THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in doubt as to any aspect of this circular, you should consult your stockbroker or other licensed securities dealer, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares 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 takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims 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 亞太資源有限公司[*] (Incorporated in Bermuda with limited liability)

(Stock Code: 1104) (Warrant Code: 324)

DISCLOSEABLE TRANSACTION AND POSSIBLE MAJOR TRANSACTION RELATING TO

THE COMMITMENT TO TAKE UP CERTAIN SHARES IN AN UNDERWRITTEN RIGHTS ISSUE TO BE CONDUCTED BY MOUNT GIBSON

The Aggregated Commitments constitute a major transaction of the Company under the Listing Rules. A notice convening the SGM to be held at 7th Floor, Board Room, The Dynasty Club, South West Tower, Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong on Monday, 29 December 2008 at 11:00 a.m. or any adjournment thereof is set out on pages 492 to 495 of this Circular. A form of proxy for the SGM is enclosed with this circular. Whether or not you are 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, Tricor Secretaries Limited, 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 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 thereof should you so desire.

12 December 2008

For identification purpose only

		Page
Definitions. . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		4
Appendix I –	Financial Information on the Group. . . . . . . . . . . . . . . . . . . . . . . . . .	26
Appendix II –	Pro Forma Financial Information of the Group. . . . . . . . . . . . . . . . .	100
Appendix III –	Financial Information on Mount Gibson. . . . . . . . . . . . . . . . . . . . . .	104
Appendix IV –	Management Discussion and Analysis of Mount Gibson. . . . . . . . . .	452
Appendix V –	General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	480
Notice of the SGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		492

– i –

DEFINITIONS

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

“A$”

Australian dollars, the lawful currency of Australia

“Aggregated Commitments” the Shareholding Commitment and the Underwriting Commitment in aggregate “Announcement” the announcement of the Company dated 5 November 2008 in relation to the Heads of Agreement

“APAC Subsidiaries”

two wholly-owned subsidiaries of the Company which held an aggregate of 164,148,144 MG Shares as at the Latest Practicable Date

“ASX”

Australian Securities Exchange Limited

“Available Production” lump and fines iron ore products from mines owned by Mount Gibson and/or its subsidiaries at the date of the Heads of Agreement (being Koolan Island, Tallering Peak and Extension Hill), that are available for shipping having regard to shipping schedules, mine production, transport logistics and port capacity, and that are not the subject of any existing binding offtake agreements

“Board” the board of Directors “Company” APAC Resources Limited, a company incorporated in Bermuda with limited liability, with its securities listed on the Main Board of the Stock Exchange

“connected person(s)” having the meaning ascribed to it under the Listing Rules “Directors” directors of the Company “FIRB” Foreign Investment Review Board of Australia “Group” the Company and its subsidiaries

– 1 –

DEFINITIONS

“Heads of Agreement”	the legally binding heads of agreement entered into between
	the Company and Mount Gibson on 2 November 2008 pursuant
	to which the Company and Mount Gibson have agreed on the
	key terms that will be contained in the definitive agreements
	in respect of, amongst other things, the offtake agreements and
	the Underwriting Agreement
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“Hong Kong”	Hong Kong Special Administrative Region of the People’s
	Republic of China
“Latest Practicable Date”	8 December 2008, being the latest practicable date prior to
	printing of this circular for the purpose of ascertaining certain
	information contained in this circular
“Listing Rules”	Rules Governing the Listing of Securities on The Stock
	Exchange of Hong Kong Limited
“MG Shares”	ordinary shares in the issued share capital of Mount Gibson
“Mount Gibson”	Mount Gibson Iron Limited, a corporation incorporated under
	the laws of Australia, with its shares listed on the ASX
“related body corporate”	having the meaning ascribed to it under section 50 of the
	Corporations Act 2001 in Australia, with effect that a body
	corporate is related to another body corporate of which it is
	the holding company; another body corporate of which it is a
	subsidiary; and another body corporate where it is a subsidiary
	of the holding company of that other body corporate
“Rights Issue”	a 1 for 5 renounceable rights issue to existing shareholders of
	Mount Gibson to be conducted by Mount Gibson at an issue
	price of A$0.60 (equivalent to approximately HK$3.09) to
	raise approximately A$97 million (equivalent to approximately
	HK$499,550,000)
“SFO”	Securities and Futures Ordinance (Chapter 571 of the Laws of
	Hong Kong)

– 2 –

DEFINITIONS

“SGM”

the special general meeting of the Shareholders to be convened at 7th Floor, Board Room, The Dynasty Club, South West Tower, Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong on Monday, 29 December 2008 at 11:00 a.m. for the purposes of considering and, if thought fit, approving the Aggregated Commitments

“Shares”

ordinary shares of HK$0.10 each in the issued share capital of the Company

“Shareholders”

holders of Shares

“Shareholding Commitment”

the Company’s full entitlement (through the APAC Subsidiaries) under the Rights Issue in relation to MG Shares owned by the Company (through the APAC Subsidiaries) as at the date of the Heads of Agreement, namely, 32,829,629 new shares in Mount Gibson to be subscribed for under the Rights Issue

“Shortfall Shares”

up to 82,900,000 shares in Mount Gibson not taken up by shareholders of Mount Gibson in the Rights Issue, which does not include the Shareholding Commitment

“Stock Exchange”

The Stock Exchange of Hong Kong Limited

“Underwriting Agreement”

the underwriting agreement to be entered into between the Company (or its nominee) and Mount Gibson under which the Company (or its nominee) will have the right to underwrite the Shortfall Shares in priority to any other underwriters to the Rights Issue. The definitive Underwriting Agreement was entered into on 20 November 2008.

“Underwriting Commitment”

the underwriting of the Shortfall Shares under the Underwriting Agreement in priority to any other underwriters to the Rights Issue by the Company (or its nominee)

“%”

per cent.

In this circular, for purpose of illustration only, amounts quoted in A$ have been converted into HK$ at the rate of A$1.00 to HK$5.15 as at 1 November 2008. Such exchange rate has been used, where applicable, for purposes of illustration only and does not constitute a representation that any amounts were or may have been exchanged at this or any other rates or at all.

– 3 –

LETTER FROM THE BOARD

APAC RESOURCES LIMITED 亞太資源有限公司[*]

(Incorporated in Bermuda with limited liability)

(Stock Code: 1104) (Warrant Code: 324)

Executive Directors: Mr. Cao Zhong (Chairman) Mr. Liu Yongshun (Chief Executive Officer) Mr. Zhou Luyong (Deputy Chief Executive Officer) Ms. Chong Sok Un Mr. Chen Zhaoqiang Mr. Yue Jialin

Independent Non-Executive Directors: Mr. Wong Wing Kuen, Albert Mr. Chang Chu Fai, Johnson Francis Mr. Alan Stephen Jones Mr. Robert Moyse Willcocks

Registered office: Clarendon House 2 Church Street Hamilton HM11 Bermuda

Head office and principal place of business: 32/F China Online Centre 333 Lockhart Road Wanchai Hong Kong

12 December 2008

To the Shareholders and, for information only, the Warrantholders

Dear Sir or Madam,

DISCLOSEABLE TRANSACTION AND POSSIBLE MAJOR TRANSACTION RELATING TO THE COMMITMENT TO TAKE UP CERTAIN SHARES IN AN UNDERWRITTEN RIGHTS ISSUE TO BE CONDUCTED BY MOUNT GIBSON

INTRODUCTION

The Board announced in the Announcement that on 2 November 2008, the Company entered into the legally binding Heads of Agreement with Mount Gibson pursuant to which the Company and Mount Gibson have agreed on the key terms that will be contained in the definitive agreements in respect of, amongst other things, (a) the Company (through the APAC Subsidiaries) committing to take up its full entitlement under the Rights Issue in relation to MG Shares owned by the Company (through the APAC Subsidiaries) as at the date of the Heads of Agreement; and (b) the Company (or its nominee) underwriting in priority the Shortfall Shares in the Rights Issue.

For identification purpose only

– 4 –

LETTER FROM THE BOARD

As at the Latest Practicable Date, the Company (through the APAC Subsidiaries) held 164,148,144 MG Shares, representing approximately 20.41% interest in the issued share capital of Mount Gibson. Upon taking up the Shareholding Commitment, the Group’s shareholding in Mount Gibson will remain at 20.41%. After completion of the Rights Issue, the Group’s shareholding in Mount Gibson will be between approximately 20.41% (assuming that the Rights Issue is fully subscribed and the Group does not increase its percentage shareholding through the Underwriting Agreement) and approximately 29% (if the Shortfall Shares are all taken up by the Company (or its nominee) as the underwriter).

The purpose of this circular is to provide the Shareholders with, amongst other things, details of (a) the terms of the Shareholding Commitment and the Underwriting Commitment; and (b) a notice to convene the SGM to approve the Aggregated Commitments, in accordance with the requirements of the Listing Rules.

THE HEADS OF AGREEMENT

On 2 November 2008, the Company entered into the legally binding Heads of Agreement with Mount Gibson pursuant to which the Company and Mount Gibson have agreed on the key terms that will be contained in the definitive agreements in respect of, amongst other things, (a) the Company (through the APAC Subsidiaries) committing to take up its full entitlement under the Rights Issue in relation to MG Shares owned by the Company (through the APAC Subsidiaries) as at the date of the Heads of Agreement; and (b) the Company (or its nominee) underwriting in priority the Shortfall Shares in the Rights Issue. The Company has committed to the transactions contemplated under the Heads of Agreement subject to the conditions set out therein. If the Company elects to use a nominee in relation to the transaction(s) contemplated under the Heads of Agreement, that nominee must be a related body corporate of the Company and the Company must guarantee the performance of the nominee’s obligations in respect of the relevant transaction(s).

Date

2 November 2008

Parties

(1) The Company
(2) Mount Gibson

To the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, Mount Gibson and the ultimate beneficial owner of Mount Gibson are third parties independent of the Company and connected persons of the Company.

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LETTER FROM THE BOARD

DISCLOSEABLE TRANSACTION

The Rights Issue

Pursuant to the Heads of Agreement, the Company (through the APAC Subsidiaries) has committed to take up its full entitlement under the Rights Issue in relation to MG Shares owned by the Company (through the APAC Subsidiaries) as at the date of the Heads of Agreement. The terms of the Rights Issue shall include, amongst other things, the following:

(1) Mount Gibson to conduct a 1 for 5 renounceable rights issue to existing shareholders at an issue price of A$0.60 (equivalent to approximately HK$3.09), to raise approximately A$97 million (equivalent to approximately HK$499,550,000);
(2) the Rights Issue is to be conducted as soon as practicable;
(3) the Rights Issue is to be conducted as a traditional renounceable rights issue;
(4) the Rights Issue is to be conducted as a documented rights issue (involving Mount Gibson issuing a prospectus);
(5) Mount Gibson may engage a bank to act as a lead manager (but not an underwriter) to manage the distribution of the Rights Issue; and
(6) the Company (through the APAC Subsidiaries) is to commit to take up the Shareholding Commitment.

As at the Latest Practicable Date, the Company (through the APAC Subsidiaries) held 164,148,144 MG Shares, representing approximately 20.41% interest in the issued share capital of Mount Gibson. As at the Latest Practicable Date, the Company was the single largest shareholder of Mount Gibson. Upon taking up the Shareholding Commitment, the Group’s shareholding in Mount Gibson will remain at 20.41%.

Consideration

Based on an issue price of A$0.60 (equivalent to approximately HK$3.09) in the Rights Issue, the aggregate subscription price to be paid by the APAC Subsidiaries for the Shareholding Commitment is A$19,697,777 (equivalent to approximately HK$101,443,552).

– 6 –

LETTER FROM THE BOARD

The issue price of A$0.60 (equivalent to approximately HK$3.09) was determined by the board of Mount Gibson which took into account of (a) the closing price of the MG Shares of A$0.405 (equivalent to approximately HK$2.09) on the last trading day before Mount Gibson requested a trading halt on 23 October 2008; (b) the net assets value per MG Share of approximately A$0.74 (equivalent to approximately HK$3.81) according to Mount Gibson’s 2008 annual report; and (c) the capital funding required by Mount Gibson. The Directors consider that the issue price is fair and reasonable on the basis that it represents (a) a discount of 49.2% to the average closing price of MG Shares during the one month prior to the date of the Heads of Agreement of approximately A$1.18 (equivalent to approximately HK$6.08) and (b) a discount of 18.9% to the net assets value per MG Share of approximately A$0.74 (equivalent to approximately HK$3.81).

Sources of funding

The aggregate subscription price to be paid by the APAC Subsidiaries for the Shareholding Commitment will be financed by the Group from its internal resources and borrowings.

Listing Rules Implications

The subscription of MG Shares by the APAC Subsidiaries in respect of the Shareholding Commitment constitutes a discloseable transaction for the Company under Rule 14.06(2) of the Listing Rules on the basis that the calculations of the relevant percentage ratios are within the range of 5% and 25%.

POSSIBLE MAJOR TRANSACTION

The Underwriting Agreement

Pursuant to the Heads of Agreement, the Company (or its nominee) and Mount Gibson will enter into the Underwriting Agreement under which the Company (or its nominee) will have the right to underwrite the Shortfall Shares in priority to any other underwriters to the Rights Issue. The Underwriting Agreement is to be on the following terms:

(1) the Company (or its nominee) will be only underwriting the Underwriting Commitment;
(2) the Underwriting Commitment will be subject to approval by the Shareholders under the Listing Rules, if required, and the Company taking all steps to ensure that the Rights Issue and the underwriting arrangements meet all applicable steps required under the Listing Rules and any other relevant legislation;

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LETTER FROM THE BOARD

(3) the Underwriting Agreement will be subject to approval by the shareholders of Mount Gibson;
(4) the fee payable to the Company (or its nominee) in consideration of it being an underwriter will be 3.5% of the value of the Underwriting Commitment;
(5) the Company currently has FIRB approval due to expire on 8 January 2009 to increase its holding in Mount Gibson to 29%:
(a) the Company will apply to FIRB as soon as practicable for, amongst other things, approval to increase its shareholding in Mount Gibson to the maximum percentage that it would receive if it took up the Shareholding Commitment and the entire Underwriting Commitment in the Rights Issue;
(b) if the said fresh FIRB approval is not received prior to the Underwriting Agreement becoming unconditional, the Company (or a related body corporate of the Company) will proceed to underwrite the Underwriting Commitment on the basis of the existing FIRB approval, but if the Company is unable to rely on the existing FIRB approval, the Company must use its best endeavours to arrange for a non-associated person that is not subject to any regulatory approval issues to underwrite the portion of the Shortfall Shares that the Company is unable to underwrite;
(c) Mount Gibson must use its best endeavours to assist the Company with the fresh FIRB Approval referred to above;
(6) If required by Mount Gibson’s banking syndicate:
(a) the Company must deposit 40% of the Underwriting Commitment into an interest bearing escrow account holding to the order of the Company and Mount Gibson jointly or provide a letter of credit or bank guarantee equivalent to Mount Gibson within five business days after execution of the Underwriting Agreement;
(b) the Company must deposit the remaining balance (if any) of the outstanding Underwriting Commitment into the same interest bearing escrow account (taking into account the actual number of Shortfall Shares and the Company’s initial 40% deposit) at least five business days prior to the latter of the SGM or Mount Gibson’s shareholders’ meeting to be held in respect of the transactions contemplated under the Heads of Agreement.

– 8 –

LETTER FROM THE BOARD

Any amount that is not required to subscribe for the Shortfall Shares (including interest accrued on that amount) under the Underwriting Agreement is to be refunded to the Company as soon as practicable or prior to the completion of the Rights Issue. The full amount is to be refunded to the Company immediately if the Underwriting Agreement is terminated in accordance with its terms or if Mount Gibson shareholders and/or the Shareholders do not approve the underwriting as contemplated under the Heads of Agreement; and

(7) the Underwriting Agreement will contain warranties and termination events that are customary for an underwriting of this nature and subject to usual limitations of liability for breach of warranty.

The Company lodged an application for the fresh FIRB approval referred to in paragraph (5) (a) above on 5 November 2008 and lodged a further notice with respect to the fresh FIRB approval on 2 December 2008. The Company has never failed to obtain a FIRB approval for previous applications and has considered the possibility of failing to obtain the fresh FIRB approval as referred to in paragraph 5(b) above. However, since the decision of FIRB is beyond the Company’s control, the Company could not reach a conclusive view.

The arrangement referred to in paragraph (6) above has been included in the Heads of Agreement at the request of Mount Gibson’s banking syndicate as it may request for such deposit arrangement to be made by the Company. The Company is of the view that such deposit arrangement is justifiable in the circumstances because the Company (a) is a corporate underwriter which is not a financial institution and (b) is not incorporated in Australia.

After completion of the Rights Issue, the Group’s shareholding in Mount Gibson will be approximately 29% (following the Shareholding Commitment being taken up by the APAC Subsidiaries and if the Shortfall Shares are all taken up by the Company (or its nominee) as the underwriter).

Conditions

The underwriting arrangements in the Rights Issue (including the Underwriting Agreement) will be subject to approval by the shareholders of Mount Gibson. The resolutions to approve the underwriting arrangements in the Rights Issue and the long term offtake agreement(s) to be entered into between the Company (or its nominee) and a subsidiary of Mount Gibson pursuant to the Heads of Agreement (as referred to below) to be put to the shareholders’ meeting of Mount Gibson are inter-conditional on each other and all other relevant resolutions put at the same general meeting of Mount Gibson. For the purposes of such shareholders’ approval, the Company and its associates will not be permitted to vote on the relevant resolutions at the shareholders’ meeting of Mount

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LETTER FROM THE BOARD

Gibson. As at the Latest Practicable Date, the expected date of the shareholders’ meeting of Mount Gibson was 30 December 2008. In the event that the Underwriting Agreement is not approved by the shareholders of Mount Gibson at such meeting, the Company cannot proceed with the Underwriting Commitment even if the Aggregated Commitments have been approved at the SGM. Under such circumstances, the Company will proceed with the subscription of MG Shares in respect of the Shareholding Commitment only.

Consideration

Assuming that the Shortfall Shares are all taken up by the Company (or its nominee) as the underwriter, the aggregate subscription price to be paid by the Company (or its nominee) for the Underwriting Commitment is A$49,740,000 (equivalent to approximately HK$256,161,000).

The aggregate consideration to be paid by the Group for the Shareholding Commitment and the Underwriting Commitment (assuming that the Shortfall Shares are all taken by the Company (or its nominee) as the underwriter) is A$69,437,777 (equivalent to approximately HK$357,604,552).

Subject to all applicable laws and policies and the terms of the Underwriting Agreement, in consideration of the Company (or its nominee) underwriting the Underwriting Commitment, the Company (or its nominee) will receive from Mount Gibson a fee of 3.5% of the value of the Underwriting Commitment.

The underwriting commission of 3.5% of the value of the Underwriting Commitment was determined based on arm’s length negotiation between the Company and Mount Gibson with reference to the current market norm in Australia in relation to underwriting transactions. The Directors consider that the underwriting commission is fair and reasonable.

Sources of funding

The aggregate subscription price to be paid by the Company (or its nominee) for the Underwriting Commitment will be financed by the Group from its internal resources and borrowings. As at the Latest Practicable Date, the exact amount of total consideration to be paid by the Group for the Shareholding Commitment and the Underwriting Commitment cannot be ascertained, and the Company has not reached a decision on the apportionment of the exact amount of the consideration to be settled by each of internal resources and borrowings for the Shareholding Commitment and the Underwriting Commitment.

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LETTER FROM THE BOARD

Listing Rules Implications

The subscription of the MG Shares in respect of the Shareholding Commitment is, in itself a discloseable transaction pursuant to Rule 14.06(2) of the Listing Rules and does not require approval by Shareholders pursuant to Rule 14.33 of the Listing Rules. However, this subscription, when aggregated with the subscription of the MG Shares in respect of the Underwriting Commitment, will constitute a major transaction within the meaning of Rule 14.06(3) of the Listing Rules. Accordingly, the Stock Exchange has indicated that the subscription of the MG Shares in respect of the Aggregated Commitments will be subject to the approval of the Shareholders at the SGM in accordance with the requirements of Chapter 14 of the Listing Rules. No Shareholder will be required to abstain from voting at the SGM. To this end, if Shareholders’ approval is not obtained in respect of the Aggregated Commitments, then the Company will proceed with the subscription of the MG Shares in respect of the Shareholding Commitment only. If the Shareholding Commitment takes place prior to the SGM, the Company shall proceed with subscription of the MG Shares in respect of the Shareholding Commitment on the basis that it is a discloseable transaction. Accordingly, the Shareholding Commitment and the Underwriting Commitment are not inter-conditional.

THE OFFTAKE AGREEMENTS

Pursuant to the Heads of Agreement, the Company (or its nominee) and the relevant Mount Gibson subsidiary shall enter into a series of offtake agreements (short term and long term) under which Mount Gibson will agree to sell certain iron ore produced by it to the Company (or its nominee). Under the long term offtake agreement(s), Mount Gibson will agree to sell and the Company (or its nominee) will agree to buy 20% of Available Production from 1 July 2009 for the life of the respective mines. The long term offtake agreement(s) will be subject to approval by the shareholders of Mount Gibson and the resolutions to approve the long term offtake agreement(s) and the underwriting arrangements in the Rights Issue to be put to the shareholders’ meeting of Mount Gibson are inter-conditional on each other and all other relevant resolutions put at the same general meeting of Mount Gibson. Upon execution of the short term offtake agreement, the Company will have the right to nominate one director to Mount Gibson’s board of directors.

The above disclosure of the offtake agreements is made by the Company on a voluntary basis. These offtake agreements are transactions of a revenue nature in the ordinary and usual course of business of the Group which are not discloseable under Chapter 14 of the Listing Rules but are disclosed in this circular for information of the Shareholders and prospective investors only.

The Underwriting Agreement and the long term offtake agreement(s) referred to above are conditional and may or may not proceed. Accordingly, Shareholders and prospective investors are reminded to exercise extreme caution when trading in the Shares and warrants of the Company.

– 11 –

LETTER FROM THE BOARD

FORMAL AGREEMENTS

Pursuant to the Heads of Agreement, the Company and Mount Gibson must negotiate in good faith and use their best endeavours to agree and enter into definitive offtake agreements and a definitive Underwriting Agreement as soon as practicable. The matters set out in the Heads of Agreement are not exhaustive of the terms which are required in such definitive agreements. As such, the terms of the Heads of Agreement may be refined or expanded subsequently in the definitive agreements.

As at the Latest Practicable Date, pursuant to the Heads of Agreement, the Company (or its nominee) has with Mount Gibson (and its relevant respective nominees), entered into a series of definitive offtake agreements (short term and long term). Further, Mr Cao Zhong has been appointed as a non-executive director of Mount Gibson with effect from 1 December 2008. Mr Cao was nominated as a director by the Company and subsequently appointed to the Mount Gibson board in accordance with the terms of the Heads of Agreement. Currently, Mr Cao Zhong is the Chairman and an executive director of the Company.

On 20 November 2008, APAC Resources Investments Limited (a direct wholly-owned subsidiary of the Company) (as the underwriter) (the “ Underwriter ”), the Company (as the guarantor) and Mount Gibson entered into the definitive Underwriting Agreement, the terms of which are substantially the same as those set out in the Heads of Agreement. However, similar to other customary underwriting agreements, the definitive Underwriting Agreement contains additional terms and conditions in respect of the Underwriting Commitment. Set out below is a summary of the conditions precedent and termination events under the definitive Underwriting Agreement for information of the Shareholders and prospective investors.

(a) Conditions precedent

The obligations of the Underwriter are conditional on each of the following conditions precedent to the completion of the Underwriting Agreement and the Underwriter may terminate the Underwriting Agreement with one business day’s notice if any of the following conditions precedent is not satisfied by the agreed deadlines:

(1) the Mount Gibson’s prospectus (“ Prospectus ”) and ASX announcements referring to the Rights Issue (“ Rights Issue Documentation ”) are in a form acceptable to the Underwriter (acting reasonably);

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LETTER FROM THE BOARD

(2) none of the termination events outlined below has occurred before the Shortfall Settlement Date (as defined in the Underwriting Agreement, that is, the date specified as the date on which the Underwriter must apply for the Shortfall Shares in accordance with the terms of the Underwriting Agreement (currently 9 January 2009) or such other day agreed by the parties in writing);
(3) during the Issue Period (as defined in the Underwriting Agreement, that is, between the date of the Underwriting Agreement and its completion) there is no application made to, action or investigation threatened or commenced by, or decision or order issued by a regulatory authority in connection with the Rights Issue, which:
restrains or prohibits, or otherwise materially adversely affects, the completion of the Rights Issue or the completion of any other transaction contemplated by the Rights Issue (whether subject to conditions or not) or the rights of the Underwriter or its related body corporate in respect of Mount Gibson and the MG Shares to be acquired under the Rights Issue; or
requires the divestiture by the Underwriter or any related body corporate of any MG Shares, or the divestiture of any assets of the Mount Gibson group or the Underwriter;
(4) ASX officially approving the quotation of the MG Shares offered pursuant to the Rights Issue (“ Rights Shares ”) and the rights of Mount Gibson’s shareholders to subscribe for Rights Shares (“ Rights ”) on or before:
the last business day before the Rights are scheduled to be traded in the final timetable agreed with the Underwriter (“ Timetable ”) in respect of the Rights; and
an agreed date by which Mount Gibson must have received from ASX official quotation approval (currently 5 December 2008) in respect of the Rights Shares.

The quotation must be without qualifications or conditions (other than customary conditions in respect of the Rights), and must not be subsequently withdrawn, withheld or qualified;

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LETTER FROM THE BOARD

(5) the Company obtaining the approval of its Shareholders at SGM for the Aggregated Commitments and the Company taking all steps required under the Listing Rules and any other relevant legislation, including FIRB approval, before 9 January 2009 (or such other day as agreed by the parties in writing);
(6) Mount Gibson obtaining the approval of its shareholders at its general meeting and taking all other steps required under the ASX Listing Rules and any other relevant legislation for entry into the Underwriting Agreement and the long term offtake agreements;
(7) the Underwriter receiving by 9.00 am on the date of lodgement of the Prospectus a copy of the final due diligence report of the due diligence committee formed by Mount Gibson in connection with the Rights Issue (“ DDC ”), which must also be addressed to, and expressed to be for the benefit of, each of the DDC members and their representatives and signed by each member of the DDC, and accompanied by all opinions and sign-offs provided to the DDC which are expressed to be for the benefit of each member of the DDC and their representatives, each in a form acceptable to the Underwriter (acting reasonably);
(8) the due diligence investigations conducted by Mount Gibson in connection with the Prospectus being completed to the satisfaction of the Underwriter (acting reasonably) by 9.00 am on the date of lodgement of the Prospectus; and
(9) each offtake agreement having been executed by all relevant parties on or before the agreed date.

(b) Termination events

The Underwriter may terminate the Underwriting Agreement if any of the following termination events occurs at any time before completion of the Underwriting Agreement, or the deadline otherwise specified in the Underwriting Agreement (“ Termination Events ”):

(1) the Rights Issue does not comply in all respects with the relevant conditions specified in section 611 of the Australian Corporations Act 2001 (Cth) (“ Corporations Act ”) ;
(2) the Underwriter becomes aware of:
any information in the Rights Issue Documentation or other Public Information (as defined in the Underwriting Agreement) which is untrue, incorrect or misleading or deceptive in a material manner; or

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LETTER FROM THE BOARD

any material omission from or non-disclosure in the Rights Issue Documentation,

and Mount Gibson fails to correct the information within 2 business days of being alerted by the Underwriter;

(3) a statement contained in any of the Rights Issue Documentation or other Public Information (as defined in the Underwriting Agreement) is or becomes materially misleading or deceptive;
(4) any material default by Mount Gibson or any of its subsidiaries in the performance of its obligations under the Underwriting Agreement or by any party in the performance of its obligations under any agreement referred to in the Rights Issue Documentation;
(5) a material contravention by Mount Gibson of any provision of its constitution (or by a subsidiary of Mount Gibson of its constitution), the Corporations Act, taxation legislation or the ASX Listing Rules;
(6) the occurrence of an event that has a material adverse effect on the assets, liabilities, financial position or performance, profits, losses or prospects of Mount Gibson or any subsidiary, insofar as the position in relation to that subsidiary affects the overall position of Mount Gibson, unless the effect results from:
any matter disclosed by Mount Gibson on ASX following the last accounts (on 30 June 2008) or otherwise disclosed in the Prospectus.
any default by a Mount Gibson customer under a previous offtake agreement, or where a Mount Gibson customer is currently in default under a previous offtake agreement, any further default by that customer; or
any legal action taken by Mount Gibson or its subsidiaries or a Mount Gibson customer in relation to a default by a Mount Gibson customer under a previous offtake agreement,

(“ Material Adverse Effect ”);

(7) any legal action is commenced or threatened against Mount Gibson or any of its subsidiaries which, if successful, could, or any current pending legal action is determined with the result that it will, cause a Material Adverse Effect;
(8) Mount Gibson or any of its subsidiaries is ordered to pay in excess of A$1 million and the order has not been discharged within 7 business days;

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LETTER FROM THE BOARD

(9) the introduction of a law or policy likely to prohibit, restrict or regulate the Rights Issue or capital issues or reasonably likely to materially affect the level of valid applications for MG Shares under the Rights Issue;
(10) at any time during the Issue Period, any member of the Mount Gibson group becomes insolvent (as defined under the Underwriting Agreement);
(11) Mount Gibson fails to lodge the Prospectus with ASX by 3 December 2008 or such other date as agreed between the parties;
(12) the Australian Takeovers Panel makes a declaration that circumstances in relation to the affairs of Mount Gibson are unacceptable circumstances under Part 6.10 of the Corporations Act;
(13) a new circumstance in relation to Mount Gibson or any of its subsidiaries has arisen since the lodgement of the Rights Issue Documentation with ASX that would have been required to be included by the Corporations Act if it had arisen before the Rights Issue Documentation was lodged and Mount Gibson fails to lodge documents correcting the defect within a reasonable time of becoming aware of the new circumstance;
(14) other than in relation to the Rights Shares and the Placement (as defined in the Underwriting Agreement), Mount Gibson or any of its subsidiaries alters the issued capital of Mount Gibson or the relevant subsidiary (as the case may be) before the proposed date of allotment of the Rights Shares in the Timetable (being 12 January 2009) or disposes or attempts to dispose of a substantial part of the business or property of Mount Gibson without the prior written approval of the Underwriter;
(15) approval is refused or not granted, or approval is granted subject to conditions other than customary pre-quotation listing conditions, to the quotation of the Rights Shares on ASX or for the Rights Shares to be traded through CHESS (the Australian clearing house electronic subregister system operated by Australian Stock Exchange Settlement and Transfer Corporation Pty Ltd.), on or before the agreed date or if granted, the approval is subsequently withdrawn, qualified (other than by customary pre-quotation listing conditions) or withheld;
(16) approval is refused or not granted, or approval is granted subject to conditions, to the quotation of the Rights on ASX or for the Rights to be traded through CHESS, on or before the last business day before the agreed date, or if granted, the approval is subsequently withdrawn, qualified or withheld;

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LETTER FROM THE BOARD

(17) the Australian Securities and Investments Commission (“ ASIC ”) gives notice of any deficiency in the Rights Issue Documentation or related documents or ASIC gives notice of an intention to hold a hearing, examination or investigation, or it requires information to be disclosed in connection with the Rights Issue or Mount Gibson, other than where the relevant notice does not become public and is withdrawn or addressed within 3 business days and the Underwriter is immediately notified of ASIC’s notice or requirements and the progress of its being withdrawn or addressed;
(18) any person (other than the Underwriter) who has previously consented to the inclusion of its name in the Prospectus withdraws that consent or any person gives notice under section 730 of the Corporations Act in relation to the Prospectus;
(19) Mount Gibson is prevented from allotting the Rights Shares within the time required by the Underwriting Agreement, the Corporations Act, the ASX Listing Rules, any statute or court order or a regulatory authority;
(20) the S&P/ASX 200 Index, as published by ASX, is at any time after the date of lodgement of the Prospectus with ASIC and ASX, equal to or less than 2822.56 for a period of 3 consecutive trading days;
(21) Mount Gibson does not provide a certificate to the Underwriter as and when required certifying that:
Mount Gibson has complied with all of its obligations under the Underwriting Agreement and in respect of the Rights Issue, the ASX Listing Rules, statute or otherwise;
Mount Gibson is not in default under the provisions of the Underwriting Agreement;
none of the Termination Events have occurred or, if a Termination Event has occurred, it has been disclosed to the Underwriter and the Underwriter has confirmed that it has not formed the opinion that it is entitled to terminate the Underwriting Agreement; and
the representations and warranties given by Mount Gibson under the Underwriting Agreement are true and correct (“ Closing Certificate ”);

– 17 –

LETTER FROM THE BOARD

(22) a statement in a Closing Certificate is untrue or incorrect in a material respect;
(23) the Rights Issue is not conducted in accordance with the Timetable or any event specified in the Timetable is delayed for more than 2 business days without the prior written consent of the Underwriter;
(24) Mount Gibson withdraws the Rights Issue;
(25) any representation, warranty or undertaking given by Mount Gibson in the Underwriting Agreement is or becomes untrue or incorrect; or
(26) the commencement or major escalation of local, national or international hostilities or armed conflict (whether war has been declared or not), or a major terrorist act is perpetrated on any country or any diplomatic, military, commercial or political establishment of any country, or the occurrence of any combination of such circumstances, where in each case in the reasonable opinion of the Underwriter (acting in good faith), the event:
has materially adversely affected, or is reasonably likely to materially adversely affect, the business or the financial or trading position of the Underwriter and each of its related body corporate as a whole;
is reasonably likely to materially adversely prejudice the success of the Rights Issue, the willingness of persons to subscribe for the Rights Shares or the market price of the securities of Mount Gibson;
has given or could give rise to a material liability for the Underwriter or the Company; or
has given or could give rise to a contravention by the Underwriter or the Company, or the Underwriter or the Company being involved in a contravention of, the Corporations Act or any other applicable law.

INFORMATION ABOUT MOUNT GIBSON

Based on information published by Mount Gibson:

Mount Gibson is a company incorporated in Australia with limited liability in 1996. MG Shares are listed on the ASX and is part of the S&P/ASX 100 index as at the Latest Practicable Date.

– 18 –

LETTER FROM THE BOARD

The principal business of Mount Gibson is mining of hematite iron ore deposits at Koolan Island and Tallering Peak and exploration and development of hematite iron ore deposits in Western Australia including Koolan Island, Tallering Peak and Extension Hill. Mount Gibson is a pure iron ore exploration and mining company which owns iron ore deposits and holds mining rights. During the financial year ended 30 June 2008, Mount Gibson has produced and sold 6.9 million tonnes and 5.5 million tonnes of iron ore respectively. Mount Gibson currently exports most of its iron ore materials to China.

Based on the 2008 annual report of Mount Gibson, the audited consolidated net asset value of Mount Gibson for the year ended 30 June 2008 was A$596,492,000 (equivalent to approximately HK$3,071,933,800). The audited net profit before and after tax (from continuing operations) of Mount Gibson for the last two financial years ended 30 June are as follows:

		30 June 2007		30 June 2008
		(Audited)		(Audited)
	A$	HK$	A$	HK$
Net profit before tax	42,253,000	217,602,950	163,857,000	843,863,550
Net profit after tax	29,044,000	149,576,600	113,344,000	583,721,600

On 3 November 2008, Mount Gibson issued an announcement on the ASX in relation to, among other things, the Rights Issue and the Heads of Agreement. Set out below are some extracts from such announcement in relation to the financial position of Mount Gibson for Shareholders’ information:

“Mount Gibson Iron Limited ( Mount Gibson ) advised ASX on 9 October 2008 that it was in discussions with a number of its customers in relation to requested delays to iron ore shipments scheduled for the quarter commencing October 2008. Three of those customers have now defaulted on their binding offtake agreements.”
“Mount Gibson has carefully reviewed all of its available options and has taken steps which mitigate the risk of further defaults and deferments while preserving its rights against its defaulting customers.”

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LETTER FROM THE BOARD

• “The impact of some of its customers defaulting on Mount Gibson’s near term cash flows together with the desire of Mount Gibson to continue priority development at Koolan Island and Extension Hill requires the raising of additional equity finance. The Rights Issue and Placement will together raise gross proceeds of A$162.5 million. Together with existing cash reserves, the additional funds raised will ensure that Mount Gibson is adequately funded to continue priority development activities and mitigate the impact on Mount Gibson of any near term volatility in the iron ore market and financial markets.”

• “Mount Gibson will be pursuing those customers who materially breached their offtake agreements to recover from them any losses arising from volume and price differences between the customers’ existing offtake agreements and the new offtake agreements. Mount Gibson believes it will recover any such losses from those customers in due course.”

• “The Rights Issue and Placement, together with ongoing cash flows, will ensure that Mount Gibson is adequately funded to continue priority development activities at both Koolan Island and Extension Hill, which mitigates the impact of the current events on Mount Gibson’s medium and longer term operational objectives.

As a result of shipping delays to date, the new offtake arrangements and the need to modify mine plans at both Koolan Island and Tallering Peak, Mount Gibson has revised its iron ore shipment forecast for the 2008/2009 financial year to 5.0 million tonnes from the original 7.2 million tonnes. Mount Gibson advises that this, together with ore prices received for the remainder of the financial year at a discount to benchmark, will have a material impact on the company’s profitability in the current financial year.”

• “Consistent with both company policies and minimum bank mandated hedging requirements, Mount Gibson has entered into foreign exchange forward contracts to cover approximately 60% of its budgeted US Dollar exposure for the 2008/2009 and 2009/2010 financial years.

As at 1 November 2008, Mount Gibson has outstanding forward contracts for:

US$375 million at a average rate of 0.8824 per US$ due to expire in the 2008/2009 financial year; and

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LETTER FROM THE BOARD

US$185 million at an average rate of 0.8109 per US$ due to expire in the 2009/2010 financial year.

Mount Gibson’s lenders have expressed a willingness to consider rolling forward excess foreign exchange forward contracts once new offtake arrangements are in place and the Rights Issue and Placement have been completed. This will prevent Mount Gibson from having to cash settle any forward contracts not needed for coverage of monthly operational US dollar income. Although Mount Gibson anticipates the ongoing support of its lenders there is no commitment at this stage from them to roll existing foreign exchange hedges forward, however the proceeds from the Rights Issue and Placement will adequately cover any cash required.”

Shareholders can visit the following website to view a full version of the announcement issued by Mount Gibson on 3 November 2008 as referred to above:

http://www.mtgibsoniron.com.au/pages2/InvestRelations.aspx?PageID=IR_ASX

INFORMATION ABOUT THE GROUP

The Company is a company incorporated in Bermuda with limited liability. Its securities are listed on the Main Board of the Stock Exchange.

The Group is principally engaged in (a) trading in base metals and commodities trading portfolio primarily focused on natural resources and related sectors; (b) trading in fabric products and other merchandises; and (c) trading and investment of listed securities in the resources and related industries.

REASONS FOR AND BENEFITS OF THE SHAREHOLDING COMMITMENT AND THE UNDERWRITING COMMITMENT

The Rights Issue to be conducted by Mount Gibson allows it to raise crucial additional capital with which to progress its business plan and to enable it to have sufficient working capital and to minimise its current exposure to financiers.

The Company views the increase in investment in Mount Gibson pursuant to the Shareholding Commitment and the Underwriting Commitment as a step to preserve the Group’s interest in Mount Gibson from being diluted and as a way in which to strengthen and support its existing investment. In particular, Mount Gibson’s mining and exploration of hematite iron ore provides an opportunity to expand the Company’s trade in resources and bring continued growth.

– 21 –

LETTER FROM THE BOARD

The Company agreed to enter into the Underwriting Agreement at the request of Mount Gibson and, by way of acting as underwriter to the Rights Issue, the Company could be able to safeguard its interest and investment in Mount Gibson.

The trading of metals is one of the principal business activities of the Group and the Directors consider that the long term offtake agreement(s) will give the Group a good opportunity to secure long term supply of hematite iron ore products for its trading activities.

Ultimately, the Company regards the increase in investment in Mount Gibson as a continuation of its committed long term investment in Australia. This long term commitment brings the benefit of the Company’s ability to access world markets for Australian hematite iron ore as well as long term growth and positive returns for the Company.

In respect of the Shareholding Commitment, there will be positive impacts on the noncurrent assets (available-for-sale investment) and current assets (trading securities) and negative impacts on current assets (cash and cash equivalents) and/or current liabilities (borrowings) of the Group but no effect on the net assets 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 and realised gain and loss from disposal in respect of the Group’s investment and unrealised gain and loss from mark-to-market fair value changes on trading securities.

In respect of the Underwriting Commitment, there will be positive impacts on the noncurrent assets (available-for-sale investments) and negative impacts on current assets (cash and cash equivalents) and/or current liabilities (borrowings) of the Group and positive impacts on the net assets value. It is not expected to have any immediate effect on the Group’s earnings until there is receipt of future dividends or distribution from Mount Gibson and realised gain and loss from disposal in respect of the Group’s investment.

The Directors consider that the terms and conditions of the Shareholding Commitment and the Underwriting Commitment are on normal commercial terms and are fair and reasonable as far as the Shareholders as a whole are concerned and in the interests of the Company and the Shareholders as a whole.

– 22 –

LETTER FROM THE BOARD

BUSINESS PLAN AND FUTURE INTENTIONS

The Group aims to establish itself as a significant natural resources trading and investment group by identification, evaluation and acquisition of strategic interests in quality natural resources assets (either indirectly through investment in, and support of, resources corporations or by direct investment in mineral projects) so as to build up a portfolio of long term cash generating investments that enhances the Company’s value in the context of natural resources industry consolidation and rationalisation where it believes value can be maximised for all concerned stakeholders.

One of the strategies the Group employs is to work co-operatively with resources companies and management teams it identifies as reputable, trustworthy partners to achieve their corporate objectives where they are aligned with the Group.

Another possible strategy is 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 Group to undertake profitable investments in the resources sector and to secure reliable long term production offtake to the Group’s strategic advantage.

As at the Latest Practicable Date, the Company as a substantial shareholder of Mount Gibson and one of the underwriters in the Rights Issue, has the following current intentions in relation to Mount Gibson following implementation of the transactions contemplated under the Heads of Agreement:

(a) To support Mount Gibson and its management in relation to the operational plans as described in the Explanatory Memorandum issued by Mount Gibson to its shareholders dated 25 November 2008 (available at http://www.mtgibsoniron.com.au/ pages2/InvestRelations.aspx?PageID=IR_ASX).
(b) To support Mount Gibson in pursuing its strategic goal of becoming a leading Australian independent iron ore producer. The Company has no current intention to seek to do any of the following:
change the incumbent senior management;
amend Mount Gibson’s dividend policy;
transfer any of Mount Gibson’s property to the Company; or
redeploy any of Mount Gibson’s fixed assets.

– 23 –

LETTER FROM THE BOARD

(c) Mount Gibson will continue to operate under the name “Mount Gibson Iron Limited” and the head office of Mount Gibson will remain in Perth, Western Australia.

SGM

A notice convening the SGM is set out on pages 492 to 495 of this circular. An ordinary resolution in respect of the Aggregate Commitments will be proposed at the SGM accordingly.

A form of proxy for the SGM is enclosed with this circular. Whether or not you are 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, Tricor Secretaries Limited, 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 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 thereof should you so desire.

PROCEDURES FOR DEMANDING A POLL

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

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

– 24 –

LETTER FROM THE BOARD

Under the Listing Rules, the ordinary resolution to be proposed at the SGM to approve the Aggregate Commitments is subject to the approval of the Shareholders at the SGM and at which no Shareholder shall abstain from voting.

RECOMMENDATIONS

The Directors consider that the terms and conditions of the Shareholding Commitment and the Underwriting Commitment are fair and reasonable as far as the Shareholders as a whole are concerned and in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors recommend the Shareholders to vote in favour of the resolution as set out in the notice of the SGM.

ADDITIONAL INFORMATION

Your attention is drawn to the additional information set out in the Appendices to this circular.

Yours faithfully, On behalf of the Board of APAC RESOURCES LIMITED Cao Zhong Chairman

– 25 –

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 2007

Set out below is a summary of results and assets and liabilities of the Group for three financial years ended 31 December 2007 as extracted from the Company’s 2007 annual report.

Financial Summary

Results

	Year ended 31 December	Year ended 31 December
	2007	2006	2005
	HK$’000	HK$’000	HK$’000
Turnover	65,348	22,773	68,393
Profit before taxation	345,313	25,220	6,539
Income tax expense	–	(238)	(38)
Profit after taxation	345,313	24,982	6,501
Minority interests	–	–	–
Profit for the year	345,313	24,982	6,501
Assets and liabilities
	As at 31 December
	2007	2006	2005
	HK$’000	HK$’000	HK$’000
Total assets	4,749,348	279,373	43,003
Total liabilities	(11,052)	(149,397)	(21,122)
Minority interests	–	–	–
Shareholders’ funds	4,738,296	129,976	21,881

Assets and liabilities

– 26 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2. AUDITORS’ REPORT

Reproduced below is the auditors’ report for the year ended 31 December 2007 issued by Graham H.Y. Chan & Co. as extracted from the Company’s 2007 annual report.

==> picture [145 x 40] intentionally omitted <==

TO THE SHAREHOLDERS OF APAC RESOURCES LIMITED

(incorporated in Bermuda with limited liability)

We have audited the consolidated financial statements of APAC Resources Limited (the “Company”) set out on pages 29 to 83, which comprise the consolidated and Company balance sheets as at 31 December 2007, and the consolidated income statement, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

DIRECTORS’ RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS

The directors of the Company are responsible for the preparation and the true and fair presentation of these financial statements in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants and the disclosure requirements of the Hong Kong Companies Ordinance. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are 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 an opinion on these financial statements based on our audit. Our report is made solely to you, as a body, in accordance with Section 90 of the Bermuda Companies Act 1981, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement.

– 27 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risk of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and true and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OPINION

In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2007 and of the Group’s profit and cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

Graham H. Y. Chan & Co.

Certified Public Accountants (Practising) Unit 1, 15/F., The Center, 99 Queen’s Road Central, Hong Kong

16 April 2008

– 28 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

3. AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP FOR THE YEAR ENDED 31 DECEMBER 2007

The financial information set out below is an extract from pages 29 to 83 of the annual report of the Company for the year ended 31 December 2007. All information in this paragraph should be read in conjunction with the audited accounts for the year ended 31 December 2007 which are included in the Company’s 2007 annual report.

CONSOLIDATED INCOME STATEMENT

For the Year Ended 31 December 2007

Note Turnover 4 Gain on disposal of available-for-sale investment Net gain from sale of trading securities Revenue from sales of goods Unrealised gain on trading securities Interest income Other operating income Purchases Equity-settled share option expenses Salaries and allowances Operating lease rental on buildings Gain on disposal of a subsidiary 6 Impairment of goodwill Other operating expenses Finance costs 7 Profit before taxation 8 Income tax expense 9 Profit for the year	2007 HK$’000 65,348 19,646 – 24,751 566,796 14,360 80 (24,055) (214,889) (8,041) (1,584) 1,536 – (21,678) (11,609) 345,313 – 345,313	2006 HK$’000 22,773

		– 910 19,920 38,743 1,181 419 (19,568 – (3,354 (366 – (3,116 (7,396 (2,153
		25,220 (238
		24,982

– 29 –

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Attributable to: Equity shareholders of the company Minority interests Profit for the year Dividends 12 Earnings per share attributable to equity shareholders of the Company – basic (HK Cents per share) 13 – diluted (HK Cents per share) Note	345,313 – 345,313 – 9.78 9.39 2007 HK$’000	24,982 – 2006 HK$’000
		24,982

		–

		3.10

		N/A

– 30 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEET

As at 31 December 2007

Note Non-current assets Property, plant and equipment 14 Deposit for acquisition of available-for-sale investment Available-for-sale investment 16 Current assets Inventories 17 Trade and other receivables 18 Trading securities 19 Pledged bank deposits Cash and cash equivalents 20 Current liabilities Trade and other payables 21 Margin financing 22 Income tax payable Net current assets Total assets less current liabilities Capital and reserves Share capital 23 Reserves Total equity attributable to equity shareholders of the Company	2007 HK$’000 2,198 – 2,993,426 2,995,624 – 233,296 814,957 10,526 694,945 1,753,724 9,018 1,797 237 11,052 1,742,672 4,738,296 472,629 4,265,667 4,738,296	2006 HK$’000 – 20,000 –
		20,000
		1,494 8,460 227,039 10,098 12,282
		259,373
		7,585 141,612 200
		149,397
		109,976
		129,976

		125,900 4,076
		129,976

– 31 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

BALANCE SHEET

As At 31 December 2007

Note Non-current assets Property, plant and equipment 14 Investments in subsidiaries 15 Current assets Other receivables Bank balances and cash Current liabilities Other payables Net current assets Total assets less current liabilities Capital and reserves Share capital 23 Reserves 26 Total equity	2007 HK$’000 2 1,726,686 1,726,688 447 592,708 593,155 8,324 584,831 2,311,519 472,629 1,838,890 2,311,519	2006 HK$’000 – 90,065
		90,065
		478 7,093
		7,571
		4,602
		2,969
		93,034

		125,900 (32,866
		93,034

– 32 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the Year Ended 31 December 2007

At 1 January 2007 Changes in equity for 2007 Fair value change in available-for-sale investments and total income recognised directly in equity Currency translation differences Profit for the year Total recognised income and expenses for the year Issue of right shares, net of expenses Issue of placing shares for cash, net of expenses Issue of shares upon exercise of warrants Issue of shares for acquisition of available-for-sale investments Equity-settled share option expenses At 31 December 2007	Share Capital HK$’000 125,900 – – – – 125,900 186,500 5,565 28,764 – 472,629	Share Premium HK$’000 105,470 – – – – 248,778 1,456,976 11,131 165,392 – 1,987,747	Attributable to equity shareholders of the Company Special Reserve Investment Revaluation Reserve Exchange Reserve Share Option Reserve HK$’000 HK$’000 HK$’000 HK$’000 (14,980) – – – – 1,817,762 – – – – 1,350 – – – – – – 1,817,762 1,350 – – – – – – – – – – – – – – 214,889 (14,980) 1,817,762 1,350 214,889	Retained Earnings/ (Accumulated Losses) HK$’000 (86,414) – – 345,313 345,313 – – – – – 258,899	Total HK$’000 129,976
					1,817,762 1,350 345,313
					2,164,425
					374,678 1,643,476 16,696 194,156 214,889
					4,738,296

At 1 January 2006 Changes in equity for 2006 Profit for the year and total recognised income and expenses Issue of shares upon the conversion of convertible debt Issue of rights shares At 31 December 2006	Share Capital HK$’000 41,300 – 2,000 82,600 84,600 125,900	Share Premium HK$’000 106,957 – – (1,487) (1,487) 105,470	Attributable to equity shareholders of the Company Special Reserve Investment Revaluation Reserve Exchange Reserve Share Option Reserve HK$’000 HK$’000 HK$’000 HK$’000 (14,980) – – – – – – – – – – – – – – – – – – – (14,980) – – –	Retained Earnings/ (Accumulated Losses) HK$’000 (111,396) 24,982 – – – (86,414)	Total HK$’000 21,881
					24,982
					2,000 81,113
					83,113
					129,976

– 33 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT

For the Year Ended 31 December 2007

Note Operating activities Profit before taxation Adjustments for: Interest on other loans Interest on margin financing account Depreciation Equity-settled share option expenses Unrealised gain on trading securities Gain on disposal of a subsidiary Impairment of goodwill Interest income Operating cash flows before changes in working capital Decrease in inventories (Increase)/decrease in trade and other receivables Increase/(decrease) in trade and other payables Cash (used in)/from operations Hong Kong profits tax paid Hong Kong profits tax refund Net cash (used in)/from operating activities Investing activities Purchase of property, plant and equipment Payment for the purchase of trading securities Payment for the acquisition of available-for-sale investment Deposit paid for acquisition of available-for-sale investment Acquisition of a subsidiary Disposal of a subsidiary 6 Increase in pledged bank deposits Interest received Net cash used in investing activities	2007 HK$’000 345,313 6,118 5,491 179 214,889 (566,796) (1,536) – (14,360) (10,702) – (224,836) 3,686 (231,852) (13) 50 (231,815) (2,377) (21,122) (961,508) – – 777 (428) 14,360 (970,298)	2006 HK$’000 25,220 958 1,195 – – (38,743 – 3,116 (1,181
		(9,435 416 29,074 (626
		19,429 (107 –
		19,322
		– (188,296 – (20,000 (876 – (6,086 1,181
		(214,077

– 34 –

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Financing activities Issue of rights shares, net of expenses Issue of placing shares, net of expenses Issue of share upon exercise of warrants Interest paid Increase in margin financing loan Repayment of margin financing loan Repayment of other loans Net cash from financing activities Net increase in cash and cash equivalents Effect of foreign exchange rate change Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December 20 Note	374,678 1,643,476 16,696 (11,609) – (139,815) – 1,883,426 681,313 1,350 12,282 694,945 2007 HK$’000	81,113 – – (2,153 141,612 – (15,000 2006 HK$’000
		205,572
		10,817 – 1,465
		12,282

– 35 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO THE FINANCIAL STATEMENTS

For the Year Ended 31 December 2007

1. Corporate information

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 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 35.

The financial statements are presented in Hong Kong dollars (“HK$”) and all values are rounded to the nearest thousand except when otherwise indicated.

2. Significant accounting policies

(a) Statement of compliance

These financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (HKFRSs), (which also includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (HKASs) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. A summary of the significant accounting policies adopted by the Company and its subsidiaries (together referred to as the “Group”) is set out below.

The HKICPA has issued certain new and revised HKFRSs that are first effective or available for early adoption for the current accounting period of the Group and the Company. Note 3 provides information on any changes in accounting policies resulting from initial application of these developments to the extent that they are relevant to the Group for the current and prior accounting periods reflected in these financial statements.

(b) Basis of preparation of the financial statements

The consolidated financial statements for the year ended 31 December 2007 comprise the Company and its subsidiaries.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The measurement basis used in the preparation of the financial statements is the historical cost basis except that financial instruments classified as trading securities and available-for-sale investments are stated at their fair value as explained in the accounting policies set out below.

The preparation of financial statements in conformity with HKFRSs requires management to make judgments, estimates and assumption that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other source. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgments made by management in the application of HKFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 33.

(c) Subsidiaries and minority interests

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account.

An investment in a controlled subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases. Intra-group balances and transactions and any unrealised profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.

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APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Minority interests represent the portion of the net assets of subsidiaries attributable to interests that are not owned by the Company, whether directly or indirectly through subsidiaries, and in respect of which the Group has not agreed any additional terms with the holders of those interests which would result in the Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. Minority interests are presented in the consolidated balance sheet within equity, separately from equity attributable to the equity shareholders of the company. Minority interests in the results of the Group are presented on the face of the consolidated income statement as an allocation of the total profit or loss for the year between minority interests and the equity shareholders of the Company.

Where losses applicable to the minority exceed the minority’s interest in the equity of a subsidiary, the excess, and any further losses applicable to the minority, are charged against the Group’s interest except to the extent that the minority has a binding obligation to, and is able to, make additional investment to cover the losses. If the subsidiary subsequently reports profits, the Group’s interest is allocated all such profits until the minority’s share of losses previously absorbed by the Group has been recovered.

In the Company’s balance sheet, an investment in a subsidiary is stated at cost less impairment loss, unless the investment is classified as held for sale or included in a disposal group that is classified as held for sale.

(d) Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment, and where the cost of the item can be measured reliably, the expenditure is capitalised as an additional cost of that asset or as a replacement.

Depreciation of property, plant and equipment, is provided to write off their cost, less their estimated residual value, if any, using the straight-line method over their estimated useful lives as follows:

–	Leasehold improvement	over the lease term
–	Office equipment	5 years
–	Computer	5 years
–	Motor vehicles	5 years

Residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each balance sheet date.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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. The gain or loss arising on derecognition of the asset is the difference between the net disposal proceeds and the carrying amount of the relevant asset, and is recognised in the income statement in the year in which the asset is derecognised.

(e) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on a first in, first out basis and includes all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is determined on the basis of anticipated sales proceeds in the ordinary course of business less estimated selling expenses.

(f) Financial instruments

Financial assets and financial liabilities are recognised on the consolidated balance sheet when the Group has become a party to the contractual provisions of the instrument.

All regular way purchases and sales of financial assets are recognised on the trade date, that is the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the market place.

(i) Financial assets at fair value through profit or loss

Investments in securities held for trading are classified as current assets and are initially stated at fair value. At each balance sheet date the fair value is re-measured, with any resultant gain or loss being recognised in profit or loss. Upon disposal, the difference between the net sales proceeds and the carrying value is included in the income statement.

