Discovery Energy Corp. - Annual Report: 2011 (Form 10-K)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

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Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

(Not applicable to registrant) Yes r      No r

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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

Yes ý    No q

The aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the Registrant as of August 31, 2010, the last business day of the Registrant's most recently completed second fiscal quarter, was $2,680,875 (computed based upon the price at which the Company's common stock was last sold).

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

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PART I

Santos Resource Corp. (the "Company" or "Santos") was incorporated under the laws of the state of Nevada on May 24, 2006. We have not commenced business operations and we are considered an exploration stage company. We are defined as a "shell company" under the Rule 405 of the Securities Act and Rule 12b-2 of the Exchange Act because we have nominal operations and nominal assets. To date, our activities have been limited to organizational matters, obtaining a geological report on the Lourdeau Property (also referred to as Lourdeau Claims) and the preparation and filing of a registration statement on Form S-1.

Our business plan is to proceed with the exploration of the Lourdeau Property to determine whether there are commercially exploitable reserves of base and precious metals. We presently do not have funds to meet our general operating expenses and to meet our obligations under the Property Option Agreement. We currently do not have any arrangements for financing and we may not be able to obtain financing when required. We are currently relying on loans that may be available to Santos from management. We do not have the funds to conduct the recommended exploration program. Due to extreme weather conditions, exploration activities can only be conducted between June and August of each year. We are attempting to raise additional money, and have not started the exploration program as we have not been successful in raising funds. If we are able to raise additional money, we may conduct the exploration program recommended by Mr. Michel Boily in the summer of 2011. We anticipate the recommended program will cost approximately $110,452 (CAD$107,570), and will take approximately 5 weeks to complete.

Mr. Michel Boily, Ph.D., P. Geo. was hired by Santos to provide a Technical Report in July 2007 on the Lourdeau Property. Mr. Boily has been continuously practicing in his profession as a geologist since 1988, and is a specialist of granitoid-hosted precious and rare metal deposits in Quebec. He graduated from the University of Montreal (1988) in Quebec, Canada, with a PhD in geology. He is a registered Professional Geologist in good standing with l'Ordre des Géologues du Québec (permit no. 1097). Mr. Boily does not have any interest in the Lourdeau Property or the Company.

Mr. Boily does not have any interest in the Lourdeau Property or the Company. The report is based on published and private reports, maps and data provided by the Company and in the public domain. Mr. Boily's report details the geological and exploration history of the Lourdeau Property, including the land status, climate, geology and mineralization. Based upon previous exploration activity in the area, Mr. Boily recommends the Company conduct a specific exploration program on the Lourdeau Property. The purpose of this report was to evaluate the area of the claim group, and the prior exploration work conducted on the claims, and to recommend an exploration program.

Mr. Boily recommends a systemic surface sampling program of the Lourdeau Vein site and its vicinity, and the northern edge of the Lourdeau Hill, incorporating grab and channel sampling, in order to get a solid geochemical assay database. Mr. Boily recommends obtaining a helicopter-borne geophysical survey to cover the rest of the Lourdeau Property. Geophysical survey means the collection of information systematically. Mr. Boily recommends the geophysical magnetic and radiometric surveys to be done on a 100 meter spaced grid. This program is estimated to cost approximately $110,452 (CAD$107,570), and will take approximately 5 weeks to complete.

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The recommended exploration program costs approximately $110,452 (CAD$107,570) and consists of the following:

Depending on the results of this program, the next phase could involve a drilling campaign which would define the targets acquired during the geophysical surveys and sampling campaign. The focus of the drilling will be the uranium-mineralized sandstones at the Lourdeau Hill, with the gold, copper and silver-mineralized metavolcanic constituting secondary targets.

Our mineral claims presently do not have any mineral reserves. There is no mining plant or equipment located on the property.

We have not yet commenced physical exploration of the Lourdeau Claims. Our exploration program is exploratory in nature and there is no assurance that mineral reserves will be found.

The exploration program proposed by the Company's independent consultant is designed to determine whether mineralization exists to the extent that further exploration is recommended to outline any such mineralized zones. It is uncertain at this time the precise quantity of minerals in the property that would justify actual mining operations. If we decide to abandon our mineral claim at any stage of our exploration program, we intend to acquire other properties and conduct similar exploration programs. The other properties may be located in the same mining district or we may in the future explore properties located in other jurisdictions, which may include other provinces in Canada, or in the United States. Currently, the Company does not have any other properties or any intentions of acquiring any other properties.

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We plan to conduct a systemic surface sampling program of the Lourdeau Vein site and its vicinity, and the northern edge of the Lourdeau Hill, incorporating grab and channel sampling, in order to get a solid geochemical assay database. Mr. Boily recommends obtaining a helicopter-borne geophysical survey to cover the rest of the Lourdeau Property. Mr. Boily recommends the geophysical magnetic and radiometric surveys to be done on a 100 m spaced grid.

Depending on the results of this program, the next phase could involve a drilling campaign which would define the targets acquired during the geophysical surveys and sampling campaign. The focus of the drilling will be the uranium-mineralized sandstones at the Lourdeau Hill, with the gold, copper and silver-mineralized metavolcanic constituting secondary targets.

We anticipate that additional funding will be in the form of equity financing from the sale of our common stock. However, we cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our common stock to fund additional phases of the exploration program should we decide to proceed. We believe that debt financing will not be an alternative for funding any further phases in our exploration program. The risky nature of this enterprise and lack of tangible assets places debt financing beyond the credit-worthiness required by most banks or typical investors of corporate debt until such time as an economically viable mine can be demonstrated. We do not have any arrangements in place for any future equity financing.

We have not hired any personnel to perform the geological work on the Lourdeau Property. Any geologist that we hire in the future will be responsible for selecting the appropriate personnel and incurring all worker-related costs, which we will reimburse for such services.

Initially, we intend to use the services of contractors and consultants for exploration work on our properties. At present, we have no paid employees. We believe keeping a low number of full-time employees will conserve cash and allow greater flexibility in the future.

We will be required to comply with all regulations, rules and directives of governmental authorities and agencies applicable to the exploration of minerals in Canada generally, and in Quebec specifically.

The key government agency in charge of mining in Quebec, Canada is the Ministry of Natural Resources, or ministère des Ressources naturelles. The Ministry of Natural Resources administers three laws relevant to the mining industry in Quebec: (i) The Mining Act (Loi sur les mines); (ii) The Mining Duties Act (Loi concernant les droits sur les mines); and (iii) SOQUEM Act (Loi sur la société québécoise d'exploration minière).

The Quebec Mining Act allows a mineral explorer to claim a portion of available governmental lands for the exclusive ownership of the mining rights area. Pursuant to the Quebec Mining Act, a foreign company working on mining claims in the Province of Quebec must register with the provincial government of Quebec. We are not registered with the government of Quebec, and we will need to register with the government of Quebec before we work on the Lourdeau Claims.

We currently have no costs to comply with environmental laws concerning our exploration program. A permit is required to penetrate the forested areas with the obligation to store along access zones cut lumber of potential commercial value. We do not expect to be required to obtain additional governmental authorizations or to undertake studies of environmental impact and project approval unless and until we discover commercially viable quantities of mineral deposits. Under the Quebec Mining Act, should we discover mineral deposits and desire to commence mining operations, we will be required to file a mining site rehabilitation plan with the Natural Resources Ministry. This rehabilitation plan discusses how the operator intends to rehabilitate the property following its intended use of the property and includes an estimate of the costs involved in the rehabilitation. We may also be required to obtain permits and

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distribution rights-of-way from the Natural Resources Ministry for the construction of the access roads and power lines.

Other laws are indirectly relevant to our business, including the Quebec Environmental Quality Act and the Canadian Environmental Assessment Act. These acts are administered by separate provincial and federal governmental agencies that have the separate authority to approve or require changes to a company's impact assessment. Notwithstanding this separate authority, these federal and provincial governmental agencies generally attempt to coordinate their review and approval procedures.

The Quebec Environment Quality Act, includes standards related to protection of the soil, water, and air quality. Article 22 of the Environmental Quality Act requires that any proponent who wants to build or modify the environment in any way obtain a certificate of approval from the Quebec Environment Ministry. Directive 19, established under the Environmental Quality Act, sets criteria for environmental impact studies to accompany applications for certificates of approval under the Act, and also sets standards on the ways different types of mines should operate.

We are prepared to engage professionals, if necessary, to ensure regulatory compliance, but in the near term we expect our activities to require minimal regulatory oversight. If we expand the scope of our activities in the future, it is reasonable to expect expenditures on compliance to rise.

We will also have to sustain the cost of reclamation and environmental remediation for all work undertaken which causes sufficient surface disturbance to necessitate reclamation work. Both reclamation and environmental remediation refer to putting disturbed ground back as close to its original state as possible. Other potential pollution or damage must be cleaned-up and renewed along standard guidelines outlined in the usual permits. Reclamation is the process of bringing the land back to a natural state after completion of exploration activities. Environmental remediation refers to the physical activity of taking steps to remediate, or remedy, any environmental damage caused, i.e. refilling trenches after sampling or cleaning up fuel spills. Our initial programs do not require any reclamation or remediation other than minor clean up and removal of supplies because of minimal disturbance to the ground. The amount of these costs is not known at this time as we do not know the extent of the exploration program we will undertake, beyond completion of the recommended three phases described above. Because there is presently no information on the size, tenor, or quality of any resource or reserve at this time, it is impossible to assess the impact of any capital expenditures on our earnings or competitive position in the event a potentially economic deposit is discovered.

An investment in the Company is highly speculative in nature and involves an extremely high degree of risk. There is no assurance that our business will be profitable. You should carefully consider the risks described below and the other information in this annual report before investing in our common stock. If any of the following risks occur, our business, operating results and financial condition could be seriously harmed.

Our Company is only recently organized with no operating history, which makes it difficult to evaluate the investment merits of our Company. Our Company was organized on May 24, 2006 and is a start-up company. We have no operating history and we do not have any business prior to our organization. As of February 28, 2011, we incurred $69,689 to acquire an option to acquire and explore the Lourdeau Property, and $175,711 in professional fees to organize the Company and file a registration statement on Form S-1. We have incurred a total of $248,895 in expenses, with a cash balance of $1,909 as of February 28, 2011.

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We may not be able to continue as a going concern if we do not obtain additional financing.

Because of our lack of sufficient funds and short operating history incurring only expenses, and no revenues, our independent accountants' audit report states that there is substantial doubt about our ability to continue as a going concern. Our independent auditor in their audit report have stated that we are in the exploration stage, have no permanently established source of revenue, and are dependent on our ability to raise capital from shareholders or other sources to sustain operations, raising substantial doubt about our ability to continue as a going concern. Therefore, our ability to continue as a going concern is highly dependent upon obtaining additional financing for our planned operations. As of the date hereof, all our cash has been raised from the issuance of securities.

