CORAZON MINING LIMITED — Annual Report 2005

Sep 26, 2005

Graynic Metals Limited

(ACN 112 898 825)

Annual Financial Report

For the Period from 10 February 2005 to 30 June 2005

CORPORATE DIRECTORY
DIRECTORS' REPORT
AUDITOR'S INDEPENDENCE DECLARATION
INCOME STATEMENT
BALANCE SHEET
STATEMENT OF CHANGES IN EQUITY
DIRECTORS' DECLARATION
INDEPENDENT AUDIT REPORT TO THE MEMBERS OF GRAYNIC METALS $LIMITED$
ADDITIONAL SHAREHOLDER INFORMATION
SCHEDULE OF MINERAL TENEMENTS

CORPORATE DIRECTORY

MANAGING DIRECTOR Ronald Thom

NON-EXECUTIVE DIRECTOR Nathan McMahon Clive Jones

COMPANY SECRETARY Kent Hunter

PRINCIPAL & REGISTERED OFFICE

Level 2, 22 Oxford Close Leederville WA 6008 Telephone: (08) 9381 1436 Facsimile: (08) 9381 1068

AUDITORS

Ord Partners Chartered Accountants Level 2, 47 Colin Street WEST PERTH WA 6005

SHARE REGISTRAR

Advanced Share Registry Services 110 Stirling Highway NEDLANDS WA 6009 Telephone: (08) 9389 8033 Facsimile: (08) 9389 7871

STOCK EXCHANGE LISTING

Australian Stock Exchange (Home Exchange: Perth, Western Australia) Code: GYN

BANKERS

National Australia Bank 50 St Georges Terrace PERTH WA 6000

DIRECTORS' REPORT

Your directors present their report on the Company for the period ended 30 June 2005.

$L$ DIRECTORS

The names of directors in office at any time during or since the end of the period are:

Ron Thom Nathan McMahon Clive Jones Kent Hunter (resigned 21 February 2005)

Directors have been in office since Graynic Metals Limited was incorporated on the 10 February 2005 to the date of this report unless otherwise stated.

COMPANY SECRETARY

The following person held the position of company secretary at the end of the financial period:

Kent Hunter

Mr Hunter is a Chartered Accountant with over 15 years corporate and company secretarial experience. He has been involved in the listing of 12 junior gold and mineral exploration companies on ASX in the past three years with capital raisings exceeding \$40 million. He has experience in capital raisings, ASX compliance and regulatory requirements and is currently a non-executive director of Cazaly Resources Limited, Gryphon Minerals Limited, Elixir Petroleum Limited and Scimitar Resources Limited and is company secretary of three other ASX listed entities. Mr Hunter was appointed as Company Secretary on the incorporation of the Company.

$\mathfrak{Z}$ PRINCIPAL ACTIVITIES

The principal activity of the Company during the financial period was mineral exploration.

Graynic Metals Limited was incorporated on 10 February 2005.

There were no significant changes in the nature of the Company's principal activities during the financial period.

$\mathbf{3}$ . OPERATING RESULTS

The loss of the Company after providing for income tax amounted to \$145.362.

DIVIDENDS PAID OR RECOMMENDED $\overline{A}$ .

The directors do not recommend the payment of a dividend and no amount has been paid or declared by way of a dividend to the date of this report.

$\P$ REVIEW OF OPERATIONS

The Company controls three key project areas within mineral provinces that have demonstrated copper, lead, zinc, nickel and/or platinum mineralization. These three project areas, which are all in Western Australia, are the Quartz Circle Project near Nullagine, the Jutson Rocks Project east of Laverton, and the Northampton Project north of Geraldton. Under an agreement with Cazaly Resources Limited, the Company can earn an 80% interest in any (or each) of these projects by the expenditure of \$1 million on any (or each) project within a period of forty-two months, as detailed in the Company's prospectus dated 13 April 2005.

Ouartz Circle

Quartz Circle is the most advanced project, and the Company has already carried out significant exploration in this area. A total of 11 drill holes have been completed, of which six holes had a diamond drilling component. The holes were targeting Cu, Pb and Zn mineralization at prospects where strong mineralisation had previously been encountered by other companies. Some encouraging levels of zinc mineralization were achieved within the reverse circulation (RC) holes, but not all assay results have yet been received for the diamond drilling. The program is still being assessed.

The Company has also carried out some geological mapping with petrographic (thin section) support, leading to a new geological interpretation for a portion of the project area. This work is still in progress. Additional assays (Co, Cr, Ni, Nb, Ta) of 564 soil samples collected by Cazaly Resources in 2004 has highlighted some potential for nickel mineralization in the northern exploration licence.

The Company is planning a low-level aeromagnetic survey over the entire project area to identify new targets for base metals, nickel, and other commodities. Further field work, including more geological mapping, is planned to better elucidate the geological setting. New soil sampling programs have been planned for areas of specific interest.

Jutson Rocks

Before exploration can commence here, access must be negotiated with the traditional owners and these negotiations are about to commence. At this stage, very little has been spent on exploration but once access is granted it is planned to implement an exploration program. This would probably include a shallow drilling program to obtain geochemical samples in those areas thought to be the most prospective, and possibly an airborne geophysical survey such as EM to give a more regional appraisal. These techniques have recently been successful in the WMC-Falcon Minerals joint venture at nearby Collurabbie, which is believed to have a comparable geological setting.

Northampton

This exploration licence is an application only and exploration will not be undertaken until the licence is granted. The project is centred on the historic lead mines which commenced production in the 1850s. These early lead mines were focussed on vein style mineralization of limited size, but the Company would be seeking a much larger target. It has been suggested by a previous exploration group that this terrain is similar to that at Broken Hill, and that a Broken Hill style of deposit could exist at depth beneath the veins. It is this style of deposit that the Company would be targeting, primarily by airborne geophysics such as magnetics or EM.

FINANCIAL POSITION

The Company successfully listed on the Australian Stock Exchange on the 30 June 2005 raising \$2.5 million through the issue of 12,500,000 fully paid shares as detailed in the prospectus dated 13 April 2005. The Company is currently offering 12,250,002 options at a price of 1cent each exercisable at 20 cents on or before 16 September 2005 as detailed in the short form prospectus dated 18 August 2005. If fully taken up the options issue will raise a total of \$122,500 before the costs of the issue. The Directors believe that the Company currently has sufficient capital to effectively explore its current landholdings.

BUSINESS STRATEGIES AND PROSPECTS FOR THE FORTHCOMING YEAR

The Company remains committed to adding to shareholder wealth and whilst the current focus is on base metals, nickel and platinum group elements, all wealth generating opportunities will be examined.

As exploration progresses the Company may decide to add projects to or divest projects from its current portfolio.

6. SIGNIFICANT CHANGES IN STATE OF AFFAIRS

The following significant changes in the state of affairs of the Company occurred during the financial period:

On 10 February 2005 the Company issued 3 ordinary subscriber shares pursuant to the registration of the Company.

On 21 February 2005 the Company issued 500,000 ordinary shares at \$0.001 each to parties involved in the promotion, management and fund raising activities of the Company.

On 28 March 2005 a total of 4,000,000 options were issued to a RAB Special Situations LLP as a incentive for participating in a placement of 6,250,000 fully paid ordinary shares. The options comprised 2,000,000 exercisable at \$0.20 on or before 28 March 2007, and 2,000,000 options exercisable at \$0.30, on or before 28 March 2008.

On 31 March 2005 the Company issued 1,500,000 ordinary shares at \$0.10 each to various parties for the purpose of raising seed capital.

On 31 March 2005 a total of 2,000,000 Options exercisable at \$0.30 on or before 30 April 2008 were issued to directors pursuant to a Prospectus dated on 13 April 2005.

On 13 April 2005 the Company lodged a prospectus to raise a total of \$1,250,000 by way of issuing 6,250,000 shares at an issue price of 20 cents each.

On 16 June 2005 the Company issued 10,000,000 ordinary shares to Cazaly Resources Limited as consideration for exploration assets acquired on the Quartz Circle, Juston Rocks and Northampton Projects, pursuant to the prospectus dated 13 April 2005.

On 16 June 2005 the Company issued 6,250,000 ordinary shares at \$0.20 each to RAB Special Situations LLP ("RAB") pursuant to the contract dated 28 March 2005 between RAB and the Company.

On 16 June 2005 the Company issued 6,250,000 ordinary shares at \$0.20 each to various parties pursuant to the prospectus issued by the Company and dated 13 April 2005.

The offer was fully subscribed, and the company was admitted to the Official List of the Australian Stock Exchange on Tuesday 28 June 2005.

$\bar{\mathcal{I}}$ AFTER BALANCE DATE EVENTS

On 18 August 2005 the Company issued a prospectus offering shareholders the opportunity to participate in a 1 for 2 non-renounceable entitlements issue for a total of 12,250,002 options at 1 cent each. Shareholders registered at 5.00pm on Monday 29 August 2005 will be entitled to 1 new option for every 2 existing shares held.

The closing date of the Offer is 16 September 2005 and the Offer is anticipated to raise a total of \$122.500 before the costs of the issue.

Other than detailed above, no matters or circumstances have arisen since the end of the financial period which significantly affected or may significantly affect the operations of the Company, the results of those operations, or the state of affairs of the Company in future financial vears.

$\mathbf{R}$ . FUTURE DEVELOPMENTS

The Company will continue its mineral exploration activity at and around its exploration projects with the object of identifying commercial resources.

