QUANTUM GRAPHITE LIMITED — Interim / Quarterly Report 2015

Mar 12, 2015

==> picture [465 x 146] intentionally omitted <==

ACN 008 101 979

Valence Industries Limited (previously Strategic Graphite Limited) Interim Financial Statements

for the half-year ended 31 December 2014 to be read in conjunction with the 30 June 2014 Annual Report

Competent Persons Statement Valence Industries confirms that it is not aware of any new information or data that materially affects the information included in this half year report and that all material assumptions and technical parameters underpinning the estimates in this half year report continue to apply and have not materially changed since the announcements previously released as “Valence Doubles Existing ROM Stockpiles” (6/8/14), “Uley Graphite Grade Increases to 11.7%” (17/11/14), “Maiden High Grade Graphite Ore Reserve” (17/12/2014) and “VXL Feasibility Study Expansion and Adv Manufacturing” (2/1/15).

VALENCE INDUSTRIES LIMITED ACN: 008 101 979

Contents

DIRECTORS’ REPORT .................................................................................................................................................................. 1 AUDITOR’S INDEPENDENCE DECLARATION............................................................................................................................. 4 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME .......................................... 5 CONSOLIDATED STATEMENT OF FINANCIAL POSITION ......................................................................................................... 6 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ......................................................................................................... 7 CONSOLIDATED STATEMENT OF CASH FLOWS ...................................................................................................................... 8 NOTES TO THE FINANCIAL STATEMENTS................................................................................................................................. 9 DIRECTORS’ DECLARATION ..................................................................................................................................................... 16 INDEPENDENT REVIEW REPORT ............................................................................................................................................. 17

This Interim Report covers Valence Industries Limited (“Valence” or the “Company”) as a Group consisting of Valence Industries Limited and its subsidiaries, collectively referred to as the “Group”. The financial report is presented in the Australian currency.

Valence is a company limited by shares, incorporated and domiciled in Australia.

Registered Office Level 1, 67 Greenhill Road Wayville SA 5034 Principal place of Business Ground Floor, 60 Hindmarsh Square Adelaide SA 5000 Website www.valenceindustries.com

VALENCE INDUSTRIES LIMITED ACN: 008 101 979

Directors’ Report

The Directors of Valence Industries Limited present their Report together with the financial statements of the consolidated entity, being Valence Industries (“Valence” or “the Company”) and its controlled entities (“the Group”) for the half year ended 31 December 2014 and the Independent Review Report thereon.

DIRECTORS

The following persons were directors of Valence during the period.

• Graham Spurling - Chairman

• Christopher Darby - Managing Director & CEO

• Glenister Lamont - Non-executive Director

• Ian Schache - Non-executive Director

• Ian Pattison - Non-executive Director (appointed 10 December 2014)

Company Secretary

• Jaroslaw Kopias

REVIEW OF OPERATIONS AND FINANCIAL RESULTS

The half year to 31 December 2014 has been a significant period for Valence Industries. The Company has become Australia’s only graphite production company having achieved a number of critical milestones including release of a maiden Ore Reserve, government permits for operations, commencement of stockpile processing at the Uley Graphite[TM] mine and delivery of a Feasibility Study for a significant expansion of the Company’s graphite product manufacturing in South Australia. There were no lost time injuries at the Uley Graphite[TM] operations through the Phase I refurbishment and pre-commissioning phases.

The comparative period to 31 December 2013 was prior to the listing of Valence on ASX. The Group has seen a significant increase in activity as noted below and reflected in the Consolidated Statement of Profit or Loss and Other Comprehensive Income.

Uley Operations

Opening of Uley Graphite[TM] Mine and Commissioning of Phase I Plant

The Uley Graphite[TM] mine was formally opened on 25 November 2014 and has received strong community and government support.

Commissioning and initial production using pre-processed fines stockpiles commenced on 25 December 2014 after the Company received regulatory approvals from the South Australian government. New laboratory facilities were also commissioned to allow the Company to meet operational and customer requirements for quality certification. Full commissioning of the Uley Phase I plant is scheduled to be completed by the September quarter 2015 with first export shipments also scheduled for this period.

