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disposal of properties. The Company will periodically have to raise additional funds to continue its operations, and while it has been successful in doing so in the past, there can be no assurance it will be able to do so in the future.

 

The Company specializes in searching for gold and base metal deposits in almost unexplored territories of Quebec. Most of its activities take place in the central part of Quebec, particularly in the James Bay area, which comprises several Archean greenstone belts known as being very favourable to the presence of economic gold and base metal deposits. This region differentiates from others by its accessibility and by the existence of clear agreements ruling the access to the territory. The Company is among the most active exploration companies in Quebec with a vast portfolio of properties.

 

Selected Quarterly Financial Information (unaudited)

 

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Other Information (unaudited)

Since its incorporation, Virginia Mines (“Virginia”) has not paid any cash dividends on its outstanding common shares. Any future dividend payment will depend on the Company’s financial requirements for the financing of its exploration programs and on its future financial growth, and on any other factor that the Board of Directors will deem necessary to consider in the circumstances. It is highly unlikely that any dividends will be paid in the near future.

 

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Exploration Activities from Continuing Operations

Summary of activities

During the six-month period ended August 31, 2006, the Company's exploration costs amounted to $1,850,860 (of which an amount of $1,730,693 was capitalized) in comparison with costs of $1,349,202 (of which an amount of $1,146,961 was capitalized) for the same period in 2005.

On August 29, 2006, the Company granted Macdonald Mines Exploration Ltd. the option to acquire a 50% interest in the LG3.5 property in consideration of 40 000 $ in cash, which amount was not cashed as of August 31, 2006, and the carrying-out of exploration work totalling 1,200,000 $ no later than August 29, 2011.

During the summer of 2006, the Company has initiated work on several new projects in various sectors of the James Bay region, among others the sectors of Opinaca, Assinica, Fontanges and Rivière Broadback. Work carried out on these new projects acquired while in the wake of the Éléonore discovery consisted mainly of prospecting, geological reconnaissance and ground geochemical surveys to outline new targets for gold and base metals. Work is still ongoing on some of these projects and most of assays results are yet to come; so additional time is required to evaluate the real potential of these projects.

The Company was also very active on two partnership projects, namely Corvet Est (with Goldcorp Inc.) and the Coulon project (with Breakwater Resources Ltd.). In the first case, a program of geological mapping was conducted in July and was followed in August by a diamond drilling program of around 2,300 metres that is still in progress. This drilling program applies mainly to the extensions of the Marco and Contact zones. At Coulon, a program of geological mapping was initiated in August and will be going on until September. A drilling program of around 2,500 metres will follow in October to test the extensions of known massive-sulphide lenses as well as new targets generated by the work in progress.

 

Results of Operations from Continuing Operations

Revenues for the quarter ended August 31, 2006 were $758,823 compared to $522,023 for the same period in 2005. Revenues for the six-month period ended August 31, 2006 stood at $5,603,018 compared to $1,441,087 for the same period in 2005. Interest income and dividends for the three-month and six-month periods ended August 31, 2006 increased following the increase in short-term investments.

The Company also receives fees for its role as the operator of projects in its various partnerships. The Company received fees from GoldCorp on the Corvet Est project during the first two quarters of 2006 and from Breakwater Resources Ltd. on the Coulon project during the second quarter of 2006. The Company received fees mostly from Noranda inc. on the Coulon project during the first quarter of 2006 and from Placer Dome inc. on the Corvet Est project during the second quarter of 2005. Option payments received in excess of cost of mining properties and the gain on sale of mining properties have been recognized in earnings following agreements with partners.

