SANDFIRE RESOURCES NL

ABN 55 105 154 185

ANNUAL REPORT

2006

CORPORATE DIRECTORY

DIRECTORS	Peter S THOMAS Non-executive Chairman
	Gregory H STEEMSON Managing Director
	Graeme J HUTTON Technical Director
COMPANY SECRETARY	Maicolm K Smartt FCPA FCIS
PRINCIPAL REGISTERED OFFICE	1 Ventnor Avenue West Perth Western Australia, 6005 Telephone: (08) 9226 5833 Facsimile: (08) 9226 5844 Email: [email protected] Internet: www.sandfire.com.au
AUDITOR	Somes & Cooke Chartered Accountants 1304 Hay Street West Perth Western Australia, 6005
SHARE REGISTRY	Security Transfer Registrars Pty Ltd 770 Canning Highway Applecross Western Australia, 6153 Telephone: (08) 9315 2333 Facsimile: (08) 9315 2233 Email: www.securitytransfer.com.au
SOLICITORS	Blakiston & Crabb 1202 Hay Street West Perth Western Australia, 6005
STOCK EXCHANGE LISTING	The Company's shares are quoted on the Australian Stock Exchange. The Home Exchange is Perth.
ASX CODE	SFR - ordinary shares SFRCA - contributing shares

TENEMENTS SCHEDULE

as at 30-06-06

Tenement Listing
Project	Status	Interest	Tenement
Doolgunna	Granted	100%	E52/1697
	Granted	100%	E52/1698
	Granted	100%	E52/1699
	Granted	100%	E52/1715
	Application	100%	P52/1123
Yannarie	Granted	100%	E08/1374
	Granted	100%	E08/1409
	Granted	100%	E09/1111
Urandy	Granted	100%	E08/1462
	Granted	100%	E08/1463
Sandfire	Granted	100%	E04/1344
	Granted	100%	E04/1449
	Granted	100%	E04/1451
Tangadee	Application	100%	E52/1794
	Application	100%	E52/1795
	Application	100%	E52/1796
	Application	100%	E52/1797
	Application	100%	E52/1798
	Application	100%	E52/1799
	Application	100%	E52/1800
Glen Ross	Application	100%	E52/1801
	Application Application	100% 100%	E52/1840 E52/1841
	Application	100%	E52/1842
	Application	100%	E52/1843
	Application	100%	E52/1844
	Application	100%	E52/1845
Mt Boggola	Granted	100%	E08/1433
	Granted	100%	E08/1460
	Granted	100%	E52/1736
	Granted	100%	E52/1780
	Granted	100%	E52/1781
	Granted	100%	E52/1782
Borroloola	Granted	100%	EL 10121
	Granted	100%	MLN 624

Directors' Renort

The directors present their report (this Report) on Sandfire Resources NL (Sandfire or Company) for the 12 month period (Period) ended 30 June 2006.

This Report is accompanied by the financial report of the Company for the Period. Terms defined in this Report have the same meaning where appearing in the financial report.

DIRECTORS

The names and details of the directors of the Company at the date of this Report are:

Peter S Thomas B. Juris, LLB Non-executive Chairman

Mr Thomas is a practicing solicitor with more than 25 years national and international experience in the resource sector, both oil and minerals, specialising in the provision of general contractual and corporate advice to both miners and explorers. He is also Chairman of Image Resources NL and Meteoric Resources NL and was a Director of Magnetic Minerals Limited until it was taken over by Ticor in early 2003.

Mr Thomas has been a Director of Sandfire since 18 June 2003 and other than stated above has had no other Directorships in listed companies in the last 3 years.

Gregory H Steemson B.Sc (Geology), MSc (Geophysics), FAusIMM (CP), FAIG

Managing Director

Mr Steemson is a graduate of the University of Oueensland and the University of Utah. He is a qualified geologist and geophysicist and has held senior positions within the mining industry during his 30 year career. Greg has been directly involved in successful exploration programs for gold, base metals, diamonds, iron ore, mineral sands and coal. He has professional work experience throughout Australia and in South Africa, New Zealand, New Guinea, Fiji, Canada, South America and China. He is also a Director of Mineral Commodities Limited and Allied Gold Limited. Mr Steemson brings management and expertise in exploration to the Board.

Mr Steemson has been a Director of Sandfire since 18 June 2003 and other than stated above has had no other Directorships in listed companies in the last 3 years.

Graeme J Hutton B.Sc(Hons), FAusIMM

Technical Director

Mr Hutton is a graduate of the University of Western Australia. Since graduating some 40 years ago, Graeme has established himself as a highly successful prospecting geologist. His early prospecting career was centered on the Hamersely Iron Province. These activities, undertaken on behalf of DFD Rhodes Pty Ltd, have since been rewarded with Graeme's family Company receiving or being entitled to receive royalties from the Rhodes Ridge Group and West Angelas owned by Rio Tinto, Hope Downs owned by Kumba resources and Hancock Prospecting and McAmeys owned by BHP Iron. These royalties give recognition to Graeme's pioneering role in the development of this mineral field.

In the late 1970's, Graeme, together with Mr Peter Ingram, formed Metana Minerals NL which was one of the star performers of the developing gold mining industry in WA during the 1980's. Leaving the Metana Group in the early 1990's, Graeme was the driving force behind the establishment of Kimberley Diamond Company (KDC), now Australia's second commercial diamond producer. Graeme maintains an active involvement with KDC in the role of Technical Director. Graeme also serves on the Board of Herald Resources.

Mr Hutton has been a Director of Sandfire since 18 June 2003 and other than stated above has had no other Directorships in listed companies in the last 3 years.

COMPANY SECRETARY

Malcoim K Smartt BA(Acctg) Grad Dip Bus, FCPA, FCIS, FCIM

Mr Smartt has held a number of senior finance positions within the resource sector over the past 20 years and completes the Finance and Company Secretarial functions for several listed resource companies.

Directors - interests in securities

The relevant interests of each director in the share capital of the Company, as notified by the directors to the Australian Stock Exchange Limited in accordance with section 205G(1) of the Corporations Act 2001, at the date of this Report are as follows:

Directors' Report

	Position	Ordinary fully paid shares	Contributing Shares
P S Thomas (registered holder Peter Thomas and	Non Executive	400.000	1,000,000
Susan Goodwin ATF Waterford Retirement Plan)	Chairman
G H Steemson (registered holder Gregory Hugh	Managing	1.414.286	20.000
and Barbara Fay Steemson)	Director
G J Hutton (registered holder Faustus Nominees	Technical	5,676,822	$\mathbf{w}$
Pty Ltd)	Director

Each Director's relevant interest from the start of the Period and movements to the end of the Period are detailed at Note 16 to the financial statements..

Earnings Per Share

The basic loss per share is \$0.068

Dividends

No dividends have been paid or declared.

Corporate Information

Corporate Structure

The Company which was incorporated and is domiciled in Australia has no subsidiaries.

Nature of Operations and principal activities

The principal activity of the Company during the course of the financial year was mineral exploration.

There was no significant change in the nature of this activity during the year.

Number of Employees

The number of employees as at the end of the financial year was 6 (2005:4).

Operating and Financial Review

The Company experienced the highs and lows of greenfields exploration during the Period with the success at Doolgunna and the loss of the hole at Sandfire. However, on balance, it was a good year for the Company.

The highlights for the year include:

the gold discovery at Doolgunna; ä.
the continuing development of the exploration model and associated drilling targets at Yannarie; and
key work being done which since balance date has assisted target definition at the Gordons prospect at Borroloola and the development of the regional exploration play around that project.

The illustrations inside the cover have been included to provide examples of the data and targets now in the Company's possession with work undertaken during the Period contributing to the same.

