CORAZON MINING LIMITED — Interim / Quarterly Report 2006

Mar 15, 2006

Graynic Metals Limited

(ABN 87-112-898-825)

Financial Report For the Half-Year Ended 31 December 2005

Company Directory	1
Directors' Report	$\mathbf{2}$
Income Statement	8
Balance Sheet	9
Statement of Cashflows	10 °
Statement of Change in Equity	11
Notes to the Financial Statements	12 2
Directors' Declaration	18
Independence Declaration	19.
Independent Review Report	20.

CORPORATE DIRECTORY

NON-EXECUTIVE CHAIRMAN Ivan Hoffman

MANAGING DIRECTOR Ronald Thom

NON-EXECUTIVE DIRECTORS 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, GYNO

BANKERS

National Australia Bank 50 St Georges Terrace PERTH WA 6000

DIRECTORS' REPORT

Your Directors present their report on the Company for the half-year ended 31 December 2005.

DIRECTORS

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

Ivan Hoffman (appointed 28 October 2005) Ron Thom Nathan McMahon Clive Jones

REVIEW OF OPERATIONS

In November 2005 the Company entered into an agreement with a private company, Resource Investment Group Pty Ltd, to acquire three high quality projects near Broken Hill and another at Gulf Creek near Tamworth in New South Wales. The deal involved the acquisition of the holding company Resource Investment Group Pty Ltd by issuing to the vendors 10 million Graynic ordinary shares and 4 million unlisted options exercisable at 30 cents, together with a payment of \$50,000 in cash. The deal has since received shareholder approval at an Extraordinary General Meeting held on 17 February 2006.

The Company believes that these projects are a substantial and exciting addition to its existing portfolio. and that evaluation drilling at the scheelite prospect at Yanco Glen could well lead to an early cashflow for the Company in the current buoyant tungsten market.

The Company also completed a placement of 2,500,000 shares to private sophisticated investors at 20c each to raise \$500,000 of working capital. The money will be used mainly to fund exploration in NSW, and drilling is planned at Yanco Glen within the first quarter of 2006.

NSW PROJECTS

The projects comprise the four granted exploration licences Yanco Glen (EL 6489), Wertago (EL 6424), and Copper Ridge (EL 6435) in the Broken Hill area, and Gulf Creek (EL 6492) in the Tamworth area.

A. Yanco Glen Project

Highlights

• Identified scheelite resources with possibility of early production.
• Potential for shear-hosted gold.

Scheelite is calcium tungstate (CaWO4) and is one of the two main ores of tungsten metal. Tungsten is used in the manufacture of certain hard steels and alloys and is in great demand at the moment due to the upsurge of steelmaking in China. Scheelite is often sold as a concentrate produced on site in a relatively cheap and straightforward process.

The identified scheelite resources at Yanco Glen occur in the south of the tenement at a distance of about 30km north of Broken Hill. Scheelite was mined on a small scale in the 1930s and the small workings define the line of lode over a distance of about 2km. Between 1980 and 1984 CRA Exploration (CRAE) investigated the scheelite potential and estimated that there could be a substantial scheelite resource present.

Indications from the geology and data available suggest that an exploration target in the range of 1 to 2Mt at average grades of around 0.5%W could be present. This is based upon detailed geological mapping, UV lamping (scheelite fluoresces under ultraviolet light), rock chip sampling and some drilling over the 2km long extent of workings. This potential quantity and grade of mineralisation is only conceptual in nature as there is insufficient exploration data currently available to define a Mineral Resource and it is uncertain if further exploration will result in the determination of a Mineral Resource.

The main target zone is well defined and a drill out of the scheelite resource was scheduled to commence in February 2006. Difficulties in obtaining a drilling rig have led to a slight delay and the drilling will commence mid March.

A line of small gold workings including the historic Anaconda mine occur in the northern part of the tenement. They have not been explored in recent times and will be investigated in 2006.

