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Management’s Discussion and Analysis of Financial Conditions and Results of Operations 2

Management’s Responsibility for Financial Reporting 24

Independent Auditors’ Report 25

Consolidated Financial Statements 26

Notes to Consolidated Financial Statements 29

2010 ANNUAL FINANCIAL REPORTManagement’s Discussion and Analysis and Consolidated Financial Statements

FORTUNEMINERALS LIMITED

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MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITIONS AND RESULTS OF OPERATIONSYear Ended December 31, 2010

This Management’s Discussion and Analysis of Fortune Minerals Limited (“Fortune” or the “Company”) is dated February 24, 2011 and should be readin conjunction with the Company’s Annual Audited Consolidated Financial Statements for the year ended December 31, 2010 prepared in accordancewith Canadian generally accepted accounting principles. This discussion contains certain forward-looking information and is expressly qualified bythis cautionary statement at the end of this Discussion. All dollar amounts are presented in Canadian dollars unless indicated otherwise.

••• INTERNATIONAL FINANCIAL REPORTING STANDARDS

The Company has included an update on the status of the conversion to International Financial Reporting Standards (“IFRS”) which addresses the appli-cable areas of IFRS 1 exemptions and exceptions and key differences between IFRS and Canadian generally accepted accounting principles (“CanadianGAAP”) that will have an impact on the financial statements and note disclosure of Fortune Minerals Limited (refer to pages 10 through 18).

••• SELECTED ANNUAL INFORMATION

2010 2009 2008

Total revenues $24,889 $50,334 $506,921Net loss (1,711,277) (1,332,452) (1,378,793)Basic and fully diluted loss per common share (0.02) (0.02) (0.03)Total assets 127,917,977 123,728,635 99,286,206Total long term financial liabilities 2,917,749 2,854,772 –

••• SUMMARY OF QUARTERLY RESULTS

2010Dec-31 Sep-30 Jun-30 Mar-31

Revenues $6,073 $5,397 $5,222 $8,197Net loss (458,158) (444,496) (479,690) (328,933)Basic and fully diluted loss per common share* – – (0.01) –

2009Dec-31 Sep-30 Jun-30 Mar-31

Revenues $3,636 $6,032 $21,180 $19,486Net loss (392,360) (224,232) (523,321) (192,539)Basic and fully diluted loss per common share* (0.01) – (0.01) –

*Note: the sum of quarterly loss per common share for a fiscal year may not equal the year-to-date amount due to rounding.

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••• OVERVIEW

The Company’s most significant assets are the Mount Klappan anthracite metallurgical coal project in northwest British Columbia (“Klappan”) andthe NICO gold-cobalt-bismuth-copper project in the Northwest Territories (“NICO”), both of which are in the development phase and wholly owned.Prices for Fortune’s primary commodities remain reasonably strong and with rising demand, the Company is well positioned as it continues to pur-sue its core objective of transforming itself into a producer. The advantages Fortune offers include: diversified assets; our projects are located inCanada, a mining friendly politically stable country; our development projects provide participation in commodities of critical importance to the worldeconomy including gold, cobalt, bismuth, copper, and metallurgical coal; and, a near-term production plan that offers a different risk profile than grassroots exploration companies.

Fortune is committed to seeking an appropriate joint venture partner to help develop the Mount Klappan project. The Company entered into anengagement with Deloitte & Touche Corporate Finance Canada Inc. to act as the Company’s financial advisor during the second quarter of 2010 toimplement a renewed strategy for identifying and engaging a suitable strategic partner in order to maximize value for shareholders and realize thepotential of Klappan. Activities in relation to this engagement are proceeding as planned into 2011. Further, the Company engaged Marston & MarstonInc. ("Marston") to update the financial model from its 2008 definitive feasibility study. The update indicates positive economics for the project usinga new railway development strategy for haulage of anthracite metallurgical coal products from Klappan to the port of Prince Rupert (see newsrelease dated November 4, 2010 on the Company’s website or on SEDAR). As the economy continues to recover and prices for metallurgical coal firmup due to increasing demand and global supply constraints, management believes that the environment for finding a suitable partner for the projectis favourable.

Fortune is continuing to develop NICO independently and the Company’s 2010 business activities were focused on advancing engineering, permit-ting and financing of NICO and its related hydrometallurgical process facility, the Saskatchewan Metals Processing Plant” (“SMPP”), inSaskatchewan while minimizing expenditures in other areas not on the critical path to production. In support of engineering, permitting and financ-ing initiatives, the Company undertook the following activities in 2010:

• Conducted additional environmental and socio-economic studies for NICO and the SMPP;• Developed management plans and reports required by various regulatory bodies; • Conducted community consultation, mine site visits and preparation for negotiations with the Tlicho on an Participation Agreement;• Advanced Front End Engineering and Design (“FEED”) programs for NICO and the SMPP including the completion of additional pilot plant

testing; • Completion of due diligence activities for the SMPP property including environmental, geotechnical and hydrogeological studies; and, • A 37-hole exploration drill program at NICO, in part, to support ongoing engineering and construction of the mill, mine buildings and airstrip.

The main objectives for the 37-hole drill program were to extend the known mineral reserves for the deposit and provide better definition of theperimeter of the ore body for detailed mine operations and production scheduling. The results from the first 10 drill holes were received during thethird quarter and for the remaining 27 holes were received during the fourth quarter and both identified additional high-grade intersections (see newsrelease dated September 9, 2010 and December 3, 2010 on the Company’s website, www.fortuneminerals.com, or on SEDAR at www.sedar.com, fora summary of drill results). During the year ended December 31, 2010, the Company also completed the dismantling of the remaining structures andrelocated its salvaged milling and process assets from the Golden Giant Mine (the “Hemlo Assets”) to strategic staging locations prior to refurbish-ment and shipment to the Northwest Territories. As a result, the Company fulfilled its remaining obligations at the Golden Giant Mine site ahead of itsApril 1, 2011 deadline and its security deposit was returned. Subsequent to year end, the Company also settled a dispute with the contractor whowas hired to complete portions of the dismantling and demolition scope relating to the Hemlo Assets and no further amounts are owed, resulting inthe Company receiving its share of disputed amounts previously held in trust pending resolution of the dispute. The Hemlo Assets were acquired byFortune in 2006 as part of the purchase of mill and related facilities for the NICO project and no further obligations relating to the assets exist, theHemlo project is complete and the assets are now available for refurbishment at the appropriate time. Subsequent to year end, the Company alsoreceived the SMPP draft Project Specific Guidelines ("PSG's") from the Environmental Assessment Branch of Saskatchewan's Ministry ofEnvironment, an important milestone in the environmental assessment process in Saskatchewan. Once finalized, the PSG's will outline the require-ments of the provincial environmental assessment process and identify key issues that will need to be addressed in the Environmental ImpactStatement ("EIS"). Fortune also held information sessions in local communities near the future site of the SMPP to update the general public on theCompany's plans for the SMPP and to address any questions prior to the submission of the EIS.

The Company continues to maintain its core group of management and employees to lead activities on the critical path to production while focusingon minimizing general and administration expenses to support and finance its principal projects. An additional $8,466,859 in net cash proceeds wereraised during the year to continue to fund the key activities of the Company. Management continues to review various financing alternatives to max-imize value for shareholders and has an ongoing relationship with BNP Paribas as financial advisor and lead arranger to pursue a future projectfinancing facility to fund the construction and commissioning of NICO and the SMPP.

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••• RESULTS OF OPERATIONS

SUMMARYThe Company’s net loss for the three-month period ended December 31, 2010 was $458,158 or $nil per share compared to $392,360 or $0.01 per sharefor the same period in the prior year. The net loss for the year ended December 31, 2010 was $1,711,277 or $0.02 per share compared to $1,332,452 or$0.02 per share for the prior year.

The increase in net loss for 2010 is attributable primarily to increased capital taxes and corporate advisory costs incurred during the year related toMount Klappan. Expenditures for much of the ongoing activity in 2010 were funded from financing proceeds received in late 2009. The Company main-tained a reasonable cash position and working capital balance throughout 2010, by raising additional funds as required for 2010 and for preliminaryplanned activities for 2011. At the end of 2010, Fortune had cash and cash equivalents of $9,143,974, a working capital balance of $8,228,901 and long-term debt of $2,917,749. At December 31, 2009, the Company has cash and cash equivalents of $18,328,148, a working capital balance of $17,945,994and long-term debt of $2,854,772.

REVENUESFortune’s investment income, its primary source of revenue, decreased to $24,889 in 2010 compared to $50,334 in 2009. Interest and other income waslower in 2010 due to lower investment income earned on smaller cash balances held with financial institutions. The Company invests its surplus cashin low risk, liquid investments, which typically have low yields but preserve their principle value during times of market uncertainty.

EXPENSESExpenses increased in 2010 to $2,235,490 compared to $1,583,399 in 2009. The increase in 2010 is primarily a result of capital taxes and corporate advi-sory costs with some nominal increases attributable to interest expenses, stock based compensation and administrative expenses and a nominaldecrease in investor relations expenses. Capital taxes applicable to the Company in Ontario were eliminated effective July 1, 2010, therefore, in sub-sequent periods, capital taxes are anticipated to be $nil. The corporate advisory costs incurred in 2010 relate to an engagement to find a strategicpartner for the Mount Klappan project which was entered into during 2010. Interest expense was higher for the year ended December 31, 2010 sinceinterest was not incurred until late in the first quarter of 2009 when the long-term debt was arranged.

Upon the grant of stock options, management estimates the fair value of the options using the Black-Scholes model. The estimated fair value of theoptions is allocated to stock-based compensation expense, capital assets and deferred assets based on an approximation of the allocation of theoptionee’s future compensation. In the case of directors, the entire fair value of the options granted is recorded as a stock-based compensationexpense.

Below is a summary of the estimated fair value of stock options granted for the periods ending December 31, 2010 and 2009:

2010 2009

Options granted during the year 1,195,000 1,185,000Total estimated fair value $436,200 $355,500Average fair value per option $0.37 $0.30Allocated to:

Stock-based compensation expense $253,000 $216,500Exploration and development expenditures $113,700 $103,500Capital assets $69,500 $35,500

In 2010, the Company’s net loss included $81,901 in foreign exchange loss from $US cash on hand during the year that decreased in value due to thestrengthening of the $CDN compared to the $US. These funds are being held to settle various anticipated $US denominated purchases of equipmentand supplies.

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FUTURE TAX RECOVERYThe Company recognized a future income tax recovery of $591,000 in 2010 compared to $368,000 in 2009. The current year recovery reflects the recog-nition of future tax benefits resulting from the current year tax loss as well as a reduction in the future tax rate. In 2009, the recognition of future taxbenefits resulted primarily from the tax loss for the year and from un-deducted share issuance costs. The Company’s future tax liability hasdecreased, principally, due to and the increase in non-capital losses and pre-production mining investment tax credits carry forwards. The currenttax provision recorded is the estimated amount owing related to the enactment of income tax harmonization between the Ontario and FederalGovernments.

CASH FLOWCash used in operating activities during 2010 was $4,134,724 compared to $778,664 used in operating activities during 2009. However, the majority ofthe difference between periods is due to changes in non-cash working capital. Operating activities before changes in non-cash working capital usedcash of $1,969,082 in 2010 compared to $1,416,427 in 2009. The use of cash by operating activities is related to the level of administrative and investorrelations activity during the period as well as interest payments made on long-term debt, capital taxes and corporate advisory costs. The use of cashfrom changes in working capital balances during 2010 is a result of a decrease in accounts payable and accrued liabilities of $2,204,668 due to thetiming of certain business activities and settlement of related accounts with vendors, specifically the settlement of a dispute that arose during 2009with a contractor hired to dismantle and demolish certain Hemlo assets. The source of cash from changes in working capital balances for 2009reflected an increase in accounts payable and accrued liabilities offset by an increase in accounts receivable due to the timing of certain businessactivities.

Cash used in investing activities decreased to $13,516,309 in 2010 from $15,511,190 in 2009. Net cash exploration and development expendituresincurred by Fortune on its properties during the three- and twelve-month periods ending December 31, 2010 were $1,873,072 and $9,178,049,respectively, which includes recovery of expenditures previously capitalized of $322,373 from a third party. Net cash expenditures related to thefollowing projects:

Three months ended Year endedDecember 31, 2010 December 31, 2010

NICO $2,080,887 $9,070,502Mount Klappan 105,224 319,799All other projects, net recovery of expenditures (313,039) (212,252)

Total cash exploration and development expenditures $1,873,072 $9,178,049

For comparison, net cash exploration and development expenditures incurred by Fortune on its properties during the three-and twelve-month peri-ods ending December 31, 2009 were $1,641,038 and $7,655,489, respectively. The expenditures related to the following projects:

Three months ended Year endedDecember 31, 2009 December 31, 2009

NICO $1,532,848 $7,279,119Mount Klappan 51,864 291,820All other projects 56,326 84,550

Total cash exploration and development expenditures $1,641,038 $7,655,489

The 2010 project expenditures were consistent with the original forecasted net expenditures at NICO and Klappan reflecting the planned activitiesundertaken, with the exception of approximately $1 million of budgeted NICO expenditures not incurred during 2010 that will be deferred to 2011 dueto the timing of certain activities.

In addition, the Company spent $1,050,679 and $7,332,384 during the three- and twelve-month periods ended December 31, 2010 on plant and equip-ment and capital assets compared to $606,769 and $5,910,454 for the same periods in 2009. In 2010, this included net cash expenditures related to theSMPP of $5,207,795 primarily due to environmental and FEED activities. In addition, the cost of capital assets includes expenditures on the Company’sHemlo Assets. In the prior year, the expenditures on the Hemlo Assets consisted primarily of dismantling, deconstruction and salvage of the HemloAssets was completed for less than the budgeted by approximately $0.3 million.