(ii) Available-for-sale investments

Available-for-sale investments are those non-derivates and are designated as available-for-sale investments or not classified under other investment categories. Available-for-sale investments are carried at fair value. Unrealised gain and losses (including transaction costs on acquisition) arising from changes in the fair value are recognised in fair value reserve in accordance with HKAS 39. When the securities are sold, the difference between the net sale proceeds and the carrying value, and the accumulated fair value adjustments in the investment revaluation reserve are treated as gains or losses on disposal. 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.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(iii) Trade and other receivables

Trade and other receivables are initially recognised at fair value and thereafter stated at amortised cost using the effective interest rate method, 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.

A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimate future cash flows, discounted at the effective interest rate. The amount of provision is recognised in the income statement.

(iv) Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that are ready 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.

For the purpose of the balance sheets, cash and cash equivalents comprise cash on hand and at banks, including term deposits, which are not restricted as to use.

(v) Trade and other payables

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

(vi) 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.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(vii) 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.

(viii) Derecognition of financial assets and liabilities

Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received and the cumulative gain or loss that had been recognised directly in equity is recognised in the income statement.

For financial liabilities, they are removed from the company’s balance sheet when, and only when they are extinguished (i.e. when the obligation specified in the relevant contract is discharged, cancelled or expired). The difference between the carrying amount of the financial liability derecognised and the consideration paid or payable is recognised in the income statement.

(g) Impairment of assets

(i) Impairment of investments in equity securities and other receivables

Investment in equity securities and other current and non-current receivables that are stated at cost or amortised cost or are classified as available-for-sale securities are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such evidence exists, any impairment loss is determined and recognised as follows:

For trade and other current receivables and other financial assets carried at amortised cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets), where the effect of discounting is material. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group.

If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognised in prior years.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

For available-for-sale securities, the cumulative loss that had been recognised directly in equity is removed from equity and is recognised in profit or loss. The amount of the cumulative loss that is recognised in profit or loss is the difference between the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that asset previously recognised in profit or loss.

Impairment losses recognised in profit or loss in respect of available-for-sale equity securities are not reversed through profit or loss. Any subsequent increase in the fair value of such assets is recognised directly in equity.

(ii) Impairment of non-financial assets

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 expenses immediately.

Where 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.

(h) Employee benefits

(i) Short term employee benefits in the form of leave

Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the balance sheet date.

Employee entitlement to sick leave and maternity leave are not recognised until the time of leave.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(ii) Retirement benefit costs

The Group operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for all its employees in Hong Kong. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the income statement as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the company in an independently-administered fund. The Group’s employer contributions vest fully with the employees when contributed into the MPF Scheme. The company’s contributions to the MPF Scheme are recognised as an expense in the income statement as incurred.

(iii) 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 (“equitysettled 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.

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.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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 is designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph.

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

(i) Income tax

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 recognised on the 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 other assets and liabilities in a transaction that affects neither the accounting profit nor the taxable profit.

Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

– 44 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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 income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

(j) Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when the Group or the Company has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

(k) Revenue recognition

Revenue is measured at the fair value of the consideration received and receivable.

Sales of investments held for trading are recognised on a trade-date basis when contracts are executed.

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

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

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(l) Foreign currencies

These financial statements are presented in Hong Kong dollars, which is the Company’s functional and presentation currency.

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. Nonmonetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

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

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

For the purpose of the consolidated cash flow statement, the cash flows of overseas subsidiary is translated into Hong Kong dollars at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of overseas subsidiary which arise throughout the year are translated into Hong Kong dollars at the weighted average exchange rates for the year.

(m) Borrowing costs

Borrowing costs are expensed in profit or loss in the period in which they are incurred, except to the extent that they are capitalised as being directly attributable to the acquisition, construction or production of qualifying assets, namely assets that necessarily take a substantial period of time to get ready for their intended use or sale.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(n) Leases

Leases are classified as finance leases when the terms of the lease transfer substantially all the risk and rewards of ownership of the assets concerned to the lessee. All other leases are classified as operating leases and annual rentals are charged to the income statement on a straight-line basis over the relevant lease term. Benefits received and receivable as an incentive to enter into an operating lease are recognised as a reduction of rental expense over the lease term on a straight-line basis.

(o) Segment reporting

A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

In accordance with the Group’s internal financial reporting system, the Group has chosen business segment information as the primary reporting format and geographical segment as the secondary reporting format for the purpose of these financial statements.

Segment revenue, expenses, results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis to that segment. Segment revenue, expenses, assets and liabilities are determined before intra-group balances and intra-group transactions are eliminated as part of the consolidation process, except to the extent that such intra-group balances and transactions are between group enterprises within a single segment. Inter-segment pricing is based on similar terms as those available to other external parties.

Segment capital expenditure is the total cost incurred during the period to acquire segment assets (both tangible and intangible) that are expected to be used for more than one period.

Unallocated items mainly comprise financial and corporate assets, interest-bearing loans, borrowings, tax balances, corporate and financing expenses.

– 47 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

3. Adoption of new and revised standards

The HKICPA has issued a number of new and revised HKFRSs and Interpretations that are first effective or available for early adoption for the current accounting period of the Group and the Company.

There have been no significant changes to the accounting policies applied in these financial statements for the years presented as a result of these developments. However, as a result of the adoption of HKFRS 7, Financial instruments: Disclosures and the amendment to HKAS 1, Presentation of financial statements: Capital disclosures, there have been some additional disclosures provided as follows:

As a result of the adoption of HKFRS 7, the financial statements included expanded disclosure about the significance of the company’s financial instruments and the nature and extent of risks arising from those instruments, compared with the information previously required to be disclosed by HKAS 32, Financial instruments: Disclosure and presentation. These disclosures are set out in note 28.

The amendment to HKAS 1 introduces additional disclosure requirements to provide information about the level of capital and the company’s objectives, policies and processes for managing capital. These new disclosures are set out in note 23.

Both HKFRS 7 and the amendment to HKAS 1 do not have any material impact on the classification, recognition and measurement of the amounts recognised in the financial statements.

The Group has not applied the following new and revised HKFRSs, that have been issued but are not yet effective, in these financial statements.

HKAS 1 (Revised) Presentation of Financial Statements[1] HKAS 23 (Revised) Borrowing Costs[1] HKAS 27 (Revised) Consolidated and Separate Financial Statements[5] HKFRS 2 (Amendment) Vesting Conditions and Cancellations[1] HKFRS 3 (Revised) Business Combinations[5] HKFRS 8 Operating Segments[1] HK(IFRIC) – INT 11 HKFRS 2 – Group and Treasury Share Transactions[2] HK(IFRIC) – INT 12 Service Concession Arrangements[3] HK(IFRIC) – INT 13 Customer Loyalty Programmes[4] HK(IFRIC) – INT 14 HKAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction[3]

1 Effective for annual periods beginning on or after 1 January 2009

2 Effective for annual periods beginning on or after 1 March 2007

3 Effective for annual periods beginning on or after 1 January 2008

4 Effective for annual periods beginning on or after 1 July 2008

5 Effective for annual periods beginning on or after 1 July 2009

– 48 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The Group is in the process of making an assessment of the impact of these new and revised HKFRSs upon initial application. So far, it has concluded that while the adoption of HKFRS 8 may result in new or amended disclosures, these new and revised HKFRSs are unlikely to have a significant impact on the Group’s results of operations and financial position.

4. Turnover

Turnover represents revenue generated from sales of goods as well as revenue from investments, and is analysed as follows:

Revenue from sales of base metals Proceeds from sale of trading securities Revenue from sales of fabric products and other merchandises Proceeds from sale of available-for-sale investment	2007 HK$’000 – – 24,751 40,597 65,348	2006 HK$’000 5,788 2,853 14,132 –
		22,773

5. Segmental information

Primary reporting format – business segments

As at 31 December 2007, the Group comprises the following main business segments:

(i) trading in base metals;
(ii) trading in fabric products and other merchandises; and
(iii) trading and investment of listed securities

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The following tables represent revenue and profit/(loss) information on each of the above business segments for the years ended 31 December 2006 and 2007, and certain assets and liabilities information regarding business segments as at 31 December 2006 and 2007. The comparative figures for the year ended 31 December 2006 were restated to conform to current year presentation.

Revenue from external customers Segment result Unallocated corporate expenses Gain on disposal of a subsidiary Finance costs Profit before taxation Income tax expense Profit for the year	Trading in base metals 2007 2006 HK$’000 HK$’000 – 5,788 (8) (12)	Trading and investment of listed securities Trading in fabric products and other merchandises 2007 2006 2007 2006 HK$’000 HK$’000 HK$’000 HK$’000 40,597 2,853 24,751 14,132 585,437 38,882 1,508 69	Consolidated 2007 2006 HK$’000 HK$’000 65,348 22,773 586,937 38,939 (231,551) (11,566) 1,536 – (11,609) (2,153) 345,313 25,220 – (238) 345,313 24,982	Consolidated 2007 2006 HK$’000 HK$’000 65,348 22,773 586,937 38,939 (231,551) (11,566) 1,536 – (11,609) (2,153) 345,313 25,220 – (238) 345,313 24,982

				38,939 (11,566) – (2,153)
				25,220 (238)
				24,982

Trading in base metals Trading and investment of listed securities Trading in fabric products and other merchandises 2007 2006 2007 2006 2007 2006 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Segment assets 226,368 551 3,812,668 247,039 5,448 7,281 Unallocated corporate assets Consolidated total assets Segment liabilities 5 – 2,195 570 5 – Unallocated corporate liabilities Consolidated total liabilities	Consolidated 2007 2006 HK$’000 HK$’000 4,044,484 254,871 704,864 24,502 4,749,348 279,373 2,205 570 8,847 148,827 11,052 149,397	Consolidated 2007 2006 HK$’000 HK$’000 4,044,484 254,871 704,864 24,502 4,749,348 279,373 2,205 570 8,847 148,827 11,052 149,397
		279,373

		570 148,827
		149,397

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Secondary reporting format – geographical segments

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

Trading in base metals Trading and investment of listed securities Trading in fabric products and other merchandises 2007 2006 2007 2006 2007 2006 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Hong Kong and PRC – 5,788 – 2,853 7,240 1,614 Australia – – 40,597 – – – South East Asia – – – – 988 – United States of America – – – – 5,789 – Africa – – – – 10,734 12,518	Consolidated 2007 2006 HK$’000 HK$’000 7,240 10,255 40,597 – 988 – 5,789 – 10,734 12,518 65,348 22,773	Consolidated 2007 2006 HK$’000 HK$’000 7,240 10,255 40,597 – 988 – 5,789 – 10,734 12,518 65,348 22,773
		22,773

The following table provides an analysis of the Group’s assets by geographical location of assets:

Trading in base metals Trading and investment of listed securities Trading in fabric products and other merchandises 2007 2006 2007 2006 2007 2006 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Hong Kong and PRC 226,368 551 184,623 21,810 12 919 Australia – – 3,628,045 225,229 – – United States of America – – – – 3,033 – Africa – – – – 2,403 6,362 Unallocated assets – –	Consolidated 2007 2006 HK$’000 HK$’000 411,003 23,280 3,628,045 225,229 3,033 – 2,403 6,362 704,864 24,502 4,749,348 279,373	Consolidated 2007 2006 HK$’000 HK$’000 411,003 23,280 3,628,045 225,229 3,033 – 2,403 6,362 704,864 24,502 4,749,348 279,373
		279,373

Additions of property, plant and equipment to the amount of HK$2,377,000 for the year ended 31 December 2007 are all located in Hong Kong and PRC. There was no addition of property, plant and equipment for the year ended 31 December 2006.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

6. Gain on disposal of a subsidiary

Pursuant to an option agreement dated 14 June 2006, Rise Cheer Limited (“Rise Cheer”), a wholly owned subsidiary of the Company, would have an option to put to Professional Trading Limited (“Professional Trading”) for the 60% interest in Chinaright Electronics Limited (“Chinaright”). During the year, Rise Cheer exercised the put option against Professional Trading for the 60% interest in Chinaright.

Net liabilities disposed of: Inventories Bank balances and cash Trade and other payables Net liabilities Gain on disposal Consideration received – cash	HK$’000 1,494 23 (2,253)
	(736) 1,536
	800

An analysis of the net inflow of cash and cash equivalents in respect of the disposal of a subsidiary is as follows:

Cash consideration Cash and cash equivalents disposed of Net inflow of cash and cash equivalents	HK$’000 800 (23)
	777

7. Finance costs

Interest on other loans Interest on margin financing account	2007 HK$’000 6,118 5,491 11,609	2006 HK$’000 958 1,195
		2,153

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

8. Profit before taxation

Profit before taxation has been arrived at after charging the following:

Auditors’ remuneration Depreciation Exchange loss (net) Legal and professional fees Consultancy fee – settled by cash – equity-settled share option expenses Total consultancy fee Staff costs, including directors’ emoluments – salaries and allowance – equity-settled share option expenses – staff quarter – Retirement benefits scheme contributions, net of nil forfeited contributions Total staff costs	2007 HK$’000 330 179 2,054 5,454 6,886 21,165 28,051 8,041 193,724 111 96 201,972	2006 HK$’000 250 – 2 2,290

		– –
		–

		3,354 – – 70
		3,424

– 53 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

9. Income tax expense

Hong Kong profits tax provided for the year	2007 HK$’000 –	2006 HK$’000 238

No provision for Hong Kong profits tax has been made for the year as the Group had no assessable profit. Hong Kong profits tax was calculated at 17.5% on the estimated assessable profit arising in Hong Kong during the year ended 31 December 2006.

No provision for overseas taxation has been made for the year as the subsidiaries operating in the PRC had no assessable income for PRC taxation purpose.

The income tax expense for the year can be reconciled to the profit before taxation per the consolidated income statement as follow:

Profit before taxation Tax at Hong Kong Profits Tax rate of 17.5% Tax effect of non-deductible expenses Tax effect of non-taxable income Tax effect of tax loss not recognised Income tax expense	2007 HK$’000 345,313 60,430 38,683 (105,198) 6,085 –	2006 HK$’000 25,220

		4,413 2,069 (6,943 699
		238

At 31 December 2007, the Group had unused tax losses of approximately HK$44,755,000 (2006: HK$8,161,000) 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.

– 54 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

10. Directors’ and employees’ emoluments

An analysis of remuneration paid and payable to directors of the Company for the year ended 31 December 2007 and 2006 is set as follows:

Executive directors Mr. Cao Zhong (note a) Mr. Liu Yongshun (note b) Ms. Chong Sok Un (note c) Mr. Zhou Luyong (note b) Mr. Chen Zhaoqiang (note d) Mr. Yue Jialin Mr. Lau Yau Cheung (note e) Mr. Michael Joseph Bogue (note f) Independent non-executive directors Mr. Wong Wing Kuen, Albert Mr. Tsui Robert Che Kwong (note g) Mr. Yang Weiming (note h) Mr. Chang Chu Fai, Johnson Francis (note i) Mr. Alan Stephen Jones (note j) Mr. Robert Moyse Willcocks (note j)	Fee HK$’000 – – – – – – – – 80 33 20 59 52 52 296	Salaries, Allowances and Benefits in Kind HK$’000 1,000 1,230 1,000 839 650 – 1,113 381 – – – – – – 6,213	Employee Share Option Benefits HK$’000 56,380 58,470 43,538 9,908 14,996 – – – 2,236 – – 1,490 – – 187,018	Retirement Scheme Contribution HK$’000 – – – – – – 37 – – – – – – – 37	2007 Total HK$’000 57,380 59,700 44,538 10,747 15,646 – 1,150 381 2,316 33 20 1,549 52 52
					193,564

– 55 –

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Executive directors Mr. Yue Jialin Mr. Lau Yau Cheung Mr. Michael Joseph Bogue (note f) Independent non-executive directors Mr. Wong Wing Kuen, Albert Mr. Tsui Robert Che Kwong (note g) Mr. Wu Guo Jian (note k) Mr. Yang Weiming (note h)	Fee HK$’000 – – 11 40 40 20 16 127	Salaries, Allowances and Benefits in Kind HK$’000 – 2,050 – – – – – 2,050	Employee Share Option Benefits HK$’000 – – – – – – – –	Retirement Scheme Contribution HK$’000 – 30 – – – – – 30	2006 Total HK$’000 – 2,080 11 40 40 20 16
					2,207

Notes: a) Mr. Cao Zhong was appointed as executive director on 26 April 2007
b) Mr. Liu Yongshun and Mr. Zhou Luyong were appointed as non-executive directors on 29 May 2007 and re-designated as executive directors on 27 July 2007
c) Ms. Chong Sok Un was appointed as an executive director on 6 July 2007

d) Mr. Chen Zhaoqiang was appointed as a non-executive director on 6 July 2007 and re-designated as an executive director on 7 September 2007

e) Mr. Lau Yau Cheung resigned as an executive director on 31 October 2007 f) Mr. Michael Joseph Bogue resigned as an executive director on 8 June 2007 g) Mr. Tsui Robert Che Kwong resigned as an independent non-executive director on 1 November 2007 h) Mr. Yang Weiming resigned as an independent non-executive director on 27 July 2007 i) Mr. Chang Chu Fai, Johnson Francis was appointed as independent non-executive director on 6 July 2007 j) Mr. Alan Stephen Jones and Mr. Robert Moyse Willcocks were appointed as independent non-executive directors on 27 July 2007
k) Mr. Wu Guo Jian resigned as an independent non-executive director on 8 August 2006

– 56 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

During the year ended 31 December 2007, Mr. Yue Jialin waived his emoluments to the amount of HK$120,000 (2006: HK$20,000). The waived emoluments were excluded in the above disclosure.

Apart from the above, there was no arrangement under which a director waived or agreed to waive any remuneration during the years ended 31 December 2007 and 2006.

During the year, certain directors were granted share options, in respect of their services to the Group, under the share option scheme of the Company, further details of which are set out in note 24 to the financial statements. The fair value of such options, which has been amortised to the income statement, was determined as at the date of the grant and included in the above directors’ remuneration disclosures. No share options were granted to the directors in 2006.

Of the five individuals with the highest emoluments in the Group, all (2006: one individual) are directors of the Company whose emoluments are included in the disclosure set out above. The aggregate of the emoluments in respect of the remaining four individuals of the year ended 31 December 2006 whose emolument fell within the band of nil to HK$1,000,000 are as follows:

Salaries and allowances Retirement benefits scheme contributions	2007 HK$’000 – – –	2006 HK$’000 1,136 40
		1,176

Other than the granting of share options to certain directors during the year ended 31 December 2007, no emoluments were paid by the Group to any of the directors or the five highest paid individuals, as an inducement to join or upon joining the Group or as compensation for loss of office during the years ended 31 December 2007 and 2006.

11. Profit/(loss) attributable to equity shareholders of the company

The consolidated profit attributable to equity shareholders of the Company includes a loss of approximately HK$225,410,000 (2006: profit of HK$22,313,000) which has been dealt with in the financial statements of the Company.

– 57 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

12. Dividends

No dividends had been paid or declared by the Company during the year (2006: nil).

13. Earnings per share

(a) Basic earnings per share

The calculation of basic earnings per share is based on the profit for the year of HK$345,313,000 (2006: HK$24,982,000) and the weighted average number of 3,532,282,202 (2006: 807,098,630) ordinary shares in issue during the year.

(b) Diluted earnings per share

The earnings used in the calculation of diluted earnings per share are the same as those for the basic earnings per share, as set out above.

The weighted average number of ordinary shares for the purposes of diluted earnings per share reconciles to the weighted average number of ordinary shares used in the calculation of basic earnings per share as follows:

Weighted average number of ordinary shares used in the calculation of basic earnings per share Shares deemed to be issued for no consideration in respect of: – warrants – share options	2007 3,532,282,202 145,452,627 – 3,677,734,829	2006 N/A N/A N/A
		N/A

The calculation of the diluted earnings per share did not assume the exercise of the Company’s outstanding share options as their exercise prices were higher than the average market price of the Company’s shares for the year.

Diluted earnings per share for the year ended 31 December 2006 has not been presented as there were no potential dilutive shares outstanding during that year.

– 58 –

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

14. Property, plant and equipment

Group Leasehold Improvement HK$’000 Cost Additions and at 31 December 2007 1,289 Accumulated depreciation Charge for the year and at 31 December 2007 151 Net book value At 31 December 2007 1,138 Company Cost Additions and at 31 December 2007 Accumulated depreciation Charge for the year and at 31 December 2007 Net book value At 31 December 2007	Office Equipment HK$’000 79 2 77	Computer HK$’000 456 26 430	Motor Vehicle Total HK$’000 HK$’000 553 2,377 – 179 553 2,198 Leasehold Improvement HK$’000 2 – 2	Motor Vehicle Total HK$’000 HK$’000 553 2,377 – 179 553 2,198 Leasehold Improvement HK$’000 2 – 2	Total HK$’000 2,377 179
					2,198


				–
				2

– 59 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

15. Investments in subsidiaries

Unlisted investments Amounts due from subsidiaries Less: impairment	The Company 2007 2006 HK$’000 HK$’000 28,080 – 1,761,216 152,675 (62,610) (62,610 1,698,606 90,065 1,726,686 90,065	The Company 2007 2006 HK$’000 HK$’000 28,080 – 1,761,216 152,675 (62,610) (62,610 1,698,606 90,065 1,726,686 90,065
		152,675 (62,610
		90,065
		90,065

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 receivable in the next twelve months from the balance sheet date and the amounts are therefore shown as non-current.

Particulars of the Company’s principal subsidiaries at 31 December 2007 are set out in note 35.

16. Available-for-sale investments

Listed equity securities, in Hong Kong, at fair value Listed equity securities, in overseas, at fair value	The Group 2007 2006 HK$’000 HK$’000 177,760 – 2,815,666 – 2,993,426 –	The Group 2007 2006 HK$’000 HK$’000 177,760 – 2,815,666 – 2,993,426 –
		–

– 60 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

17. Inventories

Goods purchased for resale	The Group 2007 2006 HK$’000 HK$’000 – 1,494

18. Trade and other receivables

The Group allows an average credit period of 60 – 90 days to its trade customers. The Group seeks to maintain strict control over its outstanding receivables. Overdue balances are reviewed regularly by senior management.

The following is an aged analysis of trade receivables at the balance sheet date, based on the invoice date, is as follows:

Trade receivables 0 to 30 days 31 to 60 days 61 to 90 days 91 to 365 days Over 365 days Other receivables Purchase deposits Other deposits and prepayment	The Group 2007 2006 HK$’000 HK$’000 – 3,076 – 2,048 4,559 2,124 611 418 – 130 5,170 7,796 646 664 226,368 – 1,112 – 233,296 8,460	The Group 2007 2006 HK$’000 HK$’000 – 3,076 – 2,048 4,559 2,124 611 418 – 130 5,170 7,796 646 664 226,368 – 1,112 – 233,296 8,460
		7,796 664 – –
		8,460

– 61 –

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

The aged analysis of trade receivables that are not considered to be impaired is as follows:

Neither past due nor impaired: Current Past due but not impaired: 0 to 30 days 31 to 60 days 61 to 90 days 91 to 365 days Over 365 days	The Group 2007 2006 HK$’000 HK$’000 – – – 3,076 4,559 2,048 611 2,124 – 418 – 130 5,170 7,796	The Group 2007 2006 HK$’000 HK$’000 – – – 3,076 4,559 2,048 611 2,124 – 418 – 130 5,170 7,796
		7,796

Receivables that were past due but not impaired relate to customers that have a good track record with the Group which were fully recovered after the balance sheet date. The Group does not hold any collateral over these balances.

19. Trading securities

Trading securities, at fair value Listed equity securities, in Hong Kong Listed equity securities, in overseas	The Group 2007 2006 HK$’000 HK$’000 2,578 1,810 812,379 225,229 814,957 227,039	The Group 2007 2006 HK$’000 HK$’000 2,578 1,810 812,379 225,229 814,957 227,039
		227,039

– 62 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

20. Cash and cash equivalents

Pledged bank deposits Cash at bank and in hand Cash held in a securities account maintained in a securities company Less: Pledged bank deposits Cash and cash equivalents	The Group 2007 2006 HK$’000 HK$’000 10,526 10,098 690,644 9,421 4,301 2,861 705,471 22,380 (10,526) (10,098 694,945 12,282	The Group 2007 2006 HK$’000 HK$’000 10,526 10,098 690,644 9,421 4,301 2,861 705,471 22,380 (10,526) (10,098 694,945 12,282
		22,380 (10,098
		12,282

Cash at bank earns interest at floating rates based on daily bank deposit rates. Short term deposits during the year are made for varying period of between 1 day and one month depending on the immediate cash requirements of the Group, and earn interest at respective short term time deposits rates. The carrying amount of the cash and cash equivalent approximate to their fair value.

Cash and cash equivalents of HK$1,718,700 (2006: Nil) are denominated in RMB. RMB is not a freely convertible currency and the remittance of funds out of the PRC is subject to the exchange restriction imposed by the PRC government.

– 63 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

21. Trade and other payables

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

Trade payables 0 to 30 days 90 days to 365 days over 365 days Other payables	The Group 2007 2006 HK$’000 HK$’000 – – – 192 – 1,754 – 1,946 9,018 5,639 9,018 7,585	The Group 2007 2006 HK$’000 HK$’000 – – – 192 – 1,754 – 1,946 9,018 5,639 9,018 7,585
		1,946 5,639
		7,585

All trade and other payables are expected to be settled within one year.

22. Margin financing loan

The margin loan facility was secured by part of available-for-sale investments and trading securities with carrying amount of approximately HK$3,628,045,000 as at 31 December 2007 (2006: HK$225,229,000).

– 64 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

23. Share capital

(a) Authorised and issued share capital

Ordinary shares of HK$0.10 each Authorised: At 1 January Increase during the year At 31 December Issued and fully paid: At 1 January Issue of rights shares Issue of shares under placement Issue of shares upon exercise of warrants Issue of shares as consideration for acquisition of available-for-sale investment Issue of share upon conversion of convertible bond At 31 December	2007 Number of Shares Amount HK$’000 2,000,000,000 200,000 6,000,000,000 600,000 8,000,000,000 800,000 1,259,000,000 125,900 1,259,000,000 125,900 1,865,000,000 186,500 55,653,550 5,565 287,637,505 28,764 – – 4,726,291,055 472,629	2006 Number of Shares Amount HK$’000 1,000,000,000 100,000 1,000,000,000 100,000 2,000,000,000 200,000 413,000,000 41,300 826,000,000 82,600 – – – – – – 20,000,000 2,000 1,259,000,000 125,900	2006 Number of Shares Amount HK$’000 1,000,000,000 100,000 1,000,000,000 100,000 2,000,000,000 200,000 413,000,000 41,300 826,000,000 82,600 – – – – – – 20,000,000 2,000 1,259,000,000 125,900
			200,000

			41,300 82,600 – – – 2,000
			125,900

Details of the movements in the Company’s share capital during the year ended 31 December 2007 are as follows:

(i) Pursuant to an ordinary resolution passed on 4 January 2007, the authorised share capital of the Company was increased to HK$800 million by the creation of 6,000 million shares of HK$0.1 each.

– 65 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(ii) The Company completed a rights issue on 1 February 2007, which raised gross proceeds of HK$377.7 million by issuing 1,259 million rights shares at HK$0.3 each. As a result of the rights issue, a total of 251,800,000 bonus warrants were allotted and issued. The bonus warrants will be exercisable for a period of three years commencing on 5 February 2007 to 4 February 2010. During the year, part of the bonus warrants issued were exercised for 55,653,550 shares of HK$0.10 each with an exercise price of HK$0.30 per warrant, which raised gross proceeds of HK$16.7 million.
(iii) On 28 February 2007, the Company completed a placing of 800 million new shares at the price of HK$0.3 per share, which raised gross proceeds of HK$240 million.
(iv) On 20 July 2007, the Company completed a placing of 665 million new shares at price of HK$1.29 per shares, which raised gross proceeds of HK$857.8 million.
(v) On 17 October 2007, the Company completed a placing of 400 million new shares at price of HK$1.48 per shares, which raised gross proceeds of HK$592 million.
(vi) Pursuant to a resolution passed in a special general meeting of the Company held on 27 July 2007, 101,430,066 shares, 95,374,546 shares and 90,832,893 shares with par value of HK$0.10 each were allotted and issued to Siberian Worldwide Limited, Asia Bright International Limited and First South International Limited respectively for acquisition of totally 862,912,520 shares of China Primary Resources Holdings Limited, which securities are listed on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited.

(b) Capital management

The Group’s objectives of capital management are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, adjust its debt level, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes during the years ended 31 December 2007 and 2006.

The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by the sum of total equity and net debt. Net debt is calculated as total borrowings (including current and non-current borrowings) less cash and cash equivalents. Capital includes equity attributable to the equity shareholders.

– 66 –

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

During 2007, the Group’s strategy was to maintain a stable gearing ratio. The gearing ratios at 31 December 2007 and 2006 were as follows:

Total borrowings Less: cash and cash equivalents (note 20) Net (cash)/debt Total equity and net debt Gearing ratio	2007 HK$’000 1,797 694,945 (693,148) 4,738,296 N/A	2006 HK$’000 141,612 12,282
		129,330

		259,306

		49.9%

The improvement in the gearing ratio results primarily from the proceeds on issue of the Company’s new shares by rights issue and share placements.

24. Share options scheme

The Company has a share option scheme (the “Scheme”) which was adopted on 22 September 2004 (“Adoption Date”) whereby the board of directors of the Company may grant options to eligible persons, including directors of the Company and its subsidiaries, as incentives to directors and eligible employees to subscribe for shares in the Company. The Scheme will expire on 21 September 2014.

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 in accordance with the terms of the Scheme at any time during the option period and not more than ten years after the Adoption Date. The option period will be determined by the board of directors and communicated to each grantee. The exercise price is determined by the board of directors, 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 which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Scheme must not exceed 30% of the shares in issue from time to time. The number of shares in respect of which options may be granted to any individual in any 12-month period up to the date of grant is not permitted to exceed 1% of the shares of the Company in issue at the date of grant without 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 by the Company’s shareholders in general meeting taken on a poll.

– 67 –

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Details of the share options offered and accepted under the Scheme during the year ended 31 December 2007 and their movement during the year are as follows:

Grantees
Date of Grant
Exercise Period
Exercise
Price
per Share
No. of Options
Granted
During the Year
HK$ Directors
Mr. Cao Zhong
29 May 2007
29 May 2007 to
28 May 2010 (note 1)
1.20
33,000,000
15 August 2007
(note 2)
15 August 2007 to
5 July 2010
1.50
100,000,000
Mr. Liu Yongshun
27 July 2007
(note 3)
27 July 2007 to
28 May 2010 (note 1)
1.20
150,000,000
Mr. Zhou Luyong
29 May 2007
29 May 2007 to
28 May 2010 (note 1)
1.20
33,000,000
Ms. Chong Sok Un
15 August 2007
(note 4)
15 August 2007 to
5 July 2010
1.50
110,000,000
Mr. Chen Zhaoqiang
6 July 2007
6 July 2007 to
5 July 2010 (note 1)
1.50
33,000,000
Mr. Wong Wing Kuen, Albert
6 July 2007
6 July 2007 to
5 July 2010
1.50
3,000,000
Mr. Tsui Robert Che Kwong
(note 5)
6 July 2007
6 July 2007 to
5 July 2010
1.50
3,000,000
Mr. Chang Chu Fai, Johnson
Francis
6 July 2007
6 July 2007 to
5 July 2010
1.50
2,000,000
Others
Employees (note 6)
6 July 2007
6 July 2007 to
5 July 2010
1.50
9,000,000
Consultant
6 July 2007
6 July 2007 to
5 July 2010
1.50
10,000,000
Consultant
3 October 2007
3 October 2007 to
2 October 2010
1.40
25,000,000
511,000,000

Outstanding
as at
31 December
2007
Closing Price
Immediate
Before Date
of Grant
HK$ 33,000,000
1.09
100,000,000
1.02
150,000,000
1.45
33,000,000
1.09
110,000,000
1.02
33,000,000
1.47
3,000,000
1.47
3,000,000
1.47
2,000,000
1.47
9,000,000
1.47
10,000,000
1.47
25,000,000
1.22
511,000,000

During the year, no options were exercised, cancelled or lapsed.

– 68 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Note:

The relevant options are exercisable subject to the following vesting conditions:
a) The options granted to Mr. Cao Zhong are exercisable when the share price of the Company is HK$1.50 or above.
b) The options granted to Mr. Liu Yongshun are exercisable as follows:
- 1/3 of the options granted are exercisable at any time on or after the date of grant up to and including the date of maturity. No part of the options will be exercisable if the closing price of the Company’s shares is lower than HK$1.50;
- 1/3 of the options granted are exercisable from 29 May 2008 up to and including the date of maturity. No part of the options will be exercisable if the closing price of the Company’s shares is lower than HK$2; and
- 1/3 of the options granted are exercisable from 29 May 2009 up to and including the date of maturity. No part of the options will be exercisable if the closing price of the Company’s shares is lower than HK$2.50.
c) The options granted to Mr. Zhou Luyong and Mr. Chen Zhaoqiang are exercisable as follows:
- 1/3 of the options granted are exercisable at any time on or after the respective date of grant up to and including the respective date of maturity. No part of the options will be exercisable if the closing price of the Company’s shares is lower than HK$1.50;
- 1/3 of the options granted are exercisable after one year from the respective grant date up to and including the respective date of maturity. No part of the options will be exercisable if the closing price of the Company’s shares is lower than HK$2; and
- 1/3 of the options granted are exercisable after two years from the respective grant date up to and including the respective date of maturity. No part of the options will be exercisable if the closing price of the Company’s shares is lower than HK$2.50.
100,000,000 options were granted on 6 July 2007 conditional upon approval at special general meeting which was eventually obtained on 15 August 2007. The closing price of the Company on the last trading day before 6 July 2007 was HK$1.46.
150,000,000 options were granted on 29 May 2007 conditional upon approval at special general meeting which was eventually obtained on 27 July 2007. The closing price of the Company on the last trading day before 29 May 2007 was HK$1.09.
110,000,000 options were granted on 6 July 2007 conditional upon approval at special general meeting which was eventually obtained on 15 August 2007. The closing price of the Company on the last trading day before 6 July 2007 was HK$1.46.

– 69 –

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

With the cessation of the directorship on 31 October 2007, the share options granted to Mr. Tsui Robert Che Kwong was lapsed on 31 January 2008.
Included in the share options granted to employees is a total number of 3,000,000 options granted to the spouse of Mr. Lau Yau Cheung, as an employee of the Group.
The options are measured using the Binomial Pricing Model. The inputs into the Model are summarised as follows:

Date of grant	29 May	6 July	27 July	15 August	3 October
	2007	2007	2007	2007	2007
Expected volatility	66%	74%	75%	73%	67%
Expected life (year)	3	3	3	3	3
Risk-free interest rate	4.24%	4.45%	4.17%	4.13%	3.89%
Expected annual dividend yield	Nil	Nil	Nil	Nil	Nil
Fair value per option (HK$)	0.509	0.822	0.720	0.396	0.549

The volatility measured at the standard deviation of expected share price is based on statistical analysis of daily shares over the period from the date of resumption of trading of the Company’s shares on The Stock Exchange of Hong Kong Limited (i.e. 14 July 2006) to the date immediately preceding the grant date. The above calculation is based on the assumption that there is no material difference between the expected volatility over the whole life of the share options and the historical volatility of the Company shares set out above.
The risk free rate is being yield of 3-year Exchange Fund Note at the date of grant.
The Group recognised total expenses of approximately HK$214,889,000 for the year ended 31 December 2007 in relation to share options granted by the Company.

25. Warrants

On 5 February 2007, the Company issued a total of 251,800,000 bonus warrants (the “Warrants”), as a result of the rights issue completed on 1 February 2007, with an aggregate subscription amount of HK$75,540,000. Each of the Warrants entitled the warrant-holder to subscribe for one ordinary share of the Company of HK$0.10 each at the initial subscription price of HK$0.30 (subject to adjustment (if any) during the period from 5 February 2007 until 4 February 2010 (both dates inclusive). During the year, 55,653,550 Warrants were exercised, which raised gross proceeds of HK$16.7 million. As at 31 December 2007, there were 196,146,450 Warrants outstanding.

– 70 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

26. Reserves

The amounts of the Group’s reserves and the movements therein for the current and prior year are presented in the consolidated statement of changes in equity on page 33 of the financial statements.

Company At 1 January 2006 Rights shares issuing expenses Profit for the year At 31 December 2006 At 1 January 2007 Issue of rights shares Rights shares issuing expenses Issue of placing shares Placing shares issuing expenses Shares issuing upon exercise of warrants expenses Equity-settled share option expenses Issue of shares for acquisition of available-for-sale investments Loss for the year At 31 December 2007	Share Premium HK’000 106,957 (1,487) – 105,470 105,470 251,800 (3,022) 1,503,350 (46,374) 11,131 – 165,392 – 1,987,747	Contributed Surplus HK’000 60,274 – – 60,274 60,274 – – – – – – – – 60,274	Share Option Reserve HK’000 – – – – – – – – – – 214,889 – – 214,889	Accumulated Losses HK’000 (220,923) – 22,313 (198,610) (198,610) – – – – – – – (225,410) (424,020)	Total HK’000 (53,692) (1,487) 22,313
					(32,866)

					(32,866) 251,800 (3,022) 1,503,350 (46,374) 11,131 214,889 165,392 (225,410)
					1,838,890

Nature and purpose of reserves

(i) Special reserve

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.

(ii) Contributed surplus

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.

– 71 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(iii) Investment revaluation reserve

The investment revaluation reserve arises on the revaluation of available-for-sale financial assets. Where a revalued financial asset is sold, the portion of the reserve that relates to that financial asset, and is effectively realised, is recognised in profit or loss. Where a revalued financial asset is impaired, the portion of the reserve that relates to that financial asset is recognised in profit or loss.

(iv) Share option reserve

The share option reserve comprises the fair value of unexercised share options granted to directors, employees and consultants of the Group recognised in accordance with HKFRS 2. Further information about share-based payments is set out in note 24.

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.

27. Major non-cash transactions

During the year, 287,637,505 new shares of the Company were issued in exchange for 862,912,520 shares of China Primary Resources Holdings Limited, a company listed on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited, with nominal value of HK$0.00125 each. Total consideration, based on the market price of the Company’s shares at the date of exchange which was HK$0.225 together with the stamp duty paid, was HK$194,653,000.

– 72 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

28. Financial risk management

(a) Financial risk factors

The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk.

(i) Market risk

Currency risk

The Group exposes to currency risk as certain trading securities are denominated in foreign currencies, primarily with respect to Australian dollar (“AUD”). Currency risk arises from future commercial transactions and recognised assets.

The following table demonstrates the sensitivity at the balance sheet date to a reasonably possible change in the AUD exchange rate, with all other variables held constant, of the Group’s net profit (due to change in the fair value of monetary assets and liabilities).

		Increase/
	Increase/	(Decrease)
	(Decrease)	in Profit
	in AUD Rate	After Tax
	%	HK$’000
2007
If Australian dollar weakens against Hong Kong dollar	7%	57,158
If Australian dollar strengthens against Hong Kong dollar	(7%)	(57,158)
2006
If Australian dollar weakens against Hong Kong dollar	7%	15,732
If Australian dollar strengthens against Hong Kong dollar	(7%)	(15,732)

Interest rate risk

The Group’s exposure to interest rate risk arises primarily from its borrowings and bank deposits. Borrowings and bank deposits at variable rates expose the company to cash flow interest rate risk.

– 73 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The Group currently does not have any interest rate hedging policy. The directors monitor the Group’s exposure on ongoing basis and will consider hedging interest rate risk should the need arise.

At 31 December 2007, it is estimated that a general increase/decrease of 50 basis points in interest rates, with all other variables held constant, would increase/decrease the company’s profit after tax and retained profits by approximately HK$3 million (2006: HK$0.6 million).

The sensitivity analysis above has been determined assuming that the change in interest rates had occurred at the balance sheet date and had been applied to the Group’s exposure to interest rate risk for financial instruments in existence at that date. The 50 basis point increase or decrease represents management’s assessment of a reasonably possible change in interest rates over the period until the next annual balance sheet date. The analysis is performed on the same basis for 2006.

Price risk

The Group is exposed to equity price changes arising from equity investments classified as trading securities (see note 19) and available-for-sale investments (see note 16).

The sensitivity analyses below have been determined based on the exposure to equity price risks at the reporting date.

If equity prices had been 5% higher/lower:

net profit for the year ended 31 December 2007 would increase/decrease by HK$40,748,000 (2006: increase/decrease by HK$11,352,000); and
other equity reserves would increase/decrease by HK$149,671,000 (2006: no effect) for the Group as a result of the changes in fair value of available-for-sale investments.

(ii) 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. Key areas where the Group is exposed to credit risk are trade and other receivables and bank balances. In order to minimise the credit risk, the Group reviews that recoverable amount of each individual debtor at each balance sheet date to ensure that adequate impairment losses are made for irrecoverable amounts. The creditworthiness of these debtors is considered by reviewing their financial strength prior to finalisation of any contract and transaction. In this regard, the directors of the Group consider that the Group’s credit risk is significantly reduced.

– 74 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. At the balance sheet date, the Group has a certain level of concentrations of credit risk as 44% (2006: 81%) and 100% (2006: 100%) of the total trade receivables was due from the Group’s largest customer and the five largest customers respectively.

The maximum exposure to credit risk without taking account of any collateral held is represented by the carrying amount of each financial asset in the balance sheet after deducting any impairment allowance. The Group does not provide any guarantees which would expose the Group to credit risk.

Further quantitative disclosures in respect of the Group’s exposure to credit risk arising from trade and other receivables are set out in note 18.

(iii) Liquidity risk

The Group enjoyed a strong financial position at the end of 2007, with cash and cash equivalents amounting to HK$695 million as at 31 December 2007, a significant increase from HK$12 million in 2006.

The Group financed its operations and investment activities with internally generated cash flow, balanced with proceeds from the prior issue of rights shares and placing shares.

The table below summaries the maturity profile of the Company’s financial liabilities at 31 December 2007 and 2006 based on contractual undiscounted payments. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.

As at 31 December 2007

Trade and other payables Margin financing Income tax payable	Carrying Amount HK$’000 9,018 1,797 237 11,052	Total Contractual Undiscounted Cash Flow HK$’000 9,018 1,797 237 11,052	Within One Year or On Demand HK$’000 9,018 1,797 237
			11,052

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

As at 31 December 2006

Trade and other payables Margin financing Income tax payable	Carrying Amount HK$’000 7,585 141,612 200 149,397	Total Contractual Undiscounted Cash Flow HK$’000 7,585 141,612 200 149,397	Within One Year or On Demand HK$’000 7,585 141,612 200
			149,397

(b) Fair value estimation

The fair value of financial instruments traded in active markets (such as trading securities and available-for-sale investments) are based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price.

The carrying amounts of the Group’s other financial asset except amount due from subsidiaries, and financial liabilities approximate their fair values due to their short maturities. For amounts due from subsidiaries which are unsecured, interest-free and have no fixed terms of repayment, it is not meaningful to disclose their fair values.

– 76 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

29. Commitment

(a) Operating lease – the Group as lessee

Minimum lease payments under operating leases in respect of rented premises during the year	2007 HK$’000 1,584	2006 HK$’000 366

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 After one year but within five years	2007 HK$’000 2,004 2,651 4,655	2006 HK$’000 153 –
		153

Operating lease payments represent rental payable by the Group for its office premises, a director’s quarter and a photocopying machine. Leases are negotiated for the term of between two to five years.

(b) Capital commitment

On 20 December 2007, the Company entered into an investment agreement with 平頂山煤業（集團）有限責任公司（「平頂山煤業」）and 平頂山煤業集團天藍能源發展有限公司（「天藍能源」）, to form a limited company which will be incorporated in the PRC with the registered capital of RMB50 million. The interest in the investment from 平頂山煤業，天藍能源 and the Company are 40%, 20% and 40% respectively. Capital payable by the Company is RMB20 million, which equivalent to approximately HK$22 million. Up to the date of this report, the incorporation process has not been completed.

– 77 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

30. Material related party transactions

During the year, the Group entered into the following material related party transactions.

Compensation of key management personnel

Remuneration for key management personnel, including amounts paid to the Company’s directors and the highest paid employee as disclosed in note 10 is as follows:

Short-term employee benefits Post-employment benefits Share-based payment	2007 HK$’000 6,213 37 183,292 189,542	2006 HK$’000 2,050 30 –
		2,080

31. Pledge of assets

(a) Margin loan facilities secured by available-for-sale investments (b) Banking facilities of HK$10 million (2006: HK$10 million) granted by a bank and secured by bank deposits of the Group	The Group 2007 2006 HK$’000 HK$’000 3,628,045 225,229 10,526 10,098 3,638,571 235,327	The Company 2007 2006 HK$’000 HK$’000 – – – – – –	The Company 2007 2006 HK$’000 HK$’000 – – – – – –
			–
			–

– 78 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

32. 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. Except for one director and one management staff, the Group’s contributions are subject to a cap of monthly relevant payroll cost of HK$20,000.

The total cost charged to the consolidated income statement of HK$96,100 (2006: HK$70,200) 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 approximately HK$50,000 forfeited contribution, which arose upon employees leaving the retirement benefits scheme and which was available to reduce the contribution payables in the future years.

33. Critical accounting judgment and estimates

In the process of applying the Group’s accounting policies, the Group’s management has made judgments and estimates based on past experiences, expectations of the future and other information. The key sources of estimation uncertainty and critical judgments that may significantly affect the amounts recognised in the financial statements are disclosed below:

Equity-settled share option expenses

The equity-settled share option expenses are subject to the limitations of the Binomial Pricing Model and the uncertainty in estimates used by management in the assumptions. The estimates include limited early exercise behaviour, expected interval and frequency of open exercise periods in the share option life, and other relevant parameters of the share option model.

Classification of financial assets

Directors shall make significant judgments on classification of financial assets. Different classifications would affect the accounting treatment and the Group’s financial position and operating results.

– 79 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

34. Post balance sheet events

On 23 January 2008, the Company, through its direct wholly-owned subsidiary, APAC Resources Strategic Holdings Limited, acquired, by way of placement, 139,000,000 ordinary shares of Metals X Limited, a company listed on ASX, at the price of AUD0.30 per share. The gross consideration is approximately AUD41,700,000, which equivalent to approximately HK$281,000,000.

35. Particulars of subsidiaries

			Proportion	of ownership	interest
	Place of
	incorporation/	Particulars of	Group’s	Held	Held
	establishment	issued and	effective	by the	by a
Name of company	and operation	paid up capital	interest	company	subsidiary	Principal activities
Asia Cheer Trading Limited	Hong Kong	HK$1 ordinary	100%	100%		Trading in fabric products
		share				and other merchandises and
						investment holding
First Landmark Limited	British Virgin	US$1 ordinary	100%	100%		Investment holding
	Islands	share
Sino Chance Trading Limited	Hong Kong	HK$1 ordinary	100%	100%		Trading in base metals
		share
Sky Joy Management Limited	Hong Kong	HK$1 ordinary	100%	100%		Provision of management services
		share
Net Success Investments	British Virgin	US$1 ordinary	100%	100%		Investment holding
Limited	Islands	share
Fortune Desire Investments	British Virgin	US$1 ordinary	100%	100%		Investment holding
Limited	Islands	share
Mount Sun Investments	British Virgin	US$1 ordinary	100%	100%		Investment holding
Limited	Islands	shares
Super Grand Investments	British Virgin	US$1 ordinary	100%	100%		Investment holding
Limited	Islands	shares
亞太資源（青島）有限公司	People’s	US$29,800,000	100%		100%	Trading of mineral resources
	Republic of
	China
瑞域（上海）投資諮詢	People’s	US$3,600,000	100%	100%		Provision of consultancy service in
有限公司	Republic of					corporate management, metallurgy
	China					technology, investment and
						development in mineral resources

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

– 80 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

4. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP FOR THE SIX MONTHS ENDED 30 JUNE 2008

Set out below is the unaudited condensed consolidated financial statements of the Group for the six months ended 30 June 2008 together with the comparative unaudited figures for the corresponding period in 2007, extracted from 2008 interim report of the Company.

CONDENSED CONSOLIDATED INCOME STATEMENT

For the six months ended 30 June 2008

Notes Turnover 3 Gain on disposal of available-for-sale investments Net gain from sales of trading securities Revenue from sales of goods Unrealised gain on trading securities Interest income Other operating income Purchases Equity-settled share option expenses Salaries and allowances Operating lease rental on buildings Provision for doubtful debt for other receivables Gain on disposal of a subsidiary Other operating expenses Finance costs Profit before taxation 4 Income tax expenses 5 Profit for the period Earnings per share attributable to equity shareholders of the Company 6 – Basic – Diluted	Six months ended 30 June 2008 2007 HK$’000 HK$’000 (Unaudited) (Unaudited) 401,659 18,725 22,488 16,535 35,079 – 170,215 18,725 258,773 141,022 5,247 981 4,704 63 (162,538) (18,188 (36,637) (933 (7,908) (1,793 (1,670) (405 (17,025) – – 1,536 (11,702) (7,317 (3) (8,089 259,023 142,137 (521) – 258,502 142,137 5.47 HK cents 4.99 HK cents 5.32 HK cents 4.78 HK cents	Six months ended 30 June 2008 2007 HK$’000 HK$’000 (Unaudited) (Unaudited) 401,659 18,725 22,488 16,535 35,079 – 170,215 18,725 258,773 141,022 5,247 981 4,704 63 (162,538) (18,188 (36,637) (933 (7,908) (1,793 (1,670) (405 (17,025) – – 1,536 (11,702) (7,317 (3) (8,089 259,023 142,137 (521) – 258,502 142,137 5.47 HK cents 4.99 HK cents 5.32 HK cents 4.78 HK cents

		16,535 – 18,725 141,022 981 63 (18,188 (933 (1,793 (405 – 1,536 (7,317 (8,089
		142,137 –
		142,137

		4.99 HK cents

		4.78 HK cents

– 81 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONDENSED CONSOLIDATED BALANCE SHEET

At 30 June 2008

Notes Non-current assets Property, plant and equipments 7 Available-for-sale investments 8 Current assets Trade and other receivables 9 Trading securities 10 Pledged bank deposits 15 Cash and cash equivalents 15 Current liabilities Other payables Margin financing loan 11 Tax payable Net current assets Total assets less current liabilities Capital and reserves Share capital 12 Reserves Total equity attributable to equity holders of the Company Minority interests Total equity	30 June 2008 HK$’000 (Unaudited) 1,977 3,250,341 3,252,318 231,008 1,437,784 88,979 329,877 2,087,648 9,603 – 758 10,361 2,077,287 5,329,605 472,657 4,856,948 5,329,605 – 5,329,605	31 December 2007 HK$’000 (Audited) 2,198 2,993,426
		2,995,624
		233,296 814,957 10,526 694,945
		1,753,724
		9,018 1,797 237
		11,052
		1,742,672
		4,738,296

		472,629 4,265,667
		4,738,296 –
		4,738,296

– 82 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 June 2008

At 1 January 2007 Issue of right shares, net Issue of placing shares for cash, net Issue of shares upon exercise of warrants Changes in fair value of available-for-sale investments Equity-settled share option expenses Profit for the period At 30 June 2007 At 1 January 2008 Issue of shares upon exercise of warrants Changes in fair value of available-for-sale investments Exchange difference arising from translation of accounts of overseas subsidiaries Equity-settled share option expenses Profit for the period At 30 June 2008	Share capital HK$’000 125,900 125,900 80,000 4,106 – – – 335,906 472,629 28 – – – – 472,657	Share premium account HK$’000 105,470 248,778 149,800 8,212 – – – 512,260 1,987,747 56 – – – – 1,987,803	Special reserve HK$’000 (14,980) – – – – – – (14,980) (14,980) – – – – – (14,980)	Investment revaluation reserve HK$’000 – – – – 477,828 – – 477,828 1,817,762 – 280,199 – – – 2,097,961	Exchange reserve HK$’000 – – – – – – – – 1,350 – – 15,887 – – 17,237	Share option reserve Retained earnings/ (accumulated losses) HK$’000 HK$’000 – (86,414) – – – – – – – – 933 – – 142,137 933 55,723 214,889 258,899 – – – – – – 36,637 – – 258,502 251,526 517,401	Total HK$’000 129,976 374,678 229,800 12,318 477,828 933 142,137
							1,367,670

							4,738,296 84 280,199 15,887 36,637 258,502
							5,329,605

– 83 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

For the six months ended 30 June 2008

Net Cash From Operating Activities Net Cash Used In Investing Activities Net Cash (Used In)/From Financing Activities Net (Decrease)/Increase in Cash and Cash Equivalents Cash and Cash Equivalents at 1 January Effect of foreign exchange rate changes Cash and Cash Equivalents at 30 June Analysis of the balances of cash and cash equivalents Bank balances and cash Cash held in securities accounts maintained in securities companies	Six months ended 30 June 2008 2007 HK$’000 HK$’000 (Unaudited) (Unaudited) 225 8,654 (379,470) (692,463 (1,710) 690,717 (380,955) 6,908 694,945 12,282 15,887 – 329,877 19,190 302,127 19,159 27,750 31 329,877 19,190	Six months ended 30 June 2008 2007 HK$’000 HK$’000 (Unaudited) (Unaudited) 225 8,654 (379,470) (692,463 (1,710) 690,717 (380,955) 6,908 694,945 12,282 15,887 – 329,877 19,190 302,127 19,159 27,750 31 329,877 19,190
		6,908 12,282 –
		19,190

		19,159 31
		19,190

– 84 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

For the six months ended 30 June 2008

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 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 32/F., China Online Centre, 333 Lockhart Road, Wanchai, Hong Kong.

The Company and its subsidiaries (collectively referred to as “the Group”) are principally engaged in the (i) trading in base metals and commodities trading portfolio primarily focused on natural resources and related sectors; (ii) trading in fabric products and other merchandises and (iii) trading and investment of listed securities in the resources and related industries.

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 were approved for issue by the Board of Directors on 22 September 2008.

2. Basis of Preparation and Accounting Policies

These unaudited Interim Financial Statements are prepared in accordance with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“Listing Rules”), including compliance 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 2007 annual report.

This interim financial report contains condensed consolidated financial statements and selected explanatory notes. The notes include an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the Group since the 2007 annual report. The condensed consolidated interim financial statements and notes thereon do not include all of the information required for full set of financial statement prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”, which term collectively includes HKASs and Interpretations).

– 85 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

In the current period, the Group has applied, for the first time, the following new standards, amendments and interpretations (hereinafter collectively referred to as “new HKFRSs’’), issued by the HKICPA, which are effective for the Group’s accounting periods beginning on 1 January 2008.

HK (IFRIC) – INT 11 HKFRS 2 – Group and treasury share transactions HK (IFRIC) – INT 12 Service concession arrangements HK (IFRIC) – INT 14 HKAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interactions

The application of these new HKFRSs did not have any material impact on how the financial statements of the Group are prepared and presented for the current or prior accounting period.

The Group has not early applied the following new standards and interpretations that have been issued but are not yet effective. The directors of the Company anticipate that the application of these standards, amendments and interpretations will have no material impact on the financial statements of the Group.