Maiden high grade Ore Reserve delivered

During the half year the Company delivered its maiden graphite Ore Reserve at the Uley Graphite[TM] site of 2,035,000 tonnes at an average grade of 12.9% gC (graphitic Carbon), for 261,000 contained tonnes of graphite. The in-situ average resource grade significantly increased over previously reported figures. This is attributable, in part, to the very high grade Arterial Flake[TM] graphite contained in the pegmatitic intrusions as announced on 9 October 2014.

In August 2014 the Company announced that it had increased the Mineral Resource of stockpiled material from 74,000 tonnes to 174,000 tonnes at an average grade of 6.23% graphitic carbon for 10,800 contained tonnes of graphite.

Further drilling aiming to upgrade Uley resources and reserves also commenced during the period at the Uley Pit 2 Extension.

Feasibility Study for expanded operations delivered

On 31 December 2014 Valence Industries delivered its Feasibility Study for expansion of existing operations and for further advanced product handling and manufacturing treatment of its flake graphite products, with a summary released to the ASX on 2 January 2015. The Feasibility Study defined an advanced manufacturing program with two key aspects: the expansion of flake graphite concentrate production at the Uley Graphite[TM] site, and an advanced product manufacturing and high purity and

1

VALENCE INDUSTRIES LIMITED ACN: 008 101 979

micronisation facility to be established at the port of Adelaide (Phase III), with total graphite production expected to reach 64,000 tonnes per annum.

Safety & Environment

Valence Industries received approval for its Program for Environment Protection and Rehabilitation ( PEPR ) on 23 December 2014 allowing commissioning to commence. The Company also achieved an excellent safety record with no lost time injury at its Uley Graphite[TM] operations.

Our People

In the half year Valence Industries ramped-up its recruitment of personnel required for our operations. This incurred significant cost ahead of grant of approvals for production. The Company now has a qualified team of site operations personnel who live on the Eyre Peninsula within commuting distance from the Uley plant.

Valence Industries’ commitment to Port Lincoln and the Eyre Peninsula has also extended to engagement with a significant number of local and regional contractors.

Our Customers

Valence Industries has increased customer commitments across a range of industries and regions in line with the commencement of operations at the Uley Graphite[TM] mine.

Product qualification in the graphite market is an essential precursor to the confirmation of larger scale product supply contracts. The process of qualification has involved shipment of samples to 15 new customers engaged in a range of industries from refractories to advanced engineering. As production rates are progressively increased the qualification program is structured to lead to new sales contracts in addition to conversion of MOUs that contemplate more than 80,000 tonnes of graphite sales over 3 years.

Valence Industries has a market development strategy involving active engagement with European, Asia Pacific and North American customers and multiple industries. This global reach and industry diversity is designed to achieve optimum prices for the high quality flake graphite produced by Valence Industries and to manage the Company’s exposure to any particular market segment or region.

The Company has customer orders for scheduled delivery of 8,000 tonnes, equivalent to the full first year of production from the current plant, as production volumes are increased progressively to the 14,000 tpa name plate capacity of the current plant by third quarter calendar 2015. First shipments to customers are expected to occur in the first quarter of calendar 2015.

Finance and Corporate

The net loss for the Group, from the six months to 31 December 2014, was $3,733,272 (2013: $1,786,880) after providing for income tax – an increase of $1,946,392 to the corresponding period.

The key contributor to the increased loss for the year was an overall increase in activities and commencement of works in readiness for production. Recruitment and pre-commissioning ahead of permitting incurred expenses of over $1.0M. During the prior period to December 2013 the Company had limited operations as preparations were made for the Initial Public Offering (IPO) on 6 January 2014.

Valence Industries had $8.3 million cash on hand as at 31 December 2014, an increase of $1.5 million from 30 June 2014.

As part of the Company’s obligations under the Uley Graphite[TM] PEPR approved on 23 December 2014, a rehabilitation bond of $1.709M was lodged. A term deposit held as security against that bond has been classified as restricted cash in the Consolidated Statement of Financial Position and therefore as a cash outflow.

Payment for plant and laboratory programs as part of the pre-commissioning, construction testing and installation of equipment, particularly in conjunction with the primary processing circuit, amounted to $4.4 million.