B. Wertago Project

Highlights

• Historic Cu-Ag production with head grades up to $30\%$ Cu.
• Modern exploration has been limited in scope.
• Previous diamond drilling intersected $2m (a) 4.6\%$ Cu below historic workings at Eclipse.
• Zn is known to be present in exploration drill core but was never assayed
• Prospects lie adjacent to the same regional structure as the Grasmere deposit about 30km to the $\bullet$ southeast (0.55mt @ 2.5% Cu, Black Range Minerals Ltd).
• Previous gold exploration results included 12.2m $(a)$ 4.6 g/t Au, not followed up. $\bullet$

The copper mineralization at Wertago is evident within numerous historic workings which occur along structures linked to the Koonenberry Fault. The presence of a major fault is important, as in general large deposits occur near large fault structures. The shears hosting the known mineralization are targets in themselves and will be drill tested in early 2006 to identify high grade copper resources which might lead to early production. However the general setting, including the occurrence of Ag, Pb, and Zn as well as Cu suggests that a large polymetallic deposit could be present in the area. There is also potential for Cu-Au porphyry deposits and Century-style zinc deposits within the Koonenberry belt.

C. Copper Ridge Project

Highlights

• Historic small-scale copper mining.
• A zone of Cu potential 3.5km long.
• Copper mineralization could be in a sheeted vein system.
• Untested by modern exploration no drilling in $125$ years. $\blacksquare$

There is little published information on this prospect because it has never previously been held as an exploration licence. Previous work has been confined to small-scale copper mining for which there are no production records. The mineralization occurs as narrow individual lodes which repeat as parallel reefs, and may be a sheeted vein system. Alternatively the mineralization could relate to an intrusion of Cu porphyry style.

D. Gulf Creek Project

Highlights

• Historic copper production at high Cu grades.
• $\bullet$ Three-lode system with some existing Cu-Zn resources.
• Limited modern exploration. $\bullet$

The Gulf Creek copper mine represents the largest copper mine of its type in the New England region of NSW and was primarily mined between 1889 and 1912. Over 35,000 tonnes of Cu ore was mined at an average grade of 5% Cu over the mine life. Higher grades were recovered from some areas such as the Fishers Mine, with head grades exceeding 15% Cu. Mine records estimate that ore reserves up to 50,000 tonnes of ore grading $2.7\%$ copper, and $4.5\%$ zinc could remain in the known ore lenses.

The deposit is considered to be a Cyprus pyrite style and has not been properly explored since mining ceased almost 100 years ago, creating an exceptional modern exploration opportunity.

The mine reached a depth of 150m, had a strike length of 400m and the ore channel was 30m in width. The ore channel hosts 3 parallel lodes known as the Cornish Lode (2m wide at 6-6.5% Cu), Middle Lode (1.5-2m wide at 3-3.5% Cu), and the Big Lode (7m wide at 2-2.5% Cu). Records indicate Zn credits amount to nearly twice the Cu in the estimated ore reserves, but this will be verified by drilling.

WA PROJECTS

Ouartz Circle

Drilling

In August the Company completed its first round of drilling at the Igloo and Emperor prospects based on data generated by previous explorers. The program consisted of 5 reverse circulation (RC) holes and 6 diamond drill holes with RC precollars, and the best intersections are shown in the following table.

Hole ID	Northing	Easting	Downhole	Sample	Interval	Au	Pb	Zn
			Depth (m)	Type	(m)	ppm	$\%$	$\%$
Igloo Prospect
GM 1	7601392	208914	76-80	RC comp	4	1.50
			177-183	Core	6	1.59
GM 2	7601408	208993	$170 - 171$	Core	ĺ	2.22
Emperor Prospect
GM 5	7600694	209504	48-52	RC comp	4			1.49
			60-72	RC comp	12	0.30	1.12	2.07
			96-104	RC comp	8			1.20
			144-145	Core	ĺ	0.34	0.20	1.73
			185-186	Core	ĺ	0.22	0.60	3.86
GM 6	7600700	209502	56-60	RC comp	4			3.28
			68-76	RC comp	8			1.50
			148-150	RC comp	$\overline{2}$			2.19
GM7	7600690	209485	56-60	RC comp	4			4.48
			103-104	Core	ĺ		0.50	1.03
GM 8	7600727	209537	$12 - 16$	RC comp	4		2.10	1.60
GM 9	7600834	209510	28-32	RC comp	4			2.82
			56-72	RC comp	16			1.78
			76-80	RC comp	4			1.83
			100-104	RC comp	$\overline{4}$			1.05

OUARTZ CIRCLE DRILLING RESULTS

The results confirm the Emperor Prospect as a strongly-mineralised base metal system, within a rock assemblage typical of a volcanic massive sulphide environment. It is particularly encouraging that all 5 holes drilled at the Emperor Prospect intersected significant mineralisation, with drill hole GM 9 at the northern limit of previous drilling having the most substantial mineralisation.

