 2013 To the Shareholders of Lydian International Limited

We are responsible for the preparation and fair presentation of the Consolidated Financial Statements, as well as the financial reporting process that gives rise to such Consolidated Financial Statements. This responsibility requires us to make significant accounting judgments and estimates. For example, we are required to choose accounting principles and methods that are appropriate to the Company’s circumstances, and we are required to make estimates and assumptions that affect amounts reported. Fulfilling this responsibility requires the preparation and presentation of our Consolidated Financial Statements in accordance with international financial reporting standards. We also have responsibility for the preparation and fair presentation of other financial information in this report and to ensure the consistency of this information with the financial statements. We are responsible for developing and implementing internal controls over the financial reporting process. These controls are designed to provide reasonable assurance that relevant and reliable financial information is produced. To gather and control financial data, we have established accounting and reporting systems supported by internal controls over financial reporting and an internal audit program. We believe that our internal controls over financial reporting provide reasonable assurance that our assets are safeguarded against loss from unauthorized use or disposition, that receipts and expenditures of the Company are made only in accordance with authorization of management and directors of the Company and that our records are reliable for preparing our Consolidated Financial Statements and other financial information in accordance with applicable international financial reporting standards and in accordance with applicable securities rules and regulations. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. We have established disclosure controls and procedures, internal controls over financial reporting and corporate-wide policies to ensure that Lydian International’s consolidated financial position, results of operations and cash flows are presented fairly. Our disclosure controls and procedures are designed to ensure timely disclosure and communication of all

material information required by regulators. We oversee, with assistance from management, these controls and procedures and all required regulatory disclosures. To ensure the integrity of our financial statements, we carefully select and train qualified personnel. We also ensure our organisational structure provides appropriate delegation of authority and division of responsibilities. Our policies and procedures are communicated throughout the organisation. Our Board of Directors is responsible for reviewing and approving the Consolidated Financial Statements and for overseeing management’s performance of its financial reporting responsibilities. Their financial statement-related responsibilities are fulfilled mainly through the Audit Committee. The Audit Committee is composed entirely of independent directors and includes three directors with financial expertise. The Audit Committee meets regularly with management and the independent registered Chartered Accountants to review accounting policies, financial reporting and internal control issues and to ensure each party is properly discharging its responsibilities. The Audit Committee is responsible for the appointment and compensation of the independent registered Chartered Accountants and also considers their independence, reviews their fees and (subject to applicable securities laws) pre-approves their retention for any permitted non-audit services and their fee for such services. The independent registered Chartered Accountants have full and unlimited access to the Audit Committee, with and without the presence of management.

Timothy Coughlin President and Chief Executive Officer March 23, 2013

Roderick Corrie Chief Financial Officer March 23, 2013

2012 Annual Report | Lydian International | 33


Independent Auditors’ Report As of March 21, 2013 To the Shareholders of Lydian International Limited

We have audited the accompanying consolidated financial statements of Lydian International Limited and its subsidiaries, which comprise the consolidated statement of financial position as at December 31, 2012 and 2011, and the consolidated income statements, statements of comprehensive income, statements of changes in equity, and statements of cash flows for the year ended December 31, 2012 and 2011, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility 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) as issued by the International Accounting Standards Board (IASB), 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.

Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with International Standards on Auditing.  Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies

34 | Lydian International | 2012 Annual Report

used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Lydian International Limited and its subsidiaries as at December 31, 2012 and 2011, and their financial performance and cash flows for the years then ended in accordance with IFRS as issued by the IASB.

Signed “Grant Thornton LLP” Chartered Accountants Licensed Public Accountants March 21, 2013 Mississauga, Canada


Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

Consolidated income statements For years ended December 31, 2012 and 2011 Notes Interest income total income Employee salaries and benefits expense Services and consumables used Administrative and other expenses Depreciation and amortisation expenses Interest expense Other losses total expenses loss before tax Income taxes loss for the year

5

6 7 8 12,13 9

10

Loss for the year attributable to: Common shareholders Non-controlling interest

loss per share attributable to owners of the parent (basic and diluted)

11

December 31, 2012 £

December 31, 2011 £

220,007 220,007

44,297 44,297

(3,044,924) (848,388) (1,950,594) (71,315) (349,651) (376,009) (6,640,881)

(3,007,019) (683,957) (1,312,335) (102,172) (547,743) (345,959) (5,999,185)

(6,420,874) (6,420,874)

(5,954,888) (5,954,888)

(6,384,282) (36,592) (6,420,874)

(5,899,696) (55,192) (5,954,888)

(0.05)

(0.06)

Consolidated statements of Comprehensive income For years ended December 31, 2012 and 2011 December 31, 2012 £

December 31, 2011 £

Loss for the year

(6,420,874)

(5,954,888)

Other comprehensive income: Exchange differences arising on translation of foreign operations

(3,163,037)

(640,353)

total comprehensive loss for the year

(9,583,911)

(6,595,241)

(9,487,376) (96,535) (9,583,911)

(6,512,381) (82,860) (6,595,241)

Notes

Comprehensive loss for the year attributable to: Common shareholders Non-controlling interest

2012 Annual Report | Lydian International | 35


Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

Consolidated statements of Financial Position December 31, 2012 £

December 31, 2011 £

12 13 14 15 16

2,360,999 122,886 29,640,711 2,105,903 34,230,499

476,012 95,522 23,739,005 1,371,935 126,600 25,809,074

17 18

20,113,998 425,445 20,539,443

8,301,907 410,434 8,712,341

54,769,942

34,521,415

77,632,082 345,076 2,368,034 (3,267,535) (26,481,864) 50,595,793 50,595,793

43,850,290 345,076 2,079,136 (164,441) (1,795,654) (17,232,781) 27,081,626 408,496 27,490,122

Notes Assets Non-current assets Property and equipment Intangible assets Exploration and evaluation assets Other non-current assets Other long-term financial assets total non-current assets Current assets Cash and cash equivalents Other current assets total current assets tOtAl Assets eQuitY AND liABilities Capital and reserves Share capital Warrants Equity settled employee benefits reserve Translation of foreign operations Other reserves – option to purchase non-controlling interest Accumulated deficit total equity attributable to the parent Non-controlling interest total equity

19 20 21 22

Non-current liabilities Other non-current liability Provisions total non-current liabilities

24 25

366,382 156,001 522,383

28,800 28,800

Current liabilities Accrued liabilities and other payables Current portion of Due to Newmont total current liabilities

26 23

576,948 3,074,818 3,651,766

858,361 6,144,132 7,002,493

54,769,942

34,521,415

tOtAl eQuitY AND liABilities

36 | Lydian International | 2012 Annual Report


Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

Consolidated statements of Changes in equity Share capital including, premium and discounts £

Warrants £

Equity settled employee benefits reserve £

Translation of foreign operations £

Balance at December 31, 2010 Proceeds from exercised warrants

Other reserves £

Other Reserves Share Issuable £

Accumulated deficit £

37,778,041

1,202,829

655,985

448,244

(1,037,816)

715,506

(11,333,085)

28,429,704

491,356

28,921,060

Non Attributable controlling to owners interest £ £

Total £

3,088,622

-

-

-

-

-

-

3,088,622

-

3,088,622

Proceeds from exercised options

451,024

-

-

-

-

-

-

451,024

-

451,024

Attributable to exercised warrants

857,753

(857,753)

-

-

-

-

-

-

-

-

Attributable to exercised options

172,656

-

(172,656)

-

-

-

-

-

-

-

Attributable to expired options

28,850

-

(28,850)

-

-

-

-

-

-

-

Employee share options issued during the year

-

-

1,624,657

-

-

-

-

1,624,657

-

1,624,657

1,473,344

-

-

-

(757,838)

(715,506)

-

-

-

-

-

-

-

(612,685)

-

-

(5,899,696)

(6,512,381)

(82,860)

(6,595,241)

43,850,290

345,076

2,079,136

(164,441)

(1,795,654)

-

(17,232,781)

