Mining Lease and Option to Purchase Agreement

 

 

                  Mining Lease and Option to Purchase Agreement

 

 

         This Mining Lease and Option to Purchase Agreement ("Agreement") is

made and entered into by and between Carl Pescio, doing business as Pescio

Exploration, and Janet Pescio (collectively "Owner"), and Tornado Gold

International Corp., a Nevada corporation ("TOGI").

 

                                    Recitals

 

         A. Owner owns the unpatented mining claims situated in Eureka County,

Nevada, more particularly described in Exhibit A attached to and by this

reference incorporated in this Agreement (collectively the "Property").

 

         B. Owner desires to lease the Property to TOGI and to grant to TOGI the

option to acquire ownership of the Property.

 

         Now, therefore, in consideration of their mutual promises, the parties

agree as follows:

 

1. DEFINITIONS. The following defined terms, wherever used in this Agreement,

shall have the meanings described below:

 

     1.1 "Area of Interest" means the geographic area within two (2) miles from

the exterior boundaries of the Property on the Effective Date.

 

     1.2 "Closing Date" means the date on which TOGI's purchase of the Property

is closed in accordance with Section 5.

 

     1.3 "Effective Date" means February 5, 2004.

 

      1.4 "Governmental Regulations" means all directives, laws, orders,

ordinances, regulations and statutes of any federal, state or local agency,

court or office.

 

     1.5 "Interest Rate" means the prime interest rate established by the

Department of Business and Industry of the State of Nevada plus two percent (2%)

per annum.

 

     1.6 "Lease Year" means each one (1) year period following the Effective

Date and each anniversary of the Effective Date.

 

     1.7 "Minerals" means all minerals and mineral materials, including gold,

silver, platinum and platinum group metals, base metals (including antimony,

chromium, cobalt, copper, lead, manganese, mercury, nickel, molybdenum,

titanium, tungsten, zinc), and other metals and mineral materials which are on,

in or under the Property.

 

     1.8 "Minimum Payments" means the minimum payments payable by TOGI in

accordance with Section 4.1.

 

 

 

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     1.9 "Net Smelter Returns" means the net smelter returns from the production

of Minerals from the Property as calculated and determined in accordance with

Exhibit 1 attached to and part of Exhibit B attached to and part of the

conveyance to be executed and delivered in accordance with Section 5.5.

 

     1.10 "Option" means the option granted by Owner to TOGI to acquire

ownership of the Property.

 

     1.11 "Owner" means collectively Carl Pescio, doing business as Pescio

Exploration, and Janet Pescio, and Owner's heirs, successors and assigns.

 

     1.12 "Property" means the unpatented mining claims described in Exhibit A,

plus any additional unpatented mining claims which are made subject to this

Agreement in accordance with its terms.

 

     1.13 "Purchase Price" means the purchase price for the Property described

in Section 5.

 

     1.14 "Royalty" means the production royalty payable by TOGI to Owner in

accordance with Section 4.2.

 

     1.15 "TOGI" means and Tornado Gold International Corp., a Nevada

corporation, and its successors and assigns.

 

2. LEASE AND GRANT OF RIGHTS. Owner leases the Property to TOGI and grants TOGI

the rights and privileges described in this Section.

 

     2.1 LEASE. Owner leases the Property to TOGI for the purposes of

exploration for Minerals, provided, however, that TOGI shall have no right to

construct, develop or operate a mine on the Property without first having

exercised and closed the Option.

 

     2.2 WATER RIGHTS. Subject to the regulations of the State of Nevada

concerning the appropriation and taking of water, TOGI shall have the right to

appropriate and use water, to drill wells for the water on the Property and to

lay and maintain all necessary water lines as may be required by TOGI in its

operations on the Property. On termination of this Agreement, except on TOGI's

exercise and closing of the Option, TOGI shall assign and convey to Owner all

permits and water rights appurtenant to the Property which are acquired by TOGI

during the term of this Agreement. If TOGI exercises and closes the Option,

Owner shall assign and convey to TOGI all permits and water rights appurtenant

to the Property.

