IMPORTANT

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

If you have sold or transferred all your shares in CITIC Resources Holdings Limited, you should at once hand this circular to the purchaser or transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected, for transmission to the purchaser or transferee.

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

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CITIC RESOURCES HOLDINGS LIMITED

(incorporated in Bermuda with limited liability) (Stock Code: 1205)

MAJOR TRANSACTION

ACQUISITION AND INCREASE OF INTEREST IN MACARTHUR COAL LIMITED

21 September 2007

	Page
DEFINITIONS..............................................................................................................................	1
LETTER FROM THE BOARD
INTRODUCTION ......................................................................................................................	4
PRINCIPAL TERMS OF THE SHARE PURCHASE AGREEMENT ...................................	5
INFORMATION ON THE COMPANY ....................................................................................	6
INFORMATION ON TALBOT GROUP...................................................................................	6
INFORMATION ON MACARTHUR COAL ...........................................................................	6
REASONS AND BENEFITS OF THE ACQUISITION..........................................................	7
FINANCIAL EFFECTS OF THE ACQUISITION ..................................................................	8
PROSPECTS OF THE GROUP.................................................................................................	8
LISTING RULES IMPLICATIONS..........................................................................................	9
ADDITIONAL INFORMATION ..............................................................................................	10
APPENDIX I FINANCIAL INFORMATION ON THE GROUP ...................................	I-1
APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL....................	II-1
APPENDIX III PRO FORMA FINANCIAL INFORMATION ON THE GROUP .........	III-1
APPENDIX IV GENERAL INFORMATION.......................................................................	IV-1

– i –

DEFINITIONS

Unless the context otherwise requires, the following terms and expressions used in this circular shall have the following meanings:

“Acquisition”	the acquisition of the Macarthur Sale Shares by CACL from
	Talbot Group pursuant to the Share Purchase Agreement
“associates”	has the meaning ascribed to it under the Listing Rules
“ASX”	the Australian Securities Exchange
“CA”	CITIC Australia Pty Limited, a company incorporated in the
	State of Victoria, Australia with limited liability and a direct
	wholly-owned subsidiary of CITIC Group
“CACL”	CITIC Australia Coal Pty Limited, a company incorporated in
	the State of Victoria, Australia with limited liability and an
	indirect wholly-owned subsidiary of the Company
“CITIC Group”	CITIC Group, a state-owned enterprise incorporated in, and
	under the direct supervision of the State Council of, the PRC
“Company”	CITIC Resources Holdings Limited, a company incorporated
	in Bermuda with limited liability and whose Shares are listed
	on the Stock Exchange
“connected person”	has the meaning ascribed to it under the Listing Rules
“Coppabella and Moorvale	an unincorporated co-operative joint venture which operates the
Joint Venture”	Coppabella and Moorvale coal mines in the State of Queensland,
	Australia
“Directors”	the directors of the Company
“Group”	the Company and its subsidiaries
“Hong Kong”	the Hong Kong Special Administrative Region of the PRC
“Kazakhstan Business”	the operation of oil and oil related businesses and activities in
	Kazakhstan including but not limited to the development and
	production of oil at the Karazhanbas oilfield in Kazakhstan by
	JSC Karazhanbasmunai, Argymak TransService LLP and Tulpar
	Munai Services LLP
“Keentech”	Keentech Group Limited, a company incorporated in the British
	Virgin Islands with limited liability and an indirect wholly-
	owned subsidiary of CITIC Group

– 1 –

DEFINITIONS

“Last ASX Trading Day”	2 July 2007, being the trading day on the ASX on which the
	Share Purchase Agreement was entered into between CACL
	and Talbot Group
“Latest Practicable Date”	19 September 2007
“Listing Rules”	the Rules Governing the Listing of Securities on the Stock
	Exchange
“Macarthur Coal”	Macarthur Coal Limited, a company incorporated in Australia
	with limited liability and whose shares are listed on the ASX
“Macarthur Sale Shares”	15,683,735 existing fully paid Macarthur Shares
“Macarthur Shares”	ordinary shares in the share capital of Macarthur Coal
“PRC”	the People’s Republic of China (for the purpose of this circular
	only, excluding Hong Kong, the Macau Special Administrative
	Region and Taiwan)
“Sale Price”	the price of A$7.20 (HK$43.92) per Macarthur Sale Share
“SFO”	the Securities and Futures Ordinance (Chapter 571 of the Laws
	of Hong Kong)
“Share Purchase Agreement”	the share purchase agreement dated 2 July 2007 signed between
	CACL and Talbot Group in respect of the Acquisition
“Shareholders”	holders of Shares from time to time
“Shares”	ordinary shares of HK$0.05 each in the share capital of the
	Company
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Talbot Group”	Talbot Group Investments Pty Limited, a company incorporated
	in Australia with limited liability

– 2 –

DEFINITIONS

”A$”	Australian dollars, the lawful currency of Australia
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
”US$”	United States dollars, the lawful currency of the United States
	of America
“%”	per cent

In this circular, amounts in US$ and A$ respectively have been converted into HK$ or vice versa at the rate of US$1=HK$7.8 and A$1=HK$6.1 respectively for illustration purposes only. No representation is made that any amounts in US$, A$ or HK$ have been or could have been or can be converted at the above rates or at any other rates or at all.

– 3 –

LETTER FROM THE BOARD

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CITIC RESOURCES HOLDINGS LIMITED

(incorporated in Bermuda with limited liability) (Stock Code: 1205)

Executive Directors: Mr. KONG Dan (Chairman) Mr. MI Zengxin (Vice Chairman) Mr. SHOU Xuancheng (Vice Chairman) Mr. SUN Xinguo (President and Chief Executive Officer) Ms. LI So Mui Mr. QIU Yiyong Mr. ZENG Chen Mr. ZHANG Jijing

Registered Office: Clarendon House 2 Church Street Hamilton HM11 Bermuda

Non-executive Directors: Mr. MA Ting Hung Mr. TANG Kui Mr. WONG Kim Yin (Alternate to Mr. Tang Kui)

Independent Non-executive Directors: Mr. FAN Ren Da, Anthony Mr. NGAI Man Mr. TSANG Link Carl, Brian

Head Office and Principal Place of Business: Suites 3001-3006 30/F, One Pacific Place 88 Queensway Hong Kong

21 September 2007

To Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION

ACQUISITION AND INCREASE OF INTEREST IN MACARTHUR COAL LIMITED

INTRODUCTION

Reference is made to the announcement of the Company dated 3 July 2007 in respect of the Acquisition.

On 2 July 2007, CACL, an indirect wholly-owned subsidiary of the Company, agreed to purchase 15,683,735 existing fully paid Macarthur Shares from Talbot Group. Completion of the Acquisition occurred on 6 July 2007 and CACL increased its shareholding in Macarthur Coal from 11.62% to 19.99% of the total Macarthur Shares in issue as at the Last ASX Trading Day.

– 4 –

LETTER FROM THE BOARD

Macarthur Coal is a public company listed on the ASX and is involved in operation, exploration, development and mining activities in the Bowen Basin in the State of Queensland, Australia.

The aggregate consideration paid by CACL to Talbot Group in respect of the purchase of the Macarthur Sale Shares is A$112,922,892 (HK$688,829,641.20).

The Acquisition constitutes a major transaction for the Company under the Listing Rules and was conditional upon the approval of Shareholders. As no Shareholder is required to abstain from voting if the Company were to convene a special general meeting to approve the Acquisition, this condition was satisfied by way of a written approval from Keentech and CA pursuant to Rule 14.44 of the Listing Rules. Keentech and CA are wholly-owned subsidiaries of CITIC Group and together constitute a closely allied group of Shareholders holding more than 50% of the nominal value of securities of the Company giving the right to attend and vote if a special general meeting of the Company were to be convened to approve the Acquisition. Keentech and CA are the registered and beneficial holders of 1,990,180,588 Shares and 750,413,793 Shares respectively. The total number of Shares in issue was 5,256,684,381 as at the Latest Practicable Date. No special general meeting of the Company will be convened in respect of the Acquisition.

The main purpose of this circular is to provide Shareholders with information relating to the Acquisition and Macarthur Coal.

PRINCIPAL TERMS OF THE SHARE PURCHASE AGREEMENT

Date

2 July 2007

Parties

(1) CACL
(2) Talbot Group

Acquisition of Macarthur Sale Shares

Pursuant to the Share Purchase Agreement, CACL shall purchase the Macarthur Sale Shares from Talbot Group.

To the best of the Directors’ knowledge, information and belief and having made all reasonable enquiry, Talbot Group, and its ultimate beneficial owners, are third parties independent of the Company and connected persons of the Company.

Macarthur Sale Shares

15,683,735 existing fully paid Macarthur Shares, representing 8.37% of the total Macarthur Shares in issue on the Last ASX Trading Day.

– 5 –

LETTER FROM THE BOARD

Sale Price

A$7.20 (HK$43.92) per Macarthur Sale Share and which was paid in cash to Talbot Group at completion of the Acquisition.

The Sale Price represents (i) a premium of 6.19% to the closing price of A$6.78 (HK$41.36) per Macarthur Share as quoted on the ASX on the Last ASX Trading Day; (ii) a premium of 5.11% to the average closing price of A$6.85 (HK$41.79) per Macarthur Share as quoted on the ASX for the five trading days immediately prior to and including the Last ASX Trading Day; and (iii) a premium of 6.98% to the average closing price of A$6.73 (HK$41.10) per Macarthur Share as quoted on the ASX for the ten trading days immediately prior to and including the Last ASX Trading Day.

The Sale Price was agreed following arm’s length negotiations between CACL and Talbot Group.

The aggregate Sale Price of A$112,922,892.00 (HK$688,829,641.20) was financed from internal resources of the Group.

Each of CACL and Talbot Group was responsible for its own costs and expenses incurred in respect of the Acquisition.

Completion of the Acquisition

Completion of the Acquisition took place on 6 July 2007.

INFORMATION ON THE COMPANY

The Company is a diversified energy and natural resources investment holding company and is CITIC Group’s flagship resources vehicle and the only listed subsidiary of CITIC Group engaged in oil and gas investments. Through its subsidiaries, the Company has interests in oil, aluminum smelting, coal mining, import and export of commodities, and manganese mining and processing.

INFORMATION ON TALBOT GROUP

Talbot Group is a Queensland owned and operated investment group focusing on the resources sector with an asset base in excess of A$450,000,000 (HK$2,745,000,000). Its activities include minerals exploration, mine and market development and financial investments as well as a substantial property and share portfolio.

INFORMATION ON MACARTHUR COAL

Macarthur Coal is a public company listed on the ASX.

It is involved in operation, exploration, development and mining activities in the Bowen Basin in the State of Queensland, Australia. Macarthur Coal’s principal product is low volatile pulverized coal injection (“ PCI ”) coal for use in the production of steel. Macarthur Coal is a key supplier of low volatile PCI coal to steel mills in Asia, Europe and the Americas, providing about 44% of the low volatile PCI coal exported from Australia.

– 6 –

LETTER FROM THE BOARD

Macarthur Coal has interests in two open-cut coal mines, the Coppabella Mine and the Moorvale Mine and plans to develop up to five new mines in Australia by 2010. The projects proposed for development are Olive Downs Open-cut Project, Moorvale Underground Project, Moorvale West Project, Vermont East/Wilunga Project and Burton West and North Underground Project.

The consolidated net profits of Macarthur Coal (both before and after taxation and extraordinary items) for the two financial years immediately preceding the date of the Share Purchase Agreement are set out below:

	Year ended	30 June
	2006	2005
	A$	A$
	(HK$)	(HK$)
Profit before taxation and extraordinary items	214,045,000	89,640,000
	(1,305,674,500)	(546,804,000)
Profit after taxation and extraordinary items	149,589,000	64,147,000
	(912,492,900)	(391,296,700)

The consolidated net profits of Macarthur Coal (both before and after taxation and extraordinary items) for the six months ended 31 December 2005 and 2006 are set out below:

	Six months ended	31 December
	2006	2005
	A$	A$
	(HK$)	(HK$)
Profit before taxation and extraordinary items	59,846,000	116,781,000
	(365,060,600)	(712,364,100)
Profit after taxation and extraordinary items	42,416,000	82,148,000
	(258,737,600)	(501,102,800)

The consolidated total assets of Macarthur Coal as at 30 June 2005 and 2006 were A$440,662,000 (HK$2,688,038,200) and A$592,116,000 (HK$3,611,907,600) respectively and as at 31 December 2006 was A$596,455,000 (HK$3,638,375,500).

The consolidated net assets of Macarthur Coal as at 30 June 2005 and 2006 were A$236,088,000 (HK$1,440,136,800) and A$391,173,000 (HK$2,386,155,300) respectively and as at 31 December 2006 was A$406,674,000 (HK$2,480,711,400).

REASONS AND BENEFITS OF THE ACQUISITION

The Company is a diversified energy and natural resources investment holding company.

– 7 –

LETTER FROM THE BOARD

The Group holds interests in coal mining through a 7% interest in the Coppabella and Moorvale Joint Venture and an existing 11.62% shareholding interest in Macarthur Coal. Through the Coppabella and Moorvale Joint Venture, the Group produces low volatile PCI coal. Macarthur Coal is also a partner in the Coppabella and Moorvale Joint Venture and has other coal interests in the Bowen Basin in the State of Queensland, Australia and its principal product is PCI coal. Macarthur Coal’s operations supply about 35% of the seaborne global demand for PCI coal.

It is part of the Group’s long term business strategy to enhance its interests in the coal industry. The Acquisition represents a unique opportunity to increase the Group’s shareholding in a company with coal assets that are in strong demand particularly from steel mills in Asia, Europe and the Americas and a management team that the Group knows well. The further investment in Macarthur Coal provides the Company with a stronger strategic position in Macarthur Coal. By increasing its investment in Macarthur Coal to 19.99%, the Company will increase its influence in Macarthur Coal. Since completion of the Acquisition, a director of the Company has been appointed to the board of Macarthur Coal.

The Directors believe the terms of the Acquisition are fair and reasonable and in the interests of the Company and Shareholders as a whole.

FINANCIAL EFFECTS OF THE ACQUISITION

Following completion of the Acquisition, the Group holds a 19.99% shareholding interest in Macarthur Coal. Such shareholding interest will be treated as an investment in an associate and will be accounted for using the equity method. Appendix III to this circular presents the pro forma financial information on the Group and describes the basis of preparation of the pro forma financial information on the Group.

Net Asset Value

The audited net asset value of the Group as at 31 December 2006 was HK$3,505,089,000. As set out in Appendix III to this circular, assuming the Acquisition had been completed on 31 December 2006, the pro forma net asset value of the Group as at 31 December 2006 would have been HK$3,275,738,000.

PROSPECTS OF THE GROUP

Coal is an important element of the Group’s business strategy and completion of the Acquisition will add to the Group’s objective to be a diversified energy and natural resources company.

The Group’s principal coal product is PCI coal for which there continues to be a strong demand from Asia, Europe and the Americas.

– 8 –

LETTER FROM THE BOARD

In addition, the Group is increasing the scale of its existing oil portfolio and enhancing its profile as an oil producer through the acquisition of 50% of CITIC Group’s interest in the Kazakhstan Business, for a consideration of US$1,003,500,001 (HK$7,827,300,008) which the Directors believe will contribute in bringing about an increase in investment opportunities in the oil sector for the Group. As demand in Asia, together with strong demand in the Americas, Japan and Europe, continues to drive competition for energy resources, in particular oil and gas, the Directors believe that it is in the Company’s interest and that of Shareholders to develop the Group’s oil portfolio further as and when suitable investment opportunities arise.

The Group’s interest in the Kazakhstan Business will improve considerably the Group’s annual oil production and oil related generated revenue and is expected to become the single largest contributor to the Group’s annual revenue. Capital expenditure and operating expenses associated with the Kazakhstan Business will, however, increase the Group’s overall capital commitments and operating costs although net cash flows of the Group should still generally improve as a result of the Group’s interest in the Kazakhstan Business.

Concurrently with the acquisition of the Kazakhstan Business and the Acquisition, the Group is conducting a due diligence review of the Hainan-Yuedong Block in Bohai Bay Basin in Liaoning Province in the PRC. This is part of a review to determine whether the Group will proceed with its option to acquire an effective 90% interest in the contractor’s rights and obligations in the HainanYuedong Block for a consideration of US$150,000,000 (HK$1,170,000,000) subject to adjustment. If the results of the due diligence review prove satisfactory and such interest can also be successfully acquired, the Group’s overall oil interests will be further enhanced as a result. However, as the HainanYuedong Block project is currently in the appraisal and development stage, there will not be an immediate contribution to the Group’s revenue from this project. Capital expenditure and operating expenses associated with the development of the Hainan-Yuedong Block would add to the Group’s overall capital commitments and operating costs and will likely cause a decrease in net cash flows of the Group until production is commenced.

As a whole, the Group is financially sound and well positioned to implement and support its business strategy. It has a strong cash position and is able to continue to leverage on the support of its major shareholders when necessary to develop the Group’s businesses.

LISTING RULES IMPLICATIONS

– 9 –

LETTER FROM THE BOARD

On 2 July 2007, the Company received a written approval from Keentech and CA to the Acquisition. Keentech and CA are wholly-owned subsidiaries of CITIC Group (and therefore a closely allied group of Shareholders). Keentech and CA are the registered and beneficial holders of 1,990,180,588 Shares and 750,413,793 Shares respectively. The total number of Shares in issue was 5,256,684,381 as at the Latest Practicable Date. The aggregate amount of 2,740,594,381 Shares held by Keentech and CA represent more than 50% of the nominal value of securities of the Company giving the right to attend and vote if a special general meeting of the Company were convened to approve the Acquisition. Keentech, CA and their respective associates do not have any interest in the Share Purchase Agreement, and Keentech and CA are not interested in the Acquisition other than through their holding of Shares. Accordingly, pursuant to Rule 14.44 of the Listing Rules, no special general meeting of the Company will be convened in respect of the Acquisition.

ADDITIONAL INFORMATION

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

Yours faithfully, For and on behalf of the Board Kong Dan Chairman

– 10 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(A) SUMMARY OF AUDITED CONSOLIDATED FINANCIAL INFORMATION OF THE GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2006

The following was extracted from the published audited financial statements of the Group for the three years ended 31 December 2006.

Results

HK$’000

Revenue
Profit before tax
Tax
Profit for the year
Attributable to:
Shareholders of the Company
Minority interests
Assets and liabilities and minority interests
HK$’000
Non-current assets
Current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Minority interests

Year ended 31 December
2006
2005
2004
Restated
7,503,428
5,786,386
3,610,791
316,189
342,157
59,725
(70,152)
(110,642)
(52,322)
246,037
231,515
7,403
200,815
221,703
4,772
45,222
9,812
2,631
246,037
231,515
7,403
31 December
2006
2005
2004
4,373,701
3,080,713
2,699,246
4,954,660
2,939,314
2,999,004
9,328,361
6,020,027
5,698,250
2,854,539
1,437,385
1,369,385
2,968,733
1,615,235
1,672,332
5,823,272
3,052,620
3,041,717
279,746
25,634
19,693
3,225,343
2,941,773
2,636,840

– I-1 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(B) SUMMARY OF AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP FOR THE TWO YEARS ENDED 31 DECEMBER 2006

The following was extracted from the Company’s 2006 annual report. (References to page numbers in the extract reproduced below are to pages contained in the Company’s annual report for the year ended 31 December 2006.)

INDEPENDENT AUDITORS’ REPORT

To the shareholders of CITIC Resources Holdings Limited

(Incorporated in Bermuda with limited liability)

We have audited the financial statements of CITIC Resources Holdings Limited set out on pages 41 to 125, which comprise the consolidated and Company balance sheets as at 31 December 2006, and the consolidated income statement, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Directors’ responsibility for the financial statements

The directors of the Company are responsible for the preparation and the true and fair presentation of these financial statements in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants and the disclosure requirements of the Hong Kong Companies Ordinance. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. Our report is made solely to you, as a body, in accordance with Section 90 of the Bermuda Companies Act 1981, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

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

– I-2 –

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

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

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

Opinion

In our opinion, the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2006 and of the Group’s profit and cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

Ernst & Young

Certified Public Accountants

18th Floor Two International Finance Centre 8 Finance Street, Central Hong Kong 20 April 2007

– I-3 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED INCOME STATEMENT

YEAR ENDED 31 DECEMBER 2006 HK$’000 Notes REVENUE 5 Cost of sales Gross profit Other income and gains 5 Selling and distribution costs Administrative expenses Other operating expenses, net Finance costs 9 PROFIT BEFORE TAX 6 Tax 10 PROFIT FOR THE YEAR ATTRIBUTABLE TO: Shareholders of the Company 11 Minority interests EARNINGS PER SHARE ATTRIBUTABLE TO ORDINARY SHAREHOLDERS OF THE COMPANY 12 Basic Diluted DIVIDEND PER SHARE	2006 7,503,428 (6,974,598) 528,830 283,245 (68,302) (214,910) (62,319) (150,355) 316,198 (70,152) 246,037 200,815 45,222 246,037 HK4.65 cents HK4.61 cents Nil	2005 Restated 5,786,386 (5,376,077) 410,309 195,293 (33,805) (132,526) (3,384) (93,730) 342,157 (110,642) 231,515 221,703 9,812 231,515 HK5.14 cents N/A Nil

– I-4 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEET

31 DECEMBER 2006 HK$’000

Notes NON-CURRENT ASSETS Property, plant and equipment 13 Prepaid land lease premiums 14 Goodwill 17 Other intangible assets 15 Other assets 16 Available-for-sale equity investments 20 Prepayments, deposits and other receivables 21 Loan receivable 24 Deferred tax assets 35 Total non-current assets CURRENT ASSETS Inventories 22 Accounts receivable 25 Prepayments, deposits and other receivables 21 Loan receivable 24 Equity investments at fair value through profit or loss 26 Derivative financial instruments 31 Due from related companies 23 Due from the ultimate holding company 23 Other assets 16 Cash and bank balances 27 Assets of a disposal group classified as held for sale 28 Total current assets CURRENT LIABILITIES Accounts payable 29 Tax payable Accrued liabilities and other payables 30 Derivative financial instruments 31 Due to a minority shareholder 32 Bank and other loans 33 Provisions 34	2006 2,391,501 58,353 341,512 135,701 555,983 845,936 16,346 21,615 6,754 4,373,701 1,112,150 939,938 1,867,396 17,327 1,974 16,380 51,486 34,320 62,945 850,744 4,954,660 — 4,954,660 533,788 47,108 306,789 286,920 38,174 1,588,022 53,738 2,854,539	2005 1,170,614 — 341,512 — 573,878 657,035 326,486 — 11,188
		3,080,713
		656,138 395,749 29,185 — 1,830 12,356 — — 58,365 1,519,595
		2,673,218
		266,096
		2,939,314
		186,288 71,709 51,153 203,541 — 858,393 33,229
		1,404,313

– I-5 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEET

31 DECEMBER 2006 HK$’000 Notes Liabilities of a disposal group classified as held for sale 28 Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Bank and other loans 33 Deferred tax liabilities 35 Derivative financial instruments 31 Provisions 34 Other payables Total non-current liabilities Net assets EQUITY Equity attributable to shareholders of the Company Issued capital 36 Reserves 38(a) Minority interests Total equity	2006 — 2,854,539 2,100,121 6,473,822 6,473,822 2,214,540 519,933 41,063 117,549 75,648 2,968,733 3,505,089 215,909 3,009,434 3,225,343 279,746 3,505,089	2005 33,072
		1,437,385
		1,501,929
		4,582,642
		4,582,642 1,047,223 470,985 11,016 86,011 —
		1,615,235
		2,967,407

		215,844 2,725,929
		2,941,773 25,634
		2,967,407

Kwok Peter Viem

Director

Ma Ting Hung

Director

– I-6 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY YEAR ENDED 31 DECEMBER 2006 HK$’000

Attributable to shareholders of the Company

At 1 January 2005 Exchange realignment Net losses on cash flow hedges # Change in fair value of available-for-sale equity investments # Total income and expense for the year recognised directly in equity Profit for the year Total income and expense for the year Acquisition of interests in subsidiaries by minority shareholders Dividends paid to minority shareholders Equity-settled share option arrangements At 31 December 2005	Issued capital 215,844 — — — — — — — — — 215,844	Share premium account 2,561,962 — — — — — — — — — 2,561,962	Contributed surplus 65,527 — — — — — — — — — 65,527	Exchange fluctuation reserve 50,335 (57,175) — — (57,175) — (57,175) — — — (6,840)	Available- for-sale revaluation reserve 203,741 — — 87,045 87,045 — 87,045 — — — 290,786	Hedging reserve (30,205) — (122,126) — (122,126) — (122,126) — — — (152,331)	Share option Accumulated reserve losses — (267,558) — — — — — — — — — 221,703 — 221,703 — — — — 12,680 — 12,680 (45,855)	Sub-total 2,799,646 (57,175) (122,126) 87,045 (92,256) 221,703 129,447 — — 12,680 2,941,773	Minority interests 19,693 (1,144) — — (1,144) 9,812 8,668 2,801 (5,528) — 25,634	Total equity 2,819,339 (58,319) (122,126) 87,045 (93,400) 231,515 138,115 2,801 (5,528) 12,680 2,967,407

Amounts net of deferred tax impact already.

– I-7 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY YEAR ENDED 31 DECEMBER 2006 HK$’000

Attributable to shareholders of the Company

Notes At 1 January 2006 Exchange realignment Net gains on cash flow hedges # Change in fair value of available-for-sale equity investments # Total income and expense recognised directly in equity Profit for the year Total income and expense for the year Acquisition of interests in subsidiaries by minority shareholders 39(a) Dividends paid to minority shareholders Issue of new shares upon exercise of share options 38(b) Equity-settled share option arrangements 38(b) At 31 December 2006	Issued capital 215,844 — — — — — — — — 65 — 215,909	Share premium account 2,561,962 — — — — — — — — 1,625 — 2,563,587 *	Contributed surplus 65,527 — — — — — — — — — — 65,527 *	Available- Exchange for-sale fluctuation revaluation reserve reserve (6,840) 290,786 5,802 — — — — (23,507) 5,802 (23,507) — — 5,802 (23,507) — — — — — — — — (1,038) 267,279	Retained Share profits/ Hedging option (accumulated reserve reserve losses) (152,331) 12,680 (45,855) — — — 72,915 — — — — — 72,915 — — — — 200,815 72,915 — 200,815 — — — — — — — (286) — — 26,141 — (79,416) 38,535 154,960*	Sub-total 2,941,773 5,802 72,915 (23,507) 55,120 200,815 256,025 — — 1,404 26,141 3,225,343	Minority interests 25,634 2,016 — — 2,016 45,222 47,238 213,432 (6,558) — — 279,746	Total equity 2,967,407 7,818 72,915 (23,507) 57,226 246,037 303,263 213,432 (6,558) 1,404 26,141 3,505,089

These reserve amounts comprise the consolidated reserves of HK$3,009,434,000 (2005: HK$2,725,929,000) in the consolidated balance sheet.

Amounts net of deferred tax impact already.

– I-8 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT

YEAR ENDED 31 DECEMBER 2006 HK$’000

Notes
2006
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax
316,189
Adjustments for:
Interest income
5
(144,810)
Dividend income from listed investments
5
(55,115)
Gain on sales of coal exploration interests
5
—
Gain on disposal of available-for-sale
equity investments
5
(5,235)
Gain on conversion of available-for-sale
equity investments
5
(17,502)
Equity-settled share option expenses
6
26,158
Depreciation
6
92,560
Amortisation
6
68,113
Loss on disposal/write-off of items of property,
plant and equipment
6
4,568
Provision/(write-back of provision) for impairment
of items of property, plant and equipment
6
(4,893)
Provision for long service and leave payments
6
6,715
Provision for impairment of accounts receivable
6
1,816
Provision against inventories
6
1,515
Provision for rehabilitation cost
6
8,554
Provision for abandonment cost
6
112
Unrealised losses on embedded derivatives
6
111,667
Unrealised foreign exchange losses
25,777
Warranty income, net
6
(14,908)
Finance costs
9
150,355
571,636
Decrease/(increase) in inventories
(302,729)
Increase in accounts receivable
(502,396)
Decrease/(increase) in prepayments,
deposits and other receivables
(59,723)
Increase in due from related companies
(51,486)
Increase/(decrease) in accounts payable
313,906
Decrease in accrued liabilities and other payables
(116,872)
Increase in an amount due to a minority shareholder
38,174

2005
342,157
(75,002)
(19,768)
(78,463)
—
—
12,680
114,330
58,348
6,563
12,733
12,779
1,725
5,151
1,292
—
13,235
—
—
93,730
501,490
21,180
(95,046)
223,100
—
(24)
—
—

– I-9 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT

Year ended 31 December 2006
HK$’000
Notes
2006
Cash (used in)/generated from operations
(109,490)
Australian income tax paid
(144,835)
PRC income tax paid
(623)
Net cash inflow/(outflow) from operating activities
(254,948)
CASH FLOWS FROM INVESTING ACTIVITIES
Interest received
142,403
Dividends received from listed investments
5
55,115
Purchases of items of property, plant and equipment
13
(173,368)
Purchase of other intangible assets
15
(32)
Proceeds from disposal of items of property,
plant and equipment
21,632
Proceeds from disposal of available-for-sale
equity investments
31,221
Net cash inflow from acquisition of subsidiaries
39(a)
148,230
Repayment of loan receivable
15,990
Net cash outflow from acquisition
of the participating interest in a joint venture
39(b)
(757,723)
Proceeds from disposal of short term investments
—
Deposits paid for potential investment projects
21
(1,560,000)
Payments of interest, legal and professional fees
and other charges incurred in relation to
potential investment projects
(35,177)
Net cash outflow from investing activities
(2,111,709)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of share capital
36
1,404
Acquisitions of interests in subsidiaries
by minority shareholders
—
Dividends paid to minority shareholders
(6,558)
New bank and other loans
6,019,860
Repayment of bank and other loans
(4,183,162)
Interest paid
(137,025)
Finance charges paid
(3,652)
Net cash inflow/(outflow) from financing activities
1,690,867

2005
650,700
(80,491)
—
570,209
75,002
19,768
(149,124)
—
—
—
—
—
—
827
(288,500)
(22,929)
(364,956)
—
2,801
(5,528)
63,606
(222,518)
(91,726)
(11,523)
(264,888)

– I-10 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT

YEAR ENDED 31 DECEMBER 2006
HK$’000
Notes
2006
NET DECREASE IN CASH AND
CASH EQUIVALENTS
(675,790)
Cash and cash equivalents at beginning of year
1,519,595
Effect of foreign exchange rate changes, net
6,939
CASH AND CASH EQUIVALENTS
AT END OF YEAR
850,744
ANALYSIS OF BALANCES OF CASH
AND CASH EQUIVALENTS
Cash and bank balances
27
310,258
Non–pledged time deposits with original maturity
of less than three months when acquired
27
540,486
850,744

2005
(59,635)
1,606,833
(27,603)
1,519,595
166,033
1,353,562
1,519,595

– I-11 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

BALANCE SHEET

31 DECEMBER 2006 HK$’000 Notes NON-CURRENT ASSETS Interests in subsidiaries 18 Prepayments, deposits and other receivables Total non-current assets CURRENT ASSETS Prepayments, deposits and other receivables Bank balances 27 Total current assets CURRENT LIABILITIES Accrued liabilities and other payables Bank loans, unsecured 33 Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Bank loans, unsecured 33 Net assets EQUITY Issued capital 36 Reserves 38(b) Total equity	2006 2,382,642 5,527 2,388,169 1,674,413 22,690 1,697,103 76,706 343,200 419,906 1,277,197 3,665,366 1,170,000 2,495,366 215,909 2,279,457 2,495,366	2005 1,721,501 7,518
		1,729,019
		3,280 887,680
		890,960
		82 —
		82
		890,878
		2,619,897 —
		2,619,897

		215,844 2,404,053
		2,619,897

Kwok Peter Viem

Director

Ma Ting Hung

Director

– I-12 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

1. CORPORATE INFORMATION

CITIC Resources Holdings Limited is a limited liability company incorporated in Bermuda. The head office and principal place of business of the Company is located at Suites 3001-3006, 30th Floor, One Pacific Place, 88 Queensway, Hong Kong.

The principal activity of the Company is investment holding.

Following the acquisition of CITIC Dameng Mining Industries Limited (the “Manganese Company”) and its subsidiaries, and 51% participating interest in the Seram Island Non-Bula Block production sharing contract (the “Seram PSC”), the Group is principally engaged in the following businesses:

the operation of the Portland Aluminium Smelter which sources alumina and produces aluminium ingots in Australia;
the operation of coal mining and the sale of coal in Australia;
the export of various commodity products such as alumina, aluminium ingots and iron ore and the import of other commodities and manufactured goods such as vehicle and industrial batteries, tyres, alloy wheels and various metals such as steel and aluminium extrusion products in Australia;
the sale of crude oil and petroleum drilled from the Dagang Oilfield in the PRC;
the operation of manganese mining and the sale of refined manganese products in the PRC; and
the exploration, development, production and sale of crude oil and petroleum drilled from the Seram Island Non-Bula Block, Indonesia.

On 18 February 2006, the Group exercised its option to convert its 40% participating interest in the Kongnan Block within the Dagang Oilfield in the PRC (the “Dagang Participating Interest”), with a then carrying value of US$27,386,135 (HK$213,612,000), into 8,591,434 common shares (“Ivanhoe Shares”) in the share capital of Ivanhoe Energy Inc. (“Ivanhoe”) and a 3-year non-interest bearing, unsecured loan of US$7,386,135 (HK$57,612,000) (“Ivanhoe Loan”) repayable by Ivanhoe. Ivanhoe Loan is repayable by 36 monthly instalments and the first instalment was due and received in March 2006.

In the opinion of the directors, the parent and the ultimate holding company of the Company is CITIC Group, a company incorporated in the PRC.

During the year, the Group continues to explore other investment opportunities in the field of natural resources.

– I-13 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

1. CORPORATE INFORMATION (continued)

Proposed acquisition of potential oil assets located in Kazakhstan

On 27 October 2006, a memorandum of understanding (the “MOU”) was entered into by the Company and CITIC Group. Pursuant to the MOU, the Company has been granted a purchase right (the “Purchase Right”), which is exercisable by the Company during the period of one year (from the date which CITIC Group completed its acquisition of the oil assets located in Kazakhstan), to acquire these assets (the “Potential Assets”). The Potential Assets principally comprise a 94.6% interest in Karazhanbasmunai JSC, a joint stock company formed under the laws of Kazakhstan, which holds 100% of the mineral rights until 2020 to develop the Karazhanbas Oil and Gas Field in Mangistau Oblast, Kazakhstan. On 29 December 2006, CITIC Group completed the acquisition of the Potential Assets from CITIC Canada Petroleum Limited (formerly known as Nations Energy Company Ltd.) (“CCPL”).

If the Company elects to exercise the Purchase Right, completion of the sale and purchase of the Potential Assets between the CITIC Group and the Company will constitute a very substantial acquisition and connected transaction of the Company under the Listing Rules and such transaction will require the approval of the independent shareholders of the Company and the approval of the relevant government and regulatory authorities in Kazakhstan. As at 31 December 2006, the Purchase Right has not been exercised by the Company.

2.1 BASIS OF PREPARATION

These financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) (which also include Hong Kong Accounting Standards (“HKASs”) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. They have been prepared under the historical cost convention, except for derivative financial instruments and equity investments, which have been measured at fair value. A disposal group held for sale is stated at the lower of carrying amount and fair value less costs to sell as further explained in note 28 to the financial statements. These financial statements are presented in Hong Kong dollars (“HK$”) and all values are rounded to the nearest thousand (HK$’000) except where otherwise indicated.

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 December 2006. Adjustments are made to bring into line any dissimilar accounting policies that may exist. The results of subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

The acquisition of subsidiaries during the year has been accounted for using the purchase method of accounting. This method involves allocating the cost of business combinations to the fair value of the identifiable assets acquired, and liabilities and contingent liabilities assumed at the date of acquisition. The cost of the acquisition is measured at the aggregate of the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition.

– I-14 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.1 BASIS OF PREPARATION (continued)

Basis of consolidation (continued)

Minority interests represent interests of outside shareholders not held by the Group in the results and net assets of the Company’s subsidiaries.

2.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS

The Group has adopted the following new and revised HKFRSs for the first time for the current year’s financial statements. Except for certain cases giving rise to new and revised accounting policies and additional disclosures, the adoption of these new and revised standards and interpretation has had no material effect on these financial statements.

HKAS 21 Amendment Net Investment in a Foreign Operation HKAS 39 & HKFRS 4 Amendments Financial Guarantee Contracts HKAS 39 Amendment Cash Flow Hedge Accounting of Forecast Intragroup Transactions HKAS 39 Amendment The Fair Value Option HKFRS 6 Exploration for and Evaluation of Mineral Resources HK(IFRIC) - Int 4 Determining whether an Arrangement contains a Lease

The principal changes in accounting policies are as follows:

(a) HKAS 21 The Effects of Changes in Foreign Exchange Rates

Upon the adoption of the HKAS 21 Amendment regarding a net investment in a foreign operation, all exchange differences arising from a monetary item that forms part of the Group’s net investment in a foreign operation are recognised in a separate component of equity in the consolidated financial statements irrespective of the currency in which the monetary item is denominated. This change has had no material impact on these financial statements as at 31 December 2006 or 31 December 2005.

(b) HKAS 39 Financial Instruments: Recognition and Measurement

(i) Amendment for financial guarantee contracts

This amendment has revised the scope of HKAS 39 to require financial guarantee contracts issued that are not considered insurance contracts, to be recognised initially at fair value and to be remeasured at the higher of the amount determined in accordance with HKAS 37 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with HKAS 18 Revenue. The adoption of this amendment has had no material impact on these financial statements.

– I-15 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (continued)

(b) HKAS 39 Financial Instruments: Recognition and Measurement (continued)

(ii) Amendment for the fair value option

This amendment has changed the definition of a financial instrument classified as fair value through profit or loss and has restricted the use of the option to designate any financial asset or any financial liability to be measured at fair value through the income statement. The Group had not previously used this option, and hence the amendment has had no effect on the financial statements.

(iii) Amendment for cash flow hedge accounting of forecast intragroup transactions

This amendment has revised HKAS 39 to permit the foreign currency risk of a highly probable intragroup forecast transaction to qualify as a hedged item in a cash flow hedge, provided that the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and that the foreign currency risk will affect the consolidated income statement. As the Group currently has no such transactions, the amendment has had no effect on these financial statements.

(c) HKFRS 6 – Exploration for and Evaluation of Mineral Resources

HKFRS deals with the accounting for exploration and evaluation of mineral resources, including oil and gas.

(d) HK(IFRIC) – Int 4 Determining whether an Arrangement contains a Lease

The Group has adopted this interpretation as of 1 January 2006, which provides guidance in determining whether arrangements contain a lease to which lease accounting must be applied. This interpretation has had no material impact on these financial statements.

– I-16 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.3 IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS

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

HKAS 1 Amendment Capital Disclosures HKFRS 7 Financial Instruments: Disclosures HKFRS 8 Revised Requirements of Segment Reporting HK(IFRIC) - Int 7 Applying the Restatement Approach under HKAS 29 Financial Reporting in Hyperinflationary Economies HK(IFRIC) - Int 8 Scope of HKFRS 2 HK(IFRIC) - Int 9 Reassessment of Embedded Derivatives HK(IFRIC) - Int 10 Interim Financial Reporting and Impairment HK(IFRIC) - Int 11 HKFRS 2 — Group and Treasury Share Transactions Service HK(IFRIC) - Int 12 Service Concession Arrangements

The HKAS 1 Amendment shall be applied for annual periods beginning on or after 1 January 2007. The revised standard will affect the disclosures about qualitative information about the Group’s objective, policies and processes for managing capital; quantitative data about what the Company regards as capital; and compliance with any capital requirements and the consequences of any non-compliance.