$9₁$ ENVIRONMENTAL ISSUES

The Company is aware of its environmental obligations with regards to its exploration activities and ensures that it complies with all regulations when carrying out any exploration work.

INFORMATION ON DIRECTORS 10.

Ronald Thom	Managing Director
Qualifications	B. Sc, Ph.D
Experience	Ron has extensive experience in base metals, platinum, lateritic nickel and industrial mineral exploration with a strong track record of success. He has field experience in every State and Territory in Australia. Throughout 30 years in the minerals industry Ron has acquired extensive experience in exploration management, budgeting, and exploration strategy. Ron was a non-executive director of Westcoast Minerals Limited from its listing in October 2003 until his resignation in March 2004.
	Ron has previously been an Exploration Manager and has been involved in several profitable mining ventures including Davyhurst and Tuckabiana. Ron has been a director since 21 February 2005.
Interest in Shares	524,000 Fully Paid Ordinary Shares

Nathan McMahon	Non-Executive Director

Qualifications B. Comm (UWA)

Experience Nathan is currently Managing Director - Corporate and Administration, for Cazaly Resources Limited (appointed 15 August 2003) which is listed on the ASX. Nathan was the founding director of Hamill Resources Ltd which listed on the ASX in June 2001 and which acquired significant exploration success and increase in market capitalization during his tenure. Nathan has demonstrated extensive skills in project acquisition and management. Nathan has been a director of Cazaly Resources Limited since the company's incorporation on 10 February 2005. Nathan was also a director of International Goldfields Limited from 10 November 2000 to 15 August $2003$

Interest in Shares	1,260,150	Fully Paid Ordinary Shares
Interest in Options	1,000,000	30 cent Options expiring 30 April 2008

Clive Jones Non-Executive Director

Oualifications B. App. Sc (Geol)

Clive is currently Managing Director for Cazaly Resources Ltd Experience (appointed 15 September 2003) which is listed on the ASX. Clive is also a Non-Executive Director of the Australian exploration company Jackson Gold Limited and was appointed on 25 March 2005. Clive has formerly been a director of Mount Burgess Mining Ltd and ASX Listed Hamill Resources Limited and International Goldfields Limited (from 14 December 2000 to 19 December 2003), which both experienced significant market capitalisation growth during his tenure as a director. Clive has been involved in mineral exploration for over 20 years and has worked on the exploration for a range of commodities including gold, base metals, mineral sands, diamonds and industrial minerals. Clive was also previously a Director of Mount Burgess Mining Ltd where he oversaw the discovery of the high grade Red October gold deposit situated in the Eastern Goldfields of Western Australia.

Interest in Shares	1,057,689	Fully Paid Ordinary Shares
Interest in Options	1,000,000	30 cent Options expiring 30 April 2008
Kent Hunter		Non-Executive Director (resigned 21 February 2005)
Qualifications	BBus CA
Interest in Shares		192,830 Fully Paid Ordinary Shares

$II$ REMUNERATION REPORT

This report details the nature and amount of remuneration for each director of Graynic Metals Limited.

Remuneration Policy

The remuneration policy of Graynic Metals Limited has been designed to align director objectives with shareholder and business objectives by providing a fixed remuneration component which is assessed on an annual basis in line with market rates. The board of Graynic Metals Limited believes the remuneration policy to be appropriate and effective in its ability to attract and retain the best directors to run and manage the company, as well as create goal congruence between directors and shareholders.

The board's policy for determining the nature and amount of remuneration for board members is as follows:

The remuneration policy, setting the terms and conditions for the executive directors and other senior staff members, was developed by the managing director and approved by the board after seeking professional advice from independent external consultants.

In determining competitive remuneration rates, the Board seeks independent advice on local and international trends among comparative companies and industry generally. It examines terms and conditions for employee incentive schemes, benefit plans and share plans. Independent advice is obtained to confirm that executive remuneration is in line with market practice and is reasonable in the context of Australian executive reward practices.

All executives receive a base salary (which is based on factors such as length of service and experience), superannuation and fringe benefits.

The Company is an exploration entity, and therefore speculative in terms of performance. Consistent with attracting and retaining talented executives, directors and senior executives are paid market rates associated with individuals in similar positions, within the same industry. The Board however does not endorse the use of incentive and bonus payments for directors and senior executives at this point in time. The Board however were issued shares and options as part of the terms of the Initial Public Offer. Board members have largely retained these securities which assist in aligning their objectives with overall shareholder value.

Further performance incentives will be issued in the event that the entity moves from an exploration to a producing entity, and key performance indicators such as profits and growth can be used as measurements for assessing Board performance.

The executive directors and executives receive a superannuation guarantee contribution required by the government, which is currently 9% and do not receive any other retirement benefits.

All remuneration paid to directors is valued at the cost to the company and expensed. Shares given to directors and executives are valued as the difference between the market price of those shares and the amount paid by the director or executive. Options are valued using the Black-Scholes methodology,

The board policy is to remunerate non-executive directors at market rates for comparable companies for time, commitment and responsibilities. The managing director in consultation with independent advisors determines payments to the non-executive directors and reviews their remuneration annually, based on market practice, duties and accountability. The maximum aggregate amount of fees that can be paid to non-executive directors is subject to approval by

shareholders at the Annual General Meeting. Fees for non-executive directors are not linked to the performance of the Company. However, to align directors' interests with shareholder interests, the directors are encouraged to hold shares in the company and are able to participate in the employee option plan.

Company Performance, Shareholder Wealth and Directors' and Executives' Remuneration

The remuneration policy has been tailored to increase goal congruence between shareholders and directors and executives. This has been achieved by the issue of shares to the majority of the directors and executives to encourage the alignment of personal and shareholder interest.

Details of Remuneration for Period Ended 30 June 2005

The remuneration for each director of the company during the period was as follows:

	Primary			Post Employment	Equity
	Salary, Fees and. Commissions	Non Cash Benefits	Cash Bonus	Superannuation Options Contribution		Total
	\$	\$	\$	S	\$	S
Directors
Ronald Thom	30,328			2,730		33,058
Nathan McMahon	6,000				17,816(i)	23,816
Clive Jones	6,000				17,816(i)	23,816
Kent Hunter (ii)
	42,328			2,730	35,632	80,690

(i) The fair value of the Options is calculated at the date of grant using a Black-Scholes model.

(ii) Mr Hunter resigned on 21 February 2005.

The following factors and assumptions were used in determining the fair value of options issued to Directors on grant date:

Grant Date	Expiry Date	Fair Value Per Option	Exercise Date	Price of Shares on Grant Date	Estimated Volatility	Risk Free Interest Rate	Dividend Yield
31/03/05	30/04/08	\$0.0524	$\cdot$	S0.20	50%	5.25%	0%

Estimated volatility approximates historic volatility. Each option entitles the holder to purchase one ordinary share in the Company.

Employment Contracts of Directors and Senior Executives

The employment conditions of the managing director. Ronald Thom is formalised in a contract of employment. Other than the managing director, all executives are permanent employees of Graynic Metals Limited. Ron Thom is employed under a fixed 12 month contract, which commenced on 21 February 2005 and expires on 20 February 2006.

The employment may be terminated by the Company or Mr Thom by giving the other 4 weeks notice in writing. Alternatively, the employment may be terminated by the Company providing compensation instead of the period of notice required. Termination payments due are four weeks lieu of notice if the termination period is not worked out. Termination payments are not payable on resignation or dismissal for serious misconduct. In the instance of serious misconduct the company can terminate employment at any time. Any options issued as remuneration not exercised before or on the date of termination will lapse.

$12.$ MEETINGS OF DIRECTORS

The number of directors' meetings (including committees) held during the financial period each director held office during the financial period and the number of meetings attended by each director are:

	Directors Meetings			Due Diligence Committee Meetings
Director	Number Eligible to Attend	Meetings Attended	Meetings Attended	Number Eligible to Attend
R Thom	3	3	3
N McMahon	3	3	3	3
C Jones	3	3
K Hunter

$13.$ INDEMNIFYING OFFICERS OR AUDITOR

In accordance with the constitution, except as may be prohibited by the Corporations Act 2001 every Officer, auditor or agent of the Company shall be indemnified out of the property of the Company against any liability incurred by him in his capacity as Officer, auditor or agent of the Company or any related corporation in respect of any act or omission whatsoever and howsoever occurring or in defending any proceedings, whether civil or criminal.

$14.$ OPTIONS

During the financial period and up to the date of this report the Company issued a total of 2,000,000 share options exercisable at 30 cents on or before 30 April 2008 to directors and executives.

	Options at the beginning of the period	Issued	Exercised	Lapsed	Balance 30,06.05
Ronald Thom			۰	۰	۰
Nathan McMahon		1,000,000	۰	۰	1,000,000
Clive Jones		1,000,000	۰	-	1,000,000
Kent Hunter	$\blacksquare$	-	$\blacksquare$	$\overline{\phantom{0}}$	$\blacksquare$
		2,000,000	$\blacksquare$		2,000,000

Unissued Shares Under Option

At the date of this report unissued ordinary shares of the company under option are:

Expiry Date	Exercise Price	Number of Shares
28 March 2007	\$0.20	2,000,000
30 April 2008	\$0.30	2,000,000
28 March 2008	\$0.30	2,000,000

There have been no issue of ordinary shares as a result of the exercise of options during or since the end of the financial period.