 

3. TERM. The initial term of this Agreement shall commence on the Effective Date

and shall expire twenty (20) years after the Effective Date, unless this

Agreement is sooner terminated, canceled or extended. Owner grants to TOGI and

TOGI shall have the option and right to extend the term of this Agreement for

additional extension terms of one (1) year each on the express condition that

TOGI is conducting exploration, development or mining activities on the Property

at the expiration of the term immediately preceding the proposed extension term

and TOGI is current in its performance of all of its obligations under this

Agreement, including, expressly, TOGI's payment obligations.

 

 

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4. PAYMENTS. TOGI shall make the following payments to Owner:

 

     4.1 MINIMUM PAYMENTS. On the dates described below, TOGI shall pay to Owner

the sums ("Minimum Payments") described below:

 

                     DATE                                        PAYMENT AMOUNT

 

   April 15, 2005                                                  $22,500.00

   Second anniversary of the Effective Date                        30,000.00

   Third anniversary of the Effective Date                          37,500.00

   Fourth anniversary of the Effective Date                        50,000.00

   Fifth anniversary of the Effective Date                         62,500.00

   Sixth anniversary of the Effective Date and on                 100,000.00

   each subsequent anniversary of the Effective Date

 

The Minimum Payments which are paid after the fourth anniversary of the

Effective Date and completion of a bankable positive feasibility study for the

development of a mine on the Property shall constitute advance payments of the

Royalty and shall be credited in TOGI's favor against its Royalty payment

obligations.

 

     4.2 PRODUCTION ROYALTY. TOGI shall pay to Owner a production royalty based

on the Net Smelter Returns from the production or sale of Minerals from the

Property. The Royalty percentage rate for the Property shall be four percent

(4%) of the Net Smelter Returns. The Royalty percentage rate for the production

of Minerals from any unpatented mining claims located by TOGI or Owner outside

the exterior boundaries of the Property and within the Area of Interest shall be

four percent (4%) of the Net Smelter Returns and the Royalty percentage rate for

the production of Minerals from any mineral rights, mining claims outside the

exterior boundaries of the Property and within the Area of Interest which TOGI

acquires from any third party shall be one percent (1%) of the Net Smelter

Returns (the "Area of Interest Royalty").

 

         TOGI shall have the option to acquire the royalty (the "Royalty

Option") in accordance with Section. TOGI shall have the option to purchase

one-half (1/2) of the Royalty applicable to the Property representing two

percent (2%) of the Net Smelter Returns. TOGI shall have the right to elect to

purchase such part of the Royalty in increments representing one percent (1%) of

the Net Smelter Returns and the purchase price for each such increment shall be

One Million Five Hundred Thousand Dollars ($1,500,000). TOGI shall have the

option to purchase one-half (1/2) of the Area of Interest Royalty applicable to

mineral rights, mining claims and properties which TOGI acquires from third

parties representing one-half percent (.5%) of the Net Smelter Returns. The

purchase price for such part of the Area of Interest Royalty shall be Five

Hundred Thousand Dollars ($500,000) for the one-half percent (.5%) of the Area

of Interest Royalty applicable to mineral rights, mining claims and properties

which TOGI acquires from any third party.

 

 

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     4.3 METHOD OF PAYMENT. Except as otherwise provided in this Agreement, all

payments by TOGI to Owner shall be paid by check delivered to Owner at its

address for notice purposes or by wire transfer to an account designated by

Owner. TOGI shall be obligated to deliver a single check or payment and shall

have no liability or responsibility for allocation of the payment among the

members of Owner.

 

     4.4 INTEREST. If any Minimum Payment or other amount payable by TOGI

remains delinquent for a period in excess of thirty (30) days, TOGI shall pay to

Owner interest from and after the due date at the Interest Rate.

