Management Discussion Analysis Mandalay Resources by alicejenny

VIEWS: 5 PAGES: 31

									Management’s Discussion & Analysis

       September 30, 2011
CONTENTS

1.0 DATE ........................................................................................................................................................................6

1.1 SUBSEQUENT EVENTS ..............................................................................................................................................6

1.2 PORTFOLIO AND OPERATIONAL OVERVIEW ............................................................................................................7

1.3 SELECTED ANNUAL AND QUARTERLY INFORMATION .............................................................................................8

1.4 RESULTS OF OPERATIONS ......................................................................................................................................12

1.5 SUMMARY OF QUARTERLY RESULTS .....................................................................................................................19

1.6 LIQUIDITY, SOLVENCYAND USES OF CASH .............................................................................................................21

1.7 CONTRACTUAL COMMITMENTS AND CONTINGENCIES ........................................................................................21

1.8 OFF-BALANCE SHEET ARRANGEMENTS .................................................................................................................22

1.9 TRANSACTIONS WITH RELATED PARTIES ...............................................................................................................22

1.10 PROPOSED TRANSACTIONS .................................................................................................................................22

1.11 CRITICAL ACCOUNTING POLICIES ........................................................................................................................22

1.12 FINANCIAL INSTRUMENTS ...................................................................................................................................26

1.13 OTHER MD&A REQUIREMENTS ...........................................................................................................................27

1.14 OUTSTANDING SHARES .......................................................................................................................................29

1.15 QUALIFIED PERSONS ............................................................................................................................................31

1.16 CAUTIONARY STATEMENTS .................................................................................................................................31

1.17 FORWARD LOOKING STATEMENTS......................................................................................................................31




                                                                                        2
MANAGEMENT’S DISCUSSION AND ANALYSIS

This Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with the
consolidated financial statements and notes of Mandalay Resources Corporation (“Mandalay” or the
“Company”) for the quarter ended September 30, 2011, the audited consolidated financial statements
of the Company for the year ended December 31, 2010, the Management’s Discussion and Analysis of
such financial statements and the Company’s annual information form dated March 31, 2011 (the “AIF”)
as well as other information relating to the Company on file with the Canadian provincial securities
regulatory authorities on SEDAR at www.sedar.com. The Company’s reporting currency is the United
States dollar and all amounts in this MD&A are expressed in U.S. dollars unless otherwise stated. The
Company reports its financial position, results of operations and cash flows in accordance with
International Financial Reporting Standards (“IFRS”).

The information provided in this document is not intended to be a comprehensive review of all matters
concerning the Company. No securities commission or regulatory authority has reviewed the accuracy
or adequacy of the information presented herein.

This MD&A contains forward-looking statements. Please refer to “Cautionary Statement Regarding
Forward Looking Statements” at the end of this MD&A for a discussion of some of the risks and
uncertainties associated with forward-looking statements.

                               THIRD QUARTER FINANCIAL AND OPERATING HIGHLIGHTS

1. Financial Highlights

In the third quarter, the Company generated record revenue of $26,960,784, record profit from mining
operations before depletion and depreciation of $13,685,605 and record net income of $13,177,845
($0.05 per share). Net income is inclusive of non-cash, non-operating income of $7,465 ,691 related to
mark-to-market adjustment of silver and gold put options 1(“puts”) and a silver note payable to Coeur
d’Alene Mine Corporation (the “Silver Note”). Excluding $7,465,691 of mark-to-market, non-cash, non-
operating income, net income from underlying operations was $5,712,154 ($0.02 per share).

For comparison, in the quarter ended June 30, 2011, revenue was $24,360,995, profit from mining
operations before depletion and depreciation was $12,236,044 and net income was $1,936,478 ($0.01
per share) inclusive of a non-cash charge of $4,101,701 related to the mark-to-market adjustment of
silver puts and the Silver Note .

In the third quarter of 2010, the Company generated revenue of $4,303,930, profit from mining
operations before depletion and depreciation of $1,294,159 and a net loss of $464,749 (loss of $0.00 per
share).



1
 These put options gives the Company the right, but not the obligation, to sell a specified amount of gold or silver at a specified price within a
specified time.

                                                                          3
2. Operating Highlights
   a. Consolidated Production and Sales Results
      In the third quarter of 2011, Mandalay produced less gold (3,624 ounces (oz)) and less antimony
      (305 tonnes (t)), but more silver (299,679 oz), than in the second quarter of 2011. The higher
      silver production was due to the continuing ramp-up at Cerro Bayo; the lower gold and
      antimony was due to lower than planned grade of ore mined at Costerfield. Comparable
      production in the quarter ended September 30, 2010 was much less than in the current year
      because Cerro Bayo was then not yet in production and the Costerfield ramp-up was as yet
      incomplete.

       A record amount of silver (376,409 oz) was sold during the quarter ended September 30, 2011
       due to it being the first complete quarter of shipments from Cerro Bayo. The previous two
       quarters saw lower silver sales due to shipping limitations at Cerro Bayo as a result of the force
       majeure declared by Dowa Metals and Mining Co. (“Dowa”) on March 16, 2011 following the
       March 11, 2011 earthquake off the Pacific coast of Tohoku. Antimony and gold sales were lower
       in the third quarter (3,798 oz gold and 279 t antimony) than in the second quarter of 2011 due
       to the lower mined ore grades at Costerfield resulting in lower amounts of concentrate
       produced and shipped.

                                                             Quarter Ended               Quarter Ended              Quarter Ended
                               Units
                                                           September 30, 2011            June 30, 2011            September 30, 2010
              PRODUCTION

              Gold (oz)                                                     3,624                       4,408                      1,848
              Silver (oz)                                                 299,679                     284,324                        NA
              Antimony (t)                                                    305                         413                        267

              SALES

              Gold (oz)                                                     3,798                       4,526                      1,499
              Silver (oz)                                                 376,409                     270,404                        NA
              Antimony (t)                                                    279                         433                        234

              Equivalent Au Ozs1

              Produced (oz)                                                13,395                      16,660                      3,911
              Sold (oz)                                                    15,102                      16,582                      3,307

          1
           Equivalent Au Ozs for silver is calculated by converting silver to equivalent gold ounces by taking the average silver price
          realized during the period and multiplying it by the ounces of silver produced or sold during the period and dividing the resultant
          number by the realized gold price and adding these two number to the actual number of gold produced or sold. Equivalent Au
          Ozs for antimony is calculated by converting antimony to equivalent gold ounces by taking the average antimony price realized
          during the period and multiplying it by the tonnes of antimony produced or sold during the period and dividing the resultant
          number by the realized gold price and adding these two number to the actual number of gold produced or sold.




                                                                  4
b. Costerfield Gold-Antimony mine, Victoria, Australia
          i. Production —Saleable gold production for the third quarter of 2011 was 2,057
             oz versus 2,856 oz in the previous quarter and 4,528 oz in the first quarter of the
             year. Saleable antimony production for the third quarter of 2011 was 305 t
             versus 413 t in the previous quarter and 512 t in the first quarter. The higher
             first quarter production is due to the consumption of the large stockpile of ore
             as of January 1, 2011. The lower metal production in the third quarter relative
             to the second quarter was caused by low grade of ore delivered from the mine
             to the plant in the quarter. The Company took a number of actions in August to
             increase the ore grade which have started to bear results.
         ii. Operating Costs —Cash cost per ounce of gold equivalent produced in the third
             quarter of 2011 was $1,646/oz versus $906/oz in the second quarter of 2011
             and $759/oz in the first quarter of 2011. Cash cost per ounce has risen
             principally due to the lower grades contained in ore processed, and also due to
             an increase in overall spending as the mine has dealt with increasing water
             inflows, worse than expected ground conditions, and poor availability of old
             equipment. The increase in cash cost per ounce is expected to be temporary as
             the Company made a number of improvements in the mine during the third
             quarter, flow of which are expected to reduce cash cost per ounce in following
             quarters.

c.   Cerro Bayo Silver-Gold mine, Patagonia, Chile

              i. Production — During the third quarter of 2011, saleable silver production was
                 299,679 oz versus 284,324 oz in the second quarter and 339,366 oz in the first
                 quarter. Saleable gold production in the third, second, and first quarters was
                 1,567, 1,552 and 1,450 oz respectively. The generally upward trend in metal
                 production is partially obscured by the anomalously high production in the first
                 quarter of 2011 as the plant started up and processed not only January’s mined
                 ore, but also the ore stockpiled during the fourth quarter of 2010 when only
                 mine development occurred. During the third quarter of 2011, development
                 continued on the Dagny, Fabiola, Yasna, and Delia NW veins. Stoping gathered
                 momentum on Dagny and Fabiola, while the Delia NW decline reached the first
                 planned production level of the vein and operating development began.

        ii.     Operating Costs — Cash cost per saleable ounce of silver produced in
                concentrate for the third quarter of 2011 net of gold credits was $17.51/oz
                versus $11.29/oz in the second quarter of 2011. The higher cost is due to a
                temporary drop in the ounces delivered from the mine to the mill related to
                mine scheduling during the ramp-up.




