Etruscan Resources Inc. (EET:TSX) - Newswire

Etruscan resources inc. – 2010 FIRST QUARTER

Etruscan Resources Inc. Suite 306, Royal Bank Building 1597 Bedford Highway Halifax, Nova Scotia Canada B4A 1E7 Phone: (902) 832 6700 Toll Free: (877) 465 3674 Fax: (902) 832 6702 Email: [email protected] Website: www.etruscan.com

EEttrruussccaann RReessoouurrcceess IInncc.. ((EEEETT::TTSSXX)) interim report to shareholders management discussion and analysis unaudited consolidated financial statements for the THREE month period ended FEBRUARY 28, 2010 (IN US DOLLARS, UNLESS INDICATED OTHERWISE)


management discussion & analysis ___________________________________________________________________________________ FOR THE THREE MONTH period ENDED FEBRUARY 28, 2010


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General This Management Discussion and Analysis (MD&A) of Etruscan Resources Inc. (Etruscan or the Company) is dated April 14, 2010 and provides an analysis of the financial operating results for the period ended February 28, 2010 as compared to November 30, 2009 and the previous quarters. This MD&A should be read in conjunction with Etruscan’s 2009 audited consolidated financial statements including the related note disclosure, all of which are prepared in accordance with generally accepted accounting principles (GAAP) in Canada. All amounts are in US dollars unless otherwise specified. Individual share capital amounts are noted in Canadian dollars (C$). The financial statements and additional information, including the Company’s Annual Information Form, Certifications of Annual and Interim Filings, press releases and technical reports referenced herein are available on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com under the Company’s name. The common shares of Etruscan are traded on The Toronto Stock Exchange under the symbol “EET”. More extensive information on Etruscan can be found on its website at www.etruscan.com. Overview Etruscan is a gold production and development company that operates the Youga Gold Mine in Burkina Faso through its 90% owned subsidiary, Burkina Mining Company S.A. (BMC). The Company has two gold projects at the feasibility stage; the Agbaou Gold Project in Côte d’Ivoire and the Finkolo Gold Project in Mali. The Company also has gold focused exploration projects covering 9,000 square kilometers in Burkina Faso, Mali, Côte d’Ivoire and Ghana, West Africa. Highlights for the quarter ended February 28, 2010 · Youga Gold Mine produced 18,836 ounces during Q1, 2010. · Operating costs at the Youga Gold Mine declined 18.6% from

US$791 per ounce in Q1 2009 to US$644 per ounce in Q1 2010. · A US$2.8 million drill program commenced to expand the

resources at the Youga Gold Mine · A US $10million private placement was announced which closed

in March 2010. The proceeds are being used to continue the development of the Agbaou Gold project, to advance the Finkolo joint venture and to advance exploration on the Company’s most prospective drill ready targets, the Daoukro Permit, eastern Côte d'Ivoire and the Keniebandi Permit, Mali West.

· A corporate restructuring was announced including the appointment of a new President and Chief Executive Officer and the reorganization of corporate head office and exploration departments.

Objectives for the remainder of 2010 Youga Mine Objectives: · Produce 80,000 ounces of gold at a total cash cost between $550

and $650 per ounce. · Continue exploration on the Youga Gold Belt to identify

additional resources/reserves to increase Youga Mine life. · Continue operational, purchasing/warehousing and maintenance

improvements to increase gold production and further reduce cash operating costs.

Development Project Objectives: · Continue development process at the Agbaou Gold Project

including pursuing the granting of the mining permit and negotiation of a mining convention. In order to improve the economics of the project the Company will commence drilling to increase the proven component of the ore reserves, drilling to increase overall resource and reserves, and condemnation drilling in locations of key facilities. In addition, a review of the project design criteria and re-engineering will take place in order to produce a more robust and financeable project.

· Advance the Finkolo joint venture to feasibility. Exploration Objectives: · Initiate a drilling program on the Dietekro gold anomaly on the

Daoukro Permit in eastern Côte d’Ivoire. · Complete drilling on the Keniebandi Permit in Western Mali. Review of Operations Youga Gold Mine, Burkina Faso The Youga Gold Mine is located in southern Burkina Faso near the border with Ghana. The mine is owned and operated by BMC which is owned 90% by Etruscan and 10% by the State of Burkina Faso. Commercial production and substantial completion was achieved at the Youga Gold Mine effective July 1, 2008. Operational improvements at Youga continued during the first quarter of 2010 with continued focus on increasing equipment availability through improved preventative maintenance, increases in critical spares warehousing, and additional tools, shop equipment and training. During the first quarter of 2010, gold sales totaled 17,191 ounces which generated cash revenues of $19.3 million. All gold sales during the first quarter were transacted at spot gold prices resulting in the Youga Gold Mine generating positive cash flow from operations of $7.1 million. This is a 34% improvement over the previous quarter. The life-of-mine reserves at Youga as at December 31, 2009 calculated using a US$700 per ounce gold price are estimated at 5.9 million tonnes with an average grade of 2.5 grams per tonne containing 474,000 ounces of gold. In addition, 1.5 million tonnes have been classified as marginal ore with an average grade of 0.7 grams per tonne. This material will be stockpiled separately and considered for processing at the end of the mine life. The current marginal stockpile is estimated at 0.2 million tonnes with an average grade of 0.8 grams per tonne. A number of potential satellite gold deposits have already been identified on the Youga mining permit within a three kilometer radius of the existing plant and are being evaluated for conversion into reportable resources and reserves. Exploration drilling of identified near-mine targets and additional reconnaissance exploration has commenced. Furthermore, an exploration program at the Ouaré gold deposit, located 35 kilometers northeast of the Youga Gold Mine, has generated positive results. The Company commenced a US$2.8 million exploration program comprised of 15,000 - 20,000 meters of drilling focused on increasing resources and reserves from satellite deposits in the immediate vicinity of the Youga Gold Mine and on expanding resources at the Ouaré Zone. The objectives of the exploration programs are to extend mine life and justify expansion of through-put capacity at the Youga Gold Mine and to continue to search for new deposits along the Youga Greenstone Belt.



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Non-GAAP financial measures The Company has provided performance measures prepared according to Canadian GAAP as well as certain non-GAAP performance measures. These non-GAAP performance measures do not have any standardized meaning prescribed by GAAP and, therefore, are not necessarily comparable to similar measures presented by other companies. The Company believes that, in addition to conventional measures prepared in accordance with GAAP, certain investors use this information to evaluate the Company’s performance. Accordingly, they are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance

prepared in accordance with GAAP. These non-GAAP performance measures reconciled to reported GAAP measures are outlined below. The Company calculates operating costs per ounce in order to enhance comparability with other mining companies and to monitor its operations. Cash costs are derived from the statement of operations and include operating costs such as mining, milling, refining and transportation, royalties, and administration but exclude amortization, financing, reclamation and mine closure and foreign exchange. Costs are based on production activity.

Qtr ended Feb 28, 2010

USD /oz

Qtr ended Nov 30, 2009

USD /oz

Qtr ended Aug 31, 2009

USD /oz

Qtr ended May 31, 2009

USD /oz

Qtr ended Feb 28, 2009

USD /oz

Gold sold (oz) 17,191 16,510 16,916 14,520 16,160 Gold revenue per financial statements 19,283,442 1,122 17,446,677

1,057

15,946,721

943 13,352,689 920

14,091,833 872

Delivered into hedge commitment - - (109,310)

(7)

(4,071,993)

(241) (3,176,182) (219)

(2,398,452) (148)

19,283,442 1,122 17,337,367 1,050 11,874,728 702 10,176,507 701 11,693,381 724

Gold produced (oz) 18,836 18,927 17,747 13,024 15,181

Direct mining costs 9,097,300 483 11,475,336 606 12,115,893 683 9,989,854 767 9,219,308 607 Mining administration costs 1,746,829 93 1,827,834 97 1,374,089 77 1,921,061 148 1,647,767 108 Third party smelting, refining

and transportation 87,212 5 89,673

5

89,851

5 78,805 6

89,389 6 Inventory adjustment 607,679 32 (1,900,578) (100) (813,386) (46) (753,266) (58) 719,757 47 Cash operating costs 11,539,020 613 11,492,265 608 12,766,447 719 11,236,454 863 11,676,221 768 Royalty expense 583,304 31 518,882 27 358,954 20 301,009 23 355,203 23 Total cash costs 12,122,324 644 12,011,147 635 13,125,401 739 11,537,462 886 12,031,424 791

Financing costs 912,132 1,018,268 1,056,438 1,170,802 1,179,219 Mining amortization 3,670,249 4,605,602 2,957,037 2,111,536 2,408,440 Total expense per financial

statements 16,704,705 17,635,017

17,138,876

14,819,801

15,619,083



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Review of Feasibility Projects Agbaou Gold Project, Côte d’Ivoire The Company’s most advanced development project is the Agbaou Gold Project which is located on the Oumé-Fêtêkro gold belt in Côte d’Ivoire, approximately 200 kilometers northwest of the port city of Abidjan. The Company was granted the Agbaou exploration permit in November, 2003. In September 2009, the Company completed an updated feasibility study for the Agbaou Gold Project titled “Feasibility Update Study Report on the Agbaou Gold Project, Côte d’Ivoire, West Africa” prepared by MDM Engineering International Ltd. and Coffey Mining Pty Ltd. The base case scenario in the updated feasibility study concludes that Agbaou will produce an average of 77,000 ounces of gold per year at a cash operating cost of $516 per ounce over a 9.1year mine life. The feasibility study is based on probable reserves of 10.9 million tonnes of ore with an average grade of 2.1 grams per tonne containing 665,000 ounces. Pit optimizations were carried out using a US$1,000 per ounce gold price. The study proposes open pit mining of three pits using an owner operated mining fleet with the ore to be processed through a conventional gravity-CIL (carbon-in-leach) plant with a design capacity of 1.2 million tonnes per annum. The average gold recovery is 91% and the strip ratio is 7:1. Initial capital costs for the Agbaou Gold Project are estimated to be $106 million. In October 2009, the Feasibility Update Study was submitted to the Government of Côte d’Ivoire together with an application for the issuance of a mining permit for the Agbaou Project. In accordance with the laws of Côte d’Ivoire, a new company must be established to hold the mining permit with the company being owned 85% by the Company, 10% by the State and 5% by SODEMI, the State owned mining company and original holder of the Agbaou exploration permit. In November 2009, in accordance with Cote d’Ivoire environmental laws, the Environmental and Social Impact Study (ESIS) for the Agbaou Gold Project was submitted to the National Agency of Development and Environment (ANDE) which organized the Public Consultation and ESIS review processes. The ESIS was formally approved through official order from the Minister of Environment, Waters and Forests issued in December 2009 and the Company was granted the Environmental Permit to operate the Agbaou Gold Mine in December 2009. Both documents are preliminary requirements to obtain the mining permit. In the first quarter of 2010, the Company invested an additional $0.1 million bringing the total investment in the Agbaou feasibility study to $2.75 million. In the first quarter of 2010 focus has been on pursuing the granting of a mining permit. In order to improve the economics of the project the Company will undertake a drilling program of $3 to $4 million to increase the proven component of the ore reserves, increase overall resource and reserves, and condemnation drilling in locations of key facilities. In addition a review of the project design criteria and re-engineering will take place in order to produce a more robust and financeable project. The 2010 program includes some social work in the Agbaou village focused on the improvement of water and education facilities.

Finkolo Gold Project, Mali The Company’s most advanced project in Mali is the Finkolo Gold Project located on the Syama gold belt, approximately 300 kilometers southeast of Bamako, the capital city of Mali. The Finkolo permit is contiguous with Resolute Mining Limited's (Resolute) Syama permit, which hosts the Syama Gold Mine. Resolute holds a 60% interest in the Finkolo Gold Project and acts as operator and manager of the joint venture. Under the terms of the joint venture agreement Resolute finances all costs of the joint venture until completion of a feasibility study. The Company will reimburse Resolute for its share of joint venture costs from 50% of its share of future project cash flow. In July 2009, Resolute completed an updated resource estimation for the Tabakoroni deposit on the Finkolo permit. At a 1.0 gram per tonne cutoff Resolute reported 6.83 million tonnes of measured and indicated resource at 2.78 grams per tonne gold (610,000 ounces) and a further 3.13 million tonnes of inferred resource at 2.18 grams per tonne gold (220,000 ounces). During the first quarter of 2010, Resolute continued work on the mining feasibility study that will determine the most effective means of exploiting the deposit. Infill reverse circulation drilling for resource estimations was completed along with diamond drilling for pit-wall stability studies and metallurgical test work (comminution, gravity, leach and flotation) continues. Review of Exploration Projects Etruscan significantly reduced its level of exploration activities in 2009 as the Company focused its financial resources on the improvement of production at the Youga Gold Mine. In the first quarter of 2010, exploration outside the Youga gold belt has been focused on commencing drill programs on the Company’s most prospective drill ready targets, the Daoukro Permit, eastern Côte d’Ivoire and the Keniebandi Permit, Mali West. Presently the Company has exploration properties in: Burkina Faso, Côte d’Ivoire, Mali, Ghana and Namibia. In addition the Company’s subsidiary, Etruscan Diamonds Limited, is pursuing various alternatives to realize the value of the Company’s diamond interests in South Africa. Health and Safety During the first quarter of 2010, the Health and Safety programs at Youga continued to encourage safe production. As of February 28, 2010, the Youga Gold Mine achieved 314 days without a lost time incident. Safety, maintenance, operations and stationary/mobile equipment training programs are being conducted on a regular basis and the use of personal protection equipment was re-emphasized in the first quarter. Cases of malaria, typhoid and respiratory illnesses at Youga decreased during the first quarter of 2010 due to preventative programs, more medical staff and greater awareness in the workforce. Environmentally, the Youga facilities operated without any reportable spills during the first quarter of 2010. Tailings storage facility water quality samples remained within guidelines. Numerous water diversion and control structures were constructed before the 2009 rainy season and proved effective in controlling inflow to the tailings storage facility and open pit mines. Site storm drainage and diversion systems were established and constructed in the process facilities area and five emergency



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overflow containment ponds were constructed, the last being completed in the first quarter 2010. Social Report In 2009, the Company established The Etruscan Foundation/La Foundation Etruscan which is a registered charitable foundation in Canada to assist the Company in raising funds for its social initiatives. Etruscan will facilitate the administration of this Foundation ensuring that virtually all of the donations will go towards relieving poverty, advancing education and benefiting local communities in Africa. Near the Youga Mine in Burkina Faso, the Company supports the Youga Medical and Maternity Clinics with regular shipments of medical supplies. With the financial assistance of RMB Resources, a solar powered water supply system was recently installed to provide water to the Youga Medical and Maternity Clinics. During the first quarter of 2010, the Company donated supplies to the Youga Village School, arranged for cleaning services to the Medical and Maternity Clinics, supported Woman’s Day, provided dirt work services to the secondary school at Wangala, upgraded 24 kilometers of road north of Zabre and re-built three stream crossings on the Youga – Zabre road. Major contractors at the Youga Mine joined the Company in establishing a social account with regular monthly contributions.