 

     4.5 CURRENCY. All sums referred to in this Agreement are in United States

currency.

 

     5. OPTION. Owner grants to TOGI the exclusive right to acquire ownership of

the Property, subject to the Royalty reserved by Owner and subject to TOGI's

obligations under the conveyance executed and delivered by Owner on the closing

of the Option. TOGI may exercise the Option at any time after: (a) TOGI has paid

to Owner Minimum Payments in the sum of One Hundred Five Thousand Dollars

($105,000); and (b) TOGI has completed a bankable positive feasibility study for

the development of a mine on the Property and TOGI has provided to Owner a copy

of the positive bankable feasibility study. TOGI may exercise the Royalty Option

at any time before TOGI completes a bankable positive feasibility study for the

development of a mine on the Property and has provided to Owner a copy of the

bankable positive feasibility study, provided, however, that if TOGI does not

exercise the Royalty Option, the Royalty Option shall be terminated and of no

effect.

 

     5.1 NOTICE OF ELECTION. If TOGI elects to exercise the Option, TOGI shall

deliver written notice to Owner. On Owner's receipt of TOGI's notice of exercise

of the Option, the parties shall make diligent efforts to close the conveyance

of the Property, as applicable, within thirty (30) days after Owner's delivery

of the notice.

 

     5.2 REAL PROPERTY TRANSFER TAXES. TOGI shall pay the real property transfer

taxes, if any, the costs of escrow and all recording costs incurred in closing

of the Option. The parties acknowledge that there are presently no real property

transfer taxes assessed on the transfer of title to unpatented mining claims,

including the unpatented mining claims which constitute the Property.

 

     5.3 PRORATION OF TAXES. Payment of any and all state and local real

property and personal property taxes levied on the Property and not otherwise

provided for in this Agreement shall be prorated between the parties as of the

closing of any transaction on the basis of a thirty (30) day month. The parties

acknowledge that there are presently no real property taxes assessed against

unpatented mining claims, including the unpatented mining claims which

constitute the Property.

 

     5.4 PAYMENT ON CLOSING. On closing of the Option, TOGI shall pay the

Purchase Price to Owner, in cash or by wire transfer to an account designated by

Owner.

 

 

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     5.5 CONVEYANCE ON CLOSING. If TOGI exercises and closes the Option, Owner

shall execute and deliver to TOGI a conveyance of the Property in the form of

Exhibit B attached to and by this reference incorporated in this Agreement. On

the closing of the Option, the parties shall complete the conveyance by (a)

inserting the description of all of the unpatented mining claims which comprise

the Property on closing of the Option; (b) inserting the Royalty percentage

rates which shall be taken from Section 4.2 of this Agreement, unless on

exercise of the Option TOGI exercises and closes the Royalty Option, in which

case the Royalty percentage rates as reduced shall be inserted in the

conveyance; and (c) inserting the schedule of Minimum Payments applicable after

the closing of the Option. The execution, delivery and recording of the

conveyance shall not constitute a merger of TOGI's obligations under this

Agreement which shall survive the closing of the Option, specifically, the

obligations expressly stated in the conveyance and TOGI's obligations which

accrue, but are not fully performed, before the closing of the Option, including

the obligations under Sections 4.1, 6, 7.3, 9, 10, 11, 12, 13 and 22 of this

Agreement. Owner and TOGI shall execute and deliver such other written

assurances and instruments as are reasonably necessary for the purpose of

closing the purchase of the Property.

 

     5.6 EFFECT OF CLOSING. On closing of the Option, TOGI shall own the

Property, subject to the Royalty reserved by Owner and TOGI's obligations stated

in the conveyance of the Property and this Agreement shall terminate.

