Persistence Gold Group Ltd - Proxy Solicitation & Information Statement 2007

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 APAC Resources 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.

APAC RESOURCES LIMITED

(

)[*]

(Incorporated in Bermuda with limited liability)

(Stock code: 1104)

MAJOR TRANSACTION RELATING TO

THE ACQUISITION OF 40,125,967 ORDINARY SHARES AND VERY SUBSTANTIAL ACQUISITION AND

CONNECTED TRANSACTION

RELATING TO

THE CONDITIONAL ACQUISITION OF 19,754,646 ORDINARY SHARES IN MOUNT GIBSON

Independent Financial Adviser

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A letter from the Independent Board Committee to the Independent Shareholders, containing its recommendation to the Independent Shareholders, is set out on pages 20 to 21 of this circular. A letter of advice from Ample Capital Limited, the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders is set out on pages 22 to 33 of this circular.

A notice convening the SGM to be held at 4:30 p.m. on Wednesday, 4 April 2007 at 20/F., Central Tower, 28 Queen’s Road Central, Hong Kong or any adjournment thereof is set out on pages 364 and 365 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 26th Floor, 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.

* For identification purpose only

19 March 2007

		Page
Definitions . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		5
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		20
Letter from the IFA	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Appendix I —	Financial Information on the Group . . . . . . . . . . . . . . . . . . . . . . . . .	34
Appendix II —	Management Discussion and Analysis of the Group . . . . . . . . . . . . . .	82
Appendix III —	Pro Forma Financial Information of the Group . . . . . . . . . . . . . . . .	98
Appendix IV —	Financial Information on Mount Gibson . . . . . . . . . . . . . . . . . . . . . .	106
Appendix V —	Management Discussion and Analysis of the Mount Gibson Group . .	338
Appendix VI —	General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	353
Notice of the SGM	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	364

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DEFINITIONS

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

“Announcement”

the announcement of the Company dated 16 February 2007 in relation to, amongst other things, the Acquisition and the Conditional Acquisition Agreement

“Acquisition”

the acquisition of an aggregate of 40,125,967 MG Shares by Fortune Desire through a number of on-market transactions on the Australian Stock Exchange at an aggregate consideration of A$33,501,170 (equivalent to approximately HK$202,722,279 at an exchange rate of approximately A$1.00 to HK$6.0512)

“AASB”
Australian Accounting Standards Board
“associates”

has the meaning ascribed to it under the Listing Rules

“Australian Stock Exchange” The Australian Stock Exchange Limited
“Board” board of the Directors
“Bonus Warrant(s)” or 251,800,000 warrants of the Company
“Warrant(s)”
“Business Day”

“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 “Company” APAC Resources Limited, a company incorporated in Bermuda with limited liability, with its securities listed on the Main Board of the Stock Exchange “Companies Ordinance” the Companies Ordinance (Chapter 32 of the Laws of Hong Kong) “Conditional Acquisition” the conditional acquisition of 19,754,646 MG Shares, representing approximately 2.51% interest in Mount Gibson as at 9 February 2007 by Fortune Desire pursuant to the terms and conditions of the Conditional Acquisition Agreement “Conditional Acquisition the conditional sale and purchase agreement dated 9 February Agreement” 2007 entered into between Fortune Desire and the Vendor relating to the sale and purchase of the 19,754,646 MG Shares

— 1 —

DEFINITIONS

“connected person” “Directors”
“Fortune Desire”
“Group”
“HKAS”
“HKFRS”
“HKICPA”
“Hong Kong”
“Independent Financial Adviser” or “IFA”
“Independent Board Committee”
“Independent Shareholders”
“Latest Practicable Date”
“Listing Rules”
“MG Share(s)”

has the meaning ascribed to it under the Listing Rules

the directors of the Company

Fortune Desire Investments Limited, a company incorporated in the British Virgin Islands with limited liability and a direct wholly-owned subsidiary of the Company

the Company and its subsidiaries

Hong Kong Accounting Standards issued by the HKICPA

Hong Kong Financial Reporting Standards

Hong Kong Institute of Certified Public Accountants

the Hong Kong Special Administrative Region of the PRC

Ample Capital Limited, a corporation licensed to carry on types 4, 6 and 9 (advising on securities, advising on corporate finance and asset management respectively) regulated activities under the SFO, and the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the terms of the Conditional Acquisition Agreement the committee comprising Mr. Wong Wing Kuen, Albert, Mr. Tsui Robert Che Kwong and Mr. Yang Weiming, being all the independent non-executive Directors of the Company, appointed by the Board under the Listing Rules to advise and make recommendation to the Independent Shareholders as to how to vote at the SGM on the ordinary resolution regarding the terms of the Conditional Acquisition Agreement

Shareholders (other than Shougang and its associates) who are not required under the Listing Rules to abstain from voting at the SGM to approve the Conditional Acquisition Agreement and the transactions contemplated thereunder

16 March 2007, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information contained in this circular

Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited

ordinary shares in the issued share capital of Mount Gibson

— 2 —

DEFINITIONS

“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 1,312,739,562 Shares
	held by it, representing approximately 39.56% of the existing
	issued share capital of the Company as at the Latest
	Practicable Date, pursuant to Divisions 2 and 3 of part XV of
	the SFO
“Mtpa”	Million tonnes per annum
“Previous Circular”	the circular dated 12 December 2006 of the Company in
	respect of, amongst other things, a very substantial
	acquisition for the Company relating to the conditional
	acquisition of 48,373,197 MG Shares
“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
	1,312,739,562 Shares, representing approximately 39.56% of
	the existing issued share capital of the Company, pursuant to
	Divisions 2 and 3 of part XV of the SFO
“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
“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 4:30 p.m. on Wednesday, 4 April
	2007 for the purposes of considering and, if thought fit,
	ratifying and approving, amongst other things, the
	Acquisition and the Conditional Acquisition Agreement
	respectively
“Share(s)”	ordinary share(s) of HK$0.10 each in the issued share capital
	of the Company

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DEFINITIONS

“Shareholder(s)”	holder(s) of the Share(s)
“Shougang”	Shougang Holding (Hong Kong) Limited, a private company
	incorporated with limited liability in Hong Kong. As	at	the
	Latest Practicable Date, Shougang was deemed	to	be
	interested in 660,000,000 Shares, representing approximately
	19.89% of the existing issued share capital of the Company,
	pursuant to Divisions 2 and 3 of part XV of the SFO
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Timely Rich”	Timely Rich Limited, a company incorporated in Samoa with
	limited liability and a direct wholly-owned subsidiary		of
	Shougang
“UIG”	Utility Industry Group
“Vendor”	Timely Rich
“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.

— 4 —

LETTER FROM THE BOARD

APAC RESOURCES LIMITED ( )[[*]]

)[[*]]

(Incorporated in Bermuda with limited liability)

(Stock code: 1104)

Executive Directors:

Mr. Yue Jialin (Chairman) Mr. Lau Yau Cheung (Chief Executive Officer) Mr. Michael Joseph Bogue

Registered Office: Clarendon House 2 Church Street Hamilton HM11 Bermuda

Independent Non-Executive Directors:

Mr. Wong Wing Kuen, Albert Mr. Tsui Robert Che Kwong Mr. Yang Weiming

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

19 March 2007

To the Shareholders and, for information only, the Warrant holders

Dear Sir or Madam,

MAJOR TRANSACTION RELATING TO

THE ACQUISITION OF 40,125,967 ORDINARY SHARES AND

VERY SUBSTANTIAL ACQUISITION AND

CONNECTED TRANSACTION

RELATING TO THE CONDITIONAL ACQUISITION OF 19,754,646 ORDINARY SHARES IN MOUNT GIBSON

INTRODUCTION

On 6 February 2007, the Company (through its direct wholly-owned subsidiary, Fortune Desire) acquired an aggregate of 40,125,967 MG Shares, representing approximately 5.09% interest in the

For identification purpose only

— 5 —

LETTER FROM THE BOARD

issued share capital of Mount Gibson as at 9 February 2007, through a number of on-market transactions on the Australian Stock Exchange, at an aggregate consideration of A$33,501,170 (equivalent to approximately HK$202,722,279 at an exchange rate of approximately A$1.00 to HK$6.0512) being all at an average price of approximately A$0.8349 per MG Share.

On 9 February 2007, the Company (through its direct wholly-owned subsidiary, Fortune Desire) entered into the Conditional Acquisition Agreement with the Vendor (a direct wholly-owned subsidiary of Shougang and hence a connected person of the Company), pursuant to which, amongst other things, Fortune Desire as the purchaser, has conditionally agreed to acquire 19,754,646 MG Shares, representing approximately 2.51% interest in the issued share capital of Mount Gibson as at 9 February 2007, at an aggregate consideration of A$16,791,449.1 (equivalent to HK$102,427,839.51 at an exchange rate of approximately A$1.00 to HK$6.10). Completion of the Conditional Acquisition Agreement is conditional upon the fulfillment of certain conditions precedent.

The purpose of this circular is to give you further information on, amongst other things, details of (i) the Acquisition; (ii) Conditional Acquisition Agreement; and (iii) a notice to convene the SGM to ratify the Acquisition and to approve the Conditional Acquisition Agreement 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 Ample Capital Limited, the Independent Financial Adviser, in respect of the terms of the Conditional Acquisition Agreement. 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 resolution regarding the terms of the Conditional Acquisition Agreement.

Ample Capital Limited has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders on whether the terms of the Conditional Acquisition Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

THE ACQUISITION

On 6 February 2007, the Company (through its direct wholly-owned subsidiary, Fortune Desire) acquired an aggregate of 40,125,967 MG Shares, representing approximately 5.09% interest in the issued share capital of Mount Gibson as at 9 February 2007, through a number of on-market transactions on the Australian Stock Exchange at an aggregate consideration of A$33,501,170 (equivalent to approximately HK$202,722,279 at an exchange rate of approximately A$1.00 to HK$6.0512) being all at an average price of approximately A$0.8349 per MG Share.

Date

6 February 2007.

— 6 —

LETTER FROM THE BOARD

Parties

(1) Various vendors under a number of on-market transactions on the Australian Stock Exchange.
(2) Fortune Desire as purchaser.

To the best knowledge, information and belief of the Directors, having made all reasonable enquiries, the vendors under such on-market transactions on the Australian Stock Exchange and their ultimate owners are independent third parties not connected with the Company, any of its subsidiaries or any of their respective associates, or any of the connected persons of the Company, any of its subsidiaries or any of their respective associates.

The MG Shares acquired by the Company

The Company (through its direct wholly-owned subsidiary, Fortune Desire) acquired an aggregate of 40,125,967 MG Shares, representing approximately 5.09% interest in the issued share capital of Mount Gibson as at 9 February 2007.

Consideration

The aggregate consideration for the Acquisition by the Company (through its direct whollyowned subsidiary, Fortune Desire) of 40,125,967 MG Shares is A$33,501,170 (equivalent to approximately HK$202,722,279 at an exchange rate of approximately A$1.00 to HK$6.0512) being all at an average price of approximately A$0.8349 per MG Share ranging from A$0.785 to A$0.840 as at 6 February 2007, and were settled in cash. The consideration was determined by reference to the prevailing trading prices of the MG Shares on the Australian Stock Exchange. The closing price of MG Shares was A$0.79 (equivalent to approximately HK$4.78 at an exchange rate of approximately A$1.00 to HK$6.0512) as at 6 February 2007.

Completion

Completion of the Acquisition has taken place on 9 February 2007 in accordance with the normal clearing and settlement procedures for on-market transactions on the Australian Stock Exchange. The Acquisition was not subject to any condition.

Before the completion of the Acquisition, the Company held 89,702,908 MG Shares, representing approximately 11.39% interest in the issued share capital of Mount Gibson as at 9 February 2007. After completion of the Acquisition of the 40,125,967 MG Shares, the Company’s shareholding in Mount Gibson has increased from approximately 11.39% to 16.48% as at 9 February 2007.

Source of Funding

The Acquisition was financed by margin financing provided by a stock-broking firm, Sun Hung Kai Investment Services Limited (“SHKIS”), the respective margin financing account has been settled by the Company on 2 March 2007 which was funded by the proceeds raised in the placing of new Shares completed on 28 February 2007 (the “Placing”). To the best knowledge, information and belief

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LETTER FROM THE BOARD

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

THE CONDITIONAL ACQUISITION

On 9 February 2007, the Company (through its direct wholly-owned subsidiary, Fortune Desire) entered into the Conditional Acquisition Agreement with the Vendor (a direct wholly-owned subsidiary of Shougang and hence a connected person of the Company), pursuant to which, among other things, Fortune Desire as the purchaser, has conditionally agreed to acquire 19,754,646 MG Shares, representing approximately 2.51% interest in the issued share capital of Mount Gibson as at 9 February 2007, at an aggregate consideration of A$16,791,449.1 (equivalent to HK$102,427,839.51 at an exchange rate of approximately A$1.00 to HK$6.10).

The Conditional Acquisition Agreement

Date

9 February 2007.

Parties

(1) Timely Rich Limited as the Vendor.
(2) Fortune Desire as purchaser.

The MG Shares further acquired by the Company

Pursuant to the Conditional Acquisition Agreement, the Company (through its direct whollyowned subsidiary, Fortune Desire) shall acquire, and the Vendor shall sell, an aggregate of 19,754,646 MG Shares, representing approximately 2.51% interest in the issued share capital of Mount Gibson as at 9 February 2007.

Conditions precedent

Completion of the Conditional Acquisition Agreement is conditional upon fulfilment of the following conditions:

(i) the approval by the Independent Shareholders in respect of the Conditional Acquisition Agreement on a vote taken by way of poll at the SGM and at which Shougang and its associates shall abstain from voting in accordance with all applicable requirements under the Listing Rules; and

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LETTER FROM THE BOARD

(ii) all necessary authorisations being obtained and maintained by Fortune Desire as a result of the transactions contemplated under the Conditional Acquisition Agreement.

Completion

Subject to the fulfilment of the conditions precedent as aforesaid, the completion of the Conditional Acquisition Agreement shall take place at the expiry of five Business Days after all the transactions contemplated under the Conditional Acquisition Agreement have been completed (or such earlier or later date as may be agreed by the Vendor and Fortune Desire in writing).

If any of the conditions is not fulfilled (or waived by Fortune Desire other than condition (i) above which cannot be waived) on or before 31 December 2007 (or such earlier or later date as may be agreed by the Vendor and Fortune Desire in writing), the Conditional Acquisition Agreement shall cease and determine and the Company shall have no obligation or liability under the Conditional Acquisition Agreement save for any antecedent breach under the terms of the Conditional Acquisition Agreement.

After the completion of the Acquisition but before the Conditional Acquisition, the Company held 129,828,875 MG Shares, representing approximately 16.48% interest in the issued share capital of Mount Gibson as at 9 February 2007. After completion of the Conditional Acquisition for 19,754,646 MG Shares, the Company will hold 149,583,521 MG Shares in aggregate, representing approximately 18.99% interest in the issued share capital of Mount Gibson as at 9th February, 2007.

Consideration

The consideration payable by Fortune Desire for the Conditional Acquisition is HK$102,427,839.51 being A$0.85 per MG Share (at an exchange rate of approximately A$1.00 to HK$6.1).

The consideration payable by Fortune Desire pursuant to the Conditional Acquisition Agreement has been paid as to HK$40,971,135.80 upon execution of the Conditional Acquisition Agreement as deposit and the balance in the sum of HK$61,456,703.71 shall be payable at the expiry of five Business Days after all the transactions contemplated in the Conditional Acquisition Agreement have been completed, provided that the parties thereto may agree to an extension for a further period at such term(s) as agreed by themselves. If the conditions precedent as aforesaid are not fulfilled pursuant to the terms of the Conditional Acquisition Agreement, the deposit in the sum of HK$40,971,135.80 shall be refunded to Fortune Desire forthwith.

The consideration is arrived at after arm’s length negotiation between Fortune Desire and the Vendor and with reference to the prevailing market price of MG Shares traded on the Australian Stock Exchange on 9 February 2007 (being the date of the Conditional Acquisition Agreement).

The consideration of the 19,754,646 MG Shares at A$0.85 per MG Share represents (i) a premium of approximately 6.25% over the average closing price of the MG Share (i.e. A$0.80 per MG Share) quoted on the Australian Stock Exchange on the last 5 full trading days up to and including 8 February 2007; and (ii) a premium of approximately 9.68% over the closing price of the MG Share (i.e. A$0.775 per MG Share) quoted on the Australian Stock Exchange on 9 February 2007.

— 9 —

LETTER FROM THE BOARD

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. To achieve such objective, the Company negotiated at arm’s length with Shougang and decided to purchase the entire block of MG Shares held by Timely Rich at a premium of 6.25% in a bid to build up its substantial strategic shareholding interest in Mount Gibson which is justified for such block lot size of MG Shares.

Source of funding

The payment of the consideration for the Conditional Acquisition will be financed by internal resources whereby the sum of HK$40,971,135.80 will be financed through the proceeds from the previous rights issue of the Company completed on 1 February 2007 and the sum of HK$61,456,703.71 from the Placing.

INFORMATION ON MOUNT GIBSON

Mount Gibson is a company incorporated in Australia with limited liability in 1938. Its shares are listed on the Australian Stock Exchange.

The principal business of Mount Gibson is mining of hematite iron ore deposits at Tallering Peak and Koolan Island 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 and Koolan Island to 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 A$	Audited A$
Net	assets	value	$97,420,000	$67,629,000
Net	Profit	before taxation and minority interest	$16,151,000	$22,032,000
Net	Profit	after taxation and minority interest	$23,479,000	$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.

— 10 —

LETTER FROM THE BOARD

As disclosed in the Previous Circular, Mount Gibson had on 24 July 2006 announced its intention to make a scrip takeover offer (“Mount Gibson Offer”) for Aztec Resources Limited (“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.

In November 2006, the Group held an aggregate 84,000,000 shares in Aztec which were held in its short term trading portfolio and were subsequently converted into 28,000,000 MG Shares on 28 November 2006 pursuant to the Mount Gibson Offer which had been disclosed in the Previous Circular, representing approximately 3.56% interest in the issued share capital of Mount Gibson as at 9 February 2007.

In January 2007, the Group held an aggregate 39,689,135 shares in Aztec which were compulsorily acquired by Mount Gibson on 6 February 2007, and accordingly such shares in Aztec converted into 13,229,711 MG Shares pursuant to the Mount Gibson Offer, representing approximately 1.68% interest in the issued share capital of Mount Gibson as at 9 February 2007.

As at the Latest Practicable Date and as a result of the compulsory acquisition of the Group’s Aztec shares pursuant to the Mount Gibson Offer, the Group’s investment in Aztec which was held in its short term trading portfolio, had been compulsorily acquired and converted into 13,229,711 MG Shares as at 9 February 2007, representing approximately 1.68% interest in the issued share capital of Mount Gibson as at 9 February 2007. The Group’s investments in Aztec shares, which totalled 123,689,135 in aggregate, and which were held in its short term trading portfolio, had either been converted into MG Shares following the Group’s acceptance of the Mount Gibson Offer or been converted into MG Shares pursuant to the compulsory acquisition process for Aztec. After such conversions, the Group ceases to hold any shares in Aztec.

After the completion of Mount Gibson Offer, Aztec has become a wholly-owned subsidiary of Mount Gibson.