Consolidated Results of Operations Comparative results Commercial production for the Youga Gold Mine was achieved on July 1, 2008. Accordingly, there is no comparative information for gold revenues and expenses prior to July 2008. Prior to July 1, 2008 the operating and financing costs associated with the Youga Gold Mine were capitalized as preproduction costs to property, plant and equipment. Functional Currency and Reporting Currency

Effective December 1, 2008, the US dollar has become the functional currency of Cayman Burkina Mines Limited (CBML) and BMC which operate the Youga Gold Project. Effective December 1, 2009, the US dollar has also become the functional currency of all other operations of the Company. Previously the functional currency was the Canadian dollar. Factors considered when adopting the US dollar as functional currency include gold sales being denominated in US dollars, the US dollar denominated financing arrangements and financial derivative, and the profile of the operating costs. This change has been applied prospectively with no restatement of prior periods.

At December 1, 2009, the Company also changed its reporting currency from the Canadian dollar to the US dollar. As a result of this change in reporting currency, the financial information of the prior periods has been translated using the current rate method, as if the US dollar had been the reporting currency in prior years. The resulting cumulative exchange difference of $32,744,680 has been reported in accumulated other comprehensive income.

All amounts are in US dollars unless otherwise noted.



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Consolidated Statement of Operations – for the quarters ended

Feb 28, 2010

($)

Nov 30, 2009 ($)

Aug 31, 2009 ($)

May 31, 2009

($)

Feb 28, 2009

($)

Nov 30, 2008

($)

Aug 31, 2008

($)

May 31, 2008

($)

Gold revenue 19,283,442 17,446,677 15,946,721 13,352,689 14,091,833 15,055,919 7,013,292 - Royalty expense 583,304 518,847 358,954 301,009 355,203 409,818 171,289 - 18,700,138 16,927,795 15,587,767 13,051,680 13,736,630 14,646,101 6,842,003 - Expenses Mining operations 9,792,190 9,574,758 11,302,508 9,236,588 9,939,065 7,632,778 5,698,261 - Mine amortization 3,670,249 4,605,602 2,957,307 2,111,536 2,408,440 3,748,469 1,397,209 - Mine administration 1,746,829 1,827,834 1,374,089 1,921,061 1,647,767 2,403,863 1,577,505 - 3,490,870 919,601 (45,867) (217,505) (258,642) 860,991 (1,830,972) - Other expenses (income) General and administrative expenses 3,321,364 2,412,158 1,151,259 1,034,701 1,032,459 1,236,270 1,503,924 2,073,041 Financing costs 687,507 893,645 1,098,418 991,572 1,086,451 988,005 664,713 253,289 Financing costs – accretion and

amortization 339,497 3,062,375 1,328,998 831,207 612,425 401,087 268,449 - Foreign currency (gain) loss (160,745) 47,704 452,897 213,508 457,251 6,129,885 3,065,012 727,161 Stock based compensation 140,000 1,911,970 2,701 25,755 636,219 (89,713) 15,469 1,478,023 Other income (7,599) 12,227 80,089 (6,308) (3,405) (77,748) (63,043) (169,829) Write-off of mineral property 70,947 2,877,681 271,757 1,683,606 287,520 2,750,503 - - Loss for the quarter (900,101) (10,689,159) (4,431,986) (4,991,546) (4,367,562) (10,487,297) (7,285,496) (4,361,685) Gain (loss) on financial derivative

instrument 5,700,000 (23,549,508) 4,118,152 (4,171,594) (25,449,553) 7,500,240 8,792,918 17,964,104 Loss from diamond operations on

care and maintenance (106,838) (242,921) (57,518) (70,804) (131,669) - - - Non-controlling interest in loss from

Ghana write-down and diamond operations 170,000 421,965 247,555 955,420 - 10,646,272 681,708 235,955

Gain on disposal of interest in African GeoMin - - 1,322,345 - - - - -

Write-down of Blue Gum Diamond Project - - - - - (27,086,601) - -

Net income (loss) 4,863,061 (33,668,623) 1,198,548 (8,278,524) (29,948,784) (19,427,387) 2,189,131 13,838,374 Net income (loss) per share 0.01 (0.15) 0.01 (0.05) (0.23) (0.18) 0.02 0.11



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Consolidated results of operations Etruscan’s net income for the first quarter of 2010 was $4.9 million or $0.01 per share compared to a net loss for the year ended November 30, 2009 of $70.6 million or $0.42 per share including a net loss in the first quarter of $30 million or $0.23 per share. In 2010, the first quarter income includes a gain on the financial derivative instrument of $5.7 or $0.01 per share. In 2009, the first quarter loss includes a loss on the financial derivative instrument of $25.4 or $0.20 per share. Cash flow from operations The Youga Gold Mine generated cash flow from operations of $7.1 million in the first quarter of 2010 as compared to $2.4 million during 2009 including $5.3 million in the last quarter of 2009. The cash flow accumulated on a quarterly basis is as follows:

Quarter ended: $ February 28, 2009 (338,043) May 31, 2009 (1,360,955) August 31, 2009 (1,250,674) November 30, 2009 5,326,220 Year ended November 30, 2009 2,376,548

Quarter ended February 28, 2010 7,161,119

Youga Gold Mine revenue Cash revenues from the Youga Gold Mine for the first quarter 2010 aggregated $19.3 million with 17,191 ounces being sold at an average price of $1,122 per ounce. All gold sales during the first quarter were transacted at spot gold prices resulting in the Youga Mine generating positive cash flow from operations of $7.1 million. Cash revenues for the first quarter of 2009 aggregated $14.1 million or $872 per ounce of gold sold. The non-cash revenue adjustment related to the financial derivative for the first quarter $2.4 million ($148 per ounce) for net cash revenue received of $11.7 million (US$724 per ounce). Youga Gold Mine expenses Mine operations expenses for the first quarter of 2010 amounted to $9.8 million as compared to $40.1 million in 2009 including $9.9 million in the first quarter. Mine administration expenses aggregated $1.7 million in the first quarter of 2010 as compared to $6.8 million in 2009 including $1.6 million in the first quarter. During the first quarter of 2010 the Youga Gold Mine produced 18,836 ounces (first quarter 2009 – 15,181 ounces) of gold at a total cash cost of $644 per ounce (first quarter 2009 – $791). During the fourth quarter of 2009 the Youga Mine produced 18,927 ounces of gold at a total cash cost of US$635 per ounce. Amortization expenses for the first quarter of 2010 amount to $3.7 million as compared to $12.1 million in 2009 including $2.4 million in the first quarter.

General and administrative expenses In the first quarter of 2010, the Company incurred general and administrative expenditures of $3.3 million as compared to $5.6 million in 2009 including $1 million in the first quarter. The Company is reorganizing its corporate office and exploration department to streamline operations and reduce overhead costs. As part of this reorganization, the Company is relocating its head office to London, UK and has recognized severance costs of $2 million primarily associated with its corporate office in Halifax. Financing costs The composition of the financing costs is as follows:

Feb 28, 2010 (Qtr)

$

Nov 30, 2009 (Qtr)

$

Feb 28, 2009 (Qtr)

$ Interest on long-term debt – gold 369,307 441,297 634,462 Interest on notes payable - 122,889 - Interest on corporate guarantee 33,490 136,491 - Interest on long-term debt –

diamonds 81,983 (26,373) 266,500 Other financing costs 202,727 219,341 185,489

687,507 893,645 1,086,451

Accretion expense – notes payable - 2,704,745 253,157 Amortization of deferred financing

costs 339,497 357,630 359,268

339,497 3,062,375 612,425 In the first quarter of 2010, the Company incurred financing costs of $0.7 million as compared to $4 million in 2009 including $1.1 million in the first quarter. Interest expense on the Youga long-term debt was $0.4 million in the first quarter of 2010 as compared to $2.4 million in 2009 including $0.7 million in the first quarter. The 2009 expense also included $0.6 million related to the unsecured promissory notes issued during the year as well as $0.3 million relating to deemed interest on the completion guarantee provided to the Industrial Development Corporation of South Africa (IDC) for the Blue Gum Diamond Mine. Accretion expense relating to the issuance of unsecured promissory notes totalled $4.3 million. The notes which aggregated $10 million were issued and then repaid during 2009. Amortization of deferred financing fees was $0.3 million in the first quarter of 2010 as compared to $1.5 million in 2009 including $0.4 million in the first quarter. Other expenses and income Effective December 1, 2009, the Company recognized a change in functional currency for corporate and exploration activities. In the prior year, the Company had recognized a change in functional currency for its gold mining operations. Effective December 1, 2009, the Company recognized a change in its reporting currency for all operations. With the functional and reporting currency both now in US dollars, foreign exchange gains and losses have been minimized. In the first quarter of 2010 the Company incurred a foreign currency gain of



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$0.2 million relating to the Euro and the South African rand against the US dollar. The Company incurred a foreign currency loss of $1.2 million in 2009 including $0.5 million in the first quarter. The Company also incurred a loss of $9.2 million in 2008. In 2009 with the change in the functional currency at the Youga Gold Mine, all foreign currency gains and losses associated with the Youga debt are recorded in the other comprehensive income. The Company issued 0.5 million stock options in the first quarter of 2010 as compared to 10.3 million stock options during 2009 including 4.2 million in the first quarter of 2009. As a result of applying the Black-Scholes option-pricing model, the Company has recorded stock-based compensation expense of $0.1 million in the first quarter of 2010 as compared to $2.6 million in 2009 including $0.7 million in the first quarter of 2009. In the first quarter of 2010 the Company incurred $0.1 million in mineral property write-offs which consisted mostly of property payments in South Africa. In 2009 the Company wrote down its mineral property expenditures by $5.4 million, of which $2.8 million related to the Haber joint venture properties in Ghana, $2 million related to properties under option in Namibia and $0.3 million related to properties in Burkina Faso. In 2008 the Company wrote down its expenditures on most of its diamond exploration properties resulting in a write-down of $1 million and its expenditures on its Mali exploration properties resulting in a write-down of $1.4 million. The loss on diamond operations includes expenditures related to the care and maintenance of the South African diamond operations which aggregated $0.1 million in the first quarter of 2010 as compared to $0.5 million in 2009 including $0.1 in the first quarter. The Company also recorded the non-controlling interest share of the loss of $0.2 million in the first quarter of 2010. In 2009, the Company recorded the non-controlling interest share of the loss of $1.6 million including $0.9 million for diamond operations and $0.7 million for exploration activities in Ghana. In the third quarter of 2009, the Company concluded the sale of its interest in the Samira Hill Gold Mine in Niger to SEMAFO Inc. for US$3 million resulting in an accounting gain of $1.3 million after the reversal of cumulative translation adjustment of $1.7 million which was originally recorded in 2003. Financial Derivative Instrument In early 2007 the Company implemented a gold price protection program for the Youga Gold Project which was a requirement under the $35 million debt facility. The gold price protection program was initially comprised of a combination of bought put options and sold call options whereby 100% of forecast gold production for the first five years of the project (initially 456,102 ounces) was price-protected at a minimum price of $629 per ounce. The put options were funded by writing call options covering 45% of the feasibility study life-of-mine production (initially 246,306 ounces) having a strike price of $700 per ounce. The program required no cash or other margin. As part of the financial restructuring completed in October 2009, the Company completed the cash settlement of 62,236 ounces of the gold hedge commitments at a cost of $23 million. This represented approximately 42% of the Company’s $700 per ounce gold call options resulting in less than 20% of the remaining life-of-mine production

being hedged. The settlement of these hedge commitments was completed to increase the Company’s leverage to rising gold prices. To the end of February 2010 call options aggregating 70,810 ounces were settled with delivery of gold production, 92,492 were settled with cash payments and put options aggregating 239,112 ounces expired unexercised. A total of 83,004 ounces of gold remain hedged at $700 per ounce as of November 30, 2009. The accounting treatment of these financial derivatives requires them to be recorded at fair value. The accounting for the financial derivative instruments resulted in losses being recorded in connection with the cash settlements of call options and the delivery of gold into the call options; since in both cases the settlement occurred when the spot gold price exceeded $700 per ounce. The mark to market valuation of the financial derivative at February 28, 2010 resulted in an unrealized gain for the quarter. The composition of the gain is included in the following table. A further explanation of the items included in the table has also been provided.

Composition of (gain) loss on financial derivative

Note

Qtr ended Feb 28,

2010 $

Year ended Nov 30,

2009 $

Cash settled (a) - 23,000,000 Gold sales (b) - 9,755,938 Change in unrealized loss (gain) (c) (5,700,000)

18,050,000

(5,700,000) 50,805,938

a) In October 2009, the Company completed the cash settlement on 62,236 ounces of the gold hedge commitments at a cost of $23 million. This represented approximately 42% of Etruscan’s $700 per ounce gold call options resulting in less than 20% of the remaining life-of-mine production being hedged.

b) As a result of the accounting treatment for the financial derivative, gold revenue is recorded at the spot gold price on the revenue recognition date. In 2009, the Company delivered into the hedge obligation a total of 45,182 ounces from production realizing a loss of $9.8 million. c) In the first quarter of 2010, the Company recorded a net unrealized gain of $5.7 million (2009 - net unrealized loss of $18.1 million) resulting in a financial derivative liability of $33.7 million at the end of February 2010.

Blue Gum Diamond Operations At the end of 2008, the Company placed the Blue Gum Diamond Mine on care and maintenance due to operating losses, lower than planned production and decreased diamond prices. The Company recorded a write-down of its deferred development costs of $31.6 million based on the amount by which the carrying value exceeded the discounted value of the expected future cash flows. As a result the Company has eliminated the balance of the EDL non-controlling interests ($9.2 million) and the Blue Gum Diamonds Pty Ltd non-controlling interest ($3.9 million). The non-controlling interest in the loss and write-down of diamond operations of $13.6 million includes these amounts together



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with the net gain on restructuring and financing of diamond assets of $0.5 million Liquidity and Capital Resources

Etruscan Resources Inc. Etruscan has historically financed its acquisition, exploration and development of mineral properties and its ongoing operating costs with proceeds from equity subscriptions, debt financing, as well as funding arrangements with other companies. With the Youga Gold Mine now in commercial production the Company also has operating revenues from the sale of gold which are anticipated to be sufficient to fund the Youga Mine operating and financing costs as well as providing funds for other corporate purposes. On October 23, 2009, the Company completed a private placement of a total of 153,123,000 common shares to Endeavour Financial Corporation at a price of C$0.30 per common share for aggregate proceeds to the Company of $43 million. The private placement was part of a comprehensive financial reengineering undertaken by the Company which included a substantial restructuring of the Company’s debt facility provided by RMB Australia Holdings Limited and Macquarie Bank Limited (Youga Lenders) for the Youga Gold Project. $23 million of the private placement proceeds were used to purchase approximately 42% (62,236 ounces) of the Company’s $700 per ounce gold call options resulting in less than 20% of the current Youga gold life-of-mine production being hedged. In November 2009 Endeavour Financial exercised 6,855,760 warrants it had acquired, generating proceeds to Etruscan of $2.7 million. Endeavour presently owns approximately 55% of the issued and outstanding shares of Etruscan. During the first two quarters of 2009, the Company raised $5 million by issuing senior unsecured convertible promissory notes to Conus Partners Inc. and its affiliate and completed a $8.6 million private placement financing with 2190776 Ontario Inc. In May 2009 the Company completed a further $5 million senior unsecured convertible promissory notes financing with these two investors. The Company advanced a significant portion of these proceeds to fund the operations at the Youga Gold Mine as well as debt service. At February 28, 2010, the Company had a consolidated working capital deficiency of $2.9 million as compared to a deficiency of $0.6 million at the end of 2009. The working capital deficiency at February 28, 2010 includes an additional $1.7 million for the current portions of the long-term debt and the financial derivative liability. Available cash at the end of February 2010 was $7.2 million as compared to $9.4 million at the end of fiscal 2009. On February 18, 2010 the Company entered into an engagement letter with Raymond James Limited to act as agent in a private placement by Etruscan of 28,378,378 common shares of the Company at a price of C$0.37 per common share to raise net proceeds of approximately $9.6 million. The offering closed on March 4, 2010. The net proceeds of the offering are being used to initiate and advance exploration programs on the Company’s properties in West Africa and for general corporate purposes.