27,081,626

408,496 27,490,122

Prepayment on option and shares issuable to purchase non-controlling interest (Note 22) Total comprehensive loss for the year Balance at December 31, 2011

2012 Annual Report | Lydian International | 37


Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

Consolidated statements of Changes in equity Share capital including, premium and discounts £

Warrants £

Equity settled employee benefits reserve £

Translation of foreign operations £

Other reserves £

Other Reserves Share Issuable £

Accumulated deficit £

Balance at December 31, 2011 Issue of new shares (Note 19)

43,850,290

345,076

2,079,136

(164,441)

(1,795,654)

-

(17,232,781)

27,081,626

408,496

27,490,122

31,941,086

-

-

-

-

-

-

31,941,086

-

31,941,086

Cost of shares issued

(1,881,581)

-

-

-

-

-

-

(1,881,581)

-

(1,881,581)

Equity share capital issued in purchase of non-controlling interest (Note 22) Proceeds from exercised options

1,381,108

-

-

-

(1,381,108)

-

-

-

-

-

Attributable to exercised options

1,527,000

-

-

-

-

-

-

1,527,000

-

1,527,000

609,714

-

(609,714)

-

-

-

-

-

-

-

Attributable to expired options

204,465

-

(204,465)

-

-

-

-

-

-

-

Employee share options issued during the year

-

-

1,103,077

-

-

-

-

1,103,077

Total comprehensive loss for the year

-

-

-

(3,103,094)

-

-

(6,384,282)

(9,487,376)

(96,535)

(9,583,911)

Purchase of non-controlling interest

-

-

-

-

3,176,762

-

(2,864,801)

311,961

(311,961)

-

77,632,082

345,076

2,368,034

(3,267,535)

-

-

(26,481,864)

50,595,793

Balance at December 31, 2012

38 | Lydian International | 2012 Annual Report

Non Attributable controlling to owners interest £ £

Total £

1,103,077

- 50,595,793


Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

Consolidated statements of Cash Flows December 31, 2012 ÂŁ

December 31, 2011 ÂŁ

(6,490,355) (6,490,355)

(4,671,986) (4,671,986)

220,007

44,297

(2,219,665) (7,752,766) (3,245,307) 139,248 7,362 (18,848) (12,869,969)

(413,348) (7,082,435) (129,500) (64,801) (7,645,787)

Cash flows from financing activities Proceeds from issuance of share capital, net Net cash generated from financing activities

31,586,505 31,586,505

3,539,646 3,539,646

Net increase (decrease) in cash and cash equivalents

12,226,181

(8,778,127)

Cash and cash equivalents, beginning of year

8,301,907

17,058,692

Effects of exchange rate changes on the balance of cash held in foreign currencies

(414,090)

21,342

20,113,998

8,301,907

Notes Cash flows from operating activities Payments to suppliers and employees Net cash used in operating activities Cash flows for investing activities Interest received Payments for property and equipment and intangible assets Exploration and evaluation amounts paid Payments to Newmount for settlement of debt Long term (investment)/disposals Proceeds from fixed assets disposal Deposits made Net cash used in investing activities

Cash and cash equivalents, end of the year

12,13 14 16 18

2012 Annual Report | Lydian International | 39


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

1. General information Lydian International Limited (the “Company”) is a company continued under the laws of Jersey effective on December 12, 2007 (formerly existing under the laws of Alberta, Canada). The registered office address of the Company is Ground Floor, Charles House, Charles Street, St Helier, JE2 4SF Channel Islands. The Company’s ordinary shares (“Ordinary Shares”) began trading on the Toronto Stock Exchange (“TSX”) on January 10, 2008 under the symbol “LYD”. The Company, together with its subsidiaries, (the “Group”) is a mineral exploration and development group of companies focussed on emerging and transitional environments, and is developing precious and base metal assets located in Armenia and Georgia under exploration licences granted by local authorities. The Group’s main exploration project is gold at Amulsar, Armenia. In conducting operations in Armenia and Georgia, the Company is subject to considerations and risks not typically associated with companies operating in Canada. These include risks such as political, economic and legal environments in an emerging market. The Company’s results may be adversely affected by changes in political and social conditions and by changes in governmental policies with respect to mining laws and regulations, currency conversion and remittance abroad and rates and methods of taxation. The principal accounting policies of the Group are further described in Note 3.

2. Adoption of New and Revised Accounting standards i)

Standards and Interpretations effective in the current period

There were no new standards or revised Standards and Interpretations issued by the International Accounting Standards Board (the “IASB”) and International Financial Reporting Interpretations Committee (the “IFRIC”) of the IASB that are relevant to the Group’s operations for the annual reporting period beginning on January 1, 2012. ii)

Standards and Interpretations in issue but not yet adopted

Management anticipates that those standards and interpretations deemed applicable to the Company’s business will be adopted in the Company’s financial statements of future periods as they become effective and that the adoption will have no material impact on the financial statements of the Company in the periods of initial application other than for additional disclosures. Those which management currently believes are or will be applicable are as follows: IFRS 9 Financial Instruments This Standard issued in November 2009 and amended in October 2010 introduces new requirements for the classification and measurement of financial assets and financial liabilities and for derecognition. IFRS 9 requires all recognised financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement to be subsequently measured at amortised cost or fair value. Specifically, debt instruments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. All other debt instruments and equity instruments are measured at their fair values at the end of subsequent accounting periods. The most significant effect of IFRS 9 regarding the classification and measurement of financial liabilities relates to the accounting for changes in fair value of a financial liability (designated as at fair value through profit or loss) attributable to changes in the credit risk of that liability IFRS 9 is effective for annual periods beginning on or after January 1, 2015, with earlier application permitted. The management anticipate that IFRS 9 will be adopted in the Group’s consolidated financial statements for the annual period beginning January 1, 2015 and that the application of the new Standard will not have a significant impact on amounts reported in respect of the Group’s financial assets and financial liabilities. Consolidation Standards A package of consolidation standards are effective for annual periods beginning or after January 1, 2013. Information on these new standards is presented below. The Group’s management has not completed its assessment of the impact of these new and revised standards on the Group’s consolidated financial statements.

40 | Lydian International | 2012 Annual Report


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

IFRS 10 “Consolidated Financial Statements” supersedes IAS 27 “Consolidated and Separate Financial Statements” and SIC 12 “Consolidation – Special Purpose Entities”. It revised the definition of control together with accompanying guidance to identify an interest in a subsidiary. However, the requirements and mechanics of consolidation and the accounting for any non-controlling interests and changes in control remain the same. IFRS 11 “Joint Arrangements” supersedes IAS 31 “Interests in Joint Ventures”. It aligns more closely the accounting by the investors with their rights and obligations relating to the joint arrangement. In addition, IAS 31’s option of using proportionate consolidation for joint ventures has been eliminated. IFRS 11 now requires the use of the equity accounting method, which is currently used for investments in associates. IFRS 12 “Disclosure of Interests in Other Entities” integrates and makes consistent the disclosure requirements for various types of investments, including unconsolidated structured entities. It introduces new disclosure requirements about the risks to which an entity is exposed from its involvement with structured entities. IFRS 13 Fair Value Measurement IFRS 13 does not affect which items are required to be fair-valued, but clarifies the definition of fair value and provides related guidance and enhanced disclosures about fair value measurements. IFRS 13 is applicable for annual periods beginning on or after January 1, 2013. The Group’s management has not completed its assessment of the impact of this new standard on the Group’s consolidated financial statements. Amendments to IAS 1 Presentation of Financial Statements The Amendments to IAS 1 require an entity to group items presented in other comprehensive income into those that, in accordance with other IFRSs: (a) will not be reclassified subsequently to profit or loss and (b) will be reclassified subsequently to profit or loss when specific conditions are met. This amendment is applicable for annual periods beginning on or after July 1, 2012. The Group’s management expects this will change the current presentation of items in other comprehensive income; however, it will not affect the measurement or recognition of such items. IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine IFRIC 20 sets out authoritative guidance on accounting for costs incurred by mining companies in removing waste materials to gain access to mineral ore deposits (“stripping costs”). The material removed when stripping in the production phase will not necessarily be 100 per cent waste; often it will be a combination of ore and waste. The ratio of ore to waste can range from uneconomic low grade to profitable high grade. Removal of material with a low ratio of ore to waste may produce some usable material, which can be used to produce inventory. This removal might also provide access to deeper levels of material that have a higher ratio of ore to waste. There can therefore be two benefits accruing to the entity from the stripping activity: usable ore that can be used to produce inventory and improved access to further quantities of material that will be mined in future periods. IFRIC 20 considers when and how to account separately for these two benefits arising from the stripping activity, as well as how to measure these benefits both initially and subsequently. IFRIC 20 applies for annual periods beginning on or after 1 January 2013. Earlier application is permitted. It applies to stripping costs incurred on or after the beginning of the earliest period presented. Management anticipates that IFRIC 20 will be adopted in the Group’s financial statements for the annual period beginning on January 1, 2013 and that the application of the new Interpretation will not have a significant impact on the financial statements.