 

6. COMPLIANCE WITH THE LAW. TOGI shall, at TOGI's sole cost, promptly comply

with all Governmental Regulations relating to the condition, use or occupancy of

the Property by TOGI, including but not limited to all exploration and

development work performed by TOGI during the term of this Agreement. TOGI

shall, at its sole cost, promptly comply with all applicable Governmental

Regulations regarding reclamation of the Property and TOGI shall defend,

indemnify and hold harmless Owner from any and all actions, assessments, claims,

costs, fines, liability and penalties arising from or relating to TOGI's failure

to comply with any applicable Governmental Regulations. Owner agrees to

cooperate with TOGI in TOGI's application for governmental licenses, permits and

approvals, the costs of which shall be borne by TOGI.

 

7. TOGI'S WORK PRACTICES AND REPORTING.

 

     7.1 WORK PRACTICES. TOGI shall work the Property in a miner-like fashion.

 

     7.2 INSPECTION OF DATA. During the term of this Agreement, Owner shall have

the right to examine and make copies of all data, including interpretative data,

regarding the Property in TOGI's possession during reasonable business hours and

upon prior notice, provided, however, that the rights of Owner to examine such

data shall be exercised in a manner that does not interfere with the operations

of TOGI.

 

     7.3 REPORTS. On or before March 1 following each Lease Year during which

this Agreement is effective, TOGI shall deliver to Owner a report of all of

TOGI's activities conducted on the Property for the previous calendar year.

 

 

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8. SCOPE OF AGREEMENT. This Agreement shall extend to and include the unpatented

mining claims described in Exhibit A attached to this Agreement and in the

exhibits which are part of this Agreement, and all other interests, mining

claims and property rights made part of and subject to this Agreement in

accordance with this Section. All unpatented mining claims located by Owner or

TOGI which are partially or wholly in the Area of Interest shall be located for

Owner's benefit and shall be part of and subject to this Agreement. If a party

locates any unpatented mining claims in the Area of Interest, the locator shall

promptly notify the other party. The parties shall execute and deliver an

amendment of this Agreement, in recordable form, which provides that the newly

located unpatented mining claims are part of the Property and are subject to

this Agreement. The amendment may be recorded by either party.

 

9. LIENS AND NOTICES OF NON-RESPONSIBILITY. TOGI agrees to keep the Property at

all times free and clear of all liens, charges and encumbrances of any and every

nature and description done made or caused by TOGI, and to pay, and defend,

indemnify and hold harmless Owner from and against, all indebtedness and

liabilities incurred by or for TOGI which may or might become a lien, charge or

encumbrance; except that TOGI need not discharge or release any such lien,

charge or encumbrance so long as TOGI disputes or contests the lien, charge or

encumbrance or posts a bond sufficient to discharge lien acceptable to Owner.

Subject to TOGI's right to dispute or contest the lien, charge or encumbrance or

to post a bond in accordance with the foregoing, if TOGI does not within thirty

(30) days following the imposition of any such lien, charge or encumbrance,

cause the same to be released of record, Owner shall have, in addition to

Owner's contractual and legal remedies, the right, but not the obligation, to

cause the lien to be released by such manner as Owner deems proper, including

payment of the claim giving rise to such lien, charge or encumbrance. All sums

paid by Owner for and all expenses incurred by it in connection with such

purpose, including court costs and attorney's fees, shall be payable by TOGI to

Owner on demand with interest at the Interest Rate. Nothing in this Section

shall prohibit TOGI's grant of a lien or security interest in this Agreement to

secure financing for its operations on or relating to the Property.

 

10. TAXES.

 

     10.1 REAL PROPERTY TAXES. Owner shall pay any and all taxes assessed and

due against the Property before execution of this Agreement. TOGI shall pay

promptly before delinquency all taxes and assessments, general, special,

ordinary and extraordinary, that may be levied or assessed during the term of

this Agreement upon the Property. All such taxes for the year in which this

Agreement is executed and for the year in which this Agreement terminates shall

be prorated between Owner and TOGI, except that neither Owner nor TOGI shall be

responsible for the payment of any taxes which are based upon income, net

proceeds, production or revenues from the Property assessed solely to the other

party. The parties acknowledge that there are presently no real property taxes

assessed against unpatented mining claims, including the unpatented mining

claims which constitute the Property.