Outstanding share data As at April 14, 2010, the Company has 366,784,201 common shares outstanding (November 30, 2009 – 338,405,823). For financial statement presentation, the Company nets 488,000 common shares of the Company held by subsidiaries. These shares are held as portfolio investments; however, as required by GAAP, they have been recorded as a reduction to capital stock in the financial statements. As at April 14, 2010, the Company has 38,051,585 common stock purchase warrants and 18,465,000 stock options outstanding. Since the end of February, 2010 the Company has granted 1.62 million stock options with an exercise price of C$0.43 per share. Long-term Debt Etruscan Resources Inc. In the first quarter of 2009, the Company completed a $5 million debt financing for working capital purposes by issuing senior unsecured convertible promissory notes (Dec Notes) to Conus Partners Inc. and its affiliates. The Dec Notes were repayable on December 24, 2010 with interest at the rate of 7% per annum. The Dec Notes and the May Notes (described below) were repaid on October 23, 2009. In accordance with the required accounting for such financial instruments the proceeds from the Dec Notes were allocated to notes payable and the other equity components. An allocation of $1.68 million was recorded to these warrants with $1.35 million and $0.33 million to the A and B warrants respectively. An additional allocation of $0.08 million was made to the conversion option. With the repayment of these notes in the fourth quarter of 2009, the notes payable were accreted back to the original face value. During the year, the Company has recorded accretion expense, relating to the Dec Notes and the May Notes (described below) of $4.3 million which is included in financing costs. The Company also granted 10,430,531 common stock purchase warrants in association with this financing. Each Warrant entitles the holder to purchase one common share of the Company on or before December 24, 2013 at an exercise price of C$0.2915 per common share. On May 28, 2009, the Company completed a second $5 million financing with two major shareholders, 2190776 Ontario Inc. and Conus Partners Inc. (the Lenders), consisting of senior unsecured convertible promissory notes (May Notes) and warrants. The May Notes were repayable on May 28, 2010 with interest at the rate of 10% per annum, calculated and compounded quarterly. As part of the May notes payable financing, Etruscan issued two tranches of warrants to the Lenders. A total of 7,717,933 warrants (representing 50% of the principal of the Notes divided by C$0.3602) (X Warrants) were issued to the Lenders on closing with each X Warrant entitling the holder to purchase one common share of Etruscan on or before May 28, 2011 at an exercise price of C$0.3602. The second tranche of 5,368,918 warrants (Y Warrants) were issued on November 24, 2009 with each Y warrant entitling the holder to purchase one common share of Etruscan on or before May 28, 2011 at an exercise price of C$0.4913.



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The proceeds from these Notes were allocated to notes payable and the other equity components. An allocation of $1.66 million was recorded to the X and Y warrants. An additional allocation of $0.9 million was made to the conversion option. Youga Gold Project A $35 million debt facility was provided to the Company by RMB Australia Holdings Limited (RMB) and Macquarie Bank Limited (Macquarie) for purposes of developing the Youga Gold Mine. In the first quarter of 2008, the Company completed and drew down a subordinated project debt financing of $7.5 million from RMB and Macquarie. The net proceeds were used to fund the completion of the Youga Gold Project. In 2008 the Company repaid $4.5 million. In 2009, the Company repaid an additional $5 million and the banks converted $3 million to Etruscan shares resulting in a balance owing of $30 million at the end of 2009. The Youga debt facility is structured as a full recourse facility to the Company. Standard project finance security provisions apply. Initial draw down under the facility was subject to the Company satisfying a number of conditions precedent including the implementation of a gold price protection program. This loan is repayable on a quarterly basis over a 3-year term commencing December 31, 2010, with interest at LIBOR plus 5%. On a quarterly basis, the RMB/Macquarie debt is subject to cash management conditions requiring that Youga cash reserves in excess of $5 million must be remitted to the lenders to reduce the outstanding amount of the debt. The fuel supply contract at the Youga Gold Mine is with Total Burkina (Total). Under the provisions of the contract, Total was required to install infrastructure for the storage and distribution of fuel at the mine site. This facility was commissioned in the second quarter of 2009 and the Company is required to repay Total for the infrastructure cost over a five year period from the date of commissioning. In 2009, the Company has recorded this financing obligation at $0.9 million. Blue Gum Diamond Project In 2008, the Company’s 35% owned subsidiary, Blue Gum Diamonds (Pty) Limited, completed a loan from the Industrial Development Corporation of South Africa (IDC) in the amount of R15 million bearing interest at South African prime (as at February 28, 2010 – 10%) plus 0.5%. This loan was repayable in quarterly instalments of R882,350 ($0.1 million) plus interest commencing on August 1, 2008. The first scheduled payment was made and subsequently the IDC agreed to defer all repayments of principal and interest on the loan until January 1, 2010. The loan is secured by a notarial bond over all of the moveable property and effects of Blue Gum Diamonds (Pty) Limited as well as a pledge of the Company’s shares of Blue Gum Diamonds (Pty) Limited. As at February 28, 2010, the outstanding principal amount was R14.1 million ($1.8 million). On December 5, 2007, Etruscan Diamonds concluded an agreement with Mogopa Blue Gum (Pty) Ltd. (Mogopa) to transfer a 26% interest in the Tirisano Diamond Mine to Mogopa. Mogopa is the Black Economic Empowerment (BEE) partner for the mine as required by South African mineral legislation. Mogopa is also Etruscan Diamonds’ BEE partner on the Hartbeestlaagte and Zwartrand properties which, together with the Tirisano Diamond Mine, constitute the Blue Gum Diamond Project.

On December 5, 2007, Mogopa completed a financing in the form of a preference share investment of R25.35 million from the IDC to finance the acquisition of a 26% interest in the Tirisano Diamond Mine for R26 million (C$3.9 million). Mogopa and Etruscan Diamonds each contributed its share of these properties, 26% and 74% respectively, to Blue Gum Diamonds (Pty) Ltd. (Blue Gum). Mogopa’s 26% interest in Blue Gum Diamonds (Pty) Limited was recorded as non-controlling interest and at the end of 2008, this amount has been reversed as the non-controlling interest’s share of the write-down in the Blue Gum Project. Etruscan Resources Inc. provided a completion guarantee to the IDC guaranteeing the Blue Gum IDC debt and the performance of Mogopa under the preference share subscription agreement, including redemption of the R25.35 million of preference shares on the fifth anniversary of the date of issue and payment of dividends yielding a real after tax interest rate of return of 8% in accordance with the terms set out in preference share subscription agreement. The guarantee is only effective once the Youga bank debt has been repaid. As at February 28, 2010, the Company has recorded the obligation under this completion guarantee at its fair value of $4.1 million. In November 2009, Blue Gum Diamonds (Pty) Limited completed a loan from the IDC in the amount of R5.5 million loan. The proceeds were used to fund the payment of suppliers and the continued care and maintenance of the Blue Gum Diamond Project. The loan bears interest at 15.5 % and is repayable in 12 quarterly installments of R458,400 commencing on January 1, 2010. However, this payment has not been made. Long-term debt repayment The aggregate amount of principal repayments required in each of the next five years to meet retirement provisions on long-term debt, is summarized as follows:

$000’s Year ending February 28, 2011 5,400

2012 10,500 2013 14,500 2014 7,400 37,800

Related Party Transactions In the first quarter of 2010, the Company incurred advisory fees and costs aggregating $122,355 (2009 - $407,545) for services provided by Endeavour Financial International Corporation. An affiliated company of Endeavour owns 55% of the issued common shares of the Company. As at February 28, 2010 the amount payable to Endeavour totalled $24,936 (November 30, 2009 - $367,544). Disclosure Controls and Procedures Disclosure controls and procedures have been designed by the Company to ensure that financial information disclosed by the Company in the MD&A, the consolidated financial statements and the related annual filings of the Company is properly recorded, processed, summarized and reported to its Officers and the Board of Directors. The Chief Executive Officer and Chief Financial Officer believe such controls and procedures are effective in providing reasonable assurance



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that material items requiring disclosure are identified and reported in a timely manner. Internal Control over Financial Reporting The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has designed, established and is maintaining a system of internal control over financial reporting. Under the supervision of the CFO, the Company’s internal control over financial reporting is a process designed to provide reasonable assurance that the financial information prepared by the Company for external purposes is reliable and has been recorded, processed and reported in an accurate and timely manner and in accordance with Canadian GAAP. The Company’s controls include policies and procedures that: · pertain 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 Canadian GAAP; 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.

As a result of the Company commencing commercial production at its Youga Gold Project, effective July 1, 2008, the Company implemented additional controls and procedures surrounding these gold producing activities. Except for these changes, there were no other changes in the Company’s internal control over financial reporting during the past two fiscal years that materially affected or are reasonably likely to materially affect its internal control over financial reporting. The Company’s management, including the CEO and CFO, believe that any disclosure controls and procedures or internal controls 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 control. The design of any systems 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.

Recent Accounting Pronouncements Effective for interim and annual financial statements relating to years beginning on or after December 1, 2008, the Company adopted new CICA accounting standards regarding inventories and going concern. These standards were adopted on a prospective basis without restatement of prior periods. For a summary of these new accounting standards and the resulting effects thereof, refer to note 3 in the consolidated financial statements. This note also summarizes future new accounting standards which may be applicable to the Company. Critical Accounting Estimates The preparation of the Company’s financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported results. Estimates and assumptions are based on historical experience, guidelines and practices within the mining industry or other business and are reviewed by management on an ongoing basis. Actual results could differ from those based on such estimates and assumptions. Management considers the following accounting estimates and assumptions to be the most critical to understanding the Company’s financial statements and the uncertainties that could impact its financial condition, results of operations and cash flows. Property, plant and equipment and mineral reserve estimates The Company’s mineral reserves are its best estimate of product that can be economically and legally extracted from its mining property. The Company’s mineral reserve estimates are calculated by qualified persons in accordance with the definitions and guidelines adopted by the Canadian Institutes of Mining, Metallurgy and Petroleum. These estimates are developed after taking into account a range of factors including quantities, ore grades, production techniques and recovery rates, exchange rates, forecast commodity prices and production costs. The estimates are supported by geological studies and drilling samples to determine the quantity and grade of the ore body. Significant judgment is required to generate an estimate based on the geological data available. The Company’s reserve estimates may have a great impact on the information contained in the Company’s financial statements. A large portion of the Company’s property, plant and equipment is amortized using the units of production method over the expected operation life of the mine based on estimated recoverable ounces of gold. Estimated recoverable ounces of gold include proven and probable reserves and non-reserved material when sufficient objective evidence exists that the non-reserve material will be processed. The calculation of the units-of-production rate of amortization and, accordingly, the annual amortization charge to operations, could be materially affected to the extent that actual production in the future is different from current forecasts of production based on estimated mineral reserves. These factors could include an expansion of estimated mineral reserves through exploration activities, differences between estimated and actual cash costs of mining, due to differences in grade, metal recovery rates and changes to foreign currency exchange and commodity prices from the assumptions used in the estimation of mineral reserves. The accounting estimates related to amortization are critical accounting estimates and are influenced by the Company’s estimates of mineral reserves. Amortization charges are adjusted



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prospectively based on annual year-end assessments of Company’s mineral reserves. Mineral properties and related deferred costs Exploration and development costs relating to mineral properties are deferred until the properties are brought into commercial production, at which time they are amortized on the unit of production basis, or until the properties are abandoned or sold or management determines that the mineral property is not economically viable, at which time the deferred costs are written off. The Company has maintained title to certain properties that have been written off. Any proceeds relating to these properties will be recorded in income as received. Management’s estimate of mineral prices, recoverable proven and probable reserves and operating and capital costs are subject to certain risks and uncertainties that may affect the recoverability of mineral properties and related deferred costs. Although management has made its best estimate of these factors, it is possible that material changes could occur which may adversely affect management’s estimate of the net cash flows to be generated from its properties. Although the Company has taken steps to verify title to mineral properties in which it has an interest, according to the industry standards for the current stage of exploration and development of such properties, these procedures do not guarantee the Company’s title. Such properties may be subject to prior undetected agreements or transfers and title may be affected by such defects.

Asset retirement obligation and reclamation Mining operations involve activities that have a significant effect on the area surrounding such operations. The Company’s operations, development and exploration activities are also subject to various laws and regulations governing the protection of the environment. Potential changes in the laws and regulations could have an adverse effect on the actual environmental and reclamation costs that the Company could incur in the future. The Company has estimated its ultimate legal obligation with respect to reclamation and closure costs. Provisions are made for the costs of decommissioning and site rehabilitation when the related environmental disturbance takes place. To calculate the fair value of these obligations, the Company discounted the projected cash flows for the corresponding time periods over which these costs would be incurred. Provisions are recognized at the net present value of future expected costs which are accreted to full value over time through charges to income. The inflation rates and discount rates the Company used to calculate the fair value of the Company’s asset retirement obligations are critical factors in the calculation of future value and discounted present value costs. The accounting estimates related to reclamation and closure costs are critical accounting estimates. The Company will not incur most of these costs for a number of years, requiring it to make estimates over a relatively long period. Reclamation and closure laws and regulations could change in the future or circumstances affecting the Company’s operations could change, either of which could result in significant changes to its current plans and future costs. Calculating the fair value of the Company’s asset retirement obligations requires management to assign probabilities to projected cash flows, to make long-term assumptions about inflation rates, to determine its long-term credit-adjusted, risk-free interest rates and to determine market risk premiums that are appropriate for its operations over long periods of time. Given

the magnitude of its estimated reclamation and closure costs, changes in any or all of these estimates could have a material impact on the Company’s financial condition and results of operations. The provision recognized represents management’s best estimate of the costs that will be incurred, but significant judgment is required as many of these will not crystallize until the end of the life of the mine. Estimates are reviewed annually and are based on current regulatory requirements and the estimated useful life of mines. Engineering and feasibility studies are undertaken periodically; however significant changes in the estimates of contamination, restoration standards and techniques will result in changes to provisions from period to period. The final cost of currently recognized rehabilitation provisions may be higher or lower than currently provided for based on the range of engineering estimates evaluated by management.