HKFRS 7 shall be applied for annual periods beginning on or after 1 January 2007. The standard requires disclosures that enable users of the financial statements to evaluate the significance of the Group’s financial instruments and the nature and extent of risks arising from those financial instruments.

HKFRS 8 shall be applied for annual periods beginning on or after 1 January 2009. The standard requires the disclosure of information about the operating segments of the Group, the products and services provided by the segments, the geographical areas in which the Group operates, and revenues from the Group’s major customers. This standard will supersede HKAS 14 Segment Reporting.

HK(IFRIC) - Int 7, HK(IFRIC) - Int 8, HK(IFRIC) - Int 9, HK(IFRIC) - Int 10, HK(IFRIC) - Int 11 and HK(IFRIC) - Int 12 shall be applied for annual periods beginning on or after 1 March 2006, 1 May 2006, 1 June 2006, 1 November 2006, 1 March 2007 and 1 January 2008, respectively.

The Group is in the process of making an assessment of the impact of these new and revised HKFRSs upon initial application. So far, it has concluded that while the adoption of the HKAS 1 Amendment, HKFRS 7 and HKFRS 8 may result in new or amended disclosures, these new and revised HKFRSs are unlikely to have a significant impact on the Group’s results of operations and financial position.

– I-17 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Subsidiaries

A subsidiary is an entity whose financial and operating policies the Company controls, directly or indirectly, so as to obtain benefits from its activities.

The results of subsidiaries are included in the Company’s income statement to the extent of dividends received and receivable. The Company’s interests in subsidiaries are stated at cost less any impairment losses.

Joint ventures

A joint venture is an entity set up by contractual arrangement, whereby the Group and other parties undertake an economic activity. The joint venture operates as a separate entity in which the Group and the other parties have an interest.

The joint venture agreement between the venturers stipulates the capital contributions of the joint venture parties, the duration of the joint venture and the basis on which the assets are to be realised upon its dissolution. The profits and losses from the joint venture’s operations and any distributions of surplus assets are shared by the venturers, either in proportion to their respective capital contributions, or in accordance with the terms of the joint venture agreement.

A joint venture is treated as:

(a) a subsidiary, if the Group has unilateral control, directly or indirectly, over the joint venture’s financial and operating policies;
(b) a jointly-controlled entity, if the Group does not have unilateral control, but has joint control, directly or indirectly, over the joint venture:
(c) an associate, if the Group does not have unilateral or joint control, but holds, directly or indirectly, generally not less than 20% of the joint venture’s registered capital and is in a position to exercise significant influence over the joint venture; or
(d) an equity investment accounted for in accordance with HKAS 39, if the Group holds, directly or indirectly, less than 20% of the joint venture’s registered capital and has neither joint control of, nor is in a position to exercise significant influence over, the joint venture.

– I-18 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Jointly-controlled assets

Jointly-controlled assets are assets in a joint venture over which the Group has joint control with other venturers in accordance with contractual arrangements and through the joint control of which the Group has control over its share of future economic benefits earned from the assets.

The Group’s share of jointly-controlled assets and any liabilities incurred jointly with other venturers are recognised in the consolidated balance sheet and classified according to their nature. Liabilities and expenses incurred directly in respect of its interests of jointly-controlled assets are accounted for on an accrual basis. Income from the sale or use of the Group’s share of the output of the jointly-controlled assets, together with its share of any expenses incurred by the joint ventures, are recognised in the income statement when it is probable that the economic benefits associated with the transactions will flow to or from the Group. Adjustments are made to bring into line any dissimilar accounting policies that may exist.

Goodwill

Goodwill arising on the acquisition of subsidiaries represents the excess of the cost of the business combination over the Group’s interest in the net fair value of the acquirees’ identifiable assets acquired, and liabilities and contingent liabilities assumed as at the date of acquisition.

Goodwill arising on acquisition is recognised in the consolidated balance sheet as an asset, initially measured at cost and subsequently at cost less any accumulated impairment losses.

The carrying amount of goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units.

Each unit or group of units to which the goodwill is so allocated:

represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and
is not larger than a segment based on either the Group’s primary or the Group’s secondary reporting format determined in accordance with HKAS 14 Segment Reporting.

Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash- generating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cashgenerating units) is less than the carrying amount, an impairment loss is recognised.

– I-19 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Goodwill (continued)

Where goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operation within that unit is disposed of, goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash–generating unit retained.

An impairment loss recognised for goodwill is not reversed in a subsequent period.

Impairment of non-financial assets other than goodwill

Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than inventories, deferred tax assets, financial assets, goodwill and a disposal group classified as held for sale), the asset’s recoverable amount is estimated. An asset’s recoverable amount is calculated as the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs to sell, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to the consolidated income statement in the period in which it arises in those expense categories consistent with the function of the impaired asset.

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss of an asset other than goodwill and certain financial assets is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, however not to an amount higher than the carrying amount that would have been determined (net of any depreciation/ amortisation), had no impairment loss been recognised for the asset in prior years. A reversal of such impairment loss is credited to the consolidated income statement in the period in which it arises.

Related parties

A party is considered to be related to the Group if:

(a) the party, directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, the Group; (ii) has an interest in the Group that gives it significant influence over the Group; or (iii) has joint control over the Group;

– I-20 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Related parties (continued)

(b) the party is an associate;
(c) the party is a jointly-controlled entity;
(d) the party is a member of the key management personnel of the Group or its parent;
(e) the party is a close member of the family of any individual referred to in (a) or (d);
(f) the party is an entity that is controlled, jointly-controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e); or
(g) the party is a post-employment benefit plan for the benefit of the employees of the Group, or of any entity that is a related party of the Group.

Property, plant and equipment and depreciation

Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and any impairment losses. When an item of property, plant and equipment is classified as held for sale or when it is part of a disposal group classified as held for sale, it is not depreciated and is accounted for in accordance with HKFRS 5, as further explained in the accounting policy for “Non-current assets and disposal groups held for sale”. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the consolidated income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment, and where the cost of the item can be measured reliably, the expenditure is capitalised as an additional cost of that asset or as a replacement.

Depreciation is calculated on the straight-line basis to write off the cost of each item of property, plant and equipment to its residual value over its estimated useful life. Plant and machinery, which include the furnace, water system, pot room and ingot mill, and buildings and structures used in the Portland Aluminium Smelter, are estimated to have a useful life up to 2030.

– I-21 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Property, plant and equipment and depreciation (continued)

Other fixed assets are estimated to have the following useful lives:

Leasehold improvements 10–12 years or over the unexpired lease terms, whichever is shorter Motor vehicles, plant, machinery, tools and equipment 5–15 years Furniture and fixtures 4–5 years Buildings and structures 15–30 years

Freehold land is not depreciated.

Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately.

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

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in the consolidated income statement in the year the asset is derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset.

Construction in progress represents a building and structure under construction, which is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction and capitalised borrowing costs on related borrowed funds during the period of construction. Construction in progress is reclassified to the appropriate category of property, plant and equipment or investment properties when completed and ready for use.

Oil and gas properties

For oil and gas properties, the successful effort method of accounting is adopted. The Group capitalises initial acquisition costs of oil and gas properties. Impairment of initial acquisition costs is recognised based on exploratory experience and management judgment. Upon discovery of commercial reserves, acquisition costs are transferred to proved properties. The costs of drilling and equipping successful exploratory wells are all classified as development costs, including those renewals and betterments which extend the economic lives of the assets. The costs of unsuccessful exploratory wells and all other exploration costs are expensed as incurred.

Exploratory wells are evaluated for economic viability within one year of completion. Exploratory wells that discover potentially economic reserves in areas where major capital expenditure will be required before production would begin and when the major capital expenditure depends upon successful completion of further exploratory work remain capitalised, and are reviewed periodically for impairment.

– I-22 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Property, plant and equipment and depreciation (continued)

Oil and gas properties (continued)

Productive oil and gas properties and other tangible and intangible costs of production properties are amortised using the unit-of-production method on a property-by-property basis under which the ratio of produced oil and gas to the estimated remaining proved developed reserves is used to determine the depreciation, depletion and amortisation provision. Costs associated with significant development projects are not depleted until commercial production commences and the reserves related to those costs are excluded from the calculation of depletion.

Capitalised acquisition costs of proved properties are amortised by the unit-of-production method on a propertyby-property basis computed based on the total estimated units of proved reserves.

Capital works

Capital works represent exploration and development expenditure in relation to the Group’s mining activities, which includes costs of coal mining tenements, are carried forward to the extent that:

(i) such costs are expected to be recouped through successful development and production of the areas or by its sale; or
(ii) exploration activities in the area that have not reached a stage which permits a reasonable assessment of the existence of economically recoverable reserves.

Costs are amortised from the date of commencement of production on a production output basis.

Other intangible assets

Other intangible assets represent mining rights and are stated at cost less accumulated amortisation and impairment losses. The mining rights are amortised using the units of production method based on the proven and probable mineral reserves, which are reviewed at least at each balance sheet date. The intangible assets are assessed for impairment whenever there is an indication that the intangible asset may be impaired.

Other assets

Other assets represent the amounts paid for an electricity supply agreement (the “ESA”), a 30-year base power contract entered into with the State Electricity Commission of Victoria, Australia. The ESA provides steady electricity supply at a fixed tariff to the Portland Aluminium Smelter for a period up to 31 October 2016. Other assets are stated at cost less accumulated amortisation, provided on a straight-line basis over the term of the base power contract, and any impairment losses.

– I-23 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Non-current assets and disposal groups held for sale

Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. For this to be the case, the asset or disposal group must be available for immediate sale in its present condition subject only to terms that are usual and customary for the sale of such assets or disposal groups and its sale must be highly probable.

Non-current assets and disposal groups (other than deferred tax assets and financial assets) classified as held for sale are measured at the lower of their carrying amounts and fair values less costs to sell.

Investments and other financial assets

Financial assets in the scope of HKAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, and available-for-sale financial assets, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Group considers whether a contract contains an embedded derivative when the Group first becomes a party to it. The embedded derivatives are separated from the host contract which is not measured at fair value through profit or loss when the analysis shows that the economic characteristics and risks of embedded derivatives are not closely related to those of the host contract.

The Group determines the classification of its financial assets after initial recognition and, where allowed and appropriate, re-evaluates this designation at the balance sheet date.

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

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of sale in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments or financial guarantee contracts. Gains or losses on these financial assets are recognised in the income statement.

Where a contract contains one or more embedded derivatives, the entire hybrid contract may be designated as a financial asset at fair value through profit or loss, except where the embedded derivative does not significantly modify the cash flows or it is clear that separation of the embedded derivative is prohibited.

– I-24 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Investments and other financial assets (continued)

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

Financial assets may be designated upon initial recognition as at fair value through profit or loss if the following criteria are met: (i) the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognising gains or losses on them on a different basis; (ii) the assets are part of a group of financial assets which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management strategy; or (iii) the financial asset contains an embedded derivative that would need to be separately recorded.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are subsequently carried at amortised cost using the effective interest method. Amortised cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction costs. Gains and losses are recognised in the consolidated income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

Available- for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets in listed and unlisted equity securities that are designated as available for sale or are not classified in any of the other two categories. After initial recognition, available-for-sale financial assets are measured at fair value, with gains or losses recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the consolidated income statement.

When the fair value of unlisted equity securities cannot be reliably measured because (a) the variability in the range of reasonable fair value estimates is significant for that investment or (b) the probabilities of the various estimates within the range cannot be reasonably assessed and used in estimating fair value, such securities are stated at cost less any impairment losses.

Fair value

The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business at the balance sheet date. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions; reference to the current market value of another instrument which is substantially the same; a discounted cash flow analysis; and option pricing models.

– I-25 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Impairment of financial assets

The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired.

Assets carried at amortised cost

If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced either directly or through the use of an allowance account. The amount of the impairment loss is recognised in the consolidated income statement.

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the consolidated income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date.

In relation to trade receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Group will not be able to collect all of the amounts due under the original terms of an invoice. The carrying amount of the receivables is reduced through the use of an allowance account. Impaired debts are derecognised when they are assessed as uncollectible.

Assets carried at cost

If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Impairment losses on these assets are not reversed.

– I-26 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Impairment of financial assets (continued)

Available-for-sale financial assets

If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in the consolidated income statement, is transferred from equity to the consolidated income statement. Impairment losses on equity instruments classified as available-for-sale are not reversed through the consolidated income statement.

Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where:

the rights to receive cash flows from the asset have expired;
the Group retains the rights to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or
the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that the Group may repurchase, except in the case of a written put option (including a cashsettled option or similar provision) on an asset measured at fair value, where the extent of the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

Financial liabilities at amortised cost (including bank and other loans)

Financial liabilities including bank and other loans are initially stated at fair value less directly attributable transaction costs and are subsequently measured at amortised cost, using the effective interest method unless the effect of discounting would be immaterial, in which case they are stated at cost.

Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process.

– I-27 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognised in the consolidated income statement.

Derivative financial instruments and hedging

The Group uses derivative financial instruments such as forward currency and commodity contracts and interest rate swap to hedge its risks associated with foreign currency, commodity price and interest rate fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are taken directly to the consolidated income statement.

The fair value of forward currency and commodity contracts is calculated by reference to current forward exchange rates and commodity prices for contracts with similar maturity profiles. The fair value of interest rate swap contracts is determined by reference to applicable interest rates in the market.

For the purpose of hedge accounting, hedges are classified as:

fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability, or an unrecognised firm commitment (except for foreign currency risk); or
cash flow hedges when hedging the exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction, or a foreign currency risk in an unrecognised firm commitment.

At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting, the risk management objective and its strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the Group will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

Hedges which meet the strict criteria for hedge accounting are accounted for as follows:

– I-28 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Fair value hedges

The change in the fair value of a hedging derivative is recognised in the consolidated income statement. The change in the fair value of the hedged item attributable to the risk hedged is recorded as a part of the carrying amount of the hedged item and is also recognised in the consolidated income statement.

For fair value hedges relating to items carried at amortised cost, the adjustment to carrying value is amortised through the consolidated income statement over the remaining term to maturity. Any adjustment to the carrying amount of a hedged financial instrument for which the effective interest method is used is amortised to the consolidated income statement.

Amortisation may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. If the hedged item is derecognised, the unamortised fair value is recognised immediately in the consolidated income statement.

When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a corresponding gain or loss recognised in the consolidated income statement. The changes in the fair value of the hedging instrument are also recognised in the consolidated income statement.

Cash flow hedges

The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective portion is recognised in the consolidated income statement.

Amounts taken to equity are transferred to the consolidated income statement when the hedged transaction affects the consolidated income statement, such as when hedged financial income or financial expense is recognised or when a forecast sale occurs. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or non-financial liability.

If the forecast transaction or firm commitment is no longer expected to occur, the amounts previously recognised in equity are transferred to the consolidated income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, the amounts previously recognised immediately in equity remain in equity until the forecast transaction or firm commitment occurs.

Inventories

Inventories are stated at the lower of cost and net realisable value. Except for exported goods held for re-sale which are stated at cost on the first-in, first-out basis, cost is determined on the weighted average basis. In the case of work in progress and finished goods, cost comprises direct materials, direct labor and an appropriate proportion of overheads. Net realisable value is based on estimated selling prices less any estimated costs to be incurred to completion and disposal.

– I-29 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Cash and cash equivalents

For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management.

For the purpose of the balance sheets, cash and bank balances comprise cash on hand and at banks, including term deposits, and assets similar in nature to cash, which are not restricted as to use.

Provisions

A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.

When the effect of discounting is material, the amount recognised for a provision is the present value at the balance sheet date of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in the consolidated income statement.

Provision for rehabilitation cost represents the estimated costs of rehabilitation relating to the areas disturbed during the operation of the Portland Aluminium Smelter and the coal mines in Australia. The Group is required to return the sites to the Australian authorities in their original condition. The Group has estimated and provided for the expected costs of removal and clean-up on a periodical basis, based on the estimates provided by the environmental authorities when they reviewed the sites.

Provision for abandonment cost represents the estimated costs of abandoning oil and gas properties. The provision for abandonment cost has been classified under long term liabilities. The associated cost is capitalised and the liability is discounted and an accretion expense is recognised using the credit-adjusted risk-free interest rate in effect when the liability is initially recognised.

Income tax

Income tax comprises current and deferred tax. Income tax is recognised in the consolidated income statement, or in equity if it relates to items that are recognised in the same or a different period directly in equity.

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities.

– I-30 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income tax (continued)

Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences, except:

where the deferred tax liability arises from goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of taxable temporary differences associated with investments in subsidiaries and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, carryforward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax credits and unused tax losses can be utilised except:

where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Conversely, previously unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.

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

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

– I-31 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue recognition

Revenue is recognised on the following bases when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably:

(a) from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;
(b) interest income, on an accrual basis using the effective interest method by applying the rate that discounts the estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial assets;
(c) handling service fee, when the services have been rendered; and
(d) dividend income, when the shareholders’ right to receive payment has been established.

Operating leases

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Rentals payable under operating leases are charged to the consolidated income statement on the straight-line basis over the lease terms.

Prepaid land lease premiums under operating leases are initially stated at cost and subsequently recognised on the straight-line basis over the lease terms.

Employee benefits

Share-based payment transactions

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

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value is determined by using a binominal model, further details of which are given in note 37 to the financial statements. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of the Company (the “market conditions”), if applicable.

– I-32 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Employee benefits (continued)

Share-based payment transactions (continued)

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

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

Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.

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

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

The Group has adopted the transitional provisions of HKFRS 2 in respect of equity-settled awards and has applied HKFRS 2 only to equity-settled awards granted after 7 November 2002 that had not vested by 1 January 2005 and to those granted on or after 1 January 2005.

Ownership-based remuneration is provided to employees via the CITIC Australia Trading Limited (“CATL”) director option plan and the employee option plan. Information relating to the schemes is set out in note 37 to the financial statements.

Share-based compensation to directors and employees is recognised as an expense in respect of the services received measured on a fair value basis.

– I-33 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Employee benefits (continued)

Share options granted after 7 November 2002 and vested on or after 1 January 2005

The fair value of the options granted under the director and employee option plans is recognised as an employee benefits expense with a corresponding increase in equity. The fair value is measured at the grant date and recognised over the period during which the employees become unconditionally entitled to the options.

The fair value of the options at the grant date is independently determined using a Black Scholes option pricing model that takes into account the exercise price, the term of the options, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the options, the share price at the grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the options.

The fair value of the options granted excludes the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the entity revises its estimate of the number of options that are expected to become exercisable. The employee benefits expense recognised during each period takes into account the most recent estimate.

Upon the exercise of options, the balance of the share option reserve relating to those options is transferred to the share capital. The market value of any shares issued to employees for no cash consideration under the employee share scheme is recognised as an employee benefits expense with a corresponding increase in equity when the employees become entitled to the shares.

Long service payments

Certain of the Group’s employees have completed the required number of years of service to the Group in order to be eligible for long service payments under the Hong Kong Employment Ordinance or the superannuation legislation of the Australian government in the event of termination of their employment. The Group is liable to make such payments in the event that such termination of employment meets the circumstances as specified in the respective regulations.

The Group provides for the probable long service leave and holiday pay expected to be paid to employees under the superannuation legislation of the Australian government. The provision is based on the best estimate of the probable future payments which have been earned by the employees from their service to the Group to the balance sheet date.

– I-34 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Employee benefits (continued)

Pension schemes

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

The employees of the Group’s subsidiaries which operate in the PRC are required to participate in a central pension scheme operated by the local municipal government. Subsidiaries are required to contribute a certain percentage of their payroll costs to the central pension scheme. The contributions are charged to the consolidated income statement as they become payable in accordance with the rules of the central pension scheme.

The Group operates a defined contribution retirement benefits scheme (the “RB Scheme”) under the superannuation legislation of the Australian government for those employees in Australia who are eligible to participate. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the consolidated income statement as they become payable in accordance with the rules of the RB Scheme. The assets of the RB Scheme are held separately from those of the Group in an independently administered fund. The Group’ contributions as an employer vest fully with the employees when contributed into the RB Scheme.

Paid leave carried forward

The Group provides paid leave to its employees under their employment contracts on a calendar year basis. Under certain circumstances, such leave remains untaken as at the balance sheet date is permitted to be carried forward and utilised by the respective employees in the following year. An accrual is made at the balance sheet date for the expected future cost of such paid leave earned during the year by the employees and carried forward.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, i.e., assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised as part of the cost of those assets. The capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs capitalised.

– I-35 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Foreign currencies

These financial statements are presented in Hong Kong dollars, which is the Company’s functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions are initially recorded using the functional currency rates ruling at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are re-translated at the functional currency rates of exchange ruling at the balance sheet date. All differences are taken to the consolidated income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

The functional currencies of certain overseas subsidiaries are currencies other than the Hong Kong dollar. As at the balance sheet date, the assets and liabilities of these entities are translated into the presentation currency of the Company at the exchange rates ruling at the balance sheet date and, their income statements are translated into Hong Kong dollars at the weighted average exchange rates for the year. The resulting exchange differences are included in a separate component of equity as the exchange fluctuation reserve. On disposal of a foreign entity, the deferred cumulated amount recognised in equity relating to that particular foreign operation is recognised in the consolidated income statement.

For the purpose of the consolidated cash flow statement, the cash flows of overseas subsidiaries and jointlycontrolled assets are translated into Hong Kong dollars at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of overseas subsidiaries and jointly-controlled assets which arise throughout the year are translated into Hong Kong dollars at the weighted average exchange rates for the year.

3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

Judgements

In the process of applying the Group’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the financial statements:

Tax

Determining income tax provisions requires the Group to make judgements on the future tax treatment of certain transactions. The Group carefully evaluates tax implications of transactions in accordance with prevailing tax regulations and makes tax provisions accordingly. In addition, deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilised. This requires significant judgment on the tax treatments of certain transactions and also assessment on the probability that adequate future taxable profits will be available for the deferred tax assets to be recovered.

– I-36 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Employee benefits — share-based payment transactions

The valuation of the fair value of the share options granted requires judgment in determining the expected volatility of the share price, the dividends expected on the shares, the risk-free interest rate during the life of the options and the number of share options that are expected to become exercisable, details of which are set in note 37 to the financial statements. Where the outcome of the number of options that are exercisable is different from the previously estimated number of exercisable options, such difference will have impact on the consolidated income statement in the subsequent remaining vesting period of the relevant share options.

Estimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

Impairment of goodwill

The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December 2006 was HK$341,512,000 (2005: HK$341,512,000). More details are given in note 17 to the financial statements.

Oil and gas reserve and mining reserves

The most significant estimates in the oil and gas operation pertain to oil and gas reserves and mining reserves volumes and the future development, purchase price allocation, provision for rehabilitation cost and abandonment cost as well as estimates relating to certain oil and gas reserve and mining revenues and expenses. Actual amounts could differ from those estimates and assumptions. More details are given in notes 3, 13 and 34 to the financial statements.

4. SEGMENT INFORMATION

Segment information is presented by way of two segment formats: (i) on a primary segment reporting basis, by business segment; and (ii) on a secondary segment reporting basis, by geographical segment.

– I-37 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

4. SEGMENT INFORMATION (continued)

The Group’s operating businesses are structured and managed separately according to the nature of their operations and the products and services they provide. Each of the Group’s business segments represents a strategic business unit that offers products and services which are subject to risks and returns that are different from those of the other business segments. Summary details of the business segments are as follows:

(a) the aluminium smelting segment comprises the operation of the Portland Aluminium Smelter which sources alumina and produces aluminium ingots in Australia;
(b) the coal segment comprises the operation of coal mining and the sale of coal in Australia;
(c) the import and export of commodities segment represents the export of various commodity products such as alumina, aluminium ingots and iron ore and the import of other commodities and manufactured goods such as vehicle and industrial batteries, tyres, alloy wheels and various metals such as steel and aluminium extrusion products in Australia;
(d) the manganese segment comprises the operation of manganese mining operated by the Manganese Company (a non-wholly-owned subsidiary of the Company) and the sale of refined manganese products in the PRC;
(e) the crude oil segment comprises the operation of oilfields and the sale of crude oil in the PRC and Indonesia; and
(f) the others segment comprises other operating activities of the Group.

In determining the Group’s geographical segments, revenues are attributed to the segments based on the location of the customers, and assets are attributed to the segments based on the location of the assets.

Intersegment sales and transfer are transacted with reference to the selling prices used for sales made to third parties at the then prevailing market prices.

(a) Business segments

The following tables present revenue, profit and certain assets, liabilities and expenditure information for the Group’s business segments for the years ended 31 December 2006 and 2005.

– I-38 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

4. SEGMENT INFORMATION (continued)

(a) Business segments (continued)

Group

Year ended Aluminium 31December 2006 smelting Segment revenue: Sales to external customers 1,602,930 Other income 37,039 1,639,969 Segment results 108,340 Interest income and unallocated gains Unallocated expenses Profit from operating activities Unallocated finance costs Profit before tax Tax Profit for the year Segment assets 2,034,177 Unallocated assets Total assets Segment liabilitie 922,399 Unallocated liabilities Total liabilities Other segment information: Depreciation and amortisation 106,630 Unallocated amounts Other non-cash expenses 19,750 Unallocated amounts Capital expenditure 14,955 Unallocated amounts	Import and export of Coal commodities Manganese 274,752 5,074,136 538,006 120 9,756 15,193 274,872 5,083,892 553,199 76,756 111,025 65,759 157,624 1,360,989 942,910 281,107 261,457 351,228 10,060 1,460 17,198 5,487 842 2,041 10,795 2,368 133,111	Crude oil 13,604 5,637 19,241 15,847 1,038,281 1,087,969 11,549 — 7,975	Others Consolidated — 7,503,428 — 67,745 — 7,571,173 (11,980) 365,747 215,500 (114,703) 466,544 (150,355) 316,189 (70,152) 246,037 55,195 5,589,176 3,739,185 9,328,361 28,788 2,932,948 2,890,324 5,823,272 11,534 158,431 2,242 160,673 — 28,120 33,668 61,788 — 169,204 4,196 173,400

– I-39 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS HK$’000

4. SEGMENT INFORMATION (continued)

(a) Business segments (continued)

Group

Year ended 31 December 2005 Aluminium Restated smelting Segment revenue: Sales to external customers 1,148,078 Other income/(expenses) (3,138) 1,144,940 Segment results 173,383 Interest income and unallocated gains Unallocated expenses Profit from operating activities Unallocated finance costs Profit before tax Tax Profit for the year Segment assets 2,133,100 Unallocated assets Total assets Segment liabilities 485,296 Unallocated liabilities Total liabilities Other segment information: Depreciation and amortisation 98,553 Unallocated amounts Other non-cash expenses 34,937 Unallocated amounts Capital expenditure 15,646 Unallocated amounts	Import and export of Coal commodities Manganese 259,705 4,300,699 — 78,463 21,602 — 338,168 4,322,301 — 177,792 82,631 — 160,472 849,057 — 74,925 102,084 — 9,135 1,278 — 2,482 219 — 11,499 2,051 —	Crude oil 77,429 — 77,429 (6,620) 266,096 33,072 50,043 — 114,093	Others Consolidated 475 5,786,386 10 96,937 485 5,883,323 (15,507) 411,679 98,356 (74,148) 435,887 (93,730) 342,157 (110,642) 231,515 67,119 3,475,844 2,544,183 6,020,027 25,308 720,685 2,331,935 3,052,620 11,511 170,520 2,158 172,678 431 38,069 14,854 52,923 4 143,293 5,831 149,124

– I-40 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

4. SEGMENT INFORMATION (continued)

(b) Geographical segments

The following tables present revenue and certain asset and expenditure information for the Group’s geographical segments for the year ended 31 December 2006 and 2005.

Group

Year ended 31 December 2006 Hong Kong Segment revenue: Sales to external customers — Other segment information: Segment assets 1,860,751 Capital expenditure 280 Year ended 31 December 2005 Segment revenue: Sales to external customers — Other segment information: Segment assets 1,225,585 Capital expenditure 5,245	Mainland China 3,305,764 1,788,287 137,027 3,052,563 333,414 114,097	Australia 1,495,282 4,373,161 28,118 1,373,495 4,461,028 29,782	Europe 1,850,518 215,243 — 866,188 — —	North America 315,187 — — 309,394 — —	Other Asian countries 494,481 1,090,919 7,975 105,215 — —	Others Consolidated 42,196 7,503,428 — 9,328,361 — 173,400 79,531 5,786,386 — 6,020,027 — 149,124

– I-41 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

5. REVENUE, OTHER INCOME AND GAINS

Revenue, which is also the Group’s turnover, represents the net invoiced value of goods sold during the year, after allowances for returns, trade discounts and royalties.

An analysis of the Group’s revenue, other income and gains is as follows:

Revenue Sale of goods: Aluminium smelting Coal Import and export of commodities Manganese Crude oil Others Other income and gains Interest income Handling service fees Dividend income from listed investments Gain on sales of coal exploration interests Gain on disposal of available-for-sale equity investments Insurance claim income Gain on conversion of available-for-sale equity investments Sale of scraps Others	2006 1,602,930 274,752 5,074,136 538,006 13,604 — 7,503,428 144,810 7,121 55,115 — 5,235 25,996 17,502 11,891 15,575 283,245 7,786,673	2005 Restated 1,148,078 259,705 4,300,699 — 77,429 475
		5,786,386
		75,002 13,326 19,768 78,463 — — — 5,148 3,586
		195,293
		5,981,679

– I-42 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

6. PROFIT BEFORE TAX

The Group’s profit before tax is arrived at after charging/(crediting):

Notes Cost of inventories sold Depreciation 13 Amortisation of the ESA 16 Amortisation of other intangible assets 15 Amortisation of prepaid land lease premiums 14 Minimum lease payments under operating leases on land and buildings Auditors’ remuneration Employee benefits expense (including directors’ remuneration — note 7): Wages and salaries Equity-settled share option expenses Pension scheme contributions Provision for long service and leave payments Loss on disposal/write-off of items of property, plant and equipment Provision/(write-back of provision) for impairment of items of property, plant and equipment Exchange (gains)/losses, net Provision against inventories Provision for impairment of accounts receivable Provision for rehabilitation cost Provision for abandonment cost Warranty income, net* #	2006 6,974,598 92,560 62,930 4,235 948 8,504 7,369 95,218 26,158 289 6,715 128,380 4,568 (4,893) 53,883 1,515 1,816 8,554 112 (14,908)	2005 Restated 5,376,077 114,330 58,348 — — 7,215 4,374 52,381 12,680 186 12,779 78,026 6,563 12,733 (30,754) 5,151 1,725 1,292 — —

Cost of inventories sold for the year ended 31 December 2006 included an amount of HK$331,693,257 (2005: HK$153,450,000), which comprised direct staff costs, operating lease rentals, depreciation and amortisation of the ESA. Such amount has also been included in the respective expense items disclosed above. Unrealised losses on embedded derivatives of HK$111,667,000 (2005: HK$ 13,235,000) and hedge loss of HK$162,522,000 (2005: HK$31,678,000) had been included in cost of inventories sold.

** These amounts are included in “Other operating expenses, net” on the face of the consolidated income statement.

The warranty income, net, represents warranty income of HK$34,320,000 received from CITIC Group net of loss on conversion of the Dagang Participating Interest into Ivanhoe Shares and Ivanhoe Loan of HK$19,412,000. More details are given in note 43(c) to the financial statements.

– I-43 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

7. DIRECTORS’ REMUNERATION

Directors’ remuneration for the year, disclosed pursuant to the Listing Rules and Section 161 of the Hong Kong Companies Ordinance, is as follows:

Fees: Executive directors Independent non-executive directors Other emoluments of executive directors: Salaries, allowances and benefits in kind Bonuses Share option benefits Pension scheme contributions	2006 860 567 1,427 10,717 1,950 24,618 60 37,345 38,772	2005 — 330
		330
		6,685 2,643 11,564 274
		21,166
		21,496

During the year, certain directors were granted share options, in respect of their services to the Group, under the share option scheme of the Company, further details of which are set out in note 37 to the financial statements. The fair value of such options, which has been recognised to the consolidated income statement over the vesting period, was determined as at the date of grant and the amount included in the financial statements for the current year is included in the above director’s remuneration disclosures.

(a) Independent non-executive directors

The fees paid to independent non-executive directors during the year were as follows:

Chan Mo Po, Paul Fan Ren Da, Anthony Ngai Man Tsang Link Carl, Brian	2006 — 200 167 200 567	2005 90 120 — 120
		330

There were no other emoluments payable to the independent non-executive directors during the year (2005: Nil).

– I-44 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

7. DIRECTORS’ REMUNERATION (continued)

(b) Executive directors

2006 Kwok Peter Viem Ma Ting Hung Shou Xuancheng Sun Xinguo Li So Mui Mi Zengxin Qiu Yiyong Zeng Chen Zhang Jijing 2005 Kwok Peter Viem Ma Ting Hung Shou Xuancheng Sun Xinguo Li So Mui Mi Zengxin Qiu Yiyong Zeng Chen Zhang Jijing	Fees — — — — — 215 215 215 215 860 — — — — — — — — — —	Salaries, allowances and benefits in kind 1,873 2,003 2,003 2,003 2,003 — — 832 — 10,717 1,388 1,388 597 597 1,548 — — 1,167 — 6,685	Pension Share option scheme Total Bonuses benefits contributions remuneration 300 7,825 12 10,010 300 7,825 12 10,140 450 1,283 12 3,748 450 1,597 12 4,062 450 642 12 3,107 — 1,283 — 1,498 — 1,283 — 1,498 — 1,597 — 2,644 — 1,283 — 1,498 1,950 24,618 60 38,205 225 3,260 12 4,885 225 3,260 12 4,885 113 917 3 1,630 450 459 3 1,509 225 458 12 2,243 — 917 — 917 — 917 — 917 1,405 459 232 3,263 — 917 — 917 2,643 11,564 274 21,166	Pension Share option scheme Total Bonuses benefits contributions remuneration 300 7,825 12 10,010 300 7,825 12 10,140 450 1,283 12 3,748 450 1,597 12 4,062 450 642 12 3,107 — 1,283 — 1,498 — 1,283 — 1,498 — 1,597 — 2,644 — 1,283 — 1,498 1,950 24,618 60 38,205 225 3,260 12 4,885 225 3,260 12 4,885 113 917 3 1,630 450 459 3 1,509 225 458 12 2,243 — 917 — 917 — 917 — 917 1,405 459 232 3,263 — 917 — 917 2,643 11,564 274 21,166
				38,205

				4,885 4,885 1,630 1,509 2,243 917 917 3,263 917
				21,166

There was no arrangement under which a director waived or agreed to waive any remuneration during the year.

– I-45 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

8. FIVE HIGHEST PAID EMPLOYEES

The five highest paid individuals during the year included five (2005: four) directors, details of whose remuneration are set out in note 7 above. Details of the remuneration of the remaining one non-director, highest paid employee for 2005 are as follows:

Salaries, housing allowances, other allowances and benefits in kind Bonuses Pension scheme contributions	2006 — — — —	2005 481 1,465 578
		2,524

The number of non-director, highest paid employees whose remuneration fell within the HK$2,500,001 to HK$3,000,000 banding is nil (2005: one).

9. FINANCE COSTS

Interest expense on bank and other loans repayable: Within one year In the second to fifth years, inclusive Beyond five years Total interest Less: Interest capitalised Other finance charges: Increase in discounted amounts of provision arising from the passage of time Others*	2006 85,452 64,773 9,697 159,922 (22,897) 137,025 7,673 5,657 150,355	2005 43,264 10,219 34,054
		87,537 —
		87,537 2,445 3,748
		93,730

Included amortisation of up-front fees of HK$2,004,600 (2005: HK$501,150).

– I-46 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS HK$’000

10. TAX

Group

Current — Hong Kong Current — Elsewhere Charge for the year Overprovision in prior years Deferred — note 35 Total tax charge for the year	2006 — 103,072 (4,533) (28,387) 70,152	2005 — 102,371 — 8,271
		110,642

The statutory tax rate for Hong Kong profits tax is 17.5% (2005: 17.5%) on the estimated assessable profits arising in Hong Kong during the year. No provision for Hong Kong profits tax has been made as the Group had no assessable profits arising in Hong Kong for the year (2005: Nil).

Taxes on profits assessable elsewhere have been calculated at the rates of tax prevailing in the countries in which the Group operates, based on existing legislation, interpretations and practices in respect thereof.

Provision for Australian income tax has been made at the statutory rate of 30% (2005: 30%) on the estimated assessable profits arising in Australia during the year.

For the year ended 31 December 2006, the tax rates applicable to the subsidiaries established and operating in the PRC and Indonesia are 33% and 30% respectively. However, certain PRC subsidiaries of the Group are subject to a full corporate income tax exemption for the first two years and a 50% reduction in the succeeding three years, commencing from the first profitable year. No provision for Indonesian tax has been made for the year as the Indonesian operation of the Group did not generate any assessable profits.

– I-47 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

10. TAX (continued)

A reconciliation of the tax charge/(credit) applicable to profit/(loss) before tax using the statutory rates for the countries/jurisdiction in which the Company and its subsidiaries are domiciled to the tax charge/(credit) at the effective tax rates is as follows:

Group — 2006

Profit/(loss) before tax Tax charge/(credit) at the statutory rates Lower tax rate/tax holiday or concessions for specific provinces or local authorities Adjustments in respect of current tax of previous periods Income not subject to tax Expenses not deductible for tax Tax losses utilised from previous periods Increase in unutilised tax losses carried forward Tax charge/(credit) at the Group’s effective rate Group — 2005 Profit/(loss) before tax Tax charge/(credit) at the statutory rates Income not subject to tax Expenses not deductible for tax Increase in unutilised tax losses carried forward Tax charge at the Group’s effective rate	Australia 299,407 89,822 — (4,533) (14,454) 1,058 — — 71,893 Australia 380,231 114,069 (23,727) 19,413 — 109,755	Mainland China 68,589 22,634 (25,638) — (3,375) 5,988 (6,815) 5,465 (1,741) Mainland China (23,136) (7,635) — — 8,522 887	Hong Kong (47,222) (8,264) — — (7,990) 16,254 — — — Hong Kong (14,938) (2,614) (6,388) 9,002 — —	Indonesia (4,585) (1,376) — — — — — 1,376 — Indonesia — — — — — —	Consolidated 316,189 102,816 (25,638) (4,533) (25,819) 23,300 (6,815) 6,841 70,152 Consolidated 342,157 103,820 (30,115) 28,415 8,522 110,642

– I-48 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS HK$’000

10. TAX (continued)

The Group has unrecognised deferred tax assets from tax losses arising in Hong Kong, the PRC and Indonesia in aggregate of HK$69,569,000 (2005: aggregate of HK$57,183,000) that are available for offsetting against future taxable profits of the companies in which the losses arose. Deferred tax assets have not been recognised in respect of these losses arising in Hong Kong and the PRC as they have arisen in companies that have been loss-making for some time.

11. PROFIT ATTRIBUTABLE TO SHAREHOLDERS OF THE COMPANY

The consolidated profit attributable to shareholders of the Company for the year ended 31 December 2006 includes a loss of HK$152,093,000 (2005: profit of HK$17,079,000) (note 38(b)) dealt with in the financial statements of the Company.

12. EARNINGS PER SHARE ATTRIBUTABLE TO ORDINARY SHAREHOLDERS OF THE COMPANY

The calculation of basic earnings per share is based on the profit for the year attributable to ordinary shareholders of the Company and the weighted average number of ordinary shares in issue during the year.

