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Birch Mountain Resources Ltd – ‘20-F/A’ for 12/31/07

On:  Thursday, 6/5/08, at 6:09pm ET   ·   As of:  6/6/08   ·   For:  12/31/07   ·   Accession #:  1204459-8-1236   ·   File #:  1-32475

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 6/06/08  Birch Mountain Resources Ltd      20-F/A     12/31/07    5:1.3M                                   Newsfile Cor… Toronto/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F/A      Amendment to Annual Report of a Foreign Private     HTML    946K 
                          Issuer                                                 
 2: EX-12.1     Statement re: Computation of Ratios                 HTML     11K 
 3: EX-12.2     Statement re: Computation of Ratios                 HTML     11K 
 4: EX-13.1     Annual or Quarterly Report to Security Holders      HTML      8K 
 5: EX-13.2     Annual or Quarterly Report to Security Holders      HTML      8K 

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

FORM 20-F/A
(Amendment No. 1)

Commission file number 001-32475

BIRCH MOUNTAIN RESOURCES LTD.
(Exact name or Registrant as specified in its charter)

Not Applicable
(Translation of Registrant’s name into English)

Alberta, Canada
(Jurisdiction of incorporation or organization)

Suite 300, 250 - 6^th Avenue S.W.
Calgary, Alberta, Canada
T2P 3H7
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

None
Securities registered or to be registered pursuant to Section 12(g) of the Act:

Common shares, without par value and Shareholders Rights
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

Indicate the number of outstanding shares of each of the issuer’s classes of capital stock as of the close of the period covered by the annual report.
84,180,737 Common Shares

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

Yes  £                        No  Q

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes £                         No Q

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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 report), and (2) has been subject to such filing requirements for the past 90 days.

Yes Q                         No £

Indicate by check mark whether the registrant is a large accelerated filer. An accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accredited filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer £                         Accelerated filer Q                          Non-accelerated filer £

Indicated by check mark which financial statement item the registrant has elected to follow.

Item 17 Q                         Item 18 £

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £                         No Q

2

3

GLOSSARY & ABBREVIATIONS

Certain terms and their usage used throughout this Form 20-F are defined below.

4

5

In this Form 20-F, the Company may provide cross-references relevant to the information being provided.  These cross-references are provided for ease of reference only and are not meant to be exclusionary to other relevant information in this Form 20-F, which may relate to the disclosure in question.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

The information presented in or incorporated by reference in this Form 20-F includes both historical information and “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) relating to the future results of Birch (including projections and business trends), which involve risks and uncertainties.  

Numerous factors could cause actual results to differ materially from those in the forward-looking statements, including without limitation, continuing production by oil sands companies in the Company’s market area, development of new competing or replacement technology, lack of market acceptance or insufficient demand, declining commodity prices, specifically the price of oil, inability of the Company to execute the business plan, failure to protect intellectual property, unsuccessful exploration of mineral properties and related activities, unfavourable changes in the regulatory environment including environmental, tax, land tenure or other regulatory regimes, the inability to finance future development, the dependence upon the abilities and continued participation of certain key employees or consultants of Birch and the failure to obtain regulatory approval for the Hammerstone application.  Although the Company believes the Hammerstone application will be approved, there can be no assurances that the application will be approved. As a result of the foregoing and other factors, no assurance can be given as to future results, levels of activity and achievements.

Investors are cautioned not to put undue reliance on forward-looking statements, and should not infer that there has been no change in the affairs of Birch since the date of this report that would warrant any modification of any forward-looking statement made in this document or other documents filed periodically with securities regulators.  All subsequent written and oral forward-looking statements attributable to Birch or persons acting on its behalf are expressly qualified in their entirety by this notice.  Except as required by law, Birch disclaims any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events or otherwise.

REPORTING CURRENCY AND FINANCIAL INFORMATION

Currency and Exchange Rates

Financial information in this Form 20-F is expressed in Canadian dollars; therefore, unless otherwise noted, references to “Cdn$” or “$” are to Canadian dollars.  The following tables sets forth the period-end exchange rate, the average of the period, and the high and low exchange rates in the period, for the Canadian dollar in exchange for United States dollars, based upon the inverse of exchange rates reported by the Federal Reserve Bank of New York at the noon buying rates in New York City for cable transfers payable in Canadian dollars as certified for customs purposes.  As of December 31, 2007, the noon rate of exchange, as reported by the Federal Reserve Bank of New York for the conversion of United States dollars into Canadian dollars was US $1.0120 (US $1.00 = CDN $0.9881).  As of March 20, 2008 the noon rate of exchange, as reported by the Federal Reserve Bank of New York for the conversion of United States dollars into Canadian dollars was US $0.9742 (US $1.00 = CDN $1.0265).

6

The following table sets forth the period-end exchange rate, the average of the period, and the high and low exchange rates in the period for the Canadian dollar in exchange for United States dollars, for each month during the previous six months, based upon the inverse of exchange rates reported by the Federal Reserve Bank of New York at the noon buying rates in New York city for cable transfers payable in Canadian dollars as certified for customs purposes.

ITEM 1

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

This item is not applicable.

ITEM 2

OFFER STATISTICS AND EXPECTED TIMETABLE

This item is not applicable.

7

ITEM 3

KEY INFORMATION

A.

Selected Financial Information

The following selected consolidated financial data for the years ended December 31, 2007, 2006, 2005, 2004, and 2003 are derived from the audited consolidated financial statements for the periods indicated and should be read in conjunction therewith.

Notes:

(1)

Refers to Canadian Generally Accepted Accounting Principles.

(2)

The loss per common share was calculated using the weighted average number of common shares outstanding during the period indicated.

(3)

Based on the number of common shares outstanding at the end of the year indicated.  Excludes common shares issuable upon exercise of stock options and any other outstanding convertible securities.

(4)

Refers to US Generally Accepted Accounting Principles.

Neither Birch nor its predecessors have declared or paid dividends on its common shares during the last five fiscal years.  Any future decision to declare dividends on common shares will be made by the Board of Directors depending upon the financial requirements to finance growth, the financial condition of Birch and other factors that the Board of Directors may consider appropriate in the circumstances.  Birch anticipates that future earnings will be retained for the development of its business and does not anticipate the payment of dividends to shareholders for the foreseeable future.

B.

Capitalization and Indebtedness

This item is not applicable.

8

C.

Reasons for the Offer and Use of Proceeds

This item is not applicable.

D.

Risk Factors

Capital

Birch currently has insufficient revenue to meet its yearly operating and capital requirements.  Historically, the Company has successfully raised funds necessary to develop its leases and permits, to prepare for and plan operations and to conduct its corporate affairs primarily through public and private placements of common stock or debt financing. As required in the future or as advantageous to the Company, financing may be available through joint venture or partnering agreements, through additional issuance of equity or by obtaining project debt financing.  Although these are alternatives the Company will investigate, there is no assurance that the Company will be successful in raising the capital it needs to continue its business.

Birch is an Early Stage Production Company

Birch opened the MVQ, the initial quarry situated within the Hammerstone Project, in December 2005, under the regulatory approvals and operating permits received in July 2005.  The MVQ is fully operational, producing and selling a range of limestone aggregate and reagent products.  First commercial sales occurred in the second quarter of 2006.

In May 2006, Birch filed an Application with the provincial regulatory authorities for the remainder of the Hammerstone Project, to integrate the existing MVQ with an expanded quarry and aggregate plant, as well as a limestone processing complex to produce limestone-based reagent products.

There is a risk that the operations at MVQ may have delays, interruptions or increased costs or that the Hammerstone Project may not commence at all, due to many factors, including, without limitation:

• breakdown or failure of equipment or processes;

• production performance falling below expected levels of output or efficiency;

• design errors;

• contractor or operator errors;

• non-performance by third-party contractors;

• labour disputes, disruptions or declines in productivity;

• increases in materials or labour costs;

• inability to attract sufficient numbers of qualified workers;

• delays in obtaining, or conditions imposed by, regulatory approvals;

• changes in the scope of the development or operations;

• markets for products not developing as expected;

• violation of permit requirements;

• disruption of energy supply; and

• catastrophic events such as fires, earthquakes, storms or explosions.

The current construction and operations schedules may not proceed as planned, there may be delays and the operation of the MVQ and the development of the Hammerstone Project may not be achieved on time or on budget.  Any such delays may increase or decrease the costs and may require additional financing, which may not be available.  Actual costs to operate the MVQ or to construct and develop the Hammerstone Project will vary from estimates and such variances may be significant. Given the stage of development of the Hammerstone Project, various changes may be made prior to completing construction.  Based on current scheduling, the Hammerstone Project is not expected to start commercial quicklime operations before late 2009.

9

The information contained herein, including, without limitation, reserve and economic evaluations, is conditional upon receipt of all regulatory approvals and no material changes being made to the planned MVQ operations and the Hammerstone Project.

Regulatory and Environmental Requirements May Impact the Company’s Ability to Operate

The Company operates in areas that are subject to government provisions regulating operations and development of mineral resources.  Birch may be constrained or forbidden to develop its plans and mandated operating guidelines may adversely affect the economic viability of the projects.  The Company holds metallic and industrial mineral permits and leases issued by the Government of Alberta.                                                 

Birch is required by regulation to operate under environmental approval conditions that are issued by the Government of Alberta and the Government of Canada.  Additionally, public expectation of industry’s environmental performance is high. Birch has established environmental policies, procedures and management systems and has operated the quarry in full compliance with all environmental conditions since quarry operations began in 2006.  Birch has and will continue to work with regulators and local communities to address public environmental concerns.

Competitive Risk May Reduce the Corporation’s Ability to Operate

Birch must develop its mineral reserves and there is no assurance the type or amount of the mineral reserves will produce the economic results expected.  Additionally, the Company must negotiate sales arrangements with its customers and demonstrate that its products are reliable and suitable for use in the oil sands industry.  Although the Company believes that competing aggregate companies in the Fort McMurray region are limited in both size and quality and, as a result, high market share assumptions have been made, Birch may have to compete with larger companies that have greater assets and financial and human resources, and which may be able to sustain lower margins than the Company to develop business.  Birch and the economic viability of the MVQ and the Hammerstone Project may be negatively impacted if new sources of aggregates and/or industrial minerals are located and developed.

Independent Reviews Provide No Assurance of Future Results

Although third parties have prepared reviews, reports and projections relating to the viability and expected performance of the MVQ and the Hammerstone Project, it cannot be assured that these reports, reviews and projections and the assumptions on which they are based will, over time, prove to be accurate. Birch gained regulatory approval for the MVQ in 2005 and beginning in 2006, operated the quarry and successfully extracted, processed and sold quality limestone aggregate products. The ability of Birch to obtain the necessary approvals, to secure adequate operating and capital financing to move forward with the next phase of quarry expansion and the construction and operation of the quicklime plant, and to operate profitably in the future are uncertain.

Customer Dependency May Reduce the Flexibility of the Company to Operate

For the sale of aggregate and less so for the sale of reagent products, Birch is dependent on customers located geographically near the limestone quarry and production facilities.  Costs of transportation of aggregate are high relative to its cost of production and tend to be prohibitive to customers who ship the product over longer distances.  As a result, Birch plans to market products to the oil sands industry in the Fort McMurray region in Northern Alberta.  With market concentration based on geography, Birch is dependant on production and expansion in the local area.  There are no guarantees that oil sands companies will continue to require the Company’s products in sufficient quantities to ensure profitable operations.

10

Personnel Risks May Impact the Company’s Ability to Carry Out its Operational Plans

The Company currently employs 31 fulltime and part time employees.  In 2007, operations, maintenance and technical personnel were hired to operate the quarry 24 hours per day, seven days per week, producing and shipping up to 20,000 tonnes per day.  In Northern Alberta, skilled labour and technical services are in high demand and there is uncertainty surrounding the ability to obtain the workforce required to implement the future stages of the Hammerstone Project, which includes the construction and operation of the quicklime plants.  Should the Company not be able to secure sufficient personnel, the project may not become operational or economically viable.