$15$ PROCEEDINGS ON BEHALF OF COMPANY

No person has applied for leave of Court to bring proceedings on behalf of the company or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or any part of those proceedings.

The company was not a party to any such proceedings during the period.

16. AUDITORS INDEPENDENCE DECLARATION

The lead auditor's independence declaration for the year ended 30 June 2005 has been received and can be found on page 11 of the annual report.

$17.$ NON AUDIT SERVICES

The board of directors is satisfied that the provision of non-audit services performed during the year by the entity's auditors is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the services disclosed below did not compromise the external auditor's independence for the following reason:

The nature of the services provided do not compromise the general principles relating to $\bullet$ auditors independence as set out in the Institute of Chartered Accountants in Australia and CPA Australia's Professional Statement F1: Professional Independence.

An amount of \$7,000 was payable to Ord Corporate Pty Ltd, an associated entity of Ord Partners (auditors) for the preparation of an Investigating Accountant's Report, for inclusion in the Company's prospectus dated 13 April 2005. No other fees were paid or payable to the auditors for non-audit services performed during the period to 30 June 2005.

Signed in accordance with a resolution of the Board of Directors.

mbo Flom

Ron Thom Managing Director

Perth, 20 September 2005

20 September 2005

The Board of Directors Graynic Metals Limited C/- Mining Corporate Advisory Services Pty Ltd PO Box 1905 SUBJACO WA 6904

Dear Sirs

DECLARATION OF INDEPENDENCE

In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Graynic Metals Limited.

As lead partner for the audit of the financial statements of Graynic Metals Limited for the year ended 30 June 2005, I declare that to the best of my knowledge and belief, there have been no contraventions of:

• The auditor independence requirements of the Corporations Act 2001 in $\bullet$ relation to the audit; and
• Any applicable code of professional conduct in relation to the audit.

Yours sincerely ORD PARTNERS

Ian Keith Macpherson Partner

PARTNERS CHARTERED ACCOUNTANTS

Ian K Macpherson CA

Robert W Parker CA

Craig A Vivian CA

,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,

Level 2, 47 Colin Street West Perth WA 6005

PO Box 359 West Perth WA 6872

$\mathbf{2} + 61893213514$ ■ +61 8 9321 3523

ord@ordgroup.com.au www.ordgroup.com.au

INCOME STATEMENT FOR THE PERIOD FROM 10 FEBRUARY 2005 TO 30 JUNE 2005

	NOTE	10 February 2005 to 30 June 2005
Revenues		S
Other Income	2	8,489
Administrative expense		(28, 724)
Employee benefits expense		(9,264)
Borrowing costs expense		(540)
Consultancy expenses		(31, 461)
Compliance and regulatory expenses		(16,765)
Occupancy expenses		(4,157)
Directors fees		(56, 805)
Insurance expenses		(4, 722)
Depreciation expense		(1, 413)
Loss from continuing operations before income tax expense/benefit	3	(145, 362)
Income tax expense/benefit relating to ordinary activities
Net Loss attributable to members		(145, 362)
Basic loss per share (cents per share)	18	(3.94)
Diluted loss per share (cents per share)	18	(3.39)

BALANCE SHEET AS AT 30 JUNE 2005

		2005
	NOTE	\$
CURRENT ASSETS
Cash and cash equivalents Trade and other receivables	$\tau$ 8	2,216,933 48,913
TOTAL CURRENT ASSETS		2,265,846
NON CURRENT ASSETS
Plant and equipment Exploration and evaluation expenditure	9 10	8,587 2,350,877
TOTAL NON CURRENT ASSETS		2,359,464
TOTAL ASSETS		4,625,310
CURRENT LIABILITIES
Trade and other payables Provisions	11 12	228,769 3,008
TOTAL CURRENT LIABILITIES		231,777
TOTAL LIABILITIES		231,777
NET ASSETS		4,393,533
EQUITY
Contributed equity Option Premium Reserve Accumulated losses	13 14 15	4,371,565 167,330 (145, 362)
TOTAL EQUITY		4,393,533

STATEMENT OF CASH FLOWS FOR THE PERIOD FROM 10 FEBRUARY 2005 TO 30 JUNE 2005

	NOTE	10 February 2005 to 30 June 2005 \$
Cash Flows from Operating Activities
- Payments to suppliers and employees - Interest received - Payments for exploration and evaluation		(48,311) 8,489 (250, 516)
Net cash used in operating activities	19	(290, 338)
Cash Flows From Investing Activities
- Purchase of plant and equipment		(10,000)
Net cash used in investing activities		(10,000)
Cash Flows from Financing Activities
Proceeds from issue of shares Payment for costs of issue of shares Proceeds from borrowings		2,650,503 (147,240) 14,008
Net cash provided by financing activities		2,517,271
Net increase in cash held		2,216,933
Cash and cash equivalents at beginning of financial period
Cash and cash equivalents at end of financial period	7	2,216,933

STATEMENT OF CHANGES IN EQUITY
FOR PERIOD FROM 10 FEBRAURY 2005 TO 30 JUNE 2005

	Issued Capital	Accumulated Losses	Option Premium Reserve	Total
	S	\$	S	\$
At the beginning of financial period		-
Issue of share capital	4,371,565	-		4,371,565
Issue of options			167,330	167,330
Loss for the period		(145, 362)		(145, 362)
Balance at 30 June 2005	4,371,565	(145, 362)	167,330	4,393,533

$\overline{L}$ STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CORPORATE INFORMATION

The financial report of Gravnic Metals Limited for the year ended 30 June 2005 was authorised for issue in accordance with a resolution of the directors on 20 September 2005. Graynic Metals Limited is a company limited by shares incorporated in Australia whose shares are publicly traded on the Australian stock exchange. Graynic Metals Limited was incorporated on 10 February 2005.

$(a)$ Basis of Preparation

The financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards. The financial report has also been prepared on a historical cost basis, except for derivative financial instruments and available for-sale financial assets that have been measured at fair value.

The carrying values of recognised assets and liabilities that are hedged with fair value hedges are adjusted to record changes in the fair values attributable to the risks that are being hedged.

The financial report is presented in Australian dollars.

Statement of compliance (b)

The financial report complies with Australian Accounting Standards, which include Australian equivalents to International Financial Reporting Standards ('AIFRS'). Compliance with AIFRS ensures that the financial report, comprising the financial statements and notes thereto, complies with International Financial Reporting Standards $('IFRS').$

This is the first financial report prepared for Graynic Metals Limited, and therefore no comparative results are available.

Income Tax $\left( c\right)$

Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognised for all taxable temporary differences:

• except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither that accounting profit nor taxable profit or loss; and
• in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences, carryforward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised:

• except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

$\overline{L}$ STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

in respect of deductible temporary differences with investments in subsidiaries, $\bullet$ associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Income taxes relating to items recognised directly in equity are recognised in equity are not in the income statement.

Exploration and evaluation expenditure $(d)$

Exploration, evaluation and development expenditure incurred is accumulated in respect of each identifiable area of interest. These costs are carried forward only if they relate to an area of interest for which rights of tenure are current and in respect of which:

• $(i)$ such costs are expected to be recouped through successful development and exploitation or from sale of the area; or
• exploration and evaluation activities in the area have not, at balance date, reached a $(ii)$ stage which permit a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active operations in, or relating to, the area are continuing.

Accumulated costs in respect of areas of interest which are abandoned are written off in full against profit in the year in which the decision to abandon the area is made.

A regular review is undertaken of each area of interest to determine the appropriateness of continuing to carry forward costs in relation to that area of interest.

$(e)$ Leases

Leases of fixed assets where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership, are transferred to entities in the Company are classified as finance leases. Finance leases are capitalised, recording an asset and a liability equal to the present value of the minimum lease payments, including any guaranteed residual values. Leased assets are depreciated on a diminishing value basis over their estimated useful lives where it is likely that the Company will obtain ownership of the asset or over the term of the lease. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period.

Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses in the periods in which they are incurred.

$L$ STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

$\omega$ Earnings Per Share

Basic earnings per share ("EPS") is calculated by dividing the net profit attributable to members for the reporting period, after excluding any costs of servicing equity, by the weighted average number of ordinary shares of the Company, adjusted for any bonus issue.

Revenue $\omega$

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:

Interest

Revenue is recognised as the interest accrues (using the effective interest method, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument) to the net carrying amount of the financial asset.

$\mathbf{a}$ Cash and cash equivalents

Cash and short-term deposits in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less.

For the purposes of the Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

Employee Benefits $\ddot{a}$

Provision is made for the Company's liability for employee benefits arising from services rendered by employees to balance date. Employee benefits expected to be settled within one year together with entitlements arising from wages and salaries, annual leave and sick leave which will be settled after one year, have been measured at the amounts expected to be paid when the liability is settled, plus related on-costs. Other employee benefits payable later than one year have been measured at the present value of the estimated future cash outflows to be made for those benefits.

Contributions are made by the Company to employee superannuation funds and are charged as expenses when incurred.

$\ddot{\theta}$ Goods and Services Tax (GST)

Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office ("ATO"). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the statement of financial position are shown inclusive of GST.

The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the statement of financial position.

Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows.