The calculation of diluted earnings per share is based on the profit for the year attributable to ordinary shareholders of the Company. The weighted average number of ordinary shares used in the calculation is the number of ordinary shares in issue during the year, as used in the basic earnings per share calculation, and the weighted average number of ordinary shares assumed to have been issued at no consideration on the deemed exercise or conversion of all dilutive potential ordinary shares into ordinary shares.

A diluted earnings per share amount for the year ended 31 December 2005 has not been presented as exercise prices of the outstanding share options of the Company were greater than the market price of the Company’s shares prevailing during a substantial period of the year ended 31 December 2005.

The calculations of basic and diluted earnings per share are based on:

Earnings Profit attributable to ordinary shareholders of the Company, used in the basic earnings per share calculation Shares Weighted average number of ordinary shares in issue during the year used in the basic earnings per share calculation Effect of dilution — weighted average number of ordinary shares: Share options	2006 2005 200,815 221,703 Number of shares 2006 2005 4,317,072,600 4,316,884,381 43,138,686 — 4,360,211,286 4,316,884,381	2005 221,703

		4,316,884,381

– I-49 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

13. PROPERTY, PLANT AND EQUIPMENT

Group

31 December 2006

Notes Cost: At beginning of year Additions Disposals/write-off Acquisition of subsidiaries 39(a) Acquisition of a 51% participating interest in the Seram PSC 39(b) Transfers At 31 December 2006 Accumulated depreciation and impairment: At beginning of year Provided during the year Disposals/write-off Impairment/(reversal of impairment) Exchange realignment At 31 December 2006 Net book value: At 31 December 2006	Oil and gas properties — 7,975 — — 846,530 — 854,505 — 3,323 — — — 3,323 851,182	Freehold Leasehold land improvements 5,832 4,119 25 210 — — — — — — — — 5,857 4,329 — 867 — 742 — — — — — 2 — 1,611 5,857 2,718	Motor vehicles, plant, machinery, tools and equipment 977,819 41,710 (19,184 ) 117,990 — 15,891 1,134,226 125,389 63,662 (4,875 ) (14,583 ) 2,091 171,684 962,542	Construction in progress and construction material — 85,714 (8,711 ) 69,172 — (36,440 ) 109,735 — — — — — — 109,735	Furniture and fixtures 1,377 755 (165 ) 2,524 2,067 — 6,558 238 565 (72 ) — — 731 5,827	Buildings and structures 275,926 10,700 (3,181 ) 122,199 — 20,549 426,193 21,048 19,253 (257 ) 191 767 41,002 385,191	Capital works 60,582 26,279 (163 ) 3,996 — — 90,694 7,499 5,015 — 9,499 232 22,245 68,449	Total 1,325,655 173,368 (31,404 ) 315,881 848,597 — 2,632,097 155,041 92,560 (5,204 ) (4,893 ) 3,092 240,596 2,391,501

Note: As at 31 December 2006, the property, plant and equipment of HK$62,252,000 (2005: Nil) were pledged against the bank loans as further detailed in note 33(b) to the financial statements. Freehold land of the Group is located in Australia.

– I-50 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

13. PROPERTY, PLANT AND EQUIPMENT (continued)

Group

31 December 2005

Motor

Cost: At beginning of year Additions Disposals/write-off Reclassification to a disposal group held for sale Exchange realignment At 31 December 2005 Accumulated depreciation and impairment: At beginning of year Provided during the year Disposals/write-off Impairment Reclassification to a disposal group held for sale At 31 December 2005 Net book value: At 31 December 2005	Oil and gas properties 189,612 114,093 — (303,705 ) — — 3,848 50,043 — — (53,891 ) — —	Freehold Leasehold land improvements 4,964 2,305 1,155 2,239 — (462 ) — — (287 ) 37 5,832 4,119 — 373 — 656 — (162 ) — — — — — 867 5,832 3,252	vehicles, plant, machinery, tools and equipment 1,015,271 17,565 (1,596 ) — (53,421 ) 977,819 66,141 47,436 (921 ) 12,733 — 125,389 852,430	Construction in progress and construction material — — — — — — — — — — — — —	Furniture and fixtures 3 1,385 (11 ) — — 1,377 — 238 — — — 238 1,139	Buildings and structures 286,882 8,744 (5,577 ) — (14,123 ) 275,926 9,278 11,770 — — — 21,048 254,878	Capital works 57,699 3,943 — — (1,060 ) 60,582 3,312 4,187 — — — 7,499 53,083	Total 1,556,736 149,124 (7,646 ) (303,705 ) (68,854 ) 1,325,655 82,952 114,330 (1,083 ) 12,733 (53,891 ) 155,041 1,170,614

Note: During the year ended 31 December 2005, the directors of the Company considered that certain machinery, tools and equipment were impaired following the sudden failure of electricity supply that had occurred in late 2005. Based on the estimated recoverable amount set out in an insurance compensation plan covering the said machinery, tools and equipment, an impairment provision of HK$12,733,000 was made in 2005.

– I-51 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

14. PREPAID LAND LEASE PREMIUMS

Group

Arising on acquisitions of subsidiaries (note 39(a)) Cost at 31 December Amortisation Carrying amount at 31 December Current portion included in prepayments, deposits and other receivables Non-current portion	2006 60,564 60,564 (948) 59,616 (1,263) 58,353	2005 —
		— —
		— —
		—

The leasehold land is held under a long term lease and is situated in the PRC. Leasehold land of HK$1,300,000 is pledged for bank loans as further detailed in note 33(b) to the financial statements.

15. OTHER INTANGIBLE ASSETS

Group

	Mining rights
Arising on acquisitions of subsidiaries (note 39(a))	139,904
Additions	32
At 31 December 2006	139,936
Amortisations provided during the year	(4,235)
Net carrying amount at 31 December 2006	135,701

As at 31 December 2006, the mining rights of HK$135,701,000 were pledged against certain bank loans of the Group as further detailed in note 33(b) to the financial statements.

– I-52 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

16. OTHER ASSETS

Group Cost: At beginning of year Exchange realignment At 31 December Accumulated amortisation: At beginning of year Provided during the year At 31 December Net book value: At 31 December Non-current portion Current portion Other assets represent the amounts paid for the ESA. GOODWILL Group Cost: At beginning and end of year	2006 737,311 49,615 786,926 105,068 62,930 167,998 618,928 555,983 62,945 618,928 2006 341,512	2005 780,367 (43,056) 737,311 46,720 58,348 105,068 632,243 573,878 58,365 632,243 2005 341,512

17. GOODWILL

– I-53 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

17. GOODWILL (continued)

Group (continued)

Impairment testing of goodwill

Goodwill acquired through business combinations has been allocated to the following cash-generating units, which are reportable segments, for impairment testing:

aluminium smelting segment of HK$316,830,000 (2005: HK$316,830,000); and
import and export of commodities segment of HK$24,682,000 (2005: HK$24,682,000).

Aluminium smelting segment

The recoverable amount of the aluminium smelter cash-generating unit is determined based on a value in use calculation using cash flow projections based on financial budgets covering a five-year period approved by senior management. The discount rate applied to cash flow projections is 6.22% (2005: 5.5%).

Import and export of commodities segment

The recoverable amount of the import and export of commodities cash-generating unit is determined based on fair value less costs to sell. The fair value is calculated by reference to the market share price of the listed vehicle of the import and export of commodities segment (CATL) as at 31 December 2006.

18. INTERESTS IN SUBSIDIARIES

Company Unlisted shares, at cost Due from subsidiaries Due to subsidiaries Provision for impairments	2006 173,134 2,822,924 (1,716) 2,994,342 (611,700) 2,382,642	2005 173,134 2,004,583 (1,716) 2,176,001 (454,500) 1,721,501

The balances with subsidiaries are unsecured, interest-free and have no fixed terms of repayment.

– I-54 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

18. INTERESTS IN SUBSIDIARIES (continued)

Particulars of the principal subsidiaries are as follows:

	Place of		Percentage of
	incorporation/	Nominal value	equity interest
	registration	of issued shares/	attributable to
Name	and operations	paid-up capital	the Company	Principal activities
Directly held
SEA Wood Investment	British Virgin Islands/	US$10,000	100	Investment holding
Holdings Limited	Hong Kong
Starbest Venture	British Virgin Islands/	US$1	100	Investment holding
Limited	Hong Kong
CITIC Oil and Gas	British Virgin Islands/	US$100	100	Investment holding
Holdings Limited	Hong Kong
Star Elite Venture	British Virgin Islands/	US$1	100	Investment holding
Limited*	Hong Kong
Indirectly held
Nusoil Manufacturing	British Virgin Islands/PRC	US$100	100	Investment holding
Limited
Wing Lam (International)	Hong Kong	HK$60,000,000	100	Investment holding
Timber Limited
Dongguan Xinlian	PRC	HK$60,000,000	100	Dormant
Wood Products Company
Limited (note (a))
Global Enterprises (HK)	Hong Kong	HK$2	100	Provision of
Limited				management services
Maxpower Resources	British Virgin Islands/	US$1	100	Investment holding
Limited	Hong Kong
Toplight Resources	British Virgin Islands/	US$1	100	Investment holding
Limited	Hong Kong

– I-55 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS HK$’000

18. INTERESTS IN SUBSIDIARIES (continued)

	Place of		Percentage of
	incorporation/	Nominal value	equity interest
	registration	of issued shares/	attributable to
Name	and operations	paid-up capital	the Company	Principal activities
Indirectly held (continued)
Richfirst Holdings	British Virgin Islands/	US$100	100	Investment holding
Limited	PRC
Cogent Assets Limited	British Virgin Islands/	US$2	100	Investment holding
	Hong Kong
Group Smart Resources	British Virgin Islands/	US$1	100	Investment holding
Limited	Hong Kong
Highkeen Resources	British Virgin Islands/	US$1	100	Investment holding
Limited	Hong Kong
CITIC Petrochemical	British Virgin Islands/	US$1	100	Investment holding
Holdings Limited	Hong Kong
CITIC Petrochemical	British Virgin Islands/	US$1	100	Investment holding
Investments Limited	Hong Kong
CITIC Resources Australia	State of Victoria, Australia	A$199,019,212	100	Investment holding
Pty Limited#
CITIC Portland Holdings	State of Victoria, Australia	A$196,791,454	100	Investment holding
Pty Limited#
CITIC Australia (Portland)	State of Victoria, Australia	A$45,675,117	100	Aluminium smelting
Pty Limited#
CITIC Portland Surety	State of Victoria, Australia	A$1	100	Investment holding
Pty Limited#
CITIC (Portland) Nominees I	State of Victoria, Australia	A$2	100	Investment holding
Pty Limited (note (b))#

– I-56 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS HK$’000

18. INTERESTS IN SUBSIDIARIES (continued)

	Place of		Percentage of
	incorporation/	Nominal value	equity interest
	registration	of issued shares/	attributable to
Name	and operations	paid-up capital	the Company	Principal activities
Indirectly held (continued)
CITIC (Portland) Nominees II	State of Victoria, Australia	A$2	100	Investment holding
Pty Limited (note (b))#
CITIC Nominees Pty Limited	State of Victoria, Australia	A$6,693,943	100	Investment holding
Partnership#
CITIC Nominees Pty	State of Victoria, Australia	A$2	100	Investment holding
Limited#
CITIC Portland Finance I	State of Victoria, Australia	A$2	100	Financing
Pty Limited#
CITIC Australia Trading	State of Victoria, Australia	A$7,635,440	77.66	Investment holding
Limited (note (c))#
CITIC Australia Commodity	State of Victoria, Australia	A$500,002	77.66	Import and export of
Trading Pty Limited#				commodities and
				manufactured goods
CITIC Tyres & Wheels	State of Victoria, Australia	A$100	77.66	Import of tyres
Pty Limited#				and alloy wheels
CITIC Batteries Pty Limited#	State of Victoria, Australia	A$2	77.66	Dormant
CITIC Australia Coal	State of Victoria, Australia	A$6,589,637	100	Investment holding
Pty Limited#
CITIC Australia Coal	State of Victoria, Australia	A$2,845,375	100	Exploration,
Exploration Pty Limited#				development and
				mining of coal
CITIC Australia Coppabella	State of Victoria, Australia	A$5,000,002	100	Mining and
Pty Limited#				production of coal

– I-57 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS HK$’000

18. INTERESTS IN SUBSIDIARIES (continued)

	Place of		Percentage of
	incorporation/	Nominal value	equity interest
	registration	of issued shares/	attributable to
Name	and operations	paid-up capital	the Company	Principal activities
Indirectly held (continued)
CITIC Australia Moorvale	State of Victoria, Australia	A$2	100	Exploration and
West Pty Limited#				development of
				coal mines
CITIC Olive Downs	State of Victoria, Australia	A$99,958	100	Exploration and
Pty Limited#				development of
				coal mines
CITIC West Walker	State of Victoria, Australia	A$91,812	100	Exploration and
Pty Limited#				development of
				coal mines
CITIC West Rolleston	State of Victoria, Australia	A$196,390	100	Exploration and
Pty Limited#				development of
				coal mines
CITIC West/North Burton	State of Victoria, Australia	A$34,238	100	Exploration and
Pty Limited#				development of
				coal mines
CITIC Capricorn	State of Victoria, Australia	A$9,549	100	Exploration and
Pty Limited#				development of
				coal mines
CITIC Bowen Basin	State of Victoria, Australia	A$378,353	100	Exploration and
Pty Limited#				development of
				coal mines
CITIC Nickel Pty Ltd#	State of Victoria, Australia	A$2	100	Investment holding
CITIC Nickel Australia	State of Victoria, Australia	A$1	100	Exploration and
Pty Limited#				development of
				nickel mines

– I-58 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS HK$’000

18. INTERESTS IN SUBSIDIARIES (continued)

	Place of		Percentage of
	incorporation/	Nominal value	equity interest
	registration	of issued shares/	attributable to
Name	and operations	paid-up capital	the Company	Principal activities
Indirectly held (continued)
CITIC Nickel International	State of Victoria, Australia	A$1	100	Exploration and
Pty Limited#				development of
				nickel mines
Beijing Qian Quan Investment	Beijing, PRC	RMB1,243,173	100	Consulting
Consultant Co. Limited#
Beijing Yi Xin Mei	Beijing, PRC	RMB500,000	100	Consulting
Pty Limited#
CITIC Mining Equipment	State of Victoria, Australia	A$2	100	Investment holding
Pty Limited* #
Tyre Choice Pty Limited* #	State of Victoria, Australia	A$2	77.66	Investment holding
CITIC Dameng Holdings	Bermuda/Hong Kong	HK$100,000	80	Investment holding
Limited
CITIC Dameng Investments	British Virgin Islands/	US$1	80	Investment holding
Limited (note (d))	Hong Kong
CITIC Dameng Trading	Hong Kong	HK$10,000	80	Trading
Limited
CITIC Dameng Mining	PRC	RMB500,000,000	48	Exploration and
Industries Ltd.* ^				development of
(��)			manganese mines
Guangxi Start Manganese	PRC	RMB24,280,000	34.16	Exploration and
Material Co., Ltd				development of
(��)*	∆			manganese mines

– I-59 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

18. INTERESTS IN SUBSIDIARIES (continued)

	Place of		Percentage of
	incorporation/	Nominal value	equity interest
	registration	of issued shares/	attributable to
Name	and operations	paid-up capital	the Company	Principal activities
Indirectly held (continued)
Guangxi Nanning Kuanguang	PRC	RMB1,000,000	36.96	Manufacture of
Industry & Trade Co., Ltd				manganese and
(��				metal products
��)*∆
Tiandeng Dameng	PRC	RMB6,000,000	28.8	Manufacture and
Ferroalloy Co., Ltd				sale of metal
(��				products
��)*∆
Guangxi Daxin Dabao	PRC	RMB2,680,000	28.8	Iron alloy smelting
Ferroalloy Co., Ltd
(��
��)*∆
CITIC Indonesia Energy	British Virgin Islands/	US$1	100	Investment holding
Limited*	Hong Kong
CITIC Seram Energy	British Virgin Islands/	US$50,000	100	Investment holding
Limited* (note (e))	Indonesia
CITIC New Highland	British Virgin Islands/	US$1	100	Investment holding
Petroleum Limited*	Hong Kong

Acquired or established during the year.
Not audited by Ernst & Young Hong Kong or other Ernst & Young International member firms.
^ Sino-foreign equity joint venture registered under the PRC law.
∆ Limited liability company registered under the PRC law.

The above table lists the subsidiaries of the Company which, in the opinion of the directors of the Company, principally affected the results for the year or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors of the Company, result in particulars of excessive length.

– I-60 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS HK$’000

18. INTERESTS IN SUBSIDIARIES (continued)

Notes:

(a) Dongguan Xinlian Wood Products Company Limited (“Dongguan Xinlian”) is a wholly-foreign owned enterprise established by Wing Lam (International) Timber Limited (“Wing Lam”) in the PRC for a period of 12 years commencing from the date of issuance of its business licence on 3 January 1997.
(b) These two companies jointly own CITIC Nominees Pty Limited Partnership, which owns the interests in the Portland Aluminium Smelter joint venture.
(c) The shares of CATL are listed on the Australian Stock Exchange (the “ASX”).

CATL operates a pre-IPO share option scheme for its directors and other employees (the “Pre-Scheme”). The purpose of the Pre-Scheme is to provide incentives for employees to remain in their employment for the long term. CATL had granted share options under the Pre-Scheme to its directors and other employees to subscribe for a total of 4,700,000 shares in CATL at subscription prices that range from A$0.20 to A$0.35 per share. No consideration is payable by participants on the grant of the options.

(d) On 28 February 2006, CITIC Dameng Investments Limited completed the acquisition of the Manganese Company. The Manganese Company in turn holds controlling interests in Guangxi Start Manganese Material Co., Ltd., Guangxi Nanning Kuanguang Industry & Trade Co. Ltd., Tiandeng Dameng Ferroalloy Co., Ltd. and Guangxi Daxin Dabao Ferroalloy Co., Ltd.
(e) CITIC Seram Energy Limited (“CITIC Seram”) acquired a 51% participating interest in the 30 year Seram PSC which owns certain oil producing assets in Indonesia for a purchase price of HK$874,952,000, subject to adjustment.

On 23 November 2006, CITIC Seram completed the acquisition of a 51% participating interest in the Seram PSC from KUFPEC (Indonesia) Limited. As of the same date, CITIC Seram became the operator responsible for managing and operating exploration and development at the Seram Island Non-Bula Block.

CITIC Seram has granted to Lion Petroleum (Seram) Limited (“Lion”) a put option (the “Put Option”), in which Lion has the right (but not the obligation) to sell to CITIC Seram, and require CITIC Seram to acquire Lion’s 2.5% participating interest in the Seram PSC for a consideration of US$4,700,000 (HK$36,700,000 million), subject to adjustment. The Put Option may be exercised at any time during the three months period from the date on which the budget and work program for the year 2007 for the Seram joint venture are approved by the operating committee in accordance with the joint operating agreement of Seram. Lion did not exercise the Put Option and the Put Option lapsed in March 2007.

– I-61 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

19. INTERESTS IN JOINTLY-CONTROLLED ASSETS

At 31 December 2006, the Group had joint venture operations in which the Group holds interests as follows:

(a) 22.5% participating interest in the Portland Aluminium Smelter joint venture, the principal activity of which is aluminium smelting;
(b) 16% participating interest in the spent potlining project joint venture at Portland, the principal activity of which is the processing of spent potlining;
(c) 7% participating interest in the Coppabella and Moorvale coal mines joint venture, the principal activity of which is the mining and sale of coal;
(d) 10% participating interest in the Olive Downs joint venture, the principal activity of which is the exploration of coal;
(e) 10% participating interest in the Moorvale West joint venture, the principal activity of which is the exploration of coal;
(f) 10% participating interest in the West/North Burton joint venture, the principal activity of which is the exploration of coal;
(g) 10% participating interest in the West Rolleston joint venture, the principal activity of which is the exploration of coal;
(h) 15% participating interest in the West Walkers joint venture, the principal activity of which is the exploration of coal;
(i) 15% participating interest in the Capricorn joint venture, the principal activity of which is the exploration of coal;
(j) 15% participating interest in the Bowen Basin Coal joint venture, the principal activity of which is the exploration of coal;
(k) 50% participating interest in the CB Exploration joint venture, the principal activity of which is the exploration of coal; and
(l) 51% participating interest in the Seram PSC. Details of the acquisition of the participating interest in this oilfield are included in note 39(b) to the financial statements.

The jointly-controlled assets as detailed in (c) to (k) have different reporting dates to the Group, being 30 June compared to 31 December. The jointly-controlled assets as detailed in (a) to (k) are not audited by Ernst & Young Hong Kong or other Ernst & Young International member firms. The audited financial statements issued by another auditors of these jointly-controlled assets up to 31 December 2006 have been used for the purpose of preparation of the consolidated financial statements of the Group.

– I-62 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

19. INTERESTS IN JOINTLY-CONTROLLED ASSETS (continued)

The Group’s interest in the net assets employed in the Portland Aluminium Smelter joint venture, which accounts for over 10% of the Group’s total assets, is included in the consolidated balance sheet under the classifications shown below:

Non-current assets Current assets Currenrt liabilities Non-current liabilities Share of net assets employed in the Portland Aluminium Smelter joint venture	2006 2,200,182 146,986 (318,611) (92,210) 1,936,347	2005 2,070,585 114,681 (99,115) (397,667)
		1,688,484

The Group’s interests in the net assets employed in the Seram joint venture is included in the consolidated balance sheet under the classifications shown below:

Non-current assets Current assets Current liabilities Non-current liabilities Share of net assets employed in the Seram joint venture	2006 853,295 203,556 (49,604) (100,483) 906,764	2005 — — — —
		—

The Group’s interests in the combined net assets employed in the other jointly-controlled assets are included in the consolidated balance sheet under the classifications shown below:

Non-current assets Current assets Current liabilities Non-current liabilities Share of net assets employed in the other joint ventures	2006 68,602 94,123 (43,599) (14,696) 104,430	2005 61,166 58,356 (31,768) (10,564)
		77,190

– I-63 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

20. AVAILABLE-FOR-SALE EQUITY INVESTMENTS

Non-current listed equity investments, at fair value:

Australia Canada	Group 2006 2005 770,538 657,035 75,398 — 845,936 657,035	Group 2006 2005 770,538 657,035 75,398 — 845,936 657,035
		657,035

The cost of the above investments were:

Australia Canada	Group 2006 2005 296,344 258,522 130,013 — 426,357 258,522	Group 2006 2005 296,344 258,522 130,013 — 426,357 258,522
		258,522

During the year, the loss on fair value of the Group’s available-for-sale equity investments of HK$10,175,000 (2005: gain of HK$124,350,000) and related deferred tax liability of HK$13,332,000 (2005: HK$37,305,000) amounted to HK$23,507,000 had been debited directly from equity (2005: HK$87,045,000 had been credited directly into equity).

The fair values of available-for-sale listed equity investments are based on quoted market prices.

21. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

Current portion

The current balance includes an amount of HK$86,115,727 being professional fees incurred for financial and legal advice in connection with the Group’s potential investment projects. These amounts are intended to be capitalised into the cost of the potential investments if the Group proceeds with these investments. Otherwise such professional fees will be expensed off to the consolidated income statement once it is determined that the Group will not proceed with the related investment.

The current year’s balance also includes an amount of US$200,000,000 (HK$1,560,000,000) which was paid as earnest money for the potential investment project in Kazakhstan, further details of which are set out in note 43(b) to the financial statements.

– I-64 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

21. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES (continued)

Current portion (continued)

An amount of HK$2,066,000 (2005: HK$301,000) is included in the current portion and represents an amount due from fellow subsidiaries of the Group. The balance is unsecured, interest-free and has no fixed terms of repayment.

Non-current portion

Last year’s non-current balance included an amount of RMB300,000,000 (HK$288,500,000) and an amount of HK$17,170,000 which was paid as deposit and prepayment of professional fees for the Manganese Company. Last year’s balance also included prepayment of professional fees of HK$5,739,000 directly attributable to other potential investments.

22. INVENTORIES

Raw materials Work in progress Finished goods	Group 2006 2005 184,149 67,468 124,512 37,830 803,489 550,840 1,112,150 656,138	Group 2006 2005 184,149 67,468 124,512 37,830 803,489 550,840 1,112,150 656,138
		656,138

23. DUE FROM RELATED COMPANIES/THE ULTIMATE HOLDING COMPANY

The amounts due from related companies/the ultimate holding company of the Group are unsecured, interest-free and repayable on demand. The carrying values of the amounts due from related companies/the ultimate holding company approximate to their fair values.

The maximum outstanding balances during the year for related companies and the ultimate holding company were HK$51,486,000 and HK$34,320,000 respectively.

– I-65 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS HK$’000

24. LOAN RECEIVABLE

The Group’s loan receivable arose from the conversion of the Dagang Participating Interest. More details are given in notes 28 and 43(c) to the financial statements.

The amortised cost of the Group’s loan receivable approximate to its fair value.

The maturity profile of the loan receivable as at the balance sheet date is analysed into the remaining periods to its contractual maturity dates as follows:

Repayable: Within three months Three months to one year One year to five years Portion classified as current assets Portion classified as non-current assets ACCOUNTS RECEIVABLE Notes receivables Trade receivables	Group 2006 2005 4,235 — 13,092 — 21,615 — 38,942 — (17,327) — 21,615 — Group 2006 2005 18,522 — 921,416 395,749 939,938 395,749	Group 2006 2005 4,235 — 13,092 — 21,615 — 38,942 — (17,327) — 21,615 — Group 2006 2005 18,522 — 921,416 395,749 939,938 395,749
		395,749

25. ACCOUNTS RECEIVABLE

Notes receivables represent bank acceptance notes of the Manganese Company which are issued by major banks in China.

The Group normally offers credit terms of 30 to 60 days to its established customers.

– I-66 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

25. ACCOUNTS RECEIVABLE (continued)

An aged analysis of the accounts receivable as at the balance sheet date, based on the invoice date, is as follows:

Within one month One to two months Two to three months Over three months	Group 2006 2005 643,465 313,181 255,889 76,950 17,794 4,630 22,790 988 939,938 395,749	Group 2006 2005 643,465 313,181 255,889 76,950 17,794 4,630 22,790 988 939,938 395,749
		395,749

Included in the Group’s total accounts receivable is an amount due from the Group’s fellow subsidiary of HK$235,785,000 (2005: HK$18,313,000), which is repayable on similar credit terms to those offered to other customers of the Group.

26. EQUITY INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS

	Group
	2006	2005
Current unlisted equity investments, at fair value:
Australia	1,974	1,830

The above equity investments at 31 December 2005 and 2006 were classified as held for trading.

27. CASH AND BANK BALANCES AND PLEDGED BANK DEPOSITS

Cash and bank balances Time deposits*	Group 2006 2005 310,258 166,033 540,486 1,353,562 850,744 1,519,595	Company 2006 2005 1,955 48 20,735 887,632 22,690 887,680	Company 2006 2005 1,955 48 20,735 887,632 22,690 887,680
			887,680

Amounts of HK$75,528,279 (2005: HK$522,332,000) and HK$15,372,065 (2005: HK$520,618,000) of the time deposits

of the Group and of the Company, respectively, as at 31 December 2006 were placed with CITIC Ka Wah Bank Limited.

– I-67 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS HK$’000

27. CASH AND BANK BALANCES AND PLEDGED BANK DEPOSITS (continued)

Cash at bank earns interest at floating rates based on daily bank deposit rates. Short term time deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group, and earn interest at the respective short term time deposit rates. The carrying amounts of the cash and cash equivalents and pledged deposits approximate to their fair values.

At the balance sheet date, the cash and bank balances of the Group and the Company denominated in Renminbi (“RMB”) amounted to HK$116,754,514 and HK$2,310,052 (2005: HK$147,509 and Nil). The RMB is not freely convertible into other currencies, however, under Mainland China’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Group is permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business.

28. ASSETS/LIABILITIES OF A DISPOSAL GROUP CLASSIFIED AS HELD FOR SALE

Pursuant to a resolution of the board of directors of the Company passed on 15 November 2005, the Company announced the board’s decision to exercise its option to convert the Dagang Participating Interest into Ivanhoe Shares and Ivanhoe Loan. The Group decided to cease its holding of Dagang Participating Interest because the Group was of the view that the conversion is in the interests of the Group as it will provide the Group with exposure to all of Ivanhoe’s oil and energy interests rather than just the Dagang Oilfield project. The conversion was completed on 18 February 2006. Further details of the conversion are included in note 43(c) to the financial statements. As at 31 December 2005, the assets and liabilities related to the Dagang Participating Interest were classified as a disposal group held for sale.

The results of the Dagang Participating Interest for the period/year are presented below:

Period from 1 January 2006 to 18 February 2006 Revenue 13,604 Expenses (13,771) Loss before tax (167) Tax 889 Net profit/(loss) for the period/year 722	2005 77,429 (84,049) (6,620) (887) (7,507)

– I-68 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

28. ASSETS/LIABILITIES OF A DISPOSAL GROUP CLASSIFIED AS HELD FOR SALE (continued)

The major classes of assets of the Dagang Participating Interest classified as held for sale as at 31 December are as follows:

Assets Property, plant and equipment, net Accounts receivable Assets classified as held for sale Liabilities Accounts payable	2006 — — — —	2005 249,814 16,282
		266,096

		33,072

29. ACCOUNTS PAYABLE

An aged analysis of the accounts payable as at the balance sheet date, based on the invoice date, is as follows:

Within one month One to two months Two to three months Over three months	Group 2006 2005 455,696 170,572 58,416 14,762 5,284 172 14,392 782 533,788 186,288	Group 2006 2005 455,696 170,572 58,416 14,762 5,284 172 14,392 782 533,788 186,288
		186,288

The accounts payable are non interest-bearing and are normally settled on 60-day terms.

There is no account payable included in a disposal group (note 28) as at 31 December 2006 (2005: HK$33,073,000) which was aged within three months.

30. ACCRUED LIABILITIES AND OTHER PAYABLES

Included in the total balance was an amount of HK$7,210,000 (2005: HK$6,644,000) due to CITIC Group, the ultimate holding company of the Company, which represents an interest expense payable on loans totalling US$41,000,000 (HK$327,003,000) that had been advanced by CITIC Group (note 33(g)).

– I-69 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS HK$’000

31. DERIVATIVE FINANCIAL INSTRUMENTS

Forward currency contracts and currency options Forward commodity contracts Interest rate swap and options Derivative financial instruments Portion classified as non-current: Derivative financial instruments Current portion	Group 2006 Assets Liabilities 10,064 8,450 — 134,310 6,316 — — 185,223 16,380 327,983 — (41,063) 16,380 286,920

The carrying amounts of forward currency and commodity contracts, interest rate swap and embedded derivatives are the same as their fair values.

The Group is the party to derivative financial instruments in the normal course of business in order to hedge the exposure to fluctuations in foreign exchange rates, commodity prices and interest rates.

Accounting policies in relation to derivative financial instruments are set out in note 2.4 to the financial statements.

Forward currency contracts and currency option — cash flow hedges

The Group’s exports business in Australia involves transactions where both the sales revenue and the majority of the related costs of the goods sold are denominated in United States dollars, as well as other currencies. The Group has entered into forward currency contracts and currency options to hedge its net foreign currency exposures in relation to such transactions.

Imports of the Group generally involve transactions where the purchases of imported goods (as well as some of the costs related to such purchases) are denominated in United States dollars, as well as other currencies. However, subsequent sales of such goods are generally denominated in Australian dollars. Therefore, to enable the Group to manage such business operations, including setting the Australian dollar selling prices of the imported goods, forward currency contracts and currency options are entered into to hedge current and anticipated future purchases.

The contracts are timed to mature when major shipments are scheduled to arrive and cover anticipated purchases and sales in the ensuing financial year. Forward currency contracts described above are considered to be cash flow hedges, and are accounted for in accordance with the accounting policy set out in note 2.4 to the financial statements.

– I-70 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

31. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

Forward currency contracts and currency option — cash flow hedges (continued)

At 31 December, the terms of the outstanding contracts held by the Group were as follows:

		2006	2006		2005
		Weighted		Weighted
		average	Contractual	average	Contractual
		exchange rate	amount	exchange rate	amount
			HK$’000		HK$’000
Forward contracts:
(i)	Sell A$/Buy US$
	Less than 3 months	0.7681	303,625	0.7426	168,917
	Buy A$/Sell US$
	Less than 3 months	0.7312	68,849	0.7403	78,484
	In 3 to 12 months, inclusive	0.7137	58,548	0.7435	163,983
	In 1 to 2 years, inclusive	0.7134	6,413	0.7435	18,222
Currency options:
(i)	Put US$ option sell
	Less than 3 months	0.7700	40,081	0.7565	12,482
	In 3 to 12 months, inclusive	—	—	0.7704	3,531
(ii)	Call A$ option buy
	Less than 3 months	—	—	0.7565	12,482
	In 3 to 12 months, inclusive	—	—	0.7704	3,531

Amounts disclosed above represent currencies sold measured at the contracted rate.

The portion of gain or loss on the hedging instruments that is determined to be an effective hedge is recognised directly in equity. When a cash flow occurs, the Group adjusts the initial measurement of the component recognised in the balance sheet by the related amount in equity.

– I-71 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

31. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

Forward commodity contracts — cash flow hedges

The Group has also committed to the following contracts in order to protect the Group from adverse movements in aluminium prices.

All commodity contracts are normally settled other than by physical delivery of the underlying commodities and hence are classified as financial instruments. On maturity, the contracted price is compared to the spot price and the differential is applied to the contracted quantity. A net amount is paid or received by the Group.

Aluminium forward contracts are entered into for the purpose of hedging future production, the contracts are considered to be cash flow hedges, and are accounted for in accordance with the accounting policy in note 2.4 to the financial statements.

At 31 December, the terms of the Group’s outstanding commodity derivative financial instruments were as follows:

		2006			2005
	Quantity	Average price	Contractual	Quantity	Average price	Contractual
	hedged	per tonne	amount	hedged	per tonne	amount
	(MT)	HK$	HK$’000	(MT)	HK$	HK$’000
Aluminium forward (sold):
Less than 3 months	5,600	15,733	88,883	7,800	13,697	106,835
In 3 to 12 months, inclusive	15,750	16,988	267,581	19,350	13,681	264,776
In 1 to 2 years, inclusive	6,700	15,444	102,340	2,150	13,681	29,421
In 2 to 5 years, inclusive	450	14,680	6,604	12,000	12,769	153,213

Interest rate swap contracts and options — cash flow hedges

The Group has entered into interest rate swap to hedge against unfavorable movements in interest rates payable on floating rate borrowings. The Group is obliged to pay interest at fixed rates and receive interest at floating rates on the notional principal of the swap, with settlement being on a net basis.

The contracts require settlement of net interest receivable or payable at specified intervals which coincide with the dates on which interest is payable on the underlying debt. Such net receipts or payments are recognised as an adjustment to interest expense at the time the floating rates are set for each interval. The floating rates for A$ denominated swap are set by reference to Bank Bill Swap reference rate (“BBSW”) and for US$ denominated swap are set by reference to London Interbank Offered Rate (“LIBOR”).

Swap currently in place cover 50% of the syndicate loan principal outstanding in CITIC Australia (Portland) Pty Limited and are timed to expire as each loan repayment falls due. The fixed interest rate is fixed at 3.58% over the whole term of the contract and the variable interest rates are set at 6-month LIBOR.

– I-72 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

31. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

Interest rate swap contracts and options — cash flow hedges (continued)

Interest rate options are entered from time to time by the coal mining and other joint venture managers on behalf of the joint venture partners to reduce the impact of changes in interest rates on floating rate long- term basis.

At 31 December, the remaining terms, notional principal amounts and other significant terms of the Group’s outstanding interest rate swap contracts and options were as follows:

US$ interest rate swap:

	2006		2005
	Weighted		Weighted
	average	Notional	average	Notional
	rate (%)	amount	rate (%)	amount
Within 1 year	3.58	23,400	3.58	23,400
In the fifth year	3.58	296,400	3.58	319,800

The terms of the forward contracts and options have been negotiated to match the terms of the commitments. The cash flow hedges of the expected future sales and the expected future purchases were assessed to be highly effective and a net loss, before deferred tax, of HK$78,385,000 was included in the hedging reserve as follows:

Total fair value losses included in the hedging reserve Total fair value losses included in profit or loss Deferred tax on fair value losses Net losses on cash flow hedges	2006 78,385 111,667 (9,989) 180,063	2005 174,468 13,235 (56,313)
		131,390

32. DUE TO A MINORITY SHAREHOLDER

The amount due to a minority shareholder is unsecured, interest-free and repayable on demand. The carrying amount of the amount due to a minority shareholder approximates to its fair value.

– I-73 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS HK$’000

33. BANK AND OTHER LOANS

Notes Bank loans — unsecured # (a) Bank loans — secured * # (Note) (b) Unsecured loan from Transport Infrastructure Corridor (c) Unsecured loan from Exploration Permit for coal (d) Unsecured loans from former minority shareholders ^ (e) Unsecured loan from a minority shareholder ^ (f) Unsecured loan from CITIC Group # (g) Unsecured loan from��^ (h) Bank loans — unsecured #	Group 2006 2005 2,465,035 772,594 878,650 686,405 6,815 7,850 6,242 6,775 11,862 11,862 61,930 61,330 327,003 358,800 45,025 — 3,802,562 1,905,616 Company 2006 2005 1,513,200 —

Fixed rate

Floating rate

^ Interest free

Note: Includes the effects of a related interest rate swap as further detailed in note 31 to the financial statements.

– I-74 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS HK$’000

33. BANK AND OTHER LOANS (continued)

Notes:

(a) The unsecured bank loans of HK$2,465,035,000 include mainly a revolving term loans denominated in U.S. dollars that totalled US$230,000,000 (HK$1,419,560,000), which was interest bearing at LIBOR + (0.5% to 0.7%). The unsecured bank loans also include trade finance facilities of A$154,218,268 (HK$951,835,000) which were interest bearing at LIBOR and are guaranteed by CITIC Resources Australia Pty Limited.
(b) The secured bank loans of HK$878,650,000 include mainly:

A US$82,000,000 (HK$639,600,000) loan due by 31 December 2008 (extendable in accordance with the terms of the Portland Aluminum Smelter joint venture), which was interest-bearing at LIBOR and secured by a 22.5% participating interest in Portland Aluminium Smelter joint venture.

A loan of RMB243,846,336 (HK$239,050,000) with due date from 17 January 2007 to 14 September 2010, which was interest-bearing at rates ranging from 6.12% to 7.25% per annum and secured by property, plant and equipment of HK$62,252,000, prepaid land lease premiums of HK$1,300,000, a letter of credit, mining rights of HK$135,701,000 and a guarantee provided by a minority shareholder.

(c) The loans were obtained from the State Government of Queensland, Australia. The loans are unsecured, interest bearing at 6.69% per annum and repayable in equal quarterly instalments by 30 September 2012.
(d) The loans were obtained from the manager of the Coppabella and Moorvale coal mines joint venture. The loans are unsecured, interest bearing at 6% per annum and repayable in equal annual instalments by 11 December 2013.
(e) The loans were from the former minority shareholders (details of which are set out in note 40(a)). The loans are unsecured, interest-free and not repayable within one year.
(f) The loan was from a minority shareholder of CITIC Dameng Investments Limited, namely CITIC United Asia Investments Limited (which is an indirect wholly-owned subsidiary of CITIC Group). The loan is unsecured, interest-free and not repayable within one year.
(g) The loan of US$41,000,000 (HK$327,003,000) was granted by CITIC Group, the ultimate holding company of the Group. The loan is unsecured, interest bearing at LIBOR + 1.5% per annum and repayable in equal annual instalments by September 2015.
(h) The loans were from ��. The loans are unsecured, interest-free and repayable on 1 July 2007.