Completion of Placement and SPP

In September 2014 Valence Industries issued 17,142,844 shares to Institutional and sophisticated investors for a placement to raise $12.0 million (before costs) at an issue price of $0.70 per share (Placement).

A Share Purchase Plan was also offered to all eligible shareholders in Australia and New Zealand at a price of $0.70 per share (SPP). That SPP was designed to allow all shareholders to participate in new securities in Valence Industries on the same terms as the offer to applicants under the placement. The SPP closed on 31 October 2014 raising a further $687,500.

2

VALENCE INDUSTRIES LIMITED ACN: 008 101 979

Project Finance

Valence Industries has received multiple term sheets for project finance for the proposed expansion of flake graphite production at the Uley Graphite[TM] site, and an advanced product manufacturing and high purity and micronisation facility to be established at the port of Adelaide, with total graphite production expected to reach 64,000 tonnes per annum.

Negotiations are progressing with multiple international parties, and Valence Industries expects to conclude the financing arrangements by April 2015. The finance facilities are expected to also provide for working capital requirements over the 2015-2016 construction & commissioning periods.

Appointment of Director

The Company appointed Ian Pattison as a Director on 10 December 2014. Mr Pattison is a solicitor and chartered accountant and has deep experience in capital markets and is a director of Chimaera Capital Limited.

Events arising since the end of the reporting period

On 2 January 2015 Valence Industries announced its Feasibility Study for expansion of its existing operations and for further advanced product handling and manufacturing treatment of its flake graphite products. The Feasibility Study defined an advanced manufacturing program with two key aspects: the expansion of base flake graphite concentrate production at the Uley Graphite[TM] site, and a combined advanced product manufacturing and handling and high purity and micronisation facility to be established at the port of Adelaide.

On 19 February 2015 shareholders approved the issue of 4.0 million unlisted options exercisable at $1.10 per share to the Managing Director with various performance conditions and a further 1.5 million unlisted options to non-executive directors at a General Meeting of the Company.

In the opinion of the Directors there are no other matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Company, the results of those operations or the state of affairs of the Company in subsequent financial years.

A copy of the auditor’s independence declaration as required under s307C of the Corporations Act 2001 is included on page 4 of this financial report and forms part of this Directors’ Report.

Signed in accordance with a resolution of the directors.

==> picture [103 x 61] intentionally omitted <==

Christopher Darby

Managing Director and CEO 13 March 2015

3

==> picture [216 x 41] intentionally omitted <==

Level 1, 67 Greenhill Rd Wayville SA 5034

Correspondence to: GPO Box 1270 Adelaide SA 5001

T 61 8 8372 6666 F 61 8 8372 6677 E info.sa@au.gt.com W www.grantthornton.com.au

AUDITOR’S INDEPENDENCE DECLARATION TO THE DIRECTORS OF VALENCE INDUSTRIES LIMITED

In accordance with the requirements of section 307C of the Corporations Act 2001, as lead auditor for the review of Valence Industries Limited for the half-year ended 31 December 2014, I declare that, to the best of my knowledge and belief, there have been:

• a No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the review; and

b No contraventions of any applicable code of professional conduct in relation to the review.

GRANT THORNTON AUDIT PTY LTD Chartered Accountants

J L Humphrey Partner – Audit & Assurance Adelaide, 13 March 2015

Grant Thornton Audit Pty Ltd ACN 130 913 594

a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389

‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited.

Liability limited by a scheme approved under Professional Standards Legislation. Liability is limited in those States where a current scheme applies.

VALENCE INDUSTRIES LIMITED ACN: 008 101 979

Consolidated Statement of Profit or Loss and Other Comprehensive Income For the half year ended 31 December 2014

Notes Other income Corporate expenses 2 Commercialisation expenses 2 Pre-commissioning expenses 2 Total operating loss Interest revenue Interest expense Foreign exchange loss Capital raising costs Net financing income Loss before tax Income tax expense Loss for the reporting period attributable to owners of the parent entity Other comprehensive income Total comprehensive loss for the period attributable to owners of the parent entity Loss per share from continuing operations Basic and diluted loss – cents per share 3	31 December 2014 $ 31 December 2013 $ 4,989 - (1,968,211) (1,030,225) (618,918) - (1,004,726) -
	(3,586,866) (1,030,225) 151,611 - (818) (11,986) (18,679) - - (392,411)
	132,114 (404,397)
	(3,454,752) (1,434,622) (278,620) (352,258)
	(3,733,272) (1,786,880) - -
	(3,733,272) (1,786,880)
	2.07 1.57

This statement should be read in conjunction with the notes to the financial statements.

