THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult a licensed securities dealer, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your securities in Shanghai Merchants Holdings Limited, you should at once hand this circular to the purchaser or transferee, or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee. The Stock Exchange of Hong Kong Limited and the Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

This circular appears for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for the securities mentioned herein.

SHANGHAI MERCHANTS HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

(Stock code: 1104)

(1) VERY SUBSTANTIAL ACQUISITION RELATING TO THE CONDITIONAL ACQUISITION OF 48,373,197 ORDINARY SHARES IN MOUNT GIBSON (2) PROPOSED RIGHTS ISSUE IN THE PROPORTION OF ONE RIGHTS SHARE FOR EVERY EXISTING SHARE HELD ON THE RECORD DATE (3) PROPOSED ISSUE OF ONE BONUS WARRANT FOR EVERY FIVE RIGHTS SHARES (4) PLACING OF NEW SHARES (5) PROPOSED CHANGE OF NAME FOR SHANGHAI MERCHANTS HOLDINGS LIMITED (6) INCREASE OF AUTHORISED SHARE CAPITAL AND

(7) REFRESHMENT OF GENERAL MANDATES TO ISSUE SHARES AND REPURCHASE SHARES

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

==> picture [256 x 33] intentionally omitted <==

Underwriter to the Rights Issue

A letter from the Independent Board Committee to the Independent Shareholders, containing its recommendation to the Independent Shareholders, is set out on page 50 of this circular. A letter of advice from SinoPac Securities (Asia) Limited, the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders is set out on pages 52 to 79 of this circular.

It should be noted that the last day of dealings in Shares on cum-rights basis is Tuesday, 19 December 2006. The Shares will be dealt with on an ex-rights basis from Wednesday, 20 December 2006. To qualify for the Rights Issue, a Qualifying Shareholder’s name must appear on the register of members of the Company on the Record Date, which is currently expected to be Thursday, 4 January 2007. In order to be registered as a member of the Company on the Record Date, any transfers of Shares (with relevant share certificates) must be lodged with the Company’s branch registrar in Hong Kong, Secretaries Limited, for registration by 4:00 p.m. on Thursday, 21 December 2006. The register of members of the Company will be closed from Friday, 22 December 2006 to Thursday, 4 January 2007 (both dates inclusive). No transfer of the Shares will be registered during this period.

A notice convening the SGM to be held at 10:00 a.m. on Thursday, 4 January 2007 at 20/F., Central Tower, 28 Queen’s Road Central, Hong Kong or any adjournment thereof is set out on pages 461 to 469 of this circular. Whether or not you are able to attend the SGM, please complete the accompanying form of proxy, in accordance with the instructions printed thereon, and deposit the same at the offices of the Company’s branch share registrar in Hong Kong, Secretaries Limited at 26/F., Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as practicable and in any event not less than 48 hours before the time appointed for the holding of the SGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM or any adjournment thereof should you so wish

The Underwriter may terminate the arrangements set out in the Underwriting Agreement by notice in writing issued to the Company at any time between the date of the Underwriting Agreement and 5:00 p.m. on the second Business Day after the Final Acceptance Date if there occurs any one or more than one of the following events:-

(i) the Underwriter shall become aware of the fact that, any of the warranties contained in the Underwriting Agreement was, then or at the material time, untrue, inaccurate or misleading, or that the Company or the Majority Shareholders or either of them is/are in breach of any provision of the Underwriting Agreement or the Irrevocable Undertaking;

(ii) the enactment of any new law or regulation, any change in existing laws or regulations or any change in the interpretation or application thereof by any court or other competent authority, whether in Hong Kong or otherwise in a jurisdiction relevant in the context of the Rights Issue;
(iii) any change in local, international, financial, political, economic or stock market conditions, whether in Hong Kong or otherwise in a jurisdiction relevant in the context of the Rights Issue; or

(iv) any change or development involving a prospective change in taxation or exchange controls in Hong Kong,

and such event or events is or are in the bona fide and reasonable opinion of the Underwriter:

(a) likely to have a material adverse effect on the business or financial or trading position or prospect of the Company or the Group; or

(b) likely to have a material adverse effect on the success of the Rights Issue or the level of Shares underwritten by the Underwriters; or

(c) so material and prejudicial as to make it inappropriate, inadvisable or inexpedient to proceed further with the Rights Issue,

then the Underwriter may, in addition to and without prejudice to any other remedies to which the Underwriter may be entitled, after consultation with the Company and its professional advisers, by notice in writing to the Company on or before 5:00 p.m. on the third Business Day after the Final Acceptance Date to terminate the Underwriting Agreement forthwith.

If the Underwriter terminates or rescinds the Underwriting Agreement, the Rights Issue will not proceed.

* For identification purpose only

12 December 2006

			Page
Expected timetable		. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	ii
Definitions.. . . . . . .		. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the	Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		8
Letter from the	Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		50
Letter from SinoPac		. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	52
Appendix I	—	Financial Information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . .	80
Appendix II	—	Management Discussion and Analysis of the Group . . . . . . . . . . . . . .	129
Appendix III	—	Pro Forma Financial Information of the Group . . . . . . . . . . . . . . . .	145
Appendix IV	—	Financial Information on Mount Gibson . . . . . . . . . . . . . . . . . . . . . .	164
Appendix V	—	Management Discussion and Analysis of the Mount Gibson Group . .	365
Appendix VI	—	Summary of the terms of the Bonus Warrants . . . . . . . . . . . . . . . . . .	433
Appendix VII	—	Explanatory Statement as to Repurchase of Shares . . . . . . . . . . . . . .	442
Appendix VIII	—	General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	446
Notice of the SGM .		. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	461

— i —

EXPECTED TIMETABLE

Year 2006

Events Year 2006 Last day of dealings in Shares on a cum-right basis . . . . . . . . . . . . . . . . . . Tuesday, 19 December First day of dealings in Shares on an ex-right basis . . . . . . . . . . . . . . . . Wednesday, 20 December Latest time for lodging transfers of Shares in order to be qualified for the Rights Issue . . . . . . . . . . . 4:00 p.m. on Thursday, 21 December Register of members for the Shares closes . . . . . . . . . . . . . . . . . . . . . . . . . Friday, 22 December to Thursday, 4 January 2007 (both dates inclusive) Year 2007 Latest time for lodging forms of proxy for the purpose of the SGM . . . . . . . . . . . . . . . . . . . . . . . . . . .10:00 a.m. on Tuesday, 2 January Time and date of the SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . .10:00 a.m. on Thursday, 4 January Despatch of the Rights Issue Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Thursday, 4 January Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Thursday, 4 January Publication of results of SGM in newspapers and on the Stock Exchange’s website . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Friday, 5 January Register of members for the Shares reopens . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Friday, 5 January First day of trading in nil-paid Rights Shares . . . . . . . . . . . . . . . . . . . . . . . . . . Monday, 8 January Latest time for splitting nil-paid Rights Shares . . . . . . . . . . . . . . .4:00 p.m. on Friday, 12 January Last day of trading in nil-paid Rights Shares . . . . . . . . . . . . .4:00 p.m. on Wednesday, 17 January Latest time for acceptance of and payment for Rights Shares (Note) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4:00 p.m. on Monday, 22 January Latest time for the Rights Issue to become unconditional . . . . . .5:00 p.m. on Thursday, 25 January Announcement of the results of the Rights Issue . . . . . . . . . . . . . . . . . . . . . .Thursday, 1 February Despatch of refund cheques in respect of wholly or partly unsuccessful excess applications . . . . . . . . . . . . . . . . . . . .Thursday, 1 February

— ii —

EXPECTED TIMETABLE

Share certificates for fully-paid Rights Shares and

certificates for Bonus Warrants to be posted . . . . . . . . . . . . . . . . . . . . . . . .Thursday, 1 February

Dealings in fully-paid Rights Shares and

the Bonus Warrants commence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Monday, 5 February

Effect of bad weather on the latest time for acceptance of and payment for Rights Shares:

The latest time for acceptance of and payment for Rights Shares will not take place.

Note: If there is a “black” rainstorm warning or a tropical cyclone warning signal number 8 or above in force in Hong Kong on the latest date for acceptance of and payment for Rights Shares (i) at any local time before 12:00 noon and no longer in force after 12:00 noon on 22 January 2007, the latest time of acceptance of and payment for Rights Shares will be extended to 5:00 p.m. on the same Business Day and (ii) at any local time between 12:00 noon and 4:00 p.m. on 22 January 2007, the latest time of acceptance time of and payment for Rights Shares will be rescheduled to 4:00 p.m. on the following Business Day which does not have either of those warnings in force at any time between 9:00 a.m. and 4:00 p.m.

If the latest time for acceptance of and payment for Rights Shares does not take place on the expected latest date for acceptance of the offer of the Rights Shares, the dates mentioned in this section may be affected. A press announcement will be made by the Company in such event.

The expected timetable for the Rights Issue and the Bonus Warrants Issue set out below is for indicative purposes only and it has been prepared on the assumption that all the conditions of the Rights Issue and the Bonus Warrants Issue will be fulfilled. The expected timetable is subject to change, and any changes will be announced in a separate announcement by the Company as and when appropriate. All times and dates in this circular refer to Hong Kong local times and dates.

It should be noted that the Underwriting Agreement contains provisions granting the Underwriter, by notice in writing, the right to terminate its obligations thereunder on the occurrence of certain events. These events are set out in the paragraph headed “Termination of the Underwriting Agreement” on pages 27 to 28 of this circular. If the Underwriting Agreement is terminated by the Underwriter or does not become unconditional, the Rights Issue and the Bonus Warrants Issue will not proceed.

Subject to the Rights Issue being approved at the SGM, the Rights Issue Documents containing information on the Rights Issue and the Bonus Warrants Issue will be despatched to the Qualifying Shareholders and the Prospectus (except the PALs or EAFs) only to the Excluded Shareholders for their information, as soon as practicable after the SGM.

— iii —

DEFINITIONS

In this circular, unless the context otherwise requires, the following expressions have the following meanings:

“Announcement”

the announcement of the Company dated 9 November 2006 in relation to, amongst other things, (i) the Acquisition Agreement; (ii) the Rights Issue and the Bonus Warrants Issue; (iii) the Underwriting Agreement; (iv) the Placing Agreement, and (v) the refreshment of general mandates to issue Shares and repurchase Shares

“Acquisition Agreement”

the conditional sale and purchase agreement dated 27 October 2006 entered into between the Purchaser and the Vendors relating to the sale and purchase of the Sale Shares

“ASSB”

Australian Accounting Standards Board

“associates”

“Australian Stock Exchange” or

has the meaning ascribed to it under the Listing Rules The Australian Stock Exchange Limited

“ASX”

“Board”

board of the Directors

“Bonus Warrant(s)” or 251,800,000 warrants of the Company

“Warrant(s)”

“Bonus Warrants Issue”

the issue of one Bonus Warrant for every five Rights Shares successfully subscribed by the Qualifying Shareholders which will entitle the Bonus Warrant holder to subscribe for new Shares at the Bonus Warrants Subscription Price

“Bonus Warrants Subscription an initial subscription price of HK$0.30 per Share (subject to Price” adjustment) upon exercise of one Bonus Warrant

“Business Day” a day (excluding Saturday, Sunday or any day on which a tropical cyclone warning signal no. 8 or above or a black rainstorm warning signal is hoisted in Hong Kong at any time between 9:00 a.m. and 5:00 p.m.) on which banks are generally open for business in Hong Kong

“Bye-laws” the bye-laws of the Company

“China” or “PRC” the People’s Republic of China which, for the purpose of this prospectus, excludes Hong Kong, Macau and Taiwan

“Circular Posting Date” 12 December 2006 or such other date as the Company and the Underwriter may agree in writing

— 1 —

DEFINITIONS

“Company”	Shanghai Merchants Holdings limited, a company
	incorporated in Bermuda with limited liability and the issued
	shares of which are listed on the Main Board of the Stock
	Exchange
“Companies Ordinance”	the Companies Ordinance (Chapter 32 of the Laws of Hong
	Kong)
“Completion Date”	the date on which the completion of the Acquisition
	Agreement will take place, being the fifth Business Day after
	the fulfillment of the last of the conditions set out in the
	sub-paragraph headed “Conditions precedent” in the
	paragraph headed “The Acquisition Agreement” in this
	circular
“Conditional Acquisition”	the conditional acquisition of the Sale Shares, representing
	approximately 8.79% interest in Mount Gibson as at 7
	November 2006 (Australian time) (subject to dilution effect,
	if any, from time to time contemplated by Mount Gibson
	issuing shares as a result of the unconditional takeover offer
	in respect of Aztec Resources Limited) by Fortune Desire
	Investments Limited pursuant to the terms and conditions of
	the Acquisition Agreement
“connected person”	has the meaning ascribed to it under the Listing Rules
“Consideration”	the consideration of HK$244,474,752 payable by the Group to
	the Vendors for the acquisition of the Sale Shares,
	representing approximately 8.79% interest in Mount Gibson
	as at 7 November 2006 (Australian time) (subject to dilution
	effect, if any, from time to time contemplated by Mount
	Gibson issuing shares as a result of the unconditional
	takeover offer in respect of Aztec Resources Limited)
	pursuant to the Acquisition Agreement
“Directors”	the directors of the Company
“EAF(s)”	form(s) of application for excess Rights Shares in the agreed
	form proposed to be issued to the Qualifying Shareholders
“Excluded Shareholders”	Existing Shareholders whose registered address, as shown in
	the register of member of the Company at the close of
	business on the Record Date, are located in a jurisdiction
	outside Hong Kong, which the Directors have (having made
	such enquiry concerning the applicable legal and regulatory
	requirements thereof) concluded it expedient to exclude such
	Existing Shareholders from the Rights Issue and the Bonus
	Warrants Issue in accordance with the Bye-Laws

— 2 —

DEFINITIONS

“Final Acceptance Date”	22 January 2007 or such other date as the Company and the
	Underwriter may agree in writing, being the latest time for
	acceptance of and payment for Rights Shares
“Group”	the Company and its subsidiaries
“HKAS”	Hong Kong Accounting Standards issued by the HKICPA
“HKFRS”	Hong Kong Financial Reporting Standards
“HKICPA”	Hong Kong Institute of Public Certified Accountants
“HKSCC”	Hong Kong Securities Clearing Company Limited
“Hong Kong”	the Hong Kong Special Administrative Region of the PRC
“Independent Board Committee”	the committee comprising Mr. Wong Wing Kuen, Albert, Mr.
	Tsui Robert Che Kwong, Mr. Yang Weiming and Mr. Michael
	J. Bogue, being all the Independent Non-Executive Directors
	of the Company, appointed by the Board under the Listing
	Rules to advise the Independent Shareholders in respect of the
	terms of (i) the Acquisition Agreement; (ii) the Rights Issue
	and the Bonus Warrants Issue; (iii) the Underwriting
	Agreement; (iv) the Placing Agreement, and (v) the grant of
	New Issue Mandate
“Independent Shareholders”	Shareholders other than the controlling shareholder of the
	Company, i.e. Profit Harbour and its associates
“Last Trading Date”	26 October 2006, being the last full trading day immediately
	before the suspension of trading in the Shares prior to the
	publication of the Announcement
“Latest Practicable Date”	5 December 2006, being the latest practicable date prior to the
	printing of this circular for the purpose of ascertaining certain
	information contained in this circular
“Majority Shareholders”	Profit Harbour and Shougang
“Mount Gibson”	Mount Gibson Iron Limited, a corporation incorporated under
	the laws of Australia, the shares of which are listed on the
	Australian Stock Exchange
“Mr. Yue”	Mr. Yue Jialin, the chairman and executive director of the
	Company. Mr. Yue is the sole shareholder of Profit Harbour
	and therefore deemed to be interested in 596,699,801 Shares
	held by it, representing approximately 47.39% of the existing
	issued share capital of the Company as at the Latest
	Practicable Date pursuant to the SFO

— 3 —

	DEFINITIONS
“Mtpa”	Million tonnes per annum
“New Issue Mandate”	the proposed mandate to be sought from the Independent
	Shareholders at the SGM, as permitted by Rule 13.36(4) of
	the Listing Rules for an additional mandate to allot, issue and
	deal in 121,937,047 Shares (i.e. approximately 4.84% of the
	Company’s issued share capital as enlarged by the completion
	of the Rights Issue which is 2,518,000,000 Shares)
“New Repurchase Mandate”	the proposed mandate to be sought from the Shareholders at
	the SGM and at which no Shareholder shall abstain from
	voting, as permitted by Rule 10.06(1), to repurchase Shares
	not exceeding 10% of the Company’s issued share capital as
	at the date of the SGM, being 125,900,000 Shares
“PAL(s)”	the renounceable provisional allotment letter(s) to be issued
	to the Qualifying Shareholders in respect of the Rights Shares
	in the agreed form
“Placing”	the placing of the Placing Shares at the Placing Price
“Placing Agent”	SHKIS
“Placing Agreement”	the placing agreement dated 9 November 2006 entered into
	between the Company and the Placing Agent in relation to the
	Placing
“Placing Completion Date”	a day which is two (2) months from the date of the SGM
	(currently scheduled to be on or around 4 January 2007)
	where the specific mandate in relation to the Placing is
	approved and granted by the Independent Shareholders on a
	vote taken by way of poll at the SGM and at which the
	controlling shareholder (i.e. Profit Harbour) and its associates
	shall abstain from voting, if such day not being a Business
	Day, the preceding Business Day of such day
“Placing Period”	the period of two (2) months from the date of the SGM
	(currently scheduled to be on or around 4 January 2007)
	where the specific mandate in relation to the Placing is
	approved and granted by the Independent Shareholders on a
	vote taken by way of poll at the SGM and at which the
	controlling shareholder (i.e. Profit Harbour) and its associates
	shall abstain from voting and ending at 5:00 p.m. on the
	Business Day preceding the Placing Completion Date
“Placing Price”	HK$0.30 per Placing Share

— 4 —

DEFINITIONS

“Placing Shares”	800,000,000 new Shares issued by the Company, representing
	31.77% of the existing issued share capital of the Company
	enlarged by the completion of the Rights Issue pursuant to the
	Placing Agreement
“Previous Issue Mandate”	The general mandate which was granted by the Shareholders
	at the 2006 AGM, authorising the Directors to allot, issue and
	deal in the Shares of the issued share capital of the Company
	and to make or grant offers, agreements and options which
	would or might require the exercise of such powers during or
	after end of the relevant period which shall not exceed
	aggregate of 20% of the nominal amount of the share capital
	of the Company in issue as at the date of the 2006 AGM
“Profit Harbour”	Profit Harbour Investments Limited, a company incorporated
	in the British Virgin Islands with limited liability whose
	registered office is at P.O. Box 957, Offshore Incorporations
	Centre, Road Town, Tortola, British Virgin Islands, and is
	wholly and beneficially owned by Mr. Yue. As at the Latest
	Practicable Date, Profit Harbour was interested in
	596,699,801 Shares, representing approximately 47.39% of
	the existing issued share capital of the Company
“Prospectus”	the prospectus to be issued by the Company relating to the
	Rights Issue and the Bonus Warrants Issue
“Prospectus Posting Date”	4 January 2007 or such other date as the Company and the
	Underwriter may agree in writing
“Purchaser”	Fortune Desire Investments Limited, a company incorporated
	with limited liability in the British Virgin Islands, with its
	registered office at P.O. Box 957, Offshore Incorporations
	Centre, Road Town, Tortola, British Virgin Islands and a
	direct wholly-owned subsidiary of the Company
“Qualifying Shareholders”	Shareholders on the register of members of the Company on
	the Record Date other than the Excluded Shareholders
“Record Date”	Thursday, 4 January 2007 or such other date as the Company
	and the Underwriter may agree in writing, being the date by
	reference to which entitlements under the Rights Issue will be
	determined
“Rights Issue”	the proposed issue of the 1,259,000,000 Rights Shares at the
	Subscription Price on the basis of one Rights Share for every
	existing Share held on the Record Date
“Rights Issue Documents”	the Prospectus, PAL and EAF

— 5 —

	DEFINITIONS
“Rights Share(s)”	the 1,259,000,000 Shares proposed to be issued pursuant to
	the Rights Issue
“Sale Shares”	48,373,197 ordinary shares representing approximately
	8.79% of interest in Mount Gibson as at 7 November 2006
	(Australian time) (subject to dilution effect, if any, from time
	to time contemplated by Mount Gibson issuing shares as a
	result of the unconditional takeover offer in respect of Aztec
	Resources Limited), to be sold as contemplated under the
	Acquisition Agreement
“Settlement Date”	the date falling three Business Days after the later of (a) Final
	Acceptance Date, and (b) the date on which the Company
	notifies the Underwriter of the final number of the Shares
	being underwritten or such other date as the Underwriter and
	the Company may agree in writing
“SFO”	Securities and Futures Ordinance (Chapter 571 of the Laws of
	Hong Kong)
“SGM”	the special general meeting of the Shareholders of the
	Company to be convened at 10:00 a.m. on Thursday, 4
	January 2007 for the purposes of considering and, if thought
	fit, approving, among other things, the Acquisition
	Agreement, the Rights Issue and the Bonus Warrants Issue,
	the Placing Agreement, the change of the Company’s name,
	the increase of the authorised share capital of the Company
	and the grant of New Issue Mandate
“Share(s)”	ordinary share(s) of HK$0.10 each in the issued share capital
	of the Company
“Shareholder(s)”	holder(s) of the Share(s)
“SHK International”	Sun Hung Kai International Limited, a licensed corporation to
	carry out type 1 (dealing in securities) and type 6 (advising on
	corporate finance) regulated activities under the SFO, which
	is not a connected person (as defined in the Listing Rules) of
	the Company
“SHKIS”	Sun Hung Kai Investment Services Limited, a licensed
	corporation under the SFO permitted to carry out Type 1
	(dealing in securities) and Type 4 (advising on securities)
	regulated activities
“Shougang”	Shougang Holding (Hong Kong) Limited, a private company
	incorporated with limited liability in Hong Kong whose
	registered office is at 7th Floor, Bank of East Asia Harbour
	View Centre, 56 Gloucester Road, Wanchai, Hong Kong. As at
	the Latest Practicable Date, Shougang was interested in
	300,000,000 Shares, representing approximately 23.83% of
	the existing issued share capital of the Company through its
	wholly-owned subsidiary, Benefit Rich Limited

— 6 —

DEFINITIONS

“SinoPac” or “Independent	SinoPac Securities (Asia) Limited, a licensed corporation
Financial Adviser”	permitted to carry out Types 1, 4, 6 and 9 regulated activities
	(dealing in securities, advising on securities, advising on
	corporate finance and asset management) under the SFO, and
	the independent financial adviser to the Independent Board
	Committee and the Independent Shareholders in respect of the
	terms of (i) the Acquisition Agreement; (ii) the Rights Issue
	and the Bonus Warrants Issue; (iii) the Underwriting
	Agreement; (iv) the Placing Agreement, and (v) the grant of
	New Issue Mandate
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Subscription Price”	the subscription price of HK$0.30 per Rights Share pursuant
	to the Rights Issue
“UIG”	Utility Industry Group
“Underwriter”	SHK International
“Underwriting Agreement”	the underwriting agreement dated 8 November 2006 entered
	into between the Company and the Underwriter in relation to
	the Rights Issue
“Underwritten Shares”	362,300,199 Rights Shares, being the total number of Rights
	Shares to be issued pursuant to the Rights Issue less those
	Rights Shares agreed and undertaken to be taken up by Profit
	Harbour and Shougang
“Vendors”	Honest Opportunity Limited and New Fortress Investments
	Limited, both being companies incorporated with limited
	liability in the British Virgin Islands and each of them being
	individually referred to as “Vendor”
“2006 AGM”	the annual general meeting of the Company held on 23 May
	2006
“p.a.”	per annum
“A$”	Australian dollar(s), the lawful currency of Australia
“HK$”	Hong Kong dollar(s), the lawful currency of Hong Kong
“US$” of “US dollar(s)”	United States dollar(s), the lawful currency of the United
	States of America
“%”	per cent.

— 7 —

LETTER FROM THE BOARD

SHANGHAI MERCHANTS HOLDINGS LIMITED

*

(Incorporated in Bermuda with limited liability)

(Stock code: 1104)

Executive Directors:

Mr. Yue Jialin (Chairman)

Mr. Lau Yau Cheung (Chief Executive Officer)

Independent Non-Executive Directors:

Registered Office:

Clarendon House 2 Church Street Hamilton HM11 Bermuda

Mr. Wong Wing Kuen, Albert

Mr. Tsui Robert Che Kwong

Mr. Yang Weiming

Mr. Michael J. Bogue

Head office and principal place of business in Hong Kong:

Rooms 2808-10 28/F., Wing On House 71 Des Voeux Road Central Hong Kong

12 December 2006

To the Shareholders,

Dear Sir or Madam,

(4) PLACING OF NEW SHARES

(5) PROPOSED CHANGE OF NAME FOR SHANGHAI MERCHANTS HOLDINGS LIMITED

(6) INCREASE OF AUTHORISED SHARE CAPITAL AND

(7) REFRESHMENT OF GENERAL MANDATES TO ISSUE SHARES AND REPURCHASE SHARES

INTRODUCTION

On 9 November 2006, the Directors announced that, on 27 October 2006, the Company entered into the Acquisition Agreement with the Vendors pursuant to which, among other things, the Purchaser, a wholly owned subsidiary of the Company, has conditionally agreed to acquire 48,373,197

— 8 —

LETTER FROM THE BOARD

ordinary shares in Mount Gibson, representing approximately 8.79% interest in Mount Gibson as at 7 November 2006 (Australian time) (subject to dilution effect, if any, from time to time contemplated by Mount Gibson issuing shares as a result of the unconditional takeover offer in respect of Aztec Resources Limited (“Aztec”)).

The completion of the Acquisition Agreement is subject to the approval by the Independent Shareholders on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting on the basis that (i) the transaction contemplated under the Acquisition Agreement constitutes a very substantial acquisition for the Company under the Listing Rules, on the basis that the calculation of the assets ratio is over 100% and that the Purchaser is a direct wholly-owned subsidiary of the Company and (ii) the completion of the Acquisition Agreement is conditional on the completion of the Rights Issue which is also subject to the approval by the Independent Shareholders on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting.

The Directors further announced that the Company proposed to raise HK$377,700,000 before expenses by way of the Rights Issue of 1,259,000,000 Rights Shares at a price of HK$0.30 each payable in full on acceptance. The Company also proposed a bonus issue of one Bonus Warrant for every five Rights Shares successfully subscribed by the Qualifying Shareholders. Based on 1,259,000,000 Rights Shares to be issued pursuant to the Rights Issue, the total number of Bonus Warrants to be issued will be 251,800,000 warrants, entitling the holders thereof to subscribe for the same number of Shares. The Bonus Warrants will entitle their holders to subscribe for new Shares at an initial subscription price of HK$0.30 per Share (subject to adjustment) upon exercise of one Bonus Warrant.

On 28 October 2006, the Directors approved the Bonus Warrants Issue and the terms of such issue.

The Rights Issue will be fully underwritten by the Underwriter, on the terms and conditions set out in the Underwriting Agreement entered into between the Company and the Underwriter on 8 November 2006. Details of the major terms and conditions of the Underwriting Agreement are set out in the paragraph headed “Underwriting Arrangement” below.

The Directors further announced that, on 9 November 2006, the Company and SHKIS entered into the Placing Agreement, whereby the Company has agreed to place, through SHKIS as the Placing Agent, an amount of 800,000,000 new Shares to independent investors at the Placing Price per Placing Share. The Placing Shares are fully underwritten by SHKIS. Details of the major terms and conditions of the Placing Agreement are set out in the paragraph headed “Placing Agreement” below.

The Directors proposed to change the Company’s name from “Shanghai Merchants Holdings Limited” to “APAC Resources Limited” and its Chinese name, for identification purpose, to “ ”. A further announcement will be made on the change of name becoming effective. The Company will seek the Shareholders’ approval at the SGM to approve the requisite resolution to change its existing name.

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LETTER FROM THE BOARD

The Directors further proposed to increase the Company’s authorised share capital from HK$200,000,000.00 divided into 2,000,000,000 Shares to HK$800,000,000.00 divided into 8,000,000,000 Shares of nominal value of HK$0.10 each, by the creation of additional 6,000,000,000 unissued Shares.

The Directors will seek the Shareholders’ approval at the SGM on the proposal to top-up the general mandate from 62,600,000 to 381,662,953 Shares (i.e. approximately 15.16% of the Company’s issued share capital as enlarged by the completion of the Rights Issue which is 2,518,000,000). In addition, the Directors will further seek the approval of the Independent Shareholders at the SGM for an additional mandate, to allot, issue and deal in 121,937,047 Shares (i.e. approximately 4.84% of the Company’s issued share capital as enlarged by the completion of the Rights Issue which is 2,518,000,000). The Directors will further seek the approval of the Shareholders at the SGM to repurchase Shares not exceeding 10% of the Company’s issued share capital as at the date of the SGM.

The purpose of this circular is to give you further information on, among other things, details of the (i) the Acquisition Agreement; (ii) the Rights Issue and the Bonus Warrants Issue; (iii) the Underwriting Agreement; (iv) the Placing Agreement, (v) the increase of authorised share capital of the Company; (vi) the change of name of the Company; (vii) the grant of refreshment of general mandates to issue Shares and repurchase Shares (comprising the Previous Issue Mandate, New Issue Mandate and New Repurchase Mandate); and (viii) a summary of the terms of the Bonus Warrants and (ix) a notice to convene the SGM and other information in accordance with the requirements of the Listing Rules. This circular also contains the recommendation of the Independent Board Committee and the advice of SinoPac, the Independent Financial Adviser, in respect of the terms of the Acquisition Agreement, the Underwriting Agreement, the Rights Issue and the Bonus Warrants Issue, the grant of New Issue Mandate and the Placing Agreement.

Mr. Michael J. Bogue, Mr. Wong Wing Kuen, Albert, Mr. Tsui Robert Che Kwong and Mr. Yang Weiming , being all the Independent Non-Executive Directors of the Company, have been appointed by the Board to serve as members of the Independent Board Committee to advise and make recommendation to the Independent Shareholders as to how to vote at the SGM on the ordinary resolutions regarding (i) the Acquisition Agreement; (ii) the Rights Issue and the Bonus Warrants Issue; (iii) the Underwriting Agreement; (iv) the Placing Agreement, and (v) the grant of New Issue Mandate.

SinoPac has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders on whether the terms of (i) the Acquisition Agreement; (ii) the Rights Issue and the Bonus Warrants Issue; (iii) the Underwriting Agreement; (iv) the Placing Agreement, and (v) the grant of New Issue Mandate are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

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LETTER FROM THE BOARD

CONDITIONAL ACQUISITION

On or around 19 October 2006, Mr. Lau Yau Cheung (“Mr. Lau”), executive Director, became aware of the Vendors’ shareholding in Mount Gibson. Mr. Lau then conferred with Mr. Yue, with regard to the matter and both Mr. Yue and Mr. Lau shared the view that the matter should be looked into and considered further. On or around 21 October 2006, Mr. Lau liaised with the Vendors in an attempt to ascertain their intention to dispose of their shares in Mount Gibson (the “Mount Gibson Shares”).

Negotiations at arm’s length were conducted by Mr. Lau with the Vendors during the period from 21 October 2006 to 24 October 2006. The Vendors are independent third parties and Mr. Lau who conducted the negotiations on behalf of the Company is not connected in any way with any of Mount Gibson’s shareholders or directors or chief executive or their respective associates. After such negotiations with the Vendors, the executive Directors decided that they had gathered sufficient information and details to inform the other Directors and ask them for a decision on the matter.

On 24 October 2006, the Company sent notice of Board meeting to the Directors with an agenda which included the item of considering the proposed acquisition of the Mount Gibson Shares. On 25 October 2006, the Board met to consider and then decided to adopt and passed resolutions to approve the Conditional Acquisition, the Acquisition Agreement, the Rights Issue, the Underwriting Agreement and the Placing Agreement.

On 27 October 2006, the Company entered into the Acquisition Agreement to acquire the 48,373,197 Sale Shares, representing approximately 8.79% interest in Mount Gibson as at 7 November 2006 (Australian time). Upon completion of the Acquisition Agreement, Mount Gibson will be owned as to approximately 8.79% as at 7 November 2006 (Australian time) (subject to dilution effect, if any, from time to time contemplated by Mount Gibson issuing shares as a result of the unconditional takeover offer in respect of Aztec) by the Group. The Company has solely relied on the published information of Mount Gibson in making the decision with respect to the Conditional Acquisition.

Mount Gibson is a specialist iron ore exploration company which owns iron ore deposits and holds mining rights, with its shares listed on the Australian Stock Exchange. Its principal business is mining of hematite iron ore deposits at Tallering Peak and exploration and development of hematite iron ore deposits in the Midwest region of Western Australia. The Sale Shares will be held for strategic investment purpose. The Company will account for such investment as “available for sale financial assets” as defined under HKAS39 issued by the HKICPA.

The Acquisition Agreement

Date

27 October 2006

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LETTER FROM THE BOARD

Parties

The Vendors: Honest Opportunity Limited and New Fortress Investments Limited

The Purchaser: Fortune Desire Investments Limited

Assets to be acquired

Pursuant to the Acquisition Agreement, it is agreed that the Purchaser shall acquire, and the Vendors shall sell, the Sale Shares.

Conditions precedent

Completion of the Acquisition Agreement is conditional upon fulfillment of the following conditions:

(i) the approval by the Independent Shareholders in respect of the Acquisition Agreement on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting in accordance with all applicable requirements under the Listing Rules;
(ii) completion of the Rights Issue; and
(iii) all necessary authorisations being obtained and maintained by the Purchaser as a result of the transactions contemplated in the Acquisition Agreement.

Completion

Subject to the fulfillment of the conditions precedent as aforesaid, the completion of the Acquisition Agreement shall take place at the earlier of the expiry of five Business Days after all the transactions contemplated in the Acquisition Agreement have been completed or 7 February 2007 (or such earlier or later date as may be agreed by the Vendors and the Purchaser in writing).

If any of the Conditions is not fulfilled (or waived by the Purchaser other than condition (i) above which cannot be waived) on or before 7 February 2007 (or such earlier or later date as may be agreed by the Vendors and the Purchaser in writing), the Acquisition Agreement shall cease and determine and the Company shall have no obligations and liabilities under the Acquisition Agreement save for any antecedent breaches under the terms of the Acquisition Agreement.

Consideration

The Consideration payable by the Purchaser for the Conditional Acquisition is HK$244,474,752 being A$0.85 per Sale Share (at an exchange rate of A$1.00 to HK$5.9458). The Consideration is arrived at after arm’s length negotiation between the Purchaser and the Vendors and with reference to the market price of the Sale Shares traded on the Australian Stock Exchange. The Consideration of the

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LETTER FROM THE BOARD

Sale Shares represents a premium of 14.6% over the average closing price of the Sale Shares quoted on the Australian Stock Exchange on the last 5 full trading days up to and including 26 October 2006. Given the potential iron ore production growth of Mount Gibson in the emerging Midwest region of Western Australia combined with being an unique opportunity to secure a strategic foothold in the Australian natural resources sector, the Directors consider that it is reasonable and in the interests of the Company as a whole, to purchase a substantial strategic shareholding of listed shares in Mount Gibson at a price over the then prevailing market price of its shares.

The Consideration payable by the Purchaser pursuant to the Acquisition Agreement has been paid as to HK$20,000,000 upon execution of the Acquisition Agreement as deposit and the balance in the sum of HK$224,474,752 at the earlier of the expiry of five Business Days after all the transactions contemplated under the Acquisition Agreement have been completed or 7 February 2007, provided that the parties thereto may agree to an extension for a further period at such term(s) as agreed by the parties thereto. If the conditions precedent as aforesaid are not fulfilled pursuant to the terms of the Acquisition Agreement, the deposit in the sum of HK$20,000,000 shall be refunded to the Purchaser forthwith.

Source of funding

The Group would fund the Conditional Acquisition as to HK$244,474,752 by way of the Rights Issue. Details of the Rights Issue are set out under the paragraph headed “Rights Issue” below.

Information on the Company

The Company is incorporated as an exempted company with limited liability in Bermuda under the Companies Act 1981 of Bermuda (as amended) and its shares are listed on the Stock Exchange. The Group is principally engaged in trading of base metals and fabric products and other merchandises.

Information on the Vendors

Honest Opportunity Limited is a company incorporated with limited liability in the British Virgin Islands. Its principal business is securities trading and investments.

New Fortress Investments Limited is a company incorporated with limited liability in the British Virgin Islands. Its nature of business is investment holding.

Information on the Purchaser

Fortune Desire Investments Limited is a company incorporated with limited liability in the British Virgin Islands and a direct wholly-owned subsidiary of the Company. It is a special vehicle set up for investment holding purpose.

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LETTER FROM THE BOARD

Information on Mount Gibson

Mount Gibson is a company incorporated in Australia with limited liability in 1996, and its shares are listed on the Australian Stock Exchange. Its principal business is mining of hematite iron ore deposits at Tallering Peak and exploration and development of hematite iron ore deposits in the Midwest region of Western Australia. Mount Gibson is a specialist iron ore exploration company which owns iron ore deposits and holds mining rights. Mount Gibson currently exports all its current iron ore materials from its operations located at Tallering Peak Hematite to China. It also has plans to export its future iron ore materials directly to customers in China and throughout Asia.

The audited financial information of Mount Gibson for the two years ended 30 June 2006 and 2005 are as follows:

	Year ended	Year ended
	30 June 2006	30 June 2005
	Audited	Audited
	A$	A$
Net assets value	$97,420,000	$67,629,000
Profit before taxation and extraordinary items	$16,151,000	$22,032,000
Profit after taxation and extraordinary items	$23,073,000	$13,502,000

The Company confirmed that no dividends had been paid or declared and no recommendation had been made as to dividends for the past three years for Mount Gibson.

REASONS FOR AND BENEFITS OF THE CONDITIONAL ACQUISITION

Over the past few years the Company has continued to review and evaluate numerous business and investment opportunities consistent with its operations of trading particularly in the lucrative commodities industry. Until now the Company has not identified suitable investment or significant commodity trading opportunities in line with its corporate objectives and principal business activities. The Board believes that the Conditional Acquisition represents a unique strategic investment holding in the Australian resources sector upon which to build a significant investment and commodities trading company primarily focused on the natural resources and related sectors.

The Company has identified a number of geographic regions and commodity markets which it believes present attractive opportunities to pursue the Company’s principal activities of commodities trading and strategic investment and where rationalization and consolidation is likely to occur.

The Midwest iron ore region of Western Australia has been identified by the Company as one such region. This region is likely to be a significant producer of iron ore, one individual commodity identified by the Company as currently having attractive market characteristics, supply and demand fundamentals and a favourable outlook for the foreseeable future.

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LETTER FROM THE BOARD

The Conditional Acquisition relates to Mount Gibson who is currently the leading iron ore producer in the Midwest region of Western Australia with its production from the Tallering Peak Operations and its proposed development of the Extension Hill Hematite Project, details of which are set out below.

Tallering Peak Operations

Mount Gibson’s first iron ore mine was developed at Tallering Peak, which is located 170 kilometres by road and rail from the port of Geraldton in the Midwest region of Western Australia. Mining of overburden commenced in November 2003 and the first shipment of ore occurred in February 2004.

Mining operations at Tallering Peak are being undertaken by Mount Gibson utilising its own workforce and equipment. Mining of the first pit (T4) is now complete. Mining of the second pit (T5) and the third pit (T3) is underway. Resources at Tallering Peak are expected to permit mining to increase to 3.0 million tonnes per year of iron ore for five years commencing June 2006.

After mining, the ore is crushed and screened at the mine-site into lump and fines stockpiles. The mine is currently producing lump and fines at a 65:35 ratio. Lump ore is sold at a higher rate than fines which must be sintered before feeding to a blast furnace.

The crushed ore is transported 65 kilometres by road-train to Mullewa where it is stockpiled at Mount Gibson’s rail loading facility.

At Mullewa, the ore is loaded onto rail wagons by employees using front end loaders. The ore is then railed 107 kilometres to Geraldton, where it is stockpiled in a purpose built 150,000 tonnes capacity storage shed which was constructed by Mount Gibson. From there the ore is loaded onto ships by the Geraldton Port Authority, for transport to China.

The road haulage, rail transport, and ship loading, is being carried out by experienced contractors.

Mount Gibson has contracted to sell all of its production for the life of the Tallering Peak mine. Prices are fixed to the prevailing published freight on board prices for iron ore sold by Hamersley Iron from its Pilbara ports. These prices are reviewed annually, for adjustment on 1 April of each year.

Extension Hill Hematite Project

Mount Gibson holds the rights to mine hematite ore occurring at the Extension Hill and other deposits within the Mount Gibson range. Mount Gibson has completed a desk top study of the Extension Hill hematite deposit. The strongly positive result has prompted a detailed feasibility study to evaluate costs and risks of various development strategies and designs, with a completion target of December 2006.

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LETTER FROM THE BOARD

It is anticipated that subject to approvals and the development of port facilities in Geraldton, ore shipments will commence in January 2008. The Extension Hill mine is expected to produce 3.0 million tonnes per year of direct shipping iron ore for a minimum of five years at a similar operating profit to Tallering Peak as extra haulage costs will be largely offset by reduced mining costs resulting from a much lower waste to ore ratio. Mount Gibson has completed a desktop study on stand-alone development of the hematite at Extension Hill.

More detailed work on the Extension Hill Project is now underway to evaluate costs and risks of various development strategies and designs, with an interim completion target of December 2006. Once that work is complete a project proposal will be formulated and submitted to the board of directors of Mount Gibson for approval, then to government and the community for consideration.

It is expected that completion of the approvals process and development of the Extension Hill Project will result in ore production by December 2007.

Mount Gibson’s intention is to move ahead with the Extension Hill Project, subject to approvals, as rapidly as possible, to take advantage of current iron ore market conditions.

Source: Mount Gibson website materials and Extension Hill Project Developments Update September 2006 at www.mtgibsoniron.com.au.

Mount Gibson also currently has an unconditional takeover offer underway in respect of fellow Western Australian iron ore company, Aztec, a company listed on the Australian Stock Exchange, which if successful would create one of the largest Australian independent iron ore producers. The Company currently also holds an interest of approximately 7.27% in Aztec as at the date of 7 November 2006 (Australian time) in its trading portfolio.

The Midwest region of Western Australia refers to the geographical area which extends inland (or east) from Geraldton across to Cue. Mount Gibson is one of the first of a number of resources companies which have iron ore projects currently in production in the Midwest region or have aspirations to become iron ore producers.

The Conditional Acquisition is consistent with the Company’s strategy of seeking to undertake commodity trading and make investments to participate in industry rationalization and consolidation where returns are maximized for Shareholders.

The Board considers that it is in the interest of the Company to enter into the Acquisition Agreement. The Board is of the opinion that the terms of the Acquisition Agreement are fair and reasonable and in the interests of the Shareholders taken as a whole.

The Independent Non-Executive Directors were of the view that the terms of the Acquisition Agreement are fair, reasonable and on normal commercial terms, and entering into the Acquisition Agreement is in the commercial benefit and long-term interest of the Company and the Shareholders as a whole.

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LETTER FROM THE BOARD

Information on Aztec

Aztec is an iron ore company listed on the Australian Stock Exchange. Aztec is currently developing the Koolan Island Iron Ore Project located in the Buccaneer Archipelago of Yampi Sound in Western Australia.

As at 7 November 2006, the Company held 84,000,000 shares in Aztec, representing approximately 7.27% in Aztec in its trading portfolio.

On 24 July 2006, Mount Gibson had announced its intention to make a scrip takeover offer (“Mount Gibson Offer”) for all the shares in Aztec by proposing to offer one new Mount Gibson share for every three shares held in Aztec valuing each Aztec share at A$0.263 based on the Mount Gibson volume weighted average price on 21 July 2006 of A$0.789, being the last trading day before announcement of the Mount Gibson Offer. The date of the Mount Gibson Offer was 28 August 2006. If the Mount Gibson Offer is successful, it would enable Mount Gibson to become one of the largest Australian independent iron ore producers by virtue of its scale and multiple asset portfolio. As at 30 June 2006, Mount Gibson owned as to approximately 15.24% shareholding interest in Aztec.

The Company had decided to take advantage of the Mount Gibson Offer to convert its shareholding in Aztec into shares in Mount Gibson to obtain the highest possible return for the Company and its Shareholders as a whole. The Company had decided to accept Mount Gibson Offer on 21 November 2006 for conversion.

Upon conversion of the 84,000,000 shares in Aztec into Mount Gibson shares, the Company will hold 28,000,000 Mount Gibson shares, representing approximately 4.62% of all the issued ordinary shares in Mount Gibson as at 28 November 2006.

After the conversion of the Aztec shares into Mount Gibson shares and completion of the Conditional Acquisition, the Company will hold 76,373,197 Mount Gibson shares, representing approximately 12.59% of the total number of 606,426,390 issued ordinary shares in Mount Gibson as at 28 November 2006.

As at 28 November 2006, more than 50% of the offerees accepted the Mount Gibson Offer.

As at the Latest Practicable Date, the total number of issued ordinary shares of Mount Gibson and Aztec were 626,485,379 shares and 1,132,296,221 shares respectively. Assuming all the shareholders of Aztec accepts the Mount Gibson Offer, 889,264,299 Aztec shares (excluding the shareholding interest of 243,031,922 Aztec shares already owned by Mount Gibson) will be converted to 296,421,433 Mount Gibson shares by way of new issue on the basis of one share of Mount Gibson for every three shares of Aztec. As a result, the total number of issued ordinary shares of Mount Gibson will be increased by 296,421,433 shares to 922,906,812 shares. Assuming that (i) all the offerees accept the Mount Gibson Offer and the Conditional Acquisition is successfully completed; and (ii) no further new issue of Mount Gibson shares after the Latest Practicable Date, the Company will hold 76,373,197 shares in Mount Gibson, representing approximately 8.28% interest in Mount Gibson as at the Latest Practicable Date.

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LETTER FROM THE BOARD

The Directors further consider that the Company (for itself and on behalf of its subsidiaries) continues to seek opportunities to secure long-term iron ore sales contracts with iron ore materials suppliers. After the conversion of the Aztec shares into Mount Gibson shares and completion of the Conditional Acquisition, the Company believes that with this strategic shareholding in Mount Gibson, the Group is in a better position to seek and secure such long-term iron ore sales contracts with resources companies operating in the Midwest iron ore region of Western Australia. Furthermore, the Directors consider that the profit margin for trading iron ore materials is expected to be much higher than the existing trading business of the Group. Having considered the potential business opportunities with respect to the iron ore sales contracts, the Directors are of the view that the Conditional Acquisition represents a strategic investment for building a significant investment and commodities trading portfolio primarily focused on natural resources and related sectors.

To the best knowledge, information and belief of the Directors having made all reasonable enquiries, the Vendors and its ultimate beneficial owners are independent third parties not connected with the Company or its subsidiaries or any of their respective associates, or any of the connected persons of the Company or its subsidiaries or any of their respective associates.

FINANCIAL EFFECT OF THE CONDITIONAL ACQUISITION

The Group would fund the Conditional Acquisition as to HK$244,474,752 by way of the Rights Issue. The Sale Shares will be held for strategic investment purpose. Accordingly, the Company will account for such investment as “available for sale financial assets” as defined under HKAS39 issued by the HKICPA. Any unrealized appreciation or depreciation of the market value of the Sale Shares before disposal will not be accounted for in the Group’s consolidated income statement. The Board, therefore, believes that the acquisition of the Sale Shares will not give rise to any material adverse effect on the earnings, working capital, gearing ratio and assets and liabilities of the Group.

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LETTER FROM THE BOARD

We have made reference to the section headed “Pro Forma Financial Information of the Group” as set out in Appendix III to the Circular for the following financial effect of the Conditional Acquisition:

	As 30 June	After
	2006	acquisition
	HK$’000	HK$’000
Net current assets	15,787	144,912
Total assets	23,188	397,188
Total liabilities	7,401	7,401
Net asset value	15,787	389,787
Net asset value per Share	0.038	0.23
	31 December	After
	2005	acquisition
	HK$’000	HK$’000
Profit for the year	6,501	6,501

Upon completion of the Conditional Acquisition, both net current assets and net asset value of the Group will be increased by 8.18 times and 23.69 times respectively, no adverse impact would be incurred in the liabilities of the Group and the result of the Group would remain unchanged.

THE RIGHTS ISSUE AND THE BONUS WARRANTS ISSUE

The Company proposes to raise HK$377,700,000 before expenses by way of the Rights Issue of 1,259,000,000 Rights Shares at a price of HK$0.30 each Rights Share payable in full on acceptance. The Company also proposes a bonus issue of one Bonus Warrant for every five Rights Shares successfully subscribed by the Qualifying Shareholders. Based on 1,259,000,000 Rights Shares to be issued pursuant to the Rights Issue, the total number of Bonus Warrants to be issued will be 251,800,000 warrants, entitling the holders thereof to subscribe for the same number of Shares. The Bonus Warrants will entitle their holders to subscribe for new Shares at an initial subscription price of HK$0.30 per Share (subject to adjustment) upon exercise of one Bonus Warrant.

Part of the proceeds raised from the Rights Issue in the sum of HK$224,474,752 will be applied towards payment of the balance of the Consideration. In respect of the balance in the sum of HK$153,225,248, (i) HK$20,000,000 will be deducted by the Company, being the deposit paid in respect of the Conditional Acquisition, to recover the same amount of money which has been previously reserved for base metal trading in the previous rights issue of the Company; (ii) approximately HK$3,700,000 will be used for the payment of professional fees and expenses in relation to the transactions contemplated under the Rights Issue and the Bonus Warrants Issue; and (iii) the balance thereof, i.e. approximately HK$129,525,248 will be used by the Company to acquire further investment interests in the resources industry, where opportunities arise to make additional investments where returns are maximised for Shareholders, and as general working capital and for future investment purposes.

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LETTER FROM THE BOARD

The Rights Issue is conditional and is fully underwritten. The Bonus Warrants Issue is conditional on the completion of the Rights Issue.

In particular, the Rights Issue and the Bonus Warrants Issue are subject to the approval by the Independent Shareholders on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting, the increase of authorised share capital of the Company having taken effect and the Underwriter not terminating the Underwriting Agreement in accordance with its terms (see “Termination of the Underwriting Agreement” below).

The Company will provisionally allot one nil-paid Rights Share for every existing Share held by the Qualifying Shareholders whose names appear on the register of members of the Company on the Record Date. If the conditions of the Rights Issue and the Bonus Warrants Issue cannot be fulfilled, the Rights Issue will not proceed.

Issue statistics of Rights Issue

Basis of Rights Issue	—	One Rights Share for every existing Share held on the
		Record Date
Existing issued share capital	—	1,259,000,000 Shares (comprising 413,000,000 issued
		Shares before the resumption of trading in Shares of the
		Company on the Stock Exchange as of the 2006 AGM)
		and 826,000,000 Shares allotted and issued pursuant to
		the previous rights issue upon resumption and
		20,000,000 Shares allotted and issued upon conversion
		of the convertible bonds of the Company)
Number of Rights Shares	—	1,259,000,000 Rights Shares
Subscription price	—	HK$0.30 for each Rights Share

As at the Latest Practicable Date, the Company has no outstanding convertible securities, options or warrants in issue which confer any right to subscribe for or convert or exchange into the Shares.

The total amount of Rights Shares represent 100% of the existing issued share capital of the Company and 50% of the issued share capital of the Company as enlarged by the completion of the Rights Issue. Based on the Subscription Price of HK$0.30 per Rights Share, the net proceeds to be raised by the Company from the Rights Issue is approximately HK$374,000,000 after deduction of expenses including, among others, underwriting commission and professional fees.

Subscription Price for Rights Shares

HK$0.30 per Rights Share, payable in full when a Qualifying Shareholder accepts the provisional allotment of the Rights Shares or applies for excess Rights Shares or when a transferee of nil-paid Rights Shares applies for the relevant Rights Shares.

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LETTER FROM THE BOARD

The Subscription Price represents:

(i) a discount of approximately 26.8% to the closing price of HK$0.41 per Share as quoted on the Stock Exchange on the Last Trading Day;
(ii) a discount of approximately 24.1% to the average closing price of approximately HK$0.395 per Share as quoted on the Stock Exchange for the last 5 full trading days up to and including the Last Trading Day;
(iii) a discount of approximately 18.8% to the average closing price of approximately $0.3695 per Share as quoted on the Stock Exchange for the last 10 full trading days up to and including the Last Trading Day;
(iv) a discount of approximately 15.5% to the theoretical ex-right price of approximately HK$0.355 per Share, calculated on the basis of the closing price of HK$0.41 per Share on the Last Trading Day; and
(v) a discount of approximately 14.28% to the closing price of HK$0.35 per Share as quoted on the Stock Exchange on the Latest Practicable Date.

The Subscription Price was determined on the basis of arm’s length negotiations between the Company and the Underwriter with reference to the then prevailing market price of the Shares and recent financial conditions of the Group. The Subscription Price was set at a discount to the market price of the Shares in order to give an incentive to the Shareholders to participate in the Rights Issue.

The Group had unaudited net assets of approximately HK$15,787,000 as at 30 June 2006.

Basis of provisional allotment of Rights Shares

One Rights Share in nil-paid form will be issued for every existing Share held by a Qualifying Shareholder on the Record Date. The board lot of the Rights Shares in nil-paid form will be 20,000, which is the same as the board lot of the Shares.

Number of Bonus Warrants

Based on 1,259,000,000 Rights Shares to be issued pursuant to the Rights Issue, the total number of Bonus Warrants to be issued will be 251,800,000 warrants, entitling the holders thereof to subscribe for the same number of Shares, representing approximately 20% of the existing share capital of the Company, approximately 10% of the issued share capital as enlarged by the completion of the Rights Issue and approximately 9.09% of the issued share capital as enlarged by the completion of the Rights Issue and full exercise of the Bonus Warrants.

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LETTER FROM THE BOARD

Subject to the approval of the Rights Issue and the Bonus Warrants Issue by the Independent Shareholders on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting, application will be made to the Stock Exchange for the listing of, and permission to deal in, the Rights Shares, in both nil-paid and fully-paid forms, the Bonus Warrants and the Shares which may fall to be issued upon the exercise of the Bonus Warrants.

The Bonus Warrants will be traded in board lot of 40,000.

Subscription Period of the Bonus Warrants

The Bonus Warrants will be exercisable at any time from the date on which the Bonus Warrants are listed on the Stock Exchange (the “Commencement Date”) up to and including the day before the 3rd anniversary of the Commencement Date of the Bonus Warrants.

Bonus Warrants Subscription Price

The Bonus Warrants will entitle their holders to subscribe for new Shares at an initial subscription price of HK$0.30 per Share (subject to adjustment) upon exercise of one Bonus Warrant.

The Bonus Warrants Subscription Price represents:

(i) a discount of approximately 26.8% to the closing price of HK$0.41 per Share as quoted on the Stock Exchange on the Last Trading Day;
(ii) a discount of approximately 24.1% to the average closing price of approximately HK$0.395 per Share as quoted on the Stock Exchange for the last 5 full trading days up to and including the Last Trading Day;
(iii) a discount of approximately 18.8% to the average closing price of approximately $0.3695 per Share as quoted on the Stock Exchange for the last 10 full trading days up to and including the Last Trading Day;
(iv) a discount of approximately 15.5% to the theoretical ex-right price of approximately HK$0.355 per Share, calculated on the basis of the closing price of HK$0.41 per Share on the Last Trading Day; and
(v) a discount of approximately 14.28% to the closing price of HK$0.35 per Share as quoted on the Stock Exchange on the Latest Practicable Date.

Qualifying Shareholders

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LETTER FROM THE BOARD

To qualify for the Rights Issue, Shareholders must at the close of business on the Record Date be registered as a member of the Company. Shareholders having an address in Hong Kong on the register of members of the Company at the close of business on the Record Date are qualified for the Rights Issue. Shareholders having addresses outside Hong Kong on the register of members of the Company at the close of business on the Record Date are qualified for the Rights Issue, only if the Board, after making relevant enquiry with lawyers in the relevant jurisdictions, considers that the offer to these Shareholders would not contravene any legal restriction under the laws of the relevant place or any requirement of the relevant regulatory body or stock exchange in that place and such offer will not require any relevant registration.

The last day of dealings in the Shares on a cum-right basis is Tuesday, 19 December 2006. The Shares will be dealt with on an ex-right basis on Wednesday, 20 December 2006. In order to be registered as a member of the Company on the Record Date, the Shareholders must lodge the relevant transfers of the Shares (with the relevant share certificates) with the Company’s branch registrar in Hong Kong, Secretaries Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong by 4:00 p.m. on Thursday, 21 December 2006.

The register of members of the Company will be closed from Friday, 22 December 2006 to Thursday, 4 January 2007, both dates inclusive. No transfer of the Shares will be registered during this period.

Rights of the Overseas Shareholders

If at the close of business on the Record Date, a Shareholder’s address on the Company’s register of members is in a place outside Hong Kong, that Shareholder may not be eligible to take part in the Rights Issue. The Rights Issue Documents will not be registered under the applicable securities legislation of any jurisdiction other than Hong Kong and Bermuda. The Company will comply with all necessary requirements specified in Rule 13.36(2) of the Listing Rules. The Board will make enquiries with lawyers in the relevant jurisdictions as to whether the issue of Rights Shares to the Overseas Shareholders may contravene the applicable securities legislation of the relevant overseas places or the requirements of the relevant regulatory body or stock exchange. If, after making such enquiry, the Board is of the opinion that it would be necessary or expedient, on account either of the legal restrictions under the laws of the relevant place or any requirement of the relevant regulatory body or stock exchange in that place, not to offer the Rights Shares to such Overseas Shareholders, no provisional allotment of nil-paid Rights Shares or allotment of fully-paid Rights Shares will be made to such Overseas Shareholders. In such circumstances, the Rights Issue will not be extended to the Excluded Shareholders. The Company will send the Rights Issue Documents (except the PALs or EAFs) to the Excluded Shareholders for their information only. As at the Latest Practicable Date, all Shareholders on the Company’s register of members have Hong Kong registered addresses.

Arrangements will be made for the Rights Shares which would have otherwise been provisionally allotted to the Excluded Shareholders to be sold in the market in their nil-paid form as soon as practicable after dealings in the nil-paid Rights Shares commence on the Stock Exchange and in any

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LETTER FROM THE BOARD

event before the last date for dealings in nil-paid Rights Shares, if a premium (net of expenses) can be obtained. The proceeds of each sale, less expenses and stamp duty, of HK$100 or more will be paid to the relevant Excluded Shareholder in Hong Kong dollars. The Company will retain individual amounts of less than HK$100 for the benefit of the Company.

Status of the Rights Shares and the Shares to be issued upon exercise of the Bonus Warrants

The Rights Shares when allotted and fully-paid and the Shares to be issued upon exercise of the Bonus Warrants will rank pari passu in all respects with the existing Shares in issue on the date of allotment of such Shares in fully-paid form. Holders of such Shares will be entitled to receive all future dividends and distributions which are declared, made or paid on or after the close of business on any Business Day falling during the subscription period on which any of the subscription rights represented by such Warrants are duly exercised. Subject to the approval of the Rights Issue and the Bonus Warrants Issue by the Independent Shareholders on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting, application will be made to the Stock Exchange for the listing of, and permission to deal in, the Rights Shares, in both nil-paid and fully-paid forms, the Bonus Warrants and the Shares which may fall to be issued upon the exercise of the Bonus Warrants.

Share certificates for the Rights Shares and the Bonus Warrants

Subject to the fulfillment of the conditions of the Rights Issue, the respective share certificates for all fully-paid Rights Shares and the Bonus Warrants are expected to be posted to the Qualifying Shareholders who have accepted and applied for (where appropriate) and paid for the Rights Shares on or before Thursday, 1 February 2007 at their own risk.

Fractional entitlements

Fractional entitlements will not be issued but will be aggregated and sold for the benefit of the Company.

Application for excess Rights Shares

Qualifying Shareholders may apply for any unsold entitlements of the Excluded Shareholders and any Rights Shares provisionally allotted but not accepted by the Qualifying Shareholders or otherwise subscribed for by transferees of nil-paid Rights Shares. Application can be made by completing the EAF and lodging the same with remittance for the excess Rights Shares. The Directors will allocate the excess Rights Shares at their discretion and on a fair and equitable basis, but preference will be given to topping-up odd lots to whole board lots.

Shareholders with their Shares held by a nominee company should note that the Board will regard the nominee as a single Shareholder according to the register of members of the Company. Accordingly, the Shareholders should note that the aforesaid arrangement in relation to the top-up odd

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LETTER FROM THE BOARD

lots for allocation of excess Rights Shares will not be extended to beneficial owners individually. Shareholders with their Shares held by a nominee company are advised to consider whether they would like to arrange for the registration of the relevant Shares in the name of the beneficial owner(s) prior to the Record Date.

For Shareholders whose Shares are held by their nominee(s) and would like to have their names registered on the register of members of the Company, they must lodge all necessary documents with the Company’s branch registrar in Hong Kong, Hong Kong Branch Share Registrar and Transfer Office, Secretaries Limited, 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, for completion of the relevant registration by 4:00 p.m. on Thursday, 21 December 2006.

The Majority Shareholders have not decided on whether to apply for any excess Rights Shares.

Conditions of the Rights Issue and the Bonus Warrants Issue

Completion of the Rights Issue and the Bonus Warrants Issue is conditional upon, among others, fulfillment of the following conditions:

(i) the circular of the Company (duly approved by the Stock Exchange) being posted to the Shareholders on or before the Circular Posting Date and with the respective resolutions duly passed by the Independent Shareholders on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting in respect of the Rights Issue and the Bonus Warrants Issue, together with a resolution duly passed approving the increase in authorised share capital of the Company to facilitate the issue of Rights Shares and the Shares which may fall to be issued upon the exercise of the Bonus Warrants, in compliance with the Listing Rules on or before the Prospectus Posting Date;
(ii) the Stock Exchange granting or agreeing to grant (subject to allotment and despatch of certificates in respect of Rights Shares, as appropriate, the posting of the Rights Issue Documents and any other condition which may be agreed in their reasonable opinion by the Company and the Underwriter) the listing of, and permission to deal in, the Rights Shares (in both their nil-paid and fully paid forms), the Bonus Warrants and the Shares which may fall to be issued upon the exercise of the Bonus Warrants on the Stock Exchange on or before 5:00 p.m. on the second Business Day after the Final Acceptance Date;
(iii) the filing with and registration of the Rights Issue Documents by the Registrar of Companies in Hong Kong in compliance with the Companies Ordinance;
(iv) the posting to Qualifying Shareholders of the Rights Issue Documents on the Prospectus Posting Date; and
(v) the delivery to the Underwriter on the Prospectus Posting Date a copy of each of the Rights Issue Documents, duly signed for and on behalf of the Company by a duly authorized officer thereof.

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LETTER FROM THE BOARD

In the event that the above conditions precedent have not been fulfilled or otherwise waived, released or modified (in whole or in part) in writing by the Underwriter (other than conditions (i) and (ii) above which cannot be waived) with the agreement of the Company, or shall become incapable of being fulfilled on or before such date, currently expected to be on or around 7 February 2007, without being so waived, released or modified, the Underwriting Agreement may be terminated by the Underwriter by written notice to the Company, in which case, all liabilities of the parties to the Underwriting Agreement shall cease and determine and none of the parties shall have any claim against the other except, among other things, claims arising out of any antecedent breach of any of the provisions of the Underwriting Agreement.

The Rights Issue Documents will be filed with the Registrar of Companies in Bermuda as soon as reasonably practicable after publication.

Application for listing of the Rights Shares, the Bonus Warrants and the Shares which may fall to be issued upon the exercise of the Bonus Warrants on the Stock Exchange

The Company will apply to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the Rights Shares in both nil-paid and fully-paid forms, the Bonus Warrants and the Shares which may fall to be issued upon the exercise of the Bonus Warrants.

Subject to the granting of listing of, and permission to deal in, the Rights Shares in both their nil-paid and fully-paid forms, the Bonus Warrants and the Rights Shares which may fall to be issued upon the exercise of the subscription rights attaching to the Bonus Warrants on the Stock Exchange, the Rights Shares in both their nil-paid and fully-paid forms, the Bonus Warrants and the Rights Shares which may fall to be issued upon the exercise of the subscription rights attaching to the Bonus Warrants will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the commencement date of dealings in the Rights Shares in both their nil-paid and fully-paid forms, the Bonus Warrants on the Stock Exchange or such other date as determined by HKSCC. Settlement of transactions between participants of the Stock Exchange on any trading day is required to take place in CCASS on the second trading day thereafter. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time.

Dealings in the Rights Shares in their nil-paid and fully-paid forms will be subject to the payment of stamp duty in Hong Kong.

UNDERWRITING ARRANGEMENTS

Underwriting agreement

Date: 8 November 2006 Underwriter: SHK International Number of Rights Shares A total of 362,300,199 Rights shares, representing underwritten: approximately 28.78% of the issued share capital of the Company, are underwritten by the Underwriter.

— 26 —

LETTER FROM THE BOARD

Commission:

2% of the aggregate Subscription Price for the Underwritten Shares, which is expected to be approximately HK$2,173,801.19.

To the best knowledge, information and belief of the Directors having made all reasonable enquiries, the Underwriter and its ultimate beneficial owners are independent third parties not connected with the Company or its subsidiaries or any of their respective associates, or any of the connected persons of the Company or its subsidiaries or any of their respective associates.

Irrevocable Undertakings from Profit Harbour and Shougang

As at the date of the Underwriting Agreement, Profit Harbour is interested in 596,699,801 Shares, representing approximately 47.39% of the existing issued share capital of the Company, and Shougang is interested in 300,000,000 Shares, representing approximately 23.83% of the existing issued share capital of the Company. Each of Profit Harbour and Shougang has irrevocably undertaken to take up 596,699,801 Rights Shares and 300,000,000 Rights Shares respectively which will be provisionally allotted to them under the Rights Issue.

Termination of the Underwriting Agreement

(i) the Underwriter shall become aware of the fact that, any of the warranties contained in the Underwriting Agreement was, then or at the material time, untrue, inaccurate or misleading, or that the Company or the Majority Shareholders or either of them is/are in breach of any provision of the Underwriting Agreement or the Irrevocable Undertaking;
(ii) the enactment of any new law or regulation, any change in existing laws or regulations or any change in the interpretation or application thereof by any court or other competent authority, whether in Hong Kong or otherwise in a jurisdiction relevant in the context of the Rights Issue;
(iii) any change in local, international, financial, political, economic or stock market conditions, whether in Hong Kong or otherwise in a jurisdiction relevant in the context of the Rights Issue; or
(iv) any change or development involving a prospective change in taxation or exchange controls in Hong Kong,

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LETTER FROM THE BOARD

and such event or events is or are in the bona fide and reasonable opinion of the Underwriter:

(a) likely to have a material adverse effect on the business or financial or trading position or prospect of the Company or the Group; or
(b) likely to have a material adverse effect on the success of the Rights Issue or the level of Shares underwritten by the Underwriters; or
(c) so material and prejudicial as to make it inappropriate, inadvisable or inexpedient to proceed further with the Rights Issue,

If the Underwriter terminates or rescinds the Underwriting Agreement, the Rights Issue will not proceed.

WARNING OF THE RISKS OF DEALING IN THE SHARES AND THE RIGHTS SHARES

Existing Shares will be dealt with on an ex-right basis from Wednesday, 20 December 2006. To qualify for the Rights Issue, all transfers of Shares must be lodged for registration with the branch registrar of the Company by 4:00 p.m. on Wednesday, 20 December 2006. The register of members of the Company will be closed from Friday, 22 December 2006 to Thursday, 4 January 2007 (both dates inclusive). No transfer of the Shares will be registered during this period.

The Rights Shares in their nil-paid form is expected to be dealt in from Monday, 8 January 2007 to Wednesday, 17 January 2007 (both days inclusive). The Shareholders should note that dealings in such Shares will take place while the conditions to which the Underwriting Agreement is subject remain unfulfilled. If the Underwriter terminates the Underwriting Agreement, or the conditions of the Rights Issue and the Bonus Warrants Issue are not fulfilled, the Rights Issue will not proceed and the Rights Issue will lapse.

Any Shareholder or other person contemplating selling or purchasing the Shares and/or the Rights Shares in their nil-paid forms during the aforesaid period who is in any doubt about his/her/its position is recommended to consult his/her/its professional adviser.

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LETTER FROM THE BOARD

Any Shareholder or other person contemplating selling or purchasing the Shares and/or the Rights Shares in their nil-paid forms up to the date when the conditions of the Rights Issue and the Bonus Warrants Issue are fulfilled (which is expected to be Thursday, 25 January 2007) will accordingly bear the risk that the Rights Issue may not become unconditional and may not proceed.

REASONS FOR AND BENEFITS OF THE RIGHTS ISSUE AND THE BONUS WARRANTS ISSUE

The amount of HK$244,474,752 from the aggregate amount of Rights Issue (after expenses including underwriting commission, professional fees, printing charges and sundry expenses) will be applied towards payment of the Consideration for the Conditional Acquisition. As mentioned above, the Directors are of the view that the Conditional Acquisition is in the interests of the Company and the Shareholders as a whole as it will help strengthening the asset base of the Group. Accordingly, the Directors consider that it is fair and reasonable for the Company to raise the required financing for the Conditional Acquisition by way of the Rights Issue as the exercise provides opportunities for the Shareholders to maintain their stakes in the Company and to enjoy the anticipated benefits from the Conditional Acquisition.

In the event that the Conditional Acquisition is not completed, the Board intends to apply the proceeds from the Rights Issue to acquire further investment interests in the resources industry, where opportunities arise to make additional investments where returns are maximised for Shareholders, and as general working capital and for future investment purposes.

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LETTER FROM THE BOARD

SHAREHOLDING STRUCTURE BEFORE AND AFTER THE RIGHTS ISSUE AND THE BONUS WARRANTS ARE EXERCISED IN FULL

Set out below is a table showing the shareholding structure of the Company as at the Latest Practicable Date, after completion of the Rights Issue assuming different levels of acceptance of the Rights Shares by the Qualifying Shareholders:

							Immediately following
						Immediately following	completion of the
					Immediately following	completion of the	Rights Issue assuming
					completion of the	Rights Issue assuming	the Majority
			Immediately	following	Rights Issue assuming	all Qualifying	Shareholders having
			completion of the		the Majority	Shareholders have	fully taken up their
			Rights Issue assuming		Shareholders have	taken up their	entitlements and fully
			all Qualifying		fully taken up their	respective entitlements	underwritten by the
			Shareholders have		entitlements and fully	and the Bonus	Underwriter and the
	As at the Latest		taken up	their	underwritten by the	Warrants are	Bonus Warrants are
Shareholders	Practicable Date		respective entitlements		Underwriter	exercised in full	exercised in full
	Number of	Share-	Number of	Share-	Number of Share-	Number of Share-	Number of Share-
	Shares	holding	Shares	holding	Shares holding	Shares holding	Shares holding
		(%)		(%)	(%)	(%)	(%)
Profit Harbour	596,699,801	47.39%	1,193,399,602	47.39%	1,193,399,602 47.39%	1,312,739,562 47.39%	1,312,739,562 47.39%
Shougang	300,000,000	23.83%	600,000,000	23.83%	600,000,000 23.83%	660,000,000 23.83%	660,000,000 23.83%
Existing public
Shareholders	362,300,199	28.78%	724,600,398	28.78%	362,300,199 14.39%	797,060,438 28.78%	362,300,199 13.08%
Underwriter	—	—	—	—	362,300,199 14.39%	— —	434,760,239 15.70%
Total	1,259,000,000	100%	2,518,000,000	100%	2,518,000,000 100%	2,769,800,000 100%	2,769,800,000 100%

MAINTENANCE OF THE LISTING OF THE SHARES AFTER RIGHTS ISSUE AND THE BONUS WARRANTS ISSUE

Following completion of the Rights Issue and/or the Bonus Warrants Issue are exercised in full, the Underwriter will become a substantial shareholder of the Company if none of the Qualifying Shareholders (except the Majority Shareholders) is willing to take up his/her/its entitlements of such number of Rights Shares. The Underwriter will own approximately as to 14.39% of the issued share capital of the Company as enlarged by the completion of the Rights Issue (as set out in the fourth column of the table above) and 15.70% of the issued share capital of the Company as enlarged by the completion of the Rights Issue and full exercise of the Bonus Warrants (as set out in the sixth column of the table above).

It is the intention of the Underwriter to place out at least 10.61% of the issued share capital of the Company as enlarged by the completion of the Rights Issue and 11.92% of the issued share capital of the Company as enlarged by the completion of the Rights Issue and full exercise of the Bonus Warrants respectively, to other independent investors in the capital market for the purpose of maintaining the public float requirement of 25% under the Listing Rules.

It is also the intention of the Company to maintain the listing of the Shares on the Stock Exchange after the completion of the Proposed Acquisition, the Rights Issue and the Bonus Warrants Issue. Accordingly, the Company undertakes that it will take such appropriate steps as may be necessary or required to maintain and/or restore the minimum public float for Shares at all times upon completion of the Rights Issue and the Bonus Warrants Issue.

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LETTER FROM THE BOARD

The Stock Exchange has stated that if, at the date of completion of the Rights Issue, less than 25% of the Shares are held by the public or if the Stock Exchange believes that:

a false market exists or may exist in the trading in the Shares; or
there are too few shares of the Shares in public hands to maintain an orderly market,

then it will consider exercising its discretion to suspend trading in the Shares until a sufficient public float is attained. In this connection, it should be noted that upon completion of the Rights Issue, there may be insufficient public float for the Shares and therefore trading in the Shares may be suspended until a sufficient level of public float is attained.

PLACING OF 800,000,000 NEW SHARES

The Board also proposes to raise additional equity of HK$240,000,000 through the Placing which is fully underwritten by SHKIS at the Placing Price by the Placing Agent. The additional funding will be used by the Group to acquire further investment interests in resources industry, where an opportunity comes to make additional investments on such acceptable terms and conditions, as the Company deems fit.

On 9 November 2006, the Placing Agreement was executed, pursuant to which the Company has agreed to place, through SHKIS as the Placing Agent, an amount of 800,000,000 new Shares to independent investors at the Placing Price per Placing Share. The Company will seek the Independent Shareholders’ approval, on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting, to grant a specific mandate for the allotment, issue and dealing with the Placing Shares under the Placing Agreement in accordance with all applicable requirements under the Listing Rules.

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LETTER FROM THE BOARD

Placing Agreement made between the Company and the Placing Agent

The Company As the vendor. Number of Placing Shares: 800,000,000 new Shares to be placed, representing approximately 31.77% of the existing issued share capital of the Company enlarged by the completion of the Rights Issue. Underwriting: The Placing is fully underwritten by SHKIS. Placing price: HK$0.30 per Placing Share which represents:

(i) a discount of approximately 26.8% to the closing price of HK$0.41 per Share as quoted on the Stock Exchange on the Last Trading Day;
(ii) a discount of approximately 24.1% to the average closing price of approximately HK$0.395 per Share as quoted on the Stock Exchange for the last 5 full trading days up to and including the Last Trading Day;
(iii) a discount of approximately 18.8% to the average closing price of approximately HK$0.3695 per Share as quoted on the Stock Exchange for the last 10 full trading days up to and including the Last Trading Day;
(iv) a discount of approximately 15.5% to the theoretical ex-right price of approximately HK$0.355 per Share, calculated on the basis of the closing price of HK$0.41 per Share on the Last Trading Day; and
(v) a discount of approximately 14.28% to the closing price of HK$0.35 per Share as quoted on the Stock Exchange on the Latest Practicable Date.

Placing Agent: SHKIS. Placing commission: SHKIS will receive a placing commission of 4% on the gross proceeds of the Placing.

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LETTER FROM THE BOARD

Placees:

The Placing Shares will be placed to not less than six placees (which will be individual, corporate or institutional investors or a combination of them). Such placees and their respective ultimate owners are all:

(i) independent of, and not acting in concert with, the Company and parties acting in concert with it; and
(ii) independent third parties not connected with the Company or its subsidiaries or any of their respective associates, or any of the connected persons of the Company or its subsidiaries or any of their respective associates.

Conditions: The Placing is conditional upon:

(i) Independent Shareholders of the Company approving the Placing Agreement on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting, in accordance with all applicable requirements under the Listing Rules;
(ii) Independent Shareholders of the Company approving the grant of the specific mandate to allot, issue and deal in the Placing Shares under the Placing Agreement on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting, in accordance with all applicable requirements under the Listing Rules; and
(iii) the Stock Exchange granting or agreeing to grant the listing of, and the permission to deal in, the Placing Shares,

none of the above conditions can be waived.

The Placing is conditional and may or may not proceed. Accordingly, shareholders and prospective investors are reminded to exercise extreme caution when trading in the Shares of the Company.

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LETTER FROM THE BOARD

Completion:

The Placing must be completed on a day which is two (2) months from the date of the SGM (currently scheduled to be on or around 4 January 2007) where the specific mandate in relation to the Placing is approved and granted by the Independent Shareholders on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting, if such day not being a Business Day, the preceding Business Day of such day, failing which the Placing will cease and terminate.

The Company will further announce the results of each Placing being made at the Placing Price during the Placing Period, amongst other details, the identity of the placees and the number of Placing Shares being placed out to such placees.

The completion of the Placing will not be affected in the event that the Rights Issue does not proceed for whatever cause.

The Placing of 800,000,000 Placing Shares represents approximately 63.54% of the existing issued share capital of the Company, approximately 31.77% of the issued share capital as enlarged by the completion of the Rights Issue, approximately 28.88% of the issued share capital as enlarged by the completion of the Rights Issue and full exercise of the Bonus Warrants, approximately 24.11% of the issued share capital as enlarged by the completion of the Rights Issue and the Placing but before full exercise of the Bonus Warrants and approximately 22.41% of the issued share capital as enlarged by the completion of the Rights Issue, full exercise of the Bonus Warrants and the Placing with all Placing Shares fully placed out or underwritten.

Termination of the Placing Agreement

SHKIS may terminate the arrangements set out in the Placing Agreement, if, at any time prior to 12:00 noon on the Placing Completion Date, in the absolute opinion of SHKIS, the success of the Placing or the business or financial prospects of the Group would or might be adversely affected by any of the following events:

(a) the introduction of any new Law or any change in existing Laws or change in the interpretation or application of existing Laws; or
(b) the occurrence of any event, development or change (whether or not local, national or international or forming part of a series of events or changes occurring or continuing before, as at or after the date of the Placing Agreement and including an event or change in relation to or a development of an existing state of affairs) of a political, military, industrial, financial, economic or other nature, whether or not sui generis with any of the foregoing, resulting in a material adverse change in, or which might be expected to result in a material adverse change in, political, economic or stock market conditions; or

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LETTER FROM THE BOARD

(c) the imposition of any moratorium, suspension or material restriction on trading in securities generally on the Stock Exchange occurring due to exceptional financial circumstances or otherwise; or
(d) a change or development involving a prospective change in taxation in Hong Kong or any relevant jurisdiction or the implementation of exchange controls which shall or might materially and adversely affect the Company or its present or prospective shareholders in their capacity as such; or
(e) any change or deterioration in the conditions of local, national or international securities markets occurs,

then and in any such case, SHKIS may terminate the Placing Agreement without liability to the Company by giving notice in writing to the Company, provided that such notice is received prior to 12:00 noon on the Placing Completion Date.

In the event that SHKIS terminates the Placing Agreement pursuant to any of the above, all obligations of the Company and SHKIS under the Placing Agreement, shall cease and determine, upon which neither party thereto shall have any claim against the other in respect of any matter arising out of or in connection with the Placing Agreement, except for any breach arising prior to such termination.

If SHKIS terminates or rescinds the Placing Agreement, the Placing will not proceed.

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LETTER FROM THE BOARD

SHAREHOLDING STRUCTURE BEFORE AND AFTER THE COMPLETION OF THE RIGHTS ISSUE, THE BONUS WARRANTS ISSUE AND THE PLACING

Set out below is a table showing the shareholding structure of the Company as at the Latest Practicable Date, after completion of the Rights Issue, the Bonus Warrants Issue and the Placing assuming all the Placing Shares have been successfully purchased or procured to be purchased:

					Immediately
					following completion
					of the Rights Issue
				Immediately	assuming all the
				following completion	Qualifying
			Immediately	of the Rights Issue	Shareholders have
			following completion	assuming all the	taken up their
			of the Rights Issue	Qualifying	respective
			assuming all the	Shareholders have	entitlements, the
			Qualifying	taken up their	Bonus Warrants are
			Shareholders have	respective	exercised in full and
			taken up their	entitlements and the	the Placing Shares
	As at the Latest		respective	Bonus Warrants are	are fully placed out
Shareholders	Practicable Date		entitlements	exercised in full	or underwritten
	Number of	Share-	Number of Share-	Number of Share-	Number of Share-
	Shares	holding	Shares holding	Shares holding	Shares holding
		(%)	(%)	(%)	(%)
Profit Harbour	596,699,801	47.39%	1,193,399,602 47.39%	1,312,739,562 47.39%	1,312,739,562 36.77%
Shougang	300,000,000	23.83%	600,000,000 23.83%	660,000,000 23.83%	660,000,000 18.49%
Existing Public
Shareholders	362,300,199	28.78%	724,600,398 28.78%	797,060,438 28.78%	797,060,438 22.33%
SHKIS/Placees	—	—	— —	— —	800,000,000 22.41%
Total	1,259,000,000	100%	2,518,000,000 100%	2,769,800,000 100%	3,569,800,000 100%

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LETTER FROM THE BOARD

MAINTENANCE OF THE LISTING OF THE SHARES AFTER THE PLACING

Following completion of the Placing, SHKIS may become a substantial shareholder of the Company if the Placing Shares are not fully placed out and as a result SHKIS has to underwrite the remaining Placing Shares. If no Placing Shares are able to be placed out by the expiry of the Placing Period, SHKIS will own approximately as to 22.41% of the issued share capital of the Company as enlarged by the completion of the Rights Issue, full exercise of the Bonus Warrants and the Placing (as set out in the last column of the table above).

It is the intention of SHKIS to place out at least 2.67% of the issued share capital of the Company as enlarged by the completion of the Rights Issue, full exercise of the Bonus Warrants and the Placing, to other independent investors in the capital market for the purpose of maintaining the public float requirement of 25% under the Listing Rules.

It is also the intention of the Company to maintain the listing of the Shares on the Stock Exchange after the completion of the Proposed Acquisition, the Rights Issue, the Bonus Warrants Issue and the Placing. Accordingly, the Company undertakes that it will take such appropriate steps as may be necessary or required to maintain and/or restore the minimum public float for Shares at all times upon completion of the Rights Issue, the Bonus Warrants Issue and the Placing.

The Stock Exchange has stated that if, at the date of completion of the Placing, less than 25% of the Shares are held by the public or if the Stock Exchange believes that:

a false market exists or may exist in the trading in the Shares; or
there are too few shares of the Shares in public hands to maintain an orderly market,

then it will consider exercising its discretion to suspend trading in the Shares until a sufficient public float is attained. In this connection, it should be noted that upon completion of the Placing, there may be insufficient public float for the Shares and therefore trading in the Shares may be suspended until a sufficient level of public float is attained.

FINANCIAL EFFECT OF THE PLACING

We have made reference to the section headed “Pro Forma Financial Information of the Group” as set out in Appendix III to the Circular for the following financial effect of the Placing:

	As at	After
	30 June 2006	placing
	HK$’000	HK$’000
Net current assets	15,787	245,287
Total assets	23,188	252,688
Total liabilities	7,401	7,401
Net asset value	15,787	245,287

Upon completion of the Placing, both net current assets and net asset value of the Group will be increased by 14.5 times and no adverse impact would be incurred in the liabilities of the Group.

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LETTER FROM THE BOARD

REASONS FOR AND BENEFITS OF THE PLACING

The proceeds from the Placing will be used by the Group to acquire further investment interests in the resources industry, where opportunities arise to make additional investments where returns are maximised for Shareholders.

Use of proceeds

The net proceeds from the Placing will be used to acquire interests in companies that are compatible with the Company’s business strategy of trading in physical commodities and establishing short-term trading portfolios to maximize the Company’s return. Hence, the proceeds will be used to acquire, in particular, interests in natural resources industries and (if necessary) to increase shareholding interest in Mount Gibson. In this respect, the Company has decided to convert its shares in Aztec into Mount Gibson Shares primarily as trading portfolio.

The Directors propose to seek the Independent Shareholders’ approval on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting at the SGM to grant a specific mandate for the allotment and, issue of and dealing in the Placing Shares in accordance with all applicable requirements under the Listing Rules.

An explanatory statement containing the particulars required by the Listing Rules to enable the Shareholders to make an informed view on whether to vote for or against the resolution for the grant of the specific mandate to be proposed at the SGM will be set out in the circular of the Company.

In view of the current market conditions, the Directors consider that the Placing represents a good opportunity to raise further working capital for the Company while at the same time broadening the Shareholder and capital base and that raising capital at favourable market conditions is a sensible and beneficial move for the Group when future need for capital is anticipated.

Net proceeds from the Placing of approximately HK$229,500,000 (after deduction of expenses including, among others, underwriting commission and professional fees) will be applied by the Group to fund new investments and acquisitions in the future as and when opportunities arise and for general working capital purposes.

Hence, the Directors are of the view that the proposed Rights Issue, the Bonus Warrants Issue and Placing are in the interests of the Shareholders as a whole.

The Independent Non-Executive Directors, after reviewing the use of proceeds from the Placing, consider that such use is fair and reasonable, and is in the commercial benefit and long-term interest of the Company and the Shareholders as a whole.

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LETTER FROM THE BOARD

FUND RAISING ACTIVITIES OF THE COMPANY FOR THE 12 MONTHS ENDING ON THE DATE OF THE ANNOUNCEMENT

The following table summarises the fund raising activities of the Company for the 12 months ending on the date of the Announcement:

Date of announcement/ Fund raising circular/prospectus event

Net proceeds raised

Proposed use of proceeds

Actual use of proceeds

11 May 2006 previous rights 30 May 2006 issue 1 June 2006 20 June 2006 11 July 2006

Approximately HK$81,000,000

Approximately HK$25,000,000 to invest in fabric and other merchandises trading business

Approximately HK$16,000,000 has been used in the fabric and other merchandises trading (including HK$8,000,000 increase in pledge bank deposit for obtaining bank facilities)

Approximately HK$9,000,000 has been reserved in the bank to be used for fabric and other merchandises trading

Approximately HK$20,000,000 to invest in base metal trading business (Note 1)

Approximately HK$36,000,000 reserved as general working capital (Note 2)

HK$20,000,000 has been used as deposit for the Conditional Acquisition of the Sales Shares

Approximately HK$26,000,000 has been used for the acquisition of Aztec’s shares as a stock in its trading portfolio

Approximately HK$3,000,000 has been used for the acquisitions of stocks listed on the Stock Exchange as stocks in its trading portfolio

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LETTER FROM THE BOARD

Date of announcement/	Fund raising	Net proceeds	Proposed use	Actual use
circular/prospectus	event	raised	of proceeds	of proceeds
				Approximately
				HK$2,500,000 has
				been used to settle
				outstanding payables
				before the previous
				rights issue and
				expenses incurred in
				the second half of
				2006
				Approximately
				HK$4,500,000 has
				been reserved as
				general working
				capital deposited in
				the bank
15 June 2006	Conversion of	Approximately	Approximately	The entire sum of
	Convertible Bonds	HK$2,000,000	HK$2,000,000 used	approximately
			to pay for the	HK$2,000,000 was
			consideration of	used to pay for the
			acquiring	consideration of
			approximately 60%	acquiring
			interest in Chinaright	approximately 60%
			Electronics Limited	interest in Chinaright
				Electronics Limited

Notes:

The amount of HK$20,000,000 earmarked for base metal trading business will be used in the following manner: a sum of HK$10,000,000 will be deposited in bank(s) to be used for pledge as security for trading facilities and a sum of HK$10,000,000 will be used for settlement of purchases of base metal for a period of two months with respect to the two-months credit period granted to the customers in physical base metal trading.
In order to maximize return for the Shareholders, the Board had decided that the general working capital of the Company should not be left idle and should be fully utilized in acquiring interests in sound investments of potential growth and return on a short term basis in September 2006. The Directors of the Company had considered the use of the general working capital to build up short term trading portfolio in shares in listed companies. The intended usage as general working capital can be achieved on the basis that the stocks of Aztec and other listed shares on the Stock Exchange held by the Company can be sold at any time through the Australian Stock Exchange and the Stock Exchange respectively, hence, the proceeds of selling such stocks/shares can easily be applied for use as general working capital from time to time.

The Independent Non-Executive Directors concur with the executive Directors’ view that there is no change in the use of proceeds since the securities trading portfolio is short-term and can easily be liquidated at any time. In the opinion of the Independent Non-Executive Directors, the working capital of the Company is simply being better utilized to secure a higher return to the long-term benefit of the Company as a whole. As such, there is no change in the focus of the Company’s principal business operation and activities and there is no intention whatsoever on the part of the Company nor the Board to become an investment holding company.

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LETTER FROM THE BOARD

Application for listing of the Placing Shares on the Stock Exchange

The Company will apply to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the Placing Shares.

Dealings in the Placing Shares will be subject to the payment of stamp duty in Hong Kong.

LISTING RULES IMPLICATIONS

The completion of the Acquisition Agreement is subject to the approval by the Independent Shareholders on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting on the basis that (i) the transaction contemplated under the Acquisition Agreement constitutes a very substantial acquisition for the Company under the Listing Rules, on the basis that the calculation of the assets ratio is over 100% and that the Purchaser is a direct wholly-owned subsidiary of the Company and (ii) the completion of the Acquisition Agreement is conditional on the completion of the Rights Issue which is also subject to the Independent Shareholders on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting.

The Company has announced a rights issue on 11 May 2006 and results of which have been announced on 11 July 2006. The Rights Issue and the Bonus Warrants Issue aggregating with the previous rights issue have increased the issued share capital of the Company by more than 50%. With reference to Rule 7.19(6)(a) of the Listing Rules, the Rights Issue and the Bonus Warrants Issue are conditional on the approval by the Independent Shareholders on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting.

Subject to the approval of the Rights Issue and the Bonus Warrants Issue by the Independent Shareholders at the SGM as aforesaid, application will be made to the Stock Exchange for the listing of, and permission to deal in, the Rights Shares, in both nil-paid and fully-paid forms, the Bonus Warrants and the Shares which may fall to be issued upon the exercise of the Bonus Warrants.

An Independent Board Committee of the Company has been constituted to consider the terms of the Acquisition Agreement, the Rights Issue and the Bonus Warrants Issue, the Underwriting Agreement, the grant of New Issue Mandate and the Placing Agreement and to advise and make recommendation to the Independent Shareholders as to how to vote at the SGM on the ordinary resolutions regarding the aforesaid. Mr. Wong Wing Kuen, Albert, Mr. Tsui Robert Che Kwong, Mr. Yang Weiming and Mr. Michael J. Bogue have been appointed by the Board to serve as members of the Independent Board Committee.

The Independent Financial Adviser, SinoPac has been appointed to advise the Independent Board Committee and the Independent Shareholders on the fairness and reasonableness of the transactions contemplated in the Acquisition Agreement, the Rights Issue and the Bonus Warrants Issue, the Underwriting Agreement, the grant of New Issue Mandate and the Placing Agreement in accordance with the Listing Rules.

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LETTER FROM THE BOARD

The Company is also required to obtain specific approval from the Independent Shareholders on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting on the specific mandate for the allotment and issue of and dealing in the Placing Shares under the Placing Agreement under Rule 13.36(1) of the Listing Rules.

Subject to the approval of allotment and issue of and dealing in the Placing Shares under the Placing Agreement by the Independent Shareholders at the SGM as aforesaid, application will be made to the Stock Exchange for the listing of, and permission to deal in, the Placing Shares.

CHANGE OF NAME

The Directors propose to change the name of the Company from “Shanghai Merchants Holdings Limited” to “APAC Resources Limited” and its Chinese name, for identification purpose, to “ ” to reflect the previous changes in the shareholding structure of the Company and to enable the investors to have an easy recognition on the Company’s future principal business activities. The Directors propose to seek the Shareholders’ approval at the SGM to approve the requisite resolution to change the Company’s existing name.

The proposed change of name will be subject to the passing of the special resolution by the Shareholders at the SGM and will become effective subject to the approvals of the Registrar of Companies in Hong Kong and Bermuda.

The change of name will not affect any rights of the Shareholders. All existing share certificates issued bearing the existing name of the Company will, after the change of name becoming effective, continue to be good evidence of title to the Shares and will be valid for trading, settlement and delivery for the same number of shares in the new name of the Company on the Stock Exchange.

Holders of existing share certificates may exchange them for new share certificates at the expense of the Company within one month after the change of name becomes effective. Holders of existing share certificates who wish to exchange the existing share certificates for new share certificates bearing the new name should deliver the existing share certificates to the Company’s share registrar being the Hong Kong Branch Share Registrar and Transfer Office, Secretaries Limited, 26/F, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong during normal business hours. Any exchange of new share certificates after one month from the effective date of the change of name will be accepted for exchange only on payment of a fee of HK$2.50 (or such higher amount as may from time to time be allowed by the Stock Exchange) for each new share certificate issued.

A further announcement will be made on the change of name and short stock name of the Company becoming effective.

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LETTER FROM THE BOARD

INCREASE OF AUTHORISED SHARE CAPITAL

As the current authorised share capital of the Company is HK$200,000,000.00 divided into 2,000,000,000 Shares of nominal value HK$0.10 each, there is insufficient amount of authorised capital for the Company to complete the Rights Issue and the Bonus Warrants Issue.

The Directors propose to seek the Shareholders’ approval at the SGM to approve the requisite resolution to increase the Company’s authorised capital from HK$200,000,000.00 to HK$800,000,000.00 divided into 8,000,000,000 Shares of nominal value of HK$0.10 each.

The proposed increase of the authorised share capital will be subject to and become effective upon the passing of the ordinary resolution by the Shareholders at the SGM.

REFRESHMENT OF GENERAL MANDATES TO ISSUE SHARES AND REPURCHASE SHARES

At the 2006 AGM, ordinary resolutions were passed whereby general mandates authorizing the Directors, amongst other things, to (i) allot, issue and deal in the Shares of the issued share capital of the Company and to make or grant offers, agreements and options which would or might require the exercise of such powers during or after end of the relevant period which shall not exceed aggregate of 20% of the nominal amount of the share capital of the Company in issue as at the date of the 2006 AGM (“Previous Issue Mandate”) and (ii) repurchase shares of the Company on the Stock Exchange or on any other stock exchange recognised which shall not exceed aggregate of 10% of the nominal amount of the share capital of the Company in issue as at the date of the 2006 AGM i.e. the Previous Repurchase Mandate.

Since the date of the 2006 AGM, the Company has used up approximately 4.84% of the Previous Issue Mandate applying towards issuance of 20,000,000 Shares for the conversion of the convertible bonds of the Company in August 2006 (the calculation of 4.84% is based on the said 20,000,000 Shares divided by the 413,000,000 issued Shares as at the date of the 2006 AGM) leaving an unused portion of approximately 15.16% under the Previous Issue Mandate. Details of the calculation are set out below:

No. of issued shares as at the date of 413,000,000 Shares 2006 AGM Increase in the no. of Shares issued after 826,000,000 Shares completion of the previous rights issue of the Company in July 2006 No. of Shares issued pursuant to the 20,000,000 Shares conversion of the convertible bonds of the Company in August 2006 Total no. of issued Shares as at the 1,259,000,000 Shares Latest Practicable Date

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LETTER FROM THE BOARD

Increase in the no. of Shares issued after completion of the Rights Issue
1,259,000,000 Rights Shares
Total no. of issued Shares as enlarged by the completion of the Rights Issue
2,518,000,000 Shares
No. of Shares permitted to be issued under the Previous Issue Mandate
82,600,000 Shares,
i.e. 20% x 413,000,000 Shares
No. of Shares and % used under the Previous Issue Mandate
20,000,000 Shares used for convertible bonds 4.84%, i.e. 20,000,000 Shares x 100%
413,000,000 Shares
No. of Shares and % not used under the Previous Issue Mandate
62,600,000 Shares

15.16%, i.e. 62,600,000 Shares x 100% 413,000,000 Shares

No. of Shares permitted to be issued after the grant of refreshment of the Previous Issue Mandate based on the issued share capital as enlarged by the completion of the Rights Issue
381,662,953 Shares,
i.e. 15.16% x 2,518,000,000 Shares
No. of Shares permitted to be issued after the grant of New Issue Mandate based on the issued share capital as enlarged by the completion of the Rights Issue

121,937,047 Shares,

i.e. 4.84% x 2,518,000,000 Shares
No. of Shares permitted to be issued after the grant of the refreshment of the Previous Issue Mandate and the New Issue Mandate based on the issued share capital as enlarged by the completion of the Rights Issue

503,600,000 Shares,

i.e. 20% x 2,518,000,000 Shares

Refreshment of Previous Issue Mandate

In view of the enlarged issued share capital of the Company as a result of the Rights Issue and the Bonus Warrants Issue, the Directors will seek the approval of the Shareholders at the SGM and at which no Shareholder shall abstain from voting, as permitted by Rule 13.36(4)(e) of the Listing Rules, to top-up the general mandate from 62,600,000 to 381,662,953 Shares (approximately 15.16% of the Company’s issued share capital as enlarged by the completion of the Rights Issue which is 2,518,000,000 Shares).

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LETTER FROM THE BOARD

Grant of New Issue Mandate

As a result of the Rights Issue and the Bonus Warrants Issue, the refreshment of the Previous Issue Mandate as to approximately 15.16% of the Company’s issued share capital as enlarged by the completion of the Rights Issue pursuant to Rule 13.36(4)(e) of the Listing Rules will not be sufficient to provide the Company with flexibility to issue securities for cash or as consideration for acquisition of assets as when the Directors think fit and appropriate. Even though the Directors currently have no intention of any acquisition by the Company nor any plan for raising capital by issuing new securities after the Conditional Acquisition, Rights Issue, the Bonus Warrants Issue and the Placing, the Directors will further seek the approval of the Independent Shareholders at the SGM, as permitted by Rule 13.36(4) of the Listing Rules for an additional mandate to allot, issue and deal in 121,937,047 Shares (i.e. approximately 4.84% of the Company’s issued share capital as enlarged by the completion of the Rights Issue which is 2,518,000,000 Shares i.e. the New Issue Mandate.