– I-75 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

33. BANK AND OTHER LOANS (continued)

Bank loans repayable:
Within one year or on demand
In the second year
In the third to fifth years, inclusive
Beyond five years
Other loans repayable:
Within one year
In the second year
In the third to fifth years, inclusive
Beyond five years
Loans from former minority shareholders, beyond one year
Loans from minority shareholders, beyond one year
Loans from CITIC Group:
Within one year
In the second year
In the third to fifth years, inclusive
Beyond five years
Total bank and other loans
Portion classified as current liabilities
Non-current portion
Bank loans repayable:
Within one year or on demand
In the second year
In the third to fifth years, inclusive
Portion classified as current liabilities
Non-current portion

Group
2006
2005
1,495,017
817,476
833,648
48,719
1,015,020
140,400
—
452,404
3,343,685
1,458,999
46,796
1,917
1,878
1,917
6,335
5,751
3,073
5,040
58,082
14,625
11,862
11,862
61,930
61,330
46,209
39,000
38,999
39,000
116,998
117,000
124,797
163,800
327,003
358,800
3,802,562
1,905,616
(1,588,022)
(858,393)
2,214,540
1,047,223
Company
343,200
—
234,000
—
936,000
—
1,513,200
—
(343,200)
—
1,170,000
—

– I-76 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS HK$’000

33. BANK AND OTHER LOANS (continued)

The carrying amounts of the Group’s and the Company’s current borrowings approximate to their fair values. The carrying amounts and fair values of the Group’s non-current borrowings are as follows:

Group

Effective interest rate p.a. (%) Unsecured loans from Transport Infrastructure Corridor 5.921 Unsecured loans from Exploration Permit for coal 5.960 Unsecured loans from CITIC Group 6.034 Unsecured bank loans 5.855 Secured bank loans 5.898 Unsecured bank loans 5.898 Other secured bank loans 5.844 – 5.855 Unsecured loans from former minority shareholders 5.960 Unsecured loan from a minority shareholder 5.960	Carrying amounts 2006 2005 5,788 7,850 5,498 6,775 280,794 319,800 1,170,000 — 592,785 639,606 6,863 — 79,020 — 11,862 11,862 61,930 61,330 2,214,540 1,047,223	Fair values 2006 2005 5,923 7,955 5,506 6,826 289,509 315,863 1,176,820 — 593,662 630,411 6,955 — 81,091 — 11,557 11,615 59,755 60,051 2,230,778 1,032,721	Fair values 2006 2005 5,923 7,955 5,506 6,826 289,509 315,863 1,176,820 — 593,662 630,411 6,955 — 81,091 — 11,557 11,615 59,755 60,051 2,230,778 1,032,721
			1,032,721

Company

	Effective	interest	Carrying	amounts	Fair	values
	rate	p.a. (%)	2006	2005	2006	2005
Unsecured bank loans		6.034	1,170,000	—	1,176,820	—

– I-77 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

34. PROVISIONS

Group

At 1 January 2006 Acquisition of a joint venture (note 39(b)) Additions Amount written back Exchange realignment At 31 December 2006 Portion classified as current liabilities Non-current portion	Long service and leave payments 45,877 — 6,715 — 3,600 56,192 (45,476) 10,716	Provision for rehabilitation cost 73,363 — 34,365 (23,225) 5,798 90,301 (8,262) 82,039	Provision for abandonment cost — 24,682 112 — — 24,794 — 24,794	Total 119,240 24,682 41,192 (23,225) 9,398 171,287 (53,738) 117,549

35. DEFERRED TAX

The movements in the Group’s deferred tax liabilities and assets during the year were as follows:

Deferred tax liabilities — 2006

Accelerated tax depreciation At 1 January 2006 430,687 Acquisitions of subsidiaries (note 39(a)) 3,465 Deferred tax charged to the consolidated income statement during the year (note 10) (14,363) Deferred tax credited to equity during the year — Exchange realignment 30,613 Gross deferred tax liabilities at 31 December 2006 450,402	Fair value adjustments 40,298 7,788 (15,458) 30,461 6,442 69,531	Total 470,985 11,253 (29,821) 30,461 37,055 519,933

– I-78 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

35. DEFERRED TAX (continued)

Deferred tax assets — 2006

At 1 January 2006
Deferred tax charged to the consolidated income statement
during the year (note 10)
Deferred tax credited to equity during the year
Exchange realignment
Gross deferred tax assets at 31 December 2006
Net deferred tax liabilities at 31 December 2006
Deferred tax liabilities — 2005
Accelerated
tax depreciation
At 1 January 2005
449,170
Deferred tax charged to the consolidated
income statement during the year (note 10)
9,317
Deferred tax debited to equity during the year
—
Exchange realignment
(27,800)
Gross deferred tax liabilities
at 31 December 2005
430,687
Deferred tax assets — 2005
At 1 January 2005
Deferred tax charged to the consolidated income statement
during the year (note 10)
Exchange realignment
Gross deferred tax assets at 31 December 2005
Net deferred tax liabilities at 31 December 2005

Losses available
for offset against
future taxable profit
11,188
(1,434)
(4,484)
1,484
6,754
513,179
Fair value
adjustments
Total
62,955
512,125
(3,971)
5,346
(15,046)
(15,046)
(3,640)
(31,440)
40,298
470,985
Losses available
for offset against
future taxable profit
14,984
(2,925)
(871)
11,188
459,797

– I-79 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2006 2005

NOTES TO FINANCIAL STATEMENTS

HK$’000

36. SHARE CAPITAL

Authorised:

6,000,000,000 (2005: 6,000,000,000) ordinary shares of HK$0.05 each 300,000 300,000 Issued and fully paid: 4,318,184,381 (2005: 4,316,884,381) ordinary shares of HK$0.05 each 215,909 215,844

During the year, the subscription rights attaching to 1,300,000 share options were exercised at the subscription price of HK$1.08 per share, resulting in the issue of 1,300,000 ordinary shares of HK$0.05 each for a total cash consideration, before issuance expenses, of HK$1,404,000. The use of the proceeds is for the Group’s normal daily operation.

Share options

Details of the Company’s share option scheme and the share options issued under the scheme are included in note 37 to the financial statements.

37. SHARE OPTION SCHEME

On 30 June 2004, a new share option scheme (the “New Scheme”) was adopted by the Company to replace the share option scheme which was adopted by the Company on 21 August 1997 (the “Old Scheme”). The Old Scheme was terminated on 30 June 2005.

Pursuant to the New Scheme, the Company may grant options to eligible participants to subscribe for shares in the Company subject to the terms and conditions stipulated therein. A summary of the New Scheme is as follows:

— (a) Purpose To enable the Company to grant options to Eligible Participants (as defined below) as incentives and rewards for their contributions to the Group. — (b) Eligible Participants Being employees or executives or officers of the Company or any of its subsidiaries (including their respective executive and non-executive directors) and consultants, business associates and advisers who will provide or have provided services to the Group.

– I-80 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

37. SHARE OPTION SCHEME (continued)

The total number of shares which may be issued upon the exercise of all outstanding options granted and yet to be exercised under the New Scheme shall not exceed 30% of the total number of shares of the Company in issue.

(d) Maximum entitlement of each — Eligible Participant

The total number of shares issued and to be issued upon exercise of the options granted to each Eligible Participant (including exercised, cancelled and outstanding options) in any 12-month period up to and including the date of grant shall not exceed 1% of the total number of shares of the Company in issue at the date of grant.

(e) Period during which the shares must be taken up under an option

The period during which an option may be exercised is determined by the board of directors of the Company at its absolute discretion, except that no option may be exercised after 10 years from the date of adoption of the New Scheme, subject to early termination of the New Scheme.

(f) Minimum period for which an option must be held before it can be exercised
The minimum period for which an option must be held before it can be exercised is one year.
(g) Basis of determining the exercise price

The exercise price must be at least the highest of (i) the closing price of the shares of the Company on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) as stated in the Stock Exchange’s daily quotation sheet on the date of the grant, which must be a business day; (ii) the average of the closing prices of the shares of the Company on the Stock Exchange as stated in the Stock Exchange’s daily quotation sheets for the five business days immediately preceding the date of the grant; and (iii) the nominal value of a share.

(h) Remaining life of the New Scheme

The New Scheme remains in force until 29 June 2014 unless otherwise terminated in accordance with the terms stipulated therein.

Share options do not confer rights on the holders to dividends or to vote at shareholders’ meetings.

– I-81 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

37. SHARE OPTION SCHEME (continued)

On 2 June 2005, the Company granted share options under the New Scheme to its directors, certain consultants and employees to subscribe for a total of 167,000,000 ordinary shares in the Company at the exercise price of HK$1.08 per share. Of these, 45,683,116 ordinary shares to each of Mr. Kwok Peter Viem and Mr. Ma Ting Hung were granted subject to approval by shareholders of the Company in the special general meeting held on 26 July 2005 (the “SGM”) in accordance with the Listing Rules and the Rules of the New Scheme. Furthermore, all share options were granted on the basis that certain terms attached thereto required the approval of shareholders of the Company in the SGM as they constituted a change to the terms of the New Scheme. The closing price of the shares immediately before the date of grant was HK$1.07 per share.

On 28 December 2005, the Company granted additional share options under the New Scheme to its directors to subscribe for a total of 10,000,000 ordinary shares in the Company at the exercise price of HK$1.06 per share. The closing price of the shares immediately before the date of grant was HK$1.05 per share.

The 1,300,000 share options exercised during the year resulted in the issue of 1,300,000 ordinary shares of the Company and new share capital of HK$65,000 and share premium of HK$1,625,000 (before issue expenses), as further detailed in note 36 to the financial statements.

– I-82 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

37. SHARE OPTION SCHEME (continued)

Movements in the share options during the year end options outstanding under the New Scheme as at the balance sheet date are set out below:

Participants Directors Kwok Peter Viem Ma Ting Hung Shou Xuancheng Sun Xinguo Li So Mui Mi Zengxin Qiu Yiyong Zeng Chen Zhang Jijing Eligible participants In aggregate	Number of share options At 1 Exercised At 31 Exercise January during December price 2006 the year 2006 Date of grant Exercise period* HK$ 50,000,000 — 50,000,000 02-06-2005 02-06-2007 to 01-06-2010 1.08 50,000,000 — 50,000,000 02-06-2005 02-06-2007 to 01-06-2010 1.08 10,000,000 — 10,000,000 02-06-2005 02-06-2006 to 01-06-2010 1.08 5,000,000 — 5,000,000 02-06-2005 02-06-2006 to 01-06-2010 1.08 5,000,000 — 5,000,000 28-12-2005 28-12-2006 to 27-12-2010 1.06 10,000,000 — 10,000,000 5,000,000 — 5,000,000 02-06-2005 02-06-2006 to 01-06-2010 1.08 10,000,000 — 10,000,000 02-06-2005 02-06-2006 to 01-06-2010 1.08 10,000,000 — 10,000,000 02-06-2005 02-06-2006 to 01-06-2010 1.08 5,000,000 — 5,000,000 02-06-2005 02-06-2006 to 01-06-2010 1.08 5,000,000 — 5,000,000 28-12-2005 28-12-2006 to 27-12-2010 1.06 10,000,000 — 10,000,000 10,000,000 — 10,000,000 02-06-2005 02-06-2006 to 01-06-2010 1.08 165,000,000 — 165,000,000 12,000,000 (1,300,000 ) 10,700,000 02-06-2005 02-06-2006 to 01-06-2010 1.08 177,000,000 (1,300,000 ) 175,700,000	Number of share options At 1 Exercised At 31 Exercise January during December price 2006 the year 2006 Date of grant Exercise period* HK$ 50,000,000 — 50,000,000 02-06-2005 02-06-2007 to 01-06-2010 1.08 50,000,000 — 50,000,000 02-06-2005 02-06-2007 to 01-06-2010 1.08 10,000,000 — 10,000,000 02-06-2005 02-06-2006 to 01-06-2010 1.08 5,000,000 — 5,000,000 02-06-2005 02-06-2006 to 01-06-2010 1.08 5,000,000 — 5,000,000 28-12-2005 28-12-2006 to 27-12-2010 1.06 10,000,000 — 10,000,000 5,000,000 — 5,000,000 02-06-2005 02-06-2006 to 01-06-2010 1.08 10,000,000 — 10,000,000 02-06-2005 02-06-2006 to 01-06-2010 1.08 10,000,000 — 10,000,000 02-06-2005 02-06-2006 to 01-06-2010 1.08 5,000,000 — 5,000,000 02-06-2005 02-06-2006 to 01-06-2010 1.08 5,000,000 — 5,000,000 28-12-2005 28-12-2006 to 27-12-2010 1.06 10,000,000 — 10,000,000 10,000,000 — 10,000,000 02-06-2005 02-06-2006 to 01-06-2010 1.08 165,000,000 — 165,000,000 12,000,000 (1,300,000 ) 10,700,000 02-06-2005 02-06-2006 to 01-06-2010 1.08 177,000,000 (1,300,000 ) 175,700,000	Price per share
	At 1 January 2006 50,000,000 50,000,000 10,000,000 5,000,000 5,000,000 10,000,000 5,000,000 10,000,000 10,000,000 5,000,000 5,000,000 10,000,000 10,000,000 165,000,000 12,000,000 177,000,000	Exercised during the year — — — — — — — — — — — — — — (1,300,000 ) (1,300,000 )	Immediately At date before the At of grant exercise date exercise date** HK$ HK$ HK$ 1.07 N/A N/A 1.07 N/A N/A 1.07 N/A N/A 1.07 N/A N/A 1.05 N/A N/A 1.07 N/A N/A 1.07 N/A N/A 1.07 N/A N/A 1.07 N/A N/A 1.05 N/A N/A 1.07 N/A N/A 1.07 1.46 — 1.84 1.42 — 1.88

The vesting period of the share options is from the date of the grant until the commencement of the exercise period.
** The share price at date of grant is the closing price as quoted on the Stock Exchange on the trading day immediately prior to the date of grant of the share options.

– I-83 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

37. SHARE OPTION SCHEME (continued)

No other feature of the options granted was incorporated into the measurement of fair value.

At the balance sheet date, the Company had 175,700,000 share options outstanding under the New Scheme. The exercise in full of the remaining share options would, under the present capital structure of the Company, result in the issue of 175,700,000 additional ordinary shares of the Company, additional share capital of HK$8,785,000 and share premium of HK$180,771,000 (before issue expenses).

On 7 March 2007, the Company issued options under the New Scheme in respect of 20,000,000 shares at the exercise price of HK$3.072 per share. The closing price of the shares immediately before the grant was HK$3.07 per share.

At the date of approval of these financial statements, the Company had 190,200,000 share options outstanding under the Scheme, which represented approximately 3.8% of the Company’s shares in issue as at that date.

The following share options of CATL were outstanding under the Pre-Scheme during the year:

Participants Directors of the Company Zeng Chen Zhang Jijing Directors of CATL: Eligible participants	Number of share options At 1 January 2006 Grant/(exercised) At Restated during the year 31 December 2006 Exercise period 166,668 — 166,668 19 June 2005 to 18 June 2007 200,000 (200,000) — 19 June 2005 to 18 June 2007 366,668 (200,000) 166,668 366,668 (186,668) 180,000 19 June 2005 to 18 June 2007 140,000 — 140,000 19 June 2005 to 18 June 2007 506,668 (186,668) 320,000 216,666 — 216,666 19 June 2003 to 18 June 2007 399,999 (66,667) 333,332 19 June 2004 to 18 June 2007 400,002 — 400,002 19 June 2004 to 18 June 2007 1,016,667 (66,667) 950,000 1,890,003 (453,335) 1,436,668	Price per share
		Immediately Exercise before the At exercise price exercise date date A$ A$ A$ 0.350 N/A N/A 0.350 0.525 0.520 0.350 0.730 0.755 0.350 N/A N/A 0.200 N/A N/A 0.250 0.730 0.755 0.300 N/A N/A

– I-84 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

38. RESERVES

(a) Group

Movements in the Group’s reserves for the current and prior years are presented in the consolidated statement of changes in equity on pages 44 and 45 of the financial statements.

The contributed surplus of the Group represents the difference between the nominal value of the share capital of the holding company of the Group acquired by the Company pursuant to the Group reorganisation prior to the listing of the Company’s shares over the nominal value of the share capital of the Company issued in exchange therefor.

(b) Company

As at 1 January 2005 Equity-settled share options arrangements (note 37) Net profit for the year At 31 December 2005 and 1 January 2006 Issue of new shares upon exercise of share options (note 37) Equity-settled share options arrangements (note 37) Net loss for the year At 31 December 2006	Share premium Contributed account surplus 2,561,962 172,934 — — — — 2,561,962 172,934 1,625 — — — — — 2,563,587 172,934	Share option Accumulated reserve losses — (360,584) 12,662 — — 17,079 12,662 (343,505) (286) — 26,158 — — (152,093) 38,534 (495,598)	Total 2,374,312 12,662 17,079 2,404,053 1,339 26,158 (152,093) 2,279,457

The contributed surplus of the Company represents the excess of the then combined net assets of the subsidiaries acquired pursuant to the Group reorganisation detailed in note (a) above, over the nominal value of the share capital of the Company issued in exchange therefor. In accordance with the laws of Bermuda, the contributed surplus of the Company may be distributed in cash or in specie in certain prescribed circumstances.

The share option reserve comprises the fair value of share options granted which are yet to be exercised, as further explained in the accounting policy for share based payments transactions in note 2.4 to the financial statements. The amount will either be transferred to the share premium account when the related options are exercised or be transferred to retained profit should the related options expire or be forfeited.

– I-85 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS HK$’000

39. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

(a) Acquisitions of subsidiaries

On 28 February 2006, the Group acquired a 48% indirect interest (with effective control via a 80% owned subsidiary) in the Manganese Company. The Manganese Company is engaged in the operation of manganese mining and sale of refined manganese products in the PRC. The purchase consideration was in form of cash, consideration amount of RMB300,000,000 (HK$288,500,000) (note 21) and the cost directly attributable to the acquisition of HK$17,170,000 had been paid in 2005 and recorded as a long term prepayment.

The fair values of the identifiable assets and liabilities of the Manganese Company and its subsidiaries as at the date of acquisition and the carrying amounts immediately before the acquisition were as follows:

Notes o Net assets acquired: Property, plant and equipment 13 Prepaid land lease premiums 14 Other intangible assets 15 Cash and bank balances Inventories Accounts receivable Prepayments, deposits and other receivables Accounts payable Accrued liabilities and other payables Tax payable Deferred tax liabilities 35 Bank and other loans Minority interests Satisfied by deposits paid in 2005	Fair value recognised n acquisition 315,881 60,564 139,904 148,230 16,801 12,624 6,755 (19,188) (139,279) (823) (11,253) (11,114) (213,432) 305,670 305,670	Carrying amount 315,881 60,564 104,013 148,230 16,801 12,624 6,755 (19,188) (139,279) (823) (3,465) (11,114) (202,191) 288,808

– I-86 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

39. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (continued)

(a) Acquisitions of subsidiaries (continued)

An analysis of the net inflow of cash and cash equivalents in respect of the acquisition of subsidiaries is as follows:

Cash consideration paid Cash and bank balances acquired Net inflow of cash and cash equivalents in respect of the acquisition of subsidiaries	2006 — 148,230 148,230	2005 — —
		—

Since its acquisition, the Manganese Company and its subsidiaries contributed HK$538,006,000 to the Group’s turnover and HK$65,759,000 to the consolidated profit for the year ended 31 December 2006.

Had the combination taken place at the beginning of the year, the revenue of the Group and the profit of the Group for the year would have been HK$7,529,736,000 and HK$252,978,000, respectively.

The purchase price allocation set out above is still preliminary, pending the finalisation of the valuation of certain property, plant and equipment and intangible assets and the determination of the tax basis of the assets and liabilities acquired.

(b) Acquisition of participating interest in a joint venture

On 22 November 2006, the Group acquired a 51% participating interest in the Seram PSC (see details in note 18(e)). The purchase consideration for the acquisition was in form of cash, with HK$757,723,000 paid at the acquisition date and directly attributable costs of HK$117,229,000 taken up as accrued liabilities and other payables.

– I-87 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

39. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (continued)

(b) Acquisition of participating interest in a joint venture (continued)

The fair values of the identifiable assets and liabilities of the 51% participating interest in the Seram PSC as at the date of acquisition and the carrying amounts immediately before the acquisition were as follows:

Notes o Net assets acquired: Oil and gas properties 13 Furniture and fixtures 13 Deferred tax assets Inventories Prepayments, deposits and other receivables Accounts payable Accrued liabilities and other payables Tax payable Provisions 34 Long term other payables Satisfied by: Cash Accrued liabilities and other payables	Fair value recognised n acquisition 846,530 2,067 — 75,611 99,415 (8,121) (26,335) (8,135) (24,682) (81,398) 874,952 757,723 117,229 874,952	Carrying amount 639,920 2,067 243,549 75,611 99,415 (8,121) (26,335) (8,135) (24,682) (81,398)
		911,891

		— —
		—

An analysis of the net outflow of cash and cash equivalents in respect of the acquisition of the 51% participating interest in the Seram PSC is as follows:

Cash consideration paid Cash and bank balances acquired Net outflow of cash and cash equivalents in respect of the acquisition of participating interest in a joint venture	2006 757,723 — 757,723	2005 — —
		—

The purchase price allocation set out above is still preliminary, pending the finalisation of the valuation relating to the oil and gas reserves and the determination of the tax basis of the assets and liabilities acquired.

– I-88 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

39. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (continued)

(c) Disposal of a participating interest in a joint venture

On 18 February 2006, the Group converted the Dagang Participating Interest into Ivanhoe Shares and Ivanhoe Loan. More details of the transaction are given in note 28 to the financial statements. Net assets disposed of on 18 February 2006 had immaterial changes compared to that of 31 December 2005.

(d) Major non-cash transactions

On 15 December 2005, the Group disposed of part of its participating interest in Bowen Basin Joint Venture in consideration of certain ordinary shares of Macarthur. On the same date, the Group also restructured the remaining participating interest in the Bowen Basin Joint Venture into seven separate jointly-controlled assets.

During the year ended 31 December 2006, the Group converted the Dagang Participating Interest into Ivanhoe shares and Ivanhoe Loan. More details of the transaction are given in note 28 to the financial statements.

During the year ended 31 December 2006, Mount Gibson Iron Limited (“Mount Gibson”), a third party, acquired Aztec Resources Limited, an available-for-sale equity investment of the Group, through the issuance of new shares of Mount Gibson to a subsidiary of the Group. Such non-cash share swap transaction resulted in a gain on disposal of available-for-sale equity investments of HK$17,502,000 (note 5).

During the year ended 31 December 2006, the Group has incurred professional fees in connection with the Group’s potential investment projects which had been accrued and remained unsettled as at 31 December 2006 in aggregate of HK$50,939,000.

40. LITIGATION

(a) In January 1999, Dongguan Xinlian, a wholly-owned subsidiary of the Company held through Wing Lam, received a writ of summons (the “Claim”) from China Foreign Trade Development Company (the “Plaintiff”) claiming US$6,362,000 (HK$49,624,000) and related interest in respect of six re-export contracts purported to have been entered into by Dongguan Xinlian prior to it becoming a Group subsidiary. A judgment (the “First Judgment”) was issued by the Shenzhen Intermediate People’s Court in February 2000 against Dongguan Xinlian for a sum of US$3,448,000 (HK$26,894,000). In response, Dongguan Xinlian filed an appeal against the First Judgment with the People’s High Court of Guangdong Province.

– I-89 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

40. LITIGATION (continued)

(a) (continued)

In August 2003, certain members of the Plaintiff management team were sentenced to imprisonment for creating forged documents, including those presented by them in relation to the Claim. Despite this, the People’s High Court of Guangdong Province issued a judgment (the “Second Judgment”) in December 2003 against Dongguan Xinlian for US$4,800,000 (HK$37,440,000) with related interest. In January 2004, Dongguan Xinlian filed another appeal to the State Supreme Court requesting the withdrawal of the Second Judgment and a decision that Dongguan Xinlian is not liable to the Plaintiff in respect of the Second Judgment. In December 2004, the People’s High Court of Guangdong Province overturned the Second Judgment and issued a decision that it will re-hear the case.

In December 2005, the People’s High Court of Guangdong Province issued a judgment whereby the validity of the Second Judgment against Dongguan Xinlian was maintained (the “Third Judgment”).

As advised by the Group’s legal advisers, there were a number of conflicts and discrepancies with regard to the Second Judgment and the Third Judgment. The Second Judgment and the Third Judgment were not supported by valid evidence and although the People’s High Court of Guangdong Province acknowledged the criminal liabilities of certain members of the Plaintiff’s management team (including forging the contracts connected to the Claim), the People’s High Court of Guangdong Province did not, contrary to normal legal procedures, take these factors into account when it gave the Third Judgment. In February 2006, Dongguan Xinlian commenced an appeal process against the Third Judgment. In the meantime, the Shenzhen Intermediate People’s Court has frozen the assets and machinery of Dongguan Xinlian and the Group has also taken steps to apply for a suspension of the auction of the assets and machinery of Dongguan Xinlian.

The ex-shareholders of Wing Lam (the “Ex-shareholders”) have given an undertaking to indemnify the Group against all monetary losses that may arise from the Claim up to HK$11,862,000, being the outstanding other loans from the Ex-shareholders as at 31 December 2006.

In light of the indemnity from the Ex-shareholders and the advice of the Group’s legal advisers, the directors believe that the outcome of the Claim will not have a material adverse impact on the financial results of the Group; and accordingly, no provision is considered necessary.

– I-90 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS HK$’000

40. LITIGATION (continued)

(b) The Group has a 7% participating interest in the unified unincorporated co-operative Coppabella and Moorvale coal mine joint venture, the manager and agent of which is Macarthur Coal (C&M Management) Pty Limited (the “Manager”). Roche Mining Pty Limited (the “Contractor”) is contracted to mine coal and overburden at the Coppabella mine for a five-year term which commenced on 1 July 2003.

In December 2003, the Manager lodged a notice of dispute with the Contractor under the terms of the mining contract. The claim included recovery of loss and damages for higher production costs and demurrage resulting from a failure of the Contractor to deliver coal in accordance with the contract provisions. Subsequently, the Manager received a series of claims from the Contractor as follows:

(i) Related to the 2004 financial year

In June 2004, following rejection by the superintendent of claims from the Contractor, the Contractor lodged a notice of dispute on the Manager under the mining contract. The rejected claim, consisting of nine heads of claim, included higher costs of mining in the 2004 financial year due to alleged delay in access to particular mining areas and alleged adverse mining conditions. The Contractor then referred the dispute to arbitration.

(ii) Related to the 2005 financial year

In February 2005, the arbitrator determined that seven of the nine points of claim could proceed to arbitration. The Manager received the detailed points of claim from the Contractor in March 2005 and detailed further particulars in September 2005. In April 2006, the Manager lodged its defence to the points of claim and lodged a counterclaim against the Contractor. In July 2005, the Contractor lodged a further notice of dispute in relation to alleged additional costs resulting from the superintendent’s approval of the 2005 financial year mine plan. The claims were rejected by the superintendent and the subsequent dispute was referred to arbitration in August 2005. In April 2006, the Contractor lodged a consolidated and further amended points of claim in relation to both the 2004 financial year claim and the 2005 financial year claim.

(iii) Related to the 2006 financial year

In January 2006, the Contractor lodged a further notice of claim in relation to alleged additional costs resulting from the superintendent’s approval of the 2006 financial year mine plan. However, the Contractor has not provided to the superintendent the requested details of the nature and quantum of this claim. In October 2006, the Manager lodged its defence to the consolidated claim.

The total value of the three claims noted above for financial years 2004, 2005 and 2006 is in the order of A$100 million (HK$617 million) out of which the Group’s share amounted to A$7 million (HK$43 million). Areas of duplication have been identified across these three claims and the Contractor is yet to provide particulars regarding basis and quantum of the third claim.

– I-91 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS HK$’000

40. LITIGATION (continued)

(b) (continued)

The Manager disputes the above claims and will vigorously defend its position in arbitration. The arbitrator has set a date to hear the consolidated 2004 and 2005 financial year claims in June 2007. However, there is no set date for hearing of the consolidated 2006 financial year claim.

In the opinion of the directors, disclosure of any further information about the above matter would be prejudicial to the interests of the Manager and the joint venture participants of the Coppabella and Moorvale coal mine joint venture.

41. OPERATING LEASE ARRANGEMENTS

At 31 December 2006, the Group had total future minimum lease payments under non-cancellable operating leases in respect of land and buildings falling due as follows:

Within one year In the second to fifth years, inclusive Beyond five years	Group 2006 2005 12,883 9,348 16,803 14,827 9,848 2,423 39,534 26,598	Group 2006 2005 12,883 9,348 16,803 14,827 9,848 2,423 39,534 26,598
		26,598

42. COMMITMENTS

In addition to the operating lease commitments detailed in note 41 above, the Group had the following capital expenditure commitments:

expenditure commitments:
	Group
	2006	2005
Contracted, but not provided for:
Infrastructure, plant and equipment, share of
the jointly-controlled entities	27,445	8,911

At 31 December 2006, the Group had authorised but not contracted for commitments in relation to the acquisition of the Potential Assets in Kazakhstan as set out in note 1.

Save as aforesaid, at the balance sheet date, neither the Company nor the Group had other significant commitments (2005: Nil).

– I-92 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

43. RELATED PARTY TRANSACTIONS AND CONNECTED TRANSACTIONS

In addition to matters disclosed elsewhere in the financial statements, during the year, the Group had the following transactions with its related parties:

(a) During the year ended 31 December 2006, the Group made sales in aggregate of HK$1,378,446,000 (2005: HK$1,025,037,000) to a fellow subsidiary, CITIC Metal Company Limited. The sales were made on normal commercial terms and conditions offered to the major customers of the Group.

As at 31 December 2006, the Group had an amount due from the fellow subsidiary of HK$235,785,000 (2005: HK$18,313,000) which has been included in the accounts receivable balance.

(b) Proposed very substantial acquisition regarding the acquisition of Potential Assets located in Kazakhstan

On 27 October 2006, a MOU was entered into by CITIC Group and the Company. Pursuant to the MOU, the Company has been granted a Purchase Right, which is exercisable by the Company during the period of one year (from the date which CITIC Group completed its acquisition of certain potential assets), to acquire the Potential Assets. The Potential Assets principally comprise a 94.6% interest in Karazhanbasmunai JSC, a joint stock company formed under the laws of Kazakhstan, which holds 100% of the mineral rights until 2020 to develop the Karazhanbas Oil and Gas Field in Mangistau Oblast, Kazakhstan. On 29 December 2006, CITIC Group completed the acquisition of the Potential Assets from CCPL. The Company paid US$200,000,000 (HK$1,560,000,000) (note 21) on 31 October 2006 to CITIC Group as the earnest money for the proposed acquisition.

If the Company elects to exercise the Purchase Right, completion of the sale and purchase of the Potential Assets between CITIC Group and the Company will constitute a very substantial acquisition and connected transaction of the Company under the Listing Rules and such transaction will require the approval of the independent shareholders of the Company and the approval of the relevant government and regulatory authorities in Kazakhstan. As at 31 December 2006, the Purchase Right had not been exercised by the Company. Further details are set out in the announcement of the Company dated 1 November 2006.

On 31 October 2006, an acknowledgement from CITIC Group was received by the Group in respect of a warranty settlement agreement dated 10 October 2006 between the Group and CITIC Group, pursuant to which CITIC Group agreed to compensate the Company for HK$34,320,000 in respect of loss of HK$19,412,000 suffered by the Company in respect of the conversion of the Dagang Participating Interest in Richfirst into Ivanhoe Shares. A loss to the reduction in the number of Ivanhoe Shares converted due to the appreciation of Ivanhoe Shares prices during the delayed conversion period.

As at 31 December 2006, the Group had an outstanding amount due from the ultimate holding company of HK$34,320,000 due to the above (note 23). The outstanding amount was settled subsequent to the balance sheet date.

– I-93 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

43. RELATED PARTY TRANSACTIONS AND CONNECTED TRANSACTIONS (continued)

(d) During the year, the Group has paid rental charges of HK$2,814,000 (2005: HK$2,679,000) to 99 King Street Property Management Pty. Ltd., a subsidiary of CITIC Group.
(e) Outstanding balances with related parties:
(i) As disclosed in the consolidated balance sheet, the Group had outstanding advances payable to its minority shareholder of HK$38,174,000 (2005: nil). Details of the advances are included in note 32 to the financial statements.
(ii) Details of the Group’s receivables from its fellow subsidiaries, related companies and ultimate holding company of HK$2,066,000 (2005: HK$301,000), HK$51,486,000 (2005: nil) and HK$34,320,000 (2005: nil) respectively, as at the balance sheet date. Details of the receivables are included in notes 21 and 23 to the financial statements.
(iii) Details of the Group’s loans from the Company’s former minority shareholders, a minority shareholder and the ultimate holding company are included in note 33 to the financial statements.

44. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group’s principal financial instruments, other than derivatives, comprise bank loans, other interest- bearing loans, finance leases, and cash and short term deposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations.

The Group also enters into derivative transactions, including principally interest rate swap, forward currency and commodity contracts. The purpose is to manage the interest rate, currency and commodity price risks arising from the Group’s operations and its sources of finance.

It is, and has been, throughout the year under review, the Group’s policy that trading in financial instruments shall be undertaken only with due care.

The main risks arising from the Group’s financial instruments are cash flow interest rate risk, foreign currency risk, credit risk and liquidity risk. The board reviews and agrees policies for managing each of these risks and they are summarised below. The Group’s accounting policies in relation to derivatives are set out in note 2.4 to the financial statements.

– I-94 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

44. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)

Interest rate risk

The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long term debt obligations with floating interest rates.

The Group’s policy is to manage its interest cost using a mix of fixed and variable rate debts. To manage this mix in a cost-effective manner, the Group enters into interest rate swap, in which the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. These swap are designated to hedge the underlying debt obligations. At 31 December 2006, after taking into account the effect of the interest rate swap, approximately 50% (2005: 41%) of the Group’s interest-bearing borrowings bore interest at fixed rates.

Foreign currency risk

The Group has transactional currency exposures. Such exposures arise from sales or purchases by operating units in currencies other than the units’ functional currency. The Group requires all its operating units to use forward currency contracts to eliminate the foreign currency exposures, for which payment is anticipated more than one month after the Group has entered into a firm commitment for a sale or purchase. The forward currency contracts must be in the same currency as the hedged item. It is the Group’s policy not to enter into forward contracts until a firm commitment is in place.

It is the Group’s policy to negotiate the terms of the hedge derivatives to match the terms of the hedged item to maximise hedge effectiveness.

Credit risk

The Group trades only with recognised and creditworthy third parties. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis and the Group’s exposure to bad debts is not significant. For transactions that are not denominated in the functional currency of the relevant operating unit, the Group does not offer credit terms without the specific approval of the head of credit control.

The credit risk of the Group’s other financial assets, which comprise cash and cash equivalents, available-for-sale financial assets and certain derivative instruments, arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments.

Since the Group trades only with recognised and creditworthy third parties, collateral is usually not required.

Liquidity risk

The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans and other interest-bearing loans.

– I-95 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

45. POST BALANCE SHEET EVENTS

Subsequent to the balance sheet date, the Group entered into the following significant transactions:

(a) On 9 February 2007, the Company entered into the placing and subscription agreement (the “Placing and Subscription Agreement”) with United Star International Inc. (“USI”) as subscriber, Citigroup Global Markets Asia Limited and UBS AG as underwriters, pursuant to which the Company agreed to allot and issue, and USI agreed to subscribe for 570,000,000 new ordinary shares of the Company of HK$0.05 each at a price of HK$2.46 per new share.

The 570,000,000 new shares represent 13.2% of the issued share capital of the Company as at 8 February 2007, being the last trading day before the signing of the Placing and Subscription Agreement (the “Last Trading Day”). The placing price of HK$2.46 represents (i) a discount of 5.02% to the closing price of HK$2.59 per share as quoted on the Stock Exchange on the Last Trading Day; (ii) a premium of 2.93% to the average closing price of HK$2.39 per share as quoted on the Stock Exchange for the five trading days immediately prior to and including the Last Trading Day; and (iii) a premium of 2.93% to the average closing price of HK$2.39 per share as quoted on the Stock Exchange for the ten trading days immediately prior to and including the Last Trading Day.

The transaction, completed on 28 February 2007, constituted a discloseable transaction under the Listing Rules. Further details of the transaction are set out in the announcement of the Company dated 9 February 2007.

(b) On 9 February 2007, the Company entered into the subscription agreement (the “Subscription Agreement”) with Keentech Group Limited (“Keentech”), a major shareholder of the Company, pursuant to which the Company conditionally agreed to allot and issue, and Keentech agreed to subscribe for 130,000,000 new ordinary shares of the Company of HK$0.05 each (the “Subscription Shares”) at a price of HK$2.46 (the “Subscription Price”) per subscription share.

The Subscription Shares represent 2.66% of the issued share capital of the Company as at 2 March 2007, being the latest practicable date prior to the printing of the circular of the Company dated 5 March 2007 (the “Latest Practicable Date”) or 2.59% of the issued share capital of the Company as enlarged by the issue of the Subscription Shares.

The Subscription Price represents (i) a discount of 5.02% to the closing price of HK$2.59 per share as quoted on the Stock Exchange on the Last Trading Day; (ii) a premium of 2.93% to the average closing price of HK$2.39 per share as quoted on the Stock Exchange for the five trading days immediately prior to and including the Last Trading Day; and (iii) a premium of 2.93% to the average closing price of HK$2.39 per share as quoted on the Stock Exchange for the ten trading days immediately prior to and including the Last Trading Day.

The transaction, completed 19 April 2007, constituted a connected transaction under the Listing Rules. The total consideration of the Subscription Shares amounted to HK$319,800,000 and was paid in cash on the completion date. Further details of the transaction are set out in the circular of the Company dated 5 March 2007.

– I-96 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

HK$’000

45. POST BALANCE SHEET EVENTS (continued)

(c) On 20 March 2007, an ordinary resolution was passed at the special general meeting of the Company whereby the authorised share capital of the Company of HK$300,000,000 divided into 6,000,000,000 ordinary shares of HK$0.05 each be increased to HK$500,000,000 divided into 10,000,000,000 ordinary shares of HK$0.05 each by the creation of an additional 4,000,000,000 ordinary shares of HK$0.05 each, which such shares shall on their issue rank pari passu in all respects with existing issued shares.
(d) During the 5th Session of the 10th National People’s Congress, which was concluded on 16 March 2007, the PRC Corporate Income Tax Law (the “New Tax Law”) was approved and will become effective on 1 January 2008. The New Tax Law introduces a wide range of changes which include, but are not limited to, the unification of the income tax rate for domestic-invested and foreign-invested enterprises at 25%. Since the detailed implementation and administrative rules and regulations have not yet been announced, the financial impact of the New Tax Law to the Group cannot be reasonably estimated at this stage.

46. COMPARATIVE AMOUNTS

Certain comparative amounts have been reclassified and restated to conform with the current year’s presentation and accounting treatment.

47. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the board of directors on 20 April 2007.