In addition, the Group had acquired 100,000 MG Shares through on-market transactions on the Australian Stock Exchange on 2 February 2007, representing approximately 0.01% interest in the issued share capital of Mount Gibson as at 9 February 2007. On 1 February 2007, the Group further acquired 48,373,197 MG Shares at a consideration of HK$244,474,752 under a conditional acquisition which had constituted a very substantial acquisition for the Company and subject to the then independent Shareholders’ approval (the “Previous Acquisition”), as disclosed in the Company’s announcement dated 9 November 2006 and the Previous Circular, representing approximately 6.14% interest in the issued share capital of Mount Gibson as at 9 February 2007. The consideration was payable by Fortune Desire by way of the fund raised by the rights issue completed on 1 February 2007. Such approval was obtained at the special general meeting held on 4 January 2007. Further details were disclosed in the Company’s Previous Circular dated 12 December 2006 and the Company’s announcement dated 4 January 2007. The Group currently holds such investment (i.e. 48,473,197 MG Shares) for strategic investment purpose and has classified such in the accounts as “Available for Sale Financial Assets” as defined under HKAS39 issued by the HKICPA.

— 11 —

LETTER FROM THE BOARD

On 6 February 2007, the Group acquired an aggregate of 40,125,967 MG Shares through a number of on-market transactions on the Australian Stock Exchange. The MG Shares from the Acquisition will be held by the Group for strategic investment purpose and will be classified in the accounts as “Available for Sale Financial Assets” as defined under HKAS39 issued by the HKICPA.

As a result of the above but before the completion of the Conditional Acquisition, the Group held 129,828,875 MG Shares, representing approximately 16.48% in the issued share capital of Mount Gibson as at 9 February 2007.

On 9 February 2007, the Group conditionally acquired 19,754,646 MG Shares from the Vendor. The MG Shares from the Conditional Acquisition will be held by the Group for strategic investment purpose and will be classified in the accounts as “Available for Sale Financial Assets” as defined under HKAS39 issued by the HKICPA.

Following completion of the Conditional Acquisition, the Group will hold in aggregate 149,583,521 MG Shares, representing approximately 18.99% in the issued share capital of Mount Gibson as at 9 February 2007.

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. 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 Company has the intention of acquiring further investment interests in the resources industry, where returns are maximized for the Shareholders as a whole.

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). Its securities are listed on the Main Board of the Stock Exchange.

INFORMATION ON FORTUNE DESIRE

Fortune Desire 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.

INFORMATION ON TIMELY RICH

Timely Rich is a company incorporated with limited liability in Samoa and a direct wholly-owned subsidiary of Shougang. It is principally engaged in investment holding.

— 12 —

LETTER FROM THE BOARD

REASONS FOR AND BENEFITS OF THE ACQUISITION AND THE CONDITIONAL ACQUISITION

As disclosed in the Previous Circular, the Company had expressed its intention to acquire further interests in the natural resources industries where opportunities arise to make additional investments where returns are maximized for the Shareholders, and if necessary to increase shareholding interest in Mount Gibson, apart from the completion of the Previous Acquisition.

Since the Previous Acquisition, the Company has still been on the lookout for good investment opportunities to maximize return for the Shareholders. It has always been the intention of the Company to seek to lock in the supply of iron ore materials and to trade in such materials for higher profit. An increase in the shareholding interest in Mount Gibson is an attempt to reinforce the existing business of the Company so that it is in a better position in seeking to assure supply of raw materials for the trading in commodities with a higher profit margin. The Acquisition and the Conditional Acquisition are anticipated 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 investment in 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 Acquisition and the Conditional Acquisition are further attempts to assure the supply of raw iron ore materials for engaging in such physical commodities trading and helps to consolidate the asset and earning bases of the Group.

The Acquisition and the Conditional Acquisition are consistent with the Company’s strategy of seeking geographic regions and commodity markets which it believes present attractive opportunities and where rationalization and consolidation is likely to occur.

In view of current market conditions, the Directors consider that both the Acquisition and the Conditional Acquisition represent a good opportunity for the Company to further increase its investment 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.

In respect of the Acquisition, there was a positive impact on the non-current asset value and a negative impact on the current liabilities of the Group but no effect on the net asset value. It is not expected to have any immediate material effect on the Group’s earnings until there is receipt of future dividends or distributions from Mount Gibson in respect of the Company’s investment.

In respect of the Conditional Acquisition, there is neither any effect on the total asset value and current liabilities of the Group. It is not expected to have any immediate material effect on the Group’s earnings until there is receipt of future dividends or distributions from Mount Gibson in respect of the Company’s investment.

Having regard to the nature of and the benefits resulting from the Acquisition and the Conditional Acquisition, the Directors believe that the Acquisition and the terms of the Conditional Acquisition Agreement are fair and reasonable and in the interests of the Shareholders taken as a whole.

— 13 —

LETTER FROM THE BOARD

BUSINESS PLAN AND FUTURE INTENTIONS

The Company seeks to become a significant natural resources trading and investment company through the identification, evaluation and acquisition of strategic interests in quality natural resource assets (either indirectly through investment in, and support of, resource corporations or by direct investment in mineral projects) as a means to build an extensive portfolio of long term cash generating investments so as to enhance the Company’s value in the context of natural resource industry consolidation and rationalization where it believes value can be maximized for all concerned stakeholders.

A core focus of the Company involves working co-operatively with resource companies and management teams it identifies as reputable, trustworthy partners to achieve their corporate objectives where they are aligned with the Company.

Another core focus is to seek to bridge the gap between Western mining companies and Asian end-users to facilitate investment in, and fast-track development of, quality natural resource assets enabling the Company to undertake profitable investments in the resources sector and to secure reliable long term production offtake to the Company’s strategic advantage.

The Board believes here currently exists a favourable climate for global commodity prices, outlook and equity prices for global resource companies in general. This outlook is expected to continue for the foreseeable future with the sustained demand for commodities globally with a particular emphasis on the demand stemming from China and, more recently, India.

The Board acknowledges that there are potential timing risks associated with buying resource assets at what may subsequently prove to be towards the upper end of the commodity price cycle. Whether the current robust climate for commodity prices and the natural resources sector is at a cyclical high or whether globally the sector is experiencing a paradigm shift for commodities into a super-cycle remains to be ascertained. However with the Company’s corporate objective of focusing and investing in quality natural resource assets, during any unforeseen commodity price downturn the Company’s investment and trading activities are more likely to withstand and mitigate such adverse market conditions.

The Company is currently assessing (and will continue to assess) a number of investment opportunities in the natural resources sector in line with its corporate strategy. These opportunities are focused on the Company’s identified preferred commodities and preferred geographical locations as well as on opportunities where the Board believes that it can add value through likely resource industry consolidation and rationalization.

The Company regards the investment in mining as an opportunity that complement, enhance and reinforce its principal business. The Board is of the view that the acquisition of China Mineral Resources Limited (“China Mineral”) as announced by the Company on 6 March 2007 fits with the Company’s business strategy, corporate objectives and principal business activities and such acquisition enables the Company to explore and exploit an iron mine to produce iron ore directly, which will ensure a long term and steady supply of iron ore material.

— 14 —

LETTER FROM THE BOARD

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

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

Date of announcement/

circular/prospectus	Fund raising event	Proceeds raised	Proposed use of proceeds	Actual use of proceeds
11 May 2006	Previous Rights	Approximately	Approximately	Approximately
30 May 2006	Issue	HK$81,000,000	HK$25,000,000 to invest	HK$16,000,000 has been
1 June 2006			in fabric and other	used in the fabric and
20 June 2006			merchandises trading	other merchandises trading
11 July 2006			business	(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 has been
			HK$20,000,000 to invest	used as deposit for the
			in base metal trading	Previous Acquisition of
			business (Note 1)	48,373,197 MG Shares
			Approximately	Approximately
			HK$36,000,000 reserved	HK$26,000,000 has been
			as general working capital	used for the acquisition of
			(Note 2)	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
				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 —

LETTER FROM THE BOARD

Date of announcement/ circular/prospectus Fund raising event Proceeds raised Proposed use of proceeds Actual use of proceeds 15 June 2006 Conversion of Approximately Approximately The entire sum of Convertible Bonds HK$2,000,000 HK$2,000,000 used to pay approximately for the consideration of HK$2,000,000 was used to acquiring approximately pay for the consideration 60% interest in Chinaright of acquiring approximately Electronics Limited 60% interest in Chinaright Electronics Limited 9 November 2006 Rights Issue Approximately HK$224,474,752 will be HK$224,474,752 has been 30 November 2006 HK$377,700,000 used to pay for the used to pay for the 6 December 2006 balance of consideration balance of consideration 12 December 2006 of acquiring 48,373,197 of acquiring 48,373,197 4 January 2007 MG Shares MG Shares 31 January 2007 HK$20,000,000 will be HK$20,000,000 has been returned to the Company’s deducted by the Company, account, previously used being the deposit paid in as the deposit paid in respect of acquiring respect of acquiring 48,373,197 MG Shares, to 48,373,197 MG Shares, to recover the same amount recover the same amount of money which has been of money which has been previously reserved for previously reserved for base metal trading in the base metal trading in the previous right issue of the Previous Right Issue of Company the Company Approximately Approximately HK$3,700,000 will be HK$2,174,000 has been spent for the professional used to pay underwriting fees and expenses in commission and relation to the Rights approximately Issue and the Bonus HK$1,526,000 has been Warrants Issue reserved for outstanding professional fee Approximately Approximately HK$129,525,248 will be HK$40,971,000 has been used by the Company to used to pay deposit for the acquire further investment Conditional Acquisition interests in the resources and approximately industry HK$88,554,248 was reserved for the further investment interests in the resources industry

— 16 —

LETTER FROM THE BOARD

Date of announcement/
circular/prospectus	Fund raising event	Proceeds raised	Proposed use of proceeds	Actual use of proceeds
9 November 2006	Placing of New	Approximately	Approximately	Approximately
30 November 2006	Shares	HK$240,000,000	HK$10,500,000 will be	HK$9,760,000 has been
6 December 2006			used for expenses	used to pay underwriting
12 December 2006			including, amongst other	commission and part of
4 January 2007			things, underwriting	professional fee.
28 February 2007			commission and	Approximately
			professional fees	HK$740,000 has been
				reserved for outstanding
				professional fee
			Approximately	Approximately
			HK$229,500,000 will be	HK$61,456,704 has been
			applied by the Group to	reserved for paying the
			fund new investments and	balance for the
			acquisitions in the future	Conditional Acquisition
			as and when opportunities	and HK$168,043,296 has
			arise and for general	been reserved for new
			working capital purposes	investments and
				acquisitions in the future
				and for general working
				capital purposes

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 Board 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.

LISTING RULES IMPLICATIONS

The transactions contemplated in the Acquisition constitute a major transaction of the Company, on the basis that the calculation of the profits and revenue ratios for the Company are both within the range of 25% and 100%, and is subject to the approval of the Shareholders at the SGM and at which no Shareholder shall abstain from voting. However, the relevant approval from the Shareholders has not been obtained in accordance with the requirements under the Listing Rules before completion of the Acquisition which took place on 9 February 2007. An ordinary resolution will be proposed at the SGM to ratify the Acquisition which is subject to the approval of the Shareholders at the SGM and at which no Shareholder shall abstain from voting. The Board is of the view that it is necessary and appropriate to obtain ratification on entering into the Acquisition notwithstanding completion has taken place.

— 17 —

LETTER FROM THE BOARD

The transactions contemplated under the Conditional Acquisition Agreement constitute a very substantial acquisition and a connected transaction for the Company, on the basis that the transactions contemplated under the Conditional Acquisition Agreement have been aggregated (pursuant to Rule 14.23 of the Listing Rules) with the transactions contemplated in the Acquisition which has taken place within twelve months from the date of entering into the Conditional Acquisition Agreement of interest in the same company, Mount Gibson, and therefore the calculation of the profit ratio for the Company is over 100% and that the Vendor is a direct wholly-owned subsidiary of Shougang and Shougang is a substantial Shareholder and hence a connected person of the Company, and is therefore subject to the approval of the Independent Shareholders on a vote taken by way of poll at the SGM and at which Shougang and its associates shall abstain from voting.

An Independent Board Committee of the Company has been constituted to consider the terms of the Conditional Acquisition Agreement and to advise and make recommendation to the Independent Shareholders as to how to vote at the SGM on the ordinary resolution regarding the aforesaid. Mr. Wong Wing Kuen, Albert, Mr. Tsui Robert Che Kwong and Mr. Yang Weiming have been appointed by the Board to serve as members of the Independent Board Committee.

The Independent Financial Adviser, Ample Capital Limited, has been appointed to advise the Independent Board Committee and the Independent Shareholders on the fairness and reasonableness of the transactions contemplated under the Conditional Acquisition Agreement in accordance with the Listing Rules.

SGM

A notice convening the SGM is set out on pages 364 and 365 of this circular. Ordinary resolutions in respect of the Acquisition and the Conditional Acquisition Agreement will be proposed at the SGM accordingly.

A form of proxy for the SGM is enclosed with 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 Hong Kong Branch Share Registrar 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

— 18 —

LETTER FROM THE BOARD

(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 resolution to be proposed at the SGM to ratify the Acquisition is subject to the approval of the Shareholders at the SGM and at which no Shareholder shall abstain from voting. The ordinary resolution to be proposed at the SGM to approve the Conditional Acquisition Agreement is subject to the approval of the Independent Shareholders on a vote taken by way of poll at the SGM and at which Shougang and its associates shall abstain from voting.

RECOMMENDATIONS

The Board considers that the transactions contemplated in the Acquisition and under the Conditional Acquisition Agreement are in the interests of the Company and the Shareholders as a whole, and the terms and transactions contemplated in and under 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 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 the IFA and the additional information set out in the Appendices to this circular.

On behalf of the Board of APAC RESOURCES LIMITED Yue Jialin Chairman

— 19 —

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 the Conditional Acquisition Agreement for inclusion in this circular.

APAC RESOURCES LIMITED

(

)[*]

(Incorporated in Bermuda with limited liability)

(Stock code: 1104)

19 March 2007

To the Independent Shareholders

Dear Sir or Madam,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

RELATING TO THE CONDITIONAL ACQUISITION OF 19,754,646 ORDINARY SHARES IN MOUNT GIBSON

We have been appointed as the Independent Board Committee to make recommendations to you in connection with the terms of the Conditional Acquisition Agreement, details of which are set out in the letter from the Board contained in the circular issued by the Company to the Shareholders dated 19 March 2007 (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.

Having considered the Conditional Acquisition Agreement as set out in the letter from the Board contained on pages 5 to 19 of the Circular and the advice of Ample Capital Limited, the Independent Financial Adviser, in relation thereto as set out on pages 22 to 33 of the Circular, we are of the view that the Conditional Acquisition Agreement is 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.

For identification purpose only

— 20 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Accordingly, we recommend you to vote in favour of the ordinary resolution to be proposed at the SGM to approve the Conditional Acquisition Agreement and the transactions contemplated thereunder.

Yours faithfully,

For and on behalf of the Independent Board Committee

Wong Wing Kuen, Albert Tsui Robert Che Kwong Independent non-executive Director Independent non-executive Director

Yang Weiming

Independent non-executive Director

— 21 —

LETTER FROM THE IFA

The following is the full text of the letter of advice from IFA in connection with the Conditional Acquisition Agreement for inclusion in this circular.

==> picture [114 x 45] intentionally omitted <==

Ample Capital Limited Unit A, 14th Floor Two Chinachem Plaza 135 Des Voeux Road Central Hong Kong

19 March 2007

To the Independent Board Committee and the Independent Shareholders of APAC Resources Limited

Dear Sirs,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION RELATING TO THE CONDITIONAL ACQUISITION OF 19,754,646 MG SHARES

INTRODUCTION

We refer to our engagement by the Company to advise the Independent Board Committee and the Independent Shareholders in respect of the purchase of 19,754,646 MG Shares contemplated under the Conditional Acquisition, the particulars of which have been set out in a circular to the Shareholders dated 19 March 2007 (the “Circular”) and in which this letter is reproduced. Unless the context requires otherwise, terms used in this letter shall have the same meanings as given to them under the definitions section of the Circular. In this letter and for illustrative purposes only, the exchange rate from A$ to HK$ is assumed to be A$1 = HK$6.10 unless otherwise stated.

Ample Capital Limited has been appointed as the independent financial adviser to the Independent Board Committee and the Independent Shareholders to give our recommendation as to whether the terms of the Conditional Acquisition Agreement are fair and reasonable so far as the Independent Shareholders are concerned. Details of the reasons for the proposed Conditional Acquisition are set out in the section headed “Letter from the Board” in the Circular (the “Board Letter”).

— 22 —

LETTER FROM THE IFA

On 16 February 2007, the Company announced that, among other things, the Company (through its direct wholly-owned subsidiary, Fortune Desire) entered into the Conditional Acquisition Agreement with the Vendor (a direct wholly-owned subsidiary of Shougang and hence a connected person of the Company) on 9 February 2007. Pursuant to the Conditional Acquisition Agreement, Fortune Desire as the purchaser has conditionally agreed to acquire 19,754,646 MG Shares, representing 2.51% interest in the issued share capital of Mount Gibson as at 9 February 2007, at an aggregate consideration of A$16,791,449.10 (equivalent to approximately HK$102,427,839.51).

The Company further announced that on 6 February 2007, the Company (through its direct wholly-owned subsidiary, Fortune Desire) acquired an aggregate of 40,125,967 MG Shares, representing approximately 5.09% interest in the issued share capital of Mount Gibson as at 9 February 2007, through a number of on-market transactions on the Australian Stock Exchange, at an aggregate consideration of approximately A$33,501,170 (equivalent to approximately HK$202,722,279 at an exchange rate of approximately A$1.00 to HK$6.0512) at an average price of approximately A$0.8349 per MG Share.

The transaction contemplated in the Conditional Acquisition constitutes a very substantial acquisition and a connected transaction for the Company, on the basis that the transactions contemplated in the Conditional Acquisition have been aggregated (pursuant to Rule 14.23 of the Listing Rules) with the transaction contemplated in the Acquisition which has taken place within twelve months from the date of entering into the Conditional Acquisition of interest in the same company, Mount Gibson, and therefore the calculation of the profit ratio for the Company is over 100% and that the Vendor is a direct wholly-owned subsidiary of Shougang, a substantial Shareholder and hence a connected person of the Company. Accordingly, the Conditional Acquisition is subject to the approval of the Independent Shareholders on a vote taken by way of poll at the SGM and at which Shougang and its associates shall abstain from voting. Profit Harbour, a controlling Shareholder, is not connected with Shougang (other than both being Shareholders at the level of the Company). Accordingly, Profit Harbour is considered to be an Independent Shareholder and shall be able to cast its vote in respect of the Conditional Acquisition at the SGM.

In formulating our opinion, we have relied on the accuracy of the information and representations contained in the Circular and the information and representations provided to us by the Directors and management of the Group and have assumed that all information and representations made by the Group and the Directors were true, accurate and complete at the time they were made and continue to be so as at the date of the Circular. We consider that we have obtained from the Company all of the necessary information on which to form a reasonable basis for our opinion. We have also assumed that all statements of belief, opinion and intention made by the Directors in the Circular were reasonably made after due enquiry. We have no reason to suspect that any material facts have been

— 23 —

LETTER FROM THE IFA

omitted or withheld from the information contained or opinions expressed in the Circular nor to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors. We have not, however, conducted an independent in-depth investigation into the affairs of the Group nor have we carried out any independent verification of the information supplied.