In order for us to perform any exploration program, we will need to obtain additional financing. As of February 28, 2011, we had cash in the amount of $1,909 and current liabilities of $71,134. We currently do not have any operations and we have no income. Our business plan calls for incurring approximately $110,452 on an exploration program incorporating grab and channel sampling followed by a helicopter-borne geophysical survey, which would define the targets acquired during the geophysical surveys and sampling campaign. We do not have sufficient funds to meet our general operating expenses and to meet our obligations under the Property Option Agreement. We currently do not have any arrangements for financing and we may not be able to obtain financing when required. We are currently relying on loans that may be available to Santos from management. We do not have funds to conduct the exploration program. If we raised the funds and conducted the exploration programs, and if our exploration programs are successful in discovering ore of commercial tonnage and grade, we will require additional funds in order to place the Lourdeau Claims into commercial production. Obtaining additional financing would be subject to a number of factors, including the market price for uranium, gold, silver, copper, base and precious metals and the cost of exploring for these minerals. These factors may make the timing, amount, terms or conditions of additional financing unavailable to us.

We may not have access to the Lourdeau Property during the winter season due to snow in the area and road closures. Extreme weather can also occur in other seasons and limit access to the Lourdeau Property. The summers are very short (from early June to late August). As a result, any attempts to visit, test, or explore the property may be limited to these few months of the year when weather permits such activities. These limitations can result in significant delays in exploration efforts, as well as mining and production in the event that commercial amounts of minerals are found. Such delays can result in our inability to meet deadlines for exploration expenditures required to be made in order to retain title to our claims under provincial mineral property laws.

Mr. Richard Pierce, our sole executive officer, does not have any formal training as a geologist, or in the technical aspects of management of a company specializing in mining and exploration for base and precious metals. Mr. Pierce has no business experience with exploration companies, his decisions and choices may not take into account standard exploration or mining approaches commonly used in the industry. As a result of this inexperience, there is a higher risk of our being unable to complete our business plan for the exploration of our mineral claims. In addition, we will have to rely on the technical services of others with expertise in geological exploration in order for us to carry our planned exploration program. If we are unable to contract for the services of such individuals, it will make it difficult and maybe impossible to pursue our business plan. There is thus a higher risk of business failure.

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Because our sole executive officer has only agreed to provide his services on a part-time basis, he may not be able or willing to devote a sufficient amount of time to our business operations, causing our business to fail.

Our sole executive officer is employed on a full time basis by other companies. Because we are in the early stages of our business, Mr. Pierce, our executive officer, devotes approximately 10 hours per week to our affairs. If the demands of our business require the full business time of Mr. Pierce, he is prepared to adjust his timetable to devote up to 15 hours a week. However, Mr. Pierce may not be able to devote sufficient time to the management of our business, as and when needed. It is possible that the demands of Mr. Pierce's other business interests will increase with the result that he would no longer be able to devote sufficient time to the management of our business. Competing demands on Mr. Pierce's time may lead to a divergence between his interests and the interests of other shareholders.

We believe that our continued success depends to a significant extent upon the efforts and abilities of our senior management and in particular Richard Pierce, our sole executive officer. Mr. Pierce has been in management for over 20 years. We believe that the loss of Mr. Pierce's business and management experience could hinder our ability to pursue our stated plan of operations and obtain debt or equity financing, if and when required.

There may be conflict of interest situations whenever our Company conducts any business with Starfire, the registered owner of the Lourdeau Property. Richard Pierce, our sole executive officer, is also a director of Starfire. Shareholders of Santos will be dependent upon our management exercising, in a manner fair to all of our shareholders, his fiduciary duties as an officer or as a member of our board of directors. There is no way to prevent or control any business transactions between Santos and Starfire relating to the Lourdeau Property that could have a negative or unfavorable consequence for Santos. There is a significant risk that Santos may not receive fair treatment in any transaction connected to the Lourdeau Property and as a result the shareholders of Santos will be adversely affected.

We have no measured mineral bodies. If we do not find a mineral body or bodies containing valuable minerals or metals or if we cannot conduct further exploration of any minerals, either because we do not have money to do it or because it is not economically feasible to do it, we may have to cease operations and you will loose your investment.

Pursuant to the Property Option Agreement we acquired a 75% interest in and to the Lourdeau Claims by paying a total of CAD$10,000 in cash; issuing 75,000 shares to Starfire Minerals Inc., the registered owner of the Lourdeau Claims; and incurring at least a total of $48,155 (CAD$50,000) of expenditures on the property before April 1, 2011. As of the date hereof, we have paid Starfire $10,582 (CAD$10,000); issued to Starfire 75,000 shares; and instead of incurring expenditures we paid Starfire $48,155 (CAD$50,000) in cash. The Lourdeau Property is our sole asset and if we fail to keep the Lourdeau Property in good standing, we will have no assets and you may lose all your investment.

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Title to the Lourdeau Claims is registered in the name of Starfire Minerals Inc. and Starfire may transfer title to third parties without our knowledge.

Our right to a 75% interest in and to the Lourdeau Claims is pursuant to the Property Option Agreement. We cannot prevent Starfire from transferring the Lourdeau Property to third parties. A third party has no way of knowing that we have rights to the Lourdeau Property since ownership is registered in the name of Starfire with the government of Quebec. If the Lourdeau Property is transferred to third parties we may have to litigate in order to determine our ownership rights. There is no way of knowing if Starfire will or has transferred the property to third parties. Our only protection is our contractual rights under the Property Option Agreement.

There are several governmental regulations that materially restrict mineral exploration or exploitation. We will be subject to the mining laws of Quebec as we carry out our exploration programs. Because we are a foreign company working on mining claims in Quebec, we will need to register with the government of Quebec before we work on the Lourdeau Claims. We may be required to obtain work permits, post bonds and perform remediation work for any physical disturbance to the land in order to comply with these regulations. While our planned exploration program budgets for regulatory compliance, there is a risk that new regulations could increase our costs of doing business and prevent us from carrying out our exploration program.

Rule 12b-2 of the Exchange Act defines a shell company as a registrant that has no or nominal operations, and either (a) no or nominal assets; (b) assets consisting solely of cash and cash equivalents; or (c) assets consisting of any amount of cash and cash equivalents and nominal other assets. Our balance sheet states that we have cash as our only asset therefore, we are defined as a shell company. SEC rules prohibit shell companies from using a Form S-8 to register securities pursuant to employee compensation plans. However, the rules do not prevent us from registering securities pursuant to registration statements. SEC rules regarding Form 8-K requires shell companies to provide more detailed disclosure upon completion of a transaction that causes it to cease being a shell company. If and when we cease to be a shell company, we must file a current report on Form 8-K containing the information required pursuant to Regulation S-K and in a registration statement on Form 10, within four business days following completion of the transaction together with financial information of the private operating company. In order to assist the SEC in the identification of shell companies, we are also required to check a box on Form 10-Q and Form 10-K indicating that we are a shell company. To the extent that we are required to comply with additional disclosure because we are a shell company, we may be delayed in executing any mergers or acquiring other assets that would cause us to cease being a shell company.

The SEC adopted a new Rule 144 effective February 15, 2008, which makes resale of restricted securities by shareholders of a shell company more difficult. The new Rule 144 cannot be relied upon for the resale of securities of a shell company, and may be relied upon to sell securities of a former shell company only if all of the following conditions are met: the issuer has ceased to be a shell company; the issuer is subject to the reporting requirements of the Exchange Act; the issuer has filed all Exchange Act reports required for the past 12 months; and at least one year has elapsed from the time that the issuer filed current Form 10 information on Form 8-K changing its status to a non-shell company.

Our directors and sole executive officer, as a group, control approximately 44.3% of our issued and outstanding shares of common stock. The interests of our directors and executive officer may not be, at

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all times, the same as that of other shareholders. Since our directors and executive officer are not simply passive investors but also our Board of Directors and executive officer, their interests as an executive may, at times, be adverse to those of passive investors. Where those conflicts exist, our shareholders will be dependent upon our directors and executive officer exercising, in a manner fair to all of our shareholders, their fiduciary duties as an officer or as a member of our board of directors. Also, our directors and executive officer will have the ability to significantly influence the outcome of most corporate actions requiring shareholder approval, including the merger of Santos with or into another company, the sale of all or substantially all of our assets and amendments to our articles of incorporation. This concentration of ownership with our directors and executive officer may also have the effect of delaying, deferring or preventing a change in control of Santos, which may be disadvantageous to minority shareholders.

Our Form S-1 Registration Statement filed on November 26, 2008, registered for resale 13,836,500 shares of our common stock held by our selling shareholders, which represents 43.1% of the common shares outstanding. The offer or sale of a large number of shares at any price may cause the market price to fall.

Santos's common stock is subject to Rule 15g-9 of the Securities and Exchange Commission which regulates broker/dealer practices in connection with transactions in "penny stocks". Penny stocks generally are equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in that security are provided by the exchange or system. The penny stock rules require a broker/dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the Commission that provides information about penny stocks and the nature and level or risks in the penny stock market. The broker/dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker/dealer and its salesperson in the transaction, and if the broker/dealer is the sole market-maker, the broker/dealer must disclose this fact and the broker/dealer's presumed control over the market. This information must be provided to the customer orally or in writing before or with the written confirmation of trade sent to the customer. The bid and offer quotations, and the broker/dealer and its salesperson compensation information, must be given to the customer in writing before or with the customer's confirmation. The broker/dealer must make a special suitability determination for purchasers of the securities and receive the purchaser's written agreement to the transaction prior to sale. Monthly statements must be sent by the broker/dealer to the customer disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. These disclosure requirements may reduce the level of trading activity in the market for Santos's common stock and may limit the ability of investors in this offering to sell Santos's common stock in the secondary market.

There has been, and continues to be, a limited public market for our common stock. An active trading market for our shares has not, and may never develop or be sustained and purchasers of our shares may not be able to resell their securities at prices equal to or greater than the price paid for these shares.

Our common stock is quoted on the OTC Bulletin Board. FINRA Rule 6530 provides that OTC Bulletin Board issuers who are late in filing their annual or quarterly reports three times within a 24-month period will be ineligible for quotation on the OTC Bulletin Board. In order to regain eligibility under this rule,

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Santos would need to timely file all of its annual and quarterly reports due in a one year period. We have not been late in filing our quarterly and annual reports.