– I-97 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

FINANCIAL INFORMATION RELATING TO MACARTHUR COAL FOR THE THREE YEARS ENDED 30 JUNE 2007

The following information was extracted from the published audited financial statements of Macarthur Coal for the three years ended 30 June 2007 which was prepared in accordance with Australian Accounting Standards. (References to page numbers in the extract reproduced below are to pages contained in the published annual reports of Macarthur Coal)

STATEMENTS OF FINANCIAL PERFORMANCE

FOR THE YEAR ENDED 30 JUNE 2005

Note Revenue from coal sales 3 Cost of coal sold Gross profit Other revenue from ordinary activities 3 Distribution expenses Administration expenses Borrowing costs 4 Other expenses from ordinary activities Profit from ordinary activities before related income tax (expense)/benefit Income tax (expense)/benefit relating to ordinary activities 6 Net profit 21 Basic earnings per share 7 Diluted earnings per share 7	Consolidated 2005 2004 A$’000 A$’000 370,157 222,254 (232,806) (172,683) 137,351 49,571 2,546 3,093 (29,765) (14,487) (8,584) (4,735) (6,588) (10,814) (4,787) (6,758) 90,173 15,870 (28,753) (4,127) 61,420 11,743 $0.378 $0.086 $0.368 $0.086	The Company 2005 2004 A$’000 A$’000 — — — — — — 31,549 26,111 — — (6,496) (3,825) (2,647) (3,745) (25) (17,548) 22,381 993 (787) (11) 21,594 982

The statements of financial performance are to be read in conjunction with notes to the financial statement set out on pages 67 to 115.

– II-1 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

STATEMENTS OF FINANCIAL POSITION

AS AT 30 JUNE 2005

Note Current assets Cash assets 8 Receivables 9 Inventories 10 Other financial assets 11 Current tax assets 6(b) Other 12 Total current assets Non-current assets Receivables 9 Other financial assets 11 Property, plant and equipment 13 Exploration, evaluation and development expenditure 14 Deferred tax assets 6(d) Other 12 Total non-current assets Total assets Current liabilities Payables 15 Interest-bearing liabilities 16 Current tax liabilities 6(b) Provisions 17 Other financial liabilities 18 Other 19 Total current liabilities Non-current liabilities Payables 15 Interest-bearing liabilities 16 Deferred tax liabilities 6(c) Provisions 17 Other financial liabilities 18 Other 19 Total non-current liabilities Total liabilities Net assets Equity Contributed equity 20 Retained profits 21 Total equity	Consolidated 2005 2004 A$’000 A$’000 18,138 11,775 30,744 29,788 24,075 11,312 78,273 33,863 — 7,000 48,020 37,028 199,250 130,766 7,624 2,768 2,783 8,906 174,603 186,094 40,555 37,126 5,565 6,601 12,722 3,497 243,852 244,992 443,102 375,758 61,346 28,409 26,662 14,816 16,505 — 1,456 1,678 4,807 9,404 20,221 10,452 130,997 64,759 — 10,000 9,790 67,370 25,011 17,885 10,730 8,397 12,698 18,501 4,723 9,395 62,952 131,548 193,949 196,307 249,153 179,451 181,086 155,053 68,067 24,398 249,153 179,154	The Company 2005 2004 A$’000 A$’000 17,685 11,686 27,827 8,587 — — — — — 7,000 332 642 45,844 27,915 126,754 113,512 56,385 57,871 138 78 — — 5,565 6,601 — 257 188,842 178,319 234,686 206,234 1,176 548 5,627 — 16,505 — 198 65 — — — — 23,506 613 — 1,563 — 29,871 25,011 17,885 39 48 — — — — 25,050 49,367 48,556 49,980 186,130 156,254 181,086 155,053 5,044 1,201 186,130 156,254	The Company 2005 2004 A$’000 A$’000 17,685 11,686 27,827 8,587 — — — — — 7,000 332 642 45,844 27,915 126,754 113,512 56,385 57,871 138 78 — — 5,565 6,601 — 257 188,842 178,319 234,686 206,234 1,176 548 5,627 — 16,505 — 198 65 — — — — 23,506 613 — 1,563 — 29,871 25,011 17,885 39 48 — — — — 25,050 49,367 48,556 49,980 186,130 156,254 181,086 155,053 5,044 1,201 186,130 156,254
			27,915
			113,512 57,871 78 — 6,601 257
			178,319
			206,234
			548 — — 65 — —
			613
			1,563 29,871 17,885 48 — —
			49,367
			49,980
			156,254

			155,053 1,201
			156,254

The statements of financial position are to be read in conjunction with the notes to the financial statements set out on pages 67 to 115.

– II-2 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED 30 JUNE 2005

Note Cash flows from operating activities Cash receipts in the course of operations Cash payments in the course of operations Dividends received Interest received Borrowing costs paid Income tax refunded 6(b) Income taxes paid 6(b) Net cash provided by/(used in) operating activities 25(b) Cash flows from investing activities Payments for property, plant and equipment Proceeds from property, plant and equipment Payments for acquisition of joint venture interests and related assets (net of cash) Proceeds from disposal of joint venture interests and related assets (net of cash) Payments for exploration, evaluation and development expenditure Payments for other financial assets Advances to controlled entities Advances to related entities Net cash provided by/(used in) investing activities Cash flows from financing activities Net proceeds from issue of shares Proceeds from borrowings Repayment of borrowings Payment of borrowing costs: • Convertible notes • Other Proceeds from other financial liabilities Payments for other financial liabilities Dividends paid Net cash provided by/(used in) financing activities Net increase/(decrease) in cash held Cash at the beginning of the financial year Cash at the end of the financial year 25(a)	Consolidated 2005 2004 A$’000 A$’000 361,709 218,857 (259,095) (190,445) — — 2,385 1,038 — (590) 8, 847 — (5,862) (9,913) 107,984 18,947 (5,848) (15,008) — 12 — (19,638) — 1,404 (3,640) (3,993) (40,674) (10,233) — — (6,408) — (56,570) (47,456) 1,789 29,993 22,180 54,422 (43,826) (52,002) (2,012) (3,002) (2,602) (2,760) — 10,355 (2,829) (2,261) (17,751) (1,286) (45,051) 33,459 6,363 4,950 11,775 6,825 18,138 11,775	The Company 2005 2004 A$’000 A$’000 2,051 1,725 (6,036) (4,092) 19,034 17,586 10,518 6,842 — (30) 8,847 — (5,862) — 28,552 22,031 (85) (35) — 11 — — — — — — — — (4,494) (42,609) — — (4,579) (42,633) 1,789 29,993 — 9,600 — (9,600) (2,012) (3,002) — (145) — — — — (17,751) (1,286) (17,974) 25,560 5,999 4,958 11,686 6,728 17,685 11,686

The statements of cash flow are to be read in conjunction with the notes to the financial statements set out on pages 67 to 115.

– II-3 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES

The significant policies which have been adopted in the preparation of the financial report are:

a) Basis of preparation

The financial report is a general purpose financial report which has been prepared in accordance with Accounting Standards, Urgent Issues Group Consensus Views, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001 .

It has been prepared on the basis of historical costs and except where stated, does not take into account changing money values or fair values of non-current assets.

Accounting policies have been consistently applied by each entity in the consolidated entity and, except where there is a change in accounting policy as set out in Note 2, are consistent with those of the previous year.

b) Principles of consolidation

Controlled entities

The financial statements of controlled entities are included in the consolidated financial statements from the date control commences until the date control ceases.

Outside interests in the equity and results of the entities that are controlled by the Company are shown as a separate item in the consolidated financial statements.

Associates

Associates are those entities, other than partnerships, over which the consolidated entity exercises significant influence and which are not intended for sale in the near future.

In the consolidated financial statements, investments in associates are accounted for using equity accounting principles. Investments in associates are carried at the lower of the equity accounted amount and recoverable amount.

Joint ventures

A Joint Venture is either an entity or operation that is jointly controlled by the consolidated entity.

The consolidated entity’s interests in unincorporated joint venture operations are brought to account by including its proportionate share of joint ventures’ assets, liabilities and expenses and the consolidated entity’s revenue from the sale of its share of output on a line-by-line basis, from the date joint control commences to the date joint control ceases.

– II-4 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

b) Principles of consolidation (continued)

Transactions eliminated on consolidation

Unrealised gains and losses and inter-entity balances and effects of transactions with or between controlled entities are eliminated in full on consolidation.

Unrealised gains resulting from transactions with associates are eliminated to the extent of the consolidated entity’s interest. Unrealised gains relating to associates are eliminated against the carrying amount of the investment. Unrealised losses are eliminated in the same way as unrealised gains, unless they evidence a recoverable amount impairment.

c) Revenue recognition

Revenues are recognised at fair value of the consideration received net of the amount of goods and services tax (GST) payable to the taxation authority. Exchanges of goods or services of the same nature and value without any cash consideration are not recognised as revenues.

Sale of goods

Revenue from the sale of coal is recognised (net of penalties, returns, discounts, allowances and hedging gains/losses) when control of the goods passes to the customer.

Interest revenue

Interest revenue is recognised as it accrues, taking into account the effective yield on the financial asset.

Sale of non-current assets

The gross proceeds of non-current asset sales are recognised as revenue at the date control of the asset passes to the buyer, usually when an unconditional contract of sale is signed.

The gain or loss on disposal is calculated as the difference between the carrying amount of the asset at the time of disposal and the net proceeds on disposal (including incidental costs).

Dividends

Dividend revenue is recognised net of any franking credits.

Revenue from dividends and distributions from controlled entities is recognised by the parent entity when they are declared by the controlled entities.

Revenue from dividends from other investments is recognised when dividends are received.

– II-5 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

d) Goods and services tax

Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense.

Receivables and payables are stated with the amount of GST included.

The net amount of GST recoverable from, or payable to, the Australian Taxation Office (ATO) is included as a current asset or liability in the statement of financial position.

Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows.

e) Foreign currency

Transactions

Foreign currency transactions are translated to Australian currency at the rates of exchange ruling at the dates of the transactions. Amounts receivable and payable in foreign currencies at reporting date are translated at the rates of exchange ruling on that date.

Exchange differences relating to amounts payable and receivable in foreign currencies are brought to account as exchange gains or losses in the statement of financial performance in the financial year in which the exchange rates change, except where:

hedging specific anticipated transactions (refer Note 1(f))
relating to acquisition of qualifying assets (refer Note 1(g)).

Natural hedge

A specific natural hedge exists between the United States dollar denominated cash advance term loan (see Note 16) and United States dollar denominated coal sales revenue. The natural hedge position was established when the cash advance term loan was restructured and the Australian dollar denominated debt was redrawn as a United States dollar denominated debt and upon further drawings of United States dollar denominated debt. The United States dollar denominated debt has been brought to account at the 30 June 2005 exchange rate with the exchange gain or loss arising from the difference between the hedge rate and the year end rate being carried forward as a deferred unrealised foreign exchange gain or loss (Note 19).

The mandatory minimum repayment schedule of the cash advance term loan has been used to identify the future coal sales to which the natural hedge relates. When sales occur, they will be translated at the hedge rate (being the rate at the time of loan drawdown) and any gains or losses will be offset against the carried forward deferred foreign exchange gains or losses arising on the revaluation of the United States dollar denominated debt.

– II-6 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

f) Derivatives

The consolidated entity is exposed to changes in interest rates, foreign exchange rates and commodity prices from its activities. The consolidated entity uses forward foreign exchange contracts to hedge foreign exchange risk and interest rate options and interest rate swaps to hedge interest rate risk. Derivative financial instruments are not held for speculative purposes.

Hedges

Anticipated transactions

Transactions are designated as a hedge of the anticipated specific purchase or sale of goods or services, purchase of qualifying assets, or an anticipated interest transaction, only when they are expected to reduce exposure to the risks being hedged, are designated prospectively so that it is clear when an anticipated transaction has or has not occurred and it is probable the anticipated transaction will occur as designated.

Gains or losses on the hedge arising up to the date of the anticipated transaction, together with any costs or gains arising at the time of entering into the hedge, are deferred and included in the measurement of the anticipated transaction when the transaction has occurred as designated. Any gains or losses on the hedge transaction after that date are included in the statement of financial performance.

The net amounts receivable or payable under forward foreign exchange contracts and the associated deferred gains or losses are recorded on the statement of financial position from the date of inception of the hedge transaction. The net receivables or payables are revalued using the foreign currency rate current at reporting date.

The net amounts receivable or payable under open swaps and the associated deferred gains or losses are not recorded on the statement of financial position until the hedge transaction occurs. When recognised the net receivables or payables are revalued using the interest rates current at reporting date.

Option premiums are recorded when paid and included in the measurement of the transaction when it occurs.

When the anticipated transaction is no longer expected to occur as designated, the deferred gains and losses relating to the hedged transaction are recognised immediately in the statement of financial performance.

Where a hedge transaction is terminated early and the anticipated transaction is still expected to occur as designated, the deferred gains and losses that arose on the hedge prior to its termination continue to be deferred and are included in the measurement of the purchase or sale when it occurs. Where a hedge transaction is terminated early because the anticipated transaction is no longer expected to occur as designated, deferred gains or losses that arose on the hedge prior to its termination are included in the statement of financial performance for that period.

– II-7 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

f) Derivatives (continued)

Hedges (continued)

Anticipated transactions (continued)

Where a hedge is redesignated as a hedge of another transaction, gains and losses arising on the hedge prior to its redesignation are only deferred where the original anticipated transaction is still expected to occur as designated. When the original anticipated transaction is no longer expected to occur as designated, any gains or losses relating to the hedge instrument are included in the statement of financial performance for that period.

Gains and losses that arise prior to and upon the maturity of transactions entered into under hedge rollover strategies are deferred and included in the measurement of the hedged anticipated transaction if the transaction is still expected to occur as designated. If the anticipated transaction is no longer expected to occur as designated, the gains and losses are recognised immediately in the statement of financial performance.

Other hedges

All other hedge transactions are initially recorded at the relevant rate at the date of the transaction. Hedges outstanding at reporting date are valued at the spot rate ruling on that date and any gains or losses are brought to account in the statement of financial performance.

Costs or gains arising at the time of entering into the hedge are deferred and amortised over the life of the hedge.

g) Borrowing costs

Borrowing costs include interest, amortisation of discounts or premiums relating to borrowings, amortisation of ancillary costs incurred in connection with arrangement of borrowings, finance charges in respect of finance leases and foreign exchange differences net of hedged amounts on borrowings.

Interest payments in respect of financial instruments classified as liabilities are included in borrowing costs.

Where interest rates are hedged or swapped, the borrowing costs are recognised net of any effect of the hedge or the swap.

Ancillary costs incurred in connection with the arrangement of borrowings are capitalised as “deferred expenditure” and amortised over the life of the borrowings or over five years, whichever is lesser.

– II-8 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

g) Borrowing costs (continued)

Borrowing costs are expensed as incurred unless they relate to qualifying assets. Qualifying assets are assets which take more than 12 months to get ready for their intended use or sale. In these circumstances, borrowing costs associated with qualifying assets are capitalised to the cost of the assets. Where funds are borrowed specifically for the acquisition, construction or production of a qualifying asset, the amount of borrowing costs capitalised is the amount incurred in relation to that borrowing, net of any interest earned on those borrowings. Where funds are borrowed generally, borrowing costs are capitalised using a weighted average capitalisation rate.

Exploration and evaluation expenditure carried forward relating to areas of interest which have not reached a stage permitting reliable assessment of economic benefits are not qualifying assets.

h) Taxation

The consolidated entity adopts the income statement liability method of tax effect accounting.

Income tax expense is calculated on operating profit adjusted for permanent differences between taxable and accounting income. The tax effect of timing differences, which arise from items being brought to account in different periods for income tax and accounting purposes, is carried forward in the statement of financial position as a future income tax benefit or a provision for deferred income tax.

Future income tax benefits are not brought to account unless realisation of the asset is assured beyond reasonable doubt. Future income tax benefits relating to tax losses are only brought to account when their realisation is virtually certain. The tax effects of capital losses are not recorded unless realisation is virtually certain.

Capital gains tax, if applicable, is provided for in establishing the period’s income tax expense when an asset is sold.

Tax consolidation

The Company is the head entity in the tax-consolidated group comprising the Company and all of its Australian wholly-owned subsidiaries set out in Note 28. The head entity recognises all of the current and deferred tax assets and liabilities of the tax consolidated group (after elimination of intragroup transactions).

The tax-consolidated group has entered into a tax sharing agreement (TSA) that requires wholly-owned subsidiaries to make contributions to the head entity for current tax assets and liabilities and movements in deferred tax balances arising from external transactions during the year.

– II-9 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

h) Taxation (continued)

Tax consolidation (continued)

Under the TSA, the contributions are calculated on a “stand-alone basis” so that the contributions are equivalent to the tax balances generated by external transactions entered into by wholly-owned subsidiaries. The contributions are payable as set out in the agreement and reflect the timing of the head entity’s obligations to make payments for tax liabilities to the relevant tax authorities. The assets and liabilities arising under the TSA are recognised as intercompany assets and liabilities with a consequential adjustment to income tax expense/revenue.

i) Earnings per share

Basic earnings per share (EPS) is calculated by dividing the net profit attributable to members of the parent entity for the reporting period, after excluding any costs of servicing equity (other than ordinary shares and converting preference shares classified as ordinary shares for EPS calculation purposes), by the weighted average number of ordinary shares of the Company, adjusted for any bonus issue.

Diluted EPS is calculated by dividing the basic EPS earnings, adjusted by the after tax effect of financing costs associated with dilutive potential ordinary shares and the effect on revenues and expenses of conversion to ordinary shares associated with dilutive potential ordinary shares, by the weighted average number of ordinary shares and dilutive potential ordinary shares adjusted for any bonus issue.

j) Acquisitions of assets

Initial costs

All assets acquired including property, plant and equipment and intangibles other than goodwill are initially recorded at their cost of acquisition at the date of acquisition, being the fair value of the consideration provided plus incidental costs directly attributable to the acquisition.

When equity instruments are issued as consideration, their market price at the date of acquisition is used as fair value, except where the notional price at which they could be placed in the market is a better indication of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity subject to the extent of proceeds received, otherwise expensed.

Where settlement of any part of cash consideration is deferred, the amounts payable are recorded at their present value, discounted at the rate applicable to the consolidated entity if a similar borrowing were obtained from an independent financier under comparable terms and conditions. The unwinding of the discount is treated as interest expense.

– II-10 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

j) Acquisitions of assets (continued)

Initial costs (continued)

The costs of assets constructed or internally generated by the consolidated entity, other than goodwill, include the cost of materials and direct labour. Directly attributable overheads and other incidental costs are also capitalised to the asset. Borrowing costs are capitalised to qualifying assets as set out in Note 1(g).

Expenditure, including that on internally generated assets, is only recognised as an asset when the entity controls future economic benefits as a result of the costs incurred, it is probable that those future economic benefits will eventuate, and the costs can be measured reliably. Costs attributable to feasibility and alternative approach assessments are expensed as incurred.

Subsequent additional costs

Costs incurred on assets subsequent to initial acquisition are capitalised when it is probable that future economic benefits in excess of the originally assessed performance of the asset will flow to the consolidated entity in future years, otherwise, expensed as incurred.

k) Use and revision of accounting estimates

The preparation of the financial report requires the making of estimations and assumptions that affect the recognised amounts of assets, liabilities, revenues and expenses and the disclosure of contingent liabilities. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

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

l) Receivables

The collectability of debts is assessed at reporting date and where appropriate, specific provision is made for any doubtful accounts.

Trade debtors

Trade debtors to be settled within 90 days are carried at amounts due.

– II-11 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

m) Inventories

Inventories are carried at the lower of cost and net realisable value.

Cost is allocated on a monthly first in and first out basis and includes direct material, overburden removal, coal mining, coal processing, labour, related transportation costs to the point of sale and other fixed and variable overhead costs directly related to mining activities. The site overheads and rehabilitation cost component of inventory is allocated using standard costing. Depreciation and amortisation are allocated to inventories on a units of production basis.

Net realisable value is determined on each inventory lines’ normal selling pattern. Expenses of marketing, selling and distribution to customers are estimated and are deducted to establish net realisable value.

n) Investments

Controlled entities

Investments in controlled entities are carried in the Company’s financial statements at the lower of cost and recoverable amount. Refer Note 1(q) and 28.

Associates

In the Company’s financial statements, investments in unlisted shares of associates are carried at the lower of cost and recoverable amount. Refer Note 29.

Joint ventures

In the consolidated entity’s financial statements, investments in joint venture operations are accounted for as set out in Note 1(b).

o) Leased assets

Finance leases

Leases under which the consolidated entity assumes substantially all the risks and benefits of ownership are classified as finance leases. Other leases are classified as operating leases.

Operating leases

Payments made under operating leases are expensed on a straight line basis over the term of the lease, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased property.

– II-12 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

p) Exploration, evaluation and development expenditure

Exploration, evaluation and development costs are accumulated in respect of each separate area of interest.

Exploration and evaluation costs are carried forward where right of tenure of the area of interest is current and they are expected to be recouped through sale or successful development and exploitation of the area of interest, or, where exploration and evaluation activities in the area of interest have not yet reached a stage that permits reasonable assessment of the existence of economically recoverable reserves.

Development costs related to an area of interest are carried forward to the extent that they are expected to be recouped either through sale or successful exploitation of the area of interest.

When an area of interest is abandoned or the directors decide that it is not commercial, any accumulated costs in respect of that area are written-off in the financial period the decision is made. Each area of interest is also reviewed at the end of each accounting period and accumulated costs written-off to the extent that they will not be recoverable in the future.

When production commences, carried forward exploration, evaluation and development costs are transferred to Property, Plant and Equipment - Mining Property. Any exploration conducted within an operating Mining Lease area is expensed as incurred.

q) Recoverable amount of non-current assets valued on cost basis

The carrying amounts of non-current assets valued on the cost basis, other than exploration and evaluation expenditure carried forward (refer Note 1(p)), are reviewed to determine whether they are in excess of their recoverable amount at reporting date. If the carrying amount of a non-current asset exceeds its recoverable amount, the asset is written-down to the lower amount. The write-down is expensed in the reporting period in which it occurs.

Where a group of assets working together supports the generation of cash inflows, recoverable amount is assessed in relation to that group of assets.

In assessing recoverable amounts of non-current assets, the relevant cash flows have not been discounted to their present value, except where specifically stated.

Cost versus fair value

Except where specifically stated, non-current assets are recorded at the lower of cost and recoverable amount.

– II-13 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

r) Depreciation and amortisation

Complex assets

The components of major assets that have materially different useful lives, are effectively accounted for as separate assets, and are separately depreciated.

Useful lives

All assets, excluding freehold land, have limited useful lives and are depreciated/amortised using the straight line method over their estimated useful lives, taking into account estimated residual values, with the exception of carried forward exploration, evaluation and development expenditure in the production phase which is depreciated on a units of production basis over the life of the economically recoverable reserves being 74,524,110 (2004: 78,504,300) tonnes for the Coppabella Mine and 19,427,050 (2004: 20,652,343) for the Moorvale Mine at the beginning of the financial year or, where it is likely the consolidated entity will obtain ownership of the asset, the life of the asset.

Assets are depreciated or amortised from the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and held ready for use.

Amortisation is not charged on costs carried forward in respect of areas of interest in the exploration or development phases until commercial production commences.

Depreciation and amortisation rates and methods are reviewed annually for appropriateness. When changes are made, adjustments are reflected prospectively in current and future periods only (refer Note 4(c)). Depreciation and amortisation are expensed, except to the extent that they are included in the carrying amount of another asset (eg inventory stocks) as an allocation of production overheads.

The depreciation/amortisation rates or useful lives used for each class of asset are as follows:

	2005	2004
Property, plant and equipment
Mining property	7 — 15 years	8 — 16 years
Buildings and infrastructure	6.5% — 40%	6.5% — 40%
Plant and equipment	13% — 40%	13% — 40%

– II-14 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

s) Overburden in advance

Expenditure incurred in the removal of overburden from coal deposits is deferred, and expensed in operating expenditure as the coal is extracted. The balance of the amount deferred is reviewed at each reporting date to determine the amount (if any) which is no longer recoverable out of future revenue. Any amounts so determined are written-off.

t) Payables

Liabilities are recognised for amounts to be paid in the future for goods or services received. Trade accounts payable are normally settled within 30 days.

u) Interest bearing liabilities

Bank loans are recognised at their principal amount, subject to set-off arrangements. Interest expense is accrued at the contracted rate and included in “Other creditors and accruals”.

v) Employee benefits

Wages, salaries and annual leave

Liabilities for employee benefits for wages, salaries and annual leave expected to be settled within 12 months of the year-end represent present obligations resulting from employees’ services provided up to the reporting date, calculated at undiscounted amounts based on remuneration wage and salary rates that the consolidated entity expects to pay as at the reporting date including related on-costs, such as, workers compensation insurance and payroll tax.

Long service leave

The provision for employee benefits to long service leave represents the present value of the estimated future cash outflows to be made resulting from employees’ services provided to reporting date.

The provision is calculated using expected future increases in wage and salary rates including related oncosts and expected settlement dates based on turnover history and is discounted using the rates attaching to national government bonds at reporting date which most closely match the terms of maturity of the related liabilities. The unwinding of the discount is treated as long service leave expense.

– II-15 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

v) Employee benefits (continued)

Directors’ Option Plan, Executive Option Plan and Employee Share Plan

Information relating to the plans is set out in Note 33.

Transaction costs associated with issuing shares and options are recognised in equity subject to the extent of the proceeds received, otherwise expensed. Other administrative costs are expensed.

Superannuation plan

The Company and its controlled entities contribute to several defined contribution superannuation plans. Contributions are charged against income as they are made.

w) Provisions

A provision is recognised when there is a legal, equitable or constructive obligation as a result of a past event and it is probable that a future sacrifice of economic benefits will be required to settle the obligation, the timing or amount of which is uncertain.

If the effect is material, a provision is determined by discounting the expected future cash flows (adjusted for expected future risks) required to settle the obligation at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability, being risk free rates on national government bonds most closely matching the expected future payments, except for certain mine site rehabilitation as noted below. The unwinding of the discount is treated as part of the expense related to the particular provision.

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the recovery receivable is recognised as an asset when it is probable that the recovery will be received and is measured on a basis consistent with the measurement of the related provision.

In the statement of financial performance, the expense recognised in respect of a provision is presented net of the recovery. In the statement of financial position, the provision is recognised net of the recovery receivable only when the entity:

has a legally recognised right to set-off the recovery receivable and the provision; and
intends to settle on a net basis, or to realise the asset and settle the provision simultaneously.

– II-16 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

w) Provisions (continued)

Dividends

A provision for dividends payable is recognised in the reporting period in which the dividends are declared, for the entire undistributed amount, regardless of the extent to which they will be paid in cash.

Mine site rehabilitation

Provisions are made for the estimated cost of rehabilitation relating to areas disturbed during the mine’s operation up to reporting date but not yet rehabilitated, as if the mine was shutdown at reporting date. Provision has been made in full for all disturbed areas at the reporting date based on current estimates of costs per hectare to rehabilitate such areas. The estimated cost of rehabilitation includes the current cost of recontouring, topsoiling and revegetation employing current technology while having regard to current legislative requirements. Only the costs per hectare for rehabilitation of long term building and infrastructure areas are discounted to their present value and are capitalised as an asset and amortised over the economic life of the mine on a units of production basis. Changes in estimates are dealt with on a prospective basis as they arise.

Significant uncertainty exists as to the amount of rehabilitation obligations which will be incurred due to the impact of changes in environmental legislation.

Assumptions have been made as to the remaining life of existing sites based on studies conducted by independent technical advisors.

x) Financial instruments issued

Other financial instruments

Where financial instruments, such as convertible notes issued by the Company, are redeemable at the option of the holder but the Company has the right to either convert them to ordinary shares or to pay the cash equivalent, the proceeds received are classified as a liability and related distributions as interest expense.

– II-17 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

2. CHANGES IN ACCOUNTING POLICIES

There have been no changes in accounting policies since the end of the previous financial year.

3. REVENUE FROM ORDINARY ACTIVITIES

Revenue from operating activities Sale of coal Other revenues From operating activities: • Management fee — related parties • Dividends — related parties • Net foreign exchange gains • Interest: • Related parties • Other parties • Sundry — other parties From outside operating activities: • Gross proceeds from sale of non-current assets Total other revenues Total revenue from ordinary activities	Consolidated 2005 2004 A$’000 A$’000 370,157 222,254 158 122 — — — 517 — — 2,385 1,038 3 — — 1,416 2,546 3,093 372,703 225,347	The Company 2005 2004 A$’000 A$’000 — — 1,994 1,672 19,034 17,586 — — 9,368 6,400 1,150 442 3 — — 11 31,549 26,111 31,549 26,111	The Company 2005 2004 A$’000 A$’000 — — 1,994 1,672 19,034 17,586 — — 9,368 6,400 1,150 442 3 — — 11 31,549 26,111 31,549 26,111
			1,672 17,586 — 6,400 442 — 11
			26,111
			26,111

– II-18 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

4. PROFIT FROM ORDINARY ACTIVITIES BEFORE INCOME TAX EXPENSE

Consolidated
2005
2004
A$’000
A$’000
a)
Individually significant expenses included
in profit from ordinary activities before
income tax expense
•
Capitalised borrowing costs written off
—
1,912
•
Write-off of overburden in advance
3,120
2,845
•
Write-down in value of investments in controlled
entities to recoverable amount
—
—
b)
Profit from ordinary activities before income
tax expense/benefit has been arrived at after
charging/(crediting) the following items
(including items in (a) above):
•
Borrowing costs relating to convertible notes
2,012
3,002
•
Borrowing costs relating to bank loans and other
4,576
7,812
6,588
10,814
•
Depreciation:
•
Mining property
9,007
5,726
•
Buildings and infrastructure
6,118
5,573
•
Plant and equipment
229
313
15,354
11,612
•
Net foreign exchange losses
1,782
—
•
Net expense from movements in provision for:
•
Rehabilitation
1,987
1,709
•
Employee entitlements
124
21
•
Net bad and doubtful debts expense including
movement in provision for doubtful debts
1,471
—
•
Government royalties on mineral sales
or production
20,822
11,587
•
Operating lease rental expenses
499
423
•
Exploration expenditure
152
258
•
Net (gain)/loss on disposal of non-current assets
23
2,002
•
Write-down in value of investments in controlled
entities to recoverable amount
—
—

The Company
2005
2004
A$’000
A$’000
—
—
—
—
—
17,521
2,012
3,002
635
743
2,647
3,745
—
—
—
—
25
21
25
21
—
—
—
—
124
2 1
—
—
—
—
177
145
—
—
—
(5)
—
17,521

– II-19 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

4. PROFIT FROM ORDINARY ACTIVITIES BEFORE INCOME TAX EXPENSE

c) Revision of accounting estimate

Restatement of economic reserves

Economic recoverable reserves for the Moorvale Mine have decreased from 26,131,614 (Macarthur Coal Limited share: 20,652,343) tonnes on 1 July 2004 to 24,460,000 tonnes (Macarthur Coal Limited share: 19,427,050). The effect of this revision reduces amortisation expense by approximately A$48,000 for the year ended 30 June 2005.

5. AUDITORS’ REMUNERATION

Audit services: • Auditors of the Company — KPMG • Audit and review of the financial reports(A) — Current year — Prior year Other services: • Auditors of the Company — KPMG • Other assurance services(A) (B) • Taxation services(A) • Joint venture operations(D) — Audit — Other services(E) • KPMG related entities • Other(F) • Due diligence(C)	Consolidated 2005 2004 A$ A$ 132,000 120,510 — 4,500 132,000 125,010 62,413 55,800 66,520 56,827 68,862 66,446 32,734 19,021 55,136 — — 26,578 285,665 224,672	The Company 2005 2004 A$ A$ 132,000 120,510 — 4,500 132,000 125,010 62,413 55,800 66,520 56,827 — — — — 55,136 — — 26,578 184,069 139,205	The Company 2005 2004 A$ A$ 132,000 120,510 — 4,500 132,000 125,010 62,413 55,800 66,520 56,827 — — — — 55,136 — — 26,578 184,069 139,205
			125,010

			55,800 56,827 — — — 26,578
			139,205

– II-20 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

5. AUDITORS’ REMUNERATION (continued)

(A) All auditors’ remuneration is borne by the Company for the consolidated entity.
(B) Other assurance services include advice in relation to accounting, AIFRS, corporate governance, continuous disclosure and risk management issues.
(C) Due diligence services relate to the rights issue in the prior year.
(D) Represents the consolidated entity’s share of remuneration paid for audit and other services incurred by joint ventures.
(E) Represents tax advice and assistance with financial modelling.
(F) Represents license and other fees paid to a related entity, of which KPMG holds a 50% interest, for purchase of tax compliance software by the consolidated entity.

– II-21 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

6. TAXATION

a)
Income tax expense/(benefit)
Consolidated
2005
2004
A$’000
A$’000
Prima facie income tax expense calculated
at 30% (2004: 30%) on the profit from
ordinary activities
27,052
4,761
Increase in income tax expense due to:
•
Non allowable amortisation of mining property
2,343
1,437
•
Other
1,236
1,092
•
Income tax expense related to current and deferred
tax transactions of the wholly owned subsidiaries
in the tax consolidated group
—
—
•
Write-down of investments in controlled entities
—
—
Decrease in income tax expense due to:
•
Recovery of income tax expense under
Tax Sharing Agreement
—
—
•
Deduction for float costs
(304)
(295)
•
Non assessable dividends
—
—
•
Under/(over) provision prior year
157
(116)
•
Other
(1,731)
(964)
Income tax expense/(revenue) attributable to
profit from ordinary activities
28,753
5,915
Deferred tax expense/(benefit) arising from the resetting
of the tax values of assets as a result of the tax
consolidation legislation implemented on 1 July 2002
—
(1,788)
Total income tax expense/(benefit) attributable to
profit from ordinary activities
28,753
4,127
Income tax expense/(revenue) attributable to
profit from ordinary activities is made up of:
•
Current income tax provision
20,434
4,017
•
Deferred income tax provision
7,126
3,066
•
Future income tax benefit
1,036
(1,052)
•
Tax related payable/(recoverable) to/(from)
wholly owned subsidiaries
—
—
•
Under/(over) provision prior year
157
(116)
•
Deferred tax expense/(benefit) arising from the resetting
of the tax values of assets as a result of the tax
consolidation legislation implemented on 1 July 2002
—
(1,788)
28,753
4,127

The Company
2005
2004
A$’000
A$’000
6,714
298
—
—
17
19
27,996
4,117
—
5,256
(27,996)
(4,117)
(304)
(295)
(5,710)
(5,276)
70
9
—
—
787
11
—
—
787
11
20,434
4,153
(107)
13
14
(47)
(19,624)
(4,117)
70
9
—
—
787
11

– II-22 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

6. TAXATION (continued)

b) Current tax liabilities/(assets)

Consolidated
2005
2004
A$’000
A$’000
Provision for current income tax
payable/(receivable)
Movements during the year
•
Balance at the beginning of the year
(7,000)
1,248
•
Under/(over) provision in prior period
157
(1,202)
•
Income tax paid
(5,862)
(9,913)
•
Income tax received
8,847
—
•
Current year’s income tax provision
20,363
2,867
•
Income tax expense related to
wholly-owned subsidiaries in a tax
consolidated group
—
—
16,505
(7,000)
c)
Deferred tax liabilities
Consolidated
2005
2004
A$’000
A$’000
Provision for deferred income tax
Provision for deferred income tax comprises
the estimated expense at the applicable
rate of 30% on the following items:
•
Difference in depreciation and
amortisation of property, plant and
equipment for accounting and income
tax purposes
2,069
1,256
•
Expenditure currently deductible for
tax but deferred and amortised for
accounting purposes
21,166
14,576
•
Sundry items
1,776
2,053
•
Provision for deferred income tax
relating to timing differences
attributable to wholly owned
subsidiaries under tax consolidation
—
—
25,011
17,885

The Company
2005
2004
A$’000
A$’000
(7,000)
1,384
70
(1,384)
(5,862)
—
8,847
—
722
—
19,728
(7,000)
16,505
(7,000)
The Company
2005
2004
A$’000
A$’000
—
1
—
—
—
14
25,011
17,870
25,011
17,885

– II-23 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

6. TAXATION (continued)

d) Deferred tax assets

Consolidated 2005 2004 A$’000 A$’000 Future income tax benefit Future income tax benefit comprises the estimated future benefit at the applicable rate of 30% on the following items: • Provisions and accrued employee entitlements not currently deductible 3,656 3,022 • Difference in depreciation and amortisation of property, plant and equipment for accounting and income tax purposes — 31 • Sundry items 283 384 • Tax losses carried forward 1,626 3,164 • Future income tax benefit relating to timing differences attributable to wholly-owned subsidiaries under tax consolidations — — 5,565 6,601 Future income tax benefit not taken to account The potential future income tax benefit in a controlled entity, which is a company, arising from timing differences has not been recognised as an asset because the recovery of the timing difference is not assured beyond any reasonable doubt: • Capital losses 32 32 32 32	The Company 2005 2004 A$’000 A$’000 71 34 83 31 27 8 — — 5,384 6,528 5,565 6,601 — — — —	The Company 2005 2004 A$’000 A$’000 71 34 83 31 27 8 — — 5,384 6,528 5,565 6,601 — — — —
		6,601

		—
		—

– II-24 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

6. TAXATION (continued)

d) Deferred tax assets (continued)

The potential future income tax benefit will only be obtained if:

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

7. EARNINGS PER SHARE

Earnings used as the numerator in calculating earnings per share (basic and diluted earnings per share) Net profit Weighted average number of shares used as the denominator Number for basic earnings per share Ordinary shares Number for diluted earnings per share Ordinary shares Effect of directors’ and executives share options on issue Effect of convertible notes on issue	Consolidated 2005 2004 A$’000 A$’000 61,420 11,743 Number Number 162,350,704 136,907,425 162,350,704 136,907,425 501,247 90,391 3,880,810 — 166,732,761 136,997,816	Consolidated 2005 2004 A$’000 A$’000 61,420 11,743 Number Number 162,350,704 136,907,425 162,350,704 136,907,425 501,247 90,391 3,880,810 — 166,732,761 136,997,816

		Number 136,907,425
		136,907,425 90,391 —
		136,997,816

During the financial year 16,719,850 convertible notes were converted to ordinary shares. The basic EPS calculation includes these notes converted to shares (2004: 54,000).

During the financial year 1,380,000 options were converted to ordinary shares. The diluted EPS calculation includes that portion of these options assumed to be issued for nil consideration, weighted with references to the date of conversion. The weighted average number included is 411,650 (2004: 21,456).

The following convertible notes and options issued have not been included in the calculation of diluted EPS as they are not dilutive:

Directors’ Option Plan — 600,000
• Executive Option Plan — 600,000 • Convertible Notes — 20,600,660

– II-25 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

8. CASH ASSETS

Cash at bank and in hand Bank cash deposit account at call, paying interest at 5.5% (2004: 5.2%) at 30 June 2005 Bank bills maturing in 30 days paying interest at 5.6% (2004: 5.5%) at 30 June 2005	Consolidated 2005 2004 A$’000 A$’000 905 185 4,675 4,632 12,558 6,958 18,138 11,775	The Company 2005 2004 A$’000 A$’000 452 98 4,675 4,630 12,558 6,958 17,685 11, 686	The Company 2005 2004 A$’000 A$’000 452 98 4,675 4,630 12,558 6,958 17,685 11, 686
			11, 686

– II-26 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

9. RECEIVABLES

Current Trade debtors Other debtors Tax related receivables Amounts receivable from associated and related entities – unsecured Non-current Security deposits Loans to employees – Employee Share Plan (refer Note 33) Amounts receivable from controlled entities – unsecured Amounts receivable from associated and related entities – unsecured Less Provision for doubtful debts	Consolidated 2005 2004 A$’000 A$’000 23,274 18,416 5,595 3,239 — — 1,875 8,133 30,744 29,788 85 95 7 26 — — 92 121 8,434 2,647 (902) — 7,624 2,768	The Company 2005 2004 A$’000 A$’000 — — 226 — 27,324 8,273 277 314 27,827 8,587 — — 7 26 126,747 113,486 126,754 113,512 — — — — 126,754 113,512	The Company 2005 2004 A$’000 A$’000 — — 226 — 27,324 8,273 277 314 27,827 8,587 — — 7 26 126,747 113,486 126,754 113,512 — — — — 126,754 113,512
			8,587

			— 26 113,486
			113,512
			— —
			113,512

Other debtors amounts mainly comprise GST refund due from the Australian Taxation Office and other amounts receivable in the ordinary course of business for usual operating activities. Collateral is not obtained.