Alternate Technologies May Reduce the Demand for the Company’s Products

The use of limestone for aggregates and the use of quicklime as a product for desulphurization of air emissions and water treatment could be replaced by alternate technologies as the oil sands industry looks at more cost-effective and efficient methods.  The rate of development and adoption of new technologies and the impact of these technologies on the Company’s business cannot be determined.

Revenue and Earnings May Fluctuate Which Could Affect Our Common Share Price

Our revenues and earnings may vary from quarter to quarter as a result of a number of factors, including:

• Concentration in our customer base

• The timing of substantial orders

• Seasonal fluctuations in demand

• Delays in the manufacture or shipment of products

• Our ability to obtain payment from our customers on a timely basis

• Our ability to manage inventory levels given the volatility in our sales, the length of the sales cycle and the variable and unpredictable nature of demand in the region

As a result, quarter-to-quarter and seasonal comparisons of our revenues and earnings may not be meaningful. It is also possible that these quarterly fluctuations could result in our operating results falling below the expectations of investors and securities analysts in one or more future quarters. As a result, these quarterly fluctuations in our revenues and earnings may affect the market price of Common Shares.

Birch Will Require Additional Regulatory Approvals and Operating Permits

In the ordinary course of business, mining companies are required to seek regulatory approvals and operating permits from the federal, provincial and local governments for expansion of existing operations and the commencement of new operations.  Obtaining the necessary regulatory approvals and operating permits is a complex and time-consuming process involving numerous agencies and often involving public hearings and costly undertakings on the part of the Company.  The duration and success of regulatory and permitting efforts are contingent upon many variables outside the Company’s control. Environmental protection permitting, including the approval of reclamation plans, may increase costs and cause delays depending on the nature of the activity to be permitted and the interpretation of applicable requirements implemented by the permitting authority.  There can be no assurance that all regulatory approvals and operating permits will be obtained and, if obtained, that the costs involved will not exceed those previously estimated by the Company.  It is possible that the costs and delays associated with the compliance with such standards and regulations could become such that the Company could not proceed with the development or operation of the Hammerstone Project.  All regulatory approvals and operating permits for the MVQ were received in July 2005.

11

Title Risks May Result in Title Claims or Disputes

Birch is satisfied that it has good and proper right, title and interest in and to the mineral properties that are currently under development or in production.

Aboriginal peoples have claimed aboriginal title and rights to a substantial portion of western Canada.  Certain aboriginal peoples have filed a claim against the Government of Canada, the Province of Alberta, certain governmental entities and the Regional Municipality of Wood Buffalo (RMWB), which includes the City of Fort McMurray, Alberta claiming, among other things, aboriginal title to large areas of lands surrounding Fort McMurray, including the lands on which the MVQ and the Hammerstone Project and most of the oil sands operations in Alberta are located.  Such claims, if successful, could have a significant adverse effect on the oil sands bitumen producers and on Birch, the MVQ and/or the Hammerstone Project.

Abandonment and Reclamation Costs and Regulations May Change

Birch is responsible for complying with terms and conditions of environmental and regulatory approvals and all laws and regulations regarding the abandonment of the site and reclamation of its lands at the end of its economic life, which abandonment and reclamation costs may be substantial.  A breach of such legislation and/or regulations may result in the imposition of fines and penalties, including an order for cessation of operations at the site until satisfactory remedies are made.  Abandonment and reclamation costs are estimates and since they will be a function of regulatory requirements at the time, costs of goods and services at the time and the value of the salvaged equipment may be more or less than the abandonment and reclamation costs. Birch is required to post bond or a letter of credit with Alberta Environment annually in an amount sufficient to reclaim the lands disturbed, thus managing the long-term reclamation liability.

Birch is Subject to Certain Mining Hazards

The business of mining is subject to certain types of risks and hazards, including environmental hazards, and industrial accidents.  Such occurrences could result in damage to, or destruction of, mineral properties or production facilities, personal injury or death, environmental damages, delays in mining, monetary losses and possible legal liability.  Any payments made with regards to such liabilities may have a material adverse effect on Birch’s financial position.  The Company carries insurance to protect itself against certain risks of mining and processing to the extent that it is economically feasible but which may not be adequate.

12

There is a Possibility of Dilution to Present and Prospective Shareholders

Any transaction involving the issuance of additional Birch shares or securities may result in dilution, possibly substantial, to present and prospective holders of Common Shares. 

Enforcement of Civil Liabilities by Present and Prospective Shareholders May be Adversely Affected

The enforcement by investors of civil liabilities under the federal securities laws of the US may be affected adversely by the fact that the Company is incorporated under the laws of Alberta, Canada; that the independent auditors who have audited the Company’s financial statements and some or all of the Company’s directors and officers may be residents of Canada or elsewhere, and that all or a substantial portion of the Company’s assets and said persons are located outside the US.  As a result, it may be difficult for holders of the Common Shares to effect service of process within the US upon people who are not residents of the US or to realize in the US upon judgments of courts of the US predicated upon civil liabilities under the federal securities laws of the US.

ITEM 4

INFORMATION ON BIRCH

A.

History and Development of Birch

Birch is an Alberta corporation formed under the provisions of the Alberta Business Corporations Act (ABCA), by amalgamation of one of Birch’s predecessors, also named Birch Mountain Resources Ltd., and its wholly owned subsidiary, Birch Mountain Minerals Ltd., on December 31, 1995.

Birch’s head office and registered office are located at Suite 300, 250 - Sixth Avenue S.W., Bow Valley Square 4, Calgary, Alberta T2P 3H7, phone: (403) 262-1838, and Suite 1000, 400 Third Avenue S.W., Calgary, Alberta T2P 4H2, phone: (403) 232-9500, respectively.

Birch was founded in 1995 as a junior mineral exploration company.  Prior to 2000, it explored for precious metals, base metals and diamonds on properties in western Canada, the Yukon and Kalimantan, Indonesia.  Since 2000, the Company has expanded beyond conventional mineral exploration to include industrial minerals as well as research and development on naturally occurring precious and non-precious metal microparticles and nanoparticles.  Currently, Birch is only active in Alberta, Canada.  

From early 2000 to 2002, the Company’s work led to the development of methods to isolate and image, using high-resolution transmission electron microscopes, naturally occurring base and precious metal nanoparticles in rocks and process residues from the Athabasca region of northeast Alberta.  The commercial significance of these findings has not been determined.  A reliable method for measuring precious metal concentration has not yet been developed nor have independently verified and commercial methods of extraction been developed.  In December 2002, Birch was awarded US patent 6,494,932 entitled, “Recovery of Natural Nanoclusters and the Nanoclusters Isolated Thereby”, which covers processes for the recovery of natural nanoparticles from geological materials and their processed counterparts.

In June 2002, the Industrial Minerals Division was established to pursue opportunities arising from growing demand for industrial minerals in the Athabasca region of northeast Alberta.  The mineral rights held by the Company offer a compelling business opportunity due to their location close to current and planned oil sands facilities and the forecast increase in demand for aggregate and quicklime products from the oil sands industry and local infrastructure requirements.  Consequently, management has focused on this business opportunity over the past several years.

13

Principal Capital Expenditures

The Company has invested principally in its mineral properties in the Athabasca region since 2002.  Over the past five years, $55 million has been invested in the MVQ and the Hammerstone Project and $23 million has been invested in mining equipment, software, hardware, leasehold improvements and miscellaneous office equipment.  There have been no significant divestitures or disposals over the past several years.

B.

Business Overview

Birch is in the industrial minerals business producing and selling limestone aggregate products. Birch’s principal operations are located north of Fort McMurray, Alberta, where the Company holds metallic and industrial mineral rights over an extensive portion of the Athabasca region in the heart of Alberta’s expanding oil sands industry.  Birch does not own the mineral rights to the geological formations that contain the oil sands, but owns the mineral rights to the rocks that lie geologically beneath the oil sands. Since 2002, Birch has worked to commercialize the industrial mineral potential of limestone deposits that occur on its mineral holdings in the Athabasca region.

Birch operates the MVQ, an early production stage limestone quarry that produces limestone aggregate products for sale to customers in the Athabasca oil sands region of northeastern Alberta. The MVQ produces various products from limestone rock and crushed limestone rock in the form of aggregate or reagent limestone. The Company is engaged in the regulatory approval process for the Hammerstone Project which will expand the production capability of the MVQ and add an integrated limestone processing complex to provide manufactured limestone based products such as quicklime, as well as related services such as spent lime recalcining.

The Company operates separate divisions for industrial minerals, and mineral exploration and technology and the consolidated financial statements provide segmented information to identify expenditures in each. See “Item 17 - Financial Statements.”

Industrial Minerals

Muskeg Valley Quarry

In 2004, Birch applied to license a limestone quarry called the Muskeg Valley Quarry (MVQ), situated within the Hammerstone Project.  The original application was to develop a starter quarry to supply crushed limestone aggregate to the local market.  

In February 2004, Birch released an independent technical report on the MVQ project entitled, Muskeg Valley Project, Alberta – Independent Qualified Person’s Review and Technical Report (the “2004 Technical Report”).  The 2004 Technical Report was a preliminary assessment of the aggregate and calcinable limestone potential of the proposed MVQ.  It included a mineral resource estimate for calcinable and aggregate grade limestone, and a preliminary financial model. The 2004 Technical Report concluded that additional studies directed towards the construction and operation of a combined aggregate and quicklime facility were justified.

In March 2004, Birch filed an application and the supporting Environmental Impact Assessment (the “MVQ Application”) with the NRCB to develop, operate and reclaim a quarry and aggregate plant on its mineral leases adjacent to the Muskeg River. The Company received Approval NR-2005-1 from the NRCB on July 14, 2005, as authorized by an Order in Council from the Alberta Government the previous day, to construct and operate the MVQ and an aggregate plant.  During the last two quarters of 2005, site preparation work was completed that provided access to the MVQ.  Trees and overburden were cleared and a two-kilometre commercial access road was established.  The Company extracted limestone from surface exposures of its own limestone and used it in building the access road.  During the second quarter of 2006, aggregate meeting various product specifications was produced and the first sales from the MVQ were made.

14

Quarry development continued through 2006 in order to create the space necessary to operate efficiently and to provide access to the four limestone rock units present in the quarry.  Overburden was removed and pit materials were excavated and trucked to stockpiles.  

Birch had a modest start to 2007 due to weather related slowdowns and began building up deliveries during the summer with the quarry having its highest performance month in June, operating 24 hours a day, seven days a week and shipping up to 20,000 tonnes per day.  

After the strong sales in the second quarter, the Company expected that July and August orders would continue since the construction season in Ft. McMurray, Alberta is relatively short and most of the projects are constructed during the summer.  However, the Company observed a general slowdown in the supply of aggregates for site preparation and infrastructure projects.  The Company believes four factors contributed to the lack of sales:

A.

Oil sand project cost over-runs.

B.

Labour shortages in the oil sands industry – especially on the construction side.

C.

Alberta Royalty Review process.

D.

The use of gravel deposits by oil sand operators on their existing oil sand leases.

As a consequence, the Company believes that customers’ site preparation and construction project work was deferred.

As it became apparent that deliveries were slowing substantially in July 2007, operations were scaled back to day shift only. Quarry staff was then reduced further to critical skills levels in October.  Equipment and personnel were scaled back to the minimum levels necessary to initiate a timely response to new orders.

Birch submitted a bid for a significant order during the third quarter with anticipated delivery in September 2007.  In early October 2007, the Company was informed that the order was awarded to a competitive lower bidder. Equipment and personnel that had been retained to fill this anticipated quote were immediately returned or laid off.  With the Birch-owned Andreas crushing spread operational and fully reliable, the rental crushing spread was returned and the number of pieces of rented mobile equipment reduced further.