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CASH FLOW (Continued)

Assets for their future use at NICO. During 2010, the remaining warehouse was dismantled, the project was completed and additional expenses wereincurred for transporting and storing the assets prior to refurbishment for future construction at NICO. The Company exceeded its planned 2010expenditures for the SMPP by approximately $1.3 million in order to accelerate activities required to permit and finance the facility and for due dili-gence activities undertaken on the land prior to closing of the purchase agreements which is required by December 31, 2012. This was partially off-set by the remaining salvage and transportation of the Hemlo Assets was completed for less than the budgeted by approximately $0.3 million.

The Company raised net cash proceeds of $8,466,859 as a result of financing activities during 2010. Net cash proceeds of $3,845,998 were raised fromthe issuance of 4,635,473 common shares through private offerings during 2010. In addition, net cash proceeds of $4,326,164, $310,501, and $14,800were raised through the exercise of 7,015,653 warrants, 477,694 compensation units, and 20,000 employee stock options, respectively. In 2010 expens-es of $30,604 were incurred relating to the public offering in late 2009.

Reconciliation of cash and non-cash changes in share capital:

2010

Shares/Warrants Cash Proceeds Non-cash TotalIssued and Costs, Net Proceeds, Net Proceeds, Net

# $ $ $

Common shares issued during the yearPublic offering – (29,702) – (29,702)Private offerings 4,635,473 3,845,998 – 3,845,998Exercise of options 20,000 14,800 5,300 20,100Exercise of warrants 7,015,653 4,327,164 922,763 5,249,927Exercise of compensation units 477,694 291,393 121,040 412,433Future tax impact – – (4,001) (4,001)

Total common shares issued 12,148,820 8,449,653 1,045,102 9,494,755Average proceeds per share issued 0.70 0.08 0.78

Warrants issued during the yearPublic offering – (902) – (902)Private offerings – – – –Exercise of compensation units 238,847 19,108 7,937 27,045Warrants in lieu of fees – – 121,017 121,017Exercise of warrants (7,015,653) (1,000) (922,763) (923,763)Expiration of warrants (19,194) – (3,205) (3,205)Modification of warrants – – 64,210 64,210

Total net warrants issued (6,796,000) 17,206 (732,804) (715,598)Average proceeds per warrant issued 0.08 0.03 0.11

Change in share capital 8,466,859 312,298 8,779,157

*Note: as a result of rounding of Total Proceeds, Net, to the nearest dollar, certain individual items disclosed above may also be rounded.

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2009

Shares/Warrants Cash Proceeds Non-cash TotalIssued and Costs, Net Proceeds, Net Proceeds, Net

# $ $ $

Common shares issued during the yearPublic offering (1) 26,538,550 14,944,371 (403,468) 14,540,903Private offerings 12,690,750 6,156,567 – 6,156,567Future tax impact – – (857,585) (857,585)

Total common shares issued 39,229,300 21,100,938 (1,261,053) 19,839,885Average proceeds per share issued 0.54 (0.03) 0.51

Warrants issued during the yearPublic offering (1) 13,269,275 967,535 (26,457) 941,078Private offerings 4,546,000 713,646 – 713,646Warrants in lieu of fees 2,975,000 – 292,783 292,783Future tax impact – – (53,415) (53,415)Expiration of warrants (5,348,000) – (1,865,280) (1,865,280)

Total warrants issued 15,442,275 1,681,181 (1,652,369) 28,812Average proceeds per warrant issued 0.08 0.01 0.09

Change in share capital 22,782,119 (2,913,422) 19,868,697

(1) Public offering consisted of 26,538,550 units for $0.65 per unit. Each unit consisted of one common share and one half of one common share purchase warrant.

*Note: as a result of rounding of Total Proceeds, Net, to the nearest dollar, certain individual items disclosed above may also be rounded.

••• LIQUIDITY AND CAPITAL RESOURCES

As at December 31, 2010, Fortune had cash and cash equivalents of $9,143,974, a working capital balance of $8,228,901 and long-term debt of$2,917,749. The Company’s principal operational objectives for 2011 with respect to the NICO project are to continue its focus on obtaining the nec-essary permits for the project and completing activities required to support future financing arrangements. The Company’s principal objectives for2011 with respect to Klappan are to continue the process of seeking a strategic partner and to continue progressing activities in support of obtain-ing the necessary permits for the project in the future. The Company’s working capital is sufficient to fund its preliminary planned activities for 2011.The Company regularly reviews its planned activities relative to available funding and prioritizes activities based on what is required to complete crit-ical path activities. Ultimately, additional financing will be required to construct the mine infrastructure, the processing facilities and acquire addi-tional equipment for the NICO and Klappan projects. The Company will continue evaluating its alternatives with a view to executing a financing plansuitable to fund its transformation into a producer.

••• OUTLOOK

As noted, the Company’s principal objective remains to achieve successful commercial production for its projects. The Company`s activities in pur-suit of its objectives are subject to many risks as discussed under the heading “Risks and Uncertainties” section below. The most significant risks tomeeting its objective in the targeted time frame continue to be permitting and financing. These risks arise primarily from external stakeholders suchas government regulators, First Nations, and investors who have significant influence over the outcome of the Company`s efforts. Accordingly, man-agement has sought proactive ways to address risks in its business model and has developed appropriate strategies to move forward by focusingexpenditures on critical path activities.

Major milestones on the path forward for NICO and the SMPP include:

• the receipt of environmental permits;• the completion of a debt financing agreement; and • sourcing any additional equity required to fulfill the Company’s contribution to the projects under any debt financing agreements.

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••• OUTLOOK (Continued)

The major milestone on the path forward for Klappan is:

• Identification of potential partners, evaluation of potential transactions and ultimately entering into a strategic arrangement suitable to theCompany.

The Company, as it moves forward, will continue to focus on prudent management of capital resources while advancing the development of its proj-ects and mitigating risks.

••• TRANSACTIONS WITH RELATED PARTIES

During 2010, the Company paid businesses owned or controlled by or related to the President and CEO, the Vice President Finance and CFO, theCorporate Secretary and Director, and a Director, in aggregate, $707,929 for various third party consulting and legal services received during the year.Additional amounts of $64,446 were owing to these related parties for services received during 2010.

••• CRITICAL ACCOUNTING ESTIMATES

GOING CONCERN ASSUMPTIONThe recoverability of amounts shown for mineral properties and related exploration and development expenditures is dependent upon the econom-ic viability of recoverable reserves, the ability of the Company to obtain the necessary permits and financing to complete the development, and futureprofitable production or proceeds from the disposition thereof.

Currently, the Company does not have a source of revenue other than investment income and it has relied, primarily, on equity financings to fund itsactivities. However, the Company raised a small amount of long-term debt to supplement equity financings when the cost of equity capital was notacceptable. The Company may have limited access to capital at an acceptable cost to existing shareholders depending on economic conditions fromtime to time. The Company’s share price has steadily risen through the second half of 2010 and into 2011, increasing the market capitalization of theCompany, and improving the cost of capital compared to the prior year. As well, the Company at December 31, 2010 has positive working capital andcash balances and manages the cash position prudently though ongoing monitoring of current and future cash and working capital balances rela-tive to planned activities. The available capital is sufficient to fund the Company’s preliminary planned activities for 2011.

INTERESTS IN MINING PROPERTIES AND EXPLORATION AND DEVELOPMENT EXPENDITURESIn accordance with the Company’s accounting policies, acquisition costs and exploration expenditures relating to mineral properties are capitalizeduntil the properties are brought into commercial production or disposed. Amortization will commence when a property is put into commercial pro-duction. As the Company does not currently have any properties in commercial production, no amortization has been recorded.

Mineral reserve and mineral resource estimates are not precise and also depend on statistical inferences drawn from drilling and other data, whichmay prove to be unreliable. Future production could differ from mineral resource estimates for the following reasons:

(a) Mineralization or formation could be different from those predicted by drilling, sampling and similar tests;(b) The grade of mineral resources may vary from time to time and there can be no assurance that any particular level of recovery can be

achieved from the mineral resources; and(c) Declines in the market prices of contained minerals may render the mining of some or all of the Company’s mineral resources uneconomic.

Any of these factors may result in impairment of the carrying amount of interests in mining properties or exploration and development expenditures.

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FUTURE INCOME TAXESThe Company follows the liability method of tax allocation in accounting for income taxes. Under this method, future tax assets and liabilities aredetermined based on differences between the financial reporting and tax bases of assets and liabilities, and measured using the substantively enact-ed tax rates and laws that will be in effect when the differences are expected to reverse. Assessing the recoverability of deferred tax assets requiresmanagement to make significant estimates related to expectations of future taxable income and substantively enacted tax rates. The Company, by2010, has completed feasibility studies and certain updates for both of its principal projects and is undertaking related permitting and financing activ-ities. Management has determined it is more likely than not that the Company will achieve production and realize the benefit of certain non-capitallosses, its un-deducted share issuance costs and pre-production mining investment tax credits. The benefit of these amounts is estimated to be$4,263,000 and has been recorded in the consolidated financial statements to the extent that the deduction for share issuance costs and operatinglosses expire post-2015 and pre-production investment tax credits begin to expire in 2028. A future tax liability of $11,229,000 has also been record-ed in the consolidated financial statements for the book value of exploration and development expenditures and capital assets in excess of tax value.

STOCK BASED COMPENSATION AND WARRANTS OR COMPENSATION OPTIONS PRIVATELY OR IN LIEU OF FEESThe Company recognizes an expense for option awards using the fair value method of accounting. The company also records the fair value of war-rants granted through private offerings or in lieu of fees and compensation options granted using a fair-value estimate. Management estimates thefair value of stock options, warrants granted through private offerings or in lieu of fees, and compensation options using the Black-Scholes model.The Black-Scholes model, used by the Company to calculate values, as well as other accepted option valuation models, was developed to estimatefair value of freely tradable, fully transferable options and warrants, which may significantly differ from the Company's stock option awards or war-rant grants. These models also require four highly subjective assumptions, including future stock price volatility and expected time until exercise,which greatly affect the calculated values. Accordingly, management believes that these models do not necessarily provide a reliable single meas-ure of the fair value of the Company's stock option awards. The valuation models are used to provide a reasonable estimate of fair value given thevariables used.

ASSET RETIREMENT OBLIGATIONSLegal obligations associated with site restoration on the retirement of assets are recognized when they are incurred and when a reasonable esti-mate of the fair value of the obligation can be made. If a reasonable estimate of fair value cannot be made in the period the asset retirement obliga-tion is incurred, the liability should be recognized when a reasonable estimate of the fair value of the obligation can be made. The Company has notcommenced operations on its mining properties and the principal projects are in the development stage. Due to the uncertainty around the settle-ment date of potential asset retirement obligations for the Company’s projects, management is not able to make a reasonable estimate of the fairvalue of the legal obligation in accordance with Canadian GAAP. Each period, Management reviews whether a reasonable estimate of fair value canbe made on potential future asset retirement obligations for each project.

CONTINGENCIESThe Company is from time to time involved in claims and litigation arising in the normal course of business. Claims are made by third parties againstthe Company and by the Company against third parties with respect to costs incurred and/or amounts charged under applicable contract provisions.Although Management makes an estimate and provides for the final resolution of these claims in the financial statements, it is possible that the finalresolution of these matters may require the Company to make expenditures in excess of estimates. Subsequent to year end, a dispute with a thirdparty relating to a claim was settled and the result of the settlement was not materially different than the estimate that had previously been record-ed by management.

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••• INTERNATIONAL FINANCIAL REPORTING STANDARDS

Effective January 1, 2011, the accounting framework under which financial statements are prepared in Canada for all publicly accountable enterpris-es is scheduled to change to IFRS as issued by the International Accounting Standards Board (“IASB”). IFRS uses a conceptual framework similarto Canadian GAAP, but there are significant differences in recognition, measurement and disclosures. An IFRS convergence plan is in the process ofbeing completed. In 2010, the Company hired an additional employee and engaged advisors to assist with the evaluation of differences betweenCanadian GAAP and IFRS and implementation of the convergence plan to be able to meet the timelines. The following provides a summary of the sta-tus of IFRS implementation, including management’s analysis of key differences between IFRS and Canadian GAAP and the adjustments that areexpected on transition and to 2010 comparative balances. The analysis included below has been completed by management and included consulta-tion with the external auditors throughout the process, however, the analysis and adjustments described below have not been audited by theCompany’s external auditors.

IFRS TRANSITION – IDENTIFY AND SELECT APPLICABLE IFRS 1 EXEMPTIONS AND EXCEPTIONS

The Company has conducted an assessment of the impact of IFRS 1 First-time Adoption of International Financial Reporting Standards (“IFRS 1”).The key principle of IFRS 1 is full retrospective application of all IFRS in force at the closing balance sheet date for the first IFRS financial state-ments prepared on transition to IFRS. IFRS 1 acknowledges that full retrospective application may not be practical or appropriate in all situationsand prescribes:

• Optional exemptions to provide limited relief for first time adopters from specific aspects of certain IFRS standards in the preparation ofthe Company’s opening balance sheet; and

• Mandatory exceptions to retrospective application of certain IFRS standards.

Additionally, to ensure financial statements contain high-quality information that is transparent to users, IFRS 1 contains disclosure requirements tohighlight changes made to financial statements due to the transition to IFRS. The Company has reviewed the available exemptions and has electedto take the following exemptions, as allowed under IFRS 1:

Business CombinationsFor all transactions accounted for as business combinations under previous GAAP, the Company may elect to not restate business combinationsbefore the date of transition, restate all business combinations before the date of transition; or restate a particular business combination, in whichcase subsequent business combinations must be restated.

• The Company will elect to apply IFRS 3 Business Combinations (“IFRS 3”) to business combinations that occurred on or after January 1,2010.