PRINCIPAL FACTORS CONSIDERED

In arriving at our opinion in relation to the Agreement, we have taken into consideration the following factors:

1. Background information

The Group is principally engaged in (i) trading in base metals and commodities trading portfolio primarily focused on natural resources and related sectors; and (ii) trading in fabric products and other merchandises with investment in the resources and related industries and listed securities as trading portfolio. An inspection of the Company’s annual report for the year ended 31 December 2005 (the “Annual Report”) reveals that the Group recorded an audited turnover of approximately HK$68,393,000, representing an approximately 206.63% increase from the audited turnover of around HK$22,305,000 recorded during the year ended 31 December 2004. In addition, the Group managed to turn around its audited loss of around HK$36,299,000 recorded in the year ended 31 December 2004 to an audited profit of approximately HK$6,501,000 for the year ended 31 December 2005. As at 31 December 2005, the Group had audited total assets, total liabilities and net assets of around HK$43,003,000, HK$21,122,000 and HK$21,881,000 respectively. In the Company’s interim report for the 6 months ended 30 June 2006, the Group recorded unaudited turnover of around HK$5,788,000, representing a decrease of around 85.90% from the unaudited turnover of approximately HK$41,055,000 for the corresponding period in the previous year. In addition, the Group recorded an unaudited loss of around HK$6,094,000 for the 6 months ended 30 June 2006 versus an unaudited profit of approximately HK$10,532,000 recorded in the 6 months ended 30 June 2005. The Group had unaudited total assets, total liabilities and net assets of around HK$23,188,000, HK$7,401,000 and HK$15,787,000 respectively as at 30 June 2006.

The Independent Shareholders should note that the Group’s unaudited assets as at 30 June 2006 does not include the estimated net proceeds of around HK$374,000,000 and HK$229,500,000 generated from the one-for-one rights issue (the “Rights Issue”) and placing of 800,000,000 new Shares (the “Placing”) respectively which were both announced by the Company on 9 November 2006. As announced by the Company on 31 January 2007 and 28 February 2007, the Rights Issue had become unconditional and the Placing had completed respectively. In the Board Letter, it is stated that the consideration payable under the Conditional Acquisition is to be financed as to HK$40,971,135.80 and HK$61,456,703.71 by the proceeds generated from the Rights Issue and the Placing respectively.

2. Information on Mount Gibson

As stated in the Board Letter, Mount Gibson is a company incorporated in Australia with limited liability in 1938. Its MG Shares are listed on the Australian Stock Exchange. The

— 24 —

LETTER FROM THE IFA

principal business of Mount Gibson is mining of hematite iron ore deposits at Tallering Peak and Koolan Island 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 and Koolan Island to 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	asset	value	97,420,000	67,629,000
Net	profit	before taxation and minority interest	16,151,000	22,032,000
Net	profit	after taxation and minority interest	23,479,000	13,502,000

It is further stated in the Board Letter that no dividends had been paid or declared and no recommendation had been made by the board of Mount Gibson as to dividends for the past three years for Mount Gibson.

As disclosed in the section headed “Information on Mount Gibson” in the Board Letter, before the completion of the Conditional Acquisition, the Company has acquired, through a series of acquisitions and conversions, 129,828,875 MG Shares, representing approximately 16.48% in the issued share capital of Mount Gibson as at 9 February 2007. The series of acquisitions and conversions include:

(i) the conversion of 84,000,000 shares in Aztec Resources Limited (“Aztec”) held by the Group to 28,000,000 MG Shares on 28 November 2006 under Mount Gibson’s scrip takeover offer for Aztec announced by Mount Gibson on 24 July 2006 (the “Mount Gibson Offer”);
(ii) the acquisition of 48,373,197 MG Shares on 1 February 2007 under the very substantial acquisition of the Company as announced by the Company on 9 November 2006 (the “Previous Acquisition”);
(iii) the acquisition of 100,000 MG Shares through on-market transactions on the Australian Stock Exchange on 2 February 2007;
(iv) the compulsory conversion of 39,689,135 shares in Aztec to 13,229,711 MG Shares on 6 February 2007 under the Mount Gibson Offer; and
(v) the acquisition of 40,125,967 MG Shares through a number of on-market transactions on the Australian Stock Exchange on 6 February 2007 under the Acquisition.

— 25 —

LETTER FROM THE IFA

3. Reasons for and the benefits of the Conditional Acquisition Agreement

It is stated in the Board Letter that as disclosed in the Previous Circular, the Company had expressed its intention to acquire further interests in the natural resources industries where opportunities arise to make additional investments where returns are maximized for Shareholders, and if necessary to increase shareholding interest in Mount Gibson, apart from the completion of the Previous Acquisition.

The Board Letter further states that since the Previous Acquisition, the Company has still been on the lookout for good investment opportunities to maximize return for Shareholders. It has always been the intention of the Company to seek to lock in the supply of iron ore materials and to trade in such materials for higher profit. An increase in the shareholding interest in Mount Gibson is an attempt to reinforce the existing business of the Company so that it is in a better position in seeking to assure supply of raw materials for the trading in commodities with a higher profit margin. The Acquisition and the Conditional Acquisition are anticipated 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 Acquisition and Conditional Acquisition are consistent with the Company’s strategy of seeking geographic regions and commodity markets which it believes present attractive opportunities and where rationalization and consolidation is likely to occur.

In view of current market conditions, the Directors consider that both the Acquisition and the Conditional Acquisition represents a good opportunity for the Company to further increase its investment 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.

Having regard to the nature of and the benefits resulting from the Acquisition and the Conditional Acquisition, the Directors believe that the Acquisition and the Conditional Acquisition are fair and reasonable and in the interests of the Shareholders taken as a whole.

After taking into account the potential benefits of the Conditional Acquisition, we concur with the Directors’ view and consider that the Conditional Acquisition is in the interest of the Independent Shareholders and the Company as a whole.

— 26 —

LETTER FROM THE IFA

4. Terms of the Conditional Acquisition Agreement

4.1 The consideration

The consideration payable by Fortune Desire for the Conditional Acquisition is HK$102,427,839.51 being A$0.85 per MG Share.

The consideration payable by Fortune Desire pursuant to the Conditional Acquisition Agreement has been paid as to HK$40,971,135.80 upon execution of the Conditional Acquisition Agreement as deposit and the balance in the sum of HK$61,456,703.71 shall be paid at the expiry of five Business Days after all the transactions contemplated under the Conditional Acquisition Agreement have been completed, 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 Conditional Acquisition Agreement, the deposit in the sum of HK$40,971,135.80 shall be refunded to Fortune Desire forthwith.

The consideration of the 19,754,646 MG Shares at A$0.85 per MG Share represents (i) a premium of approximately 6.25% over the average closing price of the MG Shares (i.e. A$0.80 per MG Share) quoted on the Australian Stock Exchange on the last 5 full trading days up to and including 8 February 2007; and (ii) a premium of approximately 9.68% over the closing price of the MG Shares (i.e. A$0.775 per MG Share) quoted on the Australian Stock Exchange on 9 February 2007.

It is stated in the Board Letter that given the potential iron ore production growth of Mount Gibson in the emerging Midwest region of Western Australian 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. To achieve such objective, the Company negotiated on arm’s length with Shougang and decided to purchase the entire block of MG Shares held by Timely Rich at a premium of 6.25% in a bid to build up its substantial strategic shareholding interest in Mount Gibson which is justified for such block lot size of MG Shares.

We consider that the basis upon which the consideration payable to Shougang was determined, i.e. with reference to the prevailing market price of MG Shares traded on the Australian Stock Exchange on 9 February 2007 (being the date of the Conditional Acquisition Agreement), to be fair and reasonable to the Independent Shareholders.

— 27 —

LETTER FROM THE IFA

4.1.1 Historical closing price of the MG Shares

We set out below the historical closing price and trading volume of the MG Shares on the Australian Stock Exchange during the 3 months ended 9 February 2007 (being the date of the Conditional Acquisition Agreement).

==> picture [366 x 441] intentionally omitted <==

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

1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Date
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
0
Date
10-Nov-0617-Nov-0624-Nov-061-Dec-068-Dec-0615-Dec-0622-Dec-0629-Dec-065-Jan-0712-Jan-0719-Jan-0726-Jan-072-Feb-079-Feb-07
10-Nov-0617-Nov-0624-Nov-061-Dec-068-Dec-0615-Dec-0622-Dec-0629-Dec-065-Jan-0712-Jan-0719-Jan-0726-Jan-072-Feb-079-Feb-07
Closing price per MG Share (A$)
Trading Volume (MG Shares)
----- End of picture text -----

Source: http://www.yahoo.com.au

— 28 —

LETTER FROM THE IFA

As demonstrated in the charts above, the MG Shares traded between A$0.77 per MG Share as recorded on 29 January 2007 and A$0.925 per MG Share as recorded on 28 December 2006. During the aforementioned 3 months period, the average closing price of the MG Shares on the Australian Stock Exchange was around A$0.84 per MG Share. The average daily turnover of the MG Shares was approximately 3,123,000 MG Shares per day during the 3 months period mentioned above, representing around 0.40% of Mount Gibson’s issued share capital as at 9 February 2007.

From the above information, we note that the consideration per MG Share of around A$0.85 is approximately 1.19% higher than the average closing price per MG Share of around A$0.84 during the 3 months ended 9 February 2007. Furthermore, the 19,754,646 MG Shares which are to be acquired under the Conditional Acquisition Agreement is around 5.33 times over the average daily turnover of around 3,123,000 MG Shares during the 3 months ended 9 February 2007.

For reasons set out in section 4.2 of this letter below, we consider the aforementioned premium of the consideration per MG Share over the historical closing price per MG Share to be fair and reasonable to the Independent Shareholders.

4.1.2 Comparative analysis with industry peers

In order to conduct a comparative analysis of Mount Gibson with its industry peers, we have identified 8 companies (the “Comparables”) listed on the Australian Stock Exchange which are engaged in the business of iron ore mining. We set out our comparative analysis on (i) the price to earning ratio, (ii) price to book ratio and (iii) price to ore reserve ratio below.

			Approximate	Approximate	Approximate
	Approximate		price to	price to	price to
Name of company (ticker)	market capitalization1	Price per share2	earning ratio3	book ratio4	ore reserve ratio5
	A$’million	A$	times	times	times
The Company (MGX)6	669.62	0.85	28.52	6.13	20.60
Admiralty Resources	91.97	0.15	n/a	5.19	n/a
NL (ADY)
Fortescue Metals	4,170.22	15.77	n/a	30.42	3.96
Group Limited
(FMG)
Gindalbie Metals	270.50	0.62	n/a	5.20	n/a
Limited (GBG)
Grange Resources	161.18	1.54	83.26	4.76	n/a
Limited (GRR)
Midwest Corporation	160.20	1.01	n/a	3.01	n/a
Limited (MIS)
Murchison Metals	574.21	1.72	n/a	10.51	n/a
Limited (MMX)
Portman Limited	894.26	5.09	7.75	2.55	10.13
(PMM)
Territory Iron Limited	60.45	0.39	n/a	3.38	15.66
(TFE)
		Mean:	45.50	8.13	9.92

Sources: http://www.bloomberg.com, http://www.asx.com.au and http://www.yahoo.com.au

— 29 —

LETTER FROM THE IFA

Notes:

For the Comparables, the approximate market capitalization was calculated based on the closing price per share on 9 February 2007 (being the date of the Conditional Acquisition Agreement).
For the Comparables, the price per share was based on the closing price per share as quoted on the Australian Stock Exchange on 9 February 2007 (being the date of the Conditional Acquisition Agreement).
For the Comparables, the approximate price to earning ratio was calculated based on the market capitalization stated above and the audited net profit for the latest financial year for which information is available. Where “n/a” is stated, a loss was made for the latest financial year.
For the Comparables, the approximate price to book ratio was calculated based on the market capitalization stated above and the audited net assets as at the latest financial year end for which information is available.
For the Comparables, the approximate price to ore reserve ratio was calculated based on the market capitalization stated above and the amount of ore reserves (in tons) as stated in the latest available annual report. Where “n/a” is stated, no relevant information was located within the annual report.
For the Company, all figures were calculated based on the consideration per MG Share of A$0.85, the issued share capital of Mount Gibson as at 9 February 2007 of 787,786,821 MG Shares and figures available in Mount Gibson’s annual report for the year ended 30 June 2006.

As demonstrated in the analysis presented above, only 2 out of 8 of the Comparables were profitable in the latest financial year for which financial statements are available. From the analysis, we have learnt that the approximate price to earning ratio of the Comparables ranged from 7.75 times to 83.26 times with the mean being around 45.50 times. For the approximate price to book ratio, the comparative figures ranged from a low of 2.55 times to a high of 30.42 times with a mean of 8.13 times. For the approximate price to ore reserve ratio, the range was between 3.96 times to 15.66 times with a mean of 9.92 times.

Due to the absence of the relevant data with respect to the approximate price to earning ratio and approximate price to ore reserve ratio for over half of the Comparables, we are of the view that basing our conclusion as to the fairness and reasonableness of the consideration to be payable to Shougang (through Timely Rich) under the Conditional Acquisition Agreement on these two parameters will not be meaningful. Nevertheless, we note that the Company’s approximate price to earning ratio of 28.52 times is within the range of the Comparables and is below the average figure of the Comparables of 45.50 times. As for the approximate price to ore reserve ratio, the Company’s figure of 20.60 times is larger than both the average figure of 9.92 times and the high end of the Comparables of 15.66 times. As we turn our attention to the approximate price to book ratio, we note that the Company’s figure of 6.13 times is within the range of the Comparables and is also below the average figure of 8.13 times.

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LETTER FROM THE IFA

Based on the comparative analysis illustrated above, we consider that the consideration payable under the Conditional Acquisition to be fair and reasonable to the Independent Shareholders.

4.2 Conclusion

Having considered the above and in particular:

the consideration per MG Share of A$0.85 represents a premium of approximately 9.68% over the closing price of A$0.775 per MG Share on 9 February 2007 (being the date of the Conditional Acquisition Agreement);
the consideration per MG Share of A$0.85 represents a premium of approximately 1.19% over the average closing price per MG Share of around A$0.84 for the 3-month period ended 9 February 2007 (being the date of the Conditional Acquisition Agreement);
the 19,754,646 MG Shares to be acquired under the Conditional Acquisition Agreement is approximately 5.33 times over the average daily turnover of around 3,123,000 MG Shares during the 3 months ended 9 February 2007 and the purchase of the said amount of MG Shares on the Australian Stock Exchange may normally have the effect of driving the market price of the MG Shares upwards on the date of purchase and hence increase the total cost of purchase;
the Company’s approximate price to book ratio of 6.13 times is within the range of the Comparables and is also below the average figure of 8.13 times; and
factors set out in the section headed “Reasons for and the benefits of the Conditional Acquisition Agreement” of this letter,

we consider that the consideration of HK$102,427,839.51 to be payable to Shougang (through Timely Rich) pursuant to the Conditional Acquisition Agreement (together with the approximately 9.68% premium of the consideration per MG Share of A$0.85 over the closing price of A$0.775 per MG Share on 9 February 2007 (being the date of the Conditional Acquisition Agreement)) to be fair and reasonable and is in the interest of the Company and the Shareholders as a whole.

5. Financial effects of the Conditional Acquisition Agreement

5.1 Earnings

In the audited financial statements obtained from the Annual Report, the Group recorded audited net profit of around HK$6,501,000 during the year ended 31 December 2005. According to Mount Gibson’s annual report for the year ended 30 June 2006, it had recorded net profit of around A$23,479,000 (or equivalent to around HK$143,222,000). Upon the completion of the Conditional Acquisition Agreement, the Group will hold

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LETTER FROM THE IFA

149,583,521 MG Shares, representing approximately 18.99% of Mount Gibson’s issued share capital as at 9 February 2007. As the Company’s shareholding in Mount Gibson is below 50%, Mount Gibson is not expected be classified as a subsidiary of the Company and accordingly, its results are not expected to be consolidated with that of the Group. Furthermore, no dividends had been paid or declared and no recommendation had been made by the board of Mount Gibson as to dividends for the past three years for Mount Gibson. As demonstrated in the “Unaudited pro forma consolidated income statement of the Group” in Appendix III of the Circular headed “Pro Forma Financial Information of the Group”, there is no pro forma adjustment arising out of the Conditional Acquisition for the item “Profit for the period”. Save for the receipt of future dividend or distribution from the Company’s investment in Mount Gibson, the Conditional Acquisition is not expected to have any immediate material effect on the Group’s earnings.

5.2 Net asset value

The unaudited pro forma net assets of the Group (after the Previous Acquisition, Rights Issue and Placing but before adjustments arising out of the Acquisition and Conditional Acquisition) appearing in the “Unaudited pro forma consolidated balance sheet of the Group” in Appendix III of the Circular headed “Pro Forma Financial Information of the Group” (the “Pro Forma Balance Sheet”) amounted to approximately HK$619,287,000. On the other hand, Mount Gibson had audited net assets (excluding minority interests) of around A$97,420,000 (equivalent to approximately HK$594,262,000) as at 30 June 2006. As mentioned immediately above, Mount Gibson’s financial statements are not expected to be consolidated with that of the Group. As discussed with the management of the Company, the 19,754,646 MG Shares to be acquired under the Conditional Acquisition will be initially booked in the Company’s books and accounts as “Available for Sale Financial Assets” at cost, i.e. the consideration payable under the Conditional Acquisition Agreement. As demonstrated in the Pro Forma Balance Sheet, there is no effect arising from the pro forma adjustments for the Conditional Acquisition on the Group’s net asset value. Save for as a result of any unforeseen change in the fair value (e.g. arising out of fluctuations in the market value of the MG Shares on the Australian Stock Exchange) of the Company’s investment in Mount Gibson subsequently which will be recognized in equity (investment revaluation reserve), the Conditional Acquisition is not expected to have any immediate material effect on the Group’s net asset value.

5.3 Gearing

The Group’s unaudited pro forma total equity (after the Previous Acquisition, Rights Issue and Placing but before adjustments arising out of the Acquisition and Conditional Acquisition) appearing in the Pro Forma Balance Sheet is approximately HK$619,287,000. Furthermore, the Pro Forma Balance Sheet shows nil unaudited pro forma total debts (after the Previous Acquisition, Rights Issue and Placing but before adjustments arising out of the Acquisition and Conditional Acquisition), translating to a debt-to-equity ratio (total debts/total equity x 100%) of nil. As at 30 June 2006, Mount Gibson had audited total equity and total debts of around A$109,196,000 (equivalent to around HK$666,096,000) and around A$5,841,000 (equivalent to around HK$35,630,000) respectively, translating

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LETTER FROM THE IFA

into a debt-to-equity ratio of around 5.35%. As demonstrated in the Pro Forma Balance Sheet, there is no pro forma adjustment arising out of the Conditional Acquisition for the item “Total Equity”. Furthermore, the Pro Forma Balance Sheet does not show any change to the debts of the Group as a result of the Conditional Acquisition. Since (i) the results of Mount Gibson are not expected to be consolidated with that of the Group, (ii) the Conditional Acquisition is not expected to have any immediate material effect on the Group’s total equity and (iii) the Conditional Acquisition is not financed by any debt, the Conditional Acquisition is not expected to have any immediate material effect on the Group’s gearing position.

5.4 Liquidity

As per the Pro Forma Balance Sheet, the Group has unaudited pro forma current assets (after the Previous Acquisition, Rights Issue and Placing but before adjustments arising out of the Acquisition and Conditional Acquisition) and unaudited pro forma current liabilities (after the Previous Acquisition, Rights Issue and Placing but before adjustments arising out of the Acquisition and Conditional Acquisition) of approximately HK$381,813,000 and HK$7,401,000 respectively, translating into a current ratio (current assets/current liabilities) of approximately 51.59. As at 30 June 2006, Mount Gibson had audited current assets and current liabilities of around A$65,924,000 (equivalent to around HK$402,136,000) and A$24,431,000 (equivalent to around HK$149,029,000) respectively, translating into a current ratio of approximately 2.70. As demonstrated in the Pro Forma Balance Sheet, the Conditional Acquisition is expected to have a negative impact of around HK$103,708,000 on the item “Bank balances and cash” which would decrease unaudited pro forma current assets to around HK$278,105,000. At the same time, the Pro Forma Balance Sheet does not show any adjustment to the Group’s current liabilities which is attributable to the Conditional Acquisition. Due to the pro forma adjustment to the Group’s current assets, the Conditional Acquisition is expected to decrease the Group’s current ratio to around 37.58, representing a decrease of around 27.16%.