The New Issue Mandate is subject to the approval by the Independent Shareholders on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting. In summary, the grant of the refreshment of the Previous Issue Mandate together with the New Issue Mandate by the Shareholders and the Independent Shareholders respectively shall not exceed an aggregate of 20% of the nominal amount of the share capital of the Company in issue as enlarged by the completion of the Rights Issue.

Grant of New Repurchase Mandate

Further, the Directors will further seek the approval of the Shareholders at the SGM and at which no Shareholder shall abstain from voting, as permitted by Rule 10.06(1), to repurchase Shares not exceeding 10% of the Company’s issued share capital as at the date of the SGM , being 125,900,000 Shares i.e. the New Repurchase Mandate.

An explanatory statement containing the particulars required by the Listing Rules to enable the Shareholders to make an informed view on whether to vote for or against the resolution for the grant of the proposed general mandate in relation to the New Repurchase Mandate to be proposed at the SGM has been set out in Appendix VII to this circular.

BUSINESS PLAN AND FUTURE INTENTIONS

The Group is principally engaged in trading of base metals and fabric products and other merchandise. The resumption proposal as set out in the Company’s announcement dated 13 July 2006 (the “Resumption Proposal”) was a proposal made in July 2006. The Conditional Acquisition was not introduced to the Company until October 2006. The Directors, therefore, have no idea of acquiring the Sale Shares in Mount Gibson at the time of putting forward the Resumption Proposal. As a result, the Conditional Acquisition was not included in the Resumption Proposal. According to the Resumption Proposal, the Company has stated the following which we cited therefrom:

(i) “Further, leveraging on the extensive experience and business networks of the directors, the Board has been exploring and exploiting other viable business opportunities to enhance the future business prospects of the Company.”

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LETTER FROM THE BOARD

(ii) “The Board will endeavour to explore other viable business opportunities and strengthen its revenue base for the benefit of the shareholders of the Company as a whole.”
(iii) “Leveraging on the extensive business networks of the controlling shareholders, directors and management, the Group plans to expand into other product categories and provide more value-added services including supply chain management, manufacturing sourcing and quality control, so as to increase its profit margin derived from the sales orders.”

With reference to the Resumption Proposal, the Company, precisely, at that time had future plans which included enhancement and expansion of its business prospects and operations by undertaking or investing in trading in new products or commodities. Eventually, the Company identified a potential supplier for iron ore in Mount Gibson and intended to expand its business operations to the trading of iron ore and other commodities so as to increase the Group’s profit margin. The Board believed that carrying on commodities trading such as iron ore in addition to its physical copper trading would enhance the Group’s business prospects and profit margin which was in line with the Group’s principal business and objective.

Similarly and in support, the Board, with a view to expanding the business operations and enhancing the financial performance of the Group, decided to acquire interests in Chinaright Electronics Limited which is primarily engaged in the distribution of IC chips for set-top box. In this respect, “ the Board considers that the proposed acquisition will diversify the Group’s source of income and enhance the long term prospect of the Group .” This also clearly shows that, at the time of the Resumption Proposal, the Board had already considered adopting trading in physical commodity to enhance its business prospects and financial performance, diverse its source of income, increase its profits and return on its assets for the long-term benefit of the Group.

In this regard, acquisition of the Mount Gibson Shares meets such business plan and development strategy of the Group as Mount Gibson provides supply of iron ore materials for physical commodity trading to potentially complement the base metal trading business of the Group. As such, the Company wishes to emphasize that the Conditional Acquisition is not a departure from its physical base metals trading business but rather a reinforcement and enhancement of the same.

In the Resumption Proposal, the Company has amply indicated its intent to locate and trade in new products and physical commodities to increase return for the interests of the Shareholders as a whole. In this connection, the Company wishes to acquire shares in Mount Gibson so as to seek to engage in physical iron ore commodity trading.

Since the Company does not want to stretch its financial position at the moment, it chooses to fund such business move in the form of the Acquisition by the Rights Issue which is fully underwritten. The Independent Non-Executive Directors consider that it has been the business policy and strategy of the Company to look out for, and the Company has been looking out for, investment and commodities trading opportunities and the Acquisition allows the Company to implement and materialize its business policy and strategy and corporate objective.

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LETTER FROM THE BOARD

After the resumption of trading in July 2006, the Company continued to pursue its existing business operation and has not engaged in any business activities that indicate a departure from the Company’s principal business activities of trading in base metals, fabric and other merchandise products.

The Company has been on the lookout for good investment opportunities to maximize return for Shareholders. The Company wishes to lock in the supply of iron ore materials and to trade in such materials for higher profit. A shareholding interest in Mount Gibson is not a change of the principal business of the Company but an attempt to reinforce the existing business of the Company in seeking to assure supply of raw materials for the trading in commodities with a higher profit margin. The Conditional Acquisition is expected to produce higher return on asset with increase in profit and value of the Company to the benefit of the Shareholders as a whole.

The Company wishes to stress that it is not changing its principal business. Instead the Company is looking for business and investment opportunities that complement, enhance and reinforce it. An investment in natural resources industry such as in a company like Mount Gibson being an iron ore exploration and producing company fits in with the Company’s business strategy, corporate objectives and principal business activities. The Conditional Acquisition as an attempt to assure the supply of raw iron ore materials for engaging in such physical commodities trading helps to consolidate the asset and earning bases of the Group.

The Company will continue to maintain its existing principal business and look for investment opportunities to enhance its operation and results.

The Company does not have any current representation in the board of directors of Mount Gibson (the “Mount Gibson Board”) or any other involvement save and except for its shareholding interest in Mount Gibson. In an effort to consolidate and strengthen its interest in Mount Gibson as the platform to pursue its strategy of securing long-term iron ore supply from the Midwest region of Australia, the Company may choose to work constructively with the Mount Gibson Board and its management team so as to add value to the Company’s shareholding interest in Mount Gibson. The Company may, in due course, seek formal representation on the Mount Gibson Board, but to date, no discussions have been had with Mount Gibson in relation to the matter.

The Independent Non-Executive Directors endorse the Board’s decision in an effort to enhance the Company’s financial performance and business prospects through investment in business opportunities that conform with the Company’s business objectives and activities.

— 47 —

LETTER FROM THE BOARD

SGM

A notice convening the SGM is set out on pages 461 to 469 of this circular. Ordinary resolutions in respect of (i) the Acquisition Agreement; (ii) the Rights Issue and the Bonus Warrants Issue; (iii) the Underwriting Agreement; (iv) the Placing Agreement, (v) the increase of authorised share capital of the Company; and (vi) the grant of refreshment of general mandates to issue Shares and repurchase Shares (comprising the Previous Issue Mandate, New Issue Mandate and New Repurchase Mandate), and special resolution in respect of the change of name of the Company will be proposed at the SGM.

A form of proxy for the SGM is enclosed in this circular. If you are not able to attend the SGM, you are requested to complete the form of proxy in accordance with the instructions printed on it and return it to the share registrars of the Company, Secretaries Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the SGM or any adjournment of the meeting. Completion and return of the form of proxy shall not preclude you from attending and voting in person at the SGM or any adjournment of the meeting thereof should you so desire.

PROCEDURES FOR DEMANDING A POLL

Pursuant to Bye-law 66 of the Bye-laws of the Company, at any general meeting a resolution put to the vote of a meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded:

(a) by the chairman of such meeting; or
(b) by at least three Shareholders present in person (or in the case of a Shareholder being a corporation by its duly authorised representative) or by proxy for the time being entitled to vote at the meeting; or
(c) by a Shareholder or Shareholders present in person (or in the case of a Shareholder being a corporation by its duly authorised representative) or by proxy and representing not less than one-tenth of the total voting rights of all Shareholders having the right to vote at the meeting; or
(d) by a Shareholder or Shareholders present in person (or in the case of a Shareholder being a corporation by its duly authorised representative) or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all shares conferring that right.

Under the Listing Rules, the ordinary resolutions to be proposed at the SGM to approve (i) the Acquisition Agreement; (ii) the Rights Issue and the Bonus Warrants Issue; (iii) the Underwriting Agreement; (iv) the Placing Agreement, and (v) the grant of New Issue Mandate, are subject to the approval of the Independent Shareholders on a vote taken by way of poll at the SGM and at which the controlling shareholder (i.e. Profit Harbour) and its associates shall abstain from voting. The ordinary

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LETTER FROM THE BOARD

resolutions to be proposed at the SGM to approve (x) the increase of authorised share capital of the Company; (y) the grant of refreshment of Previous Issue Mandate and (z) the grant of the New Repurchase Mandate, are subject to the approval of the Shareholders at the SGM and at which no Shareholder shall abstain from voting. The special resolution to be proposed at the SGM to approve the change of name of the Company is subject to the approval of the Shareholders at the SGM and at which no Shareholder shall abstain from voting.

RECOMMENDATIONS

The Board considers that (i) the transactions contemplated in the Acquisition Agreement, the Rights Issue and the Bonus Warrants Issue, the Underwriting Agreement and the Placing Agreement; (ii) the increase of authorised share capital of the Company; and (iii) the change of name of the Company; and (iv) the refreshment of general mandates to issue Shares and repurchase Shares (comprising the Previous Issue Mandate, New Issue Mandate and New Repurchase Mandate) are in the interests of the Company and its Shareholders as a whole, and the terms and transactions contemplated in each of which are fair and reasonable so far as the Shareholders are concerned. Accordingly, the Directors recommend all the Shareholders to vote in favour of all the ordinary resolutions and the special resolution as set out in the notice of the SGM.

ADDITIONAL INFORMATION

Your attention is also drawn to the letter from the Independent Board Committee, the letter from SinoPac and the additional information set out in the Appendices to this circular.

On behalf of the Board of Shanghai Merchants Holdings Limited Yue Jialin Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

The following is the text of a letter from the Independent Board Committee to the Independent Shareholders in connection with (i) the Acquisition Agreement; (ii) the Rights Issue and the Bonus Warrants Issue; (iii) the Underwriting Agreement; (iv) the Placing Agreement, and (v) the grant of New Issue Mandate for inclusion in this circular.

SHANGHAI MERCHANTS HOLDINGS LIMITED

1*

(Incorporated in Bermuda with limited liability)

(Stock code: 1104)

12 December 2006

To the Independent Shareholders

Dear Sir or Madam,

(1) VERY SUBSTANTIAL ACQUISITION RELATING TO THE CONDITIONAL ACQUISITION OF 48,373,197 ORDINARY SHARES IN MOUNT GIBSON

(2) PROPOSED RIGHTS ISSUE IN THE PROPORTION OF ONE RIGHTS SHARE FOR EVERY EXISTING SHARE HELD ON THE RECORD DATE

(3) PROPOSED ISSUE OF ONE BONUS WARRANT FOR EVERY FIVE RIGHTS SHARES

(4) PLACING OF NEW SHARES

(5) PROPOSED CHANGE OF NAME FOR SHANGHAI MERCHANTS HOLDINGS LIMITED

(6) INCREASE OF AUTHORISED SHARE CAPITAL AND

(7) REFRESHMENT OF GENERAL MANDATES TO ISSUE SHARES AND REPURCHASE SHARES

We have been appointed as the Independent Board Committee to make recommendations to you in connection with (i) the Acquisition Agreement; (ii) the Rights Issue and the Bonus Warrants Issue; (iii) the Underwriting Agreement; (iv) the Placing Agreement, and (v) the grant of New Issue Mandate, details of which are set out in the letter from the Board contained in the circular issued by the Company to the Shareholders dated 12 December 2006 (the “Circular”), of which this letter forms part. Terms defined in the Circular will have the same meanings when used herein unless the context otherwise requires.

* For identification purpose only

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Having considered (i) the Acquisition Agreement; (ii) the Rights Issue and the Bonus Warrants Issue; (iii) the Underwriting Agreement; (iv) the Placing Agreement, and (v) the grant of New Issue Mandate as set out in the Letter from the Board contained on pages 8 to 49 of the Circular and the advice of SinoPac in relation thereto as set out on pages 52 to 79 of the Circular, we are of the view that (i) the Acquisition Agreement; (ii) the Rights Issue and the Bonus Warrants Issue; (iii) the Underwriting Agreement; (iv) the Placing Agreement, and (v) the grant of New Issue Mandate are in the interests of the Company and the Shareholders as a whole and the terms thereof, viewed as a whole, are fair and reasonable so far as the Independent Shareholders are concerned.

Accordingly, we recommend you to vote in favour of the resolutions to be proposed at the SGM to approve (i) the Acquisition Agreement; (ii) the Rights Issue and the Bonus Warrants Issue; (iii) the Underwriting Agreement; (iv) the Placing Agreement, and (v) the grant of New Issue Mandate, and the transactions contemplated under them.

Yours faithfully,

For and on behalf of the Independent Board Committee Michael J. Bogue Wong Wing Kuen, Albert Independent Non-Executive Director Independent Non-Executive Director Tsui Robert Che Kwong Yang Weiming Independent Non-Executive Director Independent Non-Executive Director

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LETTER FROM SINOPAC

The following is the full text of a letter received from SinoPac setting out its opinion to the Independent Board Committee and the Independent Shareholders in respect of the terms of (i) the Acquisition Agreement; (ii) the Rights Issue and the Bonus Warrants Issue; (iii) the Underwriting Agreement; (iv) the Placing Agreement; and (v) the grant of New Issue Mandate, prepared for the purpose of incorporation in this circular.

==> picture [256 x 32] intentionally omitted <==

23rd Floor, Two International Finance Centre 8 Finance Street, Central, Hong Kong

12 December 2006

To the Independent Board Committee and the Independent Shareholders of Shanghai Merchants Holdings Limited

Dear Sirs and Madams,

(1) VERY SUBSTANTIAL ACQUISITION RELATING TO THE CONDITIONAL ACQUISITION OF 48,373,197 ORDINARY SHARES IN MOUNT GIBSON; (2) PROPOSED RIGHTS ISSUE IN THE PROPORTION OF ONE RIGHTS SHARE FOR EVERY EXISTING SHARE HELD ON THE RECORD DATE; (3) PROPOSED ISSUE OF ONE BONUS WARRANT FOR EVERY FIVE RIGHTS SHARES;
- (4) PLACING OF NEW SHARES; AND
(5) REFRESHMENT OF GENERAL MANDATES TO ISSUE SHARES AND REPURCHASE SHARES

INTRODUCTION

We refer to our appointment as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in relation to (i) the Acquisition Agreement; (ii) the Rights Issue and the Bonus Warrants Issue; (iii) the Underwriting Agreement; (iv) the Placing Agreement; and (v) the grant of New Issue Mandate, details of which are set out in the letter from the Board (the “ Letter from the Board ”) contained in the circular issued by the Company to the Shareholders dated 12 December, 2006 (the “ Circular ”), of which this letter forms part. Unless the context otherwise requires, terms used in this letter shall have the same meanings as those defined in the Circular.

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LETTER FROM SINOPAC

In formulating our opinions and recommendations, we have relied on the statements, information and facts supplied by, the opinion expressed by and the representations of, the Directors and the management of the Group, including those set out in the Circular. We have assumed that all statements, information and facts supplied by, the opinion expressed by and representations of, the Directors and the management of the Group, including those set out in the Circular, were true, complete and accurate in all material aspects at the time they were made and given and continue to be so in all material respect at the date of despatch of the Circular and up to the time of the SGM. We have also assumed that all statements of beliefs, opinions, assumptions and intentions made by the Directors in the Circular were reasonably made after due and careful enquiry and were based on honestly-held opinions. We have no reason to doubt the truth, accuracy and/or completeness of the information, opinions, facts and representations provided to us by the Company and/or the Directors and we have been advised by the Directors that no material facts have been omitted from the information and representations provided in and referred to in the Circular.

We consider that we have been provided with sufficient information to enable us to reach an independent view to justify our reliance on the accuracy of the information and representations contained in the Circular and to provide a reasonable basis for our recommendations. The Directors have confirmed to us that no material facts have been omitted from the information supplied to us and we have no reason to suspect that any relevant information have been withheld, nor are we aware of any facts or circumstances which would render the information provided and the representations made to us to be untrue, inaccurate, or misleading. We have not, however, carried out any independent verification of the information provided to us by the Directors, nor have we conducted any independent investigation into any related transactions referred to in the Circular, or into the businesses, affairs and prospects of the Group, Mount Gibson or Aztec Resources Limited (“ Aztec ”).

Solely for your convenience, this letter contains translations of certain Australian dollar amounts into Hong Kong dollars at an exchange rate of A$1.00 to HK$5.9458. Shareholders should not construe these translations as representations that the Australian amounts could actually be converted into any Hong Kong dollar at the rates indicated or at all.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating our opinion and giving our recommendation to the Independent Board Committee and the Independent Shareholders, we have taken into account the following principal factors and reasons.

(A) Conditional Acquisition

1. Reasons for and benefits of the Conditional Acquisition

The Group is principally engaged in trading of base metals and fabric products and other merchandises. We understand from the Directors that the Company has continued to review and evaluate numerous business and investment opportunities consistent with its operations of trading particularly in the lucrative commodities industry and has not identified suitable investment or significant commodity trading opportunities in line with the Group’s corporate objective and principal

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LETTER FROM SINOPAC

business activities until now. As mentioned in the Letter from the Board, the Conditional Acquisition is consistent with the Company’s strategy of seeking to undertake commodity trading and make investments to participate in industry rationalization consolidation where returns are maximized for Shareholders.

Mount Gibson is a specialist iron ore exploration company which owns iron ore deposits and holds mining rights in the Midwest region of Western Australia. It is currently the leading iron ore producer in the Midwest region of Western Australia whose production is generated from the Tallering Peak Operations and the proposed development of the Extension Hill Project. Details of the Tallering Peak Operations and the Extension Hill Project are set out under the paragraph headed “Reasons for and benefits of the Conditional Acquisition” in the Letter from the Board. As stated in the annual report of Mount Gibson for the year ended 30 June 2006, Mount Gibson recorded a net profit of approximately A$13.5 million (equivalent to approximately HK$81 million) and A$23.1 million (equivalent to approximately HK$138 million) for the two years ended 30 June 2005 and 30 June 2006, respectively, representing an increase of approximately 71%.

According to the annual report of Mount Gibson for the year ended 30 June 2006, the reason for such significant increase in net profit is that Mount Gibson and its 100% owned entities controlled entities have formed a tax consolidated group in the year ended 30 June 2006. Members of the consolidated group have entered into a tax sharing arrangement in order to allocate income tax expenses to the wholly owned controlled entities on a pro-rate basis. In such regard, Mount Gibson enjoyed the income tax benefit for the recognition in the current period of tax losses available for use by the consolidated entity, which also accounted for the increase in net profit for the year ended 30 June 2006.

On 24 July 2006, Mount Gibson announced its intention to merge with a fellow Western Australian iron ore mining company, Aztec, a company listed on the Australian Stock Exchange, by way of an unconditional takeover offer, which, if successful, would enable Mount Gibson to become one of the largest Australian independent iron ore producers by virtue of its scale and multiple asset portfolio. Mount Gibson owned as to approximately 15.24% shareholding interest in Aztec as at 30 June 2006.

Under such takeover offer, Mount Gibson offered to the shareholders of Aztec (including the Company which owned 84 million shares in Aztec, representing approximately 7.27% in Aztec as at 7 November 2006 (Australian time)) on the basis of one share of Mount Gibson for every three shares of Aztec. Upon completion of the Conditional Acquisition, the Company would own approximately 8.79% interest in Mount Gibson as at 7 November 2006 (Australian time) subject to dilution effect, if any, from time to time contemplated by Mount Gibson issuing shares as a result of the aforementioned unconditional takeover offer.

On 21 November 2006, the Company had decided to accept the takeover offer by Mount Gibson to convert its 84,000,000 shares of Aztec to 28,000,000 shares of Mount Gibson. Assuming that the Conditional Acquisition is successfully completed and taking into account of the conversion of 84,000,000 shares of Aztec to 28,000,000 shares of Mount Gibson by the Company, the Company will hold 76,373,197 shares in Mount Gibson, representing approximately 12.59% of the total number of 606,426,390 issued ordinary shares in Mount Gibson as at 28 November 2006.

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LETTER FROM SINOPAC

As at 28 November 2006, more than 50% of the offerees accepted the takeover offer by Mount Gibson.

As at the Latest Practicable Date, the total number of issued ordinary shares of Mount Gibson and Aztec was 626,485,379 shares and 1,132,296,221 shares respectively. Assuming all the shareholders of Aztec accept the takeover offer by Mount Gibson, 889,264,299 shares of Aztec (excluding the shareholding interest of 243,031,922 shares of Aztec already owned by Mount Gibson, after the conversion of the Company’s shareholding in Aztec into shares in Mount Gibson) will be converted to 296,421,433 shares of Mount Gibson by way of new issue on the basis of one share of Mount Gibson for every three shares of Aztec. As a result, the total number of issued ordinary shares of Mount Gibson will be increased by 296,421,433 shares to 922,906,812 shares. Assuming that (i) all the offerees accept the takeover offer by Mount Gibson and the Conditional Acquisition is successfully completed; and (ii) no further new issue of shares in Mount Gibson after the Latest Practicable Date, the Company will hold 76,373,197 shares in Mount Gibson, representing approximately 8.28% in the shareholding interest in Mount Gibson.

Based on the above analysis, upon the successful completion of the takeover offer by Mount Gibson, the Company’s shareholding interest in Mount Gibson will decrease from approximately 8.79% (upon completion of the Conditional Acquisition) to approximately 8.28% (upon completion of the Conditional Acquisition and the unconditional takeover offer).

Referring to the “Management discussion and analysis of the Mount Gibson Group” set out in Appendix V to the Circular, the takeover bid for Aztec is an important element for Mount Gibson’s growth that delivers both Mount Gibson and Aztec to a significantly higher production capability and asset portfolio based in Australia. Furthermore, upon the successful completion of such unconditional takeover offer, Mount Gibson and Aztec will merge together as a group (“ Merged Group ”). The Merged Group will further enhance its business performance by combining production and intellectual capital, reducing costs and operational risk, and improving access to future funding.

The Directors advise that the Company (for itself and on behalf of its subsidiaries) continues to seek opportunities to secure long-term iron ore sales contracts with iron ore materials suppliers. After completion of the Conditional Acquisition, the Company believes that with this strategic shareholding in Mount Gibson, the Group is in a better position to seek and secure such long-term iron ore sales contracts with resources companies operating in the Midwest iron ore region of Western Australia. Furthermore, having discussed with the management of the Company, we understand that the profit margin for trading iron ore materials is expected to be much higher than the existing trading business of the Group. Having considered the potential business opportunities with respect to the iron ore sales contracts, we concur with the Directors’ view that the Conditional Acquisition represents a strategic investment for building a significant investment and commodities trading portfolio primarily focused on natural resources and related sectors.

We concur with the Directors’ view that the success of the Conditional Acquisition would likely provide the Group opportunities for entering into aforementioned iron ore sales contracts, which would in turn expand the Group’s principal business of base metal trading business and improve the Group’s profitability.

However, we would like to draw the Independent Shareholders’ attention to the fact that, although the Directors have reasonable confidence in securing and entering into such long-term iron ore sales contacts with iron ore production and project development companies located in the Midwest

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LETTER FROM SINOPAC

region of Western Australia, such contracts have not been entered into, secured or engaged as at the Latest Practicable Date, and may or may not be entered into, secured or engaged after the completion of the Conditional Acquisition. If such iron ore sales contracts could not be executed in the future, the expected business opportunity would not exist.

Based on the above, and taking into consideration (i) the potential business growth of Mount Gibson; (ii) the potential leading position of Mount Gibson as one of the largest Australian independent iron ore producers subject to the successful unconditional takeover of Aztec; and (iii) the potential business opportunity for the trading of iron ore materials under long-term sales contract to be sought by the Group after completion of the Conditional Acquisition, we concur with the Directors’ view that the Conditional Acquisition represents a strategic investment in the natural resources sector which is consistent with the Company’s strategy of seeking investment in the business of physical commodities trading and is in the long-term interests of the Company and the Shareholders as a whole.

Consideration for the Conditional Acquisition

Basis of the Consideration

The Consideration payable by the Purchaser for the Conditional Acquisition is HK$244,474,752, being A$0.85 per Sale Share (at the exchange rate of A$1.00 equivalent to approximately HK$5.9458 per Sale Share). As disclosed in the Letter from the Board, the Consideration is arrived at after arm’s length negotiation between the Purchaser and the Vendors and with reference to the market price of the Sale Shares traded on the Australian Stock Exchange. The Consideration of the Sale Shares represents a premium of approximately 14.6% over the average closing price of the Sale Shares quoted on the Australian Stock Exchange on the last five full trading days up to and including 26 October 2006. Over the previous calendar year from 26 October 2005 to 27 October 2006, the average share price of Mount Gibson was A$0.765 per share (equivalent to approximately HK$4.55) with a high of A$1.015 (equivalent to approximately HK$6.03) on 11 April 2006 and a low of A$0.59 (equivalent to approximately HK$3.51) on 22 December 2005. The Consideration for the Sale Shares represents a premium of approximately 11.11% over the average closing prices of the Sale Shares quoted on the Australian Stock Exchange for a period from 26 October 2005 to 27 October 2006.

==> picture [439 x 203] intentionally omitted <==

----- Start of picture text -----

Price(A$)
A$0.85
1.2
1.0
0.8
0.6
0.4
0.2
0.0
26-Oct-05 2-Dec-05 6-Jan-06 10-Feb-06 17-Mar-06 21-Apr-06 26-May-06 30-Jun-06 4-Aug-06 8-Sep-06 13-Oct-06 17-Nov-06 Latest
Practicable Date
----- End of picture text -----

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LETTER FROM SINOPAC

As illustrated in the chart above, the market closing price of Mount Gibson has increased and are equal to A$0.85 per share (equivalent to approximately HK$5.1) quoted on the Australian Stock Exchange as at the Latest Practicable Date. As mentioned in the Letter from the Board, given that a potential iron ore production growth of Mount Gibson in the emerging Midwest region of Western Australia combined with being a unique opportunity to secure a strategic foothold in the Australian natural resources sector, the Directors consider that it is reasonable and in the interests of the Company as a whole to purchase a substantial strategic shareholding of listed shares in Mount Gibson at a price over the then prevailing market price of its shares. After taking into consideration (i) the increase in production capacity by aggregating the resources and capital of Mount Gibson and Aztec upon completion of the takeover of Aztec; (ii) the valuation analysis for the Conditional Acquisition set out in the following paragraph headed “Comparison among other similar mining companies”; and (iii) the potential business opportunities resulting from the long-term iron ore contracts mentioned above, we concur with the Directors’ view that it is acceptable to purchase the Sale Shares from the Vendors at a price over the then prevailing market price per share with a premium of 14.6%

Payment terms

The Consideration is payable by the Purchaser pursuant to the Acquisition Agreement on the following schedule:

as to HK$20,000,000 upon execution of the Acquisition Agreement as deposit; and
as to the remaining balance in the sum of HK$224,474,752 at the earlier of (i) the expiry of five Business Days after all the transactions contemplated under the Acquisition Agreement have been completed; or (ii) 7 February 2007, provided that the parties thereto may agree to an extension for a further period at such term(s) as agreed by the parties thereto.

As mentioned in the Letter from the Board, the deposit of HK$20,000,000 has been paid by the Purchaser upon execution of the Acquisition Agreement, and the remaining balance of the Consideration in the sum of HK$224,474,752 will be funded by way of the Rights Issue. Since the Conditional Acquisition is conditional upon the completion of the Rights Issue, funding for the balance of the Consideration will therefore depend on the completion of the Rights Issue. Having reviewed the conditions precedent for the completion of the Acquisition Agreement, and having considered that should the completion of the Rights Issue, being one of the conditions precedent for the Acquisition Agreement, fail to complete, the deposit in the sum of HK$20,000,000 shall be refunded to the Purchaser forthwith, we consider that the above payment terms under the Acquisition Agreement are fair and reasonable so far as the Independent Shareholders are concerned and that the entering into the Acquisition Agreement is in the interests of the Company and the Shareholders as a whole. Details of the relevant terms and arrangement of the Rights Issue are set out in section (B) below.

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LETTER FROM SINOPAC

3. Comparison among other similar mining companies

In assessing the fairness and reasonableness of the Consideration, we have identified the following comparable companies as set out in the following table below, which are also engaged in iron ore mining business and are listed on the Australian Stock Exchange. In consideration of the different size and development stages between Mount Gibson and such comparable companies, we have conducted comparable companies trading analysis based on (i) price to book value ratio; (ii) price to earnings ratio; and (iii) price to ore reserves ratio for our assessment as shown below.

			Share price
			as at the
		Market	Latest	Price to		Price to
		capitalization	Practicable	book	Price to ore	earnings
Comparables1	Ticker	(A$ million)	Date	ratio	reserves ratio	ratio
Rio Tinto Limited	RIO	34,850	76.29	1.84	Not disclosed	11.86
BHP Billiton Limited	BHP	91,973	26.31	2.99	Not disclosed	11.97
Murchison Metals Limited	MMX	372	1.15	6.82	Not disclosed	Net loss
Midwest Corporation Limited	MIS	118	0.745	2.21	16.76	Net loss
Portman Limited	PMM	878	5.0	3.57	9.76	10.43
Gindalbie Metals Limited	GBG	247	0.57	4.72	Not disclosed	Net loss
Aztec Resources Limited	AZR	311	0.275	2.81	12.49	Net loss
Fortescue Metals Group Limited	FMG	2,842	10.75	18.64	Not disclosed	Net loss
High				18.64	16.76	11.97
Low				1.84	9.76	10.43
Mean				5.45	13.0	11.42
Median				3.28	12.49	11.86
Mount Gibson2	MGX	475	0.85	3.51	14.62	14.17

Source: Bloomberg.net

Note: 1 based on net asset value as reported in the latest annual report and the share price as at the Latest Practicable Date

2 based on the relevant figures as reported in the latest annual report and the Consideration per Sale Share

Referring to the above table, Rio Tinto Limited, BHP Billiton Limited and Portman Limited show positive price to earnings ratios since they are well established and profitable mining companies compared to the other comparable companies, which are in development stages and have yet to generate income as stated in their latest financial year end. Although the price to earnings ratio of Mount Gibson set out above is comparatively higher, having taken into consideration that (i) the annual production of Mount Gibson will substantially increase by approximately 167% for the financial year ending 30 June 2007 as stated in its latest annual report; (ii) the potential business opportunity for trading of iron ore materials under long-term sales contract; and (iii) Mount Gibson, which started to generate profit during the financial year ended 30 June 2005, is in different

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LETTER FROM SINOPAC

development stage compared to the above comparable companies in terms of profitability and production scale, we concur with the Directors’ view that the Consideration of A$0.85 per Sale Share with its comparatively higher price to earning ratio of approximately 14.17x is acceptable after taking into consideration of the above factors for the potential growth of Mount Gibson.

Apart from the price to earnings ratio, the above table illustrates that the mean and medium price to book ratio of the comparable companies are 5.45x and 3.28x respectively. After excluding the outliners of the price to book ratio of approximately 1.84x and 18.64x for Rio Tinto Limited and Fortescue Metals Group Limited respectively, the mean and medium price to book ratio of the Comparable companies are 3.85x and 3.28x respectively. After taking into consideration that the price to book ratio of Mount Gibson, being 3.51x as calculated above, (i) falls within the range between the maximum and minimum price to book ratios of the Comparables whether or not the outliners are excluded; and (ii) is close to the median price to book ratio of the comparable companies, we consider that the price to book ratio of Mount Gibson is acceptable.

The above table also illustrates that the range of the price to ore reserves ratio is from 9.76x to 16.76x and that the mean and medium price to ore reserves ratio of the comparable companies are 13.0x and 12.49x respectively. Although Mount Gibson’s price to ore reserves ratio of approximately 14.62x is comparatively higher, it lies within the range of the price to ore reserves ratio among the Comparables and comparable to the mean and median price to ore reserves ratios of the comparable companies. In addition, we are of the view that the successful takeover of Aztec by Mount Gibson would improve the price to ore reserves ratio of Mount Gibson. In view of the above, we consider that the price to ore reserves ratio of Mount Gibson is acceptable.

We noted that mining companies have different stages of business development, some of the comparable companies as shown above, such as Murchison Metals Limited, Gindalbie Metals Limited, Aztec and Fortescue Metals Group Limited, are in developing stages and did not generate profit in their respective latest financial year. Furthermore, as not all the material iron ore reserves of the comparable companies have been properly classified or can be obtained publicly, we therefore consider that the assessment by way of comparing the price to ore reserves ratio may not be conclusive in lieu of sufficient data provided. After taking into consideration the above analysis and that substantial investment should be made in the initial stages of a mining company’s development, we are of the view that the price to book ratio for the assessment of the Consideration is the most reasonable basis among the above three pricing multiples.

4. Effect of the Conditional Acquisition on the financial position of the Group

The following discussion on the effect on the financial position of the Group as a result of the Conditional Acquisition is based on pro forma financial information set out in Appendix III to the Circular. The financial effects of the Rights Issue together with the Conditional Acquisition will be discussed in the paragraph headed “Financial effects of the Rights Issue” in section (B) below. Shareholders are advised to refer to such Appendix for details and should note that, as stated in Appendix III to the Circular, the unaudited pro forma financial information set out therein has been prepared for illustrative purposes only and because of its nature, it may not give a true picture of the financial position of the Group as at 30 June 2006 or any future date or the results for the period presented or for any future period.

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LETTER FROM SINOPAC

Effect on net asset value

As the Sale Shares will be held for strategic investment purpose, the Company will account for such investment in the Sale Shares pursuant to the Conditional Acquisition as “available for sale financial assets” as defined under HKAS39 issued by the Hong Kong Institute of Certified Public Accountants (“ HKICPA ”) and hence, the assets and liabilities of Mount Gibson will not be consolidated into the Group’s consolidated balance sheet. Accordingly, as shown in the unaudited pro forma balance sheet of the Group as set out in paragraph I in Appendix III to the Circular, there will be no material effect on the net asset value of the Group.

Effect on earnings

As discussed above, the investment in the Sale Shares pursuant to the Conditional Acquisition will be accounted for as “available for sale financial assets” as defined under HKAS39 issued by the HKICPA. Any unrealized appreciation or depreciation of the market value of the Sale Shares before disposal will not be accounted for in the Group’s consolidated income statement. In addition, unrealized gain and losses arising from changes in the fair value of available-for-sale financial assets are recognized in investment revaluation reserve in accordance with HKAS39 issued by HKICPA. Accordingly, as shown in the unaudited pro forma income statement of the Group as set out in paragraph I in Appendix III to the Circular, there will be no material effect on the net profit of the Group.

Effect on gearing

According to the unaudited consolidated balance sheet of the Group as at 30 June 2006, no borrowings (including bank loans and loan from minority shareholders of a subsidiary) was recorded by the Group. Since the Consideration of the Conditional Acquisition will be fully satisfied by way of the Rights Issue, no adverse impact would be incurred in the liabilities of the Group but the liquidity of the Group would be improved after completion of the Rights Issue.

Working capital

As stated in the Letter from the Board, the net proceeds from the Rights Issue will amount to approximately HK$374 million. The unaudited working capital (representing the difference between current assets and current liabilities of the Group) of the Group as at 30 June 2006 was approximately HK$15.8 million. Upon completion of the Conditional Acquisition, the Company is required to settle the outstanding Consideration of HK$224,474,752 in cash and the unaudited working capital of the Group as at 30 June 2006 will be further decreased. However, since the Consideration will be funded by way of Rights Issue, the net proceeds from the Rights Issue would improve the working capital position of the Group upon completion of the Rights Issue and provide additional capital for the future expansion of business upon completion of the Conditional Acquisition.

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LETTER FROM SINOPAC

Having considered that (i) the Conditional Acquisition is consistent with the Company’s strategy of seeking to undertake commodity trading and make investments to participate in industry rationalization and consolidation where returns are maximized for Shareholders; (ii) the Consideration for the Conditional Acquisition is acceptable; (iii) the payment terms under the Acquisition Agreement are fair and reasonable; and (iv) as discussed above, the Conditional Acquisition will not have any material adverse impact on the earnings, working capital, gearing ratio and the net asset value of the Group, we concur with the Directors’ view that the Conditional Acquisition are on normal commercial terms, and the terms of which are fair and reasonable so far as the Independent Shareholders are concerned and the entering into the Acquisition Agreement is in the interests of the Company and the Shareholders as a whole.

(B) Rights Issue
Subscription Price

The Subscription Price of HK$0.30 per Rights Share represents:

(a) a discount of approximately 26.8% to the closing price of HK$0.41 per Share as quoted on the Stock Exchange on the Last Trading Day;
(b) a discount of approximately 24.1% to the average closing price of approximately HK$0.395 per Share as quoted on the Stock Exchange for the last five full trading days up to and including the Last Trading Day;
(c) a discount of approximately 18.8% to the average closing price of approximately HK$0.3695 per Share as quoted on the Stock Exchange for the last ten full trading days up to and including the Last Trading Day;
(d) a discount of approximately 15.5% to the theoretical ex-right price of approximately HK$0.355 per Share, calculated on the basis of the closing price of HK$0.41 per Share on the Last Trading Day; and
(e) a discount of approximately 14.28% to the closing price of HK$0.35 per Share as quoted on the Stock Exchange on the Latest Practicable Date.

As mentioned in the Letter from the Board, the Subscription Price was determined after arm’s length negotiation between the Company and the Underwriter with reference to the then prevailing market price of the Shares and recent financial conditions of the Group. In order to enhance the attractiveness of the Rights Issue, the Directors consider that it is appropriate to set the Subscription Price at a discount to the market price of the Shares. We notice that it is common for the listed companies to issue rights shares at a discount to the market price in order to give an incentive to their shareholders to participate in the rights issue.

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LETTER FROM SINOPAC

We have reviewed and included below those companies listed on the Main Board of the Stock Exchange which have announced rights issue with discount to their respective market price during the last six months preceding the date of Announcement. We consider that the adoption of such a six-month period in our analysis is appropriate as it provides an insight on the principal terms of the rights issues recently conducted by other Main Board listed companies under similar market sentiments.

				Discount of	subscription
				price over (to)
				the closing	the
				price on the	theoretical
	Stock	Date of	Basis of	last trading	ex-rights	Underwriting
Comparables	code	announcement	entitlement	day	price	commission
				%	%	%
Shanghai Merchants
Holdings Limited	1104	11 May 06	2 for 1	61.5	34.8	2.0
IDT International Limited	167	16-Jun-06	1 for 5	37.5	33.3	2.0
Poly (Hong Kong)
Investments Limited	119	22-Jun-06	1 for 2	3.6	2.4	2.5
Kiu Hung International
Holdings Limited	381	6-Jul-06	7 for 20	70.6	64.0	2.5
Frasers Property (China)
Limited	535	20-Jul-06	1 for 2	39.4	30.2	2.5
Magnum International
Holdings Limited	305	28-Jul-06	1 for 2	75.5	67.3	1.25
Sino Technology
Investments Company
Limited	1217	23-Aug-06	1 for 2	50.0	40.0	3.0
Easyknit International
Holdings Limited	1218	30-Aug-06	3 for 1	68.2(1)	35.2(1)	1.0
Tak Shun Technology
Group Limited	1228	12-Sept-06	2 for 5	66.7	58.7	2.0
Cheuk Nang (Holdings)
Limited	131	22-Sep-06	1 for 1	17.4	9.5	2.5
Century Legend
(Holdings) Limited	79	22-Sept-06	1 for 2	71.8(1)	63.0(1)	2.5
Asia Standard
International Group
Limited	129	26-Sep-06	1 for 3	24.9	19.9	2.0
Celestial Asia Securities
Holdings Limited	1049	11-Oct-06	1 for 2	27.3	20.0	2.5
Mean				47.3	36.8	2.2
Median				50.0	34.8	2.5
The Company	1104	27-Oct-06	1 for 1	26.8	15.5	2.0

Source: Website of the Stock Exchange

Note:

Adjustments made to take into account the effect of share consolidation.

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LETTER FROM SINOPAC

Among the Comparables, the discounts to the respective closing prices of the shares on the Last Trading Day prior to the release of the relevant announcements of the rights issues ranged from approximately 3.6% to 75.5% with a mean discount of approximately 47.3% and the discounts to the theoretical ex-right prices of the rights issues ranged from approximately 2.4% to 67.30% with a mean discount of approximately 36.8%. Although the discount of the Subscription Price to the closing price of the Shares on the Last Trading Day of approximately 26.8% and the discount of the Subscription Price to the theoretical ex-right price of approximately 15.5% are lower than the respective mean discounts of the Comparables, the discounts of the Subscription Price fall within the respective range between the maximum and minimum discounts of the Comparables. We consider that the pricing of the Rights Issue is in line with that of the Comparables during the period and is acceptable.

2. Bonus Warrants Issue

The Company proposes a bonus issue of one Bonus Warrant for every five Rights Shares successfully subscribed by the Qualifying Shareholders. The Bonus Warrants will be exercisable at any time from the date on which the Bonus Warrants are listed on the Stock Exchange (the “ Commencement Date ”) up to and including the day before the third anniversary of the Commencement Date of the Bonus Warrants.

As (i) holders of the Bonus Warrants have full discretion on whether or not to subscribe for the same number of Shares; and (ii) the discount of the Bonus Warrants Subscription Price to the closing price of the Shares on the Last Trading Day was approximately 26.8%, we consider the Bonus Warrants Issue, as part of the Rights Issue, is in the interests of the Company and the Shareholders as a whole and the Bonus Warrants Subscription Price is fair and reasonable so far as the Independent Shareholders are concerned.

— 63 —

LETTER FROM SINOPAC

3. Share price performance

The chart below illustrates the performance of the Shares from 2 May 2005 to the Latest Practicable Date (the “ Review Period ”).

==> picture [437 x 184] intentionally omitted <==

----- Start of picture text -----

Price (HK$)
0.45
0.40
0.35 HK$0.35
0.30
0.25
0.20
Note Note
0.15
0.10
0.05
0.00
2-May 18-May 5-Jun 20-Jun 5-Jul 20-Jul 4-Aug 21-Aug 5-Sep 20-Sep 6-Oct 23-Oct 8-Nov 23-Nov Latest
Year 2006 Practicable Date
----- End of picture text -----

Source: Website of the Stock Exchange Note: Trading suspension

The closing price per Share as quoted on the Stock Exchange during the Review Period has been on an increasing trend and ranged from HK$0.103 to HK$0.395. As shown in the chart above, the Shares were traded above the Subscription price of HK$0.30 per Rights Share in the recent month prior to the date of Announcement.

After considering that (i) the Group recorded a profit rebound from net loss of approximately HK$36 million in 2004 to a net profit of approximately HK$6 million in 2005; (ii) the discount level of the Subscription Price is in line with the recent market practice; (iii) the intended usage of part of the proceeds from the Rights Issue for the Conditional Acquisition; and (iv) all Qualifying Shareholders are offered an equal opportunity to participate in the enlargement of the capital base, we are of the view that the discount level of the Subscription Price provides a reasonable incentive for the Qualifying Shareholders to subscribe for the Rights Shares and is fair and reasonable so far as the Independent Shareholders are concerned.

4. Underwriting commission

We consider that it is fair and reasonable for the Underwriter to charge for an underwriting commission to compensate for its underwriting exposure. We noticed from the Comparables that, the commissions of underwriters ranged from 1.0% to 3.0%, with a mean commission rate of approximately 2.2%. As the commission charged by the Underwriter of 2% falls within the range of commissions and is lower than the mean commission charged by other underwriters among the Comparables (whether or not the underwriters are controlling shareholders of the listed issuers concerned), we are of the view that the commission charged by the Underwriter is comparable to the market practice.

— 64 —

LETTER FROM SINOPAC

5. Nil-paid Rights Shares and excess application

If the Qualifying Shareholders decide not to take up all or part of their provisional allotment entitlements, they will have the opportunity to realize all or part of their nil-paid Rights Shares in the market, subject to the then prevailing market conditions, and receive cash consideration although there is no guarantee that they can dispose of their nil-paid Rights Shares at a price to their satisfaction.

Besides, if the Qualifying Shareholders decide to further increase their percentage of shareholdings in the Company, they can either acquire additional Rights Shares in nil-paid form in the market which will enable them to subscribe for Rights Shares in addition to their provisional allotment entitlements or apply for excess Rights Shares through the EAF(s) and the Directors will allocate the excess Rights Shares at their sole discretion on a fair and equitable basis, but preferences will be given to topping-up odd lots to whole board lots.

We are of the view that the proposed arrangements of the Rights Issue are in-line with the market practice for rights issue and are able to cater for different objectives of the Qualifying Shareholders.

6. Proposed use of proceeds

The Company proposes to raise HK$377,700,000 before expenses by way of the Rights Issue of 1,259,000,000 Rights Shares at a price of HK$0.30 per Rights Share payable in full on acceptance. Part of the proceeds raised from the Rights Issue in the sum of HK$224,474,752 will be applied towards the payment of the balance of the Consideration for the Conditional Acquisition. In respect of the balance in the sum of HK$153,225,248, (i) HK$20,000,000 will be deducted by the Company, being the deposit paid in respect of the Conditional Acquisition, to recover the same amount of money which has been previously reserved for base metal trading in the previous rights issue of the Company; (ii) approximately HK$3,700,000 will be spent for the professional fees and expenses in relation to the Rights Issue and the Bonus Warrants Issue; and (iii) the balance of approximately HK$129,525,248 will be used by the Company to acquire further investment interests in the resources industry, when opportunities arise to make additional investments where returns are maximized for Shareholders, and as general working capital and for future investment purposes.

Having discussed with the Directors, we concur with the Directors’ view that the proceeds from the Rights Issue would allow the Group to further develop the business which the Directors decide to focus on in the future to effectively capture business opportunities.

— 65 —

LETTER FROM SINOPAC

7. Effect on shareholding interests of the Shareholders

The following illustrates the shareholding structure of the Company immediately before and after completion of the Rights Issue.

Profit Harbour Shougang Existing public Shareholders Underwriter Total	As at the Latest Practicable Date Number of Shares Share- holding (%) 596,699,801 47.39 300,000,000 23.83 362,300,199 28.78 — — 1,259,000,000 100.00	As at the Latest Practicable Date Number of Shares Share- holding (%) 596,699,801 47.39 300,000,000 23.83 362,300,199 28.78 — — 1,259,000,000 100.00	Immediately following completion of the Rights Issue assuming all the Qualifying Shareholders have taken up their respective entitlements Number of Shares Share- holding (%) 1,193,399,602 47.39 600,000,000 23.83 724,600,398 28.78 — — 2,518,000,000 100.00	Immediately following completion of the Rights Issue assuming all the Qualifying Shareholders have taken up their respective entitlements Number of Shares Share- holding (%) 1,193,399,602 47.39 600,000,000 23.83 724,600,398 28.78 — — 2,518,000,000 100.00	Immediately following completion of the Rights Issue assuming the Majority Shareholders have fully undertaken up their entitlements and fully underwritten by the Underwriter Number of Shares Share- holding (%) 1,193,399,602 47.39 600,000,000 23.83 362,300,199 14.39 362,300,199 14.39 2,518,000,000 100.00	Immediately following completion of the Rights Issue assuming the Majority Shareholders have fully undertaken up their entitlements and fully underwritten by the Underwriter Number of Shares Share- holding (%) 1,193,399,602 47.39 600,000,000 23.83 362,300,199 14.39 362,300,199 14.39 2,518,000,000 100.00	Immediately following completion of the Rights Issue assuming all Qualifying Shareholders have taken up their respective entitlements and the Bonus Warrants are exercised in full Number of Shares Share- holding (%) 1,312,739,562 47.39 660,000,000 23.83 797,060,438 28.78 — — 2,769,800,000 100.00	Immediately following completion of the Rights Issue assuming all Qualifying Shareholders have taken up their respective entitlements and the Bonus Warrants are exercised in full Number of Shares Share- holding (%) 1,312,739,562 47.39 660,000,000 23.83 797,060,438 28.78 — — 2,769,800,000 100.00	Immediately following completion of the Rights Issue assuming the Majority Shareholders having fully taken up their entitlements and fully underwritten by the Underwriter and the Bonus Warrants are exercised in full Number of Shares Share- holding (%) 1,312,739,562 47.39 660,000,000 23.83 362,300,199 13.08 434,760,239 15.70 2,769,800,000 100.00	Immediately following completion of the Rights Issue assuming the Majority Shareholders having fully taken up their entitlements and fully underwritten by the Underwriter and the Bonus Warrants are exercised in full Number of Shares Share- holding (%) 1,312,739,562 47.39 660,000,000 23.83 362,300,199 13.08 434,760,239 15.70 2,769,800,000 100.00
		100.00		100.00		100.00		100.00		100.00

The Independent Shareholders who are Qualifying Shareholders should note that, should they decide to subscribe for their full provisional allotment entitlements of the Rights Shares, there would not be any dilution effect on their interests in the Company. However, we would like to draw the Independent Shareholders’ attention to the fact that, for those Independent Shareholders who do not wish to take up all or part of their provisional allotment entitlements to the Rights Shares, their corresponding interest in the Company will be diluted. In case all the Qualifying Shareholders (other than the Majority Shareholders and the Underwriter) decide not to take up their provisional allotments of the Rights Issue and the Underwriter has taken up all the provisional allotments in its capacity as the Underwriter, the percentage of shareholding of the Independent Shareholders will be reduced from approximately 28.78% to approximately 14.39% (assuming none of the Bonus Warrants are exercised) or to approximately 13.08% (assuming all the Bonus Warrants are exercised).

However, it should be noted that such Qualifying Shareholders will have the opportunity to realise their nil-paid rights to subscribe for the Rights Shares (the “Nil-Paid Rights”) on the market during the dealings of Nil-Paid Rights on the Stock Exchange, subject to the then prevailing market conditions.

— 66 —

LETTER FROM SINOPAC

As explained below, based on the Group’s latest financial position particularly its working capital position, we consider that it would be appropriate for the Company to raise equity financing as compared to debt financing for the Conditional Acquisition and future business development as it would enable the Company to improve its overall financial position.

Having considered the above analyses, we consider that the shareholding dilution effect arising from the Rights Issue is acceptable.

8. Financial effects of the Rights Issue

The following discussion on the effect on the financial position of the Group as a result of the Rights Issue, followed by the Conditional Acquisition, is based on pro forma financial information set out in Appendix III to the Circular. Shareholders are advised to refer to such Appendix for details and should note that, as stated in Appendix III to the Circular, the unaudited pro forma financial information set out therein has been prepared for illustrative purposes only and because of its nature, it may not give a true picture of the financial position of the Group as at 30 June 2006 or any future date or the results for the period presented or for any future period.

Effect on net asset value

Based on the financial information of the Group set out in Appendix I to the Circular, the audited consolidated net asset value of the Group attributable to equity holders of the Company is approximately HK$21.9 million or equivalent to approximately HK$0.053 per Share as at 31 December 2005 (based on the then Shares in issue of 413,000,000 Shares). The unaudited consolidated net asset value of the Group attributable to equity holders of the Company was approximately HK$15.8 million or equivalent to approximately HK$0.038 per Share as at 30 June 2006 (based on the then Shares in issue of 413,000,000 Shares).

As mentioned in the paragraph headed “Effect of the Conditional Acquisition on the financial position of the Group”, there will be no material effect on the net asset value solely as a result of the Conditional Acquisition. According to the paragraph headed “1. Unaudited pro forma financial information — only acquisition and rights issues” as set out in Appendix III to the Circular, upon completion of the Rights Issue and the Conditional Acquisition, the unaudited consolidated net asset value of the Group attributable to equity holders of the Company will be HK$389.8 million or equivalent to approximately HK$0.15 per Share (based on 2,518,000,000 Shares in issue), which represents an increase of approximately 2.8 times to the audited net asset value per Share as at 31 December 2005 and an increase of approximately 3.9 times to the unaudited consolidated net asset value per Share as at 30 June 2006. The significant increase in the unaudited consolidated net asset value of the Group attributable to equity holders of the Company is attributable to the adjustment of the equity component of the Rights Issue of approximately HK$374 million.

— 67 —

LETTER FROM SINOPAC

Effect on earnings

The Company recorded a profit attributable to Shareholders of approximately HK$6.5 million (audited) and a net loss of approximately HK$6.1 million (unaudited) for the year ended 31 December 2005 and the six months ended 30 June 2006 respectively. According to the paragraph headed “1. Unaudited pro forma financial information — only acquisition and rights issues” as set out in Appendix III to the Circular, upon completion of the Rights Issue and the Conditional Acquisition, the pro forma profit attributable to the equity holders of the Company would remain unchanged as the Company will account for the investment under the Conditional Acquisition as “available for sale financial assets” as defined under HKAS39 issued by the HKICPA.

Effect on gearing

Working capital

As stated in the Letter from the Board, the net proceeds from the Rights Issue will amount to approximately HK$374 million. After the payment of the balance of the Consideration for the Conditional Acquisition, approximately HK$129,525,248, being part of the proceeds from the Rights Issue, will be applied by the Company to acquire further investment interests in resources industry and as general working capital, which would improve the working capital position of the Group upon completion of the Rights Issue.

The unaudited working capital (representing the difference between current assets and current liabilities of the Group) of the Group as at 30 June 2006 was approximately HK$15.8 million. Upon completion of the Rights Issue and the Conditional Acquisition, the Company is required to settle the outstanding Consideration of HK$224,474,752 in cash and the unaudited working capital of the Group as at 30 June 2006 will be further decreased. However, since the Consideration will be funded by way of Rights Issue, the net proceeds from the Rights Issue would improve the working capital position of the Group upon completion of the Rights Issue and provide additional capital for the future expansion of business upon completion of the Conditional Acquisition.

— 68 —

LETTER FROM SINOPAC

Having considered that (i) the discount level of the Subscription Price provided a reasonable incentive for the Qualifying Shareholders to subscribe for the Rights Shares; (ii) the application of proceeds from the Rights Issue for the Conditional Acquisition and future business opportunities; (iii) additional working capital from the Rights Issue; and (iv) improvement of the net assets value, gearing and working capital as stated in paragraph (A) above, we are of the view that the terms of the Rights Issue are fair and reasonable so far as the Independent Shareholders are concerned and the Rights Issue are in the interests of the Company and the Shareholders as a whole.

(C) The Placing

1. Reasons for the Placing

As mentioned in the Letter from the Board, in view of the current market conditions, the Directors consider that the Placing represents a good opportunity to raise additional funds for the Company while at the same time broadening the Shareholder and capital base of the Company.

Net proceeds from the Placing of approximately HK$229,500,000 (after deduction of expenses including, among others, underwriting commission and professional fees) will be applied for funding new investments and acquisitions in the future as and when opportunities arise and for general working capital.

For the purpose of the Placing, we concur with the Directors’ view that raising capital during favourable market conditions is a sensible move for the Group when future expansion and need for capital is anticipated.

2. Historical price performance

The chart below sets out the variation of the daily closing price of the Shares from 2 May 2006 to the Latest Practicable Date (the “ Review Period ”).

==> picture [437 x 184] intentionally omitted <==

Source: Website of the Stock Exchange Note: Trading suspension

— 69 —

LETTER FROM SINOPAC

The Placing Price is HK$0.30 per Placing Share, which was agreed between the Company and the Underwriter after arm’s length negotiations and represents:

(a) a discount of approximately 26.8% to the closing price of HK$0.41 per Share as quoted on the Stock Exchange on the Last Trading Day;
(b) a discount of approximately 24.1% to the average closing price of approximately HK$0.395 per Share as quoted on the Stock Exchange for the last five full trading days up to and including the Last Trading Day;
(c) a discount of approximately 18.8% to the average closing price of approximately HK$0.3695 per Share as quoted on the Stock Exchange for the last ten full trading days up to and including the Last Trading Day;
(d) a discount of approximately 15.5% to the theoretical ex-right price of approximately HK$0.355 per Share, calculated on the basis of the closing price of HK$0.41 per Share on the Last Trading Day; and
(e) a discount of approximately 14.28% to the closing price of HK$0.35 per Share as quoted on the Stock Exchange on the Latest Practicable Date.

Based on the above share price movement during the Review Period as illustrated in the chart above, the Shares were traded in the range of HK$0.103 per Sare to HK$0.395 per Share and were traded above the Placing Price during October and November except when the trading of the Shares were suspended.

In assessing the fairness and reasonableness of the terms of the Placing Agreement, we have reviewed and compared the Placing Price with those placements that had gross fund raised of at least HK$100 million conducted by companies listed on the Stock Exchange (the “ Comparable Companies ”) from 1 May 2006 up to the date of the Announcement (the “ Comparable Placements ”).

— 70 —

LETTER FROM SINOPAC

The following table sets out, among other things, the premium/(discount) represented by the placing price (where appropriate) over/to (i) the closing price on the last trading day prior to release of the announcement of the Comparable Companies; and (ii) the average closing price of shares on the ten trading days prior to the release of the respective announcement of the Comparable Companies.

							Discount/
						Discount/	(Premium) of
						(Premium) of	the placing
						the placing	price/
						price/	subscription
						subscription	price to the
					Placing/	price to	average
					subscription	closing price	closing price
					expenses per	of shares on	of shares on
					share to the	the last	the last ten
				Placing price/	placing price/	trading day	trading days
				subscription	subscription	prior to the	prior to the
Announcement	Name of issuer	Type of	Gross fund	price (where	price (where	announcement	release of the
date	(Stock code)	placement	raised	appropriate)	appropriate)	date	announcement
			(HK$)		(%)	(%)	(%)
			(approximately)	_(HK$) _	_(approximately) _	_(approximately) _	(approximately)
3-May-06	Topsearch	Top-up placing	113.6 million	0.8	0.49	(3.9)	2.50
	International
	(Holdings) Limited
	(2323)
8-May-06	Polytec Asset	Placing of new	5,556.6 million	1.98	0.78	11.01	14.47
	Holdings Limited	shares
	(208)
8-May-06	Kowloon	Top-up placing	1,405.6 million	12.4	2.03	8.82	7.98
	Development
	Company Limited
	(34)
8-May-06	Hong Kong	Placing of new	486.2 million	1.044	Not disclosed	1.51	0.01
	Construction	shares (to the
	(Holdings) Limited	controlling
	(190)	shareholder)
9-May-06	Aluminum	Placing of new	4,669.7 million	7.25	9.05	2.68	5.1
	Corporation of China	shares
	Limited (2600)
9-May-06	Sun Hung Kai	Top-up placing	7,912 million	88.3	1.11	4.2	1.81
	Properties Limited
	(16)

— 71 —

LETTER FROM SINOPAC

							Discount/
						Discount/	(Premium) of
						(Premium) of	the placing
						the placing	price/
						price/	subscription
						subscription	price to the
					Placing/	price to	average
					subscription	closing price	closing price
					expenses per	of shares on	of shares on
					share to the	the last	the last ten
				Placing price/	placing price/	trading day	trading days
				subscription	subscription	prior to the	prior to the
Announcement	Name of issuer	Type of	Gross fund	price (where	price (where	announcement	release of the
date	(Stock code)	placement	raised	appropriate)	appropriate)	date	announcement
			(HK$)		(%)	(%)	(%)
			(approximately)	_(HK$) _	_(approximately) _	_(approximately) _	(approximately)
10-May-06	Orient Resources	Placing of new	170 million	0.1	1	47.64	49.35
	Group Company	shares
	Limited (467)
11-May-06	Zhejiang Glass	Placing of new	255.8 million	1.8	2.7	2.17	(1.41)
	Company Limited	shares
	(739)
18-May-06	Sun Hung Kai & Co.	Top-up placing	1,736 million	7.0	2.9	10.83	8.26
	Limited (86)
30-May-06	Melco International	Top-up placing	1,176 million	19.1	3.19	5.91	(1.1)1
	Development Limited
	(200)
13-Sep-06	Li Fung Limited (494)	Top-up placing	2,768 million	17.3	1.63	4.21	5.10
15-Sep-06	Kowloon	Top-up placing	1,152 million	13.25	1.73	6.56	8.24
	Development
	Company Limited
	(34)
21-Sep-06	Guangzhou R & F	Placing of new	1,616 million	9.55	1.85	5.1	5.7
	Properties Co., Ltd.	shares
	(2777)
25-Sep-06	Beijing Capital	Placing of new	1,020 million	5.1	1.57	5.03	4.55
	International Airport	shares
	Company Limited
	(694)
6-Nov-06	Pacific Basin	Top-up placing	1,221 million	4.75	1.75	5.0	5.5
	Shipping Limited
	(2343)

— 72 —

LETTER FROM SINOPAC

							Discount/
						Discount/	(Premium) of
						(Premium) of	the placing
						the placing	price/
						price/	subscription
						subscription	price to the
					Placing/	price to	average
					subscription	closing price	closing price
					expenses per	of shares on	of shares on
					share to the	the last	the last ten
				Placing price/	placing price/	trading day	trading days
				subscription	subscription	prior to the	prior to the
Announcement	Name of issuer	Type of	Gross fund	price (where	price (where	announcement	release of the
date	(Stock code)	placement	raised	appropriate)	appropriate)	date	announcement
			(HK$)		(%)	(%)	(%)
			(approximately)	_(HK$) _	_(approximately) _	_(approximately) _	(approximately)
7-Nov-06	Hang Lung Properties	Top-up placing	6,683 million	16.3	2.15	8.0	5.31
	Limited (101)
9-Nov-06	China Power	Top-up placing	1,739 million	3.7	1.89	3.90	3.57
	International
	Development Limited
	(2380)
Average					2.24	7.57	7.35
9-Nov-06	The Company	Placing of	234 million	0.3	4.38	26.8	18.8
		New Shares

1 Closing price of shares is taken as an average of the last five trading days prior to the release of the announcement

As indicated above, the placing price/subscription price of the Comparable Placements ranged from (i) a premium of approximately 3.9% to a discount of approximately 47.64%, with an average discount being approximately 7.57% as compared to the closing prices of the shares on the Last Trading Day prior to the release of the relevant announcements of the Comparable Companies; and (ii) a premium of approximately 1.41% to a discount of 49.35%, with an average discount being approximately 7.35% as compared to the average closing price of shares on the last ten trading days (except where noted) prior to the release of relevant announcements. The Placing Price represents a discount of approximately 26.8% to the closing price on the Last Trading Day of the Shares and a discount of approximately 18.8% on the average of the last ten trading days of the Shares immediately before the date of the Announcement.

— 73 —

LETTER FROM SINOPAC

We note that the Orient Resources Group Company Limited’s placing of new shares at substantial discount of 47.64% was for the purpose of restoring public float and that Oriental Resources Group Company Limited had recorded a net loss for the year during 31 March 2006. Excluding Oriental Resources Group Company Limited from our comparables, we noted that the discount for the other Comparable Placements ranged from approximately 1.51% to 11.01% and that the discount of the Placing Price is not within that range. However, we noted that the trading in the Shares was resumed on 14 July 2006 after a long period of suspension until when the Company was allowed to proceed with the resumption proposal. In addition, the Placing Price is the same as the Subscription Price under the Rights Issue. As such, we consider it is reasonable that the Placing Price would have a relatively greater discount as compared with the other Comparable Placements (excluding Oriental Resources Group Company Limited).

Having considered the above, we are of the view that the discount to the Placing Price is acceptable and the Placing Price is fair and reasonable so far as the Independent Shareholders are concerned.

3. Terms of the Placing Agreement

In further assessing the fairness and reasonableness of the terms of the Placing Agreement, we have focused our assessment on the level of expenses including the placing commission and the principal terms and provisions of the Placing Agreement.

We have compared the percentage of the average expense of the Comparable Placements to that of the Placing. As indicated in the paragraph headed “Historical price performance” above in this paragraph (C), we note that the expenses for the placing/subscription under the Comparable Placements range from approximately 0.49% to 3.19%. The expense of the Placing Agreement as quoted above is approximately 4.38%, which comprises a placing commission of 4% on the gross proceeds of the Placing and other professional fees, and is higher than those of the Comparable Placements (except that for Aluminum Corporation of China Limited). We understand from the Directors that the placing commission of 4% was arrived at after arm’s length negotiation between the Company and the placing agent after taking into account the current situation of the Group and the market condition. In addition, as mentioned earlier, we noted that the trading in the Shares was resumed on 14 July 2006 after a long period of suspension until when the Company was allowed to proceed with the resumption proposal. Based on the above, we consider that the placing commission of the Placing, although higher than the prevailing market practice, is acceptable after taking into account the specific background of the Company. Based on our review of the Placing Agreement, we consider that the principal terms and provisions in the Placing Agreement are on normal commercial terms and in line with market practice in Hong Kong.

Based on the above examination, we consider that the terms of the Placing Agreement are fair and reasonable so far as the Independent Shareholders are concerned.

— 74 —

LETTER FROM SINOPAC

4. Financial effects of the Placing

Effect on net asset value

Based on the financial information on the Group set out in Appendix I to the Circular, the audited consolidated net asset value of the Group attributable to equity holders of the Company is approximately HK$21.8 million or equivalent to approximately HK$0.053 per Share as at 31 December 2005 (based on the then number of Shares in issue of 413,000,000 Shares). Taking into consideration the net proceeds of HK$229.5 million and excluding the effect from the Rights Issue, the unaudited consolidated net assets value will be increased to approximately HK$251.3 million, representing an improvement of approximately 11 times following the Placing.

Effect on earnings

As stated in the above paragraph headed “Reasons for the Placing”, the net proceeds from the Placing of approximately HK$229,500,000 (after deduction of expenses including, among others, underwriting commission and professional fees) will be applied for funding new investments and acquisitions in the future as and when opportunities arise which, if successfully implemented, would enhance the future profitability and growth of the Group.

Effect on gearing

Working capital

The unaudited working capital (representing the difference between current assets and current liabilities) of the Group as at 30 June 2006 was approximately HK$15.8 million. Upon completion of the Placing and excluding the effect from the Rights Issue, the working capital of the Group will be increased by approximately HK$229.5 million.

— 75 —

LETTER FROM SINOPAC

5. Dilution in shareholding

The following illustrates the shareholding structure of the Company immediately before and after completion of the Placing (assuming the successful completion of the Rights Issue).

						Immediately
						following
						completion of the
						Rights Issue
					Immediately	assuming all the
					following	Qualifying
			Immediately		completion of the	Shareholders have
			following		Rights Issue	taken up their
			completion of	the	assuming all the	respective
			Rights Issue		Qualifying	entitlements, the
			assuming all	the	Shareholders have	Bonus Warrants are
			Qualifying		taken up their	exercised in full
			Shareholders have		respective	and the Placing
			taken up their		entitlements and	Shares are fully
	As at the Latest		respective		the Bonus Warrants	placed out or
	Practicable Date		entitlements		are exercised in full	underwritten
	Number of	Share-	Number of Share-		Number of Share-	Number of Share-
	Shares	holding	Shares holding		Shares holding	Shares holding
		(%)		(%)	(%)	(%)
Profit Harbour	596,699,801	47.39	1,193,399,602	47.39	1,312,739,562 47.39	1,312,739,562 36.77
Shougang	300,000,000	23.83	600,000,000	23.83	660,000,000 23.83	660,000,000 18.49
Existing public
shareholders	362,300,199	28.78	724,600,398	28.78	797,060,438 28.78	797,060,438 22.33
SHKIS/Placees	—	—	—	—	— —	800,000,000 22.41
Total	1,259,000,000	100	2,518,000,000	100	2,769,800,000 100	3,569,800,000 100

Based on the above table, the shareholding of Profit Harbour, being the controlling shareholder as defined under the Listing Rules, in the issued share capital of the Company will be reduced from approximately 47.9% to approximately 36.77%.

The Placing Shares represent approximately 22.41% of the enlarged share capital of the Company after completion of the Rights Issue, the Bonus Warrants fully exercised and the Placing Shares are fully placed out or underwritten, and the Shares held by the public (other than the placees of the Placing) will be diluted from approximately 28.78% to approximately 22.33%. After taking into consideration that (i) the potential positive financial effects on the Group as mentioned in the above paragraph headed “Financial effects of the Placing”; (ii) potential return from financing new investments and acquisitions of the Group by the proceeds from the Placing in the future; and (iii) the Placing Price is fair and reasonable, we consider that the extent of dilution to the shareholding interests of the Independent Shareholders is acceptable.

Taking into account the factors and reasons as examined above, we are of the opinion that the terms of the Placing Agreement are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole.

— 76 —

LETTER FROM SINOPAC

(D) Grant of New Issue Mandate

1. Reasons for the refreshment

Financial flexibility

Having discussed with the Directors and considered the use of proceeds from the Rights Issue and the Placing for further investment (where opportunities arise), we understand that the Board is of the view that it is highly important to capture every investment opportunity and to fully capitalize on changing market conditions in the future. Although the Company has not yet identified any specific target for potential merger and acquisition, the Directors have expressed their interest in further expansion of its business by way of merger and/or acquisition.

After taking into consideration that the Company is actively seeking opportunities to expand and to invest in the business of physical commodities via the natural resources industry, we consider that it is prudent and reasonable for the Group to maintain a strong capital base since additional funding (further to the net proceeds from the Rights Issue and the Placing) may be needed for business development and/or if other future investment opportunities arise.

In such regard, we concur with the Directors’ view that it is important to have sufficient means to immediately capture any suitable and available investments and/or market opportunities that may arise.

Other fund raising alternatives

Since the Group has no significant securable assets to be reflected in the Group’s financial statements, the Group’s ability to obtain meaningful bank borrowings in terms of the amount and conditions of any potential loan is hindered. As equity financing is interest free and security free by nature, the Directors consider that it is one of the most suitable means of raising capital to finance expansion of the Group.

— 77 —

LETTER FROM SINOPAC

2. Effect on the shareholding of the Independent Shareholders

For your information, we set out below the potential dilution to the shareholding of the existing Independent Shareholders upon full utilization of the Previous Issue Mandate and the New Issue Mandate (assuming that the relevant resolution is approved at the SGM).

Profit Harbour Shougang SHKIS/Placees Subscribers under the New Issue Mandate Existing public shareholders Total	As at the Latest Practicable Date Number of Shares Share- holding (%) 596,699,801 47.39 300,000,000 23.83 — — 362,300,199 28.78 1,259,000,000 100.00	Immediately following completion of the Rights Issue with full take up of entitlements, the Bonus Warrants exercised in full and the Placing Shares are fully placed out or underwritten Number of Shares Share- holding (%) 1,312,739,562 36.77 660,000,000 18.49 800,000,000 22.41 797,060,438 22.33 3,569,800,000 100.00	Immediately following the full utilization of the New Issue Mandate Number of Shares Share- holding (%) 1,312,739,562 32.23 660,000,000 16.20 800,000,000 19.64 503,600,000 12.36 797,060,438 19.57 4,073,400,000 100.00	Immediately following the full utilization of the New Issue Mandate Number of Shares Share- holding (%) 1,312,739,562 32.23 660,000,000 16.20 800,000,000 19.64 503,600,000 12.36 797,060,438 19.57 4,073,400,000 100.00
				100.00

As demonstrated above, 503,600,000 Shares, representing 14.1% of the issued share capital following the completion of the Rights Issue, the Bonus Warrants Issue and the Placing, would be issued upon the full utilization of the Previous Issue Mandate and the New Issue Mandate. If the New Issue Mandate is fully utilized, the shareholding of the existing Independent Shareholders will decrease from approximately 22.33% to 19.57%, representing a potential dilution of up to approximately 2.76%. On the other hand, the shareholding of the existing Independent Shareholders together with the subscriber of Shares to be issued under the Previous Issue Mandate and the New Issue Mandate will increase from approximately 22.33% to 31.93%.

Having taken into account the additional financial flexibility offered by the grant of New Issue Mandate and refreshment of the Previous Issue Mandate as discussed previously, we consider the potential dilution of the shareholding of the existing Independent Shareholders to be acceptable so far as the Independent Shareholders are concerned.

— 78 —

LETTER FROM SINOPAC

Having considered the above principal factors, we are of the opinion that the refreshment of the Previous Issue Mandate and the grant of New Issue Mandate is in the interests of the Company and the Shareholders as a whole and the terms of the refreshment of the Previous Issue Mandate and the grant of New Issue Mandate are fair and reasonable.

RECOMMENDATION

Having considered the above principal factors and reasons, we are of the opinion that (i) the Conditional Acquisition; (ii) the Rights Issue and the Bonus Warrants Issue; (iii) the Placing; and (iv) the grant of New Issue Mandate, are in the interests of the Company and the Shareholders as a whole and that the terms of (a) the Acquisition Agreement; (b) the Rights Issue and the Bonus Warrants Issue; (c) the Underwriting Agreement; (d) the Placing Agreement; and (e) the grant of New Issue Mandate, are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned.

Accordingly, we advise the Independent Shareholders to vote in favour of the resolutions at the SGM to approve (a) the Acquisition; (b) the Rights Issue and Bonus Warrants Issue; (c) the Placing Agreement; and (d) the grant of New Issue Mandate.

Yours faithfully, For and on behalf of SinoPac Securities (Asia) Limited Frank Lam

Executive Director and Head of Corporate Finance

— 79 —

APPENDIX I FINANCIAL INFORMATION ON THE GROUP

SUMMARY OF RESULTS AND ASSETS AND LIABILITIES OF THE GROUP FOR THREE FINANCIAL YEARS ENDED 31 DECEMBER 2005

Set out below is a summary of results and assets and liabilities of the Group for three financial years ended 31 December 2005 as extracted from the Company’s annual report 2005.

Financial Summary

Results

	2003	2004	2005
	HK$’000	HK$’000	HK$’000
Turnover	62,198	22,305	68,393
Cost of sales	(69,626)	(21,369)	(66,113)
Gross profit	(7,428)	936	2,280
Other income	37	13	474
Credit arising from a scheme of arrangement with
creditors	—	—	15,421
Distribution costs	(266)	(429)	(1,353)
Administrative expenses	(18,147)	(8,455)	(8,539)
Allowance for bad and doubtful debts	(29,013)	(14,816)	—
Profit/(loss) from operations	(54,817)	(22,751)	8,283
Finance costs - interest on bank and
other borrowings	(118)	(335)	(1,744)
Allowance for advance to an investee company	—	(24,806)	—
Gain on de-consolidation of a subsidiary	—	11,624	—
Profit/(loss) before taxation	(54,935)	(36,268)	6,539
Income tax expense	—	(31)	(38)
Profit/(loss) for the year	(54,935)	(36,299)	6,501

— 80 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Assets and liabilities

	2003	2004	2005
	HK$’000	HK$’000	HK$’000
Non-current assets
Property, plant and equipment	23,895	23	—
Investment in security	—	—	—
Available-for-sale investment	—	—	—
	23,895	23	—
Current assets
Trade and other receivables	36,046	42,576	37,526
Pledged bank deposits	—	8,000	4,012
Bank balances and cash	16,831	6,929	1,465
	52,877	57,505	43,003
Current liabilities
Trade and other payables	15,023	27,093	6,053
Secured other loans	—	15,000	15,000
Taxation payable	10,070	55	69
	25,093	42,148	21,122
Net current assets	27,784	15,357	21,881
Total assets less current liabilities	51,679	15,380	21,881
Capital and reserves
Share capital	41,300	41,300	41,300
Reserves	10,379	(25,920)	(19,419)
	51,679	15,380	21,881

— 81 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

AUDITORS’ REPORT

The Company’s auditors have disclaimed their opinion on the Group’s financial statements for the year ended 31 December 2003 and issued qualified opinions relating to limitation of scopes for the Group’s financial statements for the two years ended 31 December 2005. Reproduced below is the auditors’ report for the year ended 31 December 2005 issued by Graham H.Y. Chan & Co. as extracted from the Company’s annual report 2005.

To the Shareholders of

Shanghai Merchants Holdings Limited

(incorporated in Bermuda with limited liability)

We have audited the financial statements on pages 17 to 46 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

Respective responsibilities of directors and auditors

The Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently.

It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion solely to you, as a body, in accordance with Section 90 of the Bermuda Companies Act, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

Basis of opinion

We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants, except that the scope of our work was limited as explained below.

An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the circumstances of the Company and the Group, consistently applied and adequately disclosed.

We planned our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. However, the evidence available to us was limited as set out below.

— 82 —

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Included in the consolidated balance sheet at 31 December 2005, there was available-for-sale investment. Such investment represents the Group’s 100% equity interest in Chaoyang Hua Loong Textiles and Dyeing Limited (“Chaoyang Hua Loong”), a company established in the People’s Republic of China, and is stated at nil value. In addition, full allowance against an amount of HK$24,806,000 due from Chaoyang Hua Loong had been made by the Group in previous years. In the absence of reliable current financial information relating to the assets and liabilities of Chaoyang Hua Loong, we are unable to satisfy ourselves as to whether the interest in Chaoyang Hua Loong at 31 December 2005 is free from material misstatement and also whether the full allowance against the amount due from Chaoyang Hua Loong is appropriate. Any adjustment found to be necessary to the value of the available-for-sale investment and the amount due from Chaoyang Hua Loong would affect the profit of the Group for the year ended 31 December 2005 and its net assets as at that date.

In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Qualified opinion arising from limitations of audit scope

Except for any adjustments that might have been found to be necessary had we been able to obtain sufficient evidence concerning the matters referred to in the basis of opinion section of this report, in our opinion the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2005 and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

In respect alone of the limitations on our work set out in the basis of opinion section of this report:

we have not obtained all the information and explanations that we considered necessary for the purpose of our audit; and
we were unable to determine whether proper books of account had been kept.

Graham H. Y. Chan & Co.

Certified Public Accountants (Practising)

Hong Kong 24 April 2006

— 83 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP FOR THE YEAR ENDED 31 DECEMBER 2005

The financial information set out below is an extract form pages 17 to 46 of the annual report 2005 for the year ended 31 December 2005. All information in this paragraph should be read in conjunction with the audited accounts which are included in the annual report 2005 for the year ended 31 December 2005.

Consolidated Income Statement

For the year ended 31 December 2005

Notes Turnover 5 Cost of sales Gross profit Other income 5 Credit arising from a scheme of arrangement with creditors 7 Distribution costs Administrative expenses 8 Allowance for bad and doubtful debts Profit/(loss) from operations Finance costs - interest on other loans Allowance for advance to an investee company 14 Gain on de-consolidation of a subsidiary 20 Profit/(loss) before taxation Income tax expense 10 Profit/(loss) for the year Earnings/(loss) per share - Basic 11	2005 HK$’000 68,393 (66,113)	2004 HK$’000 22,305 (21,369) 936 13 — (429) (8,455) (14,816) (22,751) (335) (24,806) 11,624 (36,268) (31) (36,299) (8.79) cents
	2,280 474 15,421 (1,353) (8,539) — 8,283 (1,744) — — 6,539 (38)	936 13 — (429 (8,455 (14,816
		(22,751 (335 (24,806 11,624
		(36,268 (31
	6,501 1.57 cents

— 84 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Consolidated Balance Sheet

At 31 December 2005

		2005	2004
	Notes	HK$’000	HK$’000
Non-current assets
Property, plant and equipment	12	—	23
Investment in security	14	—	—
Available-for-sale investment	14	—	—
		—	23
Current assets
Trade and other receivables	15	37,526	42,576
Pledged bank deposits	25	4,012	8,000
Bank balances and cash		1,465	6,929
		43,003	57,505
Current liabilities
Trade and other payables	16	6,053	27,093
Secured other loans	17	15,000	15,000
Taxation payable		69	55
		21,122	42,148
Net current assets		21,881	15,357
Total assets less current liabilities		21,881	15,380
Capital and reserves
Share capital	18	41,300	41,300
Reserves		(19,419)	(25,920)
Equity attributable to equity holders of the parent		21,881	15,380

— 85 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Balance Sheet

At 31 December 2005

		2005	2004
	Notes	HK$’000	HK$’000
Non-current assets
Interests in subsidiaries	13	6,296	32,121
Current assets
Other receivables		145	218
Bank balances		7	5,566
		152	5,784
Current liabilities
Other payables		3,840	7,525
Secured other loans	17	15,000	15,000
		18,840	22,525
Net current liabilities		(18,688)	(16,741)
		(12,392)	15,380
Capital and reserves
Share capital	18	41,300	41,300
Reserves		(53,692)	(25,920)
		(12,392)	15,380

— 86 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Statement of Changes in Equity

For the year ended 31 December 2005

		Share
	Share	premium	Contributed	Special	Accumulated
	capital	account	surplus	reserve	losses	Total
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
The Group
At 1 January 2004	41,300	106,957	—	(14,980)	(81,598)	51,679
Loss for the year	—	—	—	—	(36,299)	(36,299)
At 31 December 2004	41,300	106,957	—	(14,980)	(117,897)	15,380
Profit for the year	—	—	—	—	6,501	6,501
At 31 December 2005	41,300	106,957	—	(14,980)	(111,396)	21,881
The Company
At 1 January 2004	41,300	106,957	60,274	—	(157,429)	51,102
Loss for the year	—	—	—	—	(35,722)	(35,722)
At 31 December 2004	41,300	106,957	60,274	—	(193,151)	15,380
Loss for the year	—	—	—	—	(27,772)	(27,772)
At 31 December 2005	41,300	106,957	60,274	—	(220,923)	(12,392)

The special reserve represents the difference between the nominal value of the aggregate share capital of the subsidiaries acquired and the nominal value of the share capital of the Company issued for the acquisition at the time of a group reorganisation in 1998.

The contributed surplus represents the difference between the consolidated net assets of the subsidiaries acquired and the nominal value of the share capital of the Company issued for the acquisition at the time of a group reorganisation in 1998.

In addition to accumulated profits, under the Companies Act 1981 of Bermuda (as amended), contributed surplus of the Company is also available for distribution to shareholders. However, the Company cannot declare or pay a dividend, or make a distribution out of contributed surplus, if:

(a) it is, or would after the payment be, unable to pay its liabilities as they become due; or
(b) the realisable value of its assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts.

In the opinion of the directors, the Company had no reserve available for distribution to shareholders at the balance sheet date.

— 87 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Consolidated Cash Flow Statement

For the year ended 31 December 2005

	2005	2004
	HK$’000	HK$’000
Operating Activities
Profit/(loss) from operations	8,283	(22,751)
Adjustments for:
Depreciation and amortisation	7	17
Loss on disposal of property, plant and equipment	16	112
Allowance for bad and doubtful debts	—	14,816
Credit arising from scheme of arrangement with creditors	(15,421)	—
Interest income	(160)	(4)
Operating cash flows before working capital changes	(7,275)	(7,810)
Decrease/(increase) in trade and other receivables	5,050	(7,212)
Decrease in trade and other payables	(5,619)	(1,549)
Cash used in operations	(7,844)	(16,571)
Interest paid	(1,744)	(335)
Hong Kong profits tax paid	(24)	—
Net Cash Used in Operating Activities	(9,612)	(16,906)
Investing Activities
Decrease/(increase) in pledged bank deposits	3,988	(8,000)
Interest received	160	4
Net Cash from/(used in) Investing Activities	4,148	(7,996)
Financing Activities
Secured other loans raised	15,000	15,000
Repayment of other loans	(15,000)	—
Net Cash from Financing Activities	—	15,000
Net Decrease in Cash and Cash Equivalents	(5,464)	(9,902)
Cash and Cash Equivalents at 1 January	6,929	16,831
Cash and Cash Equivalents at 31 December
representing bank balances and cash	1,465	6,929

— 88 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the Financial Statements

For the year ended 31 December 2005

1. General

The Company is incorporated as an exempted company with limited liability in Bermuda under the Companies Act 1981 of Bermuda (as amended) and its shares are listed on The Stock Exchange of Hong Kong Limited (the”Stock Exchange”). Its parent and ultimate holding company is Profit Harbour Investments Limited (“Profit Harbour”), a company incorporated in the British Virgin Islands. The address of its registered office and principal place of business of the Company are disclosed in the “Corporate Information” section of the annual report.

The Company is an investment holding company. The principal activities of its subsidiaries are set out in note 29.

The financial statements are presented in Hong Kong dollars (“HK$”) which is the Company’s functional and presentation currency.

Impact of New Hong Kong Financial Reporting Standards (“HKFRSs”) and Hong Kong Accounting Standards (“HKASs”)

The Hong Kong Institute of Certified Public Accountants (the “HKICPA”) has issued a number of new HKFRSs, HKASs and Interpretations that are effective for accounting periods beginning on or after 1 January 2005. The Group has adopted the following HKFRSs and HKASs which are pertinent to its operations and relevant to these financial statements.

—	HKAS 1	Presentation of Financial Statements
—	HKAS 7	Cash Flow Statements
—	HKAS 8	Accounting Policies, Changes in Accounting Estimates and Errors
—	HKAS 10	Events after the Balance Sheet Date
—	HKAS 12	Income Taxes
—	HKAS 17	Leases
—	HKAS 18	Revenue
—	HKAS 19	Employee Benefits
—	HKAS 21	The Effects of Changes in Foreign Exchange Rates
—	HKAS 24	Related Party Disclosures
—	HKAS 27	Consolidated and Separate Financial Statements
—	HKAS 32	Financial Instruments: Disclosure and Presentation
—	HKAS 33	Earnings per Share
—	HKAS 36	Impairment of Assets
—	HKAS 37	Provisions, Contingent Liabilities and Contingent Assets
—	HKAS 39	Financial Instruments: Recognition and Measurement
—	HKAS 39 (Amendment)	Transition and Initial Recognition of Financial Assets and Financial Liabilities
—	HKFRS 2	Share-based Payment

The adoption of HKASs 7, 8, 10, 12, 17, 18, 19, 21, 27, 33, 36 and 37 has had no material impact on the Group’s accounting policies and the methods of computation, presentation and disclosure in the Group’s financial statements. The major effects on adoption of the other HKFRSs and HKASs are summarised as follows:

(a) The adoption of HKAS 1 requires the disclosure of judgments (apart from those involving estimations) and key assumptions concerning the future and other sources of estimation uncertainty. These disclosures are detailed in note 3 to the financial statements.

— 89 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(b) The adoption of HKAS 24 affects the identification of related parties and the disclosure of related party transactions.
(c) The adoption of HKAS 32 and HKAS 39 has resulted in a change in accounting policy for recognition, measurement, derecognition and disclosure of financial instruments. HKAS 32 requires retrospective application. The application of HKAS 32 has had no material impact on how financial instruments of the Group are presented for current and prior accounting periods. HKAS 39 which is effective for annual periods beginning on or after 1 January 2005, generally does not permit the recognition, derecognition or measurement of financial assets and liabilities on a retrospective basis. The principal effects resulting from the implementation of HKAS 39 are summarised below.

The Group has applied the relevant transitional provisions of HKAS 39 with respect to classification and measurement of financial assets and financial liabilities that are within the scope of HKAS 39.

On or before 31 December 2004, the Group classified and measured its equity securities as investment securities, which are carried at cost less impairment losses (if any), in accordance with the benchmark treatment of Statement of Standard Accounting Practice 24 “Accounting for Investments in Securities” issued by the HKICPA. From 1 January 2005 onwards, the Group classifies and measures its equity securities as “available-for-sale financial assets”, which are carried at cost, as the equity securities do not have a quoted market price in an active market and whose fair value cannot be reliably measured, in accordance with HKAS 39. No adjustment on fair value of the equity securities has been required.

(d) The adoption of HKFRS2 has resulted in a change in accounting policy for share options. Prior to this, no recognition and measurement of share-based transactions in which share options granted over shares in the Company was required until such options were exercised, at which time the share capital and share premium were credited with the proceeds received.

With effect from 1 January 2005, in order to comply with HKFRS 2, the Group has adopted a new policy for share options. Under the new policy, the Group recognises the fair value of such share options as an expense with a corresponding increase recognised in a capital reserve within equity. Further details of the new policy are set out in note 4.

There were no options granted by the Company after 7 November 2002 but had not vested before 1 January 2005. Accordingly, the adoption of HKFRS 2 in respect of share options granted has had no effect on these financial statements.

The Group has not early applied the following new HKFRSs that have been issued by the HKICPA but not yet effective. The Group has considered these standards and interpretations but does not expect that they will have a material effect on how the results of operation and financial position of the Group are prepared and presented.

—	HKAS 1 (Amendment)	Capital Disclosures 1
—	HKAS 19 (Amendment)	Actuarial Gains and Losses, Group Plans and Disclosures 2
—	HKAS 21 (Amendment)	The Effects of Changes in Foreign Exchange Rates —
		Net Investment in a Foreign Operation 2
—	HKAS 39 (Amendment)	Cash Flow Hedge Accounting of Forecast Intragroup Transactions 2
—	HKAS 39 (Amendment)	The Fair Value Option 2
—	HKAS 39 and HKFRS 4	Financial Instruments: Recognition and Measurement and Insurance
	(Amendment)	Contracts — Financial Guarantee Contracts 2
—	HKFRS 6	Exploration for and Evaluation of Mineral Resources 2
—	HKFRS 7	Financial Instruments: Disclosures 1
—	HK(IFRIC) - INT 4	Determining Whether an Arrangement Contains a Lease 2

— 90 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

— HK(IFRIC) - INT 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds[2] — HK(IFRIC) - INT 6 Liabilities Arising from Participating in a Specific Market - Waste, Electrical and Electronic Equipment[3] — HK(IFRIC) - INT 7 Applying the Restatement Approach under HKAS 29 Financial Reporting in Hyperinflationary Economies[4] 1 Effective for the annual period beginning on or after 1 January 2007 2 Effective for the annual period beginning on or after 1 January 2006 3 Effective for the annual period beginning on or after 1 December 2005 4 Effective for the annual period beginning on or after 1 March 2006

3. Critical Accounting Judgments and Key Sources of Estimation Uncertainty

Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The Group makes estimates and assumption concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results.

There is no significant risk of key assumptions concerning the future and other key sources of estimation at the balance sheet date which will cause an adjustment to carrying amounts of assets and liabilities within the next year.

There are no significant effects on amounts recognised in the financial statements arising from the judgment or estimates used by management.

4. Significant Accounting Policies

The financial statements have been prepared in accordance with HKFRSs and HKASs issued by the HKICPA. They have been prepared under the historical cost convention. The principal accounting policies adopted are set out below:

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 31 December each year. The results of subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, until the date such control ceases. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

Subsidiaries

A subsidiary is a company in which the Company, directly or indirectly, controls more than 50% of its voting power or issued share capital or controls the composition of its board of directors or has power to govern its financial and operating policies.

Investments in subsidiaries are included in the Company’s balance sheet at cost less any identified impairment loss. The results of subsidiaries are accounted for by the Company on the basis of dividend received and receivable.

Property, plant and equipment

Property, plant and equipment are stated at cost less depreciation and amortisation and accumulated impairment losses.

— 91 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Depreciation and amortisation are provided to write off the cost of items of property, plant and equipment over their estimated useful lives, using the straight-line method, at the following rates per annum:

Leasehold land Over the shorter of the term of the lease, or 50 years Buildings Over the shorter of the term of the lease, or 50 years Plant and machinery 12% Furniture, fixtures and equipment 20-33[1] ⁄3%

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement in the year in which the item is derecognised.

Impairment

At each balance sheet date, the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Impairment loss is recognised as an expense immediately.

When an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

Revenue recognition

Sales of goods are recognised when goods are delivered and title has passed or when the relevant sales contracts become unconditional.

Interest income is recognised as it accrues using the effective interest method.

Foreign currencies

In preparing the financial statements, transactions in currencies other than the Group entity’s functional currency (foreign currencies) are recorded at the rates of exchanges prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognised in profit or loss in the period in which they arise. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity, in which case, the exchange differences are also recognised directly in equity.

On consolidation, the assets and liabilities of the Group’s operations outside Hong Kong are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of.

— 92 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years, and it further excludes income statement items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

The carrying amount of deferred 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 asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited to the profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Financial instruments

Financial assets

The Group’s financial asset is classified as available-for-sale investments.

Available-for-sale investments are those non-derivative financial assets in equity securities or are not classified in any of the other three categories under the scope of HKAS 39. After initial recognition, available-for-sale investments are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised 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. For investments where there is no active market and whose fair value cannot be reliably measured, such investments are measured at cost less any impairment losses at each balance sheet date subsequent to initial recognition. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired. The amount of the impairment loss is measured as the difference between the carrying amount of the asset and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses will not reverse in subsequent periods.

Trade and other receivables

Trade and other receivables are initially recognised at fair value and thereafter stated at amortised cost less impairment losses for bad and doubtful debts, except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less impairment losses for bad and doubtful debts.

— 93 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with bank and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition.

Trade and other payables

Trade and other payable are initially recognised at fair value and thereafter stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

Interest-bearing borrowings

Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in profit or loss over the period of the borrowings using the effective interest method.

Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of new shares are taken to equity as a deduction, net of tax, from the proceeds.

Operating leases

Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Rental payments applicable to such operating leases are charged to the income statement on the straight-line basis over the lease periods.

Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of that asset. All other borrowing costs are charged to the income statement in the year in which they are incurred.

Provision

Provision are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made.

Employee benefits costs

Salaries, annual bonuses, paid annual leave, leave passage and the cost to the Group of non-monetary benefits are accrued in the year in which the associated services are rendered by employees of the Group. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.

Contributions to Mandatory Provident Fund as required under the Hong Kong Mandatory Provident Fund Schemes Ordinance, are recognised as an expense in the income statement as incurred.

— 94 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Share-based payments

The Company operates share option schemes for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. Employees (including directors) of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (“equity-settled transactions”).

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of the Company, if applicable.

The cost of equity-settled transaction is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date of which the relevant employees became fully entitled to the award (the “vesting date”). The cumulative expense recognised for equity-settlement transactions at each balance sheet date until the vesting date reflects the extent to which (i) the vesting period has expired, and (ii) the Group’s best estimate of the number of equity instruments that will ultimately vest. The charge or credit to the income statement for a period represents the movements in cumulative expense recognised as at the beginning and end of the period.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.

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 modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share.

— 95 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

5. Revenue and Other Income

The principal business of the Group is trading of base metals and fabric products and other merchandises to outsider customers. Turnover and revenue recognised during the year are as follows:

Turnover Sales revenue from trading of base metals Sales revenue from trading of fabric products and other merchandises Other income Interest income Exchange gain Others Total income	2005 HK$’000 44,937 23,456	2004 HK$’000 13,522 8,783
	68,393 160 — 314 474	22,305
		4 7 2
		13
	68,867	22,318

6. Business and Geographical Segments

Business segments

For management purposes, the Group is currently organised into two operating divisions - trading in base metals and trading in fabric products and other merchandises. These divisions are the basis on which the Group reports its primary segment information.

Principal activities are as follows:

Continuing operations:

Trading	in base metals	—	trading in base metals
Trading	in fabric products and	—	trading in fabric products and other merchandises
other	merchandises

Discontinued operation: Fabric processing — processing of raw fabric and the sale of finished fabric

In 2002, former directors of the Company determined to cease the Group’s fabric processing operation which had been carried out under Chaoyang Hua Loong. Chaoyang Hua Loong was de-consolidated from the Group with effect from 1 January 2004, hence, except for the gain on de-consolidation of a subsidiary and allowance made on advance to an investee company, no results, assets and liabilities were attributable to the fabric processing operation during the year ended 31 December 2004. Details are set out in note 14.

— 96 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Segment information about these businesses is presented below.

2005

Turnover
External sales
Results
Segment profit
Unallocated corporate expenses
Credit arising from a scheme of arrangement
with creditors
Finance costs - interest on other loans
Profit before taxation
Income tax expense
Profit for the year
Balance Sheet
Assets
Segment assets
Unallocated corporate assets
Consolidated total assets
Liabilities
Segment liabilities
Unallocated corporate liabilities
Consolidated total liabilities

Continuing operations
Discontinued
operation
Trading
in base
metals
Trading
in fabric
products and
other
merchandises
Fabric
processing
Consolidated
HK$’000
HK$’000
HK$’000
HK$’000
44,937
23,456
—
68,393
110
966
—
1,076
(8,214)
15,421
(1,744)
6,539
(38)
6,501
432
1,719
—
2,151
40,852
43,003
—
1,570
—
1,570
19,552
21,122

— 97 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2004

Turnover
External sales
Results
Segment profit
Allowance for advance to an investee
company
Gain on de-consolidation of a subsidiary
Unallocated corporate expenses
Finance costs - interest on other loans
Loss before taxation
Income tax expense
Loss for the year
Balance Sheet
Assets
Segment assets
Unallocated corporate assets
Consolidated total assets
Liabilities
Segment liabilities
Unallocated corporate liabilities
Consolidated total liabilities

Continuing operations
Discontinued
operation
Trading
in base
metals
Trading
in fabric
products and
other
merchandises
Fabric
processing
Consolidated
HK$’000
HK$’000
HK$’000
HK$’000
22
8,783
—
22,305
121
393
—
514
—
—
(24,806)
(24,806)
—
—
11,624
11,624
(23,265)
(335)
(36,268)
(31)
(36,299)
622
6,635
—
7,257
50,271
57,528
1,287
3,467
—
4,754
37,394
42,148

— 98 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Geographical segments

The following tables provide an analysis of the Group’s sales by geographical market, irrespective of the origin of the goods:

Hong Kong Africa	Sales revenue by geographical market 2005 2004 HK$’000 HK$’000 49,635 14,788 18,758 7,517 68,393 22,305	Sales revenue by geographical market 2005 2004 HK$’000 HK$’000 49,635 14,788 18,758 7,517 68,393 22,305
		22,305

All segment assets are located in Hong Kong. There was no addition of property, plant and equipment for each of the year ended 31 December 2004 and 2005 respectively.

7. Credit Arising from a Scheme of Arrangement with Creditors

On 28 February 2005, Merchants (Hong Kong) Limited (“Merchants HK”), a wholly-owned subsidiary of the Company, held a meeting with its creditors pursuant to the Order of The Honourable Deputy Justice Poon on 2 February 2005 authorising the convening of such meeting, at which a scheme of arrangement (the “Scheme”) allowing Merchants HK to compromise its debts with its creditors was duly approved by the creditors present thereat. A petition hearing before the High Court took place on 19 April 2005 at which the Court also sanctioned the Scheme, the Order for which was duly filed with the Registrar of Companies in Hong Kong on the same date whereupon the Scheme has become fully effective with the effect of reducing the Group’s liabilities by approximately HK$15,421,000.