Share-based PaymentsA company may choose to apply IFRS 2 Share based payments (“IFRS 2”), to any equity instruments that were granted before November 7, 2002 orthat vested before the later of the date of transition to IFRS and January 1, 2005 but only if the company has previously disclosed publicly the fairvalue of the instruments, determined at the measurement date.

• The Company will elect not to apply IFRS 2 to awards that vested prior to January 1, 2010.

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Borrowing Costs / Interest CapitalizationA company may choose to apply IAS 23 Borrowing Costs (“IAS 23”), retrospectively, to borrowing costs relating to qualifying assets by designatingany date prior to the transition date and applying the Standard to borrowing costs relating to all qualifying assets for which the commencement datefor capitalization is on or after that date. Alternatively, a Company may apply IAS 23 beginning at the transition date.

• The Company will elect to begin applying IAS 23 as at the transition date, January 1, 2010.

Decommissioning LiabilitiesA first-time adopter need not comply with the requirements for changes in decommissioning liabilities that occurred before the date of transition toIFRS. If a first-time adopter uses this exemption, it shall measure the liability as at the date of transition to IFRSs in accordance with IAS 37 Provisions(“IAS 37”).

• The Company will elect to take this exemption, and will measure any decommissioning liabilities as at the transition date, January 1, 2010.

Property, Plant and EquipmentFor property, plant and equipment, the a company may elect to use cost in accordance with IFRS; use fair value at the date of transition as deemedcost; or, use a revaluation carried out at a previous date as deemed cost, subject to certain conditions. The exemption may be applied to any indi-vidual item of property, plant and equipment.

• The Company will elect to use cost in accordance with IFRS.

In addition to the optional exceptions from retrospective application, the Company reviewed the four mandatory IFRS exceptions and determined thefollowing to be applicable:

EstimatesIFRS 1 prohibits the use of hindsight to correct estimates made under previous GAAP unless there is objective evidence of error. A company shouldonly adjust the estimates made under previous GAAP when the previous estimate calculation does not comply with IFRS standards. If a new esti-mate is required under IFRS, the Company will need to estimate based on the conditions that existed at the date of transition to IFRSs. The Company’sIFRS estimates as of January 1, 2010 are consistent with its Canadian GAAP estimates on that date.

Exceptions from retrospective application relating to De-recognition of Financial Assets and Liabilities, Hedge Accounting, and Non-controllingInterests were determined not to be applicable to the Company at this time.

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PREPARATION OF OPENING IFRS STATEMENT OF FINANCIAL POSITION

The January 1, 2010 Canadian GAAP statement of financial position has been reconciled to IFRS based on the application of IFRS 1. Refer to the dis-cussion below for additional information on the adjustments on transition reflected in the pro forma statement of financial position on January 1, 2010.The reconciliation below for preparing the opening IFRS statement of financial position has not been audited but is the result of management’s cur-rent analysis of the adjustments on transition as of the date hereof, therefore these adjustments are subject to change and additional adjustmentsare possible.

Fortune Minerals LimitedIncorporated under the laws of Ontario

PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at Canadian GAAP A B C D E F Pro Forma IFRS

December 31, 2009 Transitional Adjustments January 1, 2010

$ IFRS 2 IAS 37 IAS 12 IAS 12 IAS 12 IAS 16 $

ASSETSCurrent assetsCash and cash equivalents 18,328,148 – – – – – – 18,328,148Restricted cash 2,698,561 – – – – – – 2,698,561Accounts receivable 641,637 – – – – – – 641,637Prepaid expenses 62,857 – – – – – – 62,857

Total current assets 21,731,203 – – – – – – 21,731,203

Other assets 213,619 25,157 – – – – – 238,776Security deposit 300,000 – – – – – – 300,000Reclamation bonds 617,250 – – – – – – 617,250Capital assets, net 104,135 – – – – – – 104,135Mining properties 100,762,428 – 43,945 – – 1,085,000 TBD 101,891,373

123,728,635 25,157 43,945 – – 1,085,000 – 124,882,737

LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilitiesAccounts payable and accrued liabilities 3,581,550 – – – – – – 3,581,550Interest payable 90,000 – – – – – – 90,000Income taxes payable 113,659 – – – – – – 113,659

Total current liabilities 3,785,209 – – – – – – 3,785,209

Long-term debt 2,854,772 – – – – – – 2,854,772Future income taxes 7,805,000 – – (984,000) – – – 6,821,000Asset retirement obligation – – 80,333 – – – – 80,333

Total liabilities 14,444,981 – 80,333 (984,000) – – – 13,541,314

SHAREHOLDERS’ EQUITYShare capital 105,207,868 25,157 – 984,000 690,000 – – 106,907,025Contributed surplus 6,875,025 – – – – – – 6,875,025Deficit (2,799,239) – – – – – – (2,799,239)Adjustments to Opening RE – – (36,388) – (690,000) 1,085,000 TBD 358,612

Total shareholders’ equity 109,283,654 25,157 (36,388) 984,000 – 1,085,000 – 111,341,423

123,728,635 25,157 43,945 – – 1,085,000 – 124,882,737

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(a) IFRS 2 – Share-based Payments

Share based payments that were outstanding but not fully vested were assessed for any differences between Canadian GAAP and IFRS. IFRS2 requires the fair value of share-based payments issued to a non-employee in exchange for services to be measured at the date the servicewas rendered, and recognized over the life of the share-based payment. The Company had such share-based payments at the date of transi-tion to IFRS related to warrants issued to BNP Paribas for services performed for NICO project financing initiatives. Under Canadian GAAP, theCompany re-measured the fair value of these share-based payments at each reporting date and at the vesting dates. As a result of this differ-ence, the financial statements will reflect an adjustment of $25,157 to increase share capital and transaction costs recorded in other assets.

(b) IAS 37 – Provisions, Contingent Liabilities and Contingent Assets (“IAS 37”) – Asset Retirement Obligations

IAS 37 requires a company to recognize an asset retirement obligation if a legal or constructive obligation exists upon commencement of theproject when and if it can be reliably measured. IAS 37 provides guidance that differs from Canadian GAAP related to measurement of suchasset retirement obligations and requires certain assumptions to be made. The amount recorded is reassessed each reporting period based onnew estimates and assumptions. IAS 16 requires the cost of property, plant and equipment to include the estimated cost of dismantling andremoving the asset and restoring the site. Under Canadian GAAP a company is required to recognize an asset retirement obligation if a legalobligation exists and a reasonable estimate for that obligation can be made. As discussed in the Critical Accounting Estimates section above,due to uncertainty around the date of settlement of potential asset retirement obligations for the Company’s projects, an asset retirement obli-gation has not been recorded under Canadian GAAP. The Company has quantified its obligation for restoring the NICO and Klappan project sitesunder IAS 37, and will recognize an adjustment on transition to IFRS to record the asset retirement obligation ($80,333), the related asset in min-ing properties ($43,945), and retrospective adjustment for accretion through opening retained earnings ($36,388).

(c) IAS 12 – Income Taxes (“IAS 12”) – Initial Recognition Exemption

Under IFRS, a company should not recognize the deferred tax on the initial recognition of an asset or liability in a transaction that is not a busi-ness combination and at the time of the transaction does not impact accounting or taxable income at the time of initial recognition. CanadianGAAP contains no such exemption. In 2007, the Company purchased a minority interest in NICO, which does not meet the definition of a busi-ness combination under IFRS, and recorded a future tax liability of $984,000 in relation to the transaction. As a result of the IFRS and CanadianGAAP difference, the future tax liability recorded in 2007 is reversed on transition to IFRS.

(d) IAS 12 – Income Taxes (“IAS 12”) – Backwards Tracing

Under IFRS, current and deferred taxes that arise from an item recorded directly in equity should also be recorded through equity, and notthrough the income statement. Any re-measurement of an item recorded directly in equity that originally triggered the recognition of the cur-rent or deferred taxes are also recorded through the equity account and not through the income statement; this concept is referred to as “back-wards tracing”. Canadian GAAP does not allow backwards tracing on items recorded directly in equity. The Company recorded $690,000 in 2007as a deferred tax asset for certain un-deducted share issuance costs that were previously assessed as more likely than not to be realized inthe future. As a result of the difference between Canadian GAAP and IFRS related to backwards tracing, a transitional adjustment to move futuretaxes recorded on share issuance costs from the income statement to the share capital account in the balance sheet will be recorded as a ret-rospective adjustment through opening retained earnings.

(e) IAS 12 – Income Taxes – Investment Tax Credits

Under IFRS, investment tax credits (“ITC”) are not explicitly addressed and are excluded from the scope of IAS 12 and IAS 20 Accounting forgovernment grants (“IAS 20”). However, the “GAAP Hierarchy” discussed in IAS 8 Accounting policies, changes in accounting estimates anderrors (“IAS 8”) suggests that the Company is not prohibited in applying these standards. Under each IAS 12 and IAS 20 the ITC should berecorded in the income statement. Under Canadian GAAP, the Company has recorded ITCs as a reduction of the related asset, through thedeferred exploration expenditure account in mining properties. As a result of this difference, the ITCs recorded against deferred explorationexpenditures at the transition date of $1,085,000 will be adjusted for and recorded through opening retained earnings.

(f) IAS 16 – Property, Plant and Equipment

The Company is anticipating that there will be adjustments under IAS 16 as a result of differences between Canadian GAAP and IFRS, howev-er the quantification of such adjustments is in process.

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IDENTIFICATION OF KEY DIFFERENCES BETWEEN CANADIAN GAAP AND IFRS

The Company has conducted an analysis to compare current financial statement balances and disclosures based on Canadian GAAP compared toapplicable IFRS. The following are selected key areas of accounting differences where changes in accounting policies on conversion to IFRS willimpact the Company’s consolidated financial statements under IFRS going forward, but will not require an adjustment to the financial statements ontransition to IFRS. The list and comments should not be construed as a comprehensive list of all changes that will result from transition to IFRS butrather highlights those areas of accounting differences the Company currently believes to be most significant.

Mining Properties - Evaluation and Exploration Expenditures

• Current accounting policy: The Company capitalizes acquisition costs and exploration and development expenditures relating to mining prop-erties until the properties are brought into commercial production, disposed, or the mineral property is no longer economically viable or thereis a permanent impairment in value, at which time the carrying value will be written down to its estimated fair value. Unlike IFRS, Canadian GAAPindicates that exploration costs may initially be capitalized if the Company considers that such costs have the characteristics of property, plantand equipment.

• IFRS 6 - Mineral property interests, exploration and evaluation costs (“IFRS 6”): Under IFRS 6, the Company is required to develop an account-ing policy to identify which expenditures are considered exploration and evaluation activities, and recorded as assets, and to identify the cut-off point between the exploration and evaluation phase and development phase. Expenses incurred in the development phase are to be record-ed separately as intangible assets under IAS 38 Intangible assets. Exploration and evaluation assets shall be classified as either tangible orintangible according to the nature of the assets acquired.

The Company has determined it will continue to capitalize expenditures incurred relating to mineral properties until the costs are expected to berecouped through the successful development of the area of interest (or alternatively by its sale), or where activities in the area have not yet reacheda stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active operations are con-tinuing, or planned for the future. Expenditures capitalized as exploration and evaluation costs will be transferred to mine development assets oncethe work completed to date supports the future development of the property and such development receives appropriate internal approvals, includ-ing from the Board of Directors, as well as external approvals, including obtaining the necessary permits from regulatory bodies. IFRS is expected toimpact the extent of disclosure in the notes to the financial statements; however, no adjustments to the Company’s balance sheet or income state-ment on transition to IFRS have been assessed to date.

Impairment of Assets

• Current accounting policy: Impairment testing of long-term assets is based on a two-step approach under current Canadian GAAP. Currently,under Canadian GAAP, long-lived assets are tested for impairment whenever circumstances indicate that the carrying value may not be recov-erable. When events or circumstances indicate that the carrying amount of long-lived assets, other than indefinite life intangibles, are notrecoverable, the long-lived assets are first tested for impairment by comparing the estimate of future expected cash flows to the carryingamount of the assets or groups of assets. If the carrying value is not recoverable from future expected cash flows, secondly, any loss is meas-ured as the amount by which the asset's carrying value exceeds fair value and is recorded in the period. Recoverability is assessed relative toundiscounted cash flows from the direct use and disposition of the asset or group of assets. Indefinite life intangible assets are subjected toimpairment tests on an annual basis or when events or circumstances indicate a potential impairment. If the carrying value of such assetsexceeds the fair values, the assets are written down to fair value.

• IAS 36 Impairment of Assets (“IAS 36”): Under IAS 36 impairment testing is based on a one-step test, comparing the carrying amount of an assetto its recoverable amount. If there is an indication that an asset may be impaired the recoverable amount of the asset will need to be calculat-ed, this is the greater of the assets value in use or fair value less costs to sell. The assets value in use is computed using discounted future cashflows. IAS 36 requires, under certain circumstances, the reversal of impairment losses, which is not allowed under current Canadian GAAP.

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The Company’s financial statements will not be impacted on the changeover to IFRS based on the analysis of impairment indicators on transition.Nevertheless, in subsequent years, IFRS could generate more impairment than Canadian GAAP would since it uses a one-step test. The extent ofassets requiring an impairment test under IAS 36 will depend on whether any previous mining property expenditures are later defined as being devel-opment phase assets in addition to existing plant and equipment assessed for impairment on transition.

Property, Plant and Equipment

• Current accounting policy: Capital assets are stated at cost less accumulated amortization. Amortization of capital assets is recorded using thedeclining balance method.