The current status of each of the projects is summarised below.

DOOLGUNNA (Gold-copper, Sandfire 100%)

Definition of soil gold anomalies has continued on from the work completed in the previous year. Four main prospect areas have now been defined being Old Highway, East Shed Well, Cow Hole Bore and Red Bore. It is now apparent that extensive areas between these prospects are covered with transported cover rendering soil geochemistry ineffective thus leaving significant parts of the prospective structure open for further discoveries.

Mineralised corridors have been defined at Old Highway and East Shed Well where significant gold intersections have been returned from drilling. At Cow Hole Bore, the zone of anomalous gold geochemistry extends over some 5km and drilling to date has located gold mineralisation within this zone. The initial RAB drilling at Red Bore has not located any reasonable source of the gold anomalies. However, the anomalies have been confirmed and further exploration is underway to locate the source of the anomalies.

YANNARIE (Lead-zinc and copper, Sandfire 100%)

Further development of the copper-gold iron oxide exploration model continued during the year with most of the attention focussed on the Coria and Two Peaks areas.

At both prospects rock and soil samples continued to return anomalous base metal values. The Company has followed up uranium radiometric anomalies at both of these prospects. Highly anomalous uranium values were returned from mineralised veins in these two areas thus adding an important component to the generally accepted model of this type.

At the time of this Report, modelling of the geophysical data was being completed in readiness for drill testing these two areas.

BORROLOOLA, NT (Copper, Sandfire 100%)

During 2005 the Company was unable to undertake any significant field operations at Borroloola to follow up the high grade copper intersections obtained during the 2004 field season.

In 2006, however, the Company completed a second induced polarisation survey over the Coppermine Creek fault. This follow up survey has been successful in delineating the prospective zone along the fault over a distance of approximately 1.2km. The correlation between the 2004 drilling results and the recent survey is high and it is proposed to drill test the zone and a drilling rig has been contracted to mobilise to site by the beginning of October 2006.

The Company has secured additional exploration tenements in the Borroloola district such that now the Company holds granted tenure to approximately 1,882 km² in the area. The available open file information has been reviewed and, in conjunction with this review, the airborne electromagnetic data available on open file has been reprocessed.

URANDY (Copper-gold, Sandfire 100%)

The airborne magnetic anomalies selected for follow up within the structural zone targeted have been located in the field and the sources of most of them have generally been resolved. The remaining anomalies are interpreted to lie at significant depths (>500m) and are considered to have similar sources.

As part of the field investigations, a uranium radiometric anomaly was field checked and found to be due to ferruginous veins containing anomalous copper and uranium within a dolomitic siltstone. This occurrence is situated on the main structural trend being investigated by the Company. The radiometric anomaly is some 900m long. Additional field work is planned to complete the assessment of this occurrence.

MT BOGGOLA (Gold, Sandfire 100%)

Anomalous gold values have been returned from drainage samples from three areas within the project area. Further field work is planned to follow up these anomalies.

SANDFIRE (Lead-zinc, Sandfire 100%)

As reported during the year, drill hole SFMR001 was abandoned at 1181m as a result of a broken drill rod. An audit of the program is being undertaken and when complete a decision regarding future work will be made.

GLEN ROSS/TANGADEE (Lead-zinc, Sandfire 100%)

Until the various native title issues can be resolved to the Company's satisfaction, no further work is planned.

Review of Financial Condition

The Company has a sound cash position to adequately meet all exploration commitments and assess new projects.

Capital Structure

During the Period:

5,882,250 ordinary fully paid shares were placed with sophisticated investors at 30 cents each;
8,285,300 ordinary fully paid shares were issued at 35 cents under a share purchase plan;
200,000 ordinary fully paid shares were issued at 18 cents as full consideration for the purchase of tenements
191,076 contributing shares were paid up (15 cents each) to become fully paid shares;
200,000 (broker) 31 December 2008 \$0.25 options were converted into 200,000 ordinary fully paid shares:
8.076.728 options were converted into contributing shares upon payment of 10 cents per share:
4.642.692 options to subscribe for contributing shares at 10 cents per share lapsed.

These issues raised a gross amount of \$5,586,345 in aggregate and the issued capital of the Company at the end of the Period was comprised of:

57,773,626 fully paid shares; and
12,475,652 contributing shares.

As at 30 June 2006, the only options to subscribe for securities in the unissued capital of the were unlisted options to subscribe for ordinary fully paid shares as detailed in the following table:

Number of Options	Exercise Price	Expiry Date
2,800,000	25 cents each	31 December 2008
1.000.000	20 cents each	30 September 2008

Risk Management

The Company takes a proactive approach to risk management. The Board is responsible for ensuring that risks and opportunities are identified on a timely basis and that the Company's objectives and activities are aligned with the risks and opportunities identified by the Board.

The Board is of the view that in the context of a small company such as Sandfire, it is crucial for all Board members to be part of this process, and as such the Board has not established a separate risk management committee and the whole Board acts in that role.

Likely developments

The Company will continue to focus on the exploration of its portfolio of tenements and the possible acquisition of new projects and/or assets.

Further information about likely developments in the operations of the Company and the expected results of those operations on future financial years has not been included in this Report because disclosure of the information would be likely to result in unreasonable prejudice to the Company.

Environmental Regulation and Performance

The Company's operations were subject to environmental regulations under both Commonwealth and State legislation in relation to its exploration activities.

The directors are not aware of any breaches during the Period.

Indemnification of officers

The Company has entered agreements indemnifying, to the fullest extent permitted by law, each director and officer of the Company against all losses, obligations and liabilities incurred as a director or officer of the Company.

Insurance of officers

Since 30 June 2005, the Company has paid \$20,535 on account of directors and officers liability insurance premiums.

Remuneration Report

This report outlines the remuneration arrangements in place for Directors and Executives of the Company.

Remuneration philosophy

The Company's broad remuneration policy is to ensure each remuneration package properly reflects the person's duties and responsibilities and that remuneration is competitive in attracting, retaining and motivating people of the highest quality.

Details of the nature and amount of each element of the emoluments of each director of the Company are:

Table 1

Director remuneration for the Year ended 30 June 2006

	Base emolument	Superannuation contribution	Total \$
P S Thomas	50.000	50.000	50.000
G H Steemson	197.250	$\overline{\phantom{a}}$	197,250
G J Hutton	91.743	8,257	100,000

To clarify this table and Note 16, Mr Thomas had all his fees paid to his nominated superannuation.

Table 2

Remuneration of the remaining Executive of the Company for the Year ended 30 June 2006

	Base emolument	Superannuation contribution	Share Based	Total Ś.
			Payments
M Smartt (Part time)	33.000	3.000	7.848	43.848

Save as disclosed in this Report, no other benefits were given to any Directors or Executives during the year.

Fees and Benefits of Directors

The annual aggregate fees payable to Directors (as Directors), until otherwise resolved by shareholders in general meeting, is the product of \$24,000 multiplied by the weighted average number of directors for that year, plus \$26,000 per annum as an additional allowance for the Chairman to be distributed amongst the directors as they determine from time to time and, in the absence of agreement and subject to the Chairman's entitlement to additional allowance, equally.

Except as disclosed elsewhere in this Report, or the financial statements accompanying this Report, since 30 June 2005, no Director has received or become entitled to receive any benefit (other than a benefit included in the aggregate amount of emoluments received or due and receivable by Directors shown in the accounts of the Company) because of a contract made by the Company or a related body corporate with the Director or with a firm of which the Director has a substantial financial interest.

Directors' meetings

The number of directors' meetings attended by each director during the financial year was:

Director	Board Meetings

P.S. Thomas
G H Steemson
1 Hutton

$A =$ Number of meetings attended $B =$ Number of meetings during the time the Director held office during the year.

