Brazilian Diamonds Limited
TSX : BDY
AIM : BDY

Brazilian Diamonds Limited

March 28, 2007 04:00 ET

Brazilian Diamonds Limited: Final Results for the Year Ended 31 December 2006

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - March 28, 2007) - Brazilian Diamonds Limited (TSX:BDY)(AIM:BDY) -

Management's Discussion and Analysis

General

The following discussion of performance and financial condition should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2006 and 2005. The Company's financial statements are prepared in accordance with Canadian GAAP. The Company's reporting currency is Canadian dollars unless otherwise stated. The date of this Management Discussion and Analysis is March 22, 2007.

Description of Business

Brazilian Diamonds Limited (the "Company") is a development stage resource company engaged in the acquisition, exploration and development of kimberlite and alluvial diamond properties in Minas Gerais State, Brazil. The Company has over 100,000 hectares of alluvial and kimberlite exploration properties in the Paranaiba and Santo Antonio do Bonito River Basins and the Patos de Minas region as well as over 115,000 hectares of prospective exploration properties in the Serra da Canastra Kimberlite Province including the advanced stage diamondiferous Canastra 1 kimberlite pipe. In addition, the Company has its own diamond laboratory used in the recovery of kimberlite indicator minerals and in 2006 the Company received an ISO 17025 rating for the facility.

The Company's head office is located in Belo Horizonte, Brazil and its corporate office is located in Vancouver, British Columbia, Canada. Exploration headquarters are located in Patos de Minas, Brazil.

The Company is a reporting issuer in Ontario and British Columbia, Canada and its common shares trade on the Toronto Stock Exchange and Alternative Investment Market ("AIM") of the London Stock Exchange under the symbol BDY.

Outlook

The Company's exploration efforts in 2007 will continue to focus on exploring its kimberlite bodies located on its properties in Brazil. It will also work to maximize the value from its diamondiferous alluvial gravel inventories located within these same properties through joint ventures with experienced alluvial diamond miners. The Company is waiting for a final resolution of the nearby Serra da Canastra National Park boundary dispute between IBAMA (the Brazilian Federal environmental agency) and local landowners and mineral license holders. The matter has been referred to an inter-ministerial commission by the President of Brazil, which must propose a solution to resolve the dispute and present a new draft law to the Brazilian Congress. The original terms of reference for the commission stipulated a July 31, 2006 deadline for the completion of this new draft law. This deadline has now passed and the various Ministries involved in the commission are currently determining a new date for the introduction of this draft legislation. Once this dispute has been resolved, the Company expects to be in a position to commence trial mining at its Canastra 1 project.

The Stage II drilling program at the large Regis kimberlite was completed in 2006 and micro diamond test results are expected from all the drill holes by the middle of 2007. The results from this testing will be important in determining the next stage of exploration work to be carried out at the project.

The Company expects to have a decision on the viability of a large scale dredging operation from its joint venture partners at Santo Antonio do Bonito in 2007. Stage I bulk sampling at the project has now been completed and the results will be an important part of the evaluation process in determining the next phase of the project.

Plans are underway to commence mini-bulk testing of the 6 hectare, Salvador 1 kimberlite, in the second quarter of 2007 and will take six months to complete. These activities include operating license applications and the construction of a mobile treatment plant. Once the mini-bulk sample is completed and the results evaluated, the Company will be in a position to consider implementing a larger scale bulk sample in a pre-feasibility study for a future mine development.

Resource Properties

Diamond properties

During the year ended December 31, 2006, the Company focused its exploration activities on diamond properties within Minas Gerais and Bahia States, Brazil.

a) Coromandel Region

i) Santo Antonio do Bonito River

The Company, through its wholly owned subsidiary, Cobre Sul, owns various mineral claims covering both the headwaters and the main drainage valley of the river.