 

     10.2 PERSONAL PROPERTY TAXES. Each party shall promptly when due pay all

taxes assessed against such party's personal property, improvements or

structures placed or used on the Property.

 

 

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     10.3 INCOME TAXES. Owner shall not be liable for any taxes levied on or

measured by income or net proceeds, or other taxes applicable to TOGI, based

upon payments under this Agreement or under the conveyance executed and

delivered by Owner on the Closing of the Option.

 

     10.4 DELIVERY OF TAX NOTICES. If Owner receives tax bills or claims which

are TOGI's responsibility, Owner shall promptly forward them to TOGI for

payment.

 

11.   INSURANCE AND INDEMNITY.

 

     11.1 TOGI's LIABILITY INSURANCE. TOGI shall, at TOGI's sole cost, keep in

force during this Agreement term a policy of commercial general liability

insurance covering property damage and liability for personal injury occurring

on or about the Property, with limits in the amount of at least One Million

Dollars ($1,000,000) per occurrence for injuries to or death of any person.

 

     11.2 WAIVER OF SUBROGATION. TOGI and Owner each waives any and all rights

of recovery against the other, and against the partners, members, officers,

employees, agents and representatives of the other, for loss of or damage to the

Property or injury to person to the extent such damage or injury is covered by

proceeds received under any insurance policy carried by Owner or TOGI and in

force at the time of such loss or damage.

 

     11.3 WAIVER AND INDEMNIFICATION. Owner shall not be liable to TOGI and TOGI

waives all claims against Owner for any injury to or death of any person or

damage to or destruction of any personal property or equipment or theft of

property occurring on or about the Property or arising from or relating to

TOGI's business conducted on the Property. TOGI shall defend, indemnify and hold

harmless Owner and its members, officers, directors, agents and employees from

and against any and all claims, judgments, damage, demands, losses, expenses,

costs or liability arising in connection with injury to person or property from

any activity, work, or things done, permitted or suffered by TOGI or TOGI's

agents, partners, servants, employees, invitees or contractors on or about the

Property.

 

12.   ENVIRONMENTAL.

 

     12.1 DEFINITIONS. Hazardous Materials means any material, waste, chemical,

mixture or byproduct which: (a) is or is subsequently defined, listed, or

designated under Applicable Environmental Laws (defined below) as a pollutant,

or as a contaminant, or as toxic or hazardous; or (b) is harmful to or threatens

to harm public health, safety, ecology, or the environment and which is or

hereafter becomes subject to regulation by any federal, state or local

governmental authority or agency. Applicable Environmental Laws means any

applicable federal, state, or local government law (including common law),

statute, rule, regulation, ordinance, permit, license, requirement, agreement or

approval, or any applicable determination, judgment, injunction, directive,

prohibition or order of any governmental authority with jurisdiction at any

level of federal, state, or local government, relating to pollution or

protection of the environment, ecology, natural resources, or public health or

safety.

 