Results

The operating loss after income tax of the Company for the financial year was $$2,742,652$ (2005: \$1,925,886).

Non audit services

The only non audit services provided by the auditor were for tax services as shown at Note 18.

A copy of the Auditor's Independence declaration as required by Section 307c of the Corporations Act is set out on page 9.

The board is satisfied that the provision of non- audit services by Somes & Cooke during the year did not compromise the independence of the auditor (Kevin Somes) as required by the Corporations Act because he did not provide any of the non audit services, he has only assumed the role of auditor of the Company this year, the non-audit services rendered were inconsequential in terms of quantum (\$5,780) relative to the potential loss and exposure arising out of any failure to act in a fit and proper manner with due independence in an entirely disinterested but diligent manner.

Signed in accordance with a resolution of directors.

Dated at Perth 29 September 2006

P S Thomas Chairman

1304 Hay Street West Perth WA 6005 PO Box 709 West Perth WA 6872 Tel (08) 9322 4853 Fax (08) 9481 5645 Email [email protected] www.somesandcooke.com.au

SomesandCooke

28 September 2006

The Board of Directors Sandfire Resources NL 1 Ventnor Avenue West Perth WA 6005

Dear Directors

Sandfire Resources NL

In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Sandfire Resources NL.

As lead audit partner for the audit of the financial statements of Sandfire Resources NL for the year ended 30 June 2006, I declare that to the best of my knowledge and belief, there have been no contraventions of:

the auditor independence requirements of the Corporations Act 2001 in relation to the $(i)$ review; and
any applicable code of professional conduct in relation to the review. $(ii)$

Yours sincerely

SOMES and COOKE

Partner Chartered Accountants

INCOME STATEMENT for the 12 months ended 30 June 2006

	NOTE	2006	2005 \$
Revenue from ordinary activities	3
Other revenue	3	78,883	152,286
Total revenue	3	78,883	152,286
Administration Expenses	4	(267, 193)	(199, 581)
Share Based Payments	16(d)	(22, 563)
Depreciation and amortisation expense	4	(52, 587)	(65, 929)
Exploration expenditure written off	4	(2,479,192)	(1,812,662)
Loss from ordinary activities before related income tax expense		(2,742,652)	(1,925,886)
Income tax relating to ordinary activities	5
Net loss attributable to members of the Company	13	(2,742,652)	(1,925,886)
Basic earnings/(loss) per share (cents per share)	22	(6.80)	(4.93)
Diluted earnings per share	22	(6.80)	(4.93)

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

Certain expressions appearing in the financial report take their meanings from the definitions appearing in the accompanying Directors' Report.

BALANCE SHEET as at 30 June 2006

NOTE	2006	2005 \$

6		1,954,196
7	82,800	40,114
	4,691,270	1,994,310

8	170,521	210,478
9	23,337	23,000
10
	193,858	233,478

		2,227,788

		141.030
12	15,808	10,833
	193,135	151,863

		151,863
		2,075,925


13	10,108,660	4,517,535
		254,968
		(2,696,578)
		2,075,925
	11 15 14	\$ 4,608,470 4,885,128 177,327 193,135 4,691,993 22,563 (5,439,230) 4,691,993

The Balance Sheet is to be read in conjunction with the notes to the financial statements.

CASH FLOW STATEMENT for the 12 months ended 30 June 2006

NOTE	2006 \$	2005 \$

	67,774	147,894
	5,455
	(262,952)	(124,436)
23(b)	(189, 723)	23,458

	(2,479,192)	(1,812,662)
	(12,968)	(35, 367)
	(2,492,160)	(1,848,029)

	(250, 188)
	5,586,345	3.750
	5,336,157	3,750
	2,654,274	(1,820,821)
	1,954,196	3,775,017
23(a)	4,608,470	1,954,196

The cash flow statement is to be read in conjunction with the notes to the financial statements.

STATEMENT OF CHANGES IN EOUITY for the 12 months ended 30 June 2006

	Issued Capitai	Retained Earnings	Option Reserve	TOTAL
			5
As at 1 July 2004	4,513,785	(770, 693)	254,968	3,998,060
Total income / expense for the period		(1,049,696)		(1,049,696)
Exercise of Options	1,500			1.500
Contributing Shares paid Up	2.250			2,250
As at 31 December 2004	4,517,535	(1.820.389)	254,968	2,952,114
As at 1 July 2005	4,517,535	(2,696,578)	254,968	2,075,925
Total income / expense for the period		(2,742,652)		(2,742,652)
Share option reserve moved to equity	254,968		(254,968)
Share Based Payment reserve			22.563	22,563
Issue of shares	1,764,675			1.764,675
Share issue expenses	(250,188)			(250, 188)
Share Purchase Plan issue of shares	2,899,855			2,899,855
Options converted to fully paid shares	50,000			50,000
Share issued for tenement purchase	36.000			36,000
Shares paid up or conversion of options	835,815			835,815
As at 30 June 2006	10,108,660	(5,439,230)	22.563	4,691,993

NOTES TO THE FINANCIAL STATEMENTS for the 12 months ended 30 June 2006

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial report includes the financial statements of Sandfire Resources NL (Sandfire or Company) as an individual entity. The Company is a no liability company incorporated in Australia and its shares are traded on Australian Stock Exchange Limited.

(a) Basis of preparation

This general purpose financial report has been prepared in accordance with Australian equivalents to International Financial Reporting Standards (AIFRSs), other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001.

Compliance with IFRSs

Australian Accounting Standards include Australian equivalents to International Financial Reporting Standards (IFRSs). Compliance with AIFRSs ensures that the financial report, comprising the financial statements and notes of the Company, comply with IFRSs.

Application of AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards

These financial statements are the first Company financial statements to be prepared in accordance with AIFRSs. AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards has been applied in preparing these financial statements.

Financial statements of the Company until 30 June 2005 were prepared in accordance with previous Australian Generally Accepted Accounting Principles (AGAAP). AGAAP differs in certain respects from AIFRSs. When preparing the Company's 2006 financial statements, management amended certain accounting, valuation and consolidation methods applied in the AGAAP financial statements to comply with AIFRSs. The comparative figures in respect of 2005 were restated to reflect these adjustments.

Reconciliations and descriptions of the effect of the transition from previous AGAAP to AIFRSs on the Company's equity and its net loss are given in note 2.

Historical cost convention

These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets at fair value through profit or loss.

(b) Property, plant and equipment

Each class of property, plant and equipment is carried at cost or fair value less, where applicable, any accumulated depreciation and impairment losses.

Plant and equipment

Plant and equipment are measured on the cost basis.

The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows which will be received from the assets employment and subsequent disposal. The expected net cash flows have not been discounted to their present values in determining recoverable amounts. The cost of fixed assets constructed within the economic entity includes the cost of materials, direct labour, borrowing costs and an appropriate proportion of fixed and variable overheads.

Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

Depreciation

Depreciation of plant and equipment is calculated on a reducing balance basis so as to write off the net costs of each asset over the expected useful life. The rates vary between 5% and 40% per annum.

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. When revalued assets are sold, it is company policy to transfer the amounts included in other reserves in respect of those assets to retained earnings.

(c) Impairment of assets

At each reporting date, the Company reviews the carrying values of its tangible and intangible assets to determine whether there is any indication that those assets have been impaired. If such an indication exists, the recoverable amount of the asset, being the higher of the asset's fair value less costs to sell and value in use, is compared to the asset's carrying value. Any excess of the asset's carrying value over its recoverable amount is expensed to the income statement.

Impairment testing is also performed annually for goodwill and intangible assets with indefinite lives.

Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs.

(d) Exploration and evaluation costs

All exploration and evaluation expenditure is expensed to profit and loss as incurred.