In 2004, thirteen adjacent licenses covering the headwaters and adjacent plateau areas were acquired from Incris Mineracao Ltda. ("INCRIS") for U.S. $8,000. Under the agreement, INCRIS will retain a 1% gross royalty over any kimberlites developed as mines on the licenses acquired.

ii) Santo Antonio do Bonito Alluvial Diamond Mining Joint Venture

In 2004, the Company signed an agreement with Companhia Mineradora de Minas Gerais ("CODEMIG") and Mineracao Rio Novo Ltda ("MRN"), a wholly owned subsidiary of Andrade Gutierrez SA, to form a joint venture to investigate the potential for commercial exploitation of the alluvial diamond deposits within the Santo Antonio do Bonito Valley. Under the terms of the agreement CODEMIG was to spend $800,000 over two years to complete a definitive feasibility study prior to a decision to move to commercial mining operations. On January 29, 2006, the agreement was extended for another year as bulk sampling activities were completed. At the end of 2006, the joint venture partners finalized the Stage I bulk sampling program and are currently evaluating the results to determine the next phase of the project.

In compensation for its investment in this feasibility work, CODEMIG will be entitled to a 3.5% over-riding royalty from any future alluvial mining operations undertaken by the joint venture partners. Following successful completion of the evaluation programme, a new joint venture company is expected to be established in which MRN will hold a 75% interest and the Company a 25% interest.

b) Patos de Minas Region

In 2003, the Company acquired Parima Mineracao Ltda. ("Parima") for $312,000 (U.S. $225,000) from Canabrava Diamond Corporation ("Canabrava"). Through the acquisition of Parima, the Company took possession of office and laboratory facilities, kimberlite geophysical and sampling databases and exploration licenses over properties in proximity to the Company's license portfolio in the Santo Antonio do Bonito and Abaete Valleys. In addition to the purchase price, Canabrava will receive a 2% royalty on any gross revenue generated by the production and sale of diamonds from future mines developed within the claims acquired, plus a 1% royalty on an area over and surrounding the claims acquired.

c) Serra da Canastra Region

In 2002, the Company acquired all of the issued and outstanding shares of De Beers Brasil Ltda.'s ("De Beers"), wholly owned Brazilian subsidiary, Mineracao do Sul Ltda. ("Mineracao"). Mineracao's primary assets are the Canastra 1 kimberlite pipe and mineral licenses within the Serra da Canastra Region. In 2006, trial mining of the Canastra 1 pipe has been delayed until a dispute surrounding a possible extension of the nearby Serra da Canastra National Park boundary is resolved.

d) Data Sets

On September 13, 2006, the Company, through its wholly owned subsidiary, Game Creek Company Ltd. ("Game Creek"), completed the acquisition of the Chapada Diamantina Kimberlite Project data sets in the State of Bahia from De Beers Brazil Ltda. The terms of the acquisition include:

i. Cash payment on closing of $165,975 (paid);

ii. A second payment of $150,000 either in cash or the equivalent value in the common shares of the Company 180 days after closing;

iii. A third payment of $150,000 either in cash or the equivalent value in the common shares of the Company 360 days after closing;

iv. The issue to De Beers of 1 million common shares of the Company in the event of the discovery of a kimberlite pipe which after bulk testing is confirmed to contain more than 200 carats of diamonds;

v. In the event that the Company shares are issued in lieu of cash, the number of shares issued will be determined using the higher of the prevailing market price or $0.10 per share; and

vi. De Beers will retain the right to re-acquire an interest of up to 40% in any kimberlite discovery which is confirmed to contain more than 200 carats of diamonds. To exercise this right, De Beers will have to pay an amount calculated as 300% of the Company's exploration expenditures to that date on the kimberlite body.

On May 25, 2005, the Company, through its wholly owned subsidiary, Game Creek, entered into an agreement with De Beers to purchase a data set for the Maravilha Region of the State of Minas Gerais, Brazil. Pursuant to the agreement, the Company paid a total of $299,750 for the purchase of the data set as follows:

i) Cash payments totalling $50,000 (paid)

ii) Issuance of a total of 450,000 common shares of the Company at a fair value of $249,750 (issued).

e) Gold property

On November 4, 2005, the Company entered into an agreement with Hidefield Gold plc ("Hidefield") pursuant to which the Company sold its 50% interest in the Cata Preta Joint Venture for consideration comprising 2,500,000 new common shares of Hidefield (note 3(a)). The Company had previously written down the carrying value of the Cata Preta property to $Nil. The Company will also receive a 5% net profit interest on any future production from the joint venture license areas or 20% of the net proceeds received by Hidefield through future joint ventures, leases, or outright sale of any of the mineral licenses.

