TRX

Business Context and Reporting Period

Company: Tanzanian Royalty Exploration Corporation (TRX Gold Corp)

Filing Type: Form 6-K (Report of Foreign Issuer)

Reporting Period: Six months ended February 28, 2011 (Interim)

Business Stage: Exploration Stage Company. The Company explores mineral properties in Tanzania and has not yet determined if these properties contain economically recoverable mineral deposits. It generates no production revenue.

Key Financial Metrics

Cash Flow Summary (Six Months 2011):

• Operating Activities: Used $1,925,992
• Investing Activities: Used $5,455,363 (Primarily mineral property expenditures)
• Financing Activities: Provided $15,791,131 (Primarily share capital issuance and convertible debt)
• Net Increase in Cash: $8,409,775

Material Changes vs. Prior Period

• Liquidity Improvement: Cash balances increased significantly from $1.33 million to $9.74 million, driven by $13.8 million in share capital issuances and $2.0 million in convertible debt.
• Increased Exploration Spend: Net spending on mineral properties rose to $4.99 million (from $1.38 million in 2010). This includes a US$3.0 million payment for a 55% interest in the Buckreef Gold Mine re-development project.
• Operating Expenses: Salaries and benefits increased to $704,713 (from $500,674) due to doubling the employee count in Tanzania. Professional fees increased to $267,038 (from $189,356) due to tax audits and financing costs.
• Foreign Exchange: Foreign exchange loss increased to $152,121 (from $78,920) due to the depreciation of the Tanzanian Shilling.

Outlook, Risks, and Unusual Items

Management Commentary & Outlook:

• Buckreef Project: The Company is the successful bidder for the Buckreef Gold Mine re-development. Geological consultants are reviewing data to prioritize targets for a large-scale exploration program expected to begin soon.
• Kigosi Project: Bulk testing of surface gravels is progressing; two extra crushers were added to the gravity separation plant to increase recovery rates.
• Financing: The Company relies on equity funding to conduct exploration as it has no production revenue.

Risks and Contingencies:

• Internal Controls: Management identified a material weakness in internal control over financial reporting due to limited accounting personnel and lack of segregation of duties. This resulted in audit adjustments in the prior year. Disclosure controls are currently deemed ineffective.
• Property Abandonment: Subsequent to the period end, the Company identified properties to be abandoned. Costs are undetermined but will be written off in the third quarter.
• Related Party Transactions: A US$100,000 loan was approved to the Chairman and COO (Tanzania) on arm's length terms. Significant legal fees ($188,175) were paid to a firm where a director is a partner.
• Accounting Standards: The Company is transitioning to IFRS for the fiscal year beginning January 1, 2011 (August 2012 year-end).

Investor Verification Checklist

• Capital Raise Dilution: Verify the impact of the $13.8 million in share issuances and the conversion of $1 million in promissory notes (247,173 shares issued April 1, 2011) on share count and ownership.
• Internal Control Remediation: Confirm the status of the remediation plan for the material weakness in financial reporting controls.
• Buckreef Acquisition Costs: Validate the US$3.0 million expenditure for the 55% interest and the terms of the joint venture with Stamico.
• Upcoming Write-offs: Monitor the third-quarter financials for the specific costs associated with the identified property abandonments.
• Related Party Loans: Track the repayment status of the US$100,000 loan to the Chairman/COO and the $29,128 receivable from the CEO.