– II-27 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

10. INVENTORIES

Consolidated 2005 2004 A$’000 A$’000 Current Coal stocks, at cost 24,075 11,312 Refer to Note 16 for details of security over inventories.	The Company 2005 2004 A$’000 A$’000 — —	The Company 2005 2004 A$’000 A$’000 — —

11. OTHER FINANCIAL ASSETS

Current Cash and deposits – not at call Foreign currency contracts Non-current Investments in controlled entities – at cost Foreign currency contracts	Consolidated 2005 2004 A$’000 A$’000 58,630 18,417 19,643 15,446 78,273 33,863 — — 2,783 8,906 2,783 8,906	The Company 2005 2004 A$’000 A$’000 — — — — — — 56,385 57,871 — — 56,385 57,871	The Company 2005 2004 A$’000 A$’000 — — — — — — 56,385 57,871 — — 56,385 57,871
			—

			57,871 —
			57,871

Refer to Note 16 for details of security over investments in controlled entities.

– II-28 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

12. OTHER ASSETS

Current Prepayments Deferred expenditure Overburden in advance Non-current Deferred expenditure Less accumulated amortisation Prepayments Overburden in advance	Consolidated 2005 2004 A$’000 A$’000 1,814 494 257 726 45,949 35,808 48,020 37,028 2,239 1,800 (2,239) (1,296) — 504 5,392 — 7,330 2,993 12,722 3,497	The Company 2005 2004 A$’000 A$’000 75 73 257 569 — — 332 642 1,452 1,171 (1,452) (914) — 257 — — — — — 257

– II-29 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

13. PROPERTY, PLANT AND EQUIPMENT

Mining property (including mining rights and coal reserves) • At cost Less accumulated depreciation Freehold land • At cost Buildings and infrastructure • At cost Less accumulated depreciation Plant and equipment • At cost Less accumulated depreciation Capital works in progress • At cost	Consolidated 2005 2004 A$’000 A$’000 139,045 139,649 (26,177) (16,389) 112,868 123,260 4,953 4,923 65,204 64,688 (14,315) (8,111) 50,889 56,577 2,159 1,597 (723) (491) 1,436 1,106 4,457 228 174,603 186,094	The Company 2005 2004 A$’000 A$’000 — — — — — — — — — — — — — — 218 133 (80) (55) 138 78 — — 138 78

Refer to Note 16 for details of security over property, plant and equipment.

– II-30 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

13. PROPERTY, PLANT AND EQUIPMENT (continued)

Consolidated 2005 2004 A$’000 A$’000 Reconciliations Reconciliation of the carrying amounts for each class of property, plant and equipment are set out below: • Mining property Carrying amount at beginning of year 123,260 83,708 • Additions, including acquisitions through acquisition of interest in joint venture — 17,326 • Transfer from development — 29,468 • Disposals (604) (1,081) • Depreciation (9,788) (6,161) Carrying amount at end of year 112,868 123,260 • Freehold land Carrying amount at beginning of year 4,923 5,065 • Additions 30 55 • Disposals — (197) Carrying amount at end of year 4,953 4,923 • Buildings and infrastructure Carrying amount at beginning of year 56,577 28,403 • Additions, including acquisitions through acquisition of interest in joint venture 71 18,840 • Transfer from capital works in progress 507 15,177 • Disposals (62) (1,347) • Depreciation (6,204) (4,496) Carrying amount at end of year 50,889 56,577	The Company 2005 2004 A$’000 A$’000 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —	The Company 2005 2004 A$’000 A$’000 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
		—

		— — —
		—

		— — — — —
		—

– II-31 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

13. PROPERTY, PLANT AND EQUIPMENT (continued)

• Plant and equipment Carrying amount at beginning of year • Additions, including acquisitions through acquisition of interest in joint venture • Transfer from capital works in progress • Disposals • Depreciation Carrying amount at end of year • Capital works in progress Carrying amount at beginning of year • Additions, including acquisitions through acquisition of interest in joint venture • Disposals • Transfers to property, plant and equipment Carrying amount at end of year	Consolidated 2005 2004 A$’000 A$’000 1,106 849 295 484 341 33 (74) (48) (232) (212) 1,436 1,106 228 16,097 5,077 86 — (745) (848) (15,210) 4,457 228	The Company 2005 2004 A$’000 A$’000 78 70 85 35 — — — (6) (25) (21) 138 78 — — — — — — — — — —	The Company 2005 2004 A$’000 A$’000 78 70 85 35 — — — (6) (25) (21) 138 78 — — — — — — — — — —
			78

			— — — —
			—

14. EXPLORATION, EVALUATION AND DEVELOPMENT EXPENDITURE

Costs carried forward in respect of areas of interest in: • Exploration and/or evaluation phase – at cost	Consolidated 2005 2004 A$’000 A$’000 40,555 37,126 40,555 37,126	The Company 2005 2004 A$’000 A$’000 — — — —	The Company 2005 2004 A$’000 A$’000 — — — —
			—

The ultimate recoupment of costs carried forward for exploration and evaluation phases is dependent on the successful development and commercial exploitation or sale of the respective areas.

– II-32 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

15. PAYABLES

Current Trade creditors Other creditors and accruals Non-current Other amounts payable Amounts payable to controlled entities – unsecured	Consolidated 2005 2004 A$’000 A$’000 6,521 1,554 54,825 26,855 61,346 28,409 — 10,000 — — — 10,000	The Company 2005 2004 A$’000 A$’000 285 240 891 308 1,176 548 — — — 1,563 — 1,563	The Company 2005 2004 A$’000 A$’000 285 240 891 308 1,176 548 — — — 1,563 — 1,563
			548

			— 1,563
			1,563

16. INTEREST BEARING LIABILITIES

Current Bank loans – secured Redeemable convertible notes Deferred liability for acquisition of mining interest – unsecured Non-current Bank loans – secured Redeemable convertible notes Deferred liability for acquisition of mining interest – unsecured	Consolidated 2005 2004 A$’000 A$’000 19,102 12,882 5,627 — 1,933 1,934 26,662 14,816 — 26,866 — 29,871 9,790 10,633 9,790 67,370	The Company 2005 2004 A$’000 A$’000 — — 5,627 — — — 5,627 — — — — 29,871 — — — 29,871	The Company 2005 2004 A$’000 A$’000 — — 5,627 — — — 5,627 — — — — 29,871 — — — 29,871
			—

			— 29,871 —
			29,871

– II-33 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

16. INTEREST BEARING LIABILITIES (continued)

Redeemable convertible notes

In December 2002 the Company issued 20,689,660 convertible notes at an issue price of A$1.45 each with interest at 10% per annum payable half-yearly. The notes are convertible, at the option of the holder, on any interest payment date up to 11 December 2005 to ordinary shares on the basis of one share per note. The Company has the option, on receiving the conversion request from the holder, to either issue ordinary shares or to pay the cash equivalent. Any notes not converted by the maturity date must be redeemed by the Company at the issue price on the maturity date. During the year 16,719,850 (2004: 54,000) notes were converted at A$1.45 (refer Note 20).

Deferred liability for acquisition of mining interest – unsecured

In December 2003 the consolidated entity purchased an additional 23.3% interest in the Coppabella Project. As part of the acquisition, the consolidated entity entered into an arrangement to progressively purchase the 23.3% interest in the exploration tenements each six months, over a 10 year period. In accordance with applicable Australian Accounting Standards the deferred liability has been reflected at its present value in the financial statements, discounted at 10% based on 6% interest plus risk adjusted margin.

Consolidated 2005 2004 A$’000 A$’000 Financing arrangements The consolidated entity has access to the following lines of credit: Total facilities available: • Bank loans • cash advance term loan (US$14,552,000) 19,102 39,748 • revolving cash advance working capital loan 17,226 17,226 • revolving amortising cash advance bridge loan — 9,600 • Bank guarantee 33,363 35,855 69,691 102,429	The Company 2005 2004 A$’000 A$’000 — — — — — 9,600 — — — 9,600	The Company 2005 2004 A$’000 A$’000 — — — — — 9,600 — — — 9,600
		9,600

– II-34 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

16. INTEREST BEARING LIABILITIES (continued)

Consolidated 2005 2004 A$’000 A$’000 Total facilities utilised at reporting date: • Bank loans • cash advance term loan (US$14,552,000) 19,102 39,748 • revolving cash advance working capital loan — — • revolving amortising cash advance bridge loan — — • Bank guarantee 32,324 35,281 51,426 75,029 Facilities not utilised at reporting date: • Bank loans • cash advance term loan (US$Nil) — — • revolving cash advance working capital loan 17,226 17,226 • revolving amortising cash advance bridge loan — 9,600 • Bank guarantee 1,039 574 18,265 27,400	The Company 2005 2004 A$’000 A$’000 — — — — — — — — — — — — — — — 9,600 — — — 9,600	The Company 2005 2004 A$’000 A$’000 — — — — — — — — — — — — — — — 9,600 — — — 9,600
		—

		— — 9,600 —
		9,600

Bank loans

Project Finance Facility

A non-recourse Project Finance Facility applicable to the Coppabella and Moorvale mines is in place with the debt being held by the controlled entities. Bank loans provided as part of the Project Finance Facility are:

1) Cash advance term loan

The loan is denominated in United States dollars and is to be amortised on a diminishing basis on minimum scheduled repayments to 15 November 2008. An amount of A$19,102,000 (US$14,552,000) (2004: A$12,882,000; US$8,887,000) is included in current liabilities, being the amount payable within one year due to the loan being expected to be fully repaid by November 2005 based on projected cashflows. A$Nil (US$Nil) (2004: A$26,866,000; US$18,535,000) is included in non-current liabilities as the term loan will be repaid.

The interest rate applicable to the cash advance term loan comprises LIBOR plus a margin of 1.55% per annum. The effective interest rate is 5.05% (2004: 3.25%) per annum at 30 June 2005.

– II-35 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

16. INTEREST BEARING LIABILITIES (continued)

Bank loans (continued)

Project Finance Facility (continued)

2) Revolving cash advance working capital loan

The revolving cash advance working capital loans are denominated in Australian dollars. The amount drawn at 30 June 2005 is A$Nil (2004: A$Nil). The loan facility is available until 15 November 2008.

The interest rate comprises a base rate based on BBSY plus a margin of 1.55% per annum. The effective interest rate is 7.24% (2004: 7.14%) per annum at 30 June 2005. Additionally, a commitment fee of 0.70% per annum is payable on the unused portion of the revolving cash advance working capital loan facility.

3) Bank guarantee facility

The bank guarantee facility is denominated in Australian and United States dollars and is available until 15 November 2008. Bank guarantee fees are payable at 0.775% per annum and a fee of 0.35% per annum applies to the unused portion of the bank guarantee facility.

Security

The Project Finance Facility is secured by charges over the consolidated entity’s interest in the Coppabella and Moorvale Joint Venture including all of the assets and undertakings of the controlled entity, Coppabella Coal Pty Ltd, and the Company’s shares in Coppabella Coal Pty Ltd and intercompany loans to the controlled entity.

Corporate facility

Revolving amortising cash advance bridge loan

A revolving amortising bridge loan was in place during the year with the debt being held by the Company. The facility was not drawn down during the year and was cancelled on 28 February 2005.

Security

The bridge loan was secured by charges over all of the consolidated entity’s assets ranking after those assets secured under the Project Finance Facility. All charges in relation to the bridge loan have been removed.

– II-36 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

16. INTEREST BEARING LIABILITIES (continued)

Bank loans (continued)

Corporate facility (continued)

Assets pledged under security arrangements The carrying amount of the pledged non-current assets are as follows: Mining property Land Buildings and infrastructure Plant and equipment Capital works in progress Exploration, evaluation and development expenditure Receivables Deferred tax assets Other financial assets Other Shares in controlled entities Amounts receivable from controlled entities	Consolidated 2005 2004 A$’000 A$’000 109,592 123,260 3,730 4,923 51,818 56,577 1,263 1,106 4,457 228 — 37,126 7,555 2,768 — 6,601 2,783 8,906 12,723 2,993 — — — — 193,921 244,488	The Company 2005 2004 A$’000 A$’000 — — — — — — — 78 — — — — — 26 — 6,601 — — — — 56,385 57,871 79,201 113,486 135,586 178,062	The Company 2005 2004 A$’000 A$’000 — — — — — — — 78 — — — — — 26 — 6,601 — — — — 56,385 57,871 79,201 113,486 135,586 178,062
			178,062

17. PROVISIONS

Current Employee benefits Rehabilitation Non-current Employee benefits Rehabilitation	Consolidated 2005 2004 A$’000 A$’000 198 65 1,258 1,613 1,456 1,678 39 48 10,691 8,349 10,730 8,397	The Company 2005 2004 A$’000 A$’000 198 65 — — 198 65 39 48 — — 39 48	The Company 2005 2004 A$’000 A$’000 198 65 — — 198 65 39 48 — — 39 48
			65

			48 —
			48

– II-37 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

18. OTHER FINANCIAL LIABILITIES

Current Mining exploration and evaluation costs (refer Note 26(d)) Amounts payable for future user charges (refer Note 26(e)) Foreign currency contracts Non-current Mining exploration and evaluation costs (refer Note 26(d)) Amounts payable for future user charges (refer Note 26(e)) Foreign currency contracts 19. OTHER LIABILITIES Current Deferred unrealised gains on foreign currency contracts Deferred unrealised gains on US dollar bank loans Non-current Deferred unrealised gains on foreign currency contracts Deferred unrealised gains on US dollar bank loans	Consolidated 2005 2004 A$’000 A$’000 1,471 1,360 1,599 1,570 1,737 6,474 4,807 9,404 131 1,545 12,398 14,346 169 2,610 12,698 18,501 Consolidated 2005 2004 A$’000 A$’000 17,907 8,972 2,314 1,480 20,221 10,452 2,614 6,296 2,109 3,099 4,723 9,395	The Company 2005 2004 A$’000 A$’000 — — — — — — — — — — — — — — — — The Company 2005 2004 A$’000 A$’000 — — — — — — — — — — — —	The Company 2005 2004 A$’000 A$’000 — — — — — — — — — — — — — — — — The Company 2005 2004 A$’000 A$’000 — — — — — — — — — — — —
			—

			— —
			—

– II-38 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

20. CONTRIBUTED EQUITY

Share capital 172,824,327 (2004: 154,724,477) ordinary shares, fully paid Movements during the year Balance at beginning of year Shares issued: • Nil (2004: 25,781,413) pursuant to a rights issue prospectus • Transaction costs arising from issue pursuant to a rights issue prospectus • Adjustment to prior period transaction costs • 290,000 (2004: 310,000) from the exercise of options at A$1.15 per share under the Directors’ and Executives’ option plans • 550,000 (2004: Nil) from the exercise of options at A$1.30 per share under the Directors’ and Executives’ option plans • 540,000 (2004: Nil) from the exercise of options at A$1.45 per share under the Directors’ and Executives’ option plans • 16,719,850 (2004: 54,000) convertible notes at A$1.45 per share converted to ordinary shares Balance at end of year	Consolidated 2005 2004 A$’000 A$’000 181,086 155,053 155,053 124,982 — 30,938 — (1,301) (43) — 334 356 715 — 783 — 24,244 78 181,086 155,053	The Company 2005 2004 A$’000 A$’000 181,086 155,053 155,053 124,982 — 30,938 — (1,301) (43) — 334 356 715 — 783 — 24,244 78 181,086 155,053

Terms and conditions

Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders’ meetings.

In the event of winding up of the Company, ordinary shareholders rank after creditors and are fully entitled to any proceeds of liquidation.

– II-39 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

21. RETAINED PROFITS

Note Retained profits at beginning of year Net profit Dividends recognised during the year 22 Retained profits at end of year 22. DIVIDENDS	Consolidated 2005 2004 A$’000 A$’000 24,398 13,941 61,420 11,743 (17,751) (1,286) 68,067 24,398	The Company 2005 2004 A$’000 A$’000 1,201 1,505 21,594 982 (17,751) (1,286) 5,044 1,201	The Company 2005 2004 A$’000 A$’000 1,201 1,505 21,594 982 (17,751) (1,286) 5,044 1,201
			1,201

2005 2004 final – ordinary Interim – ordinary 2004 2003 final – ordinary Subsequent events Since the end of the financial year, the directors declared the following dividend:	Cents per share 3.78 7.00 10.78 1.0 11.0	Total Franked/ Date of amount unfranked payment A$ 5,873,533 Franked 30 September 2004 11,877,073 Franked 31 March 2005 17,750,606 1,285,791 Franked 20 October 2003 19,010,676 Franked 30 September 2005

The financial effect of this dividend has not been brought to account in the financial statements for the year ended 30 June 2005 and will be recognised in subsequent financial reports.

– II-40 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

22. DIVIDENDS (continued)

	The Company	The Company
	2005	2004
	A$’000	A$’000
Dividend franking account
30% franking credits available to shareholders of the Company
for subsequent financial years	16,628	3,714

The above available amounts are based on the balance of the dividend franking account at year-end adjusted for:

(a) franking credits that will arise from the payment of the current tax liability/receivable
(b) franking debits that will arise from the payment of dividends recognised as a liability at the year-end
(c) franking credits that will arise from the receipt of dividends recognised as receivables at the year-end
(d) franking credits that the entity may be prevented from distributing in subsequent years.

The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends.

23. SEGMENT REPORTING

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. The “other” segment consists of corporate and other business development activities. Unallocated items mainly comprise income earning assets and revenue, interest bearing loans, borrowings and expenses, and corporate assets and expenses. Segment capital expenditure is the total cost incurred during the year to acquire segment assets that are expected to be used for more than one period. Inter-segment pricing is determined on an arm’s length basis.

– II-41 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

23. SEGMENT REPORTING (continued)

Primary Reporting – Business segments 2005 External revenue Inter-segment revenue Total segment revenue Result Segment result Profit from ordinary activities before tax Income tax expense Profit from ordinary activities after tax Depreciation and amortisation Non-cash expenses other than depreciation and amortisation Individually significant items Assets Segment assets Consolidated total assets Liabilities Segment liabilities Consolidated total liabilities Acquisitions of non-current assets	Exploration Operating and coal mines evaluation A$’000 A$’000 371,549 — — — 371,549 — 90,930 (2,859) 15,730 3 1,177 — 3,120 — 373,513 46,818 252,180 49,796 5,433 3,459	Other Eliminations Consolidated A$’000 A$’000 A$’000 1,154 — 372,703 11,362 (11,362) — 12,516 (11,362) 372,703 2,102 — 90,173 90,173 (28,753) 61,420 419 — 16,152 124 — 1,301 — — 3,120 178,975 (156,204) 443,102 443,102 48,960 (156,987) 193,949 193,949 85 — 8,977

– II-42 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

23. SEGMENT REPORTING (continued)

	Asia	Europe	Americas	Other	Eliminations	Consolidated
	A$’000	A$’000	A$’000	A$’000	A$’000	A$’000
Secondary
Reporting -
Geographical
segments 2005
External segment
revenue by location
of customers	159,324	152,490	40,912	19,977	—	372,703

The consolidated entity operates predominately in Australia. All segment assets from ordinary activities relate to operations in Australia.

– II-43 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

23. SEGMENT REPORTING (continued)

Primary Reporting – Business segments 2004 External revenue Inter-segment revenue Total segment revenue Result Segment result Profit from ordinary activities before tax Income tax expense Profit from ordinary activities after tax Depreciation and amortisation Non-cash expenses other than depreciation and amortisation Individually significant items Assets Segment assets Consolidated total assets Liabilities Segment liabilities Consolidated total liabilities Acquisitions of non-current assets	Operating coal mines A$’000 224,887 — 224,887 17,092 12,306 1,709 4,757 307,631 227,150 36,469	Exploration and evaluation A$’000 — — — (2,215) 3 — — 41,523 42,500 4,176	Other Eliminations Consolidated A$’000 A$’000 A$’000 460 — 225,347 8,071 (8,071) — 8,531 (8,071) 225,347 993 — 15,870 15,870 (4,127) 11,743 619 — 12,928 21 — 1,730 — — 4,757 113,106 (86,502) 375,758 375,758 48,416 (121,759) 196,307 196,307 — — 40,645

– II-44 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

23. SEGMENT REPORTING (continued)

	Asia	Europe	Americas	Other	Eliminations	Consolidated
	A$’000	A$’000	A$’000	A$’000	A$’000	A$’000
Secondary Reporting
– Geographical
segments
2004
External segment
revenue by location
of customers	110,357	83,183	28,240	3,567	—	225,347

The consolidated entity operates predominately in Australia. All segment assets from ordinary activities relate to operations in Australia.

24. INTERESTS IN JOINT VENTURES

The consolidated entity holds the following interests in various joint ventures whose principal activities are coal production, exploration and evaluation, and development.

Joint Venture % Interest held Principal activity	Coppabella and Moorvale Joint Venture 2005 2004 73.3% 73.3% Coal production	Bowen Basin Coal Exploration Joint Venture 2005 2004 58%(1) 57% Exploration	Monto Coal Joint Venture 2005 2004 51% 51% Exploration and evaluation

(1) Per the farm-in agreement (refer Note 26(g) (v)) Macarthur Exploration Pty Ltd holds a 50% interest in the tenements held in the Bowen Basin Coal Exploration Joint Venture, except for West Rolleston and Capricorn in which it holds a 75% interest. The 58% (2004: 57%) interest has been applied based upon weighted contributions of existing (prior to farm-in arrangements) and new mining exploration permits.

For the year ended 30 June 2005, the contribution of the Coppabella and Moorvale Joint Venture to the operating profit before tax of the consolidated entity was A$100,412,000 (2004: A$25,668,000). The value of the consolidated entity’s 73.3% share of coal mined during the year by Coppabella and Moorvale Joint Venture was A$345,240,000 (2004: A$188,487,000).

– II-45 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

24. INTERESTS IN JOINT VENTURES (continued)

There was no coal mined by the other joint ventures during the year.

Included in the assets and liabilities of the consolidated entity are the following items which represent the consolidated entity’s interest in the assets and liabilities employed in the joint ventures, recorded in accordance with the accounting policies described in Note 1(b).

Current assets Cash assets Receivables Inventories Other financial assets Other Total current assets Non-current assets Receivables Property, plant and equipment Exploration, evaluation and development Other Total non-current assets Total assets Current liabilities Payables Provisions Other financial liabilities Total current liabilities Non-current liabilities Provisions Other financial liabilities Total non-current liabilities Total liabilities	Consolidated 2005 2004 A$’000 A$’000 15 4 6,216 12,681 24,075 11,312 319 56 47,682 36,228 78,307 60,281 44 105 174,371 186,017 40,555 37,126 12,723 2,993 227,693 226,241 306,000 286,522 48,614 26,704 1,258 1,612 1,599 1,570 51,471 29,886 10,691 8,349 12,398 14,346 23,089 22,695 74,560 52,581	The Company 2005 2004 A$’000 A$’000 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —	The Company 2005 2004 A$’000 A$’000 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
			—
			— — — —
			—
			—

			— — —
			—
			— —
			—
			—

Refer to Notes 26 and 27 for details of commitments and contingent liabilities.

– II-46 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

25. NOTES TO THE STATEMENTS OF CASH FLOWS

a) Reconciliation of cash

For the purposes of the statements of cash flows, cash includes cash on hand and at bank and short term deposits at call, net of outstanding bank overdrafts. Cash as at the end of the financial year as shown in the statements of cash flows is reconciled to the related items in the statements of financial position as follows:

		Consolidated	Consolidated	The Company	The Company
		2005	2004	2005	2004
	Note	A$’000	A$’000	A$’000	A$’000
Cash assets	8	18,138	11,775	17,685	11,686

b) Reconciliation of operating profit after income tax to net cash provided by/(used in) operating activities

		Consolidated		The Company
		2005	2004	2005	2004
		A$’000	A$’000	A$’000	A$’000
Profit from ordinary activities
	after income tax	61,420	11,743	21,594	982
Add/(less) items classified as
	investing/financing activities:
•	(Profit)/loss on sale of
	non-current assets	23	2,002	—	(5)
•	Interest on convertible notes	2,012	3,002	2,012	3,002
•	Interest on interest bearing
	liabilities	2,602	3,408	—	145
•	Exploration costs expensed	152	258	—	—
Add/(less) non-cash items:
•	Amortisation of borrowing costs	973	1,316	569	598
•	Net bad and doubtful debts expense	1,471	—	—	—
•	Amounts set aside to provisions	2,111	2,402	124	28
•	Unrealised foreign exchange losses	185	38	—	—
•	Depreciation	15,354	11,612	25	21
•	Borrowing costs written off	—	1,912	—	—
•	Overburden in advance written off	3,120	2,845	—	—
•	Write down in value of investments
	in controlled entities to recoverable
	amount	—	—	—	17,521

– II-47 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

25. NOTES TO THE STATEMENTS OF CASH FLOWS (continued)

b) Reconciliation of operating profit after income tax to net cash provided by/(used in) operating activities (continued)

Net cash provided by/(used in) operating activities before change in assets and liabilities: Change in assets and liabilities adjusted for effects of purchase and disposal of joint venture interests during the financial year: • Increase/(decrease) in income tax payable • Increase/(decrease) in net deferred tax payable • (Increase)/decrease in tax related receivable • (Increase)/decrease in tax receivable • (Increase)/decrease in receivables • (Increase)/decrease in inventories • (Increase)/decrease in overburden in advance • (Increase)/decrease in prepayments • (Increase)/decrease in deferred expenditure • Increase/(decrease) in creditors and accruals • Net cash provided by/(used in) operating activities	Consolidated 2005 2004 A$’000 A$’000 89,423 40,538 16,505 (1,244) 8,162 1,872 — — 7,000 (7,000) (937) (7,593) (12,763) (5,904) (17,598) (1,752) (6,712) 434 1,946 1,397 22,958 (1,801) 107,984 18,947	The Company 2005 2004 A$’000 A$’000 24,324 22,292 16,505 (1,384) 8,162 1,872 (27,896) 6,524 7,000 (7,000) (170) (233) — — — — (2) 170 31 (31) 598 (179) 28,552 22,031

– II-48 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

26. COMMITMENTS

a) Capital expenditure commitments

		Consolidated	Consolidated	The Company	The Company
		2005	2004	2005	2004
		A$’000	A$’000	A$’000	A$’000
Joint ventures
Buildings and infrastructure
	contracted for but not provided
	for in the financial statements
	and payable:
•	Not later than one year	369	20	—	—

b) Operating lease commitments

Future operating lease rentals not provided for in the financial statements and payable:

• Not later than one year • Later than one year but not later than five years • Later than five years	Consolidated 2005 2004 A$’000 A$’000 416 133 1,452 71 703 — 2,571 204	The Company 2005 2004 A$’000 A$’000 416 133 1,452 71 703 — 2,571 204	The Company 2005 2004 A$’000 A$’000 416 133 1,452 71 703 — 2,571 204
			204

The Company leases property under non-cancellable operating leases expiring from one to seven years. Leases generally provide the Company with a right of renewal at which time all terms are negotiated.

– II-49 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

26. COMMITMENTS (continued)

c) Mining leases - Joint ventures

Future mining lease rentals not provided for in the financial statements and payable:

• Not later than one year • Later than one year but not later than five years • Later than five years	Consolidated 2005 2004 A$’000 A$’000 298 281 1,056 867 3,277 2,805 4,631 3,953	The Company 2005 2004 A$’000 A$’000 — — — — — — — —	The Company 2005 2004 A$’000 A$’000 — — — — — — — —
			—

d) Exploration and evaluation expenditure commitments

Exploration obligations

In order to maintain current rights of tenure to exploration tenements, the consolidated entity is required to perform minimum exploration work to meet the minimum expenditure requirements specified by various State governments. The expenditure obligations are subject to renegotiation when application for a mining lease is made and at other times.

These obligations are not provided for in the financial statements and are payable:

• Not later than one year • Later than one year but not later than five years	Consolidated 2005 2004 A$’000 A$’000 477 1,096 125 202 602 1,298	The Company 2005 2004 A$’000 A$’000 — — — — — —	The Company 2005 2004 A$’000 A$’000 — — — — — —
			—

– II-50 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

26. COMMITMENTS (continued)

d) Exploration and evaluation expenditure commitments (continued)

Exploration costs

Committed costs for exploration and evaluation areas not provided for in the financial statements and payable:

• Not later than one year • Later than one year but not later than five years	Consolidated 2005 2004 A$’000 A$’000 113 223 1 40 114 263	The Company 2005 2004 A$’000 A$’000 — — — — — —	The Company 2005 2004 A$’000 A$’000 — — — — — —
			—

e) Operating commitments - Joint ventures

Commitments under the electricity, water, rail, port, coal washing plant and train loading facility agreements for joint ventures not provided for in the financial statements and payable:

• Not later than one year • Later than one year but not later than five years • Later than five years	Consolidated 2005 2004 A$’000 A$’000 28,260 20,219 82,576 75,550 20,260 26,300 131,096 122,069	The Company 2005 2004 A$’000 A$’000 — — — — — — — —	The Company 2005 2004 A$’000 A$’000 — — — — — — — —
			—

In addition to the operating commitments in (e) above, other contracts on commercial terms and conditions have been entered into with contractors for overburden and mining operations at Coppabella and Moorvale mines and with original landowners regarding royalty arrangements. As the amounts payable under the contracts vary with the quantities mined and sold, future commitments are not able to be reliably assessed and quantified.

– II-51 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

26. COMMITMENTS (continued)

e) Operating commitments - Joint ventures (continued)

On 23 October 2002, the Coppabella and Moorvale Joint Venture participants agreed to pay a user charge to the Queensland Government for the facilitation of the transport infrastructure corridor (TIC) relocation. The user charge comprises 40 quarterly payments (consolidated entity share of A$596,000 per quarter; 2004: A$661,000 per quarter), commencing 1 October 2002, which have been included in the above operating commitments less the amounts payable for future user charges brought to account at 30 June 2005 (refer Note 18).

f) Employee remuneration commitments

Commitments under non-cancellable employment contracts not provided for in the financial statements and payable:

		Consolidated	Consolidated	The Company	The Company
		2005	2004	2005	2004
		A$’000	A$’000	A$’000	A$’000
•	Not later than one year	265	265	265	265

Denis Wood is a director of Queensland Coke & Energy Pty Ltd (QCE), a wholly controlled entity of the Company. By a Services Agreement dated 1 August 2005, Coal Industry Services Pty Ltd, a director related entity, has agreed to provide the services of Denis Wood to QCE at A$392,400 per annum. The contract relates to the development of a coke project and is for a initial period of 3 years but is able to be extended. If the project is successfully developed, a royalty is payable for 15 years at A$0.50 per tonne up to 1.6 million tonnes per annum and A$0.25 per tonne for each tonne over 1.6 million tonnes per annum. The contract may be terminated for particular stated events, in which case no termination payments are payable. If terminated for other stated events, the royalty remains payable.

The above amounts represent minimum commitments under these arrangements offset by any amounts brought to account as liabilities at 30 June 2005.

– II-52 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

26. COMMITMENTS (continued)

g) Other commitments

(i) The Company has guaranteed the obligations of Monto Coal 2 Pty Ltd, a controlled entity, in relation to outstanding payments in connection with acquisition of Monto Coal 2 Pty Ltd’s 51% interest in the Monto Coal Joint Venture.

Joint Ventures

Deeds of cross charge

(ii) The payment of future cash calls by Coppabella Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the Coppabella and Moorvale Joint Venture is secured by a guarantee from the Company and a charge over Coppabella Coal Pty Ltd’s interest in the Coppabella and Moorvale Joint Venture in favour of the other joint venturers and Macarthur Coal (C&M Management) Pty Ltd (formerly Australian Premium Coals Pty Ltd) as the manager of the Coppabella and Moorvale Joint Venture.
(iii) The payment of future cash calls by Monto Coal 2 Pty Ltd, a controlled entity, for its share of operating and capital costs in the Monto Coal Joint Venture is secured by a charge over Monto Coal 2 Pty Ltd’s interest in the Monto Coal Joint Venture in favour of the other joint venturers.
(iv) Farm-in obligations (refer (v) below) and payment of future cash calls by Macarthur Exploration Pty Ltd, a controlled entity, for its share of operating and capital costs in the Bowen Basin Coal Exploration Joint Venture is secured by a charge over Macarthur Exploration Pty Ltd’s interest in the Bowen Basin Coal Exploration Joint Venture in favour of the other joint venturers.

Other

(v) A farm-in arrangement has been entered into between Macarthur Exploration Pty Ltd, a controlled entity, and the participants of the Bowen Basin Coal Exploration Joint Venture which entitles Macarthur Exploration Pty Ltd to earn an interest in various exploration tenements including the Olive Downs Project progressively as it fulfils its exploration expenditure commitments totalling A$7,500,000 over a 4 year period from 1 July 2001. Macarthur Exploration Pty Ltd fulfilled its exploration expenditure commitment of A$7,500,000 on 20 October 2004.
(vi) The Company has guaranteed the commitments of Coppabella Coal Pty Ltd, Macarthur Exploration Pty Ltd and Monto Coal 2 Pty Ltd, controlled entities, in relation to royalty arrangements.

– II-53 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

26. COMMITMENTS (continued)

g) Other commitments (continued)

Associates

Refer Note 29(b).

27. CONTINGENT LIABILITIES AND ASSETS

The details and estimated maximum amounts of contingent liabilities where the probability of future payments is not considered remote are set out below, as well as details of contingent liabilities, which although considered remote, the directors consider should be disclosed.

The directors are of the opinion that provisions are not required in respect of the contingent liabilities, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement.

Indemnities

Indemnities have been provided to directors and certain executive officers of the Company in respect of liabilities to third parties arising from their positions, except where the liability arises out of conduct involving a lack of good faith. No monetary limit applies to these agreements and there are no known obligations outstanding at 30 June 2005.[(1)]

(1) These contingent liabilities are considered remote.

Guarantees

Coppabella Coal Pty Ltd, a controlled entity, as a participant of the Coppabella and Moorvale Joint Venture, has provided bank guarantees totalling A$32,324,000 (2004: A$35,281,000) in respect of rehabilitation works, electricity, transport infrastructure corridor facilities and customers.[(1)]

The consolidated entity, as a participant of the Coppabella and Moorvale Joint Venture, has entered into a Residual Value Guarantee (RVG) with a bank regarding the lease residual value of the dragline used by a contractor at the Coppabella Mine for A$10,775,000 (2004: A$10,775,000). The lease term expires on 30 June 2008. Management of Macarthur Coal (C&M Management) Pty Ltd (formerly Australian Premium Coals Pty Ltd), the manager of the Coppabella and Moorvale Joint Venture, expect the future value of the dragline to be in excess of the residual value at 30 June 2008 provided the contractor performs to the Asset Management Plan. The financier of the dragline also holds a fixed and floating charge over Coppabella Coal Pty Ltd’s interests up to the agreed share of the residual value being A$10,775,000 (2004: A$10,775,000).[(1)]

– II-54 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

27. CONTINGENT LIABILITIES AND ASSETS (continued)

Coppabella Coal Pty Ltd, a controlled entity, as a participant of the Coppabella and Moorvale Joint Venture, has entered into the Coppabella Dragline Agreement dated 19 April 2002 requiring purchase guarantees to be provided in relation to the Marion 8200 dragline erected by Roche Mining Pty Ltd (Roche) and that will be used by Roche in undertaking a contract, being for the removal of overburden and mining of coal. In the event of a termination of the contract, the guarantees in place require Macarthur Coal (C&M Management) Pty Ltd (formerly Australian Premium Coals Pty Ltd), as agent for the Coppabella and Moorvale Joint Venture, to assume all the reasonable continuing liabilities of the dragline, any items that relate to the construction or operation of the dragline (including spare parts) and any financing responsibilities in relation to the operating lease between Roche and the Lease Financiers including Investec Bank (Australia) Limited.[(1)]

(1) These contingent liabilities are considered remote.

Environmental

Current Queensland Government environment policy requires the preparation of an Environmental Management Overview Strategy (EMOS) and a Plan of Operations detailing the quality, timing and standards of planned mine rehabilitation work. The Coppabella and Moorvale Joint Venture has prepared its EMOS and its Plans of Operations has been accepted by the Environmental Protection Agency. In addition to the EMOS and the Plans of Operations, the consolidated entity is required to lodge securities with the Department of Natural Resources and Mines to ensure compliance with relevant legislation. The total amount of the guarantees lodged with the Department of Natural Resources and Mines as at 30 June 2005 is A$11,074,000 (2004: A$8,689,000) (included in the amount of guarantees referred to above).[(1)]

(1) These contingent liabilities are considered remote.

Memorandum of Understanding

During the year, Queensland Coke & Energy Pty Ltd (QCE), a wholly owned controlled entity of the Company entered into a memorandum of understanding with a contractor to develop an estimated cost and execution plan for the design and construction of the coke plant as part of the feasibility study. If the memorandum of understanding is terminated by QCE or an alternative contractor is ultimately appointed to construct the plant, a fee of A$1,500,000 will be payable.

Litigation

On 19 December 2003, Macarthur Coal (C&M Management) Pty Ltd (the Manager) (formerly Australian Premium Coals Pty Ltd), as manager and agent for the Coppabella and Moorvale Joint Venture participants, lodged a Notice of Dispute with its mining contractor Roche Mining Pty Ltd in relation to a mining contract at the Coppabella Mine. The claim included recovery of loss and damages for higher production costs and demurrage resulting from a failure of the contractor to deliver coal in accordance with the contract provisions.

– II-55 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

27. CONTINGENT LIABILITIES AND ASSETS (continued)

Litigation (continued)

On 9 June 2004, the contractor lodged a Notice of Dispute on the Manager under the mining contract. The claim included higher costs of mining in the 2004 financial year due to alleged delay in access to particular mining areas and alleged adverse mining conditions. By letter dated 28 June 2004, the contractor referred the Dispute to arbitration.

On 9-10 December 2004, the Arbitrator heard submissions on a preliminary point as to whether the items listed in the Notice of Dispute were disputes as defined within the meaning of the mining contract and were correctly submitted in accordance with the contract. On 28 February 2005, the arbitrator determined that 7 of the 9 items could proceed to arbitration. The Manager received the Points of Claim from Roche on 21 March 2005 and detailed requests for particulars were issued on 29 April 2005 and 10 June 2005. The defence and counter claim is being prepared, however the timing for their completion is dependent on receipt of the requested particulars.

On 5 July 2005, the contractor lodged another Notice of Dispute in relation to alleged additional costs resulting from approval of the 2005 financial year Mine Plan. The contractor has sought to refer this dispute to arbitration.

The total value of the claims noted above is in the order of A$107 million for the Coppabella and Moorvale Joint Venture, of which the consolidated entity holds a 73.3% interest. Areas of duplication have been identified across these two claims and Roche is yet to provide particulars regarding basis and quantum.

The Directors of the consolidated entity (and the Manager) dispute the above claims and will vigorously defend its position in arbitration.

In the Director’s opinion, disclosure of any further information about the above matter would be prejudicial to the interests of the consolidated entity.