Discussion of Operations

Following the acquisition of several mineral exploration databases from De Beers, the Company now has access to the accumulated results of more than 30 years of exploration activity in the Canastra, Santo Antonio do Bonito, Patos de Minas regions in Minas Gerais and the Chapada Diamantina region in Bahia. Included within the Canastra data set are indicator mineral samples, microprobe chemical analyses, and 19,000 line kilometres of proprietary airborne geophysics covering the entire region. De Beers has also provided details about 35 known kimberlite occurrences and the results of ground geophysics within the Canastra region. The Chapada Diamantina data set, acquired in September 2006 from De Beers, includes 194,120 line kilometres of airborne geophysics, indicator mineral samples, microprobe analysis and mineral licenses covering the Salvador 1 kimberlite body plus five other kimberlites.

This data complements an already significant database the Company previously acquired as a result of the purchase of De Beers' Brazilian subsidiary Mineracao do Sul in August 2002. That acquisition also included 40,000 hectares of mineral claims in the Canastra area and the Canastra 1 kimberlite for which licenses are being sought to commence trial mining. The licensing process has been complicated by the potential expansion of a nearby National Park. Although there is every indication that a license will be granted to mine Canastra 1, it is not possible to accurately estimate the timetable for such a grant. Accordingly, whilst the Company will continue to lobby the Brazilian authorities to hasten the process for the license grant, it will be concentrating the majority of its resources on its other prospective projects outside the Canastra Region.

During the past three years, the Company has committed significant resources evaluating kimberlite targets in the Santo Antonio do Bonito River Basin and Patos de Minas regions. Diamond drilling and mini bulk sampling was conducted on the most promising targets and the Company is evaluating results for the continued exploration of these properties. The Company has budgeted for significant exploration activity for these projects for the 2007 year.

During 2006, the Company commenced a core drilling program on the large (greater than 120 hectare) Regis kimberlite. Two holes were drilled during August 2006 to test the existence of an approximately 20 hectare central pipe-like zone which was identified using geophysics. The first hole, RDH-01 produced significant counts of micro-diamonds and subsequent testing of the second hole, RDH-02, also produced micro diamonds. Results from this program will be evaluated prior to determining the next phase of activity for the kimberlite. The Company owns 100% of the Regis kimberlite body.

In 2006, the Company along with its joint venture partners has also completed the first stage of bulk sampling work at its Santo Antonio do Bonito alluvial project. The results of this bulk sampling will be used in 2007 to make a final decision on the economic viability of a large scale dredging operation at Santo Antonio do Bonito.

In 2006, the laboratory in Patos de Minas has been upgraded and the Company received the ISO 17025 standards certificate.

During the 2006 year, the Company also focused on cutting costs and streamlining its Brazilian operations. To achieve this, certain non-technical activities were outsourced. All essential activities were transferred to the Patos de Minas office/laboratory and a small representative office has been maintained in Belo Horizonte.

Results of Operations

The loss for the year ended December 31, 2006 was $2.1 million as compared to a loss of $1.6 million for the previous financial year excluding gain on sale of investments, reorganization costs and unrealized loss on the fair value of options. Stock-based compensation for the year ended December 31, 2006 was $0.6M (2005 - $Nil) which accounted for the major increase in general and administration expenses.

Cash and cash equivalent balances increased by $3.4 million to $4.5 million at December 31, 2006. The cash spending for mineral properties was $3.2 million. Offsetting these expenditures during the year were issues of common shares, which generated proceeds of $8.8 million. The working capital was $4.0 million versus working capital of $0.9 million at December 31, 2005.

Of the $3.6 million deferred exploration costs, $2.2M was spent on kimberlite exploration in the Santo Antonio do Bonito River Basin, $0.3M was expended on kimberlite projects in the Serra da Canastra Kimberlite Province, $0.9M was spent on the Patos de Minas project and $0.5M was spent on the acquisition of Chapada Diamantina data set. In 2006, the data sets were amortized and $0.3M (2005 - $Nil) was proportionally allocated to the related mineral properties. The current period's exploration expenditures are $0.7 million more than the same period last year due to increased drilling activity.