5

VALENCE INDUSTRIES LIMITED ACN: 008 101 979

Consolidated Statement of Financial Position

As at 31 December 2014

Notes ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventory Total current assets Non-current assets Term deposits (restricted cash) 4 Development expenditure 5 Exploration and evaluation expenditure 6 Plant and equipment 7 Total non-current assets TOTAL ASSETS LIABILITIES Current liabilities Trade and other payables Employee provisions Borrowings Total current liabilities Non-current Liabilities Borrowings Provisions 8 Total non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Issued capital 9 Reserves Accumulated losses TOTAL EQUITY	31 December 2014 $ 30 June 2014 $ 8,323,054 6,853,383 759,916 291,962 6,280 -
	9,089,250 7,145,345
	1,708,776 - 2,326,201 - 845,476 356,763 7,345,637 1,874,982
	12,226,090 2,231,745
	21,315,340 9,377,090
	3,624,287 672,887 61,508 1,878 20,606 20,606
	3,706,401 695,371
	30,909 41,212 535,575 -
	566,484 41,212
	4,272,885 736,583
	17,042,455 8,640,507
	26,033,944 13,898,624 1,096,180 1,096,180 (10,087,669) (6,354,297)
	17,042,455 8,640,507

This statement should be read in conjunction with the notes to the financial statements.

6

VALENCE INDUSTRIES LIMITED ACN: 008 101 979

Consolidated Statement of Changes in Equity For the half year ended 31 December 2014

Balance at 1 July 2014 Issue of shares Issue of shares upon exercise of options Issue costs (net of tax) Transactions with owners Comprehensive income: Total loss for the reporting period Total other comprehensive income for the reporting period Balance 31 December 2014	Share capital $ Option / Rights reserve $ Accumulated Losses $ Total equity $ 13,898,624 1,096,180 (6,354,297) 8,640,507
	12,687,522 - - 12,687,522 97,899 - - 97,899 (650,101) - - (650,101)
	12,135,320 - - 12,135,320
	- - (3,733,372) (3,733,372) - - - -
	26,033,944 1,096,180 (10,087,669) 17,042,455

Balance at 1 July 2013 Issue of shares Fair value of options issued Fair value of performance rights issued Transactions with owners Comprehensive income: Total loss for the reporting period Total other comprehensive income for the reporting period Balance 31 December 2013	Share capital $ Option / Rights reserve $ Accumulated Losses $ Total equity $ 3,228,050 - (3,392,368) (164,318)
	6,983,272 - - 6,983,272 - 766,180 - 766,180 - 453,750 - 453,750
	6,983,272 1,219,930 - 8,203,202
	- - (1,786,880) (1,786,880) - - - -
	10,211,322 1,219,930 (5,179,248) 6,252,004

This statement should be read in conjunction with the notes to the financial statements.

7

VALENCE INDUSTRIES LIMITED ACN: 008 101 979

Consolidated Statement of Cash Flows

For the half year ended 31 December 2014

Operating activities Payments to suppliers and employees Interest paid Interest received Net cash used in operating activities Investing activities Payments for plant and equipment Payments for capitalised exploration expenditure Payments for capitalised development expenditure Investment in restricted term deposits Net cash used in investing activities Financing activities Proceeds from issue of share capital Capital raising costs Drawdown of Loan Repayment of Loan Net cash from financing activities Net change in cash and cash equivalents Cash and cash equivalents, beginning of reporting period Cash and cash equivalents, end of period	31 December 2014 $ 31 December 2013 $ (3,121,683) (294,439) (818) (11,986) 180,830 -
	(2,941,671) (306,425)
	(4,449,234) - (115,273) (21,339) (1,161,773) - (1,708,776) -
	(7,435,056) (21,339)
	12,785,421 7,734,735 (928,720) (548,600) - 69,770 (10,303) (352,150)
	11,846,398 6,903,755
	1,469,671 6,575,991 6,853,383 5,029
	8,323,054 6,581,020

This statement should be read in conjunction with the notes to the financial statements.