2012 Annual Report | Lydian International | 41


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

3. significant Accounting Policies The principal accounting policies applied in the preparation of these consolidated financials are set out below. These policies have been consistently applied to all the financial periods presented unless otherwise stated. Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board as of December 31, 2012. Basis of preparation The consolidated financial statements have been prepared on the historical cost basis and presented in British Pounds. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its ‘subsidiaries’). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The results of subsidiaries acquired or disposed of during the period are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. Non-controlling interests, presented as part of equity, represent the portion of a subsidiary’s profit or loss and net assets that is not held by the Company. The Company attributes total comprehensive income or loss of subsidiaries between the owners of the parent and the non-controlling interests based on their respective ownership interests. Transactions with non-controlling interests that do not result in a loss of control are accounted for as transactions with equity owners of the group. Any difference between the amount of the adjustment to the non-controlling interest and any consideration paid or received is recognised as a separate reserve within equity. Details of the Company’s direct and indirect subsidiaries at December 31, 2012 and December 31, 2011 are as follows:

Name of subsidiary Lydian Holdings Ltd (BVI) Lydian Resources Kosovo (BVI) Lydian Resources Armenia (BVI) Lydian Resources Georgia Limited Geoteam CJSC Georgian Resource Company LLC Kavkaz Zoloto CJSC Kosovo Resource Company LLC

Place of incorporation or Registration British Virgin Islands British Virgin Islands British Virgin Islands Jersey Armenia Georgia Armenia Kosovo

effective Ownership interest 2012 2011 100% 100% 100% 100% 100% 100% 95% N/A

100% 100% 100% 100% 95% 100% 95% 100%

Principal activity Intermediate holding company Intermediate holding company Intermediate holding company Intermediate holding company Mineral exploration Mineral exploration Dormant company *Liquidation company

*Kosovo Resource Company LLC was liquidated on November 16, 2012. Interest in joint ventures Where a consolidated member of the Group participates in unincorporated joint ventures, that member accounts directly for its proportionate share of the jointly controlled assets, liabilities and related income and expenses which are then similarly included in the consolidated financial statements of the Group.

42 | Lydian International | 2012 Annual Report


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

Foreign currencies The individual financial statements of each entity in the Group are prepared in the currency of the primary economic environment in which the entity operates (its “functional currency”). For the purpose of the consolidated financial statements, the results and financial position of each entity are expressed in British Pounds, which is presentation currency for these consolidated financial statements. Although the parent company has a functional currency of Canadian Dollars, management assesses the Company’s performance in British Pounds. In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing at the dates of the transactions. At each reporting date, monetary items denominated in foreign currencies are retranslated at rates prevailing at the reporting date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences are recognised in profit or loss in the period in which they arise. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s operations are expressed in British Pounds using exchange rates prevailing at the reporting date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transaction are used. Exchange differences arising, if any, are recognised directly into other comprehensive income and transferred to the Group’s translation of foreign operations reserve. Such exchange differences are recognised in profit or loss in the period in which the foreign operation is disposed. Fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the exchange rates prevailing at the acquisition date. Share-based payments Equity-settled awards, including share options and warrants, are measured at fair value at the date of grant and recognised over the vesting period, based on the Group’s estimate of equity-settled awards that will eventually vest, along with a corresponding increase in equity. Fair value is measured using the Black-Scholes Option Pricing Model taking into consideration management’s best estimate of the expected life of the option, the expected share price volatility, the risk free rate, the expected dividend yield and the estimated number of shares that will eventually vest. Taxation The group has no taxable profit and no current income tax. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax base used in the computation of taxable profit, and are accounted for using the liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of the related asset or liability in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries except where the group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each reporting date and increased or reduced to the extent that it is probable, or no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at tax rates that are expected to apply in the period in which the liability is settled or the asset realised based on tax rates that have been enacted or substantively enacted by the reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

2012 Annual Report | Lydian International | 43


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

Current and deferred tax are recognised as an expense or income in the profit or loss, except when they relate to items credited or debited directly to equity, in which case the tax is also recognised directly in equity, or where they arise from the initial accounting in a business combination. Property and equipment Property and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment for amortisation purposes. The gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement. Expenditure to replace a component of an item of property equipment that is accounted for separately is capitalised and the existing carrying amount of the component written off. Other subsequent expenditure is capitalised if future economic benefits will arise from the expenditure. All other expenditure, including repair and maintenance, is recognised in the income statement as incurred. Depreciation is charged to the income statement based on the cost, less estimated residual value, of the asset on a straight-line basis over the estimated useful life. Depreciation commences when the assets are available for use. The estimated useful lives are as follows: Machinery Equipment Motor vehicles Structures Fixtures, fittings and other

5 years 1 – 5 years 3 – 5 years 5 years 1-5 years

Intangible assets Intangible assets, which are acquired by the Group entities and which have finite useful lives are stated at costs less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight line basis over the estimated useful lives of the intangible assets, which are estimated to be 3-10 years for computer software. Impairment of land and intangible assets with indefinite useful lives or not available for use Assets that have an indefinite useful life that are not subject to amortisation or are not available for use are evaluated for impairment annually. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the fair value less costs to sell and value in use. If the recoverable amount of an asset or cash generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognised as income immediately. Impairment of property and equipment and intangible assets with finite lives Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the fair value less costs to sell and value in use. If the recoverable amount of an asset or cash generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately.

44 | Lydian International | 2012 Annual Report


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the property and equipment at the date the impairment is reversed does not exceed what the cost less accumulated depreciation would have been had the impairment not been recognised. Exploration and evaluation assets Exploration and evaluation expenditures comprise costs incurred directly in exploration and evaluation as well as the cost of mineral licences. They are capitalised as exploration and evaluation assets subsequent to acquisition of the licences and pending determination of the technical and economic feasibility of the project. Borrowing costs attributable to the exploration and evaluation of mineral licences are expensed as incurred. When the existence of economically recoverable reserves and commercial viability are established, the related exploration and evaluation assets are reclassified as intangible assets or property, plant and equipment as appropriate. Where a project is abandoned or is determined not to be economically viable, the related costs are written off. Impairment is assessed when facts and circumstances suggest that the carrying amount of an asset may exceed its recoverable amount. Supplies Supplies are sample bags, small tools and other similar items stored to support drilling operations. Supplies are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business and selling expenses. The cost of supplies is based on the first-in first-out principle and includes expenditure incurred in acquiring the supplies and bringing them to their existing location and condition. Financial assets Financial assets other than hedging instruments are divided into the following categories: • loans and receivables • financial assets at fair value through profit or loss • available-for-sale financial assets • held-to-maturity investments. Financial assets are assigned to the different categories on initial recognition, depending on the characteristics of the instrument and its purpose. A financial instrument’s category is relevant for the way it is subsequently measured and whether any resulting income and expense is recognised in profit or loss or directly in equity. Generally, the Group recognises all financial assets using settlement day accounting. An assessment of whether a financial asset is impaired is made at least at each reporting date. All income and expense relating to financial assets are recognised in the income statement except for income or loss on any available-for-sale financial assets which are recognised in equity. Other receivables Other receivables are initially recognised at fair value. Subsequently they are measured at amortised cost less provision for impairment. A provision for impairment of receivables is established when there is objective evidence that the Group may not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor and default and delinquency in payments are considered indicators that the receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of the estimated future cash flows, discounted at the original effective interest rate. The balance of the allowance is adjusted by recording a charge or income to the statement of income of the reporting period. Any amount written-off with respect to other receivable balances is charged against the existing allowance for doubtful accounts. All accounts receivable for which collection is not considered probable are written-off. Other Investments Investments in equity securities that are neither subsidiaries nor associates are categorised as available-for-sale instruments. These assets are measured at fair value, both initially and subsequently, with changes in fair value, except for impairment losses and certain foreign exchange gains and losses, recognised in other comprehensive income until the asset is sold. Impairment losses are recognised in the consolidated income statement as incurred, as are foreign exchange gains and losses arising on monetary