Continued field investigations have now shown that the prospective rocks continue northwards for about 500m from GM 9, and this extensive new target zone will be tested in the next round of drilling. Further drill holes will be planned when the results are received from the detailed aeromagnetic survey commissioned for mid November, as the aeromagnetic data may indicate specific targets within this zone.

Completion of aeromagnetic and radiometric survey.

In December 2005 a low-level high-resolution aeromagnetic and radiometric survey was flown by UTS over the Company's tenements to assist in the mapping and interpretation of this highly- prospective but poorly understood area and to provide new targets for immediate exploration.

The processed data has now been received and a provisional interpretation has been presented by Southern Geoscience Consultants. The survey has revealed:

• Five discrete aeromagnetic highs which could be related to Ni, base metal, or other mineralization. $\bullet$
• Two outstanding potassium anomalies which could represent altered rocks associated with $\bullet$ mineralization, possibly Ni.
• Two uranium-thorium anomalies which could be associated with uranium mineralization. $\bullet$
• A possible ultramafic unit which could have potential for Ni mineralization.
• Two major faults which may influence mineralization in the area. $\bullet$
• These anomalies will be examined in the field in February prior to or during the upcoming drilling program. Should any of the anomalies merit immediate drilling this will be done as an extension to the scheduled program.
• RC drilling program for base metals scheduled for March 2006.

The Company booked a drilling rig for mid February to carry out a 2000 metre program of reverse circulation (RC) drilling at the Emperor Pb-Zn prospect. The primary objective is to test a new zone of base metal potential revealed from geological mapping last year, which showed that the classic geological setting for a volcanic massive sulphide (VMS) system extends for at least another 500m northwards from the area of previous drilling. Recent heavy cyclonic rains have delayed the commencement of drilling. which is now scheduled for mid March.

Other WA projects

Jutson Rocks

Negotiations for access to the Jutson Rocks project area have now commenced with the Traditional Owners. Once access is granted field investigations will commence with a view to implementing a substantial exploration program early in 2006. The Company is highly encouraged by the exciting drilling results achieved by the Falcon Minerals-BHPB joint venture at Collurabbie, which seems to have a similar geological setting to Jutson Rocks.

In the September Ouarter an exploration licence application was made to secure additional tenure immediately to the north, giving complete coverage of several previously-identified geochemical anomalies.

Northampton

This tenement, which includes many historic lead mines with potential also for zinc and silver mineralization, has not yet been granted.

Walgidee Hills

This tenement, which completely encompasses a large diamond-bearing lamproite intrusion in the Kimberley region, was applied for in the September Quarter but has not yet been granted

Brockman Creek

This tenement, which is in the immediate vicinity of a large diamond-bearing kimberlite dyke 50km north of Quartz Circle, was applied for in the September Quarter but has not yet been granted.

CORPORATE

On 23 September 2005, the Company issued 12,250,002 listed options to subscribe for Ordinary Fully Paid Shares at an exercise price of 20 cents on or before 31 October 2007.

On 28 October 2005, the Company appointed Mr Ivan Hoffman as Non-Executive Chairman.

On 6 December 2005, the Company issued 2,000,000 Directors Options as passed by the members at the Annual General Meeting on 30 November 2005.

ADOPTION OF AUSTRALIAN EQUIVALENTS TO IFRS

This interim financial report has been prepared under Australian equivalents to IFRS.

LEAD AUDITORS INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001

The lead auditor's independence declaration for the period ended 31 December 2005 has been received and can be found on page 19 of this report.

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

Nathan McMahon

Director

Perth, 14^th March 2006

INCOME STATEMENT FOR THE HALF-YEAR ENDED 31 DECEMBER 2005

	31 December 2005 \$
Interest Income	45,424
Other Income	6,980
Administrative expense	(33,023)
Employee benefits expense	(32, 117)
Borrowing costs expense	(721)
Consultancy expenses	(26,066)
Compliance and regulatory expenses	(28, 047)
Occupancy expenses	(9, 479)
Directors fees	(41, 133)
Directors option expense	(72, 664)
Exploration write-off	(51,993)
Depreciation expense	(2,066)
Provision for diminution in value of shares	(27,500)
Other expenses from ordinary activities	(9,785)
Loss from continuing operations before income tax expense	(282, 190)
Income tax expense relating to ordinary activities
Net loss attributable to members	(282, 190)
Basic loss per share (cents per share)	(1.15)
Diluted loss per share (cents per share)	(0.92)