$\overline{L}$ STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

$\alpha$ Recoverable amounts of Non-Current assets valued on cost basis

At each reporting date the Company assesses whether there is any indication whether there is any indication that an asset may be impaired. Where an indication of impairment exists, the Company makes a formal estimate of recoverable amount. Where carrying amount of an asset exceeds it's recoverable amount the asset is considered impaired and is written down to its recoverable amount

Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset's value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash inflows that are largely independent of those from other assets or Companys assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Joint Venture Entities $\varnothing$

A joint venture entity is an entity in which Graynic holds a long-term interest and which is jointly controlled by Graynic and one or more other venturers. Decisions regarding the financial and operating policies essential to the activities, economic performance and financial position of that venture require the consent of each of the venturers that together jointly control the entity.

Joint Venture Operations

Graynic has certain contractual arrangements with other participants to engage in joint activities where all significant matters of operating and financial policy are determined by the participants such that the operation itself has no significant independence to pursue its own commercial strategy. These contractual arrangements do not create a joint venture entity due to the fact that the policies are those of the participants, not a separate entity carrying on a trade or a business of its own.

The financial statements of Graynic include its share of the assets, liabilities and cash flows in such joint venture operations, measured in accordance with the terms of each arrangement, which is usually pro-rata to Graynic's interest in the joint venture operations.

$(m)$ Investments

All investments are initially recognised at cost, being the fair value of the consideration given and including acquisition charges associated with the investment.

After initial recognition, investments, which are classified as held for trading and available-for-sake, are measured at fair value. Gains or losses on investments held for trading are recognised in the income statement.

Gains or losses on available-for-sale investments are recognised as a separate component of equity until the investment is sold, collected or otherwise disposed of, or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the income statement.

$\overline{L}$ STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

For investments that are actively traded in organised financial markets, fair value is determined by reference to Stock Exchange quoted market bid prices at the close of business on the balance sheet date

Provisions $(n)$

Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outlay of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

Where the Company expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement.

If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

Plant and Equipment $\omega$

Plant and equipment is stated at cost less accumulated depreciation and any impairment in value.

Impairment

The carrying amounts of plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. If any such indication exists and where the carrying values exceed the recoverable amount, the assets or cash generating units are written down to their recoverable amount.

The recoverable amount of plant and equipment is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses are recognised in the income statement in the cost of sales line item.

Depreciation

The depreciable amount of all fixed assets is depreciated on a diminishing value basis over their useful lives to the Company commencing from the time the asset is held ready for use. The depreciation rates used for each class of depreciable assets are:

Class of Fixed Asset	Depreciation Rate
	2005	2004
Plant and equipment	40.0%	40.0%
Office Furniture $\&$ Equipment	40.0%	40.0%

$L$ STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)

$(p)$ Share-based payment transactions

The Company provides benefits to employees (including directors) of the Company in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares ('equity-settled transactions').

There is currently an Employee Share Option Plan (ESOP), which provides benefits to directors and senior executives.

The cost of these equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value is determined by an external valuer using a binomial model, further details of which are given in note 4.

In valuing equity-settled transactions, no account is taken of any performance conditions. other than conditions linked to the price of shares of Graynic Metals Limited ('market conditions').

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award ('vesting date').

The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects (i) the extent to which the vesting period has expired and (ii) the number of awards that, in the opinion of the directors of the Company, will ultimately vest. This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition.

Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph.

The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of earnings per share (see note 7).

The Company has applied the requirements of AASB 1 'First-time Adoption of Australian Equivalents to International Financial Reporting Standards' in respect of equity-settled awards and has applied AASB 2 'Share-Based Payments' only to equity instruments granted after 7 November 2002 that had not vested on or before 1 January 2005.

2.	REVENUE	2005 \$
	Operating activities - interest received	8,489
	Total Revenue	8,489

$\mathbf{3}$ . LOSS FROM ORDINARY ACTIVITIES

Loss from ordinary activities before income tax has been determined after:

Expenses	2005 \$
Borrowing costs - other persons	540
Minimum lease payments - Operating lease	3,140
Employee benefits expense - Salaries - Superannuation	5,726 3,539
	9,265

$\overline{4}$ REMUNERATION AND RETIREMENT BENEFITS

a) Name and positions held by directors' in office at any time during the financial period are:

Ronald Thom	Managing Director
- Nathan McMahon	Non-Executive Director
Clive Jones	Non-Executive Director
Kent Hunter	Non-Executive Director (resigned 21 February 2005)

b) Details of the nature and amount of emoluments of each director are as follows: 2005

	Primary		Post Employment	Equity
	Salary & Fees	Cash Bonus	Non Cash Benefits	Superannuation Contribution	Options	Total
	S	\$	\$	S	\$	\$
Ronald Thom	30,328		$\blacksquare$	2,730		33,058
Nathan McMahon	6,000		$\blacksquare$	$\overline{\phantom{a}}$	17,816	23,816
Clive Jones	6.000		$\bullet$	w	17,816	23,816
Kent Hunter (i)	÷		$\blacksquare$	$\blacksquare$	$\blacksquare$	$\blacksquare$
	45,328		2,730		35,632	80,690

$\overline{A}$ . REMUNERATION AND RETIREMENT BENEFITS (Cont'd)

(i) Kent Hunter resigned as a director on 22 February 2005, however retained his role as Company Secretary, for which he was paid \$18,600 for IPO compliance and accounting assistance and via Mining Corporate Advisory Services. No specified fees were paid to him during the period.

Directors Options

Options Granted As Remuneration

			Value per Option at
	Granted	Grant	Grant Date	First Exercise	Exercise	Last Exercise
	Number	Date	S	Price	Date	Date
Directors
Ronald Thom	$\mathbf{r}$	$\overline{a}$	$\mathbf{r}$	$\mathbf{r}$	$\sim$
Nathan McMahon	1,000.000	31/03/05	0.0524	30c	$\mathbf{r}$	30/04/08
Clive Jones	1,000,000	31/03/05	0.0524	30c	$\mathbf{r}$	30/04/08
Kent Hunter	$\mathbf{r}$	$\overline{\phantom{a}}$	$\mathbf{r}$		Section	$\overline{a}$
Total	2,000,000

The fair value of the options is calculated at the date of grant using a Black - Scholes model and allocated to the current reporting period.

The following factors and assumptions were used in determining the fair value of options issued to Directors on grant date:

Grant Date -	Expiry Date	Fair Value Per Option	Exercise Date	Price of Shares on Grant Date	Estimated Volatility	Risk Free Interest Rate	Dividend Yield
31/03/05	30/04/08	\$0.0524	$\mathbf{r}$	S0.20	50%	5.25%	$0\%$

Estimated volatility approximates historic volatility. Each option entitles the holder to purchase one ordinary share in the Company.

c) Number of Shares held by Directors and Executives

	Balance on Incorporation 10.02.05	Granted as Remunerati on	Received on Exercise of Options	Net Change - Other	Balance 30.06.05
Ronald Thom	$\tilde{\phantom{a}}$	$\overline{\phantom{a}}$	$\tilde{\phantom{a}}$	524,000 (i)	524,000
Nathan McMahon	$\overline{\phantom{a}}$	$\overline{\phantom{a}}$	$\bullet$	1,260,150	1,260.150
Clive Jones	$\overline{\phantom{a}}$	$\overline{\phantom{a}}$	$\bullet$	1,057,689	1,057,689
Kent Hunter		u,	$\mathbf{a}$	192,829	192,830
		$\blacksquare$	$\mathbf{a}$	3,034,668	3,034,669

(i) A total of 524,000 fully paid ordinary shares were acquired by Chaldane Pty Ltd, an entity controlled by Ronald Thom.

$\overline{4}$ REMUNERATION AND RETIREMENT BENEFITS (Cont'd)

d) Number of 30 April 2008 Options exercisable at 30 cents, held by Directors and Executives

	Options at the beginning of the period	Issued	Exercised	Lapsed	Balance 30.06.05
Ronald Thom	$\blacksquare$		$\overline{\phantom{a}}$	$\bullet$	$\overline{\phantom{a}}$
Nathan McMahon	$\pmb{\ast}$	1,000.000	w	$\overline{\phantom{a}}$	1,000,000
Clive Jones	$\tilde{\phantom{a}}$	1,000,000	$\overline{\phantom{a}}$	$\overline{\phantom{a}}$	1,000,000
Kent Hunter	$\tilde{\phantom{a}}$	w	$\overline{\phantom{a}}$	$\overline{\phantom{a}}$	$\mathbf{u}$
	$\omega$	2,000,000	ш	$\overline{\phantom{a}}$	2,000,000

The company's policy for determining the nature and amount of emoluments of board members and senior executives of the company is as follows:

The remuneration structure for executive officers, including executive directors, is based on a number of factors, including length of service, particular experience of the individual concerned, and overall performance of the company. The contracts for service between the company and specified directors and executives are on a continuing basis the terms of which are not expected to change in the immediate Termination payments are generally not payable on resignation or dismissal for serious future. misconduct. In the instance of serious misconduct the company can terminate employment at any time. Any options issued as remuneration not exercised before or on the date of termination will lapse.