International Financial Reporting Standards (“IFRS”) In 2006, the Canadian Accounting Standards Board (AcSB) published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB’s strategic plan outlines the convergence of Canadian GAAP with IFRS over an expected five year transitional period. In February 2008 the AcSB announced that 2011 is the changeover date for publicly-listed companies to adopt IFRS, replacing Canada’s own GAAP. The date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The company’s first annual financial statement under IFRS will be made for the year ending November 30, 2012, the first interim period will be the 3 months to February 28, 2011. The company’s date of transition to IFRS will be December 01, 2010 which is the beginning of the comparative year in the 1st set of IFRS financial statements. The Company will conclude transition planning in Q2 2010 and establish an IFRS conversion team to lead the conversion project. The conversion project will include three phases: 1- scoping and planning, 2- detailed assessment, 3- implementation and 4- post implementation. The scoping and planning phase involves establishing a project team and organizational structure, including oversight of the process; this includes a project management plan, stakeholder analysis and communication strategy. This phase also entails an initial assessment of the key areas where IFRS transition may have a significant impact and present significant challenges. The Company is currently preparing an initial diagnostic of the key areas in which adjustments may be required and is planning on updating the initial assessment for more recent developments as well as incorporating an analysis of the transition exceptions and exemptions available under IFRS 1 “First Time Adoption of International Financial Reporting Standards” as well as an assessment of the accounting policy choices available to the Company upon adoption. The second phase, detailed assessment, will involve technical analysis that will result in understanding potential impacts, quantification of alternatives where there are accounting policy choices, detailed analysis and decisions taken regarding IFRS 1 exemptions and exceptions available to the Company and the drafting of accounting policies in accordance with IFRS. In addition this will result in identifying resource and training requirements, processes for preparing financial statements, and establishing IT system requirements. The Company intends to disclose its progress in accomplishing the phase 2 goals in its



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Management Discussion and Analysis documents throughout 2010 as the detailed assessment phase is completed. During the implementation phase, we will identify and carry out the implementation requirements to effect management’s accounting choices, develop sample financial statements, implement business and internal control requirements, calculate the opening balance sheet at December 1, 2010 and other transitional reconciliations and disclosure requirements. The last phase, post implementation, will involve continuous monitoring of changes in IFRS throughout and continuing with the development and maintenance of IFRS competencies by addressing training requirements at various levels of the organization. Risk and Uncertainties Under Canadian reporting requirements, management of the Company is required to identify and comment on significant risks and uncertainties associated with its business activities. Management has identified the following potentially significant inherent risks and uncertainties that it considers to be particularly unique to its operations and business plans in the upcoming years. Additional Funding Requirements To fund its growth, to date the Company has been reliant upon securing the necessary capital through bank financing, and public and private offerings of equity and debt. The Company may require additional funds to finance further exploration, development and production activities as well as other corporate opportunities. The sources of external financing that the Company may use for these purposes include project or bank financing, or public or private offerings of equity or debt. In addition, the Company may enter into strategic alliances or decide to sell certain property interests and the Company may utilize any one or more of these alternatives. The ability of the Company to arrange such transactions in the future will depend in part upon obtaining the required consents from its lenders, prevailing capital market conditions, as well as the business success of the Company. Recent market events and conditions, including disruptions in the Canadian, U.S. and international credit markets and other financial systems and the deterioration of the Canadian, U.S. and global economic conditions, could, among other things, impede access to capital or increase the cost of capital, which would have an adverse effect on the Company’s ability to fund its working capital and other capital requirements. Since 2007, the U.S. credit markets have experienced serious disruption due to a deterioration in residential property values, defaults and delinquencies in the residential mortgage market (particularly, sub-prime and non-prime mortgages) and a decline in the credit quality of mortgage-backed securities. These conditions worsened in 2008 and continued in 2009 contributing to reduced confidence in the broader U.S. and global credit and financial markets and resulting in the collapse of, and government intervention in, major banks and other financial institutions. Notwithstanding various actions by the U.S. and other governments, concerns about the general condition of the capital markets, financial instruments and financial institutions persists and stock markets have declined substantially. These market disruptions have had a material adverse impact on companies in many sectors of the economy and have limited their access to capital and credit. These disruptions could, among other things, make it more difficult for the Company to obtain, or increase its cost of obtaining, capital and financing for its operations.

The market price of the common shares of the Company may be volatile. Market price fluctuations in the common shares may be due to the Company’s operating results, failing to meet expectations of securities analysts or investors in any quarter, downward revision in securities analysts’ estimates, government regulatory action, adverse change in general market conditions or economic trends, acquisitions, dispositions or other material public announcements by the Company or its competitors. In addition, the market price for securities in the stock markets, including the TSX, recently experienced significant price and trading fluctuations. These fluctuations have resulted in volatility in the market prices of securities that often has been unrelated or disproportionate to changes in operating performance. These broad market fluctuations may adversely affect the market price of the common shares of the Company. Exploration and Development The exploration and development of gold deposits involves significant risks, which even a combination of careful evaluation, experience and knowledge may not eliminate. While the discovery of a mineable deposit may result in substantial rewards, few properties which are explored are ultimately developed into producing mines. Major expenses may be required to establish ore reserves, to develop metallurgical processes and to construct mining and processing facilities at a particular site. It is impossible to ensure that the current exploration programs planned by the Company will result in a profitable commercial mining operation, and significant capital investment is required to achieve commercial production from successful exploration efforts. There is no certainty that exploration expenditures made by the Company will result in discoveries of commercial mineable quantities. Mineral Reserve and Mineral Resource Estimates Mineral reserve and mineral resource estimates are imprecise and depend partially on statistical inference drawn from drilling and other data, which may prove to be unreliable. Future production could differ dramatically from mineral reserve estimates. Production The Company currently has one operating mine, the Youga Gold Mine. No assurance can be given that the intended or expected production schedules or the estimated direct operating cash costs will be achieved at the Company’s mining operations. The Company’s level of production is dependent on a number of factors including the grade of reserves, recovery and plant throughput. The cash cost of production at any particular mining location is frequently subject to great variation from one year to the next due to a number of factors such as changing waste to ore ratios, ore grade, metallurgy, labour costs, and the cost of supplies and services, such as electricity and fuel. Many factors may cause delays or cost increases including labour issues, disruptions in power and mechanical failures. These variances can have a negative impact on the profitability of operations.



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Depletion of Mineral Reserves The Company must continually replace mining reserves depleted by production to maintain production levels over the long term. There is no assurance that the Company’s current or future exploration programs will result in any new commercial mining operations or yield new reserves to replace or expand current reserves. Outside Contractor Risks The drill blast and mining operations at the Company’s Youga Gold Project are conducted by an outside contractor. As a result, the Company’s operations at Youga are subject to a number of risks including reduced control over the aspects of the operations that are the responsibility of the contractor, failure of a contractor to perform under its agreement with the Company, inability to replace the contractor if either party terminates the contract, interruption of operations in the event the contractor ceases operations due to insolvency or other unforeseen events, failure of the contractor to comply with applicable legal and regulatory requirements and failure of the contractor to properly manage its workforce resulting in labor unrest or other employment issues. Remote Locations The Company operates in remote locations and depends on an uninterrupted flow of materials, supplies and services to those locations. Any interruptions to the procurement of equipment or the flow of materials, supplies and services to the Company’s properties could have an adverse impact on its future cash flows, earnings, results of operations and financial condition. Environmental Risks and other Hazards All phases of the Company’s operations are subject to environmental regulation in the various jurisdictions in which the Company operates. Environmental legislation in many countries is evolving and the trend has been toward stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and increasing responsibility for companies and their officers, directors and employees. Compliance with environmental laws and regulations may require significant capital outlays on behalf of the Company and may cause material changes or delays in the Company’s intended activities. There can be no assurance that future changes in environmental regulations will not adversely affect the Company’s business, and it is possible that future changes in these laws or regulations could have a significant adverse impact on some portion of the Company’s business, causing the Company to re-evaluate those activities at that time. Mining involves various other types of risks and hazards, including: industrial accidents; metallurgical and other processing problems; unusual or unexpected rock formations; structural cave-ins or slides; flooding; fires; metals losses; and periodic interruptions due to inclement or hazardous weather conditions. These risks could result in damage to, or destruction of, mineral properties, production facilities or other properties, personal injury, delays in mining, increased production costs, monetary losses and possible legal liability.

The Company uses sodium cyanide in its gold production at the Youga Gold Mine. Should sodium cyanide leak or otherwise be discharged from the containment system, the Company may be subject to liability for clean up work. The Company carries insurance to protect against certain risks in such amounts as it considers adequate. Risks not insured include environmental pollution and mine flooding. Therefore, the Company may suffer a material adverse impact on its business if it incurs losses related to any significant events that are not covered by its insurance policies. Reclamation With regard to the Youga Gold Mine, recent legislation has been adopted that provides that mining companies exploiting a mine in Burkina Faso must establish an environmental preservation and rehabilitation fund trust account (EPRF) and make annual contributions equal to the total forecasted rehabilitation budget as stated in the project’s environmental impact assessment divided by the number of years forming the mine life. The Company has established an EPRF account for the Youga Project. With regard to the Blue Gum Diamond Project, Etruscan Diamonds has provided reclamation bonding to the Department of Mines and Energy in South Africa in accordance with legislative requirements. There is no assurance that any funds or bonding provided will be sufficient to complete required reclamation work or that the Company will not be required to fund additional costs related to reclamation that could have a material adverse effect on the Company’s financial position. Political Risks The Company believes that the governments of the countries in which it is presently operating support the development of their natural resources by foreign companies. There is no assurance however that future political and economic conditions in the countries in which the Company has properties will not result in their governments adopting different policies respecting foreign ownership of mineral resources, taxation, rates of exchange, environmental protection, labour relations, repatriation of income or return of capital, restrictions on production, price controls, export controls, expropriation of property, foreign investment, maintenance of claims and mine safety. The possibility that a future government in any of these countries may adopt substantially different policies, which might extend to the expropriation of assets, cannot be ruled out. The Company’s Agbaou gold exploration permit is located in Côte d’Ivoire, which is currently experiencing a period of political unrest. Company management continues to believe that the current political situation in Côte d’Ivoire does not have a significant impact on the long-term recoverability of its investments in the Agbaou property; however, in the event the current political unrest should continue or worsen, it may have a negative effect on the recoverability of this investment.



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The political situation in South Africa introduces a certain degree of risk with respect to the Company’s activities. The Government of South Africa exercises control over such matters as exploration and mining licensing, permitting, exporting and taxation, which may adversely impact on the Company’s ability to carry out exploration, development and mining activities. Mineral Legislation The business of mineral exploration, development, mining and processing is subject to various national and local laws and plans relating to permitting and maintenance of title, environmental consents, taxation, employee relations, health and safety, royalties, land acquisitions and other matters. There is a risk that the necessary permits, consents, authorizations and agreements to implement planned exploration, development or mining may not be obtained under conditions or within the time frames that make such plans economic, that applicable laws, regulations or the governing authorities will change or that such changes will result in additional material expenditures or time delays. The Company applied for the Agbaou mining permit in October 2009 and the application is still pending. While the Company believes the Agbaou mining permit will be granted, there is no guarantee this will be the case and no certainty on timing of any such grant. Economic Risk The profitability of the Company’s operations may be significantly affected by changes in the market price of gold and diamonds. The prices of gold and diamonds fluctuate, and are affected by numerous factors beyond the control of the Company including the level of interest rates, expectations with respect to the rate of inflation, world supply of gold and diamonds, stability of exchange rates, global and regional political and economic conditions, supply and demand for jewelry, and sale by central banks and other holders, speculators and producers response to any of the foregoing factors. Gold is currently sold in US dollars and although the majority of the costs of the Company’s gold operations are in US dollars, certain costs are incurred in other currencies and subject to exchange rate fluctuation. The price of gold and diamonds are denominated in United States dollars. The operating costs of the Company’s diamond operations are denominated in South African rand. Some of the operating costs of the Company’s gold operations are denominated in currencies other than the US dollar. Fluctuations in these currencies and the United States dollar against the Canadian dollar could have a material effect on the Company’s financial results, which are denominated and reported in Canadian dollars. In respect of financial assets, the Company’s policy is to invest cash at floating rates of interest and cash reserves are to be maintained in cash or cash equivalents in order to maintain liquidity, while achieving a satisfactory return for shareholders. Fluctuations in interest rates therefore impact on the value of cash equivalents and short term investments. As a borrower, the Company is subject to the risk of increases in interest rates. The Company has long-term debts bearing interest at LIBOR-based rates and South African prime-based rates.

The Company is entitled to obtain reimbursement from the government of Burkina Faso for value added taxes paid in Burkina Faso. If the Company is unable to obtain this reimbursement this will affect its financial operating results.

Hedging and Commodity Prices The profitability of the Company is directly related to the market price of the commodities it produces. The Company can reduce price risk by using hedging tools for a portion or all of its gold production. The main hedging tools available to protect against price risk are forward contracts and put options. Various strategies are available using these tools. The Company has employed a hedging arrangement for a portion of its production from the Youga Gold Project. When gold prices rise above the price at which future production has been committed under the Company’s existing hedge arrangement, the Company will not benefit fully from the price increases. Title to Mineral Holdings The Company requires licenses and permits from various governmental authorities. The Company believes that it holds all necessary licenses and permits under applicable laws and regulation in respect of its properties and that it is presently complying in all material respects with the terms of such licenses and permits. Such licenses and permits, however, are subject to change in various circumstances. There can be no guarantee that the Company will be able to obtain or maintain all necessary licenses and permits that may be required to explore and develop its properties, commence construction or operation of mining facilities on properties under exploration or development, or to maintain continued operations that economically justify the cost. The validity of ownership of property holdings can be uncertain and may be contested. Although the Company has attempted to acquire satisfactory title to its properties, risk exists that some titles, particularly titles to undeveloped properties, may be defective. Competition The mining industry is intensely competitive. Significant competition exists for the acquisition of properties producing or capable of producing gold or other metals. The Company may be at a competitive disadvantage in acquiring additional mining properties because it must compete with other individuals and companies, many of which have greater financial resources, operational experience and technical capabilities than the Company. The Company may also encounter increasing competition from other mining companies in its efforts to hire experienced mining professionals. Increased competition could adversely affect the Company’s ability to attract necessary capital funding or acquire suitable producing properties or prospects for mineral exploration in the future. Acquisitions The Company undertakes evaluations of opportunities to acquire additional assets and businesses. Any resultant acquisitions may be significant in size, may change the scale of the Company’s business and may expose the Company to new geographic, political, operating, financial and geological risks. The Company’s success in its acquisition activities depends on its ability to identify suitable acquisition candidates, acquire them on acceptable terms and integrate their operation successfully. Any acquisitions would be accompanied by risks such as an ore body proving to be below expectations, the difficulty of assimilating the operations and personnel of any acquired companies, and the potential of unknown liabilities associated with acquired assets and businesses. There can be no assurance that the Company will be successful in overcoming these risks or any other problems encountered in connection with such acquisitions.



