Lachlan Star Limited — Audit Report / Information 2004

Feb 18, 2004

ACN 000 759 535

(Receivers and Managers Appointed, Voluntary Administrators Appointed)

Level 9, Gold Fields House 1 Alfred Street Sydney NSW 2000 Email: info@gympiegold.com.au

Phone: (02) 9251 2777 Facsimile : $(02)$ 9251 2666 Website: www.gympiegold.com.au

Report as to Affairs - Form 507 Directors' Comments

Report as to Affairs

These comments are in respect of the Gympie Gold Group. Details for each Company are given in separate Reports in accordance with ASIC Form 507.

A general update of the affairs of the Group was provided by Directors in the "Report for the December Quarter" which was released on 30 January 2004 and which encapsulated events between 1 January and 30 January 2004.

All references herein are to book values at 30 December 2003 as extracted from the preliminary unaudited accounts.

Group Liabilities

Balances were:

Employee Entitlements	\$2.3 million
Provisions for Rehabilitation	\$2.5 million
First ranking debt	\$30.2 million
Limited recourse stock&debtors debt	\$4.7 million
Second ranking debt	\$17.3 million
Equipment Leases	\$5.9 million
Trade creditors and accruals	\$14.9 million
Unsecured Loans	\$6.4 million
Convertible Notes redeemable in 2007	\$40.0 million
Debts per accounts	\$124.2 million
Unrealised foreign exchange gain	\$4.0 million
Deferred foreign exchange gain	\$1.1 million
Deferred tax liability	\$3.1 million
Total Liabilities per accounts	\$132.4million
Liquid Assets Cash and other liquid assets were:
Cash	\$17.7million
Other	\$15.0 million
Total Liquid Assets	\$32.7 million

These liquid assets are expected to be exhausted during the June quarter.

Southland Coal Ptv Limited

This Company is 100%-owned and holds 90% of the Southland Colliery Joint Venture with mine operator, Thiess Group, holding 10%.

Net realisable value of this project depends on which of three scenarios is executed:

• 1. Mine abandonment...this would lead to the realisation of real estate which may provide a net return of +/-\$5 million after land rehabilitation, together with a recovery from insurers or other third parties over some years. The amount remains uncertain but could involve one or more claims aggregating over \$30 million.
• 1. Mine re-entry, remediation and recommencement of production. subject to the state of underground workings and equipment inspection in due course, this is currently expected to require a capital injection in the order of +/-\$30 million and would strive to achieve over the longer term a net realisable value in excess of \$100 million which reflects the assumption of a going concern and the inherent value of unexploited coal reserves.
• 1. Sale to a third party...if implemented under current circumstances this is likely to realise a sum at a material discount to book value.

Range of net realisable values for Southland Coal...a material discount to book value in the shorter term to in excess of book value of \$100 million (excluding liquid assets) in the longer term.

Gympie Eldorado Gold Mines Ptv Limited

This Company is 100%-owned and is currently being offered for sale by the Receiver and Managers. The deadline for final offers is 15 March 2004.

The net realisable value under current circumstances is likely to be at a material discount to book value of \$86 million.

Achievement of optimal net realisable value over the longer term would require the reinstatement of exploration and mine development which was suspended in January 2004. Such a plan would strive to achieve over the longer term a net realisable value in excess of book value \$86 million, which reflects an assumption of going concern and the inherent value of the exploration projects.

Range of net realisable value for Gympie Eldorado...a material discount to book value in the shorter term to in excess of book value of \$86 million (excluding liquid assets) over the longer term.

Group Summary

Debts....\$124.2 million. This is a sub-set of the total book liabilities of \$132.4 million.

Range of Net Realisable Value of Assets... Lower valuation - a material discount to book value of \$186 million (excluding liquid assets) if realised in the short term. Higher valuation - Subject to the recapitalisation of both Southland Coal and Gympie Eldorado the longer term realisable value would be in excess of book value of \$186 million per preliminary unaudited accounts which were prepared on the assumption of a going concern and which rely on the inherent value of unexploited coal reserves and of gold exploration projects.

Harry Adams Managing Director - Gympie Gold Group for and on behalf of the Board of Directors