2012 Annual Report | Lydian International | 45


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

items. Foreign exchange gains and losses arising on non-monetary items, such as an investment in an equity instrument, are recognised in other comprehensive income. When an investment is derecognised, the cumulative gain or loss in accumulated other comprehensive income is reclassified to the consolidated income statement. Impairment of financial assets Financial assets, other than those carried at fair value through profit or loss, are assessed for indicators of impairment at each reporting date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial asset have been impacted. For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade and other receivables where the carrying amount is reduced through the use of an allowance account. With the exception of available-for-sale equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the financial asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. In respect of available-for-sale equity instruments, any increase in fair value subsequent to an impairment loss is recognised directly in equity. Financial liabilities The Group’s financial liabilities include accrued liabilities and other payables and the amount due to Newmont, which are initially recognised at fair value and subsequently stated at amortised cost. Trade payables are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after reporting date. Equity An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Restoration and rehabilitation A provision for restoration and rehabilitation is recognised when there is a present obligation as a result of exploration and development activities undertaken, it is probable that an outflow of economic benefits will be required to settle the obligation, and the amount of the provision can be measured reliably. The estimated future obligations include the costs of dismantling and removal of facilities, restoration and monitoring of the affected areas. The provision for future restoration costs is the best estimate of the present value of the expenditure required to settle the restoration obligation at the reporting date. Future restoration costs are reviewed annually and any changes in the estimate are reflected in the present value of the restoration provision at each reporting date. The initial estimate of the restoration and rehabilitation provision relating to exploration and development activities is capitalised into the cost of the related asset and amortised on the same basis as the related asset. Changes in the estimate of the provision of restoration and rehabilitation are treated in the same manner, except that the unwinding of the effect of discounting on the provision is recognised as a finance cost rather than being capitalised into the cost of the related asset. Interest income Interest income and expenses are reported on an accrual basis using the effective interest method. Employee benefits The Group makes contributions for the benefit of employees to the Jersey, Armenian and Georgia State pension funds. The contributions are expensed as incurred.

46 | Lydian International | 2012 Annual Report


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

Provisions A provision is recognised in the Statement of Financial Position when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, 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, where appropriate, the risks specific to the liability. Operating leases Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Loss per share Basic loss per ordinary share is calculated by dividing the loss attributed to shareholders of the parent for the period by the weighted average number of ordinary shares outstanding during the period. Diluted loss per ordinary share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. Business segments The Group operates in one business segment, mineral exploration. Geographical segments The directors of the Group are of the opinion that three geographical segments, Armenia, Georgia and head offices in Jersey (Channel Islands), existed as at December 31, 2012 and December 31, 2011. At December 31, 2010, Kosovo represented a geographical segment which was wound down in 2011 and liquidated in 2012. Other reserves Other reserves represent balances carried relating to the purchase of non-controlling interests in the Company’s subsidiaries. Non-current accrued liabilities Non-current accrued liabilities are Value Added Tax (VAT) payable for import of certain assets which are deferred from two up to three years according to Armenian legislation.

4. Critical Accounting Judgments and Key sources of estimation uncertainty Critical judgments in applying the Group’s accounting policies In the application of the Group’s accounting policies, which are described in note 3, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The most significant critical judgments that members of management have made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements are the policies on exploration and evaluation assets and functional currencies. In particular, management is required to assess exploration and evaluation assets for impairment. Note 14 discloses the carrying values of such assets. As part of this assessment, management has carried out an assessment whether there are indicators of impairment. If there are indicators, management performs an impairment test on the major assets within this balance.

2012 Annual Report | Lydian International | 47


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

The recoverability of exploration and evaluation assets is dependent on a number of factors common to the natural resource sector. These include the extent to which the Group can continue to renew its exploration and future development licences with local authorities, establish economically recoverable reserves on its properties, the availability of the Group to obtain necessary financing to complete the development of such reserves and future profitable production or proceeds from the disposition thereof. The Group will use the evaluation work of professional geologists, geophysicists and engineers for estimates in determining whether to commence or continue mining and processing. These estimates generally rely on scientific and economic assumptions, which in some instances may not be correct, and could result in the expenditure of substantial amounts of money on a deposit before it can be determined whether or not the deposit contains economically recoverable mineralisation. The functional currency for the Company and each of the Company’s subsidiaries is the currency of the primary economic environment in which each entity operates. The Company has determined the functional currency of the parent company is the Canadian dollar and the functional currencies of its material subsidiaries, Geoteam CJSC and Georgia Resource Company LLC, are the Armenian Dram and Georgian Lari, respectively. Determination of functional currency may involve certain judgements 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 which determined the primary economic environment. Key sources of estimation uncertainty The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The most significant sources of estimation uncertainty that members of management have identified in the application of accounting policies are as follows: There are tax matters that have not yet been confirmed by taxation authorities. While management believes that VAT input amounts are recoverable and the provision for income taxes is adequate, these amounts are subject to measurement uncertainty. Adjustments required, if any, to these provisions will be reflected in the period where it is determined that adjustments are warranted. The Black-Scholes Option Pricing Model was developed for use in estimating the fair value of traded options which were fully tradable with no vesting restrictions. This option valuation model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options and warrants have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the calculated fair value, such value is subject to measurement uncertainty. 

48 | Lydian International | 2012 Annual Report


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

5. Geographical segments The Group is engaged in one business activity, mineral exploration. The three key geographical segments for these activities are located in Armenia, Kosovo and Georgia. The Group’s head office activities are located in Jersey (Channel Islands) which relate to administrative matters. All transactions between segments are measured at exchange amounts. All balances, income and expenses between segments are eliminated in full on consolidation. The geographical segmented information on income statement items is given below:

interest income Armenia Georgia Kosovo Head office loss for the year Armenia Georgia Kosovo Head office Profit (loss) from disposal of property and equipment Armenia Georgia Kosovo Head office Depreciation and amortisation Armenia Gorgia Kosovo Head office Property, equipment and intangible asset expenditures Armenia Georgia Kosovo Head office

As of and for year ended December 31, 2012 £

As of and for year ended December 31, 2011 £

5,281 214,726 220,007

44,297 44,297

1,078,827 444,051 4,897,996 6,420,874

1,103,851 9,372 2,92,712 4,548,953 5,954,888

1,012 1,012

(8,715) (90,600) (99,315)

25,413 9,255 36,647 71,315

28,393 56,483 17,296 102,172

2,049,580 73,948 96,137 2,219,665

384,192 29,156 413,348

2012 Annual Report | Lydian International | 49


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

The geographical segmented information on certain Statement of Financial Position items is given below: As of December 31, 2012 £

As of December 31, 2011 £

29,311,305 329,406 29,640,711

23,535,396 203,609 23,739,005

2,243,803 63,518 53,678 2,360,999

454,800 21,212 476,012

65,059 57,827 12,886

59,283 36,239 95,522

exploration and evaluation assets Armenia Georgia Kosovo Head office

Property and equipment Armenia Georgia Kosovo Head office

intangible assets Armenia Georgia Kosovo Head office

Total assets Total liabilities

Armenia £ 33,921,672 31,893,126

December 31, 2012 Kosovo Georgia £ £ 517,910 969,997

Head office £ 52,063,040 3,387,159

Eliminations £ (31,732,680) (32,076,133)