• IAS 16 Property, plant, and equipment (“IAS 16”): IAS 16 provides companies with an option on transition to IFRS to use a cost model or a reval-uation model to value their capital assets. The cost model is consistent with the valuation requirements under Canadian GAAP and the revalu-ation model uses the fair value of an asset at the reporting date to measure the value. IAS 16 requires that the depreciable amount of an assetbe allocated on a systematic basis over its useful life and that the method of depreciation be reviewed at least each reporting period end todetermine if there has been a significant change in the pattern of consumption of the assets benefits.

The Company has determined that it will continue using the cost model to value its assets after transition to IFRS. Management is continuing to workthrough the other differences between IAS 16 and Canadian GAAP in order to determine the adjustment(s) required on transition since IAS 16 analy-sis is still in process due to a recent decision to elect to use cost in accordance with IFRS on transition under IFRS 1.

Leases

• Current accounting policy: Currently the Company accounts for leases as either operating or capital. Lease classification depends on whethersubstantially all of the risks and rewards incidental to ownership of a leased asset have been transferred from the lessor to the lessee, and ismade at inception of the lease. Currently, under Canadian GAAP, a number of indicators are used to assist in lease classification including quan-titative thresholds.

• IAS 17 Leases (“IAS 17”): A lease is classified as either a finance lease or an operating lease. Lease classification depends on whether sub-stantially all of the risks and rewards incidental to ownership of a leased asset have been transferred from the lessor to the lessee, and is madeat inception of the lease. A number of indicators are used to assist in lease classification; however, quantitative thresholds are not offered asan indicator as they are under current Canadian GAAP.

The Company has determined that there will be no impact on its financial statements on transition to IFRS, or throughout 2010 as a result of the dif-ferences between IAS 17 and Canadian GAAP for leases.

Provisions, contingent liabilities and contingent assets

• Current accounting policy: Currently, under Canadian GAAP, the Company recognizes contingent liabilities if they can be reliably measured andif the outcome is likely.

• IAS 37 Provisions, contingent liabilities and contingent assets (“IAS 37”): Under IFRS, a provision should be recognized when: there is a pres-ent obligation (legal or constructive) as a result of a past transaction or event; it is probable that an outflow of resources will be required to set-tle the obligation; and, a reliable estimate can be made of the obligation. “Probable” in this context means more likely than not. Under CanadianGAAP, the criterion for recognition in the financial statements is “likely”, which is a higher threshold than “probable”. Other differences betweenIFRS and Canadian GAAP exist in relation to the measurement of provisions, such as the methodology for determining the best estimate wherethere is a range of equally possible outcomes (IFRS uses the mid-point of the range, whereas Canadian GAAP uses the low-end of the range),and the requirement under IFRS for provisions to be discounted where material.

The Company has determined that the only impact as a result of applying IAS 37 is the recognition of an asset retirement obligation, as discussedpreviously in the “Preparation of an Opening Statement of Financial Position” section. In years subsequent to adoption of IFRS, it is possible thatthere may be some additional provisions or contingent liabilities which would meet the recognition criteria under IFRS that would not have been rec-ognized under Canadian GAAP.

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Share-Based Payments

• Current accounting policy: Under Canadian GAAP, the Company assesses inputs to the fair value calculation for share-based payments usingthe best estimate in a range, and accounts for forfeitures as they occur.

• IFRS 2 Share based payments: IFRS 2 requires the Company to estimate the forfeiture rate, with respect to share options, at the grant dateinstead of recognizing the entire compensation expense and only record actual forfeitures as they occur. For graded-vesting features, IFRSrequires each instalment to be treated as a separate share option grant, because each instalment has a different vesting period and hence thefair value of each instalment will differ. Under IFRS 2, the awards should not be re-measured at each reporting date.

The Company has assessed the fair value calculation inputs and forfeiture estimates under IFRS and determined that there will be no impact on thefinancial statements. For additional discussion on the adjustments required on transition to IFRS and subsequent to transition related to the BNPParibas warrants refer to the “Preparation of Opening IFRS Statement of Financial Position” section and “Apply IFRS Accounting Policies toComparative Financial Statements” sections respectively.

Other

Other areas that have been initially identified as having a potential significant impact in the future, but not on transition, as the Company transformsfrom exploration to operations include:

• Inventory• Revenue Recognition• Business Combinations• Functional Currency• Derivatives and Hedging• Segment Reporting

APPLY IFRS ACCOUNTING POLICIES TO COMPARATIVE FINANCIAL STATEMENTS

For the Company, the first published interim financial statements under IFRS will be for the three-month period ending March 31, 2011. However, com-parative financial statements will need to be provided for the three-month period ending March 31, 2010 and each three-month period for the remain-der of 2010. Therefore, IFRS 1 will be applied to the opening balances for the period beginning January 1, 2010. The Company is in the process of final-izing account balances in accordance with IFRS in order to have comparative financial statements on full implementation of IFRS in 2011. The fol-lowing discussion provides details on areas assessed where comparative balances for 2010 will be adjusted due to the differences betweenCanadian GAAP and IFRS. Note that the adjustments are unaudited.

IFRS 2

IFRS 2 requires the fair value of the share-based payments issued to a non-employee in exchange for a service to be measured at the date theservice was rendered, and recognized over the life of the share-based payments. Under Canadian GAAP, the Company re-measured the fair valueof certain warrants issued to BNP Paribas relating to transaction costs at each reporting date and at the vesting dates. As a result of this differ-ence, the financial statements will reflect an adjustment to the equity (warrants) and transaction cost (other assets) accounts for 2010 compara-tives as follows:

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Period Equity (Warrants) Transaction Costs (Other assets)Dr (Cr) Dr (Cr)

March 31, 2010 $43,325 ($43,325)June 30, 2010 ($17,801) $17,801September 30, 2010 ($10,317) $10,317December 31, 2010 $0 $0

IAS 12

Under IFRS, investment tax credits (“ITC”) are not explicitly addressed, and are excluded from the scope of IAS 12 and IAS 20. However, the “GAAPHierarchy” discussed in IAS 8 suggests that the Company is not prohibited in applying these standards. Under both IAS 12 and IAS 20 the ITC shouldbe recorded in the income statement. Under Canadian GAAP, the Company has recorded ITCs as a reduction of the related asset, through thedeferred exploration expenditure account. As a result of this difference, the ITCs recorded against deferred exploration expenditures through 2010will be adjusted for comparative purposes in the 2011 financial statements. The following adjustments will be recorded through the tax provision andNICO deferred exploration expenditure (“DEE”) accounts for 2010 comparatives as follows:

Period DEE - NICO Provision for taxesDr (Cr) Dr (Cr)

March 31, 2010 $191,500 ($191,500)June 30, 2010 ($63,500) $63,500September 30, 2010 $305,000 ($305,000)December 31, 2010 ($88,000) $88,000

IAS 23

Under IFRS, IAS 23 requires that an entity capitalize borrowing costs, including interest, which is directly attributable to the acquisition, constructionor production of a qualifying asset. Canadian GAAP does not contain comprehensive guidance on the method for capitalization of borrowing costs.As a result of applying IAS 23 to 2010 borrowing costs, the Company will need to record an adjustment to reduce the interest expense on the incomestatement, and increase the amount of interest being capitalized by making the following adjustments for 2010 comparatives:

Period DEE / Capital Assets Interest expenseDr (Cr) Dr (Cr)

March 31, 2010 $32,338 ($32,338)June 30, 2010 $32,377 ($32,377)September 30, 2010 $33,977 ($33,977)December 31, 2010 $25,766 ($25,766)

IAS 37

Under IAS 37, the Company will be required to record an asset retirement obligation; for additional discussion on the adjustments required ontransition to IFRS and subsequent to transition related to the BNP Paribas warrants refer to the “Preparation of Opening IFRS Statement ofFinancial Position” section. The accretion expense and respective increase in the liability recognized in the 2010 comparative balances will be$1,807 per quarter.

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ADDITIONAL AREAS ADDRESSED IN THE CONVERSION TO IFRS

Assess Process, Internal Control, System and Business Changes

The impact on process and internal controls will be minimal on transition to IFRS. The areas of IFRS identified above which have the most significantimpact on the financial statement, will not require the Company to make significant changes to processes or internal controls. As the Company’s proj-ects evolve from pre-production to operations, it is anticipated that the impact of IFRS will become more pervasive on the Company’s processes andcontrols. The Company reviewed the short-term system needs required to support future operations under IFRS with the intent to implement anyrequired changes prior to IFRS conversion. As a result, the Company implemented fixed assets inventory and accounting software with increasedfunctionality and reporting which will assist with applying IFRS accounting policies selected for property, plant and equipment.

Major business activities will not be impacted by the transition to IFRS since they are not impacted by GAAP measures currently (i.e. no debtcovenants, capital requirements, or compensation arrangements impacted by GAAP measures at this time). However, the Company will consider theimpact on business activities for any future arrangements entered into that may be impacted by IFRS accounting policies as well as any arrange-ments entered into currently that are not impacted on transition, but may be impacted in the future.

Communication and Disclosure

The Company has assessed, and will continue to assess and monitor the impact of adopting IFRS. Leading up to the first set of financial state-ments issued under IFRS, for the period ending March 31, 2011, in addition to regulatory disclosure requirements, the Company will assess thenature and extent of investor relations activity required, if any, to communicate to shareholders changes in accounting policies and account bal-ances due to IFRS.

Training and Financial Expertise

Fortune’s Corporate Controller and Chief Financial Officer have attended training programs specific to IFRS. During the third quarter of 2010, theCompany added financial expertise to the team through the hiring of an Accounting Manager with an initial emphasis on IFRS implementation respon-sibilities. The Chief Financial Officer, Corporate Controller and Accounting Manager have also completed a significant amount of self-study relatedto the standards under IFRS. The Company continues to build IFRS knowledge through senior management and Audit Committee training and com-munication. IFRS was on the agenda and relevant implementation activities discussed for each 2010 Audit Committee meeting and specific IFRSmeetings have been held to develop policies and select choices where available under IFRS, including IFRS 1 considerations. Additional meetingswill be scheduled as required between the date hereof and full IFRS implementation. In addition, the Company has engaged the external auditors toassist with certain activities related to the implementation of IFRS and has consulted on technical matters when required.

••• ENVIRONMENT

Fortune is committed to a program of environmental protection at its development projects and exploration sites. Fortune was in compliance withgovernment regulations in 2010. The Company has provided secured letters of credit in the aggregate amount of $518,000 to be held against futureenvironmental obligations with respect to Klappan and NICO. Security held is well in excess of the aggregate amount.

••• RISK AND UNCERTAINTIES

The operations of the Company are speculative due to the high-risk nature of its business, which is the acquisition, financing, exploration and devel-opment of mining properties. The risks below are not the only ones facing the Company. Additional risks not currently known to the Company, or thatthe Company currently deems immaterial, may also impair the Company’s operations. If any of the following risks actually occur, the Company’s busi-ness, financial condition and operating results could be adversely affected.

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Nature of Mineral Exploration and Mining

At the present time, the Company does not hold any interest in a mining property in production. The Company’s viability and potential success is basedon its ability to develop, exploit and generate revenue from mineral deposits. The exploration and development of mineral deposits involve significantfinancial risk over a significant period of time, which even a combination of careful evaluation, experience and knowledge may not eliminate. To date,the Company has spent approximately $94 million and $21 million on exploration and development of NICO and Klappan, respectively, on activities tomove the projects forward. In order to continue developing the projects towards operation and commercial production, the Company will be requiredto make substantial additional capital investments. It is impossible to ensure that the past or proposed exploration and development programs on theproperties in which the Company has an interest will result in a profitable commercial mining operation.

The operations of the Company are subject to all of the hazards and risks normally incident to exploration and development of mineral properties,any of which could result in damage to life and property, the environment and possible legal liability. The activities of the Company may be subjectto prolonged disruptions due to weather conditions as a result of the Company’s properties being located in northern Canada. Specifically, at NICO,the Company is subject to increased risk relating to the dependence on ice road travel to supply and equip its work programs and at Klappan theCompany is subject to increased risk relating to the potential damage to the access roads resulting from drainage or snow accumulations in moun-tainous terrain. While the Company has obtained insurance against certain risks in such amounts as it considers adequate, the nature of these risksare such that liabilities could exceed policy limits or could be excluded from coverage. There are also risks against which the Company cannot insureor against which it may elect not to insure. For example, the Company has not obtained environmental insurance at its project sites to date and haslimited its insured values of its assets to stated amounts approximating the estimated cash invested in its capital assets to date. The potential costswhich could be associated with any liabilities not covered by insurance or in excess of insurance coverage or associated with compliance with appli-cable laws and regulations may cause substantial delays and require significant capital outlays, adversely affecting the future earnings and com-petitive position of the Company.

Whether a mineral deposit will be commercially viable depends on a number of factors, some of which are the particular attributes of the deposit,such as size and grade, proximity to infrastructure, financing costs and governmental regulations, including regulations relating to prices, taxes, roy-alties, infrastructure, land use, importing and exporting and environmental protection. The Company has undertaken activities to reduce certain risksrelated to its major projects through: completion of extensive exploration and drilling programs; completion of numerous environmental baseline stud-ies; pilot plant test work and process optimization and verification; and, investing in significant engineering studies for the mine planning, mine sitebuildings and equipment, infrastructure and processing facility.

Limited Financial Resources

The existing financial resources of the Company are not sufficient to bring any of its properties into commercial production. The Company is in theprocess of updating capital cost estimates for NICO from the 2007 feasibility study to reflect a number of changes including relocating the hydromet-allurgical facility to Saskatchewan, process enhancements designed to maximize recovery of metals and plans to produce finished metals, andexpects estimated capital costs for NICO and the SMPP will exceed $400 million. At Klappan, based on the updated feasibility study using the railtransportation option and depending on an increase in production profile, estimated capital costs exceed $760 million. The Company will need toobtain additional financing from external sources and/or find suitable joint venture partners in order to fund the development of Klappan, NICO andthe SMPP. There is no assurance that the Company will be able to obtain such financing or joint venture partners on favourable terms, or at all.Failure to obtain financing or joint venture partners could result in delay or indefinite postponement of further exploration and development of theCompany’s properties.