Birch exhibited at the Oil Sands Trade Show in September 2007. The trade show was held in Edmonton for the first time and had record attendance. Trade show attendees expressed interest in both aggregate and reagent products. The Company is focusing on developing relationships with key oil sands and infrastructure contacts and entering into additional long-term sales agreements.

During the fourth quarter of 2007, discretionary spending was halted, Calgary office staff was reduced, directors’ fees were forfeited and senior executives took a voluntary salary reduction. These measures remain in place in early 2008.  In addition, the Calgary office was restructured to place the emphasis strategically on sales and marketing and cost containment. A Business Development group was established with a technical sales team and a Senior Vice President was reassigned to take charge of marketing.  A new Operations Manager was appointed to increase the focus on efficiency and cost containment at the quarry. Expenditures on the regulatory application for the Hammerstone Project were managed, while ensuring no delay in the critical approval process.

15

In December 2007, Birch signed a two year agreement with Albian Sands Energy Inc. (“Albian Sands”) for royalty sales of off-quarry limestone uncovered beneath the oil sands in Albian Sands’ Muskeg River Mine. These off-quarry arrangements are a no-cost opportunity for the Company to increase market share because the Company believes that the anticipated one-half to one million tonnes to be used would normally be filled by surface gravels from competing pits at Susan Lake and elsewhere.

In the fourth quarter of 2007, Birch delivered its first order for reagent limestone. Although the order was relatively small, it is a positive development in the reagent products side of the business and the Company believes it confirms the quality of the Birch limestone. Ordering and delivery of limited quantities of reagent limestone has continued in 2008.

The priorities for the Company in 2008 are sales and marketing, cost containment and achieving regulatory approval for the Hammerstone Project.  The Business Development Group will focus on increasing exposure of the Birch Mountain brand, building solid relationships with key clients and improving customers understanding regarding the quality advantages of limestone.  A third multi-year limestone use agreement was signed in 2008 with Petro-Canada Oil Sands Inc., on behalf of Fort Hills Energy L.P., further enhancing Birch’s market position with expanding use of our limestone in the region.

The Company had an excellent safety performance during the year with no lost time or serious incidents occurring at the quarry. The Company hired a health and safety coordinator during the year to bring this critical expertise in-house. The health and safety coordinator is working with all levels of the Company to develop materials, processes, and policies to support and build upon the Company’s safety culture.

The Hammerstone Project

As geological evaluation of the proposed MVQ progressed, testing of core samples from a 1996 drill hole and from new holes drilled in late 2002 and early 2003 confirmed the presence of high-calcium limestone suitable for producing quicklime. Quicklime is used in a range of industrial and environmental applications including flue gas desulphurization (“FGD”), which removes sulphur, mercury and other contaminants from atmospheric emissions from bitumen upgrading, and in treating water used in producing bitumen from Steam Assisted Gravity Drainage (“SAGD”) in-situ projects.  Birch has determined that a number of oil sands operators are interested in a local source of quicklime and intends to pursue the business opportunity to establish a quicklime plant on its proposed quarry site.

In December 2004, the Company filed a Public Disclosure Document for the Hammerstone Project, a project involving a southward expansion of the MVQ and construction and operation of a quicklime plant.  The footprint of the starter MVQ lies wholly within and is continuous with the Hammerstone Project. Subsequently, in March 2005, Birch released a report conforming to NI 43-101 prepared by AMEC entitled Hammerstone Project Alberta:  Independent Qualified Person’s Review and Technical Report (the “2005 Technical Report”).  The 2005 Technical Report was based on AMEC’s prefeasibility study of the Hammerstone Project.  Both the 2005 and 2006 Technical Report are available on SEDAR at its website, www.sedar.com.  

In February 2006, Birch filed a Project Update for the Proposed Hammerstone Project (the “2006 Project Update”), describing an expanded limestone processing facility producing, in addition to quicklime: hydrated lime, milk of lime, recycled spent lime, cement and reagent limestone.   The update outlines the long-term development plan for the Hammerstone Project, which will include an initial lime plant and a cement plant constructed sequentially for more efficient use of project resources and alignment to local demand.  As the oil sands region expands, the Company will add additional lime kilns and product offerings to service the local demand requirements.  Birch’s vision is to provide full-cycle products and services such as re-calcining spent lime and utilization of the gypsum by-product of flue gas desulphurization in site remediation.

16

In May 2006, Birch filed an application and environmental impact assessment with Alberta regulatory authorities for the Hammerstone Project (the “Hammerstone Application”). The area of the Hammerstone Application includes areas outside the area of the original MVQ Application. The proposed Hammerstone Project integrates the existing MVQ into an expanded quarry and aggregate plant, and adds a limestone-processing complex to produce limestone-based reagent products such as quicklime, hydrated lime and cement, as well as facilities for recycling spent lime and reclaiming solid residues generated when reagent limestone or lime are used to capture sulphur.

In August 2006, an updated independent NI 43-101 technical report entitled Hammerstone Project, Alberta: Qualified Person’s Review and Technical Report (the “2006 Technical Report”) was released, based on an update of the pre-feasibility study. The 2006 Technical Report was authored by AMEC Americas Limited and Phoenix Process Engineering, Inc.

The 2006 Technical Report describes and values the Hammerstone Project, which will ultimately cover an area of 1,608 hectares (4,408 acres). Aggregate processing facilities within the quarry will supply the needs of the oil sands industry, local infrastructure and municipal demand, as well as providing feedstock for the proposed limestone-processing complex. Limestone aggregate and reagent product average yearly sales are projected to reach an ultimate level of 19 Mt. The limestone-processing complex includes a quicklime plant that will be built in stages, projected to reach a production capacity of 1 Mt per year. Some of the quicklime will be further processed into hydrated lime in a plant with an ultimate capacity of 400,000 tonnes per year.

The Company filed an Application update on February 27, 2007 (the “2007 Hammerstone Project Update”). The purpose of the 2007 Hammerstone Project Update was to inform stakeholders of Birch’s optimized development plan for the Hammerstone Project. The 2007 Hammerstone Project Update incorporates new environmental data, plus a number of engineering efficiencies, and incorporates flash calciners as the startup strategy. Birch confirmed during 2007 that quicklime can be produced using modular flash calciners.  Adopting flash calciners will allow the Company to enter the quicklime market at a significantly lower capital cost than forecasted previously and will provide the ability to stage early production to meet market demand.  The new staged plant capacities and capital expenditures are designed to better align the build-up of production capacity with current demand projections; the ultimate productive capacity is consistent with the 2006 Technical Report.  The Company submitted its responses to supplementary questions in support of the Environmental Impact Assessment (“EIA”) for the Hammerstone Project in the fourth quarter of 2007. This is a normal part of the regulatory approval process and involved the expenditure of significant technical, engineering staff and consultant hours, consistent with meeting the regulator’s schedule. The Company anticipates regulatory approval in 2008.

Details of the Muskeg Valley Quarry and the Hammerstone Project

Location and Mineral Interests

The Hammerstone Project, which encompasses the MVQ, is located within Birch’s Athabasca mineral property, approximately 60 km north of the City of Fort McMurray near the hamlet of Fort McKay, Alberta.  The Athabasca mineral property is described in greater detail in Section 4(D) of this Form 20-F.  The Company’s mineral leases convey the rights to develop and produce metallic and industrial minerals, including limestone, while the mineral permits allow the Company to explore for these same minerals.

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The Hammerstone Project is located at a site favourable for development, where limestone occurs at surface or is overlain by only thin layers of muskeg and overburden.  The development boundaries have been determined from geological, environmental, and economic considerations.  The western boundary is set back 200 metres from the Muskeg River, consistent with setbacks for wildlife habitat on adjacent oil sands leases.  The southern boundary is an area where limestone is known from the Company’s geological mapping to be at or near surface. The eastern boundary has been placed where the overlying Cretaceous and Quaternary sediments are more than 20 metres thick, making commercial development less attractive due to the requirement to remove increasing amounts of materials overlying the limestone.  To the north, the limestone deepens beneath increasingly thick oil sands.

Future expansion of the Hammerstone Project is only possible to the south because in this area limestone lies at or near surface.  The Quarry of the Ancestors, the site of an ancient stone quarry, was discovered by Birch during its fieldwork.  This northeast corner of the project area has been set aside as an archaeological exclusion zone and due to it historical significance is under protective notation by the Government of Alberta.

In some areas, Birch’s mineral leases overlap with oil sands leases of Shell Canada Ltd. (leases 90 and 13) and Syncrude Canada Ltd. (leases 22 and 30). These companies own the mineral and hydrocarbon rights to the oil sands but not to the underlying Devonian limestone. Birch has co-development agreements with Syncrude Canada Ltd. and Canadian Natural Resources Limited and cooperation and information sharing agreements with Albian Sands Energy Inc. (a joint venture between Shell Canada Ltd., Chevron Canada, and Western Oil Sands Inc.), and Fort Hills Energy (operated by Petro Canada) that provide for cooperative exploration, environmental planning, development, extraction, and production activities in areas of the overlapping leases.

Exploration

Birch has conducted mineral exploration of the Hammerstone Project since 1995, as described in the 2006 Technical Report.  Industrial minerals exploration began in 2002 and since this time Birch has conducted geological mapping and sampling, core drilling, geochemical analyses, bulk sampling, calcine testing and aggregate testing of limestone from the Hammerstone Project area.  Birch interprets the results of its surface and subsurface exploration programs to confirm that limestone from the Hammerstone Project is suitable for producing construction aggregates, quicklime, cement and other products used by the oil sands industry and in municipal and infrastructure construction.

Mineralization

Limestone is exposed at surface across the Hammerstone Project area or is present beneath a thin layer of muskeg or glacial overburden. The four limestone units selected for quarrying are accessible from surface and all together are up to 45 metres thick; additional limestone units are present below the lowest unit. The 2005 Technical Report identifies construction aggregate, concrete rock and quicklime as products to be made from limestone quarried at the Hammerstone Project.  Other products including reagent limestone, hydrated lime, milk of lime and cement were identified in the 2006 Technical Report.

Drilling

Birch has conducted drill programs within and near the Hammerstone Project, drilling five holes in 1996, nine holes in 2002/2003 and ten holes in 2004.  Additional drilling was done for hydrogeological testing in late 2005 and early 2006, but these holes were not cored. In 2006, Birch drilled fourteen core holes at thirteen locations. Twelve development holes were within MVQ and one exploration hole was drilled off-site at Poplar Creek, north of Fort McMurray. All core was logged by Birch staff. The MVQ drill results show continuity of stratigraphy with other drill data from across the Hammerstone Project. The 2006 drill core information was not available to be included in the 2006 Technical Report.

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Sampling and Analysis

Birch conducted industrial mineral sampling programs across the Hammerstone Project area from 2002 to 2006; a total of 205 samples were collected and submitted for multi-element geochemical analyses.  In 2004, one 300 tonne bulk sample was collected from a surface pit for aggregate testing.  In 2005, drill core and excavated samples were tested to determine suitability for producing aggregate products. Drill core samples were taken over selected intervals and submitted for some or all of: aggregate testing, multi-element geochemical analyses and calcine testing. Birch concluded the results of its surface and drill core sampling programs demonstrated that construction aggregates, concrete rock and quicklime can be produced from the Hammerstone Projects.