CONCLUSION

Having considered the above principal factors, we are of the opinion that the Conditional Acquisition is in the interests of the Group and the Shareholders so far as the Independent Shareholders as a whole are concerned and the terms of the Conditional Acquisition Agreement are fair and reasonable. Accordingly, we would recommend (1) the Independent Board Committee to advise the Independent Shareholders and (2) the Independent Shareholders, to vote in favour of the ordinary resolution to approve the Conditional Acquisition at the SGM.

Yours faithfully, For and on behalf of

Ample Capital Limited Andrew Cheng

Director

— 33 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

1. 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

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

— 34 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Assets and liabilities

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

— 35 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2. AUDITOR’S 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 2004 and 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 38 to 65 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.

— 36 —

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

— 37 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

3. 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 for the year ended 31 December 2005 which are included in the annual report 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

— 38 —

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

— 39 —

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

— 40 —

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.

— 41 —

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

— 42 —

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.

— 43 —

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

— 44 —

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.

— 45 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Property, plant and equipment

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

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	20-331⁄3%

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.

— 46 —

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

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.

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.

— 47 —

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.

— 48 —

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.

— 49 —

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.

— 50 —

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	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	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
			1,076
			(8,214 15,421 (1,744
			6,539 (38
		—	6,501
			2,151
			40,852
		—	43,003
			1,570
			19,552
			21,122

— 51 —

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 13,522 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	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 13,522 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	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 13,522 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
			514
		(24,806) 11,624	(24,806 11,624 (23,265 (335
			(36,268 (31
		—	(36,299
			7,257
			50,271
		—	57,528
			4,754
			37,394
			42,148

— 52 —

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.

— 53 —

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.

— 54 —

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.

— 55 —

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)
— — — — 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	—
			23

— 56 —

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	The Company 2005 2004 HK$’000 HK$’000 75,274 75,274 6,296 32,121
	81,570 (75,274)	107,395 (75,274)
	6,296	32,121

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 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

— 57 —

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

— 58 —

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.

— 59 —

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
	—	—

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.

— 60 —

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.

— 61 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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.

— 62 —

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.

— 63 —

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.

— 64 —

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.

— 65 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

4. 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

— 66 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Condensed Consolidated Balance Sheet

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

— 67 —

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

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

— 68 —

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.

— 69 —

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Capital Disclosures[[1]]

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

— 70 —

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

— 71 —

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

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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

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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.

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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.

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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

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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.

5. WORKING CAPITAL

The Directors are of the opinion that upon the completion of the acquisition and the conditional acquisition 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.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

6. STATEMENT OF INDEBTEDNESS OF THE GROUP

Brrowings

At the close of business on 31 January 2007, 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$143,274,000.

Save as aforesaid or as otherwise disclosed herein, an apart form intra-Group liabilities, as at the close of business of 31 January 2007, 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 changes in indebtedness and contingent liabilities of the Group since 31 January 2007 up to and including the Latest Practicable Date.

7. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors are of the view that there is not 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.

8. FINANCIAL AND TRADING PROSPECTS

Over the past few years, the Group has continued to review and evaluate numerous business and investment opportunities that will complement, enhance and reinforce the Group’s existing business and has expressed its intention to acquire further interests in the natural resources industries.

In this regard, acquisition of the Mount Gibson Shares meets such business plan and development strategy of the Group as Mount Gibson, being an iron ore exploration and producing company, provides supply of iron ore materials for physical commodity trading to potentially complement the base metal trading business of the Group. The investment in Mount Gibson Shares fits in with the Company’s business strategy, corporate objectives and principal business activities.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The Board believes that both the Acquisition and the Conditional Acquisition represent a unique strategic investment holding in the Australian resources sector upon which to build a significant investment and commodities trading company focused on the natural resources and related sectors. Moreover, it is an attempt to assure supply of raw materials for the trading in commodities with a higher profit margin to consolidate the asset and earning bases of the Group.

Having regard to the business plan of the Group, net proceeds from the Placing, which has been completed on 28 February 2007, 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 acquire further investment interests in the resources industry, where opportunities arise to make additional investments where returns are maximized for Shareholders.

Further, the Board is of the view that both the Acquisition and the Conditional Acquisition are in the best interests of the Company and the Shareholders as a whole. After the completion of the two acquisitions, the asset base of the Group will also be strengthened. With the benefit of favourable economic conditions, the Board believes that the expansion of the businesses of the Group will deliver long term and sustainable values to the Shareholders.

— 81 —

APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

1. 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.

2. 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 Harbour 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.

— 87 —

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.

— 88 —

APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

3. 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.

— 89 —

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.

— 90 —

APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

4. 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).

— 91 —

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)

— 92 —

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.

— 93 —

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)

— 94 —

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.

— 95 —

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.

— 96 —

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.

— 97 —

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION

TO THE DIRECTORS OF APAC RESOURCES LIMITED

We report on the unaudited pro forma financial information of APAC Resources Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) set out on pages 101 to 105 under the headings of “Pro Forma Financial Information of the Group” in Appendix III of the Company’s circular dated 19 March 2007, in connection with the acquisition of 40,125,967 ordinary shares and the conditional acquisition of 19,754,646 ordinary shares in Mount Gibson Iron Limited (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 and the conditional acquisition 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 page 100 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.

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.

— 98 —

APPENDIX III PRO FORMA FINANCIAL INFORMATION OF THE GROUP

The unaudited pro forma financial information is for illustrative purposes only, based on the judgments 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 19 March 2007

— 99 —

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following is the unaudited pro forma financial information of the Group prepared in accordance with the Listing Rules for the purpose of illustrating the effect of the acquisition of 40,125,967 ordinary shares (the “Acquisition”) and conditional acquisition of 19,754,646 ordinary shares (the “Conditional Acquisition”) in Mount Gibson Iron Limited (“Mount Gibson”) on the financial position of the Group as if the Acquisition and Conditional Acquisition had been completed on 30 June 2006 and the results and cash flows of the Group as if the Acquisition and Conditional Acquisition had been completed on 1 January 2005. As it is prepared for illustrative purpose only, the because of its nature, it may not give a true picture of the financial position, results and cash flows of the Group following the completion of the Acquisition and the Conditional Acquisition.

The unaudited pro forma consolidated balance sheet of the Group is prepared based on the unaudited pro forma consolidated balance sheet of the Group after acquisition, rights issue and placing, as shown on page 160 of the Company’s circular of 12 December 2006, after making such pro forma adjustments relating the Acquisition and Conditional Acquisition as if the Acquisition and the Conditional Acquisition had been completed on 30 June 2006. The acquisition, rights issue and placing as mentioned in the Company’s circular of 12 December 2006 had been completed on or before 28 February 2007.

The unaudited pro forma consolidated income statement and cash flow statement of the Group are based on the unaudited pro forma consolidated income statement and cash flow statement of the Group after acquisition, rights issue and placing, as shown on pages 161-163 of the Company circular of 12 December 2006, after making such pro forma adjustments relating the Acquisition and Conditional Acquisition as if the Acquisition and the Conditional Acquisition had been completed had been completed on 1 January 2005.

The unaudited pro forma financial information has not included the following transactions which had completed after 30 June 2006:

rights issue completed on 14 July 2006, which raised gross proceeds of HK$82.6 million by issuing 826 million rights shares at HK$0.1 each; and
the convertible bond of HK$2 million issued to the Vendor for acquisition of 60% issued equity interest of Chinaright Electronics Limited was converted into 20,000,000 new shares of the Company on 24 August 2006,.

The unaudited pro forma financial information of the Group should be read in conjunction with the Company’s circular of 12 December 2006 and other financial information included elsewhere in this circular.

— 100 —

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

A. Unaudited pro forma consolidated balance sheet of the Group

Unaudited pro forma consolidated balance sheet as at 30 June 2006 after the acquisition, rights issue and placing as per the Company’s circular dated 12 December 2006 Pro forma adjustments for Acquisition Unaudited pro forma consolidated balance sheet as at 30 June 2006 after the Acquisition Pro forma adjustments for Conditional Acquisition Unaudited pro forma consolidated balance sheet as at 30 June 2006 after the Acquisition and Conditional Acquisition HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 NB 1 NB 2 Non-Current Assets Available-for-sale financial assets 244,875 202,722 447,597 103,708 551,305 Current Assets Trade and other receivables 748 748 748 Pledged bank deposits 2,014 2,014 2,014 Bank balances and cash 379,051 379,051 (103,708) 275,343 381,813 381,813 278,105 Current Liabilities Trade and other payables 7,367 7,367 7,367 Margin financing — 202,722 202,722 202,722 Tax payables 34 34 34 7,401 210,123 210,123 Net Current Assets 374,412 171,690 67,982 Net Assets 619,287 619,287 619,287 Capital and Reserves Share capital 247,200 247,200 247,200 Reserves 372,087 372,087 372,087 Total Equity 619,287 619,287 619,287	Unaudited pro forma consolidated balance sheet as at 30 June 2006 after the acquisition, rights issue and placing as per the Company’s circular dated 12 December 2006 Pro forma adjustments for Acquisition Unaudited pro forma consolidated balance sheet as at 30 June 2006 after the Acquisition Pro forma adjustments for Conditional Acquisition Unaudited pro forma consolidated balance sheet as at 30 June 2006 after the Acquisition and Conditional Acquisition HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 NB 1 NB 2 Non-Current Assets Available-for-sale financial assets 244,875 202,722 447,597 103,708 551,305 Current Assets Trade and other receivables 748 748 748 Pledged bank deposits 2,014 2,014 2,014 Bank balances and cash 379,051 379,051 (103,708) 275,343 381,813 381,813 278,105 Current Liabilities Trade and other payables 7,367 7,367 7,367 Margin financing — 202,722 202,722 202,722 Tax payables 34 34 34 7,401 210,123 210,123 Net Current Assets 374,412 171,690 67,982 Net Assets 619,287 619,287 619,287 Capital and Reserves Share capital 247,200 247,200 247,200 Reserves 372,087 372,087 372,087 Total Equity 619,287 619,287 619,287	Unaudited pro forma consolidated balance sheet as at 30 June 2006 after the acquisition, rights issue and placing as per the Company’s circular dated 12 December 2006 Pro forma adjustments for Acquisition Unaudited pro forma consolidated balance sheet as at 30 June 2006 after the Acquisition Pro forma adjustments for Conditional Acquisition Unaudited pro forma consolidated balance sheet as at 30 June 2006 after the Acquisition and Conditional Acquisition HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 NB 1 NB 2 Non-Current Assets Available-for-sale financial assets 244,875 202,722 447,597 103,708 551,305 Current Assets Trade and other receivables 748 748 748 Pledged bank deposits 2,014 2,014 2,014 Bank balances and cash 379,051 379,051 (103,708) 275,343 381,813 381,813 278,105 Current Liabilities Trade and other payables 7,367 7,367 7,367 Margin financing — 202,722 202,722 202,722 Tax payables 34 34 34 7,401 210,123 210,123 Net Current Assets 374,412 171,690 67,982 Net Assets 619,287 619,287 619,287 Capital and Reserves Share capital 247,200 247,200 247,200 Reserves 372,087 372,087 372,087 Total Equity 619,287 619,287 619,287
748 2,014 379,051 381,813 7,367 — 202,722 34 7,401 374,412	748 2,014 379,051 (103,708) 381,813 7,367 202,722 34 210,123 171,690	748 2,014 275,343
		278,105
		7,367 202,722 34
		210,123
		67,982
619,287	619,287	619,287
247,200 372,087	247,200 372,087	247,200 372,087
619,287	619,287	619,287

— 101 —

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

B. Unaudited pro forma consolidated income statement of the Group

Unaudited

Unaudited	Unaudited	Unaudited	Unaudited
pro forma consolidated income statement for the year ended 31 December 2005 after the acquisition, rights issue and placing as per the Company’s circular dated 12 December 2006 Pro forma adjustments for Acquisition Unaudited pro forma consolidated income statement for the year ended 31 December 2005 after the Acquisition Pro forma adjustments for Conditional Acquisition Unaudited pro forma consolidated income statement for the year ended 31 December 2005 after the Acquisition and Conditional Acquisition HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 NB3 NB 3 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
	2,280 474 15,421 (1,353) (8,539) 8,283 (1,744) 6,539 (38)	2,280 474 15,421 (1,353) (8,539) 8,283 (1,744) 6,539 (38)	2,280 474 15,421 (1,353 (8,539)
			8,283 (1,744)
			6,539 (38)
	6,501	6,501	6,501

— 102 —

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

C. Unaudited pro forma consolidated cash flow statement of the Group

Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the acquisition, rights issue and placing as per the Company’s circular dated 12 December 2006 Pro forma adjustments for Acquisition Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the Acquisition Pro forma adjustments for Conditional Acquisition Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the Acquisition and Conditional Acquisition HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 NB1 NB2 Operating activities Profit from operations 8,283 8,283 8,283 Adjustments for: Depreciation and amortisation 7 7 7 Loss on disposal of property, plant and equipment 16 16 16 Credit arising from scheme of arrangement with creditors (15,421) (15,421) (15,421 Interest income (160) (160) (160) Operating cash flow before working capital changes (7,275) (7,275) (7,275 Decrease in trade and other receivables 5,050 5,050 5,050 Decrease in trade and other payable (5,619) (5,619) (5,619 Cash used in operations (7,844) (7,844) (7,844 Interest paid (1,744) (1,744) (1,744 Hong Kong profits tax paid (24) (24) (24) Net cash used in operating activities (9,612) (9,612) (9,612	Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the acquisition, rights issue and placing as per the Company’s circular dated 12 December 2006 Pro forma adjustments for Acquisition Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the Acquisition Pro forma adjustments for Conditional Acquisition Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the Acquisition and Conditional Acquisition HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 NB1 NB2 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 payable (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	Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the acquisition, rights issue and placing as per the Company’s circular dated 12 December 2006 Pro forma adjustments for Acquisition Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the Acquisition Pro forma adjustments for Conditional Acquisition Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the Acquisition and Conditional Acquisition HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 NB1 NB2 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 payable (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
(7,275) 5,050 (5,619) (7,844) (1,744) (24) (9,612)	(7,275) 5,050 (5,619) (7,844) (1,744) (24) (9,612)	(7,275 5,050 (5,619
		(7,844 (1,744 (24)
		(9,612

— 103 —

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the acquisition, rights issue and placing as per the Company’s circular dated 12 December 2006 Pro forma adjustments for Acquisition Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the Acquisition Pro forma adjustments for Conditional Acquisition Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the Acquisition and Conditional Acquisition HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 NB1 NB2 Investing activities Purchase of available-for-sale financial assets (244,875) (202,722) (447,597) (103,708) (551,305 Decrease in pledged bank deposits 3,988 3,988 3,988 Interest received 160 160 160 Net cash used in investing activities (240,727) (443,449) (547,157 Financing activities Issue of right share 374,000 374,000 374,000 Issue of placing share 229,500 229,500 229,500 Increase in margin financing 202,722 202,722 202,722 Secured other loans raised 15,000 15,000 15,000 Repayment of other loans (15,000) (15,000) (15,000 Net cash from financing activities 603,500 806,222 806,222	Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the acquisition, rights issue and placing as per the Company’s circular dated 12 December 2006 Pro forma adjustments for Acquisition Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the Acquisition Pro forma adjustments for Conditional Acquisition Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the Acquisition and Conditional Acquisition HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 NB1 NB2 Investing activities Purchase of available-for-sale financial assets (244,875) (202,722) (447,597) (103,708) (551,305 Decrease in pledged bank deposits 3,988 3,988 3,988 Interest received 160 160 160 Net cash used in investing activities (240,727) (443,449) (547,157 Financing activities Issue of right share 374,000 374,000 374,000 Issue of placing share 229,500 229,500 229,500 Increase in margin financing 202,722 202,722 202,722 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 603,500 806,222 806,222	Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the acquisition, rights issue and placing as per the Company’s circular dated 12 December 2006 Pro forma adjustments for Acquisition Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the Acquisition Pro forma adjustments for Conditional Acquisition Unaudited pro forma consolidated cash flow statement for the year ended 31 December 2005 after the Acquisition and Conditional Acquisition HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 NB1 NB2 Investing activities Purchase of available-for-sale financial assets (244,875) (202,722) (447,597) (103,708) (551,305 Decrease in pledged bank deposits 3,988 3,988 3,988 Interest received 160 160 160 Net cash used in investing activities (240,727) (443,449) (547,157 Financing activities Issue of right share 374,000 374,000 374,000 Issue of placing share 229,500 229,500 229,500 Increase in margin financing 202,722 202,722 202,722 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 603,500 806,222 806,222
(240,727) 374,000 229,500 202,722 15,000 (15,000) 603,500	(443,449) 374,000 229,500 202,722 15,000 (15,000) 806,222	(547,157
		374,000 229,500 202,722 15,000 (15,000
		806,222

— 104 —

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX III

Unaudited pro

	Unaudited pro
	forma
	consolidated
	cash flow
	statement for
	the year ended				Unaudited pro
	31 December				forma
	2005 after the		Unaudited pro		consolidated
	acquisition,		forma		cash flow
	rights issue		consolidated		statement for
	and placing as		cash flow		the year ended
	per the		statement for		31 December
	Company’s		the year ended	Pro forma	2005 after the
	circular dated	Pro forma	31 December	adjustments for	Acquisition and
	12 December	adjustments for	2005 after the	Conditional	Conditional
	2006	Acquisition	Acquisition	Acquisition	Acquisition
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
		NB1		NB2
Net increase in cash
and cash
equivalents	353,161		353,161		249,453
Cash and cash
equivalents at 1
January	6,929		6,929		6,929
Cash and cash
equivalents at 31
December	360,090		360,090		256,382

NB1: The adjustment reflects the cost of acquisition of 40,125,967 ordinary shares in Mount Gibson, representing approximately 5.09% interest in Mount Gibson as at 9 February 2007. The consideration was financed by a stock-broking firm, Sun Hung Kai Investment Services Limited, the respective margin financing account was subsequently settled on 2 March 2007.
NB2: The adjustment reflects the cost of acquisition including the consideration of approximately HK$102,428,000 and direct legal and professional fee of approximately HK$1,280,000 relating to the acquisition of 19,754,646 ordinary shares in Mount Gibson, representing approximately 2.51% interest in Mount Gibson. The cash consideration will be financed by internal resources.
NB3: 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 for the six months period ended 31 December 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.

— 105 —

FINANCIAL INFORMATION ON MOUNT GIBSON

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 and a very substantial acquisition (in respect of Conditional 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 on 13 March 2007 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 on the same date. 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 and six-month period ended 31 December 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 of both the Acquisition and the Conditional Acquisition, the Group will hold a further 7.60% interest in the issued share capital of Mount Gibson as at 9 February 2007 and such 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 and six months ended 31 December 2006 have been extracted in this circular.

— 106 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Given that the financial statements of Mount Gibson have 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 requirements 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 this 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 and six month period ended 31 December 2006 adopted will be based on the Australian accounting standards.

In replacement of the accountants’ report of Mount Gibson, the following contents have been 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 annual reports for the three years ended 30 June 2006;
(e) the unaudited consolidated financial statements of Mount Gibson for the six months ended 31 December 2006 prepared in accordance with the Australian accounting standards;
(f) the directors’ report and auditor’s independent review report as disclosed in the financial report for the half-year ended 31 December 2006;
(g) 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
(h) 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.

— 107 —

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 (all monetary amounts are stated at A$).

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)

— 108 —

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

— 109 —

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

— 110 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

The gearing ratio as at 30 June 2004 was calculated on the basis of total interest-bearing borrowings in the sum of A$18,935,313 divided by total equity in the sum of 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.

— 111 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

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.

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.

— 112 —

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.

— 113 —

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.

— 114 —

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

— 115 —

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.

— 116 —

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.