     12.2 TOGI HAZARDOUS MATERIAL ACTIVITIES. TOGI shall limit any use,

generation, storage, treatment, transportation, and handling of Hazardous

Materials in connection with TOGI's use of the Property (collectively "TOGI

Hazardous Materials Activities") to those Hazardous Materials, and to quantities

of them, that are necessary to perform activities permitted under this

Agreement. TOGI Hazardous Materials Activities include, without limitation, all

such activities on or about the Property by TOGI's employees, partners, agents,

invitees, contractors and their subcontractors. TOGI shall not cause or permit

any Hazardous Materials to be disposed or abandoned at the Property, except as

allowed under Applicable Environmental Laws. TOGI shall cause all TOGI Hazardous

Materials Activities to be performed in strict conformance to Applicable

Environmental Laws. TOGI shall promptly notify Owner of any actual or claimed

violation of Applicable Environmental Laws in connection with TOGI Hazardous

Materials Activities, and TOGI shall promptly and thoroughly cure any violation

of Applicable Environmental Laws in connection with TOGI Hazardous Materials

Activities. If any governmental approval, consent, license or permit is required

under Applicable Environmental Laws for TOGI to perform any portion of its work

at the Property, including without limitation any air emission permits, before

commencing any such work, TOGI shall be solely responsible, at TOGI's expense,

for obtaining and maintaining, and providing copies of, each approval, consent,

license or permit. All TOGI Hazardous Materials Activities shall be performed by

qualified personnel who have received proper training with respect to Hazardous

Materials, including compliance with applicable OSHA laws and regulations. TOGI

shall cause all Hazardous Materials present at the Property in connection with

TOGI Hazardous Materials Activities to be safely and securely stored, using

double containment. TOGI agrees that neither its use of the Property nor TOGI

Hazardous Materials Activities shall result in contamination of the environment.

 

 

 

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     12.3 REMOVAL OF STORED HAZARDOUS MATERIALS. Before the expiration or

termination of this Agreement, and notwithstanding any other provision of this

Agreement, and in full conformance to Applicable Environmental Laws, TOGI shall:

(a) cause to be properly removed from the Property all Hazardous Materials

stored at the Property in connection with TOGI's use of the Property or in

connection with TOGI Hazardous Materials Activities; and (b) cause to be

properly dismantled, closed and removed from the Property all devices, drums,

equipment and containments used for handling, storing or treating Hazardous

Materials

Activities.

 

     12.4 ENVIRONMENTAL INDEMNITY. TOGI shall promptly reimburse, defend,

indemnify and hold harmless Owner, its employees, assigns,

successors-in-interest, agents and representatives from any and all claims,

liabilities, obligations, losses, causes of action, demands, governmental

proceedings or directives, fines, penalties, expenses, costs (including but not

limited to reasonable attorney's fees, consultant's fees and other expert's fees

and costs), and damages, which arise from or relate to: (a) TOGI Hazardous

Materials Activities; (b) any non-compliance with Applicable Environmental Laws

in connection with TOGI's use of the Property; or (c) a breach of any obligation

of TOGI under this Section.

 

     12.5 SURVIVAL. The provisions of this Section shall survive expiration or

termination of this Agreement.

 

13.   PROPERTY MAINTENANCE.

 

 

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     13.1 PROPERTY MAINTENANCE; WORK COMMITMENT.

 

              13.1.1 ANNUAL ASSESSMENT WORK. To the extent required by law,

beginning with the annual assessment work period of September 1, 2005, to

September 1, 2006, and for each succeeding annual assessment work year

commencing during the term of this Agreement. TOGI shall perform for the benefit

of the Property work of a type customarily deemed applicable as assessment work

and of sufficient value to satisfy the annual assessment work requirements of

all applicable federal, state and local laws, regulations and ordinances, if

any, and shall prepare evidence of the same in form proper for recordation and

filing, and shall timely record and/or file such evidence in the appropriate

federal, state and local office as required by applicable federal, state and

local laws, regulations and ordinances. TOGI shall deliver to Owner proof of

TOGI's compliance with this Section not less than fifteen (15) days before the

applicable deadline. If TOGI elects to terminate this Agreement more than four

(4) months before the deadline for performance of annual assessment work for the

succeeding annual assessment year, TOGI shall have no obligation to perform

annual assessment work nor to prepare, record and/or file evidence of the same

for the following annual assessment year.