HKAS 1 (Revised) Presentation of financial statements[1] HKAS 23 (Revised) Borrowing costs[1] HKAS 27 (Revised) Consolidated and separate financial statements[2] HKAS 32 & 1 Puttable financial instruments and obligations arising (Amendments) on liquidation[1] HKFRS 2 (Amendment) Share-based payment-vesting conditions and cancellations[1] HKFRS 3 (Revised) Business combinations[2] HKFRS 8 Operating segments[1] HK (IFRIC) – Int 13 Customer loyalty programmes[3] HK (IFRIC) – Int 15 Agreements for the construction of real estate[1] HK (IFRIC) – Int 16 Hedges of a net investment in a foreign operation[4]

1 Effective for annual periods beginning on or after 1 January 2009

2 Effective for annual periods beginning on or after 1 July 2009

3 Effective for annual periods beginning on or after 1 July 2008

4 Effective for annual periods beginning on or after 1 October 2008

– 86 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

3. Segment Information

Business segments

For management purposes, the Group is currently organised into three operating divisions – trading in base metals, trading in fabric products and other merchandises and trading and investment of listed securities. 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 2008 Revenue from external customers Segment result Unallocated corporate expenses Finance costs Profit before taxation Taxation Profit for the period	Trading in base metals HK$’000 170,215 4,594	Trading in fabric products and other merchandises HK$’000 – 442	Trading and investment of listed securities HK$’000 231,444 322,443	Consolidated HK$’000 401,659

				327,479 (68,453) (3)
				259,023 (521)
				258,502

– 87 –

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Six months ended 30 June 2007 Revenue from external customers Segment result Unallocated corporate expenses Gain on disposal of a subsidiary Finance costs Profit before taxation Taxation Profit for the period	– – Trading in base metals HK$’000	18,725 557 Trading in fabric products and other merchandises HK$’000	– 157,557 Trading and investment of listed securities HK$’000	18,725 Consolidated HK$’000

				158,114 (9,424) 1,536 (8,089)
				142,137 –
				142,137

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 and PRC Australia South East Asia United States of America Africa	Six months ended 30 June 2008 2007 HK$’000 HK$’000 102,956 7,240 231,444 – 67,259 988 – 2,049 – 8,448 401,659 18,725	Six months ended 30 June 2008 2007 HK$’000 HK$’000 102,956 7,240 231,444 – 67,259 988 – 2,049 – 8,448 401,659 18,725
		18,725

– 88 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

4. Profit Before Taxation

Profit before taxation has been arrived at after charging/(crediting) the following: Depreciation Exchange gain, net Legal and professional fees Consultancy fee Staff costs, including directors’ emoluments – salaries and allowance – equity-settled share option expenses – staff quarter – retirement benefits scheme contributions, net of nil forfeited contributions Total staff costs	Six months ended 30 June 2008 2007 HK$’000 HK$’000 (Unaudited) (Unaudited) 405 26 (4,688) (20 3,756 3,201 621 632 7,908 1,793 36,637 933 111 – 30 46 44,686 2,772	Six months ended 30 June 2008 2007 HK$’000 HK$’000 (Unaudited) (Unaudited) 405 26 (4,688) (20 3,756 3,201 621 632 7,908 1,793 36,637 933 111 – 30 46 44,686 2,772

		1,793 933 – 46
		2,772

– 89 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

5. Income Tax Expenses

Hong Kong profits tax provided for the period Overseas tax provided for the period	Six months ended 30 June 2008 2007 HK$’000 HK$’000 (Unaudited) (Unaudited) – – 521 – 521 –	Six months ended 30 June 2008 2007 HK$’000 HK$’000 (Unaudited) (Unaudited) – – 521 – 521 –
		–

No provision for Hong Kong Profits Tax has been made as the Group had no assessable profit for the six months ended 30 June 2008 (six months period ended 30 June 2007: nil).

No provision for overseas taxation has been made for the six months period ended 30 June 2007 as the subsidiaries operating in the PRC has no assessable income for PRC taxation purpose.

The Group has no significant unprovided deferred taxation at the balance sheet date.

6. Earnings Per Share

(a) The calculation of the basic earnings per share is based on the profit for the period of approximately HK$258,502,000 (six months ended 30 June 2007: HK$142,137,000) and on the weighted average of 4,726,524,901 (six months ended 30 June 2007: 2,850,853,386) shares in issue during the period.

– 90 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(b) The weighted average number of ordinary shares for the purpose of diluted earnings per share reconciles to the weighted average number of ordinary shares used in the calculation of basic earnings per share is as follows:

Weighted average number of ordinary shares used in the calculation of basic earnings per share Shares deemed to be issued for no consideration in respect of: – warrants – share options	Six months ended 30 June 2008 2007 4,726,524,901 2,850,853,386 129,714,824 124,284,222 – – 4,856,239,725 2,975,137,608	Six months ended 30 June 2008 2007 4,726,524,901 2,850,853,386 129,714,824 124,284,222 – – 4,856,239,725 2,975,137,608
		2,975,137,608

7. Property, Plant and Equipments

During the period, the Group’s acquisition of property, plant and equipment amounted to HK$191,000 (six months ended 30 June 2007: HK$1,446,000).

8. Available-for-sale Investments

Listed equity securities, in Hong Kong, at fair value Listed equity securities, in overseas, at fair value	30 June 2008 HK$’000 (Unaudited) 98,372 3,151,969 3,250,341	31 December 2007 HK$’000 (Audited) 177,760 2,815,666
		2,993,426

– 91 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

9. Trade and Other Receivables

Trade receivables Other receivables Purchase deposits Other deposits and prepayments	30 June 2008 HK$’000 (Unaudited) – 53,522 176,468 1,018 231,008	31 December 2007 HK$’000 (Audited) 5,170 646 226,368 1,112
		233,296

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

The aged analysis of trade receivables that are not considered to be impaired is as follows:

Neither past due nor impaired: Current Past due but not impaired: 0 to 30 days 31 to 60 days 61 to 90 days Over 90 days	30 June 2008 HK$’000 (Unaudited) – – – – – –	31 December 2007 HK$’000 (Audited) – – – 4,559 611
		5,170

– 92 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

10. Trading Securities

Trading securities, at fair value Listed equity securities, in Hong Kong Listed equity securities, in overseas	30 June 2008 HK$’000 (Unaudited) 1,898 1,435,886 1,437,784	31 December 2007 HK$’000 (Audited) 2,578 812,379
		814,957

11. Margin Financing Loan

The margin financing loan facilities were secured by certain available-for-sale investments and trading securities with carrying amount of approximately HK$4,167,978,000 as at 30 June 2008 (31 December 2007 (audited) HK$3,628,045,000).

12. Share Capital

Authorised: At 1 January 2008 and at 30 June 2008 Issued and fully paid: At 1 January 2008 Issue of shares upon exercise of warrants At 30 June 2008	Number of ordinary shares of HK$0.10 each 8,000,000,000 4,726,291,055 280,000 4,726,571,055	Amount HK$’000 800,000

		472,629 28
		472,657

– 93 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

13. Share Options Scheme

The Company operates a share option scheme (the “Scheme”) for the purpose of providing incentives or rewards to selected persons (including the Company’s directors, employees of the Group and other eligible participants as defined under the Scheme) who contribute to the Group. The Scheme was adopted on 22 September 2004 and will remain in force for 10 years from the date of adoption until 21 September 2014.

Pursuant to the annual general meeting of the Company held on 6 June 2008, the mandate limit of the Scheme was refreshed to 472,657,105 shares. During the six month period ended 30 June 2008, 3,000,000 share options held by a director and 3,000,000 share options held by a staff (year ended 31 December 2007: nil) were lapsed. As at 30 June 2008, there were 505,000,000 (as at 31 December 2007 (audited): 511,000,000) share options outstanding.

14. Warrants

On 5 February 2007, the Company issued a total of 251,800,000 bonus warrants (the “Warrants”), as a result of the rights issue completed on 1 February 2007, with an aggregate subscription amount of HK$75,540,000. Each of the Warrants entitled the warrant-holder to subscribe for one ordinary share of the Company of HK$0.10 each at the initial subscription price of HK$0.30 (subject to adjustment (if any)) during the period from 5 February 2007 until 4 February 2010 (both dates inclusive).

During the six months period ended 30 June 2008, 280,000 Warrants were exercised for 280,000 ordinary shares (year ended 31 December 2007: 55,653,550 Warrants were exercised for 55,653,550 ordinary shares) of HK$0.10 each at a price of HK$0.30. As at 30 June 2008, there were 195,866,450 Warrants outstanding (as at 31 December 2007 (audited): 196,146,450 Warrants outstanding).

15. Cash and Cash Equivalents

Pledged bank deposits Cash at bank and in hand Cash held in securities accounts maintained in securities companies Less: Pledged bank deposits Cash and cash equivalents	30 June 2008 HK$’000 (Unaudited) 88,979 302,127 27,750 418,856 (88,979) 329,877	31 December 2007 HK$’000 (Audited) 10,526 690,644 4,301
		705,471 (10,526)
		694,945

– 94 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

16. Commitments

(a) Operating lease – the Group as lessee

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	30 June 2008 HK$’000 (Unaudited) 2,004 1,649 3,653	31 December 2007 HK$’000 (Audited) 2,004 2,651
		4,655

(b) Capital commitments

On 20 Dec 2007, the Company entered into an investment agreement with 平頂山煤業（集團）有限公司（“平頂山煤業”）and 平頂山煤業集團天藍能源發展有限公司（“天藍能源”）, to form a limited company which will be incorporated in the PRC with the registered capital of RMB50 million. The interest in the investment from 平頂山煤業, 天藍能源 and the Company are 40%, 20% and 40% respectively. Capital payable by the Company is RMB20 million, which equivalent to approximately HK$23 million was settled on 25 July 2008. The incorporation process considered as completed.

– 95 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

17. Pledge of Assets

(a) Margin financing loan facilities secured by certain available-for-sale investments and trading securities (b) Banking facilities of HK$10 million and USD 60 million (2007: HK$10 million) granted by banks and secured by bank deposits of the Group	30 June 2008 HK$’000 (Unaudited) 4,167,978 88,979 4,256,957	31 December 2007 HK$’000 (Audited) 3,628,045 10,526
		3,638,571

18. Related Party Transactions

Key management personnel compensation:

Basic salaries and other allowances Bonuses Retirement benefits scheme contributions, net of nil forfeited contributions	Six months ended 30 June 2008 2007 HK$’000 HK$’000 (Unaudited) (Unaudited) 4,200 902 – 180 – 22 4,200 1,104	Six months ended 30 June 2008 2007 HK$’000 HK$’000 (Unaudited) (Unaudited) 4,200 902 – 180 – 22 4,200 1,104
		1,104

– 96 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

19. Post Balance Sheet Events

As announced on 16 July 2008, the Company, through its direct wholly-owned subsidiary, APAC Resources Investments Limited (“ ARI ”), entered into a conditional sale and purchase agreement (“ Conditional Agreement ”) with Leaping Far Investments Limited (“ Leaping Far ”) and pursuant to which ARI has conditionally agreed to purchase 10 issued shares of par value of US$1 each, representing the entire issued share capital of Good China Limited (“ GCL ”) and accept the assignment of a loan in the amount of US$16.1 million, equivalent to HK$125.58 million due by GCL to Leaping Far, at an aggregate consideration of HK$1,200,000,000. The consideration will be satisfied as to (i) HK$600,000,000 by cash and (ii) HK$600,000,000 by allotting and issuing a total of 600,000,000 new ordinary shares of the Company at HK$1.00 per share as fully paid, to Leaping Far on completion.

GCL is the legal and beneficial owner of the entire issued share capital of Upper China Industrial Limited which in turn owns 49% equity interest in a joint venture company which is engaged in the business of iron ore mining and production of iron ore materials in the PRC.

– 97 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

5. WORKING CAPITAL

6. STATEMENT OF INDEBTEDNESS OF THE GROUP

Borrowings

At the close of business on 31 October 2008, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Group had no borrowings.

Save as aforesaid or as otherwise disclosed herein, and apart from intra-Group liabilities, as at the close of business of 31 October 2008, the Group did not have any debt securities issued and outstanding, or authorised or otherwise created but unissued, any term loans (whether secured or 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 guarantees.

The Directors confirm that there is no material change in indebtedness and contingent liabilities of the Group since 31 October 2008 up to and including the Latest Practicable Date.

7. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, save as disclosed herein and the section headed “Prospect” of the 2008 interim report of the Group that the performance of the Group’s activities in trading and investment of listed securities is measured by mark-to-market accounting standards and, therefore, the continued global financial turmoil will adversely affect the Group’s results for the second half of 2008, 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 2007, the date to which the latest published audited accounts of the Company have been made up.

– 98 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

8. FINANCIAL AND TRADING PROSPECTS

As announced on 16 July 2008, the Company, through its wholly-owned subsidiary, APAC Resources Investments Limited (“ ARI ”), entered into a conditional sale and purchase agreement (“ Conditional Agreement ”) with Leaping Far Investments Limited (“ Leaping Far ”) and pursuant to which ARI has conditionally agreed to purchase from Leaping Far the entire issued share capital of Good China Limited (“ GCL ”) (the “ Sale Shares ”) and accept the assignment of loan in the amount of US$16,100,000 equivalent to HK$125,580,000 due by GCL to Leaping Far (the “ Loan ”), at an aggregate consideration of HK$1,200,000,000.

The aggregate consideration in the sum of HK$1,200,000,000 will be satisfied as to (i) HK$600,000,000 by cash and (ii) HK$600,000,000 by the issue to Leaping Far of 600,000,000 new shares of the Company (at HK$1.00 per share) (the “ Consideration Shares ”) upon completion of the purchase of the Sale Shares by ARI and the assignment of the Loan pursuant to the Conditional Agreement. The Consideration Shares (being 600,000,000 new shares) represents approximately 11.26% of the enlarged issued share capital of the Company upon allotment and issue of the Consideration Shares.

GCL is the legal and beneficial owner of the entire issued share capital of Upper China Industrial Limited which in turn owns 49% equity interests in 灤平縣偉源礦業有限責任公司 (Lan Ping Xian Wei Yuan Mining Co. Ltd.) (the “ Joint Venture Company ”) which is engaged in the business of iron ore mining and production of iron ore materials in the PRC. The main assets of the Joint Venture Company are the iron ore mine and its related infrastructure. In accordance with the business licence of the Joint Venture Company, the business operation of the Joint Venture Company includes exploitation of iron ore, processing and selling of iron ore and iron ore concentrates, selling of steel materials, mining machinery and accessories. Completion of the Conditional Agreement is subject to a number of conditions being fulfilled on or before 13 October 2008, or such other date as may be agreed by ARI and Leaping Far. Other particulars in relation to the transactions contemplated under the Conditional Agreement were disclosed in the Company’s circular of 5 August 2008. The Conditional Agreement was terminated on 3 October 2008.

The performance of the Group’s activities in trading and investment of listed securities is measured by mark-to-market accounting standards and, therefore, the continued global financial turmoil will adversely affect the Group’s results for the second half of 2008. This, coupled with the global financial crisis, economic downturn in the US and the slowing down of the economy in China, will adversely affect the Group principal business activities in trading and investment of listed securities and trading in base metals and necessitate a more cautious view to be taken by the Group in its trading and investments activities. With a strong and healthy financial position, however, the Group is able to take advantage of such market conditions when grossly undervalued investments and business opportunities arise.

– 99 –

APPENDIX II PRO FORMA FINANCIAL INFORMATION OF THE GROUP

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

==> picture [145 x 40] intentionally omitted <==

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

ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES

TO THE DIRECTORS OF APAC RESOURCES LIMITED

We report on the unaudited pro forma statement of assets and liabilities of APAC Resources Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) set out on pages 102 to 103 under the headings of “Pro Forma Financial Information of the Group” in Appendix II of the Company’s circular dated 12 December 2008, in connection with the taking up of the shareholding commitment of 32,829,629 new shares and the underwriting commitment of 82,900,000 new shares, (collectively, the Aggregated Commitments) under an underwritten rights issue to be conducted by Mount Gibson Iron Limited (the “Circular”). The unaudited pro forma statement of assets and liabilities has been prepared by the directors of the Company, for illustrative purposes only, to provide information about how the taking up of the Aggregated Commitments might have affected the relevant financial information of the Group. The basis of preparation of the unaudited pro forma statement of assets and liabilities is set out on pages 102 to 103 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 statement of assets and liabilities 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 statement of assets and liabilities 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 statement of assets and liabilities 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 statement of assets and liabilities with the directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

– 100 –

APPENDIX II PRO FORMA FINANCIAL INFORMATION OF THE GROUP

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 statement of assets and liabilities 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 statement of assets and liabilities as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

The unaudited pro forma statement of assets and liabilities 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 2008 or any future date.

Opinion

In our opinion:

a. the unaudited pro forma statement of assets and liabilities 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 statement of assets and liabilities as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

Graham H.Y. Chan & Co.

Certified Public Accountants (Practising)

Hong Kong 12 December 2008

– 101 –

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following is the unaudited pro forma statement of assets and liabilities of the Group prepared in accordance with the Listing Rules for the purpose of illustrating the effect of taking up of the shareholding commitment of 32,829,629 new shares (“Shareholding Commitment’) and the underwriting commitment of 82,900,000 new shares (“Underwriting Commitment”) (collectively, the Aggregated Commitments) under an underwritten rights issue to be conducted by Mount Gibson Iron Limited on the financial position of the Group as if the Aggregated Commitments had been completed on 30 June 2008. As it is prepared for illustrative purpose only, and because of its nature, it may not give a true picture of the financial position of the Group following the completion of the Aggregated Commitments.

The unaudited pro forma statement of assets and liabilities of the Group is prepared based on the unaudited condensed consolidated balance sheet of the Group as at 30 June 2008 as set out in Appendix I to the circular and the adjustments described below:

Non-Current Assets Property, plant and equipments Available-for-sale investments Current Assets Trade and other receivables Trading securities Pledged bank deposits Bank balances and cash Current Liabilities Trade and other payables Margin financing loan Tax payables Net Current Assets Net Assets	Unaudited condensed consolidated balance sheet as at 30 June 2008 Pro forma adjustments for Aggregated Commitments HK$’000 HK$’000 NB 1,977 3,250,341 334,196 3,252,318 231,008 1,437,784 23,409 88,979 329,877 319,877 2,087,648 9,603 – 28,762 758 10,361 2,077,287 5,329,605	Unaudited pro forma statement of assets and liabilities of the Group as at 30 June 2008 after the Aggregated Commitments HK$’000 1,977 3,584,537
		3,586,514 231,008 1,461,193 88,979 10,000
		1,791,180
		9,603 28,762 758
		39,123
		1,752,057
		5,338,571

– 102 –

APPENDIX II

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

NB: The adjustments reflect the (i) cost of acquisition of HK$101,444,000 in respect of the Shareholding Commitment (HK$78,035,000 as available-for-sale investment and HK$23,409,000 as trading securities) and HK$256,161,000 in respect of the Underwriting Commitment (as available-for-sale investment) and (ii) the income of the underwriting commission (HK$8,966,000) for the Underwriting Commitment. Total consideration (after deduction of underwriting commission) will be partly financed by cash and partially financed by margin financing loan.

After due and careful enquiry, the Directors are of the opinion that upon the completion of the Aggregated Commitments 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 for the period ending 12 months from the date of this circular. The above unaudited pro forma statement of assets and liabilities of the Group is a hypothetical scenario because of the uncertainty of allocation of sources of funding as at the date of preparation and with the objective to minimize its funding costs.

– 103 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

Pursuant to Rule 14.67 (4)(a)(i) of the Listing Rules, a circular issued in relation to a major transaction (the subscription of the MG Shares in respect of the Shareholding Commitment and the Underwriting Commitment in aggregate in this case) 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 ASX. Accordingly, it is obliged to comply with ASX 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 statements for the three years ended 30 June 2008 in full compliance with Australian accounting standards (including Australian equivalents to International Financial Reporting Standards), the Australian Corporations Act and the listing rules of ASX. 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 (“ HKFRS ”).

Further, the Company being a passive investor has no means to access Mount Gibson’s books and records and necessary information for the purposes of preparing the accountant’s report on Mount Gibson for the three years ended 30 June 2008. Without detailed financial information from Mount Gibson, the Company and its accountants cannot prepare the line-by-line reconciliation of income statements, balance sheet, statement of changes in equity and cash flow statements of Mount Gibson from Australian accounting standards to HKFRS.

The Company’s equity interest in Mount Gibson before and after taking up the Shareholding Commitment is and will be partly classified as trading securities (short term) and partly classified as available-for-sale investment (long term). The additional equity interest in Mount Gibson acquired as a result of taking up the Underwriting Commitment will be classified as available-forsale investment (long term). Trading securities are stated at fair value initially. At each balance sheet date the fair value is re-measured, with any resultant gain or loss being recognised in the profit and loss. Upon disposal, the difference between the net sales proceeds and the carrying value is included in the income statement. Available-for-sale investments are recognised at cost initially. Subsequent to initial recognition, available-for-sale investments 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 from available-for-sale investments are recognised in profit or loss when the entity’s right to receive payment is established. Therefore, the results of the available-for-sale investments are accounted for by the Group on the basis of dividends received and receivable while any unrealised gain and losses (including transaction costs on acquisition) arising from changes in the fair value are recognized in investment revaluation reserve.

– 104 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

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 2008 have been extracted in this circular.

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), 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 III, 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 14.67(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. The wavier was granted by the Stock Exchange on 2 December 2008 on the conditions that (1) the alternative disclosures as set out in sub-paragraphs (a) to (e) below will be included in this circular; and (2) this circular will be issued and despatched on or before 31 December 2008.

In replacement of the accountants’ report of Mount Gibson, the following contents have been included in this circular:

(a) reasons for not including an accountants’ report or preparing a reconciliation of the financial figures of Mount Gibson from Australian accounting standards to HKFRS;
(b) the fact that Mount Gibson’s financial statements for the three years ended 30 June 2008 have not been qualified;
(c) the audited consolidated financial statements of Mount Gibson for the three years ended 30 June 2008 prepared in accordance with Australian accounting standards (as extracted from the 2006, 2007 and 2008 annual reports of Mount Gibson);
(d) the directors’ reports and auditors’ reports of Mount Gibson for the three years ended 30 June 2008 (as extracted from the 2006, 2007 and 2008 annual reports of Mount Gibson); and
(e) letter from the reporting accountants of the Company summarising the principal differences between Australian accounting standards to HKFRS and the accounting policies between the Company and Mount Gibson.

The auditors of Mount Gibson is Ernst & Young. The financial statements of Mount Gibson for the three years ended 30 June 2008 have not been qualified by the auditors of Mount Gibson.

– 105 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

1. The following is the audited consolidated financial statements of Mount Gibson for the year ended 30 June 2008 prepared in accordance with Australian accounting standards which is extracted from the 2008 annual report of Mount Gibson (all monetary amounts are stated in A$).

CONSOLIDATED INCOME STATEMENT

For the year ended 30 June 2008

CONSOLIDATED 2008 2007 $’000 $’000 432,674 162,748 2,500 2,256 435,174 165,004 (244,635) (108,955) 190,539 56,049 3,881 2,805 (15,030) (13,020) – (1,506) (38) (8) 179,352 44,320 (15,495) (2,067) 163,857 42,253 (50,513) (13,209) 113,344 29,044 – 18,721 113,344 47,765 14.25 7.53 14.12 7.43 14.25 4.58 14.12 4.52	COMPANY	COMPANY
2008 $’000 432,674 2,500 435,174 (244,635) 190,539 3,881 (15,030) – (38) 179,352 (15,495) 163,857 (50,513) 113,344 – 113,344 14.25 14.12 14.25 14.12	2008 $’000 – 3,712 3,712 – 3,712 – (2,712) – – 1,000 (9,488) (8,488) 2,742 (5,746) – (5,746)	2007 $’000 – 2,840
		2,840 –
		2,840 1 (1,543 (1,506 –
		(208 (3
		(211 (474
		(685 91
		(594

– 106 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

CONSOLIDATED BALANCE SHEET

As at 30 June 2008

CONSOLIDATED 2008 2007 $’000 $’000 48,658 60,798 83,436 9,848 71,448 34,581 1,570 1,049 25,161 5,065 230,273 111,341 1,000 – 1,113 1,805 – – 188,497 187,768 25,919 9,027 447,235 370,684 – 11,875 663,764 581,159 894,037 692,500 73,406 64,314 12,415 98,754 342 – 1,880 1,172 88,043 164,240 – – 19,112 18,470 145,858 55,481 44,532 – 209,502 73,951 297,545 238,191 596,492 454,309 397,197 386,766 171,205 57,861 28,090 9,682 596,492 454,309	COMPANY	COMPANY
2008 $’000 48,658 83,436 71,448 1,570 25,161 230,273 1,000 1,113 – 188,497 25,919 447,235 – 663,764 894,037 73,406 12,415 342 1,880 88,043 – 19,112 145,858 44,532 209,502 297,545 596,492 397,197 171,205 28,090 596,492	2008 $’000 4,562 38 – 1 1,559 6,160 116,947 1,113 344,509 5 – – 53,840 516,414 522,574 2,114 – 342 – 2,456 18,861 – 101,607 – 120,468 122,924 399,650 397,197 (12,306) 14,759 399,650	2007 $’000 351 490 – 313 –
		1,154
		54,722 1,805 338,432 5 – – 36,894
		431,858
		433,012
		14,214 – – –
		14,214
		29,398 – – –
		29,398
		43,612
		389,400

		386,766 (6,560) 9,194
		389,400

– 107 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 30 June 2008

CONSOLIDATED 2008 2007 $’000 $’000 357,139 154,441 (299,319) (144,931) (12,067) (6,420) 45,753 3,090 2,410 2,644 – 50,354 – – (14,131) – – 3,652 684 3,767 (19,118) (36,834) (14,911) (4,578) (18,102) (37,594) – 295 (168) – (1,000) – – – 236 (280) (64,100) (18,574) 10,367 2,010 105,000 73,404 (17,057) (6,529) (87,095) – (5,008) – 6,207 68,885 (12,140) 53,401 60,798 7,397 48,658 60,798	COMPANY	COMPANY
2008 $’000 357,139 (299,319) (12,067) 45,753 2,410 – – (14,131) – 684 (19,118) (14,911) (18,102) – (168) (1,000) – 236 (64,100) 10,367 105,000 (17,057) (87,095) (5,008) 6,207 (12,140) 60,798 48,658	2008 $’000 – (2,479) (6,440) (8,919) 247 – – (14,131) – – – – – – (168) (1,000) (82,545) 236 (97,361) 10,367 105,000 – – (4,876) 110,491 4,211 351 4,562	2007 $’000 – (1,509) (111)
		(1,620)
		332 24,892 (6,275) – – – – – – 295 – – (19,148) (280)
		(184)
		2,010 – – – –
		2,010
		206 145
		351

– 108 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 30 June 2008

	Attributable to Equity Holders of the Parent	Attributable to Equity Holders of the Parent	Attributable to Equity Holders of the Parent	Total Equity
Issued Capital $’000 86,851 – – – – – – – – – – 297,905 2,010 – 386,766	(Accumulated Losses)/ Retained Earnings $’000 10,096 – – – – – – – – 47,765 47,765 – – – 57,861	Share Based Payments Reserve Net Unrealised Gains/(Losses) Reserve $’000 $’000 5,954 (1,790) – 1,032 – 1,506 – 4,506 – (1,291) – – – 2,957 – 2,957 5,753 – – 2,957 5,753 – – – – – – 8,911 3,963	Other Reserves $’000 (3,691) – – – – (386) 885 – 499 – 499 – – – (3,192)	$’000 109,196

				1,032 1,506 4,506 (1,291) (386) 885 2,957
				9,209 47,765
				56,974 297,905 2,010 (11,776)
				454,309

– 109 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONTINUED

For the year ended 30 June 2008

	Attributable	to Equity Holders of the Parent	to Equity Holders of the Parent	Total Equity
Issued Capital $’000 386,766 – – – – – – – 64 10,367 397,197	(Accumulated Losses)/ Retained Earnings $’000 57,861 – – – – – 113,344 113,344 – – 171,205	Share Based Payments Reserve $’000 8,911 – – – 5,599 5,599 – 5,599 – – 14,510	Net Unrealised Gains/(Losses) Reserve $’000 3,963 (856) 19,607 (5,942) – 12,809 – 12,809 – – 16,772	$’000 454,309

				(856) 19,607 (5,942) 5,599
				18,408 113,344
				131,752 64 10,367
				596,492

– 110 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONTINUED

For the year ended 30 June 2008

Attributable to Equity	Attributable to Equity	Holders of the Parent Share Based Payments Reserve Net Unrealised Gains/ (Losses) Reserve $’000 $’000 5,954 (2,255) 2,957 – – 1,032 – 1,506 2,957 2,538 – – 2,957 2,538 – – – – 8,911 283 8,911 283 5,599 – – (856) – 1,174 – (352) 5,599 (34) – – 5,599 (34) – – – – 14,510 249	Total Equity
Issued Capital $’000 86,851 – – – – – – 297,905 2,010 386,766 386,766 – – – – – – – 64 10,367 397,197	Accumulated Losses $’000 (5,966) – – – – (594) (594) – – (6,560) (6,560) – – – – – (5,746) (5,746) – – (12,306)	Share Based Payments Reserve $’000 5,954 2,957 – – 2,957 – 2,957 – – 8,911 8,911 5,599 – – – 5,599 – 5,599 – – 14,510	$’000 84,584

			2,957 1,032 1,506
			5,495 (594)
			4,901 297,905 2,010
			389,400

			389,400

			5,599 (856) 1,174 (352)
			5,565 (5,746)
			(181) 64 10,367
			399,650

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

NOTES TO THE CONSOLIDATED FINANCIAL REPORT

For the year ended 30 June 2008

1. Summary of significant accounting policies

(a) Corporate information

The financial report of Mount Gibson for the year ended 30 June 2008 was authorised for issue in accordance with a resolution of the directors on 11 August 2008.

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

The nature of operations and principal activities of the consolidated entity are the mining of hematite deposits at Tallering Peak and Koolan Island, construction and development of Extension Hill project, 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 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 Mount Gibson under ASIC Class Order 98/0100. Mount Gibson is an entity to which the class order applies.

(c) 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.

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APPENDIX III

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.

Controlled entities are consolidated from the date on which control is transferred to the consolidated entity and cease to be consolidated from the date on which control is transferred out of the consolidated entity.

Where there is loss of control of a controlled entity, the consolidated financial statements include the results for the part of the reporting period during which Mount Gibson has control.

Minority interests represent the interests in Asia Iron Holdings Limited, not held by the consolidated entity.

Investments in controlled entities are carried in the balance sheet of Mount Gibson at cost less impairment losses, if any.

(d) Compliance with IFRS

The financial report complies with Australian Accounting Standards and International Financial Reporting Standards (“IFRS”).

(e) New accounting standards and interpretations

Except for the amendments arising from AASB 2007-4: Amendments to Australian Accounting Standards arising from ED 151 and Other Amendments, which the consolidated entity has early adopted, Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by the consolidated entity for the annual reporting period ending 30 June 2008.

These are outlined in the table on the following three pages.

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APPENDIX III

					Application
			Impact on	Application	Date for
			consolidated entity	Date of	consolidated
Reference	Title	Summary	financial report	Standard	entity
AASB Int. 12 (Revised)	Determining whether an	The revised Interpretation	No change to accounting	1 January 2008	1 July 2008
	Arrangement contains	specifically scopes out	policy required.
	a Lease	arrangements that fall within the	Therefore no impact.
		scope of
		AASB Interpretation 12.
AASB 8 and AASB 2007-3	Operating Segments and	New standard replacing AASB	AASB 8 is a disclosure standard	1 January 2009	1 July 2009
	consequential amendments to	114 Segment Reporting, which	so will have no direct impact
	other Australian Accounting	adopts a management reporting	on the amounts included in the
	Standards	approach to segment reporting.	consolidated entity’s financial
			statements, although it may have
			an impact on the consolidated
			entity’s segment disclosure.
AASB 123 (Revised) and	Borrowing costs and	The amendments to AASB 123	No change to accounting policy	1 January 2009	1 July 2009
AASB 2007-6	consequential amendments to	require that all borrowing costs	required.
	other Australian Accounting	associated with a qualifying asset	Therefore no impact.
	Standards	be capitalised.
AASB 101 (Revised) and	Presentation of Financial	Introduces a statement of	These amendments are	1 January 2009	1 July 2009
AASB 2007-8	Statements and consequential	comprehensive income. Other	only expected to affect the
	amendments to other Australian	revisions include impacts	presentation of the consolidated
	Accounting Standards	on the presentation of items	entity’s financial report and will
		in the statement of changes	not have a direct impact on the
		in equity, new presentation	measurement and recognition
		requirements for restatements or	of amounts disclosed in the
		reclassifications of items in the	financial report. The consolidated
		financial statements, changes in	entity has not determined at this
		the presentation requirements	stage whether to present a single
		for dividends and changes to the	statement of comprehensive
		titles of the financial statements.	income or two separate
			statements.
AASB 2008-1	Amendments to Australian	The amendments clarify the	The consolidated entity	1 January 2009	1 July 2009
	Accounting Standard	definition of ‘vesting conditions’,	has share-based payment
	– Share-based Payments: Vesting	introducing the term ‘non-	arrangements that may be
	Conditions and Cancellations	vesting conditions’ for conditions	affected by these amendments.
		other than vesting conditions as	However, the consolidated entity
		specifically defined and prescribe	has not yet determined the extent
		the accounting treatment of	of the impact,
		an award that is effectively	if any.
		cancelled because a non-vesting
		condition is not satisfied.

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FINANCIAL INFORMATION ON MOUNT GIBSON

					Application
			Impact on	Application	Date for
			consolidated entity	Date of	consolidated
Reference	Title	Summary	financial report	Standard	entity
AASB 2008-2	Amendments to Australian	The amendments provide	These amendments are not	1 January 2009	1 July 2009
	Accounting Standards –	a limited exception to the	expected to have any impact on
	Puttable Financial Instruments	definition of a liability so as	the consolidated entity’s financial
	and Obligations arising on	to allow an entity that issues	report as the consolidated entity
	Liquidation	puttable financial instruments	does not have on issue or expect
		with certain specified features,	to issue any puttable financial
		to classify those instruments	instruments as defined by the
		as equity rather than financial	amendments.
		liabilities.
AASB 3 (Revised)	Business Combinations	The revised standard introduces	The consolidated entity may	1 July 2009	1 July 2009
		a number of changes to the	enter into some business
		accounting for business	combinations during the
		combinations, the most	next financial year and may
		significant of which allows	therefore consider early
		entities a choice for each	adopting the revised standard.
		business combination entered	The consolidated entity has
		into – to measure a non-	not yet assessed the impact of
		controlling interest (formerly	early adoption, including which
		a minority interest) in the	accounting policy to adopt.
		acquiree either at its fair value
		or at its proportionate interest in
		the acquiree’s net assets. This
		choice will effectively result in
		recognising goodwill relating to
		100% of the business (applying
		the fair value option) or
		recognising goodwill relating to
		the percentage interest acquired.
		The changes apply prospectively.
AASB 127 (Revised)	Consolidated and Separate	Under the revised standard, a	If the consolidated entity changes	1 July 2009	1 July 2009
	Financial Statements	change in the ownership interest	its ownership interest in existing
		of a subsidiary (that does not	subsidiaries in the future, the
		result in loss of control) will	change will be accounted for as
		be accounted for as an equity	an equity transaction. This will
		transaction.	have no impact on goodwill, nor
			will it give rise to a gain or a
			loss in the consolidated entity’s
			income statement.
AASB 2008-3	Amendments to Australian	Amending standard issued as	Refer to AASB 3 (Revised) and	1 July 2009	1 July 2009
	Accounting Standards arising	a consequence of revisions to	AASB 127 (Revised) above.
	from AASB 3 and AASB 127	AASB 3 and AASB 127.

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FINANCIAL INFORMATION ON MOUNT GIBSON

					Application
			Impact on	Application	Date for
			consolidated entity	Date of	consolidated
Reference	Title	Summary	financial report	Standard	entity
Amendments to International Financial	Cost of an Investment in a	The main amendments of	Recognising all dividends	1 January 2009	1 July 2009
Reporting Standards	Subsidiary, Jointly Controlled	relevance to Australian entities	received from subsidiaries,
	Entity or Associate	are those made to IAS 27	jointly controlled entities and
		deleting the ‘cost method’ and	associates as income will likely
		requiring all dividends from a	give rise to greater income
		subsidiary, jointly controlled	being recognised by the parent
		entity or associate to be	entity after adoption of these
		recognised in profit or loss in	amendments. In addition, if
		an entity’s separate financial	the consolidated entity enters
		statements (i.e., parent company	into any group reorganisation
		accounts). The distinction	establishing new parent
		between pre-and post-acquisition	entities, an assessment will
		profits is no longer required.	need to be made to determine
		However, the payment of such	if the reorganisation meets
		dividends requires the entity	the conditions imposed to be
		to consider whether there is an	effectively accounted for on a
		indicator of impairment. AASB	‘carry-over basis’ rather than at
		127 has also been amended to	fair value.
		effectively allow the cost of an
		investment in a subsidiary, in
		limited reorganisations, to be
		based on the previous carrying
		amount of the subsidiary (that is,
		share of equity) rather than its
		fair value.
Amendments to International Financial	Improvements to IFRSs	The improvements project is	The consolidated entity has not	1 January 2009	1 July 2009
Reporting Standards		an annual project that provides	yet determined the extent of the	except for
		a mechanism for making	impact of the amendments, if	amendments to
		non-urgent, but necessary,	any.	IFRS 5, which are
		amendments to IFRSs. The		effective from 1
		IASB has separated the		July 2009
		amendments into two parts:
		Part 1 deals with changes the
		IASB identified resulting in
		accounting changes; Part II
		deals with either terminology or
		editorial amendments that the
		IASB believes will have minimal
		impact.

Adoption of new accounting standard

The consolidated entity has adopted AASB 7 Financial Instruments: Disclosures and all consequential amendments which became applicable on 1 January 2007. The adoption of this standard has only affected the disclosure in these financial statements. There has been no affect on profit and loss or the financial position of the entity.

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APPENDIX III

(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.

(g) 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.

(h) Trade and other receivables

Trade receivables are recognised and carried at original invoice amount less any provision for impairment.

A provision for impairment of trade receivables is made when there is objective evidence that the consolidated entity will not be able to collect the debts. Indicators of impairment would include financial difficulties of the debtor, likelihood of the debtor’s insolvency and default in payment. Any impairment is recognised in the Income Statement.

The majority of sales revenue is invoiced and received in US dollars.

Generally, on presentation of shiploading documents and provisional invoice, the customer settles 90%-95% of the provisional sales invoice value within 10 days of receipt of shiploading documents and provisional invoice and the remaining 5%-10% is settled within 30 days of presentation of the final invoice. The final price is adjusted based on the final analyses of weight, chemical and physical composition, and moisture content.

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APPENDIX III

(i) 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.

Consumable materials for plant and equipment, which were previously recognised directly in the profit and loss, are now recognised as inventory. Consumable stocks are carried at the lower of cost and net realisable value.

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.

(j) Property, plant and equipment

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

Depreciation

The cost of owned 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. Plant and equipment under hire purchase or finance lease directly engaged in mining operations is written down to its residual value over the period of the hire purchase or finance lease. Other assets which are depreciated or amortised on a basis other than the units-of-production method typically are depreciated on a straight-line basis over the estimated useful life of the asset as follows:

Buildings

5-20 years

Motor vehicles

4-5 years

Office equipment

3-5 years

Leasehold improvements

Shorter of lease term or useful life of 5-10 years

Koolan Island major fleet hire purchase

5 years

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APPENDIX III

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.

(k) 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, including waste development, 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 and waste development costs to be incurred in accessing the reserves and measured resources are taken into account in determining amortisation charges. The unitsof-production method results in an amortisation charge proportional to the depletion of the economically recoverable mineral resources (comprising proven and probable reserves plus where appropriate, a portion of 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.

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APPENDIX III

(l) Acquisition, exploration, evaluation and development costs

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.

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.

(m) 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.

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.

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APPENDIX III

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.

(n) 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 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.

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APPENDIX III

(o) Financial assets

Financial assets are classified into the following specified categories: ‘held-to-maturity’ investments, ‘loans and receivables’, and ‘available-for-sale financial assets’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or, where appropriate, a shorter period.

[i] Held-to-maturity investments

Commercial bills and bonds with fixed or determinable payments and fixed maturity dates that the consolidated entity has the positive intent and ability to hold to maturity are classified as held-tomaturity investments. Held-to-maturity investments are recorded at amortised cost using the effective interest method less impairment, with revenue recognised on an effective yield basis.

[ii] Loans and receivables

Trade receivables, loans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as ‘loans and receivables’.

Trade receivables, loans and other receivables are recorded at amortised cost, using the effective interest rate method, less impairment. Interest is recognised by applying the effective interest rate method.

[iii] Available-for-sale financial assets

Available-for-sale financial assets are non derivatives that are either designated as available for sale or not classified in any of the other categories. They are included in Non-Current Assets unless the consolidated entity intends to dispose of the investment within 12 months of the balance sheet date.

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.

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APPENDIX III

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.

(p) Non-current assets and disposal groups held for sale and discontinued operations

Non-current assets and disposal groups are classified as held for sale and measured at the lower of their carrying amount and fair value less costs to sell if their carrying amount will be recovered principally through a sale transaction. They are not depreciated or amortised. For an asset or disposal group to be classified as held for sale, it must be available for immediate sale in its present condition and its sale must be highly probable.

An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset (or disposal group), but not in excess if any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset (or disposal group) is recognised at the date of derecognition.

A discontinued operation is a component of the entity that has been disposed of or is classified as held for sale and that represents a separate major line of business or geographical area of operations, is part of a single coordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately on the face of the income statement.

(q) 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

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APPENDIX III

(r) 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.

(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.

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”).

Options

There is currently a directors, Officers, Employees and Other Permitted Persons option plan.

The cost of these options is measured by reference to the fair value at the date at which they are granted. The fair value is determined by using a binomial model.

In valuing these options, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Mount Gibson.

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APPENDIX III

Performance rights

The cost of these performance rights is measured by reference to the fair value at the date at which they are granted. The fair value is determined using a Monte-Carlo simulation model.

The vesting of these performance rights is subject to a relative Total Shareholder Return (“TSR”) hurdle to be measured at 30 June 2010 and 31 December 2010. Mount Gibson’s TSR performance will be ranked relative to a comparator group consisting of resource companies listed on ASX.

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 as the effect of these conditions is included in the determination of fair value at grant date.

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

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

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

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

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APPENDIX III

(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) Borrowing costs

Borrowing costs are recognised as an expense when incurred.

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset.

(w) Leases

The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

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.

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APPENDIX III

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 in the income statement on a straight-line basis over the lease term.

Contingent rentals are recognised as an expense in the financial year in which they are incurred.

Finance Leases

Leases which effectively transfer substantially all the risks and benefits incidental to ownership of the leased item to the consolidated entity are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments.

Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the income statement.

Capitalised leased assets are depreciated over the estimated useful life of the asset or where appropriate, over the estimated life of the mine.

The cost of improvements to or on leasehold property is capitalised, disclosed as leasehold improvements, and amortised over the unexpired period of the lease or the estimated useful lives of the improvements, whichever is the shorter.

(x) Revenue

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

Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and can be measured reliably.

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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.

(y) 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

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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.

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

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

(z) 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.

Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority.

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(aa) Derivative financial instruments and hedging

The consolidated entity uses foreign currency contracts to hedge its risks associated with foreign currency fluctuations and interest rate swaps to hedge against interest rate movements. 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.

Cash flow hedges – forward foreign currency contracts

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.

The consolidated entity tests each of the designated cash flow hedges for effectiveness on a monthly basis both retrospectively and prospectively using regression analysis. A minimum of 50 data points is used for regression analysis and if the testing falls within the 80:125 range, the hedge is considered highly effective and continues to be designated as a cash flow hedge.

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APPENDIX III

At each balance date, the consolidated entity measures ineffectiveness using the ratio offset method. For foreign currency cash flow hedges if the risk is over hedged, the ineffective portion is taken immediately to other income or expense in the income statement.

Cash flow hedges – interest rate swaps

In relation to interest swaps hedged against fixed rate borrowings, the settlement dates coincide with the dates on which interest is payable on the underlying debt. All interest rate swaps matched directly against the appropriate loans and interest expense are considered highly effective, and are settled on a net basis. The swaps are measured at fair value and all gains and losses attributable to the hedged risk are taken directly to equity and reclassified into profit and loss when the interest expense is recognised. Any ineffective portion is taken to other expenses in the income statement.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting.

At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is kept in equity until the forecasted transaction occurs.

If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement.

(bb) Financial instruments issued by the consolidated entity

[i] Debt and equity instruments

Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement.

[ii] Transaction costs on the issue of equity instruments

Transaction costs arising on the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the issue of those equity instruments and which would not have been incurred had those instruments not been issued.

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(cc) Financial liabilities

[i] Financial liabilities at fair value through profit and loss

Financial liabilities at fair value through profit and loss are stated at fair value, with any resultant gain or loss recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability.

[ii] Other financial liabilities

Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis.

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.

(dd) 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.

(ee) 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.

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Diluted earnings per share is calculated as net profit attributable to members of Mount Gibson, 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.

(ff) 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(m). 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 resources and the production capacity of the operations 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. The consolidated entity uses proved and probable reserves to depreciate assets on a unit of production basis. However where a mineral property has been acquired and an amount has been attributed to the fair value of resources not yet designated as reserves the additional resources have been taken into account. When these factors change or become known in the future, such differences will impact pretax profit and carrying values of assets.

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[iii] Determination of mineral resources and ore reserves

The consolidated entity estimates its mineral resources and ore reserves in accordance with the Australian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves 2004 (the ‘JORC code’). The information on mineral resources and ore reserves were prepared by or under the supervision of Competent Persons as defined in the JORC code. The amounts presented are based on the mineral resources and ore reserves determined under the JORC code.

There are numerous uncertainties inherent in estimating mineral resources and ore reserves and assumptions that are valid at the time of estimation may change significantly when new information becomes available.

Changes in the forecast prices of commodities, exchange rates, production costs or recovery rates may change the economic status of reserves and may, ultimately, result in the reserves being restated. Such changes in the reserves could impact on depreciation and amortisation rates, asset carrying values, deferred stripping costs and provisions for decommissioning and restoration.

[iv] Impairment of capitalised exploration and evaluation expenditure

The future recoverability of capitalised exploration and evaluation expenditure is dependent on a number of factors, including whether the consolidated entity decides to exploit the related lease itself or, if not, whether it successfully recovers the related exploration and evaluation asset through sale.

Factors which could impact the future recoverability include the level of proved, probable and inferred mineral resources, future technological changes which could impact the cost of mining, future legal changes (including changes to environmental restoration obligations) and changes to commodity prices.

To the extent that capitalised exploration and evaluation expenditure is determined not to be recoverable in the future, this will reduce profits and net assets in the period in which this determination is made.

In addition, exploration and evaluation expenditure is capitalised if activities in the area of interest have not yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves. To the extent that it is determined in the future that this capitalised expenditure should be written off, this will reduce profits and net assets in the period in which this determination is made.

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[v] Impairment of capitalised mine development expenditure

The future recoverability of capitalised mine development expenditure is dependent on a number of factors, including the level of proved, probable and inferred mineral resources, future technological changes which could impact the cost of mining, future legal changes (including changes to environmental restoration obligations) and changes to commodity prices.

To the extent that capitalised mine development expenditure is determined not to be recoverable in the future, this will reduce profits and net assets in the period in which this determination is made.

[vi] Impairment of property, plant and equipment

Property, plant and equipment is reviewed for impairment if there is any indication that the carrying amount may not be recoverable. Where a review for impairment is conducted, the recoverable amount is assessed by reference to the higher of ‘value in use’ (being the net present value of expected future cash flows of the relevant cash generating unit) and ‘fair value less costs to sell’.

In determining value in use, future cash flows are based on:

Estimates of the quantities of ore reserves and mineral resources for which there is a high degree of confidence of economic extraction;
Future production levels;
Future commodity prices; and
Future cash costs of production and capital expenditure.

Variations to the expected future cash flows, and timing thereof, could result in significant changes to any impairment losses recognised, if any, which could in turn impact future financial results.

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[vii] Deferred Waste

The consolidated entity has adopted a policy of deferring waste development costs and amortising them in accordance with the life-of-mine strip ratio. Significant judgement is required in determining this ratio for each mine. Factors that are considered include:

Any proposed changes in the design of the mine;
Estimates of the quantities of ore reserves and mineral resources for which there is a high degree of confidence of economic extraction;
Future production levels;
Future commodity prices; and
Future cash costs of production and capital expenditure.

[viii] Recoverability of potential deferred income tax assets

The consolidated entity recognises deferred income tax assets in respect of tax losses to the extent that the future utilisation of these losses is considered probable. Assessing the future utilisation of these losses requires the consolidated entity to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecast cash flows from operations and the application of existing tax laws. To the extent that future cash flows and taxable income differ significantly from estimates, this could result in significant changes to the deferred income tax assets recognised, which would in turn impact future financial results.

[ix] Share-based payment transactions

The consolidated entity measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted and applying an estimated probability that they will vest. The fair value is determined by an external valuer using a binomial model, with the assumptions detailed in Note 25. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact expenses and equity.

[x] Financial guarantees

The fair value of financial guarantee contracts have been assessed using the interest differential approach.

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FINANCIAL INFORMATION ON MOUNT GIBSON

CONSOLIDATED 2008 2007 $’000 $’000 409,349 156,020 23,325 6,728 432,674 162,748 2,500 2,256 – – 2,500 2,256 664 – 54 – 3,163 2,764 – 41 3,881 2,805	COMPANY	COMPANY
2008 $’000 409,349 23,325 432,674 2,500 – 2,500 664 54 3,163 – 3,881	2008 $’000 – – – 247 3,465 3,712 – – – – –	2007 $’000 – –
		–
		332 2,508
		2,840

		– – – 1
		1

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FINANCIAL INFORMATION ON MOUNT GIBSON

11,142 4,370 – (3,010) 11,142 1,360 4,353 2,122 – (1,446) 4,353 676 – 31 15,495 2,067 8,902 2,078 10,793 4,103 5,281 885 48 51 25,024 7,117 (16) (2,400) 25,008 4,717 CONSOLIDATED 2008 2007 $’000 $’000	COMPANY	COMPANY
11,142 – 11,142 4,353 – 4,353 – 15,495 8,902 10,793 5,281 48 25,024 (16) 25,008 2008 $’000	9,488 – 9,488 – – – – 9,488 – – – – – – – 2008 $’000	3 – 2007 $’000
		3

		– –
		–
		–
		3

		– – – –
		– –
		–

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APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

Amortisation of deferred waste Amortisation of other mine properties Acquisition accrual reversal Share-based payments expense Operating lease rental – minimum lease payments Exploration expenditure written off Government royalties Salaries, wages expense and other employee benefits Net loss on sale of plant and equipment Bad debts Net (gain)/loss on cash flow hedges Net loss on disposal of available-for-sale- financial-assets Impairment of available-for-sale financial assets NOTES	135,989 55,508 29,358 3,141 (5,319) – 5,599 2,957 25,988 19,766 38 8 31,048 10,702 29,312 18,451 – 501 – 44 (390) 511 3 183 – 1,506 CONSOLIDATED 2008 2007 $’000 $’000	COMPANY
		– – – – – – – – – – – – – – – – – – – 44 (286) – – 183 – 1,506 2008 2007 $’000 $’000

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FINANCIAL INFORMATION ON MOUNT GIBSON

CONSOLIDATED 2008 2007 $’000 $’000 – – 50,513 21,286 – – 50,513 21,286 – – (48) 164 5,590 1,292 352 – 5,894 1,456	COMPANY	COMPANY
2008 $’000 – 50,513 – 50,513 – (48) 5,590 352 5,894	2008 $’000 – (2,742) – (2,742) – (64) – 352 288	2007 $’000 – 474 –
		474

		– – – –
		–

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APPENDIX III

163,857 69,052 49,157 20,715 – (774) – – 1 452 1,683 893 233 – (561) – 50,513 21,286 30.8% 30.8% 50,513 13,209 – 8,077 50,513 21,286 CONSOLIDATED 2008 2007 $’000 $’000	COMPANY	COMPANY
163,857 49,157 – – 1 1,683 233 (561) 50,513 30.8% 50,513 – 50,513 2008 $’000	(8,488) (2,546) – – 1 – (124) (73) (2,742) (32.3%) (2,742) – (2,742) 2008 $’000	(120) 2007 $’000
		(36) – 58 452 – – –
		474

		(395%) 474 –
		474

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APPENDIX III

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 group allocation approach. 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 Iron Limited. In this regard Mount Gibson has assumed the benefit of tax losses from controlled entities in the current year of $14,492,208 (2007: $26,020,750) 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.

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Recognised deferred tax assets and liabilities

Deferred tax assets and liabilities are attributable to the following:

Assets 2008 2007 $’000 $’000 (174) (131) (1,009) (718) (6,392) (10,036) – – – (105) – – (327) (275) (103) – – – – – (4,284) (999) – – – – – 4,266 (6,298) (5,893) (53,241) (36,672) (71,828) (50,563) 71,828 38,688 – (11,875)	Liabilities 2008 2007 $’000 $’000 – – – – – – 40,863 7,825 – – 3,464 2,709 8,387 2,336 468 – 268 427 1,121 396 – – 51,524 24,991 16 4 10,249 – – – – – 116,360 38,688 (71,828) (38,688) 44,532 –	Net	Net
2008 $’000 (174) (1,009) (6,392) – – – (327) (103) – – (4,284) – – – (6,298) (53,241) (71,828) 71,828 –	2008 $’000 – – – 40,863 – 3,464 8,387 468 268 1,121 – 51,524 16 10,249 – – 116,360 (71,828) 44,532	2008 $’000 (174) (1,009) (6,392) 40,863 – 3,464 8,060 365 268 1,121 (4,284) 51,524 16 10,249 (6,298) (53,241) 44,532 – 44,532	2007 $’000 (131) (718) (10,036) 7,825 (105) 2,709 2,061 – 427 396 (999) 24,991 4 4,266 (5,893) (36,672)
			(11,875) –
			(11,875)

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FINANCIAL INFORMATION ON MOUNT GIBSON

Movement in temporary differences during the financial year ended 30 June 2007 Accrued liabilities Borrowing costs Capital raising costs Deferred income Doubtful debts provision Exploration expenditure Fair value increase Foreign exchange contracts Interest receivable Inventory Lease liability Mine properties Prepaid expenditure Property, plant and equipment Provisions Tax losses Movement in temporary differences during the financial year ended 30 June 2008 Accrued liabilities Borrowing costs Capital raising costs Deferred income Doubtful debts provision Exploration expenditure Foreign exchange contracts Interest rate swaps Interest receivable Inventory Lease liability Mine properties Prepaid expenditure Property, plant and equipment Provisions Tax losses	Balance 1 July 2006 $’000 (218) (7) (266) 3,689 (162) 13,363 (1,662) 322 202 – (1,301) 3,950 5 3,562 (350) (16,443) 4,684 Balance 1 July 2007 $’000 (131) (718) (10,036) 7,825 (105) 2,709 2,061 – 427 396 (999) 24,991 4 4,266 (5,893) (36,672) (11,875)	Recognised in Income $’000 97 (711) 1,929 4,136 57 (6,629) 9,566 164 225 325 302 27,974 (1) (1,959) (5,508) (8,681) 21,286 Recognised in Income $’000 (43) (291) 3,692 33,038 105 755 409 13 (159) 725 (3,285) 26,533 12 5,983 (405) (16,569) 50,513	Recognised in Equity $’000 – – 164 – – – – 1,292 – – – – – – – – 1,456 Recognised in Equity $’000 – – (48) – – – 5,590 352 – – – – – – – – 5,894	Disposal of AIHL $’000 – – – – – (4,206) (7,904) – – – – – – 32 – 5,541 (6,537)	Recognised for Aztec $’000 (10) – (11,863) – – 181 – 283 – 71 – (6,933) – 2,631 (35) (17,089) (32,764)	Balance 30 June 2007 $’000 (131) (718) (10,036) 7,825 (105) 2,709 – 2,061 427 396 (999) 24,991 4 4,266 (5,893) (36,672)
						(11,875)

						Balance 30 June 2008 $’000 (174) (1,009) (6,392) 40,863 – 3,464 8,060 365 268 1,121 (4,284) 51,524 16 10,249 (6,298) (53,241)
						44,532

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FINANCIAL INFORMATION ON MOUNT GIBSON

COMPANY Accrued liabilities Borrowing costs Capital raising costs Doubtful debts provision Interest rate swaps Tax losses Tax (assets) liabilities Set off of tax Net tax (assets) liabilities Movement in temporary differences during the financial year ended 30 June 2007 Accrued liabilities Borrowing costs Capital raising costs Provisions Tax losses Movement in temporary differences during the financial year ended 30 June 2008 Accrued liabilities Borrowing costs Capital raising costs Provisions Interest rate swaps Tax losses	Assets Liabilities Net 2008 2007 2008 2007 2008 2007 $’000 $’000 $’000 $’000 $’000 $’000 (45) (37) – – (45) (37) (510) (6) – – (510) (6) (364) (136) – – (364) (136) (43) (43) – – (43) (43) (103) – 468 – 365 – (53,243) (36,672) – – (53,243) (36,672) (54,308) (36,894) 468 – (53,840) (36,894) 468 – (468) – – – (53,840) (36,894) – – (53,840) (36,894) Balance 1 July 2006 Recognised in Income Recognised in Equity Transfers Out (In) Balance 30 June 2007 $’000 $’000 $’000 $’000 $’000 (7) (30) – – (37 (8) 2 – – (6 (266) 130 – – (136 (169) 126 – – (43 (10,897) 246 – (26,021) (36,672 (11,347) 474 – (26,021) (36,894 Balance 1 July 2007 Recognised in Income Recognised in Equity Transfers Out (In) Balance 30 June 2008 $’000 $’000 $’000 $’000 $’000 (37) (8) – – (45 (6) (504) – – (510 (136) (165) (63) – (364 (43) – – – (43 – 13 352 – 365 (36,672) (2,078) – (14,493) (53,243 (36,894) (2,742) 289 (14,493) (53,840	Assets Liabilities Net 2008 2007 2008 2007 2008 2007 $’000 $’000 $’000 $’000 $’000 $’000 (45) (37) – – (45) (37) (510) (6) – – (510) (6) (364) (136) – – (364) (136) (43) (43) – – (43) (43) (103) – 468 – 365 – (53,243) (36,672) – – (53,243) (36,672) (54,308) (36,894) 468 – (53,840) (36,894) 468 – (468) – – – (53,840) (36,894) – – (53,840) (36,894) Balance 1 July 2006 Recognised in Income Recognised in Equity Transfers Out (In) Balance 30 June 2007 $’000 $’000 $’000 $’000 $’000 (7) (30) – – (37 (8) 2 – – (6 (266) 130 – – (136 (169) 126 – – (43 (10,897) 246 – (26,021) (36,672 (11,347) 474 – (26,021) (36,894 Balance 1 July 2007 Recognised in Income Recognised in Equity Transfers Out (In) Balance 30 June 2008 $’000 $’000 $’000 $’000 $’000 (37) (8) – – (45 (6) (504) – – (510 (136) (165) (63) – (364 (43) – – – (43 – 13 352 – 365 (36,672) (2,078) – (14,493) (53,243 (36,894) (2,742) 289 (14,493) (53,840


		(36,894

		Balance 30 June 2008 $’000 (45 (510 (364 (43 365 (53,243
		(53,840

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APPENDIX III

CONSOLIDATED 2008 2007 $’000 $’000 624 487 – 122 311 786 935 1,395 CONSOLIDATED 2008 2007 $’000 $’000 33,930 28,540 14,728 32,258 48,658 60,798	COMPANY	COMPANY
	2008 2007 $’000 $’000 624 487 – – 311 45 935 532 COMPANY	2007 $’000 487 – 45
		532

2008 $’000 33,930 14,728 48,658	2008 $’000 4,562 – 4,562	2007 $’000 351 –
		351

4. Cash and cash equivalents

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 three months depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates.