None.

Currently, we are not paying any monthly rent for our office space located at 11450 - 201A Street, Maple Ridge, British Columbia.

Our only property is a 75% interest in and to 18 mineral claims covering approximately 900.75 hectares (9.01 km²) called the Lourdeau Claims. The Lourdeau Claims are located in the La Grande geological area of Quebec, Canada, in the James Bay Territory about 620 miles (1,000 km) north of Montreal, Quebec.

We do not own or lease any property other than our interest in the Lourdeau Claims.

Glossary of Mining Terms

The following is a list of chemical elements by symbols used in this annual report.

"A" means the chemical symbol for argon;

"Au" means the chemical symbol for gold;

"Ag" means the chemical symbol for silver;

"C" means the chemical symbol for carbon;

"Co" means the chemical symbol for cobalt;

"Cr" means the chemical symbol for chromium;

"Cu" means the chemical symbol for copper;

"Fe" means the chemical symbol for iron;

"Mo" means the chemical symbol for molybdenum;

"Ni" means the chemical symbol for nickel;

"Pb" means the chemical symbol for lead;

"Th" means the chemical symbol for thorium;

"Ti" means the chemical symbol for titanium;

"U" means the chemical symbol for uranium;

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"V" means the chemical symbol for vanadium;

"Zn" means the chemical symbol for zinc; and

"Zr" means the chemical symbol for zirconium.

The following is a glossary of certain terms used in this annual report.

"alteration" means any change in the mineralogical composition of a rock that is brought about by physical or chemical means, especially by the action of hydrothermal solutions;

"anomaly" means a geological feature, especially in the subsurface, distinguished by geological, geophysical or geochemical means, which is different from the general surroundings and is often of potential economic value having a geochemical or geophysical character which deviates from regularity;

"Archean" means relating to or being the earliest eon of geological history or the corresponding system of rocks;

"arenite" means arenaceous rock; a sandstone;

"arenaceous" means resembling, derived from, or containing sand;

"argillaceous" means relating to or containing clay or clay minerals;

"assay" means to analyze the proportions of metal in a rock or overburden sample; to test an ore or mineral for composition, purity, weight or other properties of commercial interest;

"autunite" means a radioactive, usually lemon-yellow calcium phosphate mineral that occurs in tabular crystals and in scales and that is an ore of uranium;

"bornite" means a brittle metallic-looking mineral that consists of a sulfide of copper and iron and is a valuable copper ore;

"chalcocite" means a black or gray lustrous metallic mineral that consists of a sulfide of copper and is an important copper ore;

"chalcopyrite" means a yellow mineral that consists of a sulfide of copper and iron and is an important copper ore;

"chlorite" means any of a group of usually green silicate minerals associated with and resembling the micas;

"chloritization" means a metasomatic process in which the dark minerals of rocks and sometimes also the matrix itself are replaced by chlorites;

"cps" means centipoises, one cps means one one-hundredth of the unit of dynamic viscosity in the centimetre gram second system of units;

"deposit" means a mineralized body which has been physically delineated by sufficient drilling, trenching and/or underground work, and found to contain a sufficient average grade of metal or metals to warrant further exploration and/or development expenditures. Such a deposit does not qualify as a commercially mineable ore body or as containing reserves of ore, until final legal, technical and economic factors have been resolved;

"desiccation" means the process of becoming dry;

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"dextral" means facing, or located on the right side;

"diagenesis" means the physical and chemical changes undergone by a sediment during lithification and compaction, excluding erosion and metamorphism;

"dip" means the maximum angle that a structural surface makes with the horizontal, measured perpendicular to the strike of the structure and in the vertical plane;

"epigenetic" means the change in the mineral content of a rock because of outside influences;

"extrapolate" means to infer or estimate by extending or projecting known information;

"feldspar" means any of a group of abundant rock-forming minerals occurring principally in igneous, plutonic, and some metamorphic rocks, and consisting of silicates of aluminum with potassium, sodium, calcium, and, rarely, barium;

"felsic" means a igneous rock having abundant light-coloured minerals;

"g/t" means grams per metric tonne;

"geophysical survey" means a scientific method of prospecting that measures the physical properties of rock formations. Common properties investigated include magnetism, specific gravity, electrical conductivity and radioactivity;

"hectare" means a square of 100 meters on each side;

"hematite" means a red, grey, or black mineral, found as massive beds and in veins and igneous rocks. It is the chief source of iron;

"homogeneous" means composed of similar or identical parts or elements;

"host" means a rock or mineral that is older than rocks or minerals introduced into it;

"hydrothermal" means pertaining to hot water, especially with respect to its action in dissolving, redepositing and otherwise producing mineral changes within the earth's crust;

"igneous" means a classification of rocks formed from the solidification from a molten state. If the rock crystallizes within the crust, it is said to be intrusive, while if it flows onto the surface, it is extrusive;

"komatiitic" are ultramafic mantle-derived volcanic rocks;

"lb/t" means pounds per tonne;

"lenticular" means having the shape of a double-convex lense.

"mafic mineral" means a mineral that is composed predominantly of the ferromagnesian rock-forming silicates;

"mag" means a geophysical survey method which measures the magnetic properties of rocks;

"malachite" means a mineral, the green basic carbonate of copper occurring in crystals of the monoclinic system or (more usually) in masses;

"metallogeny" means the branch of the theory of minerals that investigates regional uniformities in the formation and location of ore deposits;

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"metamorphism" is the solid-state recrystallization of pre-existing rocks due to changes in physical and chemical conditions, primarily heat, pressure, and the introduction of chemically active fluids;

"metavolcanic" means rock first produced by a volcano, either as lava or tephra;

"metasediments" means sediment or sedimentary rock that shows evidence of having been subjected to metamorphism;

"mineralization" means the process or processes by which a mineral or minerals are introduced into a rock resulting in concentration of metals and their chemical compounds within a body of rock;

"muscovite" means a colorless to pale brown form of mica consisting of a silicate of aluminum and potassium;

"NI 43-101" means the Canadian National Instrument 43-101 "Standards of Disclosure for Mineral Projects" adopted by the Canadian Securities Administrators;

"nodule" means a small knobbly rock or mineral cluster;

"NSR" means net smelter return royalty;

"paleotopography" means the topography of a given area in the geologic past;

"petrogenetic" means the origin or formation of rocks;

"petrography" means description and systematic classification of rocks;

"ppb" means parts per billion;

"ppm" means parts per million;

"Proterozoic" means geologic time between the Archean and Paleozoic eras, that is, from 2500 million to 550 million years ago;

"quartz" means a mineral composed of silicon dioxide, crystalline silica, commonly in white masses, next to feldspar, the commonest mineral;

"radiometric" means measurement of geologic time by means of the rate of disintegration of radioactive elements;

"reticulate" means rock texture in which crystals are partly altered to a secondary material, forming a network that encloses the remnants of the original mineral;

"sample" means a small portion of rock, soil or a mineral deposit taken so that the metal content can be determined by assaying;

"sampling" means selecting a fractional but representative part of a rock, soil, or a mineral deposit for analysis;

"scintillometer" means scientific device used to measure small fluctuations of the refractive index of air caused by variations in temperature, humidity, and pressure;

"schist" means a metamorphic crystalline rock that has a closely foliated structure and can be split along approximately parallel planes;

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"sediment" means solid material that has settled down from a state of suspension in a liquid. More generally, solid fragmental material transported and deposited by wind, water or ice, chemically precipitated from solution, or secreted by organisms, and that forms in layers in loose unconsolidated form;

"sericite" means a kind of muscovite occurring in silky scales having a fibrous structure;

"silicification" means a metamorphic rock characterized by strong foliation or schistosity;

"schistosity" means the parallel arrangement of shaly or prismatic minerals like micas and amphiboles resulting from nonhydrostatic stress in metamorphism;

"stratigraphy" means the geology that deals with the origin, composition, distribution, and succession of strata;

"strike" means direction or trend of a geologic structure;

"tectonic" means the study of the movements and deformation of the crust on a large scale, including epeirogeny, metamorphism, folding, faulting, and plate tectonics;

"topography" is a description or representation of the features and configuration of land surfaces;

"U₃O₈" means uranium oxide concentrate, the mixture of uranium oxides produced after milling uranium ore from a mine;

"UTM" means Universal Transverse Mercator, a grid reference system;

"vein" means a precipitation or deposit from a hydrothermal fluid of, commonly, quartz, carbonate minerals and metallic minerals into a fissure or crack or other geological structure.

The Lourdeau Property is located in the La Grande geological area of Quebec in the James Bay Territory about 621 miles or 1,000 kilometers north of Montreal (see Figures 1 to 3). The property lies on the eastern shore of the La Grande 3 Reservoir ("LG-3") roughly 1.6 miles or 2.6 kilometers east-northeast from a major Hydro-Quebec levee. The property consists of 18 continuous map designed claim units (or cells) in the NTS 32G/12 sheet for a total surface of 900.75 hectares or 9.01 km2 (see Figure 4). The claims block is centered at UTM coordinates 435250 E and 5948300 N, (NAD83; zone 18) or 75^o58'45" W and 53^o40'45" N with the details of the titles given in Table 1. To the knowledge of Mr. Boily, the property is devoid of royalties, back-in-rights payments or other encumbrances. According to Quebec government records, no part of the land covered by the property is a park or mineral reserve. However, according to the Quebec Government's decree no. 241-86, exploration on 16 claims is allowed under specific conditions related to the development and utilization of water power on the LG-3 Reservoir. As parts of these claims are located on the shore of the LG-3 Reservoir, any exploration work on the property that is located on the shore will need approval from Hydro-Quebec. The Lourdeau Property is not subject to environmental liabilities except for those specified in the "Loi sur les Mines" (L.R.Q. chapter M-13.1), the Quebec Mining Act. The Quebec Mining Act imposes obligations on the mining industry to rehabilitate and restore the environment from the adverse effects of mining activities. The environmental restoration

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obligations apply to open pit or underground mines and tailings areas, and identify who must carry out such work, and particularize what must be done.

Table 1. List of map designed claims for the Lourdeau property

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Location, Accessibility, Climate, Local Resources, Infrastructure and Physiography

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Access from the south to the property is about 352 miles or 568 kilometers via the James Bay Road from the town of Matagami to the crossing of Trans-Taiga Road. From Radisson we travel south for 32 miles or 52 kilometers upon reaching this intersection (see Figure 3). From there, we progress east on the Trans-Taïga Road along the LG-3 Reservoir for about 55 miles or 90 kilometers until reaching the LG-3 airport from which we can arrange transport by helicopter to the property. One can also take the northern intersection of the Trans-Taiga Road 3 miles or 6 kilometers past the LG-3 airport and travel 10 miles or 17 kilometers north-east to a major Hydro Quebec levee on the LG-3 Reservoir (see Figure 4). At this point, we are 1.6 miles or 2.6 kilometers from the Lourdeau Property which can be attained by boat launched from a landing located at the levee.