		2005
		S
5.	AUDITORS' REMUNERATION
	Remuneration of the auditor for:
	- Auditing or reviewing the financial report	3,000
	- Other services	3,500
		6,500
6.	INCOME TAX
	Major components of income tax expense for the period ended 30 June 2005 are:
	Income Statement
	Deferred income tax relating to origination of temporary differences
	Income tax expense in income statement

NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD ENDED 30 JUNE 2005

6. INCOME TAX (Cont'd)

	S
A reconciliation of income tax expense applicable to accounting loss before income tax at the statutory income tax rate to income tax expense at the company's effective income tax rate for the period ended 30 June 2005 is as follows:
Accounting loss before tax	(145, 362)
Tax at the applicable tax rate of 30%	(43,609)
Expenses that are not deductible for income tax purposes	386
Expenditure deductible for income tax purposes	(91, 488)
Reduction in deferred tax asset in respect to tax losses not
recognised	134,711
The Company has tax losses of \$449,037 that are available indefinitely for offset against future taxable profits.
CASH AND CASH EQUIVALENTS 7.
Cash at bank	2,216,933
	2,216,933
8. RECEIVABLES
Current
Other debtors	48,913
PLANT AND EQUIPMENT 9.

Plant and Equipment	8,555
At cost	(1,313)
Accumulated depreciation	7,242
Office Furniture and Equipment	1,445
At cost	(100)
Accumulated depreciation	1,345
Total plant and equipment	8,587

$9.$ PLANT AND EQUIPMENT (Cont'd)

Reconciliations Movement in the carrying amounts for each class of plant and equipment between the beginning and end of the current financial year	\$ Plant and Equipment	2005 \$ Office Furniture	S Total
Carrying amount at the beginning of the year Additions Depreciation/expense	8,555 (1,313)	1,445 (100)	10,000 (1, 413)
Carrying amount at the end of the year	7,242	1,345	8,587
EXPLORATON AND EVALUATION EXPENDITURE 10.			2005 S
Non-Current
Costs carried forward in respect of areas of interest in: - Exploration and evaluation phases $-$ at cost			2,350,877
Brought forward Consideration of the exploration assets acquired during the period - at valuation Exploration expenditure capitalised during the year			2,000,000 350,877
At reporting date			2,350,877

The value of the Company's interest in exploration expenditure is dependent upon:

• the continuance of the Company's rights to tenure of the areas of interest; ٠
• the results of future exploration; and $\bullet$
• the recoupment of costs through successful development and exploitation of the areas of Ă interest, or alternatively, by their sale.

The Company's exploration properties may be subjected to claim(s) under native title, or contain sacred sites, or sites of significance to Aboriginal people. As a result, exploration properties or areas within the tenements may be subject to exploration restrictions, mining restrictions and/or claims for compensation. At this time, it is not possible to quantify whether such claims exist, or the quantum of such claims.

11.	PAYABLES	2005 \$
	Current
	Trade creditors (unsecured)	85,219
	Other creditors and accruals	143,550
		228,769
	Trade payables are non interest bearing and are normally settled on 28 day terms. Other payables are non interest bearing and have an average term of 60 days. The net of GST payable and GST receivable is remitted to the appropriate tax body on a quarterly basis.
12.	PROVISION
	Current
	Provision for Annual Leave	3,008
	Employees
	Number of employees at year end	L
13.	CONTRIBUTED EQUITY
	Fully paid ordinary shares	4,371,565
	(i) Ordinary Shares
	At the beginning of the reporting period
	Shares issued during the year
	3 at \$1.00 on 10 February 2005 (i) 500,000 at \$0.001 on 21 February 2005 (ii)	3 500
	1,500,000 at \$0.10 on 31 March 2005 (iii)	150,000
	10,000,000 at \$0.20 on 16 June 2005 (iv)	2,000,000
	12,500,000 at \$0.20 on 16 June 2005 (v)	2,500,000
	Transaction costs relating to share issues	(278,938)
	At reporting date	4,371,565

$\Delta 0.25$

NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD ENDED 30 JUNE 2005

$13.$ CONTRIBUTED EOUITY (cont'd)

	409.S No.
Fully paid ordinary shares
At the beginning of the reporting period
Shares issued during the year
3 at \$1.00 on 10 February 2005 (i)	3
500,000 at \$0.001 on 21 February 2005 (ii) -	500,000
1,500,000 at \$0.10 on 31 March 2005 (iii) $\overline{\phantom{0}}$	1,500,000
10,000,000 at \$0.20 on 16 June 2005 (iv) $\blacksquare$	10,000,000
12,500,000 at \$0.20 on 16 June 2005 (v) L,	12,500,000
At reporting date	24,500,003

(i) On 10 February 2005 the Company issued 3 ordinary subscriber shares pursuant to the registration of the Company.

(ii) On 21 February 2005 the Company issued 500,000 ordinary shares at \$0.001 each to parties involved in the promotion, management and fund raising activities of the Company.

(iii) On 31 March 2005 the Company issued 1,500,000 ordinary shares at \$0.10 each to various parties for the purpose of raising seed capital.

(iv) On 16 June 2005 the Company issued 10,000,000 ordinary shares to Cazaly Resources Limited as consideration for exploration assets acquired on the Quartz Circle, Juston Rocks and Northampton projects, pursuant to a prospectus dated 13 April 2005.

(v) On 16 June 2005 the Company issued $6.250,000$ ordinary shares at \$0.20 each to RAB Special Situations LLP ("RAB") pursuant to the contract dated 28 March 2005 between RAB and the Company.

On 16 June 2005 the Company issued 6,250,000 ordinary shares at \$0.20 each to various parties pursuant to the prospectus issued by the Company and dated 13 April 2005.

Terms of Ordinary Shares

Ordinary shares participate in dividends and the proceeds on winding up of the Company in proportion to the number of shares held and in proportion to the amount paid up on the shares held.

At shareholders meetings each ordinary share is entitled to one vote in proportion to the paid up amount of the share when a poll is called, otherwise each shareholder has one vote on a show of hands.

		2005
14.	OPTION PREMIUM RESERVE
	Reserves at the beginning of the reporting period
	2,000,000 Incentive Options issued to Directors (i)	35,632
	4,000,000 Options issued to Placee (ii)	131,698
		167,330

Option Reserve

The option reserve is used to record the issue of options available to be exercised for ordinary shares.

(i) On 31 March 2005 a total of $2,000,000$ Options exercisable at \$0.30 on or before 30 April 2008 were issued to directors.

(ii) On 28 March 2005 a total of 4,000,000 options were issued to a RAB Special Situations LLP as a incentive for participating in a placement of 6,250,000 fully paid ordinary shares. The options comprised 2,000,000 exercisable at \$0.20 on or before 28 March 2007, and 2,000,000 options exercisable at \$0.30, on or before 28 March 2008.

		2005 Ъ
15.	ACCUMULATED LOSSES
	Accumulated losses at the beginning of the financial period
	Net loss attributable to members	(145, 362)
	Accumulated losses at the end of the financial period	(145, 362)

16. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Company's principal financial instruments comprise cash and short term deposits. The main purpose of the financial instruments is to earn the maximum amount of interest at a low risk to the company. The Company also has other financial instruments such as trade debtors and creditors which arise directly from its operations. For the period under review, it has been the Company's policy not to trade in financial instruments

The main risks arising from the Company's financial instruments are interest rate risk and credit risk. The board reviews and agrees policies for managing each of these risks and they are summarised below:

$(a)$ Interest Rate Risk

The Company's exposure to interest rate risk, which is the risk that a financial instrument's value will fluctuate as a result of changes in market interest rates and the effective weighted average interest rate for each class of financial assets and financial liabilities comprises. The Company does not have short or long term debt, and therefore this risk is minimal.

$(b)$ Credit Risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company has adopted the policy of only dealing with credit worthy counterparties and obtaining sufficient collateral or other security where appropriate, as a means of mitigating the risk of financial loss from defaults.

$16.$ FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Cont'd)

The Company does not have any significant credit risk exposure to any single counterparty or any Company of counterparties having similar characteristics. The carrying amount of financial assets recorded in the financial statements, net of any provisions for losses, represents the Company's maximum exposure to credit risk.

$17.$ FINANCIAL INSTRUMENTS

The following table sets out the carrying amount by maturity, of the financial instruments that are exposed to interest rate risk:

2005	Interest		$>1 - 2$
	Rate	$\leq$ 1 year	vears	$>$ 2 years	Total S
Floating rate
Cash	2.6%	2,216,933	$\sim$	$\blacksquare$	2,216,933

The other financial instruments of the Company that are not included in the above table are noninterest bearing and therefore not subject to interest rate risk.