Development of the Hammerstone Project

Quarry and Aggregate Plant Development and Operations

The MVQ was opened in December 2005; production began in the first quarter of 2006 with the first sale recorded in June 2006. Site preparation at the MVQ required clearing of trees and stripping and stockpiling of organic soils and overburden, construction of access roads, water diversion structures and wash ponds, and installation of a weigh scale and office. The quarry operates as a conventional drill-blast-crush operation.  Primary crushing plants are to be located near the rock face and fed by excavators or wheel loaders.  In-pit conveyors move rock from the primary crushers to secondary crushing plants.  Birch contracted a local quarry operator to operate the quarry in 2006, but has since assumed control of all quarry operations.

Inventory includes blasted, unexcavated rock, work-in-progress rock as well as processed aggregate stockpiles meeting Alberta Department of Transportation specifications.  Processed aggregate inventories are produced and stockpiled to assure the ability to supply the spot market for aggregates.  In the aggregate industry, inventory is manufactured to meet existing and anticipated orders in advance of customer’s expected delivery dates.  This ensures the Company produces the aggregates to the necessary specifications and is able to meet the delivery schedule required by the customer.  The Company holds this processed aggregate in inventory and a sale is not recorded until the customer takes delivery.

The Birch Andreas crushing and screening plant was fully commissioned in the third quarter of 2007. Construction and commissioning delays were due to difficulties in obtaining skilled labour and making modifications required to meet changes to the mine electrical safety code.  In the absence of large orders, small batches of aggregates were run to establish the performance of the plant and verify the quality of the aggregate products. As the Andreas plant was operated, development changes were made to optimize its performance and work was conducted to assure operational safety and protection of critical parts that could be damaged by rocks or spills. Work on the electrical, instrumentation and control systems was also carried out including installing cameras to assist operators in maintaining consistently high plant productivity. The Company worked with the equipment supplier on the sharing of the costs incurred during the commissioning.

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The Company had an excellent safety performance during the year with no lost time or serious incidents occurring at the quarry. The Company hired a health and safety coordinator during the year to bring this critical expertise in-house. The health and safety coordinator is working with all levels of the Company to develop materials, processes, and policies to support and build upon the Company’s safety culture.

Hammerstone Limestone Processing Complex

The current development plan for the Hammerstone Project was presented in the 2007 Hammerstone Project Update, filed with Natural Resources Conservation Board (NRCB), Alberta Environment and the Alberta Board on February 27, 2007. The purpose of the 2007 Project Update was to inform regulators and regional stakeholders of Birch's optimized development plan for the Hammerstone Project, completed subsequent to filing the 2006 Technical Report in August 2006. The 2007 Project Update contains a revised start-up plan and staged capital expenditures that better align production capacity with demand projections. Quarry and aggregate plant operations for the Hammerstone Project remain unchanged from the 2006 Technical Report; however, plans for the limestone processing facilities have been revised and the early capital requirements reduced.

The capital savings are due to the adoption of flash calciners for initial quicklime production, beginning on-schedule in 2009. The modular flash calciners reduce project risk and enhance flexibility because they are less expensive and can be brought on stream as the market grows. Commissioning of the first rotary kiln is now scheduled for 2012, when projected quicklime and hydrated lime sales require its construction. Additional kilns for producing activated limestone and quicklime are scheduled for construction post-2012, as they are required to meet projected sales.

South Haul Road

The Company received approval from Alberta regulatory authorities on April 2, 2007 to construct the 12 kilometre South Haul Road (“SHR”), south from the MVQ, along the eastern side of the proposed Hammerstone Project. The road will connect with the proposed East Athabasca Highway (“EAH”). The SHR will be a critical link north and south with the EAH running west to east.  The EAH is an industry-led initiative to provide 54 kilometres of all-weather highway and a new bridge to serve the new and expanding oil sands developments east of the Athabasca River. The new highway will improve access from the MVQ to potential customers located south, east and west of the MVQ.

During the second quarter of 2007, initial tree clearing was done on the SHR. In the third and fourth quarters, the Company continued working with the developers towards concluding a suitable arrangement related to the SHR use and access, as well as supply of aggregate materials for the project. The developers of the EAH project are awaiting regulatory approvals and further construction will commence after all of the approvals and agreements are in place.

Capital Cost

The revised capital plan for Hammerstone presented in the 2007 Project Update was prepared using the quarry and aggregate plant information contained in the 2006 Technical Report, and new information and cost estimates prepared by independent qualified person Mr. John Macfadyen, P.E., principle of Phoenix Process Engineering, Inc. for the limestone-processing complex. The total capital cost estimate over the life of the project is now estimated to be $457 million (down from $536 million in 2006), which covers the direct field costs of four crushing plants, two flash calciners, one activation plant, three calcining plants, and the indirect costs associated with design, construction and commissioning.  Based on the 2007 Project Update, the estimated capital spending requirements for 2007 to 2011 are $108 million, down from the $229 million estimate in the 2006 Technical Report.  Interest and financing costs during construction are excluded. The 2007 capital cost estimates for the Hammerstone Project are summarized in Table 4-1.

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Table 4-1.  Hammerstone Development Capital ($ million): 2007 Project Update.

Operating Costs

The operating cost estimate is based on an owner-operated quarry, aggregate plant, and limestone processing complex, as described in the 2006 Technical Report. Costs have been calculated for the four main areas of mining, aggregate processing, calcining, hydrating, and site general and administration. Costs have been developed from data considered applicable to the Fort McMurray area. Table 4-2 shows the overall average operating cost anticipated for the Hammerstone Project over its planned 55-year life. This estimate is categorized as Class 4, Prefeasibility Study level, with a nominal expected accuracy of +25%/-25%, as defined by the Association for the Advancement of Cost Engineering Cost Estimate Classification System.

Table 4-2.  Estimated Average Operating Cost for the Hammerstone Project from the 2006 Technical Report.

Financial Analysis

In the 2006 Technical Report, AMEC performed an independent financial analysis on the Hammerstone Project using a discounted cash flow approach that assumed 100% equity financing using first quarter 2006 Canadian dollars. Projections for annual revenues and costs are based on data developed for the limestone quarry, aggregate and limestone processing plants, capital expenditures and operating costs. Estimated project cash flows were used to determine the pre- and after-tax net present value (“NPV”) and pre- and after-tax internal rate of return (“IRR”).

The pre-tax NPV of the Hammerstone Project presented in the 2006 Technical Report is C$1,669 million and the corresponding after-tax NPV is C$1,099 million (see Table 4-3), using a discount rate of 7.5%. The project’s pre-tax IRR is estimated to be 36.3% and after-tax IRR is estimated to be 31.2%. The payback period is estimated at 5.9 years from first production in January 2006. The base-case quarry life is 55 years.

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Table 4-3.  Variation in NPV ($ million) with Discount Rate and IRR from the 2006 Technical Report.

Sensitivity analysis was performed by varying quarrying cost, process cost, product price and capital expenditure across a range of minus 20% to plus 20%. The cash flow model is most sensitive to changes in reagent limestone and aggregate product price, significantly less sensitive to mining costs, processing cost, and capital costs, and least sensitive to lime plant fuel cost.

Regulatory Status

On June 14, 2005, Birch received a decision report from the NRCB recommending approval of the MVQ. All final operating permits for the MVQ were received in the third quarter of 2005.

The Company’s Hammerstone Application was filed on May 24, 2006 with an Application update filed in February 2007. The Company submitted its responses to supplementary questions in support of the EIA for Hammerstone in the fourth quarter of 2007. This is a normal part of the regulatory approval process and involved the expenditure of significant technical, engineering staff and consultant hours, consistent with meeting the regulator’s schedule. The Company anticipates regulatory approval in 2008.

Industry Overview

The Hammerstone Project is centrally located among numerous existing and planned bitumen extraction and upgrading projects in the Athabasca oil sands region of Alberta.  These projects and the associated infrastructure and municipal development, are expected to be the primary sources of demand for aggregate and reagent limestone products in the Fort McMurray region.

Demand for aggregate and reagent limestone products changes between the construction and production phases of bitumen extraction and upgrading projects. The construction phase requires a range of aggregate products including sub-base, base and construction aggregates for building roads and production facilities. In addition, asphalt aggregate is required for road building, concrete rock for building bridges, foundations and other structures, and low permeability “pond liner” to construct impermeable liners and surface water control structures. There is little or no demand for reagent limestone during the construction phase of oil sands projects.

Oil sands bitumen production facilities also require aggregate products for on-going mine and in situ project development, facilities maintenance and support, but in lower amounts than for construction.  Demand for reagent limestone products is driven by oil sands production where they are used for boiler feed-water treatment and for the control of sulphur emissions (desulphurization) where alternative fuels containing sulphur are used instead of natural gas. The reagent limestone products used for desulphurization are crushed limestone with a high calcium carbonate content for flue gas desulphurization (FGD) or fluidized bed combustion (FBC), and quicklime for FGD. Hydrated lime is used for water treatment at in-situ extraction and upgrading projects.

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Supply and Demand – Aggregate

Current supplies of glacial aggregates in the Fort McMurray region are limited in both size and quality.  Poplar Creek is a gravel pit near Fort McMurray that has recently reached total depletion.  Susan Lake is another gravel pit that is believed to have about five years’ supply.  Although additional deposits have been found more recently, they are typically small and inadequate to assure a long-lived supply for construction and operation of oil sands mining and in situ projects.  Typically, aggregate deposits remaining in the region are sand-rich and contain ironstone, rendering them inappropriate for use in manufacturing concrete.

Based on information reported in the 2003 and 2004 Athabasca Regional Issues Working Group (“RIWG”) aggregate surveys, the average annual demand for road quality aggregate over the period 2003 to 2004 was 7.7 million tonnes and for concrete rock, 0.8 million tonnes. However, the RIWG aggregate surveys did not consider limestone, which was then being used by two major oil sands producers. The average annual limestone use for aggregate by these companies for 2001 to 2005 was 2.2 Mt.  Therefore, based on historical limestone aggregate use and RIWG reported data, the average aggregate demand was estimated in 2006 to be 10.7 Mt annually, of which 8.5 Mt is estimated to come from glacial gravels.

Supply and Demand – Reagent Limestone and Quicklime

Quicklime and hydrated lime are not currently produced in the region and must be trucked in from plants located elsewhere. Competing sources of quicklime, their respective capacities and approximate road distances from the location of the proposed Hammerstone limestone processing complex are listed in Table 4-4.

Table 4-4. Competing Quicklime Plants, Canadian Prairies and Northern US Plains

¹Data from government and industry sources.

Crushed limestone for FGD is used at the Tar Island power plant operated by TransAlta Utilities Ltd. on behalf of Suncor Energy Inc.  This limestone is believed to be obtained from Waterways Formation limestone exposed at the base of Suncor’s original pit located on the west side of the Athabasca River, north of the Tar Island complex. No commercial sources of limestone, including high-calcium reagent grade limestone, currently exist in the region, other than Birch’s MVQ and Hammerstone Project. Although precise figures are not publicly available, Birch estimates that current use of reagent grade limestone in neutralizing sulphur emissions in the region amounts to approximately 250,000 to 300,000 tonnes per year.

No independent information has been found on the consumption of quicklime by the oil sands industry or other industries in the region.  Quicklime is used as a reagent in existing industrial and municipal water treatment facilities and by the pulp-and-paper industry.  Some information has been obtained from public disclosure of chemical reagents used in the oil sands industry.  Birch estimates that the current total market for quicklime and hydrated lime in northeast Alberta is 50,000 to 100,000 tonnes per year.  Much of the current demand is believed to be in the Cold Lake region, where water treatment is required for in situ steam-assisted recovery of bitumen from the oil sands.

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Long-Term Demand and Sales Forecast

The long-term demand for limestone products in the Fort McMurray region is dominated by the construction and production requirements of the oil sands industry.  As described in the 2006 Technical Report, Birch contracted the Canadian Energy Research Institute (“CERI”) of Calgary, and Dr. Graham Davis, a mineral economist and professor at the Colorado School of Mines, to update the oil sands bitumen supply model developed be CERI and used in the 2005 Technical Report. The updated “CERI/Davis” model projected oil sands construction activity and bitumen production and upgrading from 2006 to 2070 and this formed the basis of Birch’s most recent long-term demand and sales projections. The CERI/Davis model predicts that oil sands bitumen supply will continuously increase over the period 2006 to 2070, reaching nearly 12 million barrels per day by 2070.