8

VALENCE INDUSTRIES LIMITED INTERIM FINANCIAL STATEMENTS - 31 DECEMBER 2014

Notes to the financial statements

For the period ended 31 December 2014

1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES

a) Nature of operations

Valence Industries’ principal activity is the manufacture of high grade flake graphite products and the mining of and exploration for graphite deposits in South Australia.

b) General information and basis of preparation

The interim consolidated financial statements (the interim financial statements) of the Group are for the six months ended 31 December 2014 and are presented in Australian dollars($), which is the functional currency of the Group. These general purpose interim financial statements have been prepared in accordance with the requirements of the Corporations Act 2001 and AASB 134 Interim Financial Reporting. They do not include all of the information required in annual financial statements in accordance with AIFRS, and should be read in conjunction with the financial statements of the Group for the year ended 30 June 2014 and any public announcements made by the Group during the half-year in accordance with the continuous disclosure requirements arising under the Australian Securities Exchange Listing Rules and the Corporations Act 2001.

The interim financial statements have been approved and authorised for issue by the board of directors on 13 March 2015.

c) Significant accounting Policies

The significant accounting policies that have been used in the preparation of these interim financial statements are summarised below.

The interim financial statements have been prepared using the measurement bases specified by the Australian Accounting Standards for each type of asset, liability, income and expense. The measurement bases are more fully described in the accounting policies below.

The interim financial statements have been prepared in accordance with the accounting policies adopted in the Group’s last annual financial statements for the year ended 30 June 2014, except for the application of the following standards as of 1 July 2014:

AASB 1031: Materiality AASB 1055: Budgetary Reporting AASB 2013-1, Amendments to AASB 1049 – Relocation of Budgetary Reporting Requirements AASB 2013-4, Novation of Derivatives and Continuation of Hedge Accounting AASB 2013-5, Investment Entities AASB 2013-9, Conceptual Framework, Materiality and Financial Instruments AASB 2014-2, Amendments to AASB 1053 – Transition to and between Tiers, and related Tier 2 Disclosure Requirements

AASB 2014-1, Amendments to Australian Accounting Standards Part A, B and C

These standards make changes to a number of existing Australian Accounting Standards and are not expected to result in a material change to the manner in which the Group’s financial result is determined or upon the extent of disclosures included in future financial reports.

Management has reviewed the new requirements of the above standards and has concluded that there is no effect on the classification or presentation of balances.

d) Change in Presentation

During the interim period, management have changed the presentation of the profit and loss within the Consolidated Statement of Profit or Loss and Other Comprehensive Income from a Nature of Expenses to the Function of Expenses within the entity. This has been undertaken based on management’s assessment that this format provides information that is reliable and more relevant for when the consolidated entity commences production.

As required by Accounting Standards comparative figures have been adjusted to conform to changes in presentation for the current financial period.

9

VALENCE INDUSTRIES LIMITED INTERIM FINANCIAL STATEMENTS - 31 DECEMBER 2014

e) Critical accounting estimates and judgements

The Directors evaluate estimates and judgements incorporated into the financial report based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends of economic data, obtained both externally and within the Group.

i) Key estimates

Impairment

The Group assesses impairment at each reporting date by evaluating conditions specific to the Group that may lead to impairment of assets. Where an impairment trigger exists, the recoverable amount of the asset is determined.

Decommissioning provision

Estimates and assumptions of the appropriate discount rate at which to discount the liability, the timing of cash flows, the application of relevant environmental legislation and the future expected costs of decommissioning are all used in determining the carrying value of the decommissioning provision. The carrying amount of the provision is set out in note 8.

ii) Key judgements – exploration and evaluation expenditure

Exploration and evaluation costs have been capitalised on the basis that the consolidated entity will commence commercial production from any newly discovered deposits in the future, from which time the costs will be amortised in proportion to the depletion of the mineral resources.