Dependence on Key Personnel and Limited Management Team

Fortune is dependent on the services of its senior executives including the President and Chief Executive Officer, Vice President Finance and ChiefFinancial Officer and Vice President Operations, and approximately 10 full time equivalent skilled and experienced employees and consultants. Theloss of any such individuals could have a material adverse effect on Fortune’s operations. In addition, Fortune will need to supplement its existingmanagement team in order to bring any of its projects into production.

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Fluctuating Prices

Factors beyond the control of the Company may affect the marketability of coal, cobalt, bismuth, gold, copper or any other minerals discovered. Therange in market prices, over the last five years, for the commodities at NICO are as follows: annual average gold prices have ranged from a low ofUS$603/oz in 2006 and have increased annually, on average, to a high of US$1,225/oz in 2010; cobalt annual average prices have ranged from a lowof US$17.67/lb (2009) to a high of US$40.22/lb (2008), with the annual average price in 2010 being US$21.29/lb; copper annual average prices haveranged from a low of US$2.32/lb (2009) to a high of US$3.37/lb (2010); bismuth annual average prices have ranged from a low of US$4.89/lb (2006) toa high of US$13.76/lb (2007), with the annual average price in 2010 being US$9.38/lb. For anthracite coal at Klappan, market prices of metallurgicalcoal of this quality are less readily available. However, based on spot prices and trend setting contracts entered into by certain metallurgical coalproducers, it is believed that over the last five years Ultra-low volatile pulverized coal injection (“ULV PCI”) coal prices have ranged from approxi-mately US$80/tonne to US$275/tonne and coking coal prices have ranged from approximately US$100/tonne to US$300/tonne. The commodity priceshave fluctuated widely and are affected by numerous factors beyond the Company’s control such as the economic downturn observed in 2008 and2009, commodity supply shortages, weather events such as recent flooding in Australia, political instability, and changes in exchange and interestrates. The effect of these factors cannot accurately be predicted.

Permits and Licenses

The operations of the Company require licenses and permits from various governmental authorities. The Company believes that it presently holds allnecessary licenses and permits required to carry out the activities which it is currently conducting under applicable laws and regulations and theCompany believes it is presently complying in all material respects with the terms of such licenses and permits. However, such licenses and permitsare subject to change in regulations and in various operating circumstances. The Company has submitted requisite applications for land use andwater licenses in order to construct and operate a mine at its NICO project and plans to submit its Developer’s Assessment Report as part of the envi-ronmental assessment process early in 2011. However, the Company has not yet received the permits and licenses required for operations. As aresult of submitting the aforementioned applications, an environmental assessment of the project is underway and the applications are subject toreview and approval by certain regulatory bodies and First Nations. The Company has also entered the environmental assessment process for theSMPP in Saskatchewan in order to obtain the necessary permits required for operating the facility. These applications are also subject for reviewby certain regulatory authorities. In addition, the Company will be required to complete the environmental assessment process related to Klappan.Subject to receiving environmental certificates and approvals, the Company will be required to apply and obtain mining permits in order to build andoperate a mine. There can be no assurance that the Company will be able to obtain all necessary licenses and permits required to carry out futureexploration, development and mining operations at its projects.

Competition

The mineral exploration and mining business is competitive in all its phases. The Company competes with numerous other companies and individu-als, including other resource companies with greater financial, technical and other resources than the Company, in the search for and the acquisi-tion of attractive mineral properties, the acquisition of mining equipment and related supplies and the attraction and retention of qualified personnel.The Company will be constrained in its ability to manage the cost of salaries at NICO and the SMPP during construction and operations as Fortunemay be competing for labour with the much larger diamond mining companies operating in the Northwest Territories and potash companies operat-ing in Saskatchewan, respectively. Similar competition may exist in British Columbia during construction and operations of Klappan since there areother mines progressing in the region. The current estimate is that upwards of 1000 additional employees in aggregate will need to be hired to oper-ate NICO, the SMPP and Klappan. There is no assurance that the Company will continue to be able to compete successfully in the acquisition ofbuilding materials, sourcing equipment or hiring people.

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Environmental and Climate Change Regulation

The operations of the Company are subject to environmental regulations promulgated by government agencies from time to time. Environmentallegislation provides for restrictions and prohibitions on spills, releases or emissions of various substances produced in association with certainmining industry operations, such as seepage from tailings disposal areas, which would result in environmental pollution. A breach of such legisla-tion may result in the imposition of fines and penalties. In addition, certain types of operations require the submission and approval of environmen-tal impact assessments. Environmental legislation is evolving in a manner which means standards, enforcement, fines and penalties for non-com-pliance are more stringent. Environmental assessments of proposed projects carry a heightened degree of responsibility for companies and theirdirectors, officers and employees. The Company has carried out and completed significant environmental base line studies to position the Companyto successfully complete required environmental assessments; however, despite this, the Company has not been able to obtain certain environ-mental certificates in a timely manner due to the complexities of the regulatory requirements and process. The cost of compliance with changesin governmental regulations has the potential to reduce the profitability of future operations. The impacts of international or domestic climate agree-ments, carbon taxes and other potential climate change legislation are difficult to predict and are not yet fully understood, including impacts oncapital and operating costs.

Aboriginal Title and Rights Claims

Aboriginal title and rights may be claimed with respect to Crown properties or other types of tenure with respect to which mining rights have beenconferred. The Company is not aware of any aboriginal land claims having been formally asserted or any legal actions relating to aboriginal issueshaving been instituted with respect to Klappan, NICO or the SMPP properties other than certain treaty rights established by the Tahltan and Gitxsanfor Klappan and by the Tlicho for NICO. The lands that surround NICO are owned by the Tlicho Government pursuant to the agreement between theGovernment of Canada, the Northwest Territories and the Tlicho Government. The Company is aware of certain First Nations that claim certain titleand rights with respect to Crown properties related to the Company’s projects that may or may not be formally asserted with the Crown in order toseek comprehensive land claim settlements. In 2005, the Company’s Klappan property was the subject of a blockade by a group of individuals, mostbeing aboriginals, which required the Company to obtain a court injunction to remove the blockade. For NICO, while the Company has a right ofaccess to the NICO mine site under the Tlicho Agreement with the Crown, an access agreement will be required between the Tlicho and theCompany for the use of the access roads to be built through Tlicho territory to the site. The Company is aware of the mutual benefits afforded by co-operative relationships with indigenous people in conducting exploration and development activity and is supportive of measures established toachieve such cooperation including preferential hiring practices, local business development activities, involvement in environmental stewardshipand other forms of accommodation. Certain challenges with respect to timely decision making may be encountered when working with First Nationgovernments as a result of capacity restraints due to the limited number of key individuals in demanding leadership positions, turnover of leadershippersonnel and delays while elections are held. It will also be necessary for the Company to negotiate and enter into appropriate participation agree-ments with relevant First Nations in order to bring its projects into production and there is no assurance that the Company will be able to negotiatesuch agreements on favourable terms or at all. In addition, other parties may dispute the Company’s title to the properties and the properties may besubject to prior unregistered agreements or transfers or land claims by aboriginal peoples, and title may be affected by undetected encumbrancesor defects or government actions.

Estimates of Mineral Reserves and Resources May Not be Realized

The mineral reserve and resource estimates published from time to time by the Company with respect to its properties are estimates only and noassurance can be given that any particular level of recovery of minerals will in fact be realized or that an identified resource will ever qualify as acommercially mineable (or viable) deposit which can be legally and economically exploited. Material changes in resources, grades, stripping ratiosor recovery rates may affect the economic viability of projects. However, through extensive investment in exploration drilling, test mining, bulk sam-pling, engineering planning and pilot plant testing, the Company has substantially mitigated and reduced these risks. There is a risk that mineralsrecovered in small-scale laboratory and large scale pilot plant tests will be materially different under on-site conditions or in production scale oper-ations. Short-term factors, such as the need for orderly development of deposits or the processing of new or different grades, may have an adverseeffect on mining operations or the results of operations.

The Company has engaged expert independent technical consultants to advise it with respect to mineral reserves and resources and project engi-neering, among other things. The Company believes that those experts are competent and that they have carried out their work in accordance withall internationally recognized industry standards. However, if the work conducted by those experts is ultimately found to be incorrect or inadequatein any material respect, the Company may experience delays and increased costs in developing its properties.

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Health and Safety Matters

The Company’s development and exploration projects are affected by various laws and regulations, including those which cover health and safetymatters. Existing legislation and regulations are subject to change, the impacts of which are difficult to measure. It is the policy of the Company tomaintain safe working conditions at all its work sites, comply with health and safety legislation, maintain equipment and premises in safe conditionand ensure that all employees are trained and comply with safety procedures. The Company has successfully implemented policies and proceduresrelating to health and safety matters at its project sites and has a good safety record to date.

••• FINANCIAL INSTRUMENTS

As at the date hereof, the Company’s financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, recla-mation bonds, accounts payable and accrued liabilities, long-term debt, interest payable and income taxes payable. These financial instruments arerecorded at their fair values except for accounts receivable, accounts payable and accrued liabilities, long-term debt, interest payable and incometaxes payable which are recorded at amortized cost. It is management’s opinion that the Company is not exposed to significant interest or credit risksarising from these financial instruments. The Company mitigates its risk by holding its short-term investments in instruments low in risk and highlyrated with large reputable financial institutions.

••• ADDITIONAL INFORMATION

Additional information relating to the Company, including its current and previous year’s annual information forms are available on SEDAR atwww.sedar.com.

••• SHARE DATA

As at the date hereof, the Company has 107,219,427 common shares issued and outstanding, as well as: (i) warrants to purchase an aggregate of14,040,752 common shares expiring at various dates between December 3, 2011 and April 16, 2013 and exercisable at various prices between $0.72and $3.00 per share; (ii) stock options to purchase an aggregate of 4,250,000 common shares expiring at various dates between March 27, 2011 andJanuary 13, 2016 and exercisable at various prices between $0.60 and $2.96 per share; and, (iii) compensation options to purchase an aggregate of956,167 units for $0.65 on or before December 3, 2011. Each unit consists of one common share and one-half common share purchase warrant andeach whole warrant entitles the holder to purchase one common share of the Company for $0.80 on or before December 3, 2011. All warrants andcompensation options are fully vested as at the date hereof. All stock options have vested as at the date hereof, except for 20,000 which are exer-cisable at $0.92 and vest on September 20, 2011.

••• EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to seniormanagement, including the Company’s Chief Executive Officer and Chief Financial Officer, on a timely basis so that appropriate decisions can bemade regarding public disclosure. As at the end of the period covered by this management’s discussion and analysis, management of the Company,with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controlsand procedures as required by Canadian securities laws. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer haveconcluded that, as of the end of the period covered by this MD&A, the disclosure controls and procedures were effective to provide reasonableassurance that information required to be disclosed in the Company’s annual filings and interim filings (as such terms are defined under NationalInstrument 52-109— Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators) and other reportsfiled or submitted under Canadian securities laws is recorded, processed, summarized and reported within the time periods specified by those lawsand that material information is accumulated and communicated to management of the Company, including the Chief Executive Officer and the ChiefFinancial Officer, as appropriate to allow timely decisions regarding required disclosure.

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••• INTERNAL CONTROLS OVER FINANCIAL REPORTING

Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of the Company’s financial reportingand the preparation of financial statements in compliance with Canadian generally accepted accounting principles (GAAP). Any system of internalcontrol over financial reporting (ICFR), no matter how well-designed, has inherent limitations. Therefore, even well-designed systems of internal con-trol can provide only reasonable assurance with respect to financial statement preparation and presentation.

As at the end of the period covered by this management’s discussion and analysis, management of the Company, with the participation of the ChiefExecutive Officer and the Chief Financial Officer, evaluated the design and effectiveness of the Company’s internal controls over financial reportingas required by Canadian securities laws. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that,as of the end of the period covered by this MD&A, ICFR were effective to provide reasonable assurance regarding the reliability of financial report-ing and the preparation of financial statements for external purposes in accordance with GAAP. The control framework used to design and assessthe effectiveness of the Company’s ICFR is the Internal Control - Integrated Framework (COSO Framework) published by The Committee of SponsoringOrganizations of the Treadway Commission (COSO). Further, the Company uses Internal Control over Financial Reporting - Guidance for SmallerPublic Companies published by COSO, which provides guidance to smaller public companies on the implementation of the COSO Framework.

The Company assesses internal controls over financial reporting on an ongoing basis and where determined appropriate, proactively implementsenhancements to the design of controls required to support anticipated changes to and growth of the business. Due to operational, financial andadministrative changes planned to occur as the Company transforms from an exploration company to a producer together with the adoption of IFRS,changes will be required to the Company’s internal controls over financial reporting in order to maintain reasonable assurance regarding the relia-bility of the Company financial reporting and preparation of financial statements. As such, there were enhancements made to the Company’s inter-nal controls over financial reporting during the year ended December 31, 2010. Enhancements include increased segregation of duties through theaddition of an Accounting Manager and Procurement and Logistics Manager; increased policies and procedures implemented on project sites,including sign-offs from employees; better defined delegation of decision making authority; implementation of additional fixed assets accounting soft-ware functionality; additional oversight and centralization of purchasing process and controls by the addition of a Procurement and LogisticsManager; additional controls implemented around the budgeting process; and, streamlining of certain payroll and accounting processes.