8. Administrative Expenses

	2005	2004
	HK$’000	HK$’000
Administrative expenses include the following:
Auditors’ remuneration	250	430
Depreciation and amortisation	7	17
Legal and professional fees	4,760	5,093
Loss on disposal of property, plant and equipment	16	112
Retirement benefits scheme contributions, net of nil (2004: Nil) forfeited
contributions	55	15
Staff costs, including directors’ emoluments (Note 9) (NB)	1,513	496

NB: Staff costs to the amount of HK$213,000 (2004: HK$80,000) was also included in distribution costs in the consolidated income statement.

— 99 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Directors’ and Employees’ Emoluments

The remuneration of each director for the year ended 31 December 2005 and 2004 are set out below.

2005

Executive directors Yue Jialin Lau Yau Cheung Independent Non-Executive Directors Wong Wing Kuen, Albert Tsui Robert Che Kwong Wu Guo Jian Total 2004 Executive directors Yue Jialin Lau Yau Cheung Independent Non-Executive Directors Wong Wing Kuen, Albert Tsui Robert Che Kwong Wu Guo Jian Total	Fees Salaries, allowances, and benefits in kind Retirement scheme contribution HK$’000 HK$’000 HK$’000 — — — — 300 15 40 — — 40 — — 40 — — 120 300 15 Fees Salaries, allowances, and benefits in kind Retirement scheme contribution HK$’000 HK$’000 HK$’000 — — — — — — 20 — — 20 — — 20 — — 60 — —	Total HK$’000 — 315 40 40 40
		435
		Total HK$’000 — — 20 20 20
		60

During the year ended 31 December 2005, Mr. Lau Yau Cheung waived part of the emoluments amounting to HK$300,000, which were excluded in the above disclosure. Apart from the above, no director has waived or agreed to waive any emoluments during the years ended 31 December 2005 and 2004.

— 100 —

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Of the five individuals with the highest emoluments in the Group, one (2004: one) individual was a director of the Company whose emoluments are included in the disclosure set out above. The aggregate emoluments of the five highest paid individuals were as follows:

Salaries and allowances Retirement benefits scheme contributions	2005 HK$’000 1,393 55 1,448	2004 HK$’000 456 15
		471

The remuneration of each of the five highest paid individuals for the years ended 31 December 2005 and 2004 fell within Nil to HK$1,000,000 band.

During the years ended 31 December 2005 and 2004, no emoluments were paid by the Group to any of the directors or the five highest paid individuals, including directors and employees, as an inducement to join or upon joining the Group or as compensation for loss of office.

10. Income Tax Expense

Hong Kong Profits Tax is calculated at 17.5% of the assessable profit for the year.

The charge for the year can be reconciled to the profit/(loss) before taxation per the income statement as follows:

Profits /(loss) before taxation Tax at Hong Kong Profits Tax rate of 17.5% Tax effect of expenses not deductible for tax purpose Tax effect of income not taxable for tax purpose Tax effect of tax loss not recognised Utilisation of tax loss previously not recognised Tax charge for the year	2005 HK$’000 6,539	2004 HK$’000 (36,268)
	1,144 1,454 (2,755) 193 2	(6,347) 8,309 (2,051) 120 —
	38	31

At 31 December 2005, the Group had unused tax losses of approximately HK$4,164,000 (2004: HK$23,702,000) available for offset against future profits. No deferred tax asset has been recognised in respect of such losses due to the unpredictability of future profit streams. The tax losses may be carried forward indefinitely.

The Company had no significant unprovided deferred taxation at the balance sheet date.

— 101 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

11. Earnings/(Loss) Per Share

The calculation of the basic earnings/(loss) per share is based on the profit for the year of HK$6,501,000 (2004: loss of HK$36,299,000) and on 413,000,000 (2004: 413,000,000) shares in issue during the year.

Diluted loss per share has not been presented for the years ended 31 December 2005 and 2004 as there were no potential dilutive shares outstanding during both years.

12. Property, Plant and Equipment

Leasehold land and buildings Plant and machinery Furniture, fixtures and equipment HK$’000 HK$’000 HK$’000 47,578 24,985 1,017 — — (201) (47,578) (24,985) —	Leasehold land and buildings Plant and machinery Furniture, fixtures and equipment HK$’000 HK$’000 HK$’000 47,578 24,985 1,017 — — (201) (47,578) (24,985) —	Leasehold land and buildings Plant and machinery Furniture, fixtures and equipment HK$’000 HK$’000 HK$’000 47,578 24,985 1,017 — — (201) (47,578) (24,985) —	Total HK$’000 73,580 (201) (72,563) 816 816 (816) — 49,685 17 (89) (48,820) 793 793 7 (800) — — 23
— — — — 33,030 — — (33,030) — — — — —	— — — — 15,790 — — (15,790) — — — — —	816 816 (816) — 865 17 (89) — 793 793 7 (800) —	816
			816 (816
			—
			49,685 17 (89 (48,820
			793
			793 7 (800
			—
— —	— —	— 23

— 102 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

13. Interests in Subsidiaries

Unlisted investments Amounts due from subsidiaries, less allowances Less: Impairment loss	The Company 2005 2004 HK$’000 HK$’000 75,274 75,274 6,296 32,121 81,570 107,395 (75,274) (75,274) 6,296 32,121	The Company 2005 2004 HK$’000 HK$’000 75,274 75,274 6,296 32,121 81,570 107,395 (75,274) (75,274) 6,296 32,121
	81,570 (75,274)	107,395 (75,274
	6,296

The amounts due from subsidiaries are unsecured, non-interest bearing and have no fixed terms of repayment. In the opinion of the Directors, the amounts will not be repaid in the next twelve months from the balance sheet date and the amounts are therefore shown as non-current.

At the balance sheet date, the Directors had reviewed the carrying value of the investments in subsidiaries and identified that the recoverable amounts of certain subsidiaries were estimated to be lower than the carrying values of the investment in the respective subsidiary. The recoverable amount was determined by the Directors with reference to the existing operation plan and the recoverable value of the underlying assets and liabilities of the respective subsidiaries.

Particulars of the Company’s subsidiaries at 31 December 2005 are set out in note 29.

14. Available-for-sale Investment/Investment in Security

Overseas unlisted investment security (Note 20) Advance to an investee company Less: Allowance	The Group 2005 2004 HK$’000 HK$’000 — — 24,806 24,806 (24,806) (24,806) — —

The investment represents a 100% equity interest in the registered capital of Chaoyang Hua Loong Textiles and Dyeing Limited (“Chaoyang Hua Loong”), a company established in the PRC which is engaged in fabric processing and manufacturing. On 12 April 2003, the Company entered into a sale and purchase agreement to dispose of the entire issued share capital of Park Well International Group Limited (“Park Well”), including the 100% equity interest in Chaoyang Hua Loong held by a wholly-owned subsidiary of Park Well, to Show Goods Inc., a company incorporated in the British Virgin Islands, (the “Park Well Disposal Agreement”). Based on the Receivers’ (who were appointed on 17 June 2003 and were discharged on 2 July 2004) investigations, they are of the view that despite the Park Well Disposal Agreement, the purported disposal of Park Well was rescinded and not completed and therefore the Company remains to be the beneficial owner of Park Well. The Receivers had since then taken steps to secure control over various companies comprising the Park Well Group. However, Chaoyang Hua Loong remains not under the control of the Company. Having obtained legal advice, in the opinion of the directors, the Group is still unable to exercise control over the financial and operating decisions of Chaoyang Hua Loong. Accordingly, Chaoyang

— 103 —

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Hua Loong was not regarded as a subsidiary of the Company with effect from 1 January 2004 and was accounted for as an investment security and stated in the consolidated balance sheet at 31 December 2004 at nil value. The investment was reclassified as available-for-sale investment upon adoption of HKAS 39 in January 2005. Details of which are set out in note 20.

The advance to Chaoyang Hua Loong is unsecured, non-interest bearing and has no fixed terms of repayment. Despite the efforts placed by the directors to secure control over Chaoyang Hua Loong and its related assets and in light of the events described above, the directors have made full allowance against the advance to Chaoyang Hua Loong in the interests of prudence.

15. Trade and Other Receivables

The Group allows an average credit period of 60 days to its trade customers.

The following is an aged analysis of trade receivables at the balance sheet date:

Trade receivables - 0 to 30 days Other receivables	The Group 2005 2004 HK$’000 HK$’000 2,151 7,249 35,375 35,327 37,526 42,576	The Group 2005 2004 HK$’000 HK$’000 2,151 7,249 35,375 35,327 37,526 42,576
		42,576

The balance at the balance sheet date includes an amount of approximately HK$35.1 million (2004: HK$35.1 million) receivable from Great Center Limited (the “Debt”). Details of the Debt, and related litigations, are set out in notes 24(i) to (iii). Subsequent to the balance sheet date, on 12 April 2006, the Company and its controlling shareholder, Profit Harbour entered into a deed of assignment, pursuant of which Profit Harbour has conditionally agreed to acquire from the Company, the Debt at the consideration of US$4.5 million (equivalent to approximately HK$35.1 million) (the “Assignment of Debt”). The Assignment of Debt constitutes a connected transaction and a major transaction of the Company under the Rules Governing the Listing of Securities on of The Stock of Exchange of Hong Kong Limited and is therefore subject to independent shareholders’ approval.

16. Trade and Other Payables

The following is an aged analysis of trade payables at the balance sheet date:

Trade payables 0 to 30 days Over 365 days Other payables	The Group 2005 2004 HK$’000 HK$’000 1,554 3,069 — 1,287	The Group 2005 2004 HK$’000 HK$’000 1,554 3,069 — 1,287
	1,554 4,499	4,356 22,737
	6,053	27,093

— 104 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

17. Secured Other Loans

As at 31 December 2005, the secured other loans bear interest at the Hong Kong Prime Rate plus 5% per annum and are due on 30 October 2006. Details of the assets pledged are set out in note 25.

18. Share Capital

Number of ordinary shares of HK$0.10 each Authorised: At 1 January 2004, 31 December 2004 and 31 December 2005 1,000,000,000 Issued and fully paid: At 1 January 2004, 31 December 2004 and 31 December 2005 413,000,000	Amount HK$’000 100,000
	41,300

19. Share Options Schemes

The existing share option scheme was adopted by the Company pursuant to an ordinary resolution passed on 22 September 2004 for the primary purpose of providing incentives to directors and eligible employees, and will expire on 21 September 2014 (the “Scheme”). Under the Scheme, the board of directors of the Company may grant options to eligible persons, including directors of the Company and its subsidiaries, to subscribe for shares in the Company.

Options granted must be taken up within 28 days of the date of grant, upon payment of HK$1 per grant. Options may be exercised at any time from the date of grant of the share option to the 10th anniversary of the date of grant. The exercise price is determined by the directors of the Company, and will not be less than the highest of the closing price of the Company’s shares on the date of grant, the nominal value of the Company’s shares and the average closing price of the shares for the five business days immediately preceding the date of grant.

The total number of shares in respect of which options may be granted under the Scheme is not permitted to exceed 10% of the shares of the Company in issue as at 22 September 2004, being the date of passing of the resolution regarding the Scheme, without prior approval from the Company’s shareholders. The number of shares in respect of which options may be granted to any individual in any one year is not permitted to exceed 1% of the shares of the Company in issue at any point in time, without prior approval from the Company’s shareholders. Options granted to substantial shareholders or independent Non-Executive Directors in excess of 0.1% of the Company’s share capital or with a value in excess of HK$5 million must be approved in advance by the Company’s shareholders.

No option has been granted under the Scheme since its adoption.

— 105 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

20. De-consolidation of a Subsidiary

As set out in note 14, having obtained legal advice, in the opinion of the Directors the Group is not in a position to exercise control over the financial and operating decisions of Chaoyang Hua Loong. Accordingly, Chaoyang Hua Loong was not regarded as a subsidiary of the Company with effect from 1 January 2004 and was excluded from the consolidated financial statements of the Company on the same date.

Net liabilities de-consolidated: Property, plant and equipment Trade and other payables Advance from Park Well Taxation payable Gain on de-consolidation of a subsidiary Reclassification of investment in a subsidiary to investment security (Note 14)	2005 HK$’000 — — — —	2004 HK$’000 23,743 (515) (24,806) (10,046) (11,624) 11,624 —
	— —	(11,624 11,624
	—

Chaoyang Hua Loong was de-consolidated during the year ended 31 December 2004 and it did not contribute to the turnover, operating results or cash flows of the Group.

21. Major Non-cash Transaction

As detailed on note 7 above, during the year, a wholly-owned subsidiary of the Company had effected a scheme of arrangement with creditors, with which the Group’s liabilities were reduced by approximately HK$15,421,000.

During the year ended 31 December 2004, other receivables amounting to HK$14,134,000, which were offset against other payables of the same amount in prior year by the Receivers, were carried at their respective gross amounts.

22. Financial Risk Management

The Group’s activities exposed it mainly to currency risk and credit risk. The Group’s overall risk management programme seeks to minimize potential adverse effects on the Group’s financial performance.

Currency risk

The Group operates internationally and certain trade receivables are denominated in foreign currencies, which is mainly in United Stated dollars that are pegged with Hong Kong dollars. Therefore, the Group does not have any significant exposure to currency risk.

— 106 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Credit risk

The Group is exposed to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. It arises primarily from the Group’s bank deposits and trade and other receivables. The Group only traded with recognised and creditworthy third parties. Receivable balances are monitored on an ongoing basis and the Group’s exposure to bad debts is not significant. Bank balances are placed with high-credit-quality institutions and directors of the Company considered that the credit risk for such is minimal.

Interest rate risk

The Group’s interest rate risk relates to impact of interest rate changes on interest bearing secured other loan. The interest rates and terms of repayment of the borrowings are disclosed in note 17.

The Group has not used any interest rate swaps to hedge its exposure to interest rate risk.

23. Commitments

Operating Lease - The Group as lessee

		2005	2004
		HK$’000	HK$’000
Minimum	lease payments under operating leases in respect of rented premises
during	the year	465	748

At the balance sheet date, the Group had commitments for future minimum lease payments under noncancellable operating leases in respect of rented premises, which fall due as follows:

Within one year In the second to fifth year inclusive	The Group 2005 2004 HK$’000 HK$’000 366 252 153 — 519 252	The Group 2005 2004 HK$’000 HK$’000 366 252 153 — 519 252
		252

Operating lease payments represent rental payable by the Group for certain of its office premises. Leases are negotiated for an average term of two years.

Capital Commitment

On 19 April 2005, the Company has entered into a Heads of Terms with a third party in respect of a proposed acquisition of a company which is engaged in the trading of electronics parts at a consideration of HK$4,500,000.

Apart from the above, the Company and/or the Group had no commitment at the balance sheet date.

— 107 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

24. Litigation and Contingent Liabilities

At 31 December 2005, the Group had the following litigation and contingent liabilities:

(i) Having obtained legal advice, the Receivers commenced legal proceedings on 2 July 2003 against Great Center Limited (“Great Center”), a company incorporated in the British Virgin Islands, for the repayment of two sums totaling US$4.5 million (or approximately HK$35.1 million), remitted on or about 21 May 2003 with no apparent justification, from the bank accounts of Merchants (Hong Kong) Limited (“Merchants HK”), a wholly-owned subsidiary of the Company, to a bank account maintained in the name of Great Center, and interest thereon, damages and costs of the legal proceedings (“the Great Center Action”). In order to prevent the dissipation of Great Center’s assets, an injunction order was applied for, and successfully obtained on 30 June 2003, from the High Court to restrict Great Center from, inter alia, disposing of or otherwise dealing with or diminishing assets of Great Center up to the value of US$4.5 million (the “Injunction Order”). The relevant bank, the lawyers of Great Center and other relevant persons have been notified of the Injunction Order. The Injunction Order remained valid up to and including 11 July 2003 on which date the Injunction Order was continued until further order or final determination of the Great Center Action.
(ii) The writ of summons issued on 2 July 2003 in relation to the claim against Great Center for the repayment of US$4.5 million was amended on 10 July 2004 (the “Amended Writ”) to include the claims for (i) the repayment of HK$12.8 million remitted from a bank account of the Company to a bank account in the name of Great Center on or about 17 April 2003; and (ii) the repayment of HK$22.0 million remitted from a bank account of the Company to a bank account in the name of Modern Shine Enterprises Limited (“Modern Shine”), a company incorporated in the British Virgin Islands, on or about 22 April 2003, interest thereon, damages and costs of legal proceedings. The sum of claims under the Amended Writ amounts to approximately HK$69.9 million (the “Great Center Claim”). The Amended Writ also includes a bank in Hong Kong, Modern Shine, certain former executive directors, officers and employees of the Group, and all directors or authorised signatories of Great Center and Modern Shine as defendants (the “Defendants”) for the purposes of seeking orders against them for the disclosure of documents and/or information. An application was made on 10 July 2003 to the High Court for an order (the “Disclosure Order”) that the Defendants disclose to the Company and Merchants HK all relevant information and documents relating to the transfers of the amounts comprising the Great Center Claim. The Disclosure Order was granted by the High Court on 18 July 2003.
(iii) Solicitors instructed by the directors have pursued the claim against Great Center and Modern Shine further and obtained the following directions from the court:
(a) The Company do file and serve its list of documents by 21 March 2005;
(b) Great Center and Modern Shine do file and serve their lists of documents by 28 March 2005;
(c) There be inspection of documents by 11 April 2005;
(d) The parties do exchange signed witness statements of facts within 25 April 2005;
(e) The application for leave to set the case down for trial be adjourned to 25 April 2005 at 10:00 a.m. before the Listing Clerk for fixing an appointment before the Listing Master;
(f) The application to set down was adjourned by the court to a date to be fixed as Greater Centre was not ready to exchange its witness statements with the Company; and
(g) The date to exchange witness statements was postponed to 14 September 2005. The Company will apply to set down for trial after the exchange of witness statements.

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APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

The Company and Great Center have exchanged their lists of documents and solicitors for the Company have received copy documents from Great Center’s solicitors for inspection. Modern Shine has failed to comply with the direction to file and serve its list of documents. Solicitors for the Company have taken out an application against Modern Shine for an order that it must serve and file its list of documents within 7 days of the order, failing which solicitors for the Company will further apply for an order that unless Modern Shine do comply with the direction of the court within 14 days, judgment be entered against it for the full amount claimed. After that it will be for the Company to trace the assets of Modern Shine in order to recover the judgment sum. As Modern Shine has failed to file its list of documents within the time limit imposed by the court, the court entered judgment against Modern Shine on 7 November 2005 for the sum of HK$22,000,000 plus interest and damages for conversion and interest thereon.

Regarding the claim against Great Center, the Company is in negotiation with Great Center’s liquidators for an amicable settlement.

(iv) As a result of the information provided to the Company and Merchants HK under the Disclosure Order, the Receivers have discovered that, together with certain funds out of the Great Center Claim, an aggregate amount of approximately HK$37 million was transferred, by a series of transfers, by Great Center and Modern Shine to Win Victory Holdings Limited (“Win Victory”), a company incorporated in Hong Kong and Mr. Chau Ching Ngai, former substantial shareholder of the Company and the spouse of Ms. Mo Yuk Ping, and Ms. Mo Yuk Ping, former chairman of the Company, are the registered shareholders of 49% and 51%, respectively, of the issued share capital of Win Victory, without apparent legitimate commercial reason. Having obtained legal advice, the Receivers commenced legal proceedings on 23 August 2003 against WinVictory (the “Win Victory Action”) for the repayment of the HK$37 million, interest thereon, damages and costs of legal proceedings (the “Win Victory Claim”). It should be noted that should any of the amount claimed against Win Victory be recovered from Great Center and/or Modern Shine in the Great Center Claim such amounts will be taken into account in the Win Victory Action. In order to prevent the dissipation of Win Victory’s assets, the Company applied for, and obtained on 22 August 2003, from the High Court an injunction order against Win Victory (the “Win Victory Injunction Order”) to restrict Win Victory from, among other things, disposing of or otherwise dealing with or diminishing the value of its assets up to the value of HK$37 million. On 29 August 2003, the Win Victory Injunction Order was continued until further order or final determination of the Win Victory Action.
(v) Having obtained legal advice, the Receivers, on behalf of the Company, petitioned for the winding-up of Win Victory on the grounds that Win Victory is unable to pay its debts and/or it is just and equitable for Win Victory to be wound up and obtained an order from the High Court on 24 September 2003, among other things, appointing Messrs. Desmond Chung Seng Chiong and Roderick John Sutton of Ferrier Hodgson Limited of 14th Floor, Hong Kong Club Building, 3A Chater Road, Hong Kong as the provisional liquidators of Win Victory. In the first instance, this order would remain valid up to and including 7 October 2003, on which date the matter would be heard again by the High Court.
(vi) The appointment of Provisional Liquidators is continued by an order of the court made by Madam Justice Kwan on 7 October 2003 until the determination of the Winding Up Petition, which has been adjourned. Due to the lack of funds in Win Victory, the Provisional Liquidators have not undertaken an extensive investigation. The Provisional Liquidators have recently made an application to the court for the discharge of their appointment and their application is fixed to be heard on 20 April 2006. The continuation of the Petition was to enable a more thorough investigation of the flow of funds in and out of Win Victory. The Petition is being opposed by Mr. Chau Ching Ngai. Solicitors for the Company will continue with the Winding Up proceedings. In view of the application by the Provisional Liquidators, the official receiver made an application to restore the Petition, which has been adjourned to 24 April 2006 for hearing. The court had on the hearing of 24 April 2006 ordered that Win Victory be wound-up on the petition of the Company.

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APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(vii) Solicitors for the Company issued a writ of Summons on 17 December 2004 against Mr. Tsoi Hon Chung and his son Mr. Tsoi Chun Bun for the return of all statutory books, records and documents of Park Well Group on the basis that on 15 July 2003, those documents were sent by Secretaries Limited to Mr. Tsoi Chun Bun as the agent of Mr. Tsoi Hon Chun, who was at the material times the sole director of Park Well. The Company has a copy of the signed receipt by Mr. Tsoi Chun Bun for the above documents. Both Mr. Tsoi Hon Chun and Mr. Tsoi Chun Bun deny the receipt and/or receipt as agent of such statutory books and records in their Defence filed in February 2005. Solicitors for the Company have taken out a Summons for Directions for the exchange of lists of documents and witness statements in order to set the case down for trial. The court made an order for Directions on 27 April 2005 and the Company has exchanged list of documents with Mr. Tsoi Hon Chung and Mr. Tsoi Chun Bun. Mr. Tsoi Hon Chung has filed his witness statements denying knowledge of the whereabouts of the statutory books, records and document so the Park Well Group. Mr. Tsoi Chun Bun has exchanged his witness statement with the Company 20 August 2005.
Pledge of Assets

		The	Group	The	Company
		2005	2004	2005	2004
		HK$’000	HK$’000	HK$’000	HK$’000
(a)	Banking facilities of HK$4 million
	(2004: HK$8 million) granted by a bank
	and secured by bank deposits of the Group	4,012	8,000	—	—
(b)	Other loan facilities of HK$15 million
	(2004: HK$15 million) granted by a
	financial institution and secured by
	floating charges over:
	— Trade and other receivables	1,864	6,853	145	218
	— Bank balances and cash	1,376	6,917	7	5,566
		3,240	13,770	152	5,784
		7,252	21,770	152	5,784

In addition, the Company’s interests in its subsidiaries had been pledged under floating charges to secure the other loan facilities granted by a financial institution to the Group.

26. Retirement Benefits Scheme

The Group operates a Mandatory Provident Fund scheme for all qualifying employees of its Hong Kong subsidiaries. The assets of the scheme are held separately from those of the Group in funds under the control of trustees. The Group contributed 5% of the relevant payroll costs to the scheme, which contribution is matched by employees.

The total cost charged to the consolidated income statement of HK$55,000 (2004: HK$15,000) represents contributions payable to the scheme by the Group at rates specified in the rules of the scheme.

At the balance sheet date, there was no forfeited contribution, which arose upon employees leaving the retirement benefits scheme and which was available to reduce the contribution payables in the future years.

— 110 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

27. Related Party Transactions

Other than related party transactions in respect of key management personnel remuneration which was disclosed in note 9 above, the Group had no material related party transactions during the years ended 31 December 2005 and 2004.

28. Post Balance Sheet Events

The following event took place subsequent to 31 December 2005.

On 12 April 2006, the Company and its controlling shareholder, Profit Harbour entered into a deed of assignment, pursuant of which Profit Harbour has conditionally agreed to acquire from the Company, the Debt at the consideration of US$4.5 million (equivalent to approximately HK$35.1 million) (the “Assignment of Debt”). The Assignment of Debt constitutes a connected transaction and a major transaction of the Company under the Rules Governing the Listing of Securities on of The Stock of Exchange of Hong Kong Limited and is therefore subject to independent shareholders’ approval.

29. Particulars of Subsidiaries

Particulars of the subsidiaries of the Company as at 31 December 2005 are as follows:

			Proportion of	Proportion of
	Place/country of		nominal	value of
	incorporation/	Paid up issued	issued capital held		by	Principal
	establishment	ordinary share	the Company			activities
Name of subsidiary	and operations	capital	Directly	Indirectly
			%		%
Asia Cheer Trading Limited	Hong Kong	HK$1 ordinary	100		—	Trading in fabric
		share				products and other
						merchandises
First Landmark Limited	British Virgin	US$1 ordinary	100		—	Investment holding
	Islands	share
Merchants HK	Hong Kong	HK$2 ordinary	—	100		Inactive
		shares
Park Well International Group	British Virgin	US$6 ordinary	100		—	Investment holding
Limited	Islands	shares
Sino Chance Trading Limited	Hong Kong	HK$1 ordinary	100		—	Trading in base
		share				metals
Sky Joy Management Limited	Hong Kong	HK$1 ordinary	100		—	Provision of
		share				management
						services

The above list contains only the particular of subsidiaries which principally affected the results, assets or liabilities of the Group.

— 111 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP

Set out below is the unaudited condensed consolidated financial statements of the Group for the six months ended 30 June 2006 together with the comparative unaudited figures for the corresponding period in 2005, extracted from 2006 interim report of the Company.

CONDENSED CONSOLIDATED INCOME STATEMENT

For the six months ended 30 June 2006

Notes Revenue 6 Cost of sales Gross profit Other income Credit arising from a scheme of arrangement with creditors Distribution costs Administrative expenses 7 Finance costs (Loss)/profit before taxation Taxation 8 (Loss)/profit for the period (Loss)/earnings per share - Basic 9	Six months ended 30 June 2006 2005 HK$’000 HK$’000 (unaudited) (unaudited) 5,788 41,055 (5,774) (39,298) 14 1,757 183 30 — 15,421 — (762) (5,331) (4,927) (958) (841) (6,092) 10,678 (2) (146) (6,094) 10,532 (1.48) cents 2.55 cents	Six months ended 30 June 2006 2005 HK$’000 HK$’000 (unaudited) (unaudited) 5,788 41,055 (5,774) (39,298) 14 1,757 183 30 — 15,421 — (762) (5,331) (4,927) (958) (841) (6,092) 10,678 (2) (146) (6,094) 10,532 (1.48) cents 2.55 cents
	14 183 — — (5,331) (958) (6,092) (2)	1,757 30 15,421 (762 (4,927 (841
		10,678 (146
	(6,094) (1.48) cents

— 112 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONDENSED CONSOLIDATED BALANCE SHEET

At 30 June 2006

		30 June	31 December
		2006	2005
	Notes	HK$’000	HK$’000
		(unaudited)	(audited)
Non-current assets
Available-for-sale investment	10	—	—
Current assets
Trade and other receivables	11	748	37,526
Pledged bank deposits	17	2,014	4,012
Bank balances and cash		20,426	1,465
		23,188	43,003
Current liabilities
Trade and other payables	12	7,367	6,053
Secured other loans		—	15,000
Tax payable		34	69
		7,401	21,122
Net current assets		15,787	21,881
Total assets less current liabilities		15,787	21,881
Capital and reserves
Share capital	13	41,300	41,300
Reserves		(25,513)	(19,419)
Equity attributable to equity holders of the parent		15,787	21,881

— 113 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 June 2006

	Share	Share	Special	Accumulated
	capital	premium	reserve	losses	Total
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
At 1 January 2005	41,300	106,957	(14,980)	(117,897)	15,380
Profit for the period	—	—	—	10,532	10,532
At 30 June 2005	41,300	106,957	(14,980)	(107,365)	25,912
At 1 January 2006	41,300	106,957	(14,980)	(111,396)	21,881
Loss for the period	—	—	—	(6,094)	(6,094)
At 30 June 2006	41,300	106,957	(14,980)	(117,490)	15,787

— 114 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

For the six months ended 30 June 2006

	Six months ended	Six months ended
	30	June
	2006	2005
	HK$’000	HK$’000
	(unaudited)	(unaudited)
Net Cash From/(Used In) Operating Activities	31,780	(2,093)
Net Cash From/(Used In) Investing Activities	2,181	(17)
Net Cash Used In Financing Activities	(15,000)	—
Net Increase/(Decrease) in Cash and Cash Equivalents	18,961	(2,110)
Cash and Cash Equivalents at 1 January	1,465	6,929
Cash and Cash Equivalents at 30 June	20,426	4,819
Analysis of the balances of cash and cash equivalents
Bank balances and cash	20,426	4,819

— 115 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

For the six months ended 30 June 2006

1. General

The Company is incorporated as an exempted company with limited liability in Bermuda under the Companies Act 1981 of Bermuda (as amended) and its shares are listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). The directors regard Profit Harbour Investments Limited (“Profit Harbour”), a company incorporated in the British Virgin Islands, to be the parent and ultimate parent company of the Company. The address of its registered office is Clarendon House, 2 Church street, Hamilton HM11, Bermuda and the address of its principal office in Hong Kong is Rooms 2808-10, 28/F., Wing On House, 71 Des Voeux Road Central, Hong Kong.

The Company and its subsidiaries (collectively referred to as “the Group”) are principally engaged in the trading of base metals and fabric products and other merchandises.

These condensed consolidated interim financial statements (“Interim Financial Statements”) are presented in Hong Kong dollars (“HK$”), which is the Company’s functional and presentation currency. These Interim Financial Statements have been approved for issue by the Board of Directors on 8 September, 2006.

2. Basis of Preparation and Accounting Policies

These unaudited Interim Financial Statements are prepared in accordance with Hong Kong Accounting Standard (“HKAS”) 34, “Interim Financial Reporting” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

These Interim Financial Statements should be read in conjunction with the 2005 annual report.

3. Change In Accounting Policies

The accounting policies adopted are consistent with those of the consolidated financial statements for the year ended 31 December 2005.

The following new standards, amendments to standards and interpretations which are relevant to the Group’s operations are mandatory for the financial year ending 31 December 2006.

—	HKAS 19 (Amendment)	Actuarial Gains and Losses, Group Plans and Disclosures
—	HKAS 21 (Amendment)	The Effects of Changes in Foreign Exchange Rates — Net Investment in a
		Foreign Operation
—	HKAS 39 (Amendment)	Cash Flow Hedge Accounting of Forecast Intragroup Transactions
—	HKAS 39 (Amendment)	The Fair Value Option
—	HKAS 39 and HKFRS 4	Financial Instruments: Recogntion and Measurement and Insurance Contracts
	(Amendment)	— Financial Guarantee Contracts
—	HK(IFRIC) - INT 4	Determining Whether an Arrangement Contains a Lease

The adoption of the above new/revised standards and interpretations did not result in substantial change to the Group’s accounting policies.

— 116 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

— HKAS 1 (Amendment) Capital Disclosures[1] — HKFRS 7 Financial Instruments: Disclosures[1] — HK(IFRIC) — INT 7 Applying the Restatement Approach under HKAS 29 Financial Reporting in Hyperinflationary Economies[2] — HK(IFRIC) — INT 8 Scope of HKFRS 2[3] — HK(IFRIC) — INT 9 Reassessment of Embedded Derivatives[4]

1 Effective for the period beginning on or after 1 January 2007

2 Effective for the period beginning on or after 1 March 2006

3 Effective for periods beginning on or after 1 May 2006

4 Effective for periods beginning on or after 1 June 2006

4. Critical Accounting Judgments and Key Sources of Estimation Uncertainty

The Group makes estimates and assumption concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results.

There are no significant effects on amounts recognised in the financial statements arising from the judgment or estimates used by management.

5. Financial Risk Management

Currency risk

Credit risk

— 117 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

6. Segment Information

Business segments

For management purposes, the Group is currently organised into two operating divisions — trading in base metals and trading in fabric products and other merchandises. These divisions are the basis on which the Group reports its primary segment information.

Segment information about these businesses is presented below.

Six months ended 30 June 2006

		Trading in
		fabric products
	Trading in	and other
	base metals	merchandises	Consolidated
	HK$’000	HK$’000	HK$’000
Revenue
External sales	5,788	—	5,788
Results
Segment profit	15	65	80
Unallocated corporate expenses			(5,214)
Finance costs — interest on other loans			(958)
Loss before taxation			(6,092)
Taxation			(2)
Loss for the period			(6,094)

— 118 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Six months ended 30 June 2005

Trading in base metals Trading in fabric products and other merchandises Consolidated HK$’000 HK$’000 HK$’000 Revenue External sales 23,015 18,040 41,055 Results Segment profit 83 768 851 Unallocated corporate expenses (4,763) Unallocated corporate income 10 Finance costs — interest on other loans (841) Credit arising from a scheme of arrangement with creditors 15,421 Profit before taxation 10,678 Taxation (146) Profit for the period 10,532	Trading in base metals Trading in fabric products and other merchandises Consolidated HK$’000 HK$’000 HK$’000 Revenue External sales 23,015 18,040 41,055 Results Segment profit 83 768 851 Unallocated corporate expenses (4,763) Unallocated corporate income 10 Finance costs — interest on other loans (841) Credit arising from a scheme of arrangement with creditors 15,421 Profit before taxation 10,678 Taxation (146) Profit for the period 10,532	Trading in base metals Trading in fabric products and other merchandises Consolidated HK$’000 HK$’000 HK$’000 Revenue External sales 23,015 18,040 41,055 Results Segment profit 83 768 851 Unallocated corporate expenses (4,763) Unallocated corporate income 10 Finance costs — interest on other loans (841) Credit arising from a scheme of arrangement with creditors 15,421 Profit before taxation 10,678 Taxation (146) Profit for the period 10,532
		851
		(4,763) 10 (841) 15,421
		10,678 (146)
		10,532

Geographical segments

The following tables provide an analysis of the Group’s sales by geographical market, irrespective of the origin of the goods:

		Six months ended	Six months ended
		30 June
		2006		2005
		HK$’000	HK$’000
		(unaudited)	(unaudited)
Hong	Kong	5,788		27,713
Africa		—		13,342
		5,788		41,055

— 119 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

7. Administrative Expenses

	Six months ended	Six months ended
	30 June
	2006	2005
	HK$’000	HK$’000
	(unaudited)	(unaudited)
Administrative expenses include the following:
Depreciation and amortisation	—	7
Legal and professional fees	3,133	3,062
Retirement benefits scheme contributions	37	20
Staff costs, including directors’ emoluments	843	575

8. Taxation

Hong Kong profits tax is calculated at 17.5% (2005: 17.5%) of the assessable profit for the period.

The Company had no significant unprovided deferred taxation at the balance sheet date.

9. (Loss)/Earnings Per Share

The calculation of the basic (loss)/earnings per share is based on the loss for the period of HK$6,094,000 (2005: profit of HK$10,532,000) and on 413,000,000 (2005: 413,000,000) shares in issue during the period.

Diluted (loss)/earnings per share has not been presented for the six months ended 30 June 2006 and 2005, as there were no potential dilutive shares outstanding during both periods.

10. Available-For-Sale Investment

30 June 2006 31 HK$’000 (Unaudited) Advance to an investee company 24,806 Less: Allowance (24,806) —	December 2005 HK$’000 (Audited) 24,806 (24,806)
	—

The investment represents a 100% equity interest in the registered capital of Chaoyang Hua Loong Textiles and Dyeing Limited (“Chaoyang Hua Loong”), a company established in the PRC which is engaged in fabric processing and manufacturing. On 12 April 2003, the Company entered into a sale and purchase agreement to dispose of the entire issued share capital of Park Well International Group Limited (“Park Well”), including the 100% equity interest in Chaoyang Hua Loong held by a wholly-owned subsidiary of Park Well, to Show Goods Inc., a company incorporated in the British Virgin Islands, (the “Park Well Disposal Agreement”). Based on the Receivers’ investigations, they are of the view that despite the Park Well Disposal Agreement, the purported disposal of Park Well was rescinded and not completed and therefore the Company remains to be the beneficial owner of Park Well. The Receivers had since then taken steps to secure control over various companies comprising

— 120 —

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

the Park Well Group. However, Chaoyang Hua Loong remains not under the control of the Company. Having obtained legal advice, in the opinion of the Directors, the Group is still unable to exercise control over the financial and operating decisions of Chaoyang Hua Loong. Accordingly, Chaoyang Hua Loong was not regarded as a subsidiary of the Company with effect from 1 January 2004 and was accounted for as an investment security and stated in the consolidated balance sheet at 31 December 2004 at nil value. The investment was reclassified as available-for-sale investment upon adoption of HKAS 39 in January 2005.

The advance to Chaoyang Hua Loong is unsecured, non-interest bearing and has no fixed terms of repayment. Despite the efforts placed by the Directors to secure control over Chaoyang Hua Loong and its related assets and in light of the events described above, the Directors have made full allowance against the advance to Chaoyang Hua Loong in the interests of prudence.

11. Trade and Other Receivables

The Group allows an average credit period of 60-90 days to its trade customers.

The following is an aged analysis of trade receivables at the balance sheet date:

30 June 2006 31 HK$’000 (Unaudited) Trade receivables - 0 to 30 days 545 Other receivables 203 748	December 2005 HK$’000 (Audited) 2,151 35,375
	37,526

The fair value of the trade and other receivables approximates its carrying amount.

The balance at 31 December 2005 included an amount of approximately HK$35.1 million receivable from Great Center Limited (the “Debt”). Details of the Debt, and related litigations, are set out in notes 24(i) to (iii) of the annual report for the year ended 31 December 2005. On 12 April 2006, the Company and its controlling shareholder, Profit Harbour Investments Limited (“Profit Harbour”) entered into a deed of assignment, pursuant of which Profit Harbour has conditionally agreed to acquire from the Company the Debt at the consideration of US$4.5 million (equivalent to approximately HK$35.1 million) (the “Assignment of Debts”). The Assignment of Debts constitutes a connected transaction and a major transaction of the Company under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and were approved by independent shareholders by way of poll on special general meeting of the Company held on 23 May 2006. On 26 May 2006, the amount was deposited into a bank account of the Company.

— 121 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

12. Trade and Other Payables

The following is an aged analysis of trade payables at the balance sheet date:

30 June 2006 31 HK$’000 (Unaudited) Trade payables - 0 to 30 days — Other payables 7,367 7,367	December 2005 HK$’000 (Audited) 1,554 4,499
	6,053

The fair value of trade and other payables approximates its carrying amount.

13. Share Capital

	Number of
	ordinary shares of
	HK$0.10 each	Amount
		HK$’000
Authorised:
At 1 January 2006	1,000,000,000	100,000
Increased during the period	1,000,000,000	100,000
At 30 June 2006	2,000,000,000	200,000
Issued and fully paid:
At 1 January 2006 and 30 June 2006	413,000,000	41,300

Pursuant to a special resolution passed on 19 June 2006, the authorised share capital of the Company was increased to HK$200,000,000 by the creation of 1,000,000,000 shares of HK$0.1 each.

14. Share Options Schemes

The Company adopted the share option scheme (the “Scheme”) on 22 September 2004, under which the board of directors of the Company may grant options to eligible persons, including directors of the Company and its subsidiaries, to subscribe for shares in the Company. The purpose of the Scheme is to provide incentives to directors and eligible employees. The Scheme will expire on 21 September 2014.

— 122 —

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

No option has been granted under the Scheme since its adoption.

15. Commitments

At the balance sheet date, the Group had commitments for future minimum lease payments under non- cancellable operating leases in respect of rented premises, which fall due as follows:

30 June 2006 31 HK$’000 (Unaudited) Within one year 335 In the second to fifth year inclusive — 335	December 2005 HK$’000 (Audited) 366 153
	519

16. Litigation and Contingent Liabilities

At 30 June 2006, the Group had the following litigation and contingent liabilities:

(i) Having obtained legal advice, the Receivers commenced legal proceedings on 2 July 2003 against Great Center Limited (“Great Center”), a company incorporated in the British Virgin Islands, for the repayment of two sums totaling US$4.5 million (or approximately HK$35.1 million), remitted on or about 21 May 2003 with no apparent justification, from the bank accounts of Merchants (Hong Kong) Limited (“Merchants HK”), a wholly-owned subsidiary of the Company, to a bank account maintained in the name of Great Center, and interest thereon, damages and costs of the legal proceedings (“the Great Center Action”). In order to prevent the dissipation of Great Center’s assets, an injunction order was applied for, and successfully obtained on 30 June 2003, from the High Court to restrict Great Center from, inter alia, disposing of or otherwise dealing with or diminishing assets of Great Center up to the value of US$4.5 million (the “Injunction Order”). The relevant bank, the lawyers of Great Center and other relevant persons have been notified of the Injunction Order. The Injunction Order remained valid up to and including 11 July 2003 on which date the Injunction Order was continued until further order or final determination of the Great Center Action.
(ii) The writ of summons issued on 2 July 2003 in relation to the claim against Great Center for the repayment of US$4.5 million was amended on 10 July 2004 (the “Amended Writ”) to include the claims for (i) the repayment of HK$12.8 million remitted from a bank account of the Company to a bank account in the name of Great Center on or about 17 April 2003; and (ii) the repayment of HK$22.0 million remitted from a bank account of the Company to a bank account in the name of Modern Shine Enterprises Limited (“Modern Shine”), a company incorporated in the British Virgin Islands, on or about 22 April 2003, interest thereon, damages and costs of legal proceedings. The sum of claims under the Amended Writ amounts to approximately HK$69.9 million (the “Great Center Claim”). The Amended Writ also includes a bank in Hong Kong, Modern Shine, certain former executive

— 123 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

directors, officers and employees of the Group, and all directors or authorised signatories of Great Center and Modern Shine as defendants (the “Defendants”) for the purposes of seeking orders against them for the disclosure of documents and/or information. An application was made on 10 July 2003 to the High Court for an order (the “Disclosure Order”) that the Defendants disclose to the Company and Merchants HK all relevant information and documents relating to the transfers of the amounts comprising the Great Center Claim. The Disclosure Order was granted by the High Court on 18 July 2003.

(iii) Solicitors instructed by the Directors have pursued the claim against Great Center and Modern Shine further and obtained the following directions from the court:
(a) The Company do file and serve its list of documents by 21 March 2005;
(b) Great Center and Modern Shine do file and serve their lists of documents by 28 March 2005;
(c) There be inspection of documents by 11 April 2005;
(d) The parties do exchange signed witness statements of facts within 25 April 2005;
(e) The application for leave to set the case down for trial be adjourned to 25 April 2005 at 10:00 a.m. before the Listing Clerk for fixing an appointment before the Listing Master;
(f) The application to set down was adjourned by the court to a date to be fixed as Great Center was not ready to exchange its witness statements with the Company; and
(g) The date to exchange witness statements was postponed at 14 September 2005. The Company will apply to set down for trial after the exchange of witness statements.

Regarding the claim against Great Center, the Company is in negotiation with Great Center’s liquidators for an amicable settlement.

(iv) As a result of the information provided to the Company and Merchants HK under the Disclosure Order, the Receivers have discovered that, together with certain funds out of the Great Center Claim, an aggregate amount of approximately HK$37 million was transferred, by a series of transfers, by Great Center and Modern Shine to Win Victory Holdings Limited (“Win Victory”), a company incorporated in Hong Kong and Mr. Chau Ching Ngai, former substantial shareholder of the Company and the spouse of Ms. Mo Yuk Ping, and Ms. Mo Yuk Ping, former chairman of the Company, are the registered shareholders of 49% and 51%, respectively, of the issued share capital of Win Victory, without apparent legitimate commercial reason. Having obtained legal advice, the Receivers commenced legal proceedings on 23 August 2003 against Win Victory (the “Win Victory Action”) for the repayment of the HK$37 million, interest thereon, damages and costs of legal proceedings (the “Win Victory

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APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Claim”). It should be noted that should any of the amount claimed against Win Victory be recovered from Great Center and/or Modern Shine in the Great Center Claim such amounts will be taken into account in the Win Victory Action. In order to prevent the dissipation of Win Victory’s assets, the Company applied for, and obtained on 22 August 2003, from the High Court an injunction order against Win Victory (the “Win Victory Injunction Order”) to restrict Win Victory from, among other things, disposing of or otherwise dealing with or diminishing the value of its assets up to the value of HK$37 million. On 29 August 2003, the Win Victory Injunction Order was continued until further order or final determination of the Win Victory Action.

(v) Having obtained legal advice, the Receivers, on behalf of the Company, petitioned for the winding-up of Win Victory on the grounds that Win Victory is unable to pay its debts and/or it is just and equitable for Win Victory to be wound up (the “Winding-Up Petition”) and obtained an order from the High Court on 24 September 2003, among other things, appointing Messrs. Desmond Chung Seng Chiong and Roderick John Sutton of Ferrier Hodgson Limited of 14th Floor, Hong Kong Club Building, 3A Chater Road, Hong Kong as the provisional liquidators of Win Victory (the “Provisional Liquidators”). In the first instance, this order would remain valid up to and including 7 October 2003, on which date the matter would be heard again by the High Court.
(vi) The appointment of Provisional Liquidators is continued by an order of the Court made by Madam Justice Kwan on 7 October 2003 until the determination of the Winding-Up Petition, which has been adjourned. Due to the lack of funds in Win Victory, the Provisional Liquidators have not undertaken an extensive investigation. The Provisional Liquidators have recently made an application to the court for the discharge of their appointment and their application is fixed to be heard on 20 April 2006. The continuation of the Winding-Up Petition was to enable a more thorough investigation of the flow of funds in and out of Win Victory. In view of the application by the Provisional Liquidators, the Receivers made an application to restore the Winding-Up Petition, which has been adjourned to 24 April 2006 for hearing. The Court had on the hearing of 24 April 2006 ordered that Win Victory be wound-up. At the hearing on 6 September 2006, the Court had adjourned the Company’s application for the costs of Provisional Liquidators to be paid out of the assets of Win Victory and gave leave for the Company to provide documentary proof regarding the Provisional Liquidators’ fees.

17. Pledge of Assets

30 June 2006 31 HK$’000 (Unaudited) (a) Banking facilities of HK$2 million (2005: HK$4 million) granted by a bank and secured by bank deposits of the Group 2,014 (b) Other loan facilities of Nil (2005: HK$15 million) granted by a financial institution and secured by floating charges over: — Trade and other receivables — — Bank balances and cash — 2,014	30 June 2006 31 HK$’000 (Unaudited) (a) Banking facilities of HK$2 million (2005: HK$4 million) granted by a bank and secured by bank deposits of the Group 2,014 (b) Other loan facilities of Nil (2005: HK$15 million) granted by a financial institution and secured by floating charges over: — Trade and other receivables — — Bank balances and cash — 2,014	December 2005 HK$’000 (Audited) 4,012 1,864 1,376
	—	3,240
	2,014	7,252

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Related Party Transactions

Key management personnel compensation:

Key management personnel compensation:
	Six months ended
	30 June
	2006	2005
	HK$’000	HK$’000
	(unaudited)	(unaudited)
Basic salaries and other allowances	300	—
Bonuses	25	—
Retirement benefits scheme contributions	15	—
	340	—

Post Balance Sheet Events
(i) On 14 June 2006, Rise Cheer Limited (the “Purchaser”), a wholly owned subsidiary of the Company and the registered and beneficial owner (the “Vendor”) of 60% issued equity interest of Chinaright Electronics Limited (“Chinaright”), entered into an acquisition agreement. Pursuant to the acquisition agreement, the Purchaser has agreed to purchase and the Vendor agreed to sell the Sales Interest and the Sales Loan at face value to the Purchaser. The Sales Interest, being the 60,001 shares of nominal value of HK$1.00 each (representing approximately 60.0% of the entire issued capital of Chinaright) in the issued capital of Chinaright and the Sales Loan amounted to approximately HK$1 million. The consideration amounted to HK$2.0 million and will be satisfied by the issuance of the convertible bond by the Company upon the completion of the acquisition agreement. The transaction was completed on 19 July 2006.
(ii) The Company completed a rights issue on 14 July 2006, which raised gross proceeds of HK$82.6 million by issuing 826 million rights shares at HK$0.1 each. After the rights issue, Mr. Yue, via Profit Harbour, owns 928,699,801 shares of the Company.
(iii) On 24 August 2006, the convertible bond of HK$2 million issued to the Vendor as mentioned in (i) above was converted into 20,000,000 new shares of the Company.

WORKING CAPITAL

The Directors are of the opinion that upon the completion of the proposed Rights Issue and Placing and based on available banking and other facilities and internal resources of the Group, the Group has sufficient working capital for its requirements, currently and period ending 12 months from the date of this circular.

STATEMENT OF INDEBTEDNESS OF THE GROUP

Borrowings

At the close of business on 31 October 2006, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Group had margin financing of approximately HK$56,227,000.

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APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Save as aforesaid or as otherwise disclosed herein, and apart from intra-Group liabilities, as at the close of business of 31 October 2006, the Group did not have any debt securities issued and outstanding, or authorised or otherwise created but unissued, any term loans (secured, unsecured, guaranteed or not), any other borrowings or indebtedness in the nature of borrowing including bank overdrafts and liabilities under acceptances (other than normal trade bills) or acceptance credits or hire purchase commitments (whether secured or unsecured, guaranteed or not), any mortgages or charges, or other material contingent liabilities or guarantee.

The Directors confirm that there is no material change in indebtedness and contingent liabilities of the Group since 31 October 2006 up to and including the Latest Practicable Date.

MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 December 2005, the date to which the latest published audited accounts of the Company have been made up.

FINANCIAL AND TRADING PROSPECTS

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

MANAGEMENT DISCUSSION AND ANALYSIS OF ANNUAL REPORT 2003

BUSINESS REVIEW

Trading in base metals

Turnover decreased by 84% to HK$53.8 million in the year when compared with HK$346.1 million attained in 2002. Operating loss for the year was HK$7.5 million, against a profit of HK$4.5 million in 2002.

Trading in fabric

Turnover decreased by 84% in the year to HK$8.4 million when compared with HK$52.6 million attained in 2002. Operating profit for the year was HK$0.1 million, against a loss of HK$11.4 million in 2002.

BUSINESS OUTLOOK

As the Company was under the control of the Receivers from 17 June 2003 to 2 July 2004 prior to the discharge of receivership proceedings, as such had been lacking in a structured long term plan for its operations, the Directors consider it a priority in formulating all feasible options to maximize the value of the Company for the benefit of its shareholders.

CAPITAL STRUCTURE

Pursuant to a subscription agreement dated 6 March 2003 entered into between the Company and Angel Field Limited (“Angel Field”), the former substantial shareholder of the Company, Angel Field had subscribed for 125,000,000 new shares in the capital of the Company.

LIQUIDITY AND FINANCIAL RESOURCES

During the year, the capital base of the Company has been enlarged. Additional funding of approximately HK$49.9 million was obtained by the Company through the allotment and issue of new shares.

As at 31 December 2003, the Group had no outstanding bank borrowings (2002: HK$12.9 million) and bank balances and cash were at HK$16.8 million (2002: HK$26.1 million).

FOREIGN EXCHANGE EXPOSURE

Since most business transactions conducted by the Group and payments made to suppliers are either made in Hong Kong Dollars, US Dollars, or Renminbi, no use of financial instruments for hedging purposes is considered necessary.

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APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

PURCHASE, SALE OR REDEMPTION OF THE COMPANY’S LISTED SECURITIES

During the year, neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s listed securities.

EMPLOYEES AND REMUNERATION POLICY

At 31 December 2003, the Group was under the control of the Receivers since their respective appointment on 17 June 2003. Accordingly, the Group had no full time managerial, administrative and production staff in Hong Kong and the PRC.

During the year ended 31 December 2003, the Group remunerates its employees largely based on the prevailing industry practice.

MANAGEMENT DISCUSSION AND ANALYSIS OF ANNUAL REPORT 2004

BUSINESS REVIEW

Turnover of the Group during the year was HK$22,305,000, a decrease of 64% as compared with 2003. As the Group was under receivership during the period of January 2004 to July 2004, its business operations were suspended during that time. The directors were appointed to the Company as a result of a special general meeting held on 26 April 2004 and took control of the Company in July 2004 subsequent to the discharge of the former receivers. In September and December 2004, the Group resumed its fabric products and other merchandises trading business and base metals trading business respectively. Gross profit has returned to positive region to HK$936,000 (a loss of HK$7,428,000 in 2003). Loss attributable to shareholders has also reduced to HK$36,299,000 from HK$54,935,000 in 2003.

Trading in base metals

Turnover for this sector reached HK$13,522,000 in the year. It represented a decrease of 75% when compared with HK$53,827,000 attained in 2003. The decrease is because of business inactivity for the period of January to July 2004 when the Group was under the control of former receivers. The Board has endeavored to realign the overall business operation in order to resume the base metals trading business. The base metals trading business segment contributed HK$121,000 to the Group’s operating profits as compared to a loss of HK$7,509,000 in 2003.

Trading in fabric products and other merchandises

Turnover for the Group’s fabric products and other merchandises trading business segment reached HK$8,783,000 during the year (2003: HK$8,371,000), a slight increase of about 5% as compared with 2003. Segment profit attributable to the Group during the year amounted to HK$393,000 (2003: HK$81,000), an increase of 385% as compared with 2003. Such operating result was achieved notwithstanding the Group’s operation was only resumed in September 2004. Since the

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APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

Board took control of the Company, it has been taking active steps to revive the existing operations of the Group. The Board has conducted a business and operational review of the Group with a view to formulating business strategies to revive business and expand the long term growth of the business.

BUSINESS OUTLOOK

On 19 April 2005, the Company entered into a heads of terms with the shareholders of an acquisition target (“Target”) in the PRC which is also engaged in the trading business to acquire their interests in the entire issued share capital of the Target at a consideration of HK$4.5 million, which will be settled by issuance of convertible bonds by the Company. The parties have agreed that a sale & purchase agreement will be entered into upon The Stock Exchange of Hong Kong Limited (“Stock Exchange”) granting resumption of trading in the share of the Company. The Board considers that the proposed acquisition will keep itself abreast with the lucrative growth opportunities that the PRC market presents and strengthen its ability to meet the rising demand from its customers.

The Board also proposes to conduct a rights issue of HK$82.6 million immediately after the resumption (“Rights Issue”). Sun Hung Kai International Limited has indicated its interest to the Company that it will fully underwrite the Rights Issue, only conditional upon the Stock Exchange granting the resumption approval and Profit Harbor Investments Limited, the existing controlling shareholder, has undertaken to take up all its entitlement under the Rights Issue. The Board is convinced that the Company will be able to embark on business opportunities with a strengthened financial position after the Rights Issue. The Board also considers that the Rights Issue will enlarge the capital base of the Company and provided an equal opportunity to the shareholders to benefit from the growth of the Company.

The Group will continue to focus on pursuing its core business in the field of trading in fabric products and general merchandises, and base metals. The Group will also evaluate and explore other viable business opportunities made available to the Group, which could be of long-term interest and to the benefit of the Group and its shareholders as a whole. Further, the Board has been leveraging on the extensive experience and business networks of the directors to explore other viable business opportunities to create long term potential for the Company and its shareholders.

DIVIDEND

The Directors do not recommend the payment of a dividend for the year ended 31 December 2004 (2003: Nil).

LIQUIDITY AND FINANCIAL RESOURCES

As at 31 December 2004, the Group had secured borrowings of HK$15 million (2003: Nil), and bank balances and cash were at approximately HK$14,929,000 (2003: HK$16,831,000).

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APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

LITIGATION AND CONTINGENT LIABILITIES

At 31 December 2004, the Group had the following litigation and contingent liabilities:

(i) Having obtained legal advice, the Receivers commenced legal proceedings on 2 July 2003 against Great Center Limited (“Great Center”), a company incorporated in the British Virgin Islands, for the repayment of two sums totaling US$4.5 million (or approximately HK$35.1 million), remitted on or about 21 May 2003 with no apparent justification, from the bank accounts of Merchants (Hong Kong) Limited (“Merchants HK”), a wholly-owned subsidiary of the Company, to a bank account maintained in the name of Great Center, and interest thereon, damages and costs of the legal proceedings (“the Great Center Action”). In order to prevent the dissipation of Great Center’s assets, an injunction order was applied for, and successfully obtained on 30 June 2003, from the High Court to restrict Great Center from, inter alia, disposing of or otherwise dealing with or diminishing assets of Great Center up to the value of US$4.5 million (the “Injunction Order”). The relevant bank, the lawyers of Great Center and other relevant persons have been notified of the Injunction Order. The Injunction Order remained valid up to and including 11 July 2003 on which date the Injunction Order was continued until further order or final determination of the Great Center Action.
(ii) The writ of summons issued on 2 July 2003 in relation to the claim against Great Center for the repayment of US$4.5 million was amended on 10 July 2004 (the “Amended Writ”) to include the claims for (i) the repayment of HK$12.8 million remitted from a bank account of the Company to a bank account in the name of Great Center on or about 17 April 2003; and (ii) the repayment of HK$22.0 million remitted from a bank account of the Company to a bank account in the name of Modern Shine Enterprises Limited (“Modern Shine”), a company incorporated in the British Virgin Islands, on or about 22 April 2003, interest thereon, damages and costs of legal proceedings. The sum of claims under the Amended Writ amounts to approximately HK$69.9 million (the “Great Center Claim”). The Amended Writ also includes a bank in Hong Kong, Modern Shine, certain former executive directors, officers and employees of the Group, and all directors or authorised signatories of Great Center and Modern Shine as defendants (the “Defendants”) for the purposes of seeking orders against them for the disclosure of documents and/or information. An application was made on 10 July 2003 to the High Court for an order (the “Disclosure Order”) that the Defendants disclose to the Company and Merchants HK all relevant information and documents relating to the transfers of the amounts comprising the Great Center Claim. The Disclosure Order was granted by the High Court on 18 July 2003.
(iii) Solicitors instructed by the Directors have pursued the claim against Great Center and Modern Shine further and obtained the following directions from the court:
(a) The Company do file and serve its list of documents by 21 March 2005;
(b) Great Center and Modern Shine do file and serve their lists of documents by 28 March 2005;

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APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

(c) There be inspection of documents by 11 April 2005;
(d) The parties do exchange signed witness statements of facts within 25 April 2005; and
(e) The application for leave to set the case down for trial be adjourned to 25 April 2005 at 10:00 a.m. before the Listing Clerk for fixing an appointment before the Listing Master.

The Company and Great Center have exchanged their lists of documents and solicitors for the Company have received copy documents from Great Center’s solicitors for inspection. Modern Shine has failed to comply with the direction to file and serve its list of documents. Solicitors for the Company have taken out an application against Modern Shine for an order that it must serve and file its list of documents within 7 days of the order, failing which solicitors for the Company will further apply for an order that unless Modern Shine do comply with the direction of the court within 14 days, judgment be entered against it for the full amount claimed. Solicitors for the Company anticipate that judgment against Modern Shine could be entered by end of May 2005. After that it will be for the Company to trace the assets of Modern Shine in order to recover the judgment sum.

(iv) As a result of the information provided to the Company and Merchants HK under the Disclosure Order, the Receivers have discovered that, together with certain funds out of the Great Center Claim, an aggregate amount of approximately HK$37 million was transferred, by a series of transfers, by Great Center and Modern Shine to Win Victory Holdings Limited (“Win Victory”), a company incorporated in Hong Kong and Mr. Chau Ching Ngai, former substantial shareholder of the Company and the spouse of Ms. Mo Yuk Ping, and Ms. Mo Yuk Ping, former chairman of the Company, are the registered shareholders of 49% and 51%, respectively, of the issued share capital of Win Victory, without apparent legitimate commercial reason. Having obtained legal advice, the Receivers commenced legal proceedings on 23 August 2003 against Win Victory (the “Win Victory Action”) for the repayment of the HK$37 million, interest thereon, damages and costs of legal proceedings (the “Win Victory Claim”). It should be noted that should any of the amount claimed against Win Victory be recovered from Great Center and/or Modern Shine in the Great Center Claim such amounts will be taken into account in the Win Victory Action. In order to prevent the dissipation of Win Victory’s assets, the Company applied for, and obtained on 22 August 2003, from the High Court an injunction order against Win Victory (the “Win Victory Injunction Order”) to restrict Win Victory from, among other things, disposing of or otherwise dealing with or diminishing the value of its assets up to the value of HK$37 million. On 29 August 2003, the Win Victory Injunction Order was continued until further order or final determination of the Win Victory Action.

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APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

(v) Having obtained legal advice, the Receivers, on behalf of the Company, petitioned for the winding-up of Win Victory on the grounds that Win Victory is unable to pay its debts and/or it is just and equitable for Win Victory to be wound up and obtained an order from the High Court on 24 September 2003, among other things, appointing Messrs. Desmond Chung Seng Chiong and Roderick John Sutton of Ferrier Hodgson Limited of 14th Floor, Hong Kong Club Building, 3A Chater Road, Hong Kong as the provisional liquidators of Win Victory. In the first instance, this order would remain valid up to and including 7 October 2003, on which date the matter would be heard again by the High Court.
(vi) The appointment of Provisional Liquidators is continued by an order of the court made by Madam Justice Kwan on 7 October 2003 until the determination of the Winding Up Petition, which has been adjourned. Due to the lack of funds in Win Victory, the Provisional Liquidators have not undertaken an extensive investigation. The continuation of the Petition will enable a more thorough investigation of the flow of funds in and out of Win Victory. The Petition is being opposed by Mr. Chau Ching Ngai. Solicitors for the Company will continue with the Winding Up proceedings.
(vii) Solicitors for the Company issued a writ of Summons on 17 December 2004 against Mr. Tsoi Hon Chung and his son Mr. Tsoi Chun Bun for the return of all statutory books, records and documents of Park Well Group on the basis that on 15 July 2003, those documents were sent by Secretaries Limited to Mr. Tsoi Chun Bun as the agent of Mr. Tsoi Hon Chun, who was at the material times the sole director of Park Well. The Company has a copy of the signed receipt by Mr. Tsoi Chun Bun for the above documents. Both Mr. Tsoi Hon Chun and Mr. Tsoi Chun Bun deny the receipt and/or receipt as agent of such statutory books and records in their Defence filed in February 2005. Solicitors for the Company have taken out a Summons for Directions for the exchange of lists of documents and witness statements in order to set the case down for trial.

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APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

PLEDGE OF ASSETS

The Group The Company 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 (a) Banking facilities of HK$8 million (2003: Nil) granted by a bank and secured by bank deposits of the Group 8,000 — — — (b) Other loan facilities of HK$15 million (2003: Nil) granted by a financial institution and secured by floating charges over: — Trade and other receivables 6,853 — 218 — — Bank balances and cash 6,917 — 5,566 — 13,770 — 5,784 — 21,770 — 5,784 —	The Group The Company 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 (a) Banking facilities of HK$8 million (2003: Nil) granted by a bank and secured by bank deposits of the Group 8,000 — — — (b) Other loan facilities of HK$15 million (2003: Nil) granted by a financial institution and secured by floating charges over: — Trade and other receivables 6,853 — 218 — — Bank balances and cash 6,917 — 5,566 — 13,770 — 5,784 — 21,770 — 5,784 —	The Group The Company 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 (a) Banking facilities of HK$8 million (2003: Nil) granted by a bank and secured by bank deposits of the Group 8,000 — — — (b) Other loan facilities of HK$15 million (2003: Nil) granted by a financial institution and secured by floating charges over: — Trade and other receivables 6,853 — 218 — — Bank balances and cash 6,917 — 5,566 — 13,770 — 5,784 — 21,770 — 5,784 —	The Group The Company 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 (a) Banking facilities of HK$8 million (2003: Nil) granted by a bank and secured by bank deposits of the Group 8,000 — — — (b) Other loan facilities of HK$15 million (2003: Nil) granted by a financial institution and secured by floating charges over: — Trade and other receivables 6,853 — 218 — — Bank balances and cash 6,917 — 5,566 — 13,770 — 5,784 — 21,770 — 5,784 —
6,853 6,917 13,770	— — —	218 5,566 5,784	— —
			—
21,770	—	5,784	—

In addition, at 31 December 2004, the Company’s interests in its subsidiaries had been pledged under floating charges to secure the other loan facilities granted by a financial institution to the Group.

FOREIGN EXCHANGE EXPOSURE

Since most business transactions conducted by the Group and payments made to suppliers are either in Hong Kong Dollars, or US Dollars, no use of financial instruments for hedging purposes is considered necessary.

EMPLOYEES AND REMUNERATION POLICY

As at 31 December 2004, the Group had 5 managerial, trading and administrative staffs in Hong Kong.

The Group remunerates its employees largely based on the prevailing industry practice.

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APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

MANAGEMENT DISCUSSION AND ANALYSIS OF ANNUAL REPORT 2005

BUSINESS REVIEW

Turnover of the Group for the year ended 31 December 2005 was approximately HK$68,393,000 (2004: HK$22,305,000), which was up 207% from that of last year.

Profit of HK$6,501,000 was recorded for the current year, as compared to a loss of HK$36,299,000 in 2004.

Trading in base metals

Turnover for this sector for the year was approximately HK$44,937,000 (2004: HK$13,522,000). A growth of 232% was recorded as compared with last year. Following the resumption of the base metals trading business in last year, the Group has scaled up its operation in this sector in the year 2005. The base metals trading business segment contributed HK$110,000 (2004: HK$121,000) to the Group’s operating profits which represented a drop of 9%.

Trading in fabric products and other merchandises

The Group’s turnover for fabric products and other merchandises trading business segment reached HK$23,456,000 during the year (2004: HK$8,783,000), an increase of 167% over that of 2004. Segment profit attributable to the Group during the year amounted to HK$966,000 (2004: HK$393,000), an increase of 146% as compared with 2004. The Group’s management has been taking active actions to expand the operations under the constraints of available working capital.

BUSINESS OUTLOOK

With a view to expanding the Group’s business operations and enhancing its financial performance, the Group and its controlling shareholder, Profit Harbour Investments Limited (“Profit Harbour”), entered into a deed of assignment on 12 April 2006. Pursuant to which Profit Harbour has conditionally agreed to acquire from the Group its receivable due from Great Center Limited of US$4.5 million (approximately HK$35.1 million) in full at its face value. The assignment of debt is conditional upon the approval by the independent shareholders at the forthcoming special general meeting.

The Company proposes to raise approximately HK$82.6 million before expenses by way of a rights issue.

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APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

During the year ended 31 December 2005, the Company entered into a heads of terms with the shareholders of an acquisition target in the PRC, which is engaged in the trading of electronic component business, to acquire their interests in the entire issued share capital of the target at a consideration which will be settled by issuance of convertible bonds by the Company. The Board considers that the proposed acquisition will keep the Company abreast of the lucrative growth opportunities that the PRC market presents, thereby strengthening the Company’s ability to meet the rising demand from its customers.

DIVIDEND

The Board does not recommend the payment of a dividend for the year ended 31 December 2005 (2004: Nil).

LITIGATION AND CONTINGENT LIABILITIES

Details of the material litigation and contingent liabilities are set out in note 24 to the financial statements, please refer to the section “Notes to the financial statements” under Appendix I of this circular.

PLEDGE OF ASSETS

Details of the pledge of assets are set out in note 25 to the financial statements, please refer to the section “Notes to the financial statements” under Appendix I of this circular.

LIQUIDITY AND FINANCIAL RESOURCES

As at 31 December 2005, the Group had secured other loans of HK$15 million (2004: HK$15 million), and bank balances and cash were at approximately HK$5,477,000 (2004: HK$14,929,000).

FOREIGN EXCHANGE EXPOSURE

EMPLOYEES AND REMUNERATION POLICY

As at 31 December 2005, the Group had 3 (2004: 5) managerial, administrative and trading staff in Hong Kong.

The Group remunerates its employees largely based on the prevailing industry practice.

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APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

MANAGEMENT DISCUSSION AND ANALYSIS OF INTERIM REPORT 2006

Revenue of the Group for the six months ended 30 June 2006 was approximately HK$5,788,000, which was less than the revenue for the same period last year of approximately HK$41,055,000. Loss for the period under review was approximately HK$6,094,000, as compared to a profit of approximately HK$10,532,000 for the six months ended 30 June 2005. Loss and earnings per share for the two six-month periods ended 30 June 2006 and 2005 were HK$1.48 cents and HK$2.55 cents respectively.

On 26 May 2006, the Group completed the assignment of the debt due from Great Center Limited of approximately US$4.5 million for cash at face value to Profit Harbour Investments Limited (“Profit Harbour”), which is the major shareholder of the Company.

The Company completed a rights issue on 14 July 2006, which raised gross proceeds of HK$82.6 million by issuing 826 million rights shares at HK$0.1 each.

Following the completion of the above exercises and the implementation of the resumption proposal of the Company, trading in the shares of the Company on the Stock Exchange of Hong Kong Limited (“Stock Exchange”) was resumed on 14 July 2006.

BUSINESS REVIEW

Trading in base metals

Turnover for the six months ended 30 June 2006 was approximately HK$5,788,000 (2005: HK$23,015,000), which represented a drop of 75% from the same period of last year. The performance of the Group’s trading activities was affected by the uncertainties of the resumption process. The base metal trading business segment contributed a profit of HK$15,000 (2005: HK$83,000) to the Group’s operating profits which represented a drop of 82%.

Trading in fabric products and other merchandises

The Group recorded nil revenue from fabric products and other merchandises trading business segment for the six months ended 30 June 2006 (2005: HK$18,040,000). Segmental profit of HK$65,000 (2005: HK$768,000) was recorded. Segmental profit for the period under review comprised bank interest income.

DIVIDEND

The Board does not recommend the payment of an interim dividend for the six months ended 30 June 2006 (2005: Nil).

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APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

LIQUIDITY AND FINANCIAL RESOURCES

As at 30 June 2006, the Group had no outstanding borrowings (31 December 2005: secured other loans of HK$15 million). Cash balance was approximately HK$22,440,000 (31 December 2005: HK$5,477,000).

FOREIGN EXCHANGE EXPOSURE

Since most business transactions conducted by the Group and payment made to suppliers are either made in Hong Kong Dollars, US Dollars or Renminbi, no use of financial instruments for hedging purposes is considered necessary.

DIRECTORS’ INTERESTS IN SHARES, UNDERLYING SHARES AND DEBENTURES

As at 30 June 2006, the interests and short positions held by each director and chief executive of the Company and its subsidiaries in the shares, underlying shares and debentures of the Company or its associated corporations, if any, (within the meaning of Part XV of the Securities and Futures Ordinance (“SFO”)), as recorded in the register required to be kept by the Company under section 352 of the SFO or otherwise notified to the Company and The Stock Exchange of Hong Kong Limited (“Stock Exchange”) pursuant to the Model Code for Securities Transactions by Directors of Listed Companies (“Model Code”) contained in the Rules Governing the Listing of Securities on the Stock Exchange (“Listing Rules”), were as follows:

(a) Long positions in ordinary shares of the Company (the “Shares”)

		Number of
		ordinary		% of issued
	Name of director	shares	Capacity and nature	share capital
	Yue Jialin (“Mr. Yue”)	262,602,000	Interest of controlled	63.58%
			corporation	(Note 2)
			(Note 1)
(b)	Long position in Rights	Shares (Note 3)
		Number of
		ordinary		% of issued
	Name of director	shares	Capacity and nature	share capital
	Mr. Yue	826,000,000	Interest of controlled	66.67%
			corporation	(Note 5)
			(Note 4)

— 139 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

APPENDIX II

Notes:

These shares are registered in the name of, and beneficially owned by, Profit Harbour Investments Limited (“Profit Harbour”), a company incorporated in the British Virgin Islands, the entire issued share capital of which is beneficially owned by Mr. Yue.
Such percentage holding is calculated on the basis of the Company’s issued share capital of 413,000,000 Shares as at 30 June 2006.
Rights Shares refer to the 826,000,000 new Shares offered by the Company on the basis of two new Shares for every one Share held by its shareholders pursuant to the prospectus documents of the Company dated 20 June 2006 (the “Rights Issue”).
These Shares when registered will be in the name of and beneficially owned by Profit Harbour.
Such percentage holding is calculated on the basis of the Company’s issued share capital of 1,239,000,000 Shares as enlarged by the Rights Issue.

Save as disclosed above, none of the directors or chief executives of the Company or any of its subsidiaries had any interest or short position in shares, underlying shares or debentures of the Company or any of its associated corporations as at 30 June 2006, which is discloseable as per the above.

SHARE OPTIONS

No options were granted to the directors during the period under review and no options were held by the directors as at 30 June 2006.

ARRANGEMENTS TO PURCHASE SHARES OR DEBENTURES

Save as disclosed under the section headed “SHARE OPTIONS” and Note 19 in “Notes to the condensed financial statements for the six months ended 30 June 2006” under Appendix I of this circular (“POST BALANCE SHEET EVENTS”), at no time during the period under review was the Company or any of its subsidiaries a party to any arrangements to enable the directors of the Company to acquire benefits by means of the acquisition of shares in, or debentures of, the Company or any other body corporate.

— 140 —

APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

SUBSTANTIAL SHAREHOLDERS

As at 30 June 2006, the following persons, other than a director or chief executive of the Company or any of its subsidiaries, were interested or had short positions in more than 5% of the shares and underlying shares of the Company or its subsidiaries according to the register required to be kept under section 336 of the SFO in the respective amounts as follows:-

(a) Long position in ordinary shares of the Company (the “Shares”)

		Capacity	Number of	% of issued
Name	of shareholder	and nature	ordinary shares	share capital
Profit	Harbour (Note 1)	Beneficial owner	262,602,000	63.58%
				(Note 2)

(b) Long position in Rights Shares (Note 3)

			% of issued
	Capacity	Number of	share capital
Name of Shareholders	and nature	ordinary shares	(Note 4)
Profit Harbour (Note 1)	Beneficial owner	826,000,000	66.67%
		(Note 5)
Sun Hung Kai International	Beneficial owner	300,796,000	24.28%
Limited (Note 5)		(Note 5)
Sun Hung Kai & Co. Limited	Corporate	300,796,000	24.28%
(Note 6)	Interests (interest	(Note 10)
	of controlled
	corporation)
Allied Properties (H.K.) Limited	Corporate	300,796,000	24.28%
(Note 7)	Interests (interest	(Note 10)
	of controlled
	corporation)
Allied Group Limited (Note 8)	Corporate	300,796,000	24.28%
	Interests (interest	(Note 10)
	of controlled
	corporation)
Lee & Lee Trust (Note 9)	Corporate	300,796,000	24.28%
	Interests (interest	(Note 10)
	of controlled
	corporation)

— 141 —

APPENDIX II

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

			% of issued
	Capacity and	Number of	share capital
Name of Shareholders	nature	ordinary shares	(Note 4)
Sun Hung Kai International	Beneficial owner	300,796,000	24.28%
Limited (Note 5)		(Note 5)
Sun Hung Kai & Co. Limited	Corporate	300,796,000	24.28%
(Note 6)	Interests (interest	(Note 10)
	of controlled
	corporation)
Allied Properties (H.K.) Limited	Corporate	300,796,000	24.28%
(Note 7)	Interests (interest	(Note 10)
	of controlled
	corporation)
Allied Group Limited (Note 8)	Corporate	300,796,000	24.28%
	Interests (interest	(Note 10)
	of controlled
	corporation)
Lee & Lee Trust (Note 9)	Corporate	300,796,000	24.28%
	Interests (interest	(Note 10)
	of controlled
	corporation)

Notes:

The entire issued share capital of Profit Harbour is owned by Mr. Yue.
Such percentage holding is calculated on the basis of the Company’s issued share capital of 413,000,000 Shares as at 30 June 2006.
Rights Shares refer to the 826,000,000 new Shares offered by the Company on the basis of two new Shares for every one Share held by the Shareholders pursuant to the prospectus documents of the Company dated 20 June 2006 (the “Rights Issue”).
Such percentage holding is calculated on the basis of the Company’s issued share capital of 1,239,000,000 Shares as enlarged by the Rights Issue.
The interest of Sun Hung Kai International Limited (“SHKI”), the underwriter to the Rights Issue, was subunderwritten to the extent of 300,796,000 Rights Shares by Profit Harbour. In addition, Profit Harbour had undertaken to subscribe for its full entitlement under the Rights Issue which, together with its subunderwriting commitment, made up its interests in the 826,000,000 Rights Shares.

— 142 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

APPENDIX II

SHKI is a wholly owned subsidiary of Sun Hung Kai Securities Limited, which in turn is a wholly owned subsidiary of Sun Hung Kai & Co. Limited. Accordingly, both Sun Hung Kai Securities Limited and Sun Hung Kai & Co. Limited are deemed to have the same long position and short position as SHKI under the SFO.
Sun Hung Kai & Co. Limited is a non wholly-owned subsidiary of AP Emerald Limited (“APE”), APE is a wholly-owned subsidiary of AP Jade Limited which in turn is a wholly-owned subsidiary of Allied Properties (H.K.) Limited (“APL”). Accordingly, APL is deemed to have the same long position and short position as SHKI under the SFO.
APL is a non wholly-owned subsidiary of Allied Group Limited (“AGL”). Accordingly, AGL is deemed to have the same long and short position as SHKI under the SFO.
Mr. Lee Seng Hui, Ms. Lee Su Hwei and Mr. Lee Seng Huang are the trustees of the Lee & Lee Trust (“LLTrust”), being a discretionary trust. LL Trust owned approximately 40.61% interest in the issued share capital of AGL as at 11 May 2006. Accordingly, LL Trust is deemed to have the same long position and short position as SHKI under the SFO.
The figure refers to the same interest of SHKI in the 300,769,000 Rights Shares.

Save as disclosed above, no other person had interest or short position in the shares and underlying shares of the Company or its subsidiaries, which are recorded in the register required to be kept by the Company pursuant to section 336 of the SFO as at 30 June 2006, which is discloseable as per the above.

PURCHASE, SALE OR REDEMPTION OF THE COMPANY’S LISTED SECURITIES

During the six months ended 30 June 2006, neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s listed securities.

EMPLOYEES AND REMUNERATION POLICY

As at 30 June 2006, the Group had 3 managerial, trading and administrative staffs in Hong Kong.

The Group remunerates its employees largely based on the prevailing industry practice.

COMPLIANCE WITH THE CODE ON CORPORATE GOVERNANCE PRACTICES OF THE HONG KONG STOCK EXCHANGE LIMITED

For the six months ended 30 June 2006, the Company had adopted practices which complied with the provisions of the Code on Corporate Governance Practices as set out in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”). At a special general meeting of the Company held on 23 May 2006, resolution had been passed to amend the Bye-Laws of the Company to ensure the stated requirements in the Bye-Laws fully comply with the principles of Appendix 14.

— 143 —

APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

COMPLIANCE WITH THE MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORS AND SUPERVISORS OF THE COMPANY

The Company has adopted the “Model Code for Securities Transactions by Directors of Listed Issuers” as set out in Appendix 10 of the Listing Rules as the code (the “Code”) for dealing in securities of the Company by the Directors and supervisors. Having made specific enquiry, the Company confirmed that all Directors and supervisors had complied with the required standard as set out in the Code for the six months ended 30 June 2006.

Audit Committee

The Audit Committee currently comprises three Independent Non-Executive Directors namely Mr. Wong Wing Kuen, Albert, Mr. Tsui Robert Che Kwong and Mr. Yang Weiming. The committee meets not less than twice a year.

The Audit Committee has reviewed the Group’s interim results.

Remuneration Committee

The Remuneration Committee currently comprises three Independent Non-Executive Directors namely Mr. Wong Wing Kuen, Albert, Mr. Tsui Robert Che Kwong and Mr. Yang Weiming. The committee meets not less than once a year.

— 144 —

APPENDIX III

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

The following is the text of an accountants’ report from Graham H.Y. Chan & Co., the reporting accountants, on the unaudited pro forma financial information.

==> picture [38 x 38] intentionally omitted <==

GRAHAM H.Y. CHAN & CO. CERTIFIED PUBLIC ACCOUNTANTS HONG KONG

Unit 1, 15/F., The Center, 99 Queen’s Road Central, Hong Kong

ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION

TO THE DIRECTORS OF SHANGHAI MERCHANTS HOLDINGS LIMITED

We report on the unaudited pro forma financial information of Shanghai Merchants Holdings Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) set out on pages 147 to 163 under the headings of “Pro Forma Financial Information of the Group” in Appendix III of the Company’s circular dated 12 December 2006, in connection with the acquisition of 48,373,197 ordinary shares in Mount Gibson Iron Limited, the proposed rights issue in the proportion of one rights share for every existing share held on the record date and placing of new shares (the “Circular”). The unaudited pro forma financial information has been prepared by the directors of the Company, for illustrative purposes only, to provide information about how the acquisition, the proposed rights issue and the placing might have affected the relevant financial information of the Group. The basis of preparation of the unaudited pro forma financial information is set out on pages 147 to 163 of the Circular.

Respective Responsibilities of Directors of the Company and Reporting Accountants

It is the responsibility solely of the directors of the Company to prepare the unaudited pro forma financial information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to AG7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants.

It is our responsibility to form an opinion, as required by paragraph 4.29(7) of the Listing Rules, on the unaudited pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

— 145 —

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

Basis of Opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements (“HKSIR”) 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants. Our work consisted primarily of comparing the unadjusted financial information with source documents, considering the evidence supporting the adjustments and discussing the unaudited pro forma financial information with the directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the unaudited pro forma financial information has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 4.29 (1) of the Listing Rules.

The unaudited pro forma financial information is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company, and because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of:

the financial position of the Group as at 30 June 2006 or any future date; or
the result and cashflow of the Group for the year ended 31 December 2005 or any future periods.

Opinion

In our opinion:

a. the unaudited pro forma financial information has been properly compiled by the directors of the Company on the basis stated;
b. such basis is consistent with the accounting policies of the Group; and
c. the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

Graham H.Y. Chan & Co.

Certified Public Accountants (Practising) Hong Kong

12 December 2006

— 146 —

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION

Introduction

The accompanying unaudited pro forma financial information of the Group has been prepared to illustrate the effect of the acquisition of 48,373,197 ordinary shares in Mount Gibson Iron Limited (“Mount Gibson”), the proposed rights issue in the proportion of one rights share for every existing share held on the Record Date and the placing of 800,000,000 placing shares. The acquisition consideration of HK$244,474,752 will be settled by the proceeds from the proposed rights issue.

Pro forma financial information on the following five scenarios are presented:

Only rights issue
Only placing
Only acquisition and rights issue
Only rights issue and placing
Acquisition, rights issue and placing

— 147 —

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

I. UNAUDITED PRO FORMA FINANCIAL INFORMATION - ONLY RIGHTS ISSUE

Unaudited pro forma statement of adjusted consolidated net tangible assets after rights

issue

The following unaudited pro forma statement of adjusted consolidated net tangible assets of the Group is prepared based on the unaudited consolidated net tangible assets value of the Group as at 30 June 2006, as shown in the interim report of the Group for the six months ended 30 June 2006, and adjusted to reflect the effect of the proposed rights issue.

The unaudited pro forma statement of adjusted consolidated net tangible asset of the Group is prepared for illustrative purposes only and because of its nature, it may not give a true picture of the financial position of the Group for any financial periods.

Unaudited consolidated		Unaudited proforma
net tangible assets		adjusted consolidated net
of the Group as at	Estimated net proceeds	tangible assets immediately
30 June 2006	from the rights issue	after the rights issue
	(note 2)
HK$’000	HK$’000	HK$’000
15,787	374,000	389,787
Unaudited		Unaudited proforma
consolidated net		adjusted consolidated
tangible assets		net tangible assets
per share as at		per share immediately
30 June 2006		after the rights issue
(note 1)		(note 3)
HK$		HK$
0.038		0.23

Note:

The calculation of the unaudited consolidated net tangible assets per share is based on the unaudited consolidated net tangible assets of approximately HK$15,787,000, as shown in the interim report of the Group for the six months ended 30 June 2006 and 413,000,000 shares in issue as at 30 June 2006.
The estimated net proceeds from the proposed rights issue are based on 1,259,000,000 rights shares at a price of HK$0.30 per rights share, after deducting the estimated underwriting fees and other related expenses amounting to approximately HK$3.7 million to be incurred by the Company.
The unaudited proforma adjusted consolidated net tangible assets per share immediately after the rights issue is calculated based on the 413,000,000 shares in issue as at 30 June 2006 together with the 1,259,000,000 rights shares.

— 148 —

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

II. UNAUDITED PRO FORMA FINANCIAL INFORMATION - ONLY PLACING

A Unaudited pro forma consolidated balance sheet of the group after placing

The following unaudited pro forma consolidated balance sheet of the Group is prepared based on the unaudited consolidated balance sheet of the Group as at 30 June 2006, as shown in the interim report of the Group for the six months ended 30 June 2006, and adjusted to reflect the effect of the placing as if the placing had been completed on 30 June 2006.

The unaudited pro forma consolidated balance sheet of the Group is prepared for illustrative purposes only and because of its nature, it may not give a true picture of the financial position of the Group for any financial periods.

The Group as at 30 June 2006 Pro forma adjustments for placing Unaudited pro forma consolidated balance sheet of the Group after the placing HK$’000 HK$’000 HK$’000 Note 4 Current assets Trade and other receivables 748 748 Pledged bank deposits 2,014 2,014 Bank balances and cash 20,426 229,500 249,926 23,188 252,688 Current liabilities Trade and other payables 7,367 7,367 Tax payables 34 34 7,401 7,401 Net current assets 15,787 245,287 Net assets 15,787 245,287 Capital and reserves Share capital 41,300 80,000 121,300 Reserves (25,513) 149,500 123,987 15,787 245,287	The Group as at 30 June 2006 Pro forma adjustments for placing Unaudited pro forma consolidated balance sheet of the Group after the placing HK$’000 HK$’000 HK$’000 Note 4 Current assets Trade and other receivables 748 748 Pledged bank deposits 2,014 2,014 Bank balances and cash 20,426 229,500 249,926 23,188 252,688 Current liabilities Trade and other payables 7,367 7,367 Tax payables 34 34 7,401 7,401 Net current assets 15,787 245,287 Net assets 15,787 245,287 Capital and reserves Share capital 41,300 80,000 121,300 Reserves (25,513) 149,500 123,987 15,787 245,287	The Group as at 30 June 2006 Pro forma adjustments for placing Unaudited pro forma consolidated balance sheet of the Group after the placing HK$’000 HK$’000 HK$’000 Note 4 Current assets Trade and other receivables 748 748 Pledged bank deposits 2,014 2,014 Bank balances and cash 20,426 229,500 249,926 23,188 252,688 Current liabilities Trade and other payables 7,367 7,367 Tax payables 34 34 7,401 7,401 Net current assets 15,787 245,287 Net assets 15,787 245,287 Capital and reserves Share capital 41,300 80,000 121,300 Reserves (25,513) 149,500 123,987 15,787 245,287
23,188 7,367 34 7,401 15,787		252,688
		7,367 34
		7,401
		245,287
15,787		245,287
41,300 (25,513)	80,000 149,500	121,300 123,987
15,787		245,287

Notes:

The adjustment represents the estimated net proceeds from the placing of 800,000,000 placing shares at a price of HK$0.30 per placing share, after deducting the estimated placing commission and other related expenses amounting to approximately HK$10.5 million to be incurred by the Company. The net proceeds from the placing are estimated to be HK$229.5 million. This gives rise to an increase in share capital of HK$80 million and share premium of HK$149.5 million.

— 149 —

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

B. Unaudited pro forma statement of adjusted consolidated net tangible assets after placing

		Unaudited
Unaudited		proforma adjusted
consolidated net		consolidated net
tangible assets of		tangible assets
the Group as at	Estimated net proceeds	immediately after
30 June 2006	from the placing	the placing
	(note 6)
HK$’000	HK$’000	HK$’000
15,787	229,500	245,287
		Unaudited
Unaudited		proforma adjusted
consolidated net		consolidated net
tangible assets		tangible assets per
per share as at		share immediately
30 June 2006		after the placing
(note 5)		(note 7)
HK$		HK$
0.038		0.20

Note:

The calculation of the unaudited consolidated net tangible assets per share is based on the unaudited consolidated net tangible assets of approximately HK$15,787,000, as shown in the interim report of the Group for the six months ended 30 June 2006 and 413,000,000 shares in issue as at 30 June 2006.
The estimated net proceeds from the placing are based on 800,000,000 placing shares at a price of HK$0.30 per placing share, after deducting the estimated placing commission and other related expenses amounting to approximately HK$10.5 million to be incurred by the Company.
The unaudited proforma adjusted consolidated net tangible assets per share immediately after the placing is calculated based on the 413,000,000 shares in issue as at 30 June 2006 together with the 800,000,000 placing shares.

— 150 —

APPENDIX III PRO FORMA FINANCIAL INFORMATION OF THE GROUP

III. UNAUDITED PRO FORMA FINANCIAL INFORMATION - ONLY ACQUISITION AND RIGHTS ISSUE

The unaudited pro forma consolidated balance sheet of the Group is based on the unaudited consolidated balance sheet of the Group as at 30 June 2006, which has been extracted from the interim report of the Group for the six months ended 30 June 2006, after making such pro forma adjustments relating the acquisition and the proposed rights issue as if the acquisition and the proposed rights issue had been completed on 30 June 2006.

The unaudited pro forma consolidated income statement and cash flow statement of the Group are based on the audited consolidated income statement and cash flow statement for the year ended 31 December 2005, which have been extracted from the annual report of the Group for year ended 31 December 2005, after making such pro forma adjustments relating the acquisition and the proposed rights issue as if the acquisition and the proposed rights issue had been completed on 1 January 2005.

The unaudited pro forma financial information is prepared to provide information on the Group as a result of completion of the acquisition and the proposed rights issue. As it is prepared for illustrative purposes only, it may not give a true picture of the financial position or the results of the Group following completion of the acquisition and the proposed rights issue.

— 151 —

APPENDIX III PRO FORMA FINANCIAL INFORMATION OF THE GROUP

A. Unaudited pro forma consolidated balance sheet of the group after acquisition and rights issue

The Group as at 30 June 2006 Pro forma adjustments for proposed rights issue Unaudited pro forma consolidated balance sheet of the Group after the rights issue Pro forma adjustments for the acquisition Unaudited pro forma consolidated balance sheet after the acquisition and rights issue HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Note 8 Note 9 Non-current assets Available-for-sale financial assets — — 244,875 244,875 Current assets Trade and other receivables 748 748 748 Pledged bank deposits 2,014 2,014 2,014 Bank balances and cash 20,426 374,000 394,426 (244,875) 149,551 23,188 397,188 152,313 Current liabilities Trade and other payables 7,367 7,367 7,367 Tax payables 34 34 34 7,401 7,401 7,401 Net current assets 15,787 389,787 144,912 Net assets 15,787 389,787 389,787 Capital and reserves Share capital 41,300 125,900 167,200 167,200 Reserves (25,513) 248,100 222,587 222,587 15,787 389,787 389,787	The Group as at 30 June 2006 Pro forma adjustments for proposed rights issue Unaudited pro forma consolidated balance sheet of the Group after the rights issue Pro forma adjustments for the acquisition Unaudited pro forma consolidated balance sheet after the acquisition and rights issue HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Note 8 Note 9 Non-current assets Available-for-sale financial assets — — 244,875 244,875 Current assets Trade and other receivables 748 748 748 Pledged bank deposits 2,014 2,014 2,014 Bank balances and cash 20,426 374,000 394,426 (244,875) 149,551 23,188 397,188 152,313 Current liabilities Trade and other payables 7,367 7,367 7,367 Tax payables 34 34 34 7,401 7,401 7,401 Net current assets 15,787 389,787 144,912 Net assets 15,787 389,787 389,787 Capital and reserves Share capital 41,300 125,900 167,200 167,200 Reserves (25,513) 248,100 222,587 222,587 15,787 389,787 389,787	The Group as at 30 June 2006 Pro forma adjustments for proposed rights issue Unaudited pro forma consolidated balance sheet of the Group after the rights issue Pro forma adjustments for the acquisition Unaudited pro forma consolidated balance sheet after the acquisition and rights issue HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Note 8 Note 9 Non-current assets Available-for-sale financial assets — — 244,875 244,875 Current assets Trade and other receivables 748 748 748 Pledged bank deposits 2,014 2,014 2,014 Bank balances and cash 20,426 374,000 394,426 (244,875) 149,551 23,188 397,188 152,313 Current liabilities Trade and other payables 7,367 7,367 7,367 Tax payables 34 34 34 7,401 7,401 7,401 Net current assets 15,787 389,787 144,912 Net assets 15,787 389,787 389,787 Capital and reserves Share capital 41,300 125,900 167,200 167,200 Reserves (25,513) 248,100 222,587 222,587 15,787 389,787 389,787	The Group as at 30 June 2006 Pro forma adjustments for proposed rights issue Unaudited pro forma consolidated balance sheet of the Group after the rights issue Pro forma adjustments for the acquisition Unaudited pro forma consolidated balance sheet after the acquisition and rights issue HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Note 8 Note 9 Non-current assets Available-for-sale financial assets — — 244,875 244,875 Current assets Trade and other receivables 748 748 748 Pledged bank deposits 2,014 2,014 2,014 Bank balances and cash 20,426 374,000 394,426 (244,875) 149,551 23,188 397,188 152,313 Current liabilities Trade and other payables 7,367 7,367 7,367 Tax payables 34 34 34 7,401 7,401 7,401 Net current assets 15,787 389,787 144,912 Net assets 15,787 389,787 389,787 Capital and reserves Share capital 41,300 125,900 167,200 167,200 Reserves (25,513) 248,100 222,587 222,587 15,787 389,787 389,787	The Group as at 30 June 2006 Pro forma adjustments for proposed rights issue Unaudited pro forma consolidated balance sheet of the Group after the rights issue Pro forma adjustments for the acquisition Unaudited pro forma consolidated balance sheet after the acquisition and rights issue HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Note 8 Note 9 Non-current assets Available-for-sale financial assets — — 244,875 244,875 Current assets Trade and other receivables 748 748 748 Pledged bank deposits 2,014 2,014 2,014 Bank balances and cash 20,426 374,000 394,426 (244,875) 149,551 23,188 397,188 152,313 Current liabilities Trade and other payables 7,367 7,367 7,367 Tax payables 34 34 34 7,401 7,401 7,401 Net current assets 15,787 389,787 144,912 Net assets 15,787 389,787 389,787 Capital and reserves Share capital 41,300 125,900 167,200 167,200 Reserves (25,513) 248,100 222,587 222,587 15,787 389,787 389,787
748 2,014 20,426 23,188 7,367 34 7,401 15,787	374,000	748 2,014 394,426 397,188 7,367 34 7,401 389,787	(244,875)	748 2,014 149,551
				152,313
				7,367 34
				7,401
				144,912
15,787		389,787		389,787
41,300 (25,513)	125,900 248,100	167,200 222,587		167,200 222,587
15,787		389,787		389,787

— 152 —

APPENDIX III PRO FORMA FINANCIAL INFORMATION OF THE GROUP

B. Unaudited pro forma consolidated income statement of the group after acquisition and rights issue

					Unaudited
					pro forma
			Unaudited		consolidated
			pro forma		income
	The Group		consolidated		statement
	for the	Pro forma	income	Pro forma	after the
	year ended	adjustments	statement	adjustments	acquisition
	31 December	for proposed	after the	for the	and rights
	2005	rights issue	rights issue	acquisition	issue
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
				Note 10
Turnover	68,393		68,393		68,393
Cost of sales	(66,113)		(66,113)		(66,113)
Gross profit	2,280		2,280		2,280
Other income	474		474		474
Credit arising from a
scheme of arrangement
with creditors	15,421		15,421		15,421
Distribution costs	(1,353)		(1,353)		(1,353)
Administrative expenses	(8,539)		(8,539)		(8,539)
Profit from operations	8,283		8,283		8,283
Finance costs	(1,744)		(1,744)		(1,744)
Profit before taxation	6,539		6,539		6,539
Taxation	(38)		(38)		(38)
Profit for the period	6,501		6,501		6,501

— 153 —

APPENDIX III PRO FORMA FINANCIAL INFORMATION OF THE GROUP

C. Unaudited pro forma consolidated cash flow statement of the group after acquisition and rights issue

					Unaudited
					pro forma
			Unaudited		consolidated
			pro forma		cash flow
	The Group		consolidated		statement
	for the year	Pro forma	cash flow	Pro forma	after the
	ended	adjustments	statement	adjustments	acquisition
	31 December	for proposed	after the	for the	and rights
	2005	rights issue	rights issue	acquisition	issue
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
		Note 8		Note 9
Operating activities
Profit from operations	8,283		8,283		8,283
Adjustments for:
Depreciation and
amortisation	7		7		7
Loss on disposal of
property, plant and
equipment	16		16		16
Credit arising from
scheme of arrangement
with creditors	(15,421)		(15,421)		(15,421)
Interest income	(160)		(160)		(160)
Operating cash flow before
working capital changes	(7,275)		(7,275)		(7,275)
Decrease in trade and
other receivables	5,050		5,050		5,050
Decrease in trade and
other payables	(5,619)		(5,619)		(5,619)
Cash used in operations	(7,844)		(7,844)		(7,844)
Interest paid	(1,744)		(1,744)		(1,744)
Hong Kong profits tax paid	(24)		(24)		(24)
Net cash used in operating
activities	(9,612)		(9,612)		(9,612)

— 154 —

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

					Unaudited
					pro forma
			Unaudited		consolidated
			pro forma		cash flow
	The Group		consolidated		statement
	for the year	Pro forma	cash flow	Pro forma	after the
	ended	adjustments	statement	adjustments	acquisition
	31 December	for proposed	after the	for the	and rights
	2005	rights issue	rights issue	acquisition	issue
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
		Note 8		Note 9
Investing activities
Purchase of available-for-
sale financial assets	—		—	(244,875)	(244,875)
Decrease in pledged
bank deposits	3,988		3,988		3,988
Interest received	160		160		160
Net cash from/(used in)
investing activities	4,148		4,148		(240,727)
Financing activities
Issue of rights share	—	374,000	374,000		374,000
Secured other loans raised	15,000		15,000		15,000
Repayment of other loans	(15,000)		(15,000)		(15,000)
Net cash from financing
activities	—		374,000		374,000
Net (decrease)/increase in
cash and cash equivalents	(5,464)		368,536		123,661
Cash and cash equivalents
at 1 January	6,929		6,929		6,929
Cash and cash equivalents
at 31 December	1,465		375,465		130,590

— 155 —

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

Note:

The adjustment represents the estimated net proceeds from the proposed rights issue of 1,259,000,000 rights shares at a price of HK$0.30 per rights share, after deducting the estimated underwriting fees and other related expenses amounting to approximately HK$3.7 million to be incurred by the Company. The net proceeds from the rights issue are estimated to be HK$374 million of which approximately HK$244,475,000 will be applied for payment of the acquisition. This gives rise to an increase in share capital of HK$125,900,000 and share premium of HK$248,100,000.