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FINANCIAL INFORMATION ON MOUNT GIBSON

33,930 28,540 14,728 32,258 48,658 60,798 113,344 47,765 25,008 4,717 135,989 55,508 29,358 3,141 (54) 501 (502) 512 (2,500) (2,256) 38 8 5,599 2,957 – – – 44 – 1,506 2,481 – – (18,721) 3 183 (5,319) (10,325) CONSOLIDATED 2008 2007 $’000 $’000	COMPANY	COMPANY
33,930 14,728 48,658 113,344 25,008 135,989 29,358 (54) (502) (2,500) 38 5,599 – – – 2,481 – 3 (5,319) 2008 $’000	4,562 – 4,562 (5,746) – – – – (287) (247) – – (3,465) – – 2,345 – 3 – 2008 $’000	351 – 2007 $’000
		351

		(594) – – – – – (332) – – (2,508) 44 1,506 – (91) 183 (3)

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FINANCIAL INFORMATION ON MOUNT GIBSON

Changes in assets and liabilities (Increase)/decrease in trade and other receivables (Increase) in inventory (Increase)/decrease in prepayments and deposits Decrease in deferred tax assets (Increase) in capitalised deferred waste Increase 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 NOTES	(74,468) (534) (36,867) (16,673) (837) (94) – – (223,113) (102,570) 25,883 23,783 459 (172) 50,513 13,326 738 484 45,753 3,090 CONSOLIDATED 2008 2007 $’000 $’000	COMPANY	COMPANY
	(74,468) (36,867) (837) – (223,113) 25,883 459 50,513 738 45,753 2008 $’000	27 – 1 – – 1,002 190 (2,742) – (8,919) 2008 $’000	(16) – (312) 474 – 208 (179) – – 2007 $’000
			(1,620)

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APPENDIX III

[c] Non-cash financing activities

During the financial year, the consolidated entity acquired property, plant and equipment with an aggregate fair value of $6,860,022 (2007: $56,371,647) by means of finance leases and hire purchase agreements. During the financial year, the consolidated entity disposed of property, plant and equipment with an aggregate fair value of $1,320,021 (2007: $3,771,433) that were financed by means of finance leases.

CONSOLIDATED 2008 2007 $’000 $’000 78,493 3,954 – (350) 78,493 3,604 1,522 2,222 3,421 4,022 83,436 9,848 – – – – 1,000 – 1,000 –	COMPANY	COMPANY
2008 $’000 78,493 – 78,493 1,522 3,421 83,436 – – 1,000 1,000	2008 $’000 – – – – 38 38 116,092 (145) 1,000 116,947	2007 $’000 10 – 10
		17 463
		490

		54,867 (145) –
		54,722

– 149 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

[a] Terms and conditions

Terms and conditions relating to the above financial instruments:
[i] Details of terms and conditions of trade debtors and credit sales are set out in note 1(h).
[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 of $51,763,184, on which interest is charged at 7% pa, receivables from controlled entities are non-interest bearing with no fixed repayment date and are repayable on demand.
[iv] Convertible note held in Resources Mining Corporation Limited, convertible into 31,250,000 ordinary shares. The convertible note is unsecured, interest free and due on 19 December 2009.

[b] Impaired or past due financial assets

A provision for impairment loss is recognised when there is objective evidence that an individual trade receivable is impaired. At 30 June 2008, trade debtors of $nil (2007: $349,988) in the consolidated entity and $nil (2007: $nil) in Mount Gibson were impaired. The impairment losses have been included in administrative expenses in the income statement.

At 30 June 2008, trade debtors of $348,111 (2007: $1,185,790) in the consolidated entity and $nil (2007: $10,000) in Mount Gibson were past due but not impaired. These relate to a number of customers for whom there is no recent history of default and other indicators of impairment.

With respect to trade debtors that are neither impaired nor past due, there are no indications as of the reporting date that the debtors will not meet their payment obligations.

– 150 –

APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

CONSOLIDATED 2008 2007 $’000 $’000 350 – – 350 (350) – – 350 – 22 280 288 23 1 45 875 348 1,186	COMPANY	COMPANY
2008 $’000 350 – (350) – – 280 23 45 348	2008 $’000 – – – – – – – – –	2007 $’000 – – –
		–

		– – – 10
		10

– 151 –

APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

CONSOLIDATED 2008 2007 $’000 $’000 9,473 4,984 61,975 29,597 71,448 34,581 23,602 5,065 1,559 – 25,161 5,065 – 3 1,113 1,802 1,113 1,805 – –	COMPANY	COMPANY
2008 $’000 9,473 61,975 71,448 23,602 1,559 25,161 – 1,113 1,113 –	2008 $’000 – – – – 1,559 1,559 – 1,113 1,113 344,509	2007 $’000 – –
		–

		– –
		–

		3 1,802
		1,805

		338,432

– 152 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

10. Interest in subsidiaries

Name Mount Gibson Mining Limited WHTK Pty Ltd Geraldton Bulk Handling Pty Ltd Aztec Resources Limited • Koolan Iron Ore Pty Ltd • Koolan Shipping Pty Ltd • Brockman Minerals Pty Ltd	Country of Incorporation Australia Australia Australia Australia Australia Australia Australia	Percentage of Equity Interest Held by the consolidated entity 2008 2007 % % 100 100 100 100 100 100 100 100 100 100 100 100 100 100	Investment	Investment
			2008 $’000 26,187 – – 318,322 – – – 344,509	2007 $’000 20,588 – – 317,844 – – –
				338,432

ACQUISITION OF AZTEC RESOURCES LIMITED

On 24 July 2006, Mount Gibson announced its intention to acquire 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, Mount Gibson offered Aztec shareholders 1 new share for every 3 Aztec shares.

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

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.

Mount Gibson completed compulsory acquisition of the remaining Aztec shares on 9 February 2007. A total of 378,491,182 new shares in Mount Gibson were issued to Aztec shareholders.

A summary of the consideration paid by Mount Gibson and the fair value of identifiable assets and liabilities of Aztec as at the date of acquisition are provided below.

– 153 –

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APPENDIX III

Consideration Issue of Mount Gibson Iron Limited shares to Aztec shareholders 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 Recognised on acquisition $’000 Net Assets of Aztec as at 30 November 2006 Cash 9,927 Receivables 2,571 Prepayments 83 Inventories 141 Property, plant and equipment 84,985 Deferred acquisition, exploration, evaluation and development costs 282 Mine Properties 248,356 Deferred tax asset 32,764 Trade and other payables (15,081) Interest bearing liabilities (18,561) Provision – employee entitlements (153) Provision – rehabilitation (12,329) Hire purchase liabilities (15,246) 317,739	$’000 297,905 19,834
	317,739

	9,927 (6,275
	3,652

	Carrying value prior to acquisition $’000 9,927 2,571 83 141 84,985 282 85,062 – (15,081 (18,561 (153 (10,000 (15,246
	124,010

If the combination had taken place at the beginning of the period, the profit before tax from continuing operations for the consolidated entity would have been $27 million and revenue from continuing operations would have been $166 million.

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APPENDIX III

Entities subject to Class Order relief

Pursuant to Class Order 98/1418, relief has been granted to Mount Gibson Mining Limited, Aztec Resources Limited and Koolan Iron Ore Pty Ltd from the Corporations Act 2001 requirements for the preparation, audit and lodgement of their financial reports.

As a condition of the Class Order, Mount Gibson Iron Limited, Mount Gibson Mining Limited, Aztec Resources Limited and Koolan Iron Ore Pty Ltd (“Closed Group”) entered into a Deed of Cross Guarantee on 1 May 2008. The effect of this deed is that Mount Gibson Iron Limited has guaranteed to pay any deficiency in the event of winding up of these controlled entities or if they do not meet their obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The controlled entities have also given a similar guarantee in the event that Mount Gibson Iron Limited is wound up or if it does not meet its obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee.

The consolidated income statement and balance sheet of the Closed Group are as follows:

Consolidated Income Statement

Continuing operations Sale of goods Other revenue Total revenue Cost of sales Gross profit Other income Administrative expenses Impairment of available-for-sale financial assets Exploration expenses Profit from Continuing Operations before tax and finance costs Finance costs Profit from Continuing Operations before income tax Income tax (expense) Net profit from Continuing Operations for the period after income tax Profit from discontinued operations after income tax Net profit After Tax attributable to members of Mount Gibson	CONSOLIDATED	CONSOLIDATED
	2008 $’000 432,674 2,476 435,150 (239,786) 195,364 3,880 (15,013) – (36) 184,195 (15,495) 168,700 (51,966) 116,734 – 116,734	2007 $’000 162,748 2,243
		164,991 (103,390)
		61,601 2,805 (12,943) (1,506) (8)
		49,949 (2,067)
		47,882 (14,898) 32,984 18,721
		51,705

– 155 –

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APPENDIX III

Consolidated Balance Sheet

ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Prepayments Derivative financial assets Total current assets Non-current assets Available for sale financial assets Other receivables Property, plant and equipment Deferred acquisition, exploration, evaluation and development costs Mine properties Deferred income tax assets Total non-current assets TOTAL ASSETS LIABILITIES Current liabilities Trade and other payables Interest-bearing loans and borrowings Derivative financial liabilities Provisions Total current liabilities	CONSOLIDATED	CONSOLIDATED
	2008 $’000 47,679 82,662 71,448 1,569 25,161 228,519 1,113 11,699 184,710 25,919 447,141 – 670,582 899,101 71,520 12,415 342 1,827 86,104	2007 $’000 59,781 9,158 34,581 1,048 5,065
		109,633

		1,805 8,118 183,482 9,027 370,591 12,152
		585,175
		694,808

		62,803 11,303 – 1,136
		75,242

– 156 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

Non-current liabilities Provisions Interest-bearing loans and borrowings Deferred income tax liabilities Total non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Retained earnings/(accumulated losses) Reserves TOTAL EQUITY	CONSOLIDATED	CONSOLIDATED
	19,112 145,858 43,939 208,909 295,013 604,088 397,197 178,450 28,441 604,088 2008 $’000	18,470 142,932 – 2007 $’000
		161,402
		236,644
		458,164

		386,766 61,716 9,682
		458,164

11. Discontinued operations – sale of Asia Iron Holdings Limited

On 17 November 2006 the consolidated entity sold its 73% interest in Asia Iron Holdings Limited (“Asia Iron”) to Sinom Investments and ceased to consolidate Asia Iron. That business is reported as a discontinued operation in this financial report. The financial information presented below in respect of Asia Iron represents the period 1 July 2006 to 17 November 2006.

– 157 –

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APPENDIX III

[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 (30 June 2007 column) and for the twelve month period to 30 June 2006.

Note 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 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 from discontinued operations after income tax Earnings per share (cents per share): – basic earnings per share – discontinued operations – diluted earnings per share – discontinued operations	30 June 2008 $’000 – – – – – – – – – – – – – – – – –	30 June 2007 $’000 4
		4 –
		4 368 (242
		130 (16
		114 –
		114
		26,684 (8,077
		18,607
		18,721

		3.82 3.79

– 158 –

APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

[b] Details of the gain on deconsolidation of Asia Iron

Note Consideration received or receivable on disposal: – Cash received – less: transaction costs 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	30 June 2007 $’000 52,500 (492
	52,008
	24,439 885
	25,324
	26,684 (8,077
	18,607

[c] Carrying amounts of Asia Iron assets and liabilities

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

Assets Cash Trade and other receivables Prepayments Property, plant and equipment Deferred acquisition, exploration, evaluation and development costs Deferred tax assets	21 August 2006 $’000 1,654 209 72 3,149 40,303 1,367
	46,754

– 159 –

APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

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	(1,286) (1,500) (7,904) 21 August 2006 $’000
	(10,690)
	36,064 (11,625)
	24,439

[d] Assets and liabilities associated with discontinued operation

As at 30 June 2008, there are no assets or liabilities in the Balance Sheet relating to the discontinued operation.

[e] Cash flow information

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

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

30 June 2007
$’000
52,008
(1,654)

50,354
(211)
(960)
–

(1,171)

– 160 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

CONSOLIDATED 2008 2007 $’000 $’000 5 5 82,670 91,636 (12,553) (3,702) 70,117 87,934 83,545 78,005 (17,078) (7,169) 66,467 70,836 48,923 30,316 (7,341) (2,124) 41,582 28,192 522 522 (340) (292) 182 230 10,144 571 225,809 201,055 (37,312) (13,287) 188,497 187,768	COMPANY	COMPANY
2008 $’000 5 82,670 (12,553) 70,117 83,545 (17,078) 66,467 48,923 (7,341) 41,582 522 (340) 182 10,144 225,809 (37,312) 188,497	2008 $’000 5 – – – – – – – – – – – – – 5 – 5	2007 $’000 5
		– –
		–
		– –
		–
		– –
		–
		– –
		–
		–
		5 –
		5

– 161 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

5 5 70,117 87,934 66,467 70,836 41,582 28,192 182 230 10,144 571 188,497 187,768 87,934 8,843 7,775 1,778 – 1,020 (16,603) 78,526 (87) (12) – (143) (8,902) (2,078) 70,117 87,934 CONSOLIDATED 2008 2007 $’000 $’000	COMPANY	COMPANY
5 70,117 66,467 41,582 182 10,144 188,497 87,934 7,775 – (16,603) (87) – (8,902) 70,117 2008 $’000	– – – – – – – – – – – – – – – 2008 $’000	– – – – – – 2007 $’000
		–

		– – – – – – –
		–

– 162 –

APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

70,836 3,071 6,860 56,371 – 19,122 (436) (3,625) (10,793) (4,103) 66,467 70,836 28,192 5,712 2,151 682 – 1,091 16,603 21,600 (83) (8) (5,281) (885) 41,582 28,192 230 281 (48) (51) 182 230 571 2,576 9,573 34,369 – 63,752 – (100,126) 10,144 571 CONSOLIDATED 2008 2007 $’000 $’000	COMPANY	COMPANY
70,836 6,860 – (436) (10,793) 66,467 28,192 2,151 – 16,603 (83) (5,281) 41,582 230 (48) 182 571 9,573 – – 10,144 2008 $’000	– – – – – – – – – – – – – – – – – – – – – 2008 $’000	– – – – – 2007 $’000
		–
		– – – – – –
		–
		– –
		–
		– – – –
		–

– 163 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

NOTES	CONSOLIDATED 2008 2007 $’000 $’000	COMPANY
		2008 2007 $’000 $’000

13. Deferred acquisition, exploration, evaluation and development costs Deferred acquisition, exploration, evaluation and development costs carried forward in respect of mining areas of interest: Extension Hill Hematite Koolan Island Reconciliation Carrying amount at beginning of the year Additions Exploration expenditure written off Carrying amount at the end of the year	22,692 3,227 25,919 9,027 16,930 (38) 25,919	8,317 710 9,027 4,176 4,859 (8) 9,027	– – – – – – –	– –
				–

				– – –
				–

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 recognised pending commencement of production.

– 164 –

APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

711,267 469,369 (264,032) (98,685) 447,235 370,684 370,684 51,567 18,785 28,310 – 248,356 223,113 101,100 (135,989) (55,508) (29,358) (3,141) 447,235 370,684 25,709 16,510 47,697 47,804 73,406 64,314 – – CONSOLIDATED 2008 2007 $’000 $’000	COMPANY	COMPANY
711,267 (264,032) 447,235 370,684 18,785 – 223,113 (135,989) (29,358) 447,235 25,709 47,697 73,406 – 2008 $’000	– – – – – – – – – – 418 1,696 2,114 18,861 2008 $’000	– – 2007 $’000
		–

		– – – – – –
		–

		106 14,108
		14,214

		29,398

– 165 –

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APPENDIX III

3,961 2,638 8,454 8,665 – 87,451 12,415 98,754 10,320 6,399 33,931 49,082 105,000 – (3,393) – 145,858 55,481 14,281 9,037 42,385 57,747 – 100,000 25,000 5,488 – 20,474 175,000 – 256,666 192,746 CONSOLIDATED 2008 2007 $’000 $’000	COMPANY	COMPANY
3,961 8,454 – 12,415 10,320 33,931 105,000 (3,393) 145,858 14,281 42,385 – 25,000 – 175,000 256,666 2008 $’000	– – – – – – 105,000 (3,393) 101,607 – – – 25,000 – 175,000 200,000 2008 $’000	– – – 2007 $’000
		–

		– – – –
		–

		– – – – – –
		–

– 166 –

APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

14,281 9,037 42,385 57,747 – 87,451 13,816 5,488 – – 105,000 – 175,482 159,723 – – – – – 12,549 11,184 – – 20,474 70,000 – 81,184 33,023 CONSOLIDATED 2008 2007 $’000 $’000	COMPANY	COMPANY
14,281 42,385 – 13,816 – 105,000 175,482 – – – 11,184 – 70,000 81,184 2008 $’000	– – – 13,184 – 105,000 118,184 – – – 11,816 – 70,000 81,816 2008 $’000	– – – – – – 2007 $’000
		–

		– – – – – –
		–

Terms and conditions relating to the above financial facilities:

[a] Finance leases are repayable monthly with final instalments due in July 2012. Interest is charged at an average rate of 8.35%. 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 National Australia Bank Limited. Hire purchase amounts are repayable monthly with final instalments due in April 2012. Interest is charged at an average rate of 7.43%. Secured by first mortgage over the assets the subject of the hire purchase agreement and a guarantee from Mount Gibson Iron Limited. This facility is drawn and repayable in US$ for Komatsu and A$ for NAB.

– 167 –

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APPENDIX III

[c] The project finance facility was with a banking syndicate comprising Westpac Banking Corporation, Bank of Scotland (Australia) Limited and Bank of Tokyo-Mitsubishi UFJ Ltd. The $100 million facility consisted 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 was 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 was charged at an average rate of 7.22%.

As set out in [e] below, this project finance facility was repaid in full and cancelled by the drawdown of the Corporate Debt facility on 6 September 2007.

[d] This facility was with HSBC Bank Australia Limited. The security pledge for these facilities was 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.

As set out in [e] below, this facility was repaid in full and cancelled by the drawdown of the Corporate Debt facility on 6 September 2007.

[e] In June 2007 Mount Gibson mandated HSBC Australia Limited and National Australia Bank Limited as the joint lead Arranger and Underwriting Banks for a $200 million debt facility to fund the refinance of the existing project finance facility in [c] above and the HSBC facility in [d] above and provide additional debt funding for the Koolan Island and Extension Hill iron ore developments. The facility documentation was signed on 28 August 2007 with drawdown on 6 September 2007.

– 168 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

The $200 million facility consists of:

Senior debt facility of $175 million comprising 2 tranches:
Tranche 1 of $125 million;
Extension Hill tranche of $50 million which is only drawable against the Extension Hill DSO project after certain conditions precedent have been satisfied including EPA approval and Company Board approval for the project to proceed. These conditions precedent to drawdown will be satisfied in the near term; and
Contingent Instrument facility of $25 million (including guarantees, performance bonds).

At 30 June 2010 a review of the facility will be undertaken to determine the amortisation period and final debt repayment date which will be no later than 30 June 2012.

The average interest rate on the debt facility is 8.99%.

The security pledge for these facilities is a fixed and floating charge over all the assets and undertakings of Mount Gibson Iron Limited, Mount Gibson Mining Limited, Geraldton Bulk Handling Limited, Koolan Iron Ore Pty Ltd and Aztec Resources Limited together with mining mortgages over the mining tenements owned by Mount Gibson Mining Limited and Koolan Iron Ore Pty Ltd and the contractual rights of Mount Gibson Mining Limited to mine hematite at Extension Hill.

– 169 –

APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

CONSOLIDATED 2008 2007 $’000 $’000 342 – 1,780 1,072 100 100 1,880 1,172 59 28 19,053 18,442 19,112 18,470 100 12 200 188 (200) (100) 100 100 18,442 688 – 31 611 5,394 – 12,329 19,053 18,442 397,197 386,766	COMPANY	COMPANY
2008 $’000 342 1,780 100 1,880 59 19,053 19,112 100 200 (200) 100 18,442 – 611 – 19,053 397,197	2008 $’000 342 – – – – – – – – – – – – – – – 397,197	2007 $’000 –

		– –
		–

		– –
		–

		– – –
		–
		– – – –
		–
		386,766

– 170 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

NOTES Movement in ordinary shares on issue Beginning of the financial year Shares issued for controlled entity [i] Issue of shares Exercise of options Deferred income tax on capital raising cost End of the financial year	2008 Number of Shares $’000 787,786,821 386,766 – – – – 16,054,000 10,367 – 64 803,840,821 397,197	2007	2007
	Number of Shares 787,786,821 – – 16,054,000 – 803,840,821	Number of Shares 402,058,719 378,491,182 – 7,236,920 – 787,786,821	$’000 86,851 297,905 – 2,010 –
			386,766

[b] Movement in ordinary shares on issue

[i] Issued to Aztec Resources Limited shareholders in exchange for business combination of $297,905,196.

[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.

– 171 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

[d] Share options

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

Exercise Price Vesting date/Exercise Period 50 cents Vested 31 Dec 2006 – exercise on or before 31 Dec 2007 55 cents Vested 31 Dec 2007 – exercise on or before 31 Dec 2008 78 cents Vested 31 Dec 2007 – exercise on or before 31 Dec 2009 89 cents Vested 31 Dec 2007 – exercise on or before 31 Dec 2009 90 cents Vesting on 1 July 2008 – exercise on or before 30 June 2010 90 cents Vesting on 24 Oct 2008 – exercise on or before 23 Oct 2010 110 cents Vesting on 24 Oct 2010 – exercise on or before 23 Oct 2012	2008 Number – 100,000 475,000 2,646,000 2,000,000 3,000,000 2,000,000 10,221,000	2007 Number 5,000,000 5,000,000 – – 2,000,000 3,000,000 2,000,000
		17,000,000

In addition, as at 30 June 2008, there were 8,475,000 (2007: 8,625,000) 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 2008 before the options vest, at which time they will be issued to the respective employees. Once vested, these options will be exercisable at $2.99 each and expire on 31 December 2009. As at the date of this report, none of these options had vested.

Share options carry no right to dividends and no voting rights.

– 172 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

[e] Performance rights

Mount Gibson has established the Mount Gibson Iron Limited Performance Rights Plan. The rights were granted at no cost to the executives and will convert into ordinary shares on completion by the executive of three years’ continuous service, subject to satisfaction of specified performance hurdles related to Mount Gibson’s Total Shareholder Return (“TSR”) measured against the TSR of a comparator group of companies over the same period.

As at 30 June 2008 there were 283,942 performance rights on issue (2007: Nil).

CONSOLIDATED 2008 2007 $’000 $’000 14,510 8,911 16,772 3,963 (3,192) (3,192) 28,090 9,682 8,911 5,954 5,599 2,957 14,510 8,911	COMPANY	COMPANY
2008 $’000 14,510 16,772 (3,192) 28,090 8,911 5,599 14,510	2008 $’000 14,510 249 – 14,759 8,911 5,599 14,510	2007 $’000 8,911 283 –
		9,194

		5,954 2,957
		8,911

[a] Option premium reserve

– 173 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

NOTES	CONSOLIDATED 2008 2007 $’000 $’000	COMPANY
		2008 2007 $’000 $’000

3,963 (1,790) (856) 1,032 – 1,506 19,607 4,506 (5,942) (1,291) 16,772 3,963 (3,192) (3,192) (3,192) (3,192) CONSOLIDATED 2008 2007 $’000 $’000 57,861 10,096 113,344 47,765 171,205 57,861	283 (2,255) (856) 1,032 – 1,506 1,174 – (352) – 249 283 – – – – COMPANY	(2,255) 1,032 1,506 – –
		283
		–
		–
2008 $’000 57,861 113,344 171,205	2008 $’000 (6,560) (5,746) (12,306)	2007 $’000 (5,966) (594)
		(6,560)

– 174 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

CONSOLIDATED 2008 2007 $’000 $’000 – 11,776 – (11,776) – – CONSOLIDATED 2008 2007 $’000 $’000 625 791 2,237 2,175 2,862 2,966 7,709 16,010 4,885 2,302 12,594 18,312	COMPANY	COMPANY
	2008 2007 $’000 $’000 – – – – – – COMPANY	2007 $’000 – –
		–

2008 $’000 625 2,237 2,862 7,709 4,885 12,594	2008 $’000 – – – – – –	2007 $’000 – –
		–

		– –
		–

– 175 –

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APPENDIX III

16,157 15,652 50,277 64,956 – 200 66,434 80,808 (9,769) (14,024) 56,665 66,784 12,415 11,303 44,250 55,481 56,665 66,784 66,820 – – – 66,820 – CONSOLIDATED 2008 2007 $’000 $’000	COMPANY	COMPANY
16,157 50,277 – 66,434 (9,769) 56,665 12,415 44,250 56,665 66,820 – 66,820 2008 $’000	– – – – – – – – – – – – 2008 $’000	– – – 2007 $’000
		– –
		–

		– –
		–

		– –
		–

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[i] In order to maintain current rights to explore and mine the tenements at Tallering Peak, Koolan Island, and Extension Hill the consolidated entity is required to perform minimum exploration work to meet the expenditure requirements specified by the Department of Industry and Resources.
[ii] Operating leases:
operating lease for office space with an initial lease term of 5 years; and
operating lease for machinery has an average term of 1.4 years and expires in December 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 rates implicit in the finance leases and hire purchases are 8.35% and 7.43% respectively. Secured lease liabilities are secured by a charge over the leased assets.
[iv] The consolidated entity had contractual commitments to purchase property, plant and equipment principally relating to:
construction and development of the Extension Hill project of $41 million; and
Koolan Island Main Pit seawall, dewatering and footwall rehabilitation of $25 million.

NOTES Employee benefits The aggregate employee benefits liability is comprised of: Accrued wages, salaries and on-costs Provisions	CONSOLIDATED 2008 2007 $’000 $’000 421 720 1,839 1,100 2,260 1,820	COMPANY	COMPANY
	2008 $’000 421 1,839 2,260	2008 $’000 – – –	2007 $’000 – –
			–

24. Employee benefits

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Share-based payment plans Recognised share-based payment expenses Expense arising from equity-settled share- based payment transactions 2[d] NOTES	5,599 2,957 CONSOLIDATED 2008 2007 $’000 $’000	COMPANY	COMPANY
	5,599 2008 $’000	– 2008 $’000	– 2007 $’000

25. Share-based payment plans

[a] Recognised share-based payment

expenses

The share-based payment plans are described below. There have been no cancellations or modifications to any of the plans during 2008 and 2007.

[b] Employee share scheme

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

Information with respect to the number of options granted and issued under the employee share scheme is as follows:

2008 No. of Options Weighted average exercise price (cents) 17,000,000 70.3 9,275,000 85.1 – – (16,054,000) 64.6 10,221,000 92.8 3,221,000 87.3	2007	2007
No. of Options 17,000,000 9,275,000 – (16,054,000) 10,221,000 3,221,000	No. of Options 25,080,632 – (843,712) (7,236,920) 17,000,000 10,000,000	Weighted average exercise price (cents) 57.4 – 52.9 27.8
		70.3

		52.5

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FINANCIAL INFORMATION ON MOUNT GIBSON

The remaining contractual life for the options on issue as at 30 June 2008 is between 1 and 5 years (2007: 1 and 5 years).

The range for exercise prices for options on issue at the end of the year was $0.55-$2.99 (2007: $0.50$1.10).

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.

As at 30 June 2008 there were 283,942 performance rights on issue (2007: Nil) under the Mount Gibson Iron Limited Performance Rights Plan. The rights were granted at no cost to the executives and will convert into ordinary shares on completion by the executive of three years’ continuous service, subject to satisfaction of specified performance hurdles related to Mount Gibson’s Total Shareholder Return (“TSR”) measured against the TSR of a comparator group of companies over the same period.

The fair value of the performance rights is estimated as at the date of grant using a Monte-Carlo simulation model taking into account the terms and conditions upon which the performance rights were granted.

26. Earnings per share

Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of Mount Gibson by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of Mount Gibson by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.

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FINANCIAL INFORMATION ON MOUNT GIBSON

The following reflects the income and share data used in the calculations of basic and diluted earnings per share:

Profits used in calculating basic and diluted earnings per share Weighted average number of ordinary shares used in calculating basic earnings per share Effect of dilution – Share options Weighted average number of ordinary shares used in calculating diluted earnings per share	CONSOLIDATED	CONSOLIDATED
	2008 $’000 113,344 Number of Shares 795,508,824 7,182,397 802,691,221	2007 $’000 47,765 Number of Shares 634,647,892 8,082,090
		642,729,982

Conversions, calls, subscriptions or issues after 30 June 2008

Since the end of the financial year no 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.

27. Dividends paid and proposed

No amounts have been paid, declared or recommended by Mount Gibson by way of dividend since the commencement of the year.

28. Contingent liability

The Corporate Debt banks have provided a controlled entity with performance bonds totalling $13,815,907 relating to performance of environmental obligations and rail upgrades.

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29. Key management personnel disclosures

[a] Details of Key Management Personnel

[i] Directors

N Hamilton Chairman L Tonkin Managing director C Readhead Non-Executive director I Macliver Non-Executive director A Jones Non-Executive director P Bilbe Non-Executive director (resigned 21 November 2007) M Horn Non-Executive director (resigned 1 May 2008) A Rule Chief Financial Officer and alternate director from 30 June 2007

[ii] Executives

D Quinlivan Chief Operating Officer R Mencel General Manager – Tallering Peak R Jordinson General Manager – Koolan Island

[b] Compensation of Specified Key Management Personnel

Short-term Post employment Share-based payment	CONSOLIDATED 2008 2007 3,582,086 2,689,553 143,521 142,447 1,182,679 1,962,429 4,908,286 4,794,429	COMPANY	COMPANY
	2008 3,582,086 143,521 1,182,679 4,908,286	2008 476,298 29,602 – 505,900	2007 296,057 7,877 801,634
			1,105,568

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[c] Option holdings of Key Management Personnel

30 June 2008 Directors N Hamilton L Tonkin C Readhead I Macliver A Jones P Bilbe [i] M Horn [ii] A Rule [iii] Executives D Quinlivan R Mencel R Jordinson Total	Balance at Beginning of Period 1 July 2007 – 5,000,000 – – – – – 2,000,000 – 250,000 – 7,250,000	Granted as Remuneration – – – – – – – – – 100,000 100,000 200,000	Options Exercised – – – – – – – – – – – –	Net Change – – – – – – – – – – – –	Balance at End of Period 30 June 2008 – 5,000,000 – – – – – 2,000,000 – 350,000 100,000 7,450,000	Ves	ted at 30 June 20	08 Exercisable – – – – – – – – – 250,000 –
						Total – – – – – – – – – 250,000 – 250,000	Not Exercisable – – – – – – – – – – – –
								250,000

[i] Mr Bilbe resigned as a director on 21 November 2007

[ii] Mr Horn resigned as a director on 1 May 2008

[iii] Mr Rule resigned as Finance director on 30 June 2007 to become Chief Financial Officer and alternate director to Mr Tonkin

30 June 2007 Directors N Hamilton W Willis [iv] B Johnson [v] L Tonkin C Readhead I Macliver A Jones P Bilbe M Horn A Rule Executives K Malaxos [vi] R Mencel Q Granger D Quinlivan R Jordinson Total	Balance at Beginning of Period 1 July 2006 – 1,000,000 5,000,000 5,000,000 500,000 500,000 – – – 2,000,000 350,000 – – – – 14,350,000	Granted as Remuneration – – – – – – – – – – – 250,000 – – – 250,000	Options Exercised – (1,000,000) – – (500,000) (500,000) – – – – (350,000) – – – – (2,350,000)	Net Change – – (5,000,000) – – – – – – – – – – – – (5,000,000)	Balance at End of Period 30 June 2007 – – – 5,000,000 – – – – – 2,000,000 – 250,000 – – – 7,250,000	Ves	ted at 30 June 20	07 Exercisable – – – – – – – – – – – – – – –
						Total – – – – – – – – – – – – – – – –	Not Exercisable – – – – – – – – – – – – – – – –
								–

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[iv] Mr Willis resigned as a director on 24 April 2007

[v] Mr Johnson resigned as a director on 30 June 2007

[vi] Mr Malaxos resigned on 18 December 2006

[d] Shareholding of Key Management Personnel

30 June 2008 Directors N Hamilton L Tonkin C Readhead I Macliver A Jones P Bilbe [i] M Horn [ii] A Rule [iii] Executives D Quinlivan R Mencel R Jordinson Total	Balance 1 July 2007 Ord 185,000 – 1,067,500 1,500,000 100,000 52,033 – 50,000 – – – 2,954,533	Granted as Remuneration Ord – – – – – – – – – – – –	On Exercise of Options Ord – – – – – – – – – – – –	Net Change Other Ord – – (500,000) (500,000) – (52,033) – – – – 26,000 (1,026,033)	Balance 30 June 2008 Ord 185,000 – 567,500 1,000,000 100,000 – – 50,000 – – 26,000
					1,928,500

[i] Mr Bilbe resigned as a director on 21 November 2007

[ii] Mr Horn resigned as a director on 1 May 2008

[iii] Mr Rule resigned as Finance director on 30 June 2007 to become Chief Financial Officer and alternate director to Mr Tonkin

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FINANCIAL INFORMATION ON MOUNT GIBSON

30 June 2007 Directors N Hamilton W Willis [iv] B Johnson [v] L Tonkin C Readhead I Macliver A Jones P Bilbe M Horn A Rule Executives K Malaxos [vi] R Mencel Q Granger D Quinlivan R Jordinson Total	Balance 1 July 2006 Ord – 1,480,000 – – 727,500 1,000,000 – – – – 25,000 – – – – 3,232,500	Granted as Remuneration Ord – – – – – – – – – – – – – – – –	On Exercise of Options Ord – 1,000,000 – – 500,000 500,000 – – – – – – – – – 2,000,000	Net Change Other Ord 185,000 (2,480,000) – – (160,000) – 100,000 52,033 – 50,000 (25,000) – – – – (2,277,967)	Balance 30 June 2007 Ord 185,000 – – – 1,067,500 1,500,000 100,000 52,033 – 50,000 – – – – –
					2,954,533

[iv] Mr Willis resigned as a director on 24 April 2007

[v] Mr Johnson resigned as a director on 30 June 2007

[vi] Mr Malaxos resigned on 18 December 2006

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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[e] Performance Rights holding by Key Management Personnel

30 June 2008 Directors N Hamilton L Tonkin C Readhead I Macliver A Jones P Bilbe [i] M Horn [ii] A Rule [iii] Executives D Quinlivan R Mencel R Jordinson Total	Balance 1 July 2007 – – – – – – – – – – – –	Granted as Remuneration – 161,681 – – – – – 121,261 – – – 282,942	Vested during Year – – – – – – – – – – – –	Balance 30 June 2008 – 161,681 – – – – – 121,261 – – –
				282,942

[i] Mr Bilbe resigned as a director on 21 November 2007

[ii] Mr Horn resigned as a director on 1 May 2008

[iii] Mr Rule resigned as Finance director on 30 June 2007 to become Chief Financial Officer and alternate director to Mr Tonkin

Performance Rights granted as part of Remuneration have been independently valued using the BlackScholes methodology to produce a Monte-Carlo simulation model which allows the incorporation of the market based performance hurdles that must be met before the Performance Rights vest. The value per option at grant date is calculated using the following assumptions:

Grant date 18-Apr-08 Share price at grant date $2.72 Risk free interest rate 6.29% Volatility factor 52% Performance period start date 1-Jul-07 Performance period end date 30-Jun-10

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The vesting of these Performance Rights is subject to a relative Total Shareholder Return (“TSR”) hurdle to be measured at 30 June 2010 and 31 December 2010. Mount Gibson’s TSR performance will be ranked relative to a comparator group consisting of resource companies listed on ASX. The vesting scale is as follows:

Percentile Rank Achieved

Proportion of Target Award Vesting

76th percentile 100% >51st percentile and <76th percentile Pro rata allocation 51st percentile 50% <51st percentile 0%

[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 $6,043 (2007: $187) and $6,043 (2007: $187) 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	CONSOLIDATED
	2008 $’000 – – 6 6	2007 $’000 –
		–

		–
		–

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30. 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 $3,465,181 (2007: $2,507,739) was charged on the loan to Mount Gibson Mining Limited at 7%pa during the year. All other loans are interest free, have no fixed repayment date and are repayable on demand. Included in the loans are:

repayment of the Koolan project finance facility of $87,094,764 funded by Mount Gibson by way of drawdown of the Corporate Debt facility on 6 September 2007;
transfers of deferred tax asset and deferred tax liability balances to Mount Gibson from each of the wholly owned subsidiaries as a consequence of the tax consolidation group of $14,425,341 (2007: $29,467,928);
share based payment expense incurred by Mount Gibson for options issued by Mount Gibson to employees that are employed by wholly owned subsidiaries of $5,598,360 (2007: $3,041,750).

Loans were made to Mount Gibson by wholly owned subsidiaries for transfers of deferred tax asset and deferred tax liability balances to Mount Gibson from wholly owned subsidiaries as a consequence of the tax consolidation group of $18,361,000 (2007: $29,398,000). They are interest free, have no fixed repayment date and are repayable on demand.

Director-related entity transactions

There are no director-related entity transactions other than those specified in Note 29.

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31. 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 2008 2007 186,800 166,235 49,336 31,750 236,136 197,985	COMPANY	COMPANY
	2008 186,800 49,336 236,136	2008 186,800 46,761 233,561	2007 118,375 31,750
			150,125

32. Segment information

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.

33. Events after the balance sheet date

As at the date of this report there are no significant events after balance date of Mount Gibson or of the consolidated entity that require adjustment of or disclosure in this report.

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34. Financial instruments

[a] Financial risk management objectives

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.

The consolidated entity also enters into derivatives transactions, principally forward currency contracts and interest rate swaps. The purpose is to manage the currency risks and interest rate 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 foreign currency risk, interest rate risk, credit risk, commodity price risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below.

[b] Foreign currency risk

As a result of receipts being denominated in US dollars (“USD”), the consolidated entity’s cash flow can be affected significantly by movements in the USD/AUD exchange rates. The consolidated entity uses derivative financial instruments to manage specifically identified foreign currency exposures by hedging a proportion of these forecast sales transactions in accordance with the risk management policy. The primary objective of using derivative financial instruments is to reduce the volatility of earnings attributable to changes in USD/AUD, and to protect against undue adverse movements in these rates.

The hire purchase liabilities for the mining equipment at Koolan are denominated in USD.

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.

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The consolidated entity uses the following derivative instruments to manage foreign currency risk:

Instrument	Type of Hedging	Objective
Forward exchange contracts	Committed	Hedge sales receipts against cash flow volatility arising from the
		fluctuating USD/AUD exchange rates.
Collars	Committed	Hedge sales receipts against cash flow volatility arising from the
		fluctuating USD/AUD exchange rates by limiting exposure to
		exchange rates within a certain range of acceptable rates.

[i] Forward exchange contracts – cash flow hedges

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 USD. This hedge has been treated as effective, in accordance with AASB 139.

At balance date the following foreign exchange contracts were outstanding:

Forward Exchange Contracts – within one year Collar Option – within one year Call strike price 0.750/0.745 Put strike price 0.715/0.711/0.724 Total		2008	2008	Fair Value AUD $’000 23,602 – 23,602		2007	2007
	Average Contract Rate 0.8801	USD $’000 345,000 – 345,000	Contract Value AUD $’000 392,020 – 392,020		Average Contract Rate 0.7404	USD $’000 8,000 24,000 32,000	Contract Value AUD $’000 10,805 33,405 44,210	Fair Value AUD $’000 1,359 3,706
								5,065

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Movement in forward exchange contract cash flow hedge reserve

CONSOLIDATED 2008 2007 $’000 $’000 5,169 663 18,433 4,506 23,602 5,169 105 511	COMPANY	COMPANY
2008 $’000 5,169 18,433 23,602 105	2008 $’000 – – – –	2007 $’000 – –
		–

		–

[ii] Foreign currency sensitivity

The following table details the effect on profit and equity after tax to a 10% change in the Australian dollar against the USD from the spot rate at 30 June 2008 and 30 June 2007.

10% appreciation in the AUD spot rate with all other variables held constant 10% depreciation in the AUD spot rate with all other variables held constant	Consolidated Net Profit Equity (Hedge Reserve) 2008 2007 2008 2007 $’000 $’000 $’000 $’000 (3,337) 6,416 31,995 3,388 4,078 (7,841) (39,106) (3,986)	Consolidated Net Profit Equity (Hedge Reserve) 2008 2007 2008 2007 $’000 $’000 $’000 $’000 (3,337) 6,416 31,995 3,388 4,078 (7,841) (39,106) (3,986)
		2008 2007 $’000 $’000 31,995 3,388 (39,106) (3,986)

The sensitivity analysis of the consolidated entity’s exposure to the foreign currency risk at balance date has been determined based on the change in fair value due to foreign exchange movement based on exposures at balance sheet date. A positive number indicates an increase in profit and equity. All mark-to-market movements in cash flow hedges have been assumed to go to equity as the profit and loss impact for any ineffectiveness unwinds over the derivatives’ life.

Mount Gibson does not have a foreign currency exposure.

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[c] Interest rate risk

The consolidated entity’s exposure to market interest rates relates primarily to the consolidated entity’s long-term debt obligations.

The consolidated entity’s policy is to manage its interest costs using a mix of fixed and variable rate debt, and to keep between 50% and 75% of its borrowings at fixed rates of interest. The consolidated entity has entered into interest rate swaps, in which the consolidated entity agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps are designated to hedge underlying debt obligations.

The consolidated entity constantly analyses its interest rate exposure. Within this analysis, consideration is given to potential renewals of existing positions, alternative financing, alternative hedging positions and the mix of fixed and variable interest rates.

At balance date, the consolidated entity and Mount Gibson’s exposure to interest rate risks on financial assets and financial liabilities are as follows:

CONSOLIDATED i) Financial assets Cash Trade and other receivables Unlisted shares Listed shares Convertible notes Derivatives Total financial assets ii) Financial liabilities Trade and other payables Derivatives Lease liabilities Hire purchase Corporate debt Total financial liabilities	Floating interest rate 2008 2007 $’000 $’000 33,926 60,673 – – – – – – – – – – 33,926 60,673 – – – – – – – – 30,500 – 30,500 –	Fi 1 yea 2008 $’000 14,725 – – – – – 14,725 – – 3,961 8,454 – 12,415	xed interest	rate maturing in: Over 1 to 5 years 2008 2007 $’000 $’000 – – – – – – – – – – – – – – – – – – 10,320 6,399 33,931 49,082 74,500 87,451 118,751 142,932	Non-interest bearing 2008 2007 $’000 $’000 7 35 83,436 9,848 – 3 1,113 1,802 1,000 – 25,161 5,065 110,717 16,753 73,406 64,314 342 – – – – – – – 73,748 64,314	Total carrying amount per balance sheet Weighted Average Interest 2008 2007 2008 2007 $’000 $’000 % % 48,658 60,798 6.36 6.80 83,436 9,848 – – – 3 – – 1,113 1,802 – – 1,000 – – – 25,161 5,065 – – 159,368 77,516 73,406 64,314 – – 342 – – – 14,281 9,037 8.35 8.24 42,385 57,747 7.43 7.14 105,000 87,451 8.99 7.62 235,414 218,549
			r or less 2007 $’000 90 – – – – – 90 – – 2,638 8,665 – 11,303	Over 1 2008 $’000 – – – – – – – – – 10,320 33,931 74,500 118,751

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FINANCIAL INFORMATION ON MOUNT GIBSON

COMPANY i) Financial assets Cash Trade and other receivables Related party receivable Derivatives Investment in subsidiaries Unlisted shares Listed shares Convertible notes Total financial assets ii) Financial liabilities Trade and other payables Derivatives Related party loans Corporate debt Total financial liabilities	4,562 351 – – – – – – – – – – – – – – 4,562 351 – – – – – – 30,500 – 30,500 – Floating interest rate 2008 2007 $’000 $’000	– – – – – – – – – – – – – – Fi 1 yea 2008 $’000	xed interest	– – – – 51,763 51,744 – – – – – – – – – – 51,763 51,744 – – – – – – 74,500 – 74,500 – rate maturing in: Over 1 to 5 years 2008 2007 $’000 $’000	– – 38 490 64,184 2,978 1,559 – 344,509 338,432 – 3 1,113 1,802 1,000 – 412,403 343,705 2,114 14,214 342 – 18,861 29,398 – – 21,317 43,612 Non-interest bearing 2008 2007 $’000 $’000	4,562 351 6.65 7.37 38 490 – – 115,947 54,722 7.00 7.00 1,559 – – – 344,509 338,432 – – – 3 – – 1,113 1,802 – – 1,000 – – – 468,728 395,800 2,114 14,214 – – 342 – – – 18,861 29,398 – – 105,000 – 8.99 – 126,317 43,612 Total carrying amount per balance sheet Weighted Average Interest 2008 2007 2008 2007 $’000 $’000 % %
			– – – – – – – – – – – – – – r or less 2007 $’000	– – 51,763 – – – – – 51,763 – – – 74,500 74,500 Over 1 2008 $’000

[i] Interest rate swaps – cash flow hedges

The corporate debt facility of the consolidated entity currently bears an average variable interest rate of 8.99%. In order to protect against rising interest rates the consolidated entity has entered into interest rate swap contracts under which it has a right to pay interest at fixed rates. Swaps in place cover approximately 71% (2007: nil) of the principal outstanding and will expire on 30 June 2010. The fixed interest rates range between 6.98% and 8.08% (2007: nil) and the variable rate is 1.5% (2007: nil) above the 90 day bank bill rate, which at balance date was 9.39% (2007: nil).

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At 30 June 2008, the notional principal amount and period of expiry on the interest rate swap contracts are as follows:

CONSOLIDATED 2008 2007 $’000 $’000 74,500 – 74,500 – 1,559 – (342) – 1,217 –	COMPANY	COMPANY
2008 $’000 74,500 74,500 1,559 (342) 1,217	2008 $’000 74,500 74,500 1,559 (342) 1,217	2007 $’000 –
		–

		– –
		–

The interest rate swaps require settlement of net interest payable each 90 days. The settlement dates coincide with the dates on which interest is payable on the underlying debt. All swaps are matched directly against the appropriate loans and interest expense and as such are considered highly effective. They are settled on a net basis. The swaps are measured at fair value and all gains and losses attributable to the hedged risk are taken directly to equity and re-classified into profit and loss when the interest expense is recognised.

Movement in interest rate swap contract cash flow hedge reserve

CONSOLIDATED 2008 2007 $’000 $’000 – – (286) – 1,460 – 1,174 – – –	COMPANY	COMPANY
2008 $’000 – (286) 1,460 1,174 –	2008 $’000 – (286) 1,460 1,174 –	2007 $’000 – – –
		–

		–

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[ii] Interest rate sensitivity

The following table details the effect on profit and equity after tax to a 1% change in the interest rates at 30 June 2008 and 30 June 2007.

1% increase in interest rate with all other variables held constant 1% decrease in interest rate with all other variables held constant	Consolidated Net Profit Equity 2008 2007 2008 2007 $’000 $’000 $’000 $’000 (735) (612) 1,203 – 735 612 (1,232) –	Company	Company
	Net Profit 2008 2007 $’000 $’000 (735) (612) 735 612	Net Profit 2008 2007 $’000 $’000 (735) – 735 –	Equity
			2008 2007 $’000 $’000 1,203 – (1,232) –

The sensitivity analysis of the consolidated entity’s exposure to the interest rate risk at balance date has been determined based on the change in fair value due to foreign exchange movement based on exposures at balance sheet date. A positive number indicates an increase in profit and equity. All markto-market movements in cash flow hedges have been assumed to go to equity as the profit and loss impact for any ineffectiveness unwinds over the derivatives’ life.

[d] 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 balance sheet.

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$23,602,077 (2007: $5,065,313).

Credit risk has arisen from the consolidated entity invoicing customers in late June 2008 an incremental amount subsequent to the Hamersley Benchmark iron ore price being set as a higher price for both lump and fines. All contracts with customers refer to the Hamersley Benchmark iron ore price, with the new price being applied from “price setting date” of 1 April 2008. This has resulted in an increase in trade debtors of $63,544,979. The consolidated entity believes these will be fully recoverable.

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APPENDIX III

The consolidated entity minimises concentrations of credit risk in relation to trade receivables by undertaking transactions with a number of customers and by the use of letters of credit which guarantee 90% of receivable amount at the time of sale. There are no significant concentrations of credit risk within the consolidated entity.

Credit risk from balances with banks and financial institutions is managed by Treasury in accordance with a Board approved policy. Investments of surplus funds are made only with approved counterparties and within credit limits assigned to each counterparty. Counterparty credit limits are reviewed by the Mount Gibson Board on an annual basis, and may be updated throughout the year subject to approval of the Mount Gibson Board. The limits are set to minimise the concentration of risks and therefore mitigate financial loss through potential counterparty failure. No material exposure is considered to exist by virtue of the possible non performance of the counterparties to financial instruments.

[e] Commodity price risk

The consolidated entity’s exposure to commodity price risk is significant. Iron ore prices are set each year and apply from 1 April to 31 March the following year. Revenue on sales is recognised based on provisional priced sales and is subject to final adjustments between 30 to 120 days after delivery of the commodity. There are no readily available financial instruments available to hedge the iron ore price.

[f] Liquidity risk and capital risk management

The consolidated entity’s objective is to maintain a balance between continuity of funding and flexibility through the use of its corporate debt facility, finance leases and hire purchase contracts. The consolidated entity manages liquidity risk by continuously monitoring forecast and actual cash flows and matching maturity profiles of financial assets and liabilities.

The consolidated entity’s capital risk management objectives are to safeguard the business as a going concern, to maximise returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure in order to reduce the cost of capital.

Mount Gibson does not have a target debt/equity ratio, but has a policy of maintaining a flexible financing structure so as to be able to take advantage of new investment opportunities that may arise.

At 30 June 2008, the consolidated entity had unutilised standby credit facilities totalling $82 million (2007: $33 million).

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APPENDIX III

The table below analyses the consolidated entity and Mount Gibson’s financial liabilities into relevant maturity groupings based on the remaining period from the balance sheet date to the contractual maturity date. As the amounts disclosed in the table are the contractual undiscounted cash flows, these balances will not necessarily agree with the amounts disclosed in the balance sheet.

		30 June 2008				30 June 2007
Less than 6 months $’000 73,406 2,552 5,976 4,554 145 86,633 2,114 4,554 6,668	6 to 12 months $’000 – 2,511 5,118 4,480 – 12,109 – 4,480 4,480	1 to 5 years $’000 – 11,564 38,713 114,033 – 164,310 – 114,033 114,033	Over 5 years $’000 – – – – – – – – –	Less than 6 months $’000 64,314 1,734 6,242 88,697 – 160,987 3,414 – 3,414	6 to 12 months $’000 – 1,524 6,151 – – 7,675 10,800 – 10,800	1 to 5 years $’000 – 7,082 57,875 – – 64,957 – – –	Over 5 years $’000 – 200 – – – 200 29,398 – 29,398	Total $’000 64,314 10,540 70,268 88,697 –
								233,819

								43,612 –
								43,612

[g] Fair value of financial assets and financial liabilities

The carrying amounts and fair values of the financial assets and financial liabilities for the consolidated entity and Mount Gibson are shown below.

The 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 parties after allowing for transaction costs.

The fair values of cash, short-term deposits, trade and other receivables, trade and other payables and other short-term borrowings approximate their carrying values, as a result of their short maturity or because they carry floating rates of interest.

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APPENDIX III

The fair values of derivative financial instruments are sourced from an independent valuation by Mount Gibson’s treasury advisor, Oakvale Capital (“Oakvale”). Oakvale’s valuation techniques use prevailing market inputs sourced from Reuters/Bloomberg to determine an appropriate mid price valuation.

	Consoli	dated		Company	Company
20 Carrying Amount $’000 33,930 14,728 78,493 4,943 25,161 157,255 1,000 1,113 2,113 73,406 12,415 – 342 86,163 – 44,251 105,000 149,251 (76,046)	08 Fair Value $’000 33,930 14,728 78,493 4,943 25,161 157,255 1,000 1,113 2,113 73,406 12,415 – 342 86,163 – 44,251 105,000 149,251 (76,046)	20 Carrying Amount $’000 28,540 32,258 3,604 6,244 5,065 75,711 – 1,805 1,805 64,314 11,303 87,451 – 163,068 – 55,481 – 55,481 (141,033)	20 Carrying Amount $’000 4,562 – – 38 – 4,600 116,947 1,113 118,060 2,114 – – – 2,114 18,861 – 105,000 123,861 (3,315)	08 Fair Value $’000 4,562 – – 38 – 4,600 116,947 1,113 118,060 2,114 – – – 2,114 18,861 – 105,000 123,861 (3,315)	20 Carrying Amount $’000 351 – 10 480 – 841 54,722 1,805 56,527 14,214 – – – 14,214 29,398 – – 29,398 13,756	07 Fair Value $’000 351 – 10 480 –
						841
						54,722 1,805
						56,527
						14,214 – – –
						14,214
						29,398 – –
						29,398
						13,756

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

2. The following is the directors’ report and auditors’ report of Mount Gibson which is extracted from the 2008 annual report of Mount Gibson (all monetary amounts are stated at A$).

Your directors submit their report for the year ended 30 June 2008 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

Neil D. Hamilton

LLB, AICD

Chairman, Independent Non-Executive director

Mr Hamilton was appointed Non-Executive Chairman on 24 April 2007. Mr Hamilton is a lawyer with more than 23 years experience as a director of public companies. Mr Hamilton is the Chairman of the Nomination, Remuneration and Governance Committee of Mount Gibson and has overall responsibility for Corporate Governance. Mr Hamilton is the Chairman of IRESS Market Technology Limited and Northern Iron Limited and Non-Executive director of Insurance Australia Limited, Metcash Limited and Programmed Maintenance Services Limited. During the past three years Mr Hamilton served as a director of Integrated Group Limited.

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APPENDIX III

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 and 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.

Craig L. Readhead

B. Juris, LL.B, AICD

Independent Non-Executive director

Mr Readhead has spent the last 30 years practising in the resources law area and is a partner of law firm Pullinger Readhead Lucas. Mr Readhead is a member of the Nomination, Remuneration and Governance Committee and the Audit and Risk Management Committee. 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 of Heron Resources Ltd and Galaxy Resources Ltd and is a Non-Executive director of Frankland River Olive Company Limited and India Resources 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. During the past three years Mr Readhead has also served as Chairman of Nickelore Limited and Agincourt Resources Ltd.