Liquidity

The Company does not currently own or have an interest in any producing mineral properties and does not derive any revenues from operations. The Company's activities have been funded through equity financing and the Company expects that it will continue to be able to utilize this source of financing until it develops cash flow from operations. There can be no assurance, however, that the Company will be successful in its efforts. If such funds are not available or other sources of finance cannot be obtained, then the Company will be forced to curtail its activities to a level for which funding is available or can be obtained.

Most of the capital equipment for operations at Canastra 1 has already been acquired and is included as part of resource properties. The Company has minimal operating lease commitments (refer to Contractual Commitments).



2007 2008 2009 2010 2011 Total
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Office lease $ 150 $ 124 $ - $ - $ - $ 274
Photocopier lease 12 12 12 12 1 49
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$ 162 $ 136 $ 12 $ 12 $ 1 $ 323
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Capital Resources

The following forms of capital were raised during the year ended December 31, 2006:

i. On February 15, 2006, the Company issued 8,735,294 new common shares to institutional investors at a price of $0.34 per share.

ii. On March 2, 2006, the Company issued 4,000,000 common shares at a price of $0.34 per share.

iii. On March 2, 2006, the Company issued 352,093 common shares at a price of $0.34 per share as settlement of accrued interest on convertible loan.

iv. On April 24, 2006, 240,952 share purchase warrants were exercised at a price of $0.25 per share for proceeds of $60,238.

v. On December 8, 2006, the Company issued 21,510,000 shares at a price of $0.18 per share (8 pence per share) and 3,200,000 shares at a price of $0.18 per share (U$0.16 per share).

Related Party Transactions

During the year ended December 31, 2006, the Company entered into the following transactions with related parties:

a) The Company paid or accrued for corporate administrative fees which includes office administration and corporate secretarial services, accounting, investor relations, chief financial officer, rent and other office expenses at cost of $229,000 (2005 - $Nil) to HRG Management Ltd. ("HRG"). The Company received or accrued miscellaneous office recoveries of $50,000 (2005 - $Nil) from HRG. HRG is a captive management company jointly owned by the Company and certain other companies that share the Vancouver office and staff on a cost recovery basis. Kenneth P. Judge, Chairman and Stephen L. Fabian, President are common directors of the Company and HRG.

b) On February 1, 2006, the Company's Vancouver office sold all its office equipment and fixtures at its Vancouver office to HRG at book value for $84,000.

c) The Company paid a security deposit of $18,000 as last month's service and rent fee to HRG.

d) The Company advanced $17,000 to HRG for the fixed assets of HRG. The advance will be repaid annually over the useful life of the fixed assets.

e) Received or accrued office rent recoveries of $122,000 (2005 - $Nil) from HRG. Received or accrued office rent recoveries of $8,000 (2005 - $92,000) from companies with common directors of the Company.

f) Paid or accrued consulting fees for technical services and rent in the amount of $364,000 (2005 - $351,000) to Hamilton Capital Partners Limited, a company in which Kenneth P. Judge is a director.

g) Paid or accrued management fees of $165,000 to Massif Limited ("Massif"), a company in which Stephen L. Fabian is interested.

h) Paid or accrued professional fees of $27,000 (2005 - $30,000) to a law firm in which David Cowan, director is a partner.

i) Paid or accrued corporate admin fees of $79,000 (2005 - $179,000) to RWA Management Limited, a company controlled by a former officer of the Company.

j) Accrued or recovered office and technical costs of $126,000 (2005 - $247,000) from Hidefield have been capitalized to mineral properties. Kenneth P. Judge and Francis Johnstone, director are also directors of Hidefield.

k) In December 2006, the Company received 2,500,000 ordinary shares of Hidefield valued at $323,094 in a transaction during the year ended December 31, 2005 with Hidefield.

l) The $4,000 due from related parties are amounts due from companies with common directors of the Company and have normal trade terms.

Critical Accounting Estimates

The preparation of financial statements requires the Company to select from possible alternative accounting principles, and to make estimates and assumptions that determine the reported amounts of assets and liabilities at the balance sheet date and reported costs and expenditures during the reporting period. Estimates and assumptions may be revised as new information is obtained, and are subject to change. The Company's accounting policies and estimates used in the preparation of the Financial Statements are considered appropriate in the circumstances, but are subject to judgments and uncertainties inherent in the financial reporting process.