The James Bay area is characterized by a continental climate. Summers (early-June to late-August) are very short but temperate with average maxima and minima of 68^oF or 20.0^oC and 45^oF or 7.4^oC (July). Winter is harsh and starts in September and last until May, with extensive snow precipitations (267 cm) from October to May. Average temperatures reach -19.3^oF or -28.5^oC (min) and -1^oF or -18.3^oC (max) in January. The topography is typical of the Canadian Shield. The physiography of the region is rough and undulating, glaciation producing a rolling morainal plain with numerous small shallow lakes. The vegetation, adapted to the harsh climate, typifies the Taiga forest where the trees are sparse and small. The dominant species are black spruce and jack pine, but larch, birch and aspen are also present. The ground is covered by pale green lichen commonly called reindeer moss that is highly inflammable during the dry season.

The nearest village, Radisson (population 400) is located roughly 102 miles or 165 kilometers west along the Trans-Taiga and James Bay routes. Several services, including lodging, food, gas, hospital, car and truck rental and a regional airport can be obtained within this modern village.

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Title to Claims

Under the Property Option Agreement entered into on June 25, 2007, we acquired an option to acquire a 75% interest in and to 18 mineral claims called the Lourdeau Claims (also referred to as Lourdeau Property) from Starfire Minerals Inc., the registered owner of the Lourdeau Claims. On May 29, 2008, we amended the property option agreement whereby our option to acquire the Lourdeau Claims is subject to the approval of the TSX Venture Exchange, which approval was obtained in September 2008. On April 23, 2009, we amended the Property Option Agreement again, which extends the schedule for Santos to incur a portion of the final $24,061 (CAD$25,000) of Expenditures to earn Starfire's interest in the Lordeau Claims to April 30, 2010. We amended the Property Option Agreement on April 26, 2010, August 31, 2010 and December 15, 2010, which extends the schedule for Santos to incur the final $15,135 (CAD$14,740) of Expenditures in order to earn 75% of Starfire's interest in the Lourdeau Claims, from April 30, 2010 to April 1, 2011. As of April 1, 2011 we paid Starfire the final $15,135 of Expenditures and acquired a 75% interest in the Lourdeau Claims.

Under the Property Option Agreement, Starfire Minerals Inc. has a 3% Net Smelter Return ("NSR") royalty interest in the Lourdeau Claims, if and when Santos exercises its option to acquire a 75% interest in the Lourdeau Claims by making the required cash and share payments. NSR means the actual proceeds received from the sale of ore, metals or concentrated products from the Lourdeau Property derived from commercial production as recorded by the producer and net of any smelting and refining charges, penalties, costs of transportation of ores, metals or concentrates from the Lourdeau Property to any mint, smelter or other purchaser, cost of insurance of the products, and any export and import taxes levied with respect to production from the Lourdeau Property.

Santos also has the right to purchase up to two-thirds of the NSR royalty (i.e. 2% of the NSR royalty) on the basis of $100,000 for each 0.1% of the NSR royalty (i.e. $100,000 per 0.1% NSR royalty) acquired on the first one-half of the NSR royalty, and $150,000 for each 0.1% of the NSR royalty (i.e. $150,000 per 0.1% NSR royalty) thereafter for the remaining NSR royalty (i.e. the remaining 1% NSR royalty). To exercise its option to purchase the NSR royalty or any portion thereof, Santos must provide Starfire with at least 30 days advance written notice of its intention to do so, and must close upon each purchase within 60 days of each notice.

Under the Property Option Agreement, Santos is required to make all filings related to the Lourdeau Property and to maintain the Lourdeau Claims in good standing by preparing and filing the assessment reports, paying taxes and keeping the Lourdeau Property free and clear of all liens and encumbrances. The Lourdeau Claims are in good standing until July 18, 2011 and have been assigned tenure numbers 87500, 87501, 87502, 87503, 87504, 87505, 87506, 87507, 87508, 87509, 87510, 87511, 87512, 87513, 87514, 87515, 87516 and 87517 by the Province of Quebec.

In order to exercise the Option and to earn its 75% interest in the Property, Santos has to pay Starfire $10,582 (CAD$10,000) in cash payment and issue 75,000 shares to Starfire, and incur an aggregate of $48,155 (CAD$50,000) in expenditures before April 1, 2011, within the following time schedule:

(a)        pay $10,582 (CAD$10,000) upon signing of the Property Option Agreement (paid);

(b)        issue and deliver 75,000 shares within 10 business days of the date of approval of the Property Option Agreement by the board of directors of Santos (issued in June 2007);

(c)        incur $24,094 (CAD$25,000) of expenditures on the Lourdeau Property on or before September 30, 2008 (in September 2008, Santos paid Starfire cash of $24,094 instead of incurring expenditures on the property);

(d)        incur $8,926 (CAD$10,260) on the Lourdeau Property on or before May 11, 2009 (in May 2009 Santos paid Starfire cash of $8,926 instead of incurring expenditures on the property); and

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(e)        incur additional expenditures of approximately $15,135 (CAD$14,740) on the Lourdeau Property on or before April 1, 2011 (on April 1, 2011 Santos paid Starfire cash of $15,135 instead of incurring expenditures on the property).

Any shares delivered, cash payments made, or expenditures incurred toward the option price that is over and above that required to be made during a particular time will be carried forward and applied against the required payment in subsequent periods.

If Santos does not incur the full amount of expenditures within the set time period, Santos may, within 45 days after the end of the period, pay Starfire the outstanding balance to be incurred for that specific year by way of either 100% cash or 50% cash and 50% shares (valued at the weighted average trading price during the 10 trading days preceding the period ended). After these payments, the option from Starfire is deemed to have been exercised by Santos and Santos has, without any further act, acquired 75% of the Lourdeau Claims from Starfire.

Starfire and Santos agree to negotiate in good faith the terms and conditions of entering into a joint venture agreement to carry out further exploration and mining activities on the Lourdeau Property, with the intention that all costs and profits to be split proportionately by the parties according to their ownership of the Lourdeau Property.

In 1973, the Société de Développement de la Baie James ("SDBJ") undertook a regional geochemical survey of lake bottom sediments that covered the entire James Bay area. Lasting over 5 years, the survey was carried out with a sample density of 1 sample per 9 km2. Geoterrex (1973) completed a regional airborne radiometric survey in the James Bay area. The results of the survey are published in aeromagnetic maps pointing out the anomalous sectors (GM 34130). Other general unpublished airborne and ground-based mag survey were completed by Canico, the SDBJ (1972) and SES (1976).

The first systematic regional mapping program of the northern Superior Province of Quebec was undertaken in the 1950's by Eade of the Geological Survey of Canada who produced a 1:1000000 geological map of the area north of the 52^oN latitude. Eade (1966) described several types of orthogneiss in the Bienville subprovince adjacent to a band of metavolcanic and metasediments exposed along the La Grande River. In the 1960's and 1970's, the MRNFQ (Ministère des Richesses naturelles et de la Faune du Québec), conducted a systematic mapping campaign covering the regions of the La Grande River hydrographic system before the LG-2 and LG-3 reservoirs were progressively filled in the late 1970's (Sharma, 1977). Academic studies accomplished by St-Seymour (1982) highlighted the stratigraphy of komatiitic flows in the Lac Guyer sector (near the LG-3 Reservoir) and were completed by geochemical and petrogenetic studies of the volcanic rocks of the area (St-Seymour and Francis, 1988 and St-Seymour et al., 1983). The studies of Skulski (1985) and Skulski et al. (1984) were performed in a sector of the LGB in the vicinity of the LG-3 Reservoir. These incorporated a mapping survey followed by petrography and geochemical work.

A preliminary geological and metallogeny study of the 33G NTS sheet completed by Gauthier et al. (1997) and Gauthier (2000) helped launch the Moyen-Nord program (1998-2001) which consisted in a 1:50,000 scale geological mapping of the 33G and 33F NTS sheets accompanied by geochronologcal, geochemical and structural studies (see Goutier et al., 1999, 2001a and b, and 2002).

From 1974 to 1979, mining companies, notably le Groupe Minier SES (with the SDBJ) conducted several exploration campaigns including geophysical surveys, geochemical sampling, prospection, mapping and

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drilling, aiming at discovering uranium prospects (Caron and Fouques, 1979, Schumacher and Fouques, 1979 and Dupuis et al., 1976). These campaigns lead to the discovery of the Lourdeau, Frank, Domino and Ganiq showings that are associated to the Proterozoic Sakami siliciclastic Formation or located at the periphery of the Sakami basin. From 1986 to 2000, a resurgence in exploration lead by Phelps Dodge, Virginia Gold Mines, Barrick Corporation and Exploration Boréale yielded to the discovery of Au, Cu and Zn showings in Archean metavolcanic rocks (Simard, 1999, Chénard, 1998, De Chavigny, 1998, Desbiens, 1996, Masson, 1996, Girard, 1996 and Osborne, 1995).

In 1974-1975, SES-SDBJ recognized a regional N140^o-oriented fault along the La Grande River which was associated in some places with radiometric values greater than 1,000 cps. A follow-up prospection by helicopter identified an anomalous radiometric zone in argillaceous sediments north of the Lourdeau Hill. Later that year, geologists discovered a boulder train of Sakami Formation sandstones resting at the northern base of the hill. The boulder contained yellow and green impregnations in fractures later identified as autunite, malachite and chalcocite. A clearing of the hill summit later allowed the recognition of a network of N125^oE - oriented fractures through a lenticular layer of sericitic siltstone. The uranium mineralization was associated to this layer, whilst the copper impregnated the surrounding sandstone. This discovery sparked a systematic exploration campaign by the SES-SDBJ throughout 1976 and 1977. The campaign included ground prospection along grids, ground-based radiometric, mag and VLF surveys, rock and soil sampling and ultimately percussion and core drilling (see Schumacher and Foulques, 1979, Lacombe, 1977 and Gueniot, 1977).

Results from the MRNFQ survey indicate that the Lourdeau Hill is located on a rotated block oriented parallel to a N140^o dextral fault related to Archean tectonic movements. The airborne CANIICO-SDBJ survey found a conductive zone corresponding to a large depression limiting the Lourdeau Hill to the east.

