CODEIFAI LIMITED — Audit Report / Information 2006

Sep 3, 2006

Chodwick Chartered Accountants & Business Advisers

31 August 2006

REPORT TO CREDITORS

OF

AUSTRALIS MINING CORPORATION LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ("AUSTRALIS") ACN 108 649 421

x.

AUSTRALIS MINING OPERATIONS QLD PTY LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ("AUSTRALIS QLD") ACN 081 347 891

I refer to my previous correspondence relating to the abovenamed companies and write to provide an update.

As vou are aware, the following appointments pursuant to Section 436A of the Corporations Act 2001 ("the Act"), took place on the 31^st October 2005:

• Australis Mining Corporation Limited Robert Elliott & Richard Albarran.
• Australis Mining Operations QLD Ptv Limited Robert Elliott & Blair Pleash.

At the adjourned major meetings of creditors held on the 23^rd January 2006, the creditors resolved that the companies enter into individual Deeds of Company Arrangement ("Deeds"). The Deeds were executed by the company on 13 February 2006 and the Administrators on the 27^th February 2006 and Richard Albarran and I became the Deed Administrators of Australis Mining Corporation Limited on that date and Blair Pleash and I became the Deed Administrators of Australis Mining Operations QLD Pty Limited on that date.

The Australis Qld deed fund was to be effectively comprised of advances from the Australis Deed fund which was to be underwritten by Nikiticorp Limited.

To assist creditors this Report is set out under the following headings:

• 1. Deed of Company Arrangement
• 1. Administration Update
• 1. Variation of the Deed of Company arrangement
• 1. Meeting of Creditors
• 1. Recommendations
• 1. Additional Remuneration and Disbursements
• 1. Conclusion

Svonev Level 29 St Martins Tower 31 Marker Street Sydney 2000 New South Woles

GPO Box 3555 SYDNEY NSW 2004

DX 1451 Sydney

Telephone: (02) 9263 2600 Facsimile: (02) 9263 2800 Email: hesydinfo@hail chodwick.com.au

Penrith Telephone: (02) 4721 8144 Facsimile: (02) 4721 8155

Partners Robert Elliott Geoffrey McDonald Drew Townsend Dovid Kenney Bichard Albarran Gion Molocco Poul Lerov

Associates Steven Gladman Mitchell Boll Blair Pleash

National Association Holl Chadwick

Other Independent firms in: Melhouree Brishnne Adelaide Gold Coost Perth

www.holichadwick.com.au

A Member of AGN International Etd, a worldwide association of separate and independent accounting and consulting Firms.

DEED OF COMPANY ARRANGEMENT $\mathbf{1}$ .

At meetings of the Companies creditors held on the 19^th May 2006 and convened under Section 445F of the Corporations Act, creditors resolved to amend the Companies individual Deeds dated 27^th February 2006.

The amendments to the Deeds were as follows:

Australis Mining Corporation Limited

"That the Deed of Company Arrangement dated 27 February 2006 be varied as follows:

• 1. delete clause 6.3 of item 6 of the DOCA in its entirety from page 17 through to page 21:
• 1. delete the contents of item 9 and instead insert the following:
• Payment of the "amount to be paid" specified in Item 8 is to be made $TTEM9$ by 4 instalments as follows:

First instalment Payment date: Amount to be paid:	1 August 2006 \$500,000
Second Instalment Payment date: Amount to be paid:	1 November 2006 \$500,000
Third Instalment Payment date: Amount to be paid:	1 February 2007 \$500,000
Fourth Instalment Payment date: Amount to be paid: pursuant to Item 8	1 May 2007 the balance of the amount to be paid

Provided that Nikiticorp Limited may pay any part of or the full "amount to be paid" at any earlier date than the dates specified above."