– II-56 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

28. CONTROLLED ENTITIES

a) Particulars in relation to controlled entities

Particulars in relation to controlled entities
		Interest Held
		2005	2004
	Note	%	%
Name
Parent entity
Macarthur Coal Limited
Controlled entities
Coppabella Coal Pty Ltd		100	100
Olive Downs Coal Pty Ltd	(A)	100	100
Moorvale Coal Pty Ltd	(A)	100	100
Moorvale Interest Pty Ltd	(A)	100	100
Macarthur Exploration Pty Ltd	(A)	100	100
Macarthur Coal Management Pty Ltd	(A)	100	100
Monto Coal Pty Ltd	(A)	100	100
Monto Coal 2 Pty Ltd	(A)	100	100
Queensland Coke & Energy Pty Ltd	(A)	100	—
Macarthur Coal Mine Management Pty Ltd	(A)	100	—

All controlled entities were incorporated and carry on business in Australia.

(A) No separate audit opinion is issued as it is not required in the place of incorporation. The results and the state of affairs of the entity have been reviewed in forming the audit opinion on the financial report of the consolidated entity.

– II-57 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

28. CONTROLLED ENTITIES (continued)

b) Acquisition of controlled entities

The following controlled entities were acquired during the financial year:

				Contribution to
		Consolidated		consolidated
	Date aquired	entity’s interest	Consideration	net profit
		%	A$’000	A$’000
2005
Queensland Coke &
Energy Pty Ltd	14 December 2004	100	—	—
Macarthur Coal Mine
Management
Pty Ltd	15 June 2005	100	—	—

The companies were acquired as shelf companies for nominal cost. The shelf companies had no assets nor had operated at the date of acquisition.

2004

The consolidated entity did not gain control over any entities during the prior financial year.

29. INVESTMENTS IN ASSOCIATED ENTITIES

a) Name

Name
	Principal activities	Reporting date	Interest held
			2005	2004
			%	%
Macarthur Coal
(C&M Management) Pty Ltd(1)	Manager of the Coppabella
	and Moorvale Joint Venture	30 June	73.3	73.3
Bistrotel Pty Ltd	Property Owner	30 June	73.3	73.3

(1) Name changed from Australian Premium Coals Pty Ltd on 29 June 2005.

Investments in these entities are held in connection with joint venture arrangements. Under these arrangements, the consolidated entity does not have control over these associated entities, and accordingly have not been consolidated. The impact of the results and operations of the associated entities are not material to the consolidated entity and accordingly have not been equity accounted.

– II-58 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

29. INVESTMENTS IN ASSOCIATED ENTITIES (continued)

b) Commitments

Share of associates’ operating lease commitments payable: • Not later than one year • Later than one year but not later than five years	Consolidated 2005 2004 A$’000 A$’000 28 20 85 12 113 32	Consolidated 2005 2004 A$’000 A$’000 28 20 85 12 113 32
		32

30. DIRECTORS AND EXECUTIVE DISCLOSURES FOR DISCLOSING ENTITIES

Remuneration of specified directors and specified executives by the consolidated entity

Disclosures of remuneration policies, service contracts and details of remuneration are included in the Remuneration Report on page 57 to 60.

Equity instruments

Option holdings

All options refer to options over ordinary shares of the Company, which are exercisable on a one for one basis under the Directors’ Option Plan and Executive Option Plan (refer Note 33).

Options granted to directors are on the same terms and conditions as those granted to other employees. There were no options granted during the year.

– II-59 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

30. DIRECTORS AND EXECUTIVE DISCLOSURES FOR DISCLOSING ENTITIES (continued)

Equity instruments (continued)

Option holdings (continued)

The movement during the reporting period in the number of options over ordinary shares in the Company held, directly, indirectly or beneficially, by each specified director and specified executive, including their personallyrelated entities is as follows:

			Held and
	Held at		exercisable at
	1 July 2004	Exercised	30 June 2005
Specified Directors
Hon. Keith De Lacy	300,000	300,000	—
Roger Marshall	300,000	300,000	—
Don Nissen	200,000	200,000	—
Peter Forbes	—	—	—
Ken Talbot	—	—	—
Specified Executives
Robert Adams	200,000	200,000	—
Shane Stephan	130,000	20,000	110,000
Nicole Hollows	120,000	120,000	—
Denis Wood	—	—	—
Brett Garland	—	—	—
Bruce Denney	—	—	—
Gary Lee	—	—	—
Ken Carnes	—	—	—
Ian Neill	—	—	—

No options held by specified directors or specified executives are vested but not exercisable.

All shares issued on exercise of options are set out below. The amount paid per share on exercise of the options was A$1.15 per share for 290,000 options, A$1.30 per share for 550,000 options and A$1.45 per share for 540,000 options. There are no amounts unpaid on shares issued as a result of the exercise of the options.

– II-60 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

30. DIRECTORS AND EXECUTIVE DISCLOSURES FOR DISCLOSING ENTITIES (continued)

Equity instruments (continued)

Equity holdings and transactions

The movement during the reporting period in the number of ordinary shares of the Company held, directly, indirectly or beneficially, by each specified director and specified executive, including their personally-related entities are as follows:

			Received on
	Held at		exercise of		Held at
	1 July 2004	Purchases	options	Sales	30 June 2005
Specified Directors
Hon. Keith De Lacy	118,600	2,380	300,000	112,100	308,880
Roger Marshall	120,000	2,380	300,000	280,000	142,380
Don Nissen	124,200	2,380	200,000	20,000	306,580
Peter Forbes	18,000	2,380	—	—	20,380
Ken Talbot	67,453,748	—	—	—	67,453,748
Specified Executives
Robert Adams	25,699	—	200,000	55,699	170,000
Shane Stephan	72,000	—	43,707	—	115,707
Nicole Hollows	74,600	—	120,000	179,600	15,000
Denis Wood	—	—	—	—	—
Bruce Denney	—	—	—	—	—
Gary Lee	—	—	—	—	—
Ken Carnes	—	—	—	—	—
Ian Neill	—	4,000	—	4,000	—

Loans and other transactions with specified directors and specified executives

The Company has entered into standard deeds of indemnity and access with the Directors.

The Chief Executive Officer, Ken Talbot, has a 3 year contract which only provides for a fixed salary. Refer to other transactions with the consolidated entity for details on exploration tenement selldown.

Denis Wood, a director of Queensland Coke & Energy Pty Ltd (QCE) a controlled entity of the Company has a services agreement with the consolidated entity. Refer Note 26 for particulars.

Apart from the details disclosed in this note, no director has entered into a material contract with the Company or the consolidated entity since the end of the previous financial year and there were no material contracts involving directors’ interests subsisting at year end.

– II-61 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

30. DIRECTORS AND EXECUTIVE DISCLOSURES FOR DISCLOSING ENTITIES (continued)

Equity instruments (continued)

Loans

There were no loans outstanding at the reporting date to specified directors and specified executives, where the individual’s aggregate loan balance exceeded A$100,000 at any time in the reporting period.

Other transactions with the Company or its controlled entities

A number of specified directors, or their personally-related entities, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of these entities.

The terms and conditions of the transactions with directors and personally related entities were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to unrelated entities on an arm’s length basis.

Amounts payable to specified directors and their personally-related entities at reporting date arising from related party transactions were as follows:

	Consolidated		The Company
	2005	2004	2005	2004
	A$	A$	A$	A$
Current payables
Trade creditors	10	—	—	—

In accordance with the Bowen Basin Coal Exploration Joint Venture Agreement, Bowen Basin Exploration Pty Ltd (a personally-related entity of Mr Ken Talbot) reduced its interest by 3.1% interest in exploration tenements in the year. The cumulative reduction is 25.0% from the commencement of the joint venture. This resulted in a reduction of the free carried interest in the joint venture. The consolidated entity via Macarthur Exploration Pty Ltd, a controlled entity, is funding the exploration program.

– II-62 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

31. NON-DIRECTOR RELATED PARTIES

The classes of non-director related parties are:

associated companies
wholly-owned controlled entities
joint venture entities

All transactions with non-director related parties are on normal terms and conditions.

Wholly-owned controlled entities transactions

a) The Company charges interest at normal commercial rates on loans to its wholly-owned controlled entities. The loans to the wholly-owned controlled entities are unsecured and have no fixed repayment terms. Interest is charged quarterly at 8.405% (2004: 8.405%) per annum on the outstanding balance. Interest totalling A$9,368,000 (2004: A$6,400,000) was charged to the wholly-owned controlled entities during the year.
b) The Company also charges management fees to its wholly-owned controlled entities based on the total corporate office expenses. Management fees totalling A$1,994,000 (2004: A$1,672,000) were charged to the wholly-owned controlled entities during the year.
c) A wholly-owned controlled entity, Coppabella Coal Pty Ltd, paid a dividend of A$19,034,000 (2004: A$17,586,000) to the Company.

The aggregate amounts receivable and payable by the consolidated entity and the Company from nondirector related parties are shown in Notes 9 and 15. Included in these amounts is the aggregate tax related receivable from wholly-owned controlled entities under the Tax Consolidation legislation.

Macarthur Coal Management Pty Ltd, a controlled entity, charges management fees to Macarthur Coal (C&M Management) Pty Ltd (formerly Australian Premium Coals Pty Ltd), an associated entity, pursuant to the Management Fee Deed dated 31 August 1998. The management fee paid is equal to 0.5% of the aggregate FOB revenue paid to the Coppabella and Moorvale Joint Venture participants from the sale in aggregate of the first 2 million tonnes of coal from the Coppabella Mine in each financial year for the life of the Deed.

– II-63 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

32. ADDITIONAL FINANCIAL INSTRUMENTS DISCLOSURE

a) Interest rate risk

The consolidated entity enters into interest rate swaps, forward rate agreements and interest rate options to manage cash flow risks associated with the interest rates on long term borrowings that are floating.

Interest rate swaps and forward rate agreements

Interest rate swaps allow the consolidated entity to swap floating rate borrowings into fixed rates. Maturities of swap contracts are principally between one and two years. Each contract involves six monthly payment or receipt of the net amount of interest.

The consolidated entity, from time to time, may enter into forward rate agreements to offset changes in the rates paid on the USD term loan floating rate debt. No forward rate agreements were outstanding at year end (2004: Nil).

Interest rate options

The consolidated entity has entered into interest rate options to reduce the impact of changes in interest rates on the USD term loan floating rate debt. Interest rate options maturing between one and three years were outstanding at year end and at 30 June 2004.

Interest rate risk exposures

The consolidated entity’s exposure to interest rate risk and the effective weighted average interest rate for classes of financial assets and financial liabilities are set out below:

– II-64 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

32. ADDITIONAL FINANCIAL INSTRUMENTS DISCLOSURE (continued)

a) Interest rate risk (continued)

Interest rate risk exposures (continued)

Weighted average interest rate Note 2005 Financial assets Cash assets 8 5.5% Receivables 9 — Other financial assets 11 3.4% Financial liabilities Payables 15 — Interest bearing liabilities(1) 16 7.2% Other financial liabilities 18 — Employee entitlements 33 5.1% Interest rate swaps and options(1) 2004 Financial assets Cash assets 8 5.4% Receivables 9 — Other financial assets 11 2.2% Financial liabilities Payables 15 — Interest bearing liabilities(1) 16 6.9% Other financial liabilities 18 — Employee entitlements 33 5.6% Interest rate swaps and options(1)	Floating interest rate A$’000 18,138 — 58,630 76,768 — 19,102 — 39 19,141 (29,572) 11,590 — 18,417 30,007 — 39,748 — 48 39,796 (36,197)	Fixed Interest Maturing In: More 1 year 1 to 5 than or less years 5 years A$’000 A$’000 A$’000 — — — — — — — — — — — — — — — 7,560 6,096 3,694 — — — — — — 7,560 6,096 3,694 19,485 10,087 — — — — — — — — — — — — — — — — 1,934 35,967 4,537 — — — — — — 1,934 35,967 4,537 25,312 10,885 —	Non- interest bearing A$’000 — 38,368 22,426 60,794 61,346 — 17,505 198 79,049 — 185 32,556 24,352 57,093 38,409 — 27,905 65 66,379 —	Total A$’000 18,138 38,368 81,056
				137,562

				61,346 36,452 17,505 237
				115,540

				—

				11,775 32,556 42,769
				87,100

				38,409 82,186 27,905 113
				148,613

				—

(1) The effect of interest rate hedging is incorporated into the weighted average interest rate.

– II-65 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

32. ADDITIONAL FINANCIAL INSTRUMENTS DISCLOSURE (continued)

b) Foreign exchange risk

The consolidated entity enters into forward foreign exchange contracts and some option based products (smart forwards) to hedge a proportion of anticipated coal sale proceeds denominated in United States dollars and Australian dollar construction costs funded by United States dollar loans, subject to Board approved limits. The terms of these contracts are not more than 3 years. The amount of anticipated future sales and construction costs is forecast in light of current conditions in foreign markets, commitments from customers and to suppliers and experience. All sales from the first of each quarter, after allowing for the natural hedge designations referred to below, are designated as being hedged until all hedge contracts are fully utilised. Notes 1(e) and (f) set out the accounting treatment for foreign currency transactions and hedges.

The following table sets out the gross Australian dollar value to be received under foreign currency contracts, the weighted average contracted exchange rates and the settlement periods of outstanding contracts for the consolidated entity.

Sell US dollars Not later than one year Later than one year but not later than two years Later than two years but not later than three years	Consolidated Weighted average rate Amount 2005 2004 2005 2004 A$’000 A$’000 0.7284 0.6631 407,369 142,556 0.7150 0.6414 43,670 57,189 0.7670 — 10,035 — 461,074 199,745	Consolidated Weighted average rate Amount 2005 2004 2005 2004 A$’000 A$’000 0.7284 0.6631 407,369 142,556 0.7150 0.6414 43,670 57,189 0.7670 — 10,035 — 461,074 199,745
		199,745

The net deferred costs and exchange gains and losses on hedges of anticipated foreign currency sales and construction costs recognised in other assets and other liabilities at Notes 12 and 19 and the timing of their anticipated recognition as part of sales or construction costs are:

– II-66 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

32. ADDITIONAL FINANCIAL INSTRUMENTS DISCLOSURE (continued)

b) Foreign exchange risk (continued)

Foreign exchange risk (continued)
Not later than one year Later than one year but not later than two years Later than two years but not later than three years	Consolidated Net gain/(loss) 2005 2004 A$’000 A$’000 17,907 8,972 2,683 6,296 (69) — 20,521 15,268
		15,268

Foreign currency borrowings — specific natural hedge

As described in Note 1(e), foreign currency borrowings have been designated as a specific hedge of future coal sales over the anticipated repayment term of the debt. The following table sets out the Australian dollar equivalent of United States dollar foreign currency borrowings used to hedge United States dollar coal sales, the weighted average exchange rate and the anticipated timing of recognition of any unrealised gains or losses at 30 June 2005:

Weighted average rate 2005 2004 Not later than one year 0.6186 0.6186 Later than one year but not later than two years 0.6186 0.6186 Later than two years but not later than three years 0.6186 0.6186 Later than three years but not later than four years — 0.6186 Later than four years but not later than five years — 0.6186	Consolidated Amount 2005 2004 A$’000 A$’000 9,994 14,367 7,994 12,308 1,114 9,844 — 5,834 — 1,977 19,102 44,330	Unrealised gains/(losses) 2005 2004 A$’000 A$’000 2,314 1,480 1,851 1,273 258 1,018 — 603 — 205 4,423 4,579	Unrealised gains/(losses) 2005 2004 A$’000 A$’000 2,314 1,480 1,851 1,273 258 1,018 — 603 — 205 4,423 4,579
			4,579

The foreign currency borrowings are hedging anticipated coal sales. In accordance with the accounting policy note described in Note 1(f), any unrealised gains and losses on the hedge transactions will be recognised in the financial statements when the underlying transaction occurs.

– II-67 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

32. ADDITIONAL FINANCIAL INSTRUMENTS DISCLOSURE (continued)

c) Commodity price risk

The consolidated entity has managed commodity sales price risk by entering into fixed price annual and long term contracts. Contracts are divided into three categories: contracts reviewed annually for price and tonnage; long term contracts entered into for fixed tonnage with annual price reviews; and fixed price and fixed tonnage long term contracts (being 22% for 2006, 4% for 2007 and 3% for 2008 financial years). The sales contracts are generally arranged on a Japanese fiscal year basis with years commencing on 1 April.

d) Credit risk exposures

Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted.

Recognised financial instruments

The credit risk on financial assets of the consolidated entity, which have been recognised on the statement of financial position, is the carrying amount, net of any provision for doubtful debts.

The consolidated entity minimises concentrations of credit risk by undertaking transactions with a number of customers in various countries. Credit risk on customers is also reduced by entering into letters of credit with customers and discounting receivables on a limited recourse basis.

Concentration of credit risk at balance date on trade debtors are: Asia 43% (2004: 57%), Europe 44% (2004: 41%), Brazil 13%(2004: Nil%) and Other Nil% (2004: 2%).

Credit risk on cash, deposits and derivative contracts is managed by ensuring that counterparties are recognised financial intermediaries with acceptable credit ratings and using several counterparties for transactions.

Foreign exchange contracts are subject to credit risk in relation to the relevant counterparties, which are principally large financial institutions. The maximum credit risk exposure on foreign currency contracts is the full amount of the foreign currency the consolidated entity pays when settlement occurs, should the counterparty fail to pay the amount which it is committed to pay the consolidated entity. The full amount of the exposure is included in Note 32(b) above.

– II-68 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

32. ADDITIONAL FINANCIAL INSTRUMENTS DISCLOSURE (continued)

e) Net fair values of financial assets and liabilities

Valuation approach

Recognised financial instruments

Net fair values of financial assets and liabilities are determined by the consolidated entity on the following bases:

Monetary financial assets and financial liabilities not readily traded in an organised financial market are determined by valuing them at the present value of contractual future cash flows on amounts due from customers (reduced for expected credit losses) or due to suppliers. Cash flows are discounted using standard valuation techniques at the applicable on-market yield having regard to the timing of the cash flows. The carrying amounts of bank term deposits, trade debtors, other debtors, accounts payable, bank loans and employee benefits approximate net fair value.

The valuation of financial instruments reflects the estimated amounts, which the consolidated entity expects to pay or receive to terminate the contracts (net of transaction costs), or replace the contracts at their current market rates as at reporting date. This is based on independent market quotations and determined using standard valuation techniques.

Unrecognised financial instruments

The valuation of financial instruments not recognised on the statement of financial position detailed in this note reflects the estimated amounts which the consolidated entity expects to pay or receive to terminate the contracts (net of transaction costs), or replace the contracts at their current market rates as at reporting date. This is based on independent market quotations and determined using standard valuation techniques.

– II-69 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

32. ADDITIONAL FINANCIAL INSTRUMENTS DISCLOSURE (continued)

e) Net fair values of financial assets and liabilities (continued)

Net fair values

Recognised financial instruments

The carrying amounts and net fair values of financial assets and liabilities as at the reporting date are as follows:

	Consolidated	Consolidated	Consolidated	Consolidated
	2005		2004
	Carrying	Net fair	Carrying	Net fair
	amount	value	amount	value
	A$’000	A$’000	A$’000	A$’000
Financial Assets
Cash assets	18,138	18,138	11,775	11,775
Receivables	38,368	38,368	32,556	32,556
Other financial assets
• Foreign currency contracts	22,426	18,962	24,352	19,501
• Bank accounts	58,630	58,630	18,417	18,417
Financial Liabilities
Payables	61,346	61,346	38,409	38,409
Interest bearing liabilities
• Redeemable convertible notes	5,627	27,825	29,871	39,141
• Other	30,825	30,825	52,315	52,315
Other financial liabilities
• Foreign currency contracts	1,906	3,133	9,084	8,718
• Other	15,599	15,599	18,823	18,823
Employee entitlements	237	237	113	113

Cash assets, bank accounts and the redeemable convertible notes are readily traded on organised markets in a standardised form. All other financial assets and liabilities are not readily traded on organised markets in a standardised form.

– II-70 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005

32. ADDITIONAL FINANCIAL INSTRUMENTS DISCLOSURE (continued)

e) Net fair values of financial assets and liabilities (continued)

Net fair values (continued)

Unrecognised financial instruments

The net fair value of financial instruments not recognised on the statement of financial position held as at the reporting date are:

	Consolidated
	2005	2004
	A$’000	A$’000
Interest rate swaps and options	333	370

33. EMPLOYEE BENEFITS

Note Aggregate liability for employee entitlements, including on-costs: • Current Employee benefits provision 17 • Non-current Employee benefits provision 17	Consolidated 2005 2004 A$’000 A$’000 198 65 39 48 237 113	The Company 2005 2004 A$’000 A$’000 198 65 39 48 237 113	The Company 2005 2004 A$’000 A$’000 198 65 39 48 237 113
			113

– II-71 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

33. EMPLOYEE BENEFITS (continued)

The present values of employee entitlements not expected to be settled within twelve months of reporting date have been calculated using the following weighted averages:

		Consolidated		The Company
		2005	2004	2005	2004
•	Assumed rate of increase in wage
	and salary rates	3.60%	3.20%	3.60%	3.20%
•	Discount rate	5.10%	5.57%	5.10%	5.57%
•	Settlement term (years)	10	10	10	10
Number of employees
Number of employees at year end		19	14	18	13

Superannuation plans

The Company and its controlled entities contribute to several defined contribution superannuation plans.

Directors’ Option Plan

The Company has a Directors’ Option Plan for the Board of Directors.

There are no voting rights attached to unissued ordinary shares. Voting rights will be attached to unissued ordinary shares when the options have been exercised.

All options expire on the earlier of their expiry date or the date the holder ceases to be a director of the Company or the date the holder is dismissed for misconduct or for reasons involving fraud.

Unissued ordinary shares of the Company under option are:

Issue Expiry Exercise date date price 2005 5 July 2001 4 July 2006 A$1.15 5 July 2001 4 July 2006 A$1.30 5 July 2001 4 July 2006 A$1.45	Number of options at beginning of year 200,000 300,000 300,000 800,000	Options issued — — — —	Options exercised 200,000 300,000 300,000 800,000	Number of options at end of year — — —
				—

– II-72 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

33. EMPLOYEE BENEFITS (continued)

Directors’ Option Plan (continued)

Issue Expiry Exercise date date price 2004 5 July 2001 4 July 2006 A$1.15 5 July 2001 4 July 2006 A$1.30 5 July 2001 4 July 2006 A$1.45	Number of options at beginning of year 300,000 300,000 300,000 900,000	Options issued — — — —	Options exercised 100,000 — — 100,000	Number of options at end of year 200,000 300,000 300,000
				800,000

The market price of shares under these options as at 30 June 2005 was A$7.45 (2004: A$2.01).

During the financial year, the Company issued 800,000 ordinary shares as a result of the exercise of options (2004: 100,000). The fair value of shares issued as a result of exercising the options during the reporting period at their issue date is the market price of shares of the Company on the Australian Stock Exchange as at close of trading.

The amounts recognised in the financial statements of the Company and consolidated entity in relation to director share options exercised during the financial year were:

		Consolidated	Consolidated	The Company	The Company
		2005	2004	2005	2004
	Note	A$’000	A$’000	A$’000	A$’000
Issued ordinary share capital	20	1,055	115	1,055	115

No options expired during the year ended 30 June 2005 (2004: Nil).

Executive Option Plan

The Company has an Executive Option Plan for key employees of the Company and Macarthur Coal (C&M Management) Pty Ltd (formerly Australian Premium Coals Pty Ltd), an associated entity.

There are no voting rights attached to unissued ordinary shares. Voting rights will be attached to unissued ordinary shares when the options have been exercised.

– II-73 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

33. EMPLOYEE BENEFITS (continued)

Executive Option Plan (continued)

All options expire on the earlier of their expiry date or the date the holder ceases to be an executive or the date the holder is dismissed for misconduct or for reasons involving fraud.

Unissued ordinary shares of the Company under option are:

Number of options at Issue Expiry Exercise beginning of date date price year 2005 5 July 2001 4 July 2006 A$1.15 90,000 5 July 2001 4 July 2006 A$1.30 300,000 5 July 2001 4 July 2006 A$1.45 300,000 690,000 2004 5 July 2001 4 July 2006 A$1.15 300,000 5 July 2001 4 July 2006 A$1.30 300,000 5 July 2001 4 July 2006 A$1.45 300,000 900,000	Options issued — — — — — — — —	Options exercised 90,000 250,000 240,000 580,000 210,000 — — 210,000	Number of Options options at lapsed end of year — — — 50,000 — 60,000 — 110,000 — 90,000 — 300,000 — 300,000 — 690,000	Number of Options options at lapsed end of year — — — 50,000 — 60,000 — 110,000 — 90,000 — 300,000 — 300,000 — 690,000
				110,000

				90,000 300,000 300,000
				690,000

The market price of shares under these options at 30 June 2005 was A$7.45 (2004: A$2.01).

During the financial year, the Company issued 580,000 ordinary shares as a result of the exercise of options (2004: 210,000). The fair value of shares issued as a result of exercising the options during the reporting period at their issue date is the market price of shares of the Company on the Australian Stock Exchange as at close of trading.

The amounts recognised in the financial statements of the Company and consolidated entity in relation to executive share options exercised during the financial year were:

		Consolidated	Consolidated	The Company	The Company
		2005	2004	2005	2004
	Note	A$’000	A$’000	A$’000	A$’000
Issued ordinary share capital	20	777	241	777	241

No options expired during the year ended 30 June 2005 (2004: Nil).

– II-74 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

33. EMPLOYEE BENEFITS (continued)

Employee Share Plan

The Company established an Employee Share Plan (ESP) which was used to provide an opportunity for employees to participate in the Initial Public Offering. On 2 July 2001, 180,000 shares were issued to 60 eligible employees at an issue price of A$1.00 per share with a limit of 3,000 shares per employee.

All shares issued under the ESP rank equally with all other shares for time being on issue.

The Company provided interest free loans to employees to enable them to acquire shares under ESP to 100% of the total acquisition price for the shares. Any dividends declared on the shares issued under ESP will, to the extent determined by the directors, be first used to offset any loans outstanding on the shares. Employees have also provided irrevocable authority to the Company to deduct 1% of their gross salary each month in repayment of the loan.

The loan will be repayable:

a) if default is made by the employee on the repayment of the loan; or
b) the employee’s employment with the Company, its subsidiary or associate or the relevant contractor is terminated for any reason; or
c) the employee becomes insolvent or commits an act of bankruptcy.

The Company holds security over the shares the subject of a loan until the loan is repaid.

The market price of shares issued under the ESP as at 30 June 2005 was A$7.45 (2004: A$2.01).

There were no other shares eligible for issuance under ESP at 30 June 2005.

The amount recognised in the financial statements of the consolidated entity and the Company in relation to employee shares during the year were:

		Consolidated	Consolidated	The Company	The Company
		2005	2004	2005	2004
	Note	A$	A$	A$	A$
Issued ordinary share capital
(180,000 shares at A$1 each)	20	180,000	180,000	180,000	180,000
Employee loans payable at 30 June 2005	9	6,744	26,362	6,744	26,362

– II-75 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

34. IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

For reporting periods beginning on or after 1 January 2005, the consolidated entity must comply with Australian equivalents to International Financial Reporting Standards (AIFRS) as issued by the Australian Accounting Standards Board.

This financial report has been prepared in accordance with Australian accounting standards and other financial reporting requirements (Australian GAAP) applicable for reporting periods ended 30 June 2005.

Transition management

The consolidated entity has established a formal implementation project, monitored by the Audit and Risk Management Committee, to assess the impact of transition to AIFRS and to achieve compliance with AIFRS reporting for the financial year commencing 1 July 2005.

The project is achieving its scheduled milestones and the consolidated entity is expected to be in a position to fully comply with the requirements of AIFRS for the 30 June 2006 financial year.

Assessment and planning phase

The assessment and planning phase involved a high level overview of the impacts on conversion to AIFRS reporting on existing accounting and reporting policies and procedures, systems and processes, business structures and resources.

The assessment and planning phase included:

High level identification of the key differences in accounting policies and disclosures that are expected to arise from adopting AIFRS
Assessment of new information requirements affecting management information systems, as well as the impact on the business and its key processes
Evaluation of the resource implications, particularly with reference to staff and their training requirements
Preparation of a conversion plan for expected changes to accounting policies, reporting structures, systems, accounting and business processes and staff training.

The assessment and planning phase was completed by 31 December 2004.

– II-76 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

34. IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

Transition management (continued)

Design phase

The design phase formulated the changes required to existing accounting policies, procedures, systems and processes in order to transition to AIFRS. The design phase included a project team working on various material impact areas identified in the assessment and planning place as well as transitional elections and new business systems required.

The design phase incorporated:

Formulation of revised accounting policies and procedures for compliance with AIFRS requirements
Identification of potential financial impacts as at the transition date and for subsequent reporting periods prior to adoption of AIFRS
Formulation of accounting and business processes to support AIFRS reporting obligations
Identification of required changes to financial reporting and business source systems, and
Development of training programs for staff.

The design phase is substantially complete at 30 June 2005.

Implementation phase

The implementation phase includes implementation of identified changes and the procedures, processes, systems, training and development of revised AIFRS disclosures required to enable the consolidated entity to generate the required disclosures of AASB 1 First Time Adoption of Australian Equivalents to International Financial Reporting Standards .

This phase is substantially complete at 30 June 2005.

Impact of transition to AIFRS

The impact of transition to AIFRS, including the transitional adjustments disclosed in the reconciliations from current Australian GAAP to AIFRS, and the selection and application of AIFRS accounting policies, are based on AIFRS standards that management expect to be in place, or where applicable, early adopted, when preparing the first complete AIFRS financial report. Only a complete set of financial statements and notes together with comparative balances can provide a true and fair presentation of the Company’s and consolidated entity’s financial position, results of operations and cash flows in accordance to AIFRS. Accordingly, this note only provides a summary. Further disclosure and explanation will be required in the first complete AIFRS financial report for a true and fair view to be presented under AIFRS.

– II-77 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

34. IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

Impact of transition to AIFRS (continued)

The final reconciliations presented in the first financial report prepared in accordance with AIFRS may vary materially from the reconciliations provided in this note as there is a significant amount of judgement involved in the preparation of the reconciliations from current Australian GAAP to AIFRS.

Further, revisions to the selection and application of the AIFRS accounting policies may be required as a result of:

changes in financial reporting requirements that are relevant to the Company’s and consolidated entity’s first complete AIFRS financial report arising from new or revised accounting standards or interpretations issued by the Australian Accounting Standards Board subsequent to the preparation of the 30 June 2005 financial report
additional guidance on the application of AIFRS in a particular industry or to a particular transaction
changes to the Company’s and consolidated entity’s operations.

Where the application or interpretation of an accounting standard is currently being debated, the accounting policy adopted reflects management’s current assessment of the likely outcome of those deliberations. Due to the uncertainty relating to the accounting guidance no additional disclosure is made in the relevant accounting policy notes.

The rules for first time adoption of AIFRS are set out in AASB 1 First Time Adoption of Australian Equivalents to International Financial Reporting Standards . In general, AIFRS accounting policies must be applied retrospectively to determine the opening AIFRS balance sheet as at transition date, being 1 July 2004. The Standard allows a number of exemptions to this general principle to assist in the transition to reporting under AIFRS.

The significant changes in accounting policies expected to be adopted in preparing the AIFRS reconciliations and the elections expected to be made under AASB 1 are set out below:

– II-78 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

34. IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

Impact of transition to AIFRS (continued)

a) Exploration and evaluation

Under AASB 6 Exploration for and Evaluation of Mineral Resources , the consolidated entity will continue to capitalise exploration and evaluation costs if:

the rights to tenure of the area of interest are current; and either
the expenditures are expected to be recouped through successful development and exploitation of the area of interest, or alternatively, by its sale; or
activities in the area of interest have not at the reporting date reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves and active and significant operations in, or in relation to, the area of interest are continuing.

The consolidated entity will be required to impairment test capitalised exploration and evaluation costs if there is an impairment indicator such as:

the right to explore has expired during the period or will expire in the near future and is not expected to be renewed
substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned
exploration and evaluation in the specific area has not led to the discovery of commercially viable quantities of mineral resources and the entity has decided to discontinue such activities in the specific area
sufficient data exists to indicate that the carrying amount of the asset is unlikely to be recovered in full from successful development or by sale even if development in the specific area is likely to proceed.

In the event of impairment, write-downs to the statement of financial performance will occur. Any subsequent increments are also recognised in the statement of financial performance to the extent that it is a reversal of the previous write-down.

Under AASB 6 costs incurred before an entity has legal right of access to an exploration area must be expensed. For the consolidated entity, at 1 July 2004 an amount of A$39,000 is expected to be reclassified from exploration and evaluation to retained earnings. The expected adjustment to profit and loss for the year ended 30 June 2005 is A$128,000 (decrease in operating profit before tax) and decrease in capitalised exploration and evaluation costs at 30 June 2005 of A$167,000.

– II-79 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

34. IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

Impact of transition to AIFRS (continued)

a) Exploration and evaluation (continued)

No adjustments are expected for the Company.

A significant variation to the current AASB 1022 Accounting for the Extractive Industries is that development and construction costs cannot be capitalised under AASB 6 and must be guided by AASB 116 Property, Plant and Equipment , AASB 138 Intangible Assets and the AASB framework. Accordingly, development and construction costs will be required to meet asset recognition criteria and will be subject to impairment testing. The consolidated entity has no areas of interest in the development phase at 1 July 2004 or at 30 June 2005. Therefore, there will be no impact on transition.

b) Income tax

On transition to AIFRS the balance sheet method of tax effect accounting will be adopted, rather than the liability method applied currently under Australian GAAP.

Under the balance sheet approach, income tax on the profit and loss for the year comprises current and deferred taxes. Income tax will be recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it will be recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at reporting date, and any adjustments to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

The amount of deferred tax provided will be based on the expected manner of realisation of the asset or settlement of the liability, using tax rates enacted or substantively enacted at reporting date.

The majority of the income tax adjustments resulting from the transition to AIFRS for the consolidated entity are:

A deferred tax liability will be recognised in relation to interests in mining tenements acquired prior to 1 July 2001.
Share capital in the Company will be increased for the future tax benefits of float costs recognised in share capital.

A deferred tax asset will be recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets will be reduced to the extent it is no longer probable that the related tax benefit will be realised.

– II-80 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

34. IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

Impact of transition to AIFRS (continued)

b) Income tax (continued)

		Consolidated	The Company
		A$’000	A$’000
The expected impacts from the change in basis and
	the transition adjustments on the deferred tax balances and
	the previously reported income tax expense recognised
	by the consolidated entity and the Company at 1 July 2004 are:
•	increase in deferred tax assets	833	747
•	increase in deferred tax liabilities	27,953	—
•	increase in share capital	1,476	1,476
•	net decrease in retained earnings	28,596	729
The expected impact on the income tax expense for
	the financial year ended 30 June 2005 is:
•	increase/(decrease) in income tax expense	(3,645)	290
The expected impacts on the statements of
	financial position at 30 June 2005 are:
•	increase in deferred tax assets	1,067	457
•	increase in deferred tax liabilities	24,746	—
•	increase in share capital	1,476	1,476

Tax consolidation

The Urgent Issues Group (UIG) has considered the recognition of tax amounts under the tax consolidation regime under the AIFRS framework. It is proposed that wholly owned subsidiaries in the tax consolidated group will be required to recognise their own deferred tax balances directly and the current tax liability or asset will be assumed by the head entity. The consolidated entity intends to amend its tax sharing agreement prior to 30 June 2006.

c) Rehabilitation and dismantling provisions

Under current Australian GAAP, provisions are made for the estimated cost of rehabilitation relating to areas disturbed during the mine operations up to reporting date but not yet rehabilitated, as if the mine was shutdown at reporting date. The provision is mostly determined on an undiscounted basis based on current costs, current legal requirements and current technology. Only the costs per hectare for rehabilitation of long term building and infrastructure areas are discounted to their present value. In addition, the discounted costs relating to the building and infrastructure areas are capitalised as an asset and amortised over the economic life of the mine on a units of production basis.

– II-81 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

34. IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

Impact of transition to AIFRS (continued)

c) Rehabilitation and dismantling provisions (continued)

Under Australian GAAP, some initial rehabilitation costs associated with infrastructure assets were expensed. Under AIFRS the present value of these costs is required to be included in the cost of property, plant and equipment and will need to be adjusted against retained earnings. This will be an increase in retained earnings as these costs have previously been expensed.

Under AIFRS, dismantling costs associated with the coal preparation plants will be provided for and will be required to be included in the cost of the asset. These capitalised costs will be depreciated over the life of the asset.

Also under AIFRS, the present value of rehabilitation obligations is recognised at commencement of the mining project where a legal or constructive obligation exists at that time. The provision is recognised as a non-current liability with a corresponding asset recognised in relation to the mine site. At each reporting date the rehabilitation liability is re-measured in line with changes in discount rates, and timing or amount of the costs to be incurred. As the assets are not revalued, any changes in the liability are added or deducted from the related asset, other than the unwinding of the discount which is recognised as interest expense in the statement of financial performance as it occurs.

If the change in the liability results in a decrease in the liability that exceeds the carrying amount of the asset, the asset is written-down to nil and the excess is recognised immediately in profit or loss. If the change in the liability results in an addition to the cost of the asset, the recoverability of the new carrying amount is considered. Where there is an indication that the new carrying amount is not fully recoverable an impairment test is performed, with the write-down recognised in the statement of financial performance in the period in which it occurs.

At transition, the rehabilitation provision recognised under Australian GAAP was decreased to the present value of the required rehabilitation provision under AIFRS. An asset was recognised as the amount of the liability discounted to acquisition date, and accumulated depreciation was calculated on this amount from acquisition to transition date.

– II-82 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

34. IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

Impact of transition to AIFRS (continued)

c) Rehabilitation and dismantling provisions (continued)

		Consolidated
		A$’000
The expected adjustments at transition relating to rehabilitation and
	dismantling provisions recognised by the consolidated entity at 1 July 2004 are:
•	increase in rehabilitation and dismantling provisions	924
•	increase in property, plant and equipment	4,080
•	increase in accumulated depreciation	385
•	net increase in retained earnings	2,771
The expected impact on the consolidated entity for the year ended 30 June 2005 is:
•	decrease in operating profit before tax	919
The expected impacts on the consolidated entity’s statement of
	financial position at 30 June 2005 are:
•	increase in rehabilitation and dismantling provisions	1,527
•	increase in property, plant and equipment	4,153
•	increase in accumulated depreciation	774

No adjustments are expected to arise in the Company.

d) Impairment of assets

Under current Australian GAAP the carrying amounts of non-current assets valued on a cost basis, other than exploration and evaluation expenditure carried forward, are reviewed at reporting date to determine whether they are in excess of their recoverable amount. If the carrying amount of a non-current asset exceeds its recoverable amount the asset is written-down to the lower amount, with the write-down recognised in the statement of financial performance in the period in which it occurs. Where a group of assets working together supports the generation of cash inflows, recoverable amount is assessed in relation to that group of assets. In assessing recoverable amounts, the relevant cash flows have not been discounted to their present value.

Under current Australian GAAP the collectability of receivables is assessed at each reporting date and a provision is raised based on the age of the outstanding overdue balance to allow for doubtful accounts.

Under AIFRS, the carrying amount of the consolidated entity’s and Company’s non-current assets, excluding deferred tax assets will be reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset will be tested for impairment by comparing its recoverable amount to its carrying amount.

– II-83 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

34. IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

Impact of transition to AIFRS (continued)

d) Impairment of assets (continued)

If there is any indication that an asset is impaired (or for those tested annually), the recoverable amount will be estimated for the individual asset. If it is not possible to estimate the recoverable amount for the individual asset, the recoverable amount of the cash generating unit to which the asset belongs will be determined.

A cash generating unit is the smallest identifiable group of assets that generate cash inflows largely independent of the cash inflows of other assets or group of assets, each cash-generating unit must be no larger than a segment. On transition and for the year ended 30 June 2005 the consolidated entity has determined that the major cash generating units will constitute the Coppabella Mine and Moorvale Mine individually.