BALANCE SHEET AS AT 31 DECEMBER 2005

	31 December 2005	30 June 2005
	\$	$\mathbb{S}$
CURRENT ASSETS
Cash and cash equivalents	1,684,622	2,216,933
Trade and other receivables	13,757	48,913
TOTAL CURRENT ASSETS	1,698,379	2,265,846
NON CURRENT ASSETS
Financial assets	86,410
Plant and equipment	8,979	8,587
Exploration and evaluation expenditure	2,552,778	2,350,877
TOTAL NON CURRENT ASSETS	2,648,167	2,359,464
TOTAL ASSETS	4,346,546	4,625,310
CURRENT LIABILITIES
Trade and other payables	43,280	228,769
Provisions	7,265	3,008
TOTAL CURRENT LIABILITIES	50,545	231,777
TOTAL LIABILITIES	50,545	231,777
NET ASSETS	4,296,001	4,393,533
EQUITY
Issued capital	4,483,559	4,371,565
Option premium reserve	239,994	167,330
Accumulated losses	(427, 552)	(145, 362)
TOTAL EQUITY	4,296,001	4,393,533

STATEMENT OF CASH FLOWS FOR THE HALF-YEAR ENDED 31 DECEMBER 2005

	31 December 2005
NOTE
Cash Flows from Operating Activities	S
- Payments to suppliers and employees	(272, 132)
- Interest received	43,002
- Other revenue	6,980
- Payments for exploration and evaluation	(305,788)
Net cash used in operating activities	(527, 938)
Cash Flows From Investing Activities
- Purchase of equity investments	(113,910)
- Purchase of plant and equipment	(2,457)
Net cash used in investing activities	(116,367)
Cash Flows from Financing Activities
Proceeds from issue of shares	122,501
Payment for costs of issue of shares	(10, 507)
Net cash provided by financing activities	111,994
Net decrease in cash held	(532,311)
Cash and cash equivalents at beginning of financial period	2,216,933
Cash and cash equivalents at end of financial period	1,684,622

STATEMENT OF CHANGES IN EQUITY
FOR PERIOD ENDED 31 DECEMBER 2005

	Issued Capital	Accumulated Losses	Option Premium
At the beginning of financial	\$	\$	Reserve \$	Total \$
period 1 July 2005	4,371,565	(145, 362)	167,330	4,393,533
Issue of share capital	122,501			122,501
Issue costs	(10, 507)			(10, 507)
Issue of options			72,664	72,664
Loss for the period		(282, 190)		(282, 190)
Balance at 31 December 2005	4,483,559	(427, 552)	239,994	4,296,001

$L$ STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES

$\omega$ Basis of Preparation

The half-year financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 and AASB 134 "Interim Financial Reporting". Compliance with AASB 134 ensures compliance with International Financial Reporting Standard IAS 34 "Interim Financial Reporting". The half-year financial report does not include notes of the type normally included in an annual financial report and should be read in conjunction with the 2005 annual financial report.

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 half-year financial report is presented in Australian dollars.

(b) Statement of compliance

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

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

$\left( c\right)$ Income Tax

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
• in respect of deductible temporary differences with investments in subsidiaries, 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.

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

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.

$(d)$ Exploration and evaluation expenditure

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:

• such costs are expected to be recouped through successful development and $(i)$ 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.

Earnings Per Share $(e)$

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.

$\theta$ Revenue

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.

Cash and cash equivalents $\left( \varrho \right)$

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.

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

$\omega$ Employee Benefits

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.

$\ddot{a}$ 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.

Trade and Other Receivables (i)

Trade receivables, which generally have $30 - 90$ day terms, are recognised and carried at original invoice amount less any allowance for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.

Recoverable amounts of Non-Current assets valued on cost basis $(k)$

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 its 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 Company's 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.

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

$\boldsymbol{a}$ Joint Venture Entities

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.

Financial Assets $(m)$

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, are measured at fair value. Gains or losses on investments held for trading are recognised in the income statement.

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.

$(n)$ Trade and Other Payables

Trade and other payables represent liabilities for goods and services provided to the company prior to the end of the financial period and which are unpaid. Trade and other payables are carried at cost which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the company. The amounts are unsecured and are usually paid within 30 days of recognition.