(e) Leases

Leases of fixed assets where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership that are transferred are classified as finance leases.

Finance leases are capitalised by recording an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the Period.

Leased assets are depreciated on a straight-line basis over their estimated useful lives.

Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses in the periods in which they are incurred.

Lease incentives under operating leases are recognised as a liability and amortised on a straight-line basis over the life of the lease term.

(f) Income tax

The charge for current income tax expense is based on the profit for the year adjusted for any non-assessable or disallowed items. It is calculated using the tax rates that have been enacted or are substantially enacted by the balance sheet date.

Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss.

Deferred tax is calculated at the tax rates that are expected to apply to the Period when the asset is realised or liability is settled. Deferred tax is credited in the income statement except where it relates to items that may be credited directly to equity, in which case the deferred tax is adjusted directly against equity.

Deferred income tax assets are recognised to the extent that it is probable that future tax profits will be available against which deductible temporary differences can be utilised.

The amount of benefits brought to account or which may be realised in the future is based on the assumption that no adverse change will occur in income taxation legislation and the anticipation that the economic entity will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law.

(g) Goods and Services Tax (GST)

Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the balance sheet are shown inclusive of GST.

Cash flows are presented in the cash flow statement on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows.

(h) Trade and other 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.

(i) Employee benefits

Provision is made for employee benefits accumulated as a result of employees rendering services up to the reporting date. These benefits include wages and salaries, annual leave, and long service leave.

Liabilities arising in respect of wages and salaries, annual leave and any other employee benefits expected to be settled within twelve months of the reporting date are measured at their nominal amounts based on remuneration rates which are expected to be paid when the liability is settled. All other employee benefit liabilities are measured at the present value of the estimated future cash outflow to be made in respect of services provided by employees up to the reporting date. In determining the present value of future cash outflows, the market yield as at the reporting date on national government bonds, which have terms to maturity approximating the terms of the related liability, are used.

Share-based payments

The fair value of contributing shares granted is recognised as an employee benefit expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the contributing shares.

The fair value at grant date is determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the contributing shares, the impact of dilution, the share price at issue date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the security.

Upon the conversion of a contributing share, the balance of the share based payments reserve relating to that share will be transferred to share capital and the proceeds received, net of any directly attributable transaction costs, are credited to share capital.

The Black-Scholes calculation principles have been adopted as they are widely recognised by relevant authorities and bodies as being appropriate even though in the experience of the directors the results produced by the application of those principles often fail to reflect market value to a significant degree.

(m) Revenue recognition

Interest revenue is recognised on a time proportionate basis that takes into account the effective yield on the financial assets.

(n) Issued capital

Ordinary and contributing shares are included in issued capital.

Any transaction costs arising on the issue of ordinary and contributing shares are recognised directly in issued capital as a reduction of the share proceeds received.

(o) Cash and cash equivalents

Cash and cash equivalents include cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts.

(p) Comparative figures

When required by Accounting Standards, comparative figures have been adjusted to conform to changes in presentation for the current financial year.

(q) 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 and economic data, obtained both externally and within the Company.

(r) New accounting standard

The following Australian Accounting Standards that have recently been issued or amended but are not yet effective have not been adopted for the annual reporting period ending 30 June 2006:

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

AASB amendment	Affected Standard(s)	Nature of change to accounting policy	Application date of standard*	Application date for Group
2005-1	AASB 139: Financial Instruments: Recognition and Measurement	No change to accounting policy required. Therefore no impact	$1 - Jan-06$	$1 - ln1 - 06$
2005-5	AASB 1: First-time adoption of AIFRS, AASB 139: Financial Instruments: Recognition and Measurement	No change to accounting policy required. Therefore no impact	$1$ -Jan-06	$1 1 - 06$
2005-6	AASB 3: Business combinations	No change to accounting policy Required, Therefore no Impact	$1$ -Jan-06	$1$ -Jul-06
	2005-10 Disclosure and Presentation. AASB 101: presentation and Financial Statements AASB 114: Segment Reporting, AASB 117: Leases.	No change to accounting policy Required, Therefore no Impact	$1$ -Jan-07	$1$ -Jul-07

	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 and AASB 1038: Life Insurance Contracts
New Standard	AASB 7: Financial Instruments Disclosures	No change to accounting policy Required, Therefore no. Impact	$1$ -Jan-07	1-Jul-07

The following amendments are not applicable to the Group and therefore have no impact.

AASB amendmen	Affected Standard(s)
2005-2	AASB 1023: General Insurance Contracts
2005-4	AASB 139: financial instruments: Recognition and Measurement. AASB 132:financial instruments: Disclosure and Presentation
2005-9	AASB 4: Insurance contracts, AASB 1023: General Insurance Contracts AASB 139: Financial Instruments: Recognition and Measurement AASB 132:Financial Instruments: Disclosure and Presentation
2005-12	AASB 1038:Life Insurance Contracts and AASB 1023:General Insurance Contracts
2005-13	AAS 25: Financial Reporting by Superannuation Plans

Note 2: First-Time Adoption of Australian Equivalents to International Financial Reporting Standards

For all periods up to and including the year ended 30 June 2005, the Company prepared its financial statements in accordance with Australian generally accepted accounting practice (AGAAP). These financial statements for the year ended 30 June 2006 are the first the Company is required to prepare in accordance with the Australian equivalents to International Financial reporting Standards (AIFRS)

The Company 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 2. In preparing these financial statements, the Company started from an opening balance sheet as at 1 July 2004, the Company'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 is required to explain the principal adjustments made by the Company in restating to its previously published AGAAP financial statements for the year ended 30 June 2005. There was no adjustment in respect to AGAAP balance sheet as at 1 July 2004.

Exemptions applied

AASB 1 allows first-time adopters certain exemptions from the general requirement to apply AIFRS retrospectively.

The Company has taken the following exemptions:

Comparative information for financial instruments is prepared in accordance with AGAAP and the company and group have adopted AASB 132: Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments: Recognition and Measurement from 1 July 2005.

AASB 3 Business Combinations has not been applied to acquisitions of subsidiaries or of interest in associates and joint ventures that occurred before 1 July 2004.

AASB 2 Share-based Payment has not been applied to any equity instruments that were granted on or before 7 November 2002, nor has it been applied to equity instruments granted after 7 November 2002 that vested before 1 January 2005.

Explanation of material adjustments to the cash flow statement

There are no material differences between the cash flow statement presented under AIFRS and the cash flow statement presented under previous AGAAP.

	Previous GAAP at 30 Jun 05	Adjustments on Australian Equivalents to IFRS	Australian Equivalents to Introduction of IFRS at 30 Jun 05
(2a) Reconciliation of Loss for the full year to 30 June 2005	\$	\$	\$
Revenue	152,286		152,286
Depreciation expense	(65, 929)		(65, 929)
Administration expense	(199, 581)		(199, 581)
Exploration expenditure	(1,812,662)		(1,812,662)
Loss before income tax	(1,925,886)		(1,925,886)
Income tax expense
Loss for the year	(1,925,886)		(1,925,886)
Loss attributable to members of the Company	(1,925,886)		(1,925,886)