The 1976 ground-based survey undertaken by the SDBJ helped defined the position of the magnetic and non-magnetic rock assemblages within the Archean basement relative to the tectonic structure and the Sakami Formation outcrops (Gueniot, 1977). The survey also indicated that the thickness of the Sakami Formation increases regularly from the southwest to the northeast.

The ground-based radiometric survey identified three main zones of interest, the most important being the Lourdeau Vein (Figure 5). A secondary zone at the northern end of the hill carried high radiometric values associated with a porous pink sandstone at the contact with gray and white quartz arenite (Gueniot, 1977). Finally, south of the Lourdeau Hill, a contact between sercitic silt zone and an argillaceous (kaolin) white sandstone was discovered to have high radiometric values attributed to elevated Th concentrations.

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Grab and channel Sampling

Samples taken form channel cutting perpendicular to the fracture zone at the Lourdeau Vein site were semi-quantitatively analyzed for U, Th, Cu, Pb, Zr, Ni, Co, Mo and V (Gueniot, 1977). The author recognizes that these chemical analyses are not compliant with NI43-101 standards, since the method of sampling and analyses were not described by Gueniot (1977). Therefore, one must take these geochemical results only as a broad indicator of the mineralization found at the Lourdeau Vein site. Gueniot (1979) interpreted the data as an indication that Cu migrated in the pink sandstone from the zones of fracture. He also identified geodes of bornite and chalcopyrite in sandstones surrounding the mylonitic zone. The zone limited by the fractures was shown to have elevated concentrations in Pb, Mo, V, Cu, Ti, Cr, Fe, Th and U. The elevated total iron values correspond the hematization of the sandstone.

The most recent chemical assays from the Lourdeau Vein come from Goutier et al. (2001b) who cites values of 200 ppm U, 0.82% Cu and 1.2 g/t Ag (sample 199922413) and 0.15% U and 461 ppm Cu (sample 199922424) on selected grab samples (Table 2). The results from the chemical assays on quartz arenites seem to confirm the elevated U and Cu concentrations and somewhat high values in Fe and V as cited by Gueniot (1977).

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Geology of the Lourdeau Hill

The basement rocks

The basement rocks were only identified by drilling. There are defined by fined-grained folded chloritized schists (mafic volcanic rocks) with quartz, calcite, specularite and chlorite-filled fractures (Lacombe, 1977). The basement shows a dark green color changing to brown-red when irregular patches of hematite are present along micro-fractures. Patches of regolith are very irregular (6.5 to 39 feet or 2 to 12 meters) and composed of greenish-white to yellowish-white sericite, chlorite, quartz, and remnants of chlorite-schists or amphibolite (basaltic volcanic rocks) more or less altered and hematized.

The Sakami Formation

The sandstones of the Lourdeau Hill lies on a uplifted Archean block forming a hill limited by a steep incline to the northwest, southwest and south. The sandstones gently dip east before being engulfed by the waters of the LG-3 Reservoir (Figure 12). The thickness of the Sakami Formation increases rapidly towards the south and east. This augmentation is mainly controlled by fault zones oriented N150^oE, N30^oE and N70^oE. The contact with the Archean basement composed of altered amphibolites is not observed.

Lacombe (1977) recognized three cycles within the exposed Sakami Formation (Figures 12 and 13). These cycles are included within the Psa2 unit as defined by Goutier et al. (2001b). The basal cycle (Cycle I) is characterized by white, massive beds of sandstone, some argillaceous, showing ill-defined parallel bedding and containing argillaceous nodules. Petrographic examination under thin sections

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indicated that the sandstones are formed by argillaceous-coated quartz grains, sometimes cemented by secondary hematite. No feldspar was observed and was probably destroyed before the deposition of sandstones The upper segment of cycle is marked by a layer of conglomerate with quartz clasts. The thickness of the first cycle could be over 65 feet (20 meters). On a regional scale, the 1976 drilling campaign carried out by the SDBJ (Lacombe, 1977) revealed that Cycle I consists of a series of coarse, heterogranular, pinkyellow to red-brown sandstone beds (59 to 82 feet or 18 to 25 meters) with an abundant kaolinitic, hematitic or argillaceous cement. Thin layers of red-brown siltsone with dispersed quartz, mudstone, sandstone, and rare basement rock cobbles are frequently observed at the base of the stratigraphic column. The sandstones are poorly sorted and form dm to m-sized beds..

The middle cycle (Cycle II) is transitional and starts with a massive bed of pink arenite with, at its base, a layer of conglomerate with iron formation and quartz clasts. Observations from the drill holes cores and cuttings indicate a layer of angular cobble conglomerate (3.2 to 16 feet or 1 to 5 meters) composed of quartz, quartz-hematite (probably iron formation), chlorite schist and sandstone supported in a sandstone matrix and cemented with hematite and quartz. This conglomerate commonly fills ravine and desiccation fractures in the underlying sandstone. The pink arenitic sandstone is overlain by 9.8 to 16 feet (3 to 5 meters) of massive white quartz-rich sandstone portrayed by a mauve-pink reflection. To the north and west, toward the center of the Sakami basin, the thickness of Cycle II may be more important and characterized by an alternance of pink and white sandstones.

The third cycle is the most important. The beds of pink quartz-rich sandstone are defined by planar erosional surfaces. From the base to the summit, we observe: 1) pink, quartz-rich, 2 to 20 inches (5 to 50 centimeters) beds of sandstone with massive, planar stratification showing reverse graded bedding. The base is constituted by fined- to medium-grained sandstone well-cemented by silica and hematite; whilst the summit is formed by porous, coarse-grained and poorly-cemented white sandstone; 2) poorly cemented layers of coarse-grained, cross-bedded sandstone showing alteration in nodules and 3), braded, 16 to 49 feet or 5 to 15 meters thick beds of sandstone. The direction of sediment transport is roughly EW for the first two cycles. There are two direction of transport for the third cycle. The first direction coincides with the principal orientations of the tectonic grain within the La Grande Greenstone Belt and the second is oriented 120^o parallel to the structures limiting the occurrences of the Sakami sandstones.

The white massive argillaceous sandstone beds of Cycle I correspond to a first episode of clastic sediments after an hypothetical basal conglomerate formation overlying sericite-rich beds. They may correspond to shallow-depth deposits in a deltaic or near-fluviatile environment. The presence of conglomerates at the end of Cycle I could signify a high-energy emergence period. Indeed, at the end of the first Cycle, silt layers or lenses and yellow-green sericite are filling the exposed joints. The Cycle II sandstones do not extend to the entire Sakami basin. The beds are homogeneous, well-sorted with very little argillaceous material. It is probable that the sedimentation occurred at greater depth with strong currents at its base and summit. The third cycle is transgressive and corresponds to lower energy, deeper deltaic braded sediments

The Sakami sandstones underwent several episodes of diagenetic and epigenetic silicification. A pink diagenitic silicification coinciding with sandstone deposition lead to the filling of reticulated fractures in the white sandstone. The silicification is well observed on the sandstone cliffs and takes a characteristic mauve color. An epigenetic, fracture-filling, white silicification event superposed on the former, is localized and accompanied by quartz breccias.

The Lourdeau Hill forms an eastwest-oriented elevated block, tipped to toward the east and surrounded to the north, south and east by small eastwest-, N130^oE- and N60^oE- oriented grabens. The outcrops of the Sakami Formation are delimited by well-defined faults and a 30^o oriented fault divides the Loudeau Hill in two small buttes: western and eastern. The movement along these faults is of decameter size. The various sandstones blocks limited by these faults appear to show a regular staircase collapse. In the drill cores and cuttings, the faults are recognized by the intense crushing, silicification and hematization.

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Three types of fracturation were observed: a syn-sedimendary network of fractures related to the deformation of the paleotopography of the depositional surfaces and by the deformation in the layout of the sedimentary beds. The latter is seen as small collapsed sections forming depressions filled by coarser-grained sediments. This type of structure was observed only in the lower part of the Sakami Formation particularly between the white-pink sandstone transition. The synsedimentary movements correspond to collapsed or tilted blocks. Syn-diagenetic fractures generated ductile deformation and disturbed the layout of the sedimentary beds. Finally, small amplitude (16 to 32 feet or 5-10 meters), post-sedimentary faulting produced a general tipping toward the east. The post-sedimentary tectonic movements followed those occurring during the deposition. The block rotation is dextral and occurred along two axes oriented N20^oE and N100^o to N120^oE.

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Conclusions and Recommendations

The Lourdeau property, notably the U, Cu+/-Ag unconformity showing associated to Mid-Proterozoic siliciclastic sediments, represents one of the prime target of exploration in the James Bay Territory of Quebec. The main uranium showing, the Lourdeau Vein, holds a significant potential for a high-grade U mineralization. It is associated to a N125E-oriented fracture zone crosscutting the contact between white argillaceous sandstones and quartz-rich pink sandstones. The mineralization is characterized by U- yellow products in micro-fractures whilst the Cu is found in chrysocolle and bornite-chalcopyrite. Short percussion drill holes exploring the fracture zone were carried by the SES-SDBJ in the late 1970' and produced interesting U values extrapolated from radiometric downhole measurement such as : 3.3 lb/t U3O8 on 1.7 m, 7 lb/t U3O8 on 0.5 m, 5.1 lb/t U3O8 on 8.9 m and 2.7 lb/t U3O8 on 2.3 m (Lacombe, 1977). As an added value to the property, the Archean basement rocks unconformably underlying the U-mineralized Sakami Formation, exposes at least three showings mineralized in Au, Cu and Ag: Chiskamish-est, Baie-Nord I and II and Breche 167. The Chiskamish-est Au mineralization is associated with quartz veins, silicified zones or longitudinal or transversal shear zones, in an iron formation. Assay results reported by Desbiens (1996) varied between 0.8 to 13 g/t Au. The Baie-Nord I and II showings presents a vein-type mineralization characterized by a Cu-Ag+/-Au+/-Mo metallic association. Significant assay results reported by Desbiens (1996) produced values of 7.8 g/t Au, 0.1% Cu and 28.9 g/t Ag and 2.3 g/t Au, 5.6% Cu and 32.6 g/t Ag. The Breche 167 showing consists of pods of chalcopyrite disseminated within metagreywacke and metabasalt and generally associated with strongly epidotized rocks, hematized fractures, quartz-carbonate veins and chloritized shear zones. Trench and grab sampling produced the following significant assay results: 0.58 g/t Au, 1.78% Cu; 8.1 g/t Ag on 1.75 m and 0.75 g/t Au, 0.86% Cu, 6.2 g/t Ag on 1.6 m and 4.2 g/t Au. Girard (1996).