Stock Based Compensation

In calculating the value of stock options granted, management is required to make significant estimates in relation to the future volatility of the Company's share price and the period in which stock options will be exercised. The selection of the volatility factor and the estimate of the expected option life will have a significant impact on costs recognized for stock based compensation. The estimates concerning volatility are made with reference to historical volatility, which is not necessarily an accurate indicator of volatility that will be experienced in the future. Management assumes that stock options will remain unexercised until immediately prior to their expiry date, which may not be the case.

Carrying Value of Assets

The Company reviews the carrying value of mineral properties and deferred exploration costs when there are any events or circumstances that may indicate impairment. Where estimates of future cash flows are available, an impairment charge is recorded if the undiscounted future net cash flows are less than the carrying amount. Reductions in the carrying value of the properties are recorded to the extent the net book value of the property exceeds the discounted value of future cash flows. Where estimates of future cash flows are not available and where other conditions suggest impairment, management assess if carrying value can be recovered and provides for impairment if so indicated. As at December 31, 2006 the Company has assessed the impairment to long-lived assets and has found no significant impairment.

Asset Retirement Obligations

The Company relied on the results of a professional, engineering firm and used the discount and inflation rate as at December 31, 2006 to estimate the fair value of its asset retirement obligations.

Financial Instruments

During the year ended December 31, 2006, interest on the convertible loan was settled by the issue of 352,093 common shares at a price of $0.34 per share.

Hidefield Options

The Company used the Black-Scholes option pricing model to estimate the fair value of the Hidefield options.

Risk

There are significant risks that might affect further development of the Company. Although the Company has prospective diamond projects and has demonstrated that it has the ability to obtain environmental and trial mining permits, there is a risk that these projects will not be economically mineable or that the required permits will be granted in the future. Further, future market prices for diamonds are not predictable. There is also a risk that should additional development of the properties be required, financing may not be obtainable. Repatriation of earnings and capital from Brazil is subject to compliance with registration requirements. There can be no assurance that restrictions on repatriation will not be imposed in the future.

Management's Responsibility for Financial Statements

The information provided in this report, including the financial statements, is the responsibility of management. In the preparation of these statements, estimates are sometimes necessary to make a determination of future values for certain assets or liabilities. Management believes such estimates have been based on careful judgments and have been properly reflected in the accompanying financial statements.

Disclosure Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the President and Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), on a timely basis so that appropriate decisions can be made regarding public disclosure.

An evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures was conducted as of December 31, 2006, by and under the supervision of management, including the CEO and the CFO. Based on this evaluation, the CEO and the CFO have concluded that the Company's disclosure controls and procedures, as defined by Multilateral Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings, are effective to ensure that information required to be disclosed in reports filed or submitted under Canadian securities legislation is recorded, processed, summarized and reported within the time period specified in those rules and forms and reported to senior management so that appropriate decisions can be made regarding public disclosure.

Internal Control Over Financial Reporting

Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Canadian GAAP. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.

An evaluation of the design of the Company's internal control over financial reporting was conducted as of December 31, 2006, by and under the supervision of management, including the CEO and the CFO. Based on this evaluation, the CEO and the CFO have concluded that the Company's design of internal control over financial reporting, as defined by Multilateral Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings, is sufficient to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Canadian GAAP.

There have been no changes in internal control over financial reporting during the quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Changes in Accounting Policies

There were no changes in accounting policy during this period.

Subsequent Events

a) March 13, 2007, the Company paid $150,000 cash as the second payment on the purchase of the Chapada Diamantina data set.

Other Information

Additional information is available on the Company's website www.braziliandiamonds.com or on SEDAR at www.sedar.com.

Caution Regarding Forward Looking Statements

Statements contained in this document, which are not historical facts, are forward looking statements that involve risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward looking statements. Factors that could cause such differences include, but are not limited to, volatility and sensitivity to the market price for precious metals, environmental and safety issues and changes to government regulations and policies. Although the Company believes that the assumptions intrinsic in forward looking statements are reasonable, we recommend that one should not rely heavily on these statements. The Company disclaims any intention or obligation to update or revise any forward looking statements whether as a result of new information, future events or otherwise.