15

15

Foreign Assets Substantial portions of the assets of the Company are located in jurisdictions outside of Canada. As a result, it may be difficult for investors resident in Canada or other jurisdictions to enforce judgments obtained against the Company in Canada if the damages awarded exceed the realizable value of the Company’s Canadian assets. Dependence on Key Personnel The Company is dependent on a relatively small number of key personnel. The Company currently does not have key person insurance on these individuals. Due to the Company’s relatively small size, the loss of these persons or the Company’s inability to attract and retain additional highly skilled employees required for the development of the Company’s activities may have a material adverse effect on the Company’s business or future operations. In addition, the Company anticipates that as it brings its mineral properties into production and as the Company acquires additional mineral rights, the Company will experience significant growth in its operations. The Company expects this growth to create new positions and responsibilities for management and technical personnel and to increase demands on its operating and financial systems. There can be no assurance that the Company will successfully meet these demands and effectively attract and retain additional qualified personnel to manage its anticipated growth. The failure to attract such qualified personnel to manage growth effectively could have a material adverse effect on the Company’s business, financial condition and results of operations.

Company’s Directors may have Conflicts of Interests Certain of the Company’s directors also serve as directors and/or officers of other companies involved in natural resource exploration, development and production and involved in providing services to the Company. Consequently there exists the possibility of such directors to be in a position of conflict. Specifically, one of the Company’s directors, Neil Woodyer is an officer of Endeavour Financial. Endeavour Financial has been retained by the Company on an exclusive basis at industry competitive rates to provide general financial advisory services with respect to the strategic development of the Company.

Caution on Forward-Looking Statements

This Management Discussion and Analysis contains certain forward-looking statements which 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 expressed or implied by such forward-looking statements. Forward-looking statements may include statements regarding exploration results and budgets, mineral reserve and resource estimates, work programs, capital expenditures, mine operating costs, production targets and timetables, future commercial production, strategic plans, market price of precious metals or other statements that are not statements of fact. Although the Company believes the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Various factors that may affect future results include, but are not limited to: fluctuations in market prices of precious metals; foreign currency exchange fluctuations; risks relating to mining exploration and development including reserve estimation and costs and timing of commercial production; requirements for additional financing; political and regulatory risks, and other risks and uncertainties. Accordingly, readers should not place undue reliance on forward-looking statements.

Unaudited consolidated balance sheets as at February 28, 2010 and NOVEMBER 30, 2009 (Us$ - note 4)

Etruscan resources inc. – 2010 first quarter

16

February 28, 2010

$

November 30, 2009

$ Assets Current assets Cash and cash equivalents 7,214,085 9,411,270 Amounts receivable 5,014,382 4,201,986 Available-for-sale securities 101,912 132,994 Deposits and prepaid expenses 3,252,620 1,525,410 Inventory (note 5) 16,486,613 15,428,243 32,069,612 30,699,903 Property, plant and equipment (note 6) 87,357,022 89,425,880 Reclamation deposits 1,435,569 1,424,528 Mineral properties and related deferred costs (note 7) 42,179,654 40,250,895 163,041,857 161,801,206 Liabilities Current liabilities Accounts payable and accrued liabilities 18,961,336 17,122,284 Current portion of long-term debt (note 8) 5,400,000 2,930,000 Current portion of financial derivative instrument (note 9) 10,600,000 11,255,000 34,961,336 31,307,284 Long-term debt (note 8) 30,311,948 32,618,288 Financial derivative instrument (note 9) 23,050,000 28,095,000 Provision for reclamation (note 10) 4,188,194 4,101,834 92,511,478 96,122,406 Non-controlling interest in subsidiary company (note 11) 486,505 656,505 Commitments and contingency (note 12) Shareholders’ Equity Capital stock (note 13) 273,702,344 273,702,344 Warrants (note 13) 9,810,925 9,810,925 Contributed surplus (note 13) 12,348,786 12,208,786 295,862,055 295,722,055 Accumulated other comprehensive income (note 14) 40,077,202 40,058,684 Deficit (265,895,383) (270,758,444) (225,818,181) (230,699,760) 70,043,874 65,022,295 163,041,857 161,801,206

Unaudited consolidated statements of OPERATIONS for the three months ended February 28, 2010 and 2009 (US$)


17

Three months ended February

28, 2010


28, 2009 $ $ Gold revenue 19,283,442 14,091,833 Royalty expense 583,304 355,203 18,700,138 13,736,630 Expenses Mining operations 9,792.190 9,939,065 Mine amortization 3,670,249 2,408,440 Mine administration 1,746,829 1,647,767 3,490,870 (258,642) Other expenses (income) General and administrative 3,321,364 1,032,459 Financing costs 687,507 1,086,451 Financing costs – accretion and amortization 339,497 612,425 Foreign currency exchange loss (gain) (160,745) 457,251 Stock based compensation 140,000 636,219 Other loss (income) (7,599) (3,405) Write-down of mineral property (note 7) 70,947 287,520 4,390,971 4,108,920 Loss for the period before the following (900,101) (4,367,562) Gain (loss) on financial derivative instruments (note 9) 5,700,000 (25,449,553) Diamond operations on care and maintenance (106,838) (131,669) Non-controlling interest in loss (note 11) 170,000 -

Net earnings (loss) for the period 4,863,061 (29,948,784) Earnings (loss) per share - Basic 0.0144 (0.23) Weighted average number of shares – Basic 338,405,823 132,338,126 Earnings (loss) per share – Diluted 0.0136 (0.23) Weighted average number of shares – Diluted 358,559,027 132,338,126

Unaudited consolidated statements of deficit and comprehensive Income (loss) for the three months ended February 28, 2010 and 2009 (US$)


18


28, 2010


28, 2009 $ $

Consolidated Deficit Deficit – Beginning of period (270,758,444) (164,843,324) Net income (loss) for the period 4,863,061 (29,948,784) Deficit – End of period (265,895,383) (194,792,108) Consolidated Comprehensive Income (Loss) Net income (loss) for the period 4,863,061 (29,948,784) Other comprehensive income (loss) (note 14) Change in cumulative translation adjustment 32,744,680 12,199,530 Change in unrealized loss on available for sale securities 18,518 59,527 Comprehensive income (loss) for the period 37,626,259 (17,689,727)

Unaudited CONSOLIDATED statements of cash flows for the three months ended February 28, 2010 and 2009 (US$)


19


28, 2010


28, 2009 $ $

Cash provided by (used in)

Operating activities Net income (loss) for the period 4,863,061 (29,948,784) Charges (credits) to income not affecting cash

Loss (gain) on sale of assets 1,046 - Amortization and accretion 4,166,524 3,170,945 Foreign exchange loss (gain) on revaluation of long-term debt and

reclamation deposits (99,199) 363,777 Interest on completion guarantee 33,490 - Write-down of mineral properties 70,947 287,520 Unrealized (gain) loss on financial derivative instrument (5,700,000) 23,043,760 Non-controlling interest in loss and write-down of diamond operations and

net gain on restructuring and financing of Etruscan Diamonds Limited (170,000) - Stock-based compensation expense 140,000 636,219

3,305,869 (2,446,563) Net change in non-cash working capital balances related to operations

Increase in accounts receivable and deposits and prepaid expenses (2,539,606) (7,628) Increase in inventory (1,058,370) (292,696) Increase (decrease) in accounts payable and accrued liabilities 1,828,033 (2,599,085)

1,535,926 (5,345,972) Financing activities Proceeds from issuance of capital stock and warrants - 4,724,391 Proceeds from long-term debt - 4,919,113 Repayment of long-term debt (56,315) (2,494,144) (56,315) 7,149,360 Investing activities Acquisition of property, plant and equipment (1,766,121) (1,219,366) Proceeds on disposal of assets 48,555 470,033 Expenditures on mineral properties and related deferred costs – net (1,885,397) (1,342,788) Reclamation deposits (73,833) (4,581) Cumulative translation adjustment - (272,530) (3,676,796) (2,369,233) Net change in cash and cash equivalents during the period (2,197,185) (565,844) Cash and cash equivalents – Beginning of period 9,411,270 5,627,335

Cash and cash equivalents – End of period 7,214,085 5,061,491 Supplemental cash flow information (note 18)

notes to UNAUDITED consolidated financial statements for the three month period ended February 28, 2010 (US$ UNLESS INDICATED OTHERWISE)


20 1. Nature of operations

Etruscan is a gold production and development company that operates the Youga Gold Mine in Burkina Faso through its 90% owned subsidiary, Burkina Mining Company S.A. (BMC). The Company has two gold projects at the feasibility stage; the Agbaou Gold Project in Côte d’Ivoire and the Finkolo Gold Project in Mali. The Company also has exploration projects covering 9,000 square kilometers in Burkina Faso, Mali, Côte d’Ivoire, West Africa. The common shares of the Company trade on the Toronto Stock Exchange under the symbol “EET” In 2009 and 2008, the Company incurred significant losses and negative operating cash flow from operations. In the first quarter of 2010, the Company has generated net income of $4.7 million and has an accumulated deficit of $266 million. The 2010 first quarter results, as well as the 2009 results have been significantly impacted by the financial restructuring during the fourth quarter of 2009. The Company completed a comprehensive financial reengineering facilitated by a US$43 million strategic investment by Endeavour Financial, which allowed the elimination of 42% of the $700 per ounce gold hedge relating to the Youga mine as well as restructuring of the Youga debt facility.

In addition, the Youga Gold Mine has improved its production by 30% in the second half of 2009, improved its financial performance in the last four consecutive quarters, and is now generating positive cash flow. This trend has continued in the first quarter of 2010. Based on these results and on the go-forward plan developed, management is of the opinion that the going concern assumption is appropriate. These consolidated financial statements have been prepared on a going concern basis. Should this assumption not be justified, adjustments would be required to the carrying value and the classification of assets and liabilities.

2. Significant accounting policies Financial statement presentation These financial statements have been prepared in accordance with Canadian generally accepted accounting principles. All amounts are expressed in Canadian dollars, unless otherwise stated.

Consolidation These consolidated financial statements include the accounts of Etruscan Resources Incorporated and its subsidiaries, Cayman Burkina Mines Limited (100%) (CBML), Burkina Mining Company S.A. (90%) (BMC), Etruscan Resources Burkina Faso S.A. (100%), ER Burkina Exploration (100%), Etruscan Resources Côte d’Ivoire SARL (100%), Etruscan Resources Bermuda Ltd. (100%), Etruscan Resources Bermuda (Mali) Ltd. (100%), Etruscan Resources Mali SARL (100%), Etruscan Mali SARL (100%), Etruscan Resources Namibia (Pty) Ltd. (100%), Etruscan Resources Ghana Ltd. (100%), Etruscan

Haber Joint Ventures Limited (50%), Etruscan Resources Benin SARL (100%), Etruscan Diamonds Limited (47.34%) (EDL), Etruscan Diamonds Bermuda Ltd. (47.34%), Etruscan Diamonds (Pty) Ltd. (Etruscan Diamonds) (47.34%), Blue Gum Diamonds (Pty) Limited (35%), Secor GeoMin Mining Development Corporation Incorporated (Secor GeoMin) (90%), Hackett River Resources Inc. (100% excluding 10 Class B non-voting shares), 2313057 Nova Scotia Limited (100%), 2454056 Nova Scotia Limited (100%), and 3001635 Nova Scotia Limited (100%).

Management estimates The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenditures during the reported period. The more significant estimates that the Company was required to make relate to the recoverability of its investments in the Youga Gold Project, assessing impairment of its mineral properties, estimating reclamation obligations, and estimating stock-based compensation expense. Actual results could differ from those reported.

Cash and cash equivalents Cash and cash equivalents include cash on hand, balances with banks and highly liquid temporary investments. In order to limit its exposure, the Company deposits these funds with large financial institutions and limits maturity dates to 30 days or less.

Inventories Inventory includes doré bars, gold-in-circuit, ore stockpile, spare parts and supplies, and refined gold. Refined gold, doré bars, gold-in-circuit and ore stockpiles are stated at the lower of production cost and net realizable value. Spare parts and supplies inventories are stated at the lower of average cost and net realizable value. Ore stockpiles and gold-in-circuit inventories represent costs that are incurred in the process of converting mineralized ores into partially refined precious metals, or doré bars, consisting primarily of gold by value which must be refined off-site to return saleable refined gold. The process includes milling the ore, treatment with chemical solutions to dissolve precious metals and channeling the resulting gold-bearing solutions to a plant for recovery of gold in the form of doré bars. Inventory of diamonds is valued at the lower of cost and market value.

notes to unaudited consolidated financial statements for the three month period ended February 28, 2010 (US$)


21 Property, plant & equipment Property (including costs associated with the exploration and development of operating mines) plant and equipment is recorded at cost. The cost of property, plant and equipment that is acquired, constructed, or developed over time includes carrying costs directly attributable to the acquisition, construction, or development activity, such as interest costs. Capitalization of carrying costs ceases when an item of property, plant and equipment is substantially complete and ready for productive use. Net revenue and operating expense derived from property, plant and equipment prior to substantial completion and readiness for use is included in the cost. Amortization is calculated on a straight line over five years or the unit-of-production based on ounces produced. Where a unit-of-production methodology is used, the assets are amortized to their estimated residual value over the useful life defined by management’s best estimate of economically viable reserves in the current mine plan. Equipment relating to exploration and the corporate office is recorded at cost. Amortization is provided over the estimated useful life using a 20% declining balance basis. Estimates of residual values and useful lives are reassessed annually, and any change in estimate is taken into account in the determination of future amortization charges. When events or changes in circumstances occur that indicate the carrying value of an asset may not be recoverable an impairment test is performed. A loss is recognized to the extent the carrying amount is not recoverable and exceeds fair value. The impairment loss is measured by the amount by which the carrying value exceeds fair value.

Mineral properties and related deferred costs Exploration and development costs relating to mineral properties are deferred until the properties are brought into commercial production, at which time they are amortized on the unit-of-production basis, or until the properties are abandoned or sold or management determines that the mineral property is not economically viable, at which time the deferred costs are written down to fair value. The Company has maintained title to certain properties that have been written off. Any proceeds relating to these properties will be recorded in income as received. Management’s estimate of mineral prices, recoverable proven and probable reserves and operating and capital costs are subject to certain risks and uncertainties that may affect the recoverability of mineral properties and related deferred costs. Although management has made its best estimate of these factors, it is possible that material changes could occur which may adversely affect management’s estimate of the net cash flows to be generated from its properties.