Consolidated £ 54,769,942 4,174,149

Total assets Total liabilities

Armenia £ 25,662,197 21,360,459

December 31, 2011 Kosovo Georgia £ £ 268,609 5,197,678 279,783

Head office £ 34,995,611 6,742,717

Eliminations £ (26,405,002) (26,549,344)

Consolidated £ 34,521,415 7,031,293

50 | Lydian International | 2012 Annual Report


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

6. employee salaries and Benefit expenses

Salaries and other compensation Share based compensation

Year ended December 31, 2012 £ (1,941,847) (1,103,077) (3,044,924)

Year ended December 31, 2011 £ (1,382,362) (1,624,657) (3,007,019)

7. services and Consumables used

Consulting and experts’ fees Insurance Professional fees Investor relations department expenses Conference participation expenses Other

Year ended December 31, 2012 £ (234,907) (96,777) (251,034) (74,160) (76,233) (115,277) (848,388)

Year ended December 31, 2011 £ (189,620) (97,785) (185,086) (66,302) (47,547) (97,617) (683,957)

8. Administrative and Other expenses

Office operating Travel Representative expenses Research and development Audit and legal fees Donations and sponsorship Other

Year ended December 31, 2012 £ (359,059) (566,256) (105,278) (95,236) (488,406) (200,907) (135,452) (1,950,594)

Year ended December 31, 2011 £ (165,130) (327,674) (95,792) (72,951) (329,320) (153,917) (167,551) (1,312,335)

Year ended December 31, 2012 £ 1,012 12,626 1,118 (390,765) (376,009)

Year ended December 31, 2011 £ (99,315) (14,026) (165,215) (67,403) (345,959)

9. Other Gains (losses)

Disposal of property and equipment Investment disposal Other (loss) gain Exploration and evaluation assets write-off (Note 11) Foreign currency losses

2012 Annual Report | Lydian International | 51


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

10. taxation There was no taxes payable by the Group in the year ended December 31, 2012 and corresponding period in 2011.

Loss before taxation Tax at 18.0% (2017, 17.0 %) Items which are not deductible for tax purposes Losses not recognised Income tax expense

Year ended December31, 2012 £ (6,420,874) (1,155,757) 970,704 185,323 -

Year ended December 31, 2011 £ (5,954,888) (1,012,331) 837,161 175,170 -

The Group had taxation losses under jurisdiction of Jersey (Channel Islands), Armenia and Georgia as at December 31, 2012 amounting to approximately £2,103,315 (December 31, 2011: £5,986,965) that have not been recognised as there is insufficient evidence of taxable profits. As a result of the liquidation of Kosovo Resource Company, taxation losses in amount of £4,911,725 were utilised as of November 16, 2012. Tax losses incurred by Armenian and Georgian companies expire in the fifth year subsequent to when they are incurred. The tax rate in Armenia is 20% and in Georgia is 15%. Expenses incurred at the head office are non-deductible. The effective tax rate for these Consolidated Financial Statements is calculated as weighted average of tax losses to deductible expenses in each jurisdiction.

11. loss Per share Loss per share of £0.05 for the year ended December 31, 2012 (December 31, 2011-£0.06) has been calculated on the basis of the net loss of £6,384,282 (December 31, 2011 loss: £5,899,696) on 120,651,005 (December 31, 2011: 97,130,280) shares being the weighted average number of shares in issue. As a result of the losses incurred during the years ended December 31, 2012 and 2011, the potential shares to be issued from the exercise of options and warrants are not included in the computation of diluted per share amounts since the result would be antidilutive. Accordingly, the diluted loss per share and the basic loss per share for all periods presented are the same.

52 | Lydian International | 2012 Annual Report


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

12. Property and equipment COst Machinery

equipment

vehicles

lands and structures

Fixtures and fittings, other

Constructions

total

£ -

£ 578,265 154,672 (395,187) (6,096) 331,654

£ 145,490 133,269 (32,364) (4,961) 241,434

£ 42,802 178 42,980

£ 102,146 17,674 (510) (4,944) 114,366

£ -

£ 825,901 348,417 (428,061) (15,823) 730,434

Additions Disposal Exchange difference As at December 31, 2012

1,870,083 (34,222) 1,835,861

149,355 (3,635) (28,599) 448,775

72,124 (11,604) (21,297) 280,657

(3,554) 39,426

33,075 (2,333) (11,018) 135,090

22,880 (418) 22,462

2,147,517 (17,572) (98,108) 2,762,271

ACCuMulAteD DePReCiAtiON

Machinery

equipment

vehicles

lands and structures

Fixtures and fittings, other

Constructions

total

£ -

£ 301,636 106,269 (298,080) (1,123) 108,702

£ 74,276 38,810 (30,433) (1,901) 80,752

£ 640 3 643

47,404 20,224 (1,202) (2,101) 64,325

-

423,316 165,943 (329,715) (5,122) 254,422

16,255 (298) 15,957

84,533 (742) (10,023) 182,470

50,535 (9,814) (7,539) 113,934

1,803 (85) 2,361

28,576 (668) (5,683) 86,550

-

181,702 (11,224) (23,628) 401,272

CARRYiNG AMOuNt

Machinery

equipment

vehicles

lands and structures

Fixtures and fittings, other

Constructions

total

At December 31, 2012 At December 31, 2011

£ 1,819,904 -

£ 266,787 222,952

£ 166,723 160,682

£ 37,065 42,337

48,058 50,041

22,462 -

2,360,999 476,012

At January 1, 2011 Additions Disposal Exchange difference As at December 31, 2011

At January 1, 2011 Charge for the year Disposal Exchange difference As at December 31, 2011 Charge for the year Disposal Exchange difference As at December 31, 2012

In the year ended December 31, 2012, depreciation of £132,119 has been capitalised to exploration and evaluation costs (2011: £78,749).

2012 Annual Report | Lydian International | 53


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

13. intangible Assets COst

Computer software £ 100,717 64,931 (26,481) (1,998) 137,169

As at January 1, 2011 Additions Disposal Exchange difference As at December 31, 2011 Additions Disposal exchange difference As at December 31, 2012

72,144 (941) (9,828) 198,544

ACCuMulAteD AMORtisAtiON As at January 1, 2011 Charge for the year Disposal Exchange difference As at December 31, 2011

£ 41,367 26,341 (25,512) (549) 41,647

Charge for the year Disposal exchange difference As at December 31, 2012

37,470 (124) (3,335) 75,658

CARRYiNG AMOuNt At December 31, 2012 At December 31, 2011

122,886 95,522

In year ended December 31, 2012, amortisation of £15,738 has been capitalised to exploration and evaluation costs (2011: £11,363).