Demand factors were derived for each of the limestone aggregate and reagent products scheduled for production at the Hammerstone Project. The demand factors are estimates of how much of each product is required for each barrel-per-day of oil sands capacity added by construction or production capacity. Demand factors for aggregate and hydrated lime were independently derived from engineering design considerations. Demand factors for reagent limestone and quicklime were calculated using assumptions regarding the types and amounts of alternative sulphur-bearing fuels used by the oil sands industry over the period 2006 to 2060.

Forecast sales for limestone products were estimated by multiplying the CERI/Davis forecast oil sands construction and production figures by the demand parameters and Birch’s estimates of future market share.  For aggregate, market share estimates were adjusted to reflect competition from other known gravel deposits.  For quicklime and reagent limestone, market share estimates were made by distance weighting market share based on the closest alternative supplier at Exshaw, Alberta.  

Competitive Landscape

Studies by RIWG and the Alberta provincial government indicate that currently known sources of glacial gravels are insufficient to meet the long-term growth requirements of the oil sands industry.  Although additional deposits have been found recently, Birch believes they are small and inadequate to assure a long-lived supply for the construction and operation of oil sands mining and in-situ projects. Birch believes most aggregate deposits remaining in the region are sand-rich and contain abundant ironstone, rendering them inappropriate for use in making concrete and asphalt.

Based on all available information, Birch believes there will be little competition in the region for high value aggregates suitable for making concrete and asphalt. There is however more competition for lower grades of aggregate.  The prefeasibility study shows that competing sources of concrete rock are in limited supply and may be exhausted by 2011 and competing sources of construction and base grade aggregates may be exhausted by 2030.  However, Birch believes that as these competing deposits are depleted, operating costs to produce them will rise and, in the face of a long-term stable supply of aggregate from the MVQ and the Hammerstone Project, these deposits are likely to be shut-in before becoming totally exhausted.

Continuing Development of the Hammerstone Project

The Hammerstone prefeasibility update study, upon which the 2006 Technical Report is based, defined the geological, engineering, process, and financial criteria necessary to develop a quarry plan and mineral reserve estimate for the Hammerstone Project. The quarry will include and expand upon the existing MVQ and grow to cover an area of 1,608 hectares with a projected life of approximately 55 years. Quarrying will progress from north to south exposing the rock units required for production as needed. In the Hammerstone Application filed in May 2006, Birch is also seeking regulatory approval to construct and operate facilities to produce cement, recycle spent lime and store the solid by-product gypsum that is generated when limestone and/or lime are used to capture sulphur in combustion of alternative fuels.

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The Company filed an Application update to the Hammerstone Application on February 27, 2007. The purpose of the 2007 Project Update was to inform stakeholders of Birch’s optimized development plan for the Hammerstone Project. The 2007 Project Update incorporates new environmental data, plus a number of engineering efficiencies, and incorporates flash calciners as the startup strategy.  The new staged plant capacities and capital expenditures are designed to better align the build-up of production capacity with current demand projections; the ultimate productive capacity is consistent with the 2006 Technical Report.

C.

Organizational Structure

The work activities of the Birch are organized under two main divisions:  Industrial Minerals and Mineral Exploration and Technology.  Birch also has two inactive, wholly owned subsidiaries, Dawson Bay Minerals Inc., incorporated pursuant to the Corporations Act (Manitoba) and Muskeg Valley Minerals Inc., incorporated pursuant to the Alberta Business Corporation Act (ABCA).

The Company also has a 49% interest in a joint venture partnership operating as Hammerstone Products Ltd.  The other joint venture partner is the Fort McKay First Nation who owns the remaining 51% interest.  Hammerstone Products Ltd. provides a marketing service and receives a limestone marketing fee on all limestone product sold from MVQ and the Hammerstone Project.

D.

Property, Plants and Equipment

Office Space

Birch maintains its head office in Calgary, Alberta.  Executive, administrative and support staff work in the 7,972 square foot office space.  The rental commitment is $403,836 per year.  

Plant and Equipment  

Birch owns office and computer equipment and small laboratory equipment in its offices and laboratory.  The Company purchased a Hitachi EX1800 hydraulic shovel which is being used for selective excavation of limestone and should reduce the amount of blasting required.  Erection of a custom designed crushing and screening spread was completed during 2007.

The Company purchased three used rotary kilns, two pre-heaters and associated equipment in the second quarter of 2006 from a company in Addy, Washington and successfully dismantled and shipped all of the equipment to a laydown area cleared within the MVQ. All of the equipment will be stored at the quarry until the company receives regulatory approval to commence construction and operation of the limestone processing facilities.

Intellectual Property

In December 2002, Birch was granted US patent number 6,494,932 entitled, “Recovery of natural nanoclusters and the nanoclusters isolated thereby”.  Birch has also filed a similar patent application for protection under the International Patent Cooperation Treaty.  A divisional patent derived from the original patent application has been filed with the US Patent and Trademark Office.

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Mineral Properties

Birch’s mineral properties are located in northeast Alberta and they are collectively called the Athabasca mineral property. In 2002, Birch’s Industrial Minerals Division began exploration of the Athabasca mineral property and in 2006 began commercial limestone production.

Mineral Tenure in Alberta

Mineral Permits

Birch holds mineral permits issued by the Alberta Department of Energy.  Mineral permits have a 14-year term and convey the right to explore for metallic and industrial minerals.  Mineral exploration or assessment costs must be filed with the government every two years against an escalating work requirement ranging from $5.00 to $15.00 per hectare (approximately $2.00 to $6.00 per acre) for each 2-year assessment period.  Birch owns a 100% working interest in all of its mineral permits held in Alberta.  Some mineral permits are subject to a production royalty payable to the original mineral permit holder; Birch has the option to purchase most of these royalties for a fixed price.  A small minority convey a royalty right to the original mineral permit holder or its designees, with no right to purchase the royalty.  Mineral permits held in good standing may be converted to mineral leases any time prior to the expiry of their term.

Mineral Leases

Birch also holds mineral leases issued by the Alberta Department of Energy.  Mineral leases convey the right to develop and produce metallic and industrial minerals, subject to meeting development approvals.  Mineral leases have a renewable fifteen-year term, subject to payment of an annual rent of $3.50 per hectare ($1.42 per acre).  Mineral leases under production are automatically renewed at the end of their 15-year term.

In addition to Alberta mineral leases, Birch holds one Mineral Lease Agreement issued by Indian and Northern Affairs Canada (Table 4-5). This agreement conveys the mineral rights, including limestone, on lands included as part of a Treaty Settlement agreement between Canada and the Fort McKay First Nation.  The term of the agreement is 12 years.

Metallic and Industrial Mineral Permit-to-Lease Conversions

Birch has applied to have parts of certain permits that have reached the end of their respective terms converted to mineral leases.  The Province of Alberta formally recognizes their applications as “permit-to-lease conversions”.

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Overlapping Mineral Rights

Ownership of minerals within the area of the Athabasca Oil Sands Mining Area, as defined by the Government of Alberta, is split between oil sands leaseholders and mineral lease or permit holders.  The Athabasca Oil Sands Mining Area covers all of Birch’s mineral leases and many of Birch’s mineral permits and permit-to-lease conversions.  Within this area, the oil sands leaseholders own the rights to all minerals that occur within the geological formations mined for oil.  Oil sands leaseholders do not own metallic or industrial mineral rights to either the overlying sedimentary rocks or the underlying Devonian limestone, which rights are owned by the metallic and industrial mineral permit or lease holders such as Birch.

Athabasca Mineral Property

As of December 31, 2007, Birch’s Athabasca mineral property covered 317,626 hectares (784,851 acres). Annual rental payments on mineral leases of the Athabasca mineral property were $461,851 in 2007. Lease rental permits will increase if the Company elects to acquire new mineral leases or decrease if existing low priority leases are allowed to expire. The Company continues its exploration and anticipates that the extent of its mineral properties will be reduced in the future to areas Birch believes to be the most prospective.

Rock Formations and Mineralization

Limestone is the principal exploration target on the Athabasca mineral property. The geology of the Athabasca mineral property is relatively simple, and is characterized by Precambrian basement overlain by about 300 meters of shallow westward dipping sedimentary rocks chiefly of Devonian and Cretaceous age. The Devonian rocks are predominantly marine dolostones, limestones and evaporites while overlying Cretaceous rocks are predominantly sandstones and shales, including oil-bearing sandstone, or oil sands, of the McMurray Formation. Structurally, the property is underlain by complexly folded and faulted Precambrian basement rocks, but the sedimentary rocks are largely undeformed, although fault zones with limited offset are present.  A large structure, the Bitumount Graben, has resulted in an estimated total downdrop of up to 200 meters of both sedimentary and basement rocks along numerous structures in the north-central part of the Athabasca mineral property.

Location and Access

The Athabasca mineral property is located in the Regional Municipality of Wood Buffalo (“RMWB”) in northeast Alberta, Canada.  The City of Fort McMurray is the urban and economic center of RMWB.  While the region covers 61,566 square km (23,771 square miles), most of its residents live in Fort McMurray, which has a population of 64,441. The total population of RMWB is 79,810 including an estimated 10,000 persons living in work camps located close to major oil sands construction projects. The First Nation community of Fort McKay is located in the central part of Birch’s Athabasca mineral property.

Fort McMurray is located 435 km northeast of the provincial capital of Edmonton and can be reached by paved highways 2 and 63 or by regularly scheduled airline flights and bus service from Calgary and Edmonton. Fort McMurray is situated at the confluence of the Athabasca and Clearwater rivers. The larger oil sands mining plants are located approximately 45 to 100 km north of Fort McMurray.  Infrastructure north of Fort McMurray, in the vicinity of Fort McKay, is very good due to the presence of the large oil sands mining operations.  Fort McKay and the oil sands operations are accessed from Fort McMurray by provincial highway 63.  All major services, including goods and accommodation, air and helicopter service, vehicle and heavy equipment servicing and expediting can be obtained in Fort McMurray.  Infrastructure development is ongoing in Fort McMurray and the Athabasca Oil Sands Mining Area.

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Near the Athabasca River, between Fort McMurray and Fort McKay, road access is good; once away from the river and further north, the number and condition of the roads decreases. A winter road exists from the northern end of Highway 63 to Fort Chipewyan.  The Athabasca mineral property is accessible by road or all terrain vehicles. A high voltage power distribution line and high-pressure natural gas pipeline cross the Athabasca mineral property. Exploration activities are curtailed on certain exploration permits during moose and caribou calving season; this restriction occurs during spring break-up, which precludes land access for exploration activities at this time. Additionally, large tree area clearing is prohibited from May 1^st to August 15^th under the federal Migratory Birds Convention Act.

Mineral Title

Birch’s currently active Athabasca mineral permits, permit-to-lease conversions and leases were either originally acquired from the Province of Alberta, or were acquired by purchase or option from other companies or individuals.  One mineral lease was obtained from Canada. At March 20, 2008 the Athabasca mineral property covered 317,626 hectares (784,851 acres), as outlined in Table 4-5 below:

Table 4-5. Athabasca mineral property: mineral permits, permit-to-lease conversions and leases.

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Previous Exploration

Birch and others have previously explored the Athabasca mineral property for precious metals, diamonds and limestone.  Comprehensive details of all known prior exploration are included in the 2003 Technical Report. The 2003 Technical Report, filed in May 2003 in Canada and on June 3, 2003 as an exhibit to a Form 6-K filed with the SEC and is available in the Company’s public documents at www.sedar.com  and www.sec.gov.