Consolidated Balance Sheets
As at December 31, 2006 2005
(expressed in thousands of Canadian dollars) $ $

Assets

Current assets
Cash and cash equivalents 4,514 1,082
Accounts receivable and prepaids 220 549
Loans receivable - 71
Due from related parties 4 -
------------------------

4,738 1,702

Investments (note 3) 634 311

Mineral properties 21,376 17,770

Property, plant and equipment 14 106
------------------------

26,762 19,889
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------------------------

Liabilities

Current liabilities
Accounts payable and accrued liabilities 755 777

Long term payable 16 -

Hidefield options 837 433

Asset retirement obligations 79 79
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1,687 1,289
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Shareholders' Equity

Capital stock 92,848 84,321

Warrants 682 876

Contributed surplus 2,219 1,314

Deficit (70,674) (67,911)
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25,075 18,600
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26,762 19,889
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Nature of operations (note 1)


Consolidated Statements of Loss and Deficit Year ended Year ended
(expressed in thousands of Canadian dollars) December 31, December 31,
2006 2005
$ $

Expenses
Accretion on convertible loan - 37
AIM listing costs 14 14
Amortization 8 17
Bad debt - 58
Consultants 389 400
Corporate administrative services 157 179
Foreign exchange loss (gain) (11) (85)
Insurance 57 62
Interest (67) (15)
Investor relations 174 121
Legal and audit 197 183
Office costs 149 128
Regulatory 141 127
Salaries and management fees 169 237
Stock-based compensation 637 -
Travel 84 144
------------------------
(2,098) (1,607)
Other income (expenses)
Loss on disposition of property, plant and
equipment (15) -
Unrealized fair value of Hidefield options (404) (363)
Gain on disposal of Cata Preta Joint Venture - 323
Gain on sale of investments - 857
Reorganization costs (246) -
------------------------

Loss for the year (2,763) (790)

Deficit - Beginning of period (67,911) (67,121)
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Deficit - End of period (70,674) (67,911)
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------------------------

Loss per common share - basic and diluted 0.02 0.01
------------------------
------------------------

Weighted average common shares
outstanding (000's) 143,692 127,814
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Consolidated Statements of Cash Flows Year ended Year ended
(figures in tables expressed in thousands December 31, December 31,
of Canadian dollars) 2006 2005
$ $

Cash flows from operating activities
Income (Loss) for the year (2,763) (790)
Adjustments for non-cash changes
Accretion on convertible loan - 37
Accrual of interest on convertible loan - 41
Amortization 8 17
Bad debt - 58
Gain on disposition of Cata Preta Joint
Venture interest - (323)
Gain on sale of investments - (857)
Loss on disposition of property, plant and
equipment 15 -
Stock-based compensation 637 -
Unrealized fair value of Hidefield options 404 363
Changes in non-cash working capital
(Increase) decrease in accounts receivable and
prepaids 6 (84)
(Increase) decrease in loan receivable 71 (71)
Increase in related parties receivable (4) -
Increase (decrease) in accounts payable and
accrued liabilities (203) 5
------------------------

(1,829) (1,604)
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Cash flows from financing activities
Increase in long term debt 16 -
Issue of shares for private placement 8,789 1,175
Exercise of warrants 60 1,500
Share issue costs (451) (112)
Excercise of options - 106
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8,414 2,669
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Cash flows from investing activities
(Acquistion) Disposition of property, plant and
equipment 69 (67)
Deferred mineral property costs (3,222) (2,472)
Proceeds on issuance of Hidefield options - 70
Proceeds on sale of investment (note 3) - 1,174
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(3,153) (1,295)
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Increase (Decrease) in cash and cash equivalents 3,432 (230)

Cash and cash equivalents - Beginning of period 1,082 1,312
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Cash and cash equivalents - End of period 4,514 1,082
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1. Nature of operations

The Company is engaged in the exploration for and development of mineral resources. The properties of the Company are without a known body of commercial ore, the exploration programs undertaken and proposed constitute an exploratory search, and there is no assurance that the Company will be successful in its search. The Company has not earned any revenue to date from its mining operations and is therefore considered to be in the development stage. The business of exploring for minerals and mining involves a high degree of risk, and few properties that are explored are ultimately developed into producing mines. Significant expenses may be required to establish ore reserves, to develop recovery processes, and to construct mining and processing facilities at a particular site. It is not possible to ensure that the current exploration programs planned by the Company will result in a profitable commercial mining operation.