14. exploration and evaluation Assets (“eeA”) Cost

Armenia project Amulsar

Georgia project Kela (previously known as the ‘Zoti project’)

Armenia project Nor Arevik

Kosovo projects

total

At January 1, 2011 Additions EEA write off Exchange difference At December 31, 2011

£ 16,451,783 7,331,629 (248,016) 23,535,396

£ 194,170 9,439 203,609

£ 45,857 97,655 (140,859) (2,653) -

£ 24,356 (24,356) -

£ 16,497,640 7,647,810 (165,215) (241,230) 23,739,005

Additions Exchange difference At December 31, 2012

7,887,999 (2,112,090) 29,311,305

139,933 (14,136) 329,406

-

-

8,027,932 (2,126,226) 29,640,711

54 | Lydian International | 2012 Annual Report


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

The net balance of exploration and evaluation assets as of December 31, 2012 compared to December 31, 2011 increased by £5,901,706. During the year ended December 31, 2012 investment in exploration and evaluation assets of the Amulsar project totaled to £7,887,999; of which £2,112,090 is off-set due to the strengthening of British Pounds against Armenian Dram. During the year ended December 31, 2012 the investment in the Amulsar project consisted of drilling, exploration studies, maintenance costs, lease payments and environmental studies etc. During the year ended December 31, 2012 costs of exploration studies at the Kela project totaled to £139,933, primarily related to surface exploration studies. IFRS 6 requires that regular impairment assessments are made. The directors carried out a review as of December 31, 2012 and are satisfied that on the basis of the current plans and status of operations, there are no indications of impairment on the Amulsar or Kela assets. Non-cash transactions that increased EEA are as follows:

Payable to suppliers of drilling services and project development Capitalised amortisation and depreciation Mine rehabilitation reserve

Year ended December 31, 2012 £ 147,857 127,201 275,058

Year ended December 31, 2011 £ 446,463 90,112 28,800 565,375

15. Other Non-Current Assets Other non-current assets at December 31, 2012 and 2011 relate to Geoteam CJSC and Kavkaz Zoloto CJSC long-term receivables from the State input VAT and borrowings provided to persons who provide regular services to Geoteam CJSC. VAT input will be refunded by the Tax Authorities or offset with other tax liabilities through future sales of product or services. Borrowings are refunded on a regular basis from income received from provision of services. Management believes that the receivables from the State and borrowings are fully recoverable.

VAT input Geoteam CJSC VAT input Kavkaz Zoloto CJSC Long term borrowings

December 31, 2012 £ 2,094,208 11,695 2,105,903

December 31, 2011 £ 1,356,726 12,760 2,449 1,371,935

16. Other long-term Financial Assets Other long-term financial assets were related to 1,000,000 ordinary shares of Tigris Resources Limited which represents approximately 3.9% of its share capital which were sold on September 5, 2012, for net profit of £12,626. Tigris Resources Limited is focused on discovering, acquiring and developing gold and copper projects in Turkey and is not a listed company. At December 31, 2011 the carrying value approximates its fair value.

2012 Annual Report | Lydian International | 55


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

17. Cash and Cash equivalents For the purpose of the cash flow statement, cash and cash equivalents include cash on hand and in banks and investments in money market instruments. As at December 31, 2012 and 2011, the money market investments had a one month maturity period. Components of cash and cash equivalents are as follows:

Cash Money market investments

December 31, 2012 £ 1,950,817 18,163,181 20,113,998

December 31, 2011 £ 1,559,585 6,742,322 8,301,907

18. Other Current Assets The Group as at December 31, 2012 and 2011 holds the following other current assets:

Supplies VAT and GST refundable Deposits Other receivables and prepayments

December 31, 2012 £

December 31, 2011 £

16,213 26,544 143,649 239,039 425,445

10,531 25,304 124,801 249,798 410,434

19. share Capital Share capital of the Company consists of fully paid ordinary shares. The Company has one class of shares, being ordinary shares. The Company is authorised to issue an unlimited number of ordinary shares. The Company’s ordinary shares have no par value. All shares are equally eligible to receive dividends and repayment of capital and represent one vote at the shareholders’ meeting of the Company.

Number of ordinary shares issued and fully paid: Total outstanding number of shares, January 1 Issued under share based payment Shares issued for cash Shares issued on exercise of warrants and share options Total outstanding number of shares, December 31

2012

2011

104,075,686 1,000,000 19,388,482 2,397,000 126,861,168

93,659,798 1,000,000 9,415,888 104,075,686

On March 9, 2012 the Company issued to GMP Securities L.P. and Scotiabank (underwriters) 15,625,000 ordinary shares at a purchase price of CAD $2.56 per ordinary share. On March 31, 2012 underwriters have exercised their option to purchase additional 2,343,750 ordinary shares of the Company at the same purchase price per ordinary share. On March 28, 2012 the European Bank of Reconstruction and Development took up its pre-emptive rights on purchase of 1,419,732 ordinary shares at a purchase price of CAD $2.56 per ordinary share.

56 | Lydian International | 2012 Annual Report


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

During the year ended December 31, 2012 the Company issued 2,397,000 ordinary shares pursuant to exercise of share options. During the year ended December 31, 2011 the Company issued 8,675,388 and 740,500 ordinary shares pursuant to the exercise of warrants and share options, respectively. During the year ended December 31, 2012 the Company issued a total of 1,000,000 (year ended in 2011 1,000,000) shares for payment of shares owing under the “Geoteam Option Agreement”, (Note 22).

20. Warrants At December 31, 2012 the Company had 3,311,758 (December 31, 2011: 3,311,758) outstanding investor and broker warrants to subscribe for ordinary shares at a price CAD$0.59 (approximately 36 pence). Warrants may be exercised at any time from the date of vesting to the date of their expiry converting into one ordinary share of the Company. No warrants were exercised during the year ended December 31, 2012, a total of 8,675,388 warrants were exercised to ordinary shares of the Company within the year ended December 31, 2011. There were no grants of warrants during the years ended December 31, 2012 and 2011. The following reconciles the outstanding and exercisable share warrants granted under by the Company:

Balance at December 31, 2010

Number of Warrants 11,987,146

Weighted average exercise price 36 pence

Warrants exercised Balance at December 31, 2011

(8,675,388) 3,311,758

36 pence 37 pence

Balance at December 31, 2012

3,311,758

37 pence

The warrants outstanding and exercisable at the end of the reporting period can be exercised any time before May 22, 2014. Weighted average exercise price of outstanding warrants are adjusted to their equivalents in British Pounds.

21. share Based Payments - employee share Option Plan The Company’s employee share option plan grants options to employees, directors and service providers of the Company to purchase ordinary shares of the Company. In accordance with terms of the employee share option plan, the exercise price of the granted options shall be determined at the time the option is granted provided that such price shall be not less than the market price of the ordinary shares. Share options granted under the plan carry no rights to dividends and no voting rights. Each of the Company’s share options are convertible into one ordinary share of the Company. Share options may be exercised at any time from the date of vesting to the date of their expiry. Charges in relation to equity settled share-based payments are credited to an ‘Equity settled employee benefits reserve’, therefore no liabilities have been recorded in respect to these plans.

2012 Annual Report | Lydian International | 57


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

The following summarises the outstanding share options granted under the employee share option plan:

Balance at December 31, 2010 Granted Expired Exercised

Number of options 3,612,500 2,290,000 (175,000) (740,500)

Weighted average exercise price 67 pence 1.58 pounds 69 pence 61 pence

Balance at December 31, 2011

4,987,000

1.12 pounds

Granted Expired Exercised

2,610,000 (420,000) (2,397,000)

1.39 pounds 1.45 pounds 64 pence

Balance at December 31, 2012

4,780,000

1.45 pounds

Range of exercise price

£1.24-£1.85 (CAD $2-$3)

Number outstanding

4,780,000 4,780,000

Outstanding options Weighted average remaining life years 2.8 2.8

Weighted average exercise price £ 1.45 1.45

exercisable options Weighted Number average exercisable exercise price £ 2,505,000 1.54 2,505,000 1.54

The weighted average share price during the year ended December 31, 2012 was £1.45 (December 31, 2011: £1.54). Weighted average exercise price of outstanding share options are adjusted to their equivalents in British Pounds. The weighted average fair value per share option granted during the year ended December 31, 2012 was 53 pence (year ended December 31, 2011: 81 pence). Options were priced using the Black Scholes Option Pricing Model using the following assumptions:

Expected volatility Expected option life Risk free rate Dividend yield

2012 39-59% 2-3 years 1.1-1.3% 0%

2011 63% 5 years 1.7% 0%

During the year ended December 31, 2012 £1,103,077 (December 31, 2011: £1,624,657) was included in employee benefits expense in the consolidated income statement. The share options outstanding and exercisable at December 31, 2012 had a weighted average remaining contractual life of 3.3 years (December 31, 2011: 2.3 years).

22. Other Reserves - Option to Purchase Non-Controlling interest On December 9, 2010, the Company entered into an option agreement (the “Geoteam Option Agreement”) to purchase the remaining 5% non-controlling interest (the “non-controlling interest”) of the Company’s 95% indirectly owned subsidiary, Geoteam CJSC. In accordance with the terms of the option (the “Call Option”), the Company has the right to purchase the non-controlling interest on the earlier of December 9, 2013 and the occurrence of certain transactions, including a transaction involving a change of control of the Company.