In the period from 1993 to 1995, Birch and others explored for precious metals in areas that are now part of Birch’s Athabasca mineral property.  Birch is unaware of any current precious metals exploration in the area.

In 1997-98, Birch explored with a joint venture partner for diamonds on its Athabasca mineral property.  No potentially diamond-bearing rocks were found during this exploration program.

Industrial Mineral Reserves

Mineral Reserves

Canadian and US regulations on disclosure of mineral reserves differ.  In Canada, mineral resources and reserves disclosure must conform to NI 43-101 of the Canadian Securities Regulators. In the US, Industry Guide 7 (“Guide 7”) of the US Securities and Exchange Commission (“SEC”) governs the disclosure of mineral reserves.

The limestone mineral resources and reserves for Hammerstone were first defined in the 2005 Technical Report under NI 43-101 in Canada. At that time the Canadian mineral reserves did not conform to the Guide 7 requirements. Subsequently, Birch brought the quarry into production and since the second quarter of 2006 has sold limestone aggregates from the quarry at market prices. On May 24, 2006, Birch submitted the Hammerstone Application containing all applications for required approvals of the Hammerstone Project that Birch reasonably expects will be received in late 2008. By establishing commercial viability through sales of aggregates to various end-users at market prices and with expectation of regulatory approval, the Hammerstone mineral reserves met Guide 7 requirements for US purposes for qualification as a reserve as of May 24, 2006. The Hammerstone mineral reserves were updated in the 2006 Technical Report released in August 2006.

Limestone reserves are defined for each of the four geological units present in the proposed Hammerstone Quarry (2006 Technical Report). Aggregate resources and reserves are classified based on Canadian Standards Association (“CSA”) specifications for Concrete Materials (CSA Standard A23.1), Alberta Department of Transportation (“AT”) Standard Specifications for Highway Construction, and local oil sands industry specifications. For aggregates, tests included Los Angeles Abrasion (“LAA”) and Plasticity Index (PI). For concrete rock, test included the LAA and Magnesium Sulphate Soundness (“MSS”). Calcinable limestone reserves were defined based on the results of geochemical analyses of Unit 2, which contains an average 95.4% calcium carbonate and produces quicklime meeting user requirements (2006 Technical Report).

Limestone reserve estimates from the 2006 Technical Report are summarized in Table 4-6. The reserves listed meet the sales forecast feed requirements for the estimated 55-year life of the quarry.

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Table 4-6. Hammerstone Project limestone reserves reconciliation table (figures rounded; see Notes to Table 4-6, following).

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ITEM 4A

UNRESOLVED STAFF COMMENTS

None

ITEM 5

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

General

This discussion should be read in conjunction with Birch’s audited consolidated financial statements.  Birch’s consolidated financial statements have been prepared in accordance with Canadian GAAP, which differ from US GAAP.  For a discussion of these differences, see the notes to Birch’s consolidated financial statements in “Item 17 - Financial Statements.”

A.

Operating Results

Years Ended December 31, 2007, 2006 and 2005

Prior to 2002, the Company focused on precious metals, base metals and diamond exploration and minerals technology development.  In 2002, the Company identified a business opportunity to develop a limestone quarry for aggregate sales and the manufacturing of quicklime for use by the oil sands industry.  As a result, since 2002 the Company has focused on advancing this limestone business opportunity and deferred funding for precious metal exploration and further technology development.  Birch intends to continue research and development of precious metals in the future.

The Company incurred a loss of $24.5 million in the year ended December 31, 2007 (2006–$10.2 million; 2005–$4.6 million) and at December 31, 2007, had an accumulated deficit of $42.0 million.

Income

The Company earned revenues from limestone and trucking sales of $7,698,389 (2006 - $1,540,564) and cost of sales of $13,669,241 (2006 - $2,195,868).  The Company did not have any sales in 2005.

The Company earned interest income in 2007 of $169,696 and $498,028 in 2006.  In 2005, the Company’s only source of revenue was interest income of $332,568.  

Expenses

In 2007, expenses totalled $18,706,956.

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Total expenses increased by $8.7 million or 86% relative to 2006.  

• Accretion of the unamortized discount on the two debentures totaled $1,151,948 which was a $1,075,018 increase over 2006 when the Company had only one debenture issued in December 2006.  

• Accretion of financing fees in 2007 relate to the March 2007 loan facility and were fully charged to expense instead of amortized over the life of the loan when the facility was closed and repaid in December 2007.  

• Amortization of property, plant and equipment; amortization of mineral properties and accretion of the asset retirement obligation increased approximately $494,000 as the largest pieces of quarry equipment were not operational in 2006.  The Andreas crushing plant was commissioned during 2007 and was not depreciated until it was operational in the third quarter.  Accretion and depletion increased on the capitalized mineral properties due to production at the quarry which occurred throughout 2007 but had only been in production for the last six months of 2006.

• Interest and bank charges have increased $638,107 in 2007 as a result of interest paid on the credit facility.

• Long term interest has increased $2,395,018 in 2007 as a result of $2.2 million interest paid and accrued on the convertible debentures.  Additionally, interest expense of approximately $0.4 million was paid on the equipment loan.

• Mineral exploration costs have decreased by approximately $336,000 as the Company focused on quarry operations during 2007 with less spending on exploration activities as compared to 2006.

• Office costs increased by approximately $179,000, as a result of higher head office rental costs for the existing Calgary office space.

• Professional fees decreased by approximately $135,000 largely due to decreased accounting, tax and audit fees in 2007 as the Company utilized special tax assistance in 2006 with respect to flow through shares and external consultants were used for the Company’s initial Sarbanes Oxley work.   

• Indirect quarry costs have increased by $3.4 million over 2006 due to travel and accommodation, an increase of approximately $1 million, salaries, wages and benefits, an increase of approximately $1 million and increased costs for regulatory and environmental monitoring.

• Salaries and benefits increased by approximately $644,000 as a result of increases in corporate salaries, wages and benefits resulting from additional staff in 2007 in the areas of sales and marketing and health safety and environment, plus increases at the quarry for management and support staff.

• Shareholder services and marketing decreased by approximately $318,000 as the Company focused on operations and customer relations.

• Stock based compensation decreased by approximately $275,000 due to lower Black Scholes valuations for stock options issued over the past two years.

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Cost of Sales and Indirect Quarry Costs

In 2007, the Company reviewed the presentation of cost of goods sold and expenses and decided that it would be a better representation to reclassify some of the indirect quarry costs to cost of sales. The tables below outline the reclassification of cost of goods sold and expenses included in each area and the 2006 comparative figures are also provided. In each case, the amount by which indirect quarry costs were lowered was added to the cost of sales figures.  The total loss and loss per common share amounts have not been effected.

As Birch gains production experience there may be additional changes in the classifications, but the preference is to include as many costs as appropriate as direct operating costs.  It is apparent from 2007 results that the Company must continue to improve its operating practices and increase sales and quarry efficiencies in order to generate a positive gross margin.

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In 2007, the Company had cost of sales of $13,669,241 (2006-$2,195,868) and spent a total of $4,714,098 (2006-$1,337,572) on indirect quarry costs.  The Company had no sales or indirect quarry costs in 2005.

Cost of sales remained high as the Company continued with early operations at the MVQ. The Company had a significant sales order to deliver during the second quarter of 2007 and retained most of the equipment on site in readiness for future orders under discussion. The Company was unsuccessful winning the future orders and incurred stand-by rental charges.  The Company incurred higher than normal costs for in-quarry material handling as the crushing spread could not be placed in proximity to the rock face due to space limitations and equipment size.  Continuing quarry development, for the planned production levels, amounted to approximately $2.25 million of material handling costs within the quarry which is not capitalized under current accounting guidelines.  These are costs to move and expose the different units of limestone rock that feed the crushers that are characteristic of early quarrying and mining developments.  As quarry development continues and the deepest limestone rock is exposed, the crusher will be relocated to the quarry bottom and these in-quarry handling costs should decline substantially.

Indirect Quarry Costs

In 2007, the Company spent a total of $4,714,098 on indirect quarry costs.  

(1) as required by regulatory and environmental approvals

The largest increases related to travel and accommodation, an increase of approximately $1 million, and salaries, wages and benefits, an increase of approximately $1 million.  

Travel and accommodation expenses increased primarily due to camp costs for quarry staff as the quarry had transitioned from a sub-contracted operation to an owner-operated quarry.  

Salaries, wages and benefits have increased due to the production levels in 2007 as compared to 2006 and the transition from a sub-contracted operation to an owner-operated quarry.  A base number of the quarry employees such as the quarry manager, quarry administrator, the health and safety coordinator and maintenance employees, plus any head office staff working on quarry planning, sales and business development are indirect to production and are not included in inventory costs.

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Professional Fees

In 2007, the Company spent a total of $1,338,942 on professional fees compared to $1,474,021 in 2006.

Total professional fees decreased $135,079 or 9% as compared to 2006.  Accounting, tax and audit fees decreased as special tax assistance was used in 2006 with respect to flow through shares and external consultants were used for the Company’s initial Sarbanes Oxley work. In 2007, the Company incurred additional fees for the required auditor attestation for the Sarbane’s Oxley report but, wherever possible, documentation and testing was performed by internal resources to reduce costs.  The Company spent additional fees for information technology services in 2007 to upgrade the email server and network capabilities. Legal and recruiting fees increased as a result of legal fees paid for contract reviews and head hunter fees for the recruitment of new staff.  

Shareholder Services and Marketing

In 2007, the Company spent a total of $963,488 on shareholder services compared to $1,281,427 in 2006.  

Total shareholder service and marketing costs decreased $317,939 or 25% as compared to 2006. The Company reduced spending on the annual general meeting, general services, investor relations, marketing and travel and accommodation, all resulting from less activity in 2007, as compared to 2006, for investor road shows, printing of investor packages and less promotion. During 2007, stock compensation expense of $222,114 was recorded for stock options granted to an investment advisor to the Company.  The large decrease in stock exchange costs was the result of a one-time base listing fee of $150,943 paid in 2006 when the Company moved to the Toronto Stock Exchange. Marketing fees payable to Hammerstone Products Ltd. of $100,000 were accrued based on sales for the year as compared to $15,000 for 2006.

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Mineral Development Costs

In 2007, the Company spent a total of $10.8 million (2006 - $33 million; 2005 - $10.8 million) of which $10.3 million (2006 - $32.1 million; 2005 - $10.3 million) was capitalized.  

Mineral Development Costs

Total spending on mineral development decreased as early operations were underway.  During 2006, the Company focused most of its resources on opening the quarry site, stripping over-burden, building roads and exposing the rock in a pre-production phase.  As the Company moved into production, more spending was focused on operations and less on development.  As a result, some costs that were capitalized during the development phase of the company are now expensed and this has accentuated the change in costs from mineral development costs to operation costs.  These decreases were offset by a $5.6 million increase in land lease and permit costs, resulting from an accounting reclassification.  The Company reclassified $5.6 million from prepaids and deposits to mineral properties for certain mineral exploration permits purchased in 2006.  Discussions with interested parties indicated strong interest in using the land for a new town development closer to the oil sands projects and it is believed that the land will eventually be developed, in which case, the Company expects to receive a refund of its permit acquisition costs.  As a result of the uncertainty involved with this type of transaction, the amount was reclassified from current deposits to the land costs of mineral properties. As compared to 2006, mineral development costs decreased $18 million for site preparation, $1.5 million for stripping costs and $6.9 million for materials, services and drilling in 2007.

Mineral Exploration Costs

Mineral exploration costs in 2007 were $522,306 as compared to $858,964 in 2006 and $540,481 in 2005.  The majority of these costs were land lease and permit payments to hold mineral rights. In 2006, Birch Mountain initiated a surface evaluation of a metallic and industrial mineral lease further north of the Hammerstone Project adjacent to an announced oil sands development project. In 2007, further exploration was deferred as the Company concentrated on the quarry operations and cost containment.  