Although the Company has taken steps to verify title to mineral properties in which it has an interest, in accordance with industry standards for the current stage of exploration of such properties, these procedures do not guarantee the Company's title. Property title may be subject to prior agreements and non-compliance with regulatory requirements.

The Company is actively exploring and maintaining its current mineral property portfolio in Brazil. It expects to selectively explore and develop the portfolio itself and through joint venture arrangements or otherwise. The scheduling and scale of such future activities will depend on results and market conditions. Repatriation of earnings and capital from Brazil is subject to compliance with registration requirements.

2. Significant accounting policies

These audited annual consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles, and they follow the same accounting policies and methods of application as the most recent annual financial statements. Consequently, these statements should be read in conjunction with the audited annual consolidated financial statements for the year ended December 31, 2005.

3. Investments



December 31, 2006 December 31, 2005
------------------------- -------------------------

Carrying Market % Carrying Market %
value value Holding value value Holding

Lysander Minerals
Corporation $ - $ - - - 144 5.61%
Hidefield Gold
plc (a) 634 2,025 5.98% 311 1,407 7.96%
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$ 634 $ 2,025 311 1,551
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a) During the year ended December 31, 2005, the Company entered into an agreement with a related party whereby they transferred their interests in the Cata Preta Joint Venture for consideration of 2,500,000 common shares of Hidefield with a market value of $323,094. As the Company had previously written down the carrying value of its Cata Preta property to $Nil, the Company recorded a gain of $323,094. On December 20, 2006, the Company received the 2,500,000 Hidefield shares. At December 31, 2006, the Company owned 14,625,000 shares of Hidefield.

b) i) At December 31, 2006, the net unrealized gain of the 12,125,000 Hidefield shares if sold at the then market value of 8.25 pence (2005 - 5.79 pence) would be $1,135,000 (2005 - $663,000). The fair value of the Hidefield options at December 31, 2006, calculated using the Black-Scholes option pricing model was $837,000 (2005 - $433,000) resulting in an expense of $404,000 (2005 - $363,000).

The estimated fair value of each option using the Black-Scholes option pricing model has been calculated based on the following assumptions:



December 31, December 31,
2006 2005

Expected dividend yield 0% 0%
Expected share price volatility 51% 52%
Risk-free interest rate 5.28% 4.75%
Expected life of options 1 year 2 years



ii) During the year ended December 31, 2005, the Company sold 12,125,000 of 24,250,000 Hidefield units with a book value of $311,674 to related parties for proceeds of $1,200,375. Each Hidefield unit was sold for 4.5 pence and is comprised of one ordinary common share of Hidefield and an option to acquire 12,125,000 common shares of Hidefield from the Company's remaining shareholding at 6 pence per share within three years of the date of grant ("the Hidefield options").

iii) The Company initially valued the Hidefield options at their estimated fair value of $70,000 based on the premium of 0.25 pence per unit to be received over the Hidefield share trading price at January 25, 2005, the transaction date. The balance of the proceeds of $1,130,375 was applied to the disposal of the Hidefield shares resulting in a gain of $818,701 which was recognized in the statement of loss and deficit during the year ended December 31, 2005.

4. SIGNIFICANT DIFFERENCES FROM UNITED STATES ACCOUNTING PRINCIPLES

The United States generally accepted accounting principles ("U.S. GAAP") reconciliation is included solely for the purpose of the Company's filing on the Alternative Investment Market (AIM) of the London Stock Exchange. The Company is currently listed on the Toronto Stock Exchange and is not a registrant with the United States Securities and Exchange Commission.