	Previous GAAP at 30 Jun 05	Adjustments on introduction of Australian equivalents to IFRS	Australian equivalents to IFRS at 30 Jun 05
(2b) Reconciliation of Equity at 30 June 2005	\$	\$	\$
ASSETS
CURRENT ASSETS
Cash and cash equivalents	1,945,196		1,945,196
Receivables / Prepayments	40,114		40,114
TOTAL CURRENT ASSETS	1,994,310	$\overline{\phantom{a}}$	1,994,310
NON-CURRENT ASSETS
Property , Plant and Equipment	210,478		210,478
Other financial assets	23,000		23,000
TOTAL NON-CURRENT ASSETS	233,478		233,478
TOTAL ASSETS	2,227,788		2,227,788
CURRENT LIABILITIES
Payables / Provisions	151,863		151,863
TOTAL CURRENT LIABILITIES	151,863		151,863
TOTAL LIABILITIES	151,863		151,863
NET ASSETS	2,075,925	$\overline{a}$	2,075,925
EQUITY
Issued capital	4,517,535		4,517,535
Option reserve	254,968		254,968
Accumulated losses	(2,696,578)		(2,696,578)
TOTAL EQUITY	2,075,925		2,075,925

$\overline{\mathbf{3}}$ REVENUE

	2006	2005
Revenue from operating activities Interest received	78,883	152,286
Total ordinary from revenue activities	78,883	152.286

EXPENSES 4

The loss from ordinary activities before income tax expense has been determined after charging the following items:

	2006 \$	2005 \$
Audit or review of the Company's financial statements	(12,500)	(10, 490)
Depreciation	(52, 587)	(65, 929)
Share based payments	(22, 563)
Administration Expenses	(249, 718)	(180, 654)
Mineral exploration evaluation and expenditure written off	(2,479,192)	(1,812,662)
Provision for employee entitlements	(4,975)	(8,437)

INCOME TAX 5

$(a)$ Reconciliation

The prima facie tax on the loss is reconciled to the income tax expense as follows

	2006 \$	2005 \$
Operating loss	(2,742,652)	(1,925,886)
Prima facie tax benefit at 30%	(822,796)	(577,766)
Tax effect of permanent differences:	6,770	6,000
Tax effect timing difference	(13,798)	$\blacksquare$
Future income tax benefits not brought to account	829,824	571,766
expense attributable to Income tax ordinary activities

$(b)$ Future income tax benefits

The future income tax benefits of \$1,714,237 not brought to account relate to income tax losses, the benefit of which will only be realised if the following conditions for deductibility are met:

the entity derives future assessable income of a nature and of an amount sufficient to enable the $(i)$ benefit from the deductions for the losses to be realised; and
the entity continues to comply with the conditions for deductibility imposed by tax legislation; and $(ii)$ $(iii)$ no changes in tax legislation adversely affect the entity in realising the benefit from the deductions for the losses.

CASH ASSETS 6

	2006 5	2005 \$
Cash	3,204,522	729,714
Bank Bills	1,403,948	1,224,482
	4,608,470	1,954,196

RECEIVABLES $\overline{7}$

	2006	2005
	s.
GST recoverable	48.155	35.743
Accrued Interest	14.259	3,981
Debtor & Prepayment	20.386	390
	82,800	40,114

PROPERTY, PLANT AND EQUIPMENT $\bf8$

	2006	2005
	\$	\$
Office furniture and equipment
At cost	50,714	50,714
Additions	6,148
Accumulated depreciation	(27, 176)	(15, 045)
	29,650	35,669
Buildings and infrastructure
At cost	30,430	30,430
Addition	5,537
Accumulated depreciation	(6, 335)	(3, 043)
	29,632	27,387
Exploration plant and equipment
At cost	10,320	10,320
Additions	575
Accumulated depreciation	(4, 801)	(2, 818)
	6,094	7,502
Motor vehicles
At cost	189,177	189,177
Additions	406
Accumulated depreciation	(84, 437)	(49,257
	105,146	139,920
Total property, plant and equipment at book value	170,522	210,478
Bonds 9

Bonds - mines department/landlord	23,337	23,000

CAPITALISED MINERAL EXPLORATION EXPENDITURE ${\bf 10}$

	Balance at the beginning of the period		2006 \$	2005 \$

	Purchase price for tenements Exploration Expenditure		2,479,192	1,812,662
Total			2,479,192	1,812,662
	Less expenditure written off during the year		(2,479,192)	(1,812,662)
	Total amount capitalised as at 30 June 2006		$\overline{\phantom{a}}$
11	PAYABLES
	Current
	Unsecured Trade creditors and accruals		133,327	141,030
	Amounts owed to Directors and/or Director-related entities		44,000
			177,327	141,030
12	PROVISIONS
	Current Employee entitlements		15,808	10,833
	Number of employees at year end		6	4
13	CONTRIBUTED EQUITY
(a)	Ordinary Shares 53,773,626 (2005 39,015,000)		9,160,124	4,516,035
(b)	Contributing Shares
	12,475,652 with 15 cents unpaid		948,536	1,500
	Total		10,108,660	4,517,535
(c)	Ordinary Share
	Movements during the period	2006	2005
	Balance at the beginning of the period	39,015,000	39,000,000
	Shares issued for tenement at 18 cents Placement at 30 cents	200,000 5,882,250
	Share Purchase Plan at 35 cents Contributing shares paid up to ordinary shares	8,285,300 191,076
	Options paid up to ordinary shares	200,000	15,000

53,773,626

39,015,000

Balance at the end of the year

Contributing Share $(d)$

(15 cents unpaid. ASX Listed Class SFRCA)

Movements During The Year	2006 Number	2005 Number
Balance at the beginning of the period Employee Share Based payments @ 0.0001 cents	4,015,000 575,000	4.015.000
Exercise of options to acquire contributing shares Conversion from options	73,000 8,003,728
Converted to ordinary shares Balance at end of year	-191.076 12,475,652	4.015.000

$(e)$ Options Listed options

At the beginning of the year there were 12,729,420 listed options expiring on 30 September 2005 on issue. During the year, 8,076,728 were converted into contributing shares and the balance of 4,652,692 lapsed. There were no listed options at 30 June 2006.

Unlisted options

At the end of the Period, there were the following unlisted options on issue, namely, 2,800,000 with an exercise price of 25 cents and an expiry date of 31 December 2008, and 1,000,000 options with an exercise price of 20 cents and an expiry date of 30 September 2008.

$(f)$ Terms and Conditions of Contributed Equity

Ordinary Shares

Ordinary shares confer the right to receive dividends as declared and, in the event of a winding up of the Company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of shares held.

Ordinary shares entitle their holder at a meeting of the Company to one vote on a show of hands and one vote per share on a poll.

Contributing Shares

Contributing shares require a further payment of 15 cents to become fully paid and confer voting and dividend participation rights in proportion to amount paid up thereon relative to the total amount that will be paid up when converted to a fully paid share.

ACCUMULATED LOSSES 14

	2006	2005
Accumulated loss at the beginning of the period	2,696,578	770,693
Net loss attributable to members of the Company	2,742,652	1,925,886
Accumulated loss at the end of the vear	5,439,230	2,696,578

15 RESERVES

Option Premium Reserve

Balance beginning of period Options exercised	2006 254,968 (254, 968)	2005 254,968
Balance end of period		254,968
Share Based Payment Reserves
Balance beginning of period	$\blacksquare$
Payments Made	22,563
Balance end of period	22,563

16 KEY PERSONNEL COMPENSATION

$(a)$ Remuneration Disclosures

12 Months Ended 30 Jun 2006
	Primary	Cash	Non-		Post Employment	Equity	Other	TOTAL
	Salary & Fees	Bonus	cash	Super- annuation	Retirement Benefits	Options	Benefits	\$
	Specified Directors
	Thomas, P. Chairman (Non Executive)
2005	50,000			50,000*	w.	$\omega$	$\tilde{\phantom{a}}$	50,000
2006	50.000		w	50,000*		w	$\blacksquare$	50,000
	Steemson, G. Managing Director
2005	181,800		$\overline{\phantom{a}}$		u.	$\omega$	$\blacksquare$	181,800
2006	197,250					$\omega$	$\tilde{\phantom{a}}$	197,250
	Hutton,G Technical Director
2005	91,744	a.		8,256	w	$\mathbf{w}$	$\tilde{\phantom{a}}$	100,000
2006	91,744			8,256			$\overline{\phantom{a}}$	100,000
TOTALS
2005	323,544	$\tilde{\phantom{a}}$	$\mathbf{u}$	8.256	w	w	$\tilde{\phantom{a}}$	331,800
2006	338,994			58,256				347,250
	Executive
	Smartt, M Company Secretary
2005	33,000			3,000				36,000
2006	33,000	$\tilde{\phantom{a}}$		3,000		7.848	$\tilde{\phantom{a}}$	43.848

* The entirety of the fees payable to Thomas were paid into his nominated superannuation fund by way of salary sacrifice.