Australis Mining Operations QLD Pty Ltd

"That the Deed of Company Arrangement dated 27 February 2006 be varied as follows:

• 1. delete the contents of item 9 and instead insert the following:
• Payment of the "amount to be paid" specified in Item 8 is to be made $TTEM9$ by 4 instalments as follows:

First instalment Payment date: 1 August 2006 \$500,000 Amount to be paid:

Second Instalment Payment date: Amount to be paid:

1 November 2006 \$500,000

Third Instalment Payment date: Amount to be paid:

1 February 2007 \$500,000

Fourth Instalment Payment date: 1 May 2007 Amount to be paid: the balance of the amount to be paid pursuant to Item 8

Provided that Nikiticorp Limited may pay any part of or the full "amount to be paid" at any earlier date than the dates specified above.

and the deed contribution instalment advances be allocated between the respective Australis companies as an apportionment of the total group indebtedness to unsecured creditors."

$\overline{2}$ . ADMINISTRATION UPDATE

Since the execution of the Deed the following issues have arisen.

Deed Default

Under the terms and conditions of the Companies individual Deeds, a first instalment amount of \$500,000 was due on the 1^st August 2006. This amount was not received from Nikiticorp Ltd in accordance with the terms of the varied Deed of Company Arrangement.

In order to recover the first instalment amount of \$500,000, I have had several conversations and meetings with the Directors of the Companies and Nikiticorp Limited and on the 4^th August 2006, I sent a letter to all the Directors requiring certain conditions be met and information be provided before any amendment to the Deeds would be reported by me to creditors.

I note there will be partial satisfaction of the initial deed fund instalment wherein, I am advised, the sum of \$100,000 is in transit from Hong Kong to Nikiticorp from the sale of Sapphires. The funds are expected to be in the administrators account by Monday, 3 September 2006. I will advise creditors of the accuracy of this advice at the meeting of creditors on 8 September 2006.

Nikiticorp Limited (Nikiticorp)

As creditors are aware the related company Nikiticorp is to effectively underwrite contributions to the respective Deeds.

On the 30 August 2006, I received a letter from Nikiticorp (Annexure "A") indicating that the funds to be paid by Nikiticorp under the Deed, were to come from the revenue that was being generated from Nikiticorp's mining activities in Western Australia. In particular, Nikiticorp has been endeavouring to obtain a mining lease in respect of a gem material called Golden Amphibolite ("Gold Stone") which has proven to be a rare metamorphic rock consisting almost entirely of the mineral amphibole.

It is my understanding Nikiticorp suffered delays in satisfying the formal requirements of the Native Title Tribunal in order for its mining lease to be granted. However, on 26 July 2006 the Native Title Tribunal approved the application for the grant of a mining lease for the Gold Stone

I have received written confirmation from the Department of Industry and Resources of Western Australia that the aforementioned Mining Lease was granted on the 18^th August 2006.

As a result, Nikiticorp has reviewed its revenue projections and thus the timeframe in which it will be able to pay the funds due under the Deed. Details of the proposed variation of the repayment schedule are provided below under the heading, Variation of the Deed of Company Arrangement.

$\overline{3}$ . VARIATION OF THE DEED OF COMPANY ARRANGEMENT

Australis Mining Corporation Limited

Due to the effect of the above issues the Directors of the Companies with the support of Nikiticorp, have put forward a proposal to amend the terms and conditions of the Australis Deed of Company Arrangement dated the 27^th February 2006.

Please find below an extract from a letter dated 30 August 2006 (copy attached at Annexure "A") from the Directors of the Companies outlining the proposed amendments to that Deed.

"In particular, we propose that the DOCA be amended so as to provide that each of the payments by Nikiticorp there-under be postponed, with the first instalment in the sum of \$500,000 to be payable on 22 December 2006".

Essentially, the above proposed amendment to the Deeds will effect Item 9 of the Deed by varying the payment instalment dates as follows:

"ITEM 9 Payment of the "amount to be paid" specified in Item 8 is to be made by 4 instalments as follows:

First instalment Payment date: Amount to be paid:	22 December 2006 \$500,000
Second Instalment Payment date: Amount to be paid:	22 March 2007 \$500,000
Third Instalment Payment date: Amount to be paid:	22 June 2007 \$500,000
Fourth Instalment Payment date:	22 September 2007

the balance of the amount to be paid Amount to be paid: pursuant to Item 8

Provided that Nikiticorp Limited may pay any part of or the full "amount to be paid" at any earlier date than the dates specified above."