This adjustment is not expected to have a continuing effect on the Group.

The adjustment reflects the cost of acquisition including the consideration of approximately HK$244,475,000 and direct legal and professional fee of approximately HK$400,000 relating to the acquisition of 48,373,197 ordinary shares in Mount Gibson, representing approximately 8.79% interest in Mount Gibson as at 7 November 2006.

This adjustment is not expected to have a continuing effect on the Group.

No adjustment has been made to the consolidated income statement to give effect of the acquisition since:
no dividend has been paid or declared by Mount Gibson for the three years ended 30 June 2006; and
unrealised gain and losses arising from changes in the fair value of available-for-sale financial assets are recognised in investment revaluation reserve in accordance with HKAS 39.

— 156 —

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

IV. UNAUDITED PRO FORMA FINANCIAL INFORMATION - ONLY RIGHTS ISSUE AND PLACING
A Unaudited pro forma consolidated balance sheet of the group after rights issue and placing

The following unaudited pro forma consolidated balance sheet of the Group is prepared based on the unaudited consolidated balance sheet of the Group as at 30 June 2006, as shown in the interim report of the Group for the six months ended 30 June 2006, and adjusted to reflect the effect of the proposed rights issue and placing as if the proposed rights issue and placing had been completed on 30 June 2006.

The Group as at 30 June 2006 Pro forma adjustments for proposed rights issue Unaudited pro forma consolidated balance sheet of the Group after the rights issue Pro forma adjustments for placing Unaudited pro forma consolidated balance sheet after the rights issue and placing HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Note 11 Note 12 Current assets Trade and other receivables 748 748 748 Pledged bank deposits 2,014 2,014 2,014 Bank balances and cash 20,426 374,000 394,426 229,500 623,926 23,188 397,188 626,688 Current liabilities Trade and other payables 7,367 7,367 7,367 Tax payables 34 34 34 7,401 7,401 7,401 Net current assets 15,787 389,787 619,287 Net assets 15,787 389,787 619,287 Capital and reserves Share capital 41,300 125,900 167,200 80,000 247,200 Reserves (25,513) 248,100 222,587 149,500 372,087 15,787 389,787 619,287	The Group as at 30 June 2006 Pro forma adjustments for proposed rights issue Unaudited pro forma consolidated balance sheet of the Group after the rights issue Pro forma adjustments for placing Unaudited pro forma consolidated balance sheet after the rights issue and placing HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Note 11 Note 12 Current assets Trade and other receivables 748 748 748 Pledged bank deposits 2,014 2,014 2,014 Bank balances and cash 20,426 374,000 394,426 229,500 623,926 23,188 397,188 626,688 Current liabilities Trade and other payables 7,367 7,367 7,367 Tax payables 34 34 34 7,401 7,401 7,401 Net current assets 15,787 389,787 619,287 Net assets 15,787 389,787 619,287 Capital and reserves Share capital 41,300 125,900 167,200 80,000 247,200 Reserves (25,513) 248,100 222,587 149,500 372,087 15,787 389,787 619,287	The Group as at 30 June 2006 Pro forma adjustments for proposed rights issue Unaudited pro forma consolidated balance sheet of the Group after the rights issue Pro forma adjustments for placing Unaudited pro forma consolidated balance sheet after the rights issue and placing HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Note 11 Note 12 Current assets Trade and other receivables 748 748 748 Pledged bank deposits 2,014 2,014 2,014 Bank balances and cash 20,426 374,000 394,426 229,500 623,926 23,188 397,188 626,688 Current liabilities Trade and other payables 7,367 7,367 7,367 Tax payables 34 34 34 7,401 7,401 7,401 Net current assets 15,787 389,787 619,287 Net assets 15,787 389,787 619,287 Capital and reserves Share capital 41,300 125,900 167,200 80,000 247,200 Reserves (25,513) 248,100 222,587 149,500 372,087 15,787 389,787 619,287	The Group as at 30 June 2006 Pro forma adjustments for proposed rights issue Unaudited pro forma consolidated balance sheet of the Group after the rights issue Pro forma adjustments for placing Unaudited pro forma consolidated balance sheet after the rights issue and placing HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Note 11 Note 12 Current assets Trade and other receivables 748 748 748 Pledged bank deposits 2,014 2,014 2,014 Bank balances and cash 20,426 374,000 394,426 229,500 623,926 23,188 397,188 626,688 Current liabilities Trade and other payables 7,367 7,367 7,367 Tax payables 34 34 34 7,401 7,401 7,401 Net current assets 15,787 389,787 619,287 Net assets 15,787 389,787 619,287 Capital and reserves Share capital 41,300 125,900 167,200 80,000 247,200 Reserves (25,513) 248,100 222,587 149,500 372,087 15,787 389,787 619,287	The Group as at 30 June 2006 Pro forma adjustments for proposed rights issue Unaudited pro forma consolidated balance sheet of the Group after the rights issue Pro forma adjustments for placing Unaudited pro forma consolidated balance sheet after the rights issue and placing HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Note 11 Note 12 Current assets Trade and other receivables 748 748 748 Pledged bank deposits 2,014 2,014 2,014 Bank balances and cash 20,426 374,000 394,426 229,500 623,926 23,188 397,188 626,688 Current liabilities Trade and other payables 7,367 7,367 7,367 Tax payables 34 34 34 7,401 7,401 7,401 Net current assets 15,787 389,787 619,287 Net assets 15,787 389,787 619,287 Capital and reserves Share capital 41,300 125,900 167,200 80,000 247,200 Reserves (25,513) 248,100 222,587 149,500 372,087 15,787 389,787 619,287
23,188 7,367 34 7,401 15,787		397,188 7,367 34 7,401 389,787		626,688
				7,367 34
				7,401
				619,287
15,787		389,787		619,287
41,300 (25,513)	125,900 248,100	167,200 222,587	80,000 149,500	247,200 372,087
15,787		389,787		619,287

— 157 —

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

B. Unaudited pro forma statement of adjusted consolidated net tangible assets after the rights issue and placing

The following unaudited pro forma statement of adjusted consolidated net tangible assets of the Group after the rights issue and placing is prepared based on the unaudited consolidated net tangible assets value of the Group as at 30 June 2006, as shown in the interim report of the Group for the six months ended 30 June 2006, and adjusted to reflect the effect of the proposed rights issue and placing.

				Unaudited
Unaudited		Unaudited		proforma adjusted
consolidated		proforma adjusted		consolidated net
net tangible	Estimated	consolidated net		tangible assets
assets of the	net proceeds	tangible assets	Estimated net	immediately after
Group as at	from the	immediately after	proceeds from	the rights issue
30 June 2006	rights issue	the rights issue	the placing	and placing
	(note 11)		(note 12)
HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
15,787	374,000	389,787	229,500	619,287
		Unaudited		Unaudited
Unaudited		proforma adjusted		proforma adjusted
consolidated		consolidated net		consolidated net
net tangible		tangible assets		tangible assets per
assets per		per share		share immediately
share as at		immediately after		after the rights
30 June 2006		the rights issue		issue and placing
(note 13)		(note 14)		(note 15)
HK$		HK$		HK$
0.038		0.23		0.25

Note:

The adjustment represents the estimated net proceeds from the proposed rights issue of 1,259,000,000 rights shares at a price of HK$0.30 per rights share, after deducting the estimated underwriting fees and other related expenses amounting to approximately HK$3.7 million to be incurred by the Company. The net proceeds from the rights issue are estimated to be HK$374 million. This gives rise to an increase in share capital of HK$125,900,000 and share premium of HK$248,100,000.

— 158 —

APPENDIX III

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

The adjustment represents the estimated net proceeds from the placing of 800,000,000 placing shares at a price of HK$0.30 per placing share, after deducting the estimated placing commission and other related expenses amounting to approximately HK$10.5 million to be incurred by the Company. The net proceeds from the placing are estimated to be HK$229.5 million. This gives rise to an increase in share capital of HK$80 million and share premium of HK$149.5 million.
The calculation of the unaudited consolidated net tangible assets per share is based on the unaudited consolidated net tangible assets of approximately HK$15,787,000, as shown in the interim report of the Group for the six months ended 30 June 2006 and 413,000,000 shares in issue as at 30 June 2006.
The unaudited pro forma adjusted consolidated net tangible assets per share immediately after the rights issue is calculated based on the 413,000,000 shares in issue as at 30 June 2006 together with the 1,259,000,000 rights shares.
The unaudited pro forma adjusted consolidated net tangible assets per share immediately after the rights issue and placing is calculated based on the 413,000,000 shares in issue as at 30 June 2006 together with the 1,259,000,000 rights shares and 800,000,000 placing shares.

V. UNAUDITED PRO FORMA FINANCIAL INFORMATION - ACQUISITION, RIGHTS ISSUE AND PLACING

The following unaudited pro forma consolidated balance sheet of the Group after acquisition, rights issue and placing is prepared based on the unaudited proforma consolidated balance sheet after the acquisition and rights issue set out in the section III of this Appendix, after making such pro forma adjustments relating the placing as if the acquisition, the proposed rights issue and the placing had been completed on 30 June 2006.

The unaudited pro forma consolidated income statement and cash flow statement of the Group after acquisition, rights issue and placing are based on the unaudited proforma consolidated income statement and cash flow statement after the acquistion and rights issue set out in the section III of this Appendix, after making such pro forma adjustments relating the placing as if the acquisition, the proposed rights issue and placing had been completed on 1 January 2005.

The unaudited pro forma financial information of the Group after acquisition, rights issue and placing is prepared for illustrative purposes only and because of its nature, it may not give a true picture of the financial position or the results of the Group for any financial periods.

— 159 —

APPENDIX III PRO FORMA FINANCIAL INFORMATION OF THE GROUP

A Unaudited pro forma consolidated balance sheet of the group after acquisition, rights issue and placing

Unaudited pro forma consolidated balance sheet after the acquisition and rights issue Pro forma adjustments for placing Unaudited pro forma consolidated balance sheet after the acquisition, rights issue and placing HK$’000 HK$’000 HK$’000 Note 16 Non-current assets Available-for-sale financial assets 244,875 244,875 Current assets Trade and other receivables 748 748 Pledged bank deposits 2,014 2,014 Bank balances and cash 149,551 229,500 379,051 152,313 381,813 Current liabilities Trade and other payables 7,367 7,367 Tax payables 34 34 7,401 7,401 Net current assets 144,912 374,412 Net assets 389,787 619,287 Capital and reserves Share capital 167,200 80,000 247,200 Reserves 222,587 149,500 372,087 389,787 619,287	Unaudited pro forma consolidated balance sheet after the acquisition and rights issue Pro forma adjustments for placing Unaudited pro forma consolidated balance sheet after the acquisition, rights issue and placing HK$’000 HK$’000 HK$’000 Note 16 Non-current assets Available-for-sale financial assets 244,875 244,875 Current assets Trade and other receivables 748 748 Pledged bank deposits 2,014 2,014 Bank balances and cash 149,551 229,500 379,051 152,313 381,813 Current liabilities Trade and other payables 7,367 7,367 Tax payables 34 34 7,401 7,401 Net current assets 144,912 374,412 Net assets 389,787 619,287 Capital and reserves Share capital 167,200 80,000 247,200 Reserves 222,587 149,500 372,087 389,787 619,287	Unaudited pro forma consolidated balance sheet after the acquisition and rights issue Pro forma adjustments for placing Unaudited pro forma consolidated balance sheet after the acquisition, rights issue and placing HK$’000 HK$’000 HK$’000 Note 16 Non-current assets Available-for-sale financial assets 244,875 244,875 Current assets Trade and other receivables 748 748 Pledged bank deposits 2,014 2,014 Bank balances and cash 149,551 229,500 379,051 152,313 381,813 Current liabilities Trade and other payables 7,367 7,367 Tax payables 34 34 7,401 7,401 Net current assets 144,912 374,412 Net assets 389,787 619,287 Capital and reserves Share capital 167,200 80,000 247,200 Reserves 222,587 149,500 372,087 389,787 619,287
748 2,014 149,551 152,313 7,367 34 7,401 144,912	229,500	748 2,014 379,051
		381,813
		7,367 34
		7,401
		374,412
389,787		619,287
167,200 222,587	80,000 149,500	247,200 372,087
389,787		619,287

— 160 —

APPENDIX III PRO FORMA FINANCIAL INFORMATION OF THE GROUP

B. Unaudited pro forma consolidated income statement of the group after acquisition, rights issue and placing

			Unaudited
	Unaudited		pro forma
	pro forma		consolidated
	consolidated		income statement
	income statement		after the
	after the	Pro forma	acquisition,
	acquisition and	adjustments	rights issue
	rights issue	for placing	and placing
	HK$’000	HK$’000	HK$’000
Turnover	68,393		68,393
Cost of sales	(66,113)		(66,113)
Gross profit	2,280		2,280
Other income	474		474
Credit arising from a scheme
of arrangement with
creditors	15,421		15,421
Distribution costs	(1,353)		(1,353)
Administrative expenses	(8,539)		(8,539)
Profit from operations	8,283		8,283
Finance costs	(1,744)		(1,744)
Profit before taxation	6,539		6,539
Taxation	(38)		(38)
Profit for the period	6,501		6,501

— 161 —

APPENDIX III PRO FORMA FINANCIAL INFORMATION OF THE GROUP

C. Unaudited pro forma consolidated cash flow statement of the group after acquisition, rights issue and placing

			Unaudited
	Unaudited		pro forma
	pro forma		consolidated cash
	consolidated cash		flow statement
	flow statement		after the
	after the	Pro forma	acquisition,
	acquisition and	adjustments	rights issue
	rights issue	for placing	and placing
	HK$’000	HK$’000	HK$’000
		Note 16
Operating activities
Profit from operations	8,283		8,283
Adjustments for:
Depreciation and amortisation	7		7
Loss on disposal of property,
plant and equipment	16		16
Credit arising from scheme of
arrangement with creditors	(15,421)		(15,421)
Interest income	(160)		(160)
Operating cash flow before
working capital changes	(7,275)		(7,275)
Decrease in trade and other
receivables	5,050		5,050
Decrease in trade and other
payables	(5,619)		(5,619)
Cash used in operations	(7,844)		(7,844)
Interest paid	(1,744)		(1,744)
Hong Kong profits tax paid	(24)		(24)
Net cash used in operating
activities	(9,612)		(9,612)

— 162 —

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

			Unaudited
	Unaudited		pro forma
	pro forma		consolidated cash
	consolidated cash		flow statement
	flow statement		after the
	after the	Pro forma	acquisition,
	acquisition and	adjustments	rights issue
	rights issue	for placing	and placing
	HK$’000	HK$’000	HK$’000
		Note 16
Investing activities
Purchase of available-for-
sale financial assets	(244,875)		(244,875)
Decrease in pledged
bank deposits	3,988		3,988
Interest received	160		160
Net cash from/(used in)
investing activities	(240,727)		(240,727)
Financing activities
Issue of rights share	374,000		374,000
Issue of placing shares	—	229,500	229,500
Secured other loans raised	15,000		15,000
Repayment of other loans	(15,000)		(15,000)
Net cash from financing
activities	374,000		603,500
Net (decrease)/increase in
cash and cash equivalents	123,661		353,161
Cash and cash equivalents
at 1 January	6,929		6,929
Cash and cash equivalents
at 31 December	130,590		360,090

Note:

The adjustment represents the estimated net proceeds from the placing of 800,000,000 placing shares at a price of HK$0.30 per placing share, after deducting the estimated placing commission and other related expenses amounting to approximately HK$10.5 million to be incurred by the Company. The net proceeds from the placing are estimated to be HK$229.5 million. This gives rise to an increase in share capital of HK$80 million and share premium of HK$149.5 million.

— 163 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

Pursuant to Rule 14.69(4)(a)(i) of the Listing Rules, a circular issued in relation to a very substantial acquisition must contain an accountants’ report on the company being acquired which then must relate to a financial period ended six months or less before the circular is issued. The financial information on the company being acquired as contained in the accountants’ report must be prepared using accounting policies which are materially consistent with those of the Company.

Mount Gibson is a company listed on the Australian Stock Exchange. Accordingly, it is obliged to comply with Australian Stock Exchange Listing Rules in respect of the Continuous Disclosure regime as it relates to its financial information. No parties should be granted privileged access to Mount Gibson’s financial information that is not publicly available. In addition, Mount Gibson has already prepared and published its financial report in full compliance with Australian accounting standards (including Australian equivalents to International Financial Reporting Standards), the Australian Corporations Act and the Listing Rules of Australian Stock Exchange. Based on the above, it is unreasonable and will incur excessive cost to prepare and publish any new or additional financial statements prepared in accordance with Hong Kong Financial Reporting Standards.

Nevertheless, the Company had made contact with Mount Gibson and requested for the access to the latter’s books and financial records for preparation of the accountant’s report on Mount Gibson pursuant to Rule 14.69(4)(a)(i) of the Listing Rules. However, Mount Gibson declined the Company’s request. Therefore the Company has no means to access to Mount Gibson’s books and records and necessary information for the purpose of preparing the accountants’ report on Mount Gibson for three years ended 30 June 2006. Without the detailed financial information from Mount Gibson, the Company and its accountants cannot prepare the line-by-line reconciliation of income statements, balance sheets and cash flow statements of Mount Gibson from Australian accounting standards to Hong Kong Financial Reporting Standards.

Upon Completion, the Group will hold 8.79% interest only in Mount Gibson (such figure being quoted as at 7 November 2006 and subject to dilution effect, if any, from time to time contemplated by Mount Gibson issuing shares as a result of the unconditional takeover offer in respect of Aztec Resources Limited) and the investments in Mount Gibson will be accounted for as ‘Available-for-sale financial assets’ in the consolidated financial statements of the Group in accordance with HKAS 39. In accordance with HKAS39, available-for-sale financial assets are recognised at cost initially on its balance sheet. Subsequent to initial recognition, available-for-sale financial assets are carried at fair value. Unrealised gain and losses (including transaction costs on acquisition) arising from changes in the fair value are recognised in investment revaluation reserve. Dividends on an available-for-sale financial assets are recognised in profit or loss when the entity’s right to receive payment is established. Therefore, the results of the Available-for-sale financial assets are accounted for by the Group on the basis of dividends received and receivable. Any unrealised gain and losses (including transaction costs on acquisition) arising from changes in the fair value are recognised in investment revaluation reserve.

Although no accountants’ report of Mount Gibson which relates to a financial period ended six months or less before the date of this circular was contained in this circular, the financial statements of Mount Gibson for the three years ended 30 June 2006 has been extracted in this circular.

— 164 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

Given that the financial statements of Mount Gibson has been prepared based on the Australian accounting standards (including the Australian equivalents to International Financial Reporting Standards for the most recent two years) and the difference between Australian accounting standards and Hong Kong accounting standards has been set out in the letter from the reporting accountants of the Company in this Appendix, the Directors consider that sufficient information has been included in this circular.

The Company has applied to the Stock Exchange for a waiver of the requirement under Rule 14.69(4)(a)(i) of the Listing Rules such that the accountants’ report of Mount Gibson which relates to a financial period ended 6 months or less before the circular is issued need not be included in this circular and the accounting policies for the each of the three years ended 30 June 2006 adopted will be based on the Australian accounting standards.

In replacement of the accountants’ report of Mount Gibson, the following contents is included in this circular:

(a) the name of the auditors of Mount Gibson;
(b) the fact that Mount Gibson’s financial statements for the three years ended 30 June 2006 have not been qualified;
(c) the audited consolidated financial statements of Mount Gibson for the three years ended 30 June 2006 prepared in accordance with the Australian accounting standards;
(d) the directors’ report and auditors’ report of Mount Gibson as disclosed in its latest annual report;
(e) reasons for not including an accountants’ report or preparing a reconciliation of the financial figures of Mount Gibson from Australian accounting standards to HKFRS; and
(f) letter from the reporting accountants of the Company summarizing the principal differences between Australian accounting standards to HKFRS and the accounting policies between the Company and Mount Gibson, in particular, all items in the financial statements of Mount Gibson.

— 165 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(A) The auditors of Mount Gibson is Ernst & Young.
(B) The financial statements of Mount Gibson for the three years ended 30 June 2006 have not been qualified by the auditors of Mount Gibson.
(C) The following is the financial statements of Mount Gibson for the year ended 30 June 2004 prepared in accordance with Australian accounting standards which is extracted from the annual report 2004 of Mount Gibson.

Statement of Financial Performance For the year ended 30 June 2004

CONSOLIDATED 2004 2003 $ $ 14,293,488 652,240 (11,154,702) (776,844)	CONSOLIDATED 2004 2003 $ $ 14,293,488 652,240 (11,154,702) (776,844)	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — — 143,436 399,085 (128,968) (181,247) (272,903) (409,116) (305,595) (1,217,483) — — — (43,856) — (10,833,126) — (64,900) (564,030) (12,350,643) — — (564,030) (12,350,643) — — (564,030) (12,350,643) (150,000) (832,627) (714,030) (13,183,270)	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — — 143,436 399,085 (128,968) (181,247) (272,903) (409,116) (305,595) (1,217,483) — — — (43,856) — (10,833,126) — (64,900) (564,030) (12,350,643) — — (564,030) (12,350,643) — — (564,030) (12,350,643) (150,000) (832,627) (714,030) (13,183,270)
3,138,786 177,918 (1,733,389) (372,030) (1,363,751) (9,228,176) (1,601,920) — (349) (10,982,911) — (10,982,911) — (10,982,911) (150,000)	(124,604) 417,396 (272,905) (479,113) (1,221,681) — (10,591,995) — (77,741) (12,350,643) — (12,350,643) — (12,350,643) (832,627)	— 143,436 (128,968) (272,903) (305,595) — — — — (564,030) — (564,030) — (564,030) (150,000)	— 399,085 (181,247 (409,116 (1,217,483 — (43,856 (10,833,126 (64,900
			(12,350,643 —
			(12,350,643 —
			(12,350,643 (832,627
(11,132,911) (4.04) (4.04)	(13,183,270) (7.34) (7.34)	(714,030)

— 166 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Statement of Financial Position

At 30 June 2004

CONSOLIDATED 2004 2003 $ $ 1,784,086 3,244,041 1,895,000 4,309,248 1,197,678 163,927 2,797,374 — 1,817,331 44,424	CONSOLIDATED 2004 2003 $ $ 1,784,086 3,244,041 1,895,000 4,309,248 1,197,678 163,927 2,797,374 — 1,817,331 44,424	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ 26,641 2,719,244 — — 87,666 200 — — 4,958 3,250 119,265 2,722,694 23,084,848 14,431,033 6,798,301 6,771,653 5,400 5,400 — — — — — 83,761 29,888,549 21,291,847 30,007,814 24,014,541 159,461 189,106 — — — — 159,461 189,106 — — 2,375,000 2,875,000 2,375,000 2,875,000 2,534,461 3,064,106 27,473,353 20,950,435 40,848,134 33,761,186 (13,374,781) (12,810,751) — — 27,473,353 20,950,435	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ 26,641 2,719,244 — — 87,666 200 — — 4,958 3,250 119,265 2,722,694 23,084,848 14,431,033 6,798,301 6,771,653 5,400 5,400 — — — — — 83,761 29,888,549 21,291,847 30,007,814 24,014,541 159,461 189,106 — — — — 159,461 189,106 — — 2,375,000 2,875,000 2,375,000 2,875,000 2,534,461 3,064,106 27,473,353 20,950,435 40,848,134 33,761,186 (13,374,781) (12,810,751) — — 27,473,353 20,950,435
9,491,469 — — 16,758,280 17,889,333 8,647,663 — 43,295,276 52,786,745 9,813,544 7,757,213 139,264 17,710,021 499,648 11,178,100 11,677,748 29,387,769	7,761,640 — 7,223,858 1,564,903 8,833,133 — 83,761 17,705,655 25,467,295 667,554 14,427 12,014 693,995 885,000 2,937,865 3,822,865 4,516,860	119,265 23,084,848 6,798,301 5,400 — — — 29,888,549 30,007,814 159,461 — — 159,461 — 2,375,000 2,375,000 2,534,461	2,722,694
			14,431,033 6,771,653 5,400 — — 83,761
			21,291,847
			24,014,541
			189,106 — —
			189,106
			— 2,875,000
			2,875,000
			3,064,106
23,398,976	20,950,435	27,473,353
40,848,134 (23,793,662) 6,344,504	33,761,186 (12,810,751) —	40,848,134 (13,374,781) —	33,761,186 (12,810,751 —
23,398,976	20,950,435	27,473,353

— 167 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Statement of Cash Flows

For the year ended 30 June 2004

CONSOLIDATED 2004 2003 $ $ 15,051,259 960,808 (23,483,180) (2,728,724) 166,211 292,970 (1,363,750) (1,221,681)	CONSOLIDATED 2004 2003 $ $ 15,051,259 960,808 (23,483,180) (2,728,724) 166,211 292,970 (1,363,750) (1,221,681)	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — 4,925 (466,580) (571,432) 143,433 290,414 (305,595) (1,217,483) (628,742) (1,493,576) — 23,500 — — (8,650,809) (9,154,437) — — — 39,587 — — — — — — (8,650,809) (9,091,350) 7,236,948 10,240,295 — 650,000 — — (150,000) (928,603) — — — — (500,000) — 6,586,948 9,961,692 (2,692,603) (623,234) 2,719,244 3,342,478 26,641 2,719,244	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — 4,925 (466,580) (571,432) 143,433 290,414 (305,595) (1,217,483) (628,742) (1,493,576) — 23,500 — — (8,650,809) (9,154,437) — — — 39,587 — — — — — — (8,650,809) (9,091,350) 7,236,948 10,240,295 — 650,000 — — (150,000) (928,603) — — — — (500,000) — 6,586,948 9,961,692 (2,692,603) (623,234) 2,719,244 3,342,478 26,641 2,719,244
(9,629,460) 11,707 (6,486,710) — (165,000) — — — (1,603,145) (8,243,148) 7,236,948 — (1,895,000) (150,000) (990,412) 12,643,059 (5,914,144) 10,930,451 (6,942,157) 7,553,289	(2,696,627) 34,712 (1,433,986) (450) — 39,587 (1,712,698) (30,000) — (3,102,835) 10,240,295 650,000 — (928,603) (12,201) — — 9,949,491 4,150,029 3,403,260	(628,742) — — (8,650,809) — — — — — (8,650,809) 7,236,948 — — (150,000) — — (500,000) 6,586,948 (2,692,603) 2,719,244	(1,493,576
			23,500 — (9,154,437 — 39,587 — — —
			(9,091,350
			10,240,295 650,000 — (928,603 — — —
			9,961,692
			(623,234 3,342,478
611,132	7,553,289	26,641

— 168 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

The gearing ratio for the year ended 30 June 2004 was calculated on the basis of total interest-bearing borrowings in the sum of approximately A$18,935,313 divided by total equity in the sum of approximately A$23,398,976, i.e. approximately 80.92%.

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2004

1. STATEMENT OF ACCOUNTING POLICIES

(a) Basis of accounting

The financial report is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 including applicable Accounting Standards. Other mandatory professional reporting requirements (Urgent Issues Group Consensus Views) have also been complied with. The financial report has been prepared in accordance with the historical cost convention.

(b) Changes in accounting policies

The accounting policies adopted are consistent with those of the previous year.

(c) Principles of consolidation

The consolidated financial statements are those of the Consolidated Entity, comprising Mount Gibson Iron Limited (the parent company) and all entities that Mount Gibson Iron Limited controlled from time to time during the year and at reporting date.

Information from the financial statements of subsidiaries is included from the date the parent company obtains control until such time as control ceases. Where there is loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting period during which the parent company has control.

Subsidiary acquisitions are accounted for using the purchase method of accounting.

The financial statements of subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist.

All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered.

(d) Foreign currencies

Translation of foreign currency transactions

Transactions in foreign currencies of entities within the Consolidated Entity are converted to local currency at the rate of exchange ruling at the date of the transaction.

Foreign currency monetary items that are outstanding at the reporting date (other than monetary items arising under foreign currency contracts where the exchange rate for that monetary item is fixed in the contract) are translated using the spot rate at the end of the financial year. A monetary item arising under a foreign currency contract outstanding at the reporting date where the exchange rate for the monetary items is fixed in the contract is translated at the exchange rate fixed in the contract.

— 169 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Except for certain specific hedges, all resulting exchange differences arising on settlement or re-statement are recognised as revenues and expenses for the financial year. Any gains or costs on entering a hedge are deferred and amortised over the life of the contract.

Amounts payable to and by the entities within the Consolidated Entity that are outstanding at the reporting date and are denominated in foreign currencies have been converted to local currency using rates of exchange ruling at the end of the financial year.

Specific hedges

Where a purchase or sale is specifically hedged, exchange gains or losses on the hedging transactions arising up to the date of purchase or sale and costs, premiums and discounts relative to the hedging transactions are deferred and included in the measurement of the purchase or sale. Exchange gains and losses arising on the hedge transactions after that date are taken to the net profit.

(e) Cash and cash equivalents

Cash on hand and in banks and short-term deposits are stated at nominal value.

For the purposes of the Statement of Cash Flows, cash includes cash on hand and in banks, and money market investments readily convertible to cash within 2 working days, net of outstanding bank overdrafts.

Bank overdrafts are carried at the principal amount. Interest is recognised as an expense as it accrues.

(f) Receivables

Trade receivables are recognised and carried at original invoice amount less a provision for any uncollectible debts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written-off as incurred.

Receivables from related parties are recognised and carried at the nominal amount due.

(g) Investments

All investments are carried at the lower of cost and recoverable amount.

Investments in associates are carried at the lower of the equity-accounted amount and receivable amount in the consolidated financial report.

(h) Inventories

Inventories of work in progress and finished goods are physically measured or estimated and valued at the lower of cost and net realisable value. Cost comprises direct material, labour and expenditure in getting such inventories to their existing location and condition, based on weighted average costs incurred during the period in which such inventories were produced. Inventories of consumable supplies and spare parts expected to be used in production are valued at weighted average cost. Obsolete or damaged inventories of such items are valued at net realisable value.

— 170 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(i) Recoverable amount

Non-current assets measured using the cost basis are not carried at an amount above their recoverable amount, and where carrying values exceed this recoverable amount assets are written down. In determining recoverable amount, the expected net cash flows have not been discounted to their present value.

(j) Property, plant and equipment

Cost and valuation

All classes of property, plant and equipment are measured at cost.

Depreciation

The cost of property, plant and equipment is written off over its expected economic life on a units-of-production method, in the establishment of which, due regard is given to the life of the related area of interest. Land associated with mining is written off over the life of the mine. Assets which are depreciated or amortised on a basis other than the units-of-production method typically have the following expected economic lives:

		2004	2003
Property, plant and equipment;
●	Buildings	5 - 20 years	5 - 20 years
●	Motor vehicles	4 - 5 years	4 - 5 years
●	Office equipment	3 - 5 years	3 - 5 years
●	Leasehold improvements	5 - 10 years	5 - 10 years

(k) Leases

Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership.

Operating leases

The minimum lease payments of operating leases, where the lessor effectively retains substantially all of the risks and benefits of ownership of the leased item, are recognised as an expense on a straight-line basis.

Finance leases

Leases which effectively transfer substantially all the risks and benefits incidental to ownership of the leased item to the group are capitalised at the present value of the minimum lease payments and disclosed as property, plant and equipment under lease, a lease liability of equal value is also recognised.

Capitalised lease assets are depreciated over the shorter of the estimated useful life of the assets and the lease term. Minimum lease payments are allocated between interest expense and reduction of the lease liability with the interest expense calculated using the interest rate implicit in the lease and charged directly to the Statement of Financial Performance.

The cost of improvements to or on leasehold property is capitalised, disclosed as leasehold improvements, and amortised over the unexpired period of the lease or the estimated useful lives of the improvements, whichever is the shorter.

— 171 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(l) Acquisition, exploration, evaluation, development and restoration costs

Costs carried forward

Costs arising from exploration and evaluation activities are written off as incurred, except acquisition costs which are carried forward where exploration and evaluation activities have not, at balance date, reached a stage to allow a reasonable assessment regarding the existence of economically recoverable reserves.

Amortisation

Costs on productive areas are amortised over the life of the area of interest to which such costs relate on the production output basis.

Restoration costs

Restoration costs that are expected to be incurred are provided for as part of the cost of the exploration, evaluation, development, construction or production phases that give rise to the need for restoration. Accordingly, these costs are recognised gradually over the life of the facility as these phases occur. The costs include obligations relating to reclamation and other costs associated with the restoration of the site. These estimates of the restoration obligations are based on anticipated technology and legal requirements and future costs, which have been discounted to their present value. Any changes in the estimates are adjusted on a retrospective basis. In determining the restoration obligations, the entity has assumed no significant changes will occur in the relevant Federal and State legislation in relation to restoration of such mines in the future.

(m) Mine properties

Mine properties represent the accumulation of all exploration, evaluation and development expenditure incurred by or on behalf of the Consolidated Entity in relation to areas of interest in which mining of a mineral resource has commenced. When further development expenditure is incurred in respect of a mine property after the commencement of production, such expenditure is carried forward as part of the cost of that mine property only when substantial future economic benefits are established, otherwise such expenditure is classified as part of the cost of production.

Amortisation is provided on the units-of-production method, with separate calculations being made for each mineral resource. Estimated future capital development costs to be incurred in accessing the reserves and measured resources are taken into account in determining amortisation charges. The units-of-production method results in an amortisation charge proportional to the depletion of the economically recoverable mineral resources (comprising proven and probable reserves plus measured resources).

(n) Other non-current assets

Expenditure carried forward

Significant items of carry forward expenditure having a benefit or relationship to more than one period are written off over the periods to which such expenditure relates.

(o) Payables

Liabilities for trade creditors and other amounts 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 Consolidated Entity.

Payables to related parties are carried at the principal amount.

— 172 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

Deferred cash settlements are recognised at the present value of the outstanding consideration payable on the acquisition of an asset discounted at prevailing commercial borrowing rates.

(p) Interest-bearing liabilities

All loans are measured at the principal amount. Interest is recognised as an expense as it accrues. Convertible Notes are recorded as liabilities and are recognised when issued at the amount of the net proceeds received. Interest is recognised as an expense in the period to which it relates. Finance lease liability is determined in accordance with the requirements of AASB 1008 “Leases”.

(q) Provisions

Provisions are recognised when the economic entity has a legal, equitable or constructive obligation to make a future sacrifice of economic benefits to other entities as a result of past transactions or other past events, it is probable that a future sacrifice of economic benefits will be required and a reliable estimate can be made of the amount of the obligation.

A provision for dividends is not recognised as a liability unless the dividends have been declared, determined or publicly recommended on or before the reporting date.

(r) Contributed equity

Issued and paid up capital is recognised at the fair value of the consideration received by Mount Gibson.

Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received.

(s) Revenue recognition

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

Sale of goods

Control of the goods has passed to the buyer.

Interest

Control of the right to receive the interest payment.

Dividends

Control of the right to receive the dividend payment.

(t) Taxes

Income taxes

— 173 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

the time items are recognised in the financial statements and when items are taken into account in determining taxable income, the net related taxation benefit or liability, calculated at current rates, is disclosed as a future income tax benefit or a provision for deferred income tax. The net future income tax benefit relating to tax losses and timing differences is not carried forward as an asset unless the benefit is virtually certain of being realised.

Goods and Service Tax (GST)

Revenues, expenses and assets are recognised net of the amount of GST except:

where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and
receivables and payables are stated with the amount of GST included.

The net amount of GST recoverable from, or payable to, the taxation authority is included as part of payables in the Statement of Financial Position.

Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows.

Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority.

(u) Employee benefits

Provision is made for employee benefits accumulated as a result of employees rendering services up to the reporting date. These benefits include wages and salaries, annual leave and long service leave.

Liabilities arising in respect of wages and salaries, annual leave and any other employee benefits expected to be settled within twelve months of the reporting date are measured at their nominal amounts based on remuneration rates which are expected to be paid when the liability is settled. All other employee benefits liabilities are measured at the present value of the estimated future cash outflow to be made in respect of services provided by employees up to the reporting date. In determining the present value of future cash outflows, the interest rates attaching to government guaranteed securities, which have terms to maturity approximating the terms of the related liability, are used.

Employee benefits expenses and revenues arising in respect of the following categories:

wages and salaries, non-monetary benefits, annual leave, long service leave, sick leave and other leave entitlements; and
other types of employee benefits are recognised against profits on a net basis in their respective categories.

The value of the employee share incentive scheme described in note 22 is not being recognised as an employee benefits expense.

In respect of the Consolidated Entity’s defined contribution superannuation plans, any contributions made to the superannuation plans by entities within the Consolidated Entity are recognised against profits when due.

— 174 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(v) Derivative financial instruments

Forward exchange contracts

The Consolidated Entity enters into forward exchange contracts where it agrees to buy or sell specified amounts of foreign currencies in the future at a predetermined exchange rate. The objective is to match the contract with anticipated future cash flows from sales and purchases in foreign currencies, to protect the Consolidated Entity against the possibility of loss from future exchange rate fluctuations. The forward exchange contracts are usually for no longer than 12 months.

Forward exchange contracts are recognised at the date the contract is entered into. Exchange gains or losses on forward exchange contracts are recognised in net profit except those relating to hedges of specific commitments that are deferred and included in the measurement of the sale or purchase.

(w) Earnings per Share

Basic EPS is calculated as net profit attributable to members, adjusted to exclude costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted EPS is calculated as net profit attributable to members, adjusted for:

costs of servicing equity (other than dividends);
the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and
other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares; divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element.

(x) Repairs and maintenance

Plant of the Consolidated Entity is required to be overhauled on a regular basis. This is managed as part of an ongoing major cyclical maintenance program. The costs of this maintenance are charged as expenses as incurred, except where they relate to the replacement of a component of an asset, in which case the costs are capitalised and depreciated in accordance with note 1(j). Other routine operating maintenance, repair and minor renewal costs are also recognised as expenses as incurred.

(y) Acquisition of assets

The purchase method of accounting is used for all acquisitions of assets regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus incidental costs directly attributable to the acquisition.

Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of acquisition. The discount rate used is the incremental borrowing rate, being the rate at which a similar borrowing could be obtained form an independent financier under comparable terms and conditions.

(z) Comparatives

Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures.

— 175 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

2. REVENUE FROM ORDINARY ACTIVITIES

Revenues from operating activities Revenue from sale of goods Total revenues from operating activities Revenues from non-operating activities Rent Interest — other persons/corporations Proceeds from disposal of property, plant and equipment Proceeds from sale of listed investments Export marketing grant Other revenue Total revenues from non-operating activities Total revenues from ordinary activities	CONSOLIDATED 2004 2003 $ $ 14,293,488 652,240 14,293,488 652,240 — 9,084 166,211 292,970 11,707 34,712 — 39,587 — 41,043 — — 177,918 417,396 14,471,406 1,069,636	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — 4,541 143,433 290,414 — 23,500 — 39,587 — 41,043 3 — 143,436 399,085 143,436 399,085	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — 4,541 143,433 290,414 — 23,500 — 39,587 — 41,043 3 — 143,436 399,085 143,436 399,085
			—
			4,541 290,414 23,500 39,587 41,043 —
			399,085
			399,085

— 176 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

3. EXPENSES AND LOSSES

CONSOLIDATED 2004 2003 $ $ 118,937 25,684 1,191,290 11,300 114,005 — 38,424 — 1,462,656 36,984 69,714 — 4,664,107 —	CONSOLIDATED 2004 2003 $ $ 118,937 25,684 1,191,290 11,300 114,005 — 38,424 — 1,462,656 36,984 69,714 — 4,664,107 —	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — — — — — — — — — — — — 305,595 1,217,483 305,595 1,217,483 (3,004) 118,119 — 10,833,126 — — — — — 43,856 — 43,856 — 12,664 — (4,000)	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — — — — — — — — — — — — 305,595 1,217,483 305,595 1,217,483 (3,004) 118,119 — 10,833,126 — — — — — 43,856 — 43,856 — 12,664 — (4,000)
473,555 890,196	3,726 1,217,955	— 305,595	— 1,217,483
1,363,751 — — 728,002	1,221,681 — — 150,614	305,595 (3,004) — —
— 1,601,920	8,082,833 2,509,162	— —	— 43,856
1,601,920 — (6,225)	10,591,995 12,664 (11,754)	— — —

— 177 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

4. INCOME TAX

The prima facie tax on loss differs from the income
tax provided in the financial statements as
follows:
Prima facie tax on loss from ordinary activities
Tax effect of permanent differences
Write down of investment
Future income tax benefit not brought to account
Income tax expense attributable to ordinary
activities
Income tax losses
Income tax losses not brought to account at
reporting date as realisation of the benefit is not
regarded as virtually certain

CONSOLIDATED
MOUNT GIBSON IRON
LIMITED
2004
2003
2004
2003
$
$
$
$
(3,294,873)
(3,705,193)
(169,209)
(3,705,193)
—
—
—
3,249,938
3,294,873
3,705,193
169,209
455,255
—
—
—
—
33,652,945
22,670,035
2,284,926
1,720,896

The future income tax benefit will only be obtained if:

a) future assessable income is derived of a nature and of an amount sufficient to enable the benefit to be realised;

b) the conditions for deductibility imposed by tax legislation continue to be applied with; and

c) no changes in tax legislation adversely affect the Consolidated Entity in realising the benefit.

Tax Consolidation

For the purposes of income tax, Mount Gibson Iron Limited and its 100% owned subsidiaries intend to form a tax consolidated group. At the date of signing the financial report, Mount Gibson Iron Limited has not determined the date of entry into tax consolidation because this decision will be based upon the most favourable outcome in terms of the transitional rules in the tax consolidation legislation. The date of entry will be determined at the time the head company lodges its tax return.

As part of the entry into consolidation, it is anticipated that members of the group will enter into a tax sharing arrangement in order to allocate income tax expense to the wholly-owned subsidiaries on a pro-rata basis. In addition, it is anticipated that the agreement will provide for the allocation of income tax liabilities between the entities should the head entity default on its tax payments obligations.

Entering into a tax consolidation group is not expected to have an impact on the income tax balances of Mount Gibson or the Consolidated Entity for the year ended 30 June 2004.

— 178 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

5. SIGNIFICANT ITEMS

			MOUNT GIBSON	MOUNT GIBSON	IRON
	CONSOLIDATED		LIMITED
	2004	2003	2004		2003
	$	$	$		$
The loss from ordinary activities before income tax
expense includes the following specific
expenditures whose disclosure is relevant in
explaining the financial performance of the
entity:
Exploration expenditure written-off	1,601,920	10,591,995	—		43,856
Write-down of investment	—	—	—	10,833,126
RECEIVABLES
Current
Trade debtors (b)	1,046,299	4,264	9,425		200
Sundry debtors (b)	76,650	82	5,114		—
Other receivables (a)	74,729	159,581	73,127		—
	1,197,678	163,927	87,666		200
Non-current
Other receivables (a),(b)	—	—	23,229,611	14,578,801
Less: provision for doubtful debts	—	—	(144,763)	(147,768)
	—	—	23,084,848	14,431,033
a) Related party receivables
Current
Associated companies	—	159,581	—		—
	—	159,581	—		—
Non-current
Controlled entities	—	—	23,084,848	14,431,033
	—	—	23,084,848	14,431,033

6. RECEIVABLES

— 179 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

b) Terms and conditions

Terms and conditions relating to the above financial instruments

i) Trade debtors are non-interest bearing and generally on 30 day terms.
ii) Sundry debtors are non-interest bearing and have repayment terms between 30 and 90 days.
iii) Related party receivables are non-interest bearing with no fixed repayment date.

7. INVENTORIES

Inventory — consumables Inventory — ore OTHER FINANCIAL ASSETS Non-current Investments at cost comprise: Controlled entities Associated entity (a) Less: provision for diminution	CONSOLIDATED 2004 2003 $ $ 152,243 — 2,645,131 — 2,797,374 — CONSOLIDATED 2004 2003 $ $ — — — 7,223,858 — — — 7,223,858	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — — MOUNT GIBSON IRON LIMITED 2004 2003 $ $ 17,631,427 17,604,779 — — (10,833,126) (10,833,126) 6,798,301 6,771,653

8. OTHER FINANCIAL ASSETS

a) On 7th July 2003, Mount Gibson Mining Limited acquired an additional 825,000 shares in Asia Iron Pty Ltd, the company which now holds the tenements at Mt Gibson, for $165,000. Mount Gibson Mining Limited now holds 53.8% of Asia Iron Pty Ltd resulting in Asia Iron Pty Ltd becoming a subsidiary of Mount Gibson Iron Limited at 7th July 2003.

— 180 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

9. INTEREST IN SUBSIDIARIES

Name Country of Incorporation Percentage of equity interest held by the Consolidated Entity 2004 2003 % % Mount Gibson Mining Limited Australia 100 100 Whittakers Timber Pty Ltd Australia 100 100 Geraldton Bulk Handling Pty Ltd Australia 100 100 Asia Iron Pty Ltd Australia 53.8 50	Investment 2004 2003 $ $ 6,798,298 6,771,650 1 1 2 2 — — 6,798,301 6,771,653	Investment 2004 2003 $ $ 6,798,298 6,771,650 1 1 2 2 — — 6,798,301 6,771,653
		6,771,653

10. OTHER ASSETS

			MOUNT GIBSON	IRON
	CONSOLIDATED		LIMITED
	2004	2003	2004	2003
	$	$	$	$
Current
Rehabilitation bonds	—	30,000	—	—
Deposits paid	56,109	13,250	3,250	3,250
Prepayments	411,776	1,174	1,708	—
Hedging foreign currency deferred loss
(refer Note 31)	1,349,446	—	—	—
	1,817,331	44,424	4,958	3,250
Non-current
Expenditure carried forward	—	83,761	—	83,761
	—	83,761	—	83,761

— 181 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

11. PROPERTY, PLANT AND EQUIPMENT

CONSOLIDATED 2004 2003 $ $ 732,628 805,400 (69,714) —	CONSOLIDATED 2004 2003 $ $ 732,628 805,400 (69,714) —	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ 5,400 5,400 — —	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ 5,400 5,400 — —
662,914 1,670,842 (156,739) 1,514,103 9,710,686 (1,206,270) 8,504,416 5,731,857 (117,246) 5,614,611 500,660 (38,424) 462,236 18,346,673 (1,588,393)	805,400 159,280 (48,836) 110,444 63,166 (21,255) 41,911 607,148 — 607,148 — — — 1,634,994 (70,091)	5,400 — — — — — — — — — — — — 5,400 —	5,400 — —
			— — —
			— — —
			— — —
			— 5,400 —
16,758,280 1,514,103 8,504,416 5,614,611 462,236	1,564,903 41,416 41,911 — —	5,400 — — — —	5,400
			— — — —

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APPENDIX IV

CONSOLIDATED 2004 2003 $ $ 110,444 131,396 1,567,420 27,690 (44,824) — — (22,958) (118,937) (25,684) 1,514,103 110,444	CONSOLIDATED 2004 2003 $ $ 110,444 131,396 1,567,420 27,690 (44,824) — — (22,958) (118,937) (25,684) 1,514,103 110,444	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — — — — — — — —	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — — — — — — — —
			—
41,911 9,626,910 41,416 (14,531) (1,191,290)	53,211 — — — (11,300)	— — — — —	— — — — —
8,504,416	41,911	—	—
607,148 5,118,060 3,408 (114,005)	— 607,148 — —	— — — —	— — — —
5,614,611	607,148	—	—
— 500,660 (38,424)	— — —	— — —	— — —
462,236	—	—	—

b) Reconciliations

— 183 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

12. DEFERRED ACQUISITION, EXPLORATION AND DEVELOPMENT COSTS

Deferred acquisition, exploration and development costs carried forward in respect of mining areas of interest

Tallering Peak Hematite Mt Gibson Hematite Mt Gibson Magnetite	CONSOLIDATED 2004 2003 $ $ — 4,837,968 4,021,812 3,995,165 13,867,521 — 17,889,333 8,833,133	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — — — —	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — — — —
			—

The ultimate recoupment of costs carried forward for exploration is dependent on the successful development and commercial exploitation or sale of the respective mining areas. Amortisation of the costs carried forward is not being recognised pending the commencement of production. The write-down of tenements at 31 December 2003 of $7,733,937 was reversed at 30 June 2004 as a consequence of negotiations entered into prior to balance date for the sale of the investment in Asia Iron Pty Ltd for $7.5 million (refer Note 28).

13. MINE PROPERTIES

Transferred from deferred acquisition, exploration and development costs Mine development expenditure Accumulated amortization	CONSOLIDATED 2004 2003 $ $ 4,837,968 — 8,473,802 —	CONSOLIDATED 2004 2003 $ $ 4,837,968 — 8,473,802 —	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — —	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — —
	13,311,770 (4,664,107)	— —	— —	— —
	8,647,663	—	—	—

— 184 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

14. PAYABLES

			MOUNT GIBSON IRON	MOUNT GIBSON IRON
	CONSOLIDATED		LIMITED
	2004	2003	2004	2003
	$	$	$	$
Current
Bank overdraft (refer Note 20(b))	1,172,954	—	—	—
Trade creditors (a)	3,009,661	388,438	67,016	57,381
Other creditors (a)	4,281,483	279,116	92,445	131,725
Hedging foreign currency payable (refer Note 31)	1,349,446	—	—	—
	9,813,544	667,554	159,461	189,106
Non-current
Other creditors (b)	499,648	885,000	—	—
	499,648	885,000	—	—

a) Terms and conditions

Terms and conditions relating to the above financial instruments

i) Trade creditors are non-interest bearing and are normally settled on 30 day terms.
ii) Other creditors are non-interest bearing and have an average term of 90 days.

b) NON-CURRENT PAYABLE

Interest free and payable over 10 years under contract for the purchase of land required for the rail loading area for the Tallering Peak Hematite Project at Mullewa. In accordance with AASB 1015 Acquisition of Assets, as this payment is expected to paid on a deferred settlement basis, the liability has been discounted using a discount rate of 6%. The liability is due for repayment in October 2013.

— 185 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

15. INTEREST-BEARING LIABILITIES

CONSOLIDATED 2004 2003 $ $ 1,569,362 14,427 1,016,113 — 5,171,738 — 7,757,213 14,427	CONSOLIDATED 2004 2003 $ $ 1,569,362 14,427 1,016,113 — 5,171,738 — 7,757,213 14,427	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — — — —	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — — — —
			—
7,762,035 1,041,065 2,375,000	62,865 — 2,875,000	— — 2,375,000	— — 2,875,000
11,178,100	2,937,865	2,375,000	2,875,000

a) Terms and condition relating to the above financial instruments;

Finance leases are repayable monthly with final instalments due in May 2009. Interest is charged at an average rate of 8.03%. The loans are secured by first mortgage over the leased assets.

b) Packing Credit Facility held with HSBC Bank Australia Limited. Interest is payable on the outstanding balance at 3.12% pa. This is secured by a first ranking fixed and floating charge over all Mount Gibson Mining Limited’s present and future assets.
c) Stemcor (S.E.A) Limited agreed to prepay Mount Gibson Mining Limited US$6 million for iron ore to be supplied under their Off-take Agreement. The final drawdown of US$1.5 million of these funds was received on 5 January 2004. This is repaid over 18 months from the first shipment of ore to Stemcor (S.E.A) Limited in April 2004. Interest is payable on the outstanding balance of the prepayment at 7.15% pa. This facility is secured by an irrevocable and unconditional guarantee by Mount Gibson Iron Limited’s to Stemcor, guaranteeing all Mount Gibson Mining Limited’s liabilities in connection with the facility.
d) Convertible Notes are convertible at the option of the holder to Shares at $0.30 per share, with an interest rate of 10% payable at 6 monthly intervals from 31 December 2002 to 31 December 2005. The Convertibles Notes are unsecured.

— 186 —

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APPENDIX IV

16. PROVISIONS

CONSOLIDATED 2004 2003 $ $ 124,191 12,014 15,073 — 139,264 12,014	CONSOLIDATED 2004 2003 $ $ 124,191 12,014 15,073 — 139,264 12,014	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — —	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — —
			—
— 15,073	— —	— —	— —
			—

— 187 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

b) Movements in shares on issue

Beginning of the financial year Issued during the year — public equity raising — purchase of Tallering Park — equity placement — exercise of Options Less capital raising costs End of the financial year	2004 Number of Shares $ 252,561,928 33,761,186 — — — — 39,000,000 7,236,000 3,894 948 — (150,000) 291,565,822 40,848,134	2003 Number of Shares $ 118,280,904 21,228,518 126,281,008 11,365,291 8,000,000 2,000,000 — — 16 4 — (832,627) 252,561,928 33,761,186	2003 Number of Shares $ 118,280,904 21,228,518 126,281,008 11,365,291 8,000,000 2,000,000 — — 16 4 — (832,627) 252,561,928 33,761,186
			33,761,186

c) Terms and conditions of contributed equity

Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of Mount Gibson.

d) Share Options

As at balance date there were the following Options over unissued Shares:

Exercise Price Exercise Date/ Period 25 cents On or before 31 December 2003 25 cents On or before 31 December 2004 22 cents On or before 15 October 2005 15.84 cents On or before 28 February 2006 Total	2004 Number — 19,000,000 25,800,000 2,083,332 46,883,332	2003 Number 55,182,379 — — 2,083,332
		57,265,711

— 188 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

18. ACCUMULATED LOSSES

Accumulated losses Balance at the beginning of the year Net loss attributable to members of Mount Gibson Iron Limited Balance at end of year	CONSOLIDATED 2004 2003 $ $ (23,793,662) (12,810,751) (12,810,751) (460,108) (10,982,911) (12,350,643) (23,793,662) (12,810,751)	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ (13,374,781) (12,810,751) (12,810,751) (460,108) (564,030) (12,350,643) (13,374,781) (12,810,751)	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ (13,374,781) (12,810,751) (12,810,751) (460,108) (564,030) (12,350,643) (13,374,781) (12,810,751)
			(12,810,751)

19. OUTSIDE EQUITY INTEREST

Opening balance Add share of equity Closing balance	CONSOLIDATED 2004 2003 $ $ — — 6,344,504 — 6,344,504 —	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — —	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — —
			—

— 189 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

20. STATEMENT OF CASH FLOWS

a) Reconciliation of the net loss after tax to the net cash flows from operations

Net loss *Non-cash items* Depreciation of non-current assets Decrement in the value of land Decrement in net market value of financial assets Net loss on disposal of financial assets Net profit on sale of property, plant and equipment Doubtful debts expense Capitalised expense Capital raising expense Write-down of investment Exploration expenses written off Mine development expenditure Amortisation of mine properties *Changes in assets and liabilities* (Increase)/ decrease in trade and other receivables (Increase)/ decrease in inventory (Increase) in prepayments/deposits (Increase)/ decrease in capitalised project and acquisition expenditure Increase/(decrease) in creditors and accruals Increase/(decrease) in GST paid Increase/(decrease) in employee entitlements Net cash flow from operating activities	CONSOLIDATED 2004 2003 $ $ (10,982,911) (12,350,643) 1,462,656 36,984 69,714 — — 4,300 — 8,364 (6,225) (11,754) — — — — — 127,226 — — 1,601,920 10,591,995 (8,473,802) — 4,664,107 — (1,193,332) 260,490 (2,797,374) 232,817 (423,461) 32,394 83,761 (2,310,919) 6,981,083 670,862 (727,773) 4,062 112,177 7,195 (9,629,460) (2,696,627)	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ (564,030) (12,350,643) — — — — — 4,300 — 8,364 — (4,000) — 118,119 (26,648) (122,224) — 127,226 — 10,833,126 — — — — — — (90,474) (58,115) — — (1,708) 30,392 83,761 (81,411) (6,061) (7,865) (23,582) 9,155 — — (628,742) (1,493,576)

— 190 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

b) Reconciliation of cash

				MOUNT	GIBSON	IRON
		CONSOLIDATED		LIMITED
		2004	2003	2004		2003
		$	$	$		$
Cash	balance comprises:
—	cash at bank and on hand	1,784,086	3,244,041	26,641	2,719,244
—	bank overdraft	(1,172,954)	—	—		—
		611,132	3,244,041	26,641	2,719,244
—	deposits	1,895,000	4,309,248	—		—
		2,506,132	7,553,289	26,641	2,719,244

The deposit of $1,895,000 (2002: $nil) is not available for use as it is used as monetary backing for performance guarantees issued to cover minimum freight movement with Australian Western Railroad and lease payments with Westpac Banking Corporation. The above figures are reconciled to cash at the end of the financial year as shown in the statement of cash flows as follows:

CONSOLIDATED 2004 2003 $ $ Balance as above 2,506,132 7,553,289 Deposits relating to performance guarantees (1,895,000) — Balance per statement of cash flows 611,132 7,553,289 c) Financing facilities available At balance date the following financing facility had been negotiated: Total facilities — bank overdraft 1,172,954 — — bank loan 16,994,897 32,988 Facilities used at reporting date — bank overdraft 1,172,954 — — bank loan 10,347,510 — Facilities unused at reporting date — bank overdraft — — — bank loan — unused facility 6,647,387 —	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ 26,641 2,719,244 — — 26,641 2,719,244 — — — — — — — — — — — —	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ 26,641 2,719,244 — — 26,641 2,719,244 — — — — — — — — — — — —
		2,719,244
		— — — — — —

— 191 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

d) Non-cash financing activities

During the financial year, the consolidated entity acquired property, plant & equipment with an aggregate fair value of $10,127,570 by means of finance leases.

e) Acquisition/disposal of controlled entity

On 7th July 2003, Mount Gibson Mining Limited acquired an additional 825,000 shares in Asia Iron Pty Ltd, the company which now holds the tenements at Mt Gibson, for $165,000. Mount Gibson Mining Limited now holds 53.8% of Asia Iron Pty Ltd resulting in Asia Iron Pty Ltd becoming a subsidiary of Mount Gibson Iron Limited at 7th July 2003.

The value of the Mt Gibson tenements, including outside equity interest, is therefore included in Deferred Acquisition, Exploration and Development Costs (refer Note 12) as at 30 June 2004.

Consideration — shares issued — acquisition costs paid in cash Net assets of Asia Iron Pty Ltd at 7 July 2003 — Mt Gibson tenements — creditors and accruals Net cash effect Cash costs of acquisition Cash included in net assets acquired Cash paid for purchase of entity as reflected in the consolidated financial report	$ — 165,000 165,000 13,893,068 (159,131) 13,733,937 165,000 — 165,000

— 192 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

21. EXPENDITURE COMMITMENTS

a) Exploration expenditure commitments

			MOUNT GIBSON	IRON
	CONSOLIDATED		LIMITED
	2004	2003	2004	2003
	$	$	$	$
Minimum obligations not provided for in the
financial report and are payable: (i)
— Not later than one year	220,985	573,200	—	—
— Later than one year but not later than five
years	883,940	2,292,800	—	—
	1,104,925	2,866,000	—	—

b) Lease expenditure commitments

			MOUNT GIBSON	IRON
	CONSOLIDATED		LIMITED
	2004	2003	2004	2003
	$	$	$	$
Operating leases (non-cancellable) (ii)
Minimum lease payments
— Not later than one year	897,760	98,320	—	—
— Later than one year but not later than five
years	1,525,372	289,945	—	—
	2,423,132	388,265	—	—
Finance leases (iii)
Minimum lease payments
— Not later than one year	2,550,387	20,245	—	—
— Later than one year but not later than five
years	9,978,492	71,308	—	—
Total minimum lease payments	12,528,879	91,553	—	—
Future finance charges	(2,339,047)	(14,261)	—	—
	10,189,832	77,292	—	—
Total lease liability accrued for:
Current
Finance leases	1,569,362	14,427	—	—
Non-current
Finance leases	7,762,035	62,865	—	—
	9,331,397	77,292	—	—

— 193 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

i) In order to maintain current rights to explore and mine the Mt Gibson tenements the Consolidated Entity, on behalf of Asia Iron Pty Ltd, is required to perform minimum exploration work to meet the expenditure requirements specified by the Department of Industry and Resources.
ii) Operating leases:
1) The operating lease for office space with an initial lease term of 5 years has an implicit interest rate of 4%.
2) The operating lease for machinery has a term of 5 years and expires in September 2008.
iii) Finance leases have an average term of 4.5 years with the option to purchase the asset at the completion of the lease term for a pre-agreed amount. The average discount rate implicit in the leases is 8.03%. Secured lease liabilities are secured by a charge over the leased assets.

22. EMPLOYEE BENEFITS AND SUPERANNUATION COMMITMENTS

a) Employee benefits

			MOUNT GIBSON	IRON
	CONSOLIDATED		LIMITED
	2004	2003	2004	2003
	$	$	$	$
The aggregate employee benefits liability is
comprised of:
Accrued wages, salaries and on costs	369,718	21,833	19,914	2,858
Provisions (current)	124,191	12,014	—	—
	493,909	33,847	19,914	2,858

b) Employee Share Scheme

On 30 June 2003, there were 6,314,041 options issued under the Employee Share Scheme. These options were granted and vested on 14 August 2002, expired on 31 December 2003 and had a weighted average exercise price of $0.06. All of the 6,314,041 options lapsed on 31 December 2003. At 30 June 2004, there are no options on issue under the Scheme.

— 194 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

23. EARNINGS PER SHARE

The following reflects the income and share data used in the calculations of basic and diluted earnings per share:

Losses used in calculating basic and diluted earnings per share Weighted average number of ordinary Shares used in calculating basic and diluted earnings per share:	CONSOLIDATED 2004 2003 $ $ (10,982,911) (12,350,643) Number of Number of Shares Shares 271,540,888 168,156,428

The weighted average number of ordinary shares used in calculating diluted earnings per share is the same as for basic earnings per share, as the potential ordinary shares (options) do not increase the loss per share as compared to the basic earnings per share, and are therefore not dilutive.

24. DIRECTOR AND EXECUTIVE DISCLOSURES

a) Details of specified directors and specified executives

(i) specified directors

WB Willis

Chairman

BG Johnson Managing Director CL Readhead Director (non-executive) IA Macliver Director (non-executive)

(ii) specified executives

Operations Manager

JR Tyers Operations Manager RJ McGregor Mine Manager (commenced 30 September 2003) SP Coates Exploration Manager DJ Coulthard Commercial Manager AM Dent Company Secretary

b) Remuneration of Specified Directors and Specified Executives

i) Remuneration Policy

— 195 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

objective of ensuring maximum stakeholder benefit from the retention of a high quality board and executive team. To assist in achieving these objectives, the nature and amount of executive directors’ and officers’ emoluments are linked to Mount Gibson’s financial and operational performance. All directors and employees have the opportunity to qualify for participation in the Employee Share Scheme.

ii) Remuneration of specified directors and specified executives

			Primary	Non	Post Employment	Post Employment
		Salary	Cash	Monetary	Super-	Retirement	Equity	Other
		& Fees	Bonus	Benefits	annuation	Benefits	Options	Bonuses	Total
specified directors
WB Willis (i)	2004	82,934	—	—	9,102	—	53,850	—	145,886
	2003	94,951	—	—	8,549	—	114,024	—	217,524
BG Johnson	2004	288,433	—	—	—	—	143,600	—	432,033
	2003	288,587	—	—	—	—	—	—	288,587
CL Readhead	2004	33,026	—	—	2,974	—	26,925	—	62,925
	2003	33,024	—	—	2,976	—	28,656	—	64,656
IA Macliver	2004	33,026	—	—	2,974	—	26,925	—	62,925
	2003	33,024	—	—	2,976	—	28,656	—	64,656
Total Remuneration: specified directors
	2004	437,419	—	—	15,050	—	251,300	—	703,769
	2003	449,586	—	—	14,501	—	171,336	—	635,423
specified executives
JR Tyers	2004	150,000	—	—	13,500	—	—	—	163,500
	2003	102,619	—	—	26,442	—	—	—	129,061
RJ McGregor	2004	131,968	—	—	11,877	—	—	—	143,845
	2003	—	—	—	—	—	—	—	—
SP Coates	2004	114,677	—	—	10,321	—	—	—	124,998
	2003	92,128	—	—	10,501	—	—	—	102,629
DJ Coulthard	2004	120,000	—	—	—	—	—	—	120,000
	2003	120,000	—	—	—	—	14,328	—	134,328
AM Dent	2004	108,174	—	—	—	—	—	—	108,174
	2003	91,600	—	—	—	—	14,328	—	105,928
Total Remuneration: specified executives
	2004	624,819	—	—	35,698	—	—	—	660,517
	2003	406,347	—	—	36,943	—	28,656	—	471,946

(i) Included in Mr Willis’ fees is $37,062 paid as a retainer for the provision of consulting services to Mount Gibson Mining Limited during the financial year and does not constitute directors’ fees within the $150,000 maximum approved by shareholders.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

c) Remuneration Options: Granted and vested during the year

On 3 June 2004, the Directors or their nominees were issued Options as bonus payments for their efforts in assisting with the successful acquisition and development of the Tallering Peak iron ore project.

Options granted during the financial year as part of director and executive emoluments have been valued using the Black and Scholes option pricing model. The value of 3.59 cents per option is calculated using the following assumptions:

Share price 20.5 cents Exercise price 22 cents Risk free interest rate 5.55% Volatility factor 32% Expiry date 15 October 2005

d) Option holdings of specified directors and specified executives

Balance at Beginning of Period 1 July 2003 Granted as Remuneration Options Exercised specified directors WB Willis 5,327,783 1,500,000 — BG Johnson — 4,000,000 — CL Readhead 2,015,695 750,000 — IA Macliver 2,065,348 750,000 — specified executives JR Tyers — — — RJ McGregor — — — SP Coates — — — DJ Coulthard 242,847 — — AM Dent 242,847 — — Total 9,894,520 7,000,000 —	Net Change (Lapsed/ Disposed) Balance at End of Period 30 June 2004 (5,387,783) 1,440,000 (40,000) 3,960,000 (2,045,695) 720,000 (1,370,904) 1,444,444 — — — — — — (242,847) — (242,847) — (9,330,076) 7,564,444	Net Change (Lapsed/ Disposed) Balance at End of Period 30 June 2004 (5,387,783) 1,440,000 (40,000) 3,960,000 (2,045,695) 720,000 (1,370,904) 1,444,444 — — — — — — (242,847) — (242,847) — (9,330,076) 7,564,444	Vested at 30 June 2004 Total Not Exercisable Exercisable — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —	Vested at 30 June 2004 Total Not Exercisable Exercisable — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
		7,564,444		—

— 197 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

e) Shareholdings of specified directors and specified executives

	Balance	Granted as	On Exercise	Net Change	Balance
	1 July 2003	Remuneration	of Options	Other	30 June 2004
	Ord	Ord	Ord	Ord	Ord
specified directors
WB Willis	420,000	—	—	—	420,000
BG Johnson	—	—	—	—	—
CL Readhead	177,500	—	—	—	177,500
IA Macliver	1,081,666	—	—	—	1,081,666
specified executives
JR Tyers	7,220	—	—	—	7,220
RJ McGregor	—	—	—	—	—
SP Coates	1,095,000	—	—	500,000	1,595,000
DJ Coulthard	—	—	—	131,250	131,250
AM Dent	12,778	—	—	—	12,778
Total	2,794,164	—	—	631,250	3,425,414

All equity transactions with specified directors and specified executives other than those arising from the exercise of remuneration options have been entered into under terms and conditions no more favourable than those the entity would have adopted if dealing at arm’s length.

f) Loans to specified directors and specified executives

There were no loans to specified directors and specified executives during the year.

g) Other transactions and balances with specified directors and specified executives services

Pullinger Readhead Stewart, of which Mr CL Readhead is a partner, provided legal services to Mount Gibson and Consolidated Entity. The fees, paid under normal commercial terms and conditions, were $13,551 (2003:$24,412) and $49,877 (2003:$27,671) respectively.

— 198 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Amounts recognised at the reporting date in relation to other transactions:

Assets and Liabilities Current Liabilities Trade Creditors Total Liabilities Revenues and Expenses Corporate expenses Total Expenses 25. RELATED PARTY DISCLOSURES Ultimate parent	CONSOLIDATED 2004 2003 $ $ 18,982 2,637 18,982 2,637 49,877 27,671 49,877 27,671	CONSOLIDATED 2004 2003 $ $ 18,982 2,637 18,982 2,637 49,877 27,671 49,877 27,671
		2,637
		27,671
		27,671

Mount Gibson Iron Limited is the ultimate Australian parent company.

Wholly-owned group transactions

Loans were made by Mount Gibson Iron Limited to wholly owned subsidiaries. These loans are interest free and have no fixed repayment date.

Director-related entity transactions

There are no director-related entity transactions other than those specified in Note 24.

— 199 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

26. AUDITOR’S REMUNERATION

Amounts received or due and receivable by Ernst & Young for: An audit or review of the financial report of the entity and any other entity in the Consolidated Entity Other services in relation to the entity and any other entity in the Consolidated Entity	CONSOLIDATED 2004 2003 $ $ 30,000 17,000 2,935 24,860 32,935 41,860	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ 12,000 17,000 2,285 860 14,285 17,860	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ 12,000 17,000 2,285 860 14,285 17,860
			17,860

27. CONTINGENT LIABILITY

There are no contingent liabilities which were not provided for in the financial statements of the economic entity and Mount Gibson as at 30 June 2004.

28. SUBSEQUENT EVENTS

On 20 September 2004, Mount Gibson announced that it will sell its 5.825 million shares (53.8% holding) in Asia Iron Pty Ltd to Hong Kong based Asia Iron Holdings Limited for A$7.5 million which will be paid by the issue of shares in Asia Iron Holdings Limited. Whilst the rights to all technical information will transfer to Asia Iron Holdings Limited, Mount Gibson will receive $0.25/tonne (indexed to CPI increases) for any magnetite concentrate produced from the Mt Gibson deposits and it will retain the right to mine all hematite occurring on leases held now or in the future by Asia Iron Holdings Limited in Western Australia, and to receive fees for managing its magnetite operations.

The financial effect of this event has not been recognised in the 30 June 2004 financial year.

29. DISCONTINUING OPERATIONS

Whittakers Timber Pty Ltd ceased operations in November 2002. There were no operations discontinued during the year.

Total Assets Total Liabilities Net Assets	CONSOLIDATED 2004 2003 $ $ — 15,762 — (1,902) — 13,860	CONSOLIDATED 2004 2003 $ $ — 15,762 — (1,902) — 13,860
		13,860

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

30. SEGMENT INFORMATION

Segment products and locations

The Consolidated Entity operates primarily in the mining sector, through the exploration, evaluation and development of its iron ore deposits in the Mid-West region of Western Australia.

Whittakers Timber Pty Limited sold timber to the building industry in the south-west of Western Australia.

The “other” segment includes revenues and expenses associated with an investment portfolio and investment properties purchased in prior years, and other revenues and expenses associated with general head office activities.

Other 2004 2003 $ $ — — 177,918 410,307 177,918 370,720 (3,292,004) (1,399,417) 23,115,155 20,019,378 10,585,058 3,064,106 4,612,226 607,148 87,207 —	Consolidated 2004 2003 $ $ 14,293,488 652,240 177,918 417,396 14,471,406 1,069,636 (10,982,911) (12,350,643	Consolidated 2004 2003 $ $ 14,293,488 652,240 177,918 417,396 14,471,406 1,069,636 (10,982,911) (12,350,643
		1,069,636
		(12,350,643
	—	—
20,019,378	(10,982,911) 80,191,957	(12,350,643
		33,393,583
	(27,405,212)	(7,926,288
3,064,106	52,786,745 29,387,769	25,467,295
		13,809,593
	—	(9,292,733
607,148 —	29,387,769 16,900,630 1,462,656	4,516,860
		1,434,838 36,984

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

	Weighted	average	effective	interest rate			2004 2003	% %		3.97 4.73	2.43 4.82	N/A N/A		N/A N/A	N/A N/A	N/A N/A			1.36 N/A	N/A N/A	N/A N/A	8.03 8.1	3.12 N/A	N/A N/A	7.15 N/A	10.0 10.0
The Consolidated Entity’s exposure to interest rate risks and the effective interest rates of financial assets and financial liabilities are as follows:		Total carrying amount	per statement of	Fixed interest rate maturing in: financial position	Over 1 to 5 Non-interest	Floating interest rate 1 year or less years bearing	2004 2003 2004 2003 2004 2003 2004 2003 2004 2003	$ $ $ $ $ $ $ $ $ $	i) Financial assets	Cash 1,783,786 3,243,841 — — — — 300 200 1,784,086 3,244,041	Fixed Deposit 145,000 4,309,248 — — — — 1,750,000 — 1,895,000 4,309,248	Trade and other receivables — — — — — — 1,197,678 163,927 1,197,678 163,927	Hedging foreign currency deferred	loss — — — — — — 1,349,446 — 1,349,446 —	Unlisted shares — — — — — — — 7,223,858 — 7,223,858	Rehabilitation Bonds — — — — — — — 30,000 — 30,000	Total financial assets 1,928,786 7,553,089 — — — — 4,297,424 7,417,985 6,226,210 14,971,074	ii) Financial liabilities	Bank overdraft 1,172,954 — — — — — — — 1,172,954 —	Trade and other creditors — — — — — — 7,291,144 667,554 7,291,144 667,554	Hedging foreign currency payable — — — — — — 1,349,446 — 1,349,446 —	Lease liabilities — — 1,569,362 14,427 7,762,035 62,865 — — 9,331,397 77,292	Borrowings — — 1,016,113 — — — — — 1,016,113 —	Other creditors — — — — — — 499,648 885,000 499,648 885,000	Unearned revenue — — 5,171,738 — 1,041,065 — — — 6,212,803 —	Convertible Notes (to be issued) — — — — 2,375,000 2,875,000 — — 2,375,000 2,875,000	Total financial liabilities 1,172,954 — 7,757,213 14,427 11,178,100 2,937,865 9,140,238 1,552,554 29,248,505 4,504,846

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APPENDIX IV

b) Net fair values

In accordance with AASB 1012 Foreign Currency Translation, foreign currency hedges have been recognised as a deferred hedging loss and foreign currency hedge payable at the difference between the hedge rate and the spot rate. The mark to market value of the deferred hedging loss is nil and deferred hedge payable is $1,349,446 (2003: $nil). All other recognised financial assets and liabilities have been recognised at their net fair values at balance date.

c) Credit risk exposure

In relation to derivative financial instruments, whether recognised or unrecognised, credit risk arises from the potential failure of counterparties to meet their obligations under the contract or arrangement. The consolidated entity’s maximum credit risk exposure in relation to forward exchange contracts is the full amount of the foreign currency it will be required to pay or purchase when settling the forward exchange contract, should the counterparty not pay the currency it is committed to deliver to the company. At reporting date the net amount was A$1,349,446 (2003: $nil).

Concentration of credit risk

The company minimises concentrations of credit risk in relation to trade receivables by undertaking transactions with a number of customers and by the use of letters of credit which guarantee 90% of receivable amount at the time of sale.

d) Hedging instruments

Hedges for specific commitments

Mount Gibson Iron Limited has entered into a forward exchange contract at reporting date designed as a hedge of anticipated future receipts that will be denominated in US dollars.

This hedge has been treated as specific, in accordance with UIG 33, as the approximate value of the sale and the entities with which the transactions will be entered is presently known.

The amount of recognised deferred loss included in payables at reporting date was $1,349,446 (2003:$nil). The mark to market value is $17,999,710.

32. IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS

Mount Gibson Iron Limited has commenced transitioning its accounting policies and financial reporting from current Accounting Standards to Australian equivalents of International Reporting Standards (IFRS). The company has allocated internal resources to assess key areas that will be impacted by the transition to IFRS. As Mount Gibson Iron Limited has a 30 June year end, priority has been given to considering the preparation of an opening balance sheet in accordance with AASB equivalents to IFRS as at 1 July 2004. This will form the basis of accounting for Australian equivalents of IFRS in the future, and is required when Mount Gibson Iron Limited prepare its first fully IFRS compliant financial report for the year ended 30 June 2006. Set out below are the key areas where accounting policies will change and may have an impact on the financial report of Mount Gibson Iron Limited. At this stage the company has not been able to reliably quantify the impacts on the financial report.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Classification of Financial Instruments

Under AASB 139 Financial Instruments: Recognition and Measurement, financial instruments will be required to be classified into one of five categories which will, in turn determine the accounting treatment of the item. The classifications are loans and receivables — measured at amortised cost, financial assets held to maturity — measured at amortised cost, financial assets held for trading — measured at fair value with fair value changes charged to net profit or loss, financial assets available for sale — measured at fair value with fair value changes taken equity and non-trading liabilities — measured at amortised cost. This will result in a change in the current accounting policy that does not classify financial instruments. Current measurement is at amortised cost, with certain derivative financial instruments not recognised on balance sheet. The future financial effect of this change in accounting policy is not yet known as the classification and measurement process has not yet been fully completed.

Hedge Accounting

Under AASB 139 Financial Instruments: Recognition and Measurement, in order to achieve a qualifying hedge, the entity is required to meet the following criteria:

Identify the type of hedge — fair value or cash flow;
Identify the hedged item or transaction;
Identify the nature of the risk being hedged;
Identify the hedging instrument;
Demonstrate that the hedge has and will continue to be highly effective; and
Document the hedging relationship, including the risk management objectives and strategy for undertaking the hedge and how effectiveness will be tested.

Under the current accounting policy unrealised exchange gains and losses on specific hedges at balance date are deferred and recognised in the statement of financial position and any unrealised exchange gains or losses on general hedges are included in the statement of financial performance. Reliable estimation of the future financial effect of this change in accounting policy has not yet been measured.

Impairment of Assets

Under AASB 136 Impairment of Assets the recoverable amount of an asset is determined as the higher of net selling price and value in use. This will result in a change in the group’s current accounting policy which determines the recoverable amount of an asset on the basis of undiscounted cash flows. Under the new policy it is likely that impairment of assets will be recognised sooner and that the amount of write-downs will be greater. Reliable estimation of the future financial effects of this change in accounting policy is impracticable because the conditions under which impairment will be assessed are not yet known.

Share based payments

Under AASB 2 Share Based Payments, the company will be required to determine the fair value of options issued to employees as remuneration and recognise an expense in the Statement of Financial Performance. This standard is not limited to options and also extends to other forms of equity based remuneration. It applies to all share-based payments issued after 7 November 2002 which have not vested as at 1 January 2005. Reliable estimation of the future financial effects of this change in accounting policy is impracticable as the details of future equity based remuneration plans are unknown.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Income taxes

Under AASB 112 Income Taxes, the company will be required to use a balance sheet liability method which focuses on the tax effects of transactions and other events that affect amounts recognised in either the Statement of Financial Position or a tax-based balance sheet. Previously, the capital gains tax effects of asset revaluation were not recognised. It is not expected that there will be any further material impact as a result of adoption of this standard.

Exploration and Evaluation Expenditure

Under ED 130 Request for Comment on IASB ED 6 Exploration for a Evaluation of Mineral Resources, the company will be permitted to continue applying its current accounting policy in relation to the recognition and measurement of exploration and evaluation assets until the comprehensive project on extractive industries is finalised by the AASB and IASB. However, these assets will have to be assessed for impairment, on the initial application of the standard and annually, and this may result in the write down or off of exploration and evaluation costs currently carried forward under AASB 1022. Reliable estimation of the future financial effects of this change in accounting policy is impracticable until the final accounting standard is released.

Provisions, Contingent Liabilities and Contingent Assets

Under AASB 137 Provisions, Contingent Liabilities and Contingent Assets, the mining restoration and rehabilitation and provision will be required to be discounted to its present value. This will result in a change in the current accounting policy which recognises the provision gradually over the life of the mine. Reliable estimation of the future financial effects of this change in accounting policy is not yet known as a detailed study is to be conducted into the rehabilitation costs at Tallering Peak in 2004/05.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(D) The following is the director’s report and auditors’ report of Mount Gibson as disclosed in its 2004 annual report:

DIRECTORS’ REPORT

The directors submit their report for the year ended 30 June 2004.

DIRECTORS

The names and details of the Mount Gibson’s directors in offi ce during the fi nancial period and until the date of this report are as follows. Directors were in office for the entire period unless otherwise stated.

NAMES, QUALIFICATIONS AND EXPERIENCE

Bill Willis AssocDipGeol RMIT, FAusIMM, MGSA, AMP109

Chairman, non executive director

Mr Willis is a geologist with extensive technical and management experience in the Australian mining sector, particularly in iron ore. He was executive director and chief executive of Robe River Mining Co Pty Limited from 1993 to 1999 inclusive. Mr Willis was responsible to the Joint Venture between North Limited, Nippon Steel, Mitsui and Sumitomo Metals for the management, operation and expansion of the Robe River iron ore project in the Pilbara region of Western Australia in the 90’s. Earlier, Mr Willis worked for BHP and was responsible for exploration, mine geology and management of iron ore production at the company’s iron ore mines at Koolyanobbing and Yampi Sound, and responsible for exploration and mine geology at Mt Newman. Mr Willis consults to the group on a part-time basis and is a member of the Audit Committee.

Brian Johnson B.E., MIEAust

Managing director

Mr Johnson is a civil engineer with extensive experience in the construction and mining industries in Australia, South East Asia and North America. He has held a number of directorships in listed public companies. As a major shareholder and chief executive, Mr Johnson was instrumental in establishing Portman Limited’s presence in the iron ore industry between 1991 and 1994, developing mines at Koolyanobbing and Cockatoo Island. He also personally partnered Mr Lang Hancock in the development and operation of McCamey’s Monster iron ore mine in the Pilbara, prior to its sale to the BHP Group. Mr Johnson has experience in dealing with regional steel mills and major trading houses through his previous involvement in the production of coking coal, manganese and iron ore.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Craig Readhead B. Juris, LL.B, AICD

Non-executive director

Mr Readhead has spent the last 24 years practising in the resources law area and is a partner of law fi rm Pullinger Readhead Lucas. Mr Readhead has had a signifi cant legal role in the development of a number of mining projects within Australia, Africa and South East Asia. He is Chairman and a non-executive director of Heron Resources Ltd, Pioneer Nickel Ltd, Agincourt Resources Ltd and Halcyon Group Ltd, and is past President of the Australian Mining and Petroleum Law Association, and past Vice-President of the Association of Mining and Exploration Companies. Mr Readhead is a member of the Audit Committee.

Ian Macliver B.Comm, CA, ASIA, AICD

Non-Executive Director

Mr Macliver is Managing director of Grange Consulting Group Pty Ltd, which provide specialist corporate advisory services to both listed and unlisted companies. He has many years experience as a senior executive and director of both resource and industrial companies with particular responsibility for capital raising and other corporate initiatives. Mr Macliver is chairman and a non-executive director of Stratel Ltd and is a non-executive director of Port Bouvard Ltd and BioProspect Ltd. Mr Macliver is chairman of the Audit Committee.

COMPANY SECRETARIES

Angela Dent B.Bus, CA

Ms Dent consults to a number of public and private companies, as a management accountant and Company Secretary. She has experience in financial and management accounting, and statutory requirements, in Australia and South East Asia.

John Arbuckle B.Bus, CPA

Mr Arbuckle is an accountant with over 15 years experience in the mining industry, having occupied senior fi nance roles with Rio Tinto Limited, North Limited, Anaconda Nickel Limited and Perilya Limited. He is also the Chief Financial Officer of Mount Gibson.

— 207 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Interests in the Shares and Options of Mount Gibson

As at the date of this report, the interests of the directors in the shares and Options of Mount Gibson were:

	Ordinary	Options
	shares	over shares
WB Willis	420,000	1,440,000
BJ Johnson	—	3,960,000
CL Readhead	177,500	720,000
IA Macliver	1,081,666	1,444,444

CORPORATE INFORMATION

CORPORATE STRUCTURE

Mount Gibson is a company limited by shares that is incorporated and domiciled in Australia. It is the ultimate parent entity.

Mount Gibson has prepared a consolidated financial report incorporating the entities that it controlled during the financial year, which are:

Mount Gibson Mining Limited;
Whittakers Timber Pty Limited;
Geraldton Bulk Handling Pty Ltd; and
Asia Iron Pty Ltd.

NATURE OF OPERATIONS AND PRINCIPAL ACTIVITIES

The principal activities of the entities within the Consolidated Entity were:

mining of hematite deposits in Tallering Peak;
exploration and development of hematite and magnetite deposits in the Mid-West region of Western Australia;
construction of infrastructures including roads and rail terminal at Tallering Peak and an iron ore storage facility at Geraldton Port.

— 208 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

EMPLOYEES

The Consolidated Entity employed 46 employees as at 30 June 2004 (2003: 8 employees).

FUTURE FUNDING

As at the date of this report the Consolidated Entity has suffi cient funds or funding to develop and mine the Tallering Peak iron deposits.

REVIEW AND RESULTS OF OPERATIONS

A review of the Consolidated Entity’s operations are included in the Review of Projects, page 8 of the 2004 annual report of Mount Gibson.

OPERATING RESULTS FOR THE PERIOD

The operating loss of Mount Gibson and Consolidated Entity, after providing for income tax of $nil (2003: $nil), was $564,030 (2003: $12,350,643) and $10,982,911 (2003: $12,350,643) respectively.

SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS

There were no significant changes in the state of affairs of the Consolidated Entity other than those referred to elsewhere in this report or the financial statements or notes thereto.

SIGNIFICANT EVENTS AFTER BALANCE DATE

LIKELY DEVELOPMENTS AND EXPECTED RESULTS

Other than as referred to in the Review of Projects and in this report, further information as to likely developments in the operations of the entity and likely results of those operations would, in the opinion of the Directors, be speculation and not in the best interest of Mount Gibson.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

ENVIRONMENTAL REGULATION AND PERFORMANCE

Mount Gibson Mining Limited has developed Environmental Management Plans for its operations at Tallering Peak and the rail head at Mullewa. The Environmental Management Plans have been approved by the West Australian Department of Industry & Resources, Department of Environment and Department of Conservation and Land Management.

The Consolidated Entity holds various environmental licenses and authorities, issued under both State and Federal law, to regulate its mining and exploration activities in Australia. These licenses include conditions and regulations in relation to specifying limits on discharges to the environment, rehabilitation of areas disturbed during the course of mining and exploration activities and the storage of hazardous substances.

There have been no material breaches of the Consolidated Entities licenses and all mining and exploration activities have been undertaken in compliance with the relevant environmental regulations.

SHARE OPTIONS

Details of Options over ordinary shares on issue as at balance date and at the date of this report are:

		Options	on issue at
Exercise Price	Exercise Date/Period	Balance date	Date of report
25 cents	On or before 31 December 2004	19,000,000	19,000,000
22 cents	On or before 15 October 2005	25,800,000	30,800,000
15.84 cents	On or before 28 February 2006	2,083,332	2,083,332
Total		46,883,332	51,883,332

Optionholders do not have any right, by virtue of the Option, to participate in any share issue of Mount Gibson.

INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS

Mount Gibson has not, during the financial period, indemnified or made any relevant agreement for indemnifying, any person who is or has been an officer or auditor of Mount Gibson or a related body corporate, against a liability incurred as an offi cer or auditor, including costs and expenses in successfully defending legal proceedings.

— 210 —

APPENDIX IV FINANCIAL INFORMATION ON MOUNT GIBSON

During the financial year, Mount Gibson has paid premiums in respect of a contract insuring all the directors of Mount Gibson Iron Limited against costs incurred in defending proceedings except for conduct involving:

(a) a wilful breach of duty; or
(b) a contravention of sections 182 or 183 of the Corporations Act 2001,

as permitted by section 199B of the Corporations Act 2001.

The total amount of insurance contract premiums paid was $35,048. This amount has not been included in directors’ and executives’ remuneration.

DIRECTORS’ AND OTHER OFFICERS’ EMOLUMENTS

REMUNERATION POLICY

The board of directors is responsible for determining and reviewing compensation arrangements for the directors and executive officers. The maximum total compensation payable to non-executive directors is $150,000 and was approved by shareholders on 18 December 2001. The Board assesses the appropriateness of the nature and amount of emoluments of all officers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality board and executive team. To assist in achieving these objectives, the nature and amount of executive directors’ and officers’ emoluments are linked to the Company’s financial and operational performance. All directors and employees have the opportunity to qualify for participation in the Employee Share Scheme.

Details of the nature and amount of each element of the emolument of each director of Mount Gibson and each of the five executive officers of Mount Gibson and Consolidated Entity receiving the highest emolument for the financial year are as follows:

					Termination		Long	Term
	Annual	Emoluments			& Similar		Emoluments
Directors	Base Fee	Bonus	Other		Payments	Superannuation	Options	Granted
	$	$		$	$	$	Number	$
WB Willis (i)	45,872	—	37,062		—	9,102	1,500,000	53,850
BG Johnson	288,433	—		—	—	—	4,000,000	143,600
CL Readhead	33,026	—		—	—	2,974	750,000	26,925
IA Macliver	33,026	—		—	—	2,974	750,000	26,925

(i) The $37,062 paid to Mr Willis is a retainer for the provision of consulting services to Mount Gibson Mining Limited during the financial year and does not constitute directors’ fees within the $150,000 maximum approved by shareholders.

— 211 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

								Long Term
	Annual Emoluments				Termination			Emoluments
Executive					& Similar
Officers	Base Fee	Bonus	Other		Payments		Superannuation	Options Granted
	$	$		$		$	$	Number	$
JR Tyers	150,000	—		—		—	13,500	—	—
RJ McGregor	131,968	—		—		—	11,877	—	—
SP Coates	114,677	—		—		—	10,321	—	—
DJ Coulthard	120,000	—		—		—	—	—	—
AM Dent	108,174	—		—		—	—	—	—
From 1 July 2003, options granted as part of director and							executive emoluments have been
d using the Black and Scholes option pricing model. The							value of 3.59 cents per option		is
lated using the following assumptions:
Share price			20.5 cents
Exercise price			22 cents
Risk free interest rate			5.55%
Volatility factor			32%
Expiry date			15 October		2005

From 1 July 2003, options granted as part of director and executive emoluments have been valued using the Black and Scholes option pricing model. The value of 3.59 cents per option is calculated using the following assumptions:

DIVIDENDS

No dividends were paid during the period and no recommendation is made as to dividends.

DIRECTORS’ MEETINGS

The numbers of meetings of directors (including meetings of Committees of directors) held during the year and the number of meetings attended by each director were as follows:

		Audit
	Directors’ Meetings	Committee Meetings
Number of Meetings Held	12	2
WB Willis	12	2
BJ Johnson	12	—
CL Readhead	12	2
IA Macliver	10	2

— 212 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

TAX CONSOLIDATION

For the purposes of income tax, Mount Gibson and its 100% owned subsidiaries intend to form a tax consolidated group. At the date of signing the financial report, Mount Gibson Iron Limited has not determined the date of entry into tax consolidation because this decision will be based upon the most favourable outcome in terms of the transitional rules in the tax consolidation legislation. The date of entry will be determined at the time the head company lodges its tax return.

Entering into a tax consolidation group is not expected to have an impact on the income tax balances of Mount Gibson or the Consolidated Entity for the year ended 30 June 2004.

CORPORATE GOVERNANCE

In recognising the need for the highest standards of corporate behaviour and accountability, the directors of Mount Gibson Iron Limited support and have adhered to the principles of corporate governance. Mount Gibson’s corporate governance statement is contained in the additional ASX information section of this annual report.

Signed in accordance with a resolution of the directors.

WB Willis

Chairman

Perth, 29 September 2004.

— 213 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

INDEPENDENT AUDIT REPORT TO MEMBERS OF MOUNT GIBSON IRON LIMITED

SCOPE

The financial report and directors’ responsibility

The financial report comprises the statement of fi nancial position, statement of financial performance, statement of cash flows, accompanying notes to the financial statements, and the directors’ declaration for Mt Gibson and the consolidated entity, for the year ended 30 June 2004. The consolidated entity comprises both the company and the entities it controlled during that year. The directors of the company are responsible for preparing a fi nancial report that gives a true and fair view of the financial position and performance of the company and the consolidated entity, and that complies with Accounting Standards in Australia, 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 fi nancial report.

Audit approach

We conducted an independent audit of the financial report in order to express an opinion on it 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 fi nancial report presents fairly, in accordance with the Corporations Act 2001, including compliance with Accounting Standards in Australia, and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of the company’s and the consolidated entity’s financial position, and of their performance as represented by the results of their 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 amounts and disclosures in the financial report, and
assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors.

While we considered the effectiveness of management’s internal controls over fi nancial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls. We performed procedures to assess whether the substance of business transactions was accurately reflected in the financial report. These and our other procedures did not include consideration or judgement of the appropriateness or reasonableness of the business plans or strategies adopted by the directors and management of the company.

— 214 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

INDEPENDENCE

We are independent of the company, and have met the independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. In addition to our audit of the financial report, we were engaged to undertake the services disclosed in the notes to the fi nancial statements. The provision of these services has not impaired our independence.

AUDIT OPINION

In our opinion, the financial report of Mt Gibson Iron Limited is in accordance with:

(a) the Corporations Act 2001, including:
(i) giving a true and fair view of the financial position of Mt Gibson Iron Limited and the consolidated entity at 30 June 2004 and of their 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.

Ernst & Young

V W Tidy Partner

Perth

Date: 30 September 2004

— 215 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(E) The following is the financial statements for the year ended 30 June 2005 prepared in accordance with Australian accounting standards which is extracted from the annual report 2005 of Mount Gibson.

Statement of Financial Performance For the year ended 30 June 2005

Consolidated 2005 2004 $ $ 76,872,338 14,293,488 (50,556,143) (11,154,702)	Consolidated 2005 2004 $ $ 76,872,338 14,293,488 (50,556,143) (11,154,702)	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — — 1,890,358 143,436 (121,477) (128,968) (447,780) (272,903) (168,423) (305,595) — — — — (52,540) — 1,100,138 (564,030) — — 1,100,138 (564,030) — — 1,100,138 (564,030) (958,000) (150,000) 142,138 (714,030)	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — — 1,890,358 143,436 (121,477) (128,968) (447,780) (272,903) (168,423) (305,595) — — — — (52,540) — 1,100,138 (564,030) — — 1,100,138 (564,030) — — 1,100,138 (564,030) (958,000) (150,000) 142,138 (714,030)
26,316,195 644,910 (280,489) (544,557) (1,676,046) (28,496) (665,946) (52,540) 23,713,031 — 23,713,031 — 23,713,031 (958,000)	3,138,786 177,918 (1,733,389) (372,030) (1,363,751) (9,228,176) (1,601,920) (349) (10,982,911) — (10,982,911) — (10,982,911) (150,000)	— 1,890,358 (121,477) (447,780) (168,423) — — (52,540) 1,100,138 — 1,100,138 — 1,100,138 (958,000)	—
			143,436 (128,968 (272,903 (305,595 — — —
			(564,030 —
			(564,030 —
			(564,030 (150,000
22,755,031 7.44 7.16	(11,132,911) (4.04) (4.04)	142,138

— 216 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Statement of Financial Position

At 30 June 2005

Consolidated 2005 2004 $ $ 33,633,253 1,784,086 2,952,531 1,895,000 2,876,136 1,197,678 5,296,449 2,797,374 328,672 1,349,446 658,658 467,885	Consolidated 2005 2004 $ $ 33,633,253 1,784,086 2,952,531 1,895,000 2,876,136 1,197,678 5,296,449 2,797,374 328,672 1,349,446 658,658 467,885	Mount Gibson Iron Limited 2005 2004 $ $ 44,182 26,641 — — 30,114 87,666 — — — — 3,250 4,958	Mount Gibson Iron Limited 2005 2004 $ $ 44,182 26,641 — — 30,114 87,666 — — — — 3,250 4,958
45,745,699 — 2,942,318 17,416,637 29,104,015 14,724,769 64,187,739	9,491,469 — — 16,758,280 17,889,333 8,647,663 43,295,276	77,546 53,419,260 13,727,453 5,400 — — 67,152,113	119,265
			23,084,848 6,798,301 5,400 — —
			29,888,549
109,933,438	52,786,745	67,229,659	30,007,814
9,662,833 328,672 2,708,084 548,020	8,464,098 1,349,446 7,757,213 139,264	123,294 — — —	159,461 — — —
13,247,609	17,710,021	123,294	159,461
459,627 7,969,530	499,648 11,178,100	— —	— 2,375,000
8,429,157	11,677,748	—	2,375,000

— 217 —

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APPENDIX IV

Notes Total Liabilities Net Assets Equity Contributed equity 17 Accumulated losses 18 Total Parent Entity Interest in Equity Outside equity interest 19 Total Equity	Consolidated 2005 2004 $ $ 21,676,766 29,387,769 88,256,672 23,398,976 79,381,008 40,848,134 (80,631) (23,793,662) 79,300,377 17,054,472 8,956,295 6,344,504 88,256,672 23,398,976	Mount Gibson Iron Limited 2005 2004 $ $ 123,294 2,534,461 67,106,365 27,473,353 79,381,008 40,848,134 (12,274,643) (13,374,781) 67,106,365 27,473,353 — — 67,106,365 27,473,353

— 218 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Statement of Cash Flows

For the year ended 30 June 2005

Consolidated 2005 2004 $ $ 76,662,283 15,051,259 (57,207,462) (23,483,180) 426,601 166,211 (1,676,046) (1,363,750) 18,205,376 (9,629,460)	Consolidated 2005 2004 $ $ 76,662,283 15,051,259 (57,207,462) (23,483,180) 426,601 166,211 (1,676,046) (1,363,750) 18,205,376 (9,629,460)	Mount Gibson Iron Limited 2005 2004 $ $ — — (646,531) (466,580) 33,095 143,433 (168,422) (305,595) (781,858) (628,742) — — — — (28,829,328) (8,650,809) (1,511,830) — — — (2,542,317) — — — (32,883,475) (8,650,809) 34,640,874 7,236,948 — — (958,000) (150,000) — — — — — (500,000) 33,682,874 6,586,948 17,541 (2,692,603) 26,641 2,719,244 44,182 26,641	Mount Gibson Iron Limited 2005 2004 $ $ — — (646,531) (466,580) 33,095 143,433 (168,422) (305,595) (781,858) (628,742) — — — — (28,829,328) (8,650,809) (1,511,830) — — — (2,542,317) — — — (32,883,475) (8,650,809) 34,640,874 7,236,948 — — (958,000) (150,000) — — — — — (500,000) 33,682,874 6,586,948 17,541 (2,692,603) 26,641 2,719,244 44,182 26,641
45,563 (997,152) — 534,119 47,829 (2,942,317) (6,123,287)	11,707 (6,486,710) — (165,000) — — (1,603,145)	— — (28,829,328) (1,511,830) — (2,542,317) —	— — (8,650,809 — — — —
(9,435,245)	(8,243,148)	(32,883,475)
34,640,874 (1,202,532) (958,000) (2,033,670) 14,096,274 (20,290,956)	7,236,948 (1,895,000) (150,000) (990,412) 12,643,059 (5,914,144)	34,640,874 — (958,000) — — —	7,236,948 — (150,000 — — (500,000
24,251,990	10,930,451	33,682,874
33,022,121 611,132	(6,942,157) 7,553,289	17,541 26,641	(2,692,603 2,719,244
33,633,253	611,132	44,182

Closing Cash

— 219 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

The gearing ratio for the year ended 30 June 2005 was calculated on the basis of total interest-bearing borrowings in the sum of approximately A$10,677,614 divided by total equity in the sum of approximately A$88,256,672, i.e. approximately 12.10%.