— 117 —

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

— 118 —

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 $ $ — — — — — — — — — — — — — —	MOUNT GIBSON IRON LIMITED 2004 2003 $ $ — — — — — — — — — — — — — —
			—
			—
			—
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) — —	1,217,483
			118,119
			10,833,126
			—
— 1,601,920	8,082,833 2,509,162	— —	— 43,856
1,601,920 — (6,225)	10,591,995 12,664 (11,754)	— — —	43,856
			12,664 (4,000

— 119 —

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	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
		—
		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 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.

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.

— 120 —

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

— 121 —

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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	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
			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.

— 122 —

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

— 123 —

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
			— — — —

— 124 —

FINANCIAL INFORMATION ON MOUNT GIBSON

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

— 125 —

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	—	—	—

— 126 —

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.

— 127 —

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.

— 128 —

FINANCIAL INFORMATION ON MOUNT GIBSON

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	— —	— —	— —
			—

— 129 —

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

— 130 —

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)
			(460,108) (12,350,643)
			(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 $ $ — — — — — —
			—

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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)	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)
			(1,493,576)

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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:

Balance as above Deposits relating to performance guarantees Balance per statement of cash flows Financing facilities available At balance date the following financing facility had been Total facilities — bank overdraft — bank loan Facilities used at reporting date — bank overdraft — bank loan Facilities unused at reporting date — bank overdraft — bank loan — unused facility	CONSOLIDATED 2004 2003 $ $ 2,506,132 7,553,289 (1,895,000) — 611,132 7,553,289 negotiated: 1,172,954 — 16,994,897 32,988 1,172,954 — 10,347,510 — — — 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
			— — — — — —

c) Financing facilities available

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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

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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	—	—
Lease expenditure commitments
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	—	—

b) Lease expenditure commitments

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.

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APPENDIX IV

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.

— 136 —

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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	CONSOLIDATED 2004 2003 $ $ (10,982,911) (12,350,643) Number of Number of Shares Shares 271,540,888 168,156,428
		Number of Shares 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

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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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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		—

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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.

— 140 —

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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.

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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 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 $ $ — — 177,918 410,307 177,918 410,307 (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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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
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 as follows:		Total carrying amount	per statement of	Fixed interest rate maturing in: financial position	Floating Over 1 to 5 Non-interest	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

The 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$1,349,446 (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 which is extracted from the annual report 2004 of Mount Gibson (all monetary amounts are stated at A$):

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 office during the financial period and until the date of annual report 2004 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 firm 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.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Interests in the Shares and Options of Mount Gibson

As at the date of annual report 2004, 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.

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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 annual report 2004 the Consolidated Entity has sufficient 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 annual report 2004 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 annual report 2004 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 annual report 2004, 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 annual report 2004 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 annual report 2004 there are $2,375,000 of Convertible Note 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.

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.

— 152 —

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.

— 153 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

					Termination		Long Term
Executive	Annual	Emoluments			& Similar		Emoluments
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 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

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
BG Johnson	12	—
CL Readhead	12	2
IA Macliver	10	2

— 154 —

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 annual report 2004.

Signed in accordance with a resolution of the directors.

WB Willis

Chairman

Perth, 29 September 2004

— 155 —

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 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 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 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 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
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 financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls.

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APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

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 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

— 157 —

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 (all monetary amounts are stated at A$).

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

— 158 —

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

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FINANCIAL INFORMATION ON MOUNT GIBSON

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

— 160 —

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

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

The gearing ratio as at 30 June 2005 was calculated on the basis of total interest-bearing borrowings in the sum of A$10,677,614 divided by total equity in the sum of 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

Subsidiary acquisitions are accounted for using the purchase method of accounting.

— 162 —

APPENDIX IV

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.

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.

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

— 163 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

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

(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.

— 164 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Operating leases

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.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

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 progressively 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

(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”.

— 166 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(q) Provisions

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.

— 167 —

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

— 168 —

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

— 169 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

3. EXPENSES AND LOSSES/(GAINS)

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 $ $ — — — — — — — — — — — — — —	Mount Gibson Iron Limited 2005 2004 $ $ — — — — — — — — — — — — — —
			—
			—
			—
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 — — — —	305,595
			(3,004) — — —

— 170 —

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	Mount Gibson Iron Limited 2005 2004 $ $ 330,041 (169,209) — 169,209 (330,041) — — — 1,046,440 2,284,926
			—
			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

Entering into a tax consolidation group is not expected to have an impact on the income tax balances of the Mount Gibson 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.

— 171 —

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 $ $ — — — — — —
			—

— 172 —

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

— 173 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

In acquiring Asia Iron Holdings Limited, the consolidated entity also acquired the following controlled entities:

Country of Incorporation Asia Iron (Nanjing) Co., Ltd China Asia Iron Limited Hong Kong Jiangsu Investment Pty Ltd Australia Extension Hill Pty Ltd Australia Austral Iron Pty Ltd Australia AP Mining Pty Ltd Australia Westralian Iron Pty Ltd Australia OTHER ASSETS Notes Current Deposits paid Prepayments	Percentage of Equity Interest Held by the Consolidated Entity 2005 2004 % % 63 — 63 — 63 — 63 — 63 — 63 — 63 — Consolidated 2005 2004 $ $ 33,250 56,109 625,408 411,776 658,658 467,855	Investment 2005 2004 $ $ — — — — — — — — — — — — — — Mount Gibson Iron Limited 2005 2004 $ $ 3,250 3,250 — 1,708 3,250 4,958	Investment 2005 2004 $ $ — — — — — — — — — — — — — — Mount Gibson Iron Limited 2005 2004 $ $ 3,250 3,250 — 1,708 3,250 4,958
			4,958

9. OTHER ASSETS

— 174 —

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

— 175 —

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	—		—

— 176 —

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	—	—

— 177 —

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	—		—

— 178 —

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.

— 179 —

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	—	—	—

— 180 —

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 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.

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

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. Once vested the options will be exercisable at 25 cents each and expire on 31 December 2006.

— 181 —

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 $ $ — — — — — — — —
			—

— 182 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

20. STATEMENT OF CASH FLOWS

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)	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)
			(628,742)
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	26,641

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.

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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.

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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

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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

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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.

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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 Mount Gibson may, at the discretion of the board, grant options over the ordinary shares of the Mount Gibson. The options, issued for nil consideration, are granted in accordance with performance guidelines established by the directors of the Mount Gibson. All directors, officers and employees are eligible for this scheme.

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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.

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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.

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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.

— 191 —

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	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

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

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 —

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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 Mount Gibson 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

— 194 —

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 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.

— 195 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

		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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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

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).

— 197 —

FINANCIAL INFORMATION ON MOUNT GIBSON

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 Mount Gibson 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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(F) The following is the directors’ report and auditors’ report of Mount Gibson which is extracted from the annual report 2005 of Mount Gibson (all monetary amounts are stated at A$):

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 annual report 2005 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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APPENDIX IV

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

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 annual report 2005, 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 annual report 2005.

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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 annual report 2005 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

Other than as referred to in the Review of Projects and in annual report 2005, 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.

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 annual report 2005 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 annual report 2005, 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

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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FINANCIAL INFORMATION ON MOUNT GIBSON

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 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 signi.cant accounting estimates made by the directors.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

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 (all monetary amounts are stated at A$).

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 — — — — —

— 223 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

		CONSOLIDATED	CONSOLIDATED		COMPANY
	Notes	2006	2005	2006	2005
		$’000	$’000	$’000	$’000
NET CASH FLOWS FROM
FINANCING ACTIVITIES		8,579	24,300	22,918	4,854
NET (DECREASE)/
INCREASE IN CASH AND CASH
EQUIVALENTS		(26,292)	33,022	101	17
Net foreign exchange differences		56	—	—	—
Cash and cash equivalents at beginning
of period		33,633	611	44	27
CASH AND CASH EQUIVALENTS AT
END OF PERIOD	4a	7,397	33,633	145	44

— 224 —

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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FINANCIAL INFORMATION ON MOUNT GIBSON

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:

Affected Standard(s)

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.

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

FINANCIAL INFORMATION ON MOUNT GIBSON

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
Motor vehicles
Office equipment

5 - 20 years

4 - 5 years

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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APPENDIX IV

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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APPENDIX IV

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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FINANCIAL INFORMATION ON MOUNT GIBSON

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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APPENDIX IV

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.

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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.

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.

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APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

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.

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.

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APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

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.

(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.

— 237 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(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.

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.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

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.
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.

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APPENDIX IV

(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’.
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.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

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
(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

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APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

(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.

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”.

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APPENDIX IV

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.

— 243 —

FINANCIAL INFORMATION ON MOUNT GIBSON

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 — — — —

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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	COMPANY 2006 2005 $’000 $’000 — — — — (251) (145 — — (251) (145
			(145
— 199	— —	— —	— —
199 16,151	— 22,032	— 7,266	—
			(530
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%	(145
			30%

— 245 —

FINANCIAL INFORMATION ON MOUNT GIBSON

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 —	Income Statement 2006 2005 $’000 $’000 2,261 1,029 3,825 13 5,255 7,635 123 —
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)	8,530
	— —	— —	— —
—	—
449 10,898	424 —	(25) (226)	(145 —
11,347 11,347	424 424	(251)	(145

— 246 —

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

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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)	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)
			(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.

— 248 —

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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 — — — — — —
			—

— 249 —

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.

— 250 —

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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.

— 251 —

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	— — — — — —	— —
			—
			— —
			—

— 252 —

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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	—	—

— 253 —

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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	—	—

— 254 —

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	—	—

— 255 —

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 TRADE AND OTHER PAYABLES Notes Current Trade creditors Accruals and other payables	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 CONSOLIDATED 2006 2005 $’000 $’000 7,333 4,004 10,503 6,359 17,836 10,363	COMPANY 2006 2005 $’000 $’000 — — — — — — — — — — — — — — COMPANY 2006 2005 $’000 $’000 175 85 166 45 341 130	COMPANY 2006 2005 $’000 $’000 — — — — — — — — — — — — — — COMPANY 2006 2005 $’000 $’000 175 85 166 45 341 130
			130

14. TRADE AND OTHER PAYABLES

Trade creditors and other payables are non-interest bearing and are normally settled on 30 day terms.

— 256 —

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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.

— 257 —

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.

— 258 —

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	—	—

— 259 —

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	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		$’000 40,848 2,375 32,305 — 4,811 (958)
				79,381

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.

— 260 —

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.

— 261 —

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.

— 262 —

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 — — — — — — — — — —	COMPANY 2006 2005 $’000 $’000 (13,483) (13,098) 7,517 (385) (5,966) (13,483) COMPANY 2006 2005 $’000 $’000 — — — — — — — — — —
			—

— 263 —

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.

— 264 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

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
			—

— 265 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

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.

— 266 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

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.

— 267 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

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.

— 268 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(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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(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 28c provides details of options granted under the LTI plan.

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APPENDIX IV

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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APPENDIX IV

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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APPENDIX IV

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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APPENDIX IV

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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APPENDIX IV

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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APPENDIX IV

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).

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.

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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

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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	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
			115

All of the above contracts mature by 30 April 2007.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(H) The following is the directors’ report and auditors’ report of Mount Gibson which is extracted from the annual report 2006 of Mount Gibson (all monetary amounts are stated at A$):

DIRECTORS’ 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

— 282 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

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.

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

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APPENDIX IV

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.

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

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APPENDIX IV

INTERESTS IN THE SHARES AND OPTIONS OF MOUNT GIBSON

As at the date of annual report 2006, 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	—	—

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 -----

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APPENDIX IV

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 [327 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.

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.

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APPENDIX IV

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.

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 medium-term 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.

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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

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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%.

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.

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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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.

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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 annual report 2006 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 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.

LIKELY DEVELOPMENTS AND EXPECTED RESULTS

Other than as referred to in the Review and Results of Operations and in annual report 2006, 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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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 annual report 2006 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

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APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

As at the date of annual report 2006, 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 Mount Gibson 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

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.

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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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 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.

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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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 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.

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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

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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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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

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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

Mount Gibson 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 annual report 2006 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.

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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 annual report 2006 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 [453 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.

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 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

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APPENDIX IV

assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors.

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

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(I) The following is the unaudited consolidated financial statements of Mount Gibson for the six months ended 31 December 2006 prepared in accordance with the Australian accounting standards which is extracted from the half-year financial report of Mount Gibson (all monetary amounts are stated at A$)

Condensed Income Statement

For the half-year ended 31 December 2006

Notes 31 CONTINUING OPERATIONS Sale of goods 3a Other revenue 3a TOTAL REVENUE Cost of sales 3d GROSS PROFIT Other income 3b Other expenses 3d PROFIT FROM CONTINUING OPERATIONS BEFORE TAX AND FINANCE COSTS Finance costs 3c PROFIT FROM CONTINUING OPERATIONS BEFORE INCOME TAX Income tax (expense) / benefit NET PROFIT FROM CONTINUING OPERATIONS FOR THE PERIOD AFTER INCOME TAX Profit / (loss) from discontinued operations after income tax 5a NET PROFIT FOR THE PERIOD AFTER INCOME TAX Loss attributable to minority interest NET PROFIT ATTRIBUTABLE TO MEMBERS OF THE COMPANY Earnings per share (cents per share): - basic earnings per share - diluted earnings per share - basic earnings per share — continuing operations - diluted earnings per share — continuing operations	CONSOLIDATED December 2006 31 December 2005 $’000 $’000 68,243 53,005 773 1,030 69,016 54,035 (49,971) (29,542) 19,045 24,493 1,677 167 (7,012) (3,976) 13,710 20,684 (614) (573) 13,096 20,111 (4,420) 2,837 8,676 22,948 18,721 (1,268) 27,397 21,680 — 407 27,397 22,087 5.59 5.80 5.55 5.72 1.77 6.03 1.76 5.95	CONSOLIDATED December 2006 31 December 2005 $’000 $’000 68,243 53,005 773 1,030 69,016 54,035 (49,971) (29,542) 19,045 24,493 1,677 167 (7,012) (3,976) 13,710 20,684 (614) (573) 13,096 20,111 (4,420) 2,837 8,676 22,948 18,721 (1,268) 27,397 21,680 — 407 27,397 22,087 5.59 5.80 5.55 5.72 1.77 6.03 1.76 5.95
	69,016 (49,971) 19,045 1,677 (7,012) 13,710 (614) 13,096 (4,420) 8,676 18,721 27,397 —	54,035 (29,542
		24,493 167 (3,976
		20,684 (573
		20,111 2,837
		22,948 (1,268
		21,680 407
	27,397 5.59 5.55 1.77 1.76

— 305 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Condensed Balance Sheet

As at 31 December 2006

Notes 31 ASSETS CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories Prepayments Derivatives Assets classified as held for sale TOTAL CURRENT ASSETS NON-CURRENT ASSETS Available for sale financial assets Property, plant and equipment Deferred acquisition, exploration, evaluation and development costs Mine properties TOTAL NON-CURRENT ASSETS TOTAL ASSETS	CONSOLIDATED December 2006 30 June 2006 $’000 $’000 53,876 4,548 27,889 6,180 20,896 5,685 4,445 877 6,108 2,541	CONSOLIDATED December 2006 30 June 2006 $’000 $’000 53,876 4,548 27,889 6,180 20,896 5,685 4,445 877 6,108 2,541
	113,214 — 113,214 1,518 122,677 6,777 345,125 476,097 589,311	19,831 46,093
		65,924
		1,248 20,345 4,176 51,567
		77,336
		143,260

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Notes 31 LIABILITIES CURRENT LIABILITIES Trade and other payables Interest-bearing loans and borrowings 7 Derivatives Provisions Liabilities associated with assets classified as held for sale TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Provisions Interest-bearing loans and borrowings 7 Deferred income tax liabilities TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital 8 Retained earnings Reserves Parent interests Minority interest TOTAL EQUITY	CONSOLIDATED December 2006 30 June 2006 $’000 $’000 63,720 17,836 41,522 1,594 69 1,470 863 463	CONSOLIDATED December 2006 30 June 2006 $’000 $’000 63,720 17,836 41,522 1,594 69 1,470 863 463
	106,174 — 106,174 10,725 27,860 12,073 50,658 156,832	21,363 3,068
		24,431
		702 4,247 4,684
		9,633
		34,064
	432,479	109,196
	386,731 37,493 8,255 432,479 —	86,851 10,096 473
		97,420 11,776
	432,479	109,196

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Condensed Cash Flow Statement

For the half-year ended 31 December 2006

Notes 31 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers Payments to suppliers and employees Interest paid NET CASH FLOWS (USED IN)/FROM OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Interest received Net cash acquired on acquisition of controlled entity 6 Proceeds from sale of property, plant and equipment Purchase of property, plant and equipment Payment for deferred exploration and evaluation expenditure Payment for mine development Proceeds from sale of financial assets Proceeds from disposal of controlled entity, net of cash disposed 5e Purchase of available for sale investments NET CASH FLOWS FROM / (USED IN) INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of ordinary shares Loans from/(to) other entities Proceeds from borrowings Repayment of lease liabilities Repayment of borrowings Payment for performance bonds NET CASH FLOWS FROM FINANCING ACTIVITIES NET INCREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of period CASH AND CASH EQUIVALENTS AT END OF PERIOD 4a	CONSOLIDATED December 2006 31 December 2005 $’000 $’000 64,607 53,710 (67,231) (37,600) (629) (574) (3,253) 15,536 158 1,002 8,348 — 13 6 (8,309) (954) (2,320) — (2,104) (7,049) 295 — 37,854 — — (960) 33,935 (7,955) 1,703 6,711 (280) (250) 17,080 — (2,706) (1,640) — (419) — (1,100) 15,797 3,302 46,479 10,883 7,397 33,633 53,876 44,516	CONSOLIDATED December 2006 31 December 2005 $’000 $’000 64,607 53,710 (67,231) (37,600) (629) (574) (3,253) 15,536 158 1,002 8,348 — 13 6 (8,309) (954) (2,320) — (2,104) (7,049) 295 — 37,854 — — (960) 33,935 (7,955) 1,703 6,711 (280) (250) 17,080 — (2,706) (1,640) — (419) — (1,100) 15,797 3,302 46,479 10,883 7,397 33,633 53,876 44,516
	(3,253) 158 8,348 13 (8,309) (2,320) (2,104) 295 37,854 — 33,935 1,703 (280) 17,080 (2,706) — — 15,797 46,479 7,397	15,536
		1,002 — 6 (954 — (7,049 — — (960
		(7,955
		6,711 (250 — (1,640 (419 (1,100
		3,302
		10,883 33,633
	53,876

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APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

			Total	Equity	$’000	80,385	1,165	81,550	21,680	(2,278)	(760)	(115)	(21)	6,711	2,796	429	109,992	109,196	27,397	748	1,506	3,985	(388)		885	272,267	25,603	2,010	1,046	(11,776)	432,479
			Minority	Interest	$’000	8,956	—	8,956	(407)	—	—	—	—	—	—	429	8,978	11,776	—	—	—	—	—		—	—	—	—	—	(11,776)	—
				Total	$’000	71,429	1,165	72,594	22,087	(2,278)	(760)	(115)	(21)	6,711	2,796	—	101,014	97,420	27,397	748	1,506	3,985	(388)		885	272,267	25,603	2,010	1,046	—	432,479
Net	(Accumulated Unrealised	Option Losses) / Gains /	Premium Retained (Losses) Other	Reserve Earnings Reserve Reserves	$’000 $’000 $’000 $’000	1,631 (9,583) — —	— — 1,165 —	1,631 (9,583) 1,165 —	— 22,087 — —	— — (2,278) —	— — (760) —	— — (115) —	— — — (21)	— — — —	2,796 — — —	— — — —	4,427 12,504 (1,988) (21)	5,954 10,096 (1,790) (3,691)	— 27,397 — —	— — 748 —	— — 1,506 —	— — 3,985 —	— — — (388)		— — — 885	— — — —	— — — —	— — — —	1,046 — — —	— — — —	7,000 37,493 4,449 (3,194)
			Issued	Capital	$’000	79,381	—	79,381	—	—	—	—	—	6,711	—	—	86,092	86,851	—	—	—	—	—		—	272,267	25,603	2,010	—	—	386,731
				CONSOLIDATED		At 1 July 2005	Application of AASB 132 and AASB 139	At 1 July 2005	Profit for the period	Net unrealised losses on available-for-sale financial assets	Net gains/(losses) on cash flow hedges	Release to income statement on expiry of cash flow hedges	Currency translation differences	Exercise of options	Cost of share-based payment	Change in Minority Interest	At 31 December 2005	At 1 July 2006	Profit for the period	Net unrealised gain on available-for-sale financial assets	Impairment of available-for-sale financial assets	Net gains on cash flow hedges	Currency translation differences	Currency translation differences released on sale of controlled	entity	Issue of share capital	Shares to be issued pursuant to compulsory acquisition notice	Exercise of options	Cost of share-based payment	Change in Minority Interest	At 31 December 2006

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Notes to the Half-Year Financial Report

For the half-year ended 31 December 2006

1. CORPORATE INFORMATION

The financial report of Mount Gibson Iron Limited for the half-year ended 31 December 2006 was authorised for issue in accordance with a resolution of the directors on 26 February 2007.