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) in Canada which differ, in certain respects, from U.S. GAAP. Had the Company prepared the consolidated financial statements in accordance with U.S. GAAP, certain items on the consolidated balance sheet, statements of loss and deficit and statements of cash flows would have been reported as follows:



December 31, December 31,
2006 2005

Consolidated statements of loss
As reported in accordance with Canadian GAAP (2,763) (790)
Mineral property expenditures written off in
the year - net (a) (3,121) (2,047)
Accretion on convertible loan (b) - 37
Foreign exchange (b) - (16)
------------------------

Net loss under U.S. GAAP (5,884) (2,816)

Available-for-sale securities (c) 151 (767)
------------------------

Comprehensive loss (5,733) (3,583)
------------------------
------------------------

Basic and diluted loss per common share
under U.S. GAAP (0.04) (0.02)
------------------------
------------------------

Property, plant and equipment
Under Canadian GAAP 21,376 17,770
Mineral properties and exploration
expenditures (a) (17,730) (14,609)
------------------------

Under U.S. GAAP 3,646 3,161
------------------------
------------------------

Investments
Under Canadian GAAP 634 311
Unrealized holding gains (c) 1,391 1,240
------------------------

Under U.S. GAAP 2,025 1,551
------------------------
------------------------

Shareholders' Equity

Capital stock
Under Canadian and U.S. GAAP 92,848 84,321
Convertible debt (107) (107)
------------------------

92,741 84,214
------------------------

Warrants
Under Canadian and U.S. GAAP 682 876
------------------------

Contributed surplus
Under Canadian and U.S. GAAP 2,219 1,314
------------------------

Deficit
Under Canadian GAAP (70,674) (67,911)
Accretion on convertible loan (b) 107 107
Mineral properties and exploration
expenditures (a) (17,730) (14,609)
------------------------

Under U.S. GAAP (88,297) (82,413)
------------------------

Other comprehensive income
Under Canadian GAAP - -
Available-for-sale securities (c) 1,391 1,240
------------------------

Under U.S. GAAP 1,391 1,240
------------------------

Total shareholders' equity under U.S. GAAP 8,736 5,231
------------------------
------------------------


a) Mineral property expenditures

Mineral property expenditures are accounted for in accordance with Canadian GAAP as disclosed in note 2. For U.S. GAAP purposes, the Company expenses expenditures relating to unproven mineral properties as they are incurred. When proven and probable reserves are indicated by a bankable feasibility study for a property, subsequent exploration and development costs of the property are capitalized.

Under Canadian GAAP, exploration expenditures capitalized are shown as investing activities in the statement of cash flows. Under U.S. GAAP, exploration amounts expensed are classified as operating activities in the statement of cash flows.

b) Convertible loan

The Convertible loan has been accounted under Canadian GAAP which requires a portion of the convertible loan to be classified as equity. The difference between the carrying amount of the convertible loan and its face value is accreted over the life of the loan with a charge to the statement of loss and deficit. Under U.S. GAAP the convertible loan would be classified as a liability at its face value.

c) Unrealized holding gains (losses)

Under U.S. GAAP, securities are classified as trading securities or available-for-sale securities depending upon the Company's intentions. Unrealized holding gains and losses for trading securities are included in earnings. Unrealized holding gains and losses for available-for-sale securities are excluded from earnings and reported as a net amount in a separate component of shareholders' equity until realized or an other than temporary impairment in value occurs. The Company has available-for-sale securities and the adjustment necessary in the year ended December 31, 2006 was an increase of $151,000 (year ended December 31, 2005 - reduction of $767,000) to the unrealized holding gain category within shareholders' equity.

Contact Information

  • Brazilian Diamonds Limited
    Ken Judge
    Chairman
    + 44 7733 001 002
    or
    Brazilian Diamonds Limited
    Stephen Fabian
    President & CEO
    + 55 31 8814 5111
    or
    Brazilian Diamonds Limited
    Investor Relations
    Europe
    + 44 207 590 5503
    or
    Brazilian Diamonds Limited
    Investor Relations
    North America
    (604) 689-2599 or 1-866-689-2599
    (604) 689-3609 (FAX)
    Email: info@braziliandiamonds.com
    Website: www.braziliandiamonds.com
    or
    Hanson Westhouse Limited (Nomad to the Company)
    Tim Feather
    + 44 113 246 2610
    or
    Teather & Greenwood: Landsbanki (Broker to the Company)
    James Maxwell
    + 44 207 426 9000