This discussion contains certain forward-looking information. This forward-looking information includes, or may be based upon, estimates, forecasts, and statementsas to management’s expectations with respect to, among other things, the size and quality of the Company’s mineral resources, progress in development of miner-al properties, timing and cost for placing the Company’s mineral projects into production, costs of production, amount and quality of metal products recoverable fromthe Company’s mineral resources, demand and market outlook for metals and coal, future metal and coal prices. Forward-looking information is based on the opin-ions and estimates of management at the date the information is given, and is subject to a variety of risks and uncertainties and other factors that could cause actu-al events or results to differ materially from those projected in the forward-looking information. These factors include the inherent risks involved in the explorationand development of mineral properties, uncertainties with respect to the receipt or timing of required permits and regulatory approvals, the uncertainties involvedin interpreting drilling results and other geological data, fluctuating metal and coal prices, the possibility of project cost overruns or unanticipated costs and expens-es, uncertainties relating to the availability and costs of financing needed in the future, uncertainties related to metal recoveries, uncertainty in the outcome of lit-igation and other factors. Readers are cautioned to not place undue reliance on forward-looking information because it is possible that predictions, forecasts, pro-jections and other forms of forward-looking information will not be achieved by the Company. These forward-looking statements are made as of the date hereof andthe Company assumes no responsibility to update them or revise them to reflect new events or circumstances, except as required by law.

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MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

The consolidated financial statements and the Management Discussion and Analysis are the responsibility of management and have been approvedby the Board of Directors. The consolidated financial statements have been prepared by management in accordance with accounting principles gen-erally accepted in Canada. When alternative accounting methods exist, management has chosen those it deems most appropriate in the circum-stances. Financial statements are not precise as they include certain amounts based on estimates and judgments. Management has determinedsuch amounts on a reasonable basis given currently available information in order to ensure that the financial statements are presented fairly, in allmaterial respects.

The Company maintains systems of internal accounting and administrative controls in order to provide, on a reasonable basis, assurance that thefinancial information is relevant, reliable and accurate and that the Company’s assets are appropriately accounted for and adequately safeguarded.

The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and is ultimately responsible forreviewing and approving the consolidated financial statements. The Board carries out this responsibility principally through its Audit Committee.

The Audit Committee is appointed by the Board, and its members are outside directors. The Committee meets with management as well as the exter-nal auditors to discuss auditing matters and financial reporting issues and to review the consolidated financial statements, the Management’sDiscussion and Analysis and the external auditors’ report. The Committee reports its findings to the Board for consideration when approving the con-solidated financial statements for issuance to the shareholders. The Committee also considers, for review by the Board and approval by the share-holders, the engagement or reappointment of the external auditors.

The consolidated financial statements have been audited by Ernst & Young LLP, the external auditors, in accordance with Canadian generally accept-ed auditing standards on behalf of shareholders. The external auditors have free access to the Audit Committee.

Robin Goad Julian KempPresident and Vice President Finance andChief Executive Officer Chief Financial Officer

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INDEPENDENT AUDITORS’ REPORT

To the Shareholders ofFortune Minerals Limited

We have audited the accompanying consolidated financial statements of Fortune Minerals Limited, which comprise the consolidated balance sheetsas at December 31, 2010 and 2009, and the consolidated statements of loss and deficit and cash flows for the years then ended, and a summary ofsignificant accounting policies and other explanatory information.

Management’s responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian gen-erally accepted accounting principles and for such internal control as management determines is necessary to enable the preparation of the con-solidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordancewith Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform theaudit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. Theprocedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financialstatements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's prepara-tion and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriate-ness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presen-tation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Fortune Minerals Limited as atDecember 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in accordance with Canadian generallyaccepted accounting principles.

London, Canada, Chartered AccountantsMarch 9, 2011. Licensed Public Accountants

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CONSOLIDATED BALANCE SHEETSFortune Minerals Limited. Incorporated under the laws of Ontario.

As at December 31 2010 2009$ $

ASSETSCurrent assetsCash and cash equivalents [note 10[a], 13] 9,143,974 18,328,148Restricted cash [note 13] – 2,698,561Accounts receivable 466,976 641,637 Prepaid expenses 108,727 62,857

Total current assets 9,719,677 21,731,203

Other assets [note 6[i]] 381,816 213,619Security deposit [note 6[i]] – 300,000Reclamation bonds [note 6[iii]] 618,507 617,250Capital assets, net [note 5] 113,675 104,135 Mining properties [note 6] 117,084,302 100,762,428

127,917,977 123,728,635

LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilitiesAccounts payable and accrued liabilities [note 13] 1,376,882 3,581,550Interest payable 90,000 90,000Income taxes payable 23,894 113,659

Total current liabilities 1,490,776 3,785,209

Long-term debt [note 8] 2,917,749 2,854,772Future income taxes [note 9] 6,966,000 7,805,000

Total liabilities 11,374,525 14,444,981

Commitments and contingencies [note 6, 12]

SHAREHOLDERS’ EQUITY

Share capital [note 7] 113,987,025 105,207,868Contributed surplus 7,131,153 6,875,025Deficit (4,574,726) (2,799,239)

Total shareholders’ equity 116,543,452 109,283,654

127,917,977 123,728,635

See accompanying notes

On behalf of the Board:

Robin Goad, Director Mahendra Naik, Director

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CONSOLIDATED STATEMENTS OF LOSS,COMPREHENSIVE LOSS, AND DEFICITFortune Minerals Limited. Incorporated under the laws of Ontario.

Years ended December 31 2010 2009$ $

REVENUEInterest and other income 24,889 50,334

EXPENSESAdministrative 1,041,828 947,129Investor relations 178,809 222,661Stock-based compensation [note 7[h]] 253,000 216,500Capital taxes 294,508 41,000Corporate advisory costs [note 6[ii]] 283,639 –Interest expense [note 8] 166,488 136,416Amortization of capital assets 17,218 19,693

2,235,490 1,583,399

Loss before other items (2,210,601) (1,533,065)

Foreign exchange loss [note 3] (81,901) (79,187)

Loss before income taxes (2,292,502) (1,612,252)

Provision for (recovery of) income taxes [note 9]Current provision 9,775 88,200Future income tax recovery (591,000) (368,000)

Net loss for the year (1,711,277) (1,332,452)

Deficit, beginning of year (2,799,239) (1,466,787)Modification of warrants [note 7[e]] (64,210) –

Deficit, end of year (4,574,726) (2,799,239)

Basic and diluted loss per share [note 7[b]] (0.02) (0.02)


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CONSOLIDATED STATEMENTS OF CASH FLOWSFortune Minerals Limited. Incorporated under the laws of Ontario.

Years ended December 31 2010 2009$ $

OPERATING ACTIVITIESNet loss for the year (1,711,277) (1,332,452)Add (deduct) items not involving cash

Amortization of capital assets 17,218 19,693Future income taxes (591,000) (368,000)Stock-based compensation 253,000 216,500Non-cash portion of interest expense 62,977 47,832

(1,969,082) (1,416,427)

Changes in non-cash working capital balances related to operationsAccounts receivable 174,661 (288,302)Prepaid expenses (45,870) (16,642)Accounts payable and accrued liabilities (2,204,668) 772,196Interest payable – 90,000Income taxes payable (89,765) 80,511

Cash used in operating activities (4,134,724) (778,664)

INVESTING ACTIVITIESDecrease (increase) in other assets, net of non-cash items (3,180) 568,321Decrease in security deposit 300,000 177,015Decrease (increase) in restricted cash [note 13] 2,698,561 (2,698,561)Purchase of plant and equipment and capital assets (7,332,384) (5,910,454)Loss on disposal of capital assets in mining properties – 23,361Posting of security for reclamation bonds (1,257) (15,383)Increase in exploration and development expenditures (9,178,049) (7,655,489)

Cash used in investing activities (13,516,309) (15,511,190)

FINANCING ACTIVITIESProceeds on issuance of debt, net – 2,900,690Proceeds on issuance of shares, net 8,466,859 22,782,119

Cash provided by financing activities 8,466,859 25,682,809

Increase (decrease) in cash and cash equivalents during the year, net (9,184,174) 9,392,955Cash and cash equivalents, beginning of year 18,328,148 8,935,193

Cash and cash equivalents, end of year [note 10[a]] 9,143,974 18,328,148


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFortune Minerals Limited. December 31, 2010 and 2009

1. NATURE OF OPERATIONS

Fortune Minerals Limited [the “Company”] is a natural resource company with mineral deposits and exploration projects in Canada. TheCompany is focused on the exploration and the assembly and development of natural resource projects. The recoverability of amountsshown for mineral properties and related exploration and development expenditures is dependent upon the economic viability of recover-able reserves, the ability of the Company to obtain the necessary permits and financing to complete the development, and future profitableproduction or proceeds from the disposition thereof.

The Company currently operates in one geographic region, Canada, and in one industry segment, mining.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accountingprinciples [“GAAP”] and are within the framework of the significant accounting policies summarized below. The preparation of financial state-ments requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities. The reported amounts and note disclosure are determined using management’s best estimates based onassumptions that reflect the most probable set of economic conditions and planned courses of action. Actual results, however, may differ fromthe estimates used in the consolidated financial statements.

a) Principles of consolidation

The consolidated financial statements reflect the financial position and results of operations of the Company and its wholly-owned sub-sidiaries Fortune Minerals NWT Inc., Fortune Minerals Saskatchewan Inc. [“FMSI”] and Fortune Coal Limited [“FCL”]. All intercompanytransactions and balances have been eliminated.

b) Comprehensive income

Comprehensive income is composed of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss)includes unrealized gains and losses on available-for-sale financial assets, translation gains and losses on self-sustaining foreign opera-tions and accounting for certain derivative instruments and hedging activities. The components of comprehensive income, if any, are dis-closed in the consolidated statements of comprehensive income (loss). For the years ended December 31, 2010 and 2009, the Companyhas no other comprehensive income (loss) to report therefore its net income (loss) is equal to the comprehensive income (loss).

c) Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, balances with banks, and short-term fixed income deposits with original maturitydates shorter than three months.

d) Short-term investments

Short-term investments consist of marketable securities and guaranteed deposits and are recorded at fair market value.

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e) Capital assets

Capital assets are stated at cost less accumulated amortization. Amortization of capital assets is recorded using the declining balancemethod at the following rates:

Asset class Rate of amortization %

Surface facilities 20Camp structures 30Mobile equipment 30Computer equipment 30Site furniture and equipment 30Furniture and fixtures 20 to 30Leasehold improvements 50Software 35

f) Mineral properties and exploration and development expenditures

The Company capitalizes acquisition costs and exploration and development expenditures relating to mineral properties until the proper-ties are brought into commercial production, disposed of, or the mineral property is no longer economically viable or there is a permanentimpairment in value, at which time the carrying value will be written down to its estimated fair value. Payments received for explorationrights on the Company’s mineral properties are treated as cost recoveries and reduce the cost of deferred exploration expenditures relat-ed to the mineral claims.

g) Income taxes

The Company follows the liability method of tax allocation in accounting for income taxes. Under this method, future tax assets and liabil-ities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and measured using thesubstantively enacted tax rates and laws that will be in effect when the differences are expected to reverse.

h) Administrative expenses

Included in exploration and development expenses and certain capital assets is a partial allocation of administrative, general and interestexpenses. The allocation is based on the portion of expenses directly attributable to the exploration and development expenses and cap-ital assets. The allocation is distributed among each project based on its pro rata share of direct expenditures in the year.

i) Stock-based compensation plans

The Company has a fixed stock-based compensation plan approved by the shareholders at the Company’s annual meeting held on June22, 2005. The plan was re-approved including certain amendments at the Company’s annual meeting held on May 29, 2007. Under the plan,the Company may grant options to eligible individuals for up to 10% of the issued and outstanding common shares subject to certain con-ditions. As at December 31, 2010, the Company has 6,427,800 [2009 – 5,564,000] options available for grant in addition to any options issuedand outstanding. The exercise price of each option is equal to or higher than the market price of the Company’s stock on the date of grant.The plan does not provide for a maximum term. Options are granted and their terms determined at the discretion of the Board of Directors.

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The Company recognizes an expense for option awards using the fair value method of accounting based on the Black-Scholes model. Theexpense is capitalized to a similar extent as the optionee’s salary, wages or fees are capitalized. The Black-Scholes model, used by theCompany to calculate option and warrant values, as well as other accepted option valuation models, was developed to estimate fair valueof freely tradable, fully transferable options and warrants, which significantly differ from the Company’s stock option awards. These mod-els also require four highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatlyaffect the calculated values. Accordingly, management believes that these models do not necessarily provide a reliable single measureof the fair value of the Company’s stock option awards and warrants.

j) Financial instruments

Financial instruments are designated into one of the following categories: assets held for trading, held-to-maturity investments, loans andreceivables, available-for-sale financial assets or other liabilities. Depending on the financial instrument designation, fair value or cost-based measures are used for estimating fair value on the balance sheet, and gains and losses are recognized in either net income or othercomprehensive income. Held for trading and available-for-sale financial assets are measured in the balance sheet at fair value and finan-cial instruments designated as held-to-maturity investments, loans and receivables, or other liabilities are measured at amortized cost.Subsequent measurement and changes in fair value depend on initial classification. The Company has made the following designations:

• Cash and cash equivalents, restricted cash, short-term investments and reclamation bonds are designated as “assets held fortrading” and are measured at fair value. Gains and losses resulting from the periodic revaluation of these items are recordedin net income.

• Accounts receivable and security deposit are designated as “receivables” and are recorded at amortized cost, which upon initialrecognition are equal to fair value. Subsequent measurement of receivables is on the basis of amortized cost using the effective inter-est rate method.

• Long-term debt is designated as “loans” and is recorded at amortized cost, which upon initial recognition is equal to fair value.Subsequent measurement of loans is on the basis of amortized cost using the effective interest rate method.