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

1. STATEMENT OF ACCOUNTING POLICIES

(a) Basis of accounting

(b) Changes in accounting policies

Other than a change in the policy for acquisition, exploration, evaluation, development and restoration costs, the accounting policies adopted are consistent with those of the previous year.

The Consolidated Entity’s previous policy stated that all costs arising from exploration, evaluation and development activities were written off as incurred, except to the extent they arise through acquisition. The policy for acquisition, exploration, development and restoration costs has been amended to differentiate between Exploration and Evaluation costs and Development costs and to allow capitalisation where it is expected that the expenditure will be recouped by future exploitation or sale of the area of interest. This policy was changed to improve the relevance and reliability of the financial information.

The new accounting policy adopted states that:

Exploration and Evaluation costs are expensed as incurred, except where at balance date, it is expected that the expenditure will be recouped by future exploitation or sale of the area of interest, in which case the expenditure is capitalised; and
Development Costs are capitalised as incurred to the extent that such costs, together with any costs arising from acquisition, exploration and evaluation carried forward in respect of the area of interest, are expected to be recouped through future exploitation or sale of the area of interest.

This change in accounting policy has no effect on the financial results for the current or prior financial years.

(c) Principles of consolidation

Information from the financial statements of subsidiaries is included from the date the parent Company obtains control until such time as control ceases. Where there is loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting period during which the parent Company has control.

Subsidiary acquisitions are accounted for using the purchase method of accounting.

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FINANCIAL INFORMATION ON MOUNT GIBSON

The financial statements of subsidiaries are prepared for the same reporting period as the parent Company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist.

(d) Foreign currencies

Translation of foreign currency transactions

Transactions in foreign currencies of entities within the Consolidated Entity are converted to local currency at the rate of exchange ruling at the date of the transaction.

A monetary item arising under a foreign currency contract outstanding at the reporting date where the exchange rate for the monetary items is fixed in the contract is translated at the exchange rate fixed in the contract.

Specific hedges

(e) Cash and cash equivalents

Cash on hand and in banks and short-term deposits are stated at nominal value.

Bank overdrafts are carried at the principal amount. Interest is recognised as an expense as it accrues.

(f) Receivables

Receivables from related parties are recognised and carried at the nominal amount due.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(g) Investments

All investments are carried at the lower of cost and recoverable amount.

Investments in associates are carried at the lower of the equity accounted amount and receivable amount in the consolidated financial report.

(h) Inventories

(i) Recoverable amount

(j) Property, plant and equipment

Cost and valuation

All classes of property, plant and equipment are measured at cost.

Depreciation

Property, Plant and Equipment	2005	2004
Buildings	5 - 20 years	5 - 20 years
Motor vehicles	4 - 5 years	4 - 5 years
Office equipment	3 - 5 years	3 - 5 years
Leasehold improvements	5 - 10 years	5 - 10 years

(k) Leases

Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership.

Operating leases

— 222 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Finance leases

(l) Acquisition, exploration, evaluation, development and restoration costs

As noted at (b) Changes in accounting policies, the Consolidated Entity has changed its accounting policy relating to acquisition, exploration, evaluation, development and restoration costs to the following:

Acquisition costs

Exploration and evaluation costs arising from acquisitions are carried forward where exploration and evaluation activities have not, at balance date, reached a stage to allow a reasonable assessment regarding the existence of economically recoverable reserves.

Exploration and evaluation costs

Costs arising from exploration and evaluation activities are expensed as incurred, except where, at balance date, it is expected that the expenditure will be recouped by future exploitation or sale of the area of interest, in which case the expenditure is capitalised.

Development costs

Costs arising from development activities are capitalised as incurred to the extent that such costs, together with any costs arising from acquisition, exploration and evaluation carried forward in respect of the area of interest, are expected to be recouped through future exploitation or sale of the area of interest.

Amortisation

Accumulated acquisition, exploration, evaluation and development costs on productive areas are amortised over the life of the area of interest to which such costs relate on the production output basis.

Restoration costs

— 223 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

based on anticipated technology and legal requirements and future costs, which have been discounted to their present value. Any changes in the estimates are adjusted on a retrospective basis. In determining the restoration obligations, the entity has assumed no significant changes will occur in the relevant Federal and State legislation in relation to restoration of such mines in the future.

(m) Mine properties

(n) Other non-current assets

Expenditure carried forward

Significant items of carry forward expenditure having a benefit or relationship to more than one period are written off over the periods to which such expenditure relates.

(o) Payables

Payables to related parties are carried at the principal amount.

Deferred cash settlements are recognised at the present value of the outstanding consideration payable on the acquisition of an asset discounted at prevailing commercial borrowing rates.

(p) Interest-bearing liabilities

Finance lease liability is determined in accordance with the requirements of AASB 1008 “Leases”.

(q) Provisions

— 224 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

A provision for dividends is not recognised as a liability unless the dividends have been declared, determined or publicly recommended on or before the reporting date.

(r) Contributed equity

Issued and paid up capital is recognised at the fair value of the consideration received by Mount Gibson. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received.

(s) Revenue recognition

Sale of goods — Control of the goods has passed to the buyer.

Interest — Control of the right to receive the interest payment.

Dividends — Control of the right to receive the dividend payment.

(t) Taxes

Income taxes

Tax-effective accounting is applied using the liability method whereby income tax is regarded as an expense and is calculated on the accounting profit after allowing for permanent differences. To the extent timing differences occur between the time items are recognised in the financial statements and when items are taken into account in determining taxable income, the net related taxation benefit or liability, calculated at current rates, is disclosed as a future income tax benefit or a provision for deferred income tax. The net future income tax benefit relating to tax losses and timing differences is not carried forward as an asset unless the benefit is virtually certain of being realised.

Goods and Service Tax (GST)

Revenues, expenses and assets are recognised net of the amount of GST except:

Where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and
Receivables and payables are stated with the amount of GST included.

The net amount of GST recoverable from, or payable to, the taxation authority is included as part of payables in the Statement of Financial Position.

Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority.

— 225 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(u) Employee benefits

Employee benefits expenses and revenues arising in respect of the following categories:

Wages and salaries, non-monetary benefits, annual leave, long service leave, sick leave and other leave entitlements; and
Other types of employee benefits are recognised against profits on a net basis in their respective categories.

The value of the employee share incentive scheme described in note 2 is not being recognised as an employee benefits expense.

(v) Derivative financial instruments

Forward exchange contracts

(w) Earnings per Share

Diluted EPS is calculated as net profit attributable to members, divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element.

Costs of servicing equity (other than dividends);
The after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and

— 226 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

Other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares;

(x) Repairs and maintenance

(y) Acquisition of assets

The purchase method of accounting is used for all acquisitions of assets regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition, plus incidental costs directly attributable to the acquisition.

Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of acquisition. The discount rate used is the incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions.

(z) Comparatives

Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures.

2. REVENUE FROM ORDINARY ACTIVITIES

Consolidated 2005 2004 $ $ 76,872,338 14,293,488 76,872,338 14,293,488	Consolidated 2005 2004 $ $ 76,872,338 14,293,488 76,872,338 14,293,488	Mount Gibson Iron Limited 2005 2004 $ $ — — — —	Mount Gibson Iron Limited 2005 2004 $ $ — — — —
			—
— 470,931 45,563 126,553 1,863 644,910	— 166,211 11,707 — — 177,918	1,857,257 33,094 — — 7 1,890,358	— 143,433 — — 3
			143,436
77,517,248	14,471,406	1,890,358	143,436

— 227 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

3. EXPENSES AND LOSSES/(GAINS)

Depreciation of Non-Current Assets Plant and equipment Plant and equipment under lease Buildings Buildings under lease Decrement in the value of land Amortisation of mine properties Borrowing Costs Expensed Interest expense — Finance lease — Loan Doubtful debts Operating lease rental — minimum lease payments Exploration, evaluation cost written off Losses/(Gains) Net (gain)/loss on disposal of property, plant and equipment	Consolidated 2005 2004 $ $ 385,766 118,937 2,147,219 1,191,290 431,865 114,005 124,665 38,424 3,089,515 1,462,656 72,723 69,714 17,415,929 4,664,107	Consolidated 2005 2004 $ $ 385,766 118,937 2,147,219 1,191,290 431,865 114,005 124,665 38,424 3,089,515 1,462,656 72,723 69,714 17,415,929 4,664,107	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — — — — — — — — — — — — 168,423 305,595 168,423 305,595 — (3,004) — — — — — —	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — — — — — — — — — — — — 168,423 305,595 168,423 305,595 — (3,004) — — — — — —
	803,900 872,146	473,555 890,196	— 168,423	— 305,595
	1,676,046 — 959,409 665,946 17,482	1,363,751 — 728,002 1,601,920 (6,225)	168,423 — — — —

— 228 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

4. INCOME TAX

The prima facie tax on profit/(loss) differs from the income tax provided in the financial statements as follows: Prima facie tax on profit/(loss) from ordinary activities Future income tax benefit not brought to account Prior year tax losses utilised Income tax expense attributable to ordinary activities Income Tax Losses Income tax losses not brought to account at reporting date as realisation of the benefit is not regarded as virtually certain	Consolidated 2005 2004 $ $ 7,113,909 (3,294,873) — 3,294,873 (7,113,909) — — — 15,378,348 33,652,945	Mount Gibson Iron Limited 2005 2004 $ $ 330,041 (169,209) — 169,209 (330,041) — — — 1,046,440 2,284,926

The future income tax benefit will only be obtained if:

a) Future assessable income is derived of a nature and of an amount sufficient to enable the benefit to be realised;

b) The conditions for deductibility imposed by tax legislation continue to be applied with; and

Tax Consolidation

For the purposes of income tax, the Company and its 100% owned subsidiaries intend to form a tax consolidated group. At the date of signing the financial report, the Company has not determined the date of entry into tax consolidation because this decision will be based upon the most favourable outcome in terms of the transitional rules in the tax consolidation legislation. The date of entry will be determined at the time the head company lodges its tax return.

Entering into a tax consolidation group is not expected to have an impact on the income tax balances of the Company or the Consolidated Entity for the year ended 30 June 2005

c) No changes in tax legislation adversely affect the Consolidated Entity in realising the benefit.

— 229 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

5. RECEIVABLES

					Mount Gibson	Mount Gibson
			Consolidated		Iron Limited
		Notes	2005	2004	2005	2004
			$	$	$	$
Current
Trade	debtors	(b)	2,270,881	1,046,299	—	9,425
Sundry debtors		(b)	571,712	76,650	5,114	5,114
Other	receivables		33,543	74,729	25,000	73,127
			2,876,136	1,197,678	30,114	87,666
Non-Current
Other	receivables	(a),(b)	—	—	53,564,023	23,229,611
Less:	provision for doubtful debts		—	—	(144,763)	(144,763)
			—	—	53,419,260	23,084,848
a)	Related Party Receivables
	Non-Current
	Controlled entities		—	—	53,419,260	23,084,848

b) Terms and conditions — Terms and conditions relating to the above financial instruments:
i) Trade debtors are non-interest bearing and generally on 30 day terms.
ii) Sundry debtors are non-interest bearing and have repayment terms between 30 and 90 days.
iii) Except for amounts payable by Mt Gibson Mining Ltd, charged interest at 7% pa, related party receivables are non-interest bearing with no fixed repayment date.

6. INVENTORIES

Notes Inventory — consumables at cost Inventory — ore at cost	Consolidated 2005 2004 $ $ 199,231 152,243 5,097,218 2,645,131 5,296,449 2,797,374	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — —	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — —
			—

— 230 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

7. OTHER FINANCIAL ASSETS

				Mount Gibson	Mount Gibson
		Consolidated		Iron Limited
	Notes	2005	2004	2005	2004
		$	$	$	$
Current
Hedging foreign currency deferred loss	29(d)	—	1,349,446	—	—
Hedging foreign currency financial asset	29(d)	328,672	—	—	—
		328,672	1,349,446	—	—
Non-Current
Investments at cost comprise:
Controlled entities — unlisted		—	—	21,618,261	17,631,427
Less: provision for diminution		—	—	(10,833,126)	(10,833,126)
		—	—	10,785,135	6,798,301
Other entities — unlisted (at cost)		400,000	—	400,000	—
Other entities — listed (at cost)	(a)	2,542,318	—	2,542,318	—
		2,942,318	—	13,727,453	6,798,301

a) During the year, Mount Gibson Iron Limited purchased 28,743,410 shares in Resource Mining Corporation Ltd, resulting in 10.36% shareholding in Resource Mining Corporation Ltd as at 30 June 2005. At balance date the investment had a market value of $3,592,926.

8. INTEREST IN SUBSIDIARIES

Country of Incorporation Percentage of Equity Interest Held by the Consolidated Entity 2005 2004 % % Name Asia Iron Holdings Limited Hong Kong 63 — Mount Gibson Mining Limited Australia 100 100 WHTK Pty Ltd Australia 100 100 Geraldton Bulk Handling Pty Ltd Australia 100 100 MGM Pipelines Pty Ltd Australia 100 —	Investment 2005 2004 $ $ 3,986,832 — 6,798,298 6,798,298 1 1 2 2 2 — 10,785,135 6,798,301	Investment 2005 2004 $ $ 3,986,832 — 6,798,298 6,798,298 1 1 2 2 2 — 10,785,135 6,798,301
		6,798,301

— 231 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

In acquiring Asia Iron Holdings Limited, the consolidated entity also acquired the following controlled entities:

		Percentage	of Equity
		Interest Held by the
	Country of	Consolidated Entity		Investment
	Incorporation	2005	2004	2005	2004
		%	%	$	$
Asia Iron (Nanjing) Co., Ltd	China	63	—	—	—
Asia Iron Limited	Hong Kong	63	—	—	—
Jiangsu Investment Pty Ltd	Australia	63	—	—	—
Extension Hill Pty Ltd	Australia	63	—	—	—
Austral Iron Pty Ltd	Australia	63	—	—	—
AP Mining Pty Ltd	Australia	63	—	—	—
Westralian Iron Pty Ltd	Australia	63	—	—	—

9. OTHER ASSETS

Notes Current Deposits paid Prepayments	Consolidated 2005 2004 $ $ 33,250 56,109 625,408 411,776 658,658 467,855	Mount Gibson Iron Limited 2005 2004 $ $ 3,250 3,250 — 1,708 3,250 4,958	Mount Gibson Iron Limited 2005 2004 $ $ 3,250 3,250 — 1,708 3,250 4,958
			4,958

— 232 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

10. PROPERTY, PLANT AND EQUIPMENT

				Mount Gibson	Mount Gibson
		Consolidated		Iron Limited
	Notes	2005	2004	2005	2004
		$	$	$		$
Freehold Land
At cost		732,628	732,628	5,400	5,400
Decrement in the value of land		(142,437)	(69,714)	—		—
		590,191	662,914	5,400	5,400
Plant and Equipment
At cost		2,432,261	1,670,842	—		—
Accumulated depreciation		(546,006)	(156,739)	—		—
		1,886,255	1,514,103	—		—
Plant and Equipment Under Lease
At cost		12,354,535	9,710,686	—		—
Accumulated amortisation		(3,335,935)	(1,206,270)	—		—
		9,018,600	8,504,416	—		—
Buildings
At cost		6,111,598	5,731,857	—		—
Accumulated depreciation		(549,111)	(117,246)	—		—
		5,562,487	5,614,611	—		—
Buildings Under Lease
At cost		522,194	500,660	—		—
Accumulated amortisation		(163,090)	(38,424)	—		—
		359,104	462,236	—		—
Total Property, Plant and Equipment
At cost		22,153,216	18,346,673	5,400	5,400
Accumulated depreciation/amortisation		(4,736,579)	(1,588,393)	—		—
		17,416,637	16,758,280	5,400	5,400

— 233 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

					Mount Gibson	Mount Gibson
			Consolidated		Iron Limited
		Notes	2005	2004	2005	2004
			$	$	$	$
a)	Assets Pledged as Security
	The value of assets pledged as
	security are:
	Plant and equipment		1,886,255	1,514,103	—	—
	Plant and equipment under lease	20(c),(d)	9,018,600	8,504,416	—	—
	Buildings under lease	20(c),(d)	359,104	462,236	—	—
	Buildings		5,562,487	5,614,611	—	—

b) Reconciliations — Reconciliations of the carrying amounts of property, plant and equipment at the beginning and end of the current and previous financial year.

				Mount Gibson	Mount Gibson
		Consolidated		Iron Limited
	Notes	2005	2004	2005	2004
		$	$	$		$
Plant and Equipment Under Lease
Carrying amount at beginning		8,504,416	41,911	—		—
Additions		2,783,438	9,626,910	—		—
Transfers		(66,484)	41,416	—		—
Disposals		(55,551)	(14,531)	—		—
Depreciation expense		(2,147,219)	(1,191,290)	—		—
		9,018,600	8,504,416	—		—
Plant and Equipment
Carrying amount at beginning		1,514,103	110,444	—		—
Additions		617,411	1,567,420	—		—
Additions through acquisition of entities		81,517	—	—		—
Transfers		66,484	(44,824)	—		—
Disposals		(7,494)	—	—		—
Depreciation expense		(385,766)	(118,937)	—		—
		1,886,255	1,514,103	—		—
Buildings
Carrying amount at beginning		5,614,611	607,148	—		—
Additions		379,741	5,118,060	—		—
Transfers		—	3,408	—		—
Depreciation expense		(431,865)	(114,005)	—		—
		5,562,487	5,614,611	—		—
Buildings Under Lease
Carrying amount at beginning		462,236	—	—		—
Additions		21,533	500,660	—		—
Depreciation expense		(124,665)	(38,424)	—		—
		359,104	462,236	—		—

— 234 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

11. DEFERRED ACQUISITION, EXPLORATION AND EVALUATION COSTS

Notes Deferred acquisition, exploration and evaluation costs carried forward in respect of mining areas of interest: Mt Gibson Hematite Mt Gibson Magnetite Koolanooka South Magnetite	Consolidated 2005 2004 $ $ 4,021,812 4,021,812 19,874,254 13,867,521 5,207,949 — 29,104,015 17,889,333	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — — — —	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — — — —
			—

The ultimate recoupment of costs carried forward for exploration and evaluation phases is dependent on the successful development and commercial exploitation or sale of the respective mining areas. Amortisation of costs carried forward for the development phase is not being recognised pending commencement of production.

12. MINE PROPERTIES

Notes Transferred from deferred acquisition, exploration and development costs Mine development expenditure Accumulated amortisation	Consolidated 2005 2004 $ $ — 4,837,968 36,804,805 8,473,802	Consolidated 2005 2004 $ $ — 4,837,968 36,804,805 8,473,802	Mount Gibson Iron Limited 2005 2004 $ $ — — — —	Mount Gibson Iron Limited 2005 2004 $ $ — — — —
	36,804,805 (22,080,036)	13,311,770 (4,664,107)	— —	— —
	14,724,769	8,647,663	—	—

— 235 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

13. PAYABLES

Consolidated 2005 2004 $ $ — 1,172,954 9,662,833 7,291,144 9,662,833 8,464,098	Consolidated 2005 2004 $ $ — 1,172,954 9,662,833 7,291,144 9,662,833 8,464,098	Mount Gibson Iron Limited 2005 2004 $ $ — — 123,294 159,461 123,294 159,461	Mount Gibson Iron Limited 2005 2004 $ $ — — 123,294 159,461 123,294 159,461
			159,461
459,627	499,648	—	—
459,627	499,648	—	—

a) Terms and conditions — Terms and conditions relating to the above financial instruments
i) Trade creditors are non-interest bearing and are normally settled on 30 day terms.
ii) Other creditors are non-interest bearing and have an average term of 90 days.

b) Non-current payable

14. OTHER FINANCIAL LIABILITIES

								Mount	Gibson
						Consolidated		Iron Limited
					Notes	2005	2004	2005	2004
						$	$	$		$
Current
Hedging	foreign	currency	payable		29(d)	—	1,349,446	—		—
Hedging	foreign	currency	deferred	gain	29(d)	328,672	—	—		—
						328,672	1,349,446	—		—

— 236 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

15. INTEREST-BEARING LIABILITIES

Consolidated 2005 2004 $ $ 2,289,071 1,569,362 — 1,016,113 419,013 5,171,738 2,708,084 7,757,213	Consolidated 2005 2004 $ $ 2,289,071 1,569,362 — 1,016,113 419,013 5,171,738 2,708,084 7,757,213	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — — — —	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — — — —
			—
7,969,530 — —	7,762,035 1,041,065 2,375,000	— — —	— — 2,375,000
7,969,530	11,178,100	—	2,375,000

Terms and condition relating to the above financial instruments:

a) Finance leases are repayable monthly with final instalments due in May 2009. Interest is charged at an average rate of 7.87%. The loans are secured by first mortgage over the leased assets.
b) Convertible Notes are convertible at the option of the holder to Shares at $0.30 per share, with an interest rate of 10% payable at 6 monthly intervals from 31 December 2002 to 31 December 2005. The Convertibles Notes are unsecured. All convertible notes were converted to ordinary shares during the year (refer Note 17).
c) Stemcor (S.E.A) Limited agreed to prepay Mount Gibson Mining Limited US$6 million for iron ore to be supplied under their Off-take Agreement. The facility is repaid over 18 months from the first shipment of ore to Stemcor (S.E.A) Limited in April 2004. Interest is payable on the outstanding balance of the prepayment at 7.15% pa. This facility is secured by an irrevocable and unconditional guarantee by Mount Gibson to Stemcor, guaranteeing all Mount Gibson Mining Limited’s liabilities in connection with the facility. The facility was repaid in full in July 2005.

— 237 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

16. PROVISIONS

Notes Employee benefits 22 Rehabilitation (a),(b) Road resealing (b)	Consolidated 2005 2004 $ $ 238,033 124,191 247,486 15,073 62,501 — 548,020 139,264	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — — —	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — — —
			—

a) The provision for rehabilitation has been based on the experience and knowledge of the senior management and a detailed study will be conducted in 2005/06.
b) Movements in provisions:

Consolidated 2005 2004 $ $ 15,073 — 232,413 15,073 247,486 15,073	Consolidated 2005 2004 $ $ 15,073 — 232,413 15,073 247,486 15,073	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — —	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — —
			—
— 62,501	— —	— —	— —
62,501	—	—	—

— 238 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

17. CONTRIBUTED EQUITY

					Mount Gibson	Mount Gibson	Mount Gibson
			Consolidated		Iron Limited
		Notes	2005	2004	2005		2004
			$	$	$		$
a)	Issued and Paid Up Capital Ordinary
	Shares Fully Paid		79,381,008	40,848,134	79,381,008	40,848,134
				2005		2004
			Number of		Number of
			Shares	$	Shares		$
b)	Movements in Shares on Issue
	Beginning of the financial year issued
	during the year		291,565,822	40,848,134	252,561,928	33,761,186
	— converted from convertible notes		7,916,667	2,375,000	—		—
	— equity placement		49,760,604	32,305,000	39,000,000	7,236,000
	— exercise of options		19,276,700	4,810,874	3,894		948
	Less capital raising costs		—	(958,000)	—		(150,000)
	End of the Financial Year		368,519,793	79,381,008	291,565,822	40,848,134

c) Terms and conditions of contributed equity — Ordinary shares have the right to receive dividends as declared, and in the event of winding up the Company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of Mount Gibson.

d) Share Options — As at balance date there were the following Options over unissued shares:

Exercise Price	Exercise Date/ Period	2005 Number	2004 Number
25 cents	On or before 31 December 2004	—	19,000,000
22 cents	On or before 15 October 2005	30,523,300	25,800,000
15.84 cents	On or before 28 February 2006	—	2,083,332
25 cents	On or before 31 December 2006	4,500,000	—
50 cents	On or before 31 December 2007	5,000,000	—
55 cents	On or before 31 December 2008	5,000,000	—
		45,023,300	46,883,332

— 239 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

18. ACCUMULATED LOSSES

Notes Balance at the beginning of the year Net profit/(loss) attributable to members of Mount Gibson Iron Limited Balance at End of Year	Consolidated 2005 2004 $ $ (23,793,662) (12,810,751) 23,713,031 (10,982,911) (80,631) (23,793,662)	Mount Gibson Iron Limited 2005 2004 $ $ (13,374,781) (12,810,751) 1,100,138 (564,030) (12,274,643) (13,374,781)	Mount Gibson Iron Limited 2005 2004 $ $ (13,374,781) (12,810,751) 1,100,138 (564,030) (12,274,643) (13,374,781)
			(13,374,781)

19. OUTSIDE EQUITY INTEREST

Opening balance Less: Disposal by Mt Gibson Mining Limited of shares in Extension Hill Pty Ltd Add: Acquisition by Mt Gibson Iron Limited of shares in Asia Iron Holdings Ltd (see note 19(e)) Closing Balance	Consolidated 2005 2004 $ $ 6,344,504 6,344,504 (6,344,504) — 8,956,295 — 8,956,295 6,344,504	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — — — —	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — — — —
			—

— 240 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

20. STATEMENT OF CASH FLOWS

a) Reconciliation of the net profit/(loss) after tax to the net cash flows from operations Net profit/(loss) Non-Cash Items Depreciation of non-current assets Decrement in the value of land Net (profit)/loss on sale of property, plant and equipment Unrealised gain on Foreign Exchange Intra-group Interest Income Exploration expenses written off Amortisation of mine properties Changes in Assets and Liabilities (Increase)/ decrease in trade and other receivables (Increase)/ decrease in inventory (Increase) in prepayments/deposits (Increase)/ decrease in capitalised project and acquisition expenditure (Increase) in mine development expenditure Increase/(decrease) in creditors and accruals Increase/(decrease) in GST paid Increase/(decrease) in employee entitlements Net Cash Flow from Operating Activities b) Reconciliation of Cash Cash balance comprises: — Cash at bank and on hand — Bank overdraft — Deposits	Consolidated 2005 2004 $ $ 23,713,031 (10,982,911) 3,089,515 1,462,656 72,723 69,714 17,482 (6,225) (459,062) — — — 665,946 1,601,920 17,415,929 4,664,107 (1,726,288) (1,193,332) (2,499,076) (2,797,374) (127,547) (423,461) — 83,761 (24,158,980) (8,473,802) 2,132,623 6,981,083 (44,762) (727,773) 113,842 112,177 18,205,376 (9,629,460)	Consolidated 2005 2004 $ $ 23,713,031 (10,982,911) 3,089,515 1,462,656 72,723 69,714 17,482 (6,225) (459,062) — — — 665,946 1,601,920 17,415,929 4,664,107 (1,726,288) (1,193,332) (2,499,076) (2,797,374) (127,547) (423,461) — 83,761 (24,158,980) (8,473,802) 2,132,623 6,981,083 (44,762) (727,773) 113,842 112,177 18,205,376 (9,629,460)	Mount Gibson Iron Limited 2005 2004 $ $ 1,100,138 (564,030) — — — — — — — (1,857,262) (26,648) — — — — 9,725 (90,474) — — 1,708 (1,708) — 83,761 — — (52,323) (6,061) 16,156 (23,582) — — (781,858) (628,742) 44,182 26,641 — — — — 44,182 26,641	Mount Gibson Iron Limited 2005 2004 $ $ 1,100,138 (564,030) — — — — — — — (1,857,262) (26,648) — — — — 9,725 (90,474) — — 1,708 (1,708) — 83,761 — — (52,323) (6,061) 16,156 (23,582) — — (781,858) (628,742) 44,182 26,641 — — — — 44,182 26,641
	33,633,253 — 2,952,531	1,784,086 (1,172,954) 1,895,000	44,182 — —	26,641 — —
	36,585,784	2,506,132	44,182

The deposits include performance bond of $2,952,531 (2004: $1,895,000) which is not available for use as it is used as monetary backing for performance guarantees issued to cover minimum freight movement with Australian Western Railroad.

— 241 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

The above figures are reconciled to cash at the end of the financial year as shown in the statement of cash flows as follows:

Balance as above Deposits relating to performance guarantees Balance Per Statement of Cash Flows	Consolidated 2005 2004 $ $ 36,585,784 2,506,132 (2,952,531) (1,895,000) 33,633,253 611,132	Mount Gibson Iron Limited 2005 2004 $ $ 44,182 26,641 — — 44,182 26,641	Mount Gibson Iron Limited 2005 2004 $ $ 44,182 26,641 — — 44,182 26,641
			26,641

c) Financing facilities available

At balance date the following financing facilities were available:

			Mount Gibson	Mount Gibson
	Consolidated		Iron Limited
	2005	2004	2005	2004
	$	$	$	$
Total Facilities
— Bank overdraft	1,000,000	1,172,954	—	—
— Finance leases	10,258,601	10,347,510	—	—
— Guarantee facility	2,700,620	2,647,387	—	—
— Export line of credit	4,000,000	4,000,000	—	—
Facilities Used At Reporting Date
— Bank overdraft	—	1,172,954	—	—
— Finance leases	10,258,601	10,347,510	—	—
— Guarantee facility	493,120	—	—	—
— Export line of credit	—	—	—	—
Facilities Unused At Reporting Date
— Bank overdraft	1,000,000	—	—	—
— Finance leases	—	—	—	—
— Guarantee facility	2,207,500	2,647,387	—	—
— Export line of credit	4,000,000	4,000,000	—	—

d) Non-cash financing activities

During the financial year, the consolidated entity acquired property, plant & equipment with an aggregate fair value of $2,804,971 by means of finance leases.

— 242 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

e) Acquisition of Controlled Entity

During the year the Consolidated Entity acquired shares in Asia Iron Holdings Limited (Asia Iron). At 30 June 2005 the Consolidated Entity owned 82,500,000 fully paid ordinary shares in Asia Iron representing 62.98% of the issued capital in Asia Iron.

The shares in Asia Iron were acquired as follows:

		Number of
Date	Consideration	shares acquired
25 February 2005	2,750,000 Mount Gibson Iron Limited shares	5,001,000
3 March 2005	2,200,000 Mount Gibson Iron Limited shares	4,000,000
30 April 2005	Mount Gibson Iron Limited subscribed cash of $1,511,830	5,999,000
30 June 2005	Mount Gibson Mining Limited transferred its 53.8% shareholding in
	Extension Hill Pty Ltd (formerly Asia Iron Pty Ltd)	67,500,000
		82,500,000

In acquiring Asia Iron, the consolidated entity also acquired the following controlled entities:

Asia Iron (Nanjing) Co., Ltd
Asia Iron Limited
Jiangsu Investment Pty Ltd
Austral Iron Pty Ltd
AP Mining Pty Ltd; and
Westralian Iron Pty Ltd

— 243 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

The components of the acquisition cost were:

Consideration:
— Transfer by Mount Gibson Mining Limited of 53.8% controlling interest
in Extension Hill Pty Ltd to Asia Iron
— Issue of Mount Gibson Iron Limited shares to vendors of Asia Iron
shares
— Cash subscription price for Asia Iron shares
Net assets of Asia Iron at 30 June 2005:
— Cash
— Property plant and equipment
— Other assets
— Deferred acquisition, exploration and development costs
— Creditors and accruals
Total Interest Acquired in Asia Iron
Minority interest acquired
Net Cash Effect:
— Cash costs of acquisition
— Cash included in net assets acquired

$
11,250,000
2,475,000
1,511,830
15,236,830
2,045,949
81,517
16,714
25,082,203
(3,033,259)
24,193,124
62.98%
15,236,830
8,956,295
(1,511,830)
2,045,949
534,119

— 244 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

21. EXPENDITURE COMMITMENTS

					Mount Gibson	Mount Gibson
			Consolidated		Iron Limited
		Notes	2005	2004	2005	2004
			$	$	$		$
a)	Exploration Expenditure Commitments
	Minimum obligations not provided for in
	the financial report and are payable:	(i)
	— Not later than one year		826,100	220,985	—		—
	— Later than one year but not later
	than five years		3,128,400	883,940	—		—
			3,954,500	1,104,925	—		—
b)	Lease Expenditure Commitments
	Operating leases (non-cancellable)	(ii)
	Minimum lease payments
	— Not later than one year		593,644	897,760	—		—
	— Later than one year but not later
	than five years		970,697	1,525,372	—		—
			1,564,341	2,423,132	—		—
Finance Leases		(iii)
Minimum Lease Payments
	— Not later than one year		3,051,665	2,550,387	—		—
	— Later than one year but not later than five
	years		9,029,983	9,978,492	—		—
Total minimum lease payments			12,081,648	12,528,879	—		—
Future finance charges			(1,823,047)	(2,339,047)	—		—
			10,258,601	10,189,832	—		—
Total Lease Liability Accrued For:
	Current
	Finance leases		2,289,071	1,569,362	—		—
	Non-Current
	Finance leases		7,969,530	7,762,035	—		—
			10,258,601	9,331,397	—		—

i) In order to maintain current rights to explore and mine the tenements at Tallering Peak, Mt Gibson, Koolanooka, Extension Hill and Mintaja Coal, the Consolidated Entity is required to perform minimum exploration work to meet the expenditure requirements specified by the Department of Industry and Resources.

— 245 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

ii) Operating leases:
The operating lease for office space with an initial lease term of 5 years has an implicit interest rate of 4%.
The operating lease for machinery has a term of 5 years and expires in September 2008.
iii) Finance leases have an average term of 4.5 years with the option to purchase the asset at the completion of the lease term for a pre-agreed amount. The average discount rate implicit in the leases is 7.87%. Secured lease liabilities are secured by a charge over the leased assets.
c) Capital expenditure commitments

The consolidated entity has entered into an agreement to purchase 34 new narrow gauge bottom dump wagons from a Chinese railway manufacturing company for a total purchase price of $3,295,000. The wagons are scheduled for delivery to Geraldton in the first quarter of 2006. As at 30 June 2005 a deposit of $232,367 had been paid.

Employee Benefits and Superannuation Commitments

				Mount Gibson	Mount Gibson
		Consolidated		Iron Limited
		2005	2004	2005	2004
		$	$	$		$
a)	Employee Benefits
	The aggregate employee benefits liability is
	comprised of:
	Accrued wages, salaries and on costs	628,667	369,718	25,406	19,914
	Provisions (current)	238,033	124,191	—		—
		866,700	493,909	25,406	19,914

b) Employee Share Scheme

An employee share scheme has been established where the Company may, at the discretion of the board, grant options over the ordinary shares of the Company. The options, issued for nil consideration, are granted in accordance with performance guidelines established by the directors of the Company. All directors, officers and employees are eligible for this scheme.

— 246 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Information with respect to the number of options granted under the employee share scheme is as follows:

Balance at beginning of year — granted — forfeited — exercised Balance at year end Exercisable at year end	2005 No. of Options Weighted average exercise price (cents) — — 11,900,000 25.0 (1,000,000) 25.0 — — 10,900,000 25.0 — —	2004 No. of Options Weighted average exercise price (cents) — — — — — — — — — —	2004 No. of Options Weighted average exercise price (cents) — — — — — — — — — —
			—
			—

i) Options granted during the reporting period

The options were granted in December 2004 on the basis that the employees must complete employment service to 31 December 2005 before the options vest. Once vested the options will be exercisable at 25 cents each and expire on 31 December 2006.

23. EARNINGS PER SHARE

	Consolidated	Consolidated
	2005		2004
	$		$
The following reflects the income and share data used in the
calculations of basic and diluted earnings per share:
Profits/(losses) used in calculating basic earnings per share	23,713,031	(10,982,911)
Profits/(losses) used in calculating diluted earnings per share	23,713,031	(10,982,911)
	Number of Shares	Number of	Shares
Weighted average number of ordinary shares used in calculating basic
earnings per share	318,817,812	271,540,888
Weighted average number of ordinary shares used in calculating diluted
earnings per share	331,050,290	271,540,888

Conversions, calls, subscriptions or issues after 30 June 2005

Since the end of the financial year 1,131,001 options have been converted to ordinary shares. There have been no other conversions to, calls of, or subscriptions for ordinary shares or issues of potential ordinary shares since the reporting date and before the completion of this report.

— 247 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

24. DIRECTOR AND EXECUTIVE DISCLOSURES FOR THE YEAR ENDED 30 JUNE 2005

a) Details of specified directors and specified executives

(i) specified directors

WB Willis Chairman BG Johnson Managing Director CL Readhead Non-Executive Director IA Macliver Non-Executive Director

(ii) specified executives

KJ Malaxos Chief Executive Officer (Mount Gibson Mining Limited) JP Arbuckle Chief Financial Officer JR Tyers Project Manager SP Coates Exploration Manager C Lee Mine Manager Tallering Peak (appointed September 2004)

b) Remuneration of Specified Directors and Specified Executives

i) Remuneration Policy

The board of directors is responsible for determining and reviewing compensation arrangements for the directors and executive officers. The Board assesses the appropriateness of the nature and amount of emoluments of all officers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality Board and Executive team. To assist in achieving these objectives, the nature and amount of executive directors’ and officers’ emoluments are linked to Mount Gibson’s financial and operational performance. The maximum total compensation payable to non-executive directors is $150,000 and was approved by Shareholders on 18 December 2001. All directors and employees have the opportunity to qualify for participation in the Employee Share Scheme.

— 248 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

ii) Remuneration of specified directors and specified executives

specified directors WB Willis (i) 2005 2004 BG Johnson 2005 2004 CL Readhead 2005 2004 IA Macliver 2005 2004 Total Remuneration: specified directors 2005 2004 specified executives KJ Malaxos 2005 JP Arbuckle 2005 JR Tyers 2005 2004 SP Coates 2005 C Lee 2005 Total Remuneration: specified executives 2005 2004	Primary Post Employment Salary & Fees Cash Bonus Non Monetary Benefits Superannuation Retirement Benefits 116,731 — — 6,229 — 82,934 — — 9,102 — 344,669 250,000 88,309 — — 288,433 — 85,178 — — 41,951 — — — — 33,026 — — 2,974 — 38,485 — — 3,476 — 33,026 — — 2,974 —	Primary Post Employment Salary & Fees Cash Bonus Non Monetary Benefits Superannuation Retirement Benefits 116,731 — — 6,229 — 82,934 — — 9,102 — 344,669 250,000 88,309 — — 288,433 — 85,178 — — 41,951 — — — — 33,026 — — 2,974 — 38,485 — — 3,476 — 33,026 — — 2,974 —	Primary Post Employment Salary & Fees Cash Bonus Non Monetary Benefits Superannuation Retirement Benefits 116,731 — — 6,229 — 82,934 — — 9,102 — 344,669 250,000 88,309 — — 288,433 — 85,178 — — 41,951 — — — — 33,026 — — 2,974 — 38,485 — — 3,476 — 33,026 — — 2,974 —	Primary Post Employment Salary & Fees Cash Bonus Non Monetary Benefits Superannuation Retirement Benefits 116,731 — — 6,229 — 82,934 — — 9,102 — 344,669 250,000 88,309 — — 288,433 — 85,178 — — 41,951 — — — — 33,026 — — 2,974 — 38,485 — — 3,476 — 33,026 — — 2,974 —	Primary Post Employment Salary & Fees Cash Bonus Non Monetary Benefits Superannuation Retirement Benefits 116,731 — — 6,229 — 82,934 — — 9,102 — 344,669 250,000 88,309 — — 288,433 — 85,178 — — 41,951 — — — — 33,026 — — 2,974 — 38,485 — — 3,476 — 33,026 — — 2,974 —	Equity Options 29,230 58,495 1,543,389 155,212 14,615 29,247 14,615 29,247	Total 152,190 150,531 2,226,367 528,823 56,566 65,247 56,576 65,247
	541,836 437,419 207,692 185,000 150,000 150,000 130,780 130,872	250,000 — 10,000 7,500 10,000 — 10,000 7,500	88,309 85,178 — — — — — —	9,705 15,050 19,592 17,325 14,400 13,500 12,670 12,453	— — — — — — — —	1,601,849 272,201 31,285 31,285 41,714 — 31,285 12,514	2,491,699 809,848 268,569 241,110 216,114 163,500 184,735 163,339
	804,344 264,677	45,000 —	— —	76,440 23,821	— —	148,083 —	1,073,867 288,498

i) Included in Bill Willis’ fees is a $36,000 retainer for the provision of consulting services to Mount Gibson Mining Limited during the financial year.

c) Remuneration Options: Granted and vested during the year

On 15 April 2005, the directors or their nominees were issued Options under the directors, officers, Employees and Other Permitted Persons option plan.

— 249 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

Options granted as part of director and executive emoluments have been valued using the Black and Scholes option pricing model. The value per option at grant date is calculated using the following assumptions:

Date approved by Mount Gibson Iron board	24-Jan-05	24-Jan-05	24-Jan-05
Share price at date approved by Mount Gibson Iron board	$0.41	$0.41	$0.41
Grant date	16-Mar-05	16-Mar-05	15-Dec-04
Share price at grant date	$0.90	$0.90	$0.265
Exercise price	$0.50	$0.55	$0.25
Risk free interest rate	5.30%	5.30%	5.55%
Volatility factor	40%	40%	32%
Expiry date	31-Dec-07	31-Dec-08	31-Dec-06

Terms and Conditions for each grant

				Value Per	Exercise	First	Last
	Vested	Granted		Option at	Price per	Exercise	Exercise
	Number	Number	Grant Date	Grant Date	Share	Date	Date
				$	$
Specified Directors
BG Johnson	—	5,000,000	16-Mar-05	0.5516	0.50	31-Dec-05	31-Dec-07
BG Johnson	—	5,000,000	16-Mar-05	0.5716	0.55	31-Dec-06	31-Dec-08
Specified Executives
KJ Malaxos	—	750,000	15-Dec-04	0.0807	0.25	31-Dec-05	31-Dec-06
JP Arbuckle	—	750,000	15-Dec-04	0.0807	0.25	31-Dec-05	31-Dec-06
JR Tyers	—	1,000,000	15-Dec-04	0.0807	0.25	31-Dec-05	310-Dec-06
SP Coates	—	750,000	15-Dec-04	0.0807	0.25	31-Dec-05	31-Dec-06
C Lee	—	300,000	15-Dec-04	0.0807	0.25	31-Dec-05	31-Dec-06

— 250 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

d) Option holdings of specified directors and specified executives

specified directors WB Willis BG Johnson CLReadhead IA Macliver specified executives KJ Malaxos JP Arbuckle JR Tyers SP Coates C Lee Total	Balance at Beginning of Period 1 July 2004 Granted as Remuneration 2,440,000 — 6,460,000 10,000,000 1,220,000 — 1,944,444 —	Balance at Beginning of Period 1 July 2004 Granted as Remuneration 2,440,000 — 6,460,000 10,000,000 1,220,000 — 1,944,444 —	Options Exercised — — — (694,444)	Net Change (Lapsed/ Disposed) — (3,960,000) — —	Balance at End of Period 30 June 2005 2,440,000 12,500,000 1,220,000 1,250,000	Vested at 30 Total Not Exercisable 1,440,000 — — — 720,000 — 750,000 —	Vested at 30 Total Not Exercisable 1,440,000 — — — 720,000 — 750,000 —	June 2005 Exercisable 1,440,000 — 720,000 750,000
	— — — — —	750,000 750,000 1,000,000 750,000 300,000	— — — — —	— — — — —	750,000 750,000 1,000,000 750,000 300,000	— — — — —	— — — — —	— — — — —
	12,064,444	13,550,000	(694,444)	(3,960,000)	20,960,000	2,910,000	—	2,910,000

e) Shareholdings of specified directors and specified executives

			Ordinary shares Acquired/ (Sold) Balance of Ordinary shares on 30 June 2005 — 420,000 — — — 177,500 (576,110) 1,200,000	Ordinary shares Acquired/ (Sold) Balance of Ordinary shares on 30 June 2005 — 420,000 — — — 177,500 (576,110) 1,200,000
— — 7,220 1,595,000 —	— — — — —	— — — — —	25,000 — — (695,000) —	25,000 — 7,220 900,000 —

— 251 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

f) Loans to Specified Directors and Specified Executives

There were no loans to specified directors and specified executives during the year.

g) Other transactions and balances with specified directors and specified executives

Services - Pullinger Readhead Lucas, of which Mr CL Readhead is a partner, provided legal services to the Company and Consolidated Entity. The fees, paid under normal commercial terms and conditions, were $3,237 (2004:$13,551) and $16,997 (2004:$49,877) respectively.

Amounts recognised at the reporting date in relation to other transactions:

Assets and Liabilities Current Liabilities Trade Creditors Total Liabilities Revenues and Expenses Corporate expenses Total Expenses	Consolidated 2005 2004 $ $ — 18,982 — 18,982	Consolidated 2005 2004 $ $ — 18,982 — 18,982
		18,982
	16,997	49,877
	16,997	49,877

25. RELATED PARTY DISCLOSURES

Ultimate parent. Mount Gibson Iron Limited is the ultimate Australian parent company.

Wholly-owned group transactions. Loans were made by Mount Gibson Iron Limited to wholly owned subsidiaries. Interest of $1,857,257 was charged on the loan to Mount Gibson Mining Limited at 7% pa during the year. All other loans are interest free and have no fixed repayment date.

Director-related entity transactions. There are no director-related entity transactions other than those specified in Note

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APPENDIX IV

26. AUDITOR’S REMUNERATION

Amounts received or due and receivable by Ernst & Young for: An audit or review of the financial report of the entity and any other entity in the Consolidated Entity Other services in relation to the entity and any other entity in the Consolidated Entity	Consolidated 2005 2004 $ $ 45,000 30,000 — 2,935 45,000 32,935	Mount Gibson Iron Limited 2005 2004 $ $ 12,000 12,000 — 2,285 12,000 14,285	Mount Gibson Iron Limited 2005 2004 $ $ 12,000 12,000 — 2,285 12,000 14,285
			14,285

27. CONTINGENT LIABILITY

The HSBC Bank has provided a controlled entity with performance bonds totalling $493,120. A controlled entity has provided performance guarantees by way of cash deposits totalling $2,952,531 (2004: $1,895,000) to cover minimum freight movement requirements with Australian Western Railroad.

28. SEGMENT INFORMATION

Segment products and locations. The Consolidated Entity operates primarily in the mining sector, through the exploration, evaluation and development of its iron ore deposits in the Midwest region of Western Australia.

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		Weighted	Average	Effective	Interest Rate	2005 2004	% %		4.59 3.97	N/A 2.43	N/A N/A		N/A N/A	N/A N/A	N/A N/A			N/A 1.36	N/A N/A		N/A N/A	7.87 8.03	N/A 3.12	N/A N/A	7.15 7.15	N/A 10.0
The Consolidated Entity’s exposure to interest rate risks and the effective interest rates of financial assets and financial liabilities are as follows:	Total	Fixed interest Rate Maturing In: Carrying Amount Per	Statement of	Financial Floating 1 Year Over 1 to Non-Interest	Position Interest Rate or Less 5 Years Bearing	2005 2004 2005 2004 2005 2004 2005 2004 2005 2004	$ $ $ $ $ $ $ $ $ $	i) Financial Assets	Cash 33,632,949 1,783,786 — — — — 304 300 33,633,253 1,784,086	Fixed Deposit — 145,000 — — — — 2,952,531 1,750,000 2,952,531 1,895,000	Trade and other receivables — — — — — — 2,876,136 1,197,678 2,876,136 1,197,678	Hedging foreign currency	receivable — — — — — — 328,672 — 328,672 —	Unlisted shares — — — — — — 400,000 — 400,000 —	Listed shares — — — — — — 2,542,318 — 2,542,318 —	Total Financial Assets 33,632,949 1,928,786 — — — — 9,099,961 2,947,978 42,732,910 4,876,764	ii) Financial Liabilities	Bank overdraft — 1,172,954 — — — — — — — 1,172,954	Trade and other creditors — — — — — — 9,662,833 7,291,144 9,662,833 7,291,144	Hedging foreign currency	payable — — — — — — — 1,349,446 — 1,349,446	Lease liabilities — — 2,289,071 1,569,362 7,969,530 7,762,035 — — 10,258,601 9,331,397	Borrowings — — — 1,016,113 — — — — — 1,016,113	Other creditors — — — — — — 459,627 499,648 459,627 499,648	Unearned revenue — — 419,013 5,171,738 — 1,041,065 — — 419,013 6,212,803	Convertible notes — — — — — 2,375,000 — — — 2,375,000	Total Financial Liabilities — 1,172,954 2,708,084 7,757,213 7,969,530 11,178,100 10,122,460 9,140,238 20,800,074 29,248,505

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b) Net fair values

In accordance with AASB 1012 Foreign Currency Translation, foreign currency hedges have been recognised as a deferred hedging gain and foreign currency hedge receivable at the difference between the hedge rate and the spot rate. The mark to market value of deferred hedge financial asset is $116,157 (2004: $1,349,446 payable).

As at 30 June 2005, Mount Gibson Iron Limited owned 28,743,410 shares in a listed entity, Resource Mining Corporation Ltd. The investment had a market value of $3,592,926 (cost: $2,542,318).

All other recognised financial assets and liabilities have been recognised at their net fair values at balance date.

c) Credit risk exposure

In relation to derivative financial instruments, whether recognised or unrecognised, credit risk arises from the potential failure of counterparties to meet their obligations under the contract or arrangement. The Consolidated Entity’s maximum credit risk exposure in relation to forward exchange contracts is the full amount of the foreign currency it will be required to pay or purchase when settling the forward exchange contract, should the counterparty not pay the currency it is committed to deliver to Mount Gibson. At reporting date the net amount was A$328,672 (2004: $1,349,446).

Concentration of credit risk

The Consolidated Entity minimises concentrations of credit risk in relation to trade receivables by undertaking transactions with a number of customers and by the use of letters of credit which guarantee 90% of receivable amount at the time of sale.

d) Hedging instruments

i) Hedges for specific commitments

The Consolidated Entity has entered into forward exchange contracts at reporting date designed as a hedge of anticipated future receipts that will be denominated in US dollars.

This hedge has been treated as specific, in accordance with UIG 33, as the approximate value of the sale and the entities with which the transactions will be entered is presently known.

The amount of recognised deferred gain included in receivables at reporting date was $328,672 (2004:$1,349,446

loss).

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APPENDIX IV

As at 30 June 2005 the following foreign exchange contracts were outstanding:

Description	US$	A$ Equivalent	Mark to Market
Forward Exchange Contracts	10,000,000	13,413,816	166,676
— contract rate 0.7455
Collar Option	36,500,000	50,092,583	50,654
— call strike price 0.720/0.725/0.730/0.733
— put strike price 0.800/0.770/0.780/0.800
Convertible Collar Option	11,500,000	15,333,333	(101,173)
— call strike price 0.750
— put strike rate 0.800
— barrier rate 0.7998
Total	58,000,000	78,839,732	116,157

All of the above contracts mature by 30 June 2006.

30. SUBSEQUENT EVENTS

On 29 August 2005, Mount Gibson announced that it will be increasing its shareholding in Asia Iron from 63% to 76%, by the end of September 2005, through the subscription of new shares in Asia Iron and the acquisition of shares from an existing shareholding.

Since 30 June 2005, Mount Gibson has increased its shareholding in RMC from 10.36% to 13.11%.

31. IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS

Mount Gibson Iron Limited has commenced transitioning its accounting policies and financial reporting from current Accounting Standards to Australian equivalents of International Financial Reporting Standards (IFRS). Mount Gibson has allocated internal resources to assess key areas that will be impacted by the transition to IFRS. As Mount Gibson Iron Limited has a 30 June year end, priority has been given to considering the preparation of an opening balance sheet in accordance with AASB equivalents to IFRS as at 1 July 2005. This will form the basis of accounting for Australian equivalents of IFRS in the future, and is required when Mount Gibson Iron Limited prepare its first fully IFRS compliant financial report for the year ended 30 June 2006. Set out below are the key areas where accounting policies will change and may have an impact on the financial report of Mount Gibson Iron Limited. At this stage Mount Gibson has not been able to reliably quantify the impacts on the financial report.

Although the adjustments disclosed in this note are based on management’s best knowledge of expected standards and interpretations, and current facts and circumstances, these may change. For example, amended or additional standards or interpretations may be issued by the AASB and the IASB. Therefore, until Mount Gibson prepares its first full AIFRS financial statements, the possibility cannot be excluded that the accompanying disclosures may have to be adjusted

Classification of financial instruments

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FINANCIAL INFORMATION ON MOUNT GIBSON

or loss, financial assets available for sale — measured at fair value with fair value changes taken equity and non-trading liabilities — measured at amortised cost. This will result in a change in the current accounting policy that does not classify financial instruments. Current measurement is at amortised cost, with certain derivative financial instruments not recognised on balance sheet. The effect of this is currently being assessed.

During the 2005 financial year, the outstanding convertible notes were converted into equity. As the convertible notes were treated as a liability and were outstanding at the date of transition to AIFRS, Mount Gibson is considering the debt/equity classification in accordance with AASB 132 Financial Instruments: Disclosure and Presentation.

Hedge accounting

Under AASB 139 Financial Instruments: Recognition and Measurement, in order to achieve a qualifying hedge, the entity is required to meet the following criteria:

Identify the type of hedge — fair value or cash flow;
Identify the hedged item or transaction;
Identify the nature of the risk being hedged;
Identify the hedging instrument;
Demonstrate that the hedge has and will continue to be highly effective; and
Document the hedging relationship, including the risk management objectives and strategy for undertaking the hedge and how effectiveness will be tested.

Impairment of assets

Under AASB 136 Impairment of Assets the recoverable amount of an asset is determined as the higher of net selling price and value in use. This will result in a change in the group’s current accounting policy which determines the recoverable amount of an asset on the basis of undiscounted cash flows. Under the new policy it is likely that impairment of assets will be recognised sooner and that the amount of write-downs will be greater. Mount Gibson is currently preparing the appropriate model to enable the analysis of the effect of this change.

Share based payments

Under AASB 2 Share Based Payments, Mount Gibson will be required to determine the fair value of options issued to employees as remuneration and recognise an expense in the Statement of Financial Performance. This standard is not limited to options and also extends to other forms of equity based remuneration. It applies to all share-based payments issued after 7 November 2002 which have not vested as at 1 January 2005. The financial effect of these changes is in the process of being reviewed.

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Income taxes

Under AASB 112 Income Taxes, the Company will be required to use a balance sheet liability method which focuses on the tax effects of transactions and other events that affect amounts recognised in either the Statement of Financial Position or a tax-based balance sheet. Previously, the capital gains tax effects of asset revaluation were not recognised. The analysis of the effect of this change in standard is still being evaluated.

Exploration and Evaluation Expenditure

AASB 6 Exploration for and Evaluation of Mineral Resources, will permit the company to continue applying its current accounting policy in relation to the recognition and measurement of exploration and evaluation assets. The disclosure requirements of the standard are currently being analysed by the company.

Provisions, Contingent Liabilities and Contingent Assets

Under AASB 137 Provisions, Contingent Liabilities and Contingent Assets, the mining restoration and rehabilitation and provision will be required to be discounted to its present value and an offsetting asset will be created. This will result in a change in the current accounting policy which recognises the provision based upon the units of production. Reliable estimation of the future financial effects of this change in accounting policy is not yet known as a detailed study is to be conducted into the rehabilitation costs at Tallering Peak in 2005/06. The company is currently determining the impact of this change in standard.

Leases

The company is currently determining the impact of AASB 117 Leases and as such is reviewing significant contractual arrangements to determine whether they contain leases as defined in AASB 117.

Deferred Expenditure

The company is currently determining the impact of AIFRS upon post production overburden removal. The company’s current policy is to separately capitalise the costs for each area of interest and then amortise this expenditure on a units of production basis.

Business Combinations

On 30 June 2005 the company acquired a controlling interest in Asia Iron Holdings Ltd. The company is currently reviewing the acquisition accounting in accordance with the requirements of AASB 3 Business Combinations.

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APPENDIX IV

(F) The following is the directors’ report and auditors’ report of Mount Gibson as disclosed in its 2005 annual report:

DIRECTORS’ REPORT

The directors submit their report for the year ended 30 June 2005 for Mount Gibson and the Consolidated Entity incorporating the entities that it controlled during the financial year.

DIRECTORS

The names and details of Mount Gibson’s directors in office during the financial period and until the date of this report are set out below;Directors were in office for the entire period unless otherwise stated.

Names, Qualifications, Experienceand Special Responsibilities

Bill Willis — AssocDipGeol RMIT, FAusIMM, MGSA, AMP109

Chairman, non-executive director

Brian Johnson — BE MIEAust

Managing director (until 24 October 2005)

Mr Johnson is a civil engineer with extensive experience in the construction and mining industries in Australia, South East Asia and North America. He has held a number of directorships in listed public companies. As a major shareholder and Chief Executive, Mr Johnson was instrumental in establishing Portman Limited’s presence in the iron ore industry between 1991 and 1994, developing mines at Koolyanobbing and Cockatoo Island. He also personally partnered Mr Lang Hancock in the development and operation of McCamey’s Monster iron ore mine in the Pilbara, prior to its sale to the BHP Group. Mr Johnson has experience in dealing with regional steel mills and major trading houses through his previous involvement in the production of coking coal, manganese and iron ore. Mr Johnson has been managing director since the inception of Mount Gibson. During the past three years Mr Johnson has not served as a director of any other listed companies.

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Craig Readhead — B Juris, LLB, AICD

Non-executive director

Mr Readhead has spent the last 25 years practising in the resources law area and is a partner of law firm Pullinger Readhead Lucas. Mr Readhead has had a significant legal role in the development of a number of mining projects within Australia, Africa and South East Asia. He is Chairman and a non-executive director of Heron Resources Ltd, Agincourt Resources Ltd and Halcyon Group Ltd, and is past President of the Australian Mining and Petroleum Law Association, and past Vice-President of the Association of Mining and Exploration Companies. Mr Readhead is a member of the Audit Committee. During the past three years Mr Readhead has also served as a director of Pioneer Nickel Ltd and New World Alloys Ltd.

Ian Macliver — BComm, CA, ASIA, AICD

Non-executive director

Mr Macliver is managing director of Grange Consulting Group Pty Ltd, which provide specialist corporate advisory services to both listed and unlisted companies. He has many years experience as a senior executive and director of both resource and industrial companies with particular responsibility for capital raising and other corporate initiatives. Mr Macliver is Chairman and a non-executive director of Stratatel Ltd and is a non-executive director of Port Bouvard Ltd, BioProspect Ltd and Ottoman Energy Ltd. Mr Macliver is chairman of the Audit Committee. During the past three years Mr Macliver has also served as a director of Commoditel Ltd, Continental Goldfields Ltd, Konekt Ltd (formerly Startrack Communications Ltd) and ORT Ltd (formerly Syntech Ltd).

Alan Rule — BComm, BAcc, CA

Finance director

Mr Rule was appointed finance director on 1 July 2005. He is a chartered accountant with extensive experience in the mining industry in Australia. He held the position of Chief Financial Officer of Western Metals Limited and more recently St Barbara Mines Limited. He has considerable experience in international financing of mining projects and implementation of accounting controls and systems. Mr Rule was previously finance director of Asia Iron Holdings Limited and has been involved in the magnetite project since early 2004. During the past three years Mr Rule served as a director of Nustar Mining Corporation Limited.

Guoping Liu

Non-Executive Director

Mr Liu was appointed on 12 August 2005. He is the Vice-President of China Railway Materials and Supply Corporation (CRMSC) a Government owned entity ranked 60th by revenue in the top 500 enterprises in China. He has strong connections in Government and the steel industry in China, and extensive international trading experience within the USA, Europe, and South America. During the past three years Mr Liu has not served as a director of any other listed companies.

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APPENDIX IV

COMPANY SECRETARY

Angela Dent — BBus, CAMs

Dent consults to a number of public and private companies, as a Management Accountant and Company Secretary. She has experience in financial and management accounting, and statutory requirements, in Australia and South East Asia.

INTERESTS IN THE SHARES AND OPTIONS OF MOUNT GIBSON

As at the date of this report, the interests of the directors in the shares and Options of Mount Gibson Iron Limited were:

		Options Over
	Ordinary Shares	Shares
WB Willis	650,000	1,970,000
BG Johnson (refer note (i) below)	—	12,500,000
CL Readhead	177,500	1,250,000
IA Macliver	1,200,000	1,250,000
AD Rule	—	—
G Liu	—	—

(i) Mr Johnson holds 10,000,000 options in his own name. During the year Mr Johnson was a director of a subsidiary of a family trust which he does not control which holds 2,500,000 options. Mr Johnson resigned as a director of the subsidiary on 6 September 2005 and has no interest in or influence over these options at the date of this report.

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APPENDIX IV

CORPORATE INFORMATION

Corporate structure

Mount Gibson is a company limited by shares that is incorporated and domiciled in Australia. It is the ultimate parent entity and has prepared a consolidated financial report incorporating the entities that it controlled during the financial year. The structure of the Consolidated Entity as at 30 June 2005 was as follows:

==> picture [453 x 183] intentionally omitted <==

----- Start of picture text -----

Mount Gibson Iron Limited
Country of registration:Australia
ACN: 008 670 817
100% 100% 100% 100%
Geraldton Bulk Handling Pty Ltd Mount Gibson Mining Limited MGM Pipelines Pty Ltd WHTK Pty Ltd
Country of registration:Australia Country of registration:Australia Country of registration:Australia Country of registration:Australia
ACN: 100 105 388 ACN: 074 575 885 ACN: 112 872 349 ACN: 098 602 343
51.53% 11.45%
Asia Iron Holdings Limited
Country of registration: Hong Kong
HKCN: 879068
100% 100% 100% 100%
Austral Iron Pty Ltd Jiangsu Investment Pty Ltd Asia Iron Ltd
Asia Iron (Nanjing) Co., Ltd
Country of registration:Australia Country of registration:Australia Country of registration: Hong Kong
ACN: 100 180 952 ACN: 111 143 223 Country of registration: China HKCN: 866763
100% 100% 100%
AP Mining Pty Ltd Westralian Iron Pty Ltd Extension Hill Pty Ltd
Country of registration:Australia Country of registration:Australia Country of registration:Australia
ACN: 104 984 545 ACN: 106 448 695 ACN: 067 128 938
----- End of picture text -----

Nature of operations and principal activities

The principal activities of the entities within the Consolidated Entity are:

Mining of hematite deposits at Tallering Peak; and
Exploration and development of hematite and magnetite deposits in the Midwest region of Western Australia.

EMPLOYEES

The Consolidated Entity employed 71 employees as at 30 June 2005 (2004: 46 employees).

FUTURE FUNDING

As at the date of this report the Consolidated Entity has sufficient funds or funding to develop and mine the Tallering Peak iron deposits.

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APPENDIX IV FINANCIAL INFORMATION ON MOUNT GIBSON

REVIEW AND RESULTS OF OPERATIONS

Operating results for the period

A summary of the operating profit/(loss) for the Consolidated Entity and Mount Gibson is set out below:

			Mount	Gibson
	Consolidated		Iron	Ltd
	2005	2004	2005	2004
Operating profit/(loss) before tax	23,713,031	(10,982,911)	1,100,138	(564,030)
Taxation expense	—	—	—	—
Operating profit/(loss) after tax	23,713,031	(10,982,911)	1,100,138	(564,030)

Hematite operations

The Consolidated Entity’s first iron ore mine is at Tallering Peak, located170 km by road and rail from Geraldton. Mining of overburden commenced in November 2003 and the first shipment of ore occurred in February 2004.

The 2004/05 financial year was the first full year of hematite production at the Tallering Peak operations with almost 2 million tonnes of hematite ore being mined and 1.838 million tonnes sold. Approximately 65% of production for the year was lump ore and 35% fines.

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APPENDIX IV

Production for the year is summarised as follows:

Sept Qtr 2004 000’s Mining Waste bcm 999 Ore wmt 436 Crushing Lump wmt 259 Fines wmt 174 Total 433 Shipping Lump dmt 218 Fines dmt 239 Total 457	Dec Qtr 2004 March Qtr 2005 June Qtr 2005 12 to 000’s 000’s 000’s 1,051 936 810 470 549 480	Dec Qtr 2004 March Qtr 2005 June Qtr 2005 12 to 000’s 000’s 000’s 1,051 936 810 470 549 480	Dec Qtr 2004 March Qtr 2005 June Qtr 2005 12 to 000’s 000’s 000’s 1,051 936 810 470 549 480	Months 30 June 2005 000’s 3,796 1,935
259 174	305 174	296 157	405 183	1,265 688
433	479	453	588	1,953
218 239	245 218	375 128	278 137	1,116 722
457	463	503	415	1,838

Problems with the rail contractor and the Geraldton Port Authority caused operational difficulties during the year. The situation has been improving with time.

Production from the Tallering Peak operation will be increased from 2 Mtpato 3 Mtpa when additional rail wagons become available in the firstquarter of 2006.

Hematite prices are fixed to the prevailing published FOB prices for iron ore sold by Hamersley Iron from its Pilbara ports which are reviewed annually on 1 April. Mount Gibson benefited from the 71.5% price increase applicable from 1 April 2005, which increased the price of lump iron ore (63.5% Fe) to A$64/dmt and iron ore fines (61.5% Fe) to A$49/dmt (based on a US$0.78 exchange rate). This price increase in the last quarter has delivered a margin in excess of A$30/dmt for lump ore and A$20/dmt for fines.

The Consolidated Entity expects another strong year of production and profits in 2005/06 as a result of increased production and prices.

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APPENDIX IV

MAGNETITE PROJECT

During the year, the Consolidated Entity entered into commercial arrangements with Asia Iron Holdings Limited (Asia Iron), the Hong Kong based holding company which proposes to develop a pellet plant in China, and a new magnetite mine at Extension Hill in Western Australia’s Mt Gibson ranges.

In December 2004, Asia Iron acquired a 46% minority shareholding in Extension Hill Pty Ltd (EHPL) (formerly Asia Iron Pty Ltd) from an unrelated party. EHPL holds a number of mining and exploration tenements at Mt Gibson including the 250 Mt magnetite resource at Extension Hill which will be developed to supply 5.0 Mtpa of magnetite concentrate as feed for Chinese pellet plants for at least 20 years.

The Consolidated Entity acquired a 9% interest in Asia Iron in February and March 2005 through a placement and purchase of shares from existing shareholders.

On 30 June 2005, the Consolidated Entity transferred its 54% shareholding in EHPL to Asia Iron in exchange for a 54% shareholding in Asia Iron resulting in a holding of 63% in Asia Iron. The Consolidated Entity was issued 67.5 million shares by Asia Iron at HK$1.00 each, which is approximately equivalent to the A$11.0 million cost of investment in the Extension Hill magnetite project over a period of eight years.

As a result of this transaction, the Consolidated Entity has retained the same effective interest in the Extension Hill deposit as previously, and gained an interest in Asia Iron’s wholly owned magnetite deposits at Koolanooka South and Wolla Wolla, which are also located in the Midwest region of Western Australia.

The balance of Asia Iron’s shares on issue (57.5 million) were subscribed by Asia Iron’s directors and associates between December 2003 and June 2004, at HK$1.00 per share.

Mount Gibson’s wholly owned subsidiary, Mount Gibson Mining Limited (“MGM”), has retained the right to mine and sell all hematite resources at Extension Hill and at any other tenement held by Asia Iron in Western Australia.

MGM is negotiating a 20 year contract to manage the operation of the Extension Hill magnetite mine to be developed by Asia Iron and its partners, and will also be engaged to manage any other magnetite mine developed by Asia Iron in Western Australia within the next 10 years.

MGM will receive a management fee for each tonne of magnetite concentrate produced, escalated in accordance with increases in the Consumer Price Index.

On 23 June 2005, Mount Gibson signed a Participation Agreement with Shougang Holding (Hong Kong) Limited (Shougang) to jointly develop EHPL’s extensive magnetite resources at Mt Gibson.

Shougang is a wholly owned subsidiary of the Beijing based Shougang Group (also known as Capital Steel), which is China’s fourth largest steelmaker.

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APPENDIX IV

In addition to becoming the Consolidated Entity’s development partner in EHPL, Shougang has sought to become a strategic investor in Mount Gibson. Mount Gibson will grant Shougang an option to subscribe for 15% of Mount Gibson’s issued capital at the date of completion of the Bankable Feasability Study (“BFS”). Asia Iron expect to complete the BFS of the project in December 2005.

Asia Iron intends to commission both the Extension Hill mine, concentrator, slurry pipeline, necessary port facilities and a 2.5 Mtpa pellet plant at Longtan on the Yangtze River near Nanjing by the 3rd quarter of 2006.

Mount Gibson is confident the project will proceed and sees its controlling shareholding in Asia Iron as an appropriate level of exposure to the secondary processing of its magnetite ore in China, where the capital cost of proven low technology pellet plants, is less than one third of their cost in Western Australia.

REVIEW OF FINANCIAL CONDITION

During the course of the financial year, Mount Gibson took the opportunity to raise equity funding to provide sufficient funds for completion of the BFS for the magnetite project and for pre-development expenses of the magnetite project. A total of $32.3 million was raised through the placement of 47.8 million shares.

All of the outstanding convertible notes were exercised during the year resulting in 7.9 million additional shares being issued to extinguish $2.4 million in convertible notes.

Holders of 19.3 million options exercised their options during the year resulting in an additional $4.8 million in equity funding for Mount Gibson.

By 30 June 2005, Mount Gibson had acquired 10.36% in the ordinary share capital of Resource Mining Corporation Limited (“RMC”). RMC has a controlling interest in iron ore deposits at Argyle in the Kimberley and at Ravensthorpe in the South West of Western Australia.

The Consolidated Entity is in a strong position at year end with $33.6 million in cash and no debt apart from leases on mobile mining equipment. The Tallering Peak operations are generating strong monthly cash flows.

SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS

There were no significant changes in the state of affairs of the Consolidated Entity other than those referred to elsewhere in this report or the financial statements or notes thereto.

SIGNIFICANT EVENTS AFTER BALANCE DATE

On 29 August 2005, Mount Gibson announced that it will be increasing its shareholding in Asia Iron from 63% to 76% by the end of September 2005 through the subscription of new shares in Asia Iron and the acquisition of shares from an existing shareholding.

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APPENDIX IV

Since 30 June 2005, Mount Gibson has increased its shareholding in RMC from 10.36% to 13.11%.

LIKELY DEVELOPMENTS AND EXPECTED RESULTS

ENVIRONMENTAL REGULATION AND PERFORMANCE

The Consolidated Entity has developed Environmental Management Plans for its operations at Tallering Peak and the rail head at Mullewa. The Environmental Management Plans have been approved by the West Australian Government Departments’ of Industry & Resources, Environment and, Conservation and Land Management.

The Consolidated Entity holds various environmental licenses and authorities, issued under both State and Federal law, to regulate its mining and exploration activities in Australia. These licenses include conditions and regulation in relation to specifying limits on discharges into the environment, rehabilitation of areas disturbed during the course of mining and exploration activities, and the storage of hazardous substances.

There have been no material breaches of the Consolidated Entities licenses and all mining and exploration activities have been undertaken in compliance with the relevant environmental regulations.

SHARE OPTIONS

Details of Options over ordinary shares in Mount Gibson on issue as at balance date and at the date of this report are:

		Options	on issue at
Exercise Price	Exercise Date/Period	Balance Date	Date of Report
22 cents	On or before 15 Oct 2005	30,523,300	29,392,300
25 cents	On or before 31 Dec 2006	4,500,000	4,875,000
50 cents	On or before 31 Dec 2007	5,000,000	5,000,000
55 cents	On or before 31 Dec 2008	5,000,000	5,000,000
Total		45,023,300	44,267,300

In addition, as at 30 June 2005, there were 10,750,000 options granted but not issued under the Employee Share Scheme. The options were granted on the basis that the employees must complete

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APPENDIX IV

employment service to 31 December 2005 before the options vest, at which time they will be issued to the respective employees. Once vested the options will be exercisable at 25 cents each and expire on 31 December 2006. As at the date of this report, 375,000 options had vested and a further 375,000 options granted were cancelled on the redundancy of an employee.

Option holders do not have any right, by virtue of the Option, to participate in any share issue of Mount Gibson.

DIVIDENDS

No dividends were paid during the period and no recommendation is made as to dividends.

INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICES

Mount Gibson has, during the financial period, entered into deeds of access and indemnity with each director. These deeds provide access to documentation and indemnification against liability from conduct of the Consolidated Entity’s business.

A wilful breach of duty; or
A contravention of sections 182 or 183 of the Corporations Act 2001, as permitted by section 199B of the Corporations Act 2001.

The total amount of insurance contract premiums paid was $54,742. This amount has not been included in directors’ and executives’ remuneration.

REMUNERATION REPORT

This report outlines the remuneration arrangements in place for directors and executives of the Consolidated Entity.

Remuneration philosophy

The Remuneration Policy of Mount Gibson Iron Limited and its Controlled Entities has been put in place to ensure that:

Remuneration policies and systems support Mount Gibson’s wider objectives and strategies;
Directors’ and senior executives’ remuneration is aligned to the long-term interests of shareholders within an appropriate control framework; and

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APPENDIX IV

There is a clear relationship between the executives’ performance and remuneration.

Remuneration structure

In accordance with best practice corporate governance, the structure of non-executive director, executive director and senior executive management remuneration is separate.

NON-EXECUTIVE DIRECTOR REMUNERATION

Objective

The board seeks to set aggregate remuneration at a level which provides the company with the ability to attract and retain Directors of the highest calibre, whilst incurring a cost which is acceptable to Shareholders.

Structure

The Constitution and the ASX Listing Rules specify that the aggregate remuneration of non-executive directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the directors as agreed. The latest determination was at the Annual General Meeting held on 18 December 2001 when Shareholders approved an aggregate remuneration of $150,000 per year.

Each non-executive director receives a fee for being a director of Mount Gibson.

Non-executive directors should be adequately remunerated for their time and effort and the risks involved. Non-executive directors are remunerated to recognise the responsibilities, accountabilities and associated risks of directors.

All non-executive directors’ performance and remuneration is reviewed on an annual basis by the Chairman.

Non-Executive Directors’ fixed remuneration will comprise the following elements:

Cash remuneration; and
Superannuation contributions made by Mount Gibson.

Non-executive directors are eligible to receive options under Mount Gibson’s Employee Option Scheme, subject to approval by Shareholders.

Board operating costs do not form part of non-executive directors’ remuneration.

Non-Executive Directors have long been encouraged by the board to hold shares in Mount Gibson (purchased by the director on market). It is considered good governance for directors to have a stake in Mount Gibson on whose board they sit. The non-executive directors of Mount Gibson can participate in the Employee Share Plan which provides incentives where specified criteria are met.

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APPENDIX IV

EXECUTIVE DIRECTORS AND SENIOR EXECUTIVES REMUNERATION

Objective

The company aims to reward executive directors and senior executives with a level and mix of remuneration commensurate with their position and responsibilities within the company and so as to:

Reward the Executive Directors and Senior Executives for company and individual performance against targets set by reference to appropriate benchmarks;
Align the interest of the executive directors and senior executives with those of Shareholders;
Link reward with the strategic goals and performance of Mount Gibson; and
Ensure total remuneration is competitive by market standards.

Fixed remuneration

The components of the executive directors and senior executives fixed remuneration are determined individually and may include:

Cash remuneration;
Accommodation and travel benefits;
Motor vehicle, parking and other benefits; and
Reimbursement of entertainment, home office and telephone expenses.

The executive directors’ remuneration is reviewed on an annual basis by the non-executive directors. The senior executives’ remuneration is reviewed on an annual basis by the managing director.

In determining the remuneration package, Mount Gibson reviews the individual’s remuneration with the use of market data for positions with comparable companies. Where appropriate, the package is adjusted so as to keep pace with market trends and ensure continued remuneration competitiveness. In conducting a comparative analysis, Mount Gibson’s expected performance for the year is considered in the context of Mount Gibson’s capacity to fund remuneration budgets. From time to time, a review of the total remuneration package by an independent consultant in this field is undertaken to provide an independent reference point.

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APPENDIX IV

Variable remuneration

The executive directors and senior executives may receive variable remuneration as follows:

Short Term Incentives — the executive directors and senior executives are eligible to receive a bonus so long as certain key performance indicator’s (KPI’s) are achieved. These KPI’s are approved by the Board at the commencement of the financial year; and
Long Term Incentives — the executive directors and senior executives are eligible to receive Bonus Options under Mount Gibson’s Employee Option Scheme, at the discretion of the board.

Employment contracts

As at the date of this report, the Consolidated Entity had entered into employment contracts with the following executive directors and proposed executive directors:

Brian Johnson

The key terms of his current consulting contract through OTR Nominees Pty Ltd are as follows:

From 1 June 2003 to 31 December 2007
There are no termination benefits at the completion of the contract term. However, if Mount Gibson Iron Limited wishes to terminate the contract other than if Mr Johnson is guilty of any grave misconduct, serious or persistent breach of the terms of the contract or wilful neglect in the discharge of the Duties, Mount Gibson is obliged to pay out the remaining term of the contract to a maximum of two years. If OTR Nominees Pty Ltd wishes to terminate the contract, he must provide three months notice.

Mr Johnson will be stepping down as managing director of Mount Gibson in October 2005 to take responsibility for the construction of the Extension Hill magnetite mine and the Longtan pellet plant in China. Consequently, he is currently renegotiating the terms of his contract.

Alan Rule

The key terms of his contract are as follows:

5 years from 1 July 2005 to 30 June 2010
There are no termination benefits at the completion of the contract term. However, if Mount Gibson Iron Limited wishes to terminate the contract other than if Mr Rule is guilty of any grave misconduct, serious or persistent breach of the terms of the contract or wilful neglect in the discharge of the Duties, Mount Gibson is obliged to pay out the remaining term of the contract to a maximum of two years. If Mr Rule wishes to terminate the contract, he must provide three months notice.

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APPENDIX IV

Luke Tonkin

Mr Tonkin has been appointed managing director of Mount Gibson Iron Limited with effect from 24 October 2005.

The key terms of his contract are as follows:

5 years from 24 October 2005 to 24 October 2010
There are no termination benefits at the completion of the contract term. However, if Mount Gibson Iron Limited wishes to terminate the contract other than if Mr Tonkin is guilty of any grave misconduct, serious or persistent breach of the terms of the contract or wilful neglect in the discharge of the Duties, Mount Gibson is obliged to pay out the remaining term of the contract to a maximum of two years. If Mr Tonkin wishes to terminate the contract, he must provide three months notice.

Director remuneration for the year ended 30 June 2005

		Primary Benefits	Primary Benefits		Post Employment	Post Employment	Equity
		Salary &	Non			Retirement
		Fees	Monetary	Bonuses	Superannuation	Benefits	Options	Total
WB Willis	2005	116,731	—	—	6,229	—	29,230	152,190
	2004	82,934	—	—	9,102	—	58,495	150,531
BG Johnson	2005	344,669	88,309	250,000	—	—	1,543,389	2,226,367
	2004	288,433	85,178	—	—	—	155,212	528,823
CL Readhead	2005	41,951	—	—	—	—	14,615	56,566
	2004	33,026	—	—	2,974	—	29,247	65,247
IA Macliver	2005	38,485	—	—	3,476	—	14,615	56,576
	2004	33,026	—	—	2,974	—	29,247	65,247
AD Rule	2005	—	—	—	—	—	—	—
	2004	—	—	—	—	—	—	—
G Liu	2005
	2004	—	—	—	—	—	—	—

Mr Rule and Mr Liu were appointed directors of Mount Gibson on 1 July 2005 and 12 August 2005 respectively.

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APPENDIX IV

Remuneration of the 5 named executives who receive the highest remuneration for the year ended 30 June 2005

		Primary Benefits	Primary Benefits		Post Employment	Post Employment	Equity
		Salary &	Non			Retirement
		Fees	Monetary	Bonuses	Superannuation	Benefits	Options	Total
KJ Malaxos	2005	207,692	—	10,000	19,592	—	31,285	268,569
JP Arbuckle	2005	185,000	—	7,500	17,325	—	31,285	241,110
JR Tyers	2005	150,000	—	10,000	14,400	—	41,714	216,114
SP Coates	2004	150,000	—	—	13,500	—	—	163,500
	2005	130,780	—	10,000	12,670	—	31,285	184,735
C Lee	2004	114,677	—	—	10,321	—	—	124,998
	2005	130,872	—	7,500	12,453	—	12,514	163,339

All directors and executives are engaged through controlled entities of Mount Gibson Iron Ltd.

Options granted as part of remuneration for the year ended 30 June 2005

						Value per		Value per	Value at
						Option @		Option @	Date
		Grant	Exercise	Vesting	Expiry	Grant	Exercised	Exercise	Option	% of
	Grant Date	Number	Price	Date	Date	Date	Number	Date	Lapsed	Remuneration
BG Johnson	16-Mar-05	5,000,000	$0.50	31-Dec-05	31-Dec-07	$0.5516	N/A	N/A	N/A	45.3%
BG Johnson	16-Mar-05	5,000,000	$0.55	31-Dec-06	31-Dec-08	$0.5713	N/A	N/A	N/A	20.8%
KJ Malaxos	15-Dec-04	750,000	$0.25	31-Dec-05	31-Dec-06	$0.0807	N/A	N/A	N/A	11.6%
JP Arbuckle	15-Dec-04	750,000	$0.25	31-Dec-05	31-Dec-06	$0.0807	N/A	N/A	N/A	13.0%
JR Tyers	15-Dec-04	1,000,000	$0.25	31-Dec-05	31-Dec-06	$0.0807	N/A	N/A	N/A	19.3%
SP Coates	15-Dec-04	750,000	$0.25	31-Dec-05	31-Dec-06	$0.0807	N/A	N/A	N/A	16.9%
C Lee	15-Dec-04	300,000	$0.25	31-Dec-05	31-Dec-06	$0.0807	N/A	N/A	N/A	7.7%

Date approved by Mount Gibson Iron board	24-Jan-05	24-Jan-05	24-Jan-05
Share price at date approved by Mount
Gibson Iron board	$0.41	$0.41	$0.41
Grant Date	16-Mar-05	16-Mar-05	15-Dec-04
Share price at grant date	$0.90	$0.90	$0.265
Exercise price	$0.50	$0.55	$0.25
Risk free interest rate	5.30%	5.30%	5.55%
Volatility factor	40%	40%	32%
Expiry date	31-Dec-07	31-Dec-08	31-Dec-06

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APPENDIX IV

Directors’ Meeting

The numbers of meetings of directors (including meetings of committees of directors) held during the year and the number of meetings attended by each director is as follows:

		Audit
	Directors’	Committee
	Meetings	Meetings
Number of Meetings Held	12	1
WB Willis	11	1
BJ Johnson	12	—
CL Readhead	11	1
IA Macliver	10	1

Tax Consolidation

For the purposes of income tax Mount Gibson and its 100% owned subsidiaries intend to form a tax consolidated group. At the date of signing the financial report Mount Gibson has not determined the date of entry into tax consolidation because this decision will be based upon the most favourable outcome in terms of the transitional rules in the tax consolidation legislation. The date of entry will be determined at the time the head company lodges its tax return.

Entering into a tax consolidation group is not expected to have an impact on the income tax balances of Mount Gibson or the Consolidated Entity for the year ended 30 June 2005.

Corporate Governance

Auditor Independence and Non-Audit Services

The directors received the attached independence declaration from the auditor of Mount Gibson Iron Limited which forms part of this report.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Non-Audit Services

There were no non-audit services provided by the entity’s auditor, Ernst & Young, during the financial year ended 30 June 2005.

Signed in accordance with a resolution of the Directors.

WB Willis Chairman - Perth, 12 September 2005

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

INDEPENDENT AUDIT REPORT TO MEMBERS OF MOUNT GIBSON IRON LIMITED

Scope

The financial report and Directors’ responsibility

The financial report comprises the statement of financial position, statement of financial performance, statement of cash .ows, accompanying notes to the financial statements, and the directors’ declaration for Mount Gibson Iron Limited and the Consolidated Entity, for the year ended 30 June 2005. The Consolidated Entity comprises both the company and the entities it controlled during that year.

The directors of Mount Gibson are responsible for preparing a financial report that gives a true and fair view of the financial position and performance of Mount Gibson and the Consolidated Entity, and that complies with Accounting Standards in Australia, 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 and the additional disclosures.

Audit approach

We conducted an independent audit of the financial report in order to express an opinion on them to the members of Mount Gibson. 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 in.uenced 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 in Australia, and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of Mount Gibson’s and the Consolidated Entity’s financial position, and of their performance as represented by the results of their operations and cash .ows.

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

Examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report; and
Assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of signi.cant accounting estimates made by the directors.

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APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

We performed procedures to assess whether the substance of business transactions was accurately re.ected in the financial report. These and our other procedures did not include consideration or judgement of the appropriateness or reasonableness of the business plans or strategies adopted by the Directors and management of Mount Gibson.

Independence

We are independent of Mount Gibson, and have met the independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. We have given to the directors of the company a written Auditor’s Independence Declaration a copy of which is included in the directors’ report.

Audit opinion

In our opinion, the financial report is in accordance with:

(a) The Corporations Act 2001, including:
(i) Giving a true and fair view of the financial position of Mount Gibson Iron Limited and the Consolidated Entity at 30 June 2005 and of their 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.

Ernst & Young V W Tidy - Partner Perth, 12 September 2005

Liability limited by the Accountants Scheme, approved under the Professional Standards Act 1994 (NSW).

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(G) The following is the consolidated financial statements of Mount Gibson for the two years ended 30 June 2006 prepared in accordance with Australian accounting standards which is extracted from the annual report 2006 of Mount Gibson.

Consolidated Income Statement For the year ended 30 June 2006

CONSOLIDATED 2006 2005 $’000 $’000 73,389 76,872 1,907 471	CONSOLIDATED 2006 2005 $’000 $’000 73,389 76,872 1,907 471	COMPANY 2006 2005 $’000 $’000 — — 2,836 1,890 2,836 1,890 — — 2,836 1,890 1 — (6,368) (2,252) 10,833 — (25) — — — 7,277 (362) (11) (168) 7,266 (530) 251 145 7,517 (385) — — 7,517 (385)	COMPANY 2006 2005 $’000 $’000 — — 2,836 1,890 2,836 1,890 — — 2,836 1,890 1 — (6,368) (2,252) 10,833 — (25) — — — 7,277 (362) (11) (168) 7,266 (530) 251 145 7,517 (385) — — 7,517 (385)
75,296 (49,999) 25,297 1,232 (8,368) — (814) — 17,347 (1,196) 16,151 6,922 23,073 406	77,343 (50,487) 26,856 128 (2,463) — (666) (28) 23,827 (1,795) 22,032 (8,530) 13,502 —	2,836 — 2,836 1 (6,368) 10,833 (25) — 7,277 (11) 7,266 251 7,517 —	1,890 —
			1,890 — (2,252 — — —
			(362 (168
			(530 145
			(385 —
23,479 6.01 5.88 —	13,502 4.24 4.08 —	7,517

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Consolidated Balance Sheet As at 30 June 2006

CONSOLIDATED 2006 2005 $’000 $’000 4,548 33,633 6,180 6,632 5,685 5,296 877 625 2,541 —	CONSOLIDATED 2006 2005 $’000 $’000 4,548 33,633 6,180 6,632 5,685 5,296 877 625 2,541 —	COMPANY 2006 2005 $’000 $’000 145 44 58 40 — — 1 — — —	COMPANY 2006 2005 $’000 $’000 145 44 58 40 — — 1 — — —
19,831 46,093 65,924 — 1,248 — 20,345 4,176 51,567 — 77,336 143,260	46,186 — 46,186 — 2,942 — 17,665 29,104 15,131 — 64,842 111,028	204 — 204 29,690 1,248 42,431 5 — — 11,347 84,721 84,925	84 —
			84
			53,419 2,942 10,785 5 — — 424
			67,575
			67,659

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APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

CONSOLIDATED 2006 2005 $’000 $’000 17,836 10,363 1,594 2,780 1,470 — 463 300	CONSOLIDATED 2006 2005 $’000 $’000 17,836 10,363 1,594 2,780 1,470 — 463 300	COMPANY 2006 2005 $’000 $’000 341 130 — — — — — — 341 130 — — 341 130 — — — — — — — — 341 130 84,584 67,529 86,851 79,381 (5,966) (13,483) 3,699 1,631 84,584 67,529 — — 84,584 67,529	COMPANY 2006 2005 $’000 $’000 341 130 — — — — — — 341 130 — — 341 130 — — — — — — — — 341 130 84,584 67,529 86,851 79,381 (5,966) (13,483) 3,699 1,631 84,584 67,529 — — 84,584 67,529
21,363 3,068 24,431 702 4,247 4,684 9,633 34,064	13,443 — 13,443 655 8,938 11,407 21,000 34,443	341 — 341 — — — — 341	130 —
			130
			— — —
			—
			130
109,196	76,585	84,584
86,851 10,096 473 97,420 11,776	79,381 (13,383) 1,631 67,629 8,956	86,851 (5,966) 3,699 84,584 —	79,381 (13,483 1,631
			67,529 —
109,196	76,585	84,584

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Consolidated Cash Flow Statement

For the year ended 30 June 2006

CONSOLIDATED 2006 2005 $’000 $’000 75,519 76,662 (82,704) (57,208) (1,196) (1,676)	CONSOLIDATED 2006 2005 $’000 $’000 75,519 76,662 (82,704) (57,208) (1,196) (1,676)	COMPANY 2006 2005 $’000 $’000 — — (1,073) (647) (11) (169) (1,084) (816) 40 33 — (1,512) (20,813) — — — — — — — (960) (2,542) (21,733) (4,021) 7,460 34,641 — (958) (395) — 15,853 (28,829) — — — — — — — — — —	COMPANY 2006 2005 $’000 $’000 — — (1,073) (647) (11) (169) (1,084) (816) 40 33 — (1,512) (20,813) — — — — — — — (960) (2,542) (21,733) (4,021) 7,460 34,641 — (958) (395) — 15,853 (28,829) — — — — — — — — — —
(8,381) 1,951 — — 7 (12,362) (15,126) (960) (26,490) 7,460 — (395) — 1,500 (2,520) (419) (1,100) 4,053	17,778 427 534 — 45 (997) (6,123) (2,942) (9,056) 34,641 (958) 48 — 14,096 (2,034) (20,291) (1,202) —	(1,084) 40 — (20,813) — — — (960) (21,733) 7,460 — (395) 15,853 — — — — —	(816
			33 (1,512 — — — — (2,542
			(4,021
			34,641 (958 — (28,829 — — — — —

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Notes NET CASH FLOWS FROM FINANCING ACTIVITIES NET (DECREASE)/ INCREASE IN CASH AND CASH EQUIVALENTS Net foreign exchange differences Cash and cash equivalents at beginning of period CASH AND CASH EQUIVALENTS AT END OF PERIOD 4[a]	CONSOLIDATED 2006 2005 $’000 $’000 8,579 24,300 (26,292) 33,022 56 — 33,633 611 7,397 33,633	COMPANY 2006 2005 $’000 $’000 22,918 4,854 101 17 — — 44 27 145 44	COMPANY 2006 2005 $’000 $’000 22,918 4,854 101 17 — — 44 27 145 44
			17 — 27
			44

The gearing ratio for the year ended 30 June 2006 was calculated on the basis of total interest-bearing borrowings in the sum of approximately A$5,841,000 divided by total equity in the sum of approximately A$109,196,000, i.e. approximately 5.35%.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

NOTES OF THE FINANCIAL STATEMENT FOR THE YEAR ENDED 30 JUNE 2006

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Corporate information

The financial report of Mount Gibson for the year ended 30 June 2006 was authorised for issue in accordance with a resolution of the directors on 4th September 2006.

Mount Gibson is a company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Stock Exchange.

The nature of operations and principal activities of the Consolidated Entity are the mining of hematite deposits at Tallering Peak and exploration and development of hematite deposits in the Mid-West region of Western Australia. The address of the registered office is Level 1, 7 Havelock Street, West Perth, WA, 6005.

(b) 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, applicable Australian Accounting Standards and other mandatory professional reporting requirements. The financial report has also been prepared on a historical cost basis, except for derivative financial instruments and quoted available-for-sale financial assets that have been measured at fair value.

The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($’000)unless otherwise stated under the option available to the company under ASIC Class Order 98/0100. The company is an entity to which the class order applies.

(c) Statement of compliance

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

Mount Gibson financial statement and notes also comply with IFRS except for the disclosure requirements in IAS 32‘Financial Instruments: Disclosure and Presentation’ as the Australian equivalent Accounting Standard, AASB 132 ‘Financial Instruments: Disclosure and Presentation’ does not require such disclosures to be presented by Mount Gibson where its separate financial statements are presented together with the consolidated financial statements of the Consolidated Entity.

This is the first financial report prepared based on AIFRS and comparatives for the year ended 30 June 2005 have been restated accordingly. The company has taken the exemption available under AASB 1 to only apply AASB 132 “Financial Instruments: Disclosure and Presentation” and AASB 139 “Financial Instruments: Recognition and Measurement” from1 July 2005.

Reconciliations of:

AIFRS equity as at 1 July 2004 and 30 June 2005; and
AIFRS profit for the year ended 30 June 2005,

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

to the balances reported in the 30 June 2005 full-year financial report prepared under Australian Accounting Standards applicable before 1 January 2005 (“AGAAP”) along with the accounting policies for financial instruments applicable for the year ended 30 June 2005 are detailed in Note 1(dd).

(d) Changes in accounting policies

Australian Accounting Standards and UIG interpretations that have recently been issued or amended but are not yet effective have not been adopted for the annual reporting period ended 30 June 2006.

			Application
AASB		Nature of Change to	Date of	Application
Amendment	Affected Standard(s)	Accounting Policy	Standard	Date for Group
2004-3	AASB1 “First-time Adoption	No change to accounting	1 January 2006	1 July 2006
	of AIFRS”	policy required. Therefore no
		impact.
	AASB 101 “Presentation of
	Financial
	Statements”
	AASB 124 “Related Party
	Disclosures”
2005-1	AASB 139 “Financial	No change to accounting	1 January 2006	1 July 2006
	Instruments: Recognition and	policy required. Therefore no
	Measurement”	impact.
2005-4	AASB 1 “First-time
	Adoption of AIFRS”
	AASB 139 “Financial
	Instruments: Recognition and
	Measurement”
	AASB 132 “Financial
	Instruments: Disclosure and
	Presentation”
	AASB 1023 “General
	Insurance Contracts”
	AASB 1028 “Life Insurance
	Contracts”
2005-5	AASB 1 “First-time	No change to accounting	1 January 2006	1 July 2006
	Adoption of AIFRS”	policy required. Therefore no
		impact.
	AASB 139 “Financial
	Instruments: Recognition and
	Measurement”
2005-6	AASB 3 “Business	No change to accounting	1 January 2006	1 July 2006
	Combinations”	policy required. Therefore no
		impact.
2005-10	AASB 132 “Financial	No change to accounting	1 January 2007	1 July 2007
	Instruments: Disclosure and	policy required. Therefore no
	Presentation”	impact.

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APPENDIX IV

			Application
AASB		Nature of Change to	Date of	Application
Amendment	Affected Standard(s)	Accounting Policy	Standard	Date for Group
	AASB 101 “Presentation of
	Financial Statements”
	AASB 114 “Segment
	Reporting”
	AASB 117 “Leases”
	AASB 133 “Earnings Per
	Share”
	AASB 139 “Financial
	Instruments: Recognition and
	Measurement”
	AASB 1 “First-time
	Adoption of AIFRS”
	AASB 4 “Insurance
	Contracts”
	AASB 1023 “General
	Insurance Contracts”
	AASB 1038 “Life Insurance
	Contracts”
New	AASB 7 “Financial	No change to accounting	1 January 2007	1 July 2007
Standard	Instruments: Disclosures”	policy required. Therefore no
		impact.
UIG 4	Determining whether an	No change to accounting	1 January 2006	1 July 2006
	Arrangement contains a	policy required. Therefore no
	Lease	impact.
UIG 8	Scope of AASB 2	No change to accounting	1 May 2006	1 July 2006
		policy required. Therefore no
		impact.
UIG 9	Reassessment of Embedded	No change to accounting	1 June 2006	1 July 2006
	Derivatives	policy required. Therefore no
		impact.

Application date is for the annual reporting periods beginning on or after the date shown in the above table.

The following amendments are not applicable to the Consolidated Entity and therefore have no impact:

AASB Amendment Affected Standard(s) New Standard AASB 119 “Employee Benefits” (Revised Dec 04) — Accounting policy options contained within the revised standard affect accounting for defined benefit schemes only. As Mount Gibson Iron Limited do not have or do not contribute to a defined benefit scheme, there is no impact of this change. 2005-2 AASB 1023 “General Insurance Contracts” 2005-9 AASB 4 “Insurance Contracts”, AASB 1023 “General Insurance Contracts”, AASB 139 “Financial Instruments: Recognition and Measurement” and AASB 132 “Financial Instruments: Disclosure and Presentation” 2005-12 AASB 1038 “Life Insurance Contracts” and AASB 1023 “General Insurance Contracts”

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APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

2005-13 AASB 25 “Financial Reporting by Superannuation Plans” 2006-1 AASB 121 “The Effects of Changes in Foreign Exchange Rates” 2006-2 AASB 1 “First-time Adoption of Australian Equivalents to International Financial Reporting Standards” UIG 5 Rights to Interests in Decommissioning, Restoration and Environmental Rehabilitation Funds” UIG 6 Liabilities Arising from Participating in a Specific Market — Waste Electrical and Electronic Equipment UIG 7 Applying the Restatement Approach under AASB 129 “Financial Reporting in Hyperinflationary Economies”

(e) Basis of consolidation

The consolidated financial statements comprise the financial statements of Mount Gibson and its controlled entities.