                                            5
   3. Exploration

       During the third quarter of 2011, the following exploration results at Cerro Bayo, Costerfield,
       and La Quebrada were announced.

           •   The Company released the results of ongoing exploration at its Costerfield mine (see
               press release dated August 24, 2011). These results included discovery of the high grade
               Alison vein beneath the historic Alison mine a short distance from the producing
               Augusta mine and significant extensions to the W and N-lode demonstrated by new core
               drilling intercepts. Drilling continues with three core rigs.

           •   The Company released the results of ongoing exploration and development at its Cerro
               Bayo mine (see press release dated September 6, 2011). These results included
               discovery of a fault-offset portion of the high-grade Delia SE vein which the Company
               expects will contribute significantly to results expected at the next resource and reserve
               update. As well, positive results from infill drilling and mine development sampling of
               the Delia, Dagny, Fabiola, and Bianca veins continued to suggest a high proportion of
               previously inferred resource will convert to measured or indicated at the next resource
               update. Drilling continues with seven core rigs.

           •   No field activities occurred at the La Quebrada project during the third quarter.
               However, on August 9, 2011, the Company announced results of its Phase 1 core drilling
               program that was completed in the second quarter (see press release of that date).
               Phase 1 confirmed and extended the historically sampled and drilled mineralization in
               the Casa de Piedra target area that is in the Company’s NI 43-101-compliant technical
               report on the property, dated April 14, 2010, and filed on www.sedar.com. In addition a
               new target at Leoncita was tested with two holes, both of which intersected well-
               mineralized mantos.

1.0 DATE

This MD&A is dated as of November 14, 2011.

1.1 SUBSEQUENT EVENTS

Subsequent to the end of the third quarter Mandalay announced (see press release dated October 11,
2011) that the Toronto Stock Exchange (the “TSX”) has approved its notice of intention to make a
normal course issuer bid for up to 13,501,078 of its common shares (“Common Shares”) and up to
1,970,965 of its $0.33, 2012, share purchase warrants (“Warrants”). The normal course issuer bid will be
made in accordance with the requirements of the TSX. Mandalay may begin to purchase Common
Shares and Warrants on or about October 17, 2011, subject to Company blackout periods.



                                                   6
1.2 PORTFOLIO AND OPERATIONAL OVERVIEW

The Company is a Toronto-based mining company whose business is to discover, develop and produce
mineral commodities. Its current emphasis is on gold, silver, antimony and copper in Australia and
Chile. The Company’s business plan is to identify and acquire undervalued mineral assets at all stages of
the value chain from exploration through to production. The Company uses its strong technical
expertise and understanding of value creation to systematically increase the value of its assets through a
disciplined approach of exploration, mining and processing optimization and operational efficiency.
Company’s immediate goal is to have four to five producing mines in its portfolio within the next three
to four years. The Company’s current producing assets are its Costerfield gold-antimony mine in
Victoria, Australia and its Cerro Bayo silver-gold mine in Aysen, Chile. Its exploration assets include the
La Quebrada copper–silver exploration project near La Serena, Chile and district targets surrounding the
Costerfield and Cerro Bayo mines.

Costerfield

Capital development to access deeper levels of the W-lode continued in the third quarter of 2011.
Continued poor equipment availability and ground conditions led to lower than planned advance rates
and delayed development of high grade new stopes in W-lode. This has caused the mine to deliver
substantially lower grade ore to the plant than planned, resulting in lower rates of metal production,
revenue, and EBITDA. These factors also contributed to the higher unit costs for the Costerfield mine in
the third quarter.

Cerro Bayo Mine

The Company’s acquisition of the Cerro Bayo in the third quarter of 2010 set the stage for the intensive
development in the first two of four planned mines, Dagny and Fabiola, during the fourth quarter of
2010. Development ore was stockpiled through the end of 2010 and was completely processed to
concentrate in the first quarter of 2011, along with new ore produced in the first quarter of 2011. The
first shipment of concentrate from Cerro Bayo occurred on February 11, 2011, after which shipments
were halted following to the declaration of force majeure by Dowa. After the lifting of the force
majeure on April 14, 2011, the Company started shipping the accumulated concentrate stockpile in the
second quarter. Catch up and return to normal concentrate shipments resulted in record revenues for
the second and third quarters of 2011.

Capital development of the third mine, Delia NW, began ahead of schedule on March 30, 2011. As well,
operating development of the incremental Yasna vein, which is accessed through the Fabiola mine, and
the development and stoping of the Bianca vein, accessed through the Dagny mine, commenced. By the
end of the third quarter, the Delia NW decline had reached the planned uppermost ore mining level and
operating development commenced. Growing ore production from operating development and blast
hole stopes on the Fabiola and Dagny mines exceeded 800 t per day by the end of the third quarter and
total ore production is expected to reach between 1,000 – 1,200 t per day once the third mine (Delia
NW) reaches steady state production (currently anticipated for the fourth quarter of 2011).


                                                    7
La Quebrada

During the second quarter of 2011, the planned Phase 1 drill program at La Quebrada was completed.
The 3,276 metre (“m”) program consisted of seventeen infill and step-out holes (2,932 m) in the Casa de
Piedra target, and two exploratory holes (344 m) in the Leoncita North target. The favorable drill results
were disclosed by the company on August 9, 2011. Multiple copper-silver mantos (replacement
deposits in favorable sedimentary and volcanic horizons) were found in with grades from a few tenths of
a percent up to 1.64% copper and from a few grams to 53 g/t silver over 1-10 m. Work accomplished
during the third quarter consisted of preparing and submitting an application for permission to drill in a
Phase 2 program, the goal of which is to arrive at an NI 43-101-compliant inferred resource by mid-
2012.




1.3 SELECTED ANNUAL AND QUARTERLY INFORMATION

The following table sets forth a summary of the Company’s financial results for the three months ended
September 30, 2011 and 2010:

                                                                   Quarter ended                        Quarter ended
                                                                 September 30, 2011                   September 30, 2010
                                                                         $                                    $
Revenue                                                                  26,960,784                             4,303,930
Cost of sales                                                            13,275,179                             3,009,771
Earnings from mine operations
before depreciation and depletion                                               13,685,605                              1,294,159
Depreciation and depletion                                                       3,425,471                                903,229
Profit from mine operations                                                     10,260,134                                390,930
Administration                                                                   2,717,270                              1,386,859
Finance costs, fx and
others/(income)*                                                               (5,634,981)                              (531,180)
Net Income/(loss)                                                              13,177,845                               (464,749)
EBITDA                                                                         10,968,335                                (92,700)
Total assets                                                                  135,162,587                             83,614,323
Total liabilities                                                              38,683,332                             28,309,427
Earnings/(Loss) per share                                                            0.05                                   0.00

*Others includes business combination transaction costs, write off of mineral properties, stock based compensation, gain/loss on disposal of
properties and taxes.




                                                                     8
The following table sets forth the summary of the Company’s financial results for the nine months ended
September 30, 2011 and 2010:

                                                               Nine months ended Nine months ended
                                                               September 30, 2011 September 30, 2010
                                                                       $                 $
Revenue                                                               67,930,832         12,296,231
Cost of sales                                                         32,594,253           8,911,042
Earnings from mine operations
before depreciation and depletion                                              35,336,579                            3,385,189
Depreciation and depletion                                                      8,842,405                            2,301,992
Profit from mine operations                                                    26,494,174                            1,083,197
Administration                                                                  6,722,947                            4,169,129
Finance costs, fx and others*                                                   2,249,664                            2,071,409
Net Income/(loss)                                                              17,521,563                           (5,157,341)
EBITDA                                                                         28,613,632                             (783,940)
Earnings/(loss) per share                                                            0.07                                (0.04)

*Others includes business combination transaction costs, write off of mineral properties, stock based compensation, gain/loss on disposal of
properties and taxes.

EBITDA Reconciliation to Net Income

The Company defines EBITDA as earnings before interest, taxes and non cash charges/ (income). EBITDA
is presented because the Company believes it is a useful indicator of relative operating performance.
EBITDA should not be considered by an investor as an alternative to net income or cash flow as
determined in accordance with IFRS. The tables below reconcile EBITDA to reported net income for the
three and nine months ended September 30, 2010 and 2011.