Mount Gibson is a company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Stock Exchange.

The address of the registered office is Level 1, 7 Havelock Street, West Perth, WA, 6005.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The half-year financial report does not include all notes of the type normally included within the annual financial report and therefore cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of the Consolidated Entity as the full financial report.

The half-year financial report should be read in conjunction with the Annual Financial Report of Mount Gibson Iron Limited as at 30 June 2006. It is also recommended that the half-year financial report be considered together with any public announcements made by Mount Gibson Iron Limited during the half-year ended 31 December 2006 in accordance with the continuous disclosure obligations arising under the Corporations Act 2001 and Stock Exchange Listing Rules.

(a) Basis of preparation

The half-year financial report is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 and AASB 134 “Interim Financial Reporting”.

The half-year financial report has 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.

For the purpose of preparing the half-year financial report, the half-year has been treated as a discrete reporting period.

(b) Significant Accounting Policies

These half-year financial statements have been prepared using the same accounting policies as used in the Annual Financial Report of the Company for the year ended 30 June 2006, except for the adoption of amending standards mandatory for annual periods beginning on or after 1 July 2006, as described in Note 2(d).

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APPENDIX IV

(c) Basis of consolidation

The half-year consolidated financial statements comprise the financial statements of Mount Gibson and its controlled entities for the half-year ended 31 December 2006.

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 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.

(d) Changes in accounting policies

Australian Accounting Standards and UIG interpretations that have recently been issued or amended and are effective from 1 July 2006 are outlined in the table below:

AASB		Nature of Change to	Application Date	Application Date
Amendment	Affected Standard(s)	Accounting Policy	of Standard	for Group
2004-3	AASB1 “First-time Adoption of	No change to accounting policy	1 January 2006	1 July 2006
	AIFRS”	required. Therefore no impact.
	AASB 101 “Presentation of
	Financial Statements”
	AASB 124 “Related Party
	Disclosures”
2005-1	AASB 139 “Financial	No change to accounting policy	1 January 2006	1 July 2006
	Instruments: Recognition and	required. Therefore no impact.
	Measurement”
2005-4	AASB 1 “First-time Adoption of	No change to accounting policy	1 January 2006	1 July 2006
	AIFRS”	required. Therefore no impact.
	AASB 139 “Financial
	Instruments: Recognition and
	Measurement”
	AASB 132 “Financial
	Instruments: Disclosure and
	Presentation”
	AASB 1023 “General Insurance
	Contracts”
	AASB 1028 “Life Insurance
	Contracts”

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APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

AASB		Nature of Change to	Application Date	Application Date
Amendment	Affected Standard(s)	Accounting Policy	of Standard	for Group
2005-5	AASB 1 “First-time Adoption of	No change to accounting policy	1 January 2006	1 July 2006
	AIFRS”	required. Therefore no impact.
	AASB 139 “Financial
	Instruments: Recognition and
	Measurement”
2005-6	AASB 3 “Business Combinations”	No change to accounting policy	1 January 2006	1 July 2006
		required. Therefore no impact.
2005-9	AASB 4 “Insurance Contracts”	No change to accounting policy at	1 January 2006	1 July 2006
	AASB 1023 “General Insurance	group level required. Therefore
	Contracts”	no impact.
	AASB 139 “Financial
	Instruments: Recognition and
	Measurement”
	AASB 132 “Financial
	Instruments: Disclosure and
	Presentation”
2005-10	AASB 132 “Financial	No change to accounting policy	1 January 2007	1 July 2007
	Instruments: Disclosure and	required. Therefore no impact.
	Presentation”
	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”
UIG 4	Determining whether an	No change to accounting policy	1 January 2006	1 July 2006
	Arrangement contains a Lease	required. Therefore no impact.
UIG 8	Scope of AASB 2	No change to accounting policy	1 May 2006	1 July 2006
		required. Therefore no impact.
UIG 9	Reassessment of Embedded	No change to accounting policy	1 June 2006	1 July 2006
	Derivatives	required. Therefore no impact.

Application date is for the annual reporting periods beginning on or after the date shown in the above table.

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

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 no have or do not contribute to a defined benefit scheme, there is no impact of this
	change.
2005-2	AASB 1023 “General Insurance Contracts”
2005-12	AASB 1038 “Life Insurance Contracts” and AASB 1023 “General Insurance Contracts”
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”

— 313 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Notes 31 3. REVENUE AND EXPENSES a Revenue Sale of ore Other revenue Finance income — other persons/ corporations b Other income Unrealised gain on foreign exchange Realised gain on foreign exchange Net gain on sale of plant and equipment Other income c Finance costs Loans Finance charges payable under finance leases Unwinding of discount on rehabilitation provision d Expenses included in the Income Statement include: Depreciation of Non-Current Assets Amortisation of mine properties Expense of share-based payments Operating lease rental — minimum lease payments Exploration expenditure written off Government royalties Salaries, wages expense and other employee benefits Impairment of loan Impairment of available-for-sale investments 4. CASH AND CASH EQUIVALENTS a Reconciliation of cash Cash at bank and in hand Short-term deposits	CONSOLIDATED December 2006 31 December 2005 $’000 $’000 68,243 53,005 773 1,030	CONSOLIDATED December 2006 31 December 2005 $’000 $’000 68,243 53,005 773 1,030
		1,030
	165 1,496 10 6	167 — — —
	1,677	167
	423 174 17	173 384 16
	614	573
	2,819 33,123 1,046 8,604 4 4,685 8,989 280 1,506 25,308 28,568	2,058 10,247 2,796 360 50 3,731 4,030 — — 8,503 36,013
	53,876	44,516

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

b Non-cash financing activities

During the period ended 31 December 2006, the Consolidated Entity acquired property, plant and equipment with an aggregate fair value of $ 67,663 (2005: $2,773,760) by means of finance leases.

During the period from 1 December 2006 to 31 December 2006, the Consolidated Entity acquired property, plant and equipment with an aggregate fair value of $13,052,658 ($2005: $nil) by means of hire purchases.

5. SALE OF ASIA IRON HOLDINGS LIMITED

On 7 June 2006 Mount Gibson advised 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 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 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 Foreign Investment Review Board 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 $52.5 million being placed in escrow pending environmental approval.

Under a further agreement dated 17 November 2006, Sinom agreed to immediately release the first $40 million being held in escrow to the Company and Mount Gibson Mining Limited, with the balance of $12.5 million to be released to the Company and Mount Gibson Mining Limited on the earlier of 31 May 2007 and the date on which environmental approval is obtained in respect of the Extension Hill Magnetite Project.

As a result of this agreement, the 30 November 2007 deadline for obtaining environmental approval is removed and Sinom Investments is no longer entitled to terminate the original agreement and return the sale shares if the environmental deadline is not met. Sinom Investments will now have primary responsibility for obtaining environmental approval. In taking on this responsibility, Sinom Investments has agreed that it will not do anything which may adversely affect the processing of environmental approval in respect of Mount Gibson’s Extension Hill hematite project.

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APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

From 17 November 2006 the Company ceased to consolidate Asia Iron, and that business is reported as a discontinued operation in this financial report. Financial information relating to the discontinued operation of Asia Iron for the period to the date of disposal and the process of disposing of that business is set out below:

(a) Profit from discontinued operations

The financial information presented below in respect of Asia Iron represents the period 1 July 2006 to 17 November 2006 (31 December 2006 column) and for the six month period to 31 December 2005.

31 Notes ASIA IRON Other revenue TOTAL REVENUE Cost of sales GROSS PROFIT Other income Other expenses PROFIT / (LOSS) OF ASIA IRON BEFORE TAX AND FINANCE COSTS Finance costs PROFIT / (LOSS) OF ASIA IRON BEFORE INCOME TAX Income tax (expense) / benefit NET PROFIT / (LOSS) OF ASIA IRON FOR THE PERIOD AFTER INCOME TAX Gain on deconsolidation of Asia Iron (b) Related income tax (b) NET PROFIT AFTER INCOME TAX RECOGNISED ON DISPOSAL OF ASIA IRON NET PROFIT / (LOSS) FROM DISCONTINUED OPERATIONS AFTER INCOME TAX Earnings per share (cents per share): - basic earnings per share — discontinued operations - diluted earnings per share — discontinued operations	December 2006 31 $’000 4	December 2005 $’000 15
	4 — 4 368 (242) 130 (16) 114 — 114 26,684 (8,077) 18,607	15 —
		15 148 (1,430)
		(1,267) (1)
		(1,268) —
		(1,268)
		— —
		—
	18,721 3.82 3.79	(1,268)
		(0.33) (0.33)

— 316 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(b) Details of the gain on deconsolidation of Asia Iron

Notes Consideration received or receivable on disposal: - Cash received - less: transaction costs Net cash received on disposal - Cash receivable Net disposal consideration MGI and MGM share of Asia Iron net assets disposed (c) FX translation reserve at disposal date Gain on deconsolidation before income tax Related income tax expense Gain on deconsolidation of Asia Iron after income tax	31 December 2006 $’000 40,000 (492)
	39,508 12,500
	52,008
	24,439 885
	25,324
	26,684 (8,077)
	18,607

— 317 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(c) Carrying amounts of Asia Iron assets and liabilities

The major classes of assets and liabilities of Asia Iron at 21 August 2006, measured at the lower of carrying amount and fair value, were as follows:

31 Assets Cash Trade and other receivables Prepayments Property, plant and equipment Deferred acquisition, exploration, evaluation and development costs Deferred tax assets Liabilities Trade and other payables Interest bearing liabilities Deferred tax liabilities Liabilities directly associated with assets classified as held for sale Net assets of discontinued operations disposed Less: Minority interest Net assets attributable to disposal of Asia Iron	December 2006 $’000 1,654 209 72 3,149 40,303 1,367
	46,754
	(1,286) (1,500) (7,904)
	(10,690)
	36,064 (11,625)
	24,439

(d) Assets associated with discontinued operation

As at 31 December 2006, the balance of the sale proceeds being $12.5 million is included in Receivables in the Balance

Sheet.

— 318 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(e) Cash flow information

The net cash flow on disposal of Asia Iron is presented below:

31 Net cash inflow on disposal Net cash consideration received on disposal (b) Less cash and cash equivalents balances disposed (c) Net inflow of cash on disposal Net cash flows of Asia Iron In respect of the discontinued operation of Asia Iron, the following net cash flows are included in the Condensed Cash Flow statement Operating activities Investing activities Financing activities Net cash flows (used by) / from discontinued operation	December 2006 31 $’000 39,508 (1,654) 37,854	December 2005 $’000
	(211) (960) —	(492) (9,027) 10,546
	(1,171)	1,027

6. ACQUISITION OF AZTEC RESOURCES LIMITED

On 24 July 2006, the Company announced its intention to acquire Aztec Resources Limited (“ Aztec ”).

The acquisition was implemented by means of an off-market scrip takeover bid by Mount Gibson for all shares in Aztec. Under the bid, the Company offered Aztec shareholders 1 new share for every 3 Aztec shares.

As at 31 December 2006, Mount Gibson had received acceptances under its takeover bid for Aztec for 91.28% of Aztec’s fully paid ordinary shares.

As the applicable thresholds had been reached, Mount Gibson announced to ASX on 22 December 2006 that it was commencing the compulsory acquisition process to acquire all the remaining fully paid ordinary shares in Aztec which it does not already own.

Mount Gibson gained effective control of Aztec on 30 November 2006.

— 319 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

A summary of the consideration paid by Mount Gibson and the provisional fair value of identifiable assets and liabilities of Aztec as at the date of acquisition are provided below. The values are provisional because the acquisition took place on 30 November 2006 and there was insufficient time to finalise the fair values for the half-year consolidated financial report.

Consideration Issue of Mount Gibson Iron Limited shares to Aztec shareholders Shares to be issued pursuant to compulsory acquisition notice Costs of the Offer Total consideration The net cash flow on acquisition is summarised as follows: Net cash acquired with subsidiary Costs associated with the acquisition	$’000 272,267 25,603 20,386
	318,256
	9,927 (1,579)
	8,348

		Carrying
	Recognised on	value prior to
	acquisition	acquisition
	$’000	$’000
Net Assets of Aztec as at 30 November 2006
Cash	9,927	9,927
Receivables	2,571	2,571
Prepayments	83	83
Inventories	141	141
Property, plant and equipment	84,984	84,984
Deferred acquisition, exploration, evaluation and development costs	279,398	85,344
Deferred tax asset	192	—
Trade and other payables	(15,081)	(15,081)
Interest bearing liabilities	(18,561)	(18,561)
Provision — employee entitlements	(152)	(152)
Provision — rehabilitation	(10,000)	(10,000)
Hire purchase liabilities	(15,246)	(15,246)
	318,256	124,010

If the combination had taken place at the beginning of the period, the loss before tax from continuing operations for the Consolidated Entity would have been $1.8 million and revenue from continuing operations would have been $69.5 million.

— 320 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Notes 31 7. INTEREST-BEARING LOANS AND BORROWINGS Current Lease liability a Hire purchase liability b Project finance c Non-Current Lease liability a Hire purchase liability b Financing facilities available Total facilities: ● Project finance facility c ● Hire Purchase facility b ● Bank multiple advance d ● Finance leases a ● Guarantee facility d ● Commercial bill Facilities used at reporting date: ● Project finance facility ● Hire Purchase facility ● Bank multiple advance ● Finance leases ● Guarantee facility ● Commercial bill Facilities unused at reporting date: ● Project finance facility ● Hire Purchase facility ● Bank multiple advance ● Finance leases ● Guarantee facility ● Commercial bill	CONSOLIDATED December 2006 30 June 2006 $’000 $’000 2,149 1,594 4,037 — 35,336 — 41,522 1,594	CONSOLIDATED December 2006 30 June 2006 $’000 $’000 2,149 1,594 4,037 — 35,336 — 41,522 1,594
		1,594
	3,599 24,261	4,247 —
	27,860	4,247
	100,000 69,262 20,474 5,748 5,526 —	— — 20,474 5,841 5,526 1,500
	201,010	33,341
	35,336 28,298 — 5,748 5,526 —	— — — 5,841 5,526 1,500
	74,908	12,867
	64,664 40,964 20,474 — — —	— — 20,474 — — —
	126,102	20,474

— 321 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Terms and condition relating to the above financial facilities:

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 Hire purchase arrangements have been entered into by Koolan Iron Ore Pty Ltd via a Master Lease agreement with Komatsu Corporate Finance Pty Limited and Westpac Banking Corporation Limited. Hire purchase amounts are repayable monthly with final instalments due in December 2011. Interest is charged at an average rate of 6.8%. Secured by first mortgage over the assets the subject of the hire purchase agreement and a guarantee from Aztec Resources Limited.
c The project finance facility is with a banking syndicate comprising Westpac Banking Corporation, Bank of Scotland (Australia) Limited and Bank of Tokyo-Mitsubishi UFJ Ltd. The $100 million facility consists of:
Senior debt facility of $54 million (drawn in US$);
Cost overrun facility of $10 million (drawn in US$);
Working capital facility of $30 million; and
Environmental bond facility of $6 million.

The security pledge for these facilities is a fixed and floating charge over all the assets and undertakings of Koolan Iron Ore Pty Ltd with a guarantee from Aztec Resources Limited. Interest is charged at an average rate of 7.22%.

This facility includes a Review Event clause in the event of a change in control which allows the banking syndicate the opportunity to review the creditworthiness of Aztec Resources Limited and the completion risk to the Koolan project as a consequence of the change of control. The banking syndicate may choose after this review to:

leave the facility unaltered; or
request further credit support from other companies in the Group; or
give notice requiring repayment of the facility. Koolan Iron Ore Pty Ltd will have 90 days from the date of this notice to comply otherwise it will then constitute an event of default.

The banking syndicate has been given notice about the review event and has commenced its review. As a result of this review event, Mount Gibson is required to disclose this facility as a current liability notwithstanding that it may remain unaltered as a result of this review.

Should, as a result of its review, the banking syndicate require partial or full repayment of the facility, the Board of Mount Gibson believes that this can be satisfied by using a combination of available cash on hand and other existing banking facilities or if required by the issue of equity.

The banking syndicate have advised that they will require a Corporate Guarantee from Mount Gibson should the corporate debt facility set out below not be completed by 30 April 2007.

d This facility is with HSBC Bank Australia Limited. The security pledge for these facilities is a fixed and floating charge over all the assets and undertakings of Mount Gibson Mining Limited, Mount Gibson Iron Limited and Geraldton Bulk Handling Pty Ltd.

— 322 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

Mount Gibson has appointed Grant Samuel to arrange a $200 million corporate debt facility for the Mount Gibson Group. This facility will replace the Koolan Island project financing facility, replace the existing Company debt facility with HSBC and provide funding for the Extension Hill DSO project development. Mount Gibson is targeting finalisation of this corporate facility by the end of April 2007.

Notes 31 8. ISSUED CAPITAL a Ordinary shares Issued and full paid b Shares to be issued pursuant to compulsory acquisition notice	CONSOLIDATED December 2006 30 June 2006 $’000 $’000 361,128 86,851 25,603 — 386,731 86,851	CONSOLIDATED December 2006 30 June 2006 $’000 $’000 361,128 86,851 25,603 — 386,731 86,851
		86,851

		31 December	2006
		Number of Shares		$’000
b	Movement in ordinary shares on issue
Beginning of the half-year		402,058,719		86,851
	Issue of shares pursuant to Aztec Offer	346,037,396	272,267
	Exercise of options	7,236,896		2,010
End of the half- year		755,333,011	361,128

c Share options

As at balance date the following Options over unissued Shares were on issue:

31 December
2006
Exercise Price
Exercise Date/Period
Number
25 cents
On or before 31 December 2006
—
50 cents
On or before 31 December 2007
5,000,000
55 cents
On or before 31 December 2008
5,000,000
78 cents
On or before 31 December 2006
—
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
17,000,000

30 June
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

— 323 —

APPENDIX IV

FINANCIAL INFORMATION ON MOUNT GIBSON

In addition, as at 31 December 2006, there were 3,825,000 (30 June 2006: 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. 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.

9. DIVIDENDS PAID AND PROPOSED

No amounts have been paid, declared or recommended by the company by way of dividend since the commencement of the half-year.

10. RELATED PARTY DISCLOSURE

Ultimate Parent

Mount Gibson Iron Limited is the ultimate Australian parent company.

11. SEGMENT INFORMATION

The Consolidated Entity operates primarily in the mining sector, through the exploration, evaluation and development of its iron ore deposits in Western Australia.