The financial statements of controlled entities are prepared for the same reporting period as Mount Gibson, using consistent accounting policies.

Adjustments are made to bring into line any dissimilar accounting policies that may exist.

Controlled entities are consolidated from the date on which control is transferred to the Consolidated Entity and cease to be consolidated from the date on which control is transferred out of the Consolidated Entity.

Where there is loss of control of a controlled entity, the consolidated financial statements include the results for the part of the reporting period during which Mount Gibson has control.

Minority interests represent the interests in Asia Iron Holdings Limited, not held by the Consolidated Entity.

Investments in controlled entities are carried in the balance sheet of the company at cost less impairment losses,

if any.

(f) Foreign currency translation

Both the functional and presentation currency of Mount Gibson and its Australian controlled entities is Australian dollars (A$).

Transactions in foreign currencies are initially recorded in the functional currency at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All such exchange differences are taken to the income statement in the consolidated financial report.

The functional currencies of the overseas controlled entities Asia Iron Holdings Limited and Asia Iron Limited are Hong Kong dollars (HK$) and for Asia Iron (Nanjing) Co., Ltd is Chinese renminbi (RMB).

As at the reporting date the assets and liabilities of these overseas controlled entities are translated into the presentation currency of Mount Gibson at the rate of exchange ruling at the balance sheet date and the income statements are translated at the weighted average exchange rates for the period.

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APPENDIX IV

The exchange differences arising on the retranslation are taken directly to a separate component of equity.

On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement.

(g) Property, plant and equipment

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

Depreciation

The cost of property, plant and equipment directly engaged in mining operations is written off over its expected economic life on a units-of-production method, in the establishment of which, due regard is given to the life of the related area of interest. Assets which are depreciated or amortised on a basis other than the units-of-production method typically are depreciated on a straightline basis over the estimated useful life of the asset as follows:

Buildings

5 - 20 years

● Motor vehicles 4 - 5 years

● Office equipment 3 - 5 years

Leasehold improvements Shorter of lease term or useful

life of 5 - 10 years

Impairment

The carrying values 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 inflows, 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 estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount.

Derecognition

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset.

Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement in the period the item is derecognised.

(h) Mine properties

Mine properties represent the accumulation of all acquisition, exploration, evaluation and development expenditure incurred by or on behalf of the Consolidated Entity in relation to areas of interest in which mining of mineral resource has commenced. When further development expenditure is incurred in respect of a mine property after the commencement of production, such expenditure is carried forward as part of the cost of that mine property only when substantial future economic benefits are established, otherwise such expenditure is classified as part of the cost of production.

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FINANCIAL INFORMATION ON MOUNT GIBSON

Amortisation is provided on the units-of-production method, with separate calculations being made for each mineral resource.

Estimated future capital development costs to be incurred in accessing the reserves and measured resources are taken into account in determining amortisation charges. The units-of production method results in an amortisation charge proportional to the depletion of the economically recoverable mineral resources (comprising proven and probable reserves plus measured resources).

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. Should the carrying value of the expenditure not yet amortised exceed its estimated recoverable amount in any year, the excess is written off to the income statement.

(i) Acquisition, exploration, evaluation and development costs

Acquisition costs

Exploration and evaluation costs

Development costs

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. Where uncertainty exists as to the future viability of certain areas; the value of the area of interest is written off to the income statement or provided against.

(j) Borrowing costs

Borrowing costs are recognised as an expense when incurred.

(k) Rehabilitation costs

Long-term environmental obligations are based on the Consolidated Entity’s environmental management plans, in compliance with current environmental and regulatory requirements.

Full provision is made based on the net present value of the estimated cost of restoring the environmental disturbance that has occurred up to the balance sheet date. Increases due to additional environmental disturbances, relating to the development of an asset, are capitalised and amortised over the remaining lives of the area of interest.

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FINANCIAL INFORMATION ON MOUNT GIBSON

Annual increases in the provision relating to the change in the net present value of the provision are accounted for in the income statement as borrowing costs.

The estimated costs of rehabilitation are reviewed annually and adjusted as appropriate for changes in legislation, technology or other circumstances. Cost estimates are not reduced by potential proceeds from the sale of assets.

(l) Recoverable amount of assets

At each reporting date, the Consolidated Entity assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Consolidated Entity makes a formal estimate of recoverable amount. Where the 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. Recoverable amount is determined for an individual asset, unless the asset’s value in use cannot be estimated to be close to its fair value less cost to sell and it does not generate cash inflows that are largely independent of those from other assets or groups of 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.

An assessment is also made at each reporting date as to whether there is any indication that a previously recognised impairment loss may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit or loss unless the asset is carried at a revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

(m) Investments

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

After initial recognition, investments, which are classified as available-for-sale, are measured at fair value. 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.

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

For investments with no active market, fair value is determined using valuation techniques. Such valuation techniques include using recent arm’s length transactions; reference to the current market value of another instrument that is substantially the same; discounted cash flow analysis and option pricing models. Where fair value cannot be reliably measured for certain unquoted investments, these investments are measured at cost.

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APPENDIX IV

(n) Inventories

Inventories are valued at the lower of cost and net realisable value.

Cost comprises direct material, labour and expenditure in getting such inventories to their existing location and condition, based on weighted average costs incurred during the period in which such inventories were produced.

Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.

(o) Trade and other receivables

Trade receivables, which generally have 60-90 day terms, are recognised and carried at original invoice amount less an allowance for any uncollectible amounts.

An allowance for doubtful debts is made when there is objective evidence that the Consolidated Entity will not be able to collect the debts. Bad debts are written off when identified.

(p) 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.

(q) Interest-bearing loans and borrowings

All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method.

Gains and losses are recognised in the profit or loss when the liabilities are derecognised.

(r) Trade and other payables

Trade payables and other payables are carried at amortised costs and represent liabilities for goods and services provided to the Consolidated Entity prior to the end of the financial year that are unpaid and arise when the Consolidated Entity becomes obliged to make future payments in respect of the purchase of these goods and services.

(s) Provisions

Provisions are recognised when the Consolidated Entity has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow 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.

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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 the 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.

A provision for dividends is not recognised as a liability unless the dividends have been declared, determined or publicly recommended on or before the reporting date.

(t) Share-based payment transactions

The Consolidated Entity provides benefits to employees (including directors) of the Consolidated Entity 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 a directors, officers, employees and other permitted persons option plan.

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.

In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Mount Gibson.

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 Consolidated Entity, 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 at 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.

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APPENDIX IV

(u) Employee benefits

Wages, salaries, annual leave and sick leave

Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees’ services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for sick leave are recognised when the leave is taken and are measured at the rates paid or payable.

Long service leave

The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures, and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currencies that match, as closely as possible, the estimated future cash outflows.

Superannuation

Contributions made by the Consolidated Entity to employee superannuation funds, which are defined contribution plans, are charged as an expense when incurred.

(v) Leases

Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership.

Operating Leases

Contingent rentals are recognised as an expense in the financial year in which they are incurred.

Finance Leases

Leases which effectively transfer substantially all the risks and benefits incidental to ownership of the leased item to the Consolidated Entity are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments.

Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the income statement.

Capitalised leased assets are depreciated over the estimated useful life of the asset or where appropriate, over the estimated life of the mine. The cost of improvements to or on leasehold property is capitalised, disclosed as leasehold improvements, and amortised over the unexpired period of the lease or the estimated useful lives of the improvements, whichever is the shorter.

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APPENDIX IV

(w) Revenue

Sale of goods

Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and can be measured reliably.

Interest

Revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset.

Dividends

Revenue is recognised when the shareholders’ right to receive the payment is established.

(x) 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 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 the 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 can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences, carry-forward 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 associated with investments in controlled entities, 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.

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FINANCIAL INFORMATION ON MOUNT GIBSON

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 and not in the income statement.

(y) Other taxes

Revenues, expenses and assets are recognised net of the amount of GST except:

where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and
receivables and payables are stated with the amount of GST included.

The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet.

Cash flows are included in the Cash Flow Statement on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority.

(z) Derivative financial instruments and hedging

The Consolidated Entity uses foreign currency contracts to hedge its risks associated with foreign currency fluctuations. Such derivative financial instruments are initially recognised at fair value on the date the derivative contract is entered into and are subsequently remeasured to fair value.

Any gains and losses arising from changes in the fair value of derivatives, except those that qualify as cash flow hedges, are taken directly to net profit or loss for the year.

The fair value of forward exchange contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

For the purpose of hedge accounting, hedges are classified as either fair value hedges when they hedge the exposure to changes in the fair value of a recognised asset or liability; or cash flow hedges where they hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a forecasted transaction.

In relation to cash flow hedges (forward foreign currency contracts) to hedge firm commitments which meet the conditions for a special hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity and the ineffective portion is recognised in the income statement.

When the hedged firm commitment results in the recognition of an asset or a liability, then, at the time the asset or liability is recognised, the associated gains or losses that had previously been recognised in equity are included in the initial measurement of the acquisition cost or other carrying amount of the asset or liability.

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FINANCIAL INFORMATION ON MOUNT GIBSON

For all other cash flow hedges, the gains or losses that are recognised in equity are transferred to the income statement in the same year in which the hedged firm commitment affects the net profit and loss, for example when the future sale actually occurs.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting.

At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is kept in equity until the forecasted transaction occurs.

If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement.

(aa) Issued capital

Issued and paid up capital is recognised at the fair value of the consideration received by the Consolidated Entity. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction in the proceeds received.

(bb) Earnings per share

Basic earnings per share is calculated as net profit attributable to members of the parent, adjusted to exclude any costs of servicing equity (other than dividends) and preference share dividends, divided by the weighted average number of ordinary shares, adjusted for any bonus element.

Diluted earnings per share is calculated as net profit attributable to members of the company, adjusted for:

costs of servicing equity (other than dividends) and preference share dividends;
the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and
other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares;

divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element.

(cc) Significant accounting judgements, estimates and assumptions

Significant accounting judgements, estimates and assumptions have been made as follows:

(i) Mine rehabilitation provision

The consolidated entity assesses its mine rehabilitation provision annually in accordance with the accounting policy stated in Note 1(k). Significant judgement is required in determining the provision for mine rehabilitation as there are many transactions and other factors that will affect the ultimate liability payable to rehabilitate the mine site. Factors that will affect this liability include future development, changes in technology, commodity price changes and changes in interest rates. When these factors change or become known in the future, such difference will impact the mine rehabilitation provision in the period in which they change or become known.

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FINANCIAL INFORMATION ON MOUNT GIBSON

(ii) Units of production method of depreciation

The consolidated entity applies the units of production method of depreciation of its mine assets based on ore tonnes mined. These calculations require the use of estimates and assumptions. Significant judgement is required in assessing the available reserves and the production capacity of the plants to be depreciated under this method. Factors that are considered in determining reserves and resources and production capacity are the consolidated entity’s history of converting resources to reserves and the relevant time frames, the complexity of metallurgy, markets and future developments. When these factors change or become known in the future, such differences will impact pre-tax profit and carrying values of assets.

(dd) Transition to AIFRS

For all periods up to and including the year ended 30 June2005, the Consolidated Entity prepared its financial statements in accordance with AGAAP. These financial statements for the year ended 30 June 2006 are the first the Consolidated Entity is required to prepare in accordance with AIFRS.

Accordingly, the Consolidated Entity has prepared financial statements that comply with AIFRS applicable for periods beginning on or after 1 January 2005 and the significant accounting policies meeting those requirements are described in Note 1. In preparing these financial statements, the Consolidated Entity has started from an opening balance sheet as at 1 July2004, the Consolidated Entity’s date of transition to AIFRS, and made those changes in accounting policies and other restatements required by AASB 1 First-time adoption of AIFRS.

This note explains the principal adjustments made by the Consolidated Entity in restating its AGAAP balance sheet as at 1 July 2004 and its previously published AGAAP financial statements for the year ended30 June 2005.

Transitional exemptions

The Consolidated Entity has made its election in relation to the transitional exemptions allowed by AASB 1 “First-time Adoption of Australian Equivalents to International Financial Reporting Standards” as follows:

Business combinations

AASB 3 “Business Combinations” was not applied retrospectively to past business combinations (i.e. business combinations that occurred before the date of transition to AIFRS).

Share-based payment transactions

AASB 2 ‘Share-Based Payments’ is applied only to equity instruments granted after 7 November 2002 that had not vested on or before 1 January 2005.

Exemption from the requirement to restate comparative information for AASB 132 and AASB 139

The Consolidated Entity has elected to adopt this exemption and has not applied AASB 132 ‘Financial Instruments: Presentation and Disclosure’ and AASB 139 ‘Financial Instruments: Recognition and Measurement’ to its comparative information.

Designation of previously recognised financial instruments

Investments were designated as available-for-sale financial assets at the date of transition to AIFRS.

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APPENDIX IV

Rehabilitation costs

As permitted by AASB 1 the consolidated entity has elected to apply the exemption relating to rehabilitation liabilities. Accordingly, these costs are:

(a) measured as at the date of transition to Australian equivalents to IFRSs in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets;
(b) estimated when the liability first arose, by discounting the liability to that date using its best estimate of the historical risk-adjusted discount rate(s) that would have applied for that liability over the intervening period; and
(c) the accumulated depreciation on that amount is calculated, as at the date of transition to Australian equivalents to IFRS, on the basis of the current estimate of the useful life of the asset, using the depreciation policy adopted by the entity under Australian equivalents to IFRS.

Impact of adoption of AIFRS

The impacts of adopting AIFRS on total equity and profit after tax as reported under AGAAP are illustrated below.

(i) Reconciliation of total equity as presented under AGAAP to that under a AIFRS

	CONSOLIDATED	CONSOLIDATED		COMPANY	COMPANY
	30 June 2005	1 July 2004		30 June 2005	1	July 2004
	$’000		$’000	$’000		$’000
Total equity under AGAAP	88,257		23,399	67,105		27,471
Adjustments to equity:
[A] Derecognition of existing rehabilitation
accrual	246		15	—		—
[B] Adjustment for unwinding of rehabilitation
provision	(61)		(30)	—		—
[C] Adjustment for additional amortisation
charge on rehabilitation asset	(187)		(46)	—		—
[D] Adjustment relating to siding construction	(208)		(66)	—		—
[E] Adjustment for derecognition of Mullewa
land	(55)		(88)	—		—
[F] Adjustment for Income tax	(11,407)		(2,877)	424		279
Total equity under AIFRS	76,585		20,307	67,529		27,750

[A] The provision for rehabilitation recognised under AGAAP is derecognised as it was not based on discounted future cash flows.
[B] AASB 137 “Provisions, Contingent Liabilities and Contingent Assets”, requires recognition of full provision for rehabilitation based on the net present value of the estimated cost of restoring the environmental disturbance that has occurred up to the balance sheet date, as against an undiscounted provision for rehabilitation required to be recognised under AGAAP. The increase in the provision amount due to passage of time has been recognised as borrowing costs as required under AASB 137.

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APPENDIX IV

[C] Represents adjustment for additional amortisation charge due to increase in the value of rehabilitation asset created under AASB 137 “Provisions, Contingent Liabilities and Contingent Assets”.
[D] Siding construction was treated as an operating lease under AGAAP, however this has been treated as a finance lease under AASB 117 ‘Leases’.
[E] Mullewa land was treated as an asset purchased under finance lease under AGAAP, however this has been treated as operating lease under AASB 117 ‘Leases’.
[F] The Consolidated Entity had previously not recognised any deferred tax balances in its accounts under AGAAP. Under AIFRS deferred tax liabilities are recognised for all taxable temporary differences. This adjustment has increased by $3,799,501 from that disclosed in the half year financial report for the period ended 31December 2005, based on clarification of tax treatment of carried forward expenditure not previously tax effected.
(ii) Reconciliation of profit after tax under AGAAP to that under AIFRS

	CONSOLIDATED	COMPANY
	30 June 2005	30 June 2005
	$’000	$’000
Profit after tax as previously reported	23,713	1,100
Adjustments to profit:
[A] Derecognition of existing rehabilitation accrual	231	—
[B] Adjustment for unwinding of rehabilitation provision	(31)	—
[C] Adjustment for additional amortisation charge on rehabilitation asset	(141)	—
[D] Adjustment relating to siding construction	(143)	—
[E] Adjustment for derecognition of Mullewa land	33	—
[F] Share based payments	(1,630)	(1,630)
[G] Adjustment for Income tax	(8,530)	145
Profit after tax under AIFRS	13,502	(385)

[A] The provision for rehabilitation recognised under AGAAP is derecognised as it was not based on discounted future cash flows.
[B] AASB 137 “Provisions, Contingent Liabilities and Contingent Assets”, requires recognition of full provision for rehabilitation based on the net present value of the estimated cost of restoring the environmental disturbance that has occurred up to the balance sheet date, as against an undiscounted provision for rehabilitation required to be recognised under AGAAP. The increase in the provision amount due to passage of time has been recognised as borrowing costs as required under AASB 137.
[C] Represents adjustment for additional amortisation charge due to increase in the value of rehabilitation asset created under AASB 137 “Provisions, Contingent Liabilities and Contingent Assets”.
[D] Siding construction was treated as an operating lease under AGAAP, however this has been treated as a finance lease under AASB 117 ‘Leases’.
[E] Mullewa land was treated as an asset purchased under finance lease under AGAAP, however this has been treated as operating lease under AASB 117 ‘Leases’.

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FINANCIAL INFORMATION ON MOUNT GIBSON

[F] Share-based-payment costs are charged to the income statement under AASB 2 “Share-based-payments”, but not under AGAAP.
[G] The Consolidated Entity had previously not recognised any deferred tax balances in its accounts under AGAAP. Under AIFRS deferred tax liabilities are recognised for all taxable temporary differences. This adjustment has increased by $3,799,501 from that in the half year financial report for the period ended 31 December 2005, based on clarification of tax treatment of carried forward expenditure not previously tax effected.

Comparative Information — financial instruments

The Consolidated Entity has elected not to restate comparative information for financial instruments within the scope of AASB 132 “Financial Instruments: Disclosure and Presentation” and AASB 139 “Financial Instruments: Recognition and Measurement”, as permitted on the first time adoption of AIFRS.

The effect of changes in the accounting policies for financial instruments on the balance sheet as at 1 July 2005 is shown below:

		CONSOLIDATED	COMPANY
		$’000	$’000
Equity under AIFRS as at 30 June 2005		76,585	67,529
Adoption of AASB 132 and AASB 139
- Unrealised gain on available-for-sale investment	(a)	1,050	1,050
- Cash flow hedge reserve	(b)	115	—
Equity under AIFRS as at 1 July 2005		77,750	68,579

Notes:

(a) the recognition in equity of the movement in the fair value of available-for-sale investments; and
(b) the recognition and measurement of all derivatives (including any embedded derivatives at fair value).

The following transitional provision has an effect on future periods:

The effectiveness of hedging relationships were assessed from 1 October 2005; no adjustment is made to hedges under superseded policies which were not highly effective before 1 July 2005.

The main adjustments necessary that would make the comparative financial statements comply with AASB 132 and AASB 139 are listed below. Similar adjustments were made at 1 July 2005 to restate the opening financial position of Mount Gibson and Consolidated Entity to a position consistent with the accounting policies specified in Note 1(o) to 1(r) and 1(z).

(i) the measurement of financial assets designated as available-for-sale at fair value, with changes in fair value recognised in equity, rather than at cost in accordance with the superseded policy
(ii) the recognition and measurement of all derivatives (including any embedded derivatives) at fair value
(iii) the recognition in profit or loss of the movement in the fair value of derivatives which did not qualify for hedge accounting or were not designated as hedging reserve

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(iv) the transfer of deferred hedging gains and losses recognised as assets and liabilities arising from a cash flow hedge of a forecast transaction to the hedging reserve
(v) the derecognition of other deferred hedging gains and losses recognised as assets and liabilities
(vi) the deferral in equity of the effective portion of the movement in fair value of derivatives accounted for as a cash flow hedge
(vii) the recognition in profit or loss of the ineffective portion of the movement in fair value of hedging instruments accounted for as a cash flow hedge
(viii) the recognition of any current or deferred taxes in relation to the adjustments described above

The adjustments listed above are not a complete list of all adjustments that may be necessary on adopting the accounting policies specified by AASB 132 and AASB 139.

As a result of the decision not to restate comparative information the following accounting policies were applied to accounting for financial instruments in the comparative year:

Cash and cash equivalents

Cash on hand and in banks and short-term deposits are stated at nominal value.

Bank overdrafts are carried at the principal amount. Interest is recognised as an expense as it accrues.

Receivables

Receivables from related parties are recognised and carried at the nominal amount due.

Investments

All investments are carried at the lower of cost and recoverable amount. Investments in associates are carried at the lower of the equity accounted amount and receivable amount in the consolidated financial report.

Payables

Payables to related parties are carried at the principal amount.

Deferred cash settlements are recognised at the present value of the outstanding consideration payable on the acquisition of an asset discounted at prevailing commercial borrowing rates.

— 300 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Interest-bearing liabilities

All loans are measured at the principal amount. Interest is recognised as an expense as it accrues. Finance lease liability is determined in accordance with the requirements of AASB 1008 “Leases”.

Derivative financial instruments

Forward exchange contracts

(iii) explanation of material adjustments to the cash flow statements

There are no material differences between the cash flow statements presented under AIFRS and those presented under AGAAP.

— 301 —

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APPENDIX IV

2. REVENUE AND EXPENSES

CONSOLIDATED 2006 2005 $’000 $’000 73,389 76,872	CONSOLIDATED 2006 2005 $’000 $’000 73,389 76,872	COMPANY 2006 2005 $’000 $’000 — —	COMPANY 2006 2005 $’000 $’000 — —
1,907 —	471 —	40 2,796	33 1,857
1,907	471	2,836	1,890
— 632 600	126 — 2	— — 1	— — —
1,232	128	1	—
229 934 33	842 921 32	11 — —	168 — —
1,196	1,795	11	168
674 3,079 447 78 4,278 (15)	386 2,359 432 124 3,301 —	— — — — — —	— — — —
			— —
4,263 17,769 4,323 754 814 5,129 9,288	3,301 17,557 1,631 1,029 666 5,098 4,516	— — 4,323 — 25 — —	—
			— 1,631 — — — —

— 302 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

3. INCOME TAX

Major components of income tax expense for the years ended 30 June 2006 and 2005 are:

CONSOLIDATED 2006 2005 $’000 $’000 — — — — 6,601 4,730 (13,523) 3,800 (6,922) 8,530	CONSOLIDATED 2006 2005 $’000 $’000 — — — — 6,601 4,730 (13,523) 3,800 (6,922) 8,530	COMPANY 2006 2005 $’000 $’000 — — — — (251) (145) — — (251) (145) — — — — — — 7,266 (530) 2,180 (159) — — (3,731) (213) — — 1,300 227 (251) (145) 30% 30%	COMPANY 2006 2005 $’000 $’000 — — — — (251) (145) — — (251) (145) — — — — — — 7,266 (530) 2,180 (159) — — (3,731) (213) — — 1,300 227 (251) (145) 30% 30%
— 199	— —	— —	— —
199 16,151	— 22,032	— 7,266
4,845 (7,341) (5,752) — 1,326	6,610 — — 1,804 116	2,180 — (3,731) — 1,300	(159 — (213 — 227
(6,922) 30%	8,530 30%	(251) 30%

— 303 —

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APPENDIX IV

Balance 2006 $’000 2,261 3,892 17,318 322	Sheet 2005 $’000 — 67 12,063 —	Income Statement 2006 2005 $’000 $’000 2,261 1,029 3,825 13 5,255 7,635 123 — (285) (147) (1,662) — (16,439) — (6,922) 8,530 — — — — (25) (145) (226) — (251) (145)	Income Statement 2006 2005 $’000 $’000 2,261 1,029 3,825 13 5,255 7,635 123 — (285) (147) (1,662) — (16,439) — (6,922) 8,530 — — — — (25) (145) (226) — (251) (145)
23,793 1,008 1,662 16,439	12,130 723 — —	(285) (1,662) (16,439)	(147 — —
19,109 (4,684) — —	723 (11,407)	(6,922)
	— —	— —	— —
—	—
449 10,898	424 —	(25) (226)	(145 —
11,347 11,347	424 424	(251)

— 304 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Tax Consolidation

Mount Gibson and its 100% owned controlled entities have formed a tax consolidated group. Members of the Consolidated Entity have entered into a tax sharing arrangement in order to allocate income tax expense to the wholly owned controlled entities on a pro-rate basis. The agreement provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. At balance date, the possibility of default is remote. The head entity of the tax consolidated group is Mount Gibson Iron Limited.

Tax effect accounting by members of the tax consolidated group

Members of the tax consolidated group have entered into a tax funding agreement. The tax funding agreement provides for the allocation of current taxes to members of the tax consolidated group. Deferred taxes are allocated to members of the tax consolidated group in accordance with a group allocation approach which is consistent with the principles of AASB 112 Income Taxes.

The allocation of taxes under the tax funding agreement is recognised as an increase/decrease in the controlled entities intercompany accounts with the tax consolidated group head company, Mount Gibson. In this regard Mount Gibson has assumed the benefit of tax losses from controlled entities of $10,672,000 as of the balance date. The nature of the tax funding agreement is such that no tax consolidation contributions by or distributions to equity participants are required.

4. CASH AND CASH EQUIVALENTS

		CONSOLIDATED	CONSOLIDATED	COMPANY	COMPANY
	Notes	2006	2005	2006	2005
		$’000	$’000	$’000	$’000
Cash at bank and in hand		4,334	13,544	145	44
Short-term deposits		214	20,089	—	—
		4,548	33,633	145	44
Cash at bank earns interest at floating rates
based on daily bank deposit rates.
Short-term deposits are made for varying
periods of between one day and one month
depending on the immediate cash
requirements of the Group, and earn interest
at the respective short-term deposit rates.
[a] Reconciliation of cash
For the purposes of the Cash Flow Statement,
cash and cash equivalents comprise the
following at 30 June:
Cash at bank and in hand		4,334	13,544	145	44
Short-term deposits		214	20,089	—	—
		4,548	33,633	145	44
Cash at bank and in hand attributable to the
disposal group	10	2,849	—	—	—
		7,397	33,633	145	44

— 305 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

Notes [b] Reconciliation of the net profit/(loss) after tax to the net cash flows from operations Net profit/(loss) after tax Adjustments for: Depreciation of non-current assets Amortisation of mine properties Net (profit)/loss on disposal of property, plant and equipment Net exchange differences Interest received Exploration expenses written off Share based payments Intra-group interest income Bad debts Write down of investment Changes in assets and liabilities (Increase)/decrease in trade and other receivables (Increase) in inventory (Increase)/decrease in prepayments and deposits (Increase) in deferred tax assets (Increase) in mine development expenditure Increase/(decrease) in creditors and accruals Increase/(decrease) in GST paid Increase/(decrease) in deferred income tax liabilities Increase in employee benefits Net Cash Flow (used in)/from Operating Activities	CONSOLIDATED 2006 2005 $’000 $’000 23,073 13,502 4,263 3,301 17,769 17,557 (632) 17 (464) (344) (1,907) (427) 814 666 4,323 1,631 — — 541 — 400 — (2,208) (1,726) (388) (2,499) (335) (127) — — (54,205) (24,159) 7,994 1,787 (724) (45) (6,922) 8,530 227 114 (8,381) 17,778	COMPANY 2006 2005 $’000 $’000 7,356 (385) — — — — — — — — (40) (33) — — 4,323 1,631 (2,796) (1,857) 420 — 400 — 5 9 — — 2 1 (10,923) (145) — — 211 (53) (42) 16 — — — — (1,084) (816)

[c] Non-cash financing activities

During the financial year, the Consolidated Entity acquired property, plant and equipment with an aggregate fair value of $2,783,417 (2005: $2,804,971) by means of finance leases. During the financial year, the Consolidated Entity disposed of property, plant and equipment with an aggregate fair value of $7,143,498 (2005: $nil) that were financed by means of finance leases.

— 306 —

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APPENDIX IV

5. TRADE AND OTHER RECEIVABLES

CONSOLIDATED 2006 2005 $’000 $’000 3,350 2,271 1,480 572 1,350 3,789 6,180 6,632	CONSOLIDATED 2006 2005 $’000 $’000 3,350 2,271 1,480 572 1,350 3,789 6,180 6,632	COMPANY 2006 2005 $’000 $’000 — — 10 5 48 35 58 40	COMPANY 2006 2005 $’000 $’000 — — 10 5 48 35 58 40
			40
— —	— —	29,835 (145)	53,564 (145)
— —	— —	29,690 29,690	53,419
			53,419

[b] Terms and conditions

Terms and conditions relating to the above financial instruments:

[i] Trade debtors are non-interest bearing and generally on 30 day terms.
[ii] Sundry debtors are non-interest bearing and have repayment terms between 30 and 90 days.
[iii] Except for amounts payable by Mount Gibson Mining Limited, on which interest is charged at 7%pa, related party receivables are non-interest bearing with no fixed repayment date.

6. INVENTORIES

Notes Inventory — consumables at cost Inventory — ore at cost	CONSOLIDATED 2006 2005 $’000 $’000 627 199 5,058 5,097 5,685 5,296	COMPANY 2006 2005 $’000 $’000 — — — — — —	COMPANY 2006 2005 $’000 $’000 — — — — — —
			—

— 307 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

7. AVAILABLE-FOR-SALE FINANCIAL ASSETS

Notes Shares — unlisted at cost Allowance for impairment Shares-listed at fair value	CONSOLIDATED 2006 2005 $’000 $’000 400 400 (400) — — 400 1,248 2,542 1,248 2,942	COMPANY 2006 2005 $’000 $’000 400 400 (400) — — 400 1,248 2,542 1,248 2,942	COMPANY 2006 2005 $’000 $’000 400 400 (400) — — 400 1,248 2,542 1,248 2,942
			400 2,542
			2,942

Available-for-sale financial assets consist of investments in ordinary shares, and therefore have no fixed maturity date or coupon rate

8. OTHER FINANCIAL ASSETS

Notes Non-Current Investments in controlled entities — at cost Allowance for impairment	CONSOLIDATED 2006 2005 $’000 $’000 — — — — — —	COMPANY 2006 2005 $’000 $’000 42,431 21,618 — (10,833) 42,431 10,785	COMPANY 2006 2005 $’000 $’000 42,431 21,618 — (10,833) 42,431 10,785
			10,785

In the current year, the previously recognised allowance for impairment relating to Mount Gibson’s investment in Mount Gibson Mining Limited has been reversed based on current operational forecasts.

— 308 —

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APPENDIX IV

9. INTEREST IN SUBSIDIARIES

Name Country of Incorporation Percentage of Equity Interest Held by the Consolidated Entity 2006 2005 % % Mount Gibson Mining Limited Australia 100 100 WHTK Pty Ltd Australia 100 100 Geraldton Bulk Handling Pty Ltd Australia 100 100 Asia Iron Holdings Limited Hong Kong 73 63 ●Asia Iron (Nanjing) Co., Ltd China 73 63 ●Asia Iron Limited Hong Kong 73 63 ●Jiangsu Investment Pty Ltd Australia 73 63 ●Extension Hill Pty Ltd Australia 73 63 ●Austral Iron Pty Ltd Australia 73 63 ●AP Mining Pty Ltd Australia 73 63 ●Westralian Iron Pty Ltd Australia 73 63 ●MGM Pipelines Pty Ltd Australia 73 63	Investment 2006 2005 $’000 $’000 17,631 6,798 — — — — 24,800 3,987 — — — — — — — — — — — — — — — — 42,431 10,785	Investment 2006 2005 $’000 $’000 17,631 6,798 — — — — 24,800 3,987 — — — — — — — — — — — — — — — — 42,431 10,785
		10,785

10. ASSETS HELD FOR SALE

On 7 June 2006 Mount Gibson advised the Australian Stock Exchange (ASX) that it had signed an agreement with China’s third largest steel producer, the Shougang Group, for the sale of the Consolidated Entity’s entire 73% interest in Asia Iron for $52.5 million.

The agreement was subject to Foreign Investment Review Board (FIRB) approval and the minority shareholders in Asia Iron not exercising an option to match the Shougang offer. Minority shareholders had 28 days to exercise an option to match the Shougang offer.

On 6 July 2006 Mount Gibson advised the ASX that it has received notice of an election to purchase the Consolidated Entity’s shareholding in Asia Iron from a minority shareholder, Sinom Investments. Sinom Investments notice to match the Shougang offer resulted in a binding agreement for the sale of the Consolidated Entity’s entire 73% interest in Asia Iron on the same terms as those previously agreed with Shougang. As a result of Sinom Investments’ election, the condition precedent to the Shougang agreement could not be satisfied. The Consolidated Entity therefore terminated the Shougang agreement to allow the sale to Sinom Investments.

Sinom Investments obtained FIRB approval on 2 August 2006 and completion of the sale by the Consolidated Entity of its 73% interest in Asia Iron to Sinom Investments occurred on 21 August 2006 with the $52.5 million being placed in escrow pending environmental approval which is expected by the end of 2006.

If environmental approval is not obtained by 30 November 2007, Sinom Investments may terminate the agreement and the sale shares will be returned to the Consolidated Entity. Consequently, the Consolidated Entity would then retain its indirect interest in the Extension Hill Magnetite Project and would re-assess the options available to it in respect of the project.

As at 30 June 2006, Asia Iron and its subsidiaries was classified as a disposal group and was held for sale.

— 309 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

The major classes of assets and liabilities of Asia Iron measured at the lower of carrying amount and fair value less cost to sell as at 30 June 2006 in the Consolidated Balance Sheet are as follows:

Notes Assets Cash 4 Trade and other receivables Prepayments Property, plant and equipment 11 Deferred acquisition, exploration, evaluation and development costs 12 Assets classified as held for sale Liabilities Trade and other payables Interest bearing liabilities 15 Liabilities directly associated with assets classified as held for sale Less: Minority interest thereon Net assets attributable to disposal of Asia Iron Holdings Limited	2006 $’000 2,849 216 115 3,158 39,755
	46,093
	(1,568 (1,500
	(3,068
	43,025
	(11,776
	31,249

11. PROPERTY, PLANT AND EQUIPMENT

CONSOLIDATED 2006 2005 $’000 $’000 3,020 5	CONSOLIDATED 2006 2005 $’000 $’000 3,020 5	COMPANY 2006 2005 $’000 $’000 5 5	COMPANY 2006 2005 $’000 $’000 5 5
10,057 (1,214) 8,843 6,095 (3,024) 3,071	2,433 (546) 1,887 13,456 (3,604) 9,852	— — — — — —	— —
			—
			— —
			—

— 310 —

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APPENDIX IV

CONSOLIDATED 2006 2005 $’000 $’000 6,709 6,111 (997) (549)	CONSOLIDATED 2006 2005 $’000 $’000 6,709 6,111 (997) (549)	COMPANY 2006 2005 $’000 $’000 — — — —	COMPANY 2006 2005 $’000 $’000 — — — —
5,712 522 (241) 281 2,576 28,979 (5,476) 23,503 (3,158)	5,562 522 (163) 359 — 22,527 (4,862) 17,665 —	— — — — — 5 — 5 —	—
			— —
			—
			—
			5 —
			5 —
20,345	17,665	5	5
8,843 3,071 5,712 281	1,887 9,852 5,562 359	— — — —	— — — —
17,907	17,660	—	—

— 311 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

	CONSOLIDATED	CONSOLIDATED	COMPANY	COMPANY
Notes	2006	2005	2006	2005
	$’000	$’000	$’000	$’000

1,887 7,666 — — (36) (674)	1,514 618 82 66 (7) (386)	— — — — — —	— — — — — —
8,843 9,852 2,783 — (6,485) (3,079) 3,071 5,562 597 (447) 5,712 359 — (78)	1,887 9,548 2,784 (66) (55) (2,359) 9,852 5,615 379 (432) 5,562 462 21 (124)	— — — — — — — — — — — — — —	—
			— — — — —
			— — — —
			— — — —
281	359	—	—

— 312 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

12. DEFERRED ACQUISITION, EXPLORATION, EVALUATION AND DEVELOPMENT COSTS

CONSOLIDATED 2006 2005 $’000 $’000 4,022 4,022 154 — 34,547 19,874 5,208 5,208 43,931 29,104 (39,755) — 4,176 29,104	CONSOLIDATED 2006 2005 $’000 $’000 4,022 4,022 154 — 34,547 19,874 5,208 5,208 43,931 29,104 (39,755) — 4,176 29,104	COMPANY 2006 2005 $’000 $’000 — — — — — — — — — — — — — —	COMPANY 2006 2005 $’000 $’000 — — — — — — — — — — — — — —
			— —
			—
29,104 15,641 (814) 43,931 (39,755)	17,889 11,881 (666) 29,104 —	— 25 (25) — —	— — —
			— —
4,176	29,104	—	—

— 313 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

13. MINE PROPERTIES

Notes Mine development expenditure Accumulated amortisation Reconciliation Carrying amount at beginning of the year Additions Amortisation Carrying amount at the end of the year	CONSOLIDATED 2006 2005 $’000 $’000 91,603 37,398 (40,036) (22,267) 51,567 15,131 15,131 8,529 54,205 24,159 (17,769) (17,557) 51,567 15,131	COMPANY 2006 2005 $’000 $’000 — — — — — — — — — — — — — —	COMPANY 2006 2005 $’000 $’000 — — — — — — — — — — — — — —
			—
			— — —
			—

14. TRADE AND OTHER PAYABLES

Notes Current Trade creditors Accruals and other payables	CONSOLIDATED 2006 2005 $’000 $’000 7,333 4,004 10,503 6,359 17,836 10,363	COMPANY 2006 2005 $’000 $’000 175 85 166 45 341 130	COMPANY 2006 2005 $’000 $’000 175 85 166 45 341 130
			130

Trade creditors and other payables are non-interest bearing and are normally settled on 30 day terms.

— 314 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

15. INTEREST-BEARING LOANS AND BORROWINGS

Notes Current Lease liability [a] Unearned revenue Non-Current Lease liability [a] Attributable to disposal group not included above — see Note 10 [b]	CONSOLIDATED 2006 2005 $’000 $’000 1,594 2,361 — 419 1,594 2,780 4,247 8,938 1,500 —	COMPANY 2006 2005 $’000 $’000 — — — — — — — — — —	COMPANY 2006 2005 $’000 $’000 — — — — — — — — — —
			—
			—
			—

Terms and condition relating to the above financial instruments:

[a] Finance leases are repayable monthly with final instalments due in November 2014. Interest is charged at an average rate of 7.97%. Secured by first mortgage over the leased assets.
[b] Commercial bill facility held with National Australia Bank. Interest is charged at an average rate of 5.99% and expires on 28 February 2011. The commercial bill is secured by first mortgage over the land located at Yanda Farm, Western Australia which is owned by Westralian Iron Pty Ltd, a wholly owned subsidiary of Asia Iron Holdings Limited.

— 315 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

CONSOLIDATED 2006 2005 $’000 $’000 20,474 1,000 5,841 10,258 5,526 2,701 — 4,000 1,500 — 33,341 17,959	CONSOLIDATED 2006 2005 $’000 $’000 20,474 1,000 5,841 10,258 5,526 2,701 — 4,000 1,500 — 33,341 17,959	COMPANY 2006 2005 $’000 $’000 — — — — — — — — — — — —	COMPANY 2006 2005 $’000 $’000 — — — — — — — — — — — —
			—
— 5,841 5,526 — 1,500	— 10,258 493 — —	— — — — —	— — — — —
12,867	10,751	—	—
20,474 — — — —	1,000 — 2,208 4,000 —	— — — — —	— — — — —
20,474	7,208	—	—

[i] The security pledge for these facilities is a fixed and floating charge over all the assets and undertakings of the Consolidated Entity.

— 316 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

16. DERIVATIVES

Notes Current Asset Foreign currency forward contracts and options 34(c) Current Liability Foreign currency forward contracts and options 34(c)	CONSOLIDATED 2006 2005 $’000 $’000 2,541 — 1,470 —	COMPANY 2006 2005 $’000 $’000 — — — —	COMPANY 2006 2005 $’000 $’000 — — — —
			—

17. PROVISIONS

CONSOLIDATED 2006 2005 $’000 $’000 451 238 12 62 463 300	CONSOLIDATED 2006 2005 $’000 $’000 451 238 12 62 463 300	COMPANY 2006 2005 $’000 $’000 — — — — — —	COMPANY 2006 2005 $’000 $’000 — — — — — —
			—
14 688	— 655	— —	— —
702	655	—	—
62 100 (150) 12 655 33	— 62 — 62 623 32	— — — — — —	— — —
			—
			— —
688	655	—	—

— 317 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

18. ISSUED CAPITAL

CONSOLIDATED Notes 2006 2005 $’000 $’000 [a] Ordinary shares Issued and full paid 86,851 79,381 2006 Number of Shares $’000 [b] Movement in ordinary shares on issue Beginning of the financial year 368,519,793 79,381 Conversion of convertible notes — — Equity placement — — Issue of shares 40,000 10 Exercise of options 33,498,926 7,460 Less capital raising costs — — End of the financial year 402,058,719 86,851	CONSOLIDATED Notes 2006 2005 $’000 $’000 [a] Ordinary shares Issued and full paid 86,851 79,381 2006 Number of Shares $’000 [b] Movement in ordinary shares on issue Beginning of the financial year 368,519,793 79,381 Conversion of convertible notes — — Equity placement — — Issue of shares 40,000 10 Exercise of options 33,498,926 7,460 Less capital raising costs — — End of the financial year 402,058,719 86,851	CONSOLIDATED Notes 2006 2005 $’000 $’000 [a] Ordinary shares Issued and full paid 86,851 79,381 2006 Number of Shares $’000 [b] Movement in ordinary shares on issue Beginning of the financial year 368,519,793 79,381 Conversion of convertible notes — — Equity placement — — Issue of shares 40,000 10 Exercise of options 33,498,926 7,460 Less capital raising costs — — End of the financial year 402,058,719 86,851	COMPANY 2006 2005 $’000 $’000 86,851 79,381 2005 Number of Shares $’000 291,565,822 40,848 7,916,667 2,375 49,760,604 32,305 — — 19,276,700 4,811 — (958) 368,519,793 79,381
		$’000 79,381 — — 10 7,460 — 86,851

[c] Terms and conditions of contributed equity

Ordinary shares have the right to receive dividends as declared, and in the event of winding up Mount Gibson, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of Mount Gibson.

Effective from 1 July 1998, the Corporation legislation in place abolished the concept of authorised capital and par values. Accordingly, Mount Gibson does not have authorised capital nor par value in respect of its issued shares.

— 318 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

[d] Share options

As at balance date the following Options over unissued Shares were on issue:

Exercise Price Exercise Date/Period 22 cents On or before 15 October 2005 25 cents On or before 31 December 2006 50 cents On or before 31 December 2007 55 cents On or before 31 December 2008 78 cents On or before 31 December 2006 90 cents On or before 30 June 2010 90 cents On or before 23 October 2010 110 cents On or before 23 October 2012	2006 Number — 7,256,920 5,000,000 5,000,000 823,712 2,000,000 3,000,000 2,000,000 25,080,632	2005 Number 30,523,300 4,500,000 5,000,000 5,000,000 — — — —
		45,023,300

In addition, as at 30 June 2006, there were 4,175,000 (2005: 6,400,000) options granted but not issued under the Employee Share Scheme. The options were granted on the basis that the employees must complete employment service to 31 December 2007 before the options vest. Once vested the options will be exercisable at 78 cents each and expire on 31 December 2009.

Share options carry no right to dividends and no voting rights.

— 319 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

19. RESERVES

CONSOLIDATED 2006 2005 $’000 $’000 5,954 1,631 (1,790) — (3,691) — 473 1,631	CONSOLIDATED 2006 2005 $’000 $’000 5,954 1,631 (1,790) — (3,691) — 473 1,631	COMPANY 2006 2005 $’000 $’000 5,954 1,631 (2,255) — — — 3,699 1,631	COMPANY 2006 2005 $’000 $’000 5,954 1,631 (2,255) — — — 3,699 1,631
			1,631
1,631 4,323 5,954 — 1,165 (3,305) 465 (115)	— 1,631 1,631 — — — — —	1,631 4,323 5,954 — 1,050 (3,305) — —	— 1,631
			1,631
			— — — — —
(1,790) (465) (3,226) (3,691)	— — — —	(2,255) — — —	—
			— —
			—

Balances at 30 June 2006 represent the total movement during the year.

— 320 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

20. RETAINED EARNINGS / (ACCUMULATED LOSSES)

Notes Balance at the beginning of the year Net profit/(loss) attributable to members of the Company Balance at the end of the year 21. MINORITY INTERESTS Notes Opening balance Disposal by Mount Gibson Mining Limited of shares in Extension Hill Pty Ltd Issue of capital by Asia Iron Holdings Limited Share of current year loss Closing balance	CONSOLIDATED 2006 2005 $’000 $’000 (13,383) (26,885) 23,479 13,502 10,096 (13,383) CONSOLIDATED 2006 2005 $’000 $’000 8,956 6,344 — (6,344) 3,226 8,956 (406) — 11,776 8,956	COMPANY 2006 2005 $’000 $’000 (13,483) (13,098) 7,517 (385) (5,966) (13,483) COMPANY 2006 2005 $’000 $’000 — — — — — — — — — —

— 321 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

22. EXPENDITURE COMMITMENTS

CONSOLIDATED 2006 2005 $’000 $’000 906 826 3,332 3,128 4,238 3,954	CONSOLIDATED 2006 2005 $’000 $’000 906 826 3,332 3,128 4,238 3,954	COMPANY 2006 2005 $’000 $’000 — — — — — —	COMPANY 2006 2005 $’000 $’000 — — — — — —
			—
9,455 10,627	594 970	— —	— —
20,082	1,564	—	—
2,001 4,438 610 7,049 (1,208)	3,232 10,481 — 13,713 (2,414)	— — — — —	— — —
			— —
5,841	11,299	—	—
1,594 4,247	2,361 8,938	— —	— —
5,841	11,299	—	—

[i] In order to maintain current rights to explore and mine the tenements at Tallering Peak, Mt Gibson, Koolanooka, Extension Hill and Mintaja Coal, the Consolidated Entity is required to perform minimum exploration work to meet the expenditure requirements specified by the Department of Industry and Resources.

— 322 —

FINANCIAL INFORMATION ON MOUNT GIBSON

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[ii] Operating leases:

operating lease for office space with an initial lease term of 5 years and an implicit interest rate of 4%.
operating lease for machinery has a term of 5 years and expires in September 2008.
[iii] Finance leases and hire purchases have an average term of 4.5 years with the option to purchase the asset at the completion of the lease term for a pre-agreed amount. The average discount rate implicit in the leases is 7.97%. Secured lease liabilities are secured by a charge over the leased assets.

23. EMPLOYEE BENEFITS

	CONSOLIDATED	CONSOLIDATED	COMPANY	COMPANY
	2006	2005	2006	2005
	$’000	$’000	$’000	$’000
The aggregate employee benefits liability is
comprised of:
Accrued wages, salaries and on-costs	1,544	629	43	25
Provisions	465	238	—	—
	2,009	867	43	25

24. SHARE-BASED PAYMENT PLANS

Employee share scheme

An employee share scheme has been established where Mount Gibson may, at the discretion of the board, grant options over the ordinary shares of Mount Gibson. The options, issued for nil consideration, are granted in accordance with performance guidelines established by the directors of Mount Gibson. All directors, officers and employees are eligible for this scheme.

Information with respect to the number of options granted and issued under the employee share scheme is as follows:

No. Balance at beginning of year granted and issued forfeited exercised Balance at year end Exercisable at year end	2006 of Options Weighted average exercise price (cents) No. 20,900,000 25.0 9,073,712 91.7 (1,900,000) 56.9 (2,993,080) 25.0 25,080,632 57.4 13,080,632 37.8	2005 of Options Weighted average exercise price (cents) — — 21,900,000 25.0 (1,000,000) 25.0 — — 20,900,000 25.0 — —	2005 of Options Weighted average exercise price (cents) — — 21,900,000 25.0 (1,000,000) 25.0 — — 20,900,000 25.0 — —
			25.0
			—

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The outstanding balance of options granted and issued as at 30 June 2006 is represented by:

Exercise Price Exercise Date Vesting Date No. 25 cents On or before 31 December 2006 31-Dec-05 50 cents On or before 31 December 2007 31-Dec-05 55 cents On or before 31 December 2008 31-Dec-06 78 cents On or before 31 December 2009 31-Dec-05 90 cents On or before 30 June 2010 01-Jul-08 90 cents On or before 23 October 2010 24-Oct-08 110 cents On or before 23 October 2012 24-Oct-10	of Options 7,256,920 5,000,000 5,000,000 823,712 2,000,000 3,000,000 2,000,000
	25,080,632

In addition, as at 30 June 2006, there were 4,175,000 options granted but not issued under the Employee Share Scheme. The options were granted on the basis that the employees must complete employment service to 31 December 2007 before the options vest, at which time they will be issued to the respective employees. Once vested the options will be exercisable at 78 cents each and expire on 31 December 2009. As at the date of this report, none of the options had vested.

The remaining contractual life for the options on issue as at 30 June 2006 is between 1 and 6 years (2005: 1 and 2 years).

The range for exercise prices for options on issue at the end of the year was $0.25-$1.10 (2005: $0.25).

The weighted average fair value of options granted during the year was $0.43 (2005: $0.19).

The fair value of the equity-settled share options granted under the option plan is estimated as at the date of grant using a binomial model taking into account the terms and conditions upon which the options were granted.

Listed below are the inputs to the binomial model for the respective options granted during the financial period:

Grant date	31-Dec-05	4-Oct-05	4-Oct-05	4-Oct-05
Share price at grant date	$0.70	$0.86	$0.86	$0.86
Exercise price	$0.78	$0.90	$0.90	$1.10
Risk free interest rate	5.09%	5.40%	5.40%	5.40%
Volatility factor	60%	60%	60%	60%
Expiry date	31-Dec-09	30-Jun-10	23-Oct-10	23-Oct-12

25. EARNINGS PER SHARE

Basic earnings per share amount are calculated by dividing net profit for the year attributable to ordinary equity holders of Mount Gibson by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of Mount Gibson by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.

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The following reflects the income and share data used in the calculations of basic and diluted earnings per share:

	CONSOLIDATED	CONSOLIDATED
	2006	2005
	$’000	$’000
Profits used in calculating basic and diluted earnings per share	23,479	13,502
	Number of Shares	Number of Shares
Weighted average number of ordinary shares used in calculating
basic earnings per share	390,533,080	318,817,812
Effect of dilution
— Share options	8,624,527	12,232,478
Weighted average number of ordinary shares used in calculating
diluted earnings per share	399,157,607	331,050,290

7,000,000 options have not been included in the calculation of diluted earnings per share as the exercise price is greater than the market value of the share and therefore considered to be anti-dilutive.

Conversions, calls, subscriptions or issues after 30 June 2006

Since the end of the financial year 18,000 options have been converted to ordinary shares. There have been no other conversions to, calls of, or subscriptions for ordinary shares or issues of potential ordinary shares since the reporting date and before the completion of this report.

26. DIVIDENDS PAID AND PROPOSED

No amounts have been paid, declared or recommended by the company by way of dividend since the commencement of the year.

27. CONTINGENT LIABILITY

Litigation

The Consolidated Entity has received correspondence from lawyers acting for some of the minority shareholders in Asia Iron alleging that the previous managing director made certain representations to the minority shareholders on behalf of the Consolidated Entity and threatening legal action on the basis that the Consolidated Entity’s decision to sell its interest in Asia Iron resulted in a breach of those representations. The Consolidated Entity disputes the assertions of the minority shareholders. The Consolidated Entity is unable at present to give an estimate of the financial impact of this threatened legal action.

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28. DIRECTOR AND EXECUTIVE DISCLOSURES

[a] Details of Key Management Personnel

[i] Directors WB Willis Chairman BG Johnson Deputy Chairman L Tonkin Managing director (appointed 25 October 2005) AD Rule Finance director (appointed 1 July 2005) CL Readhead Non-executive director IA Macliver Non-executive director G Liu Non-executive director (appointed 12 August 2005, retired 22 February 2006) [ii] Executives SP Coates Exploration Manager DP Garcia Commercial director (Asia Iron Holdings Limited) PJ Jones Project Manager KJ Malaxos Chief executive officer (Mount Gibson Mining Limited)

[b] Compensation of Specified Key Management Personnel
[i] Compensation Policy

The compensation policy of Mount Gibson and its Controlled Entities has been put in place to ensure that:

compensation policies and systems support Mount Gibson’s wider objectives and strategies;
key management personnel remuneration is aligned to the long-term interests of Shareholders within an appropriate control framework; and
there is a clear relationship between the key management personnel performance and remuneration.

The board of directors is responsible for determining and reviewing compensation arrangements for the directors and executive officers. The board assesses the appropriateness of the nature and amount of emoluments of all officers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality Board and Executive team. To assist in achieving these objectives, the nature and amount of executive directors’ and officers’ emoluments are linked to Mount Gibson’s financial and operational performance. The maximum total compensation payable to non-executive directors is $300,000 and was approved by Shareholders on 18 November 2005. All Directors and employees have the opportunity to qualify for participation in the Employee Share Scheme.

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(A) Remuneration Committee

The Remuneration Committee of the board of directors of Mount Gibson is responsible for determining and reviewing compensation arrangements for the directors, the managing director, finance director and all other key management personnel.

The Remuneration Committee assesses the appropriateness of the nature and amount of compensation of key management personnel on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality board and executive team.

(B) Compensation Structure

In accordance with best practice corporate governance, the structure of non-executive director and executive compensation is separate and distinct.

(C) Non-Executive Director Compensation

Objective

The Board seeks to set aggregate compensation at a level that provides the company with the ability to attract and retain directors of the highest calibre, whilst incurring a cost that is acceptable to shareholders.

Structure

The Constitution and the ASX Listing Rules specify that the aggregate compensation of non-executive directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the directors as agreed. The latest determination was at the Annual General Meeting held on 18 November 2005 when the shareholders approved an aggregate compensation of $300,000 per year. The amount of aggregate compensation sought to be approved by shareholders and the manner in which it is apportioned amongst directors is reviewed annually. The Board considers advice from external consultants as well as the fees paid to non-executive directors of comparable companies when undertaking the annual review process.

Each director receives a fee for being a director of the company. Non-executive directors have long been encouraged by the Board to hold shares in the company (purchased by the director on market). It is considered good governance for directors to have a stake in the company on whose board they sit.

The compensation of non-executive directors for the period ending 30 June 2006 is detailed in Note 28(b)(ii).

(D) Executive Compensation

Objective

The entity aims to reward executives with a level and mix of compensation commensurate with their position and responsibilities within the entity so as to:

reward executives for company, business unit and individual performance against targets set by to appropriate benchmarks;
align the interests of executives with those of shareholders;

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APPENDIX IV

link rewards with the strategic goals and performance of the company; and
ensure total compensation is competitive by market standards.

Structure

In determining the remuneration package, the Remuneration Committee reviews the individual’s remuneration with the use of market data for positions with comparable companies. Where appropriate, the package is adjusted so as to keep pace with market trends and ensure continued remuneration competitiveness. In conducting a comparative analysis, Mount Gibson’s expected performance for the year is considered in the context of Mount Gibson’s capacity to fund remuneration budgets. From time to time, a review of the total remuneration package by an independent consultant in this field is undertaken to provide an independent reference point.

Compensation consists of the following key elements:

Fixed compensations
Variable compensations
Short-term incentive (STI); and
Long-term incentive.
(E) Fixed Compensation

Objective

Fixed compensation is reviewed annually by the Remuneration Committee. The process consists of a review of companywide and individual performance, relevant comparative compensation in the market and internally and, where appropriate, external advice on policies and practices.

Structure

The components of the executive fixed remuneration are determined individually and may include:

cash remuneration;
accommodation and travel benefits;
motor vehicle, parking and other benefits; and
reimbursement of entertainment, home office and telephone expenses.

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FINANCIAL INFORMATION ON MOUNT GIBSON

(F) Variable Compensation — Short Term Incentive (STI)

Objective

STI are linked to clearly specified performance targets and provide rewards for materially improved Company performance. The total potential STI available is set at a level so as to provide sufficient incentive to executives to achieve the operational targets and such that the cost to the Consolidated Entity is reasonable in the circumstances.

Structure

Actual STI payments granted depend on the extent to which specific operating targets set at the beginning of the financial year are met. The operational targets consist of a number of Key Performance Indicators covering both financial and non-financial measures of performance.

On an annual basis, the individual performance of each executive is rated and the Remuneration Committee determines the amount of STI to be allocated to each executive. Payments made are delivered as a cash bonus in the following reporting period.

(G) Variable Compensation — Long Term Incentive (LTI)

Objective

LTI rewarded to Executive Directors and Senior Executives do not have a direct link to Mount Gibson performance but in the opinion of the Board, they provide an incentive to increase performance of the business over an extended period.

Structure

LTI grants to executives are delivered in the form of options, rights or fully paid shares.

Note 28[c] provides details of options granted under the LTI plan.

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[ii] Compensation of Key Management Personnel

Directors WB Willis [#] 2006 2005 BG Johnson 2006 2005 L Tonkin 2006 AD Rule 2006 CL Readhead 2006 2005 IA Macliver 2006 2005 Executives SP Coates 2006 2005 DP Garcia 2006 PJ Jones 2006 KJ Malaxos 2006 2005 2006 2005	Short Term Post Employment Share- Based Payment Salary & Fees Cash Bonus Non Monetary Benefits Superannuation Retirement Benefits Options $’000 $’000 $’000 $’000 $’000 $’000 106 — — 9 — 15 117 — — 6 — 29 673 — 34 — — 3,114 345 250 88 — — 1,405 316 250 1 28 — 399 300 150 2 27 — 224 48 — — — — 7 42 — — — — 15 44 — — 4 — 7 38 — — 4 — 15 183 8 — 16 — 41 131 10 — 13 — 31 399 — — 13 — — 275 — 1 25 — 13 246 4 20 23 — 28 208 10 6 19 — 31 2,590 412 58 145 — 3,848 881 270 94 42 — 1,526	Total Total Performance Related $’000 % 130 11% 152 19% 3,821 81% 2,088 79% 994 65% 703 53% 55 13% 57 26% 55 13% 57 26% 248 20% 185 22% 412 — 314 4% 321 10% 274 15% 7,053 2,813

[#] Included in Bill Willis’ fees is a $36,000 retainer for the provision of consulting services to Mount Gibson Mining Limited during the financial year.

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[iii] Compensation by Category: Key Management Personnel

Short-term Post employment Share-based payment	CONSOLIDATED 2006 2005 $’000 $’000 3,060 1,245 145 42 3,848 1,526 7,053 2,813	COMPANY 2006 2005 $’000 $’000 158 136 10 7 3,848 1,526 4,016 1,669	COMPANY 2006 2005 $’000 $’000 158 136 10 7 3,848 1,526 4,016 1,669
			1,669

[iv] Contract for Services

As at the date of this report, the Consolidated Entity had entered into employment contracts with the following Executive Directors:

Luke Tonkin

The key terms of his contract are as follows:

5 years from 24 October 2005 to 24 October 2010
There are no termination benefits at the completion of the contract term. However, if Mount Gibson wishes to terminate the contract other than if Mr Tonkin is guilty of any grave misconduct, serious or persistent breach of the terms of the contract or wilful neglect in the discharge of the Duties, Mount Gibson is obliged to pay out the remaining term of the contract to a maximum of two years. If Mr Tonkin wishes to terminate the contract, he must provide three months notice.

Alan Rule

The key terms of his contract are as follows:

5 years from 1 July 2005 to 30 June 2010
There are no termination benefits at the completion of the contract term. However, if Mount Gibson wishes to terminate the contract other than if Mr Rule is guilty of any grave misconduct, serious or persistent breach of the terms of the contract or wilful neglect in the discharge of the Duties, Mount Gibson is obliged to pay out the remaining term of the contract to a maximum of two years. If Mr Rule wishes to terminate the contract, he must provide three months notice.

[c] Compensation Options: Granted and Vested During the Year

During the financial year, the directors or their nominees were issued Options approved by shareholders at a General Meeting and Executives or their nominees were issued Options under the directors, officers, employees and other permitted persons Option Plan.

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FINANCIAL INFORMATION ON MOUNT GIBSON

Options granted as part of director and executive emoluments have been valued using the Binomial option pricing model. The value per option at grant date is calculated using the following assumptions:

Grant date	31-Dec-05	4-Oct-05	4-Oct-05	4-Oct-05
Share price at grant date	$0.70	$0.86	$0.86	$0.86
Exercise price	$0.78	$0.90	$0.90	$1.10
Risk free interest rate	5.09%	5.40%	5.40%	5.40%
Volatility factor	60%	60%	60%	60%
Expiry date	31-Dec-09	30-Jun-10	23-Oct-10	23-Oct-12

Terms and Conditions for each grant:

30 June 2006
Vested
Number
Directors
AD Rule
—
L Tonkin
—
L Tonkin
—
Executives
SP Coates
—
PJ Jones
—
—

Terms and Conditions for each grant
Granted
Number
Grant date
Fair value
per option
at grant
date $
Exercise
price per
option $
First
exercise
date
Last exercise
date/expiry
date
2,000,000
4-Oct-05
0.464
0.90
1-Jul-08
30-Jun-10
3,000,000
4-Oct-05
0.478
0.90
24-Oct-08
23-Oct-10
2,000,000
4-Oct-05
0.518
1.10
24-Oct-10
23-Oct-12
250,000
31-Dec-05
0.332
0.78
31-Dec-07
31-Dec-09
250,000
31-Dec-05
0.332
0.78
31-Dec-07
31-Dec-09
7,500,000

30 June 2005
Vested
Number
Directors
BG Johnson
—
BG Johnson
—
Executives
KJ Malaxos
—
JP Arbuckle
—
JR Tyers
—
SP Coates
—
C Lee
—
—

Terms and Conditions for each grant
Granted
Number
Grant date
Fair value
per option
at grant
date $
Exercise
price per
option $
First
exercise
date
Last exercise
date/expiry
date
5,000,000
16-Mar-05
0.5516
0.50
31-Dec-05
31-Dec-07
5,000,000
16-Mar-05
0.5716
0.55
31-Dec-06
31-Dec-08
750,000
15-Dec-04
0.0807
0.25
31-Dec-05
31-Dec-06
750,000
15-Dec-04
0.0807
0.25
31-Dec-05
31-Dec-06
1,000,000
15-Dec-04
0.0807
0.25
31-Dec-05
31-Dec-06
750,000
15-Dec-04
0.0807
0.25
31-Dec-05
31-Dec-06
300,000
15-Dec-04
0.0807
0.25
31-Dec-05
31-Dec-06
13,550,000

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FINANCIAL INFORMATION ON MOUNT GIBSON

[d] Option holdings of Key Management Personnel

30 June 2006 Directors WB Willis BG Johnson L Tonkin AD Rule CL Readhead IA Macliver Executives SP Coates DP Garcia PJ Jones KJ Malaxos Total 30 June 2005 Directors WB Willis BG Johnson CL Readhead IA Macliver Executives SP Coates JP Arbuckle JR Tyers C Lee KJ Malaxos Total	Balance at Beginning of Period 1 July 2005 Granted as Remuneration 2,440,000 — 12,500,000 — — 5,000,000 — 2,000,000 1,250,000 — 1,250,000 — 750,000 250,000 — — — 250,000 750,000 — 18,940,000 7,500,000 Balance at Beginning of Period 1 July 2004 Granted as Remuneration 2,440,000 — 6,460,000 10,000,000 1,250,000 — 1,944,444 — — 750,000 — 750,000 — 1,000,000 — 300,000 — 750,000 12,094,444 13,550,000	Options Exercised Net Change (Lapsed/ Disposed) (1,440,000) — — (7,500,000) — — — — (750,000) — (750,000) — — — — — — — (400,000) — (3,340,000) (7,500,000) Options Exercised Net Change (Lapsed/ Disposed) — — — (3,960,000) — — (694,444) — — — — — — — — — — — (694,444) (3,960,000)	Balance at End of Period 30 June 2006 1,000,000 5,000,000 5,000,000 2,000,000 500,000 500,000 1,000,000 — 250,000 350,000 15,600,000 Balance at End of Period 30 June 2005 2,440,000 12,500,000 1,250,000 1,250,000 750,000 750,000 1,000,000 300,000 750,000 20,990,000	Vested at 30 June 2006 Total Not Exercisable Exercisable 1,000,000 — 1,000,000 — — — — — — — — — 500,000 — 500,000 500,000 — 500,000 750,000 — 750,000 — — — — — — 350,000 — 350,000 3,100,000 — 3,100,000 Vested at 30 June 2005 Total Not Exercisable Exercisable 1,440,000 — 1,440,000 — — — 720,000 — 720,000 750,000 — 750,000 — — — — — — — — — — — — — — — 2,910,000 — 2,910,000	Vested at 30 June 2006 Total Not Exercisable Exercisable 1,000,000 — 1,000,000 — — — — — — — — — 500,000 — 500,000 500,000 — 500,000 750,000 — 750,000 — — — — — — 350,000 — 350,000 3,100,000 — 3,100,000 Vested at 30 June 2005 Total Not Exercisable Exercisable 1,440,000 — 1,440,000 — — — 720,000 — 720,000 750,000 — 750,000 — — — — — — — — — — — — — — — 2,910,000 — 2,910,000
					2,910,000

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FINANCIAL INFORMATION ON MOUNT GIBSON

[e] Shareholding of Key Management Personnel

30 June 2006 1 Directors WB Willis BG Johnson L Tonkin AD Rule CL Readhead IA Macliver Executives SP Coates DP Garcia PJ Jones KJ Malaxos Total 30 June 2005 1 Directors WB Willis BG Johnson CL Readhead IA Macliver Executives SP Coates JP Arbuckle JR Tyers C Lee KJ Malaxos Total	Balance July 2005 Ord Granted as Remuneration Ord On Exercise of Options Ord Net Change Other Ord Balance 30 June 2006 Ord 420,000 — 1,440,000 (380,000) 1,480,000 — — 2,500,000 (2,500,000) — — — — — — — — — — — 177,500 — 750,000 (200,000) 727,500 1,200,000 — 750,000 (950,000) 1,000,000 900,000 — — 40,000 940,000 — — — — — — — — — — 25,000 — 400,000 (400,000) 25,000 2,722,500 — 5,840,000 (4,390,000) 4,172,500 Balance July 2004 Ord Granted as Remuneration Ord On Exercise of Options Ord Net Change Other Ord Balance 30 June 2005 Ord 420,000 — — — 420,000 — — — — — 177,500 — — — 177,500 1,081,666 — 694,444 (576,110) 1,200,000 1,595,000 — — (695,000) 900,000 — — — — — 7,220 — — — 7,220 — — — — — — — — 25,000 25,000 3,281,386 — 694,444 (1,246,110) 2,729,720	Balance July 2005 Ord Granted as Remuneration Ord On Exercise of Options Ord Net Change Other Ord Balance 30 June 2006 Ord 420,000 — 1,440,000 (380,000) 1,480,000 — — 2,500,000 (2,500,000) — — — — — — — — — — — 177,500 — 750,000 (200,000) 727,500 1,200,000 — 750,000 (950,000) 1,000,000 900,000 — — 40,000 940,000 — — — — — — — — — — 25,000 — 400,000 (400,000) 25,000 2,722,500 — 5,840,000 (4,390,000) 4,172,500 Balance July 2004 Ord Granted as Remuneration Ord On Exercise of Options Ord Net Change Other Ord Balance 30 June 2005 Ord 420,000 — — — 420,000 — — — — — 177,500 — — — 177,500 1,081,666 — 694,444 (576,110) 1,200,000 1,595,000 — — (695,000) 900,000 — — — — — 7,220 — — — 7,220 — — — — — — — — 25,000 25,000 3,281,386 — 694,444 (1,246,110) 2,729,720
		2,729,720

All equity transactions with key management personnel other than those arising from the exercise of remuneration options have been entered into under terms and conditions no more favourable than those the entity would have adopted if dealing at arm’s length.

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[f] Loans to Specified Key Management Personnel

There were no loans to key management personnel during the year.

[g] Other Transactions and Balances with Key Management Personnel

Services

Pullinger Readhead Lucas, of which Mr CL Readhead is a partner, provided legal services to Mount Gibson and Consolidated Entity. The fees, paid under normal commercial terms and conditions, were $1,546 (2005: $3,237) and $7,631 (2005: $16,997) respectively.

Amounts recognised at the reporting date in relation to other transactions:

Assets and Liabilities Current Liabilities Trade Creditors Total Liabilities Revenues and Expenses Corporate expenses Total Expenses	CONSOLIDATED 2006 2005 $’000 $’000 — —	CONSOLIDATED 2006 2005 $’000 $’000 — —
	— 8	— 17
	8	17

29. RELATED PARTY DISCLOSURE

Ultimate parent

Mount Gibson Iron Limited is the ultimate Australian parent company.

Wholly-owned group transactions

Loans were made by Mount Gibson to wholly owned subsidiaries. Interest of $2,795,958 (2005: $1,857,257) was charged on the loan to Mount Gibson Mining Limited at 7%pa during the year. All other loans are interest free and have no fixed repayment date.

Director-related entity transactions

There are no director-related entity transactions other than those specified in Note 28.

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APPENDIX IV

30. AUDITORS’ REMUNERATION

Amounts received or due and receivable by Ernst & Young for: An audit or review of the financial report of the entity and any other entity in the consolidated entity Other services in relation to the entity and any other entity in the consolidated entity	CONSOLIDATED 2006 2005 $’000 $’000 100 45 40 — 140 45	COMPANY 2006 2005 $’000 $’000 24 12 — — 24 12	COMPANY 2006 2005 $’000 $’000 24 12 — — 24 12
			12

31. SEGMENT INFORMATION

The Consolidated Entity operates primarily in the mining sector, through the exploration, evaluation and development of its iron ore deposits in the Midwest region of Western Australia.

32. EVENTS AFTER THE BALANCE SHEET DATE

On 24 July 2006, Mount Gibson announced the intention to merge with Aztec Resources Limited (Aztec), representing a landmark consolidation of Australia’s emerging iron ore sector. The merger will result in the creation of a leading independent Australian iron ore company, with a market capitalisation of approximately $600 million (assuming dilution for all in-the-money Mount Gibson and Aztec options), an asset portfolio offering near term cash flow, immediate growth potential supported by longer life profile and longer term development opportunities. Mount Gibson proposes to implement the merger by means of an off-market scrip takeover bid for all shares in Aztec. Under the bid, Mount Gibson offered Aztec shareholders 1 new share for every 3 shares held in Aztec, valuing each Aztec share at $0.263 based on Mount Gibson’s volume weighted average price on 21 July 2006 of $0.789, being the last trading day before announcement of the offer. The Offer is subject to a number of conditions, including a minimum acceptance condition of 90%, regulatory approvals, certain prescribed occurrences not having occurred and no material adverse change, acquisitions or disposals. Aztec’s major shareholder, Cambrian Mining Plc, has granted an option to Mount Gibson over Aztec shares equivalent to 15.27% of Aztec’s issued capital, at the Offer price.

Completion of the sale by the Consolidated Entity of its 73% interest in Asia Iron was completed on 21 August 2006 with $52.5 million being placed in escrow pending environmental approval which is expected by the end of 2006.

33. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Consolidated Entity’s principal financial instruments, other than derivatives, comprise bank loans, finance leases and hire purchase contracts, cash and short-term deposits.

The main purpose of these financial instruments is to raise finance for the Consolidated Entity’s operations.

The Consolidated Entity has various other financial instruments such as trade debtors and trade creditors, which arise directly from its operations.

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FINANCIAL INFORMATION ON MOUNT GIBSON

The Consolidated Entity also enters into derivatives transactions, principally forward currency contracts. The purpose is to manage the currency risks arising from the Consolidated Entity’s operations and its sources of finance.

The main risks arising from the Consolidated Entity’s financial instruments are interest rate risk, credit risk and foreign currency risk. The board reviews and agrees policies for managing each of these risks and they are summarised below.

Interest rate risk

The Consolidated Entity’s policy is to manage its interest cost using a mix of fixed and variable rate debt, and to keep between 50% and 75% of its borrowings at fixed rates of interest.

Credit risk

The Consolidated Entity’s maximum exposures to credit risk at balance date in relation to each class of recognised financial assets, other than derivatives, is the carrying amount of those assets as indicated in the statement of financial position. In relation to derivative financial instruments, whether recognised or unrecognised, credit risk arises from the potential failure of counterparties to meet their obligations under the contract or arrangement. The Consolidated Entity’s maximum credit risk exposure in relation to forward exchange contracts is the full amount of the foreign currency it will be required to pay or purchase when settling the forward exchange contract, should the counterparty not pay the currency it is committed to deliver to the company. At reporting date the net amount was A$1,071,486 (2005: $328,672). The Consolidated Entity minimises concentrations of credit risk in relation to trade receivables by undertaking transactions with a number of customers and by the use of letters of credit which guarantee 90% of receivable amount at the time of sale. There are no significant concentrations of credit risk within the Consolidated Entity.

Foreign currency risk

As a result of receipts being denominated in US dollars, the Consolidated Entity’s cash flow can be affected significantly by movements in the US$/A$ exchange rates.

The Consolidated Entity has entered into forward exchange contracts designed as a hedge of anticipated future receipts that will be denominated in US dollars.

It is the Consolidated Entity’s policy to negotiate the terms of the hedge derivatives to match the terms of the hedged item to maximise hedge effectiveness.

At 30 June 2006, the Consolidated Entity had hedged 48% of its foreign currency sales for which firm commitments existed at the balance sheet date, extending to 31 August 2006.

34. FINANCIAL INSTRUMENTS

[a] Interest rate risk

The Consolidated Entity’s exposure to interest rate risks and the effective interest rates of financial assets and financial liabilities are shown on the adjacent page.

— 337 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

The Consolidated Entity’s exposure to interest rate risks and the effective interest rates of financial assets and financial liabilities are as follows:

Floating interest rate Fixed interest rate maturing in: 1 year or less over 1 to 5 years 2006 2005 2006 2005 2006 2005 $’000 $’000 $’000 $’000 $’000 $’000 i) Financial assets Cash 4,333 33,633 84 — — — Trade and other receivables — — — — — — Unlisted shares — — — — — — Listed shares — — — — — — Derivatives — — — — — — Total financial assets 4,333 33,633 84 — — — ii) Financial liabilities Trade and other payables — — — — — — Derivatives — — — — — — Lease liabilities — — 1,594 2,361 4,247 8,938 Unearned revenue — — — 419 — — Total financial liabilities — — 1,594 2,780 4,247 8,938	Floating interest rate Fixed interest rate maturing in: 1 year or less over 1 to 5 years 2006 2005 2006 2005 2006 2005 $’000 $’000 $’000 $’000 $’000 $’000 i) Financial assets Cash 4,333 33,633 84 — — — Trade and other receivables — — — — — — Unlisted shares — — — — — — Listed shares — — — — — — Derivatives — — — — — — Total financial assets 4,333 33,633 84 — — — ii) Financial liabilities Trade and other payables — — — — — — Derivatives — — — — — — Lease liabilities — — 1,594 2,361 4,247 8,938 Unearned revenue — — — 419 — — Total financial liabilities — — 1,594 2,780 4,247 8,938	Floating interest rate Fixed interest rate maturing in: 1 year or less over 1 to 5 years 2006 2005 2006 2005 2006 2005 $’000 $’000 $’000 $’000 $’000 $’000 i) Financial assets Cash 4,333 33,633 84 — — — Trade and other receivables — — — — — — Unlisted shares — — — — — — Listed shares — — — — — — Derivatives — — — — — — Total financial assets 4,333 33,633 84 — — — ii) Financial liabilities Trade and other payables — — — — — — Derivatives — — — — — — Lease liabilities — — 1,594 2,361 4,247 8,938 Unearned revenue — — — 419 — — Total financial liabilities — — 1,594 2,780 4,247 8,938	Non-interest bearing 2006 2005 $’000 $’000 131 — 6,180 5,862 — 400 1,248 2,542 2,541 — 10,100 8,804	Total carrying amount per statement of financial position Weighted average effective interest rate 2006 2005 2006 2005 $’000 $’000 % % 4,548 33,633 5.29 4.59 6,180 5,862 N/A N/A — 400 N/A N/A 1,248 2,542 N/A N/A 2,541 — N/A N/A 14,517 42,437 17,836 9,593 N/A N/A 1,470 — N/A N/A 5,841 11,299 7.97 7.87 — 419 N/A 7.15 25,147 21,311	Total carrying amount per statement of financial position Weighted average effective interest rate 2006 2005 2006 2005 $’000 $’000 % % 4,548 33,633 5.29 4.59 6,180 5,862 N/A N/A — 400 N/A N/A 1,248 2,542 N/A N/A 2,541 — N/A N/A 14,517 42,437 17,836 9,593 N/A N/A 1,470 — N/A N/A 5,841 11,299 7.97 7.87 — 419 N/A 7.15 25,147 21,311
	— — — —	— — — — — — — — — — — 1,594 2,361 4,247 8,938 — — 419 — —	17,836 9,593 1,470 — — — — —	17,836 1,470 5,841 —	9,593 — 11,299 419
		— 1,594 2,780 4,247 8,938	19,306 9,593	25,147

[b] Net fair values

All recognised financial assets and liabilities in the Consolidated Entity have been recognised at their net fair values at balance date.

The recognised financial assets and liabilities in the Consolidated Entity as at 30 June 2005, except for available for sale financial assets and derivatives, have been recognised at their net fair value as detailed below.

	Carrying Value at	Net Fair Value at
	30 June 2005	30 June 2005
	$’000	$’000
Available for sale financial assets	2,942	3,992
Derivatives	—	115
	2,942	4,107

— 338 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

The net fair value, representing the mark to market of a financial asset or a financial liability, is the amount at which the asset could be exchanged or liability settled in a current transaction between willing partners after allowing for transaction costs.

[c] Hedging instruments

[i] Hedges for specific commitments

The Consolidated Entity has entered into forward exchange contracts and foreign exchange option contracts at reporting date designed as a hedge of anticipated future receipts that will be denominated in US dollars.

This hedge has been treated as effective, in accordance with AASB 139

As at 30 June 2006 the following foreign exchange contracts were outstanding:

Forward Exchange Contracts contract rate 0.7397 contract rate 0.7287 contract rate 0.7070 contract rate 0.7455 Collar Option call strike price 0.760/0.750/ 0.770/0.740/0.750/0.745 put strike price 0.7245/0.718/ 0.7335/0.72/0.715/0.711 Collar Option call strike price 0.720/0.725/ 0.730/0.733 put strike price 0.800/0.770/0.780/0.800 Convertible Collar Option call strike price 0.750 put strike price 0.800 barrier rate 0.7998 Total	2006 US$’000 A$’000 equivalent Fair Value A$’000 9,000 12,167 48 9,000 12,351 214 6,000 8,487 366 24,000 33,005 628 60,000 83,443 443 84,000 116,448 1,071	2005 US$’000 A$’000 equivalent Fair Value A$’00 10,000 13,414 165 10,000 13,414 165 36,500 50,093 51 11,500 15,333 (101) 58,000 78,840 115

All of the above contracts mature by 30 April 2007.

— 339 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(H) The following is the directors’ report and auditors’ report of Mount Gibson as disclosed in its 2006 annual report:

The directors submit their report for the year ended 30 June 2006 for Mount Gibson Iron Limited (“Company”) and the consolidated entity incorporating the entities that it controlled during the financial year (“Consolidated Entity”).

DIRECTORS

The names and details of Mount Gibson’s directors in office during the financial period and until the date of this report are set out below. Directors were in office for the entire period unless otherwise stated.

NAMES, QUALIFICATIONS, EXPERIENCE AND SPECIAL RESPONSIBILITIES

Bill Willis — AssocDipGeol RMIT, FAusIMM, MGSA, AMP109

Chairman, non-executive director

Mr Willis is a geologist with extensive technical and management experience gained over more than 40 years in the Australian mining sector, mostly in iron ore. He was executive director and chief executive of Robe River Mining Co Pty Limited from 1993 to 1999 inclusive and held senior management positions with North Limited and Peko Wallsend Pty Ltd. During a twenty year period with BHP Pty Ltd he was variously responsible for exploration, mine geology and management of iron ore production at the BHP’s iron ore mines at Koolyanobbing, Cockatoo Island and Yampi Sound, and responsible for exploration and mine geology at Mt Newman. Mr Willis consults to the group on a part-time basis, is a member of the Audit and Remuneration Committees and has overall responsibility for Corporate Governance. During the past three years Mr Willis has not served as a director of any other listed companies.

Brian Johnson — B.E., MIEAust

Deputy chairman

Mr Johnson is a civil engineer with extensive experience in the construction and mining industries in Australia, South East Asia and North America. Mr Johnson was a founding director and shareholder of Mount Gibson Mining Limited. He has held a number of directorships in listed public companies. As a major shareholder and chief executive, Mr Johnson was instrumental in establishing Portman Limited’s presence in the iron ore industry between 1991 and 1994, developing mines at Koolyanobbing and Cockatoo Island. He also personally partnered Mr Lang Hancock in the development and operation of McCamey’s Monster iron ore mine in the Pilbara, prior to its sale to the BHP Group. Mr Johnson has experience in dealing with regional steel mills and major trading houses through his previous involvement in the production of coking coal, manganese and iron ore. Mr Johnson has been managing director since the inception of Mount Gibson. On 15 October 2005, Mr Johnson resigned as managing director and was appointed Deputy Chairman of Mount Gibson. Mr Johnson is the non-executive chairman of Envirogold Limited and Linc Energy Limited. During the past three years Mr Johnson has not served as a director of any other listed companies.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Luke Tonkin — B.E., MAusIMM, AICD

Managing Director

Mr Tonkin was appointed as managing director on 25 October 2005. Mr Tonkin has extensive experience in the resource industry traversing multi-commodities of gold, nickel, tantalum, tin & lithium. He has held General Management roles within some of Australia’s largest, more complex operations namely WMC’s Kambalda Nickel Operations, St Ives Gold Operations and Leinster Nickel Operations. Mr Tonkin’s most recent role was Chief Executive Officer of Sons of Gwalia, the world’s largest Tantalum producer and third largest Australian listed gold producer, assisting administrators restructure Mount Gibson. Mr Tonkin has a proven track record of implementing large-scale investment, divestment, transition and integration plans. During the past three years Mr Tonkin has not served as a director of any other listed companies.

Alan Rule — B.Comm, B.Acc, CA

Finance Director

Mr Rule was appointed finance director on 1 July 2005. He is a chartered accountant with extensive experience in the mining industry in Australia. He held the position of chief financial officer of Western Metals Limited and more recently St Barbara Mines Limited. He has considerable experience in international financing of mining projects and implementation of accounting controls and systems. Mr Rule was previously finance director of Asia Iron Holdings Limited. Mr Rule is a non-executive director of Resource Mining Corporation Limited. During the past three years Mr Rule served as a director of Nustar Mining Corporation Limited.

Craig Readhead — B. Juris, LL.B, AICD

Non-Executive Director

Mr Readhead has spent the last 26 years practising in the resources law area and is a partner of law firm Pullinger Readhead Lucas. Mr Readhead has had a significant legal role in the development of a number of mining projects within Australia, Africa and South East Asia. He is chairman and a non-executive director of Heron Resources Ltd, Agincourt Resources Ltd and Halcyon Group Ltd, Frankland River Olive Company Limited, and is past President of the Australian Mining and Petroleum Law Association, and past Vice-President of the Association of Mining and Exploration Companies. Mr Readhead is a member of the Audit and Remuneration Committees. During the past three years Mr Readhead has also served as a director of Pioneer Nickel Ltd, New World Alloys Ltd.

Ian Macliver — B.Comm, CA, F Fin, AICD

Non-Executive Director

Mr Macliver is managing director of Grange Consulting Group Pty Ltd, which provide specialist corporate advisory services to both listed and unlisted companies. He has many years experience as a senior executive and director of both resource and industrial companies with particular responsibility for capital raising and other corporate initiatives. Mr Macliver is chairman and a non-executive director of Stratatel Ltd, BioProspect Ltd and is a non-executive director of Port Bouvard Ltd, and Ottoman Energy Ltd. Mr Macliver is Chairman of the Audit and Remuneration Committees. During the past three years Mr Macliver has also served as a director of Commoditel Ltd.

— 341 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Alan Jones — CA

Non-Executive Director

Mr Jones was appointed as a non-executive director on 28 July 2006. Mr Jones is a chartered accountant with extensive senior management and board experience in listed and unlisted Australian public companies, particularly in the construction, engineering, finance and investment industries. He is a non-executive director of Mulpha Australia Limited, Sun Hung Kai & Co. Limited (Hong Kong), Allied Group Limited (Hong Kong) and Allied Properties Limited (Hong Kong). Mr Jones has been involved in the successful merger and acquisition of a number of public companies in Australia and internationally. During the past three years Mr Jones has not served as a director of any other listed companies.

Guoping Liu

Non-Executive Director

Mr Guoping Liu is the Vice President of China Railway Materials and Supply Corporation (“CRMSC”) a Government owned entity ranked 60th by revenue in the top 500 enterprises in China. He has strong connections in Government and the steel industry in China, and extensive international trading experience within the USA, Europe, and South America. During the past three years Mr Liu has not served as a director of any other listed companies. Mr Guoping Liu was appointed a director on 12 August 2005 and retired as a director on 22 February 2006.

COMPANY SECRETARY

Angela Dent — BBus, CA

Ms Dent consults to a number of public and private companies, as a Management Accountant and Company Secretary. She has experience in financial and management accounting, and statutory requirements, in Australia and South East Asia.

INTERESTS IN THE SHARES AND OPTIONS OF MOUNT GIBSON

As at the date of this report, the interests of the Directors in the Shares and Options of Mount Gibson were:

	Ordinary	Options over
	Shares	Shares
WB Willis	1,480,000	1,000,000
BG Johnson	—	5,000,000
L Tonkin	—	5,000,000
AD Rule	—	2,000,000
CL Readhead	727,500	500,000
IA Macliver	1,000,000	500,000
AS Jones	—	—

— 342 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

CORPORATE INFORMATION

Corporate Structure

Mount Gibson Iron Limited is a company limited by shares that is incorporated and domiciled in Australia. It is the ultimate parent entity and has prepared a consolidated financial report incorporating the entities that it controlled during the financial year. The structure of the Consolidated Entity as at 30 June 2006 was as follows:

==> picture [453 x 224] intentionally omitted <==

----- Start of picture text -----

Mount Gibson Iron Limited
Country of registration:Australia
ACN: 008 670 817
100% 100% 100%
Geraldton Bulk Handling Pty Ltd Mount Gibson Mining Limited WHTK Pty Ltd
Country of registration:Australia Country of registration:Australia Country of registration:Australia
ACN: 100 105 388 ACN: 074 575 885 ACN: 098 602 343
38.09% 34.54%
Asia Iron Holdings Limited
Country of registration: Hong Kong
HKCN: 879068
100% 100% 100% 100%
Austral Iron Pty Ltd Jiangsu Investment Pty Ltd Asia Iron (Nanjing) Co., Ltd
Asia Iron (Nanjing) Co., Ltd
Country of registration:Australia Country of registration:Australia Country of registration: Hong Kong
ACN: 100 180 952 ACN: 111 143 223 Country of registration: China HKCN: 866763
100% 100% 100%
AP Mining Pty Ltd Westralian Iron Pty Ltd Extension Hill Pty Ltd
Country of registration:Australia Country of registration:Australia Country of registration:Australia
ACN: 104 984 545 ACN: 106 448 695 ACN: 067 128 938
100%
MGM Pipelines Pty Ltd
Country of registration:Australia
ACN: 112 872 349
----- End of picture text -----

Following completion of the sale of Asia Iron Holdings Limited, as set out in note 10 in the financial statements, the corporate structure of the Consolidated Entity is:

==> picture [328 x 69] intentionally omitted <==

Nature of Operations and Principal Activities

The principal activities of the entities within the Consolidated Entity are:

mining of hematite deposits at Tallering Peak; and
exploration and development of hematite deposits in the Mid-West region of Western Australia.

— 343 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Employees

The Consolidated Entity employed 120 employees as at 30 June 2006 (2005: 71 employees).

Future Funding

As at the date of this report the Consolidated Entity has sufficient funds or funding to develop and mine the Tallering Peak iron deposits.

REVIEW AND RESULTS OF OPERATIONS

Operating Results for the Period

A summary of the operating results for the Consolidated Entity is set out below:

Operating Profit Before Tax Taxation Benefit / (Expense) Operating Profit After Tax Loss Attributable to Minority Interest Net Profit Attributable to Members of the company	Consolidated 2006 2005 $’000 $’000 16,151 22,032 6,922 (8,530) 23,073 13,502 406 — 23,479 13,502

The income tax benefit reflects the recognition in the current period of tax losses available for use by the Consolidated Entity.

Tallering Peak Hematite Operations

During December 2005 Mount Gibson announced that detailed mine schedules to exploit the current ore reserve had recently been completed which indicated that development rates at Tallering Peak would need to be increased to sustain 3 Mtpa of ore production through to the end of mine life.

The increased rate of development stripping commenced in January 2006 following the mobilisation of additional hired mining equipment which will give the operation the capacity to load and haul approximately 32 Mtpa of ore and waste annually over the next two years.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

The upper zone of the Tallering Peak resource was sparsely preproduction drilled due to drill rig access limitations as a consequence of steep topography. Reconciliation of ore during the 6 months to 30 June 2006 from the upper zone of Tallering Peak under-reconciled against the resource model. This is not expected to materially affect the total resource available for exploitation as the upper zone of the resource contributes less than 4% of the total ore tonnes.

During the six months to June 2006, further ore was mined from the upper section of the Tallering Peak resource where the density of the geological information above the current pit floor was limited. The cut back of the T3c pit is now well established and has now entered the area of the Tallering Peak resource that has been better defined by recent infill drilling. As the cut back of T3c progresses, higher grade hematite ore will be encountered and ore zones will become more continuous.

Infill resource definition drilling to improve the short to mediumterm scheduling capability of Tallering Peak operations progressed satisfactorily during the 6 months to 30 June 2006. Completion of drilling is scheduled for October 2006 with modelling and detailed resource estimation to follow.

Results to date confirm the general nature of the resource, as defined by the previous broadly spaced drilling, with the new data better defining local variations in geometry and grades.

Tallering Peak’s secondary ore source, T5 Open Pit, is currently mined by a large scale owner operated fleet which will complete mining from this ore source in June 2007.

The second half of 2005/06 has prepared the Consolidated Entity for growth with the company focusing resources on improving access to deeper ore zones, enabling Tallering Peak to achieve sustainable ore production of 3 Mtpa. During the months of July and August 2006, a total in excess of 750,000 tonnes of ore was mined. Given the encouraging infill drilling results below the current pit floor and the mine’s demonstrated capacity to substantially increase total material movements and ore production, Mount Gibson is confident of mining 3 Mtpa of ore in the 2006/07 financial year.

Revenue from the sale of ore decreased by 5% in 2006 from the previous year as the mine embarked on major cut-backs of existing open pits. This resulted in a decrease of 26% in ore tonnes sold from 1,838,000 tonnes in 2005 to 1,362,000 tonnes in 2006, which was partially offset by an increase in the realised selling prices per tonne of ore sold of 29% in 2006 over the previous year.

Total cost of sales decreased marginally over the previous year whilst the cost per tonne sold increased by 33% which is directly related to Mount Gibson’s inability to access ore whilst significant open pit cut backs were in progress. The increase in cost per tonne sold can also be attributed to significant cost increases in fuel, labour, tyres and consumables in line with cost increases experienced by all mine operators in the Western Australian mining sector. It is anticipated that the cost per tonne sold will decrease as the mine has achieved 3 Mtpa rates.

— 345 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

Production summary for 12 months Unit Sept Qtr 2005 Dec Qtr 2005 Mar Qtr 2006 Jun Qtr 2006 ‘000 ‘000 ‘000 ‘000 Mining — Waste mined bcm 932 1,243 1,627 2,763 — Ore mined wmt 471 248 254 149 Crushing — Lump wmt 354 204 187 120 — Fines wmt 190 68 107 120 — Low Grade Screen wmt 17 143 98 — 561 415 392 240 Transported to Mullewa Railhead — Lump wmt 335 194 105 176 — Fines wmt 173 106 94 114 508 300 199 290 Transported to Geraldton Port — Lump wmt 320 236 110 166 — Fines wmt 186 113 78 126 506 349 188 292 Shipping — Lump wmt 322 300 97 170 — Fines wmt 178 128 50 141 500 428 147 311 Shipping — Lump dmt 317 296 96 168 — Fines dmt 174 125 49 137 491 421 145 305	Production summary for 12 months Unit Sept Qtr 2005 Dec Qtr 2005 Mar Qtr 2006 Jun Qtr 2006 ‘000 ‘000 ‘000 ‘000 Mining — Waste mined bcm 932 1,243 1,627 2,763 — Ore mined wmt 471 248 254 149 Crushing — Lump wmt 354 204 187 120 — Fines wmt 190 68 107 120 — Low Grade Screen wmt 17 143 98 — 561 415 392 240 Transported to Mullewa Railhead — Lump wmt 335 194 105 176 — Fines wmt 173 106 94 114 508 300 199 290 Transported to Geraldton Port — Lump wmt 320 236 110 166 — Fines wmt 186 113 78 126 506 349 188 292 Shipping — Lump wmt 322 300 97 170 — Fines wmt 178 128 50 141 500 428 147 311 Shipping — Lump dmt 317 296 96 168 — Fines dmt 174 125 49 137 491 421 145 305	Production summary for 12 months Unit Sept Qtr 2005 Dec Qtr 2005 Mar Qtr 2006 Jun Qtr 2006 ‘000 ‘000 ‘000 ‘000 Mining — Waste mined bcm 932 1,243 1,627 2,763 — Ore mined wmt 471 248 254 149 Crushing — Lump wmt 354 204 187 120 — Fines wmt 190 68 107 120 — Low Grade Screen wmt 17 143 98 — 561 415 392 240 Transported to Mullewa Railhead — Lump wmt 335 194 105 176 — Fines wmt 173 106 94 114 508 300 199 290 Transported to Geraldton Port — Lump wmt 320 236 110 166 — Fines wmt 186 113 78 126 506 349 188 292 Shipping — Lump wmt 322 300 97 170 — Fines wmt 178 128 50 141 500 428 147 311 Shipping — Lump dmt 317 296 96 168 — Fines dmt 174 125 49 137 491 421 145 305	Production summary for 12 months Unit Sept Qtr 2005 Dec Qtr 2005 Mar Qtr 2006 Jun Qtr 2006 ‘000 ‘000 ‘000 ‘000 Mining — Waste mined bcm 932 1,243 1,627 2,763 — Ore mined wmt 471 248 254 149 Crushing — Lump wmt 354 204 187 120 — Fines wmt 190 68 107 120 — Low Grade Screen wmt 17 143 98 — 561 415 392 240 Transported to Mullewa Railhead — Lump wmt 335 194 105 176 — Fines wmt 173 106 94 114 508 300 199 290 Transported to Geraldton Port — Lump wmt 320 236 110 166 — Fines wmt 186 113 78 126 506 349 188 292 Shipping — Lump wmt 322 300 97 170 — Fines wmt 178 128 50 141 500 428 147 311 Shipping — Lump dmt 317 296 96 168 — Fines dmt 174 125 49 137 491 421 145 305	YTD 2006 ‘000 6,565 1,122 865 485 258
561 335 173 508 320 186 506 322 178 500 317 174	415 194 106 300 236 113 349 300 128 428 296 125	392 105 94 199 110 78 188 97 50 147 96 49	240 176 114 290 166 126 292 170 141 311 168 137	1,608 810 487
				1,297 832 503
				1,335 889 497
				1,386 877 485
	421	145	305	1,362

— 346 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Production rates at Tallering Peak for the 12 months ended 30 June 2006 compared with the 12 months ended 30 June 2005 were:

waste mining increased by 73%;
ore tonnes mined decreased by 42% and
ore tonnes sold decreased by 26%.

Extension Hill Magnetite Project

The Extension Hill Magnetite Project involves the proposed mining of magnetite ore from the Extension Hill tenements and the concentrating of that ore to produce 5 Mtpa of magnetite concentrate, which would be transported via a 270 kilometre slurry pipeline from Extension Hill to the port of Geraldton for storage and loading onto vessels. The feasibility study for the Extension Hill Magnetite Project was finalised in early 2006 containing a mineral resource of 240 Mt of magnetite ore.

Mount Gibson Iron Limited and Mount Gibson Mining Limited entered into an agreement on 5 July 2006 with Sinom Investments Limited (“Sinom Investments”) for the sale to Sinom Investments of their combined 73% interest in Asia Iron Holdings Limited (“Asia Iron”), the ultimate owner of the Extension Hill Magnetite Project.

On completion, which occurred on 21 August 2006, the sale proceeds of $52.5 million were placed in escrow until environmental approval is received. A decision on environmental approval is anticipated by the end of 2006.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Extension Hill Direct Shipping Ore Project

The Consolidated Entity has recently completed a desktop study into the feasibility of the Extension Hill Direct Shipping Ore (“DSO”) project. The purpose of the study was to demonstrate robust economics of an assumed base case project strategy, identify major risks and opportunities, and to identify key focus areas for the Definitive Feasibility Study (“DFS”).

The desktop study has shown that the project has robust economics, minimal technical risks and relatively low capital requirements. The most significant risks to the project are timing and implementation. The desktop study estimates are within a �15 to 25% range and therefore are not as reliable as the results of a DFS.

The Consolidated Entity has commenced a DFS which will examine the most favourable development alternatives. The DFS will refine the commercial, technical, financial, social, economic and environmental prerequisites for a mining operation of this nature. The DFS will, given the normal risks associated with mining projects, enhance the estimated operational and financial results defined in the desktop study. The DFS is scheduled to be completed by the end of December 2006. Given the detail and currency of the Extension Hill Magnetite Project Feasibility Study, it is anticipated that both the cost and time to complete the Extension Hill DSO DFS is deliverable.