                                                                      Quarter ended                          Quarter ended
                                                                    September 30, 2011                     September 30, 2010
                                                                     $              $                        $            $
Net Income/(loss)                                                                13,177,845                            (464,749)
Add: non-cash and finance costs
Depletion and depreciation                                         3,425,471                          903,229
Write off mineral properties                                             -                              6,874
Stock-based compensation                                             428,737                          351,456
Interest and finance charges/(income)                                708,711                          269,250
Fair value adjustments                                            (7,465,691)                             -
Foreign exchange gain (loss)                                          55,291           (2,847,481) (1,088,311)                 442,498
                                                                                       10,330,364                              (22,251)

Add/(Less): Interest & other income                                   637,971             637,971            (70,449)          (70,449)
EBITDA                                                                                 10,968,335                              (92,700)




                                                                     9
                                                       Nine months ended       Nine months ended
                                                       September 30, 2011      September 30, 2010
                                                         $            $           $          $
Net Income/(loss)                                               17,521,563              (5,157,341)
Add: non-cash and finance costs
Depletion and depreciation                             8,842,405               2,301,992
Write off mineral properties                                 -                   693,206
Stock-based compensation                               1,274,058               1,470,109
Interest and finance charges/(income)                 (1,577,578)                424,037
Fair value adjustments                                 1,800,016                     -
Foreign exchange gain (loss)                             501,666 10,840,567     (434,930)   4,454,414
                                                                  28,362,130                 (702,927)

Add/(Less): Interest & (other income)/expenses          251,502      251,502     (81,013)    (81,013)
EBITDA                                                            28,613,632                (783,940)

Fair-value adjustments

On September 30, 2011, the following items on the balance sheet were subject to fair-value adjustments
in accordance with IAS 39:-

a) 750,000 silver puts with a strike price of $25/oz. These were purchased for $1,780,000, had a fair
   value of $956,850 in the second quarter of 2011 and were revalued to $1,949,700 in the third quarter
   of 2011. Revaluation resulted in non-cash income of $992,850 on the income statement for the third
   quarter of 2011.

b) 1,290,000 silver puts with a strike price of $35/oz. These were purchased for $7,737,300, had a fair
   value of $6,570,490 in the second quarter of 2011, and were revalued to $10,828,520 in the third
   quarter of 2011. Revaluation resulted in non-cash income of $4,258,030 on the income statement for
   the third quarter of 2011.

c) 840,000 silver puts with a strike price of $30/oz. These were purchased for $3,358,950, had a fair
   value of $2,456,370 in the second quarter of 2011, and were revalued to $4,471,250 in the third
   quarter of 2011. Revaluation resulted in non-cash income of $2,014,880 on the income statement for
   the third quarter of 2011.

d) 28,800 gold puts with a strike price of $1,400/oz. These were purchased for $2,995,200, had a fair
   value of $2,261,042 in the second quarter of 2011 and were revalued to $2,266,375 in the third
   quarter of 2011. Revaluation resulted in a non-cash income of $5,333 on the income statement for
   the third quarter of 2011.

e) The Silver Note. The Company’s obligation to pay to Coeur d’Alene Mines Corporation the U.S dollar
   equivalent of 125,000 oz of silver in six equal installments commencing in the third quarter of 2011
   was originally valued at the $18/oz silver price at the time the Company acquired Cerro Bayo. This
   obligation was valued at $3,616,074 in the second quarter of 2011 and was revalued in the third

                                                 10
     quarter of 2011 to $2,772,332 based on silver prices in each quarter. At the end of the third quarter
     of 2011, the Company paid the first of its installments under the Silver Note ($649,145), resulting in
     non-cash income of $194,598 for the quarter to the income statement.

All the above items are non cash, non-operating in nature, and the following tables summarize the impact
of these changes.

Fair value adjustments effect on the items in the statement of financial position

                                                                      As of September 30, 2011                                     As of December 31, 2010
                                     Underlying
                                     Operations       Note                Fair value adjustments                     Total
                                                                Q1 2011          Q2 2011         Q3 2011
                                          $                        $                $               $                 $                      $

Assets
Derivative Financial Instrument        16,053,450     (a)           (977,700)    (2,830,998)      7,271,093           19,515,845                      -
Liabilities
Current portion of long-term debt      10,064,916     (b)           259,378      1,357,495         (182,717)          11,499,073                 1,226,770
Long-term debt                            565,164     (b)           326,896        (86,792)         (11,881)             793,387                 5,188,541
Shareholders' equity
Deficit                                 3,697,461               (1,563,974)      (4,101,701)      7,465,691            5,497,477              (12,024,086)


(a) Derivative financial instruments: the Company entered into certain silver put options and gold put options to hedge commodity price risks. The
Company recorded a fair value measurement income of $7,271,093 for three months ended September 30, 2011.

(b) Silver contract: the company adjusted the silver contract to $2,772,332 as at September 30, 2011 based on updated forecast silver prices and
time values, resulting in fair value measurement income of $194,598 for three months ended September 30, 2011.


Fair value adjustments effect on the items in the income statement for
nine months ended
                                                                        September 30, 2011                                    September 30, 2010
                                                    Underlying                   Fair value
                                                    operations          Note   adjustments                      Total                    Total
                                                        $                             $                           $                        $
Income (loss) from operations                        18,497,169                             -                  18,497,169                   (5,259,424)
Other items
Interest and other income                                85,935                                   -                85,935                          85,431
Finance (costs)/income                               (2,022,454)          (a)             3,462,395              (222,438)                       (424,037)
                                                                          (b)            (1,662,379)
Gain on disposal of property,
   plant and equipment                                 (337,437)                                                 (337,437)                       (4,418)
Foreign exchange gain (loss)                           (501,666)                                  -              (501,666)                      445,107
                                                     (2,775,622)                          1,800,016              (975,606)                      102,083
Net income/(loss)                                    15,721,547                           1,800,016            17,521,563                    (5,157,341)
Income/(loss) per share
Basic                                                        0.06                                0.01                0.07                           (0.04)
Diluted                                                      0.05                                0.01                0.06                           (0.04)

(a) Derivative financial instruments: the Company entered into certain silver put options and gold put options to hedge commodity price risks.
The Company recorded a fair value measurement income of $3,462,395 for nine months ended September 30, 2011.

(b) Silver contract: the Company adjusted the silver contract to $2,772,332 as at September 30, 2011 based on updated forecast silver prices
and time values, resulting in fair value measurement loss of $1,662,379 for nine months ended September 30, 2011.




                                                                          11
1.4 RESULTS OF OPERATIONS

Three Months Ended September 30, 2011 compared to Three Months Ended September 30, 2010

During the three months ended September 30, 2011, the Company achieved record net income of
$13,177,845 (net of positive mark-to-market adjustments of $7,465,691) compared to a loss of $464,749
during the three months ended September 30, 2010. Profit was much improved in the third quarter of
2011 because Cerro Bayo had fully ramped up production from Dagny and Fabiola mines, whereas it was
not yet producing anything in the corresponding 2010 quarter.

Administration expenses for the quarter ended September 30, 2011 were $2,717,270 compared to
$1,193,087 during the quarter ended September 30, 2010. The main components of administration
expenses in third quarter of 2011 were $876,387 at Costerfield , $1,124,740 at Cerro Bayo, and
$716,143 at corporate. The corporate amount included $309,461 in management fees, $100,130 in
audit fees, $100,052 in travel expenditure, $44,591 in legal and accounting fees, and $30,605 in
consulting fees. The increase in administration costs from the third quarter of 2010 to the third quarter
of 2011 largely reflects the addition of administration costs as Cerro Bayo was acquired and ramped up
during the year.

Capital expenditures in the third quarter of 2011 were $7,721,049. Of this, $4,995,560 was spent at
Cerro Bayo: $2,706,270 for mine development, $352,393 for purchase of property, plant and equipment
and 1,936,897 for exploration. Costerfield spent $1,684,022 for decline development and $788,455 for
exploration, offset by $76,889 income from disposal of equipment. In the quarter, $234,985 of
capitalized exploration spending occurred at La Quebrada and $94,916 was spent for corporate
purposes. Capital expenditures in the third quarter of 2010 were $3,279,442. The increase in capital
spending in the third quarter of 2011 relative to 2010 is a result of the development of the Cerro Bayo
mine and the significant increase in exploration activities at both mines.




                                                   12
Costerfield Results, Production, Sales, and Costs for the Three Months Ended September 30, 2011

Revenues, operating expenses, and earnings from mining operations at Costerfield were all higher in the
third quarter of 2011 than in the corresponding quarter of 2010 due to 2011 being a full three month
production quarter at near full production rates versus 2010, when the mine was delivering lower
production rates due to flooding and falls of ground. As well, metal prices were higher in 2011 than in
2012.