Australis Mining Operations QLD Pty Ltd

Item 6 of the Schedule to the Australis QLD deed currently provides as follows:-

"this Deed is being entered into by the company and the administrators that it is conditional upon the execution, delivery, taking effect of and performance of the Deed of Company Arrangement entered into this day between Australis Mining Ltd and its Administrators Richard Albarran and Robert Elliott."

Item 9 of the schedule of that deed "Date or period for Payment" provides as follows:

"Payment of the "amount to be paid" is required on or within the expiry of five working days from the Fulfillment of the matters referred to in Item 6 above; or at such other (later date) as may reasonably be requested or consented to by the Administrator".

In my opinion, the proposed variation to the Item 9 of the Australis deed does not require a variation to Item 9 of the Schedule of the Australis Qld deed. By implication however, the advance of funds from the Australis Deed to the Australis Queensland deed will be delaved by the proposed variation of the payment dates.

As such I do not believe it is necessary to vary the Deed of Company Arrangement of Australis Mining Operations (QLD) Pty Limited.

For the purposes of full disclosure a copy of this report has been forwarded to the creditors of Australis Queensland.

4. MEETING OF CREDITORS

Pursuant to Section 445A of the Corporations Act a Deed may be varied by a resolution passed at a meeting of the company's creditors convened under Section 445F of the Corporations Act but only if the variation is not materially different from a proposed variation set out in the notice of the meeting.

Pursuant to Section 445F of the Corporations Act, please find attached a notice convening a meeting of Creditors for Australis Mining Corporation Limited, to be held at the offices of Hall Chadwick, Level 29, 31 Market Street Sydney NSW on Friday, 8^th September 2006 at 11.00am.

Please also find enclosed a Form of Proxy (for use in relation to the creditors meeting) and a Formal Proof of Debt Form.

Creditors are requested to complete the enclosed proof of debt and return it to this office with the relevant supporting documentation. Those creditors who have previously lodged proof during the administration period will not be required to lodge again. All corporations wishing to be represented at the meeting or any creditor wishing someone else to represent them at the forthcoming meeting must complete the attached Proxy Form and return it to my office before the meeting. To assist with the smooth running of the

meeting. I request that all proofs of debt and proxies be received by my office 24 hours before the appointed time for the meeting.

As noted above, the proposed amendments to the Deed of Australis Ltd do not effect a variation the terms and conditions of the Deed of Australis Mining Operations (Qld) Pty Limited and accordingly I do not propose to hold a meeting of creditors for that Company at this stage.

5. RECOMMENDATION

Advantages

The advantages of the proposal for a variation of the Deed of Company Arrangement currently in place as I see them are as follows:

On the basis of the asset and liability position disclosed to me as Administrator and discussed in my previous report pursuant to Section 439A of the Corporations Act. it is evident that the Deed of Company Arrangement anticipates greater funds to become available for distribution to unsecured creditors at an earlier time than a Liquidation of the company.

The proposed distribution to creditors is 100 cents in the dollar and it is unlikely that the same distribution would become available from the liquidation of the company.

Indeed I am unable to provide any guarantees at this time with respect to the likely quantum and timing of any dividend following costs of realisation in a liquidation scenario due to the following factors:

• Inherent uncertainty associated with realisation of the Nardoo mining tenements/ and associated fixed plant & equipment on a forced sale basis;
• Inherent uncertainty of the commerciality of voidable transaction/insolvent trading recoveries in the circumstances of this company;
• It is not subject to the conditions precedent with respect to shareholder approval of the deed transaction and issues pertaining to approval to re-listing by the ASX;
• It provides for a defined timeframe for the receipt of deed funds, with provision for acceleration of deed contributions:
• It continues to envisage a discharge of all non related party creditors claims in full;

Disadvantages

Notwithstanding the above, the proposal for variation is not without its limitations.

• . The receipt of the initial Deed Contribution is be delayed by the proposed variation;
• Ongoing trading is to be indemnified by Nikiticorp and the Deed fund is to be funded by that company. I have limited information to hand as to the financial position of that company, although the requirement to vary the deed in these circumstances does lead to the suspicion it is not strong.