Ian A. Macliver

B.Comm, CA, F Fin, AICD

Independent 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. Mr Macliver is Chairman of the Audit and Risk Management Committee and a member of the Nomination, Remuneration and Governance Committee. 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 of Stratatel Ltd and is a Non-Executive director of Port Bouvard Ltd, Empire Beer Group Ltd and Otto Energy Ltd. During the past three years Mr Macliver has also served as a director of BioProspect Ltd.

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APPENDIX III

Alan S. 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. Mr Jones is a member of the Audit and Risk Management Committee. He is a NonExecutive director of Mulpha Australia Limited, Sun Hung Kai & Co. Limited (Hong Kong), Allied Group Limited (Hong Kong), Allied Properties Limited (Hong Kong), APAC Resources Limited and IFC Capital Limited. 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.

Alan D. Rule

B.Comm, B.Acc, CA, MAICD

Alternate director

Chief Financial Officer

Mr Rule was appointed Finance director of Mount Gibson on 1 July 2005 and resigned as Finance director on 30 June 2007 to become Chief Financial Officer of Mount Gibson. Mr Rule is the alternate director to Mr Tonkin. 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 NonExecutive director of Resource Mining Corporation Limited. During the past three years Mr Rule has not served as a director of any other public company.

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APPENDIX III

Mark P. M. Horn

M.A., LLB(Hons), Dip.B.Admin, FSI(Dip)

Barrister of the Honourable Society of Lincoln’s Inn

Mr Horn resigned as a Non-Executive director on 1 May 2008.

Peter R. Bilbe

B.E. (Mining) (Hons), MAusIMM

Mr Bilbe was an executive of Mount Gibson until 30 September 2007, he subsequently resigned as a director on 21 November 2007.

COMPANY SECRETARY

Angela Dent

BBus, CA

Ms Dent consults to a number of public and private companies, as a Management Accountant and Company Secretary. She has experience in financial and management accounting, and statutory requirements, in Australia and South East Asia.

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 2008 was as follows:

==> picture [370 x 114] intentionally omitted <==

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

Mount Gibson Iron Limited
ABN: 87 008 670 817
100% 100% 100% 100%
Geraldton Bulk Handling Pty Ltd Mount Gibson Mining Limited Aztec Resources Limited WHTK Pty Ltd
ABN: 45 100 105 388 ABN: 32 074 575 885 ABN: 45 078 548 562 ABN: 15 098 602 343
100% 100% 100%
Brockman Minerals Pty Ltd Koolan Iron Ore Pty Ltd Koolan Shipping Pty Ltd
ABN: 75 094 634 401 ABN: 87 099 455 277 ABN: 110 647 848
----- End of picture text -----

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APPENDIX III

Nature of Operations and Principal Activities

The principal activities of the entities within the consolidated entity are:

mining of hematite deposits at Tallering Peak;
mining of hematite deposits at Koolan Island;
construction and development of hematite mining operations at Extension Hill; and
exploration and development of hematite deposits at Koolan Island and in the MidWest region of Western Australia.

Employees

The consolidated entity employed 222 employees as at 30 June 2008 (2007: 183 employees).

Future Funding

As at the date of this report the consolidated entity has sufficient funds or access to debt funding to develop and mine the Tallering Peak, Koolan Island and Extension Hill iron deposits.

SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS

Debt Facility

In June 2007 Mount Gibson mandated HSBC Australia Limited and National Australia Bank Limited as the joint lead Arranger and Underwriting Banks for a $200 million debt facility to fund the refinance of the existing project finance facility and the HSBC facility and provide additional debt funding for the Koolan Island and Extension Hill iron ore developments. The facility documentation was signed on 28 August 2007 with drawdown on 6 September 2007. See Note 16 for further details.

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APPENDIX III

Koolan Island Hematite Project

Koolan production and operations ramped up to achieve 3 million tonnes per annum (“Mtpa”) annualised production during the period.

Extension Hill Direct Shipping Ore Project

During the year the consolidated entity completed and the Mount Gibson Board approved the Detailed Feasibility Study into the feasibility of producing and selling 3 Mtpa of hematite ore from the Extension Hill Direct Shipping Ore project. Development and construction commenced in October 2007 with first shipments of ore scheduled for the June quarter of 2009.

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 from Continuing Operations before tax Taxation (expense) Operating profit from Continuing Operations after tax Profit from discontinued operations after income tax Net profit after tax attributable to Members of Mount Gibson	CONSOLIDATED 2008 2007 $’000 $’000 163,857 42,253 (50,513) (13,209 113,344 29,044 – 18,721 113,344 47,765	CONSOLIDATED 2008 2007 $’000 $’000 163,857 42,253 (50,513) (13,209 113,344 29,044 – 18,721 113,344 47,765
		29,044 18,721
		47,765

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APPENDIX III

Tallering Peak Hematite Operations

The Tallering Peak mine continued to improve operational performance during the financial year with waste and ore material movements increasing. Ore tonnes mined increased 31% compared with the corresponding period last year. Overall Tallering Peak achieved record annual ore production, crushing, transport and sales for the financial year. Ore shipments were restricted until early April 2008 by ongoing congestion and poor loading rates at the Geraldton Port.

The Geraldton Port Authority (“GPA”) commissioned its dedicated iron ore ship loader at Berth 5 in late March 2008. The new Berth 5 ship loader has achieved significant improvements in loading rates in the June 2008 quarter. Ore stockpiles at 30 June 2008 totalled 1.9 Mt. The commissioning of the Berth 5 ship-loader in March 2008 and the rail unloader (expected in the June 2009 quarter) is critical to building iron ore export capacity from the Geraldton Port.

Annual crushing performance increased 24% compared with the corresponding period last year which established a crusher throughput record for Tallering Peak. Annual records were also achieved for road haulage and rail haulage which established benchmark performance criteria for the 2008/09 financial year in which haulage will continue to improve with rail upgrades, additional rolling stock and increased storage capacity at the Geraldton Port particularly in the second half of the 2008/09 financial year.

Tallering Peak is being mined in a number of staged cut backs throughout the life of mine. As these stages progressed during the financial year mining bench areas increased resulting in improvements in mine productivity and ultimately record annual material movements. Multiple mine stages has exposed multiple ore sources allowing the optimal feed blend to the crushing circuit for fines and lump ore production. Staged cut backs of the Tallering Main Range ore sources will continue in 2008/09 with supplementary ore supply being produced from the T5 open cut. Total material movement and ore production is forecast to reduce slightly in 2008/09, allowing Mount Gibson to draw down marginally on substantial ore stockpiles which have been generated during the previous year.

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APPENDIX III

Continued infill and extensional exploration drilling at Tallering Peak has significantly enhanced Mount Gibson’s knowledge of the Tallering Peak geological resource and has allowed mine production to be planned with a high level of confidence. Ore mined during the year versus the Reserve resulted in a 98% tonnes and 100% grade reconciliation. Exploration will focus on extending the resource and reserve base over the next two years at Tallering Peak.

PRODUCTION SUMMARY FOR 12 MONTHS Unit Mining – Waste mined bcm – Ore mined wmt Crushing – Lump wmt – Fines wmt Transported to Mullewa Railhead – Lump wmt – Fines wmt Transported to Geraldton Port – Lump wmt – Fines wmt Shipping – Lump wmt – Fines wmt	Sept Qtr 2007 ’000 2,470 825 502 280 782 482 177 659 423 74 497 515 103 618	Dec Qtr 2007 ’000 2,744 943 450 323 773 388 309 697 382 280 662 340 252 592	Mar Qtr 2008 ’000 2,422 914 488 340 828 504 251 755 475 140 615 484 182 666	Jun Qtr 2008 ’000 2,353 1,159 565 416 981 484 401 885 452 259 711 436 256 692	YTD 2008 ’000 9,989 3,841 2,005 1,359 3,364 1,858 1,138 2,996 1,732 753 2,485 1,775 793 2,568	YTD 2007 ’000 9,600 2,932 1,645 1,066 2,711 1,577 1,033 2,610 1,425 976 2,401 1,375 937 2,312	% Incr/ (Decr) 4% 31% 22% 27%
							24% 18% 10%
							15% 22% (23%)
							3% 29% (15%)
							11%

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APPENDIX III

In accordance with Mount Gibson’s stated accounting policy, deferred waste 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. Significant expenditure on waste development at Tallering Peak during the financial year was as follows:

		12 Months	12 Months	12 Months
		ended	ended	ended
		30 June	30 June	30 June
		2008	2007	2006
Waste mined	mill bcm	9.9	9.6	6.5
Deferred waste capitalised	$ mill	97.60	93.24	54.20
Amortisation of deferred waste	$ mill	80.66	53.57	17.77

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 Resources Limited (“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. Mount Gibson acquired Aztec in February 2007.

The orebodies are tabular, high-grade hematite bodies which are estimated to produce a 30% Lump 70% Fines product with consistently high grades from the Main Ore body (>67% Fe). Initial production from established satellite pits has produced approximately 40% Lump 60% Fines product.

Recommencement of open pit mining and stockpiling of ore on the ROM pad occurred in the December quarter 2006. Construction of the shiploader, jetty facilities and crushing and screening plant were completed and commissioned in May 2007 with the first ore shipment taking place in June 2007. At the forecast production rate of 4 Mtpa (production ramps to this rate over the period to the June 2010 quarter), and based on existing ore reserves, production is expected to continue for at least eight years to 2015 with potential to increase resources as a consequence of the planned exploration drilling to be undertaken over the next two to three years.

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APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

Mount Gibson completed its first full year of production from Koolan Island in which ore sources were established, mine development and infrastructure enhanced and installed facilities elevated to required capacity. Initial production from Koolan Island is sourced from Eastern, Barramundi, Acacia and Mullet pits whilst preparatory access works are completed at Main Pit prior to the cut back and eventual production from this high grade premium ore source. Initial development of the satellite ore sources was established during the year and multiple stages of current ore sources commenced. The initial development of Eastern, Barramundi, Acacia and Mullet pits has allowed productivity to improve as bench areas are expanded. Main West, an extension to the Main Pit also commenced during the year and will form part of the stage one cut back of Main Pit. Cut backs of the southern wall of Main Pit in the Crusher Hill and Blinker Hill areas also commenced during the year providing fill material for Main Pit seawall construction.

Seawall construction, pit dewatering and footwall rehabilitation projects commenced during the year and will be ongoing through 2008/09 as Koolan Island prepares to access high quality Main Pit hematite ore. All Main pit access projects will progress in parallel allowing stage 1 of Main Pit to develop below sea level.

A total of 28,676 metres of reverse circulation drilling was completed on Koolan Island during the year and focused primarily on infilling the current resource within planned open pits. This program will continue in 2008/09 to provide an appropriate drill spacing for resource estimation. Drilling to date has reduced the resource section spacing to 50 metres or better in most areas. Detailed geostatistical analysis of the assay data has shown that ore grade and thickness can vary rapidly and identified areas require increased drill hole density to provide meaningful data for detailed ongoing mine planning and evaluation.

Two diamond drill holes were also completed during the year targeting the Main Pit hematite horizon east and centrally of the ultimate Main Pit design. Despite anticipated poor core recoveries due to the friable nature of much of the mineralisation, the drill holes intersected typical Koolan Island Main orebody hematite width, grade and physical characteristics. Both holes continued through a major synclinal fold and intersected high grade hematite mineralisation in the Acacia limb. Both drill holes demonstrated that the Main Pit ore horizon continues for at least 300 metres below the base of the ultimate Main Pit and appears to continue around the synclinal fold into the Acacia Limb. There is at least 1km of untested dip extent along the Acacia Limb between the fold closure and the Acacia Pit.

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APPENDIX III

A further 10,000 metres of diamond drilling is planned to continue testing of the deep Main Pit extensions and the Acacia Limb in 2008/09 ultimately targeting a significant increase in Koolan Island Resources.

PRODUCTION SUMMARY FOR 12 MONTHS Unit Mining – Waste mined bcm – Ore mined wmt Crushing – Lump wmt – Fines wmt Shipping – Lump wmt – Fines wmt	Sept Qtr 2007 ’000 1,779 695 347 339 686 406 248 654	Dec Qtr 2007 ’000 2,143 885 336 403 739 274 452 726	Mar Qtr 2008 ’000 2,076 669 229 374 603 259 310 569	Jun Qtr 2008 ’000 2,531 798 379 566 945 367 584 951	YTD 2008 ’000 8,529 3,047 1,291 1,682 2,973 1,306 1,594 2,900	YTD 2007 ’000 1,748 559 146 128 274 74 76 150	% Incr/ (Decr) ’000 388% 445% 784% 1,214%
							985% 1,665% 1,997%
							1,833%

Significant expenditure on waste development at Koolan Island during the financial year was as follows:

		12 Months	12 Months
		ended	ended
		30 June 2008	30 June 2007
Waste mined	mill bcm	8.5	1.7
Deferred waste capitalised	$ mill	125.51	7.86
Amortisation of deferred waste	$ mill	55.32	1.94

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APPENDIX III

Extension Hill Direct Shipping Ore Project

During the period the consolidated entity completed and the Mount Gibson Board approved 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 validated the broad strategies and parameters assumed for the June 2006 study and evaluated multiple operating options with related costs, timing and risks. The study demonstrated that the project will provide strong financial returns in a short time-frame, with minimal technical risks and relatively low capital requirements.

The DSO project will have very similar operational characteristics to Mount Gibson’s Tallering Peak operation with the added advantage of a much lower strip ratio of less than 1:1 (waste tonnes: ore tonnes) compared with Tallering Peak’s strip ratio of 6:1. Ore mined from Extension Hill will be crushed and screened on site, transported by sealed road 85km to Perenjori and loaded onto rail wagons for a 235km journey to the Geraldton Port. Ore will be stored at the Geraldton Port at Mount Gibson’s ore storage facilities being constructed at the new Berth 5 iron ore ship loading facility and loaded from Berth 5 for export.

WA Environment Minister Templeman issued Ministerial Statement 753 on 24 September 2007 thereby finalising State government environmental approval of the Mt Gibson Iron Ore Mine and Infrastructure Project. Commonwealth government approval for the Project was received on 18 December 2007.

Environmental Management Plans (“EMPs”) for the Project required by Ministerial Statement 753 were submitted to the Department of Environment and Conservation (“DEC”) and Environmental Protection Authority (“EPA”). The EPA recently confirmed acceptance of the EMPs and State approval of the EMPs has now been received. Federal approval is expected by mid September 2008. As Federal approval of the EMPs is required prior to ‘ground disturbing activities’ timely access to the Project site remains a critical project milestone.

Various other regulatory approvals are now progressing as a consequence of receipt of EMP State approval.

An application to transport processed hematite ore from the Extension Hill mine site to Mount Gibson’s facilities at Geraldton Port was lodged with the EPA. The application is proceeding through the Assessment on Referred Information (“ARI”) process nominated by the EPA.

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APPENDIX III

The commencement of operations at Extension Hill remains on schedule for the June quarter of 2009 whilst an upgrade of rail unloading facilities necessary to ensure greater utilisation of the latent capacity at the Geraldton Port remains with the Geraldton Port Authority to construct. Construction of the rail unloading facility is expected to commence in October 2008.

Review of Financial Condition

During the course of the financial year a number of events impacted on the financial condition of the consolidated entity as follows:

Shareholders funds increased by 31% to $597 million:
Holders of 16,054,000 options exercised their options resulting in $10 million in equity funding for Mount Gibson
In June 2007 Mount Gibson mandated HSBC Australia Limited and National Australia Bank Limited as the joint lead Arranger and Underwriting Banks for a $200 million debt facility to fund the refinance of the existing debt facilities and the Koolan Island and Extension Hill iron ore developments (see Note 16).
Acquisition of property, plant and equipment with an aggregate fair value of $7 million that were financed by means of finance leases.
Increase in trade receivables as a result of price increase of 79% for fines and 96% for lump ore from 1 April 2008 which was announced to ASX 24 June 2008.
Mine properties increased by $73 million primarily due to deferred waste capitalised as a result of increase in waste mined at Tallering Peak and Koolan Island.

Cash on hand at year end was $49 million with debt of $105 million drawn down under a Corporate Debt facility and $57 million in equipment finance leases and hire purchase liabilities.

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APPENDIX III

LIKELY DEVELOPMENTS AND EXPECTED RESULTS

Other than as referred to in the Review and Results of Operations and in this report, further information as to likely developments in the operations of the consolidated 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.

SIGNIFICANT EVENTS AFTER BALANCE DATE

As at the date of this report there are no significant events after balance date of Mount Gibson or of the consolidated entity that require adjustment of or disclosure in this report.

SHARE OPTIONS

Unissued shares

Details of Options over Ordinary Shares in Mount Gibson on issue as at balance date and at the date of this report are:

Exercise price Exercise date/Period 55 cents On or before 31 December 2008 78 cents On or before 31 December 2009 89 cents On or before 31 December 2009 90 cents On or before 30 June 2010 90 cents On or before 23 October 2010 110 cents On or before 23 October 2012 Total	OPTIONS ON ISSUE AT Balance date Date of report 100,000 100,000 475,000 375,000 2,646,000 2,421,000 2,000,000 2,000,000 3,000,000 3,000,000 2,000,000 2,000,000 10,221,000 9,896,000	OPTIONS ON ISSUE AT Balance date Date of report 100,000 100,000 475,000 375,000 2,646,000 2,421,000 2,000,000 2,000,000 3,000,000 3,000,000 2,000,000 2,000,000 10,221,000 9,896,000
		9,896,000

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APPENDIX III

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, 16,054,000 options were exercised to acquire fully paid ordinary shares in Mount Gibson at a weighted average exercise price of $0.65. Since the end of the financial year, no options have been exercised.

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 $74,899. This amount has not been included in directors’ and executives’ remuneration.

REMUNERATION REPORT (AUDITED)

This report outlines the remuneration arrangements in place for directors and Key Management Personnel of the consolidated entity in accordance with the requirements of the Corporations Act 2001 and its Regulations.

For the purposes of this report Key Management Personnel of the consolidated entity are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of Mount Gibson and the consolidated entity, directly or indirectly, including any directors of Mount Gibson.

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APPENDIX III

Nomination, Remuneration and Governance Committee (“NRGC”)

The NRGC of the Board of directors of Mount Gibson is responsible for determining and reviewing remuneration arrangements for the Board and Key Management Personnel.

The NRGC assesses the appropriateness of the nature and amount of remuneration 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, high performing Board and Executive team.

Remuneration Policy

The Remuneration Policy of Mount Gibson and its Controlled Entities has been put in place to ensure that:

remuneration policies and systems support Mount Gibson’s wider objectives and strategies;
Directors’ and Senior Executives’ remuneration is aligned to the long-term interests of Shareholders within an appropriate control framework; and
there is a clear relationship between the Executives’ performance and remuneration.

Remuneration Structure

In accordance with best practice corporate governance, the structure of Non-Executive director, Executive director and Senior Executive management remuneration is separate.

Non-Executive Director Remuneration

Objective

The Board seeks to set aggregate remuneration at a level which provides Mount Gibson with the ability to attract and retain directors of the highest calibre, whilst incurring a cost which is acceptable to Shareholders.

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APPENDIX III

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 26 November 2007 when Shareholders approved an aggregate remuneration of $750,000 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 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.

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APPENDIX III

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 Mount Gibson 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, the NRGC 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 III

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 general performance targets and provide rewards for materially improved Company performance. The total potential STI available is at the Board’s 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. Actual STI payments granted depend on the extent to which specific operating targets set at the beginning of the financial year are met. These targets consist of a number of Key Performance Indicators (“KPIs”) covering both financial and non-financial, corporate and individual performance measures. The STIs are based on achieving the following measures where these are applicable to the specific Executive:

performance of the consolidated entity in meeting its objectives which include contribution to net profit after tax, risk management and leadership/team contribution;
financial performance of the consolidated entity;
increase in market capitalisation of the consolidated entity; and
such other matters determined by the NRGC in its discretion.

These measures have been selected to align the interests of Executives with shareholders representing the key drivers for short term success of the business and providing a framework for delivering long term value.

The consolidated entity has predetermined benchmarks that must be met in order to trigger payments under the STI scheme. On an annual basis, the individual performance of each Senior Executive is reviewed by the NRGC, which is in line with their responsibilities, after consideration of the Executive’s performance against KPIs. This process usually occurs within two months after the reporting date. NRGC then determines the amount of STI to be allocated to each executive. Payments made are delivered as a cash bonus in the following reporting period.

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APPENDIX III

STI bonus for 2007 and 2008 financial years

For the 2007 financial year, 100% of the STI cash bonus of $350,000 as previously accrued in that period vested to executives and was paid in the 2008 financial year. For the 2008 financial year 100% of the STI cash bonus totalling $581,600 has been approved and vested to Senior Executives. $431,600 was paid in the current financial year.

Long-term Incentive (“LTI”) for 2008 financial year

At the commencement of the 2008 financial year, Mount Gibson established the Mount Gibson Iron Limited Performance Rights Plan (“PRP”). The PRP enables Mount Gibson to provide its executives with long term incentives which create a link between the delivery of value to shareholders, financial performance and rewarding and retaining the executives. Under the PRP, the Board may invite eligible executives to apply for performance rights, which are an entitlement to receive ordinary shares in Mount Gibson, subject to satisfaction by the executive of performance and vesting conditions set by the Board.

Performance rights were issued by Mount Gibson in respect of the 2008 financial year. The employment contracts for the Managing director, Mr Tonkin, and the Chief Financial Officer, Mr Rule, incorporate payment of a long term incentive for the 2008 and successive financial years. Under their employment contracts, Mr Tonkin and Mr Rule will each be invited to apply for, and Mount Gibson will grant (subject to all applicable shareholder approvals being first obtained) a number of performance rights equivalent to one third of their respective base salaries (including superannuation) divided by the volume weighted average price of Mount Gibson’s shares as traded on ASX for the 30 day period to 30 June for the relevant year.

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APPENDIX III

The rights will be granted at no cost to the executives and will convert into ordinary shares on completion by the executive of three years’ continuous service, subject to satisfaction of specified performance hurdles related to Mount Gibson’s Total Shareholder Return (“TSR”) measured against the TSR of a comparator group of companies over the same period. Mount Gibson received shareholder approval for the issue of the performance rights to Mr Tonkin and Mr Rule at its 2007 AGM.

Employment Contracts

As at the date of this report, the consolidated entity had entered into employment contracts with the following Executive director and Senior Executive:

Luke Tonkin

The key terms of his contract include:

Commenced 1 July 2008 with no set term;
Annual Salary Package increase by minimum of CPI from 1 July every year;
STI Bonus of up to one third of Annual Salary Package;
LTI Bonus of up to one third of Annual Salary Package; and
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 12 months Annual Salary Package plus any other accrued entitlements and bonuses. If Mr Tonkin wishes to terminate the contract, he must provide six months notice.

Alan Rule

The key terms of his contract include:

Commenced 1 July 2008 with no set term;
Annual Salary Package increase by minimum of CPI from 1 July every year;
STI Bonus of up to one third of Annual Salary Package;

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APPENDIX III

LTI Bonus of up to one third of Annual Salary Package; and
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 12 months Annual Salary Package plus any other accrued entitlements and bonuses. If Mr Rule wishes to terminate the contract, he must provide six months notice.

Remuneration of Key Management Personnel for the year ended 30 June 2008

Directors N Hamilton L Tonkin C Readhead I Macliver A Jones P Bilbe M Horn A Rule# Sub-total directors Executives D Quinlivan Chief Operating Officer R Mencel General Manager – Tallering Peak R Jordinson General Manager – Koolan Island Sub-total executives Totals		Short Term	Cash Bonuses $ – 210,600 – – – 205,000 – 150,000 565,600 – 16,000 – 16,000 581,600	Post Employment Super- annuation Retirement Benefits $ $ 15,556 – 48,289 – – – 7,440 – 6,606 – 4,061 – – – 37,156 – 119,108 – – – 24,413 – – – 24,413 – 143,521 –	Share Based Payment Options $ – 715,163 – – – – – 368,710 1,083,873 – 62,903 35,903 98,806 1,182,679	Total % Performance Related $ 188,400 0% 1,567,549 59% 85,000 0% 90,000 0% 80,000 0% 254,186 81% 62,500 0% 970,124 53% 3,297,759 685,058 0% 374,566 21% 550,903 7% 1,610,527 4,908,286
	Salary and Fees $ 172,844 592,083 85,000 82,560 73,394 45,125 62,500 412,844 1,526,350 683,644 271,250 515,000 1,469,894 2,996,244	Non Monetary $ – 1,414 – – – – – 1,414 2,828 1,414 – – 1,414 4,242		Super- annuation $ 15,556 48,289 – 7,440 6,606 4,061 – 37,156 119,108 – 24,413 – 24,413 143,521

Mr Rule is the Chief Financial Officer of the Mount Gibson Group and is an alternate director for Mr Tonkin.

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APPENDIX III

The following directors resigned during the year:

Mr Bilbe Mr Horn

21 November 2007 1 May 2008

Options granted as part of remuneration for the year ended 30 June 2008

					Value of				Total Value
					Options			Value	of Options
				Value per	Granted			at Date	Exercised
		Exercise	Grant	Option at	During	Vesting	Exercised	Option	and Lapsed	% of
	Grant Date	Price	Number	Grant Date	the Year	Date	Number	Lapsed	During Year	Remuneration
					$
R Mencel	9-Jan-08	$2.99	100,000	0.7387	73,870	31-Dec-08	N/A	N/A	N/A	20%
R Jordinson	9-Jan-08	$2.99	100,000	0.7387	73,870	31-Dec-08	N/A	N/A	N/A	13%

These options were granted but not yet issued on the basis that the executives must complete their employment service to 31 December 2008 before they vest.

Options granted as part of Senior 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	9-Jan-08
Share price at grant date	$2.80
Exercise price	$2.99
Risk free interest rate	6.53%
Volatility factor	53%
Expiry date	31-Dec-09

Performance Rights granted as part of remuneration for the year ended 30 June 2008

						Value of
						Performance
						Rights
					Value per	Granted
		Performance	Performance	Grant	Right at	During	% of
	Grant Date	Period Start	Period End	Number	Grant Date	the Year	Remuneration
					$	$
L Tonkin	18-Apr-08	18-Apr-08	30-Jun-10	161,681	$2.61	421,987	27%
A Rule	18-Apr-08	18-Apr-08	30-Jun-10	121,261	$2.61	316,491	33%

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APPENDIX III

Performance Rights granted as part of remuneration have been independently valued using the Black-Scholes methodology to produce a Monte-Carlo simulation model which allows the incorporation of the market based performance hurdles that must be met before the Performance Rights vest. The value per option at grant date is calculated using the following assumptions:

Grant date	18-Apr-08
Share price at grant date	$2.72
Risk free interest rate	6.29%
Volatility factor	52%
Performance period start date	1-Jul-07
Performance period end date	30-Jun-10

	Proportion of
Percentile Rank Achieved	Target Award Vesting
>76th percentile	100%
>51st percentile and <76th percentile	Pro rata allocation
51st percentile	50%
<51st percentile	0%

Shares issued on exercise of options for the year ended 30 June 2008

There were no shares issued on exercise of options by the directors and executives during the year ended 30 June 2008.

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APPENDIX III

Remuneration of Key Management Personnel for the year ended 30 June 2007

Directors N Hamilton W Willis B Johnson L Tonkin C Readhead I Macliver A Jones P Bilbe M Horn A Rule# Sub-total directors Executives K Malaxos Chief Operating Officer (until 18 December 2006) D Quinlivan Chief Operating Officer (from 18 December 2006) R Mencel General Manager – Tallering Peak Q Granger General Manager – Koolan Island (until 8 June 2007) R Jordinson General Manager – Koolan Island (from 8 June 2007) Sub-total executives Totals		Short Term	Cash Bonuses $ – – – 200,000 – – – – – 150,000 350,000 – – 15,000 – – 15,000 365,000	Post Employment Super- annuation Retirement Benefits $ $ 1,486 – 2,428 – – – 49,541 – – – 3,963 – – – 9,298 – – – 33,028 – 99,744 – 10,413 – – – 19,650 – 12,640 – – – 42,703 – 142,447 –	Share Based Payment Options $ – – 801,634 770,745 – – – – – 363,050 1,935,429 – – 27,000 – – 27,000 1,962,429	Total % Performance Related $ 18,000 0% 88,200 0% 844,368 95% 1,572,246 62% 63,000 0% 48,000 0% 44,000 0% 125,810 0% – 0% 914,672 56% 3,718,296 164,403 0% 431,078 0% 279,983 15% 153,669 0% 47,000 0% 1,076,133 4,794,429
	Salary and Fees $ 16,514 85,772 40,000 550,459 63,000 44,037 44,000 115,320 – 366,972 1,326,074 145,683 430,650 218,333 141,029 47,000 982,695 2,308,769	Non Monetary $ – – 2,734 1,501 – – – 1,192 – 1,622 7,049 8,307 428 – – – 8,735 15,784		Super- annuation $ 1,486 2,428 – 49,541 – 3,963 – 9,298 – 33,028 99,744 10,413 – 19,650 12,640 – 42,703 142,447

On 30 June 2007, Mr Rule resigned as Finance director to become Chief Financial Officer and alternate director for Mr Tonkin.

The following directors resigned during the financial year ended 30 June 2007:

Mr Willis	24 April 2007
Mr Johnson	30 June 2007
Mr Rule	30 June 2007

All executive directors and Senior Executives are engaged through Controlled Entities of Mount Gibson.

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APPENDIX III

Options granted as part of remuneration for the year ended 30 June 2007

					Value of				Total Value
					Options			Value	of Options
				Value per	Granted			at Date	Exercised
		Exercise	Grant	Option at	During	Vesting	Exercised	Option	and Lapsed	% of
	Grant Date	Price	Number	Grant Date	the Year	Date	Number	Lapsed	During Year	Remuneration
					$
R Mencel	9-Jan-07	$0.89	250,000	$0.216	54,000	31-Dec-07	N/A	N/A	N/A	10%

Options granted as part of director and Senior 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	13-June-06	4-Oct-05	4-Oct-05	4-Oct-05
Share price at grant date	$0.70	$0.70	$0.86	$0.86	$0.86
Exercise price	$0.78	$0.78	$0.90	$0.90	$1.10
Risk free interest rate	5.09%	5.09%	5.40%	5.40%	5.40%
Volatility factor	60%	60%	60%	60%	60%
Expiry date	31-Dec-09	31-Dec-06	30-Jun-10	23-Oct-10	23-Oct-12

Shares issued on exercise of options for the year ended 30 June 2007

Directors W Willis C Readhead I Macliver Total	No. of shares issued Paid per share Unpaid per share $ $ 1,000,000 0.25 – 500,000 0.25 – 500,000 0.25 – 2,000,000

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APPENDIX III

DIRECTORS’ MEETINGS

The number 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:

			Nomination,
		Audit	Remuneration
		and Risk	and
		Management	Governance
	Directors’	Committee	Committee
	Meetings	Meetings	Meetings
Number of Meetings Held	13	2	3
N Hamilton	13	–	3
L Tonkin	13	–	–
C Readhead	11	2	3
I Macliver	12	2	3
A Jones	12	2	–
P Bilbe	6	–	–
M Horn	9	–	–

Mr Rule did not attend any meetings as an alternate director during the year.

INTERESTS IN THE SHARES AND OPTIONS OF MOUNT GIBSON

As at the date of this report, the interests of the directors in the Shares and Options of Mount Gibson were:

			Performance
	Ordinary	Options	Rights over
	Shares	over Shares	Shares
N Hamilton	185,000	–	–
L Tonkin	–	5,000,000	161,681
C Readhead	567,500	–	–
I Macliver	1,000,000	–	–
A Jones	100,000	–	–
A Rule	50,000	2,000,000	121,261

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APPENDIX III

ENVIRONMENTAL REGULATION AND PERFORMANCE

The consolidated entity has developed Environmental Management Plans for its operations at Koolan Island, Tallering Peak and the rail head at Mullewa. The Environmental Management Plans have been approved by the West Australian Government Departments of Industry and Resources, Environment and Conservation, and Land Management.

The granting of an environmental works approval by the Department of Environment and Conservation to allow construction of “prescribed” facilities at the Extension Hill mine site is pending Environmental Protection Authority approval of the Environmental Management Plans.

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.

PROCEEDINGS ON BEHALF OF MOUNT GIBSON

There are no proceedings on behalf of Mount Gibson under section 237 of the Corporations Act 2001 in the financial year or at the date of this report.

ROUNDING

Amounts in this report and the accompanying financial report have been rounded to the nearest thousand dollars ($’000) unless otherwise stated under the option available to Mount Gibson under ASIC Class Order 98/0100. Mount Gibson is an entity to which the class order applies.

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.

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APPENDIX III

AUDITOR’S INDEPENDENCE DECLARATION

In accordance with section 307C of the Corporations Act 2001, the directors received the attached independence declaration from the auditor of Mount Gibson on page 35 which forms part of this report.

NON-AUDIT SERVICES

The following non-audit services were provided by the entity’s auditor, Ernst & Young. The directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised. Ernst & Young received or are due to receive the following amounts for the provision of non-audit services:

Aztec acquisition stamp duty advice Other	$ 46,761 2,575
	49,336

Signed in accordance with a resolution of the directors.

N HAMILTON

Chairman

Perth, 11 August 2008.

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APPENDIX III

Independent auditor’s report to the members of Mount Gibson Iron Limited

Report on the Financial Report

We have audited the accompanying financial report of Mount Gibson Iron Limited, which comprises the balance sheet as at 30 June 2008, and the income statement, statement of changes in equity and cash flow statement for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration of the consolidated entity comprising Mount Gibson and the entities it controlled at the year’s end or from time to time during the financial year.

Directors’ Responsibility for the Financial Report

The directors of Mount Gibson are responsible for the preparation and fair presentation of the financial report in accordance with the Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the 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. In Note 1 (d), the directors also state that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Auditor’s Responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.

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APPENDIX III

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, we consider internal controls relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Independence

In conducting our audit we have met the independence requirements of the Corporations act 2001. We have given to the directors of Mount Gibson a written Auditor’s Independence Declaration. 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.

Auditor’s Opinion

In our opinion:

the financial report of Mount Gibson Iron Limited is in accordance with 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 2008 and of their performance for the year ended on that date; and
ii complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001.
the financial report also complies with International Financial Reporting Standards as issued by the International Accounting Standards Board.

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APPENDIX III

Report on the Remuneration Report

We have audited the Remuneration Report included in pages 28 to 33 of the directors’ report for the year ended 30 June 2008. The directors of Mount Gibson are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.

Auditor’s Opinion

In our opinion the Remuneration Report of Mount Gibson Iron Limited for the year ended 30 June 2008, complies with section 300A of the Corporations Act 2001.

Ernst & Young

Gavin A Buckingham

Partner Perth

11 August 2008

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

3. The following is the audited consolidated financial statements of Mount Gibson for the year ended 30 June 2007 prepared in accordance with Australian accounting standards which is extracted from the 2007 annual report of Mount Gibson (all monetary amounts are stated in A$).

CONSOLIDATED INCOME STATEMENT

For the year ended 30 June 2007

CONSOLIDATED 2007 2006 $’000 $’000 162,748 73,389 2,256 1,857 165,004 75,246 (108,955) (50,938) 56,049 24,308 2,805 1,966 (13,020) (6,684) – – (1,506) – (8) (814) 44,320 18,776 (2,067) (1,142) 42,253 17,634 (13,209) 3,949 29,044 21,583 18,721 1,490 47,765 23,073 – 406 47,765 23,479 7.53 6.01 7.43 5.88 4.58 6.01 4.52 5.88	COMPANY	COMPANY
2007 $’000 162,748 2,256 165,004 (108,955) 56,049 2,805 (13,020) – (1,506) (8) 44,320 (2,067) 42,253 (13,209) 29,044 18,721 47,765 – 47,765 7.53 7.43 4.58 4.52	2007 $’000 – 2,840 2,840 – 2,840 1 (1,543) – (1,506) – (208) (3) (211) (474) (685) 91 (594) – (594)	2006 $’000 – 2,836
		2,836 –
		2,836 1 (6,368 10,833 – (25
		7,277 (11
		7,266 251
		7,517 –
		7,517 –
		7,517

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APPENDIX III

CONSOLIDATED BALANCE SHEET

As at 30 June 2007

CONSOLIDATED 2007 2006 $’000 $’000 60,798 4,548 9,848 6,180 34,581 5,685 1,049 877 5,065 2,541 111,341 19,831 – 46,093 111,341 65,924 – – 1,805 1,248 – – 187,768 20,345 9,027 4,176 370,684 51,567 11,875 – 581,159 77,336 692,500 143,260 64,314 17,836 98,754 1,594 – 1,470 1,172 463 164,240 21,363 – 3,068 164,240 24,431	COMPANY	COMPANY
2007 $’000 60,798 9,848 34,581 1,049 5,065 111,341 – 111,341 – 1,805 – 187,768 9,027 370,684 11,875 581,159 692,500 64,314 98,754 – 1,172 164,240 – 164,240	2007 $’000 351 490 – 313 – 1,154 – 1,154 54,722 1,805 338,432 5 – – 36,894 431,858 433,012 14,214 – – – 14,214 – 14,214	2006 $’000 145 58 – 1 –
		204 –
		204
		29,690 1,248 42,431 5 – – 11,347
		84,721
		84,925
		341 – – –
		341 –
		341

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APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

– – 18,470 702 55,481 4,247 – 4,684 73,951 9,633 238,191 34,064 454,309 109,196 386,766 86,851 57,861 10,096 9,682 473 454,309 97,420 – 11,776 454,309 109,196 CONSOLIDATED 2007 2006 $’000 $’000	COMPANY	COMPANY
– 18,470 55,481 – 73,951 238,191 454,309 386,766 57,861 9,682 454,309 – 454,309 2007 $’000	29,398 – – – 29,398 43,612 389,400 386,766 (6,560) 9,194 389,400 – 389,400 2007 $’000	– – – – 2006 $’000
		–
		341
		84,584

		86,851 (5,966) 3,699
		84,584 –
		84,584

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APPENDIX III

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 30 June 2007

CONSOLIDATED 2007 2006 $’000 $’000 154,441 75,519 (144,931) (82,704) (6,420) (1,196) 3,090 (8,381) 2,644 1,951 50,354 – – – 3,652 – – – 3,767 7 (36,834) (12,362) (4,578) (15,126) (37,594) – 295 – – (960) (18,294) (26,490) 2,010 7,460 (280) (395) – – 73,404 1,500 (6,529) (2,520) – (419) – (1,100) – 4,053 68,605 8,579 53,401 (26,292) – 56 7,397 33,633 60,798 7,397	COMPANY	COMPANY
2007 $’000 154,441 (144,931) (6,420) 3,090 2,644 50,354 – 3,652 – 3,767 (36,834) (4,578) (37,594) 295 – (18,294) 2,010 (280) – 73,404 (6,529) – – – 68,605 53,401 – 7,397 60,798	2007 $’000 – (1,509) (111) (1,620) 332 24,892 (6,275) – – – – – – 295 – 19,244 2,010 (280) (19,148) – – – – – (17,418) 206 – 145 351	2006 $’000 – (1,073) (11)
		(1,084)
		40 – – – (20,813) – – – – – (960)
		(21,733)
		7,460 (395) 15,853 – – – – –
		22,918
		101 – 44
		145

– 234 –

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APPENDIX III

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 30 June 2007

	Attributable to Equity	Attributable to Equity	Holders of the Parent	Holders of the Parent	Total Equity
Issued Capital $’000 79,381 – – – – – – – – 10 7,460 – 86,851	(Accumulated Losses)/ Retained Earnings $’000 (13,383) – – – – – – 23,479 23,479 – – – 10,096	Option Premium Reserve $’000 1,631 – – – – 4,323 4,323 – 4,323 – – – 5,954	Net Unrealised Gains/(Losses) Reserve $’000 1,165 (3,305) 465 (115) – – (2,955) – (2,955) – – – (1,790)	Other Reserves $’000 – – – – (465) – (465) – (465) – – (3,226) (3,691)	$’000 77,750

					(3,305) 465 (115) (465) 4,323
					903 23,073
					23,976 10 7,460 –
					109,196

– 235 –

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APPENDIX III

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONTINUED

For the year ended 30 June 2007

	Attributable to Equity	Attributable to Equity	Holders of the Parent	Holders of the Parent	Total Equity
Issued Capital $’000 86,851 – – – – – – – – – 297,905 2,010 – 386,766	(Accumulated Losses)/ Retained Earnings $’000 10,096 – – – – – – – 47,765 47,765 – – – 57,861	Option Premium Reserve $’000 5,954 – – – – – 2,957 2,957 – 2,957 – – – 8,911	Net Unrealised Gains/(Losses) Reserve $’000 (1,790) 1,032 1,506 3,215 – – – 5,753 – 5,753 – – – 3,963	Other Reserves $’000 (3,691) – – – (386) 885 – 499 – 499 – – – (3,192)	$’000 109,196

					1,032 1,506 3,215 (386) 885 2,957
					9,209 47,765
					56,974 297,905 2,010 (11,776)
					454,309

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APPENDIX III

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONTINUED

For the year ended 30 June 2007

Attributable to Equity	Attributable to Equity	Holders of the Parent Option Premium Reserve Net Unrealised Gains/ (Losses) Reserve $’000 $’000 1,631 1,050 – (3,305) 4,323 – 4,323 (3,305) – – 4,323 (3,305) – – – – 5,954 (2,255) 5,954 (2,255) 2,957 – – 1,032 – 1,506 2,957 2,538 – – 2,957 2,538 – – – – 8,911 283	Total Equity
Issued Capital $’000 79,381 – – – – – 10 7,460 86,851 86,851 – – – – – – 297,905 2,010 386,766	Accumulated Losses $’000 (13,483) – – – 7,517 7,517 – – (5,966) (5,966) – – – – (594) (6,560) – – (6,560)	Option Premium Reserve $’000 1,631 – 4,323 4,323 – 4,323 – – 5,954 5,954 2,957 – – 2,957 – 2,957 – – 8,911	$’000 68,579

			(3,305) 4,323
			1,018 7,517
			8,535 10 7,460
			84,584

			84,584

			2,957 1,032 1,506
			5,495 (594)
			4,901 297,905 2,010
			389,400

– 237 –

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APPENDIX III

NOTES TO THE CONSOLIDATED FINANCIAL REPORT

For the year ended 30 June 2007

1. Summary of significant accounting policies

(a) Corporate information

The financial report of Mount Gibson for the year ended 30 June 2007 was authorised for issue in accordance with a resolution of the directors on 27 August 2007.

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

The nature of operations and principal activities of the consolidated entity are the mining of hematite deposits at Tallering Peak and Koolan Island and exploration and development of hematite deposits in the MidWest 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.

(c) 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.

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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 Mount Gibson at cost less impairment losses, if any.

(d) Statement of compliance

Except for the amendments to AASB 101 Presentation of Financial Statements, which the consolidated entity has early adopted, Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by the consolidated entity for the annual reporting period ending 30 June 2007.

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APPENDIX III

These are outlined in the table below.

				Application
				Date for
		Impact on consolidated	Application Date	consolidated
Reference	Title	entity financial report	of Standard	entity
Revised AASB 101	Presentation of Financial Statements	No change to accounting	1 January 2007	1 July 2007
		policy required. Therefore
		no impact.
AASB 2005-10	Amendments to Australian	No change to accounting	1 January 2007	1 July 2007
	Accounting Standards [AASB 132,	policy required. Therefore
	AASB 101, AASB 114, AASB 117,	no impact.
	AASB 133, AASB 139, AASB 1,
	AASB 4, AASB 1023 & AASB
	1038]
AASB 2007-1	Amendments to Australian	No change to accounting	1 March 2007	1 July 2007
	Accounting Standards arising from	policy required. Therefore
	AASB Interpretation 11 [AASB 2]	no impact.
AASB 2007-2	Amendments to Australian	No change to accounting	1 January 2008	1 July 2008
	Accounting Standards arising from	policy required. Therefore
	AASB Interpretation 12 [AASB 1,	no impact.
	AASB 117, AASB 118, AASB 120,
	AASB 121, AASB 127, AASB 131 &
	AASB 139]
AASB 2007-3	Amendments to Australian	No change to accounting	1 January 2009	1 July 2009
	Accounting Standards arising from	policy required. Therefore
	AASB 8 [AASB 5, AASB 6, AASB	no impact.
	102, AASB 107, AASB 119, AASB
	127, AASB 134, AASB 136, AASB
	1023 & AASB 1038]
AASB 2007-4	Amendments to Australian	No change to accounting	1 July 2007	1 July 2007
	Accounting Standards arising from	policy required. Therefore
	ED151 and Other Amendments	no impact.

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FINANCIAL INFORMATION ON MOUNT GIBSON

				Application
				Date for
		Impact on consolidated	Application Date	consolidated
Reference	Title	entity financial report	of Standard	entity
AASB 2007-6	Amendments to Australian	No change to accounting	1 January 2009	1 July 2009
	Accounting Standards arising from	policy required. Therefore
	AASB 123 [AASB 1, AASB 101,	no impact.
	AASB107, AASB 111, AASB 116 &
	AASB 138 and Interpretations 1 and
	12]
AASB 2007-7	Amendments to Australian	No change to accounting	1 July 2007	1 July 2007
	Accounting Standards [AASB 1,	policy required. Therefore
	AASB 2, AASB 4, AASB 5, AASB	no impact.
	107 & AASB 128]
AASB 7	Financial Instruments: Disclosures	No change to accounting	1 January 2007	1 July 2007
		policy required. Therefore
		no impact.
AASB 8	Operating Segments	No change to accounting	1 January 2009	1 July 2009
		policy required. Therefore
		no impact.
AASB 123	Borrowing Costs	No change to accounting	1 January 2009	1 July 2009
(revised June 2007)		policy required. Therefore
		no impact.
AASB Interpretation 10	Interim Financial Reporting and	No change to accounting	1 November 2006	1 July 2007
	Impairment	policy required. Therefore
		no impact.
AASB Interpretation 11	Group and Treasury Share	No change to accounting	1 March 2007	1 July 2008
	Transactions	policy required. Therefore
		no impact.
AASB Interpretation 12	Service Concession Arrangements	No change to accounting	1 January 2008	1 July 2008
		policy required. Therefore
		no impact.
AASB Interpretation 129	Service Concession Arrangements	No change to accounting	1 January 2008	1 July 2008
(revised June 2007)		policy required. Therefore
		no impact.

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APPENDIX III

The financial report complies with Australian Accounting Standards, which include Australian equivalents to International Financial Reporting Standards (“AIFRS”). The financial report also complies with International Financial Reporting Standards (“IFRS”).

(e) 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.

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.

(f) Property, plant and equipment

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

Depreciation

The cost of owned 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. Plant and equipment under hire purchase or finance lease directly engaged in mining operations is written down to its residual value over the period of the hire purchase or finance lease. Other assets which are depreciated or amortised on a basis other than the units-of-production method typically are depreciated on a straight-line basis over the estimated useful life of the asset as follows:

Buildings 5-20 years Motor vehicles 4-5 years Office equipment 3-5 years Leasehold improvements Shorter of lease term or useful life of 5-10 years

Koolan Island major fleet hire purchase 5 years

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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.

(g) Mine properties

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(h) Acquisition, exploration, evaluation and development costs

Acquisition costs

Exploration and evaluation costs

Development costs

(i) Borrowing costs

Borrowing costs are recognised as an expense when incurred.

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset.

(j) Rehabilitation costs

Long-term environmental obligations are based on the consolidated entity’s environmental management plans, in compliance with current environmental and regulatory requirements.

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APPENDIX III

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.

(k) 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.

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APPENDIX III

(l) Investments

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

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.

(m) Non-current assets and disposal groups held for sale and discontinued operations

An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell the asset (or disposal group), but not in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset (or disposal group) is recognised at the date of derecognition.

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APPENDIX III

(n) Inventories

Inventories are valued at the lower of cost and net realisable value.

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.

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APPENDIX III

(r) Trade and other payables

(s) Provisions

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

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 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.

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APPENDIX III

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 and 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.

(u) Employee benefits

Wages, salaries, annual leave and sick leave

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APPENDIX III

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

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APPENDIX III

Capitalised leased assets are depreciated over the estimated useful life of the asset or where appropriate, over the estimated life of the mine.

(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

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

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APPENDIX III

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

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

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.

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APPENDIX III

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.

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.

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APPENDIX III

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting.

At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is kept in equity until the forecasted transaction occurs.

If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement.

(aa) Issued capital

(bb) Earnings per share

Diluted earnings per share is calculated as net profit attributable to members of Mount Gibson, 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.

– 254 –

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APPENDIX III

(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(j). 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 resources and the production capacity of the operations 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. The consolidated entity uses proved and probable reserves to depreciate assets on a units of production basis. However where a mineral property has been acquired and an amount has been attributed to the fair value of resources not yet designated as reserves, the additional resources have been taken into account. When these factors change or become known in the future, such differences will impact pretax profit and carrying values of assets.

(iii) Determination of mineral resources and ore reserves

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APPENDIX III

(iv) Impairment of capitalised exploration and evaluation expenditure

(v) Impairment of capitalised mine development expenditure

– 256 –

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APPENDIX III

(vi) Impairment of property, plant and equipment

In determining value in use, future cash flows are based on:

Estimates of the quantities of ore reserves and mineral resources for which there is a high degree of confidence of economic extraction;
Future production levels;
Future commodity prices; and
Future cash costs of production and capital expenditure.

Variations to the expected future cash flows, and timing thereof, could result in significant changes to any impairment losses recognised, if any, which could in turn impact future financial results.

(vii) Deferred waste

Any proposed changes in the design of the mine;
Estimates of the quantities of ore reserves and mineral resources for which there is a high degree of confidence of economic extraction;

– 257 –

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APPENDIX III

Future production levels;
Future commodity prices; and
Future cash costs of production and capital expenditure.
(viii) Recoverability of potential deferred income tax assets

(ix) Share-based payment transactions

The consolidated entity measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted and applying an estimated probability that they will vest. The fair value is determined by an external valuer using a Binomial model, with the assumptions detailed in Note 24. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact expenses and equity.

(x) Financial guarantees

The fair value of financial guarantee contracts have been assessed using the interest differential approach.

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APPENDIX III

CONSOLIDATED 2007 2006 $’000 $’000 156,020 73,389 6,728 – 162,748 73,389 2,256 1,857 – – 2,256 1,857 – 632 2,764 939 41 395 2,805 1,966	COMPANY	COMPANY
2007 $’000 156,020 6,728 162,748 2,256 – 2,256 – 2,764 41 2,805	2007 $’000 – – – 332 2,508 2,840 – – 1 1	2006 $’000 – –
		–
		40 2,796
		2,836

		– – 1
		1

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APPENDIX III

4,370 175 (3,010) – 1,360 175 2,122 934 (1,446) – 676 934 31 33 2,067 1,142 2,078 674 4,103 3,079 885 447 51 78 7,117 4,278 (2,400) (15) 4,717 4,263 CONSOLIDATED 2007 2006 $’000 $’000	COMPANY	COMPANY
4,370 (3,010) 1,360 2,122 (1,446) 676 31 2,067 2,078 4,103 885 51 7,117 (2,400) 4,717 2007 $’000	3 – 3 – – – – 3 – – – – – – – 2007 $’000	11 – 2006 $’000
		11

		– –
		–

		–
		11

		– – – –
		– –
		–

– 260 –

APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

Amortisation of deferred waste Amortisation of other 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 Net loss on sale of plant and equipment Bad debts Net loss on disposal of available-for- sale-financial-assets Impairment of investments NOTES	55,508 17,296 3,141 473 2,957 4,323 19,766 754 8 814 10,702 5,129 18,451 9,288 501 – 44 541 183 – 1,506 400 CONSOLIDATED 2007 2006 $’000 $’000	COMPANY
		– – – 4,323 – – – 25 – – – – – – 44 420 183 – 1,506 400 2007 2006 $’000 $’000

– 261 –

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FINANCIAL INFORMATION ON MOUNT GIBSON

CONSOLIDATED 2007 2006 $’000 $’000 – – – – 21,286 6,601 – (13,523) 21,286 (6,922) – – 164 – 1,292 199 1,456 199	COMPANY	COMPANY
2007 $’000 – – 21,286 – 21,286 – 164 1,292 1,456	2007 $’000 – – 474 – 474 – – – –	2006 $’000 – – (251) –
		(251)

		– – –
		–

– 262 –

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APPENDIX III

69,052 16,151 20,715 4,845 (774) (7,341) – (5,752) 452 – 893 1,326 21,286 (6,922) 30.8% (25.7%) 13,209 (3,949) 8,077 (2,973) 21,286 (6,922) CONSOLIDATED 2007 2006 $’000 $’000	COMPANY	COMPANY
69,052 20,715 (774) – 452 893 21,286 30.8% 13,209 8,077 21,286 2007 $’000	(120) (36) – 58 452 – 474 (395.5%) 474 – 474 2007 $’000	7,266 2006 $’000

		2,180 – (3,731) – 1,300
		(251)

		(3.5%) (251) –
		(251)

– 263 –

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APPENDIX III

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

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 Iron Limited. In this regard Mount Gibson has assumed the benefit of tax losses from controlled entities of $26,020,750 (2006: $10,672,008) 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.

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APPENDIX III

Recognised deferred tax assets and liabilities

Deferred tax assets and liabilities are attributable to the following:

Assets 2007 2006 $’000 $’000 (131) (218) (718) (7) (10,036) (266) – – (105) (162) – – – (1,662) (275) – – – – – (999) (1,301) – – – – 4,266 – (5,893) (350) (36,672) (16,443) (50,563) (20,409) 38,688 20,409 (11,875) –	Liabilities 2007 2006 $’000 $’000 – – – – – – 7,825 3,689 – – 2,709 13,363 – – 2,336 322 427 202 396 – – – 24,991 3,950 4 5 – 3,562 – – – – 38,688 25,093 (38,688) (20,409) – 4,684	Net	Net
2007 $’000 (131) (718) (10,036) – (105) – – (275) – – (999) – – 4,266 (5,893) (36,672) (50,563) 38,688 (11,875)	2007 $’000 – – – 7,825 – 2,709 – 2,336 427 396 – 24,991 4 – – – 38,688 (38,688) –	2007 $’000 (131) (718) (10,036) 7,825 (105) 2,709 – 2,061 427 396 (999) 24,991 4 4,266 (5,893) (36,672) (11,875) – (11,875)	2006 $’000 (218) (7) (266) 3,689 (162) 13,363 (1,662) 322 202 – (1,301) 3,950 5 3,562 (350) (16,443)
			4,684 –
			4,684

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APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

Recognised in Income $’000 (170) 15 105 3,689 (162) 5,247 (1,861) 322 135 1,052 3 – 1,209 (63) (16,443) (6,922) Recognised in Equity $’000 – – 164 – – – – 1,292 – – – – – – – – 1,456	Recognised in Equity Balance 30 June 2006 $’000 $’000 – (218 – (7 – (266 – 3,689 – (162 – 13,363 199 (1,662 – 322 – 202 – (1,301 – 3,950 – 5 – 3,562 – (350 – (16,443 199 4,684 Disposal of AIHL Recognised for Aztec Balance 30 June 2007 $’000 $’000 $’000 – (10) (131) – – (718) – (11,863) (10,036) – – 7,825 – – (105) (4,206) 181 2,709 (7,904) – – – 283 2,061 – – 427 – 71 396 – – (999) – (6,933) 24,991 – – 4 32 2,631 4,266 – (35) (5,893) 5,541 (17,089) (36,672) (6,537) (32,764) (11,875)	Balance 30 June 2006 $’000 (218 (7 (266 3,689 (162 13,363 (1,662 322 202 (1,301 3,950 5 3,562 (350 (16,443
		4,684

Recognised in Equity $’000 – – 164 – – – – 1,292 – – – – – – – – 1,456	Disposal of AIHL $’000 – – – – – (4,206) (7,904) – – – – – – 32 – 5,541 (6,537)	Balance 30 June 2007 $’000 (131) (718) (10,036) 7,825 (105) 2,709 – 2,061 427 396 (999) 24,991 4 4,266 (5,893) (36,672)
		(11,875)

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APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

COMPANY Accrued liabilities Borrowing costs Capital raising costs Doubtful debts provision Tax losses Tax (assets)/liabilities Set off of tax Net tax (assets)/liabilities Movement in temporary differences during the financial year ended 30 June 2006 Accrued liabilities Borrowing costs Capital raising costs Provisions Tax losses Movement in temporary differences during the financial year ended 30 June 2007 Accrued liabilities Borrowing costs Capital raising costs Provisions Tax losses	Assets Liabilities Net 2007 2006 2007 2006 2007 2006 $’000 $’000 $’000 $’000 $’000 $’000 (37) (7) – – (37) (7) (6) (8) – – (6) (8) (136) (266) – – (136) (266) (43) (169) – – (43) (169) (36,672) (10,897) – – (36,672) (10,897) (36,894) (11,347) – – (36,894) (11,347) – – – – – – (36,894) (11,347) – – (36,894) (11,347) Balance 1 July 2005 Recognised in Income Recognised in Equity Transfers Out (In) Balance 30 June 2006 $’000 $’000 $’000 $’000 $’000 – (7) – – (7 (10) 2 – – (8 (371) 105 – – (266 (43) (126) – – (169 – (225) – (10,672) (10,897 (424) (251) – (10,672) (11,347 Balance 1 July 2006 Recognised in Income Recognised in Equity Transfers Out (In) Balance 30 June 2007 $’000 $’000 $’000 $’000 $’000 (7) (30) – – (37 (8) 2 – – (6 (266) 130 – – (136 (169) 126 – – (43 (10,897) 246 – (26,021) (36,672 (11,347) 474 – (26,021) (36,894	Assets Liabilities Net 2007 2006 2007 2006 2007 2006 $’000 $’000 $’000 $’000 $’000 $’000 (37) (7) – – (37) (7) (6) (8) – – (6) (8) (136) (266) – – (136) (266) (43) (169) – – (43) (169) (36,672) (10,897) – – (36,672) (10,897) (36,894) (11,347) – – (36,894) (11,347) – – – – – – (36,894) (11,347) – – (36,894) (11,347) Balance 1 July 2005 Recognised in Income Recognised in Equity Transfers Out (In) Balance 30 June 2006 $’000 $’000 $’000 $’000 $’000 – (7) – – (7 (10) 2 – – (8 (371) 105 – – (266 (43) (126) – – (169 – (225) – (10,672) (10,897 (424) (251) – (10,672) (11,347 Balance 1 July 2006 Recognised in Income Recognised in Equity Transfers Out (In) Balance 30 June 2007 $’000 $’000 $’000 $’000 $’000 (7) (30) – – (37 (8) 2 – – (6 (266) 130 – – (136 (169) 126 – – (43 (10,897) 246 – (26,021) (36,672 (11,347) 474 – (26,021) (36,894


		(11,347

		Balance 30 June 2007 $’000 (37 (6 (136 (43 (36,672
		(36,894

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APPENDIX III

CONSOLIDATED 2007 2006 $’000 $’000 487 796 122 – 786 45 1,395 841 CONSOLIDATED 2007 2006 $’000 $’000 28,540 4,334 32,258 214 60,798 4,548	COMPANY	COMPANY
	2007 2006 $’000 $’000 487 796 – – 45 45 532 841 COMPANY	2006 $’000 796 – 45
		841

2007 $’000 28,540 32,258 60,798	2007 $’000 351 – 351	2006 $’000 145 –
		145

Cash at bank earns interest at floating rates based on daily bank deposit rates.