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B.

Liquidity and Capital Resources

Years Ended December 31, 2007, 2006 and 2005

Birch is in early operations and currently has insufficient revenue to meet its yearly operating and capital requirements. The Company has historically raised funds necessary to conduct its business primarily through issuance of equity or debt.  The Company has incurred operating losses since its inception in 1995, and as of December 31, 2007, has an accumulated deficit of $42.0 million (2006 - $17.5 million).  Losses are from costs incurred in the early operation and development of the MVQ and the Hammerstone Project, exploration of mineral opportunities and mineral technology research.  Results of operations have fluctuated from period to period and are expected to do so in the future. Future operating losses may occur as a result of the continued operation of the MVQ and development of the Hammerstone Project.

The Company had a working capital balance at December 31, 2007 of $7.6 million, a decrease of approximately $1.5 million from December 31, 2006.    

In 2007, the Company completed a $31.5 million debenture financing for net proceeds, after costs of financing, of $30.3 million.  The proceeds were used to repay and replace the existing senior, secured bridge facility provided by Brookfield Bridge Lending Fund Inc. and to fund ongoing operations.  As the Company develops its limestone reserve, constructs the SHR and builds plant facilities, additional funds may be required.  

The current estimates for capital for the MVQ and the initial phases of the Hammerstone Project, from 2008 to 2011, are $108 million, down from the $229 million in the 2006 Technical Report. The revised 2007 capital cost estimate for the Hammerstone Project was based on the following factors:

• A revised project schedule that deferred construction of higher cost quicklime and activation kilns.

• A revised capital plan that utilized lower cost flash calciners for initial quicklime production.

• A new capital cost estimate for the flash calciners.

• The existing capital cost estimates for all other components are from the August 2006 NI 43-101 Technical Report.  

During the year, Birch received $1.6 million (2006 - $0.4 million) from the exercise of stock options.

At present, the Company does not have sufficient working capital or cash flows to continue operations through 2008, without significant cash receipts from product and limestone royalty sales or short term financing through debt and/or equity.  The Company is actively pursuing sales opportunities.  The Company formally engaged RBC Capital Markets to assist in the evaluation of strategic alternatives, which includes discussing debt and equity strategies for its immediate and medium term capital needs.  To the extent the Company raises additional capital by issuing equity or convertible debt securities, ownership dilution to shareholders will result.  These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

In December 2007, the Company issued a senior secured convertible debenture having a face value of $31.5 million.  The debentures were issued in a private offering in connection with the refinancing of an existing credit facility and mature on June 30, 2012.  With certain restrictions on conversion ability, the debenture is convertible into common shares of the Company at any time prior to maturity at the option of the debenture holder at a conversion price of $0.80 per share.   During the period up to December 31, 2008, the holder may only convert in event of a change of control or event of default by the holder according to the terms of the agreement.  Additionally, until such time as shareholder approval is obtained, which is expected at the next annual general meeting, the holder is restricted from converting principal amounts that would result in the holder owning 20% or more of the total outstanding common shares of the Company. During the year ended December 31, 2007 no debentures were converted into shares. The debentures bear interest at prime rate plus 4%, calculated daily, compounded and payable monthly.  Assuming no conversions, interest expense relating to the debentures will be approximately $3.2 annually.  

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In December 2006, the Company issued convertible unsecured subordinated debentures having a face value of $34.5 million.  The debentures were issued pursuant to a public offering and mature on December 31, 2011.  The debentures are convertible into common shares of the Company at any time prior to maturity at the option of the debenture holder at a conversion price of $3.30 per share.  During the year ended December 31, 2007 no debentures were converted into shares. The debentures bear interest at 6% and interest is payable semi-annually.  Assuming no conversions, interest expense relating to the debentures will be approximately $2,070,000 annually.

The Company financed a crushing and screening plant with the Canadian Western Bank in 2006.  The original loan amount was $7,337,373 with an interest rate of 6.02%.  The loan is to be paid off over five years based on blended principal and interest payments of $1,379,184 per year.  

On-going commitments for capital resources relate largely to the maintenance of the mineral permits and leases granted to the Company by the Government of Alberta plus general operating leases and long term debt repayments.  At December 31, 2007, the Company held mineral leases, mineral permits and mineral permits for which applications have been filed for conversion to leases, in the Athabasca region, covering an area of 317,626 hectares (784,851 acres).  Lease payments, along with associated fees in 2008 and years beyond, will be approximately $460,851annually if Birch continues to hold all of its mineral leases into the future and will increase once current lease conversion applications are approved.  Mineral permits are maintained in good standing by making allowable exploration assessment expenditures, although there is no obligation to do so.  Birch continuously evaluates its mineral permit holdings, relinquishing and/or acquiring permits as dictated by financial considerations as well as exploration and strategic priorities.

The Company is required to reclaim any land disturbances, as detailed in its environmental approvals for the MVQ.  The Company estimated, based on costs provided by independent reclamation specialists to the Company, the costs for third parties to return the MVQ to its reclaimed status as at December 31, 2007, would be $3 million.  For financial statement purposes, these costs have been discounted to $1.7 million.  Based on a preliminary estimate, the Company issued a letter of credit to Alberta Environment for $2 million for this reclamation work.  The Company re-evaluates this annually as required in its approval process and, the Company believes it will be required to post $1 million additional security with Alberta Environment in June 2008.  Also in connection with land disturbances, the Company was required to pay timber damage fees for immature trees removed, which had not reached commercial value.  The Company paid fees based on the permitted area of the MVQ even though not all the trees have been cut.  A long-term asset of $137,294 has been recorded for the balance of amounts prepaid and this will be reduced as trees are actually cleared and sold for processing.

The Company estimated a future liability for the indemnification of shareholders for flow-through shares issued in 2003 and 2004, for which the Company was not able to incur qualifying expenditures.  The estimated liability and potential income taxes payable in the amount of $2.4 million has been accrued as an other current liability.  During 2006, the Company amended its tax filing position and has reported the impact to the subscribers.  The actual liability will not be known until the Canada Revenue Agency (“CRA”) reassesses each affected subscriber and the amounts are known by the Company.  The payment of the liability may stretch over many future years and the Company believes that this liability could vary by up to fifteen percent.  During 2007, the CRA instructed the Company to continue working with its affected shareholders to re-file their tax returns.

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C.

Research and Development, Patent and Licenses

During the fiscal year ended December 31, 2000, the Company commenced research in novel mineral technology applications.  The research resulted in the filing of US and international patent applications.  It is the Company’s policy that costs associated with such research are expensed in the period in which they are incurred.  During the fiscal years ended December 31, 2005, 2006 and 2007 the Company did not incur any related expenses.

Late in 2002, Birch was granted US patent number 6,494,932 entitled “Recovery of Natural Nanoclusters and the Nanoclusters Isolated Thereby”.  Birch has also filed a parallel patent application for protection under the International Patent Cooperation Treaty.

D.

Trend Information

Industrial Minerals

The Company’s financial results are subject to changes in aggregate product prices.  In the past fiscal year, the general trend has been relatively flat with market sales prices consistent with those used in the 2006 Technical Report. There has been some upward pressure on the price of concrete rock since 2005 due to its scarcity in the region.

E.

Off-Balance Sheet Arrangements

The Company has an operating line with a Canadian chartered bank that provides for an operating overdraft on the Company’s chequeing account and is available for letters of credit.  At December 31, 2007, the Company has issued letters of credit under this agreement, in the amount of $2.0 million to Alberta Environment for future site reclamation liabilities.  As security for this operating line, the Company has pledged $2.0 million of short-term investments on deposit at the bank.  These particulars are disclosed in the Company’s financial statements which are included in Item 17 of this Annual Report on Form 20-F.

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F.

Tabular Disclosure of Contractual Obligations

As of December 31, 2007, the Company’s known contractual obligations are as follows:

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ITEM 6

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.

Directors and Senior Management

The following table sets forth the name, business experience, functions and areas of experience in Birch and principal business activities performed outside of Birch (including, in the case of directors of Birch, other principal directorships) of each director, member of senior management and employees upon whose work Birch is dependent, as of March 20, 2008:

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Notes:

⁽¹⁾  

Each stock option entitles the holder to purchase one common share at a price of $0.30 per share until October 2, 2008.

⁽²⁾   

Each stock option entitles the holder to purchase one common share at a price of $0.55 per share until August 31, 2009.

⁽³⁾   

Each stock option entitles the holder to purchase one common share at a price of $0.74 per share until November 23, 2009.

⁽⁴⁾   

Each stock option entitles the holder to purchase one common share at a price of $2.35 per share until January 11, 2010.

⁽⁵⁾   

Each stock option entitles the holder to purchase one common share at a price of $2.48 per share until March 7, 2010.

⁽⁶⁾

Each stock option entitles the holder to purchase one common share at a price of $2.80 per share until January 2, 2012.

⁽⁷⁾  

Each stock option entitles the holder to purchase one common share at a price of $3.12 per share until June 14, 2012.

⁽⁸⁾

Each stock option entitles the holder to purchase one common share at a price of $0.64 per share until January 6, 2013.

⁽⁹⁾  

Each stock option entitles the holder to purchase one common share at a price of $0.57 per share until January 25, 2013.

⁽¹⁰⁾

Each stock option entitles the holder to purchase one common share at a price of $0.65 per share until February 18, 2013.

⁽¹¹⁾

All stock options are issued at an exercise price equal to market close of the last trading day previous to the grant date.

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To the knowledge of Birch, there are no arrangements or understandings with major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management of Birch and there is no family relationship between any of the persons named above.  

Pursuant to an Option Agreement dated May 9, 1996, among Birch, Calvyn M. Loree, James A. Brown, Saskatoon Natural Resources Ltd. and Robert M. Friedland, Mr. Friedland currently has the right to nominate one individual to the Board of Directors of Birch; however, Mr. Friedland has made no such nomination for the forthcoming year.

Pursuant to an Investor Rights Agreement dated December 21, 2007, between Birch and Tricap Partners Ltd.(“Tricap”), Tricap has the right to designate three representatives to the Board of Directors if it owns more than 29.99% of the outstanding common shares of Birch; two representatives to the Board of Directors if it owns more than 10% but less than 29.99% of the outstanding common shares of Birch; or one representative to the Board of Directors if it owns more than 5% but less than 10% of the outstanding common shares of Birch.  As of March 20, 2008, Tricap has made no such designation.

B.

Compensation

The following table sets forth the amount of compensation that was paid and benefits that were granted in the fiscal year ended December 31, 2007 to each of the individuals listed in Item 6(A) above.

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⁽¹⁾  Ms. Ullberg served as Vice President, Finance and Chief Financial Officer from September 1, 2007 until December 31, 2007.
⁽²⁾ Mr. Rocheleau served as Acting Chief Financial Officer and Director of Financial Reporting from November 13, 2006 until August 31, 2007.
⁽³⁾  Mr. Annable served as Director from May 4, 2006 until November 14, 2007.
⁽⁴⁾ Mr. Gerrish was appointed Vice President, Operations and Engineering on January 11, 2005 and held that position until November 14, 2007.

See “Item 6(A) – Directors and Senior Management regarding the number of options to purchase common shares of Birch, the exercise price and the expiration date of options granted to each of the individuals listed in Item 6(A) above.

C.

Board Practices

Directors are elected annually at Birch’s annual meeting of shareholders and hold office until the earlier of their resignation or removal from office at a subsequent annual meeting of shareholders.  The Board of Directors may fill vacancies created by departing directors between annual shareholders meetings.  Directors representing in number up to one-third the size of the board elected at the most recent shareholders meeting may be appointed by the Board of Directors between shareholders’ meetings.