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Expenses raised to $3,619,470 during the quarter ended August 31, 2006 compared to $1,509,397 for the same period in 2005. For the six-month period ended August 31, 2006, expenses were $5,880,510 compared to $2,094,326 for the same period in 2005. The increase in professional and maintenance fees mainly results from expenses related to the granting of stock options on April 6 and July 19, 2006 for a total of $1,194,272 during the second quarter of 2006 and for a total of $2,032,193 for the six-month period ended August 31, 2006. The increase in management fees is due to a slight increase in the Company’s exploration work. The increase in rent and administrative expenses mainly results, during the first current quarter, from expenses inherent to administrative and professional services, from expenses related to the exercise of stock options and from the transaction-related bonus of $370,000 allocated to directors, officers and employees in connection with the transaction involving Goldcorp. The Company decreased its advertising budget for the current periods, leading to a decrease in advertising, exhibitions and travelling expenses. The variation in general exploration costs is mainly explained by the granting of stock options on April 6 and July 19, 2006, as well as by the decrease in on-site work expenses. During the first quarter ended August 31, 2006, the Company wrote off 25 % of the Triestre property and 22 % of the Eleonore Regional property for a total of $15,292 while keeping the rights on its claims.

During the first two quarters, a writedown of short-term investments has been recognized in order that certain investments be accounted for at the lower of cost and market value.

Quarterly Information

The information presented below details the total revenues, overall net earnings (net loss), and net earnings (net loss) per participating share from continuing operations of the last eight quarters

 

The information presented below details the total revenues, overall net earnings (net loss), and net earnings (net loss) per participating share from discontinued operations of the last eight quarters.

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 Liquidity and Capital Resources from Continuing Operations

During the three-month period ended August 31, 2006, cash flows provided from operating activities amounted to $1,107,174 compared to $493,580 during the corresponding three-month period ended August 31, 2005. During the six-month period ended August 31, 2006, cash flows provided from operating activities amounted to $2,144,141 compared to $1,013,211. The increase for both quarters is primarily due to the increase in accounts receivable and accrued liabilities.

Cash flows from financing activities include the issuance of shares under private placements and the exercise of stock options and warrants. For the three-month period ended August 31, 2006, 600,000 shares were issued to Billiton Resources Canada in consideration of the latter's 50% interest in the Lac Gayot property and for the three-month period ended May 31, 2006, 1,210,406 shares were issued to Goldcorp for a cash consideration of $5,047,393. For the corresponding period in 2005, issuances in connection with private placements stood at $15.6 M.

The exercise of stock options and warrants had the effect of increasing cash flows from financing activities by $2,761 for the three-month period ended August 31, 2006 and by $422,554 for the three-month period ended August 31, 2005. Such increase amounted to $428,688 for the six-month period ended August 31, 2006 and to $4,535,707 for the six-month period ended August 31, 2005.

The Company ’ investing activities consist primarily of the additions to mining properties and increase in exploration costs and in the purchase and sale of short-term investments. The additions to mining properties and exploration work required disbursements of $1,025,945 for the three-month period ended August 31, 2006 and of $2,546,644 for the three-month period ended August 31, 2005. Such disbursements were $1,300,572 for the six-month period ended August 31, 2006 and $7,055,495 for the six-month period ended August 31, 2005. During the three-month periods ended August 31, 2006 and 2005, the increase in short-term investments was $3,847,960 and $1,022,093, respectively. This increase stood at $3,111,065 for the six-month period ended August 31, 2006 compared to $13,486,974 for the six-month period ended August 31, 2005.

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Disclosure of Outstanding Share Data

The Company may issue an unlimited number of common shares, without par value. As at October 6, 2006, 26,373,198 shares are outstanding.

The Company maintains a stock option plan under which stock options may be granted up to a maximum of 10% of the number of shares outstanding. As at October 6, 2006, 1,019,000 stock options are outstanding. Their weighted average exercise price is $4.16 and the expiry date varies from August 6, 2011 to July 19, 2016.

As at October 6, 2006, 484,162 warrants are outstanding.

On May 18, 2006, 484,162 warrants with an exercise price of $5.84 were granted in connection with private placements. These warrants expire in November 2007.

Risk Factors and Uncertainties

There have been no significant changes in the risk factors and uncertainties facing the Company, as described in February 28, 2006 Management's Discussion and Analysis of Virginia Gold Mines.

Additional Information and Continuous Disclosure

This Management’s Discussion and Analysis is dated October 6, 2006. Additional information on the Company is available through regular filings of press releases, financial statements and its annual information form on SEDAR (www.sedar.com).

 

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