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APPENDIX III

28,540 4,334 32,258 214 60,798 4,548 – 2,849 60,798 7,397 47,765 23,073 4,717 4,263 55,508 17,296 3,141 473 501 (632) 512 (464) (2,256) (1,907) 8 814 2,957 4,323 – – 44 541 1,506 400 – – (18,721) – 183 – (10,325) – CONSOLIDATED 2007 2006 $’000 $’000	COMPANY	COMPANY
28,540 32,258 60,798 – 60,798 47,765 4,717 55,508 3,141 501 512 (2,256) 8 2,957 – 44 1,506 – (18,721) 183 (10,325) 2007 $’000	351 – 351 – 351 (594) – – – – – (332) – – (2,508) 44 1,506 – (91) 183 (3) 2007 $’000	145 – 2006 $’000
		145 –
		145

		7,517 – – – – – (40) – 4,323 (2,796) 420 400 (10,833) – – –

– 269 –

APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

Changes in assets and liabilities (Increase)/decrease in trade and other receivables (Increase)/decrease in inventory (Increase)/decrease in prepayments and deposits (Increase)/decrease in deferred tax assets (Increase) in mine development expenditure Increase 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 NOTES	(534) (2,208) (16,673) (388) (94) (335) – – (102,570) (54,205) 23,783 7,994 (172) (724) 13,326 (6,922) 484 227 3,090 (8,381) CONSOLIDATED 2007 2006 $’000 $’000	COMPANY	COMPANY
	(534) (16,673) (94) – (102,570) 23,783 (172) 13,326 484 3,090 2007 $’000	(16) – (312) 474 – 208 (179) – – (1,620) 2007 $’000	5 – 2 (251) – 211 (42) – – 2006 $’000
			(1,084)

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APPENDIX III

[c] Non-cash financing activities

During the financial year, the consolidated entity acquired property, plant and equipment with an aggregate fair value of $56,371,647 (2006: $2,783,417) by means of finance leases and hire purchase agreements. During the financial year, the consolidated entity disposed of property, plant and equipment with an aggregate fair value of $3,771,433 (2006: $7,143,498) that were financed by means of finance leases.

CONSOLIDATED 2007 2006 $’000 $’000 3,604 3,350 2,222 1,480 4,022 1,350 9,848 6,180 – – – – – – – –	COMPANY	COMPANY
2007 $’000 3,604 2,222 4,022 9,848 – – – –	2007 $’000 10 17 463 490 54,867 (145) 54,722 54,722	2006 $’000 – 10 48
		58

		29,835 (145)
		29,690

		29,690

[b] Terms and conditions

Terms and conditions relating to the above financial instruments:

[i] Trade debtors are non-interest bearing and generally on 60-90 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 of $51,744,103, on which interest is charged at 7% pa, related party receivables are non-interest bearing with no fixed repayment date and are repayable on demand.

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APPENDIX III

CONSOLIDATED 2007 2006 $’000 $’000 4,984 627 29,597 5,058 34,581 5,685 3 – 1,802 1,248 1,805 1,248 – –	COMPANY	COMPANY
2007 $’000 4,984 29,597 34,581 3 1,802 1,805 –	2007 $’000 – – – 3 1,802 1,805 338,432	2006 $’000 – –
		–

		– 1,248
		1,248

		42,431

– 272 –

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APPENDIX III

9. Interest in subsidiaries

Name Mount Gibson Mining Limited WHTK Pty Ltd Geraldton Bulk Handling Pty Ltd Aztec Resources Limited • Koolan Iron Ore Pty Ltd • Koolan Shipping Pty Ltd • Brockman Minerals Pty Ltd Asia Iron Holdings Limited • Asia Iron (Nanjing) Co Ltd • Asia Iron Limited • Jiangsu Investment Pty Ltd • Extension Hill Pty Ltd • Austral Iron Pty Ltd • AP Mining Pty Ltd • Westralian Iron Pty Ltd • MGM Pipelines Pty Ltd	Country of Incorporation Australia Australia Australia Australia Australia Australia Australia Hong Kong China Hong Kong Australia Australia Australia Australia Australia Australia	Percentage of Equity Interest Held by the consolidated entity 2007 2006 % % 100 100 100 100 100 100 100 – 100 – 100 – 100 – – 73 – 73 – 73 – 73 – 73 – 73 – 73 – 73 – 73	Investment	Investment
			2007 $’000 20,588 – – 317,844 – – – – – – – – – – – – 338,432	2006 $’000 17,631 – – – – – – 24,800 – – – – – – – –
				42,431

ACQUISITION OF AZTEC RESOURCES LIMITED

On 24 July 2006, Mount Gibson announced its intention to acquire 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, Mount Gibson offered Aztec shareholders one new share for every three Aztec shares.

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

Mount Gibson completed compulsory acquisition of the remaining Aztec shares on 9 February 2007. A total of 378,491,182 new shares in Mount Gibson were issued to Aztec shareholders.

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APPENDIX III

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 as some of the costs associated with the acquisition have yet to be finalised.

Consideration Issue of Mount Gibson Iron Limited shares to Aztec shareholders 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 Recognised on acquisition $’000 Net Assets of Aztec as at 30 November 2006 Cash 9,927 Receivables 2,571 Prepayments 83 Inventories 141 Property, plant and equipment 84,985 Deferred acquisition, exploration, evaluation and development costs 282 Mine properties 248,356 Deferred tax asset 32,764 Trade and other payables (15,081) Interest bearing liabilities (18,561) Provision – employee entitlements (153) Provision – rehabilitation (12,329) Hire purchase liabilities (15,246) 317,739	$’000 297,905 19,834
	317,739

	9,927 (6,275
	3,652

	Carrying value prior to acquisition $’000 9,927 2,571 83 141 84,985 282 85,062 – (15,081 (18,561 (153 (10,000 (15,246
	124,010

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APPENDIX III

If the combination had taken place at the beginning of the period, the profit before tax from continuing operations for the consolidated entity would have been $27 million and revenue from Continuing Operations would have been $166 million.

10. Discontinued operations – sale of Asia Iron Holdings Limited

On 7 June 2006 Mount Gibson advised the 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 ASX the that it had 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 $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 Mount Gibson and Mount Gibson Mining Limited, with the balance of $12.5 million to be released to Mount Gibson 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 was removed and Sinom Investments was no longer entitled to terminate the original agreement and return the sale shares if the environmental deadline was not met. Payment of the final amount of $12.5 million was received on 31 May 2007.

From 17 November 2006 Mount Gibson 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:

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APPENDIX III

[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 (30 June 2007 column) and for the 12-month period to 30 June 2006.

NOTE 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 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 from discontinued operations after income tax Earnings per share (cents per share): – basic earnings per share – discontinued operations – diluted earnings per share – discontinued operations	30 June 2007 $’000 4 4 – 4 368 (242) 130 (16) 114 – 114 26,684 (8,077) 18,607 18,721 3.82 3.79	30 June 2006 $’000 50
		50 –
		50 205 (1,684
		(1,429 (54
		(1,483 2,973
		1,490
		– –
		–
		1,490

		0.38 0.37

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

[b] Details of the gain on deconsolidation of Asia Iron

NOTES Consideration received or receivable on disposal: – cash received – less: transaction costs 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	30 June 2007 $’000 52,500 (492
	52,008
	24,439 885
	25,324
	26,684 (8,077
	18,607

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

[c] Carrying amounts of Asia Iron assets and liabilities

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

NOTES 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	21 August 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	30 June 2006 $’000 2,849 216 115 3,158 39,755 –
		46,093
		(1,568 (1,500 –
		(3,068
		43,025 (11,776
		31,249

[d] Assets and liabilities associated with discontinued operation

As at 30 June 2007, there are no assets or liabilities in the Balance Sheet relating to the discontinued operation.

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APPENDIX III

[e] Cash flow information

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

Notes 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	30 June 2007 $’000 52,008 (1,654) 50,354 (211) (960) – (1,171)	30 June 2006 $’000 (492 (9,027 10,546
		1,027

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APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

CONSOLIDATED 2007 2006 $’000 $’000 5 3,020 91,636 10,057 (3,702) (1,214) 87,934 8,843 78,005 6,095 (7,169) (3,024) 70,836 3,071 30,316 6,709 (2,124) (997) 28,192 5,712 522 522 (292) (241) 230 281 571 2,576 201,055 28,979 (13,287) (5,476) 187,768 23,503 – (3,158) 187,768 20,345	COMPANY	COMPANY
2007 $’000 5 91,636 (3,702) 87,934 78,005 (7,169) 70,836 30,316 (2,124) 28,192 522 (292) 230 571 201,055 (13,287) 187,768 – 187,768	2007 $’000 5 – – – – – – – – – – – – – 5 – 5 – 5	2006 $’000 5 – –
		–
		– –
		–
		– –
		–
		– –
		–
		–
		5 –
		5
		–
		5

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

87,934 8,843 70,836 3,071 28,192 5,712 230 281 571 2,576 187,763 20,483 8,843 1,887 1,778 7,666 1,020 – 78,526 – (12) (36) (143) – (2,078) (674) 87,934 8,843 CONSOLIDATED 2007 2006 $’000 $’000	COMPANY	COMPANY
87,934 70,836 28,192 230 571 187,763 8,843 1,778 1,020 78,526 (12) (143) (2,078) 87,934 2007 $’000	– – – – – – – – – – – – – 2007 $’000	– – – – 2006 $’000
		–
		– – – – – – –
		–

[a] Assets pledged as security

[b] Reconciliations Reconciliations of the carrying amounts of property, plant and equipment at the beginning and end of the current and previous financial year:

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APPENDIX III

3,071 9,852 56,371 2,783 19,122 – (3,625) (6,485) (4,103) (3,079) 70,836 3,071 5,712 5,562 682 597 1,091 – 21,600 – (8) – (885) (447) 28,192 5,712 281 359 (51) (78) 230 281 2,576 – 34,369 2,576 63,752 – (100,126) – 571 2,576 CONSOLIDATED 2007 2006 $’000 $’000	COMPANY	COMPANY
3,071 56,371 19,122 (3,625) (4,103) 70,836 5,712 682 1,091 21,600 (8) (885) 28,192 281 (51) 230 2,576 34,369 63,752 (100,126) 571 2007 $’000	– – – – – – – – – – – – – – – – – – – – – 2007 $’000	– – – – – 2006 $’000
		–
		– – – – – –
		–
		– –
		–
		– – – –
		–

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

NOTES	CONSOLIDATED 2007 2006 $’000 $’000	COMPANY
		2007 2006 $’000 $’000

12. Deferred acquisition, exploration, evaluation and development costs

Deferred acquisition, exploration, evaluation and development costs carried forward in respect of mining areas of interest: Extension Hill Hematite Koolan Island Mt Gibson Magnetite Koolanooka South Magnetite Attributable to disposal group 10[c] Reconciliation Carrying amount at beginning of the year Additions Exploration expenditure written off Attributable to disposal group 10[c] Carrying amount at the end of the year 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 recognised pending commencement of production.	8,317 710 – – 9,027 – 9,027 4,176 4,859 (8) 9,027 – 9,027	4,176 – 34,547 5,208 43,931 (39,755) 4,176 29,104 15,641 (814) 43,931 (39,755) 4,176	– – – – – – – – – – – – –	– – – –
				– –
				–

				– 25 (25)
				– –
				–

– 283 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

469,369 91,603 (98,685) (40,036) 370,684 51,567 51,567 15,131 28,310 – 248,356 – 101,100 54,205 (55,508) (17,296) (3,141) (473) 370,684 51,567 16,510 7,333 47,804 10,503 64,314 17,836 – – CONSOLIDATED 2007 2006 $’000 $’000	COMPANY	COMPANY
469,369 (98,685) 370,684 51,567 28,310 248,356 101,100 (55,508) (3,141) 370,684 16,510 47,804 64,314 – 2007 $’000	– – – – – – – – – – 106 14,108 14,214 29,398 2007 $’000	– – 2006 $’000
		–

		– – – – – –
		–
		175 166
		341

		–

– 284 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

2,638 1,594 8,665 – 87,451 – 98,754 1,594 6,399 4,247 49,082 – 55,481 4,247 – 1,500 9,037 5,841 57,747 – 100,000 – 5,488 5,526 20,474 20,474 – 1,500 192,746 33,341 CONSOLIDATED 2007 2006 $’000 $’000	COMPANY	COMPANY
2,638 8,665 87,451 98,754 6,399 49,082 55,481 – 9,037 57,747 100,000 5,488 20,474 – 192,746 2007 $’000	– – – – – – – – – – – – – – – 2007 $’000	– – – 2006 $’000
		–

		– –
		–

		–
		– – – – – –
		–

– 285 –

APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

Facilities used at reporting date: • Finance leases • Hire purchase facility • Project debt facility • Contingent instrument facility • Bank multiple advance • Commercial bill NOTES	9,037 5,841 57,747 – 87,451 – 5,488 5,526 – – – 1,500 159,723 12,867 CONSOLIDATED 2007 2006 $’000 $’000	COMPANY	COMPANY
	9,037 57,747 87,451 5,488 – – 159,723 2007 $’000	– – – – – – – 2007 $’000	– – – – – – 2006 $’000
			–

Facilities unused at reporting date:

Finance leases

• Fi l
nance eases • Hire purchase facility • Project debt facility • Contingent instrument facility • Bank multiple advance • Commercial bill	– – 12,549 – 20,474 – 33,023	– – – – 20,474 – 20,474	– – – – – – –	– – – – – –
				–

Terms and conditions relating to the above financial facilities:

[a] Finance leases are repayable monthly with final instalments due in August 2013. Interest is charged at an average rate of 8.24%. 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 April 2012. Interest is charged at an average rate of 7.14%. Secured by first mortgage over the assets the subject of the hire purchase agreement and a guarantee from Mount Gibson Iron Limited. This facility is drawn and repayable in US$ for Komatsu and A$ for Westpac.

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APPENDIX III

[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 was given notice about the Review Event in December 2006. On 30 April 2007 Mount Gibson provided a Corporate Guarantee to the banking syndicate.

As set out in [e] below, this project finance facility will be repaid in full and cancelled by the drawdown of the corporate debt facility.

[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. This facility will be cancelled as a consequence of the establishment of the new corporate debt facility detailed in [e] below.

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[e] In June 2007 Mount Gibson mandated HSBC Australia Limited and National Australia Bank Limited as the joint lead Arranger and Underwriting Banks for a $200 million debt facility to fund the refinance of the existing project finance facility in [c] above and the HSBC facility in [d] above and provide additional debt funding for the Koolan Island and Extension Hill iron ore developments. The facility documentation was signed on 28 August 2007 with drawdown under the facility subject to satisfaction of certain conditions precedent normal to this type of facility which are expected to be satisfied by early September 2007.

The $200 million facility consists of:

Senior debt facility of $175 million comprising two tranches:
Tranche 1 of $125 million;
Extension Hill tranche of $50 million which is only drawable against the Extension Hill DSO project after certain conditions precedent have been satisfied including EPA approval and Company Board approval for the project to proceed; and
Contingent instrument facility of $25 million (including guarantees, performance bonds).

CONSOLIDATED 2007 2006 $’000 $’000 5,065 2,541 – 1,470	COMPANY	COMPANY
2007 $’000 5,065 –	2007 $’000 – –	2006 $’000 –

		–

16. Derivatives

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APPENDIX III

1,072 451 100 12 1,172 463 28 14 18,442 688 18,470 702 12 62 188 100 (100) (150) 100 12 688 655 31 33 5,394 – 12,329 – 18,442 688 CONSOLIDATED 2007 2006 $’000 $’000	COMPANY	COMPANY
1,072 100 1,172 28 18,442 18,470 12 188 (100) 100 688 31 5,394 12,329 18,442 2007 $’000	– – – – – – – – – – – – – – – 2007 $’000	– – 2006 $’000
		–

		– –
		–

		– – –
		–
		– – – –
		–

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CONSOLIDATED 2007 2006 $’000 $’000 386,766 86,851 2007 Number of Shares $’000 402,058,719 86,851 378,491,182 297,905 – – 7,236,920 2,010 787,786,821 386,766	COMPANY	COMPANY
	2007 2006 $’000 $’000 386,766 86,851 2006	2006 $’000 86,851

Number of Shares 402,058,719 378,491,182 – 7,236,920 787,786,821	Number of Shares 368,519,793 – 40,000 33,498,926 402,058,719	$’000 79,381 – 10 7,460
		86,851

[i] Issued to Aztec Resources Limited shareholders in exchange for business combination of $297,905,196 (see Note 9).

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[c] Terms and conditions of contributed equity

[d] Share options

As at balance date the following options over unissued shares were on issue:

Exercise Price Exercise Date/Period 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	2007 Number – 5,000,000 5,000,000 – 2,000,000 3,000,000 2,000,000 17,000,000	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

In addition, as at 30 June 2007, there were 8,625,000 (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, at which time they will be issued to the respective employees. Once vested, 2,825,000 options will be exercisable at 78 cents each and expire on 31 December 2009 and 5,800,000 options will be exercisable at 89 cents each and expire on 31 December 2009. As at the date of this report, none of these options had vested.

Share options carry no right to dividends and no voting rights.

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CONSOLIDATED 2007 2006 $’000 $’000 8,911 5,954 3,963 (1,790) (3,192) (3,691) 9,682 473 5,954 1,631 2,957 4,323 8,911 5,954 (1,790) – – 1,165 1,032 (3,305) 1,506 – 3,215 465 – (115) 3,963 (1,790) – (465) (3,192) (3,226) (3,192) (3,691)	COMPANY	COMPANY
2007 $’000 8,911 3,963 (3,192) 9,682 5,954 2,957 8,911 (1,790) – 1,032 1,506 3,215 – 3,963 – (3,192) (3,192)	2007 $’000 8,911 283 – 9,194 5,954 2,957 8,911 (2,255) – 1,032 1,506 – – 283 – – –	2006 $’000 5,954 (2,255) –
		3,699

		1,631 4,323
		5,954
		– 1,050 (3,305) – – –
		(2,255)
		– –
		–

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APPENDIX III

10,096 (13,383) 47,765 23,479 57,861 10,096 11,776 8,956 (11,776) – – 3,226 – (406) – 11,776 791 906 2,175 3,332 2,966 4,238 CONSOLIDATED 2007 2006 $’000 $’000	COMPANY	COMPANY
10,096 47,765 57,861 11,776 (11,776) – – – 791 2,175 2,966 2007 $’000	(5,966) (594) (6,560) – – – – – – – – 2007 $’000	(13,483) 7,517 2006 $’000
		(5,966)

		– – – –
		–

		– –
		–

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APPENDIX III

16,010 9,455 2,302 10,627 18,312 20,082 15,652 2,001 64,956 4,438 200 610 80,808 7,049 (14,024) (1,208) 66,784 5,841 11,303 1,594 55,481 4,247 66,784 5,841 CONSOLIDATED 2007 2006 $’000 $’000	COMPANY	COMPANY
16,010 2,302 18,312 15,652 64,956 200 80,808 (14,024) 66,784 11,303 55,481 66,784 2007 $’000	– – – – – – – – – – – – 2007 $’000	– – 2006 $’000
		–

		– – –
		– –
		–

		– –
		–

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APPENDIX III

[i] In order to maintain current rights to explore and mine the tenements at Tallering Peak, Koolan Island and Extension Hill the consolidated entity is required to perform minimum exploration work to meet the expenditure requirements specified by the Department of Industry and Resources.
[ii] Operating leases:
operating lease for office space with an initial lease term of 5 years; and
operating lease for machinery has an average term of 1.4 years and expires in December 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 rates implicit in the finance leases and hire purchases are 8.24% and 7.14% respectively. Secured lease liabilities are secured by a charge over the leased assets.

CONSOLIDATED 2007 2006 $’000 $’000 720 1,544 1,100 465 1,820 2,009 2,957 4,323	COMPANY	COMPANY
2007 $’000 720 1,100 1,820 2,957	2007 $’000 – – – –	2006 $’000 43 –
		43
		4,323

The share-based payment plans are described below.

There have been no cancellations or modifications to any of the plans during 2007 and 2006.

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(b) Employee Share Scheme

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

Information with respect to the number of options granted and issued under the Employee Share Scheme is as follows:

2007 Weighted average No. of exercise Options price (cents) 25,080,632 57.4 – – (843,712) 52.9 (7,236,920) 27.8 17,000,000 70.3 10,000,000 52.5	2006	2006
No. of Options 25,080,632 – (843,712) (7,236,920) 17,000,000 10,000,000	No. of Options 20,900,000 9,073,712 (1,900,000) (2,993,080) 25,080,632 13,080,632	Weighted average exercise price (cents 25.0 91.7 56.9 25.0
		57.4

		37.8

The outstanding balance of options granted and issued as at 30 June 2007 is represented by:

Exercise Price Exercise Date Vesting Date 50 cents On or before 31 December 2007 31-Dec-05 55 cents On or before 31 December 2008 31-Dec-06 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	No. of Options 5,000,000 5,000,000 2,000,000 3,000,000 2,000,000
	17,000,000

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The remaining contractual life for the options on issue as at 30 June 2007 is between one and five years (2006: one and six years).

The range for exercise prices for options on issue at the end of the year was $0.50-$1.10 (2006: $0.25$1.10).

25. Earnings per share

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FINANCIAL INFORMATION ON MOUNT GIBSON

The following reflects the income and share data used in the calculations of basic and diluted earnings per share:

Profits used in calculating basic and diluted earnings per share Weighted average number of ordinary shares used in calculating basic earnings per share Effect of dilution – Share options Weighted average number of ordinary shares used in calculating diluted earnings per share	CONSOLIDATED	CONSOLIDATED
	2007 $’000 47,765 Number of Shares 634,647,892 8,082,090 642,729,982	2006 $’000 23,479 Number of Shares 390,533,080 8,624,527
		399,157,607

Conversions, calls, subscriptions or issues after 30 June 2007

26. Dividends paid and proposed

No amounts have been paid, declared or recommended by Mount Gibson by way of dividend since the commencement of the year.

27. Contingent liability

The HSBC Bank has provided a controlled entity with performance bonds totalling $3,280,017.

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28. Key management personnel disclosures

[a] Details of Key Management Personnel

[i] Directors

N Hamilton Chairman (appointed 24 April 2007) W Willis Chairman (resigned 24 April 2007) B Johnson Deputy Chairman (resigned 30 June 2007) L Tonkin Managing director A Rule Finance director (resigned 30 June 2007, alternate director from 30 June 2007) C Readhead Non-Executive director I Macliver Non-Executive director A Jones Non-Executive director (appointed 28 July 2006) P Bilbe Non-Executive director (appointed 23 February 2007) M Horn Non-Executive director (appointed 30 June 2007)

[ii] Executives

K Malaxos Chief Operating Officer (resigned 18 December 2006) R Mence General Manager – Tallering Peak D Quinlivan Chief Operating Officer (appointed 18 December 2006) Q Granger General Manager – Koolan Island (from 1 December 2006 to 8 June 2007) R Jordinson General Manager – Koolan Island (from 8 June 2007)

[b] Compensation of Specified Key Management Personnel

Short-term Post employment Share-based payment	CONSOLIDATED 2007 2006 $’000 $’000 2,690 3,195 142 157 1,962 3,863 4,794 7,215	COMPANY	COMPANY
	2007 $’000 2,690 142 1,962 4,794	2007 $’000 296 8 802 1,106	2006 $’000 158 10 3,143
			3,311

The consolidated entity is taking advantage of Corporations regulation 2M.6.04 and as a result has presented the disclosure required by AASB 124 Related Party Transaction Aus 25.4 to Aus 25.7.2 in the Remuneration Report within the directors’ Report. These remuneration disclosures have been audited.

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[c] Option Holdings of Key Management Personnel

30 June 2007 Directors N Hamilton W Willis [i] B Johnson [ii] L Tonkin A Rule C Readhead I Macliver A Jones P Bilbe M Horn Executives K Malaxos [iii] R Mencel Q Granger D Quinlivan R Jordinson Total	Balance at Beginning of Period 1 July 2006 – 1,000,000 5,000,000 5,000,000 2,000,000 500,000 500,000 – – – 350,000 – – – – 14,350,000	Granted as Remuneration – – – – – – – – – – – 250,000 – – – 250,000	Options Exercised – (1,000,000) – – – (500,000) (500,000) – – – (350,000) – – – – (2,350,000)	Net Change – – (5,000,000) – – – – – – – – – – – – (5,000,000)	Balance at End of Period 30 June 2007 – – – 5,000,000 2,000,000 – – – – – – 250,000 – – – 7,250,000	Ves	ted at 30 June 20	07
						Total – – – – – – – – – – – – – – – –	Not Exercisable – – – – – – – – – – – – – – – –	Exercisable – – – – – – – – – – – – – – –
								–

[i] Mr W Willis resigned on 24 April 2007.

[ii] Mr B Johnson resigned as a director on 30 June 2007.

[iii] Mr K Malaxos resigned on 18 December 2006.

30 June 2006 Directors W Willis B Johnson L Tonkin A Rule C Readhead I Macliver Executives S Coates D Garcia P Jones K Malaxos Total	Balance at Beginning of Period 1 July 2005 2,440,000 12,500,000 – – 1,250,000 1,250,000 750,000 – – 750,000 18,940,000	Granted as Remuneration – – 5,000,000 2,000,000 – – 250,000 – 250,000 – 7,500,000	Options Exercised (1,440,000) (2,500,000) – – (750,000) (750,000) – – – (400,000) (5,840,000)	Net Change – (5,000,000) – – – – – – – – (5,000,000)	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	Ves	ted at 30 June 20	06
						Total 1,000,000 – – – 500,000 500,000 750,000 – – 350,000 3,100,000	Not Exercisable – – – – – – – – – – –	Exercisable 1,000,000 – – – 500,000 500,000 750,000 – – 350,000
								3,100,000

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FINANCIAL INFORMATION ON MOUNT GIBSON

[d] Shareholding of Key Management Personnel

30 June 2007 Directors N Hamilton W Willis [i] B Johnson [ii] L Tonkin A Rule C Readhead I Macliver A Jones P Bilbe M Horn Executives K Malaxos [iii] R Mencel Q Granger D Quinlivan R Jordinson Total	Balance 1 July 2006 Ord Granted as Remuneration Ord – – 1,480,000 – – – – – – – 727,500 – 1,000,000 – – – – – – – 25,000 – – – – – – – – – 3,232,500 –	On Exercise of Options Ord – 1,000,000 – – – 500,000 500,000 – – – – – – – – 2,000,000	Net Change Other Ord 185,000 (2,480,000) – – 50,000 (160,000) – 100,000 52,033 – (25,000) – – – – (2,277,967)	Balance 30 June 2007 Ord 185,000 – – – 50,000 1,067,500 1,500,000 100,000 52,033 – – – – – –
				2,954,533

[i] Mr W Willis resigned on 24 April 2007.

[ii] Mr B Johnson resigned as a director on 30 June 2007.

[iii] Mr K Malaxos resigned on 18 December 2006.

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FINANCIAL INFORMATION ON MOUNT GIBSON

30 June 2006 Directors W Willis B Johnson L Tonkin A Rule C Readhead I Macliver Executives S Coates D Garcia P Jones K Malaxos Total	Balance 1 July 2006 Ord $’000 420,000 – – – 177,500 1,200,000 900,000 – – 25,000 2,722,500	Granted as Remuneration Ord $’000 – – – – – – – – – – –	On Exercise of Options Ord $’000 1,440,000 2,500,000 – – 750,000 750,000 – – – 400,000 5,840,000	Net Change Other Ord $’000 (380,000) (2,500,000) – – (200,000) (950,000) 40,000 – – (400,000) (4,390,000)	Balance 30 June 2006 Ord $’000 1,480,000 – – – 727,500 1,000,000 940,000 – – 25,000
					4,172,500

[e] Loans to Specified Key Management Personnel

There were no loans to key management personnel during the year.

[f] 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 $187 (2006: $1,546) and $187 (2006: $7,631) respectively.

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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	Consolidated
	2007 $’000 – – – –	2006 $’000 –
		–
		8
		8

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 $2,507,739 (2006: $2,795,958) was charged on the loan to Mount Gibson Mining Limited at 7% pa during the year. All other loans are interest free, have no fixed repayment date and are repayable on demand. Included in the loans are:

transfers of deferred tax asset and deferred tax liability balances to Mount Gibson from each of the wholly-owned subsidiaries as a consequence of the tax consolidation group of $29,467,928 (2006: $10,672,008); and
share based payment expense incurred by Mount Gibson for options issued by Mount Gibson to employees that are employed by wholly-owned subsidiaries of $30,417,500 (2006: nil)

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Director-related entity transactions

There are no director-related entity transactions other than those specified in Note 28.

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 2007 2006 $’000 $’000 166 100 32 40 198 140	COMPANY	COMPANY
	2007 $’000 166 32 198	2007 $’000 118 32 150	2006 $’000 24 –
			24

30. Auditor’s remuneration

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

As at the date of this report. apart from the:

Corporate debt refinancing set out in Note 15; and
Minister for the Environment approval for the DSO project to proceed,

there are no other significant events after balance date of Mount Gibson or of the consolidated entity.

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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.

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, foreign currency risk, commodity price risk and liquidity 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

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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 project finance facility for construction of the Koolan project is partly denominated in US$ and all of the hire purchase liabilities for the mining equipment at Koolan are denominated in US$.

The consolidated entity has entered into forward exchange and option 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.

Commodity price risk

The consolidated entity’s exposure to commodity price risk is significant. Iron ore prices are set each year and apply from 1 April to 31 March the following year. There are no readily available financial instruments available to hedge the iron ore price.

Liquidity risk

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APPENDIX III

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 as follows:

i) Financial assets Cash Trade and other receivables Unlisted shares Listed shares Derivatives Total financial assets ii) Financial liabilities Trade and other payables Derivatives Lease liabilities Hire purchase Senior debt Total financial liabilities	Floating Interest Rate 2007 2006 $’000 $’000 60,673 4,333 – – – – – – – – 60,673 4,333 – – – – – – – – – – – –	Fixe	d Interest R	ate Maturing in: Over 1 to 5 Years 2007 2006 $’000 $’000 – – – – – – – – – – – – – – – – 6,399 4,247 49,082 – 87,451 – 142,932 4,247	Non-Intere 2007 $’000 35 9,848 3 1,802 5,065 16,753 64,314 – – – – 64,314	st Bearing 2006 $’000 131 6,180 – 1,248 2,541 10,100 17,836 1,470 – – – 19,306	Total Carrying Amount per Balance Sheet Weighted Average Effective Interest Rate 2007 2006 2007 2006 $’000 $’000 % % 60,798 4,548 6.80 5.29 9,848 6,180 N/A N/A 3 – N/A N/A 1,802 1,248 N/A N/A 5,065 2,541 N/A N/A 77,516 14,517 64,314 17,836 N/A N/A – 1,470 N/A N/A 9,037 5,841 8.24 7.97 57,747 – 7.14 N/A 87,451 – 7.62 N/A 218,549 25,147
		1 Year 2007 $’000 90 – – – – 90 – – 2,638 8,665 – 11,303	or Less 2006 $’000 84 – – – – 84 – – 1,594 – – 1,594	Over 1 to 2007 $’000 – – – – – – – – 6,399 49,082 87,451 142,932

[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 2007, except for available for sale financial assets, have been recognised at their net fair value as detailed below.

	Carrying Value at	Net Fair Value at
	30 June 2007	30 June 2007
	$’000	$’000
Available for sale financial assets	1,802	1,802

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APPENDIX III

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 2007 the following foreign exchange contracts were outstanding:

	2007		2006
US $’000 – – – 8,000 8,000 – 24,000 32,000	A$’000 Equivalent – – – 10,805 10,805 – 33,405 44,210	US $’000 9,000 9,000 6,000 – 24,000 60,000 – 84,000	A$’000 Equivalent 12,167 12,351 8,487 – 33,005 83,443 – 116,448	Fair Value A$’000 48 214 366 –
				628 443 –
				1,071

All of the above contracts mature by 29 October 2007.

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APPENDIX III FINANCIAL INFORMATION ON MOUNT GIBSON

4. The following is the directors’ report and auditors’ report of Mount Gibson which is extracted from the 2007 annual report of Mount Gibson (all monetary amounts are stated at A$).

DIRECTORS’ REPORT

Your directors submit their report for the year ended 30 June 2007 for Mount Gibson Iron Limited and the consolidated entity incorporating the entities that it controlled during the financial year (“consolidated entity”).

DIRECTORS

NAMES, QUALIFICATIONS, EXPERIENCE AND SPECIAL RESPONSIBILITIES

Neil D. Hamilton

LLB

Chairman, Independent Non-Executive director

Mr Hamilton was appointed Non-Executive Chairman on 24 April 2007. Mr Hamilton is a lawyer with more than 23 years experience as a director of public companies. Mr Hamilton is the Chairman of the Nomination, Remuneration and Governance Committee of Mount Gibson and has overall responsibility for Corporate Governance. Mr Hamilton is the Chairman of IRESS Market Technology Limited and Programmed Maintenance Services Ltd and Non-Executive director of Insurance Australia Limited. He was formerly the Chairman of Western Power Group. During the past three years Mr Hamilton has served as a director of Chieftain Securities Limited and Sons of Gwalia Ltd.

William B. Willis

AssocDipGeol RMIT, FAusIMM, MGSA, AMP109

Mr Willis resigned as a Non-Executive director and Chairman on 24 April 2007.

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APPENDIX III

Brian G. Johnson

B.E., MIEAust

Mr Johnson resigned as a Non-Executive director and Deputy Chairman on 30 June 2007.

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 and 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 to 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.

Craig L. Readhead

B. Juris, LL.B, AICD

Independent 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 is a member of the Nomination, Remuneration and Governance Committee and of the Audit and Risk Management Committee. 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 of Heron Resources Ltd, Halcyon Group Ltd and Galaxy Resources Ltd and is a Non-Executive director of Frankland River Olive Company Limited and India Resources 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. During the past three years Mr Readhead has also served as a director of Pioneer Nickel Ltd and Agincourt Resources Ltd.

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APPENDIX III

Ian A. Macliver

B.Comm, CA, F Fin, AICD

Independent Non-Executive director

Mr Macliver is Managing director of Grange Consulting Group Pty Ltd, which provides specialist corporate advisory services to both listed and unlisted companies. Mr Macliver is Chairman of the Audit and Risk Management Committee and a member of the Nomination, Remuneration and Governance Committee. 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, Empire Beer Group Ltd and Otto Energy Ltd. During the past three years Mr Macliver has also served as a director of BioProspect Ltd.

Alan S. 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. Mr Jones is a member of the Audit and Risk Management Committee. He is a NonExecutive 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.

Peter R. Bilbe

B.E. (Mining) (Hons), MAusIMM

Non-Executive director

Mr Bilbe was appointed as a Non-Executive director on 23 February 2007. Mr Bilbe, the former Managing director of Aztec Resources Limited, is an experienced engineer who has been working in the mining industry for more than 30 years. Mr Bilbe joined Aztec Resources Limited in 2004 as Project Manager for the Koolan Island Iron Ore Project and was appointed Chief Operating Officer of Aztec Resources Limited in August 2005. For the last 15 years Mr Bilbe has held various senior executive roles for mining companies both within Australia and overseas. Mr Bilbe is a NonExecutive director of RMA Energy Ltd. During the past three years Mr Bilbe has not served as a director of any other listed companies.

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APPENDIX III

Mark P. M. Horn

M.A., LLB(Hons), Dip.B.Admin, FSI(Dip),

Barrister of the Honourable Society of Lincoln’s Inn

Non-Executive director

Mr Horn was appointed as a Non-Executive director on 30 June 2007. Mr Horn is the Chief Executive of M. Horn & Co., a British corporate finance boutique regulated by the FSA. In addition, Mr Horn is the Chairman of ReSel Communications Ltd, a director and General Counsel of Lakeshore Capital, and a Non-Executive director of Bretton Resource Opportunities Fund Ltd, Bretton Capital Strategies SPC, and Dikorwe C.C. Mr Horn is also a member of the Lincolnshire County Council and Bourne Town Council, and serves as a Governor of Bourne Grammar School and Robert Manning Technology College. During the past three years Mr Horn has also served as a director of AIM2 plc.

Alan D. Rule

B.Comm, B.Acc, CA

Alternate director

Chief Financial Officer

COMPANY SECRETARY

Angela Dent

BBus, CA

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APPENDIX III

CORPORATE INFORMATION

Corporate Structure

==> picture [393 x 121] 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;
mining of hematite deposits at Koolan Island;
construction and development of hematite mining operations at Extension Hill; and
exploration and development of hematite deposits at Koolan Island and in the MidWest region of Western Australia.

Employees

The consolidated entity employed 183 employees as at 30 June 2007 (2006: 120 employees).

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APPENDIX III

Future Funding

As at the date of this report the consolidated entity has sufficient funds or access to debt funding to develop and mine the Tallering Peak, Koolan Island and Extension Hill iron deposits.

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 financial year 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 10 to these financial statements. In respect of the Consolidated 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 Consolidated Balance Sheet and Consolidated Cash Flow Statement, the prior period comparatives include the fully consolidated balances of Asia Iron. The current period balances in the Consolidated 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 developed the Koolan Island Iron Ore Project (“Koolan Island”) located in the Buccaneer Archipelago of Yampi Sound in Western Australia.

The acquisition was implemented by means of an off-market scrip takeover bid by Mount Gibson for all the shares in Aztec. Under the bid, Mount Gibson offered Aztec shareholders one new share for every three Aztec shares. Details are set out in Note 9 to these financial statements.

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APPENDIX III

Mount Gibson completed compulsory acquisition of the remaining Aztec shares on 9 February 2007. A total of 378,491,182 new shares in Mount Gibson were issued to Aztec shareholders.

There were no significant changes in the state of affairs of the consolidated entity other than those referred to elsewhere in this report or the financial statements or notes thereto.

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 from Continuing Operations before tax Taxation (expense)/benefit Operating profit from Continuing Operations after tax Profit from discontinued operations after income tax Net operating profit after tax Loss Attributable to Minority Interest Net profit attributable to Members of Mount Gibson	CONSOLIDATED 2007 2006 $’000 $’000 42,253 17,634 (13,209) 3,949 29,044 21,583 18,721 1,490 47,765 23,073 – 406 47,765 23,479	CONSOLIDATED 2007 2006 $’000 $’000 42,253 17,634 (13,209) 3,949 29,044 21,583 18,721 1,490 47,765 23,073 – 406 47,765 23,479
		21,583 1,490
		23,073 406
		23,479

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APPENDIX III

Tallering Peak Hematite Operations

The Tallering Peak mine continued to improve operational performance during the financial year with waste and ore material movements increasing 46% and 161% respectively. Ore tonnes sold also increased 67% compared with the corresponding period last year however ore shipments were restricted resulting from ongoing congestion and poor loading rates at the Geraldton Port. Mount Gibson continued to work with the Geraldton Port Authority (“GPA”) to optimise port performance and reduce the excessive waiting times experienced by all port users however Mount Gibson has become increasingly frustrated by the GPA’s progress addressing excessive ship loading and waiting times. The GPA advises that additional shiploading capacity being constructed at Berth 5 will be operational by calendar year end and consequently Mount Gibson will increase rail capacity in the second half of the 2007-08 financial year to utilise the new installed shiploading capacity at the Port and lift production to 3 Mtpa.

The 2006-07 financial year provided Mount Gibson with the opportunity to determine mine production capability, crushing and screening throughput capacity and transport capability at Tallering Peak. Although the GPA could not keep pace with Tallering Peaks operating performance Mount Gibson has demonstrated consistently that mine production, crushing and screening throughput, trucking capacity and rail capacity meets targeted 3 Mtpa production rates. Throughout the year Tallering Peak established record mine production rates exceeding 3 Mtpa, record crushing and screening rates which exceeded 3 Mtpa rates and record rail transport rates in line with required annual performance.

Due to the congestion at the Geraldton Port and the resulting substantial increase in ore stockpiled, Mount Gibson suspended mining at Tallering Peak’s T5 open pit. Operations at T5 will recommence once performance at the Geraldton Port improves and stockpiles are drawn down to appropriate levels. It is not contemplated that T5 will be mined in the 2007-08 financial year due to the current level of stockpiled material, Tallering Peak’s access to ore within the Main Range pits and the successful resource drilling carried out during the 2006-07 financial year in the T2 area providing more cost efficient access to ore production.

Extensive infill and extensional exploration drilling at Tallering Peak has significantly enhanced Mount Gibson’s knowledge of the Tallering Peak geological resource and has allowed mine production to be planned with a high level of confidence. Exploration drilling was also successful in increasing the Mineral Resource at Tallering Peak, particularly in the T2 Main Range pit area which continued to demonstrate the existence of significant mineralisation below the current resource. A total of 19,969m of exploration infill and extensional drilling was completed at Tallering Peak during the year.

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APPENDIX III

PRODUCTION SUMMARY FOR 12 MONTHS Unit Mining – Waste mined bcm – Ore mined wmt Crushing – Lump wmt – Fines wmt Transported to Mullewa Railhead – Lump wmt – Fines wmt Transported to Geraldton Port – Lump wmt – Fines wmt Shipping – Lump wmt – Fines wmt	Sept Qtr 2006 ’000 2,541 1,092 411 308 719 391 254 645 300 216 516 239 170 409	Dec Qtr 2006 ’000 2,283 681 408 255 663 370 296 666 331 253 584 429 279 708	Mar Qtr 2007 ’000 2,331 468 398 251 649 381 248 629 377 279 656 319 272 591	Jun Qtr 2007 ’000 2,445 691 428 252 680 435 235 670 417 228 645 388 216 604	YTD 2007 ’000 9,600 2,932 1,645 1,066
					2,711 1,577 1,033
					2,610 1,425 976
					2,401 1,375 937
					2,312

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APPENDIX III

Production rates and key financial statistics at Tallering Peak for the 12 months ended 30 June 2007 compared with the 12 months ended 30 June 2006 were:

waste mining increased by 46% from 6,565,000 bcms to 9,600,000 bcms;
ore tonnes mined increased by 161% from 1,122,000 tonnes to 2,934,000 tonnes;
ore tonnes sold increased by 67% from 1,386,000 tonnes to 2,312,000 tonnes; and
average realised selling prices per tonne of ore sold increased by 16.7% from A$54 per tonne to A$63 per tonne.

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

		12 months	12 months	12 months
		ended	ended	ended
		30 June 2007	30 June 2006	30 June 2005
Waste mined	mill bcm	9.6	6.5	3.8
Waste expenditure capitalised	$ mill	93.24	54.20	23.49
Waste expenditure amortised	$ mill	53.57	17.77	16.78

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.

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.

At 31 December 2006, Tallering Peak had a Mineral Resource of 22.1 Mt at 61.7% Fe including Ore Reserves of 20.7 Mt at 61.5% Fe.

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APPENDIX III

Koolan Island Hematite Project

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 program in 2004. Exploration drilling commenced in February 2004 and the bankable feasibility study was completed in August 2005.

At 31 December 2006, Koolan Island had a Mineral Resource of 57.8 million tonnes of hematite ore at a grade of 64.3% Fe, including total Ore Reserves of 24.8 million tonnes of hematite ore with a grade of 65.0% Fe. The orebodies are tabular, high-grade hematite bodies which are estimated to produce a 30% Lump 70% Fines product with consistently high grades from the Main Ore body (>67% Fe). Initial production from established satellite pits has produced 50% Lump 50% Fines product, which if continued, enhances the financial performance of Koolan Island.

Recommencement of open pit mining and stockpiling of ore on the ROM pad occurred in the December quarter 2006. Construction of the shiploader, jetty facilities and crushing and screening plant were completed and commissioned in May 2007 with the first ore shipment taking place in June 2007. At the forecast production rate of 4 Mtpa (production ramps to this rate over the period to the June 2009 quarter), and based on existing ore reserves, production is expected to continue for at least eight years to 2015 with potential to increase resources as a consequence of the planned exploration drilling to be undertaken over the next two to three years. Initial production from Koolan Island will be sourced from Eastern and Mullet pits whilst preparatory access works are completed at Main Pit prior to the cut back and eventual production from this high-grade premium ore source.

Total development costs for Koolan Island were $143 million. The project encountered cost increases of $10 million (7.5%) above the original budget 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.

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APPENDIX III

PRODUCTION SUMMARY FOR 12 MONTHS Unit Mining – Waste mined bcm – Ore mined wmt Crushing – Lump wmt – Fines wmt Shipping – Lump wmt – Fines wmt	Sept Qtr 2006 ’000 – – – – – – – –	Dec Qtr 2006 ’000 – 50 – – – – – –	Mar Qtr 2007 ’000 510 91 – – – – – –	Jun Qtr 2007 ’000 1,238 418 146 128 274 74 76 150	YTD 2007 ’000 1,748 559 146 128
					274 74 76
					150

Extension Hill Direct Shipping Ore Project

The consolidated entity has completed 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 validated the broad strategies and parameters assumed for the June 2006 study and evaluated multiple operating options with related costs, timing and risks. 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.

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APPENDIX III

The DSO project will have very similar operational characteristics to Mount Gibson’s Tallering Peak operation with the added advantage of a much lower strip ratio of less than 1:1 (waste tonnes: ore tonnes) compared with Tallering Peak’s strip ratio of 6:1. Ore mined from Extension Hill will be crushed and screened on site, transported by sealed road 85km to Perenjori and loaded onto rail wagons for a 235km journey to the Geraldton Port. Ore will be stored at the Geraldton Port at Mount Gibson’s ore storage facilities to be constructed at the new Berth 5 iron ore ship loading facility and loaded from Berth 5 for export.

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, DPI and DoIR approvals, post PER approval.

On 1 August 2007 the Western Australian Minister for the Environment gave approval for the Mt Gibson Iron Ore and Infrastructure Project, of which the mining of Extension Hill DSO is part, to proceed.

The approval from the Minister is not conditional on “the remaining ridges of Banded Iron Formations in the Mt Gibson area that contain sub-populations or suitable habitat for Darwinia masonii and Lepidosperma sp. Mt Gibson and habitat for the remaining restricted floristic communities in the Mt Gibson ranges” being secured in a formal conservation estate prior to ground disturbing activities.

Official granted approval to proceed from the State and Federal Governments is expected by the end of September 2007.

Mount Gibson management will seek Board approval to commence DSO operations as soon as practicably possible with the expectation that production will commence late 2008.

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APPENDIX III

Review of Financial Condition

During the course of the financial year a number of events impacted on the financial condition of the consolidated entity as follows:

Shareholders funds increased by 316% to $454 million:
Acquisition of Aztec increased shareholders funds by $298 million (see Note 9);
Disposal of Asia Iron Holdings increased shareholders funds by $19 million (see Note 10); and
Holders of 7,236,920 options exercised their options resulting in $2 million in equity funding for Mount Gibson.
In June 2007 Mount Gibson mandated HSBC Australia Limited and National Australia Bank Limited as the joint lead Arranger and Underwriting Banks for a $200 million debt facility to fund the refinance of the existing debt facilities and the Koolan Island and Extension Hill iron ore developments (see Note 15).
Acquisition of property, plant and equipment with an aggregate fair value of $56 million that were financed by means of finance leases, increasing lease liabilities to $67 million.

Cash on hand at year end was $61 million with debt of $87 million drawn down under the Koolan Iron Ore Project Debt facility and $67 million in equipment finance leases and hire purchase liabilities.

LIKELY DEVELOPMENTS AND EXPECTED RESULTS

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APPENDIX III

SIGNIFICANT EVENTS AFTER BALANCE DATE

As at the date of this report, apart from the:

Corporate Debt refinancing set out in Note 15; and
Minister for the Environment approval for the DSO project to proceed,

there are no other significant events after balance date of Mount Gibson or of the consolidated entity.

SHARE OPTIONS

Unissued Shares

Details of Options over Ordinary Shares in Mount Gibson on issue as at balance date and at the date of this report are:

Exercise Price Exercise Date/Period 50 cents On or before 31 December 2007 55 cents On or before 31 December 2008 90 cents On or before 30 June 2010 90 cents On or before 23 October 2010 110 cents On or before 23 October 2012 Total	OPTIONS ON ISSUE AT Balance date Date of report 5,000,000 5,000,000 5,000,000 5,000,000 2,000,000 2,000,000 3,000,000 3,000,000 2,000,000 2,000,000 17,000,000 17,000,000	OPTIONS ON ISSUE AT Balance date Date of report 5,000,000 5,000,000 5,000,000 5,000,000 2,000,000 2,000,000 3,000,000 3,000,000 2,000,000 2,000,000 17,000,000 17,000,000
		17,000,000

Option holders do not have any right, by virtue of the Option, to participate in any share issue of Mount Gibson.

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APPENDIX III

Shares issued as a result of the exercise of options

During the financial year, 7,236,920 options were exercised to acquire fully paid ordinary shares in Mount Gibson at a weighted average exercise price of $0.28. Since the end of the financial year, no options have been exercised.

DIVIDENDS

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

INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS

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 $55,307. This amount has not been included in directors’ and Executives’ remuneration.

REMUNERATION REPORT

This report outlines the remuneration arrangements in place for directors and Key Management Personnel of the consolidated entity.

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APPENDIX III

The consolidated entity is taking advantage of Corporations Regulation 2M.6.04 and as a result is presenting the disclosures required by AASB 124 Related Party Transaction Aus 25.4 to Aus 25.7.2 in the Remuneration Report within the director’s Report. These remuneration disclosures have been audited. For the purposes of this report Key Management Personnel of the consolidated entity are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of Mount Gibson and the consolidated entity, directly or indirectly, including any directors of Mount Gibson.

Nomination, Remuneration and Governance Committee (“NRGC”)

The NRGC of the Board of directors of Mount Gibson is responsible for determining and reviewing remuneration arrangements for the Board and Key Management Personnel.

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.

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APPENDIX III

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.

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.

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APPENDIX III

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 Mount Gibson 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.

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APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

Variable Remuneration

Short-term Incentive (“STI”)

performance of the consolidated entity in meeting its objectives which include contribution to net profit after tax, risk management and leadership/team contribution;
financial performance of the consolidated entity;
increase in market capitalisation of the consolidated entity;
such other matters determined by the NRGC in its discretion.

These measures have been selected to align the interests of Executives with Shareholders representing the key drivers for short-term success of the business and providing a framework for delivering long-term value.

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APPENDIX III

The consolidated entity has predetermined benchmarks that must be met in order to trigger payments under the STI scheme. On an annual basis, the individual performance of each Senior Executive is reviewed by the NRGC, which is in line with their responsibilities, after consideration of the Executive’s performance against KPIs. This process usually occurs within two months after the reporting date. NRGC then determines the amount of STI to be allocated to each Executive. Payments made are delivered as a cash bonus in the following reporting period.

STI bonus for 2006 and 2007 financial years

For the 2006 financial year, 100% of the STI cash bonus of $400,000 as previously accrued in that period vested to Executives and was paid in the 2007 financial year. For the 2007 financial year, 100% of the STI cash bonus totalling $350,000 has been approved and vested to Senior Executives.

Long-term Incentive (“LTI”) for 2008 financial year

At the commencement of the 2008 financial year, Mount Gibson established the Mount Gibson Iron Limited Performance Rights Plan (“PRP”). The PRP enables Mount Gibson to provide its Executives with long-term incentives which create a link between the delivery of value to Shareholders, financial performance and rewarding and retaining the Executives. Under the PRP, the Board may invite eligible Executives to apply for performance rights, which are an entitlement to receive ordinary shares in Mount Gibson, subject to satisfaction by the Executive of performance and vesting conditions set by the Board.

No performance rights were issued by Mount Gibson in respect of the 2007 financial year. However, Mount Gibson has agreed to vary the employment contracts for the Managing director, Mr Tonkin, and the Chief Financial Officer, Mr Rule, to incorporate payment of a long-term incentive for the 2008 and successive financial years. Under their varied employment contracts, Mr Tonkin and Mr Rule will each be invited to apply for, and Mount Gibson will grant (subject to all applicable shareholder approvals being first obtained), a number of performance rights equivalent to one third of their respective base salaries (including superannuation) divided by the volume weighted average price of Mount Gibson’s shares as traded on ASX for the 30-day period to 30 June for the relevant year.

The rights will be granted at no cost to the Executives and will convert into ordinary shares on completion by the Executive of three years’ continuous service, subject to satisfaction of specified performance hurdles related to the Company’s Total Shareholder Return (“TSR”) measured against the TSR of a comparator group of companies over the same period. Mount Gibson intends to seek Shareholder approval for the issue of the performance rights to Mr Tonkin at its 2007 AGM.

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APPENDIX III

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:

Five 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 six months notice.