58 | Lydian International | 2012 Annual Report


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

The Company also granted an option (the “Put Option”) to the holder of the non-controlling interest, whereby the holder of the non-controlling interest can require the Company to purchase the non-controlling interest at any time during the period of the Call Option if the Company is in default of its obligations under the Call Option or at the end of the option period, December 9, 2013. The aggregate purchase price payable by the Company in connection with any exercise of the Call Option or the Put Option will be CAD $500,000 in cash and 2,000,000 ordinary shares (the “Payment Shares”) in the capital of the Company. Under the Geoteam Option Agreement during year 2011 the Company issued 1,000,000 ordinary shares. On June 25, 2012 the Company issued 250,000 shares and on September 24, 2012, the Company issued the remaining 750,000 shares resulting in the extinguishment of the non-controlling interest in Geoteam CJSC. During the year ended December 31, 2012 the Company recognised £1,381,108 in Other reserves pursuant to 1,000,000 ordinary shares issued under the option agreement. During the year ended December 31, 2011 the Company recognised a total of £757,838 pursuant to 500,000 ordinary shares issued.

23. Due to Newmont On February 26, 2010, the Company entered into an agreement (the “Purchase Agreement”) with Newmont pursuant to which the Company’s 95% owned subsidiary, Geoteam CJSC, purchased all of Newmont’s interest in the joint venture known as the Caucasus Venture (the “Venture”) between the Company and Newmont. In consideration for the purchase of Newmont’s interest in the Venture and the related termination of the Venture, the Company was to; (i) issue to Newmont three million ordinary shares and (ii) make certain pre-production and then post-production payments to Newmont. The post production payments are dependent on production occurring and this allows Lydian to fund the required payments out of direct revenue from the Amulsar gold project or through alternate available funds. See Note 30. Prior to production, the Company is obligated to pay Newmont US$15 million in three US$5 million installments. The first was paid on the Closing, the second was due on or before December 31, 2011 and paid on March 13, 2012 with interest accrued for deferred payment from December 31, 2011 to actual date of payment and the third on or before the earlier of December 31, 2012 and the date that is 90 days after a bankable feasibility on any portion of the Amulsar property is complete and the Company has received all the necessary material permits to move into production. Pursuant to the terms of the agreement with Newmont, in December 2012 the Company notified Newmont of its intention to defer the third US$5 million payment to no later than December 31, 2013, the deferred payment bears interest at the rate of 10% per annum commencing December 31, 2012 until it is paid. The following reconciles movements in the amount due to Newmont:

Undiscounted amount payable at December 31, 2011 Discount at 10% Amortised cost as of December 31, 2011

us $ 10,000,000 (455,732) 9,544,268

£ 6,437,510 (293,378) 6,144,132

Undiscounted amount payable at December 31, 2011 Interest accrued Cash payment Exchange rate difference Amortised cost as of December 31, 2012

us $ 10,000,000 100,000 (5,100,000) 5,000,000

£ 6,437,510 62,641 (3,245,307) (180,026) 3,074,818

During the year ended December 31, 2012, £287,202 was recorded as an effective interest charge relating to unwinding of the discount and has been reflected in the income statement (year ended December 31, 2011: £547,743).

2012 Annual Report | Lydian International | 59


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

24. Non-Current Accrued liabilities Non-current accrued liabilities are VAT payable for import of certain equipment into Armenia, whereby VAT payments are deferred up to three years given that property is not sold, whereby the VAT is payable immediately.

25. Provisions The provision for restoration and rehabilitation represents the estimated present value of future outflow of economic benefits that will be required by the concession agreement signed between Geoteam CJSC and Government of the Republic of Armenia. The provision recognised as of December 31, 2012 relates only to rehabilitation of Amulsar mine areas affected by exploration activities as commercial production has not been reached. Though the provisions are not due within the next year, the effect of discounting is not material and has not been reflected.

Balance at December 31, 2011 Additions Balance at December 31, 2012

December 31, 2012 £ 28,800 127,201 156,001

December 31, 2011 £ 28,800 28,000

26. Accrued liabilities and Other Payables

Accrued liabilities and trade payables Wage accruals

December 31, 2012 £ 437,185 139,763 576,948

December 31, 2011 £ 727,197 131,164 858,361

27. Financial Risk Management The Group manages its exposure to financial risks by operating in a manner that minimises its exposure to the extent practical. The main financial risks affecting the Group are discussed below: Capital risk management The Group manages its capital structure and makes adjustments to it, based on the funds available to the Group, in order to support the acquisition, exploration and development of mineral properties. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Group’s management to sustain future development of the business. The properties in which the Group currently has an interest are in the exploration stage, as such, the Group is dependent on external financing to fund its activities. The Group intends to raise additional financing by issuing new share capital, debt, selling a royalty or stream, or entering into joint arrangements to carry out planned exploration and to pay for administrative costs. The Group will continue to assess new properties and seek to acquire an interest in additional properties if it believes there is sufficient geologic or economic potential and if it has adequate available or committed financial resources to complete such acquisitions.

60 | Lydian International | 2012 Annual Report


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

Management reviews its capital management approach on an interim basis. Management believes that its approach, given the relative size of the Group, is reasonable. The Group is not subject to externally imposed capital requirements. The Group defines capital as the aggregate of total equity, excluding non-controlling interest, which totals £50,595,793 (December 31, 2011: £27,081,626). Total equity comprises share capital, warrants, and reserves and accumulated deficit as disclosed in the consolidated statements of changes in equity. Liquidity risk The ultimate responsibility for liquidity risk rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group’s cash requirements and balances are projected for the Group, for a period covering at least the next 12 months, as a whole and for each country in which operations and capital expenditures are conducted. The Group plans to meet these requirements through the mix of available funds, equity financing on a required basis, project debt financing, if available, entering into joint arrangements and cash to be provided by the exercise of warrants and share options in the future. To date the Group has relied on shareholder funding to finance its operations. As the Group has finite cash resources and no material income, the liquidity risk is significant and is managed by controls over timing of expenditures. All short-term financial liabilities which relate to accrued liabilities and other payables and due to Newmont as disclosed in note 23 and 26 mature within one year of December 31, 2012. Currency risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. Currency risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the Group’s measurement currency. The Group’s management monitors the exchange rate fluctuations on a continuous basis and acts accordingly. The Group’s expenses include amounts incurred in British Pounds, Armenian Dram, Canadian Dollar, Euros, Georgian Laries and the US Dollar. The Group’s exchange risk is therefore related to movements between these currencies. The Group has a downside risk to strengthening of the Euro, Armenian Dram, Georgian Lari or US and Canadian Dollar as this increases expenses in British Pound terms. The Group’s currency risk policy is to diversify its cash resources in the British Pound, the US Dollar, the Canadian Dollar and the Euro roughly in proportion to expected future expenditure over the following twelve months. This is done to reduce the risk of the Group holding virtually all of its monetary assets in a single currency when the expenditure base is spread over five main currencies. Currency risk sensitivity The following table details the Group’s sensitivity to a 10% increase or decrease in the British Pound against the relevant foreign currencies. A 10% increase or decrease is used when reporting currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. The sensitivity analysis includes loans to operations within the Group where the denomination of the loan is in currency other than the currency of the lender. The Group’s net assets and liabilities are predominately held in British Pounds, US Dollars, Canadian Dollars, Euros and Armenians Drams. The numbers below indicate an influence on equity where the British Pound strengthens 10% against the relevant currency.