In this regard I refer to the discretion I will retain as Deed Administrator to convene a meeting of creditors for the purpose of Deed termination / variation in the event I form the opinion it is no longer desirable or practical to effectuate the Deed in its varied form.

Liquidation

There is an existing market of between \$500,000 and \$750,000 for "listed" company structures such as Australis that can be used for backdoor listings. I have not received any proposal in relation to such a matter.

I note that for the structure to be capable of being sold, a Deed of Company Arrangement must be entered into and this option would not be available in a liquidation scenario.

In the event the varied Deed is not complied with it would be my current intention to recommend to the companies' creditors that the deed be varied to incorporate realisations from the physical assets of the company and the public company shell.

Creditors will note I have placed both Nikiticorp and the directors of the company on notice of this possibility.

Whilst this option would not provide a discharge of creditors claims in full as contemplated by the Nikiticorp proposal it would be likely to provide a larger return to creditors than that possible under liquidation.

Notwithstanding the above reservations, it is my opinion that creditors should not resolve to wind the company up at their forthcoming meeting.

Accordingly creditors may consider it is in their interests to accept the variation to the Deed as proposed at the forthcoming meeting.

Creditors will note I am cognizant that related party interests to a degree have the capacity to control voting outcomes in the respective administrations. Accordingly in the event further variations are sought to the deed in the future I would consider them on their merits and in the event I did not consider them to be in unrelated creditors interests, I would give consideration to a court application pursuant to the terms of Section 600A(1) of the Act.

ADDITIONAL RENUMERATION & DISBURSEMENTS 7.

Creditors will recall that I sought approval for my remuneration as Deed Administrator in the fixed amount of \$62,500, plus GST for each of the abovenamed Companies at previous meetings of creditors

Creditors would be aware that as a result of the Companies inability to comply with the terms of the Deeds and the requirement to convene the additional deed variation meeting scheduled for 8 September 2006, the Deed Administration process has encountered additional issues that were outside the scope of the original fee resolution. As a result, additional time and costs have been incurred and the full amount of the fee resolution has been depleted.

Details in respect of the additional activities required are set out below.

Time Investigations and Formal Reports . Preparation and dispatch of Report and notices to creditors advising them of the proposed Deed variation and corresponding meetings of creditors; . Discussions with the Directors and staff regarding the late payment of the Administration and Deed funds: · Meetings and correspondence with the Directors regarding the possible amendment of the Deed and the late payment of the Administration and Deed funds: · Discussions and telephone calls with employees and creditors regarding the reasons for the late payment of the Administration and Deed funds and the Company's recent conduct. Meeting of Creditors • Convene a meeting of creditors; · Preparation of Meeting file for creditors meeting; and • Conduct the meeting of creditors. Statutory Obligations . Preparation and lodgment of minutes, in accordance with the Act; . Assist and review drafting of amended Deed of Company Arrangement; and . Preparation / execution and lodgment of amended Deed of Company Arrangement in accordance with the Act.

As a result of the additional work completed by the Deed Administrators listed above, I will be seeking the approval of additional fees in the amount of \$35,000, plus GST in respect of the Australis administration at the forthcoming meeting of creditors to be held on 8 September 2006.

6. CONCLUSION

Creditors will be aware that the Deed Administrators must act as Chairman of the forthcoming meetings of creditors. Further, it may be necessary for the Chairman to use a casting vote in respect of a motion with respect to the future of the company.

It is the Deed Administrator's intention to use any casting vote in accordance with the recommendations contained within this report. This intention is based on the information available at the date of this report and the reasons set out in this report.

This position is subject to the Deed Administrators not receiving any further information before or during the meeting that would result in the recommendation being changed.

I trust that this report adequately discloses information pertaining to the companies' position and therefore allows creditors to make an informed decision as to the companies' future. I welcome further advice or comments from creditors on this report and the affairs of the companies in general.

Should you have any further queries, please do not hesitate to contact David Ingram or Blair Pleash of this office.