Key judgements are applied in considering costs to be capitalised which includes determining expenditures directly related to these activities and allocating overheads between those that are expensed and capitalised. In addition, costs are only capitalised that are expected to be recovered either through successful development or sale of the relevant mining interest.

Factors that could impact the future commercial production at the mine include the level of reserves and resources, future technology changes, which could impact the cost of mining, future legal changes and changes in commodity prices. To the extent that capitalised costs are determined not to be recoverable in the future, they will be written off in the period in which this determination is made.

10

VALENCE INDUSTRIES LIMITED INTERIM FINANCIAL STATEMENTS - 31 DECEMBER 2014

2. EXPENSES

December 2014 Employee benefits expense Depreciation Advanced products research Other Total December 2013 Employee benefits expense Depreciation Other Total	Corporate $ Commercialisation $ Pre- Commissioning $ Total $ 622,966 240,322 500,138 1,363,426 28,232 - - 28,232 - 128,769 - 128,769 1,317,013 249,827 504,588 2,071,428
	1,968,211 618,918 1,004,726 3,591,855
	Corporate $ Commercialisation $ Pre- Commissioning $ Total $ 845,731 - - 845,731 1,791 - - 1,791 182,703 - - 182,703
	1,030,225 - - 1,030,225

Commercialisation expenses include sales and marketing and other expenses directed towards the development of value-added products and associated markets. Pre-commissioning expenses include costs of establishing operational readiness at Uley and pre-production testing of the Phase I plant.

3. EARNINGS PER SHARE

The weighted average number of shares for the purpose of diluted earnings per share can be reconciled to the weighted average number of ordinary shares used in the calculation of basic earnings per share as follows:

	6 months to	6 months to
	December	December
	2014	2013
Weighted average number of shares used in basic earnings per share	180,022,461	113,700,589
Loss per share (cents)	2.07	1.57

In accordance with AASB 133 ‘Earnings per Share’, there are no dilutive securities. The comparative loss per share has been restated from 0.89 cents to 1.54 cents to reflect a share consolidation completed on 19 November 2013.

4. TERM DEPOSITS (RESTRICTED CASH)

4. TERM DEPOSITS (RESTRICTED CASH)
Opening balance Rehabilitation bond – MLs 5561 & 5562 Closing balance	31 December 2014 $ 30 June 2014 $ - - 1,708,776 -
	1,708,776 -

Pursuant to the Company’s obligations under the Uley Graphite[TM] Program for Environment Protection and Rehabilitation (PEPR) approved on 23 December 2014 a rehabilitation bond of $1.709M was lodged. A term deposit is held as security against the bond.

11

VALENCE INDUSTRIES LIMITED INTERIM FINANCIAL STATEMENTS - 31 DECEMBER 2014

5. DEVELOPMENT EXPENDITURE

Opening balance Ore Reserve and Resource definition Decommissioning asset Other development expenditure Closing balance	31 December 2014 $ 30 June 2014 $ - - 1,374,356 - 535,575 - 416,270 -
	2,326,201 -

6. EXPLORATION AND EVALUATION EXPENDITURE

Opening balance Expenditure on exploration during the period Closing balance	31 December 2014 $ 30 June 2014 $ 356,763 192,129 488,713 164,634
	845,476 356,763

7. PLANT AND EQUIPMENT

December 2014 Gross carrying amount Opening balance Additions Balance 31 December 2014 Depreciation and impairment Opening balance Depreciation Balance 31 December 2014 Carrying amount 31 December 2014	Plant & Equipment $ Plant under construction $ Motor vehicles $ Office / IT equipment $ Software $ Intangible $ Total $ 146,623 1,675,027 91,649 9,242 51,000 - 1,973,541 227,880 5,065,736 104,602 78,102 20,717 1,850 5,498,887
	374,503 6,740,763 196,251 87,344 71,717 1,850 7,472,428
	(73,904) - (11,130) (4,373) (9,152) - (98,559) (3,595) - (8,996) (4,635) (11,006) - (28,232)
	(77,499) - (20,126) (9,008) (20,158) - (126,791)
	297,004 6,740,763 176,125 78,336 51,559 1,850 7,345,637