Other comprehensive December 31, 2012 income (profit or loss) (£) December 31, 2011

Canadian Dollar (705,599) (289,801)

Euro (7,399) (11,513)

U.S. Dollar (762,718) (284,410)

Armenian Dram (3,005,514) (2,311,861)

Georgian Lari (38,377) (18,402)

2012 Annual Report | Lydian International | 61


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

Interest rate risk Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates. Other than the deferred amount due to Newmont, the Group has no other fixed or floating rate borrowings. Cash and cash equivalents also bear interest at floating rates. Interest rate sensitivity A 100 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates. With a 100 basis point increase in interest rates the income would be higher by £173,655 and in case of decrease the loss higher by £173,655 for the twelve month period ended December 31, 2012. This analysis assumes all other variables are assumed constant. Credit risk management Credit risk arises when a failure by counter parties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the reporting date. As the Group has no revenue or trade receivables, management considers credit risk as low. Up front deposits are on occasion paid to major suppliers primarily relating to exploration drilling contracts. The payment of these deposits is considered by the management on a case by case basis and the progress on the contract carefully reviewed. During the years ended December 31, 2012 and December 31, 2011 there were no material impairment provisions required for any of the financial assets. There are no material financial assets that the Group considers past due. At December 31, 2012, the Group did not have any significant credit risk exposure to any counterparty or any group of counterparties having similar characteristics. The credit risk on cash and cash equivalents is considered by management to be limited because the counterparties are financial institutions with high credit ratings assigned by international credit rating agencies. The carrying amount of financial assets recorded in the consolidated financial statements represents the Group’s maximum exposure to credit risk. Financial assets Fixed rate financial assets are cash held on fixed term deposit. Cash at bank is held to finance the Group’s short-term cash requirements. The Group invests its available cash in bank deposits only. At December 31, 2012 and December 31, 2011, cash and cash equivalents were as follows:

December 31, 2012 December 31, 2011

Fixed rate assets £ 18,163,181 6,742,322

Cash assets £ 1,950,817 1,559,585

Total £ 20,113,998 8,301,907

Average period for which rates are fixed (months)

Average interest rates for fixed rate assets

One One

1.08 0.4%

Fair value of financial assets and liabilities All financial assets and financial liabilities are recorded at amortised cost in the consolidated financial statements. Management believes that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the consolidated financial statements approximate their fair values due to their short-term nature. The Newmont liability bears interest at a rate that approximates the estimated market rate of interest.

62 | Lydian International | 2012 Annual Report


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

28. Related Party transactions The parent and ultimate controlling party of the Group is Lydian International Limited. No individual party had overall control of the Company or Group during the periods being presented. Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below. Related parties include the Board of Directors, close family members and enterprises which are controlled by these individuals as well as certain persons performing similar functions. The non-executive members of the Board of Directors do not have employment or service contracts with Lydian International Limited and neither are they entitled to any termination benefits. None of the directors are entitled to pension benefits. The sole director and country manager of Geoteam CJSC and director of Kavkaz Zoloto CJSC previously held 5% of the shares in Geoteam CJSC and continue to hold 5% of the shares in Kavkaz Zoloto CJSC. Within the year ended December 31, 2012 pursuant to “Geoteam Option Agreement” the Company issued to Hayk Aloyan 1,000,000 ordinary shares (year ended December 31, 2011, 1,000,000) (Note 22). From July 2011 up to September 2012 the Company owned 1,000,000 ordinary shares of Tigris Resources Limited (Note 16). During the year ended December 31, 2012 the Company recorded a total of £18,575 receivable as compensation for payments done on Tigris Resources Limited behalf and services rendered to it. The directors and key management are the directors of Lydian International Limited. The remuneration of directors and key management was as follows:

Aggregate emoluments Share based payments

Year ended December 31, 2012 £ 452,343 478,648

Year ended December 31, 2011 £ 339,747 926,357

29. Operating lease and Purchase Commitments The Group leases office premises with a lease term of up to 9 years. The group does not have an option to purchase the leased asset at the expiry of the lease period. In 2011 Geoteam CJSC has endorsed long term rent contracts for lands under rock allocations. Non-cancellable operating lease commitments are disclosed below:

Up to one year More than one year and no later than five years More than five years

December 31, 2012 £ 263,729 941,286 1,502,082 2,707,097

December 31, 2011 £ 146,306 497,820 1,585,989 2,230,115

2012 Annual Report | Lydian International | 63


Notes to the Consolidated Financial Statements For the years Ending December 31, 2012 and 2011

30. Contingencies Newmont Deal On April 23, 2010 the Group purchased all of Newmont’s interests in the Group’s joint venture which included Newmont’ interests in the Amulsar gold property.  The consideration was a combination of committed and contingent payments.  The committed payments included 3 million ordinary shares of the Company, which have now been issued and three payments of US$5 million, the first was paid in 2010, the second on March 13, 2012 and the third payment was due by the end of 2012 but has been deferred according to Company’s notification (Note 23).  In addition the Group agreed to pay Newmont, following the start of commercial production, a 3% Net Smelter Royalty (“NSR”). However, between April 23, 2010 and the date that is 20 days following commencement of commercial production, Lydian may at its option elect to buy out the 3% NSR and instead pay to Newmont the aggregate sum of US$20 million (approximately £12.8 million), without interest, in 20 equal quarterly installments of US$1 million commencing on the first day of the third calendar month following the start of commercial production.  Furthermore, the Company has a one-time option prior to the commencement of commercial production to prepay these quarterly installments in a single cash payment using an annual discount rate of 10%. This equates to a single payment of approximately US$15.6 million (approximately £10.6 million). These potential post production payment(s) do not meet the definition of an obligation or a constructive obligation as the triggering event, commencement of commercial production, has not occurred.  These potential payments are therefore not recorded on the consolidated Statement of Financial Position at December 31, 2012. Drazhnje licences On July 29, 2011 the Company completed the transfer of Drazhnje licences (the Property) to KMG as per agreement with it. KMG agreed to commence Commercial Production at a date no later than end 2014. In the event that Commercial Production commences, KMG will pay to Lydian a CAD$2 million cash payment and an overriding perpetual net smelter royalty of 2% on all metals produced at the Property. Economic benefits attributable to this agreement are contingent and assets from it are not recognised in these financial statements.

31. subsequent events On March 4, 2013 International Finance Corporation exercised its 3,311,758 ordinary share purchase warrants of the Company; the exercise price per share was 38 pence (CAD 0.59). The consolidated financial statements for the year ended December 31, 2012 have been approved for issue by the board of directors on March 21, 2013.

64 | Lydian International | 2012 Annual Report


Auditors Grant Thornton LLP Suite 401, 350 Burnhamthorpe Road W Mississauga, Ontario L5B 3J1 Canada Tel: +1 416 366 0100 Fax: +1 905 804 0509 Attn: Jeremy Jagt E Mail: jjagt@GrantThornton.ca Website: www.grantthornton.ca Corporate lawyers Irwin Lowy LLP 130 Adelaide Street West Suite 1010 Toronto, Ontario M5H 3P5 Canada Tel: +1 416 361 2515 Fax: +1 416 361 2519 Attn: Eric Lowy Email: elowy@irwinlowy.com Website: www.irwinlowy.com transfer Agents Olympia Transfer Services Inc. Suite 920, 120 Adelaide Street West Toronto, Ontario M5H 1T1 Canada Tel: +1 416 364 7185 Fax: +1 416 364 1827 Attn: Lisa Clarkin Email: clarkinl@olympiatrust.com Website: www.olympiatrust.com


Head Office Ground Floor, Charles House Charles Street St Helier Jersey JE2 4SF Channel Islands Tel: +44 1534 747890 Fax: +44 1534 758708 Att. Nicole Cooney Email: nicole.cooney@lydianinternational.co.uk investor Relations - Global Ground Floor, Charles House Charles Street St Helier Jersey JE2 4SF Channel Islands Tel: +44 1534 715473 Mobile +447797 742800 Att. Donna Pugsley Email: donna.pugsley@lydianinternational.co.uk Operations Office - Armenia 37 Hanrapetutyan Street 4th Floor Yerevan 0010 Republic of Armenia Tel: +3 741 058 6037 Fax: +3 741 054 6037 Attn. Hayk Aloyan E-mail: hayk.aloyan@lydianinternational.co.uk www.geoteam.am


Lydian annual report 2012