Fair Values

Set out below is a comparison by category of the carrying amounts and fair values of all of the Company's financial instruments that are carried in the balance sheet:

On-balance sheet financial instruments

The carrying value and net fair values of financial assets and liabilities at balance date are:

	2005
	Carrying Amount \$	Net fair Value \$
Financial assets
Cash and deposits	2,216,933	2,216,933
Receivables	48,913	48,913
	2,265,846	2,265,846
Financial liabilities Payables Interest bearing liabilities	228,769	228,769
	2,037,077	2,037,077

18.	EARNINGS PER SHARE	2005 S
(a)	Earnings / (Loss) used in the calculation of basic and dilutive EPS	(145, 362)
		Number of Shares
(b)	Weighted average number of ordinary shares outstanding during the period used in the calculation of basic earnings per share:	3,685,717
	Share options are not considered dilutive, as their impact would be to decrease the net loss per share.
		2005 S
19.	CASH FLOW INFORMATION
	(i) Reconciliation from the net loss after tax to the net cash flow from operations
	- (Loss) from ordinary activities after
	income tax	(145, 362)
	Non-cash flows in operating loss
	- Depreciation	1,413
	- Options issued to directors as remuneration	35,632
	Changes in assets and liabilities
	- Increase in receivables and prepayments	(48, 913)
	- Increase in exploration and evaluation expenditure	(350, 875)
	- Increase in trade and other creditors and accruals	214,709
	- Movement in provisions	3,008
	Net cash inflows (outflows) from Operating Activities
		(290, 388)

$20.$ COMMITMENTS

In order to maintain current rights of tenure to mining tenements, the Company has the following discretionary exploration expenditure requirements up until expiry of leases. These obligations, which are subject to renegotiation upon expiry of the leases, are not provided for in the financial statements and are payable:

	2005
Not longer than one year.	1,246,059
Longer than one year, but not longer than five years	3,226,920
Longer than five years
	4,472,979

The Company has the right to earn an 80% interest in each or all of its three projects (Quartz Circle, Northampton and Jutson Rocks) by the expenditure of \$1 million on each or all of these projects within a 42 month period. The Company intends to carry out expenditure on each project in such a way that it could, if exploration results warranted, complete the necessary expenditure within the time frame to earn the interest. Future funding and/or farm-out options will be considered on an ongoing basis to ensure the Company has sufficient funds to comply with its commitments.

It should be noted that the right to earn an 80% as detailed above is not an obligation. Subject to results obtained from such exploration as carried out and ongoing assessment of each of the Company's projects, the Company may farm-out, or relinquish its rights to earn on any or all of its Projects, thereby reducing its level of commitments disclosed above.

If the Company decides to relinquish certain leases and/or does not meet these obligations, assets recognised in the balance sheet may require review to determine the appropriateness of carrying values. The sale, transfer or farm-out of exploration rights to third parties will reduce or extinguish these obligations.

21. SEGMENT INFORMATION

The Company operates predominantly in one geographical segment, being Western Australia. and in one industry, mineral mining and exploration.

$22.$ EVENTS SUBSEQUENT TO REPORTING DATE

On 18 August 2005 the Company issued a prospectus offering shareholders the opportunity to participate in a 1 for 2 non-renounceable entitlements issue for a total of 12.250,002 options at 1 cent each. Shareholders registered at 5.00pm on Monday 29 August 2005 will be entitled to 1 new option for every 2 existing shares held.

The closing date of the Offer is 16 September 2005 and the Offer is anticipated to raise a total of \$122,500 before the costs of the issue.

Other than detailed above, no matters or circumstances have arisen since the end of the financial period which significantly affected or may significantly affect the operations of the Company, the results of those operations, or the state of affairs of the Company in future financial years.

23. RELATED PARTY INFORMATION

Transactions between related parties are on commercial terms and conditions, no more favourable than those available to other parties unless otherwise stated.

Transactions with related entities:

Director related Entities

On 16 June 2005 the Company issued 10,000,000 shares at \$0.20 each to Cazaly Resources Limited as consideration for acquisitions for interests in the Quartz Circle, Jutson Rocks and Northampton projects. Mr C Jones and Mr N McMahon are directors and shareholders of Cazaly Resources Limited.

An aggregate amount of \$6,000 was paid, or was due and payable to Kingsreef Pty Ltd, a company controlled by Mr Nathan McMahon, for the provision of directorship services to the Company.

An aggregate amount of \$6,000 was paid, or was due and payable to Widerange Corporation Pty Ltd, a company controlled by Mr Clive Jones, for the provision of directorship services to the Company.

Mining Corporate Advisory Services Pty Ltd were paid \$18,600 for the period to 30 June 2005 for services associated with IPO compliance, accounting and company secretarial matters. Mr Hunter is a director and controller of Mining Corporate Advisory Services Pty Ltd.

Remuneration (excluding the reimbursement of costs) received or receivable by the directors of the Company and aggregate amounts paid to superannuation plans in connection with the retirement of directors are disclosed in Note 4 to the accounts.

These transactions were made on commercial terms and conditions and at market rates.

DIRECTORS' DECLARATION

The directors of the company declare that:

• $\mathbf{1}$ the financial statements and notes, as set out on pages 12 to 33, are in accordance with the Corporations Act 2001:
• comply with Accounting Standards and the Corporations Regulations 2001; and $(a)$
• give a true and fair view of the financial position as at 30 June 2005 and of the performance $(b)$ for the year ended on that date of the Company: and
• $\overline{2}$ . the Managing Director and Company Secretary have each declared that:
• the financial records of the company for the financial period have been properly maintained $(a)$ in accordance with section 286 of the Corporations Act 2001;
• the financial statements and notes for the financial period comply with the Accounting $(b)$ Standards; and
• $(c)$ the financial statements and notes for the financial period give a true and fair view.
• $\overline{3}$ . in the directors' opinion there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

This declaration is made in accordance with a resolution of the Board of Directors.

Ronald Thom Director

Jel Floren

Perth. 20 September 2005

INDEPENDENT AUDIT REPORT

To members of Graynic Metals Limited

Scone

The financial report and directors' responsibility

The financial report comprises the statement of financial position, statement of financial performance, statement of cash flows, accompanying notes to the financial statements, and the directors' declaration for Graynic Metals Limited ("the company"), for the year ended 30 June 2005 as set out on pages 12 to 35.

The directors of the company are responsible for the preparation and true and fair presentation of the financial report in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report.

Audit approach

We conducted an independent audit in order to express an opinion to the members of the company. Our audit was conducted in accordance with Australian Auditing Standards in order to provide reasonable assurance as to whether the financial report is free of material misstatement. The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected.

We performed procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001, including compliance with Accounting Standards and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of the company's financial position and of its performance as represented by the results of its operations and cash flows.

We formed our audit opinion on the basis of these procedures, which included:

• examining, on a test basis, information to provide evidence supporting the $\bullet$ amounts and disclosures in the financial report; and
• assessing the appropriateness of the accounting policies and disclosures used and $\bullet$ the reasonableness of significant accounting estimates made by the directors.

While we considered the effectiveness of management's internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls.

Independence

In conducting our audit we followed applicable independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001.

Ian K Macpherson CA

Robert W Parker CA

Craig A Vivian CA

Level 2, 47 Colin Street West Perth WA 6005

PO Box 359 West Perth WA 6872

$\mathbf{2}$ +61 8 9321 3514 A +61 8 9321 3523

ord@ordgroup.com.au www.ordgroup.com.au

Chartered Accountants

Audit Opinion

In our opinion, the financial report of Graynic Metals Limited is in accordance with:

• (a) the Corporations Act 2001, including:
• (i) giving a true and fair view of the company's financial position as at 30 June 2005 and of its performance for the year ended on that date; and
• (ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and
• (b) other mandatory financial reporting requirements in Australia.

ORD PARTNERS Chartered Accountants

Ian Macpherson Partner

Dated this 20th day of September, 2005

Perth, WA

ADDITIONAL SHAREHOLDER INFORMATION

Shareholding

The distribution of members and their holdings of equity securities in the company as at 29 August 2005 was as follows: Class of Equity Securities

Number Held as at 29 August 2005	Fully Paid Ordinary Shares
$1 - 1,000$		100
$1,001 - 5,000$		247
$5.001 - 10,000$		213
$10,001 - 100,000$		242
$100,001$ and over		27
TOTALS		829
Holders of less than a marketable parcel:	- fully paid shares	0

Substantial Shareholders

The names of the substantial shareholders listed in the Company's register as at 29 August 2005

Shareholder	Number
RAB Special Situations (Master Fund) Limited	7.000.000

Restricted Securities

The Company has issued the following restricted securities:

Class of Equity Security	Number	Date Ceasing To Be Restricted Securities
Ordinary Fully Paid Shares	2.894.568	30 June 2007
30 cent options expiring 30 April 2008,	2,000.000	30 June 2007
Ordinary Fully Paid Shares	700.000	31 March 2006
20 cent options expiring 28 March 2007	2,000,000	28 March 2008
30 cent options expiring 28 March 2008	2,000,000	28 March 2008
Ordinary Fully Paid Shares	522,480	31 October 2005

Voting Rights

Ordinary Shares

In accordance with the Company's Constitution, on a show of hands every member present in person or by proxy or attorney or duly authorised representative has one vote. On a poll every member present in person or by proxy or attorney or duly authorised representative has one vote for every fully paid ordinary share held.

ADDITIONAL SHAREHOLDER INFORMATION (CONT.)

Twenty Largest Shareholders

The names of the twenty largest ordinary fully paid as at 29 August 2005 are as follows:

Name	Number of Ordinary Fully Paid Shares Held	% Held of Issued Ordinary Capital
RAB Special Situations (Master Fund) Limited	7,000,000	28.571
Nathan Bruce McMahon	1,069,893	4.366
Mr Clive Bruce Jones	995,248	4.062
Chaldane Pty Ltd	524.000	2.138
Drake Resources Ltd	500,000	2.040
J P Morgan Nominees Australia	497,624	2.031
CPA Financial Services	447.861	1.828
Croesus Mining NL	255,032	1.040
Cyril Resources Pty Ltd	212,178	0.866
Colbern Fiduciary Nominees	209,970	0.857
Miss Amanda Sue Hughes	200,000	0.816
Mr Peter Bowman	200,000	0.816
Graynic Metals Limited	200,000	0.816
Mr Kent Michael Hunter	186,609	0.761
Hayes Mining Pty Ltd	150,000	0.612
Cazaly Resources Ltd	150,000	0.612
Gwynvill Trading Pty Ltd	149,287	0.609
RW Nader Holdings Pty Ltd	139,191	0.568
Kingsreef Pty Ltd	125,460	0.512
Bannerman Resources Limited	125,000	0.510
TOTAL	13,337,353	54.431

CORPORATE GOVERNANCE

The Company is committed to implementing the highest standards of corporate governance. In determining what those high standards should involve the Company has turned to the ASX Corporate Governance Council's Principles of Good Corporate Governance and Best Practice Recommendations. The Company is pleased to advise that the Company's practices are largely consistent with those ASX guidelines. As consistency with the guidelines has been a gradual process, where the Company did not have certain policies or committees recommended by the ASX Corporate Governance Council (the Council) in place during the reporting period, we have identified such policies or committees.