 

              13.1.2 FEDERAL MINING CLAIM MAINTENANCE FEES. If under applicable

federal laws and regulations federal annual mining claim maintenance fees are

required to be paid for the unpatented mining claims which constitute all or

part of the Property, beginning with the annual assessment work period of

September 1, 2005, to September 1, 2006, TOGI shall timely and properly pay the

federal annual mining claim maintenance fees, and shall execute and record or

file, as applicable, proof of payment of the federal annual mining claim

maintenance fees and of Owner's intention to hold the unpatented mining claims

which constitute the Property. TOGI shall deliver to Owner proof of TOGI's

compliance with this Section not less than fifteen (15) days before the

applicable deadline. If TOGI elects to terminate this Agreement more than four

(4) months before the deadline for payment of the federal annual mining claim

maintenance fees for the succeeding annual assessment year, TOGI shall have no

obligation to pay the federal annual mining claim maintenance fees for the

Property for the succeeding assessment year.

 

     13.2 AMENDMENT OF MINING LAWS. The parties acknowledge that legislation for

the amendment or repeal of the mining laws of the United States applicable to

the Property has been, and in the future may be, considered by the United States

Congress. The parties desire to insure that any and all interests of the parties

in the lands subject to the unpatented mining claims which comprise all or part

of the Property, including any rights or interests acquired in such lands under

the mining laws as amended, repealed or superseded, shall be part of the

Property and shall be subject to the Agreement. If the mining laws applicable to

the unpatented mining claims subject to this Agreement are amended, repealed or

superseded, the conversion or termination of Owner's interest in the Property

pursuant to such amendment, repeal or supersession of the mining laws shall not

be considered a deficiency or defect in Owner's title in the Property, and TOGI

shall have no right or claim against Owner resulting from the conversion,

diminution, or loss of Owner's interest in and to the Property, except as

expressly provided in this Agreement.

 

 

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         If pursuant to any amendment or supersession of the mining laws Owner

is granted the right to convert its interest in the unpatented mining claims

comprising the Property to a permit, license, lease, or other right or interest,

all converted interests or rights shall be deemed to be part of the Property

subject to this Agreement. Upon the grant or issuance of such converted

interests or rights, the parties shall execute and deliver an addendum to this

Agreement, in recordable form, by which such converted interests or rights are

made subject to this Agreement.

 

     13.3 WORK COMMITMENT. As a work commitment, on or before September 1, 2006,

and on or before September 1 of each subsequent Lease Year until TOGI completes

a bankable positive feasibility study, TOGI shall drill not less than 5,000

linear feet of exploration drilling on the Property or in the Area of Interest.

TOGI's work commitment for the initial 5,000 feet of exploration drilling is a

firm and unconditional commitment and obligation under this Agreement. If TOGI

does not complete drilling of 5,000 linear feet on or before September 1, 2006,

or drilling of 5,000 linear feet on or before September 1 during each subsequent

Lease Year, TOGI shall have the right to pay to Owner in lieu of performance of

the drilling work commitment the sum of Ten Dollars ($10.00) multiplied by the

difference between 5,000 linear feet and the actual number of linear feet which

TOGI drills on or before the applicable deadline. In such case, TOGI shall pay

the sum to Owner within thirty (30) days following the applicable deadline. Any

exploration drilling in excess of the minimum requirement shall be carried

forward and credited in TOGI's favor against its exploration drilling commitment

for any succeeding period. If TOGI's performance of its drilling work commitment

in any period is deferred as a result of the occurrence and continuation of a

force majeure event, TOGI shall be obligated to perform the deferred drilling

work commitment on or before September 1 of the second year following

termination of the force majeure event, provided, however, that TOGI shall

retain the right to pay to Owner in lieu of performance the sum of Ten Dollars

($10.00) multiplied by the difference between the linear feet of the deferred

drilling work commitment and the actual number of linear feet of such deferred

drilling work commitment which TOGI drills during the applicable period. TOGI's

work commitment shall terminate on TOGI's completion of a bankable positive

feasibility study.

 

14.   RELATIONSHIP OF THE PARTIES.

 

     14.1 NO PARTNERSHIP. This Agreement shall not be deemed to constitute any

party, in its capacity as such, the partner, agent or legal representative of

any other party, or to create any joint venture, partnership, mining partnership

or other partnership relationship between the parties.

 

     14.2 COMPETITION. Except as express