Remuneration Reviews $(b)$

The Board of Directors is responsible for determining and reviewing compensation arrangements for the Directors and the executive team. The Board of Directors assesses the appropriateness of the nature and amount of emoluments of such officers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum benefit from the retention of a high quality Board and executive team.

$(c)$ NUMBER OF SHARES IN WHICH KEY MANAGEMENT PERSONNEL HAVE A RELEVANT INTEREST

	Ordinary Shares
	Balance	Issued during	Options	Net Change	Balance
	30 June 05	Period	Exercised	Other	30 Jun 06

Thomas P	400,000		$\tilde{\phantom{a}}$		400,000
Steemson G	1,400,000	14,286	$\omega$	$\tilde{\phantom{a}}$	1,414,286
Hutton G	5,662,536	14,286	w		5,676,822
Smartt M			$\mathbf{w}$
Totals	7,462,536	28,572			7,491,108

			Contributing Shares
	Balance	Issued during	Options	Net Change	Balance
	30 June 05	Period	Exercised	Other	30 Jun 06
Specified Directors
Thomas P	1,000,000-		$\omega$	$\overline{\phantom{a}}$	1,000,000
Steemson G			20,000		20,000
Smartt M		200,000	$\tilde{ }$	(100,000)	100,000

$(d)$ SHARE BASED PAYMENTS

The Company issued 575,000 contributing shares to employees at .0001 cents. These options have been valued at issue date using the Black Scholes valuation methodology.

17 RELATED PARTY TRANSACTIONS

Sandfire agreed to purchase the Mt Boggola tenements from Faustus Nominees Pty Ltd a company associated with Mr G J Hutton. The terms of the agreement required Sandfire to reimburse Faustus its cost of acquiring the tenement in the amount of \$44,000. This payment was made in July 2006.

There were no other related party transactions.

18 AUDITOR'S REMUNERATION

	2006	2005

Audit Services - Financial Report	12,500	10,000
Tax Services	5,780	$\blacksquare$

RETIREMENT BENEFIT OBLIGATIONS EMPLOYEE ENTITLEMENTS AND SUPERANNUATION 19 COMMITMENTS

The Company contributes to superannuation plans to at least the minimum extent required by statute.

20 EXPENDITURE COMMITMENTS

The Company has certain obligations to perform minimum exploration work on tenements held. These obligations may vary over time, depending on the Company's exploration programs and priorities. As at balance date, total exploration expenditure commitments on tenements held by the Company which have not been provided for in the financial statements and which cover the following twelve month period amount to \$916,000. These obligations are also subject to variations by things such as farm-out arrangements or sale of the relevant tenements.

SEGMENT INFORMATION $21$

The Company operates in Australia in mineral exploration industry.

EARNINGS/(LOSS) PER SHARE 22

The following reflects the loss and share data used in the calculation of basic and diluted earnings/(loss) per share:

	2006	2005
Earnings/(loss) used in calculating basic and diluted earnings/(loss) cents per share	(2,742,652)	(1,925,886)
Weighted average number of ordinary shares used in calculating basic loss per share and diluted loss per share.	40,336,073	17,443,299

23 NOTES TO THE STATEMENTS OF CASH FLOWS

Reconciliation of Cash $(a)$

Cash at the end of the Period as shown in the statements of cash flows is reconciled to the related items in the statement of financial position as follows:

5	\$
108,470 4,500,000	154,196 1,800,000
	1,954,196
	4,608,470

$(b)$ Reconciliation of the loss from ordinary activities after income tax to the net cash flows used in operating activities

	2006 \$	2005 \$
Loss from ordinary activities after income tax	(2,742,652)	(1,925,886)
Non-cash items:
Depreciation	52,587	65,929
Exploration expenditure written off	2,479,192	1,812,662
Share Based Payments	22,563
Change in operating assets and liabilities.
(Decrease)/increase in trade creditors employee and entitlements	41,272	22,972
(Increase)/ decrease in receivables	(42, 685)	47,781
Net cash outflows used in operating activities	189,723	23,458

24 FINANCIAL INSTRUMENTS

$(a)$ Interest Rate Risk

The Company's exposure to interest rate risk, which is the risk that a financial instrument's value will fluctuate as a result of changes in market, interest rates and the effective weighted average interest rates on those financial assets, is as follows:

2006

	Note	Weighted Average Effective Interest	Floating Interest Rate		Fixed Interest Rate Maturing	Non Interest Bearing	Totai
				12 months or iess	$12 - 60$ months
		%	\$	\$	\$	\$	\$
Financial Assets		5.61%	4,500,000			108,470	4,608,470
Cash assets	22(a)
Receivables	7					82,800	82,800
Total Financial Assets			4,500,000	÷	$\blacksquare$	191,270	4,691,270
Financial Liabilities
Payables	11					177,327	177,327
Total Financial
Liabilities						177,327	177,327
Net Financial Assets/(Liabilities) 2005			$\blacksquare$	÷		13,943	4,513,943

	Note	Weighted Average Effective Interest	Floating Interest Rate		Fixed Interest Rate Maturing	Non Interest Bearing	Totai
				12 months or less	$12 - 60$ months
		%	\$	\$	\$	\$	\$
Financial Assets Cash assets	22(a)	5.23%	1,800,000			154,196	1,954,196
Receivables	7					40,114	40,114
Total Financial Assets			1,800,000		÷	194,310	1,994,310
Financial Liabilities Payables	11					129,098	129,098
Total Financial Liabilities

$(b)$ Credit Risk

The Company's maximum exposures to credit risk at balance date in relation to each class of recognized financial asset is the carrying amount of those assets as indicated in the statement of financial position.

$(c)$ Net Fair Values

The net fair values of financial assets and liabilities at balance date approximate their carrying amount.

25 CONTINGENT LIABILITIES

At the date of this Report this Report there were no known contingent liabilities.

26 SUBSEQUENT EVENTS

The Company placed 8 million shares at 55 cents to fund the exploration on Company tenements and to augment working capital.

The 6.9 million options (approved by shareholders at a meeting on 30 June 2006) were issued.

As detailed in Note 16(c) a payment to a related party has been made since year end.

There has not arisen in the interval between the end of the Period and the date of this Report any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of the Company, to affect significantly the operations of the Company, the results of those operations, or the state of affairs of the Company In future financial years.

DIRECTORS' DECLARATION

In the opinion of the Directors of Sandfire Resources NL (the Company);

the financial statements and notes as set out on pages 10 to 28 are in accordance with the Corporations $(a)$ Act 2001, including:
complying with Accounting Standards in Australia and the Corporations Regulations 2001 and other $(i)$ mandatory professional reporting requirements; and
$(ii)$ give a true and fair view of the financial position of the Company as at 30 June 2006 and of the performance, as represented by the results of the operations and the cash flows, for the period ended on that date;
$(b)$ there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.
The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 $(c)$ from the chief executive officer and chief financial officer for the financial year ended 30 June 2006.

This declaration is made in accordance with a resolution of the Directors.