Although the Company has taken steps to verify title to mineral properties in which it has an interest, according to the industry standards for the current stage of exploration and development of such properties, these procedures do not guarantee the Company’s title. Such properties may be subject to prior undetected agreements or transfers and title may be affected by such defects.

The recoverability of the amounts shown for the investment in the mineral properties is, among other things, dependent upon the discovery of economically recoverable reserves, securing and maintaining title and beneficial interest in the properties and obtaining the necessary financing to complete the development and upon future profitable production or proceeds from the disposition thereof.

Reclamation of mining properties Mining operations involve activities that have a significant effect on the area surrounding such operations. The Company’s operating, development and exploration activities are also subject to various laws and regulations governing the protection of the environment.

The Company has estimated its ultimate legal obligation with respect to reclamation and closure costs. Provisions are made for the costs of decommissioning and site rehabilitation when the related environmental disturbance takes place and are capitalized into the cost of the related asset. To calculate the fair value of these obligations, the Company discounted the projected cash flows for the corresponding time periods over which these costs would be incurred. Provisions are recognized at the net present value of future expected costs which are accreted to full value over time through charges to income. The capitalized cost is amortized on a unit-of-production basis.

Revenue recognition The Company records revenue when persuasive evidence of an arrangement exists, delivery has occurred under the terms of the arrangement, the price is fixed or determinable and collectability is reasonably assured. Revenue recorded in the financial statements is primarily from the sale of gold and is recognized when refined metal is delivered to the purchaser, which occurs when title and risks have been transferred to the purchaser. The sales price and quantity is fixed on the delivery date. Incidental revenues from the sale of by-products, such as silver, are included in revenue. These incidental revenues are not significant.

Earnings (loss) per common share Loss per common share is calculated based on the weighted average number of common shares outstanding during the year. The Company follows the “treasury stock” method in the calculation of diluted earnings per share. When the Company has losses, the exercise of outstanding stock options and warrants are included in this calculation as it would be anti-dilutive.



22

Income taxes The Company uses the liability method of accounting for income taxes. Under this method, current income taxes are recognized for the estimated income taxes payable for the current year. Future income tax assets and liabilities are recognized for temporary differences between the tax and accounting bases of assets and liabilities as well as for the benefit of losses available to be carried forward to future years for tax purposes using the substantively enacted tax rates that will be in effect when the differences are expected to reverse or when losses are expected to be utilized. Future income tax assets are evaluated and, if realization is not considered more likely than not, a valuation allowance is provided.

Translation of foreign currencies The Company has both integrated foreign operations and self sustaining foreign operations. For integrated foreign operations, monetary assets and liabilities are translated at the exchange rate in effect at the balance sheet date and non-monetary assets and liabilities at the exchange rates in effect at the time of acquisition or issue. Revenues and expenses are translated at rates approximating exchange rates in effect at the time of the transactions. Exchange gains or losses arising on translation are included in income or loss for the year.

Stock-based compensation The Company has a stock option plan which is outlined in note 13. The granting of stock options to non-employees and direct awards of stock to employees and non-employees is accounted for using the fair value method of accounting. Consideration paid for shares on exercise of the options is credited to capital stock.

Financial Instruments This standard prescribes when a financial asset, financial liability, or non-financial derivative is to be recognized on the balance sheet and whether fair value or cost-based measures are used. This standard also specifies how financial instrument gains and losses are to be measured. Derivative contracts and embedded derivatives in non-derivative contracts are to be recorded on the balance sheet at their respective fair values, with any marked to market adjustments included in net income. The Company has implemented the following classifications: ¾ Cash and cash equivalents and restricted cash are classified

as “financial assets held for trading”. These financial assets are measured at fair value and the gains/losses resulting from the evaluation at the end of each period are recorded in operating results.

¾ Securities are classified as “available for sale”. These financial assets are measured at fair value, with unrealized gains and losses recognized in “Other Comprehensive Income”.

¾ Amounts receivable are classified as “loans and receivables”. After their initial fair value measurement, they are measured at amortized cost using the effective interest method.

¾ Accounts payable and long-term debt are classified as “other financial liabilities” and are initially measured at fair value after which they are measured at amortized cost net of financing costs, using the effective interest method.

¾ Financial derivative instruments are classified as “financial liabilities held for trading”. These financial liabilities are measured at fair value and the gains/losses resulting from the evaluation at the end of each period are recorded in operating results.

¾ Transaction costs are capitalized to the cost of financial assets and liabilities classified as other than held for trading.



23

3. Future accounting changes Business Combinations - section 1582

In January 2009, the CICA issued CICA Handbook Section 1582, Business Combinations which replaced Section 1581, Business Combinations, and Section 1601, Consolidated Financial Statements, and Section 1602, Non-controlling Interests, both of which replace Section 1600, Consolidated Financial Statements. The revised standards were issued with the intent of harmonizing the standards with IFRS. Section 1582, Business Combinations, requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction; establish the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; and disclose to investors and other users all of the information required to evaluate and understand the nature and financial effect of the business combination. The section applies prospectively to business combinations with an acquisition date after the beginning of the first annual reporting period beginning on or after January 1, 2011. Section 1602, Non-controlling Interests requires all entities to report non-controlling (minority) interests as equity in consolidated financial statements. Transactions between an entity and non-controlling interests are treated as equity transactions. Section 1602 is applied retrospectively. Section 1601 and 1602 apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. International financial reporting standards In 2006, the Canadian Accounting Standards Board (AcSB) published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The

AcSB’s strategic plan outlines the convergence of Canadian GAAP with IFRS over an expected five year transitional period. In February 2008 the AcSB announced that 2011 is the changeover date for publicly-listed companies to adopt IFRS, replacing Canada’s own GAAP. The date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Accordingly, the Company will be required to adopt IFRS on December 1, 2011. The transition will require the restatement for comparative purposes of amounts reported by the Company for the year ending November 30, 2011 and the balance sheet as at December 1, 2010.

4. Functional currency and reporting currency

Effective December 1, 2008, the US dollar has become the functional currency of CBML and BMC which operate the Youga Gold Project. Effective December 1, 2009, the US dollar has also become the functional currency of all other operations of the Company. Previously the functional currency was the Canadian dollar. Factors considered when adopting the US dollar as functional currency include gold sales being denominated in US dollars, the US dollar denominated financing arrangements and financial derivative and the profile of the operating costs. In accordance with CICA Handbook Section 1651, Foreign Currency Translation, this change has been applied prospectively with no restatement of prior periods. In addition, at December 1, 2009, the Company has changed its reporting currency from the Canadian dollar to the US dollar. As a result of this change in reporting currency, the financial information of the prior periods has been translated using the current rate method, as if the US dollar had been the reporting currency in prior years. The resulting cumulative exchange difference of $32,744,680 has been reported in accumulated other comprehensive income (note 14).



24

5. Inventory

As at February 28,

2010 $

As at November 30,

2009 $

Dore bars 5,130,191 3,754,706 Gold in circuit 647,642 2,607,812 Ore stockpiles 398,883 421,877 Spare parts and supplies 10,082,306 8,416,257 Diamonds 227,591 227,591 16,486,613 15,428,243

The cost of inventory that was charged to operations represents expenses of mining operations.

6. Property, plant and equipment

As at February 28, 2010

Cost

$

Accumulated amortization

$ Net

$ Property including deferred exploration and

development related to the operating mine 31,363,852 6,282,247 25,081,605 Plant and equipment 67,827,003 12,993,519 54,833,484 Mobile equipment 6,151,998 1,918,361 4,233,637 Land and buildings 3,263,959 647,242 2,616,717 Office equipment and leaseholds 1,567,976 976,397 591,579

110,174,788 22,817,766 87,357,022

As at November 30, 2009

Cost

$

Accumulated amortization

$ Net

$ Property including deferred exploration and

development related to the operating mine 29,933,925 5,259,453 24,674,472 Plant and equipment 67,577,791 10,555,614 57,022,177 Mobile equipment 6,094,852 1,681,300 4,413,552 Land and buildings 3,234,128 543,245 2,690,883 Office equipment and leaseholds 1,567,975 943,179 624,796

108,408,671 18,982,791 89,425,880



25

7. Mineral properties and related deferred cost

For the period ended February 28, 2010 Property description

Balance November 30,

2009 $

Acquisitions and expenditures

during the period $

Write-down $

Balance February 28,

2010 $

Gold properties, Africa - Burkina Faso 6,185,958 719,462 - 6,905,420 Côte d’Ivoire 12,425,975 391,116 - 12,817,091 Mali 13,588,028 218,230 - 13,806,258 Ghana 3,177,495 220,676 (4,722) 3,393,449 Namibia 3,717,686 338,279 (10,341) 4,045,624 Diamond properties, South Africa 1,155,753 111,943 (55,884) 1,211,812

40,250,895 1,999,706 (70,947) 42,179,654

For the year ended November 30, 2009 Property description


2008 $

Acquisitions and expenditures

during the period $

Write-down $


2009 $

Gold properties, Africa Burkina Faso 5,394,865 1,137,211 (346,118) 6,185,958 Côte d’Ivoire 11,366,519 1,059,456 - 12,425,975 Mali 12,828,760 931,325 (172,057) 13,588,028 Ghana 5,236,184 780,309 (2,838,998) 3,177,495 Namibia 4,468,253 1,233,593 (1,984,160) 3,717,686 Benin - 82,502 (82,502) Diamond properties, South Africa 1,163,020 8,182 (15,449) 1,155,753

40,457,601 5,232,578 (5,439,284) 40,250,895

Carrying value of mineral properties The Company’s recorded amount of its mineral properties is accumulated based upon costs incurred to date, net of recoveries and write-downs. This approach to recording mineral properties is consistent with industry standards, EIC 174 and the Company believes that this represents its best estimate of the appropriate carrying amount for each property. The economic feasibility of each property is assessed regularly

by management based upon current geological exploration results, independent geological reports, surrounding exploration and development activities, ongoing assessment of the political environment in the countries where properties are located and the availability of funding. When a property is deemed economically unfeasible, the cost thereof is written down to fair value.



26

8. Long-term debt

Note

As at Feb 28,

2010 $

As at Nov 30,

2009 $

RMB Australia Holdings Limited and Macquarie Bank Limited - Youga debt facility (a) 30,000,000 30,000,000

Financing of fuel storage and distribution system (b) 728,337 857,062

Deferred financing costs (2,068,610) (2,408,108) 28,659,727 28,448,954 Industrial Development

Corporation of South Africa (IDC)

Mogopa Blue Gum (Pty) Limited (Mogopa) (c) 4,100,000 4,066,510

Blue Gum Diamonds (Pty) Limited (d) 1,823,819 1,895,282

Blue Gum Diamonds (Pty) Limited (e) 719,500 723,545

Wesbank (f) 362,276 363,776 Nedbank Limited (g) 46,626 50,221 7,052,221 7,099,334 35,711,948 35,548,288 Less current portion (5,400,000) (2,930,000) 30,311,948 32,618,288

a) On November 30, 2006, the Company executed a debt facility agreement for $35 million with RMB Australia Holdings Limited (RMB) and Macquarie Bank Limited (Macquarie) for purposes of developing the Youga Gold Mine. In the first quarter of 2008, the Company completed and drew down subordinated project debt financing for $7.5 million from RMB and Macquarie. The Youga debt facility is structured as a full recourse facility to the Company and is secured by all of Etruscan’s interests in the Youga Gold Project. Standard project finance security provisions apply. The Company repaid a total of $9.5 million and in 2009 the lenders converted $3 million to equity (12,261,610 common shares) resulting in a balance owing of $30 million. This loan is repayable on a quarterly basis over a 3-year term commencing December 31, 2010 with interest at USD 3-month LIBOR (as at February 28, 2010 – 0.2506%) plus 5%. On a quarterly basis, the RMB/Macquarie debt is subject to cash management conditions requiring that Youga cash reserves in excess of $5 million must be remitted to the lenders to reduce the outstanding amount of the debt.

b) The fuel supply contract at the Youga Gold Mine is with Total Burkina (Total). Under the provisions of the contract, Total was required to install infrastructure for the storage and distribution of fuel at the mine site. This facility was commissioned in the second quarter of 2009 and the Company is required to repay Total for the infrastructure cost over a five year period from the date of commissioning. The Company recorded this financing obligation at $0.9 million. The outstanding balance is €533,000 which is repayable in blended monthly payments averaging €12,000 per month over the next four years. The fuel storage assets are pledged as security for this indebtedness. c) Etruscan Resources Inc. has provided a completion guarantee to the Industrial Development Corporation of South Africa (IDC) guaranteeing the Blue Gum IDC debt and the performance of Mogopa under the preference share subscription agreement, including redemption of the R25.35 million of preference shares on the fifth anniversary of the date of issue and payment of dividends yielding a real after tax interest rate of return of 8%, in accordance with the terms set out in the preference share subscription agreement. The guarantee is only effective once the senior debt outstanding on the Youga Gold Project is paid in full and remains in place until the Blue Gum Project achieves project completion as defined in the completion guarantee which includes arranging sufficient funding for the expansion of the Blue Gum Project to 250,000 cubic meters per month. The Company recorded the obligation under this completion guarantee at the fair value of the redemption value and the accrued dividends totalling R30.4 million as at February 28, 2010. d) The Company’s 35% owned subsidiary, Blue Gum Diamonds (Pty) Limited concluded a loan from the IDC. The outstanding balance of this loan is R14.1 million bearing interest at South African prime (as at February 28, 2010 – 10%) plus 0.5%. The loan was repayable in quarterly instalments of R882,350 ($115,000) plus interest commencing on August 1, 2008. The first payment was made in August; however, no further payments have been made. In February, 2009 the IDC agreed to defer all repayments of principal and interest on the loan until January 1, 2010. However, this payment was not made. The loan is secured by a notarial bond over all of moveable property and effects of Blue Gum Diamonds (Pty) Limited as well as a pledge of the Company’s shares of Blue Gum Diamonds (Pty) Limited. e) In the fourth quarter of 2009, the Company’s 35% owned subsidiary, Blue Gum Diamonds (Pty) Limited concluded a loan from the IDC. The outstanding balance of this loan is R5.5 million bearing interest at South African prime (as at November 30, 2009 – 10.5%) plus 5%. The loan is repayable in quarterly instalments of R458,400 ($60,000) plus interest commencing on January 1, 2010. However, this payment was not made.