Where the Company's corporate governance practices do not correlate with the practices recommended by the Council, the Company is working towards compliance however it does not consider that all the practices are appropriate for the Company due to the size and scale of Company operations.

To illustrate where the Company has addressed each of the Council's recommendations, the following table cross-references each recommendation with sections of this report. The table does not provide the full text of each recommendation but rather the topic covered. Details of all of the recommendations can be found on the ASX Corporate Governance Council's website at http://www.asx.com.au/about/CorporateGovernance_AA2.shtm.

Recommendation	. Section
Recommendation 1.1 Functions of the Board and Management	1.1
Recommendation 2.1 Independent Directors	1.2
Recommendation 2.2 Independent Chairman	1.2
Recommendation 2.3 Role of the Chairman and CEO	1.2
Recommendation 2.4 Establishment of Nomination Committee	2.3
Recommendation 2.5 Reporting on Principle 2	1.2, 1.4.6, 2.3.2 and the Directors' Report
Recommendation 3.1 Directors' and Key Executives' Code of Conduct	1.1
Recommendation 3.2 Company Security Trading Policy	1.4.9
Recommendation 3.3 Reporting on Principle 3	1.1 and 1.4.9
Recommendation 4.1 Attestations by CEO and CFO	1.4.11
Recommendation 4.2 Establishment of Audit Committee	2.1
Recommendation 4.3 Structure of Audit Committee	2.1.2
Recommendation 4.4 Audit Committee Charter	2.1
Recommendation 4.5 Reporting on Principle 4	2.1
Recommendation 5.1 Policy for Compliance with Continuous Disclosure	1.4.4
Recommendation 5.2 Reporting on Principle 5	1.4.4
Recommendation 6.1 Communications Strategy	1.4.8
Recommendation 6.2 Attendance of Auditor at General Meetings	1.4.8
Recommendation 7.1 Policies on Risk Oversight and Management	2.1.3
Recommendation 7.2 Attestations by CEO and CFO	1.4.11
Recommendation 7.3 Reporting on Principle 7	2.1.3
Recommendation 8.1 Evaluation of Board, Directors and Key Executives	1.4.10
Recommendation 9.1 Remuneration Policies	2.2.4
Recommendation 9.2 Establishment of Remuneration Committee	2.2
Recommendation 9.3 Executive and Non-Executive Director Remuneration	2.2.4.1 and 2.2.4.2
Recommendation 9.4 Equity-Based Executive Remuneration	2.2.4.1
Recommendation 9.5 Reporting on Principle 9	2.2.2 and 2.2.4
Recommendation 10.1 Company Code of Conduct	3

$\ddagger$ . Board of Directors

$11$ Role of the Board

The Board's role is to govern the Company rather than to manage it. In governing the Company, the Directors must act in the best interests of the Company as a whole. It is the role of senior management to manage the Company in accordance with the direction and delegations of the Board and the responsibility of the Board to oversee the activities of management in carrying out these delegated duties.

In carrying out its governance role, the main task of the Board is to drive the performance of the Company. The Board must also ensure that the Company complies with all of its contractual, statutory and any other legal obligations, including the requirements of any regulatory body. The Board has the final responsibility for the successful operations of the Company.

To assist the Board carry our its functions, it has developed a Code of Conduct to quide the Directors, the Chairman and other key executives in the performance of their roles.

$12$ Composition of the Board

To add value to the Company the Board has been formed so that it has effective composition, size and commitment to adequately discharge its responsibilities and duties given its current size and scale of operations. The names of the Directors and their qualifications and experience are stated in the Directors' Report along with the term of office held by each of the Directors. Directors are appointed based on the specific skills required by the Company and on their decision-making and judgment skills.

The Company recognises the importance of Non-Executive Directors and the external perspective and advice that Non-Executive Directors can offer. Mr N McMahon and Mr C Jones are Non-Executive Directors, however are not independent directors as they do not meet the following criteria for independence adopted by the Company.

An Independent Director is a Non-Executive Director and:

• is not a substantial shareholder of the Company or an officer of, or otherwise associated directly with, a substantial shareholder of the Company:
• within the last three years has not been employed in an executive capacity by the Company or another group member, or been a Director after ceasing to hold any such employment;
• within the last three years has not been a principal of a material professional adviser or a material $\bullet$ consultant to the Company or another group member. Or an employee materially associated with the service provided:
• is not a material supplier or customer of the Company or another group member, or an officer of or otherwise associated directly or indirectly with a material supplier or customer;
• has no material contractual relationship with the Company or other group member other than as a Director of the Company:
• has not served on the Board for a period which could, or could reasonably be perceived to, materially interfere with the Director's ability to act in the best interests of the Company; and
• is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the Director's ability to act in the best interests of the Company.

Mr N McMahon and Mr C Jones are Non-Executive Director of the Company and do not meet the Company's criteria for independence. However, their experience and knowledge of the Company makes their contribution to the Board such that it is appropriate for them to remain on the Board.

Mr R Thom is an Executive Director of the Company and meets the Company's criteria for independence.

$1.3$ Responsibilities of the Board

In general, the Board is responsible for, and has the authority to determine, all matters relating to the policies, practices, management and operations of the Company. It is required to do all things that may be necessary to be done in order to carry out the objectives of the Company.

Without intending to limit this general role of the Board, the principal functions and responsibilities of the Board include the following.

Leadership of the Organisation: overseeing the Company and establishing codes that reflect the values of the Company and guide the conduct of the Board.

• Strategy Formulation: to set and review the overall strategy and goals for the Company and ensuring that there are policies in place to govern the operation of the Company.
• Overseeing Planning Activities: the development of the Company's strategic plan.
• Shareholder Liaison: ensuring effective communications with shareholders through an appropriate $\blacksquare$ communications policy and promoting participation at general meetings of the Company.
• Monitoring, Compliance and Risk Management: the development of the Company's risk management. $\overline{\phantom{a}}$ compliance, control and accountability systems and monitoring and directing the financial and operational performance of the Company.
• Company Finances: approving expenses and approving and monitoring acquisitions, divestitures and $\bullet$ financial and other reporting.
• Ensuring the Health, Safety and Well-Being of Employees: in conjunction with the senior management team, developing, overseeing and reviewing the effectiveness of the Company's occupational health and safety systems to ensure the well-being of all employees.
• Delegation of Authority: delegating appropriate powers to the CEO to ensure the effective day-to-day management of the Company and establishing and determining the powers and functions of the Committees of the Board

Full details of the Board's role and responsibilities are contained in the Board Charter, a copy of which is available for inspection at the Company's registered office.

$14$ Board Policies

$1.4.1$ Conflicts of Interest

Directors must:

• disclose to the Board actual or potential conflicts of interest that may or might reasonably be thought to exist between the interests of the Director and the interests of any other parties in carrying out the activities of the Company; and
• if requested by the Board, within seven days or such further period as may be permitted, take such $\bullet$ necessary and reasonable steps to remove any conflict of interest.

If a Director cannot or is unwilling to remove a conflict of interest then the Director must, as per the Corporations Act, absent himself or herself from the room when discussion and/or voting occurs on matters about which the conflict relates.

$142$ Commitments

Each member of the Board is committed to spending sufficient time to enable them to carry out their duties as a Director of the Company.

$1.4.3$ Confidentiality

In accordance with legal requirements and agreed ethical standards, Directors and key executives of the Company have agreed to keep confidential, information received in the course of the exercise of their duties and will not disclose non-public information except where disclosure is authorised or legally mandated.

$1.4.4$ Continuous Disclosure

The Board has designated the Company Secretary as the person responsible for overseeing and coordinating disclosure of information to the ASX as well as communicating with the ASX. In accordance with the ASX Listing Rules the Company immediately notifies the ASX of information:

• concerning the Company that a reasonable person would expect to have a material effect on the price or ٠ value of the Company's securities; and
• that would, or would be likely to, influence persons who commonly invest in securities in deciding $\bullet$ whether to acquire or dispose of the Company's securities.

$1.4.5$ Education and Induction

It is the policy of the Company that new Directors undergo an induction process in which they are given a full briefing on the Company. Where possible this includes meetings with key executives, tours of the premises, an induction package and presentations. Information conveyed to new Directors include:

• details of the roles and responsibilities of a Director; $\bullet$
• formal policies on Director appointment as well as conduct and contribution expectations;

• access to a copy of the Board Charter;

• quidelines on how the Board processes function;

• details of past, recent and likely future developments relating to the Board: $\blacksquare$
• background information on and contact information for key people in the organisation; $\blacksquare$
• an analysis of the Company;
• a synopsis of the current strategic direction of the Company; and $\bullet$
• a copy of the Constitution of the Company. $\bullet$

In order to achieve continuing improvement in Board performance, all Directors are encouraged to undergo continual professional development. Specifically, Directors are provided with the resources and training to address skills gaps where they are identified.