The Consolidated Entity is targeting to have the first shipment from the Extension Hill DSO project commence in the first quarter of 2008, subject to the successful completion of the DFS and subsequent Board approval. Project commencement is also subject to the readiness of the new Geraldton Port Authority Berth 5 ship loader, completion of the Consolidated Entity’s port facilities, availability of rail capacity, transport route selection, environmental approval, statutory approvals and construction of site infrastructure.

The environmental approval process for the mining of the project is at an advanced stage, with notification periods having expired and submissions having been made by interested parties. The outcome of the requisite application is expected by the end of 2006.

All key native title agreements for the project are in place.

Of the 3 Mtpa of DSO to be produced at Extension Hill, 1.4 Mtpa is committed under existing sales contracts.

Review of Financial Condition

During the year, the Consolidated Entity incurred $54.2 million (2005:$24.1 million) in waste development expenditure of which, $35.5 million was incurred in the 6 months ended 30 June 2006. In accordance with its usual accounting practice, waste development expenditure for the period has been capitalised in the Consolidated Entity’s balance sheet and will be amortised over the expected life of the mine. The Consolidated Entity’s focus on substantially increasing waste development to ensure 3 Mtpa of sustainable ore production in the future combined with reduced ore sales during the 6 months ended 30 June 2006 reduced cash on hand to $4.5 million.

— 348 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Net assets increased by 42% to $109.2 million.

During the course of the financial year, holders of 33.49 million options exercised their options resulting in $7.5 million in equity funding for Mount Gibson.

The Consolidated Entity disposed of property, plant and equipment with an aggregate fair value of $6.4 million that were financed by means of finance leases, reducing lease liabilities to $5.8 million.

SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS

There were no significant changes in the state of affairs of the Consolidated Entity other than those referred to elsewhere in this report or the financial statements or notes there to.

SIGNIFICANT EVENTS AFTER BALANCE DATE

On 24 July 2006, Mount Gibson announced the intention to merge with Aztec Resources Limited (“Aztec’), representing a landmark consolidation of Australia’s emerging iron ore sector. The merger will result in the creation of a leading independent Australian iron ore company with a market capitalisation of approximately $600 million (assuming dilution for all in-the-money Company and Aztec options), an asset portfolio offering near term cash flow, immediate growth potential supported by longer-life profile and longer term development opportunities. Mount Gibson proposes to implement the merger by means of an off-market scrip takeover bid for all shares in Aztec. Under the bid, Mount Gibson offered Aztec shareholders 1 new share for every 3 shares held in Aztec (“Offer”), valuing each Aztec share at $0.263 based on Mount Gibson’s volume weighted average price on 21 July 2006 of $0.789, being the last trading day before announcement of the offer. The Offer is subject to a number of conditions, including a minimum acceptance condition of 90%, regulatory approvals, certain prescribed occurrences not having occurred and no material adverse change, acquisitions or disposals. Aztec’s major shareholder, Cambrian Mining Plc, granted an option to Mount Gibson over Aztec shares equivalent to 15.27% of Aztec’s issued capital, at the Offer price.

LIKELY DEVELOPMENTS AND EXPECTED RESULTS

Other than as referred to in the Review and Results of Operations and in this report, further information as to likely developments in the operations of the entity and likely results of those operations would, in the opinion of the directors, be speculation and not in the best interest of Mount Gibson.

— 349 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

ENVIRONMENTAL REGULATION AND PERFORMANCE

The Consolidated Entity holds various environmental licenses and authorities, issued under both State and Federal law, to regulate its mining and exploration activities in Australia. These licenses include conditions and regulation in relation to specifying limits on discharges into the environment, rehabilitation of areas disturbed during the course of mining and exploration activities, and the storage of hazardous substances.

There have been no material breaches of the Consolidated Entities licenses and all mining and exploration activities have been undertaken in compliance with the relevant environmental regulations.

SHARE OPTIONS

Unissued shares

Details of Options over Ordinary Shares in Mount Gibson on issue as at balance date and at the date of this report are:

Options on
Exercise Price
Exercise Date/ Period
Balance date
25 cents
On or before
7,256,920
31 December 2006
50 cents
On or before
5,000,000
31 December 2007
55 cents
On or before
5,000,000
31 December 2008
78 cents
On or before
823,712
31 December 2006
90 cents
On or before
2,000,000
30 June 2010
90 cents
On or before
3,000,000
23 October 2010
110 cents
On or before
23 October 2012
2,000,000
Total
25,080,632

issue at
Date of
report
7,238,920
5,000,000
5,000,000
823,712
2,000,000
3,000,000
2,000,000

25,062,632

— 350 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

As at the date of this report, none of the options had vested. Option holders do not have any right, by virtue of the Option, to participate in any share issue of Mount Gibson.

Shares issued as a result of the exercise of options

During the financial year, 33,516,380 options were exercised to acquire fully paid ordinary shares in the company at a weighted average exercise price of $0.22. Since the end of the financial year, a further 18,000 options have been exercised, at a weighted average exercise price of $0.25.

DIVIDENDS

No dividends were paid during the period and no recommendation is made as to dividends.

INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS

Mount Gibson has, during the financial period, entered into deeds of access and indemnity with each Director. These deeds provide access to documentation and indemnification against liability for loss suffered, as a result of any act or omission, to the extent permitted by the Corporations Act 2001, from conduct of the Consolidated Entity’s business.

During the financial year, Mount Gibson has paid premiums in respect of a contract insuring all the Directors of the Company against costs incurred in defending proceedings except for conduct involving:

a wilful breach of duty; or
a contravention of sections 182 or 183 of the Corporations Act 2001, as permitted by section 199B of the Corporations Act 2001.

The total amount of insurance contract premiums paid was $57,127. This amount has not been included in directors’ and executives’ remuneration.

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APPENDIX IV

REMUNERATION REPORT

This report outlines the remuneration arrangements in place for directors and executives of the Consolidated Entity.

Remuneration Policy

The Remuneration Policy of Mount Gibson and its Controlled Entities has been put in place to ensure that:

remuneration policies and systems support Mount Gibson’s wider objectives and strategies;
Directors’ and senior executives’ remuneration is aligned to the long-term interests of Shareholders within an appropriate control framework; and
there is a clear relationship between the executives’ performance and remuneration.

Remuneration Structure

In accordance with best practice corporate governance, the structure of non-executive director, executive director and senior executive management remuneration is separate.

NON-EXECUTIVE DIRECTOR REMUNERATION

Objective

The Board seeks to set aggregate remuneration at a level which provides the company with the ability to attract and retain directors of the highest calibre, whilst incurring a cost which is acceptable to Shareholders.

Structure

The Constitution and the ASX Listing Rules specify that the aggregate remuneration of non-executive directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the directors as agreed. The latest determination was at the Annual General Meeting held on 18 November 2005 when Shareholders approved an aggregate remuneration of $300,000 per year.

Each non-executive director receives a fee for being a director of Mount Gibson.

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APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

All Non-executive directors’ performance and remuneration is reviewed on an annual basis by the Chairman.

Non-executive directors’ fixed remuneration will comprise the following elements:

cash remuneration; and
superannuation contributions made by Mount Gibson.

Non-executive directors are eligible to receive options under Mount Gibson Employee Option Scheme, subject to approval by Shareholders.

Board operating costs do not form part of Non-executive directors’ remuneration.

Non-executive directors have long been encouraged by the board to hold shares in Mount Gibson (purchased by the director on market). It is considered good governance for directors to have a stake in Mount Gibson on whose board they sit. The Non-executive directors of Mount Gibson can participate in the Employee Share Plan which provides incentives where specified criteria are met.

EXECUTIVE DIRECTORS AND SENIOR EXECUTIVES REMUNERATION

Objective

Mount Gibson aims to reward executive directors and senior executives with a level and mix of remuneration commensurate with their position and responsibilities within the company and so as to:

reward the executive directors and senior executives for company and individual performance against targets set by reference to appropriate benchmarks;
align the interest of the executive directors and senior executives with those of Shareholders;
link reward with the strategic goals and performance of Mount Gibson; and
ensure total remuneration is competitive by market standards.

Fixed Remuneration

The components of the executive directors and senior executives fixed remuneration are determined individually and may include:

cash remuneration;
accommodation and travel benefits;
motor vehicle, parking and other benefits; and

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

reimbursement of entertainment, home office and telephone expenses.

The executive directors’ remuneration is reviewed on an annual basis by the non-executive directors. The senior executives’ remuneration is reviewed on an annual basis by the managing director.

VARIABLE REMUNERATION

Short-term Incentive (STI)

The executive directors and senior executives may receive variable remuneration in the form of STI. STI are linked to clearly specified performance targets and provide rewards for materially improved Company performance. The total potential STI available is at the Boards discretion but is measured to provide sufficient incentive to the executive directors and senior executives to achieve the operational targets and such that the cost to the Consolidated Entity is reasonable in the circumstances.

On an annual basis, the individual performance of each executive is reviewed and the Remuneration Committee determines the amount of STI to be allocated to each executive. Payments made are delivered as a cash bonus in the following reporting period.

Long-term Incentive (LTI)

LTI rewarded to executive directors and senior executives do not have a direct link to Mount Gibson performance but in the opinion of the board, they provide an incentive to increase performance of the business over an extended period.

LTI grants to executives are delivered in the form of options, rights or fully paid shares.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Employment Contracts

As at the date of this report, the Consolidated Entity had entered into employment contracts with the following Executive Directors:

Luke Tonkin

The key terms of his contract are as follows:

5 years from 24 October 2005 to 24 October 2010
There are no termination benefits at the completion of the contract term. However, if the Company wishes to terminate the contract other than if Mr Tonkin is guilty of any grave misconduct, serious or persistent breach of the terms of the contract or wilful neglect in the discharge of the Duties, Mount Gibson is obliged to pay out the remaining term of the contract to a maximum of two years. If Mr Tonkin wishes to terminate the contract, he must provide three months notice.

Alan Rule

The key terms of his contract are as follows:

5 years from 1 July 2005 to 30 June 2010
There are no termination benefits at the completion of the contract term. However, if Mount Gibson wishes to terminate the contract other than if Mr Rule is guilty of any grave misconduct, serious or persistent breach of the terms of the contract or wilful neglect in the discharge of the Duties, Mount Gibson is obliged to pay out the remaining term of the contract to a maximum of two years. If Mr Rule wishes to terminate the contract, he must provide three months notice.

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APPENDIX IV

DIRECTOR REMUNERATION FOR THE YEAR ENDED 30 JUNE 2006

							Share Based
			Short Term		Post Employment		Payment
									%
		Salary &	Non	STI		Retirement		Performance
		Fees	Monetary	Bonuses	Superannuation	Benefits	Options	Total	Related
WB Willis	2006	105,505	—	—	9,495	—	14,735	129,735	11%
Non-executive
Chairman
	2005	116,731	—	—	6,229	—	29,230	152,190	19%
BG Johnson	2006	673,424	33,814	—	—	—	3,113,988	3,821,226	81%
Deputy chairman
	2005	344,669	88,309	250,000	—	—	1,405,809	2,088,787	79%
L Tonkin	2006	316,396	1,051	250,000	28,476	—	399,479	995,402	65%
Managing director
AD Rule	2006	300,000	1,822	150,000	27,417	—	224,444	703,683	53%
Finance director
CL Readhead	2006	48,000	—	—	—	—	7,368	55,368	13%
Non-executive director
	2005	41,951	—	—	—	—	14,615	56,566	26%
IA Macliver	2006	44,037	—	—	3,963	—	7,368	55,368	13%
Non-executive director
	2005	38,485	—	—	3,476	—	14,615	56,576	26%
G Liu	2006	—	—	—	—	—	—	—	—

Non-executive director

— 356 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Mr Tonkin, Mr Rule and Mr Liu were appointed directors of the company on 24 October 2005, 1 July 2005 and 12 August 2005 respectively. Mr Liu retired as a director on 22 February 2006.

REMUNERATION OF THE 5 NAMED EXECUTIVES WHO RECEIVED THE HIGHEST REMUNERATION FOR THE YEAR ENDED 30 JUNE 2006

							Share Based
			Short Term		Post Employment		Payment
									%
		Salary &	Non	STI		Retirement		Performance
		Fees	Monetary	Bonuses	Superannuation	Benefits	Options	Total	Related
DP Garcia	2006	398,655	—	—	12,777	—	—	411,432	—
Commercial director —
Asia Iron Holdings
Limited
KJ Malaxos	2006	245,833	19,728	4,167	22,500	—	28,085	320,313	10%
Chief executive officer	2005	207,692	6,412	10,000	19,592	—	31,285	274,981	15%
— Mount Gibson
Mining Limited
PJ Jones	2006	275,229	1,410	—	24,771	—	13,171	314,581	4%
Project manager
SP Coates	2006	182,580	—	7,500	16,425	—	41,265	247,770	20%
Exploration manager	2005	130,780	—	10,000	12,670	—	31,285	184,735	22%
BS Wesley	2006	129,019	1,663	5,000	11,366	—	13,171	160,219	11%
Group financial
controller

All executive directors and executives are engaged through Controlled Entities of Mount Gibson.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

OPTIONS GRANTED AS PART OF REMUNERATION FOR THE YEAR ENDED 30 JUNE 2006

									Total
									Value of
									Options
					Value of				Exercised
				Value per	Options			Value at	and
				Option @	Granted			Date	Lapsed
		Exercise	Grant	Grant	During the	Vesting	Exercised	Option	During	% of
	Grant Date	Price	Number	Date	Year	Date	Number	Lapsed	Year	Remuneration
AD Rule	4-Oct-05	$0.90	2,000,000	$0.464	928,000	1-Jul-08	N/A	N/A	N/A	31.9%
L Tonkin	4-Oct-05	$0.90	3,000,000	$0.478	1,434,000	24-Oct-08	N/A	N/A	N/A	29.5%
L Tonkin	4-Oct-05	$1.10	2,000,000	$0.518	1,036,000	24-Oct-10	N/A	N/A	N/A	10.6%
SP Coates	31-Dec-05	$0.78	250,000	$0.332	83,000	31-Dec-07	N/A	N/A	N/A	5.3%
PJ Jones	31-Dec-05	$0.78	250,000	$0.332	83,000	31-Dec-07	N/A	N/A	N/A	4.2%
BS Wesley	31-Dec-05	$0.78	250,000	$0.332	83,000	31-Dec-07	N/A	N/A	N/A	8.2%

Grant date	31-dec-05	4-oct-05	4-oct-05	4-oct-05
Share price at grant date	$0.70	$0.86	$0.86	$0.86
Exercise price	$0.78	$0.90	$0.90	$1.10
Risk free interest rate	5.09%	5.40%	5.40%	5.40%
Volatility factor	60%	60%	60%	60%
Expiry date	31-Dec-09	30-Jun-10	23-Oct-10	23-Oct-12

— 358 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

DIRECTORS’ MEETINGS

The numbers of meetings of directors (including meetings of Committees of Directors) held during the year and the number of meetings attended by each director is as follows:

		Audit
	Directors’	Committee	Remuneration
	Meetings	Meetings	Committee
Number of Meetings Held	19	2	1
WB Willis	18	2	1
BJ Johnson	15	—	—
L Tonkin	14	—	—
AD Rule	19	—	—
CL Readhead	18	2	1
IA Macliver	17	2	1
G Liu	1	—	—

Mr Tonkin, Mr Rule and Mr Liu were appointed directors of the company on 24 October 2005, 1 July 2005 and 12 August 2005 respectively. Mr Liu retired as a director on 22 February 2006.

TAX CONSOLIDATION

The Company and its 100% owned controlled entities have formed a tax consolidated group with effect from 1 April 2006. Members of the Consolidated Entity have entered into a tax sharing arrangement in order to allocate income tax expense to the wholly owned controlled entities on a pro-rate basis. In addition the agreement provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. At the balance date, the possibility of default is remote. The head entity of the tax consolidated group is Mount Gibson Iron Limited.

PROCEEDINGS ON BEHALF OF MOUNT GIBSON

There are no proceedings on behalf of Mount Gibson under section 237 of the Corporations Act 2001 in the financial year or at the date of this report.

ROUNDING

Amounts in this report and the accompanying financial report have been rounded to the nearest thousand dollars ($’000) unless otherwise stated under the option available to the company under ASIC Class Order 98/0100. Mount Gibson is an entity to which the class order applies.

— 359 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

CORPORATE GOVERNANCE

In recognising the need for the highest standards of corporate behaviour and accountability, the directors of Mount Gibson support and have adhered to the principles of corporate governance. Mount Gibson’s corporate governance statement is contained in the additional ASX information section of the annual report.

AUDITOR’S INDEPENDENCE DECLARATION

In accordance with section 307C of the Corporations Act 2001, the directors received the independence declaration from the auditor of Mount Gibson Iron Limited on page 28 of the 2006 annual report of Mount Gibson.

NON-AUDIT SERVICES

There were no non-audit services provided by the entity’s auditor, Ernst & Young, during the financial year ended 30 June 2006.

Signed in accordance with a resolution of the directors.

Bill Willis

Chairman

Perth, 4th September 2006.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

==> picture [454 x 68] intentionally omitted <==

Independent Audit Report to Members of Mount Gibson Iron Limited

Scope

The financial report and directors’ responsibility

The financial report comprises the balance sheet, income statement, statement of changes in equity, cash flow statement, accompanying notes to the financial statements, and the directors’ declaration for Mount Gibson Iron Limited and the consolidated entity, for the year ended 30 June 2006. The consolidated entity comprises both the company and the entities it controlled during that year.

The directors of the company are responsible for preparing a financial report that gives a true and fair view of the financial position and performance of the company and the consolidated entity, and that complies with Accounting Standards in Australia, 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 of the financial report 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 in Australia, and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of the company’s and the consolidated entity’s financial position, and of their performance as represented by the results of their 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 amounts and disclosures in the financial report; and

— 361 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors.

We performed procedures to assess whether the substance of business transactions was accurately reflected in the financial report. These and our other procedures did not include consideration or judgement of the appropriateness or reasonableness of the business plans or strategies adopted by the directors and management of the company.

Independence

We are independent of the company and the consolidated entity and have met the independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. We have given to the directors of the company a written Auditor’s Independence Declaration a copy of which is included in the directors’ report. In addition to our audit of the financial report, we were engaged to undertake the services disclosed in the notes to the financial statements. The provision of these services has not impaired our independence.

Audit opinion

In our opinion, the financial report of Mount Gibson Iron Limited is in accordance with:

(a) the Corporations Act 2001, including:
(i) giving a true and fair view of the financial position of Mount Gibson Iron Limited and the consolidated entity at 30 June 2006 and of their 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

Ernst & Young

V W Tidy

Partner

— 362 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(E) A letter from the reporting accountants of the Company summarizing the principal differences between Australian accounting standards and Hong Kong Financial Reporting Standards

==> picture [38 x 38] intentionally omitted <==

GRAHAM H.Y. CHAN & CO. CERTIFIED PUBLIC ACCOUNTANTS HONG KONG

Unit 1, 15/F., The Center, 99 Queen’s Road Central, Hong Kong

The Directors, Shanghai Merchants Holdings Limited Rooms 2808-10, 28th Floor, Wing On House, 71 Des Voeux Road Central, Hong Kong

Dear Sirs,

Principal differences between Australian Accounting Standards (“AASB”) and Hong Kong Financial Reporting Standards (“HKFRS”) — acquisition of shares in Mount Gibson Iron Limited

We refer to your request to provide summaries of the principal differences between AASB and HKFRS and in particular, the differences concerning all items in the financial statements of Mount Gibson Iron Limited (“Mount Gibson”).

Our summaries are presented in the following sections:

A. Similarities and differences between AASB and HKFRS concerning all items in Mount Gibson’s financial statements — based on HKFRS which become effective for accounting periods beginning on or after 1 January 2005.
B. General background of AASB and HKFRS.
C. Principal differences between AASB and HKFRS.
D. Principal differences between Pre-2005 Australian accounting standards and Hong Kong accounting standards which are commonly encountered.

— 363 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

A. Similarities and differences between AASB and HKFRS concerning all items in Mount Gibson’s financial statements — based on HKFRS which become effective for accounting periods beginning on or after 1 January 2005

Based on the published information, there should be no major differences in reported amounts under the two accounting standards so far as the financial statements of Mount Gibson are concerned. The accounting policies of Mount Gibson are materially consistent with those of the Company. The amount reported for each of the items will be similar and no reconciliation with regard to net asset and income are necessary.

B. General background of AASB and HKFRS

Both AASB and HKFRS are basically derived from International Financial Reporting Standards (“IFRS”), which is the body of financial accounting principles and rules commonly accepted by the constituent professional accountancy bodies, statement preparers, auditors, investors, analysts, regulators and other users of the markets.

AASB and HKFRS are principally based on, copied from and substantially the same as IFRS.

HKFRS are effective for accounting periods beginning on or after 1 January 2005.

AASB are effective for accounting periods beginning on or after 1 January 2005.

C. Principal differences between AASB and HKFRS

There is no principal difference between AASB and HKFRS.

D. Principal differences between Pre-2005 Australian accounting standards and Hong Kong accounting standards which are commonly encountered.

There is no principal differences between Pre-2005 Australian accounting standards and Hong Kong accounting standards.

Graham H.Y. Chan & Co.

Certified Public Accountants (Practising)

Hong Kong

12 December 2006

— 364 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

The following is the reproduction of certain paragraphs of the management discussion and analysis as contained in the annual report 2004 of Mount Gibson.

TALLERING PEAK HEMATITE

Mount Gibson’s first iron ore mine has been developed at Tallering Peak, which is located 170km by road and rail from Geraldton. Mining of overburden commenced in November 2003 and the first shipment of ore occurred in February 2004.

Mining operations at Tallering Peak are being undertaken by the Company utilising it own workforce and equipment. Mining of the first pit (T4) is operating on a two shift basis with two excavators. Mining of the second pit (T5) has recently commenced and pre-stripping of the third pit (T3) is underway.

After mining, the ore is crushed and screened at the mine-site into lump and fines stockpiles. Currently, the mine is producing lump and fines on a 65:35 ratio. This ratio is expected to improve to 70:30 with increasing depth of mining as the ore becomes more competent. Lump ore is sold at a higher rate than fines which must be sintered before feeding to a blast furnace.

The crushed ore is transported 65kms by road-train to Mullewa where it is stockpiled at Mount Gibson’s rail loading facility. Significant costs have been incurred by Mount Gibson during this financial year to seal 45 kilometres of public roads between the mine and the rail loading facility.

These costs were incurred to ensure an all weather surface is maintained to the rail-head stockpiles for continuity of supply, and to generate cost savings from reduced road maintenance.

At Mullewa, the ore is loaded onto rail wagons by Mount Gibson employees using front end loaders. The ore is then railed 107 kms to Geraldton, where it is stockpiled in a purpose built 150,000 tonne capacity storage shed which was constructed by Mount Gibson. From there the ore is loaded onto ships by the Geraldton Port Authority for transport to China.

The Company has contracted to sell 1.6Mtpa of ore for the life of the Tallering Peak mine, with about 50% going to two trading companies and 50% to two end-users. Prices are fixed to the prevailing published fob prices for iron ore sold by Hamersley Iron from its Pilbara ports, which are reviewed annually. Production in excess of the contracted tonnage is sold on the spot market which remains strong.

The crushing and screening of the ore, road haulage, rail transport, and ship loading, is being carried out by experienced contractors.

At 30 June 2004, Mount Gibson had mined 534,000 tonnes of ore, and shipped 380,000 tonnes since mid February 2004. This is a satisfactory result considering the operational problems encountered during this period at the Geraldton Port and a shortage of rail wagons.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

The Geraldton Port Authority has had difficulty in meeting its contractual obligation to load ore on a continuous 24 hour per day basis. The existing materials handling configuration cannot load the variety of mineral products without frequent stoppages being incurred through the single shiploader to allow cleandown of conveyors and changes to equipment. The Geraldton Port Authority is currently installing an additional shiploader which should significantly alleviate this problem.

The rail contractor has also struggled to provide the contracted quantity of rail wagons. However, this situation is improving with time. Despite these operational problems, Mount Gibson has managed to control costs and is operating at budgeted margins.

MT GIBSON HEMATITE

Mount Gibson owns the rights to mine hematite ore at the Extension Hill and Iron Hill deposits within the Mt Gibson range.

It is Mount Gibson’s intention to develop a mine at Mt Gibson as soon as possible but commencement will be delayed until the owner of the regional rail system can increase the system’s capacity on commercial terms acceptable to Mount Gibson.

As a consequence, it is now planned to mine-out the Tallering Peak deposits at around 2.3Mtpa to 2.5Mtpa (current rail capacity) before relocating to Mt Gibson.

In the event production of hematite continues to be restricted to 2.5Mtpa, Mount Gibson has sufficient resources at the two locations to operate at this level for approximately eleven years.

The Mt Gibson mine is expected to produce a similar operating profit to Tallering Peak as extra haulage costs will be largely offset by reduced mining costs as a result of the lower waste to ore ratio.

Development of the Mt Gibson mine and construction of a 85km private haul road to a railhead at Perenjori will cost approximately $10.0 million.

MT GIBSON MAGNETITE

Mount Gibson has recently announced that it intends to sell its interest in 54% owned subsidiary, Asia Iron Pty Ltd to Hong Kong based Asia Iron Holdings Limited for A$7.5 million and be paid by the issue of 30% of Asia Iron Holdings Limited’s shares.

Asia Iron Pty Ltd is the owner of the Mt Gibson magnetite deposits.

Mount Gibson will also receive 25 cents per tonne (indexed to CPI increases) for any magnetite concentrate produced from the Mt Gibson deposits.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Rights to all technical information will transfer to Asia Iron Holdings Limited, but in the event mining of the magnetite resources does not commence by 31 December 2009, Mount Gibson will have a six month option to repurchase the deposits at their original transfer price.

Mount Gibson will retain the right to mine all hematite occurring on leases held now or in the future by Asia Iron Holdings Limited in Western Australia, and to receive fees for managing its magnetite operations.

Mount Gibson is currently planning a mining operation on behalf of Asia Iron Holdings Limited to produce 2.5Mtpa of magnetite concentrate by late 2006, with a doubling of production one year later.

FUTURE PROJECTIONS

Mount Gibson recently announced that following a review of its operations at Tallering Peak it has projected net profits after tax of $12.6 million in 2004/05, $19.5 million in 2005/06, and $15.2 million in 2005/06.

These budgeted figures are based on conservative iron ore price increases of 7.5% in 2004/05 and 2% for the following years. Most forecasters are predicting price increases of 20% for 2004/05 and if this occurs projected profits should increase substantially.

These estimates are based on revenue generated from the Tallering Peak mine and do not include management fees from the proposed magnetite concentrate operations or from the proposed development of the Mt Gibson hematite mine within these three years.

EMPLOYEES

The Consolidated Entity employed 46 employees as at 30 June 2004 (2003: 8 employees).

OPERATING RESULTS FOR THE PERIOD

The operating loss of Mount Gibson and Consolidated Entity, after providing for income tax of $nil (2003: $nil), was $564,030 (2003: $12,350,643) and $10,982,911 (2003: $12,350,643) respectively.

SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS

There were no significant changes in the state of affairs of the Consolidated Entity other than those referred to elsewhere in this report or the financial statements or notes thereto.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

SIGNIFICANT EVENTS AFTER BALANCE DATE

LIKELY DEVELOPMENTS AND EXPECTED RESULTS

SHARE OPTIONS

Details of Options over ordinary shares on issue as at balance date and at the date of this report are:

		Options	on issue at
Exercise Price	Exercise Date/Period	Balance date	Date of report
25 cents	On or before 31 December 2004	19,000,000	19,000,000
22 cents	On or before 15 October 2005	25,800,000	30,800,000
15.84 cents	On or before 28 February 2006	2,083,332	2,083,332
Total		46,883,332	51,883,332

Optionholders do not have any right, by virtue of the Option, to participate in any share issue of Mount Gibson.

As at balance date and the date of this report there are $2,375,000 of Convertible Notes on issue, convertible to 7,916,667 shares at 30 cents per share, interest payable at 6 monthly intervals from 31 December 2002 to 31 December 2005.

— 368 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

DIRECTORS’ AND OTHER OFFICERS’ EMOLUMENTS

REMUNERATION POLICY

The board of directors of Mount Gibson is responsible for determining and reviewing compensation arrangements for the directors and executive officers. The maximum total compensation payable to non-executive directors is $150,000 and was approved by shareholders on 18 December 2001. The board assesses the appropriateness of the nature and amount of emoluments of all officers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality board and executive team. To assist in achieving these objectives, the nature and amount of executive directors’ and officers’ emoluments are linked to Mount Gibson’s financial and operational performance. All directors and employees have the opportunity to qualify for participation in the employee Share Scheme.

					Termination		Long Term
	Annual Emoluments				& Similar		Emoluments
Directors	Base Fee	Bonus	Other		Payments	Superannuation	Options Granted
	$	$		$	$	$	Number $
WB Willis (i)	45,872	—	37,062		—	9,102	1,500,000 53,850
BG Johnson	288,433	—		—	—	—	4,000,000 143,600
CL Readhead	33,026	—		—	—	2,974	750,000 26,925
IA Macliver	33,026	—		—	—	2,974	750,000 26,925
(i) The $37,062	paid to Mr Willis is a retainer for the provision of consulting services to						Mount Gibson Mining
Limited during the financial year and			does not constitute directors’ fees within the $150,000 maximum approved
by shareholders.
							Long Term
	Annual Emoluments				Termination		Emoluments
Executive					& Similar
Officers	Base Fee	Bonus	Other		Payments	Superannuation	Options Granted
	$	$		$	$	$	Number $
JR Tyers	150,000	—		—	—	13,500	— —
RJ McGregor	131,968	—		—	—	11,877	— —
SP Coates	114,677	—		—	—	10,321	— —
DJ Coulthard	120,000	—		—	—	—	— —
AM Dent	108,174	—		—	—	—	— —

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Share price 20.5 cents Exercise price 22 cents Risk free interest rate 5.55% Volatility factor 32% Expiry date 15 October 2005

DIVIDENDS

No dividends were paid during the period and no recommendation is made as to dividends.

LIABILITIES

CONSOLIDATED 2004 2003 $ $ 9,813,544 667,554 7,757,213 14,427 139,264 12,014	CONSOLIDATED 2004 2003 $ $ 9,813,544 667,554 7,757,213 14,427 139,264 12,014	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ 159,461 189,106 — — — —	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ 159,461 189,106 — — — —
17,710,021	693,995	159,461	189,106
499,648 11,178,100	885,000 2,937,865	— 2,375,000	— 2,875,000
11,677,748	3,822,865	2,375,000	2,875,000
29,387,769	4,516,860	2,534,461	3,064,106
23,398,976	20,950,435	27,473,353	20,950,435

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

ASSET PLEDGED

Assets pledged as security Assets under lease are pledged as security for the associated lease liabilities The value of assets pledged as security are: Plant and equipment Plant and equipment under lease Buildings Buildings under lease	CONSOLIDATED MOUNT GIBSON IRON LIMITED 2004 2003 2004 2003 $ $ $ $ 1,514,103 41,416 — — 8,504,416 41,911 — — 5,614,611 — — — 462,236 — — —

DEFERRED ACQUISITION, EXPLORATION AND DEVELOPMENT COSTS

Deferred acquisition, exploration and development costs carried forward in respect of mining areas of interest Tallering Peak Hematite Mt Gibson Hematite Mt Gibson Magnetite	CONSOLIDATED MOUNT GIBSON IRON LIMITED 2004 2003 2004 2003 $ $ $ $ — 4,837,968 — — 4,021,812 3,995,165 — — 13,867,521 — — — 17,889,333 8,833,133 — —	CONSOLIDATED MOUNT GIBSON IRON LIMITED 2004 2003 2004 2003 $ $ $ $ — 4,837,968 — — 4,021,812 3,995,165 — — 13,867,521 — — — 17,889,333 8,833,133 — —
		—

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

INTEREST-BEARING LIABILITIES

CONSOLIDATED 2004 2003 $ $ 1,569,362 14,427 1,016,113 — 5,171,738 — 7,757,213 14,427	CONSOLIDATED 2004 2003 $ $ 1,569,362 14,427 1,016,113 — 5,171,738 — 7,757,213 14,427	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — — — —	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — — — —
			—
7,762,035 1,041,065 2,375,000	62,865 — 2,875,000	— — 2,375,000	— — 2,875,000
11,178,100	2,937,865	2,375,000	2,875,000

a) Terms and condition relating to the above financial instruments;

Finance leases are repayable monthly with final instalments due in May 2009. Interest is charged at an average rate of 8.03%. The loans are secured by first mortgage over the leased assets.

b) Packing Credit Facility held with HSBC Bank Australia Limited. Interest is payable on the outstanding balance at 3.12% pa. This is secured by a first ranking fixed and floating charge over all Mount Gibson Mining Limited’s present and future assets.
c) Stemcor (S.E.A) Limited agreed to prepay Mount Gibson Mining Limited US$6 million for iron ore to be supplied under their Off-take Agreement. The final drawdown of US$1.5 million of these funds was received on 5 January 2004. This is repaid over 18 months from the first shipment of ore to Stemcor (S.E.A) Limited in April 2004. Interest is payable on the outstanding balance of the prepayment at 7.15% pa. This facility is secured by an irrevocable and unconditional guarantee by Mount Gibson Mount Gibson’s to Stemcor, guaranteeing all Mount Gibson Mining Limited’s liabilities in connection with the facility.
d) Convertible Notes are convertible at the option of the holder to shares at $0.30 per share, with an interest rate of 10% payable at 6 monthly intervals from 31 December 2002 to 31 December 2005. The Convertibles Notes are unsecured.

— 372 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

SHARE OPTIONS

As at balance date there were the following Options over unissued shares:

Exercise Price Exercise Date/Period 25 cents On or before 31 December 2003 25 cents On or before 31 December 2004 22 cents On or before 15 October 2005 15.84 cents On or before 28 February 2006 Total	2004 Number — 19,000,000 25,800,000 2,083,332 46,883,332	2003 Number 55,182,379 — — 2,083,332
		57,265,711

ACQUISITION/DISPOSAL OF CONTROLLED ENTITY

The value of the Mt Gibson tenements, including outside equity interest, is therefore included in Deferred Acquisition, Exploration and Development Costs as at 30 June 2004.

Consideration - shares issued - acquisition costs paid in cash Net assets of Asia Iron Pty Ltd at 7 July 2003 - Mt Gibson tenements - creditors and accruals Net cash effect Cash costs of acquisition Cash included in net assets acquired Cash paid for purchase of entity as reflected in the consolidated financial report	$ — 165,000
	165,000
	13,893,068 (159,131
	13,733,937
	165,000 —
	165,000

— 373 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

EMPLOYEE SHARE SCHEME

REMUNERATION OF SPECIFIED DIRECTORS AND SPECIFIED EXECUTIVES

i) Remuneration Policy

The board of directors is responsible for determining and reviewing compensation arrangements for the directors and executive officers. The maximum total compensation payable to non-executive directors is $150,000 and was approved by shareholders on 18 December 2001. The board assesses the appropriateness of the nature and amount of emoluments of all officers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality Board and Executive team. To assist in achieving these objectives, the nature and amount of executive directors’ and officers’ emoluments are linked to Mount Gibson’s financial and operational performance. All directors and employees have the opportunity to qualify for participation in the Employee Share Scheme.

— 374 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

ii) Remuneration of specified directors and specified executives

					Post Employment	Post Employment
			Primary	Non
		Salary	Cash	Monetary	Super-	Retirement		Equity	Other
		& Fees	Bonus	Benefits	annuation	Benefits		Options	Bonuses	Total
specified directors
WB Willis (i)	2004	82,934	—	—	9,102		—	53,850	—	145,886
	2003	94,951	—	—	8,549		—	114,024	—	217,524
BG Johnson	2004	288,433	—	—	—		—	143,600	—	432,033
	2003	288,587	—	—	—		—	—	—	288,587
CL Readhead	2004	33,026	—	—	2,974		—	26,925	—	62,925
	2003	33,024	—	—	2,976		—	28,656	—	64,656
IA Macliver	2004	33,026	—	—	2,974		—	26,925	—	62,925
	2003	33,024	—	—	2,976		—	28,656	—	64,656
Total Remuneration:
specified directors
	2004	437,419	—	—	15,050		—	251,300	—	703,769
	2003	449,586	—	—	14,501		—	171,336	—	635,423
specified executives
JR Tyers	2004	150,000	—	—	13,500		—	—	—	163,500
	2003	102,619	—	—	26,442		—	—	—	129,061
RJ McGregor	2004	131,968	—	—	11,877		—	—	—	143,845
	2003	—	—	—	—		—	—	—	—
SP Coates	2004	114,677	—	—	10,321		—	—	—	124,998
	2003	92,128	—	—	10,501		—	—	—	102,629
DJ Coulthard	2004	120,000	—	—	—		—	—	—	120,000
	2003	120,000	—	—	—		—	14,328	—	134,328
AM Dent	2004	108,174	—	—	—		—	—	—	108,174
	2003	91,600	—	—	—		—	14,328	—	105,928
Total Remuneration:
specified executives
	2004	624,819	—	—	35,698		—	—	—	660,517
	2003	406,347	—	—	36,943		—	28,656	—	471,946

— 375 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

REMUNERATION OPTIONS: GRANTED AND VESTED DURING THE YEAR

On 3 June 2004, the directors or their nominees were issued Options as bonus payments for their efforts in assisting with the successful acquisition and development of the Tallering Peak iron ore project.

Share price 20.5 cents Exercise price 22 cents Risk free interest rate 5.55% Volatility factor 32% Expiry date 15 October 2005

Option holdings of specified directors and specified executives

Balance at Beginning of Period 1 July 2003 Granted as Remuneration specified directors WB Willis 5,327,783 1,500,000 BG Johnson — 4,000,000 CL Readhead 2,015,695 750,000 IA Macliver 2,065,348 750,000 specified executives JR Tyers — — RJ McGregor — — SP Coates — — DJ Coulthard 242,847 — AM Dent 242,847 — Total 9,894,520 7,000,000	Options Exercised Net Change (Lapsed/ Disposed) Balance at End of Period 30 June 2004 — (5,387,783) 1,440,000 — (40,000) 3,960,000 — (2,045,695) 720,000 — (1,370,904) 1,444,444 — — — — — — — — — — (242,847) — — (242,847) — — (9,330,076) 7,564,444	Vested at 30 June 2004 Total Not Exercisable Exercisable — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —	Vested at 30 June 2004 Total Not Exercisable Exercisable — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
			—

— 376 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Loans to specified directors and specified executives

There were no loans to specified directors and specified executives during the year.

CONTINGENT LIABILITY

There are no contingent liabilities which were not provided for in the financial statements of the economic entity and Mount Gibson as at 30 June 2004.

SUBSEQUENT EVENTS

The financial effect of this event has not been recognised in the 30 June 2004 financial year.

SEGMENT INFORMATION

Segment products and locations

The Consolidated Entity operates primarily in the mining sector, through the exploration, evaluation and development of its iron ore deposits in the Mid-West region of Western Australia.

Whittakers Timber Pty Limited sold timber to the building industry in the south-west of Western Australia.

— 377 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Business Segments Revenues Sales to customers outside the Consolidated Entity Other revenues from customers outside the Consolidated Entity Total segment revenue Results Segment result Unallocated expenses Net profit Assets Segment assets Eliminations Total assets Liabilities Segment liabilities Eliminations Total liabilities Other segment information Acquisition of property, plant and equipment, intangible assets and other non- current assets Depreciation	Mining Timber 2004 2003 2004 2003 $ $ $ $ 14,293,488 — — 652,240 — 7,089 — — 14,293,488 7,089 — 652,240 (7,690,907)(10,833,126) — (118,100) 57,076,802 13,358,443 — 15,762 18,802,711 10,581,957 — 163,530 12,327,121 827,690 — — 1,375,449 29,220 — 7,764	Other Consolidated 2004 2003 2004 2003 $ $ $ $ — — 14,293,488 652,240 177,918 410,307 177,918 417,396 177,918 370,720 14,471,406 1,069,636 (3,292,004) (1,399,417)(10,982,911)(12,350,643) — — (10,982,911)(12,350,643) 23,115,155 20,019,378 80,191,957 33,393,583 (27,405,212) (7,926,288) 52,786,745 25,467,295 10,585,058 3,064,106 29,387,769 13,809,593 — (9,292,733) 29,387,769 4,516,860 4,612,226 607,148 16,900,630 1,434,838 87,207 — 1,462,656 36,984
	57,076,802
	18,802,711
	12,327,121 1,375,449

— 378 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Net fair values

Credit risk exposure

The entity’s maximum exposures to credit risk at balance date in relation to each class of recognised fi nancial assets, other than derivatives, is the carrying amount of those assets as indicated in the Statement of Financial Position. In relation to derivative financial instruments, whether recognised or unrecognised, credit risk arises from the potential failure of counterparties to meet their obligations under the contract or arrangement. The consolidated entity’s maximum credit risk exposure in relation to forward exchange contracts is the full amount of the foreign currency it will be required to pay or purchase when settling the forward exchange contract, should the counterparty not pay the currency it is committed to deliver to the company. At reporting date the net amount was A$1,349,446 (2003: $nil).

Concentration of credit risk

HEDGING INSTRUMENTS

Hedges for specific commitments

Mount Gibson has entered into a forward exchange contract at reporting date designed as a hedge of anticipated future receipts that will be denominated in US dollars.

This hedge has been treated as specific, in accordance with UIG 33, as the approximate value of the sale and the entities with which the transactions will be entered is presently known.

The amount of recognised deferred loss included in payables at reporting date was $1,349,446 (2003: $nil). The mark to market value is $17,999,710.

— 379 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

The following is the reproduction of certain paragraphs of the management discussion and analysis as contained in the annual report 2005 of Mount Gibson.

TALLERING PEAK MINE

The year ended 30 June 2005 was the first full year of operation for Mount Gibson’s Tallering Peak iron ore mine in the Midwest region of Western Australia.

During the period, 1.84 million tonnes of direct shipping grade hematite was mined and sold to buyers in China despite difficulties with the rail contractor not meeting contractual commitments for the supply of wagons. A total of 231,000 tonnes of ore were trucked directly from the mine to the port of Geraldton at a cost penalty of approximately $1 million for the year.

These costs have been claimed against the rail contractor but their potential receipt has not been included in gross profits of $26.3 million reported for the period.

Recent in-fill drilling and forward mine planning has indicated that production can be increased from its current level of 2.3 Mtpa to 3 Mtpa from early next year and continue at this rate until at least the end of 2011. Drilling of additional prospects at Tallering Peak may extend the life of the mine.

Mount Gibson has ordered 34 new rail wagons from a Chinese supplier which are expected to be delivered at the end of the first quarter of 2006, when mine production will be increased to 3 Mtpa.

A substantial price increase for iron ore in April 2005 had a positive impact on earnings in the last quarter of the period and the higher prices are expected to continue in the short to medium term due to strong growth in the Asian steel market.

Mount Gibson is undertaking its own mining operations at Tallering Peak rather than utilising contractors, and is making a conscientious effort to recruit its workforce from within the Geraldton region. Loyalty of technical staff and mine workers are obviously a prerequisite to a stable mining operation. The Company’s policy of granting share options connected to continuing employment to its entire work force is assisting in this regard.

Mount Gibson is fortunate to have a highly skilled and dedicated management team at Tallering Peak together with an experienced and stable work force.

Overall, conditions are favourable for Mount Gibson to make significant operating profits from the Tallering Peak mine over the next six years and beyond, while it focuses on establishing new operations in the Midwest region with much longer mine life.

— 380 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

MT GIBSON HEMATITE PROJECT

Mount Gibson’s next project will involve the expansion of its direct shipping grade iron ore operations with the development of its second hematite mine at Mt Gibson.

Mining at the rate of 1.5 Mtpa is expected to commence by the end of the second quarter of 2007, with ore to be transported 85 km by road from Mt Gibson to Perenjori, then 240 km by rail to the port of Geraldton.

Total development costs will be in the order of $10 — 15 million including establishment of the mine and storage facilities at the port. These costs will be funded from existing cash reserves.

Mining will be undertaken using Mount Gibson plant and personnel. Crushing and screening, transport, and port services will be carried out by subcontractors.

EXTENSION HILL MAGNETITE PROJECT

The second phase of Mount Gibson’s corporate development will involve the establishment of a mine at Extension Hill, Mt Gibson, to produce 5 Mtpa of high grade (68% Fe) magnetite concentrate for a minimum of 20 years.

This project is expected to be undertaken in joint venture with a major Chinese steelmaker on the basis that each participant will purchase 2.5 Mtpa of concentrate from the joint venture, for the life of mine.

Mount Gibson’s interest in the project is held through 76% owned subsidiary, Asia Iron Holdings Limited (“Asia Iron”).

Asia Iron will ship its share of concentrate to a new pellet plant it intends to construct near Nanjing in China.

The Shougang Group (“Shougang”), which is the fourth largest steel producer in China, has been granted the right to take up a 50% interest in the Extension Hill magnetite project in Western Australia, and must make financial decision in this regard by 31 January 2006, following completion of a Bankable Feasibility Study (“BFS”) in mid December 2005.

The capital cost for mine development and infrastructure, waste prestripping, the crushing and concentrating plant, and a 280 km slurry pipeline to transport concentrate to the Port of Geraldton, is expected to be in the order of $620 million.

Of this amount, $74 million of equity will be provided by Asia Iron and $174 million by the Chinese partner.

Project finance of approximately $372 million will represent 60% of total project costs.

— 381 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Mount Gibson’s equity contribution of $74 million will be financed through a combination of existing cash reserves and capital raised through Shougang’s option to subscribe for 60 million shares in Mount Gibson at $0.75 per share to raise $45 million.

Subject to the results of the BFS in December 2005, and finalising project financing, mine development should commence in the second quarter of 2006 with commissioning of the concentrator planned for mid 2007.

The management and operation of mining (other than drilling and blasting), concentrating, and slurry transport, will be undertaken by personnel from Mount Gibson Mining Limited, which will be reimbursed costs by the joint venture owners of the project, and receive an indexed management fee.

Subject to relevant approvals, it is intended to double concentrate production to 10 Mtpa in 2008 - 09.

NANJING PELLET PROJECT

A Chinese registered wholly owned subsidiary of Asia Iron proposes to construct a 2.5 Mtpa pellet making plant near Nanjing in China, using magnetite concentrate produced at Extension Hill as feed.

The pellet plant will be designed and constructed on a turnkey basis by Beijing Shougang Design Institute, a member of the Shougang Group.

Total capital cost for predevelopment expenses, including a feasibility study, engineering design, construction, project management, and commissioning, is expected to be approximately $80 million.

Asia Iron’s equity requirement of $30 million will be funded from Mount Gibson’s internal reserves.

Nanjing is located on the Yangtze River at the centre of a major industrial region with expanding steel production based on imported raw materials.

The selection of a site for pellet production at the port of Longtan near Nanjing was influenced by the ability to match the relatively small ship capacity available out of Geraldton with that of Longtan port, 430 km up the Yangtze River.

Asia Iron will avoid expensive transport of concentrate from the Chinese coast to Nanjing, which is necessary for potential competitors from Brazil who use Capesize vessels (150,000 Discrete wavelet transform to 250,000 Discrete wavelet transform) for the transport of pellets and pellet feed to China, and have to discharge cargos at the mouth of the Yangtze River prior to transporting 450 km by rail or barge to this particular steel making region.

With low capital and operating costs in China for the new pellet plant, the project appears extremely robust.

— 382 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Asia Iron is currently negotiating sales agreements for its total pellet production for the first ten years of operation.

WESTRALIAN METALISED IRON PROJECT

Asia Iron owns extensive magnetite deposits at Koolanooka South, and holds the right to mine several relatively small coal deposits north of Mingenew in the Midwest region, within a wholly owned subsidiary Westralian Iron Pty Ltd.

Westralian Iron has commenced a feasibility study which will be conducted in stages over two years to determine the technical and commercial viability of producing metalised iron at a site near the coastal town of Dongara.

Mount Gibson has recognised that the close proximity and availability of low cost magnetite, coal, and gas, combined with existing infrastructure, and a skilled workforce living in an attractive coastal environment, should result in a stable and financially robust project to produce metalised iron using proven Midrex rotary hearth furnace technology.

The study will investigate the prospect of progressively constructing four 500,000 tpa plant modules based on 60 m diameter annular furnaces with a rotating grate. The process involves mixing magnetite concentrate with suitable coal, balling, and feeding to the furnace.

The gas fired furnace can produce 100% metal with minimum impurities in a single 12 minute rotation.

Mount Gibson believes the Midrex technology will successfully compete with Hamersley Iron’s Hismelt technology, which is currently being installed for the first time in a new plant at Kwinana in Western Australia.

EXPLORATION

Exploration activity will be significantly increased from the second quarter of 2006, with the objective of:

Increasing hematite resources at Tallering Peak and Mt Gibson;
Establishing hematite resources at Koolanooka South and Walebing;
Increasing magnetite resources at Extension Hill;
Establishing magnetite resources at Koolanooka South and Wolla Wolla; and
Establishing coal resources at Irwin River, Mingenew.

— 383 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

The aim is to establish sufficient resources of direct shipping grade hematite at Mount Gibson’s four prospective properties in the Midwest region to maintain production at around 4 Mtpa for at least ten years, and to increase magnetite resources at Extension Hill sufficient to support a doubling of mine production to 10 Mtpa of magnetite concentrate in 2008 - 09.

Mount Gibson will also determine the potential of its coal deposits at Mingenew to support its proposed Metalised Iron Project.

INTERESTS IN THE SHARES AND OPTIONS OF MOUNT GIBSON

As at the date of this report, the interests of the directors in the shares and Options of Mount Gibson were:

		Options Over
	Ordinary shares	shares
WB Willis	650,000	1,970,000
BG Johnson (refer note (i) below)	—	12,500,000
CL Readhead	177,500	1,250,000
IA Macliver	1,200,000	1,250,000
AD Rule	—	—
G Liu	—	—

(i) Mr Johnson holds 10,000,000 options in his own name. During the year Mr Johnson was a director of a subsidiary of a family trust which he does not control which holds 2,500,000 options. Mr Johnson resigned as a director of the subsidiary on 6 September 2005 and has no interest in or influence over these options at the date of this report.

EMPLOYEES

The Consolidated Entity employed 71 employees as at 30 June 2005 (2004: 46 employees).

FUTURE FUNDING

As at the date of this report the Consolidated Entity has sufficient funds or funding to develop and mine the Tallering Peak iron deposits.

— 384 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

MAGNETITE PROJECT

During the year, the Consolidated Entity entered into commercial arrangements with Asia Iron, the Hong Kong based holding company which proposes to develop a pellet plant in China, and a new magnetite mine at Extension Hill in Western Australia’s Mt Gibson ranges.

In December 2004, Asia Iron acquired a 46% minority shareholding in Extension Hill Pty Ltd (“EHPL”) (formerly Asia Iron Pty Ltd) from an unrelated party. EHPL holds a number of mining and exploration tenements at Mt Gibson including the 250 Mt magnetite resource at Extension Hill which will be developed to supply 5.0 Mtpa of magnetite concentrate as feed for Chinese pellet plants for at least 20 years.

The Consolidated Entity acquired a 9% interest in Asia Iron in February and March 2005 through a placement and purchase of shares from existing shareholders.

The balance of Asia Iron’s shares on issue (57.5 million) were subscribed by Asia Iron’s directors and associates between December 2003 and June 2004, at HK$1.00 per share.

MGM will receive a management fee for each tonne of magnetite concentrate produced, escalated in accordance with increases in the Consumer Price Index.

On 23 June 2005, Mount Gibson signed a Participation Agreement with Shougang to jointly develop EHPL’s extensive magnetite resources at Mt Gibson.

Shougang is a wholly owned subsidiary of the Beijing based Shougang Group (also known as Capital Steel), which is China’s fourth largest steelmaker.

— 385 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

In addition to becoming the Consolidated Entity’s development partner in EHPL, Shougang has sought to become a strategic investor in Mount Gibson. Mount Gibson will grant Shougang an option to subscribe for 15% of Mount Gibson’s issued capital at the date of completion of the BFS. Asia Iron expect to complete the BFS of the project in December 2005.

REVIEW OF FINANCIAL CONDITION

All of the outstanding convertible notes were exercised during the year resulting in 7.9 million additional shares being issued to extinguish $2.4 million in convertible notes.

Holders of 19.3 million options exercised their options during the year resulting in an additional $4.8 million in equity funding for Mount Gibson.

— 386 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

SIGNIFICANT EVENTS AFTER BALANCE DATE

Since 30 June 2005, Mount Gibson has increased its shareholding in RMC from 10.36% to 13.11%.

LIKELY DEVELOPMENTS AND EXPECTED RESULTS

Other than as referred to in the Review of Projects and in this report, further information as to likely developments in the operations of the entity and likely results of those operations would, in the opinion of the directors, be speculation and not in the best interest of Mount Gibson.

SHARE OPTIONS

Details of Options over ordinary shares in Mount Gibson on issue as at balance date and at the date of this report are:

		Options	on issue at
Exercise Price	Exercise Date/Period	Balance Date	Date of Report
22 cents	On or before 15 Oct 2005	30,523,300	29,392,300
25 cents	On or before 31 Dec 2006	4,500,000	4,875,000
50 cents	On or before 31 Dec 2007	5,000,000	5,000,000
55 cents	On or before 31 Dec 2008	5,000,000	5,000,000
Total		45,023,300	44,267,300

In addition, as at 30 June 2005, there were 10,750,000 options granted but not issued under the Employee Share Scheme. The options were granted on the basis that the employees must complete employment service to 31 December 2005 before the options vest, at which time they will be issued to the respective employees. Once vested the options will be exercisable at 25 cents each and expire on 31 December 2006. As at the date of this report, 375,000 options had vested and a further 375,000 options granted were cancelled on the redundancy of an employee.

Option holders do not have any right, by virtue of the Option, to participate in any share issue of Mount Gibson.

— 387 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

DIVIDENDS

No dividends were paid during the period and no recommendation is made as to dividends.

REMUNERATION REPORT

This report outlines the remuneration arrangements in place for directors and executives of the Consolidated Entity.

Remuneration philosophy

The Remuneration Policy of Mount Gibson and its Controlled Entities has been put in place to ensure that:

Remuneration policies and systems support Mount Gibson’s wider objectives and strategies;
Directors’ and senior executives’ remuneration is aligned to the long-term interests of Shareholders within an appropriate control framework; and
There is a clear relationship between the executives’ performance and remuneration.

Remuneration structure

In accordance with best practice corporate governance, the structure of non-executive director, executive director and senior executive management remuneration is separate.

NON-EXECUTIVE DIRECTOR REMUNERATION

Objective

Structure

The Constitution and the Australian Stock Exchange Listing Rules specify that the aggregate remuneration of non-executive directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the Directors as agreed. The latest determination was at the Annual General Meeting held on 18 December 2001 when shareholders approved an aggregate remuneration of $150,000 per year.

Each non-executive director receives a fee for being a director of Mount Gibson.

— 388 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

All non-executive directors’ performance and remuneration is reviewed on an annual basis by the chairman.

Non-executive directors’ fixed remuneration will comprise the following elements:

Cash remuneration; and
Superannuation contributions made by Mount Gibson.

Non-executive directors are eligible to receive options under Mount Gibson’s Employee Option Scheme, subject to approval by shareholders.

Board operating costs do not form part of non-executive directors’ remuneration.

Non-executive directors have long been encouraged by the board to hold shares in Mount Gibson (purchased by the director on market). It is considered good governance for directors to have a stake in Mount Gibson on whose board they sit. The non-executive directors of Mount Gibson can participate in the Employee Share Plan which provides incentives where specified criteria are met.

EXECUTIVE DIRECTORS AND SENIOR EXECUTIVES REMUNERATION

Objective

The company aims to reward executive directors and senior executives with a level and mix of remuneration commensurate with their position and responsibilities within the company and so as to:

Reward the executive directors and senior executives for company and individual performance against targets set by reference to appropriate benchmarks;
Align the interest of the executive directors and senior executives with those of Shareholders;
Link reward with the strategic goals and performance of Mount Gibson; and
Ensure total remuneration is competitive by market standards.

— 389 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Fixed remuneration

The components of the executive directors and senior executives fixed remuneration are determined individually and may include:

Cash remuneration;
Accommodation and travel benefits;
Motor vehicle, parking and other benefits; and
Reimbursement of entertainment, home office and telephone expenses.

The executive directors’ remuneration is reviewed on an annual basis by the non-executive directors. The senior executives’ remuneration is reviewed on an annual basis by the managing director.

Variable remuneration

The executive directors and senior executives may receive variable remuneration as follows:

Short Term Incentives — the executive directors and senior executives are eligible to receive a bonus so long as certain key performance indicator’s (“KPI’s”) are achieved. These KPI’s are approved by the board at the commencement of the financial year; and
Long Term Incentives — the executive directors and senior executives are eligible to receive Bonus Options under Mount Gibson’s Employee Option Scheme, at the discretion of the board.

— 390 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Director remuneration for the year ended 30 June 2005

		Primary Benefits	Primary Benefits		Post Employment	Post Employment	Equity
		Salary &	Non			Retirement
		Fees	Monetary	Bonuses	Superannuation	Benefits	Options	Total
WB Willis	2005	116,731	—	—	6,229	—	29,230	152,190
	2004	82,934	—	—	9,102	—	58,495	150,531
BG Johnson	2005	344,669	88,309	250,000	—	—	1,543,389	2,226,367
	2004	288,433	85,178	—	—	—	155,212	528,823
CL Readhead	2005	41,951	—	—	—	—	14,615	56,566
	2004	33,026	—	—	2,974	—	29,247	65,247
IA Macliver	2005	38,485	—	—	3,476	—	14,615	56,576
	2004	33,026	—	—	2,974	—	29,247	65,247
AD Rule	2005	—	—	—	—	—	—	—
	2004	—	—	—	—	—	—	—
G Liu	2005
	2004	—	—	—	—	—	—	—

Mr Rule and Mr Liu were appointed directors of Mount Gibson on 1 July 2005 and 12 August 2005 respectively.

Remuneration of the 5 named executives who receive the highest remuneration for the year ended 30 June 2005

		Primary Benefits	Primary Benefits		Post Employment	Post Employment	Equity
		Salary &	Non			Retirement
		Fees	Monetary	Bonuses	Superannuation	Benefits	Options	Total
KJ Malaxos	2005	207,692	—	10,000	19,592	—	31,285	268,569
JP Arbuckle	2005	185,000	—	7,500	17,325	—	31,285	241,110
JR Tyers	2005	150,000	—	10,000	14,400	—	41,714	216,114
SP Coates	2004	150,000	—	—	13,500	—	—	163,500
	2005	130,780	—	10,000	12,670	—	31,285	184,735
C Lee	2004	114,677	—	—	10,321	—	—	124,998
	2005	130,872	—	7,500	12,453	—	12,514	163,339

All directors and executives are engaged through controlled entities of Mount Gibson.

— 391 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Options granted as part of remuneration for the year ended 30 June 2005

						Value per		Value per	Value at
						Option @		Option @	Date
		Grant	Exercise	Vesting	Expiry	Grant	Exercised	Exercise	Option	% of
	Grant Date	Number	Price	Date	Date	Date	Number	Date	Lapsed	Remuneration
BG Johnson	16-Mar-05	5,000,000	$0.50	31-Dec-05	31-Dec-07	$0.5516	N/A	N/A	N/A	45.3%
BG Johnson	16-Mar-05	5,000,000	$0.55	31-Dec-06	31-Dec-08	$0.5713	N/A	N/A	N/A	20.8%
KJ Malaxos	15-Dec-04	750,000	$0.25	31-Dec-05	31-Dec-06	$0.0807	N/A	N/A	N/A	11.6%
JP Arbuckle	15-Dec-04	750,000	$0.25	31-Dec-05	31-Dec-06	$0.0807	N/A	N/A	N/A	13.0%
JR Tyers	15-Dec-04	1,000,000	$0.25	31-Dec-05	31-Dec-06	$0.0807	N/A	N/A	N/A	19.3%
SP Coates	15-Dec-04	750,000	$0.25	31-Dec-05	31-Dec-06	$0.0807	N/A	N/A	N/A	16.9%
C Lee	15-Dec-04	300,000	$0.25	31-Dec-05	31-Dec-06	$0.0807	N/A	N/A	N/A	7.7%

Date approved by Mount Gibson board	24-Jan-05	24-Jan-05	24-Jan-05
Share price at date approved by Mount
Gibson board	$0.41	$0.41	$0.41
Grant Date	16-Mar-05	16-Mar-05	15-Dec-04
Share price at grant date	$0.90	$0.90	$0.265
Exercise price	$0.50	$0.55	$0.25
Risk free interest rate	5.30%	5.30%	5.55%
Volatility factor	40%	40%	32%
Expiry date	31-Dec-07	31-Dec-08	31-Dec-06

— 392 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

LIABILITIES

Consolidated 2005 2004 $ $ 9,662,833 8,464,098 328,672 1,349,446 2,708,084 7,757,213 548,020 139,264 13,247,609 17,710,021	Consolidated 2005 2004 $ $ 9,662,833 8,464,098 328,672 1,349,446 2,708,084 7,757,213 548,020 139,264 13,247,609 17,710,021	Mount Gibson Iron Limited 2005 2004 $ $ 123,294 159,461 — — — — — — 123,294 159,461	Mount Gibson Iron Limited 2005 2004 $ $ 123,294 159,461 — — — — — — 123,294 159,461	Mount Gibson Iron Limited 2005 2004 $ $ 123,294 159,461 — — — — — — 123,294 159,461
			159,461
459,627 7,969,530	499,648 11,178,100	— —	— 2,375,000
			2,375,000
			2,534,461
			27,473,353
				—

— 393 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

OTHER FINANCIAL LIABILITIES

Consolidated 2005 2004 $ $ — 1,349,446 328,672 — 328,672 1,349,446 Consolidated 2005 2004 $ $ 2,289,071 1,569,362 — 1,016,113 419,013 5,171,738 2,708,084 7,757,213	Consolidated 2005 2004 $ $ — 1,349,446 328,672 — 328,672 1,349,446 Consolidated 2005 2004 $ $ 2,289,071 1,569,362 — 1,016,113 419,013 5,171,738 2,708,084 7,757,213	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — — Mount Gibson Iron Limited 2005 2004 $ $ — — — — — — — —	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — — Mount Gibson Iron Limited 2005 2004 $ $ — — — — — — — —
			—
7,969,530 — —	7,762,035 1,041,065 2,375,000	— — —	— — 2,375,000
7,969,530	11,178,100	—	2,375,000

— 394 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Terms and condition relating to the above financial instruments:

a) Finance leases are repayable monthly with final instalments due in May 2009. Interest is charged at an average rate of 7.87%. The loans are secured by first mortgage over the leased assets.
b) Convertible Notes are convertible at the option of the holder to Shares at $0.30 per share, with an interest rate of 10% payable at 6 monthly intervals from 31 December 2002 to 31 December 2005. The Convertibles Notes are unsecured. All convertible notes were converted to ordinary shares during the year.
c) Stemcor (S.E.A) Limited agreed to prepay Mount Gibson Mining Limited US$6 million for iron ore to be supplied under their Off-take Agreement. The facility is repaid over 18 months from the first shipment of ore to Stemcor (S.E.A) Limited in April 2004. Interest is payable on the outstanding balance of the prepayment at 7.15% pa. This facility is secured by an irrevocable and unconditional guarantee by Mount Gibson Iron Limited to Stemcor, guaranteeing all Mount Gibson Mining Limited’s liabilities in connection with the facility. The facility was repaid in full in July 2005.

Share Options — As at balance date there were the following Options over unissued shares:

Exercise Price	Exercise Date/Period	2005 Number	2004 Number
25 cents	On or before 31 December 2004	—	19,000,000
22 cents	On or before 15 October 2005	30,523,300	25,800,000
15.84 cents	On or before 28 February 2006	—	2,083,332
25 cents	On or before 31 December 2006	4,500,000	—
50 cents	On or before 31 December 2007	5,000,000	—
55 cents	On or before 31 December 2008	5,000,000	—
		45,023,300	46,883,332

— 395 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

ACCUMULATED LOSSES

Notes Balance at the beginning of the year Net profit/(loss) attributable to members of Mount Gibson Balance at End of Year OUTSIDE EQUITY INTEREST Opening balance Less: Disposal by Mt Gibson Mining Limited of shares in Extension Hill Pty Ltd Add: Acquisition by Mt Gibson of shares in Asia Iron Holdings Ltd Closing Balance	Consolidated 2005 2004 $ $ (23,793,662) (12,810,751) 23,713,031 (10,982,911) (80,631) (23,793,662) Consolidated 2005 2004 $ $ 6,344,504 6,344,504 (6,344,504) — 8,956,295 — 8,956,295 6,344,504	Mount Gibson 2005 2004 $ $ (13,374,781) (12,810,751) 1,100,138 (564,030) (12,274,643) (13,374,781) Mount Gibson 2005 2004 $ $ — — — — — — — —

— 396 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

FINANCING FACILITIES AVAILABLE — AT BALANCE DATE THE FOLLOWING FINANCING FACILITIES WERE AVAILABLE:

	Consolidated	Consolidated	Mount	Gibson
	2005	2004	2005	2004
	$	$	$	$
Total Facilities
- Bank overdraft	1,000,000	1,172,954	—	—
- Finance leases	10,258,601	10,347,510	—	—
- Guarantee facility	2,700,620	2,647,387	—	—
- Export line of credit	4,000,000	4,000,000	—	—
Facilities Used At Reporting Date
- Bank overdraft	—	1,172,954	—	—
- Finance leases	10,258,601	10,347,510	—	—
- Guarantee facility	493,120	—	—	—
- Export line of credit	—	—	—	—
Facilities Unused At Reporting Date
- Bank overdraft	1,000,000	—	—	—
- Finance leases	—	—	—	—
- Guarantee facility	2,207,500	2,647,387	—	—
- Export line of credit	4,000,000	4,000,000	—	—

— 397 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

ACQUISITION

Acquisition of Controlled Entity — During the year the Consolidated Entity acquired shares in Asia Iron. At 30 June 2005 the Consolidated Entity owned 82,500,000 fully paid ordinary shares in Asia Iron representing 62.98% of the issued capital in Asia Iron.

The shares in Asia Iron were acquired as follows:

Date Consideration 25 February 2005 2,750,000 Mount Gibson shares 3 March 2005 2,200,000 Mount Gibson shares 30 April 2005 Mount Gibson subscribed cash of $1,511,830 30 June 2005 Mount Gibson Mining Limited transferred its 53.8% shareholding in Extension Hill Pty Ltd (formerly Asia Iron Pty Ltd)	Number of shares 5,001,000 4,000,000 5,999,000 67,500,000
	82,500,000

In acquiring Asia Iron, the consolidated entity also acquired the following controlled entities:

Asia Iron (Nanjing) Co., Ltd
Asia Iron Limited
Jiangsu Investment Pty Ltd
Austral Iron Pty Ltd
AP Mining Pty Ltd; and
Westralian Iron Pty Ltd

— 398 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

The components of the acquisition cost were:

Consideration:

- Transfer by Mount Gibson Mining Limited of 53.8% controlling
interest in Extension Hill Pty Ltd to Asia iron
- Issue of Mount Gibson shares to vendors of Asia Iron
- Cash subscription price for Asia Iron shares
Net assets of Asia Iron at 30 June 2005:
- Cash
- Property plant and equipment
- Other assets
- Deferred acquisition, exploration and development costs
- Creditors and accruals
Total Interest Acquired in Asia Iron
Minority interest acquired
Net Cash Effect:
- Cash costs of acquisition
- Cash included in net assets acquired

11,250,000
2,475,000
1,511,830
15,236,830
2,045,949
81,517
16,714
25,082,203
(3,033,259)
24,193,124
62.98%
15,236,830
8,956,295
(1,511,830)
2,045,949
534,119

— 399 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

EMPLOYEE BENEFITS AND SUPERANNUATION COMMITMENTS

a) Employee Benefits The aggregate employee benefits liability is comprised of: Accrued wages, salaries and on costs Provisions (current)	Consolidated 2005 2004 $ $ 628,667 369,718 238,033 124,191 866,700 493,909	Mount Gibson 2005 2004 $ $ 25,406 19,914 — — 25,406 19,914	Mount Gibson 2005 2004 $ $ 25,406 19,914 — — 25,406 19,914
			19,914

b) Employee Share Scheme — An employee share scheme has been established where Mount Gibson may, at the discretion of the board, grant options over the ordinary shares of Mount Gibson. The options, issued for nil consideration, are granted in accordance with performance guidelines established by the directors of Mount Gibson. All directors, officers and employees are eligible for this scheme.

Information with respect to the number of options granted under the employee share scheme is as follows:

Balance at beginning of year - granted - forfeited - exercised Balance at year end Exercisable at year end	2005 No. of Options Weighted average exercise price (cents) — — 11,900,000 25.0 (1,000,000) 25.0 — —	2005 No. of Options Weighted average exercise price (cents) — — 11,900,000 25.0 (1,000,000) 25.0 — —	2004 No. of Options Weighted average exercise price (cents) — — — — — —	2004 No. of Options Weighted average exercise price (cents) — — — — — —
	10,900,000	25.0	—	—
	—	—	—	—

i) Options granted during the reporting period — The options were granted in December 2004 on the basis that the employees must complete employment service to 31 December 2005 before the options vest. Once vested the options will be exercisable at 25 cents each and expire on 31 December 2006.

— 400 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

REMUNERATION OF SPECIFIED DIRECTORS AND SPECIFIED EXECUTIVES

i) Remuneration Policy

The board of directors is responsible for determining and reviewing compensation arrangements for the directors and executive officers. The board assesses the appropriateness of the nature and amount of emoluments of all officers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality board and executive team. To assist in achieving these objectives, the nature and amount of executive directors’ and officers’ emoluments are linked to Mount Gibson’s financial and operational performance. The maximum total compensation payable to non-executive directors is $150,000 and was approved by shareholders on 18 December 2001. All directors and employees have the opportunity to qualify for participation in the Employee Share Scheme.

ii) Remuneration of specied directors and specified executives

Specified Directors Salary & Fees WB Willis (i) 2005 116,731 2004 82,934 BG Johnson 2005 344,669 2004 288,433 CL Readhead 2005 41,951 2004 33,026 IA Macliver 2005 38,485 2004 33,026 Total Remuneration: 2005 541,836 specified directors 2004 437,419 specified executives KJ Malaxos 2005 207,692 JP Arbuckle 2005 185,000 JR Tyers 2005 150,000 2004 150,000 SP Coates 2005 130,780 C Lee 2005 130,872 Total Remuneration: 2005 804,344 specified executives 2004 264,677	Specified Directors Salary & Fees WB Willis (i) 2005 116,731 2004 82,934 BG Johnson 2005 344,669 2004 288,433 CL Readhead 2005 41,951 2004 33,026 IA Macliver 2005 38,485 2004 33,026 Total Remuneration: 2005 541,836 specified directors 2004 437,419 specified executives KJ Malaxos 2005 207,692 JP Arbuckle 2005 185,000 JR Tyers 2005 150,000 2004 150,000 SP Coates 2005 130,780 C Lee 2005 130,872 Total Remuneration: 2005 804,344 specified executives 2004 264,677	Primary Post Employment Cash Bonus Non Monetary Benefits Superannuation Retirement Benefits — — 6,229 — — — 9,102 — 250,000 88,309 — — — 85,178 — — — — — — — — 2,974 — — — 3,476 — — — 2,974 —	Primary Post Employment Cash Bonus Non Monetary Benefits Superannuation Retirement Benefits — — 6,229 — — — 9,102 — 250,000 88,309 — — — 85,178 — — — — — — — — 2,974 — — — 3,476 — — — 2,974 —	Primary Post Employment Cash Bonus Non Monetary Benefits Superannuation Retirement Benefits — — 6,229 — — — 9,102 — 250,000 88,309 — — — 85,178 — — — — — — — — 2,974 — — — 3,476 — — — 2,974 —	Equity Options 29,230 58,495 1,543,389 155,212 14,615 29,247 14,615 29,247	Total 152,190 150,531 2,226,367 528,823 56,566 65,247 56,576 65,247
2005 2004 2005 2005 2005 2004 2005 2005	541,836 437,419 207,692 185,000 150,000 150,000 130,780 130,872	250,000 — 10,000 7,500 10,000 — 10,000 7,500	88,309 85,178 — — — — — —	9,705 — 15,050 — 19,592 — 17,325 — 14,400 — 13,500 — 12,670 — 12,453 —	1,601,849 272,201 31,285 31,285 41,714 — 31,285 12,514	2,491,699 809,848
						268,569 241,110 216,114 163,500 184,735 163,339
	804,344 264,677	45,000 —	— —	76,440 — 23,821 —	148,083 —	1,073,867 288,498

(i) Included in Bill Willis fees is a $36,000 retainer for the provision of consulting services to Mount Gibson Mining Limited during the financial year.

— 401 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

REMUNERATION OPTIONS: GRANTED AND VESTED DURING THE YEAR

On 15 April 2005, the directors or their nominees were issued Options granted as part of director and executive emoluments date is calculated using the following assumptions:

Date approved by Mount Gibson Iron board	24-Jan-05	24-Jan-05	24-Jan-05
Share price at date approved by Mount Gibson
Iron board	$0.41	$0.41	$0.41
Grant date	16-Mar-05	16-Mar-05	15-Dec-04
Share price at grant date	$0.90	$0.90	$0.265
Exercise price	$0.50	$0.55	$0.25
Risk free interest rate	5.30%	5.30%	5.55%
Volatility factor	40%	40%	32%
Expiry date	31-Dec-07	31-Dec-08	31-Dec-06

Terms and Conditions for each grant

			Value Per
			Option at	Exercise	First	Last
	Vested	Granted Grant	Grant	Price per	Exercise	Exercise
	Number	Number Date	Date ($)	Share ($)	Date	Date
specified directors
BG Johnson	—	5,000,000 16 Mar 05	0.5516	0.50	31 Dec 05	31 Dec 07
BG Johnson	—	5,000,000 16 Mar 05	0.5716	0.55	31 Dec 06	31 Dec 08
specified executives
KJ Malaxos	—	750,000 15 Dec 04	0.0807	0.25	31 Dec 05	31 Dec 06
JP Arbuckle	—	750,000 15 Dec 04	0.0807	0.25	31 Dec 05	31 Dec 06
JR Tyers	—	1,000,000 15 Dec 04	0.0807	0.25	31 Dec 05	31 Dec 06
SP Coates	—	750,000 15 Dec 04	0.0807	0.25	31 Dec 05	31 Dec 06
C Lee	—	300,000 15 Dec 04	0.0807	0.25	31 Dec 05	31 Dec 06

— 402 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Option holdings of specified directors and specified executives

	Balance at Beginning			Net Change	Balance at End of	Vested at 30 June	Vested at 30 June
	of Period	Granted as	Options	(Lapsed/	Period 30		Not
	1 July 2004	Remuneration	Exercised	Disposed)	June 2005	Total	Exercisable	Exercisable
specified
directors
WB Willis	2,440,000	—	—	—	2,440,000	1,440,000	—	1,440,000
BG Johnson	6,460,000	10,000,000	—	(3,960,000)	12,500,000	—	—	—
CLReadhead	1,220,000	—	—	—	1,220,000	720,000	—	720,000
IA Macliver	1,944,444	—	(694,444)	—	1,250,000	750,000	—	750,000
specified
executives
KJ Malaxos	—	750,000	—	—	750,000	—	—	—
JP Arbuckle	—	750,000	—	—	750,000	—	—	—
JR Tyers	—	1,000,000	—	—	1,000,000	—	—	—
SP Coates	—	750,000	—	—	750,000	—	—	—
C Lee	—	300,000	—	—	300,000	—	—	—
Total	12,064,444	13,550,000	(694,444)	(3,960,000)	20,960,000	2,910,000	—	2,910,000

LOANS TO SPECIFIED DIRECTORS AND SPECIFIED EXECUTIVE

There were no loans to specified directors and specified executives during the year.

CONTINGENT LIABILITY

NET FAIR VALUES

As at 30 June 2005, Mount Gibson owned 28,743,410 shares in a listed entity, Resource Mining Corporation Ltd. The investment had a market value of $3,592,926 (cost: $2,542,318).

All other recognised financial assets and liabilities have been recognised at their net fair values at balance date.

— 403 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

CREDIT RISK EXPOSURE

In relation to derivative financial instruments, whether recognised or unrecognised, credit risk arises from the potential failure of counterparties to meet their obligations under the contract or arrangement. The Consolidated Entity’s maximum credit risk exposure in relation to forward exchange contracts is the full amount of the foreign currency it will be required to pay or purchase when settling the forward exchange contract, should the counterparty not pay the currency it is committed to deliver to Mount Gibson. At reporting date the net amount was A$328,672 (2004: $1,349,446).

CONCENTRATION OF CREDIT RISK

HEDGING INSTRUMENTS

Hedges for specific commitments

The Consolidated Entity has entered into forward exchange contracts at reporting date designed as a hedge of anticipated future receipts that will be denominated in US dollars.

This hedge has been treated as specific, in accordance with UIG 33, as the approximate value of the sale and the entities with which the transactions will be entered is presently known.

The amount of recognised deferred gain included in receivables at reporting date was $328,672 (2004: $1,349,446 loss).

— 404 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

As at 30 June 2005 the following foreign exchange contracts were outstanding:

Description Forward Exchange Contracts - contract rate 0.7455 Collar Option - call strike price 0.720/0.725/0.730/0.733 - put strike price 0.800/0.770/0.780/0.800 Convertible Collar Option - call strike price 0.750 - put strike rate 0.800 - barrier rate 0.7998 Total	US$ 10,000,000 36,500,000 11,500,000 58,000,000	A$ Equivalent 13,413,816 50,092,583 15,333,333 78,839,732	Mark to Market 166,676 50,654 (101,173) 116,157

All of the above contracts mature by 30 June 2006.

SUBSEQUENT EVENTS

— 405 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

The following is the reproduction of certain paragraphs of the management discussion and analysis as contained in the annual report 2006 of Mount Gibson.

TAKEOVER OF AZTEC RESOURCES

Mount Gibson is the first of the current generation of junior iron ore companies to achieve large scale iron ore production in the Mid West region whilst being recognised as a leader of the Mid West iron ore industry and a driving force behind the development of regional infrastructure. Mount Gibson has gained “first mover” status as a junior iron ore company and has taken the initiative to grow the company further during a period of strong iron ore prices whilst at the same time balancing and diversifying Mount Gibson’s portfolio of assets.

On 24 July 2006, Mount Gibson announced a takeover offer for Aztec, by offering one Mount Gibson share for every three Aztec shares.

The takeover bid is an important element of Mount Gibson’s growth strategy that delivers both MGI and Aztec shareholders Australian Stock Exchange 200 status, a significantly higher production capability and an asset portfolio that is based in Australia. Mount Gibson and Aztec shareholders will participate in a company that has a balanced and diversified asset base which helps to mitigate the risks associated with companies owning and operating single asset mining ventures. The merged company will enhance business performance by combining intellectual capital, reducing costs, combining production, reducing operational risk and improving access to future funding whilst providing all shareholders with a potential market re-rating.

Based on the projected production capacity of the merged company, consensus iron ore pricing and publicly available cost information, strong earnings growth is possible. The merger of the two companies creates Australia’s leading pure-play iron ore producer and places the combined company in a strong position to participate from a position of strength in any future accretive expansion opportunities.

Mount Gibson’s takeover offer was strongly endorsed by the largest shareholders in both Aztec and Mount Gibson. Aztec’s largest shareholder Cambrian Mining Plc granted an option to Mount Gibson, which Mount Gibson has since exercised, to acquire an initial stake of 15.24% of Aztec’s issued capital (reduced from 19.9% after the issue of shares in respect of outstanding options). Cambrian has accepted Mount Gibson’s offer in relation to its remaining interest in Aztec.

— 406 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

At the time of writing this report, Mount Gibson had a relevant interest of 33.2% in Aztec.

Mount Gibson Corporate Mineral	Mount Gibson Corporate Mineral
Resources		M tonnes	Fe%	SiO2%	Al2O3%	P%	S%	MgO%	LOI%
Measured	>57% Fe	8.37	63.6	4.35	2.19	0.02	0.07	0.58	1.42
	50-57% Fe	0.80	54.6	11.5	3.78	0.04	0.47	1.77	3.16
	Total >50% Fe	9.17	62.8	4.98	2.33	0.03	0.11	0.68	1.57
	>57% Fe	21.7	62.2	4.41	1.78	0.05	—	0.60	3.79
Indicated	50-57% Fe	3.68	55.3	9.73	3.16	0.07	—	0.97	6.21
	Total >50% Fe	25.4	61.2	5.19	1.98	0.05	—	0.65	4.14
	>57% Fe	5.51	61.5	5.52	1.59	0.05	—	—	4.12
Inferred	50-57% F3	2.66	54.7	11.1	2.76	0.08	—	0.58	6.28
	Total >50% Fe	8.17	59.3	7.33	1.97	0.06	—	—	4.82
Sub-Totals	>57% Fe	35.6	62.4	4.57	1.84	0.04	—	—	3.28
	50-57% FE	7.14	55.0	10.4	3.08	0.07	—	0.91	5.89
Mount Gibson		42.7	61.2	5.55	2.05	0.05	—	—	3.72
Corporate Grand
Total

ORE RESERVES AS AT 30 JUNE 2006

Mount Gibson Corporate Mining

Reserves	M Tonnes	Fe%	SiO%	Al2O3	P%	S%	MgO	LOI%
Total Proven	9.11	61.7	4.87	2.34	0.02	0.08	0.64	1.57
Total Probable	23.4	61.3	4.51	1.80	0.05	—	—	4.02
Mount Gibson Corporate Grand	32.5	61.4	4.61	1.95	0.04	—	—	3.34
Total

A detailed breakdown of Mount Gibson’s Reserves and Resources as at 30 June 2006 was released to the ASX on 3 August 2006.

RESERVES AND RESOURCES

Exploration and development work during the year to 30 June 2006 has increased Mount Gibson’s 100% owned Mining Reserve 75%, up from 18.6 Mt to 32.5 Mt. This increase is primarily due to:

Establishment of a Probable Reserve for the Extension Hill Hematite deposit at Mt Gibson;
Development of a sustainable Life-of-Mine Plan for Tallering Peak incorporating stockpiling strategies, enabling planned blending of subgrade material;

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APPENDIX V

Successful drilling at Tallering Peak allowing commitment to a cutback on the existing T5 pit;
Increased product prices.

Mineral Resources (also 100% owned) have increased 27%, up from 33.6 Mt to 42.7 Mt, due to:

Successful drilling extending the Extension Hill Hematite deposit at Mt Gibson;
Successful drilling extending the T5 deposit at Tallering Peak;
Reporting of Resources to a lower Fe cut-off to more accurately reflect mine planning requirements.

Resources are reported at 57% Fe and 50% Fe lower cut-offs, with total Resources now including 50%-57% Fe material (subgrade). Some, but not necessarily all, of this subgrade converts to mining Reserves. No lower cut-off grades are quoted for mining Reserves, as cut-offs vary on a monthly basis throughout the mine life. The Life-of-Mine schedule targets consistent lump and fines product grades to meet customer specifications. Mining Reserves are the sum of scheduled production, and incorporate mining dilution, stockpiling, blending and transport strategies.

EXPLORATION

Exploration activity during the year has contributed significantly to the growth of the company, with a 27% increase in established Mineral Resources achieved. This was backed by development and mining feasibility studies at both Tallering Peak and Extension Hill, which resulted in a 75% increase in reported Mining Reserves.

TALLERING PEAK

Total non-production drilling at Tallering Peak during the year amounted to 11,453m of RC in 123 holes and 2,446m of diamond core in 20 holes. Most work was infill and extensional resource definition drilling, with geotechnical investigations accounting for the bulk of the diamond core.

Drilling of 35 extensional RC holes at the T5 deposit in late 2005 was successful, allowing commitment to a significant cutback on the T5 pit which was to have been exhausted by March 2006. Infill and extensional drilling on the main range pit continues to better define the orebody around the active mining area (T3), and has identified additional material in the T2 area immediately to the north-east. Exploration drilling further along the main ridge to the north-east (T1 area) is scheduled to begin immediately land access agreements are put in place.

Validation, compilation and synthesis of existing data across the entire lease area at Tallering Peak has been facilitated by the purchase and successful implementation of acQuire software, an

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

industry-standard database platform specifically designed to meet the requirements of integrated explorers and producers like Mount Gibson. A number of follow-up targets have been selected for further work, with some drilling already completed in the Central Ridge area, a kilometre north-west of T3 and 2.5km along-strike from T5.

EXTENSION HILL

Total drilling at Extension Hill during the year amounted to 3,476m of RC in 41 holes and 363.1m of PQ core in nine holes. Surface mapping was also completed to support revision of the three-dimensional geological interpretation.

Three discrete drilling programs were completed. A program of deep RC holes towards the northern end of Extension Hill extended both magnetite and hematite zones of known mineralisation, a program of short RC holes better defined shallow hematite mineralisation and highlighted potential in detrital material off the flanks of the main hill, while a very specific program of nine PQ core holes (83mm core) was also completed to obtain hematite ore for metallurgical test work.

Re-sampling of hematite zones of interest in RC drillholes is underway to provide better resolution data in areas of composited samples, mainly to allow mining dilution sensitivity studies to be conducted.

Large areas of excellent hematite exploration potential are known at Extension Hill which have not been drilled due to the presence of a Declared Rare Flora (darwinia masonii). Flora surveys conducted this year and mechanisms documented in the Public Environmental Review will allow exploration through these areas once environmental approval is granted. Significant increases in hematite Resources and Reserves are anticipated.

OTHER AREAS

Four short diamond core holes were drilled at Asia Iron’s Irwin River Coal project to provide material for quality testing and flotation work. All four holes successfully intersected both known coal seams.

Environmental and ethnographic surveys were completed over tenements at Wolla Wolla and Walebing, enabling on-ground field activities to commence in the coming year.

Geological mapping and some ground magnetics surveys were conducted at Mt Yule, Wolla Wolla and Koolanooka South to assist in identification of drilling targets.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

INTERESTS IN THE SHARES AND OPTIONS OF MOUNT GIBSON

As at the date of this report, the interests of the directors in the shares and options of Mount Gibson were:

	Ordinary	Options over
	Shares	Shares
WB Willis	1,480,000	1,000,000
BG Johnson	—	5,000,000
L Tonkin	—	5,000,000
AD Rule	—	2,000,000
CL Readhead	727,500	500,000
IA Maoliver	1,000,000	500,000
AS Jones	—	—

Employees

The Consolidated Entity employed 120 employees as at 30 June 2006 (2005: 71 employees).

Future Funding

As at the date of this report the Consolidated Entity has sufficient funds or funding to develop and mine the Tallering Peak iron deposits.

Extension Hill Magnetite Project

Mount Gibson and Mount Gibson Mining Limited entered into an agreement on 5 July 2006 with Sinom Investments Limited (“Sinom Investments”) for the sale to Sinom Investments of their combined 73% interest in Asia Iron, the ultimate owner of the Extension Hill Magnetite Project.

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APPENDIX V

Extension Hill Direct Shipping Ore Project

The desktop study has shown that the project has robust economics, minimal technical risks and relatively low capital requirements. The most significant risks to the project are timing and implementation. The desktop study estimates are within a�15 to 25% range and therefore are not as reliable as the results of a DFS.

All key native title agreements for the project are in place.

Of the 3 Mtpa of DSO to be produced at Extension Hill, 1.4 Mtpa is committed under existing sales contracts.

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APPENDIX V

Review of Financial Condition

During the year, the Consolidated Entity incurred $54.2 million (2005: $24.1 million) in waste development expenditure of which, $35.5 million was incurred in the 6 months ended 30 June 2006. In accordance with its usual accounting practice, waste development expenditure for the period has been capitalised in the Consolidated Entity’s balance sheet and will be amortised over the expected life of the mine. The Consolidated Entity’s focus on substantially increasing waste development to ensure 3 Mtpa of sustainable ore production in the future combined with reduced ore sales during the 6 months ended 30 June 2006 reduced cash on hand to $4.5 million.

Net assets increased by 42% to $109.2 million.

During the course of the financial year, holders of 33.49 million options exercised their options resulting in $7.5 million in equity funding for Mount Gibson.

SIGNIFICANT EVENTS AFTER BALANCE DATE

On 24 July 2006, Mount Gibson announced the intention to merge with Aztec, representing a landmark consolidation of Australia’s emerging iron ore sector. The merger will result in the creation of a leading independent Australian iron ore company with a market capitalisation of approximately $600 million (assuming dilution for all in-the-money Mount Gibson and Aztec options), an asset portfolio offering near term cash flow, immediate growth potential supported by longer-life profile and longer term development opportunities. Mount Gibson proposes to implement the merger by means of an off-market scrip takeover bid for all shares in Aztec. Under the bid, Mount Gibson offered Aztec shareholders 1 new share for every 3 shares held in Aztec (“Offer”), valuing each Aztec share at $0.263 based on Mount Gibson’s volume weighted average price on 21 July 2006 of $0.789, being the last trading day before announcement of the offer. The Offer is subject to a number of conditions, including a minimum acceptance condition of 90%, regulatory approvals, certain prescribed occurrences not having occurred and no material adverse change, acquisitions or disposals. Aztec’s major shareholder, Cambrian Mining Plc, granted an option to Mount Gibson over Aztec shares equivalent to 15.27% of Aztec’s issued capital, at the Offer price.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

LIKELY DEVELOPMENTS AND EXPECTED RESULTS

SHARE OPTIONS

Unissued shares

Details of Options over ordinary shares in Mount Gibson on issue as at balance date and at the date of this report are:

		Options on	issue at
			Date of
Exercise Price	Exercise Date/Period	Balance date	report
25 cents	On or before 31 December 2006	7,256,920	7,238,920
50 cents	On or before 31 December 2007	5,000,000	5,000,000
55 cents	On or before 31 December 2008	5,000,000	5,000,000
78 cents	On or before 31 December 2006	823,712	823,712
90 cents	On or before 30 June 2010	2,000,000	2,000,000
90 cents	On or before 23 October 2010	3,000,000	3,000,000
110 cents	On or before 23 October 2012	2,000,000	2,000,000
	Total	25,080,632	25,062,632

As at the date of this report, none of the options had vested. Option holders do not have any right, by virtue of the Option, to participate in any share issue of Mount Gibson.

Shares issued as a result of the exercise of options

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

DIVIDENDS

No dividends were paid during the period and no recommendation is made as to dividends.

REMUNERATION REPORT

This report outlines the remuneration arrangements in place for directors and executives of the Consolidated Entity.

Remuneration Policy

The Remuneration Policy of Mount Gibson and its Controlled Entities has been put in place to ensure that:

remuneration policies and systems support Mount Gibson’s wider objectives and strategies;
Directors’ and senior executives’ remuneration is aligned to the long-term interests of shareholders within an appropriate control framework; and
there is a clear relationship between the executives’ performance and remuneration.

Remuneration Structure

In accordance with best practice corporate governance, the structure of non-executive director, executive director and senior executive management remuneration is separate.

NON-EXECUTIVE DIRECTOR REMUNERATION

Objective

Structure

The Constitution and the ASX Listing Rules specify that the aggregate remuneration of non-executive directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the directors as agreed. The latest determination was at the Annual General Meeting held on 18 November 2005 when Shareholders approved an aggregate remuneration of $300,000 per year.

Each non-executive director receives a fee for being a director of Mount Gibson.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

All Non-executive directors’ performance and remuneration is reviewed on an annual basis by the chairman. Non-executive directors’ fixed remuneration will comprise the following elements:

cash remuneration; and
superannuation contributions made by Mount Gibson.

Non-executive directors are eligible to receive options under Mount Gibson Employee Option Scheme, subject to approval by Shareholders.

Board operating costs do not form part of non-executive directors’ remuneration.

Non-executive directors have long been encouraged by the board to hold shares in Mount Gibson (purchased by the director on market). It is considered good governance for Directors to have a stake in Mount Gibson on whose board they sit. The non-executive directors of Mount Gibson can participate in the Employee Share Plan which provides incentives where specified criteria are met.

EXECUTIVE DIRECTORS AND SENIOR EXECUTIVES REMUNERATION

Objective

Mount Gibson aims to reward executive directors and senior executives with a level and mix of remuneration commensurate with their position and responsibilities within the company and so as to:

reward the executive directors and senior executives for company and individual performance against targets set by reference to appropriate benchmarks;
align the interest of the executive directors and senior executives with those of Shareholders;
link reward with the strategic goals and performance of Mount Gibson; and
ensure total remuneration is competitive by market standards.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Fixed Remuneration

The components of the executive directors and senior executives fixed remuneration are determined individually and may include:

cash remuneration;
accommodation and travel benefits;
motor vehicle, parking and other benefits; and
reimbursement of entertainment, home office and telephone expenses.

The executive directors’ remuneration is reviewed on an annual basis by the non-executive directors. The senior executives’ remuneration is reviewed on an annual basis by the managing director.

In determining the remuneration package, the remuneration committee reviews the individual’s remuneration with the use of market data for positions with comparable companies. Where appropriate, the package is adjusted so as to keep pace with market trends and ensure continued remuneration competitiveness. In conducting a comparative analysis, Mount Gibson’s expected performance for the year is considered in the context of Mount Gibson’s capacity to fund remuneration budgets. From time to time, a review of the total remuneration package by an independent consultant in this field is undertaken to provide an independent reference point.

VARIABLE REMUNERATION

Short-term Incentive (STI)

The executive directors and senior executives may receive variable remuneration in the form of STI. STI are linked to clearly specified performance targets and provide rewards for materially improved Mount Gibson performance. The total potential STI available is at the Boards discretion but is measured to provide sufficient incentive to the executive directors and senior executives to achieve the operational targets and such that the cost to the Consolidated Entity is reasonable in the circumstances.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Long-term Incentive (LTI)

LTI grants to executives are delivered in the form of options, rights or fully paid shares.