12. EVENTS AFTER THE BALANCE SHEET DATE

On 6 February 2007, the Company issued 32,453,786 shares to the remaining Aztec shareholders on finalisation of the compulsory acquisition of the remaining 8.72% of Aztec that the Company did not already own at 31 December 2006.

13. COMMITMENTS

At 31 December 2006 the Consolidation Entity has commitments of $19.6 million (30 June 2006: $nil) relating to capital expenditure, commitments of $21.5 million (30 June 2006: $20.0 million) relating to operating leases for the provision of mobile fleet equipment and office rental, and commitments of $34 million (30 June 2006: $5.8 million) under finance leases and hire purchase liabilities.

14. CONTINGENCIES

There are no contingent liabilities or contingent assets as at the date of this report.

— 324 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Directors’ Declaration

In accordance with a resolution of the directors of Mount Gibson Iron Limited, I state that:

In the opinion of the Directors:

a. the financial statements and the notes of the Consolidated Entity are in accordance with the Corporations Act 2001 , including:
i) giving a true and fair view of the financial position as at 31 December 2006 and the performance for the half-year ended on that date of the Consolidated Entity; and
ii) complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001; and
b. there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

Signed in accordance with a resolution of the directors.

Craig Readhead

Director

Perth, 26 February 2007

— 325 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(J) The following is the directors’ report and auditor’s independent review report which is extracted from the financial report for the half-year ended 31 December 2006 of Mount Gibson (all monetary amounts are stated at A$)

DIRECTORS’ REPORT

Your Directors submit their report for the half-year ended 31 December 2006 for the consolidated entity incorporating Mount Gibson Iron Limited (“Mount Gibson”) and the entities that it controlled during the half-year (“Consolidated Entity”) .

DIRECTORS

The names of the Company’s directors in office during the half-year and until the date of this report are as below. Directors were in office for the entire period unless otherwise stated.

Bill Willis Chairman Brian Johnson Deputy Chairman Luke Tonkin Managing Director Alan Rule Finance Director Craig Readhead Non-Executive Director Ian Macliver Non-Executive Director Alan Jones Non-Executive Director — appointed 28 July 2006 Peter Bilbe Non-Executive Director — appointed 21 February 2007

Angela Dent is the Company Secretary.

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 half-year financial report incorporating the entities that it controlled during the half-year.

Nature of Operations and Principal Activities

The principal activities of the entities within the Consolidated Entity are:

mining of hematite deposits at Tallering Peak;
construction and development of hematite mining operations at Koolan Island; and
exploration and development of hematite deposits in the Mid-West region of Western Australia.

— 326 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS

Sale of Asia Iron Holdings Limited

Mount Gibson and its wholly owned subsidiary, Mount Gibson Mining Limited (“ MGM ”) owned 73% of Asia Iron Holdings Limited (“ Asia Iron ”) during the prior reporting period and up until 17 November 2006, when Asia Iron ceased to be a subsidiary of the Consolidated Entity.

The impact on the consolidated half-year financial statements of Mount Gibson from the sale are summarised in Note 5 to the Half-Year Financial Report. In respect of the Condensed Income Statement, the financial impact of the discontinued Asia Iron operation is separated from that of the continuing operations of the Consolidated Entity in both the current and prior periods. In each of the Condensed Balance Sheet and Condensed Cash Flow Statement, the prior period comparatives include the fully consolidated balances of Asia Iron. The current period balances in the Condensed Cash Flow Statement include the impact of Asia Iron until 17 November 2006 and also the net cash impact to the Consolidated Entity of ceasing to consolidate Asia Iron.

Acquisition of Aztec Resources Limited

On 24 July 2006, Mount Gibson announced its intention to acquire Aztec Resources Limited (“ Aztec ”), representing a landmark consolidation of Australia’s emerging iron ore sector. Aztec is an iron ore company currently developing the Koolan Island Iron Ore Project (“ Koolan Island ”) located in the Buccaneer Archipelago of Yampi Sound in Western Australia. The acquisition has resulted in the creation of a leading independent Australian iron ore company with a market capitalisation of in excess of $600 million, an asset portfolio offering near term cash flow, immediate growth potential supported by longer-life profile and longer term development opportunities. The acquisition was implemented by means of an off-market scrip takeover bid by Mount Gibson for all shares in Aztec. Under the bid, Mount Gibson offered Aztec shareholders 1 new share for every 3 Aztec shares (“ 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.

At the end of the offer period on 22 December 2006, Mount Gibson’s voting power in Aztec was 91.28% and as the applicable thresholds had been reached, Mount Gibson commenced the compulsory acquisition process to acquire all the remaining fully paid ordinary shares in Aztec which it did not already own. As at 31 December 2006, Mount Gibson had acquired 91.28% of the ordinary shares in Aztec.

DIVIDENDS

No dividends were paid during the period and no recommendation is made as to dividends.

— 327 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

REVIEW AND RESULTS OF OPERATIONS

Operating Results for the Period

Summarised operating results for the Consolidated Entity for the half-year ended 31 December 2006 were:

	CONSOLIDATED	CONSOLIDATED
	31 December	31 December
	2006	2005
	$’000	$’000
Operating profit from Continuing Operations before tax	13,096	20,111
Taxation (expense) / benefit	(4,420)	2,837
Operating profit from Continuing Operations after tax	8,676	22,948
Profit / (loss) from discontinued operations after income tax	18,721	(1,268)
Net operating profit after tax	27,397	21,680
Loss Attributable to Minority Interest	—	407
Net profit attributable to Members of Mount Gibson	27,397	22,087

Tallering Peak Hematite Operations

Mining continued according to plan at Tallering Peak with operations focused on the development of the T6A pit. The majority of the pioneering work associated with this pit was successfully completed during the December quarter. The completion of this pioneering work, which is slow and difficult due to the steep topography, reduces future production risk.

Continuing large stockpiles of ore (751,000 tonnes) enabled the mining operation to focus on mining the T3c and 6A pits, exposing ore for future mining.

— 328 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Production for each quarter and year to date is set out below:

Sept 2006 qtr Dec 2006 qtr 6 000’s 000’s Mining - Waste Mined bcm 2,541 2,283 - Ore Mined wmt 1,092 681 Crushing - Lump wmt 411 408 - Fines wmt 308 255 Total wmt 719 663 Transport to Mullewa Railhead - Lump wmt 391 370 - Fines wmt 254 296 Total wmt 645 666 Transport to Geraldton Port - Lump wmt 300 331 - Fines wmt 216 253 Total wmt 516 584 Shipping - Lump wmt 239 429 - Fines wmt 170 279 Total wmt 409 708	Sept 2006 qtr Dec 2006 qtr 6 000’s 000’s Mining - Waste Mined bcm 2,541 2,283 - Ore Mined wmt 1,092 681 Crushing - Lump wmt 411 408 - Fines wmt 308 255 Total wmt 719 663 Transport to Mullewa Railhead - Lump wmt 391 370 - Fines wmt 254 296 Total wmt 645 666 Transport to Geraldton Port - Lump wmt 300 331 - Fines wmt 216 253 Total wmt 516 584 Shipping - Lump wmt 239 429 - Fines wmt 170 279 Total wmt 409 708	TOTAL 2006 months 000’s 4,824 1,773 819 563
		1,382
391 254	370 296	761 550
645	666	1,311
300 216	331 253	631 469
516	584	1,100
239 170	429 279	668 449
409	708	1,117

Production rates and key financial statistics at Tallering Peak for the 6 months ended 31 December 2006 compared with the 6 months ended 30 June 2006 were:

waste mining increased by 10%;
ore tonnes mined increased by 340%;
ore tonnes sold increased by 144%;
realised selling prices per tonne of ore sold increased by 35% to $62 per tonne; and
total cost of sales decreased by 9% to $42 per tonne.

— 329 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Significant expenditure on waste development at Tallering Peak during the half-year was as follows:

				6 Months	6 Months	6 Months
				ended	ended	ended
				31 Dec 2006	30 June 2006	31 Dec 2005
Waste	mined		mill bcm	4.8	4.3	2.1
Waste	expenditure	capitalised	$ mill	43.6	35.5	18.7
Waste	expenditure	amortised	$ mill	(32.5)	(7.4)	(7.5)

The new mining fleet comprising 300 tonne class excavators and 150 tonne class off highway haul trucks has been successfully introduced to site.

A significant challenge to mine operations is the supply of skilled operating and maintenance employees. A shortage of appropriately qualified labour and the increase in labour and consumable costs within the industry continues to dampen the operational potential of Tallering Peak and skilled labour shortages represent a risk to sustained operational performance. Mount Gibson continues to implement strategies designed to mitigate the adverse impact of these issues.

A new resource and reserve estimate is in progress and will be completed in the March 2007 quarter. This will provide improved confidence in the distribution and location of ore in the T6 Main Ridge deposit and will allow improved short and long term planning. Further resource definition drilling at T2 is scheduled for the coming quarter to follow up potential depth extensions identified by extensional drilling completed to date.

Koolan Island Hematite Project

Koolan Island which is located in the Buccaneer Archipelago of Yampi Sound in Western Australia was opened by BHP in 1965 and operated until 1993. BHP mined approximately 68 million tonnes of high grade hematite ore from five pits at Koolan — Main, Mullet, Eastern, Barramundi and Acacia.

In early 2000, Aztec acquired Koolan Island and in May 2003 an exploration licence was granted over Koolan Island. During 2003, Aztec undertook a review of available BHP data, carried out site inspections and committed to an exploration/feasibility study programme in 2004. Exploration drilling commenced in February 2004 and the bankable feasibility study was completed in August 2005.

Koolan Island has a Mineral Resource of 53.3 million tonnes of hematite ore, including total Ore Reserves of 24.8 million tonnes of hematite ore with a grade of 65.0% Fe.

Koolan Island is expected to reach full production of 4 Mtpa of high grade hematite ore by 2009.

— 330 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

The onset of the “wet” season in the Kimberley region has slowed construction activities however progress is generally as planned with the first ore shipment scheduled to occur in the second quarter of 2007.

The completion status of construction in early February 2007 was as follows:

Piling of the jetty and deck structure installation is 100% complete whilst the installation of berthing equipment and handrails have commenced;
The ship loader, which was fabricated in Tasmania, has been transported and erection on the jetty is well advanced;
The access road to the jetty is 100% complete and the final lift of the rock causeway (connecting the jetty to the island) is 90% complete;
The mechanical installation of the crushing and screening plant is 90% complete and electrical installation underway. Dry commissioning commenced in early February;
Construction of the ore stacking and reclaim system commenced during December 2006;
The installation of the power station has advanced with generator sets, cabling, transformers and MCC in place for commissioning in late February;
Sample preparation facility and assay laboratory is fully operational;
Installation of the head works and telemetry for the four fresh water bores is nearing completion;
The new village is operational with 95% of the accommodation units and the kitchen in place; and
The installation of the 1.6 million litre fuel storage facility has commenced.

Open pit mining at Eastern and Mullet pits and stockpiling of ore on the ROM pad has commenced.

The first delivery of the permanent (larger) mining fleet, comprising four 730E Komatsu haul trucks and one PC3000 Komatsu excavator, arrived at Koolan Island in early January 2007. Deliveries of the remainder of the fleet (eight trucks and one excavator) are planned to occur in March 2007.

Total development costs for Koolan Island are forecast at $147 million. The project has encountered cost increases due primarily to unforeseen ground conditions at the jetty, causeway and camp sites, changes to project scope, labour shortages, logistical and transport costs and some delays to the project schedule.

— 331 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Extension Hill Direct Shipping Ore Project

The Consolidated Entity continued to progress the Detailed Feasibility Study (“ DFS ”) into the feasibility of producing and selling 3 Mtpa of hematite ore from the Extension Hill Direct Shipping Ore (“ DSO ”) project.

The DFS generally validated the broad strategies and parameters assumed for the June 2006 study and evaluated multiple operating options with related costs, timing and risks. Other factors influencing development in the Mid-West, outside Mount Gibson’s direct control, have become more apparent and better understood during the past six months. It is these external factors which drive the timing of the development scenarios presented.

Two project development scenarios were developed, with start-up timing determined by availability of infrastructure at Geraldton Port, specifically, rail and train unloading capacity and by the timing of statutory approvals:

Base Case — first shipment in January 2009 is delayed 12 months from the previous target of January 2008 due to lack of rail and unloading infrastructure at the Port;
Best Case — first shipment in May 2008 is delayed 4 months from the previous target by statutory approval requirements, but assumes early resolution of port infrastructure issues.

A summary of the DFS financial results is:

				Cap.	Mining	Transport
	First	Post Tax		Cost	Cost	Cost	Revenue
	shipment	@8%		+/- 30%	+/- 20%	+/- 20%	+/- 20%
Scenario	date	NPV	IRR	NPV	NPV	NPV	NPV
		$mill		$mill	$mill	$mill	$mill
Base Case	Jan 2009	89	78%	74 / 103	81 / 96	62 / 115	156 / 21
Best Case	May 2008	108	121%	93 / 122	100 / 116	81 / 134	178/ 37
Desk Top Study	Jan 2008	106	115%	93 / 120	99 / 114	82 / 131	174 / 38

The DFS included the following assumptions:

Total capital cost of approximately $73 million, includes $3.6 million mine development, $2 million working capital, no contingency, compares with the June 2006 estimate of approximately $67 million; and
Total cash cost of production of approximately $36 per tonne of crusher feed, including royalties, excluding capital works and sustaining capital.

— 332 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

The study has demonstrated that the project will provide strong financial returns in a short time-frame, with minimal technical risks and relatively low capital requirements. Most significant Base Case risks lie in reliance on non-Company infrastructure.

Key critical path items driving overall project timing are:

Availability of rail unloader capacity, including Port area and further rail infrastructure;
Ministerial environmental approval of the project PER; and
DEC and DoIR approvals, post PER approval.

The development of the Extension Hill DSO project is subject to State Government Environmental approval and Mount Gibson Iron Limited Board approval.

SIGNIFICANT EVENTS AFTER BALANCE DATE

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.

AUDITOR’S INDEPENDENCE DECLARATION

The directors received the independence declaration from the auditors of the half-year ended 31 December 2006 financial report of Mount Gibson.

— 333 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

==> picture [453 x 68] intentionally omitted <==

To the members of Mount Gibson Iron Limited

Report on the Half-Year Financial Report

We have reviewed the accompanying half-year financial report of Mount Gibson Iron Limited and the entities it controlled during the half-year, which comprises the condensed balance sheet as at 31 December 2006, and the condensed income statement, condensed statement of changes in equity and condensed cash flow statement for the half-year ended on that date, other selected explanatory notes and the directors’ declaration.

Directors’ Responsibility for the half-year Financial Report

The directors of the company are responsible for the preparation and fair presentation of the half-year financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of the half-year financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor’s Responsibility

Our responsibility is to express a conclusion on the half-year financial report based on our review. We conducted our review in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of an Interim Financial Report Performed by the Independent Auditor of the Entity, in order to state whether, on the basis of the procedures described, we have become aware of any matter that makes us believe that the financial report is not in accordance with the Corporations Act 2001 including: giving a true and fair view of the consolidated entity’s financial position as at 31 December 2006 and its performance for the half-year ended on that date; and complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001 and other mandatory financial reporting requirements in Australia. As the auditor of Mount Gibson Iron Limited and the entities it controlled during the half-year, ASRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial report.

A review of a half-year financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

— 334 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

Independence

In conducting our review, we have complied with the independence requirements of 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.

Conclusion

Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the interim financial report of Mount Gibson Iron Limited and the entities it controlled during the half-year, is not in accordance with:

(a) the Corporations Act 2001 , including:
(i) giving a true and fair view of the consolidated entity’s financial position as at 31 December 2006 and of its performance for the half-year ended on that date; and
(ii) complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001 ; and
(b) other mandatory financial reporting requirements in Australia.

Ernst & Young

Gavin A Buckingham

Partner

Perth

26 February 2007

— 335 —

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX IV

(K) A letter from the reporting accountants of the Company summarizing the principal differences between Australian accounting standards and Hong Kong Financial Reporting Standards

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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, APAC Resources 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.

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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

19 March 2007

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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. (All monetary amounts are stated at A$)

TALLERING PEAK HEMATITE

Mount Gibson 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 Mount Gibson 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.

Mount Gibson 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.

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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. (All monetary amounts are stated at A$)

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 Mount Gibson’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.

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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.

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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.

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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.

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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. (all monetary amounts are stated at A$)

Tallering Peak Hematite Operations

Now in its second full year, the Tallering Peak hematite operation includes the Tallering Peak hematite mine, crushing and screening plant, the rail loading facility at Mullewa and the ore storage and loading facilities at the Port of Geraldton.

Tallering Peak had a very strong physical and financial performance in the first half of the financial year as the mine completed the first stage of multiple small open pits. MGI generated strong cash flows which set the foundation for large cut backs of existing pits in the second half of the financial year. The large cut backs involved the removal of very large quantities of waste rock. This allowed development of the mine to the stage where production of 3Mtpa for the remaining Life of Mine (“LOM”) at Tallering Peak is possible on a sustainable basis.

Ore production for the year totalled 1,122,000 tonnes whilst ore sold totalled 1,362,000 tonnes. Ore production expectations in the second half of the year were not achieved. This was due to the under reconciliation of the resource in the upper sections of the geological resource resulting from limited drill rig access caused by the steep local topography. This is not expected to materially affect the total mining resource as the upper section contributes less than 4% of the total ore tonnes.

Material movement from Tallering Peak accelerated substantially in the second half of the year compared with the first. Material movements in the first half averaged 390,000 BCM per month whilst rates of approximately 1,000,000 BCM per month were achieved by the end of the financial year. Tallering Peak will maintain these rates over the next two years to ensure sustainable ore production rates of 3Mtpa can be achieved.

The LOM plan for Tallering Peak will be continually updated and further information is acquired however the current information indicates that the strip ratio will decline significantly in 2008-09 and continue to decline through to the completion of the mine life. There is a significant possibility of extending the mine life at Tallering Peak with the development of an area to the North East described as T1. This area was originally explored by Western Mining in the late 1960’s with the establishment of an adit into the mineralised hill and some limited surface drilling. Hematite was intersected in both the adit and drilling which gives MGI confidence that further hematite discoveries in the area are possible. The exploration target in the T1 area is subject to native title and discussions have commenced with the claimants in an attempt to gain access to this area for follow up exploration.

The remaining LOM plan at Tallering Peak will see the mine develop at least a further three cut backs in order to access the deepest areas of the known ore reserve. The remaining LOM strip ratio will be in the order of 5:1 tonne for tonne. The current satellite open cut T5, which produces lower grade higher contaminant hematite ore for blending with the premium high grade and high quality ore from the Main pit, is scheduled to be completed in first half of the 2007-08 financial year.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Tallering Peak lifted production considerably in the second half of the financial year by introducing large scale mobile fleet to the operation and by selling, at a profit, the smaller scale equipment used to initially establish the mine. The introduction of the larger fleet has been timely given the substantial increases in costs in the Western Australian resource sector. Although costs at Tallering Peak have increased MGI has been able to mitigate some of the increases by introducing larger more productive equipment however future efficiencies will be pursued in order to maintain current unit costs against an escalation in fuel, consumable and wages costs. MGI has also focussed on owner operating rather than contracting out mining and crushing services. MGI has experienced an increase of contractor margins in this period of unprecedented demand for labour, services and materials. To this end MGI closed out the crushing and screening contract on site and purchased the installed equipment. Although this impacted on cash spend the unit operating costs for crushing and screening have been reduced and the throughput increased significantly.

Subsequent to the end of the 2005/06 financial year, Tallering Peak exceeded targeted ore production rates in the September quarter and has achieved an annualised production rate of 3Mpta. Ore production rates and material movements have been at record levels whilst ore grade and contaminant levels have been within contract specifications. MGI has also demonstrated that the mine, road transport and rail infrastructure can operate at 3Mtpa production rates and the Geraldton Port is well placed to deliver increased capacity with the introduction of a second iron ore ship loading facility due for completion early in 2008.