27

f) The Company’s 47.34% owned subsidiary, Etruscan Diamonds (Pty) Limited, concluded loans with Wesbank, a division of FirstRand Limited. The outstanding balance of these loans is R2.7 million bearing interest at South African prime and repayable over 24 months with a blended monthly instalment of R61,976 ($8,000). Two front-end loaders are pledged as security for these loans. g) The Company’s 47.34% owned subsidiary, Etruscan Diamonds (Pty) Limited, concluded a loan with Nedbank Limited, the balance of which is R0.4 million bearing interest at South African prime less 1%, repayable over thirteen years with a blended monthly instalment of R8,885 ($1,200) and is secured by a first mortgage bond over land and buildings. h) The aggregate amount of principal repayments required in each of the next five years to meet retirement provisions on the long-term debt, is approximately as follows: $ 000’s Year ending February, 2011 5,400

2012 10,500 2013 14,500 2014 7,400 37,800

9. Financial derivative instrument

The Company has implemented a gold price protection program for the Youga Gold Project which was a requirement under the $35 million debt facility. The gold price protection program is comprised of a combination of bought put options and sold call options whereby 100% of forecast gold production for the first five years of the project (initially 456,102 ounces) is price-protected at a minimum price of $629 per ounce. The put options were funded by writing call options covering 45% of the feasibility study life-of-mine production (initially 246,306 ounces) having a strike price of $700 per ounce. The program required no cash or other margin. To the end of February 2010 call options aggregating 70,810 ounces were settled with delivery of gold production, 92,492 were settled with cash payments and put options aggregating 239,112 ounces expired unexercised. The following table details the options contracts as at February 28, 2010:

Year

Bought Put

Options (ounces)

Price per

ounce

Sold Call

Options (ounces)

Price per

ounce

Fair Value $000’s

2010 93,846 $629 23,442 $700 10,600 2011 90,276 $629 36,030 $700 14,500 2012 58,974 $629 23,532 $700 8,550

243,096 $629 83,004 $700 33,650

Composition of (gain) loss on financial derivative

Note

Feb 28, 2010

(period) $

Nov 30, 2009

(year) $

Cash settled (a) - 23,000,000 Gold sales (b) - 9,755,938 Change in unrealized loss (gain) (c) (5,700,000)

18,050,000

(5,700,000) 50,805,938 a) In October 2009, the Company completed the cash settlement on 62,236 ounces of the gold hedge commitments at a cost of $23 million. This represented approximately 42% of Etruscan’s $700 per ounce gold call options resulting in less than 20% of the remaining life-of-mine production being hedged.

b) As a result of the accounting treatment for the financial derivative, gold revenue is recorded at the spot gold price on the revenue recognition date. In 2009, the Company delivered into the hedge obligation a total of 45,182 ounces from production realizing a loss of $9.8 million.

c) In the first quarter of 2010, the Company recorded a net unrealized gain of $5.7 million (2009 - net unrealized loss of $18.05 million) resulting in a financial derivative liability of $33.65 million. The marked to market valuation of the Youga gold financial derivative liability is summarized as follows:

Spot price of Gold

$

Youga Gold Financial

Derivative Liability $ 000’s

Balance – November 30, 2008 815 21,300 Change in the year ended November 30, 2009 18,050 Balance – November 30, 2009 1,176 39,350 Change in the period ended February 28, 2010 (5,700) Balance – February 28, 2010 1,108 33,650 Less current portion (10,600) 23,050 d) The fair value of the Youga gold financial derivative as at March 31, 2010 with a spot gold price of US$1,116 per ounce is a liability of $35.1 million.



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10. Provision for reclamation

Note

As at Feb 28,

2010 $

As at Nov 30,

2009 $

Youga Gold Project (a) 2,261,190 2,218,000 Blue Gum Diamond Project (b) 1,927,004 1,883,834 4,188,194 4,101,834 a) In May 2008 the Company assessed the reclamation liability for the Youga Gold Project at $1 million. The feasibility study established the reclamation amount at $1.5 million at the end of the mine life. As at November 30, 2008, the Company estimated that a reclamation liability of $1 million had been incurred. In August 2009, an independent study undertaken by Socrege Burkina Faso estimated a reclamation amount of $1.5 million to the Ministry of Environment and Mines of Burkina Faso. As a result of this updated information, the Company has updated its provision for reclamation. The fair value of this future reclamation liability has been calculated by adjusting this amount out to 2016 for a projected Burkina Faso rate of inflation of 10.7% which results in an undiscounted amount of $2.4 million. This amount has been discounted by applying a discount rate of 5.4% resulting in a present value of future reclamation liability in the amount of $2.2 million. The liability will be accreted over the projected life of the mine to accumulate the estimated liability of $2.4 million in 2016. For the first quarter of 2010, accretion expense of $43,190 (year ended November 30, 2009 - $61,470) was recorded increasing the Blue Gum reclamation provision to $2.26 million. b) In April 2008 the Company reassessed the reclamation liability for the Hartbeestlaagte and the Tirisano Diamond Mine which together with the Zwartrand property, constitute the Blue Gum Diamond Project. Bonding for the reclamation amount of R15 million ($1.8 million) has been submitted to the South African Department of Mines and Energy. The fair value of this future reclamation liability has been calculated by adjusting this amount out to 2015 for a projected South African rate of inflation of 7% which results in an undiscounted amount of R24.1 million ($3 million). This amount has been discounted by applying a discount rate of 9% resulting in a present value of future reclamation liability in the amount of R13.2 million ($1.6 million) at the beginning of April 2008. The fair value amount will be accreted over the projected life of the mine to accumulate the estimated liability of R24.1 million ($3 million) in 2015. For the first quarter of 2010, accretion expense of $43,170 (year ended November 30, 2009 - $143,746) was recorded increasing the Blue Gum reclamation provision to $1.9 million.

11. Investment in subsidiary companies and non-controlling interest

Etruscan Diamonds Limited The composition of the non-controlling interest in EDL is as follows:

As at Feb 28,

2010 $

As at Nov 30,

2009 $

Investment in Etruscan Diamonds Limited – net 591,063 591,063

Investment in Etruscan Diamonds Limited by creditor settlement 1,058,427 1,058,427

1,649,490 1,649,490 Accumulated non-controlling

interest in loss – Beginning of year (992,985) -

Non-controlling interest in loss for the year (170,000) (992,985)

Accumulated non-controlling interest in loss – End of year (1,162,985) (992,985)

Non-controlling interest in Etruscan

Diamonds Limited 486,505 656,505 In the second quarter of 2009, EDL concluded a private placement financing for proceeds of $591,063 and settled supplier accounts of approximately $1.1 million by issuance of 2,077,207 shares of EDL which reduced the Company’s effective ownership in EDL from 52% to 47.34%. The balance is held by third parties including employees and their affiliates who own an aggregate of 5.4 % of EDL. In the frist quarter of 2010, the Company incurred a loss of $325,000 and has recorded the non-controlling interest in the loss from diamond operations at $170,000. In 2009, the Company incurred a loss of $2.4 million and has recorded the non-controlling interest in the loss from diamond operations at $992,985.



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12. Commitments and contingency Youga Gold Project There is one major contract in place at the Youga Gold Mine. PW International Ltd. (PW) is providing drill and blasting services and load and hauling services. The term of the PW contract is from January 1, 2007 to December 31, 2012. Under the provisions of the contract, PW is required to drill and blast a minimum of 3.2 million bank cubic meters (BCM) of rock per annum at a base cost of $2.252 per BCM, to be adjusted on an annual basis over the contract term. The annual commitment is approximately $7.2 million. PW is also required to load and haul approximately 3.2 BCM of ore and waste per annum. The average annual commitment is $12 million.

On October 19, 2009 the Company provided a guarantee to BNP Paribas guaranteeing the obligations of PW Ghana Limited under a loan facility between PW Ghana Limited and BNP Paribas in the principal amount of €2,218,850. The loan proceeds were used to acquire drill equipment used by PW International Ltd. to carry out drill and blast activities at the Youga Gold Mine.

13. Capital stock

Authorized capital stock Unlimited number of common shares without nominal or par value.

Issued

Number of shares

Ascribed value

$ Balance – November 30, 2008 132,338,126 215,955,821 Issued in 2009

For cash, net of issue costs 179,438,789 48,699,699 Conversion of debt and interest 19,673,148 5,478,338 For cash, pursuant to warrant

agreements, net of costs 6,855,760 2,692,962 Fair value of warrants at date of

issuance - 844,000 For cash pursuant to stock option

plan 100,000 31,524 Balance – November 30, 2009 338,405,823 273,702,344 There have been no capital stock transactions in the first quarter of 2010. Subsequent to February 28, 2010, the Company issued 28,378,378 common shares at a price of C$0.37 for net proceeds of $9.6 million.

Treasury stock During 2007, subsidiaries of Etruscan Resources Inc., acquired 488,000 common shares of the Company at a cost of $276,445. These shares are held as portfolio investments; however, as required by generally accepted accounting principles, have been recorded as a reduction to capital stock. Warrants

Number of warrants

Ascribed value

$ Balance – November 30, 2008 13,999,222 7,479,150 Issued in conjunction with the Dec

2008 unsecured convertible promissory notes financing (a) 10,430,531 1,350,000

Issued in conjunction with restructuring of debt repayment schedule 1,500,000 380,000

Expired during the year (1,000,000) (1,307,786) Issued with the private placement

financing in March 2009 6,890,741 1,093,561 Issued in conjunction with the May

2009 unsecured convertible promissory notes financing (b) 13,086,851 1,660,000

Exercised during the year (6,855,760) (844,000) Balance – November 30, 2009 38,051,585 9,810,925 There have been no warrant transactions in 2010. A summary of the Company’s common share purchase warrants outstanding as at February 28, 2010 is as follows:

Expiry Date

Exercise price

C$

Number of warrants

July 15, 2010 0.55 4,665,741 November 2010 TSX - EET.WT 4.00 6,727,500 May 28, 2011 0.36 3,087,173 May 28, 2011 0.49 5,368,918 August 2011 TSX – EET.WT.A 1.85 4,819,500 February 2012 0.36 1,500,000 November 2012 0.49 1,452,222 December 2013 0.29 10,430,531

38,051,585



30

a) As part of the convertible promissory notes (Dec Notes) financing in December 2008 with Conus Partners Inc. and its affiliates (Lenders), Etruscan agreed to issue to the Lenders two tranches of warrants. A total of 10,430,531 warrants representing 50% of the principal of the Notes were issued to the Lenders on closing (A Warrants). Each A Warrant entitles the holder to purchase one common share of Etruscan on or before December 24, 2013 at an exercise price of C$0.2915 per common share. If the Notes were not repaid by December 24, 2009, the Lenders were entitled to a second tranche of warrants (B Warrants), equal to 50% of any principal and interest outstanding on the Notes at that time divided by the five day volume weighted average trading price (vwap) of the common shares of Etruscan on the TSX immediately prior to the first anniversary of the Notes. In accordance with the required accounting for such financial instruments the proceeds from the Dec Notes were allocated to notes payable and the other equity components. An allocation of $1.68 million was recorded to these warrants with $1.35 million and $0.33 million to the A and B warrants respectively. An additional allocation of $0.08 million was made to the conversion option. With the repayment of these notes in the fourth quarter of 2009, the B warrants were not issued. As a result, the $0.33 million of note proceeds previously allocated to the B warrants will be transferred to contributed surplus. The amount of $0.08 million allocated to the conversion option was also transferred to contributed surplus. The notes payable were accreted back to the original face value with the repayment of the notes in the fourth quarter of 2009. During the year, the Company has recorded accretion expense, relating to these notes and the notes described below, of $4.3 million which is included in financing costs. b) As part of the May notes payable financing, Etruscan issued two tranches of warrants to the Lenders. A total of 7,717,933 warrants (representing 50% of the principal of the Notes divided by C$0.3602) (X Warrants) were issued to the Lenders on closing with each X Warrant entitling the holder to purchase one common share of Etruscan on or before May 28, 2011 at an exercise price of C$0.3602. The second tranche of 5,368,918 warrants (Y Warrants) were issued on November 24, 2009 with each Y warrant entitling the holder to purchase one common share of Etruscan on or before May 28, 2011 at an exercise price of C$0.4913. In accordance with the required accounting for such financial instruments the proceeds from these Notes were allocated to notes payable and the other equity components. An allocation of $1.66 million was recorded to the X and Y warrants. An additional allocation of $0.9 million was made to the conversion option. These notes payable were retired in the fourth quarter with US$2 million being converted to equity (7,411,538 common shares) and the balance being repaid. With the settlement of these notes payable, the notes were accreted back to the original face value and amount allocated to the conversion option was transferred to contributed surplus.

Etruscan Resources Inc. Etruscan Resources Inc. has a stock option plan providing for the issuance of options equal to up to 10% of the outstanding shares. The Company may grant options to its directors, officers, employees and service providers. The exercise price of each option cannot be lower than the market price of the shares at the date of grant of the option. The number of shares optioned to insiders may not exceed 10% of the issued and outstanding shares at the date of grant. The options are exercisable immediately for a ten-year period from the date of grant. A summary of Etruscan Resources Inc.’s stock option plan and changes during the years is as follows:

Number of stock options

Weighted average exercise

price C$

Balance November 30, 2008 8,229,500 2.19 Granted during the year 10,335,000 0.44 Exercised during the year (100,000) 0.36 Expired during the year (2,119,500) 1.52 Balance November 30, 2009 16,345,000 1.18 Granted during the period 500,000 0.49 Balance February 28, 2010 16,845,000 1.16 The following table summarizes information about the stock options outstanding and exercisable at February 28, 2010:

Range of

prices $

Number outstanding

Weighted average

remaining contractual life

(years)

Weighted average

exercise price C$

0.26 – 0.36 425,500 1.4 0.30

0.37 4,160,000 9.0 0.37 0.38 – 0.48 550,000 7.1 0.41

0.49 6,150,000 9.7 0.49 0.50 – 1.17 619,500 4.3 0.86 1.18 – 1.97 640,000 4.5 1.67

1.98 1,150,000 6.0 1.98 1.99 – 2.43 95,000 5.3 2.17

2.44 1,385,000 8.1 2.44 2.45 – 4.44 270,000 6.6 3.29

4.45 1,400,000 7.0 4.45 16,845,000 4.6 1.16

Subsequent to February 28, 2010, the Company issued an additional 1.62 million options with an exercise price of C$0.43 per share. These options expire on March 4, 2020.



31

The fair value of options recognized in the consolidated statements of operations and deficit, have been estimated at the grant date using the Black-Scholes option pricing model. The weighted average assumptions used in the pricing model for the periods, are as follows:

2010 2009

Risk free interest rate 2.4% 3.1% Expected life 5 years 5 years Expected volatility 76% 73% Expected dividend yield Nil Nil Resulting weighted average fair

value at the date of grant C$0.29 C$0.29 Option pricing models require the input of assumptions regarding the expected volatility. Changes in assumptions can significantly affect the fair value estimate. Contributed surplus

As at Feb 28,

2010

As at Nov 30,

2009 $ $

Balance-beginning of period 12,208,786 6,928,454 Exercise of options - - Stock based compensation 140,000 2,662,547 Expiry of warrants - 1,637,785 Conversion options on notes

payable - 980,000 Balance - end of period 12,348,786 12,208,786

Stock-based compensation relating to stock options

In the first quarter of 2010, the Company recorded $140,000 of stock–based compensation which has been expensed during the period. In 2009, the Company recorded $2.6 million of stock–based compensation which has been expensed during the period. The Company has also recorded $0.1 million of stock–based compensation which has been allocated to mineral properties.