12

VALENCE INDUSTRIES LIMITED INTERIM FINANCIAL STATEMENTS - 31 DECEMBER 2014

June 2014 Gross carrying amount Opening balance Additions Balance 30 June 2014 Depreciation and impairment Opening balance Depreciation Balance 30 June 2014 Carrying amount 30 June 2014	Plant & Equipment $ Plant under construction $ Motor vehicles $ Office / IT equipment $ Software $ Total $ 72,802 - 9,219 3,697 - 85,718 73,821 1,675,027 82,430 5,545 51,000 1,887,823
	146,623 1,675,027 91,649 9,242 51,000 1,973,541
	(69,374) - (9,219) (3,697) - (82,290) (4,530) - (1,911) (676) (9,152) (16,269)
	(73,904) - (11,130) (4,373) (9,152) (98,559)
	72,719 1,675,027 80,519 4,869 41,848 1,874,982

8. PROVISIONS

Decommissioning provision – non-current

Opening balance Present value of expected future decommissioning costs Closing balance	31 December 2014 $ 30 June 2014 $ - - 535,575 -
	535,575 -

The provision represents the present value of estimated future decommissioning costs of the Uley Graphite[TM ] site which at the reporting date was restricted to removal of the Phase I processing plant and associated infrastructure.

13

VALENCE INDUSTRIES LIMITED INTERIM FINANCIAL STATEMENTS - 31 DECEMBER 2014

9. ISSUED CAPITAL

(a) Issued and paid up capital Fully paid ordinary shares (b) Movements in fully paid shares Opening balance as 30 June 2014 Placement – September 2014 Share Purchase Plan – November 2014 Issue of shares upon exercise of options Capital raising costs (net of tax) Balance as 31 December 2014	Number of shares 31 December 2014 $ 186,681,979 26,033,006
	Number $ 168,165,350 13,898,624 17,142,844 11,999,992 982,187 687,530 391,598 97,899 - (651,101)
	186,681,979 26,032,944

10. OPERATING SEGMENTS

The Directors have considered the requirements of AASB 8 – Operating Segments and the internal reports that are reviewed by the chief operating decision maker (the Board) in allocating resources have concluded that at this time there are no separately identifiable segments.

11. CONTINGENT LIABILITIES

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

12. RELATED PARTIES

Other than disclosed below, arrangements with related parties continue to be in place and are consistent with those disclosed in the Group’s Annual Report for the year ended 30 June 2014.

In accordance with his existing terms of appointment the remuneration for Mr Darby as Managing Director & CEO was set at $350,000 per annum (inclusive of superannuation) with effect from 1 October 2014.

Logmaor Services Pty Ltd, a business of which Glenister Lamont is a Director was paid consulting fees during the period totalling $8,250. Services provided by this entity relate to technical services provided by Mr Lamont. The total amount of fees due to Logmaor Services Pty Ltd as at 31 December 2014 was $8,250.

14

VALENCE INDUSTRIES LIMITED INTERIM FINANCIAL STATEMENTS - 31 DECEMBER 2014

13. EVENTS ARISING SINCE THE END OF THE REPORTING PERIOD

On 2 January 2015 Valence Industries announced its Feasibility Study for expansion of its existing operations and for further advanced product handling and manufacturing treatment of its flake graphite products. The Feasibility Study defined an advanced manufacturing program with two key aspects: the expansion of base flake graphite concentrate production at the Uley Graphite[TM] site, and a combined advanced product manufacturing and handling and high purity and micronisation facility to be established at the port of Adelaide.

On 19 February 2015 shareholders approved the issue of 4.0 million unlisted options exercisable at $1.10 per share to the Managing Director with various performance conditions and a further 1.5 million unlisted options to non-executive directors at a General Meeting of the Company.

In the opinion of the Directors there are no other matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Company, the results of those operations or the state of affairs of the Company in subsequent financial years.

14. GOING CONCERN BASIS OF ACCOUNTING

The interim financial statements have been prepared on the basis of a going concern. During the six months ended 31 December 2014 the consolidated group recorded a net cash outflow from operating and investing activities of $10,376,727 and an incurred an operating loss of $3,733,272.