Other than latest worked reported in Michel Boily's technical report dated August 2007, no work has been done on the property. Since our incorporation in 2006, we have incurred an aggregate of $69,689 including issuance of 75,000 shares in connection with property acquisition cost and $0 in exploration costs. Since our acquisition of the property, there has been no current exploration work performed on the property.

The centre of the Lordeau property is a little over 6 kilometers or 3.7 miles east-southeast from the Hydro-Quebec's settlement at Sakami. Further, parts of these claims are located on the shore of the LG-3 Reservoir. A power line lies approximately 5 kilometers or 3 miles west of the property and a road lies approximately 3 kilometers or 1.8 miles west of the property. Our main source of power and water will be as permitted by Hydro-Quebec.

We are attempting to raise additional money, and have not started the exploration program. If we are able to raise additional money, we may pursue the exploration program recommended by Mr. Boily on the Lourdeau property in the coming year. One of the major incentive for doing so is the favorable geological environment for defining a potential uranium unconformity associated deposit. One of the main challenge resides in confirming the radiometric extrapolated U3O8 values obtained from percussion drilling into NI 43-101 compliant chemical assays. The proposed "classical" petrogenetic model applied to the Lourdeau showing from the studies of the deposits discovered in the Athabasca Basin in Saskatchewan (Jefferson et al., 1996; Ruzicka, 1996 and Hoeve and Sibbald, 1978) also needs to be confirmed. As an added value, the Lourdeau property exhibits three showings mineralized in Au, Ag and Cu within the volcanic basement rocks. While the mineralization at these sites appears erratically distributed, it covers a comparatively large area along the northern shore of the LG-3 Reservoir.

The following exploration program is recommended by Mr. Boily:

In order to get a solid geochemical assay database, we propose a systematic surface sampling program of the Lourdeau Vein site and its vicinity incorporating grab and channel sampling. A second site discovered by scintillometer prospecting (Lacombe, 1977) at the northern edge of the Lourdeau Hill needs to be sampled. The radiometric anomaly is located within the hematitequartz clasts conglomerate at the contact with the red and pink Sakami Fm. sandstones. The sampling will also allow us to decipher the nature and composition of the U-carrier minerals by bringing specific specimens to the SEM lab.

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The Lourdeau Hill exposes only an area of 1 km² of Sakami sandstone with the property covering nearly 9 km². Therefore only helicopter-borne geophysical surveys are viable economically. We will thus undertake magnetic and radiometric surveys on a 100 m spaced grid. The magnetic survey will help provide a high-resolution profile of the basement rocks under the Sakami Formation, whilst the radiometric survey will detect the potential radioactive zones. We will beneficiate from the newest survey techniques that were not available in the 1970's. The magnetic survey will also cover the Archean metavolcanic terranes, which constitute the basement rocks of the Sakami Fm, but more interestingly, display several Au and sulphide-rich target, notably the iron formations that are highly responsive to this type of survey.

Contingent on positive results obtained during this program, we could proceed with a drilling campaign which would define the targets acquired during the geophysical surveys and sampling campaign. The focus of the drilling will be the U-mineralized sandstones at the Lourdeau Hill, with the Au, Cu and Ag-mineralized metavolcanic constituting secondary targets.

None.

Our common stock is quoted on the OTC Bulletin Board under the name "Santos Resource Corp." and the symbol "SANZ". Set forth below are the range of high and low bid quotations for the periods indicated as reported by the OTC Bulletin Board. The market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. The Company's common stock began trading on June 15, 2009. The following table reports high and low closing prices, on a quarterly basis, for the Company's common stock within the two most recent fiscal years:

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Dividend Policy

We have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings, if any, to finance the expansion of our business. As a result, we do not anticipate paying any cash dividends in the foreseeable future.

None.

The following sets forth certain information regarding sales of, and other transactions with respect to, our securities, which sales and other transactions were not registered pursuant to the Securities Act of 1933, since our incorporation in 2006. Unless otherwise indicated, no underwriters were involved in such transactions.

On June 19, 2007, we issued an aggregate of 31,040,000 shares of common stock at a price of $0.0005 per share to nine founding shareholders, which include our directors and sole officer. We received $15,520 from this offering. These shares were issued pursuant to Regulation S of the Securities Act of 1933. The purchasers represented to us that they were non-US persons, as defined in Regulation S, and that their intentions to acquire the securities was for investment only and not with a view toward distribution. We did not engage in a distribution of this offering in the United States and no general solicitation was made to the public and no advertising was conducted for the offering.

On June 25, 2007, we issued 75,000 shares of common stock to Starfire Minerals Inc., a British Columbia company, as partial consideration for Starfire granting us an option to acquire 75% of the Lourdeau Claims. These shares are issued at a deemed price of $0.15 per share. These shares were issued pursuant to Regulation S of the Securities Act of 1933. Starfire represented to us that it was a non-US person, as defined in Regulation S, and that its intentions to acquire the securities was for investment only and not with a view toward distribution. We did not engage in a distribution of this offering in the United States and no general solicitation was made to the public and no advertising was conducted for the offering.

On February 1, 2008, we issued 961,500 shares of common stock to 40 purchasers at $0.15 per share pursuant to Regulation S of the Securities Act. The purchasers represented to us that they were non-US persons, as defined in Regulation S, and that their intentions to acquire the securities was for investment only and not with a view toward distribution. We did not engage in a distribution of this offering in the United States and no general solicitation was made to the public and no advertising was conducted for the offering.

Not applicable.

The financial data presented below should be read in conjunction with the more detailed financial statements and related notes, which are included elsewhere in this report. Information discussed herein, as well as elsewhere in this Annual Report on Form 10-K, includes forward-looking statements or opinions regarding future events or the future financial performance of the Company, and are subject to a number of risks and other factors which could cause the actual results to differ materially from those contained in forward-looking statements. Among such factors are general business and economic conditions, and risk factors as listed in this Form 10-K or listed from time to time in documents filed by the Company with the Securities and Exchange Commission.

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Financial Condition

As at February 28, 2011, Santos had a cash balance of $1,909. Management does not anticipate generating any revenue for the foreseeable future. When additional funds become required, the additional funding will come from equity financing from the sale of Santos' common stock. If Santos is successful in completing an equity financing, existing shareholders will experience dilution of their interest in Santos. Santos does not have any financing arranged and Santos cannot provide investors with any assurance that Santos will be able to raise sufficient funding from the sale of its common stock. In the absence of such financing, Santos' business will fail.

Based on the nature of Santos' business, management anticipates incurring operating losses in the foreseeable future. Management bases this expectation, in part, on the fact that very few mineral claims in the exploration stage ultimately develop into producing, profitable mines. Santos' future financial results are also uncertain due to a number of factors, some of which are outside its control. These factors include, but are not limited to:

Due to Santos' lack of operating history and present inability to generate revenues, Santos' auditors have stated their opinion that there currently exists a substantial doubt about Santos' ability to continue as a going concern. This means that there is substantial doubt whether Santos can continue as an on going business for the next 12 months unless we obtain additional capital to pay our bills. We presently do not have the funds to conduct the recommended exploration program. Further, even if Santos completes its recommended exploration program, we will require additional funds in order to place the Lourdeau Claims into commercial production.

Santos' internal sources of liquidity will be loans that may be available to Santos from management. Although Santos has no written arrangements with any of directors and officers, Santos expects that the directors and officers will provide Santos with internal sources of liquidity, if it is required.

Also, Santos' external sources of liquidity will be private placements for equity conducted outside the United States. Since inception on May 24, 2006 to February 28, 2011, Santos did not complete any definitive arrangements for any external sources of liquidity, except for a private placement in February 2008 where the Company issued 961,500 shares of common stock at $0.15 per share for proceeds of $144,226.

There are no assurances that Santos will be able to achieve further sales of its common stock or any other form of additional financing. If Santos is unable to achieve the financing necessary to continue its plan of operations, then Santos will not be able to continue its exploration programs and its business will fail.

As of February 28, 2011, Santos had total assets of $4,187 and total liabilities of $71,134 for a net working capital deficit of $66,947, compared with a net working capital deficit of $36,022 as of February 28, 2010. The assets are comprised of accounts receivable of $2,278 and cash of $1,909. The liabilities consisted mainly of accounting, audit and legal fees payable and shareholder loan.

There are no assurances that Santos will be able to achieve further sales of its common stock or any other form of additional financing. If Santos is unable to achieve the financing necessary to continue its plan of operations, then Santos will not be able to continue its exploration programs and its business will fail.

Management does not believe that Santos' current cash will be sufficient to meet our general operating expenses for the next 12 months and to meet our obligations under the Property Option Agreement. We do not

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have the funds to conduct the recommended exploration program which is estimated to cost approximately $110,452 (CAD$107,570). We need to raise additional money to conduct our exploration program. If we are able to raise additional money, we plan to conduct our exploration program in the summer of 2011.

We did not earn any revenues for the fiscal year ended February 28, 2011 and from inception on May 24, 2006 to February 28, 2011. We do not anticipate earning revenues until such time as we have entered into commercial production of our mineral properties. We are presently in the exploration stage of our business and we can provide no assurance that we will discover commercially exploitable levels of mineral resources on our properties, or if such resources are discovered, that we will enter into commercial production of our mineral properties.

We incurred total expenses in the amount of $30,925 during the fiscal year ended February 28, 2011 and total expenses in the amount of $54,305 during the fiscal year ended February 28, 2010. These operating expenses comprised mainly of accounting and legal expenses of $28,283 and foreign exchange loss of $2,387 for the fiscal year ended February 28, 2011; compared to accounting and legal expenses of $43,159 and mineral property costs of $9,526 for the fiscal year ended February 28, 2010. The decrease in expenditure during the fiscal year ended February 28, 2011 as our continuous disclosure obligations incur less accounting and legal fees due to non activities in our business as we have not been successful in raising funds and due to deferral of mineral property payments.

Santos has no off-balance sheet arrangements.

This annual report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "our company believes," "management believes" and similar language. These forward-looking statements are based on our current expectations and are subject to certain risks, uncertainties and assumptions, including those set forth in the following discussion, including under the heading "Risk Factors". Our actual results may differ materially from results anticipated in these forward-looking statements. We base our forward-looking statements on information currently available to us, and we assume no obligation to update them. In addition, our historical financial performance is not necessarily indicative of the results that may be expected in the future and we believe that such comparisons cannot be relied upon as indicators of future performance. Other important factors that could cause actual results to differ materially include the following: business conditions, the price of precious metals, ability to attract and retain personnel; the price of the Company's stock; and the risk factors set forth from time to time in the Company's SEC reports, including but not limited to its annual report on Form 10-K; its quarterly reports on Form 10-Q; and any current reports on Form 8-K. In addition, the Company disclaims any obligation to update or correct any forward-looking statements in all the Company's annual reports and SEC filings to reflect events or circumstances after the date hereof.