Yours faithfully,

ROBERT ELLIOTT DEED ADMINSTRATOR

FORM 529

Paragraph 5.6.12(2)(a)

Corporations Act 2001

NOTICE OF MEETING OF CREDITORS OF COMPANY UNDER ADMINISTRATION

AUSTRALIS MINING CORPORATION LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) A.C.N 108 649 421

Notice is now given that a meeting of the creditors of the company will be held at the offices of Hall Chadwick Chartered Accountants, Level 29, 31 Market Street, Sydney NSW 2000 on Friday 8th September 2006 at 11,00am.

The purpose of the meeting is to consider and if thought fit, vote on the following resolutions:-

$(a)$ That pursuant to Section 445A of the Corporations Act the Deed of Company Arrangement of Australis Mining Corporation Limited be varied to allow each of the payments by Nikiticorp to be postponed with the first instalment in the sum of \$500,000 to be payable on 22^nd December 2006.

Essentially, the above proposed amendment to the Deeds will effect Item 9 of the Deed by varying the payment instalment dates as follows:

"ITEM 9 Payment of the "amount to be paid" specified in Item 8 is to be made by 4 instalments as follows:

First instalment Payment date: 22 December 2006 Amount to be paid: \$500,000 Second Instalment Payment date: 22 March 2007 Amount to be paid: \$500,000 Third Instalment

Payment date: Amount to be paid:

22 June 2007 \$500,000

Fourth Instalment Payment date: 22 September 2007 Amount to be paid: the balance of the amount to be paid pursuant to Item 8

Provided that Nikiticorp Limited may pay any part of or the full "amount to be paid" at any earlier date than the dates specified above."

• $(b)$ If creditors do not resolve that the Deed be varied that pursuant to Section 445C(b) of the Corporations Act the Deed of Company Arrangement be terminated and the Company wound up pursuant to Section 445E of the Corporations Act.
• The additional remuneration of the Deed Administrators and Liquidators; and $(c)$

$(d)$ Any other business.

A Form of Proxy and Form of Proof of Debt are enclosed for your convenience. These documents must be lodged at this office prior to the meeting. If a Proof of Debt has already been lodged, there is no need to provide further details to the Administrators. Please note the requirement to lodge original proxy forms in addition to any faxed copy.

Dated this 3% day of August 2006

ROBERT ELLIOTT DEED ADMINISTRATOR Hall Chadwick Level 29, 31 Market Street SYDNEY NSW 2000

Form 532

Regulation 5.6.29

A.C.N.: 108 649 421

Corporations Act 2001

APPOINTMENT OF PROXY

$*$ l/*We (if a firm, strike out "I" and set out the full name of the firm) of

(address), a creditor/*contributory/*debenture holder/*member of Australis Mining Corporation Limited, appoint

(name, address and description of the person appointed) or in his or her absence as *mv/*our *general/*special proxy vote the *meeting to at οf *creditors/*contributories*debenture holders/*members/*joint meeting of members and creditors to be held on 8^th September 2006 at 11.00am, or at any adjournment of that meeting (if a special proxy add the words "to vote for" or the words "to vote against" and specify the particular resolutions).

Dated

Signature

CERTIFICATE OF WITNESS

(This certificate is to be completed only if the person giving the proxy is blind or incapable of writing. The signature of the creditor, contributory, debenture holder or member must not be witnessed by the person nominated as proxy)

(name), of $\mathbf{I}$ $\mathbf{I}$ (address), certify that the above instrument appointing a proxy was completed by me in the presence of and at the request of the person appointing the proxy and read to him or her before she signed or marked at the instrument

Dated

Signature of witness

Description

Place of residence

* Omit if inapplicable.