The forward looking cash projections highlight that the consolidated entity is reliant on the completion of further capital raisings and/or the raising of alternate finance for continued operations including exploration and further development of the Uley project, as well as working capital. The Directors believe the consolidated group will be able to successfully source additional capital to meet its cash needs.

If additional financial resources are not obtained, the going concern basis may not be appropriate, with the result that the consolidated entity may have to realise its assets and extinguish its liabilities, other than in the ordinary course of business and at amounts different from those stated in the interim financial report. No allowance for such circumstances has been made in the interim financial report.

15

VALENCE INDUSTRIES LIMITED INTERIM FINANCIAL STATEMENTS - 31 DECEMBER 2014

Directors’ Declaration

In the opinion of the Directors of Valence Industries Limited:

• a) the financial statements and notes of Valence Industries Limited are in accordance with the Corporations Act 2001, including:

• i. giving a true and fair view of its financial position as at 31 December 2014 and of its performance for the halfyear ended on that date; and

• ii. complying with Accounting Standard 134 Interim Financial Reporting and the Corporations Regulations 2001 and

• b) there are reasonable grounds to believe that the Company will be able to pay its debts when they become due and payable.

Signed in accordance with a resolution of the Directors:

==> picture [103 x 60] intentionally omitted <==

Christopher Darby Managing Director and CEO

Adelaide 13 March 2015

16

==> picture [216 x 41] intentionally omitted <==

Level 1, 67 Greenhill Rd Wayville SA 5034

Correspondence to: GPO Box 1270 Adelaide SA 5001

T 61 8 8372 6666 F 61 8 8372 6677 E info.sa@au.gt.com W www.grantthornton.com.au

INDEPENDENT AUDITOR’S REVIEW REPORT TO THE MEMBERS OF VALENCE INDUSTRIES LIMITED

We have reviewed the accompanying half-year financial report of Valence Industries Limited (“Company”), which comprises the consolidated financial statements being the statement of financial position as at 31 December 2014, and the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the half-year ended on that date, notes comprising a statement of accounting policies, other explanatory information and the directors’ declaration of the consolidated entity, comprising both the Company and the entities it controlled at the half-year’s end or from time to time during the half-year.

Directors’ responsibility for the half-year financial report

The directors of Valence Industries Limited are responsible for the preparation of the halfyear financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such controls as the directors determine is necessary to enable the preparation of the half-year financial report that is free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express a conclusion on the half-year financial report based on our review. We conducted our review in accordance with the Auditing Standard on Review Engagements ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity, in order to state whether, on the basis of the procedures described, we have become aware of any matter that makes us believe that the half-year financial report is not in accordance with the Corporations Act 2001 including: giving a true and fair view of the Valence Industries Limited financial position as at 31 December 2014 and its performance for the half-year ended on that date; and complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001.

Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389

‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited.

Liability limited by a scheme approved under Professional Standards Legislation. Liability is limited in those States where a current scheme applies.

==> picture [139 x 27] intentionally omitted <==

As the auditor of Valence Industries Limited, ASRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial report.

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

Independence

In conducting our review, we complied with the independence requirements of the Corporations Act 2001.

Conclusion

Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the half-year financial report of Valence Industries Limited is not in accordance with the Corporations Act 2001, including:

• a giving a true and fair view of the consolidated entity’s financial position as at 31 December 2014 and of its performance for the half-year ended on that date; and

• b complying with Accounting Standard AASB 134 Interim Financial Reporting and Corporations Regulations 2001.

Material uncertainty regarding going concern

Without qualification to the conclusion expressed above, we draw attention to Note 14 to the interim financial statements. We note the interim financial statements indicate a net loss of $3,733,272 was incurred during the half year ended 31 December 2014 and the consolidated entity generated a net cash outflow of $10,376,727 from operating and investing activities. These conditions, along with other matters identified in Note 14, indicate the existence of a significant uncertainty which may cast significant doubt about the consolidated entity’s ability to continue as a going concern and therefore, the consolidated entity may be unable to realise its assets and discharge its liabilities in the normal course of business, and at the amounts stated in the financial report.

GRANT THORNTON AUDIT PTY LTD Chartered Accountants

J L Humphrey Partner – Audit & Assurance Adelaide, 13 March 2015