Signed at Perth this 29th day of September 2006

PS Thomas Chairman

1304 Hay Street West Perth WA 6005 PO Box 709 West Perth WA 6872 Tel (08) 9322 4853 Fax (08) 9481 5645 Email [email protected] www.somesandcooke.com.au

INDEPENDENT AUDIT REPORT TO THE MEMBERS OF SANDFIRE RESOURCES NL

Scope

The financial report and directors' responsibility

The financial report comprises the income statement, balance sheet, statement of changes in equity, statement of cash flows, accompanying notes to the financial statements, and the directors' declaration for Sandfire Resources NL ("the company"), for the year ended 30 June 2006 as set out on pages 10 to 29.

The directors of the company are responsible for the preparation and true and fair presentation of the financial report in accordance with Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report.

Audit approach

We conducted an independent audit of the financial report in order to express an opinion on it to the members of the company. Our audit was conducted in accordance with Australian Auditing Standards in order to provide reasonable assurance as to whether the financial report is free of material misstatement. The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot quarantee 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 Australian International Financial Reporting Standards, and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of the company's and the consolidated entity's financial position, and of their performance as represented by the results of their operations and cash flows.

We formed our audit opinion on the basis of these procedures, which included:

examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report, and
assessing the appropriateness of the accounting policies and disclosures used and the ٠ 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 judgment of the appropriateness or reasonableness of the business plans or strategies adopted by the directors and management of the company.

Independence

We are independent of the company, and have met the independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001.

Audit opinion

In our opinion, the financial report of Sandfire Resources NL is in accordance with:

the Corporations Act 2001, including: $(a)$
$(i)$ giving a true and fair view of the financial position of Sandfire Resources NL 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
other mandatory financial reporting requirements in Australia. $(b)$

Somes & Cooke

KEVIN C SOMES Partner Perth Date: 29 September 2006

CORPORATE GOVERNANCE STATEMENT

GOOD GOVERNANCE AND PRACTICE RULES

The Australian Stock Exchange Corporate Governance Council has determined a total of ten Governance and Good Practice Rules, and although not mandatory at this time, these rules must be listed and an explanation provided on whether the Company Complies with the rule, or a reason why it does not.

Full details of the Company Corporate Governance can be viewed on the internet at www.sandfire.com.au or contact the Sandfire Office 08 9226 5833 and a copy of the full Corporate Governance will be sent to you.

. PRINCIPAL .	COMPLIANCE OR DETAILS OF
	PLANNING

PRINCIPAL 1: Lay solid foundations for management and oversight
1.1 Formalise and disclose the functions reserved to the Board and those	Board All and Management
delegated to management.	functions fully detailed.

PRINCIPAL 2: Structure the Board to add value
2.1 A majority of the Board should be independent directors.	Not complied with for economic
	reasons.
2.2 The Chairperson should be an independent director.	Complied with.
2.3 The roles of Chairperson and Chief Executive Officer should not be	Complied with.
exercised by the same individual.
2.4 The board should establish a nomination committee.	The Board fulfills role οf Nomination Committee.
PRINCIPAL 3: Promote ethical and responsible decision-making
3.1 Establish a code of conduct to quide the director's, the Chief Executive
Officer (or equivalent), the Chief Financial Officer (or equivalent) and any
other key executives as to: 3.1.1
the practices necessary to maintain confidence in the Company's integrity.	οf comprehensive Code Α
The responsibility and accountability of individuals for reporting 3.1.2	Conduct has been adopted.
or investigating reports of unethical practices.
3.2 Disclose the policy concerning trading in Company securities by	A strict policy has been adopted.
Directors. Officers and Employees;

PRINCIPAL 4: Safeguard integrity in financial reporting
4.1 Require the Chief Executive Officer (or equivalent) to state in writing to	Completed by Managing Director
the Board that the Company's financial reports present a true and fair	in conjunction with Company
view, in all material respects, of the Company's financial condition and	Secretary and Auditor.
operational results and are in accordance with relevant accounting
standards. The board should establish an audit committee. 4.2	The role of Audit Committee has
	been assumed by the full Board.
Structure the audit committee so that it consists of: 4.3
Only non-executive directors.
A majority of independent directors.	Not Complied with $-$ see above.
An independent chairperson who is not the chairperson of the
Board.
At least three members.
The audit committee should have a formal operating charter. 4.4	Not appropriate at this time.
PRINCIPAL 5: Make timely and balanced disclosure.
5.1 Establish written policies and procedures designed to ensure compliance
with ASX Listing Rule disclosure requirements and to ensure
accountability at a senior management level for that compliance.	Complied with.

	PRINCIPAL 6: Respect the rights of shareholders.
	6.1 Design and disclose a communications strategy to promote effective
	communication with shareholders and encourage effective participation	Complied with.
	at general meetings.
	6.2 Request the external auditor to attend the annual general meeting and
	be available to answer shareholder questions about the audit and the
	preparation and content of the auditors report.	Complied with.
	PRINCIPAL 7: Recognise and manage risk.
7.1	The Board or appropriate Board committee should establish policies on
	risk oversight and management.	Complied with.
	7.2 The Chief Executive Officer (or equivalent) and the Chief Financial
	Officer (or equivalent) should state to the Board in writing that:
	7.2.1 the statement given in accordance with best practice recommendation 4.1 (the integrity of financial statements) is
	founded on a sound system of risk management and internal
	compliance and control which implements the policies adopted by
	the Board.	Complied with.
	7.2.2 the Company's risk management and internal compliance and
	control system is operating efficiently and effectively in all
	material respects.
	PRINCIPAL 8: Encourage enhanced performance.
8.1	Disclose the process for performance evaluation of the Board, its
	committees and individuals directors, and key executives.	Complied with.
	PRINCIPAL 9: Remunerate fairly and responsibly.
	9.1 Provide disclosure in relation to the Company's remuneration policies to
	enable investors to understand (i) the cost and benefits of these policies
	and (ii) the link between remuneration paid to directors and key	Complied with.
	executives and corporate performance.
	9.2 The Board should establish a remuneration committee.	Complied with.
	9.3 Clearly distinguish the structure of non-executive directors' remuneration
	from that of executives.	Complied with.
	9.4 Ensure that payment of equity-based executive remuneration is made in
	accordance with thresholds set in plans approved by shareholders.	Complied with.
	PRINCIPAL 10: Recognise the legitimate interest of stakeholders.
	10.1 Establish and disclose a code of conduct to guide compliance with legal and other obligations to legitimate stakeholders	Complied with.

BOARD OF DIRECTORS

The Board is responsible for the overall Corporate Governance of the Company including the strategic direction, establishing goals for management and monitoring the achievement of these goals. The Board has also established a framework for the management of the Company including setting levels of remuneration for Directors and senior personnel, an overall framework of internal control and the establishment of appropriate ethical standards.

The Board regularly reviews the Company's operational and financial performance and reviews and approves detailed budgets and investment opportunities. The Board works closely with executive management to identify and manage operational, financial and legislative risks.

To ensure the Board is well equipped to discharge its responsibilities it has established guidelines for the nomination and selection of Directors and for the operation of the Board.

COMPOSITION OF THE BOARD

Principle 2 of the Good Governance and Practice Rules recommends that:

The Majority of the Board should be non-executive - The Company has only a small "working" Board and at this time the lack of non-executives is not seen as a problem. This will be constantly reviewed.

When a vacancy exists, through whatever cause, or where it is considered that the Board would benefit from the services of a new Director with particular skills, the Board selects a candidate or panel of candidates with the appropriate expertise and experience. The Board then appoints the most suitable candidate who must stand for election at the next general meeting of shareholders. The Company does not have a formal Nomination Committee and that role is fulfilled by the whole Board.