Costerfield financial results

                                                                   Quarter ended                         Quarter ended
                                                                 September 30, 2011                    September 30, 2010
                                                                         $                                     $
Revenue                                                                   8,761,623                              4,303,930
Cost of sales                                                             6,805,141                              3,009,771
Earnings from mine operations
before depreciation and depletion                                                  1,956,482                             1,294,159
Depreciation and depletion                                                         1,510,979                               903,231
Profit/(loss) from mine operations                                                   445,503                               390,928
Administration                                                                       876,387                               410,579
Finance costs, fx and
others/(income)*                                                                    896,538                               (629,117)
Net Income/(loss)                                                                (1,327,422)                               609,465
EBITDA                                                                            1,080,095                                883,578
Capital expenditure**                                                             2,395,588                              1,422,430
 * Others includes business combination transaction costs, write off of mineral properties, stock based compensation, gain/loss on disposal of
properties and taxes.
** Capital expenditure includes additions net of disposals. It also includes capitalized depreciation on equipment.




                                                                     13
Certain aspects of production, sales, costs and capital development activities at Costerfield during the
nine months ended September 30, 2011, the three months ended September 30, 2011, and the three
previous quarters are summarized in the following table.

Costerfield operating statistics

                                                    Nine months ended   Quarter Ended       Quarter Ended      Quarter Ended       Quarter Ended
                                        Unit
                                                    September 30,2011 September 30, 2011    June 30, 2011      March 31, 2011    December 31, 2010
Mining Production and Mining Cost
Operating development                   m                        3,133             1,102              1,128                903               1,124
Mined ore                                t                      49,133            17,433             18,683             13,017              15,062
Ore mined Au grade                      g/t                        5.90             4.24               6.54               7.20               11.30
Ore mined Sb grade                       %                        4.04              2.67               4.09               5.80                6.10
Mined contained Au                      oz                       9,320             2,377              3,930              3,014               5,467
Mined contained Sb                       t                       1,983               465                763                755                 926
Mining cost per tonne ore               $/t                        261               288                224                274                 229

Processing and Processing Cost
Processed ore                            t                      55,629            18,089             18,922             18,618              13,481
Mill head grade Au                      g/t                        7.30             4.83                6.49             10.52                9.04
Mill head grade Sb                       %                        3.72              2.51               3.60               5.00                5.31
Recovery Au                              %                       85.79             83.96              86.84              86.50               76.00
Recovery Sb                              %                       91.72             92.95              93.71              88.50               83.60
Concentrate produced                   dry t                     3,693               792              1,230              1,671               1,110
Concentrate grade Au                    g/t                      93.43             92.58              87.01             101.00               74.00
Concentrate grade Sb                     %                       51.42             53.34              52.15              49.00               53.00
Saleable Au produced                    oz                       9,441             2,057              2,856              4,528               2,330
Saleable Sb produced                     t                       1,230               305                413                512                 356
Saleable Au equivalent produced         oz                      22,121             4,887              7,396              9,837               5,303
Processing cost per tonne ore           $/t                         82                73                 83                 89                  85

Sales
Concentrate sold                       dry t                     3,653               812              1,298              1,543               1,323
Concentrate Au grade                    g/t                      94.63             93.45              87.96             101.00               69.00
Concentrate Sb grade                     %                       50.96             53.58              51.65              49.00               53.00
Au sold                                 oz                      10,078             2,108              3,229              4,741               2,406
Sb sold                                  t                       1,187               279                433                476                 434

Benchmark Unit Cost
Site cash operating cost/ tonne
                                        $/t
ore processed                                                      386               435                324                401                 288
Site cash operating cost/tonne
                                        $/t
concentrate produced                                             5,810             9,926              4,976              4,467               4,312
EBITDA/tonne ore milled                 $/t                        212                60                210                341                 221

EBITDA/tonne concentrate produced       $/t                      3,190             1,364              3,235              3,800               2,684
Cash cost per oz Au equivalent
                                        $/oz
produced1                                                        1,004             1,646                906                759                 732

Capital Spending
Capital development                     m                          682               177                241                264                 229
Capital development cost               $000                      4,014             1,684              1,490                839                 701
Capital development cost/meter         $/m                       5,887             9,536              6,179              3,178               3,059
Capital purchases                      $000                      2,153               (77)             1,185              1,045               1,220
Capitalized exploration                $000                      2,131               788                799                544                 440

1
 The cash cost per ounce of gold equivalent produced is a non IFRS performance measure that is included in this MD&A because this statistic is
a key performance measure under control of the operations that management uses to monitor performance, to assess how the mine is performing,
and to plan and assess the overall effectiveness and efficiency of mining operations. This performance measure does not have a meaning within
IFRS and, therefore, amounts presented may not be comparable to similar data presented by other mining companies. This performance measure
should not be considered in isolation as a substitute for measures of performance in accordance with IFRS. Equivalent gold ounces produced is
calculated by adding to gold ounces produced, the antimony tonnes produced times the antimony realized price divided by the gold realized
price. The total cash operating cost associated with the production of these equivalent ounces produced in the period is then divided by the
equivalent gold ounces produced to yield the cash cost per equivalent ounce produced. Variations between the produced ounces and sold ounces
in a reporting period are purely the result of the timing of shipments to customers.




                                                                      14
During the three months ended September 30, 2011, the Costerfield mine completed 1,102 m of
operating development and produced 17,433 t of ore, in line with previous quarters. Mining cost in the
third quarter of 2011 at $288/t was higher than in the previous quarters due to increases in
maintenance, ground support, and other costs. Ore grade was lower than in previous quarters due to
complicated vein splays encountered during the quarter, delays in capital development of the high
grade, deeper W-lode levels and delays in stope preparation due to ground conditions.

Delays in capital development were due to low equipment availability. The Company has responded to
loader availability issues in the short term by leasing an additional LHD (load-haul-dumper), ordering
two new LHD’s and ordering a new large loader. The Company has responded to haulage issues in the
short term by leasing a replacement underground haul truck, rebuilding the existing haul truck, sending
a surplus truck from Cerro Bayo to Costerfield (which will arrive in early November, 2011) and, in the
long term, by ordering a new haul truck. The new equipment will arrive in the first and second quarters
of 2012, after which equipment leasing and maintenance costs are expected to decline.

With equipment availability issues resolved, the mine has increased capital development rates by going
to 7:7 shifting and the Company expects to achieve development rates of approximately 140 m per
month going forward. The advent of round the clock and weekend operations creates the opportunity
to blast in stopes on Fridays, a 25% increase in blast rate from previous practice. Previously, stope
blasting could not occur on Fridays because the advances would be left unsupported over the weekend.
The mine has tested cemented rock fill as an enhancement of its blast hole stoping method with initial
excellent results. A 20% increase in mining recovery, a significant reduction in dilution, and a reduction
in rehabilitation and ground support costs are anticipated from full deployment of this method.

During the third quarter of 2011, the Costerfield concentrator processed 18,089 t of ore with antimony
grades 2.51% and gold grades 4.83 g/t. Throughput was in line with previous quarters, although grade
was significantly lower because of low ore grades delivered from the mine. The plant achieved 83.96%
recovery of gold and 92.95% recovery of antimony, approximately in line with previous quarters. The
low mill head grades in the third quarter of 2011 led to low concentrate production relative to previous
quarters. Concentrate production was 792 dry metric tonnes (“dmt”), saleable antimony production
was 305 t and saleable gold production was 2,057 oz. Processing costs at $73/t during the third quarter
of 2011 were significantly lower than in previous quarters due to the cumulative impact of operating
and maintenance improvements made in previous quarters.



Sales volumes for the third quarter of 2011 were lower than in previous quarters as the impact of low
mined grades meant that smaller amounts of concentrate were ultimately available for sale. Sales were
812 dmt of concentrate, 279 t of antimony in concentrate, and 2,108 oz of gold in concentrate.

Site cash operating cost per tonne of ore processed was $435/t in the third quarter of 2011, higher than
in previous quarters. This higher cost plus the low grade of ore processed and consequent low metal
production led to a higher cost per gold equivalent ounce produced $1,646/oz. As the improvements



                                                   15
made in the mine during the third quarter flow though following quarters, the Company expects both
the volume of metal sold and the unit cash costs to improve substantially.

During the quarter, the Company invested $1,684,022 in capital development at the Costerfield mine,
$788,455 in capitalized exploration, and received net $76,889 income from sales of assets against capital
purchases. Cost per metre (“m”) of capital development was much higher than in previous quarters due
to poor ground conditions and equipment availability. As the improvements made in equipment and
manning during the third quarter take hold, the Company expects capital development rates to rise to
the 140 m per month range and costs per meter to decline. Exploration spending will continue at a
relatively high level due to the Company’s commitment to continue its three-rig drill program.