Provisions $\omega$

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.

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

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

$(p)$ Plant and Equipment

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%

$\left( q\right)$ 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 using a binomial model.

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').

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

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 vet 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.

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.

$2.$ SUBSEQUENT EVENTS

On 16 January 2006, the Company issued 2,500,000 ordinary shares at \$0.20 each to various investors pursuant to the prospectus lodged with ASIC on 14 December 2005. The issue raised \$500,000 before costs. Shareholder approval for this placement was received on 17 February 2006.

On 17 February 2006, the members of the Company approved the purchase of Resources Investment Group Pty Ltd (RIG), following the announcement on 12 December 2005 that the Company had entered into an Agreement with the owners of RIG to purchase the company.

Consideration for the purchase is 10 million Graynic ordinary shares and 4 million unlisted options exercisable at 30 cents, together with a payment of \$50,000 in cash.

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.

$\overline{3}$ . CONTINGENT LIABILITIES

There has been no change in contingent liabilities since the last annual reporting date.

4. SEGMENTAL REPORTING

The Company operates predominantly in one geographical segment, being Australia, and in one business segment, mineral mining and exploration and substantially all of the entity's resources are deployed for this purpose.

GRAYNIC METALS LIMITED ABN 23 101 049 334

DIRECTORS' DECLARATION

For the Half Year Ended 31 December 2005

The Directors of the Company declare that:

• $\mathbf{1}$ . The financial statements and notes, as set out on pages 8 to 17 are in accordance with the Corporations Act 2001 and:
• (a) comply with Accounting Standards and the Corporations Regulations 2001; and

(b) give a true and fair view of the Company's financial position as at 31 December 2005 and its performance for the half-year ended on that date.

$\overline{2}$ . 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.

Nathan McMahon Director

PERTH Dated this 14th day of March 2006 14 March 2006

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 review of the financial statements of Graynic Metals Limited for the half year ended 31 December 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 review: and
• Any applicable code of professional conduct in relation to the review.

Yours sincerely ORD PARTNERS

Ian Keith Macpherson Partner

Ian K Macpherson CA

PARTNERS CHARTERED ACCOUNTANTS

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

To the members of Gravnic Metals Limited

Scope

We have reviewed the financial report of Graynic Metals Limited for the halfyear ended 31 December 2005 as set out in pages 8 to 18. The company's directors are responsible for the financial report. The financial report includes the financial statements of the company at the end of the half-year or from time to time during the half-year. We have performed an independent review of the financial report in order to state whether, on the basis of the procedures described. anything has come to our attention that would indicate that the financial report is not presented fairly in accordance with Accounting Standard AASB 134: Interim Financial Reporting and other mandatory professional reporting requirements in Australia and statutory requirements, so as to present a view which is consistent with our understanding of the company's financial position, and performance as represented by the results of its operations and its cash flows, and in order for the company to lodge the financial report with the Australian Securities and Investments Commission/Australian Stock Exchange Limited.

Our review has been conducted in accordance with Australian Auditing Standards applicable to review engagements. A review is limited primarily to inquiries of company personnel and analytical procedures applied to the financial data. These procedures do not provide all the evidence that would be required in an audit, thus the level of assurance provided is less than given in an audit. We have not performed an audit and, accordingly, we do not express an audit opinion.

Independence

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

In accordance with ASIC Class Order 05/83, we declare to the best of our knowledge and belief that the auditor's declaration set out in page 19 of the financial reports has not changed as at the date of providing our review opinion

Statement

Based on our review, which is not an audit, we have not become aware of any matter that makes us believe the half-year financial report of Graynic Metals Limited is not in accordance with:

• $(a)$ the Corporations Act 2001, including:
• (i) giving a true and fair view of the Company's financial position at 31 December 2005 and of its performance for the half-year ended on that date: and

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

$\mathbf{F}$ +61 8 9321 3514 (m) +61 8 9321 3523

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

• (ii) complying with Australian Accounting Standard AASB 134 "Interim Financial Reporting" and the Corporations Regulations 2001; and
• other mandatory professional reporting requirements in Australia. $(b)$

ORD PARTNERS

Chartered Accountants

IAN K MACPHERSON Partner

Dated this 14^th day of March 2006. Perth, Western Australia