• Accounts payable and accrued liabilities, interest payable, and income taxes payable are designated as “other liabilities” and arerecorded at amortized cost, which upon initial recognition is equal to fair value. Subsequent measurement of other liabilities is on thebasis of amortized cost using the effective interest rate method.

As at December 31, 2010, the Company was not a party to any forward foreign exchange or metal pricing contracts for which hedgeaccounting may apply, but may use such instruments in the future. The purpose of hedge accounting is to ensure that counterbalancinggains, losses, revenues and expenses (including the effects of counterbalancing changes in cash flows) are recognized in net income inthe same period or periods. Hedge accounting is applied only when gains, losses, revenues and expenses on a hedging item would oth-erwise be recognized in income in a different period than gains, losses, revenues and expenses on the hedged item. Where gains, loss-es, revenues and expenses on the hedging item and counterbalancing gains, losses, revenues and expenses on the hedged item are rec-ognized in income in the same period, hedge accounting is both considered not necessary and not permitted by the standards.

k) Income (loss) per common share

Basic income (loss) per share is calculated by dividing net income (loss) for the year by the weighted average number of common sharesoutstanding in each respective period. Diluted income (loss) per share reflects the potential dilution of securities by adding other commonstock equivalents in the weighted average number of common shares outstanding during the year, if dilutive, and is calculated using thetreasury stock method.

l) Transaction costs

Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financialliability. For a financial asset or financial liability classified other than as held for trading, transaction costs are added to the fair value ofthe financial asset or liability on the balance sheet. For a financial asset or financial liability classified as held for trading, all transactioncosts are recognized immediately in net income.

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m) New accounting pronouncements

International Financial Reporting StandardsEffective January 1, 2011, the accounting framework under which financial statements are prepared in Canada for all publicly account-able enterprises is scheduled to change to International Financial Reporting Standards [“IFRS”]1. Accordingly, the Company’s first interimfinancial statements presented in accordance with IFRS will be for the three-month period ended March 31, 2011, and its first annual finan-cial statements presented in accordance with IFRS will be for the year ended December 31, 2011. IFRS uses a conceptual framework sim-ilar to Canadian GAAP, but there are significant differences in recognition, measurement and disclosure requirements.

Set out below are the more significant areas where IFRS will have an impact on the Company’s consolidated financial statements and notedisclosure:

• Share-based payments (IFRS 2);• Exploration for and evaluation of mineral resource (IFRS 6);• Income taxes (IAS 12);• Property, plant and equipment (IAS 16);• Borrowing costs (IAS 23);• Impairment of assets (IAS 36);• Provisions (IAS 37).

The list should not be regarded as a complete list of changes that will result from transition to IFRS. It is intended to highlight areas thatthe Company believes to be the most significant.

Furthermore, IFRS 1 provides guidance to entities on the general approach to be taken when first adopting IFRS. The underlying principleof IFRS 1 is retrospective application of IFRS standards in force at the date an entity first reports using IFRS. IFRS 1 acknowledges that fullretrospective application may not be practical or appropriate in all situations and prescribes:

• Optional exemptions from specific aspects of certain IFRS standards in the preparation of the Company’s opening consolidated bal-ance sheet; and

• Mandatory exceptions to retrospective application of certain IFRS standards.

The Company has analyzed various accounting policy choices available under IFRS 1; the following areas have been identified as mostapplicable on transition:

• Valuation of property, plant and equipment • Measurement of prior share payments• Treatment of past borrowing costs• Measurement of an asset retirement obligation

1 IFRS also includes International Accounting Standards [“IAS”], International Financial Reporting Interpretation Committee Updates[“IFRIC”], and Standing Interpretations Committee Updates [“SIC”].

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3. FINANCIAL INSTRUMENTS

The Company has designated cash and cash equivalents, short-term investments, and reclamation bonds as assets held for trading. Accountsreceivable are designated as receivables, long-term debt is classified as loans, and accounts payable and accrued liabilities, interest payableand income taxes payable are designated as other liabilities. These financial instruments are initially measured at fair value. Receivables,accounts payable and accrued liabilities and long-term debt are subsequently measured on the basis of amortized cost using the effective inter-est rate method. Assets held for trading are revalued on the reporting date based on relevant market information about the financial instrument.These valuations are estimates and changes in assumptions could significantly affect the estimates.

a) Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations.Cash and cash equivalents, short-term investments and reclamation bonds are composed of financial instruments issued by largeCanadian financial institutions with high investment-grade ratings maturing over various dates. Further, the Company limits its credit riskto any individual counterparty. The Company’s recurring receivables consist primarily of Goods and Services Tax [“GST”] and HarmonizedSales Tax [“HST”] due from the Federal Government of Canada.

b) Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in the marketprices and is comprised of three types of risk: interest rate risk; currency risk; and other price risk.

i. Interest rate risk arises because of changes in market interest rates. The Company’s cash and cash equivalents, short-term invest-ments and security held for the reclamation bonds are subject to minimal risk of changes in value, have an original maturity of 90days or less from the date of purchase and are readily convertible into cash. The interest rate on the Company’s long-term debt isfixed and is not subject to interest rate risk.

ii. Currency risk arises because of changes in foreign exchange rates. Nearly all of the Company’s current activities are priced inCanadian dollars [“$CDN”]. However, the Company expects certain of its future capital and operating costs as well as its future rev-enue streams will be priced in United States dollars [“$US”]. The Company has an operating account in $US to pay United States ven-dors and to receive $US payments as well as to manage the timing of conversion of $CDN to $US, or vice versa. At December 31,2010, included in cash and cash equivalents was $US 1,320,274.

iii. Other price risk arises because of changes in market prices other than those due to interest rates and currency changes. TheCompany is exposed to price risk with respect to commodity and equity prices. Equity price risk is the potential adverse impact onthe Company’s ability to raise new capital and generate earnings due to movement in the Company’s equity price or general move-ment in the level of the stock market. Commodity price risk is the potential adverse impact on earnings and economic value due tocommodity price movements and volatilities. The Company monitors commodity prices of anthracite coal, cobalt, gold and bismuthin addition to other metal markets, individual equity movements and the stock market to determine appropriate courses of action tobe taken by the Company.

c) Liquidity risk is the risk that the Company will not be able to meet its obligations associated with financial liabilities as they come due. TheCompany’s investment policy is to invest its excess cash in high-grade investment securities with varying terms to maturity, selected withregard to the expected timing of expenditures for continuing operations. Accounts payable and accrued liabilities are all current. TheCompany’s letters of credit are fully secured by deposits that conform to the Company’s investment policy. The Company’s long-term debtis in good standing and does not require any principal repayments until due in March 2012.

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4. MANAGEMENT OF CAPITAL

The Company’s objectives when managing capital are: (i) to safeguard the Company’s ability to continue as a going concern in order to pursuethe development of its mineral properties and provide returns for shareholders, and (ii) to maintain a flexible capital structure which optimizesthe cost of capital at an acceptable risk. The Company includes the components of shareholders’ equity, long-term debt, cash and cash equiv-alents and short-term investments, if any, in the management of capital.

The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteris-tics of the underlying assets. To maintain or adjust the capital structure, the Company may attempt to issue new shares, issue new debt, acquireor dispose of assets or adjust the amount of cash and cash equivalents and short-term investments.

To facilitate the management of its capital requirements, the Company prepares forecasts or expenditure budgets for its activities that are usedto monitor performance. Variances to plan will result in adjustments to capital deployment subject to various factors and industry conditions.The Company’s activities and the associated forecasts or budgets are approved by the Board of Directors.

The Company is not subject to any externally imposed capital requirements limiting or restricting the use of its capital. In order to maximizeongoing development efforts, the Company does not pay out dividends at this time.

The Company’s investment policy is to invest its cash in highly liquid, short-term, interest-bearing investments with maturities of less than a yearfrom the original date of acquisition, selected with regards to the expected timing of expenditure from operations.

The Company expects its current capital resources will be sufficient to carry out its exploration and development plans and operations for 2011.However, significant additional capital will be required to complete the development of the Company’s NICO and Mount Klappan projects.

5. CAPITAL ASSETS

Capital assets consist of the following:

2010 2009Accumulated Accumulated

Cost amortization Cost amortization$ $ $ $

Computer equipment 140,868 90,870 118,839 73,246Furniture and fixtures 80,914 42,520 72,880 33,673Leasehold improvements 9,602 9,164 9,602 8,726Software 47,819 22,974 33,906 15,447

279,203 165,528 235,227 131,092Less accumulated amortization 165,528 131,092

Net book value 113,675 104,135

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6. MINING PROPERTIES

Interests in mining properties consist of the following:

2010Exploration and

Capital Property development Total - miningassets costs expenditures properties

$ $ $ $

NICO Project [i] 26,362,826 3,593,049 64,413,001 94,368,876Mount Klappan Project [ii] 2,396 3,144,116 17,482,177 20,628,689Sue-Dianne Project – 9,164 2,038,761 2,047,925Other properties – – 38,812 38,812

26,365,222 6,746,329 83,972,751 117,084,302

2009Exploration and

Capital Property development Total - miningassets costs expenditures properties

$ $ $ $

NICO Project [i] 19,237,784 3,593,049 55,344,287 78,175,120Mount Klappan Project [ii] 3,424 3,144,116 17,140,957 20,288,497Sue-Dianne Project – 9,164 2,033,420 2,042,584Other properties – – 256,227 256,227

19,241,208 6,746,329 74,774,891 100,762,428

During the year ended December 31, 2010, $665,300 [2009 - $610,099] of administrative expenses, $251,810 [2009 - $314,489] of amortization and$113,700 [2009 - $103,500] of stock-based compensation were capitalized to exploration and development expenditures within mining proper-ties. Pre-production mining tax credits with a recorded value of $345,000 [2009 - $1,085,000] were deducted from exploration and developmentexpenditures within mining properties.

Capital assets consist of the following:

2010 2009Accumulated Accumulated

Cost amortization Cost amortization$ $ $ $

Surface facilities under construction 25,247,798 – 17,901,744 –Surface facilities 1,469,007 779,113 1,429,741 628,051Camp structures 600,124 499,942 600,124 457,008Mobile equipment 822,783 568,400 780,157 461,884Site furniture and equipment 31,280 23,302 31,280 19,882Land acquisition costs 64,987 – 64,987 –

28,235,979 1,870,757 20,808,033 1,566,825Less accumulated amortization 1,870,757 1,566,825

Net book value 26,365,222 19,241,208

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6. MINING PROPERTIES (Continued)

During the year ended December 31, 2010, $492,561 [2009 - $450,664] of administrative expenses, $70,041 [2009 - $94,043] of amortization and$69,500 [2009 - $35,500] of stock-based compensation were capitalized to surface facilities under construction.

i. NICO Project, Northwest Territories

The NICO Project and the related claims in the Mazenod Lake Area, Northwest Territories are wholly owned by the Company.

Golden Giant Mine AssetsOn August 31, 2006, the Company acquired, from an equipment dealer [the “Vendor”], certain mill, related surface facilities and process-ing equipment for future use at the NICO Project. Pursuant to the purchase agreement with the Vendor, the Company had an obligation tothe Vendor to dismantle and remove the assets from the site of the land owner [the “Land Owner”] by August 31, 2009. In 2008, the Companyentered into an agreement with the Land Owner, whereby certain additional assets were acquired and the dismantling and removal of theassets to be used at NICO would not be required until April 2010. Amendments to the purchase agreement with the Vendor were enteredinto reflecting the revised date. Accordingly, the Company undertook a program designed to dismantle and remove these assets.

During 2009, the agreements with the Vendor were terminated and an amending agreement with the Land Owner was executed. Underthe amended agreement with the Land Owner, the Company posted $300,000 in financial assurance in relation to the Company’s remain-ing obligations with the Land Owner to dismantle a warehouse and remove the assets salvaged prior to April 2011. The amount posted wasrecorded as a security deposit, and upon completion of the Company’s obligation, in October 2010, the security deposit was released tothe Company.

The net cost of purchase, including previously deferred amounts, deconstruction, removal, reconstruction of the assets and ongoing main-tenance, security and other related costs, have been accumulated and capitalized as surface facilities under construction until such timeas the physical assets are completed and available for use, at which time they will be classified as appropriate. No amortization has beencharged against these assets as they are not available for use. The Company has received a third-party feasibility study and has com-menced detailed engineering and planning related to the use of these assets at NICO but a construction decision has not been taken.

Saskatchewan Metals Processing Plant [“SMPP”]During 2009, a decision was made to locate the hydrometallurgical processing plant of the NICO Project from the mine site in theNorthwest Territories to a site in southern Canada. The Company entered into an agreement to purchase lands near Saskatoon,Saskatchewan on which it proposes to construct the SMPP and incorporated FMSI, a wholly owned subsidiary. A deposit of $50,000 waspaid with the balance of $825,000 due upon closing, subject to certain conditions being satisfied or waived by FMSI prior to but no laterthan December 31, 2012. Costs of purchasing the land are being capitalized as Land acquisition costs until the purchase closes. The netcosts of design, development, construction and related costs incurred for the SMPP have been accumulated and capitalized as surfacefacilities under construction until such time as the physical assets are completed and available for use, at which time they will be classi-fied as appropriate. No amortization has been charged against these assets as they are not available for use.

Project FinancingThe Company has engaged a financial institution to provide advice and financial services in connection with the arrangement of a $US200-250 million debt facility to finance the construction, start-up and operation of the Company’s NICO Project. Transaction costs of$381,816 [2009 - $213,619] have been recorded in other assets for the year ended December 31, 2010, including warrants issued in lieu offees valued at $364,050 (refer to Note 7[f]) and other incremental costs of $17,766 incurred to date.

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ii. Mount Klappan Project, British Columbia

The Mount Klappan Project in northwest British Columbia and related coal licenses are wholly owned by the Company through its sub-sidiary, FCL. Upon commercial production, the Company has a royalty agreement obligation entitling a third party to $1 per tonne of coaldelivered to the point of usage or sale.