Cerro Bayo Results, Production, Sales and Costs for the Three Months Ended September 30, 2011

Cerro Bayo generated record revenue of $18,199,161 for the quarter ended September 30, 2011.
Earnings from mine operations before depreciation and depletion were a record $11,729,123 and net
income was a record of $8,467,773. In contrast, during the third quarter of 2010, Mandalay owned
Cerro Bayo for only from August 10 forward and was just beginning its capitalized restart program by
the end of September.

Cerro Bayo financial results

                                                                   Quarter ended                        Quarter ended
                                                                 September 30, 2011                   September 30, 2010
                                                                         $                                    $
Revenue                                                                  18,199,161                                  -
Cost of sales                                                             6,470,038                                  -
Earnings from mine operations
before depreciation and depletion                                               11,729,123                                      -
Depreciation and depletion                                                       1,914,492                                      -
Profit/(loss) from mine operations                                               9,814,631                                      -
Administration                                                                   1,124,740                                   21,183
Finance costs, fx and
others/(income)*                                                                   222,118                               (262,258)
Net Income/(loss)                                                                8,467,773                                241,075
EBITDA                                                                          10,604,383                                (21,183)
Capital expenditure**                                                            4,995,560                              1,756,431

*Others includes business combination transaction costs, write off of mineral properties, stock based compensation, gain/loss on disposal of
properties and taxes.
 **Capital expenditure includes additions net of disposals. It also includes capitalized depreciation on equipment.




                                                                    16
The following table summarizes certain aspects of capital development activities, production, sales and
costs from Cerro Bayo during the nine months ending September 30, 2011, the three months ending
September 30, 2011, and the previous three quarters.

Cerro Bayo operating statistics

                                                     Nine months ended   Quarter Ended        Quarter Ended      Quarter Ended      Quarter Ended
                                        Unit
                                                     September 30,2011 September 30, 2011     June 30, 2011      March 31, 2011   December 31, 2010
Mining Production and Mining Cost
Operating development                    m                         3,264              1,104              1,133            1,027                 779
Mined ore                                 t                      131,642             54,299             41,254           36,089              10,505
Ore mined Au grade                       g/t                        1.05               1.11               1.10             0.93                0.86
Ore mined Ag grade                       g/t                      228.34             225.86             233.64           226.00              296.00
Mined contained Au                       oz                     4,460.78              1,929              1,453            1,079                 290
Mined contained Ag                       oz                   966,417.40            394,302            309,890          262,224             100,011
Mining cost per tonne ore                $/t                          59                 60                 64               52                 NA

Processing and Processing Cost
Processed ore                             t                      193,351             78,643             54,835           59,874                 NA
Mill head grade Au                       g/t                        0.95               0.95               1.08             0.83                 NA
Mill head grade Ag                       g/t                      181.06             172.05             192.95           182.00                 NA
Recovery Au                               %                        84.13              82.39              80.22            90.00                 NA
Recovery Ag                               %                        85.60              84.27              82.69            90.00                 NA
Concentrate produced                    dry t                      2,976                700                778            1,498                 NA
Concentrate grade Au                     g/t                       47.34              69.63              62.78            28.90                 NA
Concentrate grade Ag                     g/t                    9,530.35          13,314.47          11,547.57         6,714.00                 NA
Saleable Au produced                     oz                        4,569              1,567              1,552            1,450                 NA
Saleable Ag produced                     oz                      923,369            299,679            284,324          339,366                 NA
Saleable Au equivalent produced          oz                       26,792              8,508              9,264            9,020                 NA
Processing Cost per tonne ore            $/t                          29                 28                 38               22                 NA

Sales
Concentrate sold                        dry t                      2,341              1,089                948              304                 NA
Concentrate Au grade                     g/t                       44.18              50.47              44.07            22.00                 NA
Concentrate Ag grade                     g/t                    9,878.18          11,180.13           9,197.59         7,337.00                 NA
Au sold                                  oz                        3,191              1,690              1,297              204                 NA
Ag sold                                  oz                      715,851            376,409            270,404           69,037                 NA

Benchmark Unit Cost
Site cash operating cost/ tonne
                                         $/t
ore processed                                                        85                 84                102                71                 NA
Site cash operating cost/tonne
                                         $/t
concentrate produced.                                              5,533              9,485              7,176            2,833                 NA
EBITDA/tonne ore milled                  $/t                          99                135                128               26                 NA
EBITDA/tonne concentrate produced
                                         $/t
                                                                   6,451             15,148              9,013            1,055                 NA
Cash cost per oz Ag produced net of
Au byproduct credit1                    $/oz                       12.65              17.51              11.29            16.78                 NA

Capital Spending
Capital development                      m                         2,049                805                775              470                 521
Capital development cost                $000                       7,802              2,706              3,310            1,785               3,654
Capital development cost/meter          $/m                        3,807              3,364              4,274            3,801               7,013
Capital purchases                       $000                       1,890                352                727              810                 950
Capitalized exploration                 $000                       3,204              1,937                761              506                   -
1
 The cash cost per ounce of silver produced net of gold byproduct credit is a non IFRS performance measures that is included in this MD&A
because it is a key performance measure under control of the operations that management uses to monitor performance, to assess how the mine is
performing, and to plan and assess the overall effectiveness and efficiency of mining operations. This performance measure does not have a
meaning within IFRS and, therefore, amounts presented may not be comparable to similar data presented by other mining companies. This
performance measure should not be considered in isolation as a substitute for measures of performance in accordance with IFRS. The cash cost
per silver ounce produced net of gold byproduct credit is calculated by deducting the gold credit (which equals ounces gold produced times the
realized gold price in the period) from the cash operating costs in the period and dividing the resultant number by the silver ounces produced in
the period.




                                                                      17
During the three months ended September 30, 2011, the Cerro Bayo mine produced 54,299 t of ore and
completed 1,104 m of operating development. Mine production of contained gold and silver steadily
increased across all four quarters of history as the ramp-up was delivered and the proportion of stoping
ore vs. development ore increased. Mining cost per tonne in the third quarter of 2011 was $60/t, in
line with previous quarters.

During the third quarter of 2011, the Cerro Bayo concentrator processed 78,643 t of ore with grades of
172.05 g/t silver and 0.95 g/t gold. The plant achieved 82.39% recovery of gold and 84.27% recovery of
silver, higher than in the second quarter as the Company improved its concentrate regrind circuit to
achieve higher recovery while producing a concentrate grade acceptable to the customer. The Company
expects to further optimize the balance between concentrate grade and recovery going forward. The
plant produced 700 dmt of concentrate containing 299,679 oz of saleable silver and 1,567 oz of saleable
gold. There was no production in the fourth quarter of 2010 because the plant had not restarted at that
time and the relatively high production in the first quarter 2011 resulted from processing not only the
first quarter mine production but also the ore stockpiled from development during the fourth quarter of
2010. Processing cost during the third quarter of 2011 was $28/t, lower than the previous quarter as
volumes through the plant increased.

Sales volumes for the third quarter of 2011 were 1,089 dmt of concentrate, 1,690 oz of gold and
376,409 oz of silver. These were all quarterly records due to the fact that the third quarter was the first
full quarter of sales.

Total site cash operating cost per tonne of ore processed was $84/t in the third quarter of 2011. Cash
cost per ounce silver produced net of gold by-product was $17.51/oz.

During the third quarter of 2011, the Company invested $2,706,270 in capital development at Cerro
Bayo, advancing 805 m at $3,364/m. As well, Cerro Bayo spent $788,815 in capital purchases and
invested $1,936,897 in exploration. Spending on capital development and purchases are expected to
continue at similar levels going forward.

La Quebrada

Spending on exploration at La Quebrada and the rest of Chile was $234,895. During the second quarter
of 2011, the planned Phase 1 drill program at La Quebrada was completed. The 3,276 metre (“m”)
program consisted of seventeen infill and step-out holes (2,932 m) in the Casa de Piedra target, and two
exploratory holes (344 m) in the Leoncita North target. The favorable drill results were disclosed by the
company on August 9, 2011. Multiple copper-silver mantos (replacement deposits in favorable
sedimentary and volcanic horizons) were found in with grades from a few tenths of a percent up to
1.64% copper and from a few grams to 53 g/t silver over 1-10 m.

During the third quarter application was submitted seeking permission to drill in a Phase 2 program, the
goal of which is to arrive at an NI 43-101-compliant inferred resource by mid-2012.




                                                    18
Markets-- Currency Exchange Rates

The average currency exchange rates for the reporting period are summarized in the table below.
During the reporting period, the Company did not enter any hedging arrangements for currency
exchange rates.