Not applicable.

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ITEM 8. FINANCIAL STATEMENTS

(Presented In US Dollars)

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To the Stockholders of
Santos Resource Corp.
(an Exploration Stage Company)

We have audited the balance sheets of Santos Resource Corp. (an Exploration Stage Company) as at February 28, 2011 and 2010 and the statements of operations, stockholders' equity (deficiency), and cash flow for the years ended February 28, 2011 and 2010 and the period from incorporation on May 24, 2006 to February 28, 2011. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatements. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at February 28, 2011 and 2010 and the results of its operations and its cash flows for the years ended February 28, 2011 and 2010 and the period from incorporation on May 24, 2006 to February 28, 2011 in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements referred to above have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to financial statements, the Company is in the exploration stage, and has no permanently established source of revenue and is dependent on its ability to raise capital from shareholders or other sources to sustain operations. These factors, along with other matters as set forth in Note 1, raise substantial doubt that the Company will be able to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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Nature of operations and Continuance of Business - Note 1

Subsequent event - Note 7

/s/ Richard Pierce                       Director

/s/ Andrew Lee Smith                  Director

The accompanying notes are an integral part of these financial statements

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The accompanying notes are an integral part of these financial statements

49

The accompanying notes are an integral part of these financial statements

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The accompanying notes are an integral part of these financial statements

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Santos Resource Corp. (the "Company") was incorporated in the state of Nevada on May 24, 2006. The Company is an Exploration Stage Company. The Company's principal business is the acquisition and exploration of mineral properties. The Company has not presently determined whether its properties contain mineral reserves that are economically recoverable.

The accompanying financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has not generated revenues since inception and has never paid dividends and is unlikely to pay dividends or generate earnings in the immediate or foreseeable future. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary equity financing to continue operations, confirmation of the Company's interests in the underlying properties, and the attainment of profitable operations. As at February 28, 2011, the Company has not generated any revenues and has an accumulated loss of $248,895 since inception. These factors raise substantial doubt regarding the Company's ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company computes net income (loss) per share in accordance with FASB accounting standards for "Earnings per Share", which requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period would be used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti dilutive. There were no dilutive instruments outstanding at February 28, 2011 and 2010.

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The Company considers all highly liquid instruments with maturity of three months or less at the time of acquisition to be cash equivalents.

The Company is in the exploration stage and has not yet realized any revenue from its planned operations. It is primarily engaged in the acquisition, exploration, and development of mining properties. Mineral property acquisition and exploration costs are expensed as incurred. When it has been determined that a mineral property can be economically developed as a result of establishing proven and probable reserves, the costs incurred to develop such property are capitalized. Such costs will be depreciated using the units-of-production method over the estimated life of the probable reserve.

The Company has adopted FASB's accounting standards for Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments. The carrying amounts of cash, receivables, accounts payable and accrued liabilities, and shareholder loan approximate their fair values because of the short maturity of these items. Certain fair value estimates may be subject to and involve uncertainties and matters of significant judgment, and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates. The Company does not hold or issue financial instruments for trading purposes, nor does it utilize derivative instruments in the management of its foreign exchange, commodity price, or interest rate market risks.

Deferred income taxes are reported for timing differences between items of income or expense reported in the financial statements and those reported for income tax purposes in accordance with FASB's accounting standard for income taxes, which requires the use of the asset/liability method of accounting for income taxes. Deferred income taxes and tax benefits are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax loss and credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company provides a valuation allowance for deferred taxes for the estimated future tax effects attributable to temporary differences and carry-forwards when realization is not more likely than not.

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The Company accounts for uncertain income tax positions in accordance with FASB's accounting standard for Accounting for Uncertainty in Income Taxes, which requires that that the Company recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on examination by taxation authorities, based on the technical merits of the position.

The Company's functional and reporting currency is the United States dollar. Monetary assets and liabilities denominated in foreign currencies are translated in accordance with FASB's accounting standard for "Foreign Currency Translation", using the exchange rate prevailing at the balance sheet date. Non-monetary assets are translated at historical exchange rates, and revenue and expense items at the average rate of exchange prevailing during the period. Gains and losses arising on settlement of foreign currency denominated transactions or balances are included in the determination of income. Foreign currency transactions are primarily undertaken in Canadian dollars. The Company has not, to the date of these financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.

The Company reports segmented information in accordance with FASB's accounting standard for Disclosure about Segments of an Enterprise and Related Information.

(i)   In January 2010, the FASB issued Accounting Standards Update No. 2010-06, "Fair Value Measurements and Disclosures" ("ASU 2010-06").  This update provides amendments to ASC Topic 820, "Fair Value Measurements and Disclosure", that requires new disclosure for transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements.  The update also provides amendments that clarify existing disclosures surrounding levels of disaggregation and inputs and valuation techniques.  ASU 2010-06 is effective for reporting periods beginning after December 15, 2009 with the exception of Level 3 activity fair value measurements which is effective for reporting periods beginning after December 15, 2010.

(ii)  In April 2010, the FASB issued Accounting Standards Update No. 2010-13 "Compensation - Stock Compensation" ("ASU 2010-13").  This update addresses whether an employee stock option should be classified as a liability or as an equity instrument if the exercise price is denominated in the currency in which a substantial portion of the entity's equity securities trades.  That currency may differ from the entity's functional currency and from the payroll currency of the employee receiving the option.  This update provides amendments to ASC 718, "Compensation - Stock Compensation" to clarify that an employee share-based payment award that has an exercise price denominated in the currency of the market in which a substantial portion of the entity's equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition.  Therefore, an entity should not classify such an award as a liability if it otherwise qualifies as equity.  ASU 2010-13 is effective for reporting periods beginning after December 15, 2010.

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a)         On June 25, 2007, the Company issued 75,000 shares of common stock at $0.15 per share to Starfire Minerals Inc. ("Starfire") as part of its contract to Option to Purchase Property in Quebec.  Richard Pierce, President of Santos Resource Corp. is a director on the board of each company.

b)         A shareholder loaned the company US$30,804 (CAD$30,000) during the period April 2007 to April 2010. The loan is non interest bearing and unsecured and is payable upon request from the shareholder; accordingly fair value cannot be reliably determined.

c)         A shareholder of the Company contributed services to the Company. The amounts are not recorded as it is not material.

On June 25, 2007 the Company signed an option agreement (amended May 29, 2008, April 23, 2009, April 26, 2010, and December 15, 2010) to acquire a 75% interest in 18 mineral property claims in Northern Quebec known as the Lordeau Property, with Starfire. Santos was granted an option to acquire 75% of the right, title and undivided interest in the property (subject to the NSR Royalty reserved to Starfire). Terms and conditions are as follows:

a)         $10,582 (Cdn$10,000) cash payment by Santos on execution of this agreement (paid);

b)         75,000 common shares of Santos to be allotted and issued and certificates therefore delivered to Starfire (issued June 25, 2007);

c)         Incur exploration expenditures:

(i)            $24,094 (Cdn$25,000) before September 30, 2008 (incurred);

(ii)           $8,926 (Cdn$10,260) before May 11, 2009 (incurred);

(iii)          $15,135 (Cdn$14,740) before April 1, 2011 (incurred subsequently).

In the event that the Company fails to incur the full amount of Expenditures in a given period, the Company may, within 45 days of the end of such period pay Starfire an amount equal to the outstanding balance to be incurred by way of 50% cash and 50% shares (valued at the weighted average trading price for during the 10 trading days preceding the period end date).

In addition, any shares delivered, cash payments made, or Expenditures incurred toward the option price that is over and above that required to be made during a particular time shall be carried forward and applied against the required payment in subsequent periods.

Santos will pay Starfire a 3% net smelter return royalty ("NSR Royalty"). Santos may purchase in the aggregate up to two-thirds (i.e., 2% NSR Royalty) of the NSR Royalty on the basis of one hundred thousand dollars for each one-tenth percent of the NSR Royalty (i.e., $100,000 per 0.1% NSR Royalty) acquired on the first one-half of the NSR Royalty (i.e., the first 1% NSR Royalty), and one hundred fifty ($150,000) dollars for each one-tenth percent of the NSR Royalty (i.e., $150,000 per 0.1% NSR Royalty) thereafter for the remaining NSR Royalty (i.e., the remaining 1% NSR Royalty). To exercise its option to purchase the NSR Royalty or any portion thereof, Santos must provide the Owner with at least 30 days advance written notice of its intention to do so, and must close upon each purchase within 60 days of each notice.

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The Company's financial instruments consist of cash, accounts payable and accrued liabilities, and shareholder loan, unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency, or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying value, unless otherwise noted.

Currency risk is the risk to the Company's earnings that arises from fluctuations of foreign exchange rates and the degree of volatility of these rates. The Company does not use derivative instruments to reduce its exposure to foreign currency risk.

At February 28, 2011 the Company had the following financial assets and liabilities in Canadian dollars:

At February 28, 2011 US dollar amounts were converted at a rate of $0.9739 Canadian dollars to $1.00 US dollar.

A reconciliation of the provision for income taxes at the United States federal statutory rate compared to the Company's income tax expense as reported is as follows:

The significant components of deferred income tax assets at February 28, 2011 and 2010 are as follows:

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The amount taken into income as deferred income tax assets must reflect that portion of the income tax loss carry forwards that is more likely-than-not to be realized from future operations. The Company has chosen to provide a full valuation allowance against all available income tax loss carry forwards. The Company has recognized a valuation allowance for the deferred income tax asset since the Company cannot be assured that it is more likely than not that such benefit will be utilized in future years. The valuation allowance is reviewed annually. When circumstances change and which cause a change in management's judgment about the realizability of deferred income tax assets, the impact of the change on the valuation allowance is generally reflected in current income.

Management has considered the likelihood and significance of possible penalties associated with its current and intended filing positions and has determined, based on their assessment, that such penalties, if any, would not be expected to be material.

No provision for income taxes has been provided in these financial statements due to the net loss for the years ended February 28, 2011 and 2010. At February 28, 2011, the Company has net operating loss carryforwards, which expire commencing in 2028, totaling approximately $249,000.

Subsequent to the year end, the Company received additional shareholder loan of Cdn$20,000.

On April 1, 2011, the Company made cash payment of Cdn$14,740 to Starfire according to the option agreement as described in note 4 in lieu of exploration expenditures to be incurred.