Operational risk mitigation and safety management in the workplace is MGI’s highest management priority, and Tallering Peak’s management team are constantly working to improve safety awareness, reduce Lost Time Injuries and develop a “safety culture” among employees and contractors at all sites. The Lost Time Injury Frequency Rate and Disabling Injury Frequency Rate has improved over 90% since November 2005 and is in line with the industry average which reflects a significant improvement in the safety culture and risk management controls of the site. MGI will continue to adopt meaningful risk management strategies and controls that minimise the risks to people and plant.

Environmental performance is a critical “licence to operate” issue for mine management, and Tallering Peak continues to make significant improvements in the management of local fauna and flora, rehabilitation, waste disposal, mine impact monitoring and dust and emissions controls. Despite severe skills shortages in the mining industry in Western Australia, MGI has successfully recruited new management and expanded the Tallering Peak workforce in line with the significant increase in output from the mine during the year. MGI continues to be one of largest employers in the Mid West region, and employs most of its mine personnel from Geraldton or other towns in the Mid West region. MGI will continue to employ local and regional employees as a clear and demonstrable commitment to the Mid West and the region’s future growth, development and prosperity.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Extension Hill DSO Hematite Project

MGI completed a comprehensive desktop study and is nearing completion of a definitive feasibility study (“DFS”) into the development of a hematite mining and direct shipping operation located at Extension Hill in the Mt Gibson Range 85 kilometres east of Perenjori 260km east-south-east of Geraldton.

The desktop study demonstrates that the project can provide outstanding financial results in a short time-frame with minimal technical risks and relatively low capital requirements. This result is due to short construction times, minimal pre-strip enabling full ore production by the third month of mining and strong iron ore prices.

Most significant risks to the project lie in the implementation of development activities, particularly at the Geraldton Port and timing of production start-up.

MGI owns 100% of the Extension Hill DSO (“Direct Shipping Ore”) Hematite project and intends, subject to Board approval, to develop the project irrespective of whether the magnetite project at Extension Hill proceeds or not. The DFS is expected to be completed by December 2006, with submission of a project proposal to the MGI Board shortly thereafter. Project commencement would then be subject to receipt of all statutory approvals, readiness of the new Berth 5 ship loader in Geraldton, completion of MGI’s port facilities, availability of rail capacity, completion of road upgrades, and construction of site infrastructure. MGI is targeting the first quarter of calendar 2008 for first product shipment from Geraldton, subject to various environmental and statutory approvals.

The Extension Hill DSO project has JORC compliant Probable Reserves of 12.1 million tonnes already established within a designed open pit which demonstrates a life of mine waste to ore ratio of less than 1:1. There is excellent potential for significant increases in Reserves once environmental approvals are granted, both inside and adjacent to the present pit design. Shipment of up to 3 million tonnes per annum of product is envisaged, depending on final Reserves and off-site transport capacities. Lump and Fines product will be shipped in an approximate 50/50 ratio.

The Extension Hill DSO project can be substantially funded by the $52.5 million proceeds of the sale of Mount Gibson Iron’s 73% interest in Asia Iron Holdings which owns the Extension Hill Magnetite Project.

The operation will directly employ approximately 110 people on site, with a further 60 involved in contract transport operations. The operating plan is likely to involve conventional truck and hydraulic excavator open pit mining, ore crushing and screening on-site to produce blended Lump and Fines products, road transport 85 kilometres to Perenjori, then by rail in specially designed ore carrying rail wagons for the final 240 kilometre journey to the new Berth 5 storage shed at the Port of Geraldton. From there, product would be exported in Panamax sized vessels directly to customers in China and throughout Asia.

Extensive investigation into the design and operation of MGI’s second port facility is being conducted.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

Asia Iron Sale

On 7 June 2006 MGI advised ASX that it had signed an agreement with China’s third largest steel producer, the Shougang Group, for the sale of MGI and Mount Gibson Mining Limited’s (“MGM”) entire 73% interest in Asia Iron Holdings Limited (“Asia Iron”) for $52.5 million. The agreement was subject to 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 MGI advised ASX that it has received notice of an election to purchase MGI and MGM’s shareholding in Asia Iron from a minority shareholder, Sinom Investments Limited (“Sinom”). Sinom’s notice to match the Shougang offer resulted in a binding agreement for the sale of MGI and MGM’s entire 73% interest in Asia Iron to Sinom on the same terms as those previously agreed with Shougang.

Sinom obtained FIRB approval for the Asia Iron acquisition on 2 August and the proceeds have been placed in escrow pending Environmental Approval, which is not expected until late 2006 or early 2007. In the event Environmental Approval is not obtained by 30 November 2007, the agreement with Sinom can be terminated, and the 73% interest in Asia Iron returned to MGI and MGM.

The board’s decision to divest its Asia Iron stake, and therefore the Extension Hill Magnetite Project, lowers MGI’s financial and technical risk profile and enables MGI to fund the development costs of the Extension Hill DSO project without diluting shareholders through significant equity capital raisings or increasing debt through substantial borrowings. The development of the Extension Hill Magnetite Project would have exposed MGI to unacceptably high levels of debt and would have had a significant dilutionary effect on current shareholders. Given the escalating operational and capital costs associated with new and existing resources projects in Western Australia and the inability for large scale projects to be delivered on schedule due to a shortage of skilled labour, engineering resources and protracted delivery times for major items of capital equipment the sale of MGI’s stake in Asia Iron was considered by the Board to be in the best interest of MGI shareholders. MGI has retained all the rights to hematite iron ore in the Mt Gibson Ranges.

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.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

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.

At the time of writing this report, Mount Gibson had a relevant interest of 33.2% in Aztec.

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

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

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;
● 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.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

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 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.

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MANAGEMENT DISCUSSION AND ANALYSIS OF THE MOUNT GIBSON GROUP

APPENDIX V

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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GENERAL INFORMATION

APPENDIX VI

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 information, 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 were as follows:

Authorised		HK$
8,000,000,000	Shares as at the Latest Practicable Date	800,000,000
Issued and fully paid or credited as fully paid
3,318,004,378	Shares as at the Latest Practicable Date	331,800,438
3,569,800,000	Shares after full exercise of the Bonus Warrants	356,980,000

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 of 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.

The Shares which may fall to be issued upon the exercise of the Bonus Warrants 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.

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GENERAL INFORMATION

APPENDIX VI

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 Listed Issuers 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	1,312,739,562	39.56%
	corporation (Note 1)	(Note 2)	(Note 3)

Notes:

These Shares are registered/will be registered (as the case may be) in the name of and beneficially owned by Profit Harbour.
This represented an interest in 1,193,399,602 Shares and an interest in 119,339,960 units of Bonus Warrants giving rise to an interest in 119,339,960 underlying Shares. The Bonus Warrants entitle the holders to subscribe at any time during the period from 5 February 2007 to 4 February 2010 (both days inclusive) for fully paid Shares at an initial subscription price of HK$0.30 per share (subject to adjustments).
The percentage of shareholding is calculated on the basis of the Company’s issued share capital of 3,318,004,378 Shares as at the Latest Practicable Date (before any exercise of the Bonus Warrants by the respective holders).

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 Listed Issuers contained in the Listing Rules.

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.

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GENERAL INFORMATION

APPENDIX VI

(b) 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.

(c) Interests in assets

As at the Latest Practicable Date, save for the Deed of Assignment (defined below) in respect of a 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.

(d) 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.

(e) 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 Acquisition and the Conditional Acquisition.

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GENERAL INFORMATION

APPENDIX VI

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:

Long position in Shares and underlying Shares

		Number of
		Shares and
		Underlying	Approximate
Name of Shareholders	Capacity and nature	Shares	% holding
			(Note 2)	Notes
Profit Harbour	Beneficial owner	1,312,739,562	39.56%	1,3
Benefit Rich Limited	Corporate Interests	660,000,000	19.89%	4
(“Benefit”)	(interest of controlled
	corporation)
Shougang	Beneficial owner	660,000,000	19.89%	5
Chong Sok Un	Beneficial owner	427,420,000	12.88%	6

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 3,318,004,378 Shares as at the Latest Practicable Date (before any exercise of the Bonus Warrants by the respective holders).
This represented an interest in 1,193,399,602 Shares and an interest in 119,339,960 units of Bonus Warrants giving rise to an interest in 119,339,960 underlying Shares. The Bonus Warrants entitle the holders to subscribe at any time during the period from 5 February 2007 to 4 February 2010 (both days inclusive) for fully paid Shares at an initial subscription price of HK$0.30 per share (subject to adjustments).
Benefit is interested in 660,000,000 Shares and is a wholly-owned subsidiary of Shougang as at the Latest Practicable Date. This represented an interest in 600,000,000 Shares and an interest in 60,000,000 units of Bonus Warrants giving rise to an interest in 60,000,000 underlying Shares. The Bonus Warrants entitle the holders to subscribe at any time during the period from 5 February 2007 to 4 February 2010 (both days inclusive) for fully paid Shares at an initial subscription price of HK$0.30 per share (subject to adjustments).
Benefit is 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.
This represented an interest in 427,420,000 Shares held by various holding companies wholly-owned by Chong Sok Un and her associate(s) as at the Latest Practicable Date.

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GENERAL INFORMATION

APPENDIX VI

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 service 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 2004 and 2005 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 Limited (“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 Center, the Company has reached an amicable settlement with Great Center’s liquidators. The settlement was approved by the court on 6 November 2006. The Company received the

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APPENDIX VI

GENERAL INFORMATION

settlement sum of US$2,637,000 plus interest in the sum of US$114,210.30 from Great Center’s liquidators on 20 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 of

— 358 —

GENERAL INFORMATION

APPENDIX VI

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 (“Deed of Assignment”) 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 other 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 the 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 of approximately 60% interest in Chinaright Electronics Limited 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 debt of approximately HK$1 million (owed by Chinaright Electronics Limited to Professional Trading Limited as at the date of completion of the acquisition agreement) executed by Professional Trading Limited in favour of Rise Cheer Limited as part of the acquisition, the details of which are disclosed in the announcement of the Company dated 15 June 2006;

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GENERAL INFORMATION

APPENDIX VI

(viii)the sale and purchase agreement dated 27 October 2006 entered into between Fortune Desire as the purchaser and Honest Opportunity Limited and New Fortress Investments Limited both as the vendors relating to the sale and purchase of 48,373,197 MG Shares at an aggregate consideration of HK$244,474,752;
(ix) the underwriting agreement dated 8 November 2006 entered into between the Company and Sun Hung Kai International Limited in relation to the proposed issue of 1,259,000,000 rights shares of the Company at a subscription price of HK$0.30 per rights share on the basis of one rights share for every existing Share, such rights issue was subsequently completed on 1 February 2007;
(x) the placing agreement dated 9 November 2006 entered into between the Company and Sun Hung Kai Investment Services Limited in relation to the placing of 800,000,000 new Shares issued by the Company at HK$0.30 per Share, which was subsequently completed on 28 February 2007;
(xi) the Conditional Acquisition Agreement; and
(xii) the acquisition agreement dated 16 February 2007 entered into between Asia Pacific Resources Group Company Limited as the vendor, Mung Kin Keung as the guarantor and the Company as the purchaser in relation to the conditional acquisition of 10,000 shares in China Mineral Resource Limited at the consideration of HK$450,000,000.

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)

Ample Capital Limited a corporation licensed to carry on types 4, 6 and 9 (advising on securities, advising on corporate finance and asset management respectively) regulated activities under the SFO

Each of Graham H. Y. Chan & Co. and Ample Capital Limited has given and not withdrawn its written consent to the issue of this circular with the inclusion of its letters or reports dated 19 March 2007 and references to its name in the form and context in which it appears.

9. EXPERT’S INTEREST IN ASSETS

As at the Latest Practicable Date, none of Graham H. Y. Chan & Co. and Ample Capital Limited, 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.

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GENERAL INFORMATION

APPENDIX VI

As at the Latest Practicable Date, none of Graham H. Y. Chan & Co. and Ample Capital Limited, 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 place	Rooms 2808-10
of business	28th Floor, Wing On House
	71 Des Voeux Road Central
	Hong Kong
Authorised representatives	Lau Yau Cheung and To Yung Kan
Company secretary and qualified	To Yung Kan
accountant
Hong Kong legal advisers to the	P. C. Woo & Co.
Company	12th Floor, Prince’s Building
	10 Chater Road
	Central
	Hong Kong
Auditors	Graham H. Y. Chan & Co.
	Certified Public Accountants (Practising)
	Unit 1, 15th Floor,
	The Center
	99 Queen’s Road Central
	Hong Kong
Hong Kong branch share registrar	Secretaries Limited
and transfer office	26th Floor, Tesbury Centre
	28 Queen’s Road East
	Wanchai, Hong Kong

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GENERAL INFORMATION

APPENDIX VI

11. PROCEDURES FOR DEMANDING A POLL

(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.

12. GENERAL

(a) The company secretary and the qualified accountant of the Company appointed pursuant to Rule 3.24 of the Listing Rules is Mr. To Yung Kan. Mr. To Yung Kan is a qualified accountant and member of the Hong Kong Institute of Certificate Public Accountants.
(b) The English text of this circular and the accompany form of proxy shall prevail over the Chinese text thereof.

13. 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 3 April 2007:

(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;

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GENERAL INFORMATION

APPENDIX VI

(d) the accountants’ report from Graham H. Y. Chan & Co. on unaudited pro forma financial information of the Group which includes a written statement in respect of the adjustments of the unaudited pro forma financial information, the text of which is set out in Appendix III to this circular;
(e) the letter from the IFA, the text of which is set out in this circular;
(f) the consent letters from Graham H. Y. Chan & Co. and the IFA, 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 and the interim report of Mount Gibson for the six months ended 31 December 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 rights issue of the Company;
(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;
(l) the circular and prospectus of the Company dated 12 December 2006 and 4 January 2007 regarding, amongst other things, the Previous Acquisition of 48,373,197 MG Shares by Fortune Desire, the rights issue and the issue of Bonus Warrants of the Company; and
(m) this circular.

— 363 —

NOTICE OF THE SGM

APAC RESOURCES LIMITED ( )[*]

(Incorporated in Bermuda with limited liability) (Stock code: 1104)

NOTICE IS HEREBY GIVEN that a special general meeting (the “Meeting”) of APAC Resources Limited (the “Company”) will be held on 20th Floor, Central Tower, 28 Queen’s Road, Central, Hong Kong on Wednesday, 4 April 2007 at 4:30 p.m. for the purpose of considering and if thought fit, passing with or without amendments, the following resolution numbered 1 as ordinary resolution of the Company and no shareholder of the Company (the “Shareholder”) shall abstain from voting, and the following resolution numbered 2 as ordinary resolution of the Company to be taken by way of poll and Shougang Holding (Hong Kong) Limited (“Shougang”), a substantial Shareholder and a connected person of the Company, and its associates shall abstain from voting:

ORDINARY RESOLUTIONS

“ THAT the acquisition (the “Acquisition”) of 40,125,967 ordinary shares in Mount Gibson Iron Limited (“Mount Gibson”) by the Company, through its direct wholly-owned subsidiary, Fortune Desire Investments Limited (“Fortune Desire”), representing approximately 5.09% interest in the issued share capital of Mount Gibson as at 9 February 2007, by a number of on-market transactions on The Australian Stock Exchange Limited at an aggregate consideration of A$33,501,170, be and is hereby approved, confirmed and ratified, and THAT the transactions contemplated under the Acquisition 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 and the transactions contemplated thereunder.”
“ THAT the conditional sale and purchase agreement dated 9 February 2007 (the “ Conditional Acquisition Agreement”) entered into between (i) Fortune Desire as the purchaser; and (ii) Timely Rich Limited, a direct wholly-owned subsidiary of Shougang, as the vendor in relation to the sale and purchase of 19,754,646 ordinary shares in Mount Gibson, representing approximately 2.51% interest in the issued share capital of Mount Gibson as at 9 February 2007 at an aggregate consideration of HK$102,427,839.51, 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 Conditional Acquisition Agreement be and are hereby approved, confirmed and

* For identification purpose only

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NOTICE OF THE SGM

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 Conditional Acquisition Agreement and the transactions contemplated thereunder.”

By Order of the Board APAC Resources Limited Yue Jialin Chairman

Hong Kong, 19 March 2007

Registered office:

Head office and principal place of business in Hong Kong: Rooms 2808-10

Clarendon House Rooms 2808-10 2 Church Street 28/F., Wing On House Hamilton HM11 71 Des Voeux Road Central Bermuda Hong Kong

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)

Mr. Michael Joseph Bogue

Independent Non-Executive Directors:

Mr. Wong Wing Kuen, Albert
Mr. Tsui Robert Che Kwong
Mr. Yang Weiming

— 365 —

AI assistant

Persistence Gold Group Ltd — Proxy Solicitation & Information Statement 2007

50623_rns_2007-03-19_315b5de4-4290-4bea-b14e-a723a693ec27.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

APAC RESOURCES LIMITED

MAJOR TRANSACTION RELATING TO

THE ACQUISITION OF 40,125,967 ORDINARY SHARES AND VERY SUBSTANTIAL ACQUISITION AND

CONNECTED TRANSACTION

RELATING TO

THE CONDITIONAL ACQUISITION OF 19,754,646 ORDINARY SHARES IN MOUNT GIBSON

Independent Financial Adviser

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

APAC RESOURCES LIMITED ( )[[*]]

MAJOR TRANSACTION RELATING TO

VERY SUBSTANTIAL ACQUISITION AND

CONNECTED TRANSACTION

RELATING TO THE CONDITIONAL ACQUISITION OF 19,754,646 ORDINARY SHARES IN MOUNT GIBSON

INTRODUCTION

LETTER FROM THE BOARD

THE ACQUISITION

Date

Parties

The MG Shares acquired by the Company

Consideration

Completion

Source of Funding

LETTER FROM THE BOARD

THE CONDITIONAL ACQUISITION

The Conditional Acquisition Agreement

Date

Parties

The MG Shares further acquired by the Company

Conditions precedent

LETTER FROM THE BOARD

Completion

Consideration

LETTER FROM THE BOARD

Source of funding

INFORMATION ON MOUNT GIBSON

LETTER FROM THE BOARD

LETTER FROM THE BOARD

INFORMATION ON THE COMPANY

INFORMATION ON FORTUNE DESIRE

INFORMATION ON TIMELY RICH

REASONS FOR AND BENEFITS OF THE ACQUISITION AND THE CONDITIONAL ACQUISITION

LETTER FROM THE BOARD

BUSINESS PLAN AND FUTURE INTENTIONS

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

Date of announcement/

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LISTING RULES IMPLICATIONS

LETTER FROM THE BOARD

SGM

PROCEDURES FOR DEMANDING A POLL

LETTER FROM THE BOARD

RECOMMENDATIONS

ADDITIONAL INFORMATION

APAC RESOURCES LIMITED

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

RELATING TO THE CONDITIONAL ACQUISITION OF 19,754,646 ORDINARY SHARES IN MOUNT GIBSON

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Yang Weiming

LETTER FROM THE IFA

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION RELATING TO THE CONDITIONAL ACQUISITION OF 19,754,646 MG SHARES

INTRODUCTION

LETTER FROM THE IFA

LETTER FROM THE IFA

PRINCIPAL FACTORS CONSIDERED

1. Background information

2. Information on Mount Gibson

LETTER FROM THE IFA

LETTER FROM THE IFA

3. Reasons for and the benefits of the Conditional Acquisition Agreement

4. Terms of the Conditional Acquisition Agreement

4.1.1 Historical closing price of the MG Shares

Persistence Gold Group Ltd Proxy Solicitation & Information Statement 2007