                                                Average rate                Average rate            Average rate              Average rate
                 Currency                       July 1, 2011                April 1, 2011          January 1, 2011           October 1, 2010
                                             September 30, 2011             June 30, 2011          March 31, 2011           December 31, 2010

1A$ = C$                                                     1.0279                    1.0286                   0.9910                  1.0005
1A$ = US$                                                    1.0488                    1.0627                   1.0054                  0.9880
1 US$ = C$                                                   0.9807                    0.9680                   0.9857                  1.0128
1 US$ = Chilean Peso                                         472.57                    469.22                   481.78                  480.35

Markets—Commodity Prices

The markets for gold, silver and antimony continued to be robust during the third quarter of 2011.
During the reporting period, average realized prices of gold and antimony closely approximated the
average benchmark London daily afternoon price fix (for gold and silver) and Rotterdam warehouse
price (for antimony) reported in Metal Bulletin.

                                               Average price              Average price             Average price             Average price
              COMMODITY                         July 1, 2011-             April 1, 2011-           January 1, 2011-          October 1, 2010-
                                             September 30, 2011           June 30, 2011             March 31, 2011          December 31, 2010
Gold US$/Oz - Realized1                                       1,814                      1,469                    1,410                  1,365
Gold- US$/Oz. Average London Daily
PM close (Metal Bulletin)                                     1,700                      1,504                    1,384                  1,367
 Realized antimony US$/Tonne 1                                17,326                     16,036                    14,433               11,373
 Antimony US$/Tonne- Rotterdam
 Warehouse (Metal Bulletin)                                   14,931                     15,839                    14,243               11,274
 Realized silver price US$/oz                                      40                         40                    35.81                  NA
 Silver US$/oz Average London Daily
 PM close                                                          39                         40                    31.67                26.34
1
  includes the effect of prior period smelter revenue adjustment on sales revenue and realized prices for the period.




1.5 SUMMARY OF QUARTERLY RESULTS

The following information is derived from the Company’s quarterly financial statements for the past
eight quarters.

                                             September 30, 2011             June 30, 2011          March 31, 2011           December 31, 2010
                Particulars
                                                     $                            $                      $                          $
              Revenue                            26,960,784                   24,360,995            16,609,053                  8,322,097
            Income/(Loss)                        13,177,845                   1,936,478              2,407,240                  1,740,990
       Income/(Loss) per Share                      0.05                         0.01                   0.01                       0.01




                                                                       19
                               September 30, 2010        June 30, 2010   March31, 2010   December 31, 2009
           Particulars
                                      $                        $              $                 $
            Revenue                 4,303,930             5,035,912       2,956,389           317,552
         Income/(Loss)              (464,749)            (2,554,913)      (2,137,679)       (1,227,598)
     Income/(Loss) per Share          0.00                  (0.03)           (0.02)            (0.01)

Prior to December of 2009, the Company did not have any revenues and quarterly results varied based
entirely on expenditures, of which exploration constituted the most important component. Since the
acquisition of the Costerfield mine in December, 2009, and of the Cerro Bayo mine in August, 2010, the
Company’s results have been, and are expected to continue to be, influenced by the operational results
of the Costerfield and Cerro Bayo mines. These results are impacted by the levels of gold, silver and
antimony production, the costs associated with that production and the prices received for metal in
concentrate. Metal prices are determined prevailing international prices for gold, silver and antimony.
The Company’s products are sold in U.S. dollars, whereas the majority of mine costs are in Australian
dollars (at Costerfield) and Chilean pesos (at Cero Bayo). Therefore, because the Company is a U.S.
dollar reporting entity, the Company’s results will be impacted by exchange rate variations during the
reporting periods.

Consistently growing revenue from the quarter ended December 31, 2009 to the quarter ended
September 30, 2011 represents the ramp-up of Costerfield production under Mandalay ownership and
the acquisition, restart, and ramp-up of the Cerro Bayo mine. This growing revenue trajectory was
enhanced by generally increasing prices for gold, silver and antimony.

Net income in the quarters prior to and including the quarter ending September 30, 2010 was negative
due to the ramping up of production from the single Costerfield mine while the company incurred high
corporate expenses for migrating its listing to the TSX plus acquiring and financing the Cerro Bayo
acquisition.

Net income in all quarters later than the quarter ending September 30, 2010 is positive due to
Costerfield reaching its full production rate and to the growing sales from Cerro Bayo. Net income was
limited in the first and second quarters of 2011 due to the impact of the Dowa force majeure on
reducing shipments from Cerro Bayo. In the most recent quarter ending September 30, 2011, the full
impact of Cerro Bayo production on quarterly earnings is seen: net income jumped from $1.9 million in
the second quarter to $13.2 million in the third quarter.

The company expects revenue and net income to continue to rise going forward as Cerro Bayo reaches
full production through ramping up operating development and bringing stoping on line at the Delia NW
mine.




                                                    20
1.6 LIQUIDITY, SOLVENCYAND USES OF CASH

At September 30, 2011, the Company had working capital of $34,004,252, compared to $32,144,332 at
June 30, 2011. The Company had cash and cash equivalents of $9,025,144 at the end of the September
30, 2011 as compared to $10,595,911 at June 30, 2011. The working capital increase is primarily due to
Cerro Bayo ramp up during 2011.

In the future, the Company expects to fund operational requirements through a combination of
internally generated cash flow, joint venture arrangements for its projects, debt offerings and equity
financing.

In the opinion of management, the Company’s working capital at September 30, 2011, together with
cash flows from operations, will be sufficient to support the Company’s normal operating requirements
through 2011. However, taking into consideration volatile equity markets, global uncertainty in the
capital markets and increasing cost pressures, the Company is continually reviewing expenditures and
additional financial opportunities in order to ensure adequate liquidity and flexibility to support its
growth strategy while maintaining or increasing production levels at its current operations.



1.7 CONTRACTUAL COMMITMENTS AND CONTINGENCIES


As at September 30, 2011, the Company has a Silver Note payable to Coeur D’Alene Mines Corporation
in the U.S. dollar equivalent amount of 104,167 ounces of silver due in five quarterly installments.

On December 23, 2010, the Company entered into a two year C$10,000,000 loan facility secured by its
assets that pays interest at 11% per annum. Against the loan there is deferred loan costs of US$904,110
(C$947,704) which will be amortized over a period of the first tranche of C$5,000,000 (closed on
December 23, 2010) and second tranche of C$5,000,000 (closed on February 1, 2011).

In addition, the Company has several equipment loans with interest rates ranging from 7.86% to 9.93%
that are repayable over the next one to three years. The total repayment requirements are as follows:

                                     Equipment loans        Silver Contract   Sprott loan          Total
                                                  $                     $               $             $


2011                                        308,473              600,654            -           909,127
2012                                        423,998             2,171,678     9,540,000       12,135,676
2013                                        121,696                                             121,696
2014                                         30,071                                              30,071
Total                                       884,238             2,772,332     9,540,000       13,196,570




                                                       21
1.8 OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements.

1.9 TRANSACTIONS WITH RELATED PARTIES

As of September 30, 2011, the Company had no related party transactions.

1.10 PROPOSED TRANSACTIONS

None.

1.11 CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements in conformity with IFRS requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements. Significant
estimates used in the preparation of these consolidated financial statements include, but are not limited
to, the recoverability of trade and other receivables, measurement of revenue and trade receivable, the
proven and probable ore reserves and resources and the related depletion and amortization, the
estimated tonnes of waste material to be mined and the estimated recoverable tonnes of ore from each
mine area, the assumptions used in the accounting for stock-based compensation, valuation of
warrants, the provision for income and mining taxes and composition of future income and mining tax
assets and liabilities, the expected economic lives of and the estimated future operating results and net
cash flows from mining interests, the anticipated costs of reclamation and closure cost obligations, the
fair value measurement of derivative financial instruments and silver note, and the fair value of assets
and liabilities acquired in business combinations.

Inventories

Finished goods, work-in-process and stockpiled ore are valued at the lower of average production cost
or net realizable value. Production costs include the cost of raw materials, direct labor, mine-site
overhead expenses and depreciation and depletion of mining interests. Net realizable value is calculated
as the estimated price at the time of sale based on prevailing and long-term metal prices less estimated
future production costs to convert the inventories into saleable form.

Work in-process inventory represents materials that are currently in the process of being converted into
finished goods. The average production cost of finished goods represents the average cost of work in-
process inventories incurred prior to the refining process, plus applicable refining costs and associated
royalties.

Supplies are valued at the lower of average cost and net realizable value.



                                                    22
The estimates and assumptions used in the measurement of and work-in-process inventories include
recoverable ounces of gold and the price per gold ounce expected to be realized when the ounces of
gold are recovered. If these estimates or assumptions prove to be inaccurate, the Company could be
required to write down the carrying amounts of its work-in-process inventories, which would reduce the
Company’s earnings and working capital.

Property, plant and equipment

Exploration and Evaluation

Once a license to explore an area has been secured, expenditures on exploration and evaluation activities
are capitalized within property, plant and equipment.