Audit Committee

The Audit Committee of Birch currently consists of Larry Shelley, CA (chair), Charles Hopper and Kerry E. Sully.   The function of the Audit Committee is to review the overall audit plan, results of the external audit, the annual financial statements and management discussion and analysis (“MD&A”), the review of quarterly financial statements and MD&A, the review of any financial press releases and securities filings, the Company’s system of internal controls, the Company’s accounting and disclosure policies and to resolve any potential disputes with Birch’s auditors.  The Audit Committee has a significant list of detailed responsibilities that are outlined in its charter.

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Compensation Committee

The Compensation Committee of Birch currently consists of Lanny K. McDonald (chair) and Larry Shelley.  The purpose of the Compensation Committee as outlined in its charter is to determine the compensation arrangement of executive officers, to provide oversight of compensation programs to other employees and to assist or recommend with respect to various compensation issues such as policies, benefits, personnel issues and other issues.  The Committee also determines the allocation of stock option grants under the Company’s stock option plan.

Compensation Policy

The Company’s compensation policy has three components:  (i) base salary/consulting fee and benefits, (ii) the award of stock options and (iii) bonus.  The salary/consulting fee for each executive officer is determined having regard to such executive officer’s responsibilities and performance.  The Compensation Committee undertakes a review of the compensation paid by similar companies in setting guidelines for the compensation of all Company’s employees. The Compensation Committee has provided greater emphasis on the issuance of stock options to its executive officers as a major form of compensation.  In the view of the Compensation Committee, the issuance of stock options has had the advantages of encouraging growth in the Company and its share value, while reducing the cash expenditures required for executive salaries. The Company is currently a party to an employment agreement with Douglas J. Rowe dated December 1, 1995, and approved by the shareholders of the Company on May 31, 1996.  Pursuant to the employment agreement, Mr. Rowe receives a salary of $108,000 annually and is entitled to receive stock options as determined from time to time by the Committee.  The Board of Directors of the Company has subsequently approved increases in Mr. Rowe’s annual salary to $140,000 per annum, effective June 15, 2000, $164,800 effective January 1, 2004, $180,000 effective March 1, 2005, $250,000 effective January 1, 2006 and $258,750, effective June 1, 2007.  Mr. Rowe is currently working a reduced work schedule and his compensation was reduced on November 1, 2007 to $138,000.  In addition, the Company has an employment agreement with Joel Jarding, dated May 1, 2007 and approved by the Board of Directors.  Mr. Jarding is paid an annual salary of $325,000.

Disclosure Committee

The Disclosure Committee of Birch has four members: Kerry E. Sully (chair), Suzanne L. Loov, Hugh J. Abercrombie and John A. Clarke. The purpose of the Committee is to ensure that the Company implements and maintains internal procedures for appropriate and timely collection, evaluation and disclosure of information potentially subject to public disclosure under the legal, regulatory and stock exchange requirements to which the Company is subject. As excerpted from the charter of the Disclosure Committee, the Committee’s responsibilities include:

• Reviewing material developments and providing timely advice on the Company’s disclosure obligations;

• Discussing and advising on the timely review, publication and filing of periodic and current reports with the various parties involved, including the CEO and CFO;

• Periodically reviewing past disclosure and advising whether updates or corrections are appropriate; and

• Evaluating and advising on the effectiveness of the Company’s internal disclosure controls and procedures.

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Governance and Risk Committee

The Governance and Risk Committee of Birch consists of Charles Hopper (Chair), Lanny K. McDonald and Larry Shelley.  The Corporate Governance and Risk Committee charter outlines the primary purpose of the Governance and Risk Committee as threefold.

• to develop and recommend to the Board a set of corporate governance principles including policies, disclosure and business conduct;

• to act as the nominating committee of the board which includes identifying, and recommending director nominees fore ach annual meeting or as vacancies occur; and

• to oversee the evaluation of the effectives of Board members, implement a framework for orientation and continuing education.

Health, Safety and Environment Committee

The Health, Safety and Environment Committee of Birch currently consist of Derrick Kershaw (chair), and Don Dabbs.  A former director, Doug Annable, chaired the Committee until November 14, 2007.  The general function of the Health, Safety and Environment Committee is to review the Company’s practices and policies related to health, safety and the environment and to review the Company’s performance in the areas of health, safety and environment.

D.

Employees

The following table sets out the number of employees of Birch at the end of each of the past three financial years, including their main category of activity.  All of Birch’s employees are employed in Alberta, Canada.

E.

Share Ownership

See “Item 6 – Directors, Senior Management and Employees – Directors and Senior Management”, above, for disclosure regarding share ownership and options of Birch directors and senior management.

The Board of Directors of the Company adopted the stock option plan of the Company on April 24, 2006, which was ratified by shareholders on May 25, 2006 (the “Plan”). The purpose of the Plan is to advance the interests of the Company by encouraging the directors, officers, employees and consultants of the Company, and of its subsidiaries, if any, to acquire shares in the Company, thereby increasing their proprietary interest in the Company, encouraging them to remain associated with the Company and furnishing them with additional incentive in their efforts on behalf of the Company in the conduct of its affairs. The Plan is administered by the Board of Directors of the Company or by a special committee of the Board of Directors, if appointed, from time to time (the “Board”).  Pursuant to the Plan, the Board may grant non-transferable options to purchase Common shares of the Company to directors, officers, employees and consultants of the Company and its subsidiaries and employees of a person or company which provides management services (excluding investor relations services) to the Company or its subsidiaries (“Management Company Employees”) (such persons hereinafter collectively referred to as “Participants”).  Under the Plan, stock options may be granted by the Company to officers, directors, employees, consultants and employees of a person or company which provides services to the Company, its subsidiary or affiliates of the Company from time to time up to a maximum of 10% of the Company’s issued capital.  Any expiration or exercise of stock options during the terms of the Plan will allow the Company to re-grant the options on a continuous revolving and reloading basis.  Any increase in the issued and outstanding common shares will result in an increase in the available number of Common Shares issuable under the Plan, and any exercises of options will make new grants available under the Plan effectively resulting in a re-loading of the number of options available to grant under the Plan.

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The price of options granted under the Plan shall not be less than the market price of the Common Shares at the time the option is granted. Options issued under the Plan may be exercised during a period determined by the Board, which cannot exceed five (5) years if listed on the Toronto Stock Exchange Venture (TSXV) or ten (10) years if listed on the Toronto Stock Exchange (TSX), and are subject to earlier termination upon the termination of the optionee’s employment, upon the optionee ceasing to be a director and/or officer of the Company, or upon the retirement, permanent disability or death of an optionee.  The options are non-transferable, except in limited circumstances.  There is no agreement whereunder financial assistance will be provided by the Company to facilitate the purchase of shares under the Plan.  

The number of securities issuable or reserved for issuance to insiders under all security based compensation arrangements cannot at any time exceed 10% of the issued and outstanding securities of the Company and the number of securities issued to insiders under all security based compensation arrangements within a one year period may not exceed 10% of the issued and outstanding securities.

The Plan permits the Board to amend, suspend, terminate or discontinue the Plan subject to any applicable regulatory approval. In particular, the Board may amend the Plan without shareholder approval if the amendment: (a) is for the purpose of curing any ambiguity, error or omission in the Plan or to correct or supplement any provision that is inconsistent with any other provision of the Plan; (b) is necessary to comply with applicable law or requirements of any stock exchange on which the common shares of the Company are listed; (c) is an amendment to the Plan respecting administration and eligibility for participation under the Plan; (d) changes the terms and conditions on which options may be granted pursuant to the Plan including the provisions relating to option price, vesting provisions and option period; (e) changes the termination provisions of an option or the Plan; (f) is an addition of a cashless exercise feature, payable in cash or securities which provides for a full deduction of the number of underlying securities from the Plan; or (g) is an amendment to the Plan of a “housekeeping nature”.  Notwithstanding the foregoing, no such amendment may have the effect of (h) amending the number of common shares issuable under the Plan; (i) adding any form of financial assistance by the Company for the exercise of any option; (j) resulting in a material or unreasonable dilution in the number of outstanding common shares or any material benefit to option holders; or (k) changing the class of eligible optionees to broaden the participation by insiders of the Company.

Without limiting the generality of the foregoing, but subject to any required regulatory approval of any regulatory authority or stock exchange, the Board may amend the option price, the option period (which in no event shall exceed ten (10) years from the date of grant) and the termination provisions of options granted pursuant to the Plan, without shareholder approval, provided that if the Board proposes to reduce the option price or extend the option period of options granted to insiders of the Company pursuant to the Plan, such amendments will require shareholder approval.

The TSX rules require shareholder approval of the Plan every three years.

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ITEM 7

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.

Major Shareholders

To the knowledge of Birch, as of March 1, 2008, there are no persons or entities who beneficially hold, directly or indirectly or exercise control or direction over, more than 5% of the voting rights attached to the issued and outstanding common shares of Birch.

As of March 1, 2008, Birch had 134 registered shareholders of which 76 holders had an address of record within the US owning common shares, representing 15.8% of Birch’s outstanding common shares.

B.

Related Party Transactions

During the Company’s last fiscal year and up to the date of this Form 20-F, Birch has had no transactions and there are no presently proposed transactions which are material to Birch or a related party, or any transactions that are unusual in their nature or conditions, involving goods, services, or tangible or intangible assets with (a) enterprises that, directly or indirectly, through one or more intermediaries, control or are controlled by, or are under common control with, the Company; (b) associates, being an unconsolidated enterprise in which the Company has a significant influence or which has significant influence over the Company, where significant influence over an enterprise is the power to participate in the financial and operating policy decisions of the enterprise but is less than control over those polices and where shareholders beneficially owning a 10% interest in the voting power of the Company are presumed to have a significant influence on the Company; (c) individuals owning, directly or indirectly, an interest in the voting power of the Company that gives them significant influence over the Company, and close members of any such individual’s family; (d) key management personnel, being those persons having authority and responsibility for planning, directing and controlling the activities of the Company, including directors and senior management of the Company and close members of such individuals’ families; and (e) enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (c) or (d) over which such person is able to exercise significant influence.  This includes enterprises owed by directors or major shareholders of the Company and enterprises that have a member of key management in common with the Company.  Close members of individual’s family are those that may be expected to influence, or be influenced by, that person in their dealings with the Company.

The Company has not made any loans for the benefit of any of the persons listed in the previous paragraph.

C.

Interests of Experts and Counsel

This item is not applicable.

ITEM 8

FINANCIAL INFORMATION

A.

Consolidated Statements and Other Financial Information

Incorporated hereto are the audited consolidated financial statements for the years ended December 31, 2007, 2006 and 2005, which are set forth in “Item 17 - Financial Statements.”

Birch received a legal statement of claim in March, 2008 from a former employee for wrongful dismissal, claiming loss of salary damages of approximately $340,000.  The Company is strongly defending this claim and believes it is without merit and the outcome is not determinable at this time.

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Birch is not aware of any material proceeding in which any director, any member of senior management or any of Birch’s affiliates is a party adverse to Birch or has a material interest adverse to Birch.

No dividends have been paid on any common shares of Birch.  Birch intends to retain its earnings for use in the business and does not expect to pay dividends on its common shares in the foreseeable future.

B.

Significant Changes

No significant changes have occurred during 2007 or during the first three months of 2008.

ITEM 9

THE OFFER AND LISTING

A.

Offer and Listing Details

The following table sets forth the high and low market of the common shares on the TSXV or TSX for the periods indicated. The Company traded on the TSXV until December 10, 2006, at which time it moved its listing to the TSX.

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The following table sets forth the high and low market prices of the common shares on the OTC-BB; until March 21, 2005, at which time the Company’s stock began trading on the American Stock Exchange (“AMEX”).  All financial figures in this table are expressed in US dollars.