14. Accumulated other comprehensive income (loss)

Effective December 1, 2008, the Company recognized, on a prospective basis, a change in the functional currency of CBML and BMC which operate the Youga Gold Mine from the Canadian dollar to the US dollar. Effective December 1, 2009, the Company recognized, on a prospective basis, a change in the functional currency of all other operations including corporate and exploration activities from the Canadian dollar to the US dollar. Effective December 1, 2010, the Company changed its reporting currency form Canadian to US dollars.

The change in accumulated other comprehensive income is as follows:

As at Feb 28,

2010

As at Nov 30,

2009 $ $ Balance - beginning of the period 7,314,004 (1,798,328) Foreign currency translation

adjustment on the change in the functional currency for CBML and BMC which operate the Youga Gold Mine - 7,291,347

Foreign currency translation adjustment on the change in the functional currency for all other operations including corporate and exploration activities 32,744,680 -

Reversal of cumulative translation adjustment - African GeoMin - 1,749,545

Other net comprehensive gain (loss) for the period 18,518 71,440

Balance - end of the period 40,077,202 7,314,004 The change in reporting currency from Canadian dollar to US dollar has been adjusted retroactively as follows:

As at Nov 30,

2009 $ Balance - end of the period 7,314,004 Foreign currency translation adjustment on

the change in the reporting currency for all operations of the Company 32,744,680

40,058,684 The components of accumulated other comprehensive income are as follows:

As at Feb 28,

2010

As at Nov 30,

2009 $ $ Accumulated unrealized gains

on other assets 41,175 22,657 Cumulative translation

adjustment 40,036,027 40,036,027 40,077,202 40,058,684



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15. Related party transactions In the first quarter of 2010, the Company incurred advisory fees and costs aggregating $122,355 (2009 - $407,545) provided by Endeavour Financial International Corporation (Endeavour). An affiliated company of Endeavour owns 55% of the issued common shares of the Company. As at February 28, 2010 the amount payable to Endeavour totalled $24,936 (November 30, 2009 - $367,544).

16. Capital disclosures

The Company manages its capital to attempt to maximize the return to shareholders through the optimization of a reasonable debt and equity balance commensurate with current operating requirements. The strategy remains unchanged from 2009. The capital structure consists of debt, cash and cash equivalents and shareholders’ equity. The Company raises capital, as necessary, to meet its needs and to take advantage of perceived opportunities and, therefore, does not have a numeric target for its capital structure. There were no changes to the Company’s approach to capital management compared to the prior periods which is summarized as follows:

As at Feb 28,

2010

As at Nov 30,

2009 $ $

Long-term debt (note 8) 35,711,948 35,548,288 Add back deferred

financing charges 2,068,610 2,408,108 Total debt 37,780,558 37,956,396 Less: cash and cash

equivalents (7,214,085) (9,411,270) Net debt 30,566,473 28,545,126 Shareholders’ equity 70,043,874 65,022,295 Total Capital 100,610,347 93,567,421

17. Financial instruments

Financial assets

The carrying amounts and fair values of financial assets are as follows:

Category

As at Feb 28,

2010 $

As at Nov 30,

2009 $

Cash and cash equivalents (a) Held-for-trading 7,214,085 9,411,270

Amounts receivable (a) Loans &

receivables 781,134 841,613 Available for sale securities (b)

Available-for-sale 101,912 132,994

a) The carrying amount is a reasonable approximation of estimated fair value due to the immediate or short-term maturities of these financial instruments. Amounts receivable at February 28, 2010 also includes value added tax from the government of Burkina Faso in the amount of $4.2 million (November 30, 2009 - $3.4 million).

b) The available for sale securities are recorded at fair value

as represented by quoted market prices in an active market.

Financial liabilities The carrying amounts and fair values of financial liabilities are as follows:

Category

As at Feb 28,

2010 $

As at Nov 30,

2009 $

Accounts payable and accrued liabilities (a)

Other financial liabilities 18,961,336 17,122,284

Long-term debt (c)

Other financial liabilities 37,780,558 37,956,396

Financial derivative instrument (d) Held-for-trading 33,650,000 39,350,000 c) The carrying amount is a reasonable approximation of

estimated fair value as interest rates remain consistent with current rates available to the Company.

d) The financial derivative instruments are recorded at fair value.

Financial instrument risk exposure and risk management The Company is exposed in varying degrees to a variety of financial instrument related risks. Management approves and monitors the risk management processes. The type of risk exposure and the way in which such exposure is managed is provided as follows:

Credit risk Management does not believe it is exposed to any significant concentration of credit risk with the exception of the value added taxes recoverable from the government of Burkina Faso, which accounts for 84% of amounts receivable as at February 28, 2010. The Company’s exposure to credit risk on its cash and equivalents, restricted cash and deposits is limited by maintaining these assets with high-credit quality financial institutions.

Liquidity risk The Company ensures that there is sufficient capital in order to meet short term business requirements, after taking into account cash flows from operations and the Company’s holdings of cash and cash equivalents. The Company will have to raise additional debt or equity financing or sell some of its assets in order to meet its capital requirements. Refer to notes 8 and 9 for the maturity of the Companies non-current financial liability. The accounts payable are subject to normal repayment terms within 90 days.



33

Market risk The significant market risk exposures to which the Company is exposed are foreign exchange risk, interest rate risk and commodity price risk. These are discussed further below.

Foreign exchange risk The Company’s revenues from the production and sale of gold are denominated in US dollars. A significant portion of the Company’s operating expenses, operating materials, supplies, services and equipment purchases are in non US$ currencies. Accordingly, the results of the Company’s operations are subject to currency transaction risk and currency translation risk. The fluctuation of the US dollar in relation to other currencies will consequently have an impact upon the profitability of the Company and may also affect the value of the Company’s assets and the amount of shareholders’ equity.

Interest rate risk In respect of financial assets, the Company’s policy is to invest cash at floating rates of interest and cash reserves are to be maintained in cash or cash equivalents in order to maintain liquidity, while achieving a satisfactory return for shareholders. Fluctuations in interest rates therefore impact on the value of cash equivalents and short term investments. With respect to financial liabilities, the long-term debt is subject to interest rate risk since it bears interest at floating rates of interest. At November 30, 2009, if interest rates at that date had been 25 basis points lower with all other variables held constant, the net loss for the year would have been $0.1 million (2008 - $0.2 million) lower, arising mainly as a result of lower interest expense on variable borrowings. If interest rates had been 50 basis points higher, with all other variables held constant, the net loss would have been $0.2 million (2008 $0.2 million) higher, arising mainly as a result of higher interest expense on variable borrowings. The sensitivity is lower in 2009 than in 2008 because of a reduction in outstanding borrowings that has occurred as the entity's debt has matured (see note 8).

Commodity price risk The value of the Company’s mineral resource properties is related to the price of gold and diamonds and the outlook for these minerals. Gold prices historically have fluctuated widely and are affected by numerous factors outside of the Company’s control, including, but not limited to, industrial and retail demand, central bank lending, forward sales by producers and speculators, levels of worldwide production, short-term changes in supply and demand because of speculative hedging activities, and other factors. The profitability of the Company’s operations is highly dependent on the market price of gold. If gold prices decline for a prolonged period below the cost of production at the Company’s mines, it may not be economically feasible to continue production. In order to mitigate this risk, the Company has entered into a gold price protection program.

At November 30, 2009, if spot gold price at that date had been US$100 lower with all other variables held constant, the net impact on the net loss for the year would have been US$6.4 million (2008 - US$2.7 million) higher. If spot gold price had been US$100 higher, with all other variables held constant, the net impact on the net loss would have been $6.4 million (2008 $2.7 million) lower. The sensitivity is higher in 2009 than in 2008 because 2008 includes 5 months of operations whereas, 2009 includes a full year. The following table summarizes the approximate valuation of the Youga gold financial derivative liability at varying gold prices. The results in this table are calculated using the end of November 2009 option volumes and volatility as well as the period end exchange rate. This range is what management deems to be reasonably possible for the spot gold price for the year. Spot gold price ($) 900 1,000 1,100 1,200 1,300 Youga gold financial derivative liability ($ millions) 15.3 24.2 32.8 41.3 49.7

Assets Measured at Fair Value The Company holds financial derivative instruments at fair value. CICA Handbook Section 3862.27A requires disclosure of where the fair value sources used ranks on the fair value hierarchy (levels 1, 2 or 3) based on the degree to which the fair value is observable.

¾ Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities.

¾ Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

¾ Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

For period ended February 28, 2010 and the years ended 2009 and 2008 all financial instruments fair value sources were level 2 sources. The available–for-sale securities fair values were from level 1 sources.

18. Supplemental cash flow information

During the quarter ended February 28, 2010, the Company incurred expenditures on mineral properties for $0.1 million (quarter ended February 28, 2009 - $0.5 million) and capital assets for $0.8 million (quarter ended February 28, 2009 – $0.9 million) all of which were recorded as accounts payable at February 28, 2010. In the first quarter of 2009, the Company recorded the issuance of warrants at a calculated fair value of $0.5. These items are non-cash transactions and have been excluded from the statements of cash flows.



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19. Segmented information

The Company’s three main operating segments are gold mining, gold exploration/development and diamond exploration/development. The Company’s segmented information is as follows:

Quarter ended February 28,

2010 $

Quarter ended February 28,

2009 $

Net Revenue Gold mining 18,700,138 13,736,630

Segment loss (income) Gold mining (2,579,338) 1,437,861 Gold exploration and development 70,947 287,520 Diamond exploration and

development

260,332 398,169

Loss (income) of combined segments (2,248,059) 2,123,550 Foreign currency loss (gain) (160,745) 457,251 Stock based compensation 140,000 636,219 Corporate general and administration

– net

3,275,743 1,029,054 Financing costs - accretion - 253,157 Gain on disposal of in African GeoMin

- -

Loss (gain) on financial derivative (5,700,000) 25,449,553 Non-controlling interest share of loss (170,000) - Loss (income) (4,863,061) 29,948,784 Capital Expenditures

Corporate - 907 Gold mining 1,766,121 405,037 Gold exploration and development - 2,025,193 Diamond exploration and development

- (547,816)

1,766,121 1,883,321

As at February 28, 2010 As at November 30, 2009

Current

($000’s) Long Term

($000’s) Total

($000’s) Current

($000’s) Long Term

($000’s) Total

($000’s) Assets

Corporate 5,506 411 5,917 8,173 431 8,604 Gold mining 25,786 84,853 110,639 21,492 86,483 107,975 Gold exploration and development 452 42,195 42,647 645 40,690 41,335 Diamond exploration and

development

326

3,513

3,839

390 3,497 3,887 32,070 130,972 163,042 30,700 131,101 161,801 Assets Canada 5,506 411 5,917 8,173 431 8,604 South Africa 326 3,513 3,839 390 3,497 3,887 Mali 58 14,932 14,990 106 14,647 14,753 Côte d’Ivoire 39 13,149 13,188 112 12,775 12,887 Burkina Faso 25,995 91,046 117,041 21,737 92,341 114,078 Ghana 76 3,774 3,850 92 3,573 3,665 Namibia 68 4,131 4,199 88 3,820 3,908 Benin 2 16 18 2 17 19 32,070 130,972 163,042 30,700 131,101 161,801



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20. Subsequent events

Private Placement On March 4, 2010 the Company completed a private placement equity offering issuing 28,378,378 common shares, at a price of C$0.37 per common share, for net proceeds of $9.6 million. The proceeds of the financing are being used to continue the development of the Agbaou gold project, to advance the Finkolo joint venture, and advance exploration programs on the Company’s most prospective drill ready targets, the Daoukro permit in Eastern Cote D’Ivoire and the Keniebandi permit in Mali West.

Agreement with Rockwell Diamonds Inc. The Company has signed a term sheet with Rockwell Diamonds Inc. (Rockwell) whereby Rockwell proposes to purchase the shares of the Etruscan Diamonds (Pty) Ltd. This entity operates the Company’s diamond exploration and development activities in South Africa. The price to be paid to the Company is an amount not exceeding ZAR 33.5 million (approximately $4.4 million) payable in Rockwell shares valued at C$0.068 each. Completion of the disposition is subject to a number of conditions including South African mining ministry consent and securities regulatory approvals including TSX. Completion is targeted for the third calendar quarter of 2010.

Corporate information


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Corporate Office Suite 306, Royal Bank Building 1597 Bedford Highway Halifax, Nova Scotia CANADA B4A 1E7 Tel: +01 (902) 832 6700 Toll Free: +01 877 465 3674 Fax: +01 (902) 832 6702 email: [email protected] Website: www.etruscan.com

Officers Sally Eyre, Ph.D DIC President and Chief Executive Officer Stephen R. Stine Chief Operating Officer Paul Coombs CMA, CGA, M.B.A. Chief Financial Officer Werner Claessens, LicGeo.Sc. VP Exploration Janice Stairs LL.B, M.B.A. VP, General Counsel & Corporate Secretary

Directors Gerald McConnell, Chair Halifax, Nova Scotia Sally Eyre, Ph.D DIC Vancouver, British Columbia Stephen R. Stine Centennial, Colorado Neil Woodyer Monaco Frank Giustra Vancouver, British Columbia John A. Clarke, Ph.D Vancouver, British Columbia Rick Van Nieuwenhuyse Vancouver, British Columbia Gordon Keep Vancouver, British Columbia David Street London, United Kingdom

Stock Listing Toronto Stock Exchange

Trading Symbol: EET Warrants: EET.WT

EET.WT.A

Register and Transfer Agent CIBC Mellon Trust Company

Halifax, Nova Scotia

Auditors Deloitte & Touche LLP


Legal Counsel McInnes Cooper


Bankers TD Canada Trust


Bank of Africa Burkina Faso, Côte d’Ivoire and

Mali, West Africa

Field Offices Youga Gold Mine, Burkina Faso 08 BP 11197, Rue 13.26 porte 195 Ouagadougou 08, BURKINA FASO Tel: +226 50 36 10 80 Fax: +226 50 36 02 43 Etruscan Resources Burkina Faso Secteur 13, Section EP, Lot 20 Parcelle 08, Zone du Bois Ouagadougou, BURKINA FASO Tel: +226 50 36 97 49 Fax: +226 50 36 97 48 Etruscan Resources Mali BPE 2564 Bamako Quartier Mali, Rue 209, Lot 55X Bamako, MALI Tel/Fax: +223 20 23 99 04 Etruscan Resources Côte d’Ivoire 25 BP 603, Abidjan 25 CÔTE D’IVOIRE Tel: +225 22 44 53 40 Fax: +225 22 44 53 48

Documents

Etruscan Resources Inc. (EET:TSX) - Newswire