The Company records its capitalized exploration and evaluation at cost. The capitalized cost is based on
cash paid, the value of share considerations and exploration costs incurred. The recorded amount may not
reflect recoverable values as this will be dependent on the development program, the nature of the
mineral deposit, commodity prices, adequate funding and the ability of the Company to bring its projects
into production.

All costs related to the acquisition, exploration and evaluation of these interests are capitalized on the
basis of specific claim blocks or areas of geological interest until the properties to which they relate are
moved into development or production, sold, or management has determined there to be an impairment
of the value.

Management reviews the carrying value of capitalized exploration and evaluation costs at least annually.
In the case of undeveloped projects, there may be only inferred resources to form a basis for the
impairment review. The review is based on a status report regarding the Company’s intentions for
development of the undeveloped property. In some cases, the undeveloped properties are regarded as
successors to ore bodies currently in production. Where this is the case, it is intended that these will be
developed and be put into production when the current source of ore is exhausted or to replace the
reduced output.

Once an economically viable reserve has been determined for an area and the decision to proceed with
development has been approved, exploration and evaluation assets attributable to that area are first
tested for impairment and then reclassified to mining interests within property, plant and equipment.

Subsequent recovery of the resulting carrying value depends on successful development or sale of the
undeveloped project. If a project does not prove viable, all irrecoverable costs associated with the project
are written off.

Mining Interests

Mining interests represent capitalized expenditures related to the development of mining properties,
acquisition costs, capitalized borrowing costs, expenditures related to exploration and evaluation
transferred in and estimated site closure and reclamation costs.


                                                    23
Capitalized costs are depleted using the unit of production method over the estimated economic life of the
mine to which they relate.

Property, plant and equipment

Property, plant and equipment are recorded at cost less accumulated depreciation, depletion and
impairment charges.

Where an item of plant and equipment comprises major components with different useful lives, the
components are accounted for as separate items of plant and equipment.

Expenditures incurred to replace a component of an item of property, plant and equipment that is
accounted for separately, including major inspection and overhaul expenditures, are capitalized. Directly
attributable expenses incurred for major capital projects and site preparation are capitalized until the asset
is brought to a working condition for its intended use. These costs include dismantling and site restoration
costs to the extent these are recognized as a provision.

Depreciation

Mining interests are depreciated using the unit-of-production method based on the estimated total
recoverable ounces contained in proven and probable reserves at the related mine when the production
level intended by management has been reached.

The production level intended by management is considered to be reached when operational
commissioning of major mine and plant components is completed, operating results are being achieved
consistently for a period of time and there are indicators that these operating results will be sustained.
Other factors include one or more of the following:

            •   A significant utilization rate of plant capacity has been achieved;
            •   A significant portion of available funding is directed towards operating activities;
            •   A pre-determined, reasonable period of time of stable operation has passed; and
            •   A development project significant to the primary business objective of the Company has
                been completed and significant milestones have been achieved.

Management reviews the estimated useful lives, residual values and depreciation methods of the
Company’s property, plant and equipment at the end of each reporting period and when events and
circumstances indicate that such a review should be made. Changes to estimated useful lives, residual
values or depreciation methods resulting from such review are accounted for prospectively.

Plant and equipment cost is depreciated, using the straight-line method or diminishing balance method
over their estimated useful lives, if shorter than the mine life otherwise they are depreciated on the unit-
of-production basis.

The Company records a liability based on the best estimate of costs for site closure and reclamation
activities that the Company is legally or constructively required to remediate. The liability is recognized at
the time environmental disturbance occurs and the resulting costs are capitalized to the corresponding

                                                     24
asset. The provision for site closure and reclamation liabilities is estimated using expected cash flows
based on engineering and environmental reports prepared by third party industry specialists and
discounted at a pre-tax rate specific to the liability. The capitalized amount is amortized on the same basis
as the related asset. The liability is adjusted for the accretion of the discounted obligation and any changes
in the amount or timing of the underlying future cash flows. Significant judgments and estimates are
involved in forming expectations of the amounts and timing of future closure and reclamation cash flows.

Changes in site closure and reclamation estimates are accounted for as a change in the corresponding
capitalized cost.

Costs of rehabilitation projects for which a provision has been recorded are recorded directly against the
provision as incurred, most of which are incurred at the end of the life of mine.

Reserve Estimates

The Company estimates its ore reserves and mineral resources based on information compiled by
Qualified persons as defined in accordance with Canadian Securities Administrators National Instrument
43-101 Standards for Disclosure of Mineral Projects (“NI 43-101”). Reserves are used in the calculation of
depreciation and amortization, impairment assessment, assessment of life of mine stripping ratios and for
forecasting the timing of payment of mine closure, reclamation and rehabilitation costs.

There are numerous uncertainties inherent in estimating ore reserves, and assumptions that are valid at
the time of estimation may change significantly when new information becomes available. Changes in the
forecast prices of commodities, exchange rates, production costs or recovery rates may change the
economic status of reserves and may, ultimately, result in the reserves being restated.

Income taxes

The Company uses the liability method of accounting for income taxes. Deferred tax is recognized on
temporary differences between the carrying amounts of assets and liabilities in the financial statements
and the corresponding tax bases used in the computation of taxable income and on the carry forward of
tax losses and tax credit. Deferred tax liabilities are generally recognized for all taxable temporary
differences. Deferred tax assets are generally recognized 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 utilized. Such deferred tax assets and liabilities are not recognized if the temporary
difference arises from goodwill or from the initial recognition (other than in a business combination) of
other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

For the subsidiaries, the Company recognizes a deferred tax asset for deductible temporary differences
arising from investments in subsidiaries only to the extent that it is probable that the temporary difference
will reverse in the foreseeable future and taxable profit will be available against which the temporary
difference can be utilized. The Company recognizes a deferred tax liability for taxable temporary
differences associated with investments in subsidiaries, except to the extent that the Company is able to
control the timing of the reversal of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future.

                                                      25
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to
the extent that it is 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 using enacted or substantively enacted tax rates expected
to apply when the asset is realized or the liability settled.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax
assets against current tax liabilities and when they relate to income taxes levied by the same taxation
authority and the Company intends to settle its current tax assets and liabilities on a net basis.

Current and deferred tax are recognised as an expense or income in profit or loss, except when they relate
to items that are recognised outside profit or loss (whether in other comprehensive income or directly in
equity), in which case the tax is also recognised outside profit or loss, or where they arise from the initial
accounting for a business combination. In the case of a business combination, the tax effect is included in
the accounting for the business combination.

1.12 FINANCIAL INSTRUMENTS

General

The Company’s financial instruments consist of cash and cash equivalents, trade and other receivables,
reclamation and other deposits, derivative financial instruments and long-term debt. The Company also
periodically uses financial instruments to protect itself against future downward fluctuations in the
prices of gold, silver and antimony. See “Hedging Activities” below.

The Company has exposure to risks of varying degrees of significance which could affect its ability to
achieve its strategic objectives for growth and shareholder returns. The Company has credit risk which
is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its
contractual obligations and arises principally from the Company’s accounts receivable. The Company
closely monitors extensions of credit and has not experienced significant credit losses in the past. As at
December 31, 2010, the Company had no past due trade receivables.

The Company invests its excess cash principally in highly rated government and corporate debt
securities. The Company has established guidelines related to diversification, credit ratings and
maturities that maintain safety and liquidity. These guidelines are periodically reviewed by the
Company’s audit committee and modified to reflect changes in market conditions.

The Company is subject to interest rate risk on its cash and cash equivalents and believes that the
results of operations, financial position and cash flows would not be significantly affected by a sudden
change in market interest rates relative to the investment interest rates due to the short term nature of
the investments. Excess cash is invested in highly rated investment securities at fixed interest rates with
varying terms to maturity but generally with maturities of three months or less from the date of
purchase.



                                                       26
 The Company reports its financial statements in U.S. dollars; however, the Company has extensive
 operations in the Australia and Chile. As a consequence, the financial results of the Company’s
 operations as reported in U.S. dollars are subject to changes in the value of the U.S. dollar relative to the
 Australia dollar and Chilean peso. The Company does not currently enter into any foreign exchange
 hedges to limit exposure to exchange rate fluctuations. The Board of Directors continually assesses the
 Company’s strategy towards its foreign exchange rate risk, depending on market conditions.

 Hedging Activities

 The Company’s earnings and cash flows are subject to price risk due to fluctuations in the market prices
 of gold and silver. World gold and silver prices have historically fluctuated widely. World gold and silver
 prices are affected by numerous factors beyond the Company’s control, including:

 •   the strength of the U.S. economy and the economies of other industrialized and developing nations;
 •   global or regional political or economic crises;
 •   the relative strength of the U.S. dollar and other currencies;
 •   expectations with respect to the rate of inflation;
 •   interest rates;
 •   purchases and sales of gold and silver by central banks and other holders;
 •   demand for jewellery containing gold and silver; and
 •   investment activity, including speculation, in gold and silver as commodities.