The Company has evaluated subsequent events pursuant to ASL Topic 855 and has determined that there are no additional subsequent events to report.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Under the supervision and with the participation of the Company's management, including the Company's principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and Rule 15d-15(e) as of the end of the fiscal year covered by this annual report. Based on that evaluation, the principal executive officer and principal financial officer have identified that the lack of segregation of accounting duties as a result of limited personnel resources is a material weakness of its financial procedures. Other than for this exception, the principal executive officer and principal financial officer believe the disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that our disclosure and controls are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There were no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies and material weaknesses.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management has employed a framework consistent with Exchange Act Rule 13a-15(c), to evaluate our internal control over financial reporting described below. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principals.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the design and operation of our internal control over financial reporting as of February 28, 2011 based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation.

In performing the assessment, management noted that our board of directors is performing the duties of the audit committee, there is only one independent director, and none of the members is considered a financial expert. Our management believes that the lack of a financial expert on our board of directors means that no member of our board of directors has the financial expertise to review our financial statements for potential errors and provide the necessary oversight over our management's activities in the event of a management override of our internal control policies. Our management believes that this

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lack of a financial expert on our board of directors raises a reasonable possibility that a material misstatement of our annual or interim financial statements may not be timely prevented or detected and that it should therefore be considered a material weakness in our internal control over financial reporting. Because of this material weakness, our management believes that as of February 28, 2011, our company's internal controls over financial reporting were not effective. We do not currently have any plans to replace any existing member of our board of directors, nor do we have any current plans to add any additional directors.

This report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our company's registered public accounting firm pursuant to temporary rules of the SEC that permit our company to provide only management's report in this Annual Report on Form 10-K.

There were no changes in control over financial reporting during the quarter ended February 28, 2011 that have materially affected or are reasonably likely to affect our internal control over financial reporting.

None.

The following table sets forth the directors and executive officers of our Company, their ages, term served and all officers and positions with our Company. Pursuant to our bylaws, our directors are elected at our annual meeting of stockholders and each director holds office until his successor is elected and qualified. Officers are elected by our Board of Directors and hold office until an officer's successor has been duly appointed and qualified unless an officer sooner dies, resigns or is removed by the Board.

There are no arrangements or understandings regarding the length of time a director of our company is to serve in such a capacity.

Richard Pierce has been a Director, President and Secretary-Treasurer of the Company since September 13, 2006. Mr. Pierce is also presently the President and CEO of GFR Pharma Ltd. (since 1998), GFR Health Ltd. (since 1998) and Biologic Nutritional Resources Inc. (since 2006). GFR Pharma is a contract manufacturer of Nutraceutical products, GFR Health distributes Nutraceutical products for the human market, and Biologic distributes nutraceuticals for the pet (animal) market. Mr. Pierce was

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also President and CEO of GFR Pharmaceuticals Inc. (from 2000 to 2006), a Nevada company whose shares are quoted on the NASD OTC Bulletin Board. Mr. Pierce is also presently a director of Starfire Minerals Inc., a British Columbia company whose shares are listed on the TSX Venture Exchange, and the Berlin, Frankfurt and Struttgart Stock Exchanges in Germany. Starfire is also an exploration company with mineral properties and projects in Ontario and British Columbia. Mr. Pierce is one of five directors of Starfire, and in the event of a conflict, Mr. Pierce will abstain from voting on a directors resolution in both Santos and Starfire.

The functions of the audit committee are currently carried out by our Board of Directors. We do not have an audit committee or financial expert on our Board carrying out the duties of the audit committee. Our Board has determined that we do not need such an expert because we are a start-up exploration company and have no revenue. The cost of hiring a financial expert to act as a director of Santos and to be a member of the audit committee or otherwise perform audit committee functions outweighs the benefits of having a financial expert on the audit committee. We do not have a compensation committee, nominating committee, an executive committee of our board of directors, stock plan committee or any other committees.

We do not have a standing nominating committee, our Board of Directors is responsible for identifying new candidates for nomination to the Board. We have not adopted a policy that permits shareholders to

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recommend candidates for election as directors or a process for shareholders to send communications to the Board of Directors.

We have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer, Controller and persons performing similar functions within the Company. A copy of the code of ethics is filed with the SEC as an exhibit to the Company's Form S-1 filed on July 14, 2008. If we make any substantive amendments to the Code of Ethics or grant any waiver, including any implicit waiver, from a provision of the Code of Ethics to our directors, officers and employees, we will disclose the nature of such amendment or waiver in a report on Form 8-K.

There are no family relationships between any two or more of our directors or executive officers. There is no arrangement or understanding between any of our directors or executive officers and any other person pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement, plan or understanding as to whether non-management shareholders will exercise their voting rights to continue to elect the current board of directors. There are also no arrangements, agreements or understandings to our knowledge between non-management shareholders that may directly or indirectly participate in or influence the management of our affairs.

None of our directors or executive officers has been involved in any of the following events during the past five years:

• any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

• any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences);

• being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or

• being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and persons who own more than 10% of our common stock to file reports regarding ownership of, and transactions in, our securities with the Securities and Exchange Commission and to provide us with copies of those filings. Based solely on our review of the copies of such reports received by us, or written representations from certain reporting persons, we believe that during fiscal year covered by this annual report, all filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with.

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ITEM 11. EXECUTIVE COMPENSATION

Presently, we do not pay our directors or officers any salary or consulting fees. Our directors and executive officer do not currently receive and have never received any compensation for serving as a director or executive officer of the Company. In addition, at present, there are no ongoing plans or arrangements for compensation of any of our officers. There are no plans or agreements for compensation of our officers and directors even if certain milestones are achieved in the business plan. However, we expect to adopt a plan of reasonable compensation to our officers and employees when and if we become operational and profitable.

The following table sets forth all compensation awarded to, earned by, or paid for services rendered to us in all capacities during the fiscal years ended February 28, 2011, February 28, 2010 and February 29, 2009, by our executive officers and our directors.

We do not presently have a stock option plan but intend to develop an incentive based stock option plan for our officers and directors in the future and may reserve up to 20% of our outstanding shares of common stock for that purpose.

We do not have a compensation committee. The functions of the compensation committee are currently carried out by our Board of Directors.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The persons named above have full voting and investment power with respect to the shares indicated. Under the rules of the Securities and Exchange Commission, a person (or group of persons) is deemed to

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be a "beneficial owner" of a security if he or she, directly or indirectly, has or shares the power to vote or to direct the voting of such security, or the power to dispose of or to direct the disposition of such security. Accordingly, more than one person may be deemed to be a beneficial owner of the same security. A person is also deemed to be a beneficial owner of any security, which that person has the right to acquire within 60 days, such as options or warrants to purchase our common stock.

We are unaware of any contract or other arrangement the operation of which may at a subsequent date result in a change of control of our company.

Except as discussed below, since the beginning of Santos' last fiscal year, no director, executive officer, security holder, or any immediate family of such director, executive officer, or security holder owing more than 5% of our shares of common stock has had any direct or indirect material interest in any transaction or currently proposed transaction, which Santos was or is to be a participant, that exceeded the lesser of (1) $120,000, or (2) 1% of the average of Santos's total assets at year end for the last two completed fiscal years.

Our director and sole executive officer, Richard Pierce is also a director of Starfire Minerals Inc. On June 25, 2007, we entered into a Property Option Agreement with Starfire that allows us to acquire a 75% interest in and to the Lourdeau Claims. On May 29, 2008, we amended the property option agreement with Starfire whereby our option to acquire the Lourdeau Claims is subject to the approval of the TSX Venture Exchange, which approval was obtained in September 2008. On April 23, 2009, we amended the Property Option Agreement again, which extends the schedule for Santos to incur a portion of the final $24,061 (CAD$25,000) of Expenditures to earn Starfire's interest in the Lordeau property to April 30, 2010. On April 20, 2010, we amended the Property Option Agreement, which extends the schedule for Santos to incur the final $15,135 (CAD$14,740) of Expenditures in order to earn 75% of Starfire's interest in the Lourdeau Property in Quebec, from April 30, 2010 to April 1, 2011. Pursuant to the Property Option Agreement, as amended, we paid Starfire $10,582 (CAD$10,000) in 2007, $24,094 (CAD$25,000) in 2008, $8,926 (CAD$10,260) in May 2009, and $15,135 (CAD$14,740) in April 2011; and we issued 75,000 shares of common stock to Starfire in 2007. The 75,000 shares have a deemed value of $11,250. After these payments, the option from Starfire is deemed to have been exercised by Santos and Santos has, without any further act, acquired 75% of the Lourdeau Claims from Starfire.

We have no formal written employment agreement or other contracts with our officers, and there is no assurance that the services to be provided by them, and facilities to be provided by Mr. Pierce, will be available for any specific length of time in the future. Mr. Pierce anticipates initially devoting up to approximately 10 hours a week of his business time to the affairs of our Company. If and when the business operations of our company increase and a more extensive time commitment is needed, Mr. Pierce is prepared to devote up to 15 hours a week in the event that becomes necessary. The amounts of compensation and other terms of any full time employment arrangements with our Company would be determined if and when such arrangements become necessary.

We incurred legal fees of $13,047 during the fiscal year ended February 28, 2011 to Fraser and Company LLP, a law firm of David Smalley is a partner. Mr. Smalley owns over 5% of our common stock.

The Company's transactions with its officers, directors and affiliates have been and such future transactions will be, on terms no less favorable to the Company than could have been realized by the Company in arm's length transactions with non-affiliated persons and will be approved by a majority of the independent disinterested directors.

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Directors Independence

One of our two directors are independent, pursuant to the definition of an "independent director" set forth in Nasdaq Marketplace Rule 4200(a)(15). Andrew Lee Smith is independent, and Richard Pierce is not independent as he is our sole executive officer. In summary, an "independent director" means a person other than an executive officer or employee of the issuer or any other individual having a relationship which, in the opinion of the issuer's board of directors, would interfere with the exercise of independent judgement in carrying out the responsibilities of a director, and includes any director who accepted any compensation from the issuer in excess of $200,000 during any period of 12 consecutive months with the three past fiscal years. Also, the ownership of the issuer's stock will not preclude a director from being independent.

The Company is currently traded on the OTC Bulletin Board, which does not require that a majority of the Board be independent.

We do not have a compensation committee, nominating committee or audit committee; the functions of these committees are performed by our Board of Directors.

The fees billed to the Company for the fiscal years ending February 28, 2011 and February 28, 2010 by MacKay LLP were as follows:

The financial statements are set forth under Item 8 of this Annual Report on Form 10-K. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.

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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities indicated on the dates indicated.