The full Board currently holds scheduled meetings each year plus any extraordinary meetings at such other times as may be necessary to address any specific significant matters that may arise.

BOARD RESPONSIBILITIES

As the Board acts on behalf of and is accountable to the shareholders, the Board seeks to identify the expectations of shareholders, as well as other regulatory and ethical expectations and obligations. In addition, the Board is responsible for identifying areas of significant business risk and ensuring arrangements are in place to adequately manage those risks. The Board seeks to discharge these responsibilities in a number of ways.

The responsibility for the operation and administration of the Company entity is delegated by the Board to the executive team. The Board ensures that this team is appropriately qualified and experienced to discharge their responsibilities and has in place procedures to assess the performance of the executive team.

The Board is responsible for ensuring that managements' objectives and activities are aligned with the expectations and risks identified by the Board.

MONITORING OF THE BOARD'S PERFORMANCE AND COMMUNICATION TO SHAREHOLDERS

The Board aims to ensure that the shareholders, on behalf of whom they act, are informed of all information necessary to assess the performance of the directors. Information is communicated to the shareholders through:

the annual report which is distributed to all shareholders;
the half-yearly report; and
the annual general meeting and other meetings so called to obtain approval for board action as appropriate.

All documents that are released publicly are made available on the Company's website at www.sandfire.com.au.

INDEPENDENT PROFESSIONAL ADVICE

Each Director has the right to seek independent professional advice at the Company's expense. However, prior approval of the Chairman is required, which should not be unreasonably withheld.

REMUNERATION

Remuneration levels are set by the Board in accordance with industry standards to attract suitably qualified and experienced Directors and senior executives.

ETHICAL STANDARDS

All Directors and employees are expected to act with the utmost of integrity and objectivity, striving at all times to enhance the reputation and performance of the Company.

CONFLICT OF INTEREST

In accordance with the Corporations Act 2001 and the Company's Constitution, Directors must keep the Board advised, on an ongoing basis, of any interest that could potentially conflict with those of the Company. Where the Board believes that a significant conflict exists the Director concerned does not receive the relevant board papers and is not present at the meeting whilst the item is considered. There are no director related entity transactions with the Company.

DIRECTORS DEALINGS IN COMPANY SHARES

The Constitution permits Directors to acquire shares in the Company. Company policy prohibits Directors from dealing in Company shares whilst in possession of price sensitive information. Directors must notify the Company Secretary once they have bought or sold securities in the Company. In accordance with the provisions of the Corporations Act 2001 and the Listing Rules of the Australian Stock Exchange, the Company on behalf of the directors must advise the Australian Stock Exchange of any transactions conducted by them in shares and/or options in the Company.

ASX ADDITIONAL INFORMATION

Pursuant to the Listing Requirements of the Australian Stock Exchange Limited, the shareholder information set out below was applicable as at 25 September 2006.

Number of Shares and Options Holders

62,048,626 Ordinary Shares (SFR)
12,350,652 Contributing Shares with 15 cents to pay to convert to a fully paid share. (No call to be $\blacksquare$ made before 3 March 2007)
2,600,000 Options exercisable at 25 cents and expiring on 31 December 2008 $\bullet$
925,000 Options exercisable at 20 cents and expiring on 30 September 2008
6,900,000 Options exercisable at 60 cents and expiring on 30 June 2007

Distribution of Equity Securities

Analysis of numbers of shareholders by size of holding:

Distribution	Number of Shareholders	Number of Contributing Shareholders
$1 - 1.000$
$1,001 - 5,000$	53	38
$5,001 - 10,000$	130	R
$10,001 - 100,000$	329	40
More than 100,000	96	18

ľotals	619	105

Holders of Un Marketable Parcel (=/<\$500) and Uneconomic Parcels (=/<\$2000)

There were four holders of less than a marketable parcel of ordinary shares; and, $1)$
2) There were thirty holders with less than an economic parcel of ordinary shares.

Substantial Shareholders

The following shareholders are recorded in the register of Substantial Shareholders

	Number	Percentage

Faustus Nominees Pty Ltd	5,676.822	9.15
Resource Development Company	4,382,536	5.50
Evolution Master Fund Ltd	4,169,332	6.71

Voting Rights

In accordance with the Company's Constitution, voting rights in respect of ordinary shares are on a show of hands whereby each member present in person or by proxy shall have one vote and upon a poll each share shall have one vote. The contributing shares have a vote which is proportional to the amount actually paid thereon and relative to the aggregate amount paid on that share when it is fully paid.

On-market buy back

There is currently no on-market buy back of the Company's securities.

Use of cash and assets

From the date of ASX Listing (3 March 2004) until the date of this Report, the Company has used the cash and assets as declared on admission to the ASX, in a form consistent with the Company's business objectives.

ASX Additional Information

$\pmb{C}$ Twenty Largest Ordinary Shareholders

The names of the twenty largest holders of shares are listed below:

1. The company of the company of the company of the company of the company of the company of the company of the company of the company of the company of the company of the company of the company of the company of the compa
Shareholders		(as at 25 Sep 06)	Percentage
1	Faustus Nominees Pty Itd	5,676,822	9.15
2	Citicorp Nominees Pty Ltd	4,383,332	7.06
3	ANZ Nominees Limited	3,529,025	5.69
4	Resource Development Co.	3,412,536	5.50
5	All - State Finance Pty Ltd	2,226,934	3.59
6	IE properties Pty Ltd	1,562,116	2.52
7	Steemson Gregory Hugh	1,414,286	2.28
8	NEFCO Nominees Pty Ltd	1,400,000	2.26
9	Lost Ark Nominees Pty Ltd	1,015,267	1.64
10	Fiske Nominees Limited	973,000	1.57
11	National Nominees Limited	965,000	1.56
12	Tongaat Pty Ltd	964,286	1.55
13	Taylor Ross	889,000	1.43
14	Berne No 132 Nominees Pty Ltd	764,286	1.23
15	John Geoffrey Eric Benton	750,000	1.21
16	Weybridge Pty Ltd	624,928	1.01
17	Taylor Ross Jeremy	611,000	0.98
18	Merrill Lynch (Australia)	587,500	0.95
19	Chimaera Capital Limited	516,864	0.83
20	Christmas Anthony Perciva	500,000	0.81
		32,766,182	52.82%
	Total Ordinary Shares on Issue	62,048,626

D Twenty Largest Contributing Share holders

$\hat{\mathbf{z}}$

The names of the twenty largest holders of contributing shares are listed below:

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Contributing Share Holders		(as at 25 Sep 06)	Percentage
1	I E Properties Pty Ltd	2,196,880	17.61
2	Resource Development Company	1,506,268	12.07
3.	Thomas Peter & Goodwin Su	1,000,000	8.02
4	Biddlecombe Pty Ltd	1,000,000	8.02
5	All - State Finance	700,000	5.61
6	Clema John M	500,000	4.01
7	Tongaat Pty Ltd	500,000	4.01
8	Fleubaix Pty Ltd	500,000	4.01
9	Chimaera Capital Limited	500.000	4.01
10	Nutsville Pty Ltd	449,000	3.60
11	James Commodity Exports	350,000	2.81
12	I E Properties Pty Ltd	265,500	2.12
13	Street Kenneth Eric	200,000	1.60
14	Roberts Ron	150,000	1.20
15	Vieru Costica	150,000	1.20
16	Anderson Richard Campbell	138,000	1.11
17	Barrymore Geoffrey William	112,500	0.90
18	Ezzy Mervin Everett	102,000	0.82
19	Seaton Ross Holdings Pty Ltd	100,000	0.80
20	Eastrose Pty Ltd	100,000	0.80
		8,045,678	84.33%
	Total Contributing Shares on Issue at 25 Sep 06	12,350,652