$1.4.6$ Independent Professional Advice

The Board collectively and each Director has the right to seek independent professional advice at the Company's expense, up to specified limits, to assist them to carry out their responsibilities.

$1.4.7$ Related Party Transactions

Related party transactions include any financial transaction between a Director and the Company. Unless there is an exemption under the Corporations Act from the requirement to obtain shareholder approval for the related party transaction, the Board cannot approve the transaction.

$1.4.8$ Shareholder Communication

The Company respects the rights of its shareholders and to facilitate the effective exercise of those rights the Company is committed to:

• communicating effectively with shareholders through releases to the market via ASX, information mailed to shareholders and the general meetings of the Company;
• giving shareholders ready access to balanced and understandable information about the Company and corporate proposals;
• making it easy for shareholders to participate in general meetings of the Company; and $\bullet$
• requesting the external auditor to attend the annual general meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the auditor's report.

The Company also makes available a telephone number and email address for shareholders to make enquiries of the Company.

$1.4.9$ Trading in Company Shares

Due to the size of the Company, the Board does not consider it appropriate to implement a Share Trading Policy. Rather, it reminds directors, officers and employees of the prohibition in the Corporations Act 2001 concerning trading in the Company's securities when in possession of "inside information".

1.4.10 Performance Review/Evaluation

It is the policy of the Board to conduct evaluation of its performance. The evaluation process was introduced via the Board Charter adopted on 30 June 2004 and will be implemented for the financial period ended 30 June 2005. The objective of this evaluation will be to provide best practice corporate governance to the Company.

Attestations by CEO and CFO $1.4.11$

It is the Board's policy, that the CEO and the CFO make the attestations recommended by the ASX Corporate Governance Council as to the Company's financial condition prior to the Board signing the Annual Report. However, as at the date of this report the Company does not have a designated CEO or CFO. Due to the size and scale of operations of the Company these roles are performed by the Board as a whole.

• $\overline{2}$ . Board Committees
• $2.1$ Audit Committee

Due to the size and scale of operations of the Company the full Board undertakes the role of the Audit Committee. Below is a summary of the role and responsibilities of an Audit Committee.

Role $2.1.1$

The Audit Committee is responsible for reviewing the integrity of the Company's financial reporting and overseeing the independence of the external auditors.

As the whole Board only consists of three (3) members, the Company does not have an audit committee because it would not be a more efficient mechanism than the full Board for focusing the Company on specific issues and

an audit committee cannot be justified based on a cost-benefit analysis. However, in accordance with the ASX Listing Rules, the Company is moving towards establishing an audit committee consisting primarily of Independent Directors.

In the absence of an audit committee, the Board sets aside time to deal with issues and responsibilities usually delegated to the audit committee to ensure the integrity of the financial statements of the Company and the independence of the external auditor.

$212$ Responsibilities

The Audit Committee or as at the date of this report the full Board of the Company reviews the audited annual and half-yearly financial statements and any reports which accompany published financial statements and recommends their approval to the members.

The Audit Committee or as at the date of this report the full Board of the Company each year reviews the appointment of the external auditor, their independence, the audit fee, and any questions of resignation or dismissal

The Audit Committee or as at the date of this report the full Board of the Company is also responsible for establishing policies on risk oversight and management.

$2.1.3$ Risk Management Policies

The Board's Charter clearly establishes that it is responsible for ensuring there is a good sound system for overseeing and managing risk. Due to the size and scale of operations, risk management issues are considered by the Board as a whole. On 20 September 2005 Mr Ron Thom (Managing Director) and Mr Kent Hunter (Company Secretary) provided the Board with written assurance that the financial statements are founded on a sound system of risk management and internal compliance. Their statement assured the Board that the risk management and internal compliance and control system is operating efficiently and effectively in all material respects.

Remuneration Committee $2.2$

$2.2.1$ Role

The role of a Remuneration Committee is to assist the Board in fulfilling its responsibilities in respect of establishing appropriate remuneration levels and incentive policies for employees.

As the whole Board only consists of three (3) members, the Company does not have a remuneration committee because it would not be a more efficient mechanism than the full Board for focusing the Company on specific issues.

$2.2.2$ Responsibilities

The responsibilities of a Remuneration Committee, or the full Board include setting policies for senior officers' remuneration, setting the terms and conditions of employment for the Chief Executive Officer, reviewing and making recommendations to the Board on the Company's incentive schemes and superannuation arrangements. reviewing the remuneration of both Executive and Non-Executive Directors and making recommendations on any proposed changes and undertaking reviews of the Chief Executive Officer's performance, including, setting with the Chief Executive Officer goals and reviewing progress in achieving those goals.

Remuneration Policy $2.2.3$

Directors' Remuneration was approved by resolution of the Board on 21 February 2005.

Senior Executive Remuneration Policy $2.2.3.1$

The Company is committed to remunerating its senior executives in a manner that is market-competitive and consistent with best practice as well as supporting the interests of shareholders. Consequently, under the Senior Executive Remuneration Policy the remuneration of senior executive may be comprised of the following:

• fixed salary that is determined from a review of the market and reflects core performance requirements and expectations:
• a performance bonus designed to reward actual achievement by the individual of performance objectives and for materially improved Company performance;
• participation in any share/option scheme with thresholds approved by shareholders; $\bullet$
• statutory superannuation.

By remunerating senior executives through performance and long-term incentive plans in addition to their fixed remuneration the Company aims to align the interests of senior executives with those of shareholders and increase Company performance. During the year there were no Non-Director Executives.

The value of shares and options were they to be granted to senior executives would be calculated using the Black

and Scholes method.

The objective behind using this remuneration structure is to drive improved Company performance and thereby increase shareholder value as well as aligning the interests of executives and shareholders.

The Board may use its discretion with respect to the payment of bonuses, stock options and other incentive payments.

2.2.3.2 Non-Executive Director Remuneration Policy

Non-Executive Directors are to be paid their fees out of the maximum aggregate amount approved by shareholders for the remuneration of Non-Executive Directors. Non-Executive Directors do not receive performance based bonuses and do not participate in equity schemes of the Company.

Non-Executive Directors are entitled to but not necessarily paid statutory superannuation.

$2.2.4$ Current Director Remuneration

Full details regarding the remuneration of Directors, is included in the Directors' Report.

$2.3$ Nomination Committee

$2.3.1$ Role

The role of a Nomination Committee is to help achieve a structured Board that adds value to the Company by ensuring an appropriate mix of skills are present in Directors on the Board at all times.

As the whole Board only consists of three (3) members, the Company does not have a nomination committee because it would not be a more efficient mechanism than the full Board for focusing the Company on specific issues.

$2.3.2$ Responsibilities

The responsibilities of a Nomination Committee would include devising criteria for Board membership, regularly reviewing the need for various skills and experience on the Board and identifying specific individuals for nomination as Directors for review by the Board. The Nomination Committee would also oversee management succession plans including the CEO and his/her direct reports and evaluate the Board's performance and make recommendations for the appointment and removal of Directors. Currently the Board as a whole performs this role.

$2.3.3$ Criteria for selection of Directors

Directors are appointed based on the specific governance skills required by the Company. Given the size of the Company and the business that it operates, the Company aims at all times to have at least one Director with experience appropriate to the Company's target market. In addition, Directors should have the relevant blend of personal experience in accounting and financial management and Director-level business experience.

3. Company Code Of Conduct

The Board has decided against the implementation of a code of conduct as it does not believe that it is in the best interests of its employees or other stakeholders to have what purports to be an exhaustive code of conduct. The Board feels that such a code may be too prescriptive and not allow the employees the discretion they need to best serve the Company's stakeholders.

Project	Tenement	Interest held by Graynic Metals Limited
Walgidee	E04/1551	Application
Jutson Rocks	E38/1540	20% with earn in for a further 60%
Jutson Rocks	E38/1541	20% with earn in for a further 60%
Quartz Circle	E45/2602	20% with earn in for a further 60%
Quartz Circle	E46/0541	$20\%$ with earn in for a further $60\%$
Quartz Circle	M46/0371	20% with earn in for a further 60%
Ouartz Circle	P46/1360	$20\%$ with earn in for a further $60\%$
Quartz Circle	P46/1361	20% with earn in for a further 60%
Quartz Circle	P46/1362	20% with earn in for a further 60%
Ouartz Circle	P46/1363	$20\%$ with earn in for a further $60\%$
Ouartz Circle	P46/1364	20% with earn in for a further 60%
Quartz Circle	P46/1365	$20\%$ with earn in for a further $60\%$
Quartz Circle	P46/1366	20% with earn in for a further 60%
Quartz Circle	P46/1385	20% with earn in for a further 60%
Quartz Circle	P46/1386	20% with earn in for a further 60%
Ouartz Circle	P46/1441	20% with earn in for a further 60%
Quartz Circle	P46/1442	20% with earn in for a further 60%
Northampton	ELA66/0049	$20\%$ with earn in for a further $60\%$

SCHEDULE OF MINERAL TENEMENTS AS AT 20 AUGUST 2005

Prospecting Licence
Exploration Licence
Mining Licence $\bar{P}$

$\mathbf{E}% _{0}$

$\rm M$