Alan Rule

The key terms of his contract are as follows:

Five 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 III

REMUNERATION OF KEY MANAGEMENT PERSONNEL FOR THE YEAR ENDED 30 JUNE 2007

Directors N Hamilton W Willis B Johnson L Tonkin A Rule C Readhead I Macliver A Jones P Bilbe M Horn Sub–total Directors Executives K Malaxos Chief Operating Officer (until 18 December 2006) D Quinlivan Chief Operating Officer (from 18 December 2006) R Mencel General Manager – Tallering Peak Q Granger General Manager – Koolan Island (until 8 June 2007) R Jordinson General Manager – Koolan Island (from 8 June 2007) Sub–total Executives Totals		Short Term		Post Employment Share Based Payment Super- annuation Retirement Benefits Options 1,486 – – 2,428 – – – – 801,634 49,541 – 770,745 33,028 – 363,050 – – – 3,963 – – – – – 9,298 – – – – – 99,744 – 1,935,429 10,413 – – – – – 19,650 – 27,000 12,640 – – – – – 42,703 – 27,000 142,447 – 1,962,429	Post Employment Share Based Payment Super- annuation Retirement Benefits Options 1,486 – – 2,428 – – – – 801,634 49,541 – 770,745 33,028 – 363,050 – – – 3,963 – – – – – 9,298 – – – – – 99,744 – 1,935,429 10,413 – – – – – 19,650 – 27,000 12,640 – – – – – 42,703 – 27,000 142,447 – 1,962,429	Total % Performance Related 18,000 0% 88,200 0% 844,368 95% 1,572,246 62% 914,672 56% 63,000 0% 48,000 0% 44,000 0% 125,810 0% – 0% 3,718,296 164,403 0% 431,078 0% 279,983 15% 153,669 0% 47,000 0% 1,076,133 4,794,429
	Salary & Fees 16,514 85,772 40,000 550,459 366,972 63,000 44,037 44,000 115,320 – 1,326,074 145,683 430,650 218,333 141,029 47,000 982,695 2,308,769	Non Monetary – – 2,734 1,501 1,622 – – – 1,192 – 7,049 8,307 428 – – – 8,735 15,784	Cash Bonuses – – – 200,000 150,000 – – – – – 350,000 – – 15,000 – – 15,000 365,000	Super- annuation 1,486 2,428 – 49,541 33,028 – 3,963 – 9,298 – 99,744 10,413 – 19,650 12,640 – 42,703 142,447	Retirement Benefits – – – – – – – – – – – – – – – – – –

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APPENDIX III

The following directors were appointed during the year:

Mr Jones	28 July 2006
Mr Bilbe	23 February 2007
Mr Hamilton	24 April 2007
Mr Horn	30 June 2007
The following directors resigned during the year:

Mr Willis	24 April 2007
Mr Johnson	30 June 2007
Mr Rule	30 June 2007

REMUNERATION OF KEY MANAGEMENT PERSONNEL FOR THE YEAR ENDED 30 JUNE 2006

Directors W Willis B Johnson L Tonkin A Rule C Readhead I Macliver Sub–total Directors Executives D Garcia K Malaxos P Jones S Coates B Wesley Sub–total Executives Totals		Short Term		Post Employment Share Based Payment Super- annuation Retirement Benefits Options 9,495 – 14,735 – – 3,113,988 28,476 – 399,479 27,417 – 224,444 – – 7,368 3,963 – 7,368 69,351 – 3,767,382 12,777 – – 22,500 – 28,085 24,771 – 13,171 16,425 – 41,265 11,366 – 13,171 87,839 – 95,692 157,190 – 3,863,074	Post Employment Share Based Payment Super- annuation Retirement Benefits Options 9,495 – 14,735 – – 3,113,988 28,476 – 399,479 27,417 – 224,444 – – 7,368 3,963 – 7,368 69,351 – 3,767,382 12,777 – – 22,500 – 28,085 24,771 – 13,171 16,425 – 41,265 11,366 – 13,171 87,839 – 95,692 157,190 – 3,863,074	Total % Performance Related 129,735 11% 3,821,226 81% 995,402 65% 703,683 53% 55,368 13% 55,368 13% 5,760,782 411,432 – 320,313 10% 314,581 4% 247,770 20% 160,219 11% 1,454,315 7,215,097
	Salary & Fees 105,505 673,424 316,396 300,000 48,000 44,037 1,487,362 398,655 245,833 275,229 182,580 129,019 1,231,316 2,718,678	Non Monetary – 33,814 1,051 1,822 – – 36,687 – 19,728 1,410 – 1,663 22,801 59,488	Cash Bonuses – – 250,000 150,000 – – 400,000 – 4,167 – 7,500 5,000 16,667 416,667	Super- annuation 9,495 – 28,476 27,417 – 3,963 69,351 12,777 22,500 24,771 16,425 11,366 87,839 157,190	Retirement Benefits – – – – – – – – – – – – – –

All Executive directors and Senior Executives are engaged through Controlled Entities of Mount Gibson.

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APPENDIX III

OPTIONS GRANTED AS PART OF REMUNERATION FOR THE YEAR ENDED 30 JUNE 2007

					Value of				Total Value
					Options				of Options
				Value per	Granted			Value at	Exercised
		Exercise	Grant	Option @	During		Exercised	Date Option	and Lapsed	% of
	Grant Date	Price	Number	Grant Date	the Year $	Vesting Date	Number	Lapsed	During Year	Remuneration
R Mencel	9-Jan-07	$0.89	250,000	$0.216	54,000	31-Dec-07	N/A	N/A	N/A	10%

These options were granted but not yet issued on the basis that Mr Mencel must complete employment service to 31 December 2007 before they vest.

Options granted as part of Senior 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	9-Jan-07
Share price at grant date	$0.87
Exercise price	$0.89
Risk free interest rate	6.18%
Volatility factor	25.76%
Expiry date	31-Dec-09

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APPENDIX III

OPTIONS GRANTED AS PART OF REMUNERATION FOR THE YEAR ENDED 30 JUNE 2006

					Value of				Total Value
					Options				of Options
				Value per	Granted			Value at	Exercised
		Exercise	Grant	Option @	During		Exercised	Date Option	and Lapsed	% of
	Grant Date	Price	Number	Grant Date	the Year $	Vesting Date	Number	Lapsed	During Year	Remuneration
A 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%
S Coates	31-Dec-05	$0.78	250,000	$0.332	83,000	31-Dec-07	N/A	N/A	N/A	5.3%
P Jones	31-Dec-05	$0.78	250,000	$0.332	83,000	31-Dec-07	N/A	N/A	N/A	4.2%
B 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	13-June-06	4-Oct-05	4-Oct-05	4-Oct-05
Share price at
grant date	$0.70	$0.70	$0.86	$0.86	$0.86
Exercise price	$0.78	$0.78	$0.90	$0.90	$1.10
Risk free interest rate	5.09%	5.09%	5.40%	5.40%	5.40%
Volatility factor	60%	60%	60%	60%	60%
Expiry date	31-Dec-09	31-Dec-06	30-Jun-10	23-Oct-10	23-Oct-12

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APPENDIX III

DIRECTORS’ MEETINGS

The number 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 and Risk	Nomination,
		Management	Remuneration
	Directors’	Committee	and Governance
	Meetings	Meetings	Committee
Number of Meetings Held	30	2	2
N Hamilton	3	–	1
W Willis	23	1	1
B Johnson	18	1	–
L Tonkin	30	–	–
A Rule	30	–	–
C Readhead	26	2	2
I Macliver	27	2	2
A Jones	22	2	–
P Bilbe	7	–	–
M Horn	–	–	–

INTERESTS IN THE SHARES AND OPTIONS OF MOUNT GIBSON

As at the date of this report, the interests of the directors in the Shares and Options of Mount Gibson were:

	Ordinary	Options
	Shares	over Shares
N Hamilton	185,000	–
L Tonkin	–	5,000,000
A Rule	50,000	2,000,000
C Readhead	1,067,500	–
I Macliver	1,500,000	–
A Jones	100,000	–
P Bilbe	52,033	–
M Horn	–	–

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APPENDIX III

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.

ENVIRONMENTAL REGULATION AND PERFORMANCE

The consolidated entity has developed Environmental Management Plans for its operations at Koolan Island, 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 licences 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 licences and all mining and exploration activities have been undertaken in compliance with the relevant environmental regulations.

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

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APPENDIX III

CORPORATE GOVERNANCE

AUDITOR’S IN DEPENDENCE DECLARATION

In accordance with section 307C of the Corporations Act 2001, the directors received the attached independence declaration from the auditor of Mount Gibson on page 30 which forms part of this report.

NON-AUDIT SERVICES

Aztec acquisition stamp duty advice 31,750

Signed in accordance with a resolution of the directors.

N HAMILTON, Chairman

Perth, 30 August 2007.

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APPENDIX III

Independent auditor’s report to the members of Mount Gibson Iron Limited

We have audited the accompanying financial report of Mount Gibson Iron Limited, which comprise the balance sheet as at 30 June 2007, and the income statement, statement of changes in equity and cash flow statement for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the director’s declaration of the consolidated entity comprising Mount Gibson and the entities its controlled at the year’s ended or from time to time during the financial year.

Mount Gibson has disclosed information as required by paragraphs Aus 25.4 to Aus 25.7.2 of Accounting Standard 124 Related Party Disclosures (“remuneration disclosures”), under the heading “Remuneration Report” on pages 24 to 29 of the directors’ report, as permitted by Corporations Regulation 2M.6.04.

Directors’ Responsibility for the Financial Report

The directors of Mount Gibson are responsible for the preparation and fair presentation of the financial report in accordance with the Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the 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. In Note 1, the directors also state that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards. The directors are also responsible for the remuneration disclosures contained in the directors’ report.

Auditor’s Responsibility

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APPENDIX III

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, we consider internal controls relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Independence

In conducting our audit we have met the independence requirements of the Corporations Act 2001. We have given to the directors of Mount Gibson 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 and the remuneration disclosures, 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.

Auditor’s Opinion

In our opinion:

the financial report of Mount Gibson Iron Limited is in accordance with 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 2007 and of their performance for the year ended on that date; and
(ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001.

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APPENDIX III

the consolidated financial report also complies with International Financial Reporting Standards as disclosed in Note 1
the remuneration disclosures that are contained on pages 24 to 29 of the directors’ report comply with Accounting Standard AASB 124 Related Party Disclosures

Ernst & Young

Gavin A Buckingham Partner Perth 30 August 2007

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APPENDIX III

5. The following is the audited consolidated financial statements of Mount Gibson for the year ended 30 June 2006 prepared in accordance with Australian accounting standards which is extracted from the 2006 annual report of Mount Gibson (all monetary amounts are stated in A$).

CONSOLIDATED INCOME STATEMENT

For the year ended 30 June 2006

CONSOLIDATED 2006 2005 $’000 $’000 73,389 76,872 1,907 471 75,296 77,343 (49,999) (50,487) 25,297 26,856 1,232 128 (8,368) (2,463) – – (814) (666) – (28) 17,347 23,827 (1,196) (1,795) 16,151 22,032 6,922 (8,530) 23,073 13,502 406 – 23,479 13,502 6.01 4.24 5.88 4.08 – –	COMPANY	COMPANY
2006 $’000 73,389 1,907 75,296 (49,999) 25,297 1,232 (8,368) – (814) – 17,347 (1,196) 16,151 6,922 23,073 406 23,479 6.01 5.88 –	2006 $’000 – 2,836 2,836 – 2,836 1 (6,368) 10,833 (25) – 7,277 (11) 7,266 251 7,517 – 7,517	2005 $’000 – 1,890
		1,890 –
		1,890 – (2,252 – – –
		(362 (168
		(530 145
		(385 –
		(385

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APPENDIX III

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 – 19,831 46,186 46,093 – 65,924 46,186 – – 1,248 2,942 – – 20,345 17,665 4,176 29,104 51,567 15,131 – – 77,336 64,842 143,260 111,028 17,836 10,363 1,594 2,780 1,470 – 463 300 21,363 13,443 3,068 – 24,431 13,443	COMPANY	COMPANY
2006 $’000 4,548 6,180 5,685 877 2,541 19,831 46,093 65,924 – 1,248 – 20,345 4,176 51,567 – 77,336 143,260 17,836 1,594 1,470 463 21,363 3,068 24,431	2006 $’000 145 58 – 1 – 204 – 204 29,690 1,248 42,431 5 – – 11,347 84,721 84,925 341 – – – 341 – 341	2005 $’000 44 40 – – –
		84 –
		84
		53,419 2,942 10,785 5 – – 424
		67,575
		67,659
		130 – – –
		130 –
		130

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APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

702 655 4,247 8,938 4,684 11,407 9,633 21,000 34,064 34,443 109,196 76,585 86,851 79,381 10,096 (13,383) 473 1,631 97,420 67,629 11,776 8,956 109,196 76,585 CONSOLIDATED 2006 2005 $’000 $’000	COMPANY	COMPANY
702 4,247 4,684 9,633 34,064 109,196 86,851 10,096 473 97,420 11,776 109,196 2006 $’000	– – – – 341 84,584 86,851 (5,966) 3,699 84,584 – 84,584 2006 $’000	– – – 2005 $’000
		–
		130
		67,529

		79,381 (13,483 1,631
		67,529 –
		67,529

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APPENDIX III

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) (8,381) 17,778 1,951 427 – 534 – – 7 45 (12,362) (997) (15,126) (6,123) (960) (2,942) (26,490) (9,056) 7,460 34,641 – (958) (395) 48 – – 1,500 14,096 (2,520) (2,034) (419) (20,291) (1,100) (1,202) 4,053 – 8,579 24,300 (26,292) 33,022 56 – 33,633 611 7,397 33,633	COMPANY	COMPANY
2006 $’000 75,519 (82,704) (1,196) (8,381) 1,951 – – 7 (12,362) (15,126) (960) (26,490) 7,460 – (395) – 1,500 (2,520) (419) (1,100) 4,053 8,579 (26,292) 56 33,633 7,397	2006 $’000 – (1,073) (11) (1,084) 40 – (20,813) – – – (960) (21,733) 7,460 – (395) 15,853 – – – – – 22,918 101 – 44 145	2005 $’000 – (647 (169
		(816
		33 (1,512 – – – – (2,542
		(4,021
		34,641 (958 – (28,829 – – – – –
		4,854
		17 – 27
		44

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APPENDIX III

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 30 June 2006

CONSOLIDATED At 1 July 2004 Profit for the period Issue of share capital Exercise of options Conversion of convertible notes Capital raising cost Change in Minority Interest Cost of share-based payment At 30 June 2005 Application of AASB 132 and AASB 139 At 1 July 2005 Profit/(loss) for the period Net unrealised losses on available-for-sale financial assets Net gains on cash flow hedges Release to income statement on expiry of cash flow hedges Currency translation differences Issue of share capital Exercise of options Cost of share-based payment New issue of capital by a Controlled Entity At 30 June 2006	Issued Capital $’000 40,848 – 32,305 4,811 2,375 (958) – – 79,381 – 79,381 – – – – – 10 7,460 – – 86,851	Attributable to Equity Holders of the Parent Option Premium Reserve (Accumulated Losses)/ Retained Earnings Net Unrealised Gains/(Losses) Reserve Other Reserves $’000 $’000 $’000 $’000 – (26,885) – – – 13,502 – – – – – – – – – – – – – – – – – – – – – – 1,631 – – – 1,631 (13,383) – – – – 1,165 – 1,631 (13,383) 1,165 – – 23,479 – – – – (3,305) – – – 465 – – – (115) – – – – (465) – – – – – – – – 4,323 – – – – – – (3,226) 5,954 10,096 (1,790) (3,691)	Total $’000 13,963 13,502 32,305 4,811 2,375 (958) – 1,631 67,629 1,165 68,794 23,479 (3,305) 465 (115) (465) 10 7,460 4,323 (3,226) 97,420	Minority Interest $’000 6,344 – – – – – 2,612 – 8,956 – 8,956 (406) – – – – – – – 3,226 11,776	Total Equity $’000 20,307 13,502 32,305 4,811 2,375 (958) 2,612 1,631
					76,585 1,165
					77,750 23,073 (3,305) 465 (115) (465) 10 7,460 4,323 –
					109,196

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APPENDIX III

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONTINUED

For the year ended 30 June 2006

COMPANY At 1 July 2004 Loss for the period Issue of share capital Exercise of options Converted from convertible notes Capital raising cost Cost of share-based payment At 30 June 2005 Application of AASB 132 and AASB 139 At 1 July 2005 Loss for the period Net unrealised losses on available-for- sale financial assets Issue of share capital Exercise of options Cost of share-based payment At 30 June 2006	Attributable to Equity Issued Capital Option Premium Reserve $’000 $’000 40,848 – – – 32,305 – 4,811 – 2,375 – (958) – – 1,631 79,381 1,631 – – 79,381 1,631 – – – – 10 – 7,460 – – 4,323 86,851 5,954	Holders of the Accumulated Losses $’000 (13,098) (385) – – – – – (13,483) – (13,483) 7,517 – – – – (5,966)	Parent Net Unrealised Gains/ (Losses) Reserve $’000 – – – – – – – – 1,050 1,050 – (3,305) – – – (2,255)	Total Equity $’000 27,750 (385) 32,305 4,811 2,375 (958) 1,631
				67,529 1,050
				68,579 7,517 (3,305) 10 7,460 4,323
				84,584

– 346 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

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 ASX.

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.

(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.

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APPENDIX III

This is the first financial report prepared based on AIFRS and comparatives for the year ended 30 June 2005 have been restated accordingly. Mount Gibson 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,

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

– 348 –

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APPENDIX III

			Application	Application
AASB		Nature of Change to	Date of	Date for
Amendment	Affected Standard(s)	Accounting Policy	Standard	Group
2005-5	AASB 1 “First-time Adoption of AIFRS”	No change to accounting	1 January 2006	1 July 2006
		policy required.
		Therefore no impact.
	AASB 139 “Financial Instruments:
	Recognition and Measurement”
2005-6	AASB 3 “Business Combinations”	No change to accounting	1 January 2006	1 July 2006
		policy required.
		Therefore no impact.
2005-10	AASB 132 “Financial Instruments:	No change to accounting	1 January 2007	1 July 2007
	Disclosure and Presentation”	policy required.
		Therefore no impact.
	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 Standard	AASB 7 “Financial Instruments:	No change to accounting	1 January 2007	1 July 2007
	Disclosures”	policy required.
		Therefore no impact.
UIG 4	Determining whether an Arrangement	No change to accounting	1 January 2006	1 July 2006
	contains a Lease	policy required.
		Therefore no 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 Derivatives	No change to accounting	1 June 2006	1 July 2006
		policy 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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APPENDIX III

The following amendments are not applicable to the consolidated entity and therefore have no impact:

AASB Amendment	Affected Standard(s)
New Standard	AASB 119 “Employee Benefits” (Revised Dec 04) – Accounting policy
	options contained within the revised standard affect accounting for
	defined benefit schemes only. As Mount Gibson Iron Limited do not have
	or do not contribute to a defined benefit scheme, there is no impact of this
	change.
2005-2	AASB 1023 “General Insurance Contracts”
2005-9	AASB 4 “Insurance Contracts”, AASB 1023 “General Insurance
	Contracts”, AASB 139 “Financial Instruments: Recognition and
	Measurement” and AASB 132 “Financial Instruments: Disclosure and
	Presentation”
2005-12	AASB 1038 “Life Insurance Contracts” and AASB 1023 “General
	Insurance Contracts”
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”

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APPENDIX III

(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 Mount Gibson 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).

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APPENDIX III

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.

The exchange differences arising on the retranslation are taken directly to a separate component of equity.

On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement.

(g) Property, plant and equipment

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

Depreciation

The cost of property, plant and equipment directly engaged in mining operations is written off over its expected economic life on a units-of-production method, in the establishment of which, due regard is given to the life of the related area of interest. Assets which are depreciated or amortised on a basis other than the units-of-production method typically are depreciated on a straightline basis over the estimated useful life of the asset as follows:

•	Buildings	5-20 years
•	Motor vehicles	4-5 years
•	Office equipment	3-5 years
•	Leasehold improvements	Shorter of lease term or useful life of 5-10 years

Impairment

The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.

For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs.

If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount.

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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.

(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.

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).

(i) Acquisition, exploration, evaluation and development costs

Acquisition costs

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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.

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.

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(l) Recoverable amount of assets

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.

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APPENDIX III

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.

(n) Inventories

Inventories are valued at the lower of cost and net realisable value.

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.

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(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

(s) Provisions

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

– 357 –

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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 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 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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(u) Employee benefits

Wages, salaries, annual leave and sick leave

Long service leave

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.

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Finance Leases

Capitalised leased assets are depreciated over the estimated useful life of the asset or where appropriate, over the estimated life of the mine.

(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

Dividends

Revenue is recognised when the shareholders’ right to receive the payment is established.

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APPENDIX III

(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.

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.

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

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(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

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.

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Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting.

At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is kept in equity until the forecasted transaction occurs.

If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement.

(aa) Issued capital

(bb) Earnings per share

– 363 –

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APPENDIX III

Diluted earnings per share is calculated as net profit attributable to members of Mount Gibson, 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

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APPENDIX III

(dd) Transition to AIFRS

For all periods up to and including the year ended 30 June 2005, 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 July 2004, 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 ended 30 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.

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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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APPENDIX III

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

Total equity under AGAAP Adjustments to equity: A Derecognition of existing rehabilitation accrual B Adjustment for unwinding of rehabilitation provision C Adjustment for additional amortisation charge on rehabilitation asset D Adjustment relating to siding construction E Adjustment for derecognition of Mullewa land F Adjustment for Income tax Total equity under AIFRS	CONSOLIDATED 30 June 2005 1 July 2004 $’000 $’000 88,257 23,399 246 15 (61) (30) (187) (46) (208) (66) (55) (88) (11,407) (2,877) 76,585 20,307	COMPANY	COMPANY
	30 June 2005 $’000 88,257 246 (61) (187) (208) (55) (11,407) 76,585	30 June 2005 $’000 67,105 – – – – – 424 67,529	1 July 2004 $’000 27,471 – – – – – 279
			27,750

A The provision for rehabilitation recognised under AGAAP is derecognised as it was not based on discounted future cash flows.
B AASB 137 “Provisions, Contingent Liabilities and Contingent Assets”, requires recognition of full provision for rehabilitation based on the net present value of the estimated cost of restoring the environmental disturbance that has occurred up to the balance sheet date, as against an undiscounted provision for rehabilitation required to be recognised under AGAAP. The increase in the provision amount due to passage of time has been recognised as borrowing costs as required under AASB 137.

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C Represents adjustment for additional amortisation charge due to increase in the value of rehabilitation asset created under AASB 137 “Provisions, Contingent Liabilities and Contingent Assets”.
D Siding construction was treated as an operating lease under AGAAP, however this has been treated as a finance lease under AASB 117 ‘Leases’.
E Mullewa land was treated as an asset purchased under finance lease under AGAAP, however this has been treated as operating lease under AASB 117 ‘Leases’.
F The consolidated entity had previously not recognised any deferred tax balances in its accounts under AGAAP. Under AIFRS deferred tax liabilities are recognised for all taxable temporary differences. This adjustment has increased by $3,799,501 from that disclosed in the half year financial report for the period ended 31December 2005, based on clarification of tax treatment of carried forward expenditure not previously tax effected.
(ii) Reconciliation of profit after tax under AGAAP to that under AIFRS

Profit after tax as previously reported Adjustments to profit: A Derecognition of existing rehabilitation accrual B Adjustment for unwinding of rehabilitation provision C Adjustment for additional amortisation charge on rehabilitation asset D Adjustment relating to siding construction E Adjustment for derecognition of Mullewa land F Share based payments G Adjustment for Income tax Profit after tax under AIFRS	CONSOLIDATED 30 June 2005 $’000 23,713 231 (31) (141) (143) 33 (1,630) (8,530) 13,502	COMPANY 30 June 2005 $’000 1,100 – – – – – (1,630) 145
		(385)

– 368 –

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APPENDIX III

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.

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.

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APPENDIX III

The effect of changes in the accounting policies for financial instruments on the balance sheet as at 1 July 2005 is shown below:

Equity under AIFRS as at 30 June 2005 Adoption of AASB 132 and AASB 139 – Unrealised gain on available-for-sale investment (a) – Cash flow hedge reserve (b) Equity under AIFRS as at 1 July 2005 Notes:	CONSOLIDATED $’000 76,585 1,050 115 77,750	COMPANY $’000 67,529 1,050 –
		68,579

(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

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APPENDIX III

(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
(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.

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.

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APPENDIX III

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.

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

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.

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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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 15 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.

(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.

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APPENDIX III

2. Revenue and expenses

CONSOLIDATED 2006 2005 $’000 $’000 73,389 76,872 1,907 471 – – 1,907 471 – 126 632 – 600 2 1,232 128 229 842 934 921 33 32 1,196 1,795 674 386 3,079 2,359 447 432 78 124 4,278 3,301 (15) – 4,263 3,301 17,769 17,557 4,323 1,631 754 1,029 814 666 5,129 5,098 9,288 4,516	COMPANY	COMPANY
2006 $’000 73,389 1,907 – 1,907 – 632 600 1,232 229 934 33 1,196 674 3,079 447 78 4,278 (15) 4,263 17,769 4,323 754 814 5,129 9,288	2006 $’000 – 40 2,796 2,836 – – 1 1 11 – – 11 – – – – – – – – 4,323 – 25 – –	2005 $’000 –

		33 1,857
		1,890

		– – –
		–

		168 – –
		168

		– – – –
		– –
		–

		– 1,631 – – – –

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APPENDIX III

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 – – 199 – 199 – 16,151 22,032 4,845 6,610 (7,341) – (5,752) – – 1,804 1,326 116 (6,922) 8,530 30% 30%	COMPANY	COMPANY
2006 $’000 – – 6,601 (13,523) (6,922) – 199 199 16,151 4,845 (7,341) (5,752) – 1,326 (6,922) 30%	2006 $’000 – – (251) – (251) – – – 7,266 2,180 – (3,731) – 1,300 (251) 30%	2005 $’000 – – (145) –
		(145)

		– –
		–

		(530)

		(159) – (213) – 227
		(145)

		30%

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APPENDIX III

Balance	Income Statement	Income Statement
2006 $’000 2,261 3,892 17,318 322 23,793 1,008 1,662 16,439 19,109 (4,684) – – – 449 10,898 11,347 11,347	2006 $’000 2,261 3,825 5,255 123 (285) (1,662) (16,439) (6,922) – – (25) (226) (251)	2005 $’000 1,029 13 7,635 –
		(147) – – 8,530

		– – (145) – (145)

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APPENDIX III

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

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.

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APPENDIX III

4. Cash and cash equivalents

CONSOLIDATED 2006 2005 $’000 $’000 4,334 13,544 214 20,089 4,548 33,633 4,334 13,544 214 20,089 4,548 33,633 2,849 – 7,397 33,633	COMPANY	COMPANY
2006 $’000 4,334 214 4,548 4,334 214 4,548 2,849 7,397	2006 $’000 145 – 145 145 – 145 – 145	2005 $’000 44 –
		44

		44 –
		44 –
		44

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APPENDIX III

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 Notes	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 CONSOLIDATED 2006 2005 $’000 $’000	COMPANY	COMPANY
	23,073 4,263 17,769 (632) (464) (1,907) 814 4,323 – 541 400 (2,208) (388) (335) – (54,205) 7,994 (724) (6,922) 227 (8,381) 2006 $’000	7,356 – – – – (40) – 4,323 (2,796) 420 400 5 – 2 (10,923) – 211 (42) – – (1,084) 2006 $’000	(385) – – – – (33) – 1,631 (1,857) – – 9 – 1 (145) – (53) 16 – – 2005 $’000
			(816)

– 379 –

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APPENDIX III

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.

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 – – – – – – – –	COMPANY	COMPANY
2006 $’000 3,350 1,480 1,350 6,180 – – – –	2006 $’000 – 10 48 58 29,835 (145) 29,690 29,690	2005 $’000 – 5 35
		40

		53,564 (145)
		53,419

		53,419

Related party receivables

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.

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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	COMPANY
	2006 $’000 627 5,058 5,685	2006 $’000 – – –	2005 $’000 – –
			–

7. Available-for-sale financial assets

CONSOLIDATED 2006 2005 $’000 $’000 400 400 (400) – – 400 1,248 2,542 1,248 2,942	COMPANY	COMPANY
2006 $’000 400 (400) – 1,248 1,248	2006 $’000 400 (400) – 1,248 1,248	2005 $’000 400 –
		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

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8. Other financial assets

Notes Non-Current Investments in controlled entities – at cost Allowance for impairment	CONSOLIDATED 2006 2005 $’000 $’000 – – – – – –	COMPANY	COMPANY
	2006 $’000 – – –	2006 $’000 42,431 – 42,431	2005 $’000 21,618 (10,833)
			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.

9. Interest in subsidiaries

Name Mount Gibson Mining Limited WHTK Pty Ltd Geraldton Bulk Handling Pty Ltd Asia Iron Holdings Limited • Asia Iron (Nanjing) Co., Ltd • Asia Iron Limited • Jiangsu Investment Pty Ltd • Extension Hill Pty Ltd • Austral Iron Pty Ltd • AP Mining Pty Ltd • Westralian Iron Pty Ltd • MGM Pipelines Pty Ltd	Country of Incorporation Australia Australia Australia Hong Kong China Hong Kong Australia Australia Australia Australia Australia Australia	Percentage of Equity Interest Held by the consolidated entity 2006 2005 % % 100 100 100 100 100 100 73 63 73 63 73 63 73 63 73 63 73 63 73 63 73 63 73 63	Investment	Investment
			2006 $’000 17,631 – – 24,800 – – – – – – – – 42,431	2005 $’000 6,798 – – 3,987 – – – – – – – –
				10,785

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10. Assets held for sale

On 7 June 2006 Mount Gibson advised the 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.

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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

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11. Property, plant and equipment

CONSOLIDATED 2006 2005 $’000 $’000 3,020 5 10,057 2,433 (1,214) (546) 8,843 1,887 6,095 13,456 (3,024) (3,604) 3,071 9,852 6,709 6,111 (997) (549) 5,712 5,562 522 522 (241) (163) 281 359 2,576 – 28,979 22,527 (5,476) (4,862) 23,503 17,665 (3,158) – 20,345 17,665	COMPANY	COMPANY
2006 $’000 3,020 10,057 (1,214) 8,843 6,095 (3,024) 3,071 6,709 (997) 5,712 522 (241) 281 2,576 28,979 (5,476) 23,503 (3,158) 20,345	2006 $’000 5 – – – – – – – – – – – – – 5 – 5 – 5	2005 $’000 5
		– –
		–
		– –
		–
		– –
		–
		– –
		–
		–
		5 –
		5 –
		5

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8,843 1,887 3,071 9,852 5,712 5,562 281 359 17,907 17,660 1,887 1,514 7,666 618 – 82 – 66 (36) (7) (674) (386) 8,843 1,887 9,852 9,548 2,783 2,784 – (66) (6,485) (55) (3,079) (2,359) CONSOLIDATED 2006 2005 $’000 $’000	COMPANY	COMPANY
8,843 3,071 5,712 281 17,907 1,887 7,666 – – (36) (674) 8,843 9,852 2,783 – (6,485) (3,079) 2006 $’000	– – – – – – – – – – – – – – – – – 2006 $’000	– – – – 2005 $’000
		–

		– – – – – –
		–
		– – – – –

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FINANCIAL INFORMATION ON MOUNT GIBSON

3,071 9,852 5,562 5,615 597 379 (447) (432) 5,712 5,562 359 462 – 21 (78) (124) 281 359 CONSOLIDATED 2006 2005 $’000 $’000	COMPANY	COMPANY
3,071 5,562 597 (447) 5,712 359 – (78) 281 2006 $’000	– – – – – – – – – 2006 $’000	– – – – 2005 $’000
		–
		– – –
		–

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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 29,104 17,889 15,641 11,881 (814) (666) 43,931 29,104 (39,755) – 4,176 29,104	COMPANY	COMPANY
2006 $’000 4,022 154 34,547 5,208 43,931 (39,755) 4,176 29,104 15,641 (814) 43,931 (39,755) 4,176	2006 $’000 – – – – – – – – 25 (25) – – –	2005 $’000 – – – –
		– –
		–

		– – –
		– –
		–

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13. Mine properties

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	COMPANY
	2006 2005 $’000 $’000 – – – – – – – – – – – – – – COMPANY	2005 $’000 – –
		–

		– – –
		–

2006 $’000 7,333 10,503 17,836	2006 $’000 175 166 341	2005 $’000 85 45
		130

14. Trade and other payables

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

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15. Interest-bearing loans and borrowings

CONSOLIDATED 2006 2005 $’000 $’000 1,594 2,361 – 419 1,594 2,780 4,247 8,938 1,500 –	COMPANY	COMPANY
2006 $’000 1,594 – 1,594 4,247 1,500	2006 $’000 – – – – –	2005 $’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.

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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 – – 5,841 10,258 5,526 493 – – 1,500 – 12,867 10,751 20,474 1,000 – – – 2,208 – 4,000 – – 20,474 7,208	COMPANY	COMPANY
2006 $’000 20,474 5,841 5,526 – 1,500 33,341 – 5,841 5,526 – 1,500 12,867 20,474 – – – – 20,474	2006 $’000 – – – – – – – – – – – – – – – – – –	2005 $’000 – – – – –
		–

		– – – – –
		–

		– – – – –
		–

i The security pledge for these facilities is a fixed and floating charge over all the assets and undertakings of the consolidated entity.

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16. Derivatives

CONSOLIDATED 2006 2005 $’000 $’000 2,541 – 1,470 – CONSOLIDATED 2006 2005 $’000 $’000 451 238 12 62 463 300 14 – 688 655 702 655	COMPANY	COMPANY
	2006 2005 $’000 $’000 – – – – COMPANY	2005 $’000 –

		–

2006 $’000 451 12 463 14 688 702	2006 $’000 – – – – – –	2005 $’000 – –
		–

		– –
		–

17. Provisions

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Movement in provisions: Road Resealing Carrying amount at beginning of the year Provision for period Amounts utilised during the period Carrying amount at end of the year Decommissioning Rehabilitation Carrying amount at beginning of the year Unwinding of discount on rehabilitation provision Carrying amount at end of the year 18. Issued capital Notes a Ordinary shares Issued and full paid Notes	62 – 100 62 (150) – 12 62 655 623 33 32 688 655 CONSOLIDATED 2006 2005 $’000 $’000 86,851 79,381 CONSOLIDATED 2006 2005 $’000 $’000	COMPANY	COMPANY
		– – – – – – – – – – – – – – COMPANY 2006 2005 $’000 $’000	– – – 2005 $’000
			–
			– –
			–

		2006 2005 $’000 $’000 86,851 79,381

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FINANCIAL INFORMATION ON MOUNT GIBSON

b Movement in ordinary shares on issue Beginning of the financial year Conversion of convertible notes Equity placement Issue of shares Exercise of options Less capital raising costs End of the financial year	2006 Number of Shares $’000 368,519,793 79,381 – – – – 40,000 10 33,498,926 7,460 – – 402,058,719 86,851	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	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
			79,381

c Terms and conditions of contributed equity

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

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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.

19. Reserves

CONSOLIDATED 2006 2005 $’000 $’000 5,954 1,631 (1,790) – (3,691) – 473 1,631 1,631 – 4,323 1,631 5,954 1,631	COMPANY	COMPANY
2006 $’000 5,954 (1,790) (3,691) 473 1,631 4,323 5,954	2006 $’000 5,954 (2,255) – 3,699 1,631 4,323 5,954	2005 $’000 1,631 – –
		1,631

		– 1,631
		1,631

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– – 1,165 – (3,305) – 465 – (115) – (1,790) – (465) – (3,226) – (3,691) – CONSOLIDATED 2006 2005 $’000 $’000	COMPANY	COMPANY
– 1,165 (3,305) 465 (115) (1,790) (465) (3,226) (3,691) 2006 $’000	– 1,050 (3,305) – – (2,255) – – – 2006 $’000	– – – – – 2005 $’000
		–

		– –
		–

Balances at 30 June 2006 represent the total movement during the year.

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20. Retained earnings/(accumulated losses)

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

2006 $’000 8,956 – 3,226 (406) 11,776	2006 $’000 – – – – –	2005 $’000 – – – –
		–

21. Minority interests

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22. Expenditure commitments

CONSOLIDATED 2006 2005 $’000 $’000 906 826 3,332 3,128 4,238 3,954 9,455 594 10,627 970 20,082 1,564 2,001 3,232 4,438 10,481 610 – 7,049 13,713 (1,208) (2,414) 5,841 11,299 1,594 2,361 4,247 8,938 5,841 11,299	COMPANY	COMPANY
2006 $’000 906 3,332 4,238 9,455 10,627 20,082 2,001 4,438 610 7,049 (1,208) 5,841 1,594 4,247 5,841	2006 $’000 – – – – – – – – – – – – – – –	2005 $’000 – –
		–

		– –
		–

		– – –
		– –
		–

		– –
		–

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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.
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

The aggregate employee benefits liability is comprised of: Accrued wages, salaries and on-costs Provisions	CONSOLIDATED 2006 2005 $’000 $’000 1,544 629 465 238 2,009 867	COMPANY	COMPANY
	2006 $’000 1,544 465 2,009	2006 $’000 43 – 43	2005 $’000 25 –
			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.

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Information with respect to the number of options granted and issued under the employee share scheme is as follows:

2006 No. of Options Weighted average exercise price (cents) Balance at beginning of year 20,900,000 25.0 granted and issued 9,073,712 91.7 forfeited (1,900,000) 56.9 exercised (2,993,080) 25.0 Balance at year end 25,080,632 57.4 Exercisable at year end 13,080,632 37.8 The outstanding balance of options granted and issued as at 30 June	2005	2005
	No. of Options Weighted average exercise price (cents) – – 21,900,000 25.0 (1,000,000) 25.0 – – 20,900,000 25.0 – – 2006 is represented by:	Weighted average exercise price (cents) – 25.0 25.0 –
		25.0

		–

Exercise Price Exercise Date Vesting Date 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	No. 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

– 400 –

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FINANCIAL INFORMATION ON MOUNT GIBSON

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).

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

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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.

The following reflects the income and share data used in the calculations of basic and diluted earnings per share:

Profits used in calculating basic and diluted earnings per share Weighted average number of ordinary shares used in calculating basic earnings per share Effect of dilution – Share options Weighted average number of ordinary shares used in calculating diluted earnings per share	CONSOLIDATED	CONSOLIDATED
	2006 $’000 23,479 Number of Shares 390,533,080 8,624,527 399,157,607	2005 $’000 13,502 Number of Shares 318,817,812 12,232,478
		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.

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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 Mount Gibson 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.

– 403 –

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APPENDIX III

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.

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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.

(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 Mount Gibson with the ability to attract and retain directors of the highest calibre, whilst incurring a cost that is acceptable to shareholders.

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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 Mount Gibson. 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 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;
link rewards with the strategic goals and performance of Mount Gibson; and
ensure total compensation is competitive by market standards.

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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.

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APPENDIX III

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.

(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.

– 408 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

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.

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 Salary & Fees $’000 106 117 673 345 316 300 48 42 44 38 183 131 399 275 246 208 2,590 881	Term Cash Bonus $’000 – – – 250 250 150 – – – – 8 10 – – 4 10 412 270	Post Employment Non Monetary Benefits Superannuation Retirement Benefits $’000 $’000 $’000 – 9 – – 6 – 34 – – 88 – – 1 28 – 2 27 – – – – – – – – 4 – – 4 – – 16 – – 13 – – 13 – 1 25 – 20 23 – 6 19 – 58 145 – 94 42 –	Share-Based Payment Options $’000 15 29 3,114 1,405 399 224 7 15 7 15 41 31 – 13 28 31 3,848 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.

– 409 –

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APPENDIX III

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	COMPANY
	2006 $’000 3,060 145 3,848 7,053	2006 $’000 158 10 3,848 4,016	2005 $’000 136 7 1,526
			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.

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APPENDIX III

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.

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

– 411 –

APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

Terms and Conditions for each grant:

30 June 2006
Vested
Number
Directors
AD Rule
–
L Tonkin
–
L Tonkin
–
Executives
SP Coates
–
PJ Jones
–
–
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
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
Terms and Conditions for each grant
Granted
Number
Grant date
Fair value
per option at
grant date $
Exercise
price per
option $
First exercise
date
Last
exercise date/
expiry date
5,000,000
16-Mar-05
0.5516
0.50
31-Dec-05
31-Dec-07
5,000,000
16-Mar-05
0.5716
0.55
31-Dec-06
31-Dec-08
750,000
15-Dec-04
0.0807
0.25
31-Dec-05
31-Dec-06
750,000
15-Dec-04
0.0807
0.25
31-Dec-05
31-Dec-06
1,000,000
15-Dec-04
0.0807
0.25
31-Dec-05
31-Dec-06
750,000
15-Dec-04
0.0807
0.25
31-Dec-05
31-Dec-06
300,000
15-Dec-04
0.0807
0.25
31-Dec-05
31-Dec-06
13,550,000

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

d Option holdings of Key Management Personnel

Ves	ted at 30 June 20	06 Exercisable 1,000,000 – – – 500,000 500,000 750,000 – – 350,000
Total 1,000,000 – – – 500,000 500,000 750,000 – – 350,000 3,100,000 Ves	Not Exercisable – – – – – – – – – – – ted at 30 June 20
		3,100,000

		05 Exercisable 1,440,000 – 720,000 750,000 – – – – –
Total 1,440,000 – 720,000 750,000 – – – – – 2,910,000	Not Exercisable – – – – – – – – – –
		2,910,000

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APPENDIX III

FINANCIAL INFORMATION ON MOUNT GIBSON

e Shareholding 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 1 July 2005 Ord Granted as Remuneration Ord 420,000 – – – – – – – 177,500 – 1,200,000 – 900,000 – – – – – 25,000 – 2,722,500 – Balance 1 July 2004 Ord Granted as Remuneration Ord 420,000 – – – 177,500 – 1,081,666 – 1,595,000 – – – 7,220 – – – – – 3,281,386 –	On Exercise of Options Ord 1,440,000 2,500,000 – – 750,000 750,000 – – – 400,000 5,840,000 On Exercise of Options Ord – – – 694,444 – – – – – 694,444	Net Change Other Ord (380,000) (2,500,000) – – (200,000) (950,000) 40,000 – – (400,000) (4,390,000) Net Change Other Ord – – – (576,110) (695,000) – – – 25,000 (1,246,110)	Balance 30 June 2006 Ord 1,480,000 – – – 727,500 1,000,000 940,000 – – 25,000
				4,172,500

				Balance 30 June 2005 Ord 420,000 – 177,500 1,200,000 900,000 – 7,220 – 25,000
				2,729,720

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APPENDIX III

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	CONSOLIDATED
	2006 $’000 – – 8 8	2005 $’000 –
		– 17
		17

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

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.

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	COMPANY
	2006 $’000 100 40 140	2006 $’000 24 – 24	2005 $’000 12 –
			12

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APPENDIX III

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 offmarket 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 III

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 Mount Gibson. At reporting date the net amount was A$1,071,486 (2005: $328,672).

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APPENDIX III

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.

– 419 –

APPENDIX III

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
2006
2005
$’000
$’000
i)
Financial assets
Cash
4,333
33,633
Trade and other receivables
–
–
Unlisted shares
–
–
Listed shares
–
–
Derivatives
–
–
Total financial assets
4,333
33,633
ii)
Financial liabilities
Trade and other payables
–
–
Derivatives
–
–
Lease liabilities
–
–
Unearned revenue
–
–
Total financial liabilities
–
–

Fixed interest rate maturing in:
Non-interest bearing
Total carrying amount
per statement of
financial position
Weighted average
effective
interest rate
1 year or less
over 1 to 5 years
2006
2005
2006
2005
2006
2005
2006
2005
2006
2005
$’000
$’000
$’000
$’000
$’000
$’000
$’000
$’000
%
%
84
–
–
–
131
–
4,548
33,633
5.29
4.59
–
–
–
–
6,180
5,862
6,180
5,862
N/A
N/A
–
–
–
–
–
400
–
400
N/A
N/A
–
–
–
–
1,248
2,542
1,248
2,542
N/A
N/A
–
–
–
–
2,541
–
2,541
–
N/A
N/A
84
–
–
–
10,100
8,804
14,517
42,437
–
–
–
–
17,836
9,593
17,836
9,593
N/A
N/A
–
–
–
–
1,470
–
1,470
–
N/A
N/A
1,594
2,361
4,247
8,938
–
–
5,841
11,299
7.97
7.87
–
419
–
–
–
–
–
419
N/A
7.15
1,594
2,780
4,247
8,938
19,306
9,593
25,147
21,311

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.

Available for sale financial assets Derivatives	Carrying Value at 30 June 2005 $’000 2,942 – 2,942	Net Fair Value at 30 June 2005 $’000 3,992 115
		4,107

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APPENDIX III

c Hedging instruments

i Hedges for specific commitments

This hedge has been treated as effective, in accordance with AASB 139

As at 30 June 2006 the following foreign exchange contracts were outstanding:

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	Fair Value A$’000 48 214 366 628 443 1,071		2005
	US$’000 9,000 9,000 6,000 24,000 60,000 84,000	A$’000 equivalent 12,167 12,351 8,487 33,005 83,443 116,448		US$’000 10,000 10,000 36,500 11,500 58,000	A$’000 equivalent 13,414 13,414 50,093 15,333 78,840	Fair Value A$’00 165 165 51 (101)
						115

All of the above contracts mature by 30 April 2007.

– 421 –

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APPENDIX III

6. The following is the directors’ report and auditors’ report of Mount Gibson which is extracted from the 2006 annual report 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

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.

– 422 –

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APPENDIX III

Brian Johnson – B.E., MIEAust

Deputy chairman

Mr Johnson is a civil engineer with extensive experience in the construction and mining industries in Australia, South East Asia and North America. Mr Johnson was a founding director and shareholder of Mount Gibson Mining Limited. He has held a number of directorships in listed public companies. As a major shareholder and chief executive, Mr Johnson was instrumental in establishing Portman Limited’s presence in the iron ore industry between 1991 and 1994, developing mines at Koolyanobbing and Cockatoo Island. He also personally partnered Mr Lang Hancock in the development and operation of McCamey’s Monster iron ore mine in the Pilbara, prior to its sale to the BHP Group. Mr Johnson has experience in dealing with regional steel mills and major trading houses through his previous involvement in the production of coking coal, manganese and iron ore. Mr Johnson has been managing director since the inception of Mount Gibson. On 15 October 2005, Mr Johnson resigned as managing director and was appointed Deputy Chairman of Mount Gibson. Mr Johnson is the non-executive chairman of Envirogold Limited and Linc Energy Limited. During the past three years Mr Johnson has not served as a director of any other listed companies.

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.

– 423 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

Alan Rule – B.Comm, B.Acc, CA

Finance director

Mr Rule was appointed finance director on 1 July 2005. He is a chartered accountant with extensive experience in the mining industry in Australia. He held the position of chief financial officer of Western Metals Limited and more recently St Barbara Mines Limited. He has considerable experience in international financing of mining projects and implementation of accounting controls and systems. Mr Rule was previously finance director of Asia Iron Holdings Limited. Mr Rule is a non-executive director of Resource Mining Corporation Limited. During the past three years Mr Rule served as a director of Nustar Mining Corporation Limited.

Craig Readhead – B. Juris, LL.B, AICD

Non-Executive director

Mr Readhead has spent the last 26 years practising in the resources law area and is a partner of law firm Pullinger Readhead Lucas. Mr Readhead has had a significant legal role in the development of a number of mining projects within Australia, Africa and South East Asia. He is chairman and a non-executive director of Heron Resources Ltd, Agincourt Resources Ltd and Halcyon Group Ltd, Frankland River Olive Company Limited, and is past President of the Australian Mining and Petroleum Law Association, and past Vice-President of the Association of Mining and Exploration Companies. Mr Readhead is a member of the Audit and Remuneration Committees. During the past three years Mr Readhead has also served as a director of Pioneer Nickel Ltd, New World Alloys Ltd.

Ian Macliver – B.Comm, CA, F Fin, AICD

Non-Executive director

Mr Macliver is managing director of Grange Consulting Group Pty Ltd, which provide specialist corporate advisory services to both listed and unlisted companies. He has many years experience as a senior executive and director of both resource and industrial companies with particular responsibility for capital raising and other corporate initiatives. Mr Macliver is chairman and a non-executive director of Stratatel Ltd, BioProspect Ltd and is a non-executive director of Port Bouvard Ltd, and Ottoman Energy Ltd. Mr Macliver is Chairman of the Audit and Remuneration Committees. During the past three years Mr Macliver has also served as a director of Commoditel Ltd.

– 424 –

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APPENDIX III

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

– 425 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

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
	Shares	over 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

==> picture [393 x 240] intentionally omitted <==

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

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 Holding 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
Country of registration: China
ACN: 100 180 952 ACN: 111 143 223 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
Mount Gibson Iron Limited
Country of registration: Australia
ACN: 008 670 817
----- End of picture text -----

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FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

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 [373 x 96] 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
----- 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 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.

– 427 –

FINANCIAL INFORMATION ON MOUNT GIBSON

APPENDIX III

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 Mount Gibson	Consolidated 2006 2005 $’000 $’000 16,151 22,032 6,922 (8,530 23,073 13,502 406 – 23,479 13,502	Consolidated 2006 2005 $’000 $’000 16,151 22,032 6,922 (8,530 23,073 13,502 406 – 23,479 13,502
		13,502

The income tax benefit reflects the recognition in the current period of tax losses available for use by the consolidated entity.

Tallering Peak Hematite Operations

During December 2005 Mount Gibson announced that detailed mine schedules to exploit the current ore reserve had recently been completed which indicated that development rates at Tallering Peak would need to be increased to sustain 3 Mtpa of ore production through to the end of mine life.

The increased rate of development stripping commenced in January 2006 following the mobilisation of additional hired mining equipment which will give the operation the capacity to load and haul approximately 32 Mtpa of ore and waste annually over the next two years.

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.

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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 Mount Gibson 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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FINANCIAL INFORMATION ON MOUNT GIBSON

Production summary for 12 months Unit Mining – Waste mined bcm – Ore mined wmt Crushing – Lump wmt – Fines wmt – Low Grade Screen wmt Transported to Mullewa Railhead – Lump wmt – Fines wmt Transported to Geraldton Port – Lump wmt – Fines wmt Shipping – Lump wmt – Fines wmt Shipping – Lump dmt – Fines dmt	Sept Qtr 2005 ’000 932 471 354 190 17 561 335 173 508 320 186 506 322 178 500 317 174 491	Dec Qtr 2005 ’000 1,243 248 204 68 143 415 194 106 300 236 113 349 300 128 428 296 125 421	Mar Qtr 2006 ’000 1,627 254 187 107 98 392 105 94 199 110 78 188 97 50 147 96 49 145	Jun Qtr 2006 ’000 2,763 149 120 120 – 240 176 114 290 166 126 292 170 141 311 168 137 305	YTD 2006 ’000 6,565 1,122 865 485 258
					1,608 810 487
					1,297 832 503
					1,335 889 497
					1,386 877 485
					1,362

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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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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.

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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.

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.

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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.

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.

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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:

Exercise Price Exercise Date/Period 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 Total	Options o Balance date 7,256,920 5,000,000 5,000,000 823,712 2,000,000 3,000,000 2,000,000 25,080,632	n 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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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 Mount Gibson 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

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 III

REMUNERATION REPORT

This report outlines the remuneration arrangements in place for directors and executives of the consolidated entity.

Remuneration Policy

The Remuneration Policy of Mount Gibson and its Controlled Entities has been put in place to ensure that:

remuneration policies and systems support Mount Gibson’s wider objectives and strategies;
directors’ and senior executives’ remuneration is aligned to the long-term interests of shareholders within an appropriate control framework; and
there is a clear relationship between the executives’ performance and remuneration.

Remuneration Structure

In accordance with best practice corporate governance, the structure of non-executive director, executive director and senior executive management remuneration is separate.

NON-EXECUTIVE DIRECTOR REMUNERATION

Objective

The board seeks to set aggregate remuneration at a level which provides Mount Gibson with the ability to attract and retain directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders.

Structure

The Constitution and the ASX Listing Rules specify that the aggregate remuneration of non-executive directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the directors as agreed. The latest determination was at the Annual General Meeting held on 18 November 2005 when Shareholders approved an aggregate remuneration of $300,000 per year.

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APPENDIX III

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 Employee Option Scheme, subject to approval by shareholders.

Board operating costs do not form part of non-executive directors’ remuneration.

Non-executive directors have long been encouraged by the board to hold shares in Mount Gibson (purchased by the director on market). It is considered good governance for directors to have a stake in Mount Gibson on whose board they sit. The non-executive directors of Mount Gibson can participate in the Employee Share Plan which provides incentives where specified criteria are met.

EXECUTIVE DIRECTORS AND SENIOR EXECUTIVES REMUNERATION

Objective

Mount Gibson aims to reward executive directors and senior executives with a level and mix of remuneration commensurate with their position and responsibilities within Mount Gibson 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;

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APPENDIX III

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.

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APPENDIX III

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 III

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 III

DIRECTOR REMUNERATION FOR THE YEAR ENDED 30 JUNE 2006

WB Willis Non-executive 2006 Chairman 2005 BG Johnson Deputy chairman 2006 2005 L Tonkin Managing director 2006 AD Rule Finance director 2006 CL Readhead Non-executive 2006 director 2005 IA Macliver Non-executive 2006 director 2005 G Liu Non-executive director 2006	Short Term Salary & Fees Non Monetary STI Bonuses 105,505 – – 116,731 – – 673,424 33,814 – 344,669 88,309 250,000 316,396 1,051 250,000 300,000 1,822 150,000 48,000 – – 41,951 – – 44,037 – – 38,485 – – – – –	Post Employment Share Based Payment Superannuation Retirement Benefits Options Total % Performance Related 9,495 – 14,735 129,735 11% 6,229 – 29,230 152,190 19% – – 3,113,988 3,821,226 81% – – 1,405,809 2,088,787 79% 28,476 – 399,479 995,402 65% 27,417 – 224,444 703,683 53% – – 7,368 55,368 13% – – 14,615 56,566 26% 3,963 – 7,368 55,368 13% 3,476 – 14,615 56,576 26% – – – – –

Mr Tonkin, Mr Rule and Mr Liu were appointed directors of Mount Gibson on 24 October 2005, 1 July 2005 and 12 August 2005 respectively. Mr Liu retired as a director on 22 February 2006.

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APPENDIX III

REMUNERATION OF THE 5 NAMED EXECUTIVES WHO RECEIVED THE HIGHEST REMUNERATION FOR THE YEAR ENDED 30 JUNE 2006

DP Garcia Commercial director – Asia Iron Holdings Limited 2006 KJ Malaxos Chief executive officer – Mount Gibson Mining Limited 2006 2005 PJ Jones Project manager 2006 SP Coates Exploration manager 2006 2005 BS Wesley Group financial controller 2006	Short Term Salary & Fees Non Monetary STI Bonuses 398,655 – – 245,833 19,728 4,167 207,692 6,412 10,000 275,229 1,410 – 182,580 – 7,500 130,780 – 10,000 129,019 1,663 5,000	Post Employment Share Based Payment Superannuation Retirement Benefits Options Total % Performance Related 12,777 – – 411,432 – 22,500 – 28,085 320,313 10% 19,592 – 31,285 274,981 15% 24,771 – 13,171 314,581 4% 16,425 – 41,265 247,770 20% 12,670 – 31,285 184,735 22% 11,366 – 13,171 160,219 11%

All executive directors and executives are engaged through Controlled Entities of Mount Gibson.

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APPENDIX III

OPTIONS GRANTED AS PART OF REMUNERATION FOR THE YEAR ENDED 30 JUNE 2006

					Value of				Total Value
					Options				of Options
				Value per	Granted			Value at	Exercised
				Option @	During		Exercised	Date Option	and Lapsed	% of
	Grant Date	Exercise Price	Grant Number	Grant Date	the Year	Vesting Date	Number	Lapsed	During 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 III

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 Mount Gibson on 24 October 2005, 1 July 2005 and 12 August 2005 respectively. Mr Liu retired as a director on 22 February 2006.

TAX CONSOLIDATION

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.

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APPENDIX III

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 Mount Gibson under ASIC Class Order 98/0100. Mount Gibson is an entity to which the class order applies.

CORPORATE GOVERNANCE

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 III

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 Mount Gibson 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.

Audit approach

We conducted an independent audit of the financial report in order to express an opinion 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 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.

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APPENDIX III

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.

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 Mount Gibson.

Independence

We are independent of Mount Gibson 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 Mount Gibson 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.

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APPENDIX III

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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APPENDIX III

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

==> picture [145 x 39] intentionally omitted <==

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

The Directors,

APAC Resources Limited

32/F., China Online Centre 333 Lockhart Road

Wanchai 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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A. Similarities and differences between AASB and HKFRS concerning all items in Mount Gibson’s financial statements – based on HKFRS which become effective for accounting periods beginning on or after 1 January 2005

Based on the published information, there should be no major differences in reported amounts under the two accounting standards so far as the financial statements of Mount Gibson are concerned. The accounting policies of Mount Gibson are materially consistent with those of the Company. The amount reported for each of the items will be similar and no reconciliation with regard to net asset and income are necessary.

B. General background of AASB and HKFRS

Both AASB and HKFRS are basically derived from International Financial Reporting Standards (“IFRS”), which is the body of financial accounting principles and rules commonly accepted by the constituent professional accountancy bodies, statement preparers, auditors, investors, analysts, regulators and other users of the markets.

AASB and HKFRS are principally based on, copied from and substantially the same as IFRS.

HKFRS are effective for accounting periods beginning on or after 1 January 2005.

AASB are effective for accounting periods beginning on or after 1 January 2005.