The Company is formally seeking a strategic partner to help develop the Mount Klappan Project and has engaged a financial advisor toassist with the process of evaluating potential alternatives. In connection with the evaluation process, incremental costs of $283,639 havebeen expensed and recorded as corporate advisory costs for the year ended December 31, 2010.

iii. Reclamation Bonds

The Company has provided reclamation bonds in the form of a letter of credit in favour of the Receiver General for Canada and Governmentof British Columbia for the NICO and Mount Klappan projects, respectively. Reclamation bonds consist of the following:

2010 2009Bond Security held Bond Security held

amount (fair market value) amount (fair market value)$ $ $ $

NICO Project 211,000 244,273 211,000 243,777Mount Klappan Project 307,000 374,234 307,000 373,473

Net book value 518,000 618,507 518,000 617,250

The security held for the reclamation bonds consists of cash balances in accounts with a large Canadian financial institution.

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7. SHARE CAPITAL

[a] Issued and outstanding common shares:

2010 2009# $ # $

Common sharesBeginning of period 94,779,407 103,192,996 55,550,107 83,353,111Issued as a result of:

Public offering – – 26,538,550 16,188,516Private offerings [c] 4,635,473 3,972,750 12,690,750 6,331,095Exercise of options [h] 20,000 20,100 – –Exercise of warrants [d, e] 7,015,653 5,254,925 – –Exercise of compensation units [d] 477,694 412,433 – –

Share issuance costs, net tax [c, e, g] – (118,452) – (1,429,726)Future tax impact of renunciation of

development costs expended – (47,000) – (1,250,000)

End of period [b] 106,928,227 112,687,752 94,779,407 103,192,996

WarrantsBeginning of period 20,890,275 2,014,872 5,448,000 1,986,060Issued as a result of:

Public offering – – 13,269,275 1,061,542Private offerings – – 4,546,000 734,030Exercise of compensation units [d] 238,847 27,045 – –Warrant issuance costs, net tax [c, d] – (1,902) – (118,263)

In lieu of fees, net tax [f, g] – 121,017 2,975,000 216,783Exercise of warrants [d, e] (7,015, 653) (922,764) – –Expiration of warrants [e] (19,194) (3,205) (5,348,000) (1,865,280)Modification of warrants [e] – 64,210 – –

End of period 14,094,275 1,299,273 20,890,275 2,014,872

113,987,025 105,207,868

[b] The Company is authorized to issue an unlimited number of common shares without par value. At December 31, 2010, the weight-ed average number of common shares outstanding was 98,058,973 [2009 – 64,588,990]. For calculating fully diluted loss per share,for the year ended December 31, 2010 there were 2,320,000 options and 13,994,275 warrants, and 1,114,619 compensation units with557,310 warrants underlying in the compensation units with an exercise price less than the average market price for the year butthese were excluded from the fully diluted loss per share computation because inclusion would have been anti-dilutive.

[c] On November 1, 2010, the Company issued 2,100,473 common shares on a flow-through basis at a price of $0.95 per share for aggre-gate gross proceeds of $1,995,450. On June 30, 2010, the Company issued 2,535,000 common shares on a flow-through basis at aprice of $0.78 per share for aggregate gross proceeds of $1,977,300. Share issuance costs, net of tax, of $93,250, were incurred in2010 relating to these financings. Share and warrant issuance costs, net of tax, of $21,702 and $902 respectively, relate to addition-al expenditures incurred from the December 3, 2009 public offering.

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[d] During December 2010, 375,000 warrants with a book value of $27,318 were exercised for aggregate gross proceeds of $300,000;477,694 compensation units were exercised resulting in the issuance of 477,694 common shares with a book value of $121,040 and238,847 warrants with a book value of $7,937 for aggregate gross proceeds of $310,501, which were allocated between the commonshares and warrants at $291,393 and $19,108, respectively. The 238,847 warrants issued from the compensation units with a bookvalue of $27,045 were also exercised during December 2010 for aggregate gross proceeds of $191,078.

[e] On August 26, 2010, the Company modified the terms of 6,421,000 outstanding warrants, by extending the expiration date fromSeptember 2, 2010 to September 30, 2010 and decreasing the exercise price from $0.80 to $0.60 effective September 14, 2010. Thefair value of the amendment was $64,210 ($0.01 per warrant) as estimated using the Black-Scholes option pricing model withassumptions of: 1.21% risk-free rate; no expected dividend yield; 14.5% expected volatility; and a life of 37 days. The incrementalvalue of the modified warrants was measured by the difference between the fair value of the modified warrants and the value ofthe original warrants immediately before their terms were modified, and was recorded as a charge to deficit. From September 16,2010 to September 30, 2010, 6,401,806 of the 6,421,000 modified warrants, with a book value of $868,400, were exercised for $0.60 perunit, resulting in the issuance of 6,401,806 common shares for gross proceeds of $3,841,084. Share issuance costs, net of tax, of$3,500 were incurred. The remaining 19,194 warrants expired on September 30, 2010, with a recorded value of $3,205, which wascharged to contributed surplus.

[f] The Company issued 1,100,000 warrants on October 16, 2009 with an exercise price of $0.72 per share and expiration date of April16, 2013 in relation to an engagement to arrange debt financing for the NICO Project. The warrants issued in relation to the engage-ment represent transaction costs and had vesting dates of 300,000 on October 16, 2009; 266,666 on each of February 1, 2010 and May3, 2010; and, 266,668 on August 2, 2010. At September 30, 2010 all of the warrants are fully vested. These warrants are recorded atfair value measured on the vesting date. The value of the warrants is recorded in Other assets until either the debt facility isarranged or the proposed financing abandoned and was estimated using the Black-Scholes option pricing model based on the fol-lowing assumptions:

Assumptions

Number Expected Expected Estimatedof units Risk-free dividend Expected unit life fair valuegranted interest rate yield volatility [years] per unit# % % % # $

Warrants:266,668 1.53 – 64 2.8 0.22266,666 2.00 – 67 2.9 0.39266,666 1.65 – 66 3.2 0.38300,000 1.90 – 63 3.5 0.34

[g] Included in share issuance costs is $43,000 [2009 - $415,000] to record a future tax asset for deductible share issuance costs andincluded within in lieu of fees, net of tax, is $44,000 to record a future tax liability for non-deductable revaluations of warrants in lieuof fees [2009 - $76,000 for loan issue costs].

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[h] The estimated fair value of 1,195,000 options granted during the year ended December 31, 2010 has been allocated to stock-basedcompensation expense, exploration and development expenditures and capital assets in the amounts of $253,000, $113,700 and$69,500, respectively. Contributed surplus was increased by $436,200 representing the fair value compensation recorded less$49,000 related to the tax effect of the amount capitalized.

The fair value of options granted during the year ended December 31, 2010 was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:

Assumptions

Number Expected Expected Estimatedof options Risk-free dividend Expected option life fair valuegranted interest rate yield volatility [years] per option# % % % # $

40,000 2.90 – 59 5 0.391,115,000 2.55 – 59 5 0.3640,000 2.48 – 59 5 0.48

During the year ended December 31, 2010, 20,000 options were exercised with a book value of $5,300 for gross proceeds of $14,800.

A summary of the status of the Company’s stock option plan as at December 31, 2010 and December 31, 2009, and changes duringthe years ended on those dates, are presented below:

December 31, 2010 December 31, 2009

Number Weighted-average Number Weighted-averageof shares exercise price of shares exercise price

# $ # $

Options outstanding, beginning of period 3,300,000 1.61 2,785,000 2.45Granted 1,195,000 0.69 1,185,000 0.60Expired (230,000) 4.24 (670,000) 3.28Exercised (20,000) 0.74 – –

Options outstanding, end of year 4,245,000 1.22 3,300,000 1.61

Options exercisable, end of year 4,205,000 1.22 3,300,000 1.61

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The following summarizes information about the options outstanding at December 31, 2010:

Weighted-averageRange of Number Number vested Weighted-average remainingexercise prices outstanding and outstanding exercise price [i] contract life [i]$ # # $ [years]

0.50 – 0.99 2,360,000 2,320,000 0.64 3.91.00 – 1.49 150,000 150,000 1.30 2.71.50 – 1.99 895,000 895,000 1.59 2.42.00 – 2.49 665,000 665,000 2.29 1.12.50 – 2.99 175,000 175,000 2.89 0.7

4,245,000 4,205,000

[i] The weighted average exercise prices and weighted average remaining contract life are the same for both the options outstandingand the options vested and outstanding.

[i] At December 31, 2010, 900,000 [2009 – 900,000] issued common shares are being held in escrow, subject to certain productionthresholds for the NICO property.

[j] Subsequent to December 31, 2010, the following equity related transactions have occurred:

i. the Company issued 25,000 stock options pursuant to the Company’s stock option plan;

ii. 20,000 stock options were forfeited;

iii. a total of 131,969 warrants were exercised for aggregate gross proceeds of $105,575; and,

iv. 159,231 compensation units were exercised resulting in the issuance of 159,231 common shares and 79,615 warrants for aggre-gate gross proceeds of $103,500.

8. LONG-TERM DEBT

On March 2, 2009, the Company raised net proceeds excluding transaction costs of $2,925,000 pursuant to a loan agreement with a pri-vate investor. The loan has a face value of $3,000,000, is unsecured, has a term of three years and bears interest at an annual rate of 9%.Cash interest payments of $135,000 are due on the last business day of August and February of each year during the term agreement.Transaction costs totalling $118,060 consist of $93,750 for warrants issued in lieu of fees (refer to Note 7 [e]) and $24,310 for listing andlegal fees incurred. Transaction costs are recorded as a reduction to net proceeds of the loan on initial recognition and are amortizedto interest expense using the effective interest rate method over the life of the loan. As at December 31, 2010, $110,809 of transactioncosts and loan discount were amortized using the effective interest method and were included in interest expense. Consistent with theCompany’s policy on capitalizing general and administration expenses, $166,488 [2009 – $136,416] of interest was capitalized to explo-ration and development and certain capital assets during the year.

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9. INCOME TAXES

The Company has non-capital loss carryforwards totalling $10,800,000 which began to expire in 2010, un-deducted share issuance costsof $1,705,000 and unused investment tax credits on preproduction costs of $1,430,000 which begin to expire in 2028. The Company hascompleted feasibility studies for both of its principal projects and is undertaking related permitting and financing activities. Managementhas determined it is more likely than not that the Company will achieve production and will realize the benefit of certain non-capital loss-es and its un-deducted share issuance costs. The benefit of these amounts has been recorded in the consolidated financial statementsto the extent that the deduction for share issuance costs and operating losses expire post-2015.

Significant components of the Company’s future income tax assets and liabilities are as follows:

2010 2009Future tax assets $ $

Net operating loss carryforwards 2,887,000 2,117,000Un-deducted share issuance costs 455,000 676,000Unused investment tax credits on preproduction costs 1,430,000 1,085,000

4,772,000 3,878,000 Less valuation allowance related to operating losses, share issuance costs and corporate minimum tax (509,000) (530,000)

Future tax assets 4,263,000 3,348,000

Future tax liabilities

Book value of exploration and development expenditures and capital assets in excess of tax value (11,229,000) (11,153,000)

Net future tax liabilities (6,966,000) (7,805,000)

The reconciliation of income taxes computed at the statutory income tax rates to the recovery for income taxes is as follows:

2010 2009$ $

Combined federal and provincial income tax rate 30.63% 32.79%

Corporate income tax at statutory rate (702,200) (528,700)Increase (decrease) in income taxes resulting from:

Non-deductible stock compensation and other expenses 78,000 111,000Rate difference (50,000) 97,000Other 92,975 40,900

(581,225) (279,800)

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10. CONSOLIDATATED STATEMENT OF CASH FLOWS

[a] Cash and cash equivalents consist of the following:2010 2009

$ $

Cash on hand and balances with banks 8,377,150 17,566,979Short-term fixed income deposits 766,824 761,169

9,143,974 18,328,148

[b] Supplemental cash flow information:2010 2009

$ $

Interest and investment income received 23,316 72,380Interest paid 270,000 135,000

11. RELATED PARTY TRANSACTIONS

For the year ended December 31, 2010, the Company paid certain officers, directors, or their related entities an aggregate of $707,929[2009 - $765,753] for third-party consulting services on behalf of the Company during the year. At year end, $64,446 [2009 - $89,442] wasowing to these related parties for services during the year. These transactions have been recorded at their exchange amount.

12. CONTINGENCIES

The Company is from time to time involved in claims and litigation arising in the normal course of business. Claims are made by third par-ties against the Company and by the Company against third parties with respect to costs incurred and/or amounts charged under appli-cable contract provisions.

13. SUBSEQUENT EVENTS

At December 31, 2010, the Company had deposited $2,698,561 in a trust account as security in relation to a larger claim amount disputed bythe Company. This dispute was settled subsequent to year end and the funds were distributed to the Company and third-party claimant basedon their respective share of the settlement. The portion of cash that was distributed from the trust account to the Company is recorded incash and cash equivalents at December 31, 2010. The portion of cash that was distributed from the trust account to the third-party claimantis netted against the related liability recorded in Accounts payable and accrued liabilities. This cash was previously recorded as restrictedcash pending resolution of the dispute. The terms of the settlement, including the amount, are bound by confidentiality.

14. COMPARATIVE AMOUNTS

Certain comparative amounts have been reclassified from statements previously presented to conform to the presentation of theDecember 31, 2010 consolidated financial statements.

FORTUNEMINERALS LIMITED

140 Fullarton Street, Suite 1902, London, Ontario N6A 5P2TEL: 519-858-8188 FAX: 519-858-8155 EMAIL: [email protected]

WEBSITE: www.fortuneminerals.com

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