Sub-Regulation 5.6.49(2)

COMPANIES FORM 535 Corporations Act 2001

FORMAL PROOF OF DEBT OR CLAIM (GENERAL FORM)

To the Administrators of AUSTRALIS MINING CORPORATION LIMITED

1. This is to state that the Company was at 31 October 2005 and still is, justly and truly indebted to $\mathbf{r}$

H 1.	οf
	in the sum of $(2)$
	Particulars of debt are:
	Date (3) Consideration	Я	Amount c	(4) Remarks

1. The creditor has not, nor has any person by the creditor's order, to my knowledge or belief, had or received any manner of satisfaction or security for the sum or any part of it except for the following:(5)

2. (6) I am in the employment of the creditor and duly authorised in writing by the creditor to make this statement and it is within my knowledge that the debt was incurred for the consideration stated and that the debt, to the best of my knowledge and belief, still remains unpaid and unsatisfied, or

3. I am the creditor's agent duly authorised in writing to make this statement in writing and it is within my own knowledge that the debt was incurred and for the consideration stated and that the debt, to the best of my knowledge and belief, still remains unpaid and unsatisfied, or

4. (6) I make this Statement personally as the creditor and it is within my knowledge that the debt was incurred for the consideration stated and that the debt, to the best of my knowledge and belief, still remains unpaid and unsatisfied.

DATED this ________	day of ___	2006
Signature: ______
Name: 1000000000000000000000000000000000000
Occupation: ______
Address: 2008.000.000.000.000.000.000.000.000.000

Please see notes over page to assist in the completion of this form.

• (1) Insert full name and business address of the creditor and, if applicable, the creditor's partners.
• (2) Enter the amount in numbers and words and ensure that the amount reconciles to the information supplied in points (3) and (4).
• (3) Under "consideration" state how the debt arose, for example "goods sold and delivered to the Company between the dates of ____ " or "moneys advanced in respect of the Bill of Exchange". If insufficient room, attach a Statement of Account.
• (4) Under "Remarks" include details of vouchers substantiating payment, such as invoice numbers.
• (5) Insert particulars of all securities held. Where the securities are on the property of the Company, assess the value of those securities. If any bills or other negotiable securities are held, provide details of the date, drawer, acceptor, amount and due date.
• (6) Delete whichever paragraph does not apply.

30 August 2006

Mr Robert Elliott Administrator Australis Mining Corporation Limited and Australis Mining Operations QLD Pty Limited c/- Hall Chadwick Level 29, 31 Market Street Sydney NSW 2000

By facsimile: 9263-2800 and by mail

Dear Mr Elliott

Australis Mining Corporation Limited Deed of Company Arrangement ("DOCA")

I refer to the letter of 31 July 2006 and provide you with an update of our planning for the mining of goldstone in Western Australia.

By letter of 22 August 2006 from the Department of Industry and Resources (WA), we received advice to the effect that our mining lease application (made in the name of Barry Neil Kayes as nominee for our company) was granted by the Minister on 18 August 2006. I enclose a copy of that letter.

From this point on, we anticipate approximately 3 months before sufficient cash flow is generated to meet the company's obligations and leave a sufficient surplus to meet its first payment obligation under the DOCA.

During this 3 month period, the following steps will be undertaken:

• we have submitted and are awaiting approval by the end of the week for 1. Notification of Intention of mine plan with the Department of Mines;
• $\overline{2}$ . mobilisation of plant, equipment and labour $-2$ to 3 weeks;
• 1. site preparation and preparation of mining areas for production $-1$ to 2 weeks;
• production extraction of goldstone $-3$ to 4 weeks; 4.
• 1. transfer of product from mine site to Fremantle port (more than $1,500$ kms) – to commence third week of production;

shipping time from Australia to customer $-2$ to 3 weeks (depending on trans 6. shipping and availability of ships through Singapore); and

In these circumstances we have reviewed the extension of time we require for the instalment payments to be made by Nikiticorp pursuant to the DOCA and seek an amendment to the DOCA accordingly.

In particular, we propose that the DOCA be amended so as to provide that each of the payments by Nikiticorp there-under be postponed, with the first instalment in the sum of \$500,000 to be payable on 22 December 2006.

In the circumstances we ask you to give consideration to the calling of a Creditor's Meeting to amend the DOCA as proposed.

Please do not hesitate to contact me if you wish to discuss any aspect of this matter.

Yours faithfully Nikiticorp Limited

Ted Tzovaras Director

Mr Anthony Damianos Cc. CEO and Director Australis Mining Corporation Limited

Mr Jerry Goddard Director Australis Mining Corporation Limited