REMUNERATION FOR THE YEAR ENDED 30 JUNE 2006

							Share	Based
			Short Term		Post Employment		payment
		Salary &	Non	Sti		Retirement			% Performance
		Fees	Monetary	Bonuses	Superannuation	Benefits	Options	Total	Related
WB Willis	2006	105,505	—	—	9,495	—	14,735	129,735	11%
Non-executive
chairman
	2005	116,731	—	—	6,229	—	29,230	152,190	19%
Bg johnson	2006	673,424	33,814	—	—	—	3,113,988	3,821,226	81%
Deputy chairman
	2005	344,669	88,309	250,000	—	—	1,405,809	2,088,787	79%
L Tonkin	2006	316,396	1,051	250,000	28,476	—	399,479	995,402	65%
Managing
Director
AD Rule	2006	300,000	1,822	150,000	27,417	—	224,444	703,683	53%
Finance director
CL Readhead	2006	48,000	—	—	—	—	7,368	55,368	13%
Non-executive
director
	2005	41,951	—	—	—	—	14,615	56,566	26%
IA Macliver	2006	44,037	—	—	3,963	—	7,368	55,368	13%
Non-executive
director
	2005	38,485	—	—	3,476	—	14,615	56,576	26%
G Liu	2006	—	—	—	—	—	—	—	—
Non-executive
director

Mr. Tonkin, Mr. Rule and Mr. Liu were appointed directors of the company on 24 October 2005, 1 July 2005 and 12 August 2005 respectively. Mr. Liu retired as a director on 22 February 2006.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

REMUNERATION FOR THE YEAR ENDED 30 JUNE 2006

							Share	Based
			Short Term		Post Employment		Payment
		Salary &	Non	Sti		Retirement			% Performance
		Fees	Monetary	Bonuses	Superannuation	Benefits	Options	Total	Related
DP Garcia	2006	398,655	—	—	12,777	—	—	411,432	—
Commercial
director — Asia
Iron
KJ Malaxos	2006	245,833	19,728	4,167	22,500	—	28,085	320,313	10%
Chief executive	2005	207,692	6,412	10,000	19,592	—	31,285	274,981	15%
officer — Mount
Gibson Mining
Limited
PJ Jones	2006	275,229	1,410	—	24,771	—	13,171	314,581	4%
Project Manager
SP Coates	2006	182,580	—	7,500	16,425	—	41,265	247,770	20%
Exploration	2005	130,780	—	10,000	12,670	—	31,285	184,735	22%
Manager
BS Wesley	2006	129,019	1,663	5,000	11,366	—	13,171	160,219	11%
Group financial
controller

OPTIONS GRANTED AS PART OF REMUNERATION FOR THE YEAR ENDED 30 JUNE 2006

									Total Value
									of Options
					Value of				Exercised
					Options			Value at	and
				Value per	Granted			Date	Lapsed
		Exercise	Grant	Option @	During	Vesting	Exercised	Option	During	% of
	Grant Date	Price	Number	Grant Date	the Year	Date	Number	Lapsed	Year	Remuneration
AD Rule	4-Oct-05	$0.90	2,000,000	$0.464	928,000	1-Jul-08	N/A	N/A	N/A	31.9%
L Tonkin	4-Oct-05	$0.90	3,000,000	$0.478	1,434,000	24-Oct-08	N/A	N/A	N/A	29.5%
L Tonkin	4-Oct-05	$1.10	2,000,000	$0.518	1,036,000	24-Oct-10	N/A	N/A	N/A	10.6%
SP Coates	31-Dec-05	$0.78	250,000	$0.332	83,000	31-Dec-07	N/A	N/A	N/A	5.3%
PJ Jones	31-Dec-05	$0.78	250,000	$0.332	83,000	31-Dec-07	N/A	N/A	N/A	4.2%
BS Wesley	31-Dec-05	$0.78	250,000	$0.332	83,000	31-Dec-07	N/A	N/A	N/A	8.2%

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Grant date 31-Dec-05 4-Oct-05 4-Oct-05 4-Oct-05 Share price at grant date $0.70 $0.86 $0.86 $0.86 Exercise price $0.78 $0.90 $0.90 $1.10 Risk free interest rate 5.09% 5.40% 5.40% 5.40% Volatility factor 60% 60% 60% 60% Expiry date 31-Dec-09 30-Jun-10 23-Oct-10 23-Oct-12 LIABILITIES CONSOLIDATED COMPANY 2006 2005 2006 2005 $’000 $’000 $’000 $’000 CURRENT LIABILITIES Trade and other payables 17,836 10,363 341 130 Interest-bearing loans and borrowings 1,594 2,780 — — Derivatives 1,470 — — — Provisions 463 300 — — 21,363 13,443 341 130 Liabilities associated with assets classified as held for sale 3,068 — — — TOTAL CURRENT LIABILITIES 24,431 13,443 341 130 NON-CURRENT LIABILITIES Provisions 702 655 — — Interest-bearing loans and borrowings 4,247 8,938 — — Deferred income tax liabilities 4,684 11,407 — — TOTAL NON-CURRENT LIABILITIES 9,633 21,000 — — TOTAL LIABILITIES 34,064 34,443 341 130 NET ASSETS 109,196 76,585 84,584 67,529	Grant date 31-Dec-05 4-Oct-05 4-Oct-05 4-Oct-05 Share price at grant date $0.70 $0.86 $0.86 $0.86 Exercise price $0.78 $0.90 $0.90 $1.10 Risk free interest rate 5.09% 5.40% 5.40% 5.40% Volatility factor 60% 60% 60% 60% Expiry date 31-Dec-09 30-Jun-10 23-Oct-10 23-Oct-12 LIABILITIES CONSOLIDATED COMPANY 2006 2005 2006 2005 $’000 $’000 $’000 $’000 CURRENT LIABILITIES Trade and other payables 17,836 10,363 341 130 Interest-bearing loans and borrowings 1,594 2,780 — — Derivatives 1,470 — — — Provisions 463 300 — — 21,363 13,443 341 130 Liabilities associated with assets classified as held for sale 3,068 — — — TOTAL CURRENT LIABILITIES 24,431 13,443 341 130 NON-CURRENT LIABILITIES Provisions 702 655 — — Interest-bearing loans and borrowings 4,247 8,938 — — Deferred income tax liabilities 4,684 11,407 — — TOTAL NON-CURRENT LIABILITIES 9,633 21,000 — — TOTAL LIABILITIES 34,064 34,443 341 130 NET ASSETS 109,196 76,585 84,584 67,529	Grant date 31-Dec-05 4-Oct-05 4-Oct-05 4-Oct-05 Share price at grant date $0.70 $0.86 $0.86 $0.86 Exercise price $0.78 $0.90 $0.90 $1.10 Risk free interest rate 5.09% 5.40% 5.40% 5.40% Volatility factor 60% 60% 60% 60% Expiry date 31-Dec-09 30-Jun-10 23-Oct-10 23-Oct-12 LIABILITIES CONSOLIDATED COMPANY 2006 2005 2006 2005 $’000 $’000 $’000 $’000 CURRENT LIABILITIES Trade and other payables 17,836 10,363 341 130 Interest-bearing loans and borrowings 1,594 2,780 — — Derivatives 1,470 — — — Provisions 463 300 — — 21,363 13,443 341 130 Liabilities associated with assets classified as held for sale 3,068 — — — TOTAL CURRENT LIABILITIES 24,431 13,443 341 130 NON-CURRENT LIABILITIES Provisions 702 655 — — Interest-bearing loans and borrowings 4,247 8,938 — — Deferred income tax liabilities 4,684 11,407 — — TOTAL NON-CURRENT LIABILITIES 9,633 21,000 — — TOTAL LIABILITIES 34,064 34,443 341 130 NET ASSETS 109,196 76,585 84,584 67,529	Grant date 31-Dec-05 4-Oct-05 4-Oct-05 4-Oct-05 Share price at grant date $0.70 $0.86 $0.86 $0.86 Exercise price $0.78 $0.90 $0.90 $1.10 Risk free interest rate 5.09% 5.40% 5.40% 5.40% Volatility factor 60% 60% 60% 60% Expiry date 31-Dec-09 30-Jun-10 23-Oct-10 23-Oct-12 LIABILITIES CONSOLIDATED COMPANY 2006 2005 2006 2005 $’000 $’000 $’000 $’000 CURRENT LIABILITIES Trade and other payables 17,836 10,363 341 130 Interest-bearing loans and borrowings 1,594 2,780 — — Derivatives 1,470 — — — Provisions 463 300 — — 21,363 13,443 341 130 Liabilities associated with assets classified as held for sale 3,068 — — — TOTAL CURRENT LIABILITIES 24,431 13,443 341 130 NON-CURRENT LIABILITIES Provisions 702 655 — — Interest-bearing loans and borrowings 4,247 8,938 — — Deferred income tax liabilities 4,684 11,407 — — TOTAL NON-CURRENT LIABILITIES 9,633 21,000 — — TOTAL LIABILITIES 34,064 34,443 341 130 NET ASSETS 109,196 76,585 84,584 67,529
21,363 3,068 24,431 702 4,247 4,684 9,633 34,064	13,443 — 13,443 655 8,938 11,407 21,000 34,443	341 — 341 — — — — 341	130 —
			130
			— — —
			—
			130
109,196	76,585	84,584	67,529

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

ASSETS HELD FOR SALE

On 7 June 2006 Mount Gibson advised the Australian Stock Exchange that it had signed an agreement with China’s third largest steel producer, the Shougang Group, for the sale of the Consolidated Entity’s entire 73% interest in Asia Iron for $52.5 million.

The agreement was subject to Foreign Investment Review Board (“FIRB”) approval and the minority shareholders in Asia Iron not exercising an option to match the Shougang offer. Minority shareholders had 28 days to exercise an option to match the Shougang offer. On 6 July 2006 Mount Gibson advised the ASX that it has received notice of an election to purchase the Consolidated Entity’s shareholding in Asia Iron from a minority shareholder, Sinom Investments. Sinom Investments notice to match the Shougang offer resulted in a binding agreement for the sale of the Consolidated Entity’s entire 73% interest in Asia Iron on the same terms as those previously agreed with Shougang. As a result of Sinom Investments’ election, the condition precedent to the Shougang agreement could not be satisfied. The Consolidated Entity therefore terminated the Shougang agreement to allow the sale to Sinom Investments.

As at 30 June 2006, Asia Iron and its subsidiaries was classified as a disposal group and was held for sale.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

The major classes of assets and liabilities of Asia Iron measured at the lower of carrying amount and fair value less cost to sell as at 30 June 2006 in the Consolidated Balance Sheet are as follows:

Assets
Cash
Trade and other receivables
Prepayments
Property, plant and equipment
Deferred acquisition, exploration, evaluation and development costs
Assets classified as held for sale
Liabilities
Trade and other payables
Interest bearing liabilities
Liabilities directly associated with assets classified as held for sale
Less: Minority interest thereon
Net assets attributable to disposal of Asia Iron Holdings Limited

2006
$’000
2,849
216
115
3,158
39,755
46,093
(1,568)
(1,500)
(3,068)
43,025
(11,776)
31,249

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

DEFERRED ACQUISITION, EXPLORATION, EVALUATION AND DEVELOPMENT COSTS

CONSOLIDATED 2006 2005 $’000 $’000 4,022 4,022 154 — 34,547 19,874 5,208 5,208	CONSOLIDATED 2006 2005 $’000 $’000 4,022 4,022 154 — 34,547 19,874 5,208 5,208	COMPANY 2006 2005 $’000 $’000 — — — — — — — —	COMPANY 2006 2005 $’000 $’000 — — — — — — — —
43,931 (39,755)	29,104 —	— —	— —
4,176	29,104	—	—
29,104 15,641 (814) 43,931 (39,755)	17,889 11,881 (666) 29,104 —	— 25 (25) — —	— — —
			— —
4,176	29,104	—	—

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

INTEREST-BEARING LOANS AND BORROWINGS

Notes Current Lease liability [a] Unearned revenue Non-Current Lease liability [a] Attributable to disposal group not included above [b]	CONSOLIDATED 2006 2005 $’000 $’000 1,594 2,361 — 419 1,594 2,780 4,247 8,938 1,500 —	COMPANY 2006 2005 $’000 $’000 — — — — — — — — — —	COMPANY 2006 2005 $’000 $’000 — — — — — — — — — —
			—
			—
			—

Terms and condition relating to the above financial instruments:

[a] Finance leases are repayable monthly with final instalments due in November 2014. Interest is charged at an average rate of 7.97%. Secured by first mortgage over the leased assets.
[b] Commercial bill facility held with National Australia Bank. Interest is charged at an average rate of 5.99% and expires on 28 February 2011. The commercial bill is secured by first mortgage over the land located at Yanda Farm, Western Australia which is owned by Westralian Iron Pty Ltd, a wholly owned subsidiary of Asia Iron.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

FINANCING FACILITIES AVAILABLE

CONSOLIDATED 2006 2005 $’000 $’000 20,474 1,000 5,841 10,258 5,526 2,701 — 4,000 1,500 — 33,341 17,959	CONSOLIDATED 2006 2005 $’000 $’000 20,474 1,000 5,841 10,258 5,526 2,701 — 4,000 1,500 — 33,341 17,959	COMPANY 2006 2005 $’000 $’000 — — — — — — — — — — — —	COMPANY 2006 2005 $’000 $’000 — — — — — — — — — — — —
			—
— 5,841 5,526 — 1,500	— 10,258 493 — —	— — — — —	— — — — —
12,867	10,751	—	—
20,474 — — — —	1,000 — 2,208 4,000 —	— — — — —	— — — — —
20,474	7,208	—	—

[i] The security pledge for these facilities is a fixed and floating charge over all the assets and undertakings of the Consolidated Entity.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

DERIVATIVES

Current Asset Foreign currency forward contracts and options Current Liability Foreign currency forward contracts and options	CONSOLIDATED 2006 2005 $’000 $’000 2,541 — 1,470 —	COMPANY 2006 2005 $’000 $’000 — — — —	COMPANY 2006 2005 $’000 $’000 — — — —
			—

SHARE OPTIONS

As at balance date the following Options over unissued Shares were on issue:

Exercise Price	Exercise Date/Period	2006 Number	2005 Number
22 cents	On or before 15 October 2005	—	30,523,300
25 cents	On or before 31 December 2006	7,256,920	4,500,000
50 cents	On or before 31 December 2007	5,000,000	5,000,000
55 cents	On or before 31 December 2008	5,000,000	5,000,000
78 cents	On or before 31 December 2006	823,712	—
90 cents	On or before 30 June 2010	2,000,000	—
90 cents	On or before 23 October 2010	3,000,000	—
110 cents	On or before 23 October 2012	2,000,000	—
		25,080,632	45,023,300

Share options carry no right to dividends and no voting rights.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

RESERVES

CONSOLIDATED 2006 2005 $’000 $’000 5,954 1,631 (1,790) — (3,691) — 473 1,631	CONSOLIDATED 2006 2005 $’000 $’000 5,954 1,631 (1,790) — (3,691) — 473 1,631	COMPANY 2006 2005 $’000 $’000 5,954 1,631 (2,255) — — — 3,699 1,631	COMPANY 2006 2005 $’000 $’000 5,954 1,631 (2,255) — — — 3,699 1,631
			1,631
1,631 4,323	— 1,631	1,631 4,323	— 1,631
5,954	1,631	5,954	1,631
— 1,165 (3,305) 465 (115)	— — — — —	— 1,050 (3,305) — —	— — — — —
(1,790)	—	(2,255)	—

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Notes [c] Other reserves Foreign currency translation reserve Consolidation reserve EMPLOYEE BENEFITS The aggregate employee benefits liability is comprised of: Accrued wages, salaries and on-costs Provisions	CONSOLIDATED 2006 2005 $’000 $’000 (465) — (3,226) — (3,691) — CONSOLIDATED 2006 2005 $’000 $’000 1,544 629 465 238 2,009 867		COMPANY 2006 2005 $’000 $’000 — — — — — — COMPANY 2006 2005 $’000 $’000 43 25 — — 43 25	COMPANY 2006 2005 $’000 $’000 — — — — — — COMPANY 2006 2005 $’000 $’000 43 25 — — 43 25
				25

SHARE-BASED PAYMENT PLANS

Employee share scheme

— 427 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Information with respect to the number of options granted and issued under the employee share scheme is as follows:

Balance at beginning of year granted and issued forfeited exercised Balance at year end Exercisable at year end	2006 No. of Options Weighted average exercise price (cents) 20,900,000 25.0 9,073,712 91.7 (1,900,000) 56.9 (2,993,080) 25.0 25,080,632 57.4 13,080,632 37.8	2005 No. of Options Weighted average exercise price (cents) — — 21,900,000 25.0 (1,000,000) 25.0 — — 20,900,000 25.0 — —	2005 No. of Options Weighted average exercise price (cents) — — 21,900,000 25.0 (1,000,000) 25.0 — — 20,900,000 25.0 — —
			25.0
			—

The outstanding balance of options granted and issued as at 30 June 2006 is represented by:

Exercise Price Exercise Date Vesting Date No. 25 cents On or before 31 December 2006 31-Dec-05 50 cents On or before 31 December 2007 31-Dec-05 55 cents On or before 31 December 2008 31-Dec-06 78 cents On or before 31 December 2009 31-Dec-05 90 cents On or before 30 June 2010 01-Jul-08 90 cents On or before 23 October 2010 24-Oct-08 110 cents On or before 23 October 2012 24-Oct-10	of Options 7,256,920 5,000,000 5,000,000 823,712 2,000,000 3,000,000 2,000,000
	25,080,632

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

The remaining contractual life for the options on issue as at 30 June 2006 is between 1 and 6 years (2005: 1 and 2 years). The range for exercise prices for options on issue at the end of the year was $0.25-$1.10 (2005: $0.25).

The weighted average fair value of options granted during the year was $0.43 (2005: $0.19).

Listed below are the inputs to the binomial model for the respective options granted during the financial period:

Grant date	31-Dec-05	31-Dec-05	4-0ct-05	4-0ct-05	4-0ct-05	4-0ct-05	4-0ct-05	4-0ct-05
Share price at grant date	$	0.70	$	0.86	$	0.86	$	0.86
Exercise price	$	0.78	$	0.90	$	0.90	$	1.10
Risk free interest rate		5.09%		5.40%		5.40%		5.40%
Volatility factor		60%		60%		60%		60%
Expiry date	31-Dec-09		30-Jun-10		23-Oct-10		23-Oct-12

CONTINGENT LIABILITY

Litigation

LOANS TO SPECIFIED KEY MANAGEMENT PERSONNEL

There were no loans to key management personnel during the year.

— 429 —

MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

EVENTS AFTER THE BALANCE SHEET DATE

On 24 July 2006, Mount Gibson announced the intention to merge with Aztec, representing a landmark consolidation of Australia’s emerging iron ore sector. The merger will result in the creation of a leading independent Australian iron ore company, with a market capitalisation of approximately $600 million (assuming dilution for all in-the-money Mount Gibson and Aztec options), an asset portfolio offering nearterm cash flow, immediate growth potential supported by longer life profile and longer term development opportunities. Mount Gibson proposes to implement the merger by means of an off-market scrip takeover bid for all shares in Aztec. Under the bid, Mount Gibson offered Aztec shareholders 1 new share for every 3 shares held in Aztec, valuing each Aztec share at $0.263 based on Mount Gibson’s volume weighted average price on 21 July 2006 of $0.789, being the last trading day before announcement of the offer. The Offer is subject to a number of conditions, including a minimum acceptance condition of 90%, regulatory approvals, certain prescribed occurrences not having occurred and no material adverse change, acquisitions or disposals. Aztec’s major shareholder, Cambrian Mining Plc, has granted an option to Mount Gibson over Aztec shares equivalent to 15.27% of Aztec’s issued capital, at the Offer price.

FINANCIAL RISK MANAGEMENT OBJECTIVES POLICIES

The Consolidated Entity’s principal financial instruments, other than derivatives, comprise bank loans, finance leases and hire purchase contracts, cash and short-term deposits.

The main purpose of these financial instruments is to raise finance for the Consolidated Entity’s operations.

The Consolidated Entity has various other financial instruments such as trade debtors and trade creditors, which arise directly from its operations.

In relation to derivative financial instruments, whether recognised or unrecognised, credit risk arises from the potential failure of counterparties to meet their obligations under the contract or

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

arrangement. The Consolidated Entity’s maximum credit risk exposure in relation to forward exchange contracts is the full amount of the foreign currency it will be required to pay or purchase when settling the forward exchange contract, should the counterparty not pay the currency it is committed to deliver to the company. At reporting date the net amount was A$1,071,486 (2005: $328,672).

Foreign currency risk

As a result of receipts being denominated in US dollars, the Consolidated Entity’s cash flow can be affected significantly by movements in the US$/A$ exchange rates.

The Consolidated Entity has entered into forward exchange contracts designed as a hedge of anticipated future receipts that will be denominated in US dollars.

It is the Consolidated Entity’s policy to negotiate the terms of the hedge derivatives to match the terms of the hedged item to maximise hedge effectiveness.

At 30 June 2006, the Consolidated Entity had hedged 48% of its foreign currency sales for which firm commitments existed at the balance sheet date, extending to 31 August 2006.

NET FAIR VALUES

All recognised financial assets and liabilities in the Consolidated Entity have been recognised at their net fair values at balance date.

	Carrying	Net Fair
	Value at	Value at
	30 June 2005	30 June 2005
	$’000	$’000
Available for sale financial assets	2,942	3,992
Derivatives	—	115
	2,942	4,107

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

HEDGING INSTRUMENTS

Hedges for specific commitments

This hedge has been treated as effective, in accordance with AASB 139 As at 30 June 2006 the following foreign exchange contracts were outstanding:

		2006			2005
	US$’000	A$’000	Fair Value	US$’000	A$’000	Fair Value
		equivalent	A$’000		equivalent	A$’00
Forward Exchange
Contracts
contract rate 0.7397	9,000	12,167	48
contract rate 0.7287	9,000	12,351	214
contract rate 0.7070	6,000	8,487	366
contract rate 0.7455				10,000	13,414	165
	24,000	33,005	628	10,000	13,414	165
Collar Option	60,000	83,443	443
call strike price
0.760/0.750/0.770/0.740
/0.750/0.745
put strike price
0.7245/0.718/0.7335/0.7
2/0.715/0.711
Collar Option				36,500	50,093	51
call strike price
0.720/0.725/0.730/0.733
put strike price
0.800/0.770/0.780/0.800
Convertible Collar
Option				11,500	15,333	(101)
call strike price
0.750
put strike price 0.800
barrier rate 0.7998
Total	84,000	116,448	1,071	58,000	78,840	115

All of the above contracts mature by 30 April 2007.

— 432 —

SUMMARY OF TERMS OF THE BONUS WARRANTS

APPENDIX VI

SUMMARY OF THE TERMS OF THE WARRANTS

The Warrants are proposed to be created and constituted by the instrument by way of deed poll to be executed by the Company (the “Instrument”) and will be issued in registered form and will form one class and rank pari passu in all respects with each other.

Warrantholders (as defined below) shall be entitled to the benefit of, be bound by, and be deemed to have notice of all the provisions of the Instrument. Copies of the Instrument, the principal provisions of which are summarised below, will be available at the registered office of the Company or such other place as may be notified to the Warrantholders (as defined below) from time to time.

References in this summary to “Shares” are to the shares of HK$0.10 each in the authorised share capital of the Company existing on the date of issue of the Warrants and all other (if any) stock or shares from time to time and for the time being ranking pari passu therewith and all other (if any) shares or stock in the Equity Share capital of the Company resulting from any sub-division, consolidation or re-classification of Shares.

Subscription
(a) The Warrantholder shall have rights (“Subscription Rights”) to subscribe in cash for fully-paid Shares but not in respect of any fraction of a Share at a price (subject to the adjustments referred to below) of HK$0.30 per Share (“Subscription Price”). The Subscription Rights attaching to the Warrants held by a Warrantholder may be exercised, in respect of all or part of the Warrants so held, at any time between the date when dealings in the Warrants on the Stock Exchange commence (which is expected to be 5 February, 2007) (“Commencement Date”) and a date falling three years from the Commencement Date (which is expected to be 4 February, 2010) (both dates inclusive, and if either such date is not a Business Day, then the Business Day immediately preceding such date) (“Subscription Period”). Any Subscription Rights which have not been exercised on or before the end of the Subscription Period will thereafter lapse and the relevant Warrants will cease to be valid for any purpose.
(b) A Warrantholder may exercise his Subscription Rights by completing and signing the subscription form endorsed on the Warrant certificate or the separate subscription form which the Company permits to be used (both of which shall, once signed and completed, be irrevocable) and delivering the Warrant certificate, together with the separate subscription form if appropriate, to the warrant registrar of the Company for the time being (“Registrar”), together with a remittance for the subscription moneys for the Shares in respect of which the Subscription Rights are being exercised. The date on which such documents (duly completed and signed) and the relevant remittances are delivered to the Registrar shall be the date on which the relevant Subscription Rights are exercised and is hereafter referred to as the “Subscription Date”. In each case, compliance must also be made with any exchange control, fiscal or other laws or regulations for the time being applicable.

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SUMMARY OF TERMS OF THE BONUS WARRANTS

APPENDIX VI

(c) No fraction of a Share will be allotted but any balance of the subscription moneys paid on the exercise of the Subscription Rights will be refunded by the Company to the relevant Warrantholder, provided that if the Subscription Rights comprised in two or more Warrant certificates are exercised by a Warrantholder on the same Subscription Date then, for the purpose of determining whether any (and if so what) fraction of a Share arises, the Subscription Rights represented by such Warrant certificates shall be aggregated.
(d) The Company undertakes in the Instrument that Shares falling to be issued upon the exercise of the Subscription Rights will be issued and allotted not later than twenty-eight (28) days after the relevant Subscription Date and will rank pari passu in all respects with the fully-paid Shares in issue on the relevant Subscription Date and accordingly shall entitle the holders thereof to participate in all dividends and/or other distributions declared, paid or made and/or offers of further securities made by the Company on or after the relevant Subscription Date unless adjustment thereof has been made as provided in Clause 4 of the Instrument and other than any dividend or other distribution previously declared or recommended or resolved to be paid or made if the record date (as defined in the Instrument) therefore is before the relevant Subscription Date and notice of the amount and record date therefor has been given to the Stock Exchange prior to the relevant Subscription Date.
(e) As soon as practicable after the relevant allotment of Shares (and not later than twenty-eight (28) days after the relevant Subscription Date), there will be issued free of charge to the Warrantholder:
(i) certificate (or certificates) for the relevant Shares in the name(s) of the Warrantholder(s);
(ii) (if applicable) a balancing Warrant certificate in registered form in the name(s) of such Warrantholder(s) in respect of any Subscription Rights comprised within the Warrant certificate(s) delivered as described in sub-paragraph (b) above remaining unexercised;
(iii) (if applicable) a cheque representing any fractional entitlement to Shares not allotted as mentioned in sub-paragraph (c) above; and
(iv) (if applicable) a Deficiency Certificate (as defined in the Instrument).

The certificate for Shares arising on the exercise of Subscription Rights, the balancing Warrant certificate (if any), the cheque in respect of a refund (if any) and the said Deficiency Certificate (if any) will be sent by post at the risk of the said Warrantholder to the address of such Warrantholder (or in the case of a joint holding to that one of the joint Warrantholders whose name stands first in the Register). If the Company agrees, such certificates and cheque may by prior arrangement be retained by the Registrar to await collection by the relevant Warrantholder.

— 434 —

SUMMARY OF TERMS OF THE BONUS WARRANTS

APPENDIX VI

2. Adjustment of Subscription Price

The Instrument contains detailed provisions relating to the adjustment of the Subscription Price. The following is a summary of, and is subject to, the provisions of the Instrument.

(a) The Subscription Price shall (except as mentioned in sub-paragraphs (b) and (c) below) be adjusted as provided in the Instrument in each of the following cases:
(i) an alteration to the nominal amount of the Shares by reason of any consolidation or subdivision;
(ii) an issue (other than in lieu of a cash dividend) by the Company of Shares credited as fully-paid by way of capitalisation of profits or reserves (including any share premium account or capital redemption reserve fund);
(iii) a capital distribution (as defined in the Instrument) being made by the Company, whether on a reduction of capital or otherwise, to holders of Shares in their capacity as such;
(iv) a grant by the Company to the holders of Shares (in their capacity as such)of rights to acquire for cash any assets of the Company or any of its Subsidiaries (as defined in the Instrument);
(v) an offer of new Shares for subscription by way of rights, or a grant of options or warrants to subscribe for new Shares, at a price which is less than 90% of the market price (calculation as provided in the Instrument) being made by the Company to holders of Shares (in their capacity as such);
(vi) an issue wholly for cash being made by the Company or any other company of securities convertible into or exchangeable for or carrying rights of subscription for new Shares, if in any case the total Effective Consideration (as defined in the Instrument) per Share is less than 90% of the market price (calculation as provided in the Instrument), or the terms of any such issue are altered so that the said total Effective Consideration is less than 90% of the market price (calculation as provided in the Instrument);
(vii) an issue of Shares being made by the Company wholly for cash other than pursuant to a Share Option Scheme (as defined in the Instrument) at a price less than 90% of the market price (calculation as provided in the Instrument); and
(viii) the purchase by the Company of Shares or securities convertible into new Shares or any rights to acquire Shares (other than on the Stock Exchange or any other stock exchange) in any other circumstances where the Directors consider that it may be appropriate to make an adjustment to the Subscription Price.

— 435 —

SUMMARY OF TERMS OF THE BONUS WARRANTS

APPENDIX VI

(b) Except as mentioned in sub-paragraph (c) below, no such adjustment as is referred to in sub-paragraphs (a)(ii) to (viii) above will be made in respect of:
(i) an issue of fully-paid Shares upon the exercise of any conversion rights attached to securities convertible into Shares or upon the exercise of any rights (including the Subscription Rights) to acquire Shares;
(ii) an issue by the Company of Shares, or by the Company or any Subsidiary of securities convertible into or carrying rights to acquire Shares, in any such case in consideration of part consideration for the acquisition of any other securities, assets or business;
(iii) an issue of fully-paid Shares by way of capitalisation of all or part of the Subscription Right Reserve (as defined in the Instrument) which has been or may be established in certain circumstances pursuant to the terms and conditions contained in the Instrument (or any similar reserve which has been or may be established pursuant to the terms of any other securities convertible into or carrying rights to acquire Shares); or
(iv) an issue of Shares pursuant to a scrip dividend scheme in lieu of a cash dividend where an amount not less than the nominal amount of the Shares so issued is capitalised and the market value (calculation as provided in the Instrument) of the Shares is not more than 110% of the amount of dividend which holders of Shares could elect to or would otherwise receive in cash.
(c) Notwithstanding the provisions referred to in sub-paragraphs (a) and (b) above, in any circumstances where the Directors consider that an adjustment to the Subscription Price provided for under the said provisions should not be made or should be calculated on a different basis or that an adjustment to the Subscription Price should be made notwithstanding that no such adjustment is required under the said provisions or that an adjustment should take effect on a different date or with effect from a different time from that provided for under the said provisions, the Company may appoint either an Approved Merchant Bank or the Auditors (both as defined in the Instrument) to consider whether for any reason whatsoever the adjustment to be made (or the absence of adjustment) would or might not fairly and appropriately reflect the relevant interests of the persons affected thereby and, if such Approved Merchant Bank or the Auditors (as the case may be) shall consider this to be the case, the adjustment shall be modified or nullified, or an adjustment made instead of no adjustment, in such manner (including, without limitation, making an adjustment calculated on a different basis and/or the adjustment shall take effect from such other date and/or time) as shall be certified by the Approved Merchant Bank or the Auditors to be in their opinion appropriate.
(d) Any adjustment to the Subscription Price shall be made to the nearest one cent so that any amount under half a cent shall be rounded down and any amount of half a cent or more shall be rounded up and in no event shall any adjustment be made to the Subscription Price in any case in which the amount by which the Subscription Price would be reduced would be less than one cent and any adjustment which would otherwise then be required shall not be

— 436 —

SUMMARY OF TERMS OF THE BONUS WARRANTS

APPENDIX VI

carried forward. In no event shall an adjustment be made (otherwise than upon the consolidation of Shares into shares of a larger nominal amount each or upon a repurchase of Shares) which would increase the Subscription Price or which would result in the Shares being issued at a discount to their nominal value.

(e) Every adjustment to the Subscription Price shall be certified by the Approved Merchant Bank or the Auditors (acting as experts whose decision, in the absence of manifest error, shall be conclusive and binding on the Company and the Warrantholders) and notice of each adjustment (giving the relevant particulars) shall be given to the Warrantholders. Any such certificates of the Approved Merchant Bank and/or the Auditors will be available for inspection at the registered office of the Company or such other place as may be notified to the Warrantholders from time to time where copies may be obtained.

3. Registered Warrants

The Warrants will be issued in registered form. The Company shall be entitled to treat the registered holder(s) of any Warrants as the absolute owner(s) thereof and accordingly shall not, except as ordered by a court of competent jurisdiction or as required by law, be bound to recognise any equitable or other claim to or interest in such Warrants on the part of any other person, whether or not the Company has express or other notice thereof.

4. Transfer, transmission and registration

The Warrants will be transferable, in whole amounts or integral multiples of HK$0.30, by instrument of transfer in any usual or common form or in any other form which may be approved by the Directors. Where the transferor or the transferee is HKSCC Nominees Limited or its successor thereto (or such other company as may be approved by the Directors for this purpose), the transfers may be executed under the hands of authorized person(s) or by machine imprinted signature(s) on its behalf or of such person(s), as the case may be. The Company shall maintain a register of Warrantholders accordingly. Transfers of Warrants must be executed by both the transferor and the transferee. The provisions of the Company’s Bye-laws relating to the registration, transfer and transmission of Shares shall apply, mutatis mutandis, to the registration, transfer and transmission of the Warrants (except where there are express provisions in the Instrument to the contrary).

Persons who hold Warrants and have not registered the Warrants in their own names and wish to exercise the Warrants should note that they may incur additional costs and expenses in connection with any expedited re-registration of the Warrants prior to the transfer or exercise of the Warrants, in particular during the period commencing ten (10) Business Days prior to and including the last day for subscription (which is expected to be 4 February, 2010).

Since the Warrants will be admitted to CCASS, so far as applicable laws or regulations of relevant regulatory authorities, terms of the Instrument and circumstances permit, the Company may determine the last trading day of the Warrants to be a date at least three trading days before the last day of the Subscription Period (which is expected to be 4 February, 2010) i.e. the expiry date.

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SUMMARY OF TERMS OF THE BONUS WARRANTS

APPENDIX VI

5. Closure of register of Warrantholders

The registration of transfers may be suspended and the register of Warrantholders may be closed for such periods as the Directors may from time to time direct, provided that the same may not be closed for a period, or for periods together, of more than thirty (30) days in any one year. Any transfer or exercise of the Subscription Rights attached to the Warrants made while the register of Warrantholders is so closed shall, as between the Company and the person claiming under the relevant transfer of Warrants or, as the case may be, as between the Company and the Warrantholder who has so exercised the Subscription Rights attached to his Warrants (but not otherwise), be considered as made immediately after the re-opening of the register of Warrantholders.

6. Purchase and cancellation

The Company or any Subsidiaries may at any time purchase Warrants:

(a) in the open market or by tender (available to all Warrantholders alike) at any price; or
(b) by private treaty at a price per Warrant, exclusive of expenses, not exceeding 110% of the closing price of the Warrants on the Stock Exchange prior to the date of purchase of the Warrants,

but not otherwise. All Warrants purchased shall be cancelled forthwith and may not be re-issued or re-sold.

Meetings of Warrantholders and modification of rights
(a) The Instrument contains provisions for convening meetings of Warrantholders to consider any matter affecting the interests of Warrantholders, including the modification by Special Resolution (as defined in the Instrument) of the provisions of the Instrument and/or of the Conditions. A Special Resolution duly passed at any such meeting of Warrantholders shall be binding on the Warrantholders, whether present or not.
(b) All or any of the rights for the time being attached to the Warrants (including any of the provisions of the Instrument) may from time to time (whether or not the Company is being wound up) be altered or abrogated (including, but without prejudice to that generality, by waiving compliance with, or by waiving or authorising any past or proposed breach of, any of the provisions of the Conditions and/or the Instrument) with the prior sanction of a Special Resolution and may be effected only by deed poll executed by the Company and expressed to be supplemental to the Instrument.
(c) Where the Warrantholder is a recognised clearing house (within the meaning of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)) or its nominee(s), it may authorise such person or persons as it thinks fit to act as its representative (or representatives) or proxy (or proxies) at any Warrantholders’ meeting provided that, if more than one person is so authorised, the authorisation or proxy form

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SUMMARY OF TERMS OF THE BONUS WARRANTS

APPENDIX VI

must specify the number and class of Warrants in respect of which each such person is so authorised. The person so authorised will be entitled to exercise the same power on behalf of the recognised clearing house as that clearing house or its nominee(s) could exercise as if such person were an individual Warrantholder.

8. Quorum

A quorum of a meeting of Warrantholders will be two or more persons representing in aggregate the holders of not less than 5% of the Warrants for the time being outstanding, present in person or by proxy.

9. Replacement of Warrant certificates

If a Warrant certificate is mutilated, defaced, lost or destroyed, it may, at the Company’s discretion, be replaced at the office of the Registrar on payment of such costs which may be incurred in connection therewith and on such terms as to evidence, indemnity and/or security which the Company may require and on payment of such fee not exceeding HK$2.50 per certificate (or such other amount as may from time to time be permitted under the rules of the Stock Exchange) as the Company may determine. Mutilated or defaced Warrant certificates must be surrendered before replacements will be issued.

In the case of lost Warrant certificates, section 71A subsections (2), (3), (4), (6), (7) and (8) of the Companies Ordinance (Chapter 32 of the Laws of Hong Kong) shall apply as if shares referred to therein included Warrants.

10. Protection of Subscription Rights

The Instrument contains certain undertakings by and restrictions on the Company designed to protect the Subscription Rights.

11. Call

If at any time the aggregate of the amount of Exercise Moneys (as defined in the Instrument) attached to the outstanding Warrants is equal to or less than 20% of the amount of moneys payable on exercise of all the Warrants issued under the Instrument, then the Company may, on giving not less than three months’ notice, require Warrantholders either to exercise their Subscription Rights or to allow them to lapse. On expiry of such notice, all unexercised Warrants will be automatically cancelled, without compensation to Warrantholders.

12. Further issues

The Company shall be at liberty to issue further subscription warrants in such manner and on such terms as it sees fit.

— 439 —

SUMMARY OF TERMS OF THE BONUS WARRANTS

APPENDIX VI

Undertakings by the Company

The Company undertakes in the Instrument that:

(a) upon the exercise of any Subscription Rights it will within twenty-eight (28) days after the relevant Subscription Date allot and issue the number of Shares for which subscription is made;
(b) all Shares allotted on the exercise of the Subscription Rights will, taking into account of any adjustment which may have been made pursuant to paragraph 2(a) of this Appendix, rank pari passu in all respects with the fully-paid Shares in issue on the relevant Subscription Date and shall accordingly entitle the holders thereof to participate in full in all dividends and/or other distributions, declared, paid or made and/or offers of further securities made by the Company on or after the relevant Subscription Date unless adjustment therefore has been made as provided in the Instrument and other than any dividend or other distribution previously declared or recommended or resolved to be paid or made if the Record Date therefor shall be before the relevant Subscription Date and notice of the amount and Record Date for which shall have been given to the Stock Exchange prior to the relevant Subscription Date;
(c) it will send to each Warrantholder, at the same time as the same are sent to Shareholders, its audited financial statements and all other notices, reports and communications despatched by it to Shareholders generally;
(d) it will pay (if applicable) all Hong Kong stamp and capital duties, registration fees or similar charges in respect of the execution of the Instrument, the creation and initial issue of the Warrants in registered form, the exercise of the Subscription Rights and the issue of Shares upon exercise of the Subscription Rights;
(e) it will use its best endeavours to ensure that all Shares allotted on exercise of the Subscription Rights shall be admitted to listing on the Stock Exchange provided that no admission shall be obtained in the event that the Shares cease to be listed on the Stock Exchange as a result of an offer being made to the holders of Shares (or to holders excluding the offeror and/or its nominee(s) to acquire all or a proportion of the Shares);
(f) it will keep available for issue sufficient Ordinary Capital (as defined in the Instrument) to satisfy in full all rights for the time being outstanding of subscription or conversion into Shares; and
(g) it will use its best endeavours to procure that at all times during the Subscription Period, the Warrants may be dealt in on the Stock Exchange (save that this obligation will lapse in the event that the listing of the Warrants on the Stock Exchange is withdrawn following an offer for all or any other Warrants), and all Shares allotted and issued upon exercise of the Subscription Rights may upon allotment and issue or as soon as reasonably practicable thereafter, be dealt on the Stock Exchange (save that this obligation will lapse in the event that the listing of the Shares on the Stock Exchange is withdrawn following an offer for all or any of the Shares where a like offer is extended to the Warrantholders).

— 440 —

SUMMARY OF TERMS OF THE BONUS WARRANTS

APPENDIX VI

Winding up of the Company
(a) If an effective resolution is passed during the Subscription Period for the voluntary winding-up of the Company, then if such winding-up is for the purpose of reconstruction or amalgamation pursuant to a scheme of arrangement to which the Warrantholders, or some person(s) designated by them for such purpose by Special Resolution, shall be a party or in conjunction with which a proposal is made to the Warrantholders and is approved by Special Resolution, the terms of such scheme of arrangement or (as the case may be) proposal will be binding on all the Warrantholders; and
(b) in the event a notice is given by the Company to its Shareholders during the Subscription Period to convene a general meeting for the purposes of considering and, if thought fit, approving a resolution to voluntarily wind-up the Company, the Company shall on the same date as or soon after it despatches such notice to each Shareholder give notice thereof to all Warrantholders (together with a notice of the existence of this provision) and thereupon, each Warrantholder shall be entitled to exercise all or any of the Subscription Rights attaching to his Warrants at any time not later than two Business Days prior to the proposed general meeting of the Company by delivering to the Company the completed Subscription Form(s), accompanied by payment of the relevant subscription money, whereupon the Company shall as soon as possible and, in any event, no later than the Business Day immediately prior to the date of the proposed general meeting referred to above, allot the relevant Shares to the Warrantholders credited as fully paid. Subject to the foregoing, if the Company is wound-up, all Subscription Rights which have not been exercised at the date of the passing of such resolution will lapse and each Warrant certificate will cease to be valid for any purpose.

15. Overseas Warrantholders

The Instrument contains provisions giving certain discretion to the Directors in the case of any Warrantholder who has a registered address in any territory (other than Hong Kong) where (after making enquiry regarding the legal restrictions under the laws of the relevant place and the requirements of the relevant regulatory body or stock exchange), in the opinion of the Directors, the issue of Shares upon exercise of any of the Subscription Rights represented by any Warrants held by such Warrantholder may be unlawful or impracticable.

16. Notices

The Instrument contains provisions relating to notices to be given to Warrantholders.

17. Governing law

The Instrument and the Warrants are governed by and will be construed in accordance with the laws of Hong Kong.

— 441 —

EXPLANATORY STATEMENT AS TO REPURCHASE OF SHARES

APPENDIX VII

This appendix serves as explanatory statement, as required by the Listing Rules, to provide information to the Shareholders regarding the general mandate to repurchase the Shares as referred to in paragraph headed “Refreshment of general mandates to issue Shares and repurchase Shares” in the “Letter from the Board” in this circular. For the purpose of this appendix, the term “Shares” (unless otherwise stated) shall be as defined in the Code on Share Repurchases which means shares of all classes and securities which carry a right to subscribe for or purchase shares.

1. LISITNG RULES FOR REPURCHASE OF SECURITIES

The Listing Rules permit companies whose primary listings are on the Stock Exchange to repurchase their securities (which shall include, where the context permits, shares of all classes and securities which carry a right to subscribe or purchase shares) on the Stock Exchange subject to certain restrictions amongst which the Listing Rules provide that the shares proposed to be repurchased by a company must be fully-paid up and all repurchases of shares by a company with a primary listing on the Stock Exchange must be approved in advance by an ordinary resolution of shareholders either by way of general mandate to the Directors to make such repurchases or by specific approval of a particular transaction.

2. SHARE CAPTIAL

As at the Latest Practicable Date, the issued share capital of the Company was HK$125,900,000 comprising 1,259,000,000 Shares. Subject to the passing of the relevant ordinary resolution(s) as set out in the notice of the SGM granting the New Repurchase Mandate and on the basis that no Shares are allotted and issued or repurchased by the Company prior to the SGM, the Company would be allowed under the New Repurchase Mandate to repurchase such number of Shares as representing 10% of the issued share capital of the Company as at the date of the SGM (the maximum possible number of Shares which may be repurchased will be 125,900,000 Shares.)

3. REASONS FOR THE REPURCHASES

The Directors believe that the ability to repurchase Shares is in the best interests of the Company and the Shareholders. Repurchases may, depending on the market conditions and funding arrangements of the Company at the time, result in an increase in net asset value and earnings per share. The Directors are seeking a general mandate to repurchase Shares so as to give the Company flexibility to do so if and when appropriate. The number(s) and class(es) of Shares to be purchased on occasion and the price and other terms upon which the same are repurchased will be decided by the Directors at the relevant time having regard to the circumstances then pertaining.

Whilst it is not possible to anticipate in advance any specific circumstance in which the Directors might think it appropriate to repurchase shares, a repurchase would be effected where the resulting reduction in the issued capital of the Company was considered beneficial. The Directors believe that an ability to repurchase shares gives the Company additional flexibility that would be beneficial. Shareholders can be assured that the Directors would only make such repurchases in circumstances where they consider them to be in the interests of the Company because they consider the Shares can be purchased on favourable terms.

— 442 —

EXPLANATORY STATEMENT AS TO REPURCHASE OF SHARES

APPENDIX VII

4. FUNDING OF REPURCHASES

In repurchasing the Shares, the Company must fund the repurchase entirely from the Company’s available cash flow or working capital facilities legally available for such purpose in accordance with its memorandum of association and Bye-laws, the Listing Rules and the laws of Bermuda.

The Companies Act 1981 of Bermuda (as amended) provides that the amount of capital paid in connection with a share repurchase may only be paid out of the capital paid up on the relevant shares, or out of funds of the Company which would otherwise be available for dividend or distribution or from the proceeds of a fresh issue of shares made for the purpose. The Companies Act 1981 of Bermuda (as amended) further provides that the amount of premium payable on repurchase may only be paid out of either the funds that would otherwise be available for distribution or dividend or out of the share premium account of the Company. The shares repurchased will be treated as cancelled and the amount of the Company’s issued share capital will be diminished by the nominal value of such shares, but the aggregate amount of the Company’s authorized share capital will not be thereby reduced.

On the basis of the consolidated financial position of the Company for the year ended 31 December 2005 (being the date to which the latest published audited financial statements of the Company have been made up) and in particular the working capital position of the Group at that time and the number of shares of the Company in issue as at the Latest Practicable Date, the Directors consider that there would be a material adverse impact on the working capital position and that there would be a material adverse impact on the gearing position of the Group in the event that repurchases of all the Shares (which are the subject of the proposed New Repurchase Mandate) were to be carried out in full during the proposed mandate period. However, no repurchase would be made in circumstances that would have a material adverse impact on the working capital or gearing position of the Group (as compared with the financial position disclosed in its latest published audited financial statements) unless the Directors consider that such repurchases are in the best interest of the Company.

5. CONNECTED PERSONS

No connected persons (as defined in the Listing Rules) of the Company have notified the Company that they have a present intention to sell any Shares held by them to the Company and no such persons have undertaken not to sell any Shares held by them to the Company, in the event that the New Repurchase Mandate is granted by the Shareholders at the SGM.

6. DIRECTORS INTERESTS

There are no Directors or (to the best of the knowledge of the Directors, having made all reasonable enquiries) any associates (as defined in the Listing Rules) of the Directors who have a present intention, in the event that the New Repurchase Mandate is granted by the Shareholders, to sell any Shares held by them to the Company.

— 443 —

EXPLANATORY STATEMENT AS TO REPURCHASE OF SHARES

APPENDIX VII

7. DIRECTORS’ UNDERTAKING

The Directors have undertaken to the Stock Exchange that, so far as the same may be applicable, they will exercise the power of the Company to make repurchases of the Shares pursuant to the New Repurchase Mandate in accordance with the Listing Rules and the applicable laws of Bermuda and regulations set out in the memorandum of association and Bye-laws of the Company.

8. EFFECT OF THE TAKEOVERS CODE

If, on the exercise of the power to repurchase the Shares pursuant to the New Repurchase Mandate, a Shareholder’s proportionate interest in the voting rights of the Company increases, such increase will be treated as an acquisition for the purpose of Rule 32 of the Takeovers Code. As a result, a Shareholder or a group of Shareholders acting in concert (as defined in the Code), depending on the level of such increase, could obtain or consolidate control of the Company and may become obliged to make a mandatory offer in accordance with Rule 26 of the Takeovers Code.

As at the Latest Practicable Date, to the best of the knowledge and belief of the Directors, Profit Harbour, a substantial Shareholder together with its concert parties, held 596,699,801 Shares representing approximately 47.39% of the issued share capital of the Company.

On the basis of 1,259,000,000 Shares in issue as at the Latest Practicable Date and assuming no further issue or repurchase of Shares prior to the date of the SGM, if the New Repurchase Mandate were exercised in full before completion of the Rights Issue, the Bonus Warrants Issue and the Placing, the shareholding percentage of Profit Harbour and its concert parties in the Company would increase to approximately 52.66%. Such increase may give rise to an obligation on the part of Profit Harbour and its concert parties to make a mandatory offer under Rule 26 of the Takeovers Code.

Assuming that Profit Harbour and its concert parties have taken up their maximum entitlements of 596,699,801 Rights Shares pursuant to its irrevocable undertaking given to the Company and 119,339,960 Bonus Warrants, representing 119,339,960 Shares if exercised in full, the shareholding percentage of Profit Harbour and its concert parties (holding in aggregate 1,312,739,562 Shares) in the Company would:

(i) increase from approximately 47.39% of the then issued share capital of the Company (after completion of Rights Issue and the Bonus Warrants Issue (assuming all the Bonus Warrants are exercised in full) and as a result the then issued share capital of the Company will be 2,769,800,000 Shares) to approximately 49.65% of the then issued share capital of the Company after completion of the Rights Issue and the Bonus Warrants Issue (assuming all the Bonus Warrants are exercised in full), if the New Repurchase Mandate were exercised in full after completion of the Rights Issue and the Bonus Warrants Issue (assuming all the Bonus Warrants are exercised in full) but before the Placing (based on the number of issued Shares being reduced to 2,643,900,000 Shares); and
(ii) increase from approximately 36.77% of the then issued share capital of the Company (after completion of Rights Issue, the Bonus Warrants Issue (assuming all the Bonus Warrants are exercised in full) and the Placing as a result the then issued share capital of the Company will be 3,569,800,000 Shares) to approximately 38.12% of the then issued share capital of

— 444 —

EXPLANATORY STATEMENT AS TO REPURCHASE OF SHARES

APPENDIX VII

the Company after completion of the Rights Issue, the Bonus Warrants Issue (assuming all the Bonus Warrants are exercised in full) and the Placing, if the New Repurchase Mandate were exercised in full after completion of the Rights Issue, the Bonus Warrants Issue (assuming all the Bonus Warrants are exercised in full) and the Placing (based on the number of issued Shares being reduced to 3,443,900,000 Shares).

Such increase described paragraph (i) above may give rise to an obligation on the part of Profit Harbour and its concert parties to make a mandatory offer under Rule 26 of the Takeovers Code.

Save as aforesaid, the Directors are not aware of any consequences which will arise under the Takeovers Code as a result of any repurchases to be made under the New Repurchase Mandate.

The Directors have no present intention to exercise the power to repurchase the Shares to the extent that the aggregate amount of the share capital of the Company in public hands would be reduced to less than 25% of the issued share capital of the Company.

9. SHARE PRICES

The highest and lowest prices at which the Shares were traded on the Stock Exchange in each of the last twelve months immediately prior to the Latest Practicable Date were as follows:

Month							Highest	Lowest
							HK$	HK$
2005
December							suspended	suspended
2006
January							suspended	suspended
February							suspended	suspended
March							suspended	suspended
April							suspended	suspended
May							suspended	suspended
June							suspended	suspended
July							0.1510	0.1280
August							0.1260	0.1030
September							0.2900	0.1040
October							0.4100	0.2850
November							0.3900	0.3200
December	(up	to	the	Latest	Practicable	Date)	0.3500	0.3150

Source: The Stock Exchange of Hong Kong Limited

10. SECURITIES REPURCHASES MADE BY THE COMPANY

During the six months preceding the Latest Practicable Date, the Company had not repurchased any of its Shares (whether on the Stock Exchange or otherwise).

— 445 —

GENERAL INFORMATION

APPENDIX VIII

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group.

The Directors collectively and individually accept the responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts not contained in this circular, the omission of which would make any statement herein misleading.

2. SHARE CAPITAL

The authorised and issued share capital of the Company as at the Latest Practicable Date and completion of the Rights Issue, full exercise of the Bonus Warrants and the Placing were as follows:

Authorised		HK$
2,000,000,000	Shares as at the Latest Practicable Date	200,000,000
Issued and fully	paid or credited as fully paid
1,259,000,000	Shares as at the Latest Practicable Date	125,900,000
2,518,000,000	Shares after completion of the Rights Issue	251,800,000
2,769,800,000	Shares after completion of the Rights Issue and full	276,980,000
	exercise of the Bonus Warrants
3,569,800,000	Shares after completion of the Rights Issue, full	356,980,000
	exercise of the Bonus Warrants and the Placing

The issued Shares are listed on the Stock Exchange. No part of the Shares of the Company is listed or dealt in, nor is listing or permission to deal in the securities of the Company being or proposed to be sought, on any other stock exchange.

All existing Shares rank equally in all respects, including in particular as to dividend, voting rights and return on capital. The Shares in issue are listed on the Stock Exchange.

All Rights Shares, the Shares which may fall to be issued upon the exercise of the Bonus Warrants and the Placing Shares will be listed on the Stock Exchange. There is no arrangement under which future dividends are/will be waived or agreed to be waived as at the Latest Practicable Date.

Save as disclosed in this circular, no share or loan capital of the Company or any member of the Group has been put under option or agreed conditionally or unconditionally to be put under option and no warrant, derivative or conversion right affecting the Shares has been issued or granted or agreed conditionally, or unconditionally to be issued or granted.

— 446 —

GENERAL INFORMATION

APPENDIX VIII

3. DISCLOSURE OF INTERESTS BY DIRECTORS

As at the Latest Practicable Date, the interests and short positions of the Directors and chief executive of the Company in the Shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which (i) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interest or short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein; or (iii) were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by the Directors of the Listed Companies contained in the Listing Rules, were as follows:

(a) Long position in Shares

		Number of	Approximate
Name of Director	Capacity and nature	ordinary shares	% holding
Mr. Yue	Interest of controlled	596,699,801	47.39 (Note 2)
	corporation (Note 1)
Long position in Shares and Rights Shares *(Note 3)*
		Number of	Approximate
Name of Director	Capacity and nature	ordinary shares	% holding
Mr. Yue	Interest of controlled	1,193,399,602	47.39% (Note 3)
	corporation (Note 1)	(Note 3)

(b) Long position in Shares and Rights Shares (Note 3)
(c) Long position in Shares and Rights Shares and the Shares which may fall to be issued upon the exercise of the Bonus Warrants (Note 4)

		Number of	Approximate
Name of Director	Capacity and nature	ordinary shares	% holding
Mr. Yue	Interest of controlled	1,312,739,562	47.39% (Note 4)
	corporation (Note 1)	(Note 4)

— 447 —

APPENDIX VIII

GENERAL INFORMATION

(d) Long position in Shares, Rights Shares and the Shares which may fall to be issued upon the exercise of the Bonus Warrants and assuming the Placing Shares are fully placed out or underwritten (Note 5)

Number of Approximate Name of Director Capacity and nature ordinary shares % holding Mr. Yue Interest of controlled 1,312,739,562 36.77% (Note 5) corporation (Note 1)

Notes:

These Shares are registered/will be registered (as the case may be) in the name of and beneficially owned by Profit Harbour.
The percentage shareholding is calculated on the basis of the Company’s issued share capital of 1,259,000,000 Shares as at the Latest Practicable Date.
Profit Harbour had undertaken to subscribe for its full entitlement under the Rights Issue which is 596,699,801 Rights Shares. As a result, Profit Harbour will hold 1,193,399,602 Shares in aggregate. The percentage shareholding is calculated on the basis of the Company’s issued share capital of 2,518,000,000 Shares as enlarged by the completion of the Rights Issue.
In addition to the details set out in Note 3 above, Profit Harbour will be entitled to 119,339,960 Shares which fall to be issued upon exercise of the Bonus Warrants attributed to it. As a result, Profit Harbour will hold 1,312,739,562 Shares in aggregate. The percentage of shareholding is calculated on the basis of the Company’s issued share capital of 2,769,800,000 Shares as enlarged by the completion of the Rights Issue and the Bonus Warrants are exercised in full by the respective holders.
In addition to the details set out in Note 4 above, the percentage of shareholding is calculated on the basis of the Company’s issued share capital of 3,569,800,000 Shares as enlarged by the completion of Rights Issue and Bonus Warrants are exercised in full by the respective holders and the Placing Shares are fully placed out or underwritten. Rights Shares refer to the 1,259,000,000 new Shares offered by the Company pursuant to the Rights Issue. Shares which fall to be issued upon exercise of the Bonus Warrants in full refer to 251,800,000 new Shares pursuant to the Bonus Warrants Issue. Placing Shares refer to 800,000,000 new Shares pursuant to the Placing Agreement. The number of existing issued shares of the Company plus the aforesaid new Shares will be 3,569,800,000 Shares in aggregate.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors nor the chief executive of the Company had or was deemed to have any interests or short positions in the Shares, underlying shares or debentures of the Company or any of its associated corporation (within the meaning of Part XV of the SFO) which (i) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein; or (iii) were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of the Listed Companies contained in the Listing Rules.

— 448 —

GENERAL INFORMATION

APPENDIX VIII

Save as disclosed above, none of the Directors or proposed directors of the Company (if any) had any interest or short position in Shares or underlying Shares of the Company which would fall to be disclosed pursuant to the provision of Divisions 2 and 3 of Part XV of the SFO.

(c) Interests in competing businesses

As at the Latest Practicable Date, none of the Directors nor their respective associates had any business which competes or is likely to compete, either directly or indirectly, with any businesses of the Group.

(d) Interests in assets

As at the Latest Practicable Date, save for the Assignment of Debt which Mr. Yue Jialin (being the chairman and an executive director of the Company) was indirectly interested in as a result of his shareholding in Profit Harbour, none of the Directors had any direct or indirect interests in any assets which had been acquired or disposed of by, or leased to, or which were proposed to be acquired or disposed of by or leased to any members of the Group since 31 December 2005, being the date to which the latest published audited consolidated financial statements of the Company were made up.

(e) Interests in contracts

None of the Directors was materially interested in any contracts or arrangements entered into by any members of the Group and subsisting as at the Latest Practicable Date which were significant in relation to the business of the Group.

(f) Remuneration of the Directors

There will be no variation in relation to the remuneration payable to and benefits in kind receivable by the Directors in consequence of the Conditional Acquisition.

— 449 —

GENERAL INFORMATION

APPENDIX VIII

4. DISCLOSURE OF INTERESTS BY SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, so far as is known to the Directors and chief executive of the Company, the following persons (not being Directors or chief executives of the Company) had, or were deemed to have, interests or short positions in the Shares and underlying shares of the Company which would fall to be disclosed to the Company or the Stock Exchange under the provisions of Divisions 2 and 3 of part XV of the SFO or who were, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group or had an option in respect of such capital:

(a) Long position in Shares and underlying Shares

		Number of
		Shares and	Approximate
	Capacity	Underlying	% holding
Name of Shareholders	and nature	Shares	(Note 2)	Notes
Profit Harbour	Beneficial owner	1,312,739,562	104.27%	1,3
SHK International	Beneficial owner	434,760,239	34.53%	5
SHKIS	Beneficial owner	800,000,000	63.54%	6
Sun Hung Kai Securities	Corporate Interests	1,234,760,239	98.07%	7
Limited (“SHK	(interest of controlled
Securities”)	corporation)
Sun Hung Kai & Co.	Corporate Interests	1,234,760,239	98.07%	7
Limited (“SHK”)	(interest of controlled
	corporation)
Allied Properties (H.K.)	Corporate Interests	1,234,760,239	98.07%	8
Limited (“APL”)	(interest of controlled
	corporation)
Allied Group Limited	Corporate Interests	1,234,760,239	98.07%	9
(“AGL”)	(interest of controlled
	corporation)
Lee & Lee Trust	Corporate Interests	1,234,760,239	98.07%	10
	(interest of controlled
	corporation)
Benefit Rich Limited	Corporate Interests	660,000,000	52.42%	11
(“Benefit”)	(interest of controlled
	corporation)
Shougang	Beneficial owner	660,000,000	52.42%	12

— 450 —

GENERAL INFORMATION

APPENDIX VIII

(b) Long position in Rights Shares and the Shares which may fall to be issued upon the exercise of the Bonus Warrants in full and assuming the Placing Shares are fully placed out or underwritten

		Number of
		Shares and	Approximate
		Underlying	% holding
Name of Shareholders	Capacity and nature	Shares	(Note 4)	Notes
Profit Harbour	Beneficial owner	1,312,739,562	36.77%	1,3
SHK International	Beneficial owner	434,760,239	12.17%	5
SHKIS	Beneficial owner	800,000,000	22.41%	6
SHK Securities	Corporate Interests	1,234,760,239	34.58%	7
	(interest of controlled
	corporation)
SHK	Corporate Interests	1,234,760,239	34.58%	7
	(interest of controlled
	corporation)
APL	Corporate Interests	1,234,760,239	34.58%	8
	(interest of controlled
	corporation)
AGL	Corporate Interests	1,234,760,239	34.58%	9
	(interest of controlled
	corporation)
Lee & Lee Trust	Corporate Interests	1,234,760,239	34.58%	10
	(interest of controlled
	corporation)
Benefit	Corporate Interests	660,000,000	18.49%	11
	(interest of controlled
	corporation)
Shougang	Beneficial owner	660,000,000	18.49%	12

Notes:

The entire issued share capital of Profit Harbour is owned by Mr. Yue.

The percentage of shareholding is calculated on the basis of the Company’s issued share capital of 1,259,000,000 Shares as at the Latest Practicable Date.

— 451 —

GENERAL INFORMATION

APPENDIX VIII

Profit Harbour had undertaken to subscribe for its full entitlement under the Rights Issue which is 596,699,801 Rights Shares. As a result, Profit Harbour will hold 1,193,399,602 Shares in aggregate. Further, Profit Harbour will be entitled to 119,339,960 Shares which fall to be issued upon exercise of the Bonus Warrants attributed to it. Profit Harbour will therefore hold 1,312,739,562 Shares in aggregate after the completion of the Rights Issue and its entitlement to the Bonus Warrants are exercised in full.
Rights Shares refer to the 1,259,000,000 new Shares offered by the Company pursuant to the Rights Issue. Shares which fall to be issued upon exercise of the Bonus Warrants in full refer to 251,800,000 new Shares pursuant to the Bonus Warrants Issue. Placing Shares refer to 800,000,000 new Shares pursuant to the Placing. The number of existing issued shares of the Company plus the aforesaid new Shares will be 3,569,800,000 Shares in aggregate. The percentage of shareholding is calculated on the basis of the Company’s issued share capital of 3,569,800,000 Shares as enlarged by the completion of Rights Issue, the Bonus Warrants Issue and assuming the Placing Shares are fully placed out or underwritten.
The interest of SHK International as the Underwriter to the Rights Issue. It will fully underwrite the Rights Shares to the extent of 434,760,239 Rights Shares.
The interest of SHKIS as the Placing Agent pursuant to the Placing Agreement. It will also fully underwrite the Placing Shares in the amount of 800,000,000 Placing Shares.
SHK International and SHKIS are both wholly-owned subsidiaries of SHK Securities, which is in turn a wholly-owned subsidiary of SHK. Accordingly, both SHK Securities and SHK are deemed to have the same long positions as SHK International and SHKIS under the SFO for the said 434,760,239 new shares and 800,000,000 new Shares in the Company respectively, i.e. 1,234,760,239 new shares in the Company in aggregate.
SHK is a non wholly-owned subsidiary of AP Emerald Limited, which is in turn a wholly-owned subsidiary of AP Jade Limited (“AP Jade”). AP Jade is a wholly-owned subsidiary of APL. Accordingly, APL is deemed to have the same long position as SHK under the SFO.
APL is a non wholly-owned subsidiary of Allied Group Limited (“AGL”). Accordingly, AGL is deemed to have the same long position as APL under the SFO.
Mr. Lee Seng Hui, Ms. Lee Su Hwei and Mr. Lee Seng Huang are the trustees of the LL Trust, being a discretionary trust. They together owned approximately 41.25% interest in the issued share capital of AGL as at the Latest Practicable Date and were therefore deemed to have the same long position as AGL under the SFO.
Benefit was interested in 300,000,000 Shares and was a wholly-owned subsidiary of Shougang as at the Latest Practicable Date. Shougang had undertaken to procure Benefit to subscribe for its full entitlement under the Rights Issue which is 300,000,000 Rights Shares. As a result, Benefit will hold 600,000,000 Shares in aggregate (in which 300,000,000 Shares are the existing number of Shares held by Benefit as at the Latest Practicable Date). Further, Benefit will be entitled to 60,000,000 Shares which fall to be issued upon exercise of the Bonus Warrants attributed to it. Benefit will therefore hold 660,000,000 Shares in aggregate after the completion of the Rights Issue and its entitlement to the Bonus Warrants are exercised in full.
Benefit was a wholly-owned subsidiary of Shougang as at the Latest Practicable Date. As a result, Shougang is deemed to have the same long position as Benefit under the SFO for 660,000,000 Shares in aggregate after the completion of the Rights Issue and its entitlement to the Bonus Warrants are exercised in full.

— 452 —

GENERAL INFORMATION

APPENDIX VIII

Save as disclosed above, as at the Latest Practicable Date, the Directors and chief executive of the Company were not aware of any other persons (other than Directors or chief executives of the Company) had, or were deemed to have, interests or short positions in the Shares and underlying shares (including any interests in options in respect of such capital), which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of part XV of the SFO, or who was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group or had any option in respect of such capital.

5. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposed services contract with any members of the Group excluding contracts expiring or determinable by the employer within one year without payment of compensations other than statutory compensation.

6. MATERIAL LITIGATIONS

As at the Latest Practicable Date, so far as the Directors are aware, the following are the only litigations or claims of material importance which have been pending or threatened against any members of the Group:

Reference is made to the disclosure of litigation and contingent liabilities in the annual reports 2005 and 2004 of the Company.

After taking legal advice, the receivers of the Company, Mr. Alan Chung Wah Tang and Ms. Alison Wong Lee Fung Ying, both from Grant Thornton, Certified Public Accountants (the “ Receivers ”), commenced legal proceedings on 2 July 2003 against Great Center for the repayment of two sums totaling US$4.5 million (or approximately HK$35.1 million), remitted on or about 21 May 2003 with no apparent justification, from the bank of Merchants (Hong Kong) Limited, to a bank account maintained in the name of Great Center, and interest thereon, damages and costs of the legal proceedings (the “Great Center Action”).
The writ of summons issued on 2 July 2003 in relation to the claim against Great Center for the repayment of US$4.5 million was amended on 10 July 2004 (the “Amended Writ”) to include the claims for (i) the repayment of HK$12.8 million remitted from a bank account of the Company to a bank account in the name of Great Center on or about 17 April 2003; and (ii) the repayment of HK$22.0 million remitted from a bank account of the Company to a bank account in the name of Modern Shine Enterprises Limited (“Modern Shine”), a company incorporated in the British Virgin Islands, on or about 22 April 2003, interest thereon, damages and costs of legal proceedings. The sum of claims under the Amended Writ amounts to approximately HK$69.9 million. At last, the court entered judgment against Modern Shine on 7 November 2005 for the sum of HK$22,000,000 plus interest and damages for conversion and interest thereon. Regarding the claim against Great

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Center, the Company has reached an amibcable settlement with Great Center’s liquidators. The settlement was approved by the court on 6th November 2006. The terms of the settlement are that the Company will accept US$2,637,000 plus interest. The Company expects to receive the settlement sum by the end of November 2006. The Company has not obtained the judgment sum of HK$22,000,000. Since Modern Shine is a company incorporated in the British Virgin Islands, it makes the enforcement extremely costly. Further, the Company has no information on the financial status and asset position of Modern Shine. As advised by the legal advisers to the Company, the viable course of action includes the petitioning for winding up of Modern Shine, which is also a very costly process.

On 23 August 2003, the Receivers commenced legal proceedings against Win Victory Holdings Limited (“Win Victory”), a company incorporated in Hong Kong, for the repayment of a sum of HK$37.0 million, together with interest thereon, damages and costs of the legal proceedings. Further, the Receivers, on behalf of the Company, petitioned for the winding-up of Win Victory on the grounds, inter alia, that Win Victory is unable to pay its debts and provisional liquidators were appointed. Due to the lack of funds in Win Victory, the provisional liquidators have not undertaken an extensive investigation and have recently made an application to the court for the discharge of their appointment and their application is fixed to be heard on 20 April 2006. The continuation of the winding-up petition was to enable a more thorough investigation of the flow of funds in and out of Win Victory. In view of the application by the provisional liquidators, the official receiver made an application to restore the winding-up petition, which has been adjourned to 24 April 2006 for hearing. The court had on the hearing of 24 April 2006 ordered that Win Victory be wound-up on the petition of the Company. The Company is making arrangement to prove its debts and to recover its costs of the winding up proceedings in the liquidation of Win Victory.

The Directors are of the opinion that the above litigations or claims would have no material impact on the operations of the Group.

As at the Latest Practicable Date and save for those disclosed above, no member of the Group was engaged in any litigation, arbitration or claim of material importance and no litigation, arbitration or claim of material importance was known to the Directors to be pending or threatened against any members of the Group.

7. MATERIAL CONTRACTS

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by members of the Group within the two years immediately preceding the date of this circular and are or may be material:

(i) the loan agreement and the supplemental loan agreement dated 30 August 2004 and 22 November 2004 respectively entered into between the lender, being an independent third party and qualified money lender under the Money Lenders Ordinance, and the Company,pursuant to which the lender had agreed to provide to the Company a six months term loan facility commencing from the drawdown date on 30 August 2004, for an amount

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of HK$5,000,000.00 at the interest rate of 1% per month payable monthly in arrears, and such loan facility were subsequently increased to HK$15,000,000.00 pursuant to the supplemental loan agreement commencing from the drawdown of such increased sum on 22 November 2004;

(ii) the loan agreement dated 26 April 2005 entered into between the lender, being an independent third party and qualified money lender under the Money Lenders Ordinance, and the Company, pursuant to which the lender had agreed to provide to the Company a term loan for one year for amount of HK$15,000,000 with interests at 5% per annum over prime interest rate payable monthly in arrears, and such term loan was subsequently renewed on 23 August 2005;
(iii) the deed of assignment dated 12 April 2006 entered into between the Company and Profit Harbour in relation to the assignment of debt of US$4.5 million in full at face value from the Company to Profit Harbour;
(iv) the conditional agreement dated 11 May 2006 entered into between the Company and Sun Hung Kai International Limited relating to the underwriting and after arrangements in respect of the previous rights issue of 826,000,000 new Shares of the Company offered on the basis of two rights shares for every existing Share of the Company held on 19 June 2006, at the subscription price of HK$0.10 per rights share, details of which are disclosed in the circular and prospectus of the Company dated 2 June 2006 and 20 June 2006 respectively;
(v) the agreement dated 14 June 2006 entered into among the Company, Professional Trading Limited and Rise Cheer Limited (a wholly-owned subsidiary of the Company) regarding the acquisition for an aggregate consideration of HK$2.0 million to be satisfied by the issue of the convertible bond by the Company upon completion thereof, the details of which are disclosed in the circular of the Company dated 30 June 2006;
(vi) the option agreement dated 14 June 2006 entered into between Professional Trading Limited and Rise Cheer Limited (a wholly-owned subsidiary of the Company) granting to Rise Cheer Limited an option to put to Professional Trading Limited for repurchase for an aggregate consideration of HK$800,000 all of the 60% interest in Chinaright Electronics Limited together with an amount represented by the amount of debt owed by Chinaright Electronics Limited to Professional Trading Limited as at completion of the acquisition, the details of which are disclosed in the circular of the Company dated 30 June 2006;
(vii) the deed dated 14 June 2006 in respect of the assignment of the Sale Loan entered into by the Vendor in favour of the Purchaser as part of the Acquisition, the details of which are disclosed under the section headed “Letter from the Board” in this circular.

(viii) the Acquisition Agreement;

(ix) the Underwriting Agreement; and
(x) the Placing Agreement;

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8. EXPERT AND CONSENT

The following is the qualification of the expert who has given opinion or advice which is contained in this circular:

Name Qualification Graham H. Y. Chan & Co. Certified Public Accountants (Practising) SinoPac a licensed corporation permitted to carry out Types 1, 4, 6 and 9 regulated activities (dealing in securities, advising on securities, advising on corporate finance and asset management) under the SFO

Each of Graham H. Y. Chan & Co. and SinoPac has given and not withdrawn its written consent to the issue of this circular with the inclusion of its letters or reports dated 12 December 2006 and references to its name in the form and context in which it appear.

9. EXPERT’S INTEREST IN ASSETS

As at the Latest Practicable Date, none of Graham H. Y. Chan & Co. and SinoPac has any shareholding interest in any members of the Group nor the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities of any members of the Group.

As at the Latest Practicable Date, none of Graham H. Y. Chan & Co. and SinoPac has any direct or indirect interests in any assets which had since 31 December 2005 (being the date to which the latest published audited consolidated financial statements of the Group were made up) been acquired or disposed of by or leased to any member of the Group or which are proposed to be acquired or disposed of by or leased to any member of the Group.

10. CORPORATE INFORMATION

Registered office Clarendon House 2 Church Street Hamilton HM11 Bermuda Head office and principal Rooms 2808-10 place of business 28th Floor Wing On House 71 Des Voeux Road Central Hong Kong Authorised representatives Lau Yau Cheung and Ng Kwok Ping Company secretary and Ng Kwok Ping qualified accountant

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Hong Kong legal advisers to	P. C. Woo & Co.
the Company	12th Floor, Prince’s Building
	10 Chater Road
	Central
	Hong Kong
Bermuda legal advisers to	Conyers Dill & Pearman
the Company	2901 One Exchange Square
	8 Connaught Place
	Hong Kong
Auditors	Graham H. Y. Chan & Co.
	Unit 1, 15th Floor, The Center
	99 Queen’s Road
	Central
	Hong Kong
Principal share registrar and	Butterfield Fund Services (Bermuda) Limited
transfer office	Rosebank Centre
	11 Bermudiana Road
	Pembroke, Bermuda
Hong Kong branch share	Secretaries Limited
registrar and transfer	26th Floor, Tesbury Centre
office	28 Queen’s Road East
	Wanchai, Hong Kong

11. EXPENSES

The expenses in connection with the Rights Issue, the Bonus Warrants Issue and the Placing, including financial and legal advisory fees, underwriting commission, printing and translation expenses, are estimated to be approximately HK$14,200,000 and will be payable by the Company.

12. PARTICULARS OF DIRECTORS

Executive Directors

Mr. Yue Jialin, aged 38, appointed on 26 April 2004, is the Chairman and Executive Director of the Company. Mr. Yue is responsible for the strategic planning and corporate development of the Group. Mr. Yue has established in-depth knowledge of the PRC economic development and policies through his previous role as a judge in the Economic Court of People’s Court in Luowu District, Shenzhen, the People’s Republic of China (the “PRC”) during 1989 to 1992. Mr. Yue also sits on the school of business administration of Changhun Industrial University as visiting professor. Mr. Yue has engaged in legal consultation in respect of the acquisition of state owned assets and foreign investments in the PRC.

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APPENDIX VIII

GENERAL INFORMATION

Mr. Lau Yau Cheung, aged 45, appointed on 26 April 2004, is an Executive Director of the Company. Mr. Lau is the Company’s Chief Executive Officer and responsible for the overall management and general administrative activities. Mr. Lau graduated in 1984 from the University of Toronto in Canada with a Bachelor of Commerce degree and has served in various senior management positions with both private and publicly listed companies in Hong Kong in the past years. Mr. Lau is also an Independent Non-Executive Director of Chai-Na-Ta Corp., a Canadian company which is the world’s largest supplier of North American ginseng with shares listed on the NASDAQ — OTCBB in the United States, since November 2006.

Independent Non-Executive Directors

Mr. Wong Wing Kuen, Albert, aged 55, appointed on 6 July 2004, is an Independent Non-executive Director of the Company. Mr. Wong is fellow member of The Institute of Chartered Secretaies and Administrators, a fellow member of The Hong Kong Institute of Company Secretaries, a fellow member of the Taxation Institute of Hong Kong, a member of Hong Kong Securities Institute, a fellow member of Association of International Accountants, a fellow member of Society of Registered Financial Planners, a member of The Chartered Institute of Arbitrators, a member of The Chartered Institute of Bankers in Scotland and a full member of Macau Society of Certified Practising Accountants. Mr. Wong was also a director of Minghua Group International Holdings Limited, a listed public company in the USA, until 30 June 2004. Currently, Mr. Wong is the Managing Director of Charise Financial Consultants Limited, a private professional consulting firm in Hong Kong.

Mr. Tsui Robert Che Kwong, aged 53, appointed on 6 July 2004, is an Independent Non-executive Director of the Company. Mr. Tsui is a graduate of University of Buckingham, England, with a bachelor degree in Law. He is the sole proprietor of Robert C.K. Tsui & Co., a firm of solicitors in Hong Kong. Mr. Tsui has been practicing in the legal field for more than 20 years. He is also an Independent Non-Executive Director of Teem Foundation Group Limited (Stock Code: 628), a company listed on the Main Board of The Stock Exchange of Hong Kong Limited since August 2004.

Mr. Yang Weiming, aged 47, appointed on 8 August 2006, is an Independent Non-Executive Director of the Company. Mr. Yang is graduated with a bachelor’s degree from the correspondence school of Guangdong Provincial Committee Party School of CPC in 2003. He had worked at the Centre for Development and Leasing of Housing, Shenzhen Housing Bureau ( ) from 1997 to 2004, specializing in the development of properties in China. Presently, Mr. Yang is also a director of New Gold International Limited which is a private limited company incorporated in Hong Kong.

Mr. Michael Joseph Bogue, aged 35, appointed on 25 September 2006, is an Independent Non-Executive Director of the Company. Mr. Bogue holds a Bachelor of Commerce degree from the University of Western Australia and has a diverse and successful background in senior executive roles related to the global resources sector. Over the last 14 years he has undertaken numerous mergers and acquisitions, equity and debt capital market issuances and derivatives transactions across the global resources sector. He is the current Managing Director and Chief Executive Officer of RIMCapital Limited, a resources focused investment company listed on the Australian Stock Exchange. Previous

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APPENDIX VIII

executive positions have included roles within a global investment Bank as Co-Head of Mining & Metals for Asia Pacific, a senior Business Development & Finance role within a top tier Australian resources house and as principal of a boutique investment and advisory firm specializing in the resources sector.

MISCELLANEOUS

a. The company secretary and the qualified accountant of the Company appointed pursuant to Rule 3.24 of the Listing Rules is Mr. Ng Kwok Ping. Mr. Ng Kwok Ping is a qualified accountant and member of the Hong Kong Institute of Certificate Public Accountants.
b. The English text of this circular shall prevail over the Chinese text.

DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be made available for inspection during normal business hours at the offices of P. C. Woo & Co., 12th Floor, Prince’s Building, 10 Chater Road, Central, Hong Kong from the date of this circular up to and including the date of the SGM:

a. the memorandum of association and Bye-laws of the Company;
b. the material contracts referred to under the paragraph headed “Material contracts” in this appendix;
c. the annual reports of the Company for the two financial years ended 31 December 2005;
d. the accountants’ report from Graham H. Y. Chan & Co. on unaudited pro forma financial information of the Group, the text of which is set out in Appendix III to this circular;
e. the letter from SinoPac, the text of which is set out in this circular;
f. the consent letters from Graham H. Y. Chan & Co., and SinoPac referred to in the paragraph headed “Expert and consent” in this appendix;
g. the letter from Graham H.Y. Chan & Co. summarizing the principal differences between Australian accounting standards to HKFRS and the accounting policies between the Company and Mount Gibson, in particular, all items in the financial statements of Mount Gibson;
h. the annual reports of Mount Gibson for the three financial years ended 30 June 2006;
i. the circular of the Company dated 4 May 2006 regarding the assignment of debt;
j. the circular and prospectus of the Company dated 1 June 2006 and 20 June 2006 respectively regarding, inter alia, the previous rights issue of the Company;

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APPENDIX VIII

k. the circular of the Company dated 30 June 2006 regarding the proposed acquisition of trading business involving the issuance of convertible bond and reallocation of use of proceeds; and
l. this circular.

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NOTICE OF THE SGM

SHANGHAI MERCHANTS HOLDINGS LIMITED

*

(Incorporated in Bermuda with limited liability)

(Stock code: 1104)

NOTICE OF SPECIAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that a special general meeting (the “Meeting”) of Shanghai Merchants Holdings Limited (the “Company”) will be held on 20th Floor, Central Tower, 28 Queen’s Road, Central, Hong Kong on Thursday, 4 January 2007 at 10:00 a.m. for the purpose of considering and if thought fit, passing with or without amendments, the following resolutions numbered 2, 3, 6 to 8 as ordinary resolutions of the Company to be taken by way of poll and the controlling shareholder (i.e. Profit Harbour Investments Limited) and its associates shall abstain from voting, the following ordinary resolutions numbered 1, 4 and 5 as ordinary resolutions of the Company and the following special resolution numbered 9 as special resolution of the Company:

ORDINARY RESOLUTIONS

“ THAT the authorised share capital of the Company be and is hereby increased from HK$200,000,000 divided into 2,000,000,000 shares of HK$0.10 each (the “Shares”) to HK$800,000,000 divided into 8,000,000,000 shares of HK$0.10 each by the creation of an additional 6,000,000,000 Shares ranking pari passu in all respects with the existing issued and unissued Shares of the Company.”
“ THAT subject to approval of the resolutions numbered 1 above and 3 below, conditional upon the completion of the Rights Issue (as hereinafter defined in resolution numbered 3), the conditional sale and purchase agreement dated 27 October 2006 (the “Acquisition Agreement”) entered into between (i) Fortune Desire Investments Limited (“Fortune Desire”), a direct wholly-owned subsidiary of the Company, as the purchaser; and (ii) Honest Opportunity Limited and New Fortress Investments Limited as the vendors in relation to the sale and purchase of 48,373,197 ordinary shares of Mount Gibson Iron Limited (“Mount Gibson”), representing approximately 8.79% of interest in Mount Gibson as at 7 November 2006 (Australian time) (subject to dilution effect, if any, from time to time contemplated by Mount Gibson issuing shares as a result of the unconditional takeover offer in respect of Aztec Resources Limited) at a consideration of HK$244,474,752, a copy of which has been produced at the Meeting marked “A” and signed by the chairman of the Meeting for identification purpose, be and is hereby approved, confirmed and ratified, and THAT all the transactions contemplated under the Acquisition Agreement be and are hereby approved, confirmed and ratified, and THAT the directors of the Company (the “Directors”) be and are hereby authorised to do such acts and execute such other documents with or without amendments and affix the common seal of the Company thereto (if required) as they may consider necessary, desirable or expedient to carry out or give effect to or otherwise in connection with or in relation to the Acquisition Agreement.”

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NOTICE OF THE SGM

“ THAT subject to approval of the resolution numbered 1 above, conditional upon (i) the Listing Committee of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) granting or agreeing to grant (subject to allotment and despatch of certificates in respect of Rights Shares (as hereinafter defined), as appropriate, the posting of the prospectus to be issued by the Company dated 4 January 2007, the renounceable provisional allotment letter and the form of application for excess Rights Shares (collectively the “Rights Issue Documents”) to the qualifying shareholders of the Company, and the delivery of the same to the Underwriter (as hereinafter defined) on 4 January 2007, and any other condition which may be agreed in their reasonable opinion by the Company and the Underwriter (as hereinafter defined)) the listing of, and permission to deal in, the Rights Shares (as hereinafter defined) (in both their nil-paid and fully paid forms), the Bonus Warrants (as hereinafter defined) and the Shares which may fall to be issued upon the exercise of the Bonus Warrants on the Stock Exchange on or before 5:00 p.m. on the second business day after the date which is the latest time for acceptance of and payment for Rights Shares (as hereinafter defined); (ii) the filing with and registration of the Rights Issue Documents by the Registrar of Companies in Hong Kong in compliance with the Companies Ordinance and the Registrar of Companies in Bermuda (the “Registrar in Bermuda”) in accordance with the Companies Act 1981 of Bermuda (as amended); and (iii) the obligations of Sun Hung Kai International Limited (the “Underwriter”) under the underwriting agreement dated 8 November 2006 (the “Underwriting Agreement” including, if any, all supplemental agreements relating thereto) made between the Company and the Underwriter becoming unconditional and the Underwriting Agreement not being terminated in accordance with the terms thereof prior to 5:00 p.m. on the third business day after the date which is the latest time for acceptance of and payment for Rights Shares (as hereinafter defined), as set out in the circular dated 12 December 2006 (the “Circular”) despatched by the Company to the Shareholders (a copy of which has been produced to the Meeting marked “B” and signed by the chairman of the Meeting for the purpose of identification):
(a) the issue, by way of rights, of 1,259,000,000 new shares of par value of HK$0.10 each (the “Shares”) in the issued share capital of the Company (the “Rights Issue”), such 1,259,000,000 new Shares (the “Rights Shares”) to be issued at a price of HK$0.30 per Rights Share (the “Subscription Price”) to the Shareholders whose names appear on the register of members of the Company on the date by reference to which entitlements under the Rights Issue will be determined (other than those Shareholders (the “Excluded Shareholders”) with registered addresses outside Hong Kong and whom the board of Directors, after making relevant enquiry, considers their exclusion from the Rights Issue to be necessary or expedient on account either of the legal restrictions under the laws of the relevant place or any requirements of the relevant regulatory body or stock exchange in that place) in the proportion of one Rights Share for every one existing Share then held and otherwise pursuant to and in accordance with the terms and conditions set out in the Circular be and is hereby approved;
(b) the issue of 251,800,000 bonus warrants (“Bonus Warrants”) which entitle the holder thereto to subscribe for Shares at an initial price of HK$0.30 per Share (subject to adjustment), by way of bonus on the basis of one unit of subscription right for every five Rights Shares taken up (“Bonus Warrants Issue”) be and is hereby approved;

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NOTICE OF THE SGM

(c) the issue of 251,800,000 new Shares which fall to be issued upon the exercise of the Bonus Warrants pursuant to the Bonus Warrants Issue be and is hereby approved;
(d) (i) the Directors be and are hereby authorised to allot and issue the Rights Shares and the Bonus Warrants pursuant to or in connection with the Rights Issue and the Bonus Warrants Issue notwithstanding that the same may be offered, allotted or issued otherwise than pro rata to the existing Shareholders and, in particular, (ii) the Directors be and are hereby authorised to make such exclusions or other arrangements in relation to fractional entitlements or Excluded Shareholders as they may, at their absolute discretion, deem necessary or expedient or appropriate, and the Rights Shares shall not be issued to the Excluded Shareholders but shall be aggregated and issued to a nominee to be named by the Directors and such Rights Shares shall be sold and the net proceeds of such sale, after deduction of expenses shall be distributed to the Excluded Shareholders pro rata to their respective shareholdings unless the amount falling to be distributed to any Excluded Shareholder shall be less than HK$100 in which case such amount shall be retained for the benefit of the Company;
(e) the Underwriting Agreement, a copy of which has been produced at the Meeting marked “C” and signed by the chairman of the Meeting for identification purpose, be and is hereby approved, confirmed and ratified, and THAT all the transactions contemplated under the Underwriting Agreement be and are hereby approved, confirmed and ratified, and THAT the Directors be and are hereby authorized to do such acts and execute such other documents with or without amendments and affix the common seal of the Company thereto (if required) as they may consider necessary, desirable or expedient to carry out or give effect to or otherwise in connection with or in relation to the Underwriting Agreement; and
(f) the Directors be and are hereby authorised to do all such acts and execute such other documents with or without amendments and affix the common seal of the Company thereto (if required) as they may consider necessary, desirable or expedient to carry out or give effect to or otherwise in connection with or in relation to the Rights Issue and the Bonus Warrants Issue.”
“ THAT :
(a) subject to paragraph (b) below, the exercise by the Directors during the Relevant Period (as hereinafter defined) of all the powers of the Company to repurchase Shares be and is hereby generally and unconditionally approved;
(b) the aggregate nominal amount of the Shares which may be repurchased by the Company pursuant to the approval in paragraph (a) above shall not exceed 10% of the aggregate nominal amount of the share capital of the Company in issue at the date of the passing of this Resolution;
(c) the general mandate granted to the Directors to exercise the powers of the Company to purchase the Shares as approved by the Shareholders in the annual general meeting held on 23 May 2006 (“2006 AGM”) be and is hereby revoked (without prejudice to any valid exercise of such general mandate prior to the passing of this Resolution); and

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NOTICE OF THE SGM

(d) for the purpose of this Resolution:
- “ Relevant Period ” means the period from the passing of this Resolution until whichever is the earliest of:
- (i) the conclusion of the next annual general meeting of the Company;
- (ii) the expiration of the period within which the next annual general meeting of the Company is required by Bermuda law or the Company’s bye-laws to be held; or
- (iii) the revocation or variation of the authority given under this Resolution by an ordinary resolution of the Shareholders in general meeting.”
“ THAT :
(a) subject to approval of the resolution numbered 3 above, and subject further to paragraph (c) below, the exercise by the Directors during the Relevant Period (as hereinafter defined) of all the powers of the Company to allot, issue and deal with additional Shares of the Company, and to make or grant offers, agreements and options which would or might require the exercise of such powers, subject to and in accordance with all applicable laws, be and is hereby generally and unconditionally approved;
(b) the approval in paragraph (a) above shall be in addition to any other authorizations given to the Directors and shall authorise the Directors during the Relevant Period to make or grant offers, agreements and options which might require the exercise of such powers after the end of the Relevant Period;
(c) the aggregate nominal amount of share capital allotted or agreed conditionally or unconditionally to be allotted (whether pursuant to an option or otherwise) by the Directors pursuant to the approval in paragraph (a) above, otherwise than pursuant to:
- (i) a Rights Issue (as hereinafter defined);
- (ii) the exercise of rights of subscription or conversion under terms of any convertible notes issued by the Company or any securities which are convertible into Shares;
- (iii) the exercise of any option under the share option scheme or similar arrangement for the time being adopted for the grant or issue to officers or employees of the Company or any of its subsidiaries of Shares or rights to acquire Shares; and
- (iv) any scrip dividend or similar arrangement providing for the allotment of Shares in lieu of the whole or part of a dividend on the Shares in accordance with the bye-laws of the Company in force from time to time,

shall not exceed 15.16% of the aggregate nominal amount of share capital of the Company in issue at the date of the passing of this Resolution as enlarged (subject to the completion

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NOTICE OF THE SGM

of the Rights Issue) by the allotment and issue of the Rights Shares (such percentage being a refreshment of the unused portion of the general mandate granted by the shareholders of the Company at the 2006 AGM authorising the Directors, amongst other things, to allot, issue and deal in the Shares of the then issued share capital of the Company and to make or grant offers, agreements and options which would or might require the exercise of such powers during or after end of the relevant period which shall not exceed aggregate of 20% of the nominal amount of the share capital of the Company in issue as at the date of the 2006 AGM) and the said approval shall be limited accordingly; and

(d) for the purpose of this Resolution:

“ Relevant Period ” means the period from the passing of this Resolution until whichever is the earliest of:

(i) the conclusion of the next annual general meeting of the Company;
(ii) the expiration of the period within which the next annual general meeting of the Company is required by Bermuda law or the Company’s bye-laws to be held; or
(iii) the revocation or variation of the authority given under this Resolution by an ordinary resolution of the Shareholders in general meeting; and

“ Rights Issue ” means the allotment, issue or grant of Shares pursuant to an offer of Shares open for a period fixed by the Directors to holders of Shares or any class thereof on the register of members on a fixed record date in proportion to their then holdings of such Shares or class thereof (subject to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or having regard to any restrictions or obligations under the laws of, or the requirements of, any recognized regulatory body or stock exchange in any territory outside Hong Kong).”

6. “ THAT :

(a) subject to approval of the resolution numbered 3 above, and subject further to paragraph (c) below, the exercise by the Directors during the Relevant Period (as hereinafter defined) of all the powers of the Company to allot, issue and deal with additional Shares of the Company, and to make or grant offers, agreements and options which would or might require the exercise of such powers, subject to and in accordance with all applicable laws, be and is hereby generally and unconditionally approved;
(b) the approval in paragraph (a) above shall be in addition to any other authorizations given to the Directors and shall authorise the Directors during the Relevant Period to make or grant offers, agreements and options which might require the exercise of such powers after the end of the Relevant Period;

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NOTICE OF THE SGM

(c) the aggregate nominal amount of share capital allotted or agreed conditionally or unconditionally to be allotted (whether pursuant to an option or otherwise) by the Directors pursuant to the approval in paragraph (a) above, otherwise than pursuant to:
(i) a Rights Issue (as hereinafter defined);
(ii) the exercise of rights of subscription or conversion under terms of any convertible notes issued by the Company or any securities which are convertible into Shares;
(iii) the exercise of any option under the share option scheme or similar arrangement for the time being adopted for the grant or issue to officers or employees of the Company or any of its subsidiaries of Shares or rights to acquire Shares; and
(iv) any scrip dividend or similar arrangement providing for the allotment of Shares in lieu of the whole or part of a dividend on the Shares in accordance with the bye-laws of the Company in force from time to time,

shall not exceed 4.84% of the aggregate nominal amount of share capital of the Company in issue at the date of the passing of this Resolution as enlarged (subject to the completion of the Rights Issue) by the allotment and issue of the Rights Shares (such percentage being the used up portion of the general mandate granted by the shareholders of the Company at the 2006 AGM authorising the Directors, amongst other things, to allot, issue and deal in the Shares of the then issued share capital of the Company and to make or grant offers, agreements and options which would or might require the exercise of such powers during or after end of the relevant period which shall not exceed aggregate of 20% of the nominal amount of the share capital of the Company in issue as at the date of the 2006 AGM) and the said approval shall be limited accordingly; and

(d) for the purpose of this Resolution:

“ Relevant Period ” means the period from the passing of this Resolution until whichever is the earliest of:

(i) the conclusion of the next annual general meeting of the Company;
(ii) the expiration of the period within which the next annual general meeting of the Company is required by Bermuda law or the Company’s bye-laws to be held; or
(iii) the revocation or variation of the authority given under this Resolution by an ordinary resolution of the Shareholders in general meeting; and

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NOTICE OF THE SGM

  - Shares or class thereof (subject to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or having regard to any restrictions or obligations under the laws of, or the requirements of, any recognized regulatory body or stock exchange in any territory outside Hong Kong).”

“ THAT subject to approval of the resolutions numbered 1 above and 8 below, the placing agreement dated 9 November 2006 (the “Placing Agreement”) entered into between (i) Sun Hung Kai Investment Services Limited (the “Placing Agent’) as the placing agent; and (ii) the Company as the vendor in relation to the placing of 800,000,000 Shares (the “Placing Shares”) at a price of HK$0.30 per Share, a copy of which has been produced at the Meeting marked “D” and signed by the chairman of the Meeting for identification purpose, be and is hereby approved, confirmed and ratified, and THAT all the transactions contemplated under the Placing Agreement be and are hereby approved, confirmed and ratified, and THAT the Directors be and are hereby authorised to do such acts and execute such other documents with or without amendments and affix the common seal of the Company thereto (if required) as they may consider necessary, desirable or expedient to carry out or give effect to or otherwise in connection with or in relation to the Placing Agreement.”
“ THAT subject to approval of the resolutions numbered 1 and 7 above, conditional upon (i) the Listing Committee of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) granting or agreeing to grant the listing of, and permission to deal in, the Placing Shares on the Stock Exchange; and (ii) the obligations of the Placing Agent under the Placing Agreement (including, if any, all supplemental agreements relating thereto) made between the Company and the Placing Agent becoming unconditional and the Placing Agreement not being terminated in accordance with the terms thereof prior to 12:00 noon on a day which is two (2) months from the date of this Meeting if such day not being a Business Day, the preceding Business Day of such date:
(a) the grant of the specific mandate in relation to the issue of 800,000,000 new Shares pursuant to the Placing Agreement be and is hereby approved; and
(b) the exercise by the Directors during the Placing Period of all the powers of the Company to allot, issue and deal with the Placing Shares of the Company, and to make or grant offers, agreements and options which would or might require the exercise of such powers, subject to and in accordance with all applicable laws, be and is hereby generally and unconditionally approved,

— 467 —

NOTICE OF THE SGM

for the purpose of this resolution:

“Placing Period ” means the period of two (2) months from the date of this Meeting and ending at 5:00 p.m. on the Business Day preceding the Placing Completion Date.

“ Placing Completion Date ” means a day which is two (2) months from the date of this Meeting, if such date not being a Business Day, the preceding Business Day of such day.

“ Business Day” means a day (excluding Saturday, Sunday or any day on which a tropical cyclone warning signal no. 8 or above or a black rainstorm warning signal is hoisted in Hong Kong at any time between 9:00 a.m. and 5:00 p.m.) on which banks are generally open for business in Hong Kong.

SPECIAL RESOLUTION

“ THAT subject to and conditional upon the approval of the Registrar in Bermuda, the name of the Company be changed to “APAC Resources Limited” and subject to the new English name of the Company becoming effective, “ ” be adopted as its Chinese name for identification purpose only and the directors of the Company be and are hereby authorized to do all such acts, deeds and things and execute all such documents with or without amendments and affix the common seal of the Company thereto (if required) as they may, in their absolute discretion, deem fit in order to effect such change of name.”

By Order of the Board

Shanghai Merchants Holdings Limited Yue Jialin Chairman

Hong Kong, 12 December 2006

Registered office: Head office and principal Clarendon House place of business in Hong Kong: 2 Church Street Rooms 2808-10, 28/F., Hamilton HM11 Wing On House Bermuda 71 Des Voeux Road Central Hong Kong

For identification purpose only

— 468 —

NOTICE OF THE SGM

Notes:

Any member of the Company entitled to attend and vote at the Meeting is entitled to appoint another person as his proxy to attend and vote instead of him. A proxy need not be a member of the Company. A member who is the holder of two or more Shares of the Company may appoint more than one proxy to represent him to attend and vote on his behalf.
A form of proxy for use in connection with the Meeting is enclosed with this circular. To be valid, the form of proxy, together with the power of attorney or other authority (if any) under which it is signed or a certified copy of that power of attorney or authority must be deposited at the branch share registrar of the Company in Hong Kong, Secretaries Limited, 26/F., Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong not less than 48 hours before the time appointed for holding the Meeting or any adjournment thereof.

As at the date of this notice, the Directors of the Company are as follows:

Executive Directors:

Mr. Yue Jialin (Chairman)

Mr. Lau Yau Cheung (Chief Executive Officer)

Independent Non-Executive Directors:

Mr. Wong Wing Kuen, Albert
Mr. Tsui Robert Che Kwong
Mr. Yang Weiming
Mr. Michael J. Bogue

— 469 —

AI assistant

Persistence Gold Group Ltd — Proxy Solicitation & Information Statement 2006

50623_rns_2006-12-12_7f3fa76f-2ae3-4ffe-b945-70988e93e6d3.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

SHANGHAI MERCHANTS HOLDINGS LIMITED

CONTENTS

EXPECTED TIMETABLE

EXPECTED TIMETABLE

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

SHANGHAI MERCHANTS HOLDINGS LIMITED

*

(Stock code: 1104)

(7) REFRESHMENT OF GENERAL MANDATES TO ISSUE SHARES AND REPURCHASE SHARES

INTRODUCTION

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

CONDITIONAL ACQUISITION

The Acquisition Agreement

Date

Parties

Assets to be acquired

Conditions precedent

Completion

Consideration

LETTER FROM THE BOARD

Source of funding

Information on the Company

Information on the Vendors

Information on the Purchaser

LETTER FROM THE BOARD

Information on Mount Gibson

REASONS FOR AND BENEFITS OF THE CONDITIONAL ACQUISITION

LETTER FROM THE BOARD

Tallering Peak Operations

Extension Hill Hematite Project

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Information on Aztec

LETTER FROM THE BOARD

FINANCIAL EFFECT OF THE CONDITIONAL ACQUISITION

LETTER FROM THE BOARD

THE RIGHTS ISSUE AND THE BONUS WARRANTS ISSUE

LETTER FROM THE BOARD

Issue statistics of Rights Issue

Subscription Price for Rights Shares

Basis of provisional allotment of Rights Shares

Number of Bonus Warrants

LETTER FROM THE BOARD

Subscription Period of the Bonus Warrants

Bonus Warrants Subscription Price

Qualifying Shareholders

LETTER FROM THE BOARD

Rights of the Overseas Shareholders

LETTER FROM THE BOARD

Status of the Rights Shares and the Shares to be issued upon exercise of the Bonus Warrants

Share certificates for the Rights Shares and the Bonus Warrants

Fractional entitlements

Application for excess Rights Shares

LETTER FROM THE BOARD

Conditions of the Rights Issue and the Bonus Warrants Issue

LETTER FROM THE BOARD

Application for listing of the Rights Shares, the Bonus Warrants and the Shares which may fall to be issued upon the exercise of the Bonus Warrants on the Stock Exchange

UNDERWRITING ARRANGEMENTS

Underwriting agreement

LETTER FROM THE BOARD

Irrevocable Undertakings from Profit Harbour and Shougang

Termination of the Underwriting Agreement

LETTER FROM THE BOARD

WARNING OF THE RISKS OF DEALING IN THE SHARES AND THE RIGHTS SHARES

LETTER FROM THE BOARD

REASONS FOR AND BENEFITS OF THE RIGHTS ISSUE AND THE BONUS WARRANTS ISSUE

LETTER FROM THE BOARD

SHAREHOLDING STRUCTURE BEFORE AND AFTER THE RIGHTS ISSUE AND THE BONUS WARRANTS ARE EXERCISED IN FULL

MAINTENANCE OF THE LISTING OF THE SHARES AFTER RIGHTS ISSUE AND THE BONUS WARRANTS ISSUE

LETTER FROM THE BOARD

Persistence Gold Group Ltd Proxy Solicitation & Information Statement 2006