C. Principal differences between AASB and HKFRS

There is no principal difference between AASB and HKFRS.

D. Principal differences between Pre-2005 Australian accounting standards and Hong Kong accounting standards which are commonly encountered.

There is no principal differences between Pre-2005 Australian accounting standards and Hong Kong accounting standards.

Graham H.Y. Chan & Co.

Certified Public Accountants (Practising)

Hong Kong

12 December 2008

– 451 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

1. The following is the reproduction of certain paragraphs of the management discussion and analysis as contained in the 2008 annual report of Mount Gibson (all monetary amounts are stated at A$).

TALLERING PEAK

Record ore production – up 31% on the previous year
Record crushing and screening throughput – up 24% on the previous year
Record road haulage – up 15% on the previous year
Record rail cartage – up 3% on the previous year
Established substantial final product stockpiles increasing operational flexibility and ensuring increased future ore sales
Completion of infill resource drilling extends mineralisation and enhances Reserve reconciliation
Safety and environmental performance improvement

The 2007/08 year has seen Tallering Peak exceed its targeted production rate of 3 million tonnes per annum (Mtpa) with a total of 3,841,000 tonnes produced.

Early in the year, material movement and ore production immediately climbed over the previous year’s levels, causing stockpiles to expand ahead of infrastructure improvements at Geraldton Port.

Increased ore production during the first quarter of the year saw ore being sourced from multiple stages of the Main Range orebody. Mine productivity improved markedly as the pit floor area increased while the establishment of the T2 north-east cut back continued as planned.

Infill resource drilling of the T2 mineralisation, which commenced the previous year, was completed by September 2007 with 17 reverse circulation drill holes – totalling 1,202 metres – being drilled. As a result, Mount Gibson has significantly enhanced its understanding of the complex T2 resource while extending mineralisation and allowing the final pit design to extend in this area.

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APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

Staged mining of the Tallering Peak Main Range orebody continued during the second quarter with production rates approaching record levels and the T6A cut back providing the majority of the high grade ore mined, while medium grade blending ore was sourced from the T2 area.

The long-awaited commissioning of the Berth 5 ship loader at Geraldton Port saw loading of the first ship commence on 23 January 2008, with lump iron ore from Tallering Peak being loaded onto the iron ore carrier, Cape Courage.

Mount Gibson loaded seven ships from the new ship loader during the first quarter of 2008, at an average loading rate 55% higher than was previously achieved by the Berth 4 facilities, reducing loading time by more than 20 hours.

The Main Range Tallering Peak cutbacks continued in the third quarter of the year with the commencement of T6A2 benches and continuation of the T2A cut back which guaranteed continuity of ore supplies with subsequent T3C benches complete and T6A1 nearing completion.

The new Berth 5 ship loader’s critical contribution to building iron ore export capacity from the Port became evident in the last quarter of the year, with Tallering Peak posting its highest shipping tonnage to date. It is anticipated that further improvements in ship loading rates will occur as the Geraldton Port Authority eliminates unplanned outages and becomes more proficient in loading vessels at the new facility.

Thirty new rail wagons were received by Tallering Peak during the June 2008 quarter and were fully commissioned by mid-July. Combined with the sizable crushed stocks at the Rivudini rail storage facility, this additional rail capacity provides further upside for shipping rates in the first half of 2008/09.

Despite increased shipping rates, the very strong operational performance at Tallering Peak resulted in limited draw-down of stockpiles resulting in a year-end ore and product stockpile total of approximately 1.8 million tonnes.

The outlook for Tallering Peak in the coming year is very encouraging. The current high levels of ore stocks – initially due to Port delays and then later due to above-target production – will translate into a positive and sustained impact on the year’s exports particularly in the second half of the 2008/09 financial year given continued strong customer demand.

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APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

Crushing throughput at Tallering Peak improved by 24% to 3.36 million tonnes compared with the corresponding period last year. Further enhancements to the crushing circuit are scheduled for next financial year which are expected to improve plant reliability allowing further increases in output.

Beyond the 2008/09 financial year, Tallering Peak’s strip ratios decline rapidly which significantly enhances cash flow from the operation.

KOOLAN ISLAND

First full year of shipments completed
Major site infrastructure and mobile fleet substantially installed and commissioned
Record final quarter material movement, crushing and shipping
Main Pit seawall, dewatering and rehabilitation activities commenced
Cut back of Main Pit commenced
Power upgrade increases efficiency and crushing capacity
Significant exploration targets identified

Following Koolan Island’s first shipment in June 2007, the 2007/08 year represented the first full year of shipments from the operation.

The ramp-up of production commenced the previous year continued into the first quarter of the new year, with approximately 2 million bank cubic metres of material being mined and a 66% increase in ore production. Wet commissioning of the crushing and screening facility led to a 150% increase in crusher throughput over the previous quarter, while shipments more than trebled.

A power upgrade in September 2007 enhanced the operation’s ability to operate the crushing and screening facility while simultaneously loading ore carriers.

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APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

Ore production continued to increase to record levels throughout the latter part of 2007 following a focus on Main Pit West, Mullet Pit and the Barramundi Limb of East Pit. As scheduled, shipments began to decline from December during the monsoonal wet season and accelerated strongly after the season ended in March.

Various approvals for rehabilitation activities were received in October 2007 – with dewatering, rehabilitation of the footwall and construction of a seawall across Arbitration Cove commencing in December and continuing throughout the remainder of the year.

Operations at Koolan Island were restricted in the early part of 2008 due to particularly adverse weather conditions associated with two tropical cyclones and higher than average rainfall during the wet season. Accordingly, crushing and shipping rates were lower than those achieved in the December quarter but remained in line with forecasts.

In the final quarter of the year, Koolan Island returned to record levels of material movement – at 2.8 million bank cubic metres – and also achieved record crushing and shipping rates nearing 4 million tonnes on an annualised basis. This result augurs well for the operation to achieve its medium-term target of 4 Mtpa by the September quarter of 2010 following planned production ramp-up over the next two years.

The operation dispatched 13 shipments for the last quarter of the financial year, with an annual total for its first full year of 40 shipments.

Satellite open pit operations – East Pit and Barramundi Limb – developed as anticipated, while scheduled staging of Mullet Pit generated higher than planned ore volumes due to some localised conservatism in the geological model. Main Pit West has continued to expose wider benches as mining advances, improving productivity from this area. Ore production from the lower grade satellite pits is expected to continue through to the 2012 financial year.

A significant increase in total material movement from Koolan Island is scheduled for the coming year, as the cut back of Main Pit accelerates. To ensure this is completed as efficiently as possible, the mine drilling and excavator fleet has recently been enhanced with the commissioning of a SFK12 blast hole drill rig and a Hitachi 3600 excavator.

Koolan Island presents a number of organic growth opportunities owing to high prospectivity with identified untested hematite outcrops, and Main Pit ore surface extensions along strike and down dip providing outstanding synclinal and anticlinal structural targets.

– 455 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

EXTENSION HILL DIRECT SHIPPING ORE (DSO) PROJECT

Definitive Feasibility Study confirms potential for strong financial returns
State and Commonwealth Government environmental approvals granted
Operation on track for production in first half of 2009
Capital construction commenced
Design and engineering works well advanced
Various supply contracts awarded

The company completed a Definitive Feasibility Study (DFS) in August 2007, which confirmed that a 3 Mtpa hematite mining operation at Extension Hill will generate strong financial returns. Increases in capital and operating costs outlined in the DFS – over those in the June 2006 desktop study – are expected to offset by increased project revenue to yield similar project valuations.

Mount Gibson advanced the Extension Hill project throughout the year however the rate of progress was impeded by onerous Environmental Ministerial conditions and as a consequence, delays in the environmental approvals process. These delays have adversely impacted the capital and operating costs for the project which has been unnecessary and disappointing.

The project was eventually granted environmental approval to proceed by the State Government in October 2007 – with the issue of Ministerial Statement 753 – and the Commonwealth Government gave its approval in December 2007.

The Environmental Management Plan (EMP) for the project required by the Ministerial Statement was submitted to the Department of Environment and Conservation (DEC) in November 2007.

After assessment and comment by the DEC, revised EMPs were submitted in April 2008.

– 456 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

Formal EMP approval is required prior to commencement of ground disturbing activities which presents a critical project milestone. In early July 2008, the Environmental Protection Authority (EPA) provided written advice that the DEC was happy with the EMP as submitted and the EMPs have been forwarded to the Commonwealth Government for approval.

Other plans, proposals and applications submitted and approved – or in the process of approval – during the year included:

Project Management Plan for construction and operation of the Extension Hill mine as required by the Department of Consumer and Employee Protection
Mining Proposal as required by the Department of Industry and Resources
Application to transport processed hematite ore from Extension Hill to Geraldton Port, as required by the Environmental Protection Authority
Environmental Works application as required by the Department of Environment and Conservation
Application for a Water Abstraction Licence from the Department of Water
Application to upgrade haul roads
Building permit applications.

While these approvals are not considered to be in doubt, the majority are pending Commonwealth Government approval of the EMP.

The DFS highlighted the value of additional Mining Reserves to the project. Infill and extensional drilling in the area of the Extension Hill DSO open cut will commence once the EMP is approved by the Commonwealth Government and permitting of mining operations is completed late in 2008. Drilling has the potential to significantly increase the Reserve base and much of the Resource is expected to convert to Reserves.

– 457 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

Although delayed, development of the project has progressed, with many long lead capital items being tendered and off-site capital construction underway including a 250,000 tonne ore storage facility at Geraldton Port. Delays to the project have increased the capital expenditure forecast from $85 million to in excess of $100 million with the project being relatively insensitive to capital cost due to its low capital intensity.

Design and engineering works are well advanced or completed – covering storage and handling facilities at Geraldton Port, a rail siding at Perenjori, haul roads construction and realignment, the mine’s crushing and screening plant and site infrastructure and services.

Exploration drilling to locate suitable sources of process and potable water for the mine confirmed sufficient quantities to meet the mine’s requirements, and site bores have been installed.

A number of contracts have been finalised, including contracts for the supply, construction and operation of a 130-person accommodation village, supply and erection of the main office complex, and supply and installation of site communications. Rail contracts for the haulage of 3 Mtpa of iron ore from Perenjori to the Geraldton Port have been executed and rolling stock is expected to arrive from China in the March quarter of 2009.

EXPLORATION

Tallering Peak

Mount Gibson’s current exploration focus at Tallering Peak is the identification of targets for future drilling campaigns.

Early in 2008 a detailed ground based gravity survey was undertaken, focusing on the poorly drilled North Ridge, with a total of around 75 line kilometres surveyed at a station spacing of 40 metres. Gravity surveys identify areas containing rocks of higher density which may indicate hematite mineralisation.

The data generated from this survey has been processed and is currently being modelled to determine if a significant drilling target exists. Preliminary results suggest that there is a coincident gravity anomaly and zone of less intense magnetics at the northern end of the ridge which may result from a buried hematite alteration zone.

The survey has also confirmed the T1 area, located on the Main Ridge, as a potential ore source at Tallering Peak.

– 458 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

Koolan Island

Koolan Island provided the major focus of Mount Gibson’s exploration activities during the year.

In the first half of the year, rapid expansion of the infill and extensional drilling program commenced the previous year delivered excellent results.

The program focused on the Main West, Barramundi West, Barramundi South, Acacia, Acacia East, Mullet-Acacia and Eastern-Barramundi deposits. The drilling of these deposits included both infill holes to gain greater pierce point density and extensional holes evaluating areas where the mineralisation remains open along strike and down dip. During the 2007 year, 23,967 metres of drilling was completed in 272 holes.

This program was completed in early December ahead of the wet season and the RC drill rig demobilised, after having delivered a number of encouraging results with many intercepts indicating greater mineralisation thickness than in existing models.

Infill and extensional drilling recommenced in May 2008 with 74 holes for 4,709 metres completed by the end of June and resource models for all target areas are being continually updated as drilling progresses.

In January 2008 Mount Gibson announced a new diamond drilling program at Koolan Island to test down dip extent of the Main Pit hematitic surface, and to determine if the Acacia hematitic surface also extended, connecting at depth with the Main Pit hematitic surface.

Two drill holes were completed in the target area in May 2008. Both holes intersected both the Main and Acacia surfaces at depth, with all intersections displaying typical Main and Acacia mineralisation and encouraging widths identified.

The drilling also confirmed that the Main Pit mineralisation extends at least 300 metres below the ultimate designed pit depth, and that the Acacia mineralised surface appears to extend approximately 1.4 kilometres down dip to form a continuous surface with the Main Pit mineralised surface.

– 459 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

Mount Gibson is highly encouraged by these results given that the down dip extent of Main, Acacia, Barramundi and Mullet surfaces have not been previously tested by drilling. These new intersections extend known mineralisation down an additional 300 vertical metres, demonstrating the outstanding exploration targets and resource upside which exists at Koolan Island.

Given the success of these first two drill holes, a further 10,000 metres of diamond drilling has been approved by Mount Gibson’s Board in order to continue testing of the deep Main Pit extensions and the Acacia Limb. Drilling commenced in August 2008.

Extension Hill

No exploration work has been conducted at Extension Hill since March 2006 while processes related to environmental and other statutory approvals are underway. Significant – and ongoing – resource definition and extensional drilling programs are planned to commence as soon as statutory approvals authorising site access are received

RESOURCES & RESERVES

as at 30 June 2008

KOOLAN ISLAND

Mineral resources Measured Indicated Inferred Total Mineral reserves Proved Probable Total	Mt 1.45 49.4 18.3 69.1 1.43 27.9 29.4	Fe% 63.0 62.9 62.6 62.8 63.2 63.7 63.7	SiO2% 7.56 8.06 8.37 8.13 7.40 6.22 6.28	AI2O3% 1.19 0.974 0.926 0.966 1.18 1.01 1.02	P% 0.020
					0.017
					0.017
					0.017

					0.020
					0.016
					0.017

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APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

TALLERING PEAK

Mineral resources Measured Indicated Inferred Total Mineral reserves Proved Probable Total EXTENSION HILL Mineral resources Indicated Inferred Total Mineral reserves Probable Total	Mt 12.2 3.91 1.08 17.2 12.0 2.61 14.6 Mt 12.8 6.69 19.5 12.84 12.84	Fe% 63.1 59.3 56.1 61.8 62.3 58.4 61.6 Fe% 60.0 59.6 59.9 60.3 60.3	SiO2% 3.98 7.22 12.1 4.95 4.57 7.69 5.13 SiO2% 5.36 6.76 5.84 5.48 5.48	AI2O3% 2.18 3.01 4.67 2.49 2.37 3.51 2.57 AI2O3% 1.75 1.77 1.76 1.64 1.64	P% 0.026
					0.053
					0.065
					0.033

					0.025
					0.029
					0.026

					P% 0.064
					0.056
					0.060

					0.062
					0.062

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APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

TOTAL MINERAL RESOURCES TOTAL MINERAL RESERVES	Mt 105.8 Mt 56.8	Fe% 62.1 Fe% 62.4	SiO2% 7.19 SiO2% 5.80	AI2O3% 1.36 AI2O3% 1.56	P% 0.028

					P% 0.029

Note: Reserves exclude ore and product stocks.

The information in this report relating to Mineral Resources is based on information compiled by Rolf Forster, who is a member of the Australasian Institute of Mining and Metallurgy. Rolf Forster is a consultant to Mount Gibson Mining Limited, and has sufficient experience relevant to the styles of mineralisation and type of deposit under consideration and to the activity he is undertaking, to qualify as a Competent Person as defined in the December 2004 Edition of the “Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves”. Rolf Forster has consented to the inclusion of the matters in this report based on his information in the form and context in which it appears.

The information in this report relating to Mining Reserves is based on information compiled by Rolf Forster and Weifeng Li, who are both members of the Australasian Institute of Mining and Metallurgy. Rolf Forster and Weifeng Li are consultants to Mount Gibson Mining Limited, and have sufficient experience relevant to the styles of mineralisation and type of deposit under consideration and to the activity which they are undertaking, to each qualify as a Competent Person as defined in the December 2004 Edition of the “Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves”. Rolf Forster and Weifeng Li have consented to the inclusion of the matters in this report based on their information in the form and context in which it appears.

– 462 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

2. The following is the reproduction of certain paragraphs of the management discussion and analysis as contained in the 2007 annual report of Mount Gibson (all monetary amounts are stated at A$).

Having achieved its targeted production rate of three million tonnes per annum (Mtpa) in the first half of 2006, Mount Gibson’s Tallering Peak mine has seen significant mining progress since this time.

In the month of September 2006, record ore crushing and screening throughput of 286,017 tonnes was achieved, for a record quarterly result of 719,000 tonnes. In addition, the delivery and subsequent commissioning of the necessary mining fleet to increase annual material movements to sustain 3 Mtpa of ore production was completed.

The record production seen during the September quarter resulted in a significant increase in ore stockpiles, enhancing the company’s ability to blend material at the optimum specification for shipping. In line with the increase in the mine’s ore production, crushing, road transport and rail transport capabilities also increased with facilities meeting or exceeding required production rates.

The December quarter saw a focus on infill drilling results which continued to confirm the widths and high grades of mineral resources at the mine. Development of the T6A pit – a slow and difficult process due to its steep topography – also progressed, resulting in a pleasing reduction of future production risk.

While this development resulted in a reduced mining rate, the ore tonnage transported to Mullewa and railed to Geraldton both increased to record levels.

Mining rates at Tallering Peak were necessarily constrained by management during the early part of 2007 as a result of undue shipping delays at the Geraldton Port. The T5 open pit development and production was suspended, and ore stocks remained high as significant ship congestion persisted at the Port due to increased activity, poor loading rates and unplanned Port outages.

The Geraldton Port Authority’s (GPA) announcement in late January that a new ship-loading facility will be commissioned by the end of 2007 augurs well for the Port’s continuing ability to be able to service Mount Gibson as their largest customer.

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APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

Development of the T3C and T6A pits continued to expose high grade hematite mineralisation for future ore supplies, with the March completion of the T3C pit pre-strip confirming its ability to produce high grade ore as planned.

In the final quarter of the year, environmental approval to clear the T2 pit was granted and subsequent clearing of this area and pioneering work to establish the upper bench of the pit is well advanced. Early results have continued to demonstrate the existence of significant mineralisation below the current resource.

Waste stripping and ore production remained at similar levels to the previous quarter as a result of the continued congestion and poor loading rates at the Geraldton Port. In line with the GPA’s assurance that its new ship-loading facility will be operational by calendar year-end, Mount Gibson plans to increase rail capacity in the second half of 2007 to make full use of the Port’s expanded services.

The outlook for Tallering Peak in the coming year is very encouraging. The current high levels of ore stocks due to the Port delay and strong production will translate into a positive and sustained impact on the year’s exports once this impediment is removed.

Exploration

Tallering Peak’s existing sustainable Life of Mine (LOM) Plan – confirming the capacity of the mine to produce 3 Mtpa annually until 2013 – will be continually updated as Mount Gibson continues to explore in and around Tallering Peak with the intention of extending current resources and identifying additional resources.

There is a significant possibility of extending the mine’s life with the development of an area to the north-east described as T1 and extending the resource below the existing Main Range T2 open pit. The exploration target in the T1 area is subject to native title and discussions have progressed with the claimants in an attempt to gain access to this area for follow-up exploration.

Extension Hill Magnetite Project

As announced in last year’s Annual Report, Mount Gibson decided to divest its stake in Asia Iron Holdings Limited – and therefore the Extension Hill Magnetite Project – completing the transaction this year, with the final instalment transferred in May 2007.

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APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

The sale has lowered the financial and technical risk profile of the company, enabling Mount Gibson the option to fund the development costs of the Extension Hill Direct Shipping Ore (DSO) project without diluting shareholder funds through significant equity capital raisings or substantial borrowings.

Mount Gibson will now exploit the DSO hematite-geothite resource close to the surface while retaining the rights to all hematite iron ore in the Mount Gibson Ranges within the tenement area.

Extension Hill Direct Shipping Ore (DSO) Project

The Extension Hill hematite deposit has JORC-compliant Probable Reserves of 12.1 million tonnes, and the results of a Detailed Feasibility Study (DFS) carried out this year confirm that a 3 Mtpa hematite mining operation can be established quickly.

The Western Australian Minister for the Environment has advised that the project can proceed, with official approval from State and Federal governments expected by November 2007. The Mount Gibson Board has approved commencement of the DSO operations as soon as possible with the expectation that production will commence in late 2008.

Early in the year the DFS demonstrated that the project can provide outstanding financial returns in a short timeframe, with minimal technical risks and relatively low capital requirements. The completed DFS reinforced the findings of the initial desktop study.

The project’s estimated production life has been set at five to seven years, with excellent potential for significant increases in reserves – both inside and adjacent to the present pit design.

Another focus of the DFS was road and port facility design, with the Great Northern Highway realignment and haul road underpass design passed to Main Roads WA (MRWA) for review and approval. Approval is expected in October 2007.

The DFS generally validated the broad strategies and parameters assumed for the desktop 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, confirming that it is these factors that will drive the timing of development scenarios.

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APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

Documentation required for Department of Industry and Resources (DoIR) and Department of Environment and Conservation (DEC) Works Approval applications has been prepared and is in the process of lodgement.

Baseline studies for flora, fauna, water and fire monitoring and management have also been designed with fieldwork currently in progress.

Ongoing work on road, rail and port construction and operation has been successful in identifying a number of options – any one of which offer significant time and cost savings over the scenarios evaluated in the DFS. At the Geraldton Port, Mount Gibson is in discussion with existing stakeholders and other interested parties over a range of joint or Mount Gibson-owned storage facilities.

The acquisition of Aztec Resources Limited in February 2007 enabled the Koolan Island project to be fully funded and major infrastructure works to be substantially complete. Our merged and integrated team has worked tirelessly to complete critical infrastructure which has allowed us to meet planned production timelines, culminating in the milestone achievement of its first iron ore shipment in June 2007 to China.

The shipped ore was mined and stockpiled from the Eastern and Mullet pits which will continue to account for a bulk of mine production over the next two years prior to the commencement of Main Pit. Mount Gibson has forecast that 3 Mt will be produced from Koolan Island in the coming year, with its targeted production of 4 Mtpa to be reached in 2010.

Operationally, the focus throughout the year progressed mine establishment and completed infrastructure construction thus achieving Koolan Island’s first shipment by the end of the 2006/07 financial year. The construction schedule was demanding however major infrastructure was completed, including wharf, jetty, rock causeway, deck, berthing equipment, crushing and screening plant, ship loader, accommodation, offices and access roads.

The accommodation camp has capacity of 239 ensuite rooms. The village’s services are fully installed and connected, and multi-purpose buildings such as the wet mess are operational.

The Koolan Island airstrip was lengthened by 230 metres and bitumen sealed, eliminating lost time due to the company’s inability to safely land on a rain-affected strip during periods of inclement weather.

– 466 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

During the coming year Mount Gibson will complete minor capital infrastructure projects whilst preparing to access Koolan Island Main Pit. Preparatory works, which will take approximately two years, will include the construction of a seawall across Arbitration Cove, pit dewatering and footwall rehabilitation. During this period iron ore production will be sourced from satellite open pits and the extension to Main Pit known as Main West.

Exploration

To ensure the long-term future of Koolan Island, Mount Gibson has commenced detailed geological mapping and intensive resource drilling. This is primarily focused on confirming Koolan Island’s current resource of 53.3 million tonnes but is ultimately directed to increasing the reserve base of the operation through extensional and additional exploration success.

Mount Gibson currently plans to operate Koolan for the next nine years, based on the work to date. Exploration will continue to focus on additional resources and with the cooperative support of Koolan Island’s traditional indigenous land owners, the Dambimangari, the exploration search may broaden.

Infill drilling has focused on the Barramundi West and Barramundi South deposits to enhance grade definition and locate the boundaries of these deposits which were drilled in 2006. Infill drilling also progressed at Main West, returning encouraging results and extending the Main West resource.

Surface mapping and sampling progressed at the Main West deposit and the Mackerel Prospect areas to locate additional resource targets and to sterilise areas chosen for waste dumps.

To the north and east of the Mullet-Acacia deposit, mapping and sampling also commenced with random rock chip samples on outcropping hematite horizons recording values greater than 60% Fe.

Discussions continue with the Kimberley Land Council to negotiate a Heritage and Access Agreement for nearby areas of interest that are situated adjacent to the Koolan Island Exploration Licence.

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APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

RESOURCES

AT 30 JUNE 2007, ABOVE 50% Fe

TALLERING PEAK

Measured Indicated Inferred Total EXTENSION HILL Indicated Inferred Total KOOLAN ISLAND Measured Indicated Inferred Total Total	Tonnes millions 14.0 5.51 1.53 21.0 Tonnes millions 12.8 6.69 19.5 Tonnes millions 1.49 43.6 17.7 62.8 103.3	Fe % 63.4 59.2 54.4 61.6 Fe % 60.0 59.6 59.9 Fe % 63.6 63.6 62.0 63.2 62.2	SiO2 % 3.85 7.45 13.1 5.47 SiO2 % 5.36 6.76 5.84 SiO2 % 6.71 6.68 9.04 7.34 6.68	AI2O % 2.13 2.86 4.28 2.48 AI2O % 1.75 1.77 1.76 AI2O % 1.19 1.16 0.99 1.11 1.51	P % 0.023 0.049 0.075
					0.033
					P % 0.063 0.056
					0.060
					P % 0.021 0.021 0.020
					0.021
					0.031

– 468 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

The information in this report relating to Mineral Resources at Tallering Peak and Extension Hill is based on information compiled by Rolf Forster, who is a member of the Australasian Institute of Mining and Metallurgy.

The information in this report relating to Mineral Resources at Koolan Island is based on information compiled by Chris Arnold (CPGeo), principal of Chris Arnold Resource Consultants. Chris Arnold is a Member of the Australasian Institute of Mining and Metallurgy.

Rolf Forster and Chris Arnold are consultants to Mount Gibson Mining Limited, and have sufficient experience relevant to the styles of mineralisation and type of deposit under consideration and to the activity which they are undertaking, to each qualify as a Competent Person as defined in the December 2004 Edition of the “Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves”.

Rolf Forster and Chris Arnold have consented to the inclusion of the matters in this report based on their information in the form and context in which it appears.

RESERVES

AT 30 JUNE 2007

TALLERING PEAK

Proven Probable Total Ore + Product Stockpiles	Tonnes millions 14.1 4.15 18.3 0.60	Fe % 62.7 58.3 61.7 60.5	SiO2 % 4.46 8.26 5.32 7.09	AI2O % 2.29 3.68 2.60 2.61	P % 0.023 0.032
					0.025
					0.030

– 469 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

EXTENSION HILL

Probable Total KOOLAN ISLAND Proven Probable Total Ore + Product Stockpiles Total	Tonnes millions 12.8 12.8 Tonnes millions 1.48 28.4 29.9 0.39 62.0	Fe % 60.3 60.3 Fe % 63.6 64.9 64.8 61.6 62.9	SiO2 % 5.48 5.48 SiO2 % 6.69 5.25 5.32 6.09 5.38	AI2O % 1.64 1.64 AI2O % 1.19 0.98 0.99 3.48 1.63	P % 0.062
					0.062
					P % 0.021 0.018
					0.018
					0.030
					0.029

The information in this report relating to Ore Reserves is based on information compiled by Rolf Forster and Weifeng Li, who are both members of the Australasian Institute of Mining and Metallurgy.

Rolf Forster and Weifeng Li are consultants to Mount Gibson Mining Limited, and have sufficient experience relevant to the styles of mineralisation and type of deposit under consideration and to the activity which they are undertaking, to each qualify as a Competent Person as defined in the December 2004 Edition of the “Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves”.

Rolf Forster and Weifeng Li have consented to the inclusion of the matters in this report based on their information in the form and context in which it appears.

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APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

3. The following is the reproduction of certain paragraphs of the management discussion and analysis as contained in the 2006 annual report 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.

– 471 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

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.

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.

– 472 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

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.

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.

– 473 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

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.

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.

– 474 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

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.

The takeover bid is an important element of Mount Gibson’s growth strategy that delivers both MGI and Aztec shareholders ASX 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.

– 475 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

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
Corporate
Grand Total		42.7	61.2	5.55	2.05	0.05	–	–	3.72

– 476 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

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 Total	32.5	61.4	4.61	1.95	0.04	–	–	3.34

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.

– 477 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

Mineral Resources (also 100% owned) have increased 27%, up from 33.6 Mt to 42.7 Mt, due to:

Successful drilling extending the Extension Hill Hematite deposit at Mt Gibson;
Successful drilling extending the T5 deposit at Tallering Peak;
Reporting of Resources to a lower Fe cut-off to more accurately reflect mine planning requirements.

Resources are reported at 57% Fe and 50% Fe lower cut-offs, with total Resources now including 50%-57% Fe material (subgrade). Some, but not necessarily all, of this subgrade converts to mining Reserves. No lower cut-off grades are quoted for mining Reserves, as cut-offs vary on a monthly basis throughout the mine life. The Life-of-Mine schedule targets consistent lump and fines product grades to meet customer specifications. Mining Reserves are the sum of scheduled production, and incorporate mining dilution, stockpiling, blending and transport strategies.

EXPLORATION

Exploration activity during the year has contributed significantly to the growth of the company, with a 27% increase in established Mineral Resources achieved. This was backed by development and mining feasibility studies at both Tallering Peak and Extension Hill, which resulted in a 75% increase in reported Mining Reserves.

TALLERING PEAK

Total non-production drilling at Tallering Peak during the year amounted to 11,453m of RC in 123 holes and 2,446m of diamond core in 20 holes. Most work was infill and extensional resource definition drilling, with geotechnical investigations accounting for the bulk of the diamond core.

Drilling of 35 extensional RC holes at the T5 deposit in late 2005 was successful, allowing commitment to a significant cutback on the T5 pit which was to have been exhausted by March 2006. Infill and extensional drilling on the main range pit continues to better define the orebody around the active mining area (T3), and has identified additional material in the T2 area immediately to the north-east. Exploration drilling further along the main ridge to the north-east (T1 area) is scheduled to begin immediately land access agreements are put in place.

– 478 –

APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS OF MOUNT GIBSON

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 followup targets have been selected for further work, with some drilling already completed in the Central Ridge area, a kilometre north-west of T3 and 2.5km along-strike from T5.

EXTENSION HILL

Total drilling at Extension Hill during the year amounted to 3,476m of RC in 41 holes and 363.1m of PQ core in nine holes. Surface mapping was also completed to support revision of the three-dimensional geological interpretation.

Three discrete drilling programs were completed. A program of deep RC holes towards the northern end of Extension Hill extended both magnetite and hematite zones of known mineralisation, a program of short RC holes better defined shallow hematite mineralisation and highlighted potential in detrital material off the flanks of the main hill, while a very specific program of nine PQ core holes (83mm core) was also completed to obtain hematite ore for metallurgical test work.

Re-sampling of hematite zones of interest in RC drillholes is underway to provide better resolution data in areas of composited samples, mainly to allow mining dilution sensitivity studies to be conducted.

Large areas of excellent hematite exploration potential are known at Extension Hill which have not been drilled due to the presence of a Declared Rare Flora (darwinia masonii). Flora surveys conducted this year and mechanisms documented in the Public Environmental Review will allow exploration through these areas once environmental approval is granted. Significant increases in hematite Resources and Reserves are anticipated.

OTHER AREAS

Four short diamond core holes were drilled at Asia Iron’s Irwin River Coal project to provide material for quality testing and flotation work. All four holes successfully intersected both known coal seams.

Environmental and ethnographic surveys were completed over tenements at Wolla Wolla and Walebing, enabling on-ground field activities to commence in the coming year.

Geological mapping and some ground magnetics surveys were conducted at Mt Yule, Wolla Wolla and Koolanooka South to assist in identification of drilling targets.

– 479 –

GENERAL INFORMATION

APPENDIX V

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 full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts not contained in this circular, the omission of which would make any statement herein misleading.

2. DISCLOSURE OF INTERESTS BY DIRECTORS AND CHIEF EXECUTIVES

As at the Latest Practicable Date, the interests and short positions of the Directors and chief executives 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 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 the Directors of Listed Issuers contained in the Listing Rules, were as follows:

(a) Long position in Shares and underlying shares of the Company

Name of Directors
Capacity in which
interests are held
Mr. Cao Zhong
Beneficial owner
Mr. Liu Yongshun
Beneficial owner
Ms. Chong Sok Un
Beneficial owner and
interest of controlled
corporation (Note 3)

Number of shares/underlying shares
held in the Company
Total interests
as to % to the
issued share
capital of the
Company
Interests in
shares
Interests
under equity
derivatives
Total Interests
(Note 1)
–
133,000,000
133,000,000
2.81%
(Note 2)
–
150,000,000
150,000,000
3.17%
(Note 2)
614,260,000
115,000,000
(Note 2 & 4)
729,260,000
(Note 5)
15.42%

– 480 –

APPENDIX V

GENERAL INFORMATION

Mr. Zhou Luyong
Beneficial owner
Mr. Chen Zhaoqiang
Beneficial owner
Mr. Yue Jialin
Interest of controlled
corporation (Note 6)
Mr. Wong Wing Kuen,
Albert
Beneficial owner
Mr. Chang Chu Fai,
Johnson Francis
Beneficial owner
Name of Directors
Capacity in which
interests are held

–
33,000,000
33,000,000
0.70%
(Note 2)
–
33,000,000
33,000,000
0.70%
(Note 2)
16,179,602
119,339,960
135,519,562
(Note 7)
2.87%
–
3,000,000
(Note 2)
3,000,000
0.06%
–
2,000,000
(Note 2)
2,000,000
0.04%
Number of shares/underlying shares
held in the Company
Total interests
as to % to the
issued share
capital of the
Company
Interests in
shares
Interests
under equity
derivatives
Total Interests
(Note 1)

Notes:

The percentage of shareholding was calculated on the basis of the Company’s issued share capital of 4,728,659,055 Shares as at the Latest Practicable Date.
The relevant interests are share options granted pursuant to the Company’s share option scheme adopted on 22 September 2004 (the “ Scheme ”). Upon exercise of the share options in accordance with the Scheme, the Shares in the share capital of the Company are issuable.
These Shares are held by Sparkling Summer Limited (“ Sparkling Summer ”) and Rise Cheer Investments Limited (“ Rise Cheer ”), both of which are wholly-owned subsidiaries of COL Capital Limited (“ COL ”). COL is 38.56% owned by Vigor Online Offshore Limited which in turn is a wholly-owned subsidiary of China Spirit Limited (“ China Spirit ”) in which Ms. Chong Sok Un maintains 100% beneficial interest. COL is therefore deemed to have interests in the Shares and underlying shares in which Sparkling Summer and Rise Cheer are interested. Ms. Chong Sok Un is therefore deemed to have interests in the Shares and underlying shares through her 100% interest in China Spirit.
This represents 110,000,000 share options granted to Ms. Chong Sok Un and an interest in 5,000,000 units of warrants giving rise to an interest in 5,000,000 underlying shares held by Sparkling Summer. The 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).

– 481 –

GENERAL INFORMATION

APPENDIX V

This represents the interests held by: (i) Sparkling Summer as to 314,260,000 Shares and 5,000,000 units of warrants giving rise to an interest in 5,000,000 underlying shares, (ii) Rise Cheer as to 300,000,000 Shares, and (iii) 110,000,000 share options granted to Ms. Chong Sok Un.
These Shares are registered/will be registered (as the case may be) in the name of and beneficially owned by Profit Harbour Investments Limited, the entire issued share capital of which is owned by Mr. Yue Jialin.
This represents an interest in 16,179,602 Shares and an interest in 119,339,960 units of warrants giving rise to an interest in 119,339,960 underlying shares. The 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).

Save as disclosed above, as at the Latest Practicable Date, none of the Directors nor the chief executives 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 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 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) was a director or employee of a company which had any interest or short position in the Shares or underlying shares of the Company which would fall to be disclosed to the Company pursuant to the provisions of Divisions 2 and 3 of Part XV of the SFO.

(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.

– 482 –

GENERAL INFORMATION

APPENDIX V

(c) Interests in assets

As at the Latest Practicable Date, 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 2007, 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 subscription of MG Shares in respect of the Aggregated Committments.

– 483 –

GENERAL INFORMATION

APPENDIX V

3. DISCLOSURE OF INTERESTS BY SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, so far as is known to the Directors and chief executives 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 per cent. 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 of the Company

Name of Shareholders
Capacity in which
interests are held
Benefit Rich Limited
Beneficial owner
Shougang Holding
(Hong Kong) Limited
Interest of controlled
corporation (Note 4)
Rise Cheer Investments
Limited
Beneficial owner
COL Capital Limited
Interest of controlled
corporation (Note 5)
Sun Hung Kai & Co.
Limited
Interest of controlled
corporation (Note 9)

Number of shares/underlying shares
held in the Company
Total interests
as to % to the
issued share
capital of the
Company
Interests in
shares
Interests
under equity
derivatives
Total Interests
(Note 1)
600,000,000
60,000,000
(Note 2)
660,000,000
13.96%
896,000,000
60,000,000
956,000,000
(Note 3)
20.22%
300,000,000
–
300,000,000
6.34%
614,260,000
5,000,000
(Note 6)
619,260,000
(Note 7)
13.10%
598,472,893
–
598,472,893
(Note 8)
12.65%

– 484 –

APPENDIX V

GENERAL INFORMATION

Allied Properties (H.K.) Limited Interest of controlled corporation (Note 9) Allied Group Limited Interest of controlled corporation (Note 10) Lee and Lee Trust Interest of controlled corporation (Note 11) Name of Directors Capacity in which interests are held	598,472,893 – 598,472,893 12.65% 598,472,893 – 598,472,893 12.65% 598,472,893 – 598,472,893 12.65% Number of shares/underlying shares held in the Company Total interests as to % to the issued share capital of the Company Interests in shares Interests under equity derivatives Total Interests (Note 1)

Notes:

The percentage of shareholding was calculated on the basis of the Company’s issued share capital of 4,728,659,055 Shares as at the Latest Practicable Date.
This represented an interest in 600,000,000 Shares and an interest in 60,000,000 units of warrants giving rise to an interest in 60,000,000 underlying shares. The 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).
This represents the interests held by: (i) Benefit Rich Limited (“ Benefit ”) as to 600,000,000 shares and 60,000,000 units of warrants giving rise to an interest in 60,000,000 underlying shares, (ii) Easymade Investments Limited (“ Easymade ”) as to 100,000,000 shares, and (iii) Prime Success Investments Limited (“ Prime Success ”) as to 196,000,000 shares, all of which are wholly-owned subsidiaries of Shougang Holding (Hong Kong) Limited (“ Shougang ”) as at the Latest Practicable Date.
Benefit, Easymade and Prime Success are wholly-owned subsidiaries of Shougang as at the Latest Practicable Date. Accordingly, Shougang was deemed to have the same long position as Benefit, Easymade and Prime Success under the SFO.
These Shares are held by Sparkling Summer Limited (“ Sparkling Summer ”) and Rise Cheer Investments Limited (“ Rise Cheer ”), both of which are wholly-owned subsidiaries of COL Capital Limited (“ COL ”). COL is 38.62% owned by Vigor Online Offshore Limited which in turn is a wholly-owned subsidiary of China Spirit Limited (“ China Spirit ”) in which Ms. Chong Sok Un maintains 100% beneficial interest. COL is therefore deemed to have interests in the Shares and underlying shares in which Sparkling Summer and Rise Cheer are interested.

– 485 –

GENERAL INFORMATION

APPENDIX V

This represents an interest in 5,000,000 units of warrants giving rise to an interest in 5,000,000 underlying shares held by Sparkling Summer. The 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).
This represents the interests held by: (i) Sparkling Summer as to 314,260,000 Shares and 5,000,000 units of warrants giving rise to an interest in 5,000,000 underlying shares, and (ii) Rise Cheer as to 300,000,000 Shares.
This represents the interests held by: (i) Itso Limited (“ Itso ”) as to 11,000,000 Shares, and (ii) Sun Hung Kai Strategic Capital Limited (“ SHKSC ”) as to 587,472,893 Shares, both of which are indirect whollyowned subsidiaries of Sun Hung Kai & Co. Limited (“ SHK ”). Accordingly, SHK is deemed to have the same long position as Itso and SHKSC under the SFO.
SHK 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 as SHK under the SFO.
APL is a non wholly-owned subsidiary of Allied Group Limited (“ AGL ”). Accordingly, AGL is deemed to have the same long position as SHK under the SFO.
Mr. Lee Seng Hui, Ms. Lee Su Hwei and Mr. Lee Seng Huang are the trustees of Lee and Lee Trust (“ LL Trust ”), being a discretionary trust. They together owned approximately 44.51% interest in the issued share capital of AGL. Accordingly, LL Trust is deemed to have the same long position as SHK under the SFO.

Save as disclosed above, as at the Latest Practicable Date, the Directors and chief executives of the Company were not aware of any other persons (other than Directors or chief executives of the Company) who had, or were deemed to have, interests or short positions in the shares and underlying shares of the Company (including any interests in options in respect of such capital), 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 was, directly or indirectly, interested in 10 per cent. 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.

4. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposed service contracts 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.

– 486 –

GENERAL INFORMATION

APPENDIX V

5. MATERIAL LITIGATIONS

As at the Latest Practicable Date, no member of the Group was engaged in any litigation or claim of material importance and no litigation or claim of material importance was known to the Directors to be pending or threatened by or against any member of the Group.

6. 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 Latest Practicable Date and are or may be material:

(i) 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;
(ii) 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;
(iii) the conditional sale and purchase agreement dated 9 February 2007 entered into between Fortune Desire Investments Limited (a direct wholly-owned subsidiary of the Company) and Timely Rich Limited (a direct wholly-owned subsidiary of Shougang Holding (Hong Kong) Limited) relating to the sale and purchase of the 19,754,646 MG Shares at the consideration of HK$102,427,839.51;
(iv) 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, which was subsequently terminated on 1 February 2008;
(v) the conditional share and option subscription agreement dated 20 March 2007 entered into between the Company and Australasian Resources Limited in relation to the subscription of 28,000,000 shares and an option to subscribe for 14,000,000 shares of Australasian Resources Limited at the consideration of HK$174,846,000;

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GENERAL INFORMATION

APPENDIX V

(vi) the conditional sale and purchase agreement dated 29 May 2007 entered into between Siberian Worldwide Ltd., Charlie Lam Leung Seng and Super Grand Investments Limited (a direct wholly-owned subsidiary of the Company) in relation to the sale and purchase of 304,290,200 shares of China Primary Resources Holdings Limited at the consideration of HK$115,630,275.24;
(vii) the conditional sale and purchase agreement dated 29 May 2007 entered into between Asia Bright International Limited, Zhang Yuhong and Super Grand Investments Limited (a direct wholly-owned subsidiary of the Company) in relation to the sale and purchase of 286,123,640 shares of China Primary Resources Holdings Limited at the consideration of HK$108,726,982.44;
(viii) the conditional sale and purchase agreement dated 29 May 2007 entered into between First South International Limited, Mai Wei Liang and Super Grand Investments Limited (a direct wholly-owned subsidiary of the Company) in relation to the sale and purchase of 272,498,680 shares of China Primary Resources Holdings Limited at the consideration of HK$103,549,498;
(ix) the placing agreement dated 4 July 2007 entered into between the Company and Sun Hung Kai International Limited and 3V Capital Limited (as joint placing agents) in relation to the placing of 665,000,000 new Shares issued by the Company at HK$1.29 per Share;
(x) the placing and subscription agreement dated 5 October 2007 entered into between the Company, Benefit Rich Limited (as vendor), Shougang Holding (Hong Kong) Limited (as warrantor) and CITIC Securities Corporate Finance (HK) Limited (as placing agent) in relation to the placing of 400,000,000 existing Shares and subscription of 400,000,000 new Shares at HK$1.48 per Share;
(xi) the conditional sale and purchase agreement dated 13 July 2008 entered into between APAC Resources Investments Limited (a direct wholly-owned subsidiary of the Company) and Leaping Far Investments Limited in relation to the sale and purchase of the entire issued share capital of Good China Limited and the assignment of a loan for an aggregate consideration of HK$1,200,000,000, which was subsequently terminated on 3 October 2008;
(xii) the legally binding heads of agreement entered into between the Company and Mount Gibson on 2 November 2008 pursuant to which the Company and Mount Gibson agreed on the key terms which will be contained in the definitive agreements in respect of, amongst other things, the offtake agreements and the underwriting agreement (which is further described in paragraph (xiii) below); and

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GENERAL INFORMATION

APPENDIX V

(xiii) the underwriting agreement entered into between APAC Resources Investments Limited (a direct wholly-owned subsidiary of the Company, as the underwriter), the Company (as the guarantor) and Mount Gibson on 20 November 2008 in relation to the underwriting of up to 82,900,000 new shares in Mount Gibson (in priority to any other underwriters to the Rights Issue) by APAC Resources Investments Limited at an issue price of A$0.60 per share. Assuming that the Shortfall Shares are all taken up by the underwriter, the aggregate subscription price to be paid is A$49,740,000 (equivalent to approximately HK$256,161,000) and the underwriter will receive from Mount Gibson a fee of 3.5% of the value of the Underwriting Commitment.

7. 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)

Graham H. Y. Chan & Co. has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter or report dated 12 December 2008 and references to its name in the form and context in which it appears.

8. EXPERT’S INTEREST IN ASSETS

As at the Latest Practicable Date, Graham H. Y. Chan & Co. has not had any shareholding in any member of the Group nor the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

As at the Latest Practicable Date, Graham H. Y. Chan & Co. has not had any direct or indirect interests in any assets which had since 31 December 2007 (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.

– 489 –

GENERAL INFORMATION

APPENDIX V

9. CORPORATE INFORMATION

Registered office Clarendon House 2 Church Street Hamilton HM11 Bermuda Head office and principal place of business 32/F China Online Centre 333 Lockhart Road Wanchai Hong Kong Hong Kong branch share registrar and Tricor Secretaries Limited transfer office 26th Floor Tesbury Centre 28 Queen’s Road East Wanchai Hong Kong

10. GENERAL

(a) The company secretary of the Company is Ms. Fung Sam Ming. Ms. Fung is an associate member of The Institute of Chartered Secretaries and Administrators.
(b) As at the Latest Practicable Date, the Company had a causal vacancy in respect of its qualified accountant. The Company has not yet identified a suitable candidate and it will issue a separate announcement upon appointment of the qualified accountant.
(c) This circular is prepared in both English and Chinese. In the event of inconsistency, the English text shall prevail.

11. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be made available for inspection during normal business hours at the office of the Company of 32/F., China Online Centre, 333 Lockhart Road, Wanchai, Hong Kong from the date of this circular up to and including 29 December 2008:

(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;

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GENERAL INFORMATION

APPENDIX V

(c) the annual reports of the Company for the two financial years ended 31 December 2007 and the interim report of the Company for the six months ended 30 June 2008;
(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 II to this circular;
(e) the consent letter from Graham H. Y. Chan & Co. referred to under the paragraph headed “Expert and consent” in this appendix;
(f) the letter from Graham H. Y. Chan & Co. summarising the principal differences between Australian accounting standards to HKFRS and the accounting policies between the Company and Mount Gibson;
(g) the annual reports of Mount Gibson for the three financial years ended 30 June 2008;
(h) the circular of the Company dated 12 April 2007 relating to the subscription of 28,000,000 ordinary shares and 14,000,000 options in Australasian Resources Limited;
(i) the circular of the Company dated 22 June 2007 relating to, inter alia, the conditional sale and purchase of 12.66% of the issued share capital of China Primary Resources Holdings Limited;
(j) the circular of the Company dated 4 August 2008 relating to the conditional acquisition of the entire issued share capital of Good China Limited; and
(k) this circular.

– 491 –

NOTICE OF THE SGM

APAC RESOURCES LIMITED 亞太資源有限公司[*] (Incorporated in Bermuda with limited liability)

(Stock Code: 1104) (Warrant Code: 324)

NOTICE IS HEREBY GIVEN that a special general meeting (the “ Meeting ”) of APAC Resources Limited (the “ Company ”) will be held at 7th Floor, Board Room, The Dynasty Club, South West Tower, Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong on Monday, 29 December 2008 at 11:00 a.m. for the purpose of considering and if thought fit, passing with or without amendments, the following resolution as ordinary resolution of the Company and no shareholder of the Company (the “ Shareholder ”) shall abstain from voting:

ORDINARY RESOLUTION

“ THAT the aggregated subscription of (a) 32,829,629 new shares in Mount Gibson Iron Limited (“ Mount Gibson ”) in respect of the Shareholding Commitment by the Company (through its wholly-owned subsidiaries); and (b) up to 82,900,000 new shares in Mount Gibson (which does not include the Shareholding Commitment) in respect of the Underwriting Commitment by APAC Resources Investments Limited, at an issue price of A$0.60 per share and an aggregate consideration of A$69,437,777 (assuming that the 82,900,000 new shares in Mount Gibson are all taken up by APAC Resources Investments Limited as the underwriter) (“ Aggregated Commitments ”) (the details of which are set out in the circular dated 12 December 2008 (the “ Circular ”) despatched by the Company to its shareholders, a copy of which has been produced to the Meeting marked “A” and initialled by the chairman of the Meeting for identification purpose), be and is hereby approved, and THAT the transactions contemplated under the Aggregated Commitments be and are hereby approved, 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 Aggregated Commitments and the transactions contemplated thereunder, and THAT any action taken by the Directors prior to the date of the Meeting in connection with the Aggregated Commitments and any other transactions contemplated thereunder and which was not inconsistent with any matter approved by this resolution be and is hereby approved, confirmed and ratified.

For identification purpose only

– 492 –

NOTICE OF THE SGM

For the purpose of this ordinary resolution,

(a) “ Rights Issue ” means the 1 for 5 renounceable rights issue to be conducted by Mount Gibson at an issue price of A$0.60, details of which are set out in the Circular;
(b) “ Shareholding Commitment ” means the Company’s full entitlement (through its wholly-owned subsidiaries) under the Rights Issue in relation to those shares in Mount Gibson owned by the Company (through its wholly-owned subsidiaries) as at 2 November 2008, namely, 32,829,629 new shares in Mount Gibson to be subscribed for under the Rights Issue; and
(c) “ Underwriting Commitment ” means the underwriting of up to 82,900,000 new shares in Mount Gibson (not taken up by shareholders of Mount Gibson in the Rights Issue, which does not include the Shareholding Commitment) under the underwriting agreement entered into between APAC Resources Investments Limited (as the underwriter), the Company (as the guarantor) and Mount Gibson on 20 November 2008 (a copy of which has been produced to the Meeting marked “B” and initialled by the chairman of the Meeting for identification purpose), in priority to any other underwriters to the Rights Issue by APAC Resources Investments Limited.”

By Order of the Board APAC RESOURCES LIMITED Cao Zhong Chairman

Hong Kong, 12 December 2008

Registered office: Clarendon House 2 Church Street Hamilton HM11 Bermuda

Head office and principal place of business in Hong Kong: 32/F China Online Centre 333 Lockhart Road Wanchai Hong Kong

– 493 –

NOTICE OF THE SGM

Notes:

l. 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 notice. 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, Tricor Secretaries Limited, 26th Floor, 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.
The subscription of new shares in Mount Gibson in respect of the Shareholding Commitment is, in itself a discloseable transaction pursuant to Rule 14.06(2) of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (“ Listing Rules ”) and does not require approval by Shareholders pursuant to Rule 14.33 of the Listing Rules. However, this subscription, when aggregated with the subscription of the new shares in Mount Gibson in respect of the Underwriting Commitment, will constitute a major transaction within the meaning of Rule 14.06(3) of the Listing Rules. Accordingly, The Stock Exchange of Hong Kong Limited has indicated that the subscription of new shares in Mount Gibson in respect of the Aggregated Commitments will be subject to the approval of the Shareholders at the Meeting in accordance with the requirements of Chapter 14 of the Listing Rules. No Shareholder will be required to abstain from voting at the Meeting. To this end, if Shareholders’ approval is not obtained in respect of the Aggregated Commitments, then the Company will proceed with the subscription of new shares in Mount Gibson in respect of the Shareholding Commitment only. If the Shareholding Commitment takes place prior to the Meeting, the Company shall proceed with subscription of the new shares in Mount Gibson in respect of the Shareholding Commitment on the basis that it is a discloseable transaction. Accordingly, the Shareholding Commitment and the Underwriting Commitment are not inter-conditional.
The Company currently has Australian Foreign Investment Review Board (“ FIRB ”) approval due to expire on 8 January 2009 to increase its holding in Mount Gibson to 29%. The Underwriting Agreement provides that if a fresh FIRB approval is not received prior to the Underwriting Agreement becoming unconditional, APAC Resources Investments Limited (or its related body corporate) will proceed to underwrite the Underwriting Commitment on the basis of the existing FIRB approval, but if APAC Resources Investments Limited (or its related body corporate) cannot take up the Underwriting Commitment because it is unable to rely on existing FIRB approval, APAC Resources Investments Limited must use its best endeavours to arrange for a non-associated person that is not subject to any regulatory approval restrictions to subscribe for such quantity of shares in Mount Gibson for which APAC Resources Investments Limited is unable to subscribe due to FIRB restrictions.

– 494 –

NOTICE OF THE SGM

As at the date of this notice, the Directors are as follows:

Executive Directors:

Mr. Cao Zhong (Chairman)

Mr. Liu Yongshun (Chief Executive Officer)

Mr. Zhou Luyong (Deputy Chief Executive Officer)

Ms. Chong Sok Un

Mr. Chen Zhaoqiang

Mr. Yue Jialin

Independent Non-Executive Directors:

Mr. Wong Wing Kuen, Albert Mr. Chang Chu Fai, Johnson Francis Mr. Alan Stephen Jones

Mr. Robert Moyse Willcocks

– 495 –

AI assistant

Persistence Gold Group Ltd — Proxy Solicitation & Information Statement 2008

50623_rns_2008-12-11_b0e97be3-50b6-4f68-be4e-00a44ce3aea2.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

APAC RESOURCES LIMITED 亞太資源有限公司[*] (Incorporated in Bermuda with limited liability)

DISCLOSEABLE TRANSACTION AND POSSIBLE MAJOR TRANSACTION RELATING TO

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

LETTER FROM THE BOARD

APAC RESOURCES LIMITED 亞太資源有限公司[*]

DISCLOSEABLE TRANSACTION AND POSSIBLE MAJOR TRANSACTION RELATING TO THE COMMITMENT TO TAKE UP CERTAIN SHARES IN AN UNDERWRITTEN RIGHTS ISSUE TO BE CONDUCTED BY MOUNT GIBSON

INTRODUCTION

LETTER FROM THE BOARD

THE HEADS OF AGREEMENT

Date

Parties

LETTER FROM THE BOARD

DISCLOSEABLE TRANSACTION

The Rights Issue

Consideration

LETTER FROM THE BOARD

Sources of funding

Listing Rules Implications

POSSIBLE MAJOR TRANSACTION

The Underwriting Agreement

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Conditions

LETTER FROM THE BOARD

Consideration

Sources of funding

LETTER FROM THE BOARD

Listing Rules Implications

THE OFFTAKE AGREEMENTS

LETTER FROM THE BOARD

FORMAL AGREEMENTS

(a) Conditions precedent

LETTER FROM THE BOARD

LETTER FROM THE BOARD

(b) Termination events

LETTER FROM THE BOARD

(“ Material Adverse Effect ”);

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

INFORMATION ABOUT MOUNT GIBSON

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

INFORMATION ABOUT THE GROUP

REASONS FOR AND BENEFITS OF THE SHAREHOLDING COMMITMENT AND THE UNDERWRITING COMMITMENT

LETTER FROM THE BOARD

LETTER FROM THE BOARD

BUSINESS PLAN AND FUTURE INTENTIONS

LETTER FROM THE BOARD

SGM

PROCEDURES FOR DEMANDING A POLL

LETTER FROM THE BOARD

RECOMMENDATIONS

ADDITIONAL INFORMATION

1. SUMMARY OF RESULTS AND ASSETS AND LIABILITIES OF THE GROUP FOR THREE FINANCIAL YEARS ENDED 31 DECEMBER 2007

Financial Summary

Results

Assets and liabilities

2. AUDITORS’ REPORT

TO THE SHAREHOLDERS OF APAC RESOURCES LIMITED

DIRECTORS’ RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS

AUDITOR’S RESPONSIBILITY

OPINION

Graham H. Y. Chan & Co.

3. AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP FOR THE YEAR ENDED 31 DECEMBER 2007

CONSOLIDATED INCOME STATEMENT

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

CONSOLIDATED BALANCE SHEET

BALANCE SHEET

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED CASH FLOW STATEMENT

Persistence Gold Group Ltd Proxy Solicitation & Information Statement 2008