 The Company’s earnings and cash flow are also subject to price risk due to the fluctuation in the price of
 antimony. The primary factors affecting the antimony price are the demand for flame retardant
 chemicals made from antimony and Chinese primary antimony production.

 The Company occasionally purchases derivative financial instruments to protect itself against future
 downward fluctuations in the prices of gold, silver and antimony.

 The financial reporting impact of these hedges under IFRS will potentially produce non-cash earnings
 volatility on a quarterly basis because IFRS require that these hedges be valued at fair value each
 quarter. In the third quarter of 2011, the mark-to-market income on this hedge position was $7,271,093.
 It is not the Company’s intent to trade these securities but to hold them to maturity as price protection
 for its future revenues, earnings and cash flows.

 1.13 OTHER MD&A REQUIREMENTS

 INTERNAL CONTROLS OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS

I. Disclosure Controls and Procedures

 Disclosure controls and procedures are designed to provide reasonable assurance that all relevant
 information is gathered and reported on a timely basis to senior management, so that appropriate
 decisions can be made regarding public disclosure. During the second quarter the Company finished
 implementing Sage AccPac Enterprise Resource Planning (ERP) software to strengthen internal control



                                                      27
 and reporting. Sage AccPac implementation combined with improvements in the monthly close process
 provides information to the senior management for appropriate decision making.

II. Internal Controls and Financial Reporting

 The Company’s management, with the participation of its Chief Executive Officer and Chief Financial
 Officer, are responsible for establishing and maintaining adequate internal control over financial
 reporting. The Company evaluated the design and operational effectiveness of its internal controls over
 financial reporting as defined under NI 52-109 for the quarter ended September 30, 2011 The
 Company’s controls include policies and procedures that:

 •    relate to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
      transactions and dispositions of the assets of the Company;

 •    provide reasonable assurance that transactions are recorded as necessary to permit preparation of
      financial statements in accordance with IFRS, and that receipts and expenditures of the Company
      are being made only in accordance with authorizations of the Company’s management and
      directors; and

 •    provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
      use or disposition of the Company’s assets that could have a material effect on the annual financial
      statements or interim financial statements.

 The Company’s management, including its Chief Executive Officer and Chief Financial Officer, has
 evaluated the design and operational effectiveness of the Company’s internal control over financial
 reporting using the framework and criteria established in Internal Control – Integrated Framework,
 issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 In 2010, the Company’s management identified material weaknesses in internal controls over financial
 reporting which were a result of the limited number of accounting staff at the Company during the year,
 significant management change in the fourth quarter of 2009, and the addition to the portfolio of AGD
 in December, 2009, and Cerro Bayo in August, 2010. As such, it has not been possible to achieve
 complete segregation of duties and there were limitations on available review and analysis of certain
 complex accounting matters. Management and the board of directors work to mitigate the risk of
 material misstatement by regularly monitoring the financial status and reporting. In addition, when
 such complex accounting and technical issues arise, outside consulting expertise is engaged. After the
 implementation of Sage AccPac ERP system, the Company is now undertaking to implement internal
 audit function within the Company. This is designed to further identify the gaps in internal control
 procedures and help create internal policy documents as necessary.




                                                    28
The table below is a summary of key internal control issues, their potential impact and the actions the
Company is taking to remedy:


  Internal control          Potential impact of the         Current plan or actions being undertaken for
  weakness                  weakness on the issuer’s        remediating the potential material weakness
                            financial reporting and its
                            ICFR


  Complete segregation of   Accuracy and possible fraud     Appointed KPMG as internal auditors in Q4 2011.
  duties


  Collusion                 Financial loss to the Company   Will implement recommendation of the internal
                                                            auditors in 2012.


Limitation of Controls and Procedures

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, believe
that any disclosure controls and procedures or internal control over financial reporting, no matter how
well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives
of the control system are met. Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, they cannot provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been prevented or detected.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people, or by unauthorized override
of the controls. The design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Accordingly, because of the inherent
limitations in a cost effective control system, misstatements due to error or fraud may occur and not be
detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

1.14 OUTSTANDING SHARES

As of the date of this MD&A, the Company has 270,221,575 common shares issued and outstanding. The
weighted average number of shares outstanding during the third quarter used for the calculation of per
share numbers was 268,602,619.




                                                      29
Outstanding incentive stock options that could result in the issuance of additional common shares at the
respective dates as of the date of this MD&A are as follows:

       Exercise Price          As of September 30, As of November 14,               Expiry Date
            C$                         2011               2011
                        0.26              6,159,086           6,159,086                      7-Dec-14
                        0.26              1,652,500           1,452,500                    26-Aug-15
                        0.26                 50,000              50,000                    30-Aug-15
                        0.31                 50,000              50,000                      7-Sep-15
                        0.33                300,000             300,000                      6-Oct-15
                        0.34                100,000             100,000                    16-Sep-15
                        0.42                355,000             355,000                     25-Jan-16
                        0.50                 87,480              87,480                    20-Nov-11
                        0.50                 24,380              24,380                     9-May-12
                        0.50                 10,000              10,000                     17-Jul-12
                        0.50                 80,000              80,000                     1-Nov-12
                        0.50                150,000             150,000                    21-Aug-13
                        0.56              3,965,000           3,965,000                    11-Mar-16
                        0.58                470,000             470,000                    11-Apr-16
                        0.76                450,000             450,000                       4-Jul-16
            Total                        13,903,446          13,703,446

During the quarter ended September 30, 2011 the Company issued 450,000 stock options and had
13,903,446 options outstanding as of September 30, 2011 which could result in issuance of shares.
517,500 options were exercised during the third quarter of 2011.

Outstanding share purchase warrants that could result in the issuance of additional common shares at
the date of this MD&A are as follows:

       Exercise Price          As of September 30, As of November 14,               Expiry Date
            C$                         2011               2011
                        0.20              1,010,000           1,010,000                    22-Apr-14
                        0.20                600,000             600,000                      22-Jul-14
                        0.31             19,950,000          19,950,000                    30-Nov-14
                        0.33             39,419,312          39,419,312                      6-Aug-12
                        0.47              1,600,000           1,600,000                     15-Oct-14
                        0.47             42,810,000          42,810,000                    30-Nov-14
            Total                       105,389,312         105,389,312

During the quarter ended September 30 2011, the number of warrants exercised was 1,880,000 and the
Company received $756,984 (C$739,200) for the warrants exercised. The number of warrants
outstanding as of September 30, 2011 was 105,389,312.




                                                  30
1.15 QUALIFIED PERSONS

Disclosures of a scientific or technical nature in this MD&A in respect of each of the Company’s material
mineral resource properties were prepared by, or under the supervision of, the “qualified persons” (as
that term is defined in National Instrument 43-101 Standards of Disclosure for Mineral Projects (“NI 43-
101”) of the Canadian Securities Administrators) listed below:

Project                   Qualified Person                      Relationship to Mandalay Resources

Costerfield                Chris Gregory                                        Employee

Cerro Bayo                 Ronald Luethe                                        Employee

La Quebrada                Ronald Luethe                                        Employee

1.16 CAUTIONARY STATEMENTS

LANGUAGE REGARDING RESERVES AND RESOURCES

Readers are advised that NI 43-101 requires that each category of mineral reserves and mineral
resources be reported separately. For detailed information related to Company resources and reserves,
readers should refer to the AIF and other continuous disclosure documents filed by the Company since
January 1, 2010, at www.sedar.com

1.17 FORWARD LOOKING STATEMENTS

Certain statements contained in this document constitute “forward-looking statements”. Such forward-
looking statements 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
future results, performance, or achievements expressly stated or implied by such forward-looking
statements. Such factors include, among others, the following:mining industry risks; fluctuations in the
market price of mineral commodities; project development, expansion targets and operational delays;
environmental risks and hazards; requirement of additional financing; health and safety; uncertainty as
to calculations of mineral deposit estimates; marketability; licenses and permits; title matters;
governmental regulation of the mining industry; current global financial conditions; currency risk; no
history of profitability; uninsured risks; competition; repatriation of earnings; properties without known
mineral reserves; dependence upon key management personnel and executives; dependence on major
customers; infrastructure; litigation; potential volatility of market price of common shares; possible
conflicts of interest of directors and officers of the Company; absence of dividends; risk of dilution;
payment obligations relating to properties; instability of political and economic environments; and
integration of acquisitions. Specific reference is made to the AIF for a discussion of some of the factors
underlying forward-looking statements. 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. Accordingly, the reader is cautioned not to place undue reliance on forward-looking
statements.

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