An impairment loss will be recognised whenever the carrying amount of an asset, or its cash generating unit, exceeds its recoverable amount. Impairment losses will be recognised in the statement of financial performance.

Impairment losses recognised in respect of a cash generating unit will be allocated to reduce the carrying amount of the other assets in the unit pro rata based on their carrying amounts.

The consolidated entity’s current Australian GAAP accounting policy to use undiscounted cash flows is considered to be an impairment trigger on transition. No adjustments are expected to arise in the consolidated entity or the Company as at transition date of 1 July 2004 or at 30 June 2005.

Calculation of recoverable amount

Under current Australian GAAP, the recoverable amount of non-current assets was assessed at an entity level using undiscounted cash flows.

Under AIFRS the recoverable amount of the Company’s and consolidated entity’s receivables carried at amortised cost will be calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (ie the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration (ie less than 12 months) are not discounted.

The recoverable amount of other assets will be the greater of the fair value less costs to sell and the value in use. In assessing value in use, the estimated future cash flows will be discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the risks specific to the asset or cash generating unit. Cash flows will be estimated for the asset or cash generating unit in its current condition and therefore will not include cash inflows and outflows improving or enhancing the asset’s performance or expected to arise from future restructuring not yet committed to at testing date.

– II-84 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

34. IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

Impact of transition to AIFRS (continued)

d) Impairment of assets (continued)

No adjustment is expected from the change in the basis of impairment testing for trade receivables for the consolidated entity.

Reversals of impairment

Under current Australian GAAP impairment losses have not been reversed.

Under AIFRS an impairment loss will be reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss will be reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

There is no expected impact of this change in treatment on transition and as at 30 June 2005.

e) Property, plant and equipment

Property, plant and equipment will be measured at cost under AIFRS. No adjustment is expected for the consolidated entity or the Company on transition.

As carrying amounts, depreciation rates and useful economic lives are not expected to change there is no effect on the statement of financial performance for the financial year ended 30 June 2005.

Under AIFRS the gain or loss on the disposal of property, plant and equipment will be recognised on a net basis as a gain or loss rather than separately recognising the consideration received as revenue. No adjustments are expected for the Company or consolidated entity for the financial year ended 30 June 2005.

f) Business combinations

As permitted by the election available under AASB 1, the classification and accounting treatment of business combinations that occurred prior to transition date have not been restated in preparing the opening AIFRS balance sheet. The assets and liabilities are then subject to the other requirements of AASB 1, as discussed.

No adjustments are expected for the consolidated entity or the Company on transition.

– II-85 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

34. IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

Impact of transition to AIFRS (continued)

g) Employee benefits

Share based payments

Under current Australian GAAP no expense is recognised for options issued to employees.

Under AIFRS, the fair value of options granted must be recognised as an employee benefit expense with a corresponding increase in equity. The fair value will be measured at grant date taking into account market performance conditions only, and the spread over the vesting period during which the employees becomes unconditionally entitled to the options.

No adjustment will be made for options granted before 7 November 2002 which have vested before 1 January 2004. On transition all options had vested prior to 1 January 2004 resulting in no adjustment on transition or 30 June 2005.

h) Borrowing costs

Current Australian GAAP requires borrowing costs relating to qualifying assets to be capitalised as part of the cost of the asset.

Under AIFRS borrowing costs may either be recognised as an expense in the period in which they are incurred, or where they are directly attributable to the acquisition, construction or production of a qualifying asset they may be capitalised as part of the cost of the asset.

The consolidated entity expects to apply the allowed alternative treatment under AASB 123 and therefore will continue to capitalise borrowing costs where they are directly attributable to the acquisition, construction or production of a qualifying asset.

There is no expected impact on either the Company or the consolidated entity.

i) Earnings per share

Under AIFRS basic and diluted earnings per share are calculated using the profit or loss from continuing operations attributable to the ordinary equity holder of the parent entity.

The earnings per share for the financial year ended 30 June 2005 calculated on the AIFRS adjusted results are expected to be:

Basic EPS from continuing operations: Diluted EPS from continuing operations:

39.4 cents per share 38.4 cents per share

– II-86 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

34. IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

Impact of transition to AIFRS (continued)

j) Leases

Property leases – make good provisions

The consolidated entity has an operating lease that requires the asset to be returned to the lessor in its original condition. The operating lease payments do not include an element for the repairs/overhauls.

Under current Australian GAAP the costs of refurbishment are not recognised until the expenditure is incurred, whereas under AIFRS a provision for refurbishment costs must be recognised over the period of the lease, measured at the expected cost of refurbishment at each reporting date.

At 1 July 2004 a provision for make good costs associated with this operating lease is expected to be recognised by the consolidated entity and Company. The amount of this provision is not expected to be significant.

Other arrangements

The consolidated entity is a party to a mining contract for the Coppabella Mine. The arrangements include the use of a dragline to which the consolidated entity has provided a residual value guarantee (refer Note 27). The consolidated entity is currently assessing whether the Coppabella Dragline Agreement is in substance a lease and therefore should be accounted for in accordance with the requirements of AASB 117 Leases .

If the arrangements satisfy the definition of a finance lease it would result in increases in property, plant and equipment and interest bearing liabilities. The impact on the statement of financial position has not yet been quantified. It is not expected that any changes to the statement of financial performance would be significant.

There will be no expected impact on the Company.

k) Financial instruments

The consolidated entity and Company expects to take advantage of the election AASB 1 to not restate comparatives for AASB 132 Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments : Recognition and Measurement . There are no expected adjustments in relation to these standards for 1 July 2004 or the financial year ended 30 June 2005 as current Australian GAAP is expected to continue to apply.

The entity has followed Australian GAAP in accounting for financial instruments within the scope of AASB 132 and AASB 139 as described in Note 1 Statement of significant accounting policies.

– II-87 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

34. IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

Impact of transition to AIFRS (continued)

k) Financial instruments (continued)

As at 1 July 2005 the expected adjustments are:

Recognition of all derivatives on the balance sheet at fair value.
Under current Australian GAAP for foreign exchange derivatives the principles of hedge accounting has been applied. Accordingly, unrealised gains/losses have been recognised as liabilities or assets. On adoption of AASB 139 the unrealised gain or loss on the hedging instrument that is determined to be an effective hedge will be recognised in equity. Any ineffective portion will be recognised in retained earnings.
Debt establishment costs capitalised and amortised over the term of the borrowing under current Australian GAAP will be recalculated based on the effective interest rate method and recognised as part of the liability rather than as a separate asset. This is not expected to be material on transition.
The Company and consolidated entity have long term receivables with controlled entities and related entities respectively. AASB 139 requires that receivables are carried at amortised cost using the effective interest method. The expected impact on the Company and the consolidated entity has not yet been quantified.

Summary of transitional adjustments

The following sets out the expected significant adjustments to the statements of financial position of the Company and the consolidated entity at transition to AIFRS as at 1 July 2004:

Reconciliation of equity

Closing equity balance at 30 June 2004 under AGAAP Pre-acquisition exploration and evaluation costs Rehabilitation and dismantling costs Income tax adjustments Opening equity at 1 July 2004 under AIFRS	Consolidated 1 July 2004 Retained Share Total earnings capital equity A$’000 A$’000 A$’000 24,398 155,053 179,451 (39) — (39) 2,771 — 2,771 (28,596) 1,476 (27,120) (1,466) 156,529 155,063

– II-88 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

34. IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

Summary of transitional adjustments (continued)

Reconciliation of equity (continued)

Closing balance at 30 June 2004 under AGAAP Income tax adjustments Opening retained earnings at 1 July 2004 under AIFRS	The Retained earnings A$’000 1,201 (729) 472	Company 1 July 2004 Share Total capital equity A$’000 A$’000 155,053 156,254 1,476 747 156,529 157,001	Company 1 July 2004 Share Total capital equity A$’000 A$’000 155,053 156,254 1,476 747 156,529 157,001
			157,001

The following sets out the expected significant adjustments to the statements of financial performance of the Company and the consolidated entity for the year ended 30 June 2005.

Reconciliation of profit for the financial year ended 30 June 2005

Net profit after tax under AGAAP Pre-acquisition exploration costs expensed Rehabilitation and interest expense Depreciation expense Income tax benefit/(expense) Net profit after tax under AIFRS	Consolidated 30 June 2005 A$’000 61,420 (128) (530) (389) 3,645 64,018	The Company 30 June 2005 A$’000 21,594 — — — (290)
		21,304

The following sets out the expected significant adjustments to the statements of financial position of the Company and the consolidated entity as at 30 June 2005.

– II-89 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

34. IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

Summary of transitional adjustments (continued)

Reconciliation of equity

Closing balance at 30 June 2005 under AGAAP
Adjustments from AIFRS on transition
Adjustments from AIFRS for the year ending 30 June 2005
Opening retained earnings at 1 July 2005 under AIFRS
Closing balance at 30 June 2005 under AGAAP
Adjustments from AIFRS on transition
Adjustments from AIFRS for the year ending 30 June 2005
Opening retained earnings at 1 July 2005 under AIFRS

Consolidated 30 June 2005
Retained
Share
Total
earnings
capital
equity
A$’000
A$’000
A$’000
68,067
181,086
249,153
(25,864)
1,476
(24,388)
2,598
—
2,598
44,801
182,562
227,363
The Company 30 June 2005
Retained
Share
Total
earnings
capital
equity
A$’000
A$’000
A$’000
5,044
181,086
186,130
(729)
1,476
747
(290)
—
(290)
4,025
182,562
186,587

35. EVENTS SUBSEQUENT TO BALANCE DATE

Monto Thermal Coal Project

On 28 July 2005 the Company announced that Monto Coal 2 Pty Ltd, a controlled entity of the Company, entered into an agreement with a member of the China Huaneng Group (CHNG) to sell half of the consolidated entity’s existing 51% interest in the Monto thermal coal project (25.5%) for a total consideration of approximately A$29.423 million, subject to the satisfaction of several conditions precedent.

The consideration is payable in two tranches:

A$12 million is payable on the completion date, following satisfaction of conditions precedent
A$17.423 million is payable following completion of proving reserves within the tenements, completion of Stage 2 (10 million tonnes per annum) feasibility study and a decision being made by the joint venture participants to proceed with Stage 2 development.

– II-90 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2005

35. EVENTS SUBSEQUENT TO BALANCE DATE (continued)

One of the conditions precedent of the transaction involves obtaining agreement from the other Monto Coal Joint Venture participants to a revised development plan for the Monto Project. The plan involves an extensive exploration programme and major feasibility study for up to a 10 million tonne per annum operation. The feasibility study will involve the establishment of a trial opencut test pit mining operation. The drilling and feasibility study program is likely to take between two to three years to complete.

It is expected that CHNG will become a substantial consumer of coal produced from the Monto Project. The transaction will not be completed until a number of conditions precedent have been satisfied or waived, including:

(i) Applicable Australian, Queensland and People’s Republic of China government regulatory approvals in relation to the proposed transaction being obtained;
(ii) The pre-emptive rights under the Monto Coal Joint Venture agreement applicable to the 25.5% interest which the consolidated entity proposes to transfer being waived or not exercised, and the other participants consenting to the transfer of that interest to CHNG;
(iii) The consolidated entity and CHNG negotiating and agreeing certain variations to the existing joint venture documentation with the other joint venture participants, including agreeing a new development plan for the Monto Project;
(iv) The project manager and CHNG negotiating and executing a coal offtake management agreement in relation to CHNG’s 25.5% share of coal produced from the Monto Coal Joint Venture; and
(v) The project marketing agent and CHNG negotiating and executing a coal handling and transport agreement in relation to CHNG’s 25.5% share of coal produced from the Monto Coal Joint Venture.

Dividends

For dividends declared after 30 June 2005, refer Note 22.

International Financial Reporting Standards

For reporting periods beginning on or after 1 January 2005 the consolidated entity must comply with Australian equivalents to International Financial Reporting Standards (AIFRS) as issued by the Australian Accounting Standards Board. The implementation plan and potential impact of adopting AIFRS are detailed in Note 34 to the financial statements.

– II-91 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

DIRECTORS’ DECLARATION

In the opinion of the directors of Macarthur Coal Limited (“the Company”):
a. the financial statements and notes, set out on pages 64 to 115 are in accordance with the Corporations Act 2001 , including:
- (i) giving a true and fair view of the financial position of the Company and consolidated entity as at 30 June 2005 and of their performance, as represented by the results of their operations and their cash flows, for the year ended on that date; and
- (ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and
b. there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.
The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer for the financial year ended 30 June 2005.

Dated at Brisbane this 22nd day of August 2005.

Signed in accordance with a resolution of the directors:

Hon. Keith De Lacy Chairman

– II-92 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

INDEPENDENT AUDIT REPORT TO THE MEMBERS OF MACARTHUR COAL LIMITED

SCOPE

The financial report and directors’ responsibility

The financial report comprises the statements of financial position, statements of financial performance, statements of cash flows, accompanying notes 1 to 35 to the financial statements and the directors’ declaration set out on pages 64 to 116, and the disclosures made by the Company in accordance with the Corporations Regulations 2001 as required by AASB 1046 Director and Executive Disclosures by Disclosing Entities in the “Remuneration report” in the Directors’ report set out on pages 57 to 60 for both Macarthur Coal Limited (the “Company”) and Macarthur Coal Limited and its controlled entities (the “consolidated entity”), for the year ended 30 June 2005. The consolidated entity comprises both the Company and the entities it controlled during the year.

The Remuneration report also contains information in sections marked as “unaudited” not required by Accounting Standard AASB 1046 Director and Executive Disclosures by Disclosing Entities , which is not subject to our audit.

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

Audit approach

We conducted an independent audit in order to express an opinion to the members of the Company. Our audit was conducted in accordance with Australian Auditing Standards in order to provide reasonable assurance as to whether the financial report is free of material misstatement and the remuneration disclosures comply with Accounting Standard AASB 1046 and the Corporations Regulations 2001. The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected.

We performed procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 , Australian Accounting 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 and whether the remuneration disclosures comply with Accounting Standard AASB 1046 and the Corporations Regulations 2001.

KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.

– II-93 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

INDEPENDENT AUDIT REPORT TO THE MEMBERS OF MACARTHUR COAL LIMITED (continued)

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

examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report, and
assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors.

While we considered the effectiveness of management’s internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls.

AUDIT OPINION

In our opinion, the financial report including the remuneration disclosures that are contained in sections marked as “audited” of the Remuneration report in the Directors’ report of Macarthur Coal Limited are in accordance with:

a. the Corporations Act 2001 , including:
(i) giving a true and fair view of the Company’s and consolidated entity’s financial position as at 30 June 2005 and of their performance for the year ended on that date; and
(ii) complying with Accounting Standards in Australia, including AASB 1046 Director and Executive Disclosures By Disclosing Entities and the Corporations Regulations 2001; and
b. other mandatory financial reporting requirements in Australia.

KPMG Robert S Jones

Partner

Brisbane

22 August 2005

KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.

– II-94 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

INCOME STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

Note Revenue from coal sales 2 Cost of coal sold Gross profit Other income 3 Distribution expenses Administration expenses Other expenses 4 Results from operating activities Financial income 7 Financial expenses 7 Net financing income/(costs) Profit before tax Income tax (expense)/benefit 8(a) Profit for the year attributable to equity holders of the parent Earnings per share for profit attributable to the ordinary equity holders of the Company: Basic earnings per share from continuing operations 10 Diluted earnings per share from continuing operations 10 Dividends per share — ordinary shares 24	Consolidated 2006 2005 A$’000 A$’000 534,755 370,157 (287,574) (232,509) 247,181 137,648 2,463 161 (22,836) (29,765) (14,325) (8,584) (893) (4,787) 211,590 94,673 7,644 2,385 (5,189) (7,418) 2,455 (5,033) 214,045 89,640 (64,456) (25,493) 149,589 64,147 A$0.83 A$0.40 A$0.83 A$0.39 A$0.41 A$0.18	The Company 2006 2005 A$’000 A$’000 — — — — — — 64,944 21,031 — — (10,680) (6,496) (84) (25) 54,180 14,510 8,694 10,518 (1,704) (2,647) 6,990 7,871 61,170 22,381 55 (917) 61,225 21,464

The income statements are to be read in conjunction with the notes of the financial statements set out on pages 76 to 129.

– II-95 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

STATEMENTS OF RECOGNISED INCOME AND EXPENSE

FOR THE YEAR ENDED 30 JUNE 2006

Note Recognised directly in equity Cash flow hedges: Losses taken to equity Gains transferred to income statement Net expense recognised directly in equity 24 Profit for the period Total recognised income and expense for the period attributable to equity holders of the parent 24 Effect of change in accounting policy Effect of adoption of AASB 132 and AASB 139 on 1 July 2005 (with 2005 not restated): Net increase in Cash Flow Hedging Reserve: Cumulative changes in fair value of effective cash flow hedges Related deferred income tax 24, 35	Consolidated 2006 2005 A$’000 A$’000 (4,089) — (8,595) — (12,684) — 149,589 64,147 136,905 64,147 20,252 — (4,748) — 15,504 —	The Company 2006 2005 A$’000 A$’000 — — — — — — 61,225 21,464 61,225 21,464 — — — — — —	The Company 2006 2005 A$’000 A$’000 — — — — — — 61,225 21,464 61,225 21,464 — — — — — —
			— 21,464
			21,464

			— —
			—

Other movements in equity arising from transactions with owners as owners are set out in Note 24.

The amounts recognised directly in equity are disclosed net of tax-see Notes 8 and 9 for tax effect.

The statements of recognised income and expense are to be read in conjunction with the notes to the financial statements set out on pages 79 to 129.

– II-96 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

BALANCE SHEETS

AS AT 30 JUNE 2006

Note Current assets Cash and cash equivalents 11 Trade and other receivables 12 Inventories 13 Other financial assets 14 Other assets 15 Total current assets Non-current assets Trade and other receivables 12 Other financial assets 14 Deferred tax assets 9 Property, plant and equipment 16 Exploration and evaluation assets 17 Other assets 15 Total non-current assets Total assets Current liabilities Trade and other payables 18 Interest-bearing loans and borrowings 19 Income tax payable 8(c) Employee benefits 20 Provisions 21 Other financial liabilities 22 Other liabilities 23 Total current liabilities Non-current liabilities Trade and other payables 18 Interest-bearing loans and borrowings 19 Deferred tax liabilities 9 Employee benefits 20 Provisions 21 Other financial liabilities 22 Other liabilities 23 Total non-current liabilities Total liabilities Net assets Equity Issued capital 24 Reserves 24 Retained earnings 24 Total equity 24	Consolidated 2006 2005 A$’000 A$’000 168,603 18,138 52,662 32,558 15,412 24,075 8,810 78,273 74,206 46,206 319,693 199,250 4,603 13,016 — 2,783 — — 170,107 177,893 94,809 40,390 2,904 7,330 272,423 241,412 592,116 440,662 68,538 61,346 1,931 26,662 44,395 16,505 506 198 3,344 1,214 3,272 4,807 — 20,221 121,986 130,953 — — 8,785 9,790 42,335 33,656 156 39 16,600 12,715 11,081 12,698 — 4,723 78,957 73,621 200,943 204,574 391,173 236,088 246,343 182,563 2,820 — 142,010 53,525 391,173 236,088	The Company 2006 2005 A$’000 A$’000 18,038 17,685 71,346 8,409 — — — — — 257 89,384 26,351 185,299 126,754 73,343 56,385 547 664 798 138 — — — — 259,987 183,941 349,371 210,292 1,137 1,176 — 5,627 44,395 16,505 438 198 — — — — — — 45,970 23,506 52,499 — — — — — 156 39 98 — — — — — 52,753 39 98,723 23,545 250,648 186,747 246,343 182,563 — — 4,305 4,184 250,648 186,747	The Company 2006 2005 A$’000 A$’000 18,038 17,685 71,346 8,409 — — — — — 257 89,384 26,351 185,299 126,754 73,343 56,385 547 664 798 138 — — — — 259,987 183,941 349,371 210,292 1,137 1,176 — 5,627 44,395 16,505 438 198 — — — — — — 45,970 23,506 52,499 — — — — — 156 39 98 — — — — — 52,753 39 98,723 23,545 250,648 186,747 246,343 182,563 — — 4,305 4,184 250,648 186,747
			26,351
			126,754 56,385 664 138 — —
			183,941
			210,292
			1,176 5,627 16,505 198 — — —
			23,506
			— — — 39 — — —
			39
			23,545
			186,747

			182,563 — 4,184
			186,747

The balance sheets are to be read in conjunction with the notes to the financial statements set out on pages 76 to 129.

– II-97 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED 30 JUNE 2006

Note Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Dividends received Interest received Interest paid Income taxes refunded Income taxes paid Net cash from operating activities 32 Cash flows from investing activities Proceeds from sale of property, plant and equipment Acquisition of property, plant and equipment Exploration and evaluation expenditure Contributions (to)/from joint ventures Advances (to)/from subsidiaries Advances to related entities Net cash from investing activities Cash flows from financing activities Proceeds from the issue of share capital Proceeds from borrowings Repayment of borrowings Payment of finance costs: Convertible notes Other Repayment of other financial liabilities Dividends paid 24 Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at 1 July Cash and cash equivalents at 30 June 11	Consolidated 2006 2005 A$’000 A$’000 525,529 361,709 (303,899) (259,095) 221,630 102,614 — — 7,644 2,385 — — — 8,847 (27,783) (5,862) 201,491 107,984 380 — (7,301) (5,848) (6,729) (3,640) 52,609 (40,674) — — (1,868) (6,408) 37,091 (56,570) 152 1,789 — 22,180 (20,434) (43,826) (250) (2,012) (3,103) (2,602) (3,070) (2,829) (61,412) (17,751) (88,117) (45,051) 150,465 6,363 18,138 11,775 168,603 18,138	The Company 2006 2005 A$’000 A$’000 2,774 2,051 (16,839) (6,036) (14,065) (3,985) 61,488 19,034 8,694 10,518 (1,122) — — 8,847 (27,783) (5,862) 27,212 28,552 — — (744) (85) — — — — 35,395 (4,494) — — 34,651 (4,579) 152 1,789 — — — — (250) (2,012) — — — — (61,412) (17,751) (61,510) (17,974) 353 5,999 17,685 11,686 18,038 17,685

The statements of cash flows are to be read in conjunction with the notes to the financial statements set out on pages 76 to 129.

– II-98 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES

Macarthur Coal Limited (the ‘the Company’) is a company domiciled in Australia. The consolidated financial report of the Company for the year ended 30 June 2006 comprise the Company and its subsidiaries (together referred to as the ‘consolidated entity’) and the consolidated entity’s interest in associates.

The financial report was authorised for issue by Directors on 12 September 2006.

(a) Statement of compliance

The financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards adopted by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001 .

International Financial Reporting Standards (‘IFRS’) form the basis of Australian Accounting Standards adopted by the AASB, and for the purpose of this report are called Australian equivalents to IFRS (‘AIFRS’) to distinguish from previous Australian AGAAP.

This is the consolidated entity’s first financial report prepared in accordance with Australian Accounting Standards, being AIFRS and AASB 1 First-Time Adoption of Australian Equivalents to International Financial Reporting Standards has been applied.

An explanation of how the transition to AIFRS has affected the reported financial position, financial performance and cash flows of the consolidated entity and the Company is provided in Note 34.

(b) Basis of preparation

The financial report is presented in Australian dollars.

The financial report is prepared on the historical cost basis except that derivative financial instruments are stated at their fair value.

The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 (updated by CO 05/ 641 effective 28 July 2005 and CO 06/51 effective 31 January 2006) and in accordance with that Class Order, amounts in the Financial report and Directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated.

The preparation of a financial report in conformity with Australian Accounting Standards requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. These estimates and associated assumptions are based on historic experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. These accounting policies have been consistently applied by each entity in the consolidated entity.

– II-99 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(b) Basis of preparation (continued)

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

Judgements made by management in the application of Australian Accounting Standards that have a significant effect on the financial report and estimates with a significant risk of material adjustment in the next year are discussed in accounting policy (ab).

Issued standards early adopted

The entity has elected to early adopt the following accounting standards and amendments as at transition date:

AASB 2005-4 Amendments to Australian Accounting Standards (June 2005) amending AASB 139 Financial Instruments: Recognition and Measurement , AASB 132 Financial Instruments: Disclosure and Presentation , AASB 1 First-Time Adoption of Australian Equivalents to International Financial Reporting Standards (July 2004), AASB 1023 General Insurance Contracts , AASB 1038 Life Insurance Contracts
AASB 2005-5 Amendments to Australian Accounting Standards (June 2005) amending AASB 1 First-Time Adoption of Australian Equivalents to International Financial Reporting Standards (July 2004) and AASB 139 Financial Instruments: Recognition and Measurement
UIG 4 Determining whether an Arrangement contains a Lease .

Issued standards not early adopted

The following standards and amendments were available for early adoption but have not been applied by the consolidated entity in these financial statements:

AASB 7 Financial Instruments: Disclosure (August 2005) replacing the presentation requirements of financial instruments in AASB 132. AASB 7 is applicable for annual reporting periods beginning on or after 1 January 2007
AASB 2005-6 Amendments to Australian Accounting Standards (June 2005) amending AASB 3 Business Combinations . AASB 2005-6 is applicable to annual reporting periods beginning on or after 1 January 2006

– II-100 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(b) Basis of preparation (continued)

Issued standards not early adopted (continued)

AASB 2005-9 Amendments to Australian Accounting Standards (September 2005) requires that liabilities arising from the issue of financial guarantee contracts are recognised in the balance sheet. AASB 2005-9 is applicable for annual reporting periods beginning on or after 1 January 2006
AASB 2005-10 Amendments to Australian Accounting Standards (September 2005) makes consequential amendments to AASB 132 Financial Instruments: Disclosures and Presentation , AASB 101 Presentation of Financial Statements , AASB 114 Segment Reporting , AASB 117 Leases , AASB 133 Earnings per Share , AASB 139 Financial Instruments: Recognition and Measurement , AASB 1 First-Time Adoption of Australian Equivalents to International Financial Reporting Standards , AASB 4 Insurance Contracts , AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts , arising from the release of AASB 7. AASB 2005-10 is applicable for annual reporting periods beginning on or after 1 January 2007

The consolidated entity plans to adopt the above standards and amendments in the 2007 financial year.

The initial application of AASB 7 and AASB 2005-10 is not expected to have an impact on the financial results of the Company and the consolidated entity as the standard and the amendment are concerned only with disclosures.

The initial application of AASB 2005-9 could have an impact on the financial results of the Company and the consolidated entity as the amendment could result in liabilities being recognised for financial guarantee contracts that have been provided by the Company and the consolidated entity. However, the quantification of the impact is not known or reasonably estimable in the current financial year as an exercise to quantify the financial impact has not been undertaken by the Company and the consolidated entity to date.

The initial application of AASB 2005-6 is not expected to have an impact on the financial results of the Company and the consolidated entity as the amendments are concerned with areas that the Company and the consolidated entity have not transacted in.

The following standards and amendments have been issued and are available for early adoption at reporting date. However, they have not been early adopted as they are not applicable to the Company and the consolidated entity and have no impact on their financial results:

AASB 119 Employee Benefits (December 2004)
AASB 1039 Concise Financial Reports (April 2005)

– II-101 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(b) Basis of preparation (continued)

Issued standards not early adopted (continued)

AASB 2004-3 Amendments to Australian Accounting Standards (December 2004) amending AASB 1 First-Time Adoption of Australian Equivalents to International Financial Reporting Standards (July 2004), AASB 101 Presentation of Financial Statements and AASB 124 Related Party Disclosures
AASB 2005-1 Amendments to Australian Accounting Standards (May 2005) amending AASB 139 Financial Instruments: Recognition and Measurement
AASB 2005-3 Amendments to Australian Accounting Standards (June 2005) amending AASB 119 Employee Benefits (either July or December 2004)
AASB 2006-1 Amendments to Australian Accounting Standards (January 2006) amending AASB 121 The Effects of Changes in Foreign Exchange Rates (July 2004)
AASB 2006-2 Amendments to Australian Accounting Standards (March 2006)
UIG 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Fund s
UIG 6 Liabilities arising from participating in a Specific Market-Waste Electrical & Electronic Equipment
UIG 7 Applying the Restatement Approach under AASB 129 Financial Reporting in Hyperinflationary Economies
UIG 8 Scope of AASB 2
UIG 9 Reassessment of Embedded Derivatives

The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial report and in preparing an opening AIFRS balance sheet at 1 July 2004 for the purposes of the transition to Australian Accounting Standards — AIFRS, except for the adoption of AASB 132 Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments: Recognition and Measurement . The Company and the consolidated entity have applied the AASB 1.36A exemption and elected not to apply AASB 132 and AASB 139 to the comparative period. A reconciliation of opening balances impacted by AASB 132 and AASB 139 at 1 July 2005 has been provided in Note 35.

The accounting policies have been applied consistently by all entities in the consolidated entity.

– II-102 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(c) Basis of consolidation

Subsidiaries

Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial report from the date that control commences until the date that control ceases.

Investments in subsidiaries are carried at their cost of acquisition in the Company’s financial statements.

Associates

Associates are those entities in which the consolidated entity has significant influence, but not control, over the financial and operating policies. The consolidated financial statements includes the consolidated entity’s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the consolidated entity’s share of losses exceeds its interest in an associate, the consolidated entity’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the consolidated entity has incurred legal or constructive obligations or made payments on behalf of an associate.

Investments in associates are carried at their cost of acquisition in the Company’s financial statements.

Joint ventures

The interest of the consolidated entity in unincorporated joint ventures and jointly controlled assets are brought to account by recognising in its financial statements the assets it controls, the liabilities that it incurs, the expenses it incurs and its share of income that it earns from the sale of goods or services by the joint venture.

Transactions eliminated on consolidation

Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements.

Unrealised gains arising from transactions with associates are eliminated to the extent of the consolidated entity’s interest in the entity with adjustments made to the ‘Investment in associates’ and ‘Share of associate’s net profit accounts.

– II-103 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(c) Basis of consolidation (continued)

Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

Gains and losses are recognised as the contributed assets are consumed or sold by the associates or, if not consumed or sold by the associate, when the consolidated entity’s interest in such entities is disposed of.

(d) Foreign currency

Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Australian dollars at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Australian dollars at foreign exchange rates ruling at the dates the fair value was determined.

(e) Derivative financial instruments

Current accounting policy

The consolidated entity uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational and financing activities. In accordance with its treasury policy, the consolidated entity does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments.

Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the profit or loss. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged (see accounting policy (f)).

The fair value of interest rate swaps is the estimated amount that the consolidated entity would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price.

– II-104 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(e) Derivative financial instruments (continued)

Comparative period policy

The quantitative effect of the change in accounting policy is set out in Note 35.

(f) Hedging

Current accounting policy

On entering into a hedging relationship, the consolidated entity formally designates and documents the hedge relationship and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they are designated.

Cash flow hedges

Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecasted transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. When the forecasted transaction subsequently results in the recognition of a non-financial asset or non-financial liability, or the forecast transaction for a non-financial asset or non-financial liability, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-financial asset or liability. If a hedge of a forecasted transaction subsequently results in the recognition of a financial asset or financial liability, the associated gains and losses that were recognised directly in equity are reclassified into the income statement in the same period or periods during which the asset acquired or liability assumed affects profit or loss.

For cash flow hedges, other than those covered by the preceding two policy statements, the associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period or periods during which the hedged forecast transaction affects profit or loss. The ineffective part of any gain or loss is recognised immediately in the income statement.

– II-105 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(f) Hedging (continued)

Cash flow hedges (continued)

When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship, but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in equity is recognised immediately in the income statement.

Comparative period policy

Anticipated transactions

Gains or losses on the hedge arising up to the date of the anticipated transaction, together with any costs or gains arising at the time of entering into the hedge, are deferred and included in the measurement of the anticipated transaction, when the transaction has occurred as designated. Any gains or losses on the hedge transaction after that date are included in the income statement.

The net amounts receivable or payable under forward foreign exchange contracts and the associated deferred gains or losses are recorded on the balance sheet from the date of inception of the hedge transaction. The net receivables or payables are revalued using the foreign currency rate current at reporting date.

The net amounts receivable or payable under open swaps and the associated deferred gains or losses are not recorded on the balance sheet until the hedge transaction occurs. When recognised the net receivables or payables are revalued using the interest rates current at reporting date.

Option premiums are recorded when paid and included in the measurement of the transaction when it occurs.

When the anticipated transaction is no longer expected to occur as designated, the deferred gains and losses relating to the hedged transaction are recognised immediately in the income statement.

– II-106 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(f) Hedging (continued)

Comparative period policy (continued)

Anticipated transactions (continued)

Other hedges

Costs or gains arising at the time of entering into the hedge are deferred and amortised over the life of the hedge.

(g) Property, plant and equipment

Owned assets

Items of property, plant and equipment are stated at cost or deemed cost less accumulated depreciation (see below) and impairment losses (see accounting policy (n)). The cost of self-constructed assets includes the cost of materials, direct labour, and an appropriate proportion of production overheads. The cost of selfconstructed assets and acquired assets includes:

– II-107 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(g) Property, plant and equipment (continued)

Owned assets (continued)

(i) the initial estimate at the time of installation and during the period of use, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located; and
(ii) changes in the measurement of existing liabilities recognised for these costs resulting from changes in the timing or outflow of resources required to settle the obligation or from changes in the discount rate.

Mining property and development assets include costs transferred from exploration and evaluation assets once feasibility and commercial viability of an area of interest are demonstrable and subsequent costs to develop the mine to the production phase.

Where significant parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.

Subsequent costs

The consolidated entity recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied within the item will flow to the consolidated entity and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred.

Depreciation

Assets, excluding freehold land, that have limited useful lives and are depreciated using the straight line method over their estimated useful lives, taking into account estimated residual values, with the exception of mining property and development assets. Mining property and development assets are depreciated on a units of production basis over the life of the economically recoverable reserves, being 61,327,267 (2005: 74,524,110) tonnes for the Coppabella Mine and 20,458,515 (2005: 19,427,050) tonnes for the Moorvale Mine at the beginning of the financial year or, where it is likely the consolidated entity will obtain ownership of the asset, the life of the asset.

Assets are depreciated from the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and held ready for use.

Depreciation rates and methods are reviewed annually for appropriateness. When changes are made, adjustments are reflected prospectively in current and future periods only. Depreciation is expensed, except to the extent that it is included in the carrying amount of another asset (eg inventory stocks) as an allocation of production overheads.

– II-108 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(g) Property, plant and equipment (continued)

Depreciation (continued)

The depreciation rates or useful lives used for each class of asset are as follows:

	2006	2005
Property, plant and equipment
Mining property and development	6 - 14 years	7 - 15 years
Buildings and infrastructure	6.5% - 40%	6.5% - 40%
Plant and equipment	13% - 40%	13% - 40%

The residual value is reassessed annually.

(h) Exploration and evaluation expenditure

Exploration and evaluation costs, including the costs of acquiring licences, are capitalised as exploration and evaluation assets on an area of interest basis. Costs incurred before the consolidated entity has obtained the legal rights to explore an area are recognised in the Income Statement.

Exploration and evaluation assets are only recognised if the rights of the area of interest are current and either:

(i) the expenditures are expected to be recouped through successful development and exploitation of the area of interest; or
(ii) activities in the area of interest have not at the reporting date, reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves and active and significant operations in, or in relation to, the area of interest are continuing.

Exploration and evaluation assets are assessed for impairment if (i) sufficient data exists to determine technical feasibility and commercial viability, and (ii) facts and circumstances suggest that the carrying amount exceeds the recoverable amount (see accounting policy (n)). For the purposes of impairment testing, exploration and evaluation assets are allocated to cash-generating units to which the exploration activity relates. The cash generating unit shall not be larger than the area of interest.

Once the technical feasibility and commercial viability of the extraction of mineral resources in an area of interest are demonstrable, exploration and evaluation assets attributable to that area of interest are first tested for impairment and then reclassified to mining property and development assets within property, plant and equipment.

Any exploration conducted within an operating Mining Lease area is expensed as incurred.

– II-109 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(i) Development expenditure

Development costs related to an area of interest are capitalised if the expenditures are expected to be recouped through sale or successful exploitation of the area of interest. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses (see accounting policy (n)), and is included in Property, plant and equipment — Mining property and development (see accounting policy (g)).

(j) Overburden in advance

Expenditure incurred in the removal of overburden from coal deposits is deferred and expensed in operating expenditure as the coal is extracted. The balance of the amount deferred is reviewed at each reporting date to determine the amount (if any) which is no longer recoverable out of future revenue. Any amounts so determined are written-off.

(k) Trade and other receivables

Current accounting policy

Trade and other receivables are stated at amortised cost less impairment losses (see accounting policy (n)).

Comparative period policy

Trade and other receivables to be settled within 90 days are carried at amounts due.

The collectibility of debts is assessed at reporting date and where appropriate, specific provision is made for any doubtful accounts.

(l) Inventories

Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Cost is allocated on a monthly first in and first out basis and includes direct material, overburden removal, coal mining, coal processing, labour, related transportation costs to the point of sale and other fixed and variable overhead costs directly related to mining activities. The site overheads and rehabilitation cost component of inventory is allocated using standard costing. Depreciation is allocated to inventories on a units of production basis.

(m) Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less.

– II-110 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(n) Impairment

The carrying amounts of the consolidated entity’s assets, other than inventories (see accounting policy (l)) and deferred tax assets (see accounting policy (x)), are reviewed at each balance date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated.

An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.

Impairment losses recognised in respect of cash-generating units are allocated to the carrying amount of the assets in the unit on a pro rata basis.

Calculation of recoverable amount

The recoverable amount of the consolidated entity’s receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (ie the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration (ie less than 12 months) are not discounted.

Impairment of receivables is not recognised until objective evidence is available that a loss event has occurred. Receivables are individually assessed for impairment.

The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

Reversals of impairment

An impairment loss in respect of a receivable carried at amortised cost is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.

In respect of other assets, an impairment loss is reversed when there is an indication that the impairment no longer exists and there has been a change in the estimates used to determine the recoverable amount.

An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

– II-111 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(o) Share capital

Current accounting policy

Dividends

Dividends are recognised as a liability in the period in which they are declared.

Transaction costs

Transaction costs of an equity transaction are accounted for as a deduction from equity, net of any related income tax benefit.

Comparative period policy

Dividends

Transaction costs

Transaction costs arising on the issue of equity instruments are recognised directly in equity subject to the extent of proceeds received, otherwise expensed.

(p) Convertible notes

Current accounting policy

Convertible notes that can be converted to share capital at the option of the holder, where the number of shares issued does not vary with changes in their fair value, are accounted for as compound financial instruments. Transaction costs that relate to the issue of a compound financial instrument are allocated to the liability and equity components in proportion to the allocation of proceeds. The equity component of the convertible notes is calculated as the excess of the issue proceeds over the present value of the future interest and principal payments, discounted at the market rate of interest applicable to similar liabilities that do not have a conversion option. The interest expense recognised in the income statement is calculated using the effective interest rate method.

To the extent that the liability element of a compound financial instrument was no longer outstanding at 1 July 2004, the date of transition to Australian Accounting Standards — AIFRS, the amounts within equity that are attributable to the equity and liability elements have not been identified separately.

– II-112 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(p) Convertible notes (continued)

Comparative period policy

Where convertible notes issued by the Company, give rise to a contractual obligation to deliver cash to the holder, they are classified as liabilities to the extent of the obligation.

Where financial instruments are redeemable at the option of the holder, redeemable at a fixed date with cumulative interest obligations, the proceeds received are classified as a liability and related distributions as interest expense.

(q) Interest-bearing borrowings

Current accounting policy

Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis.

Comparative period policy

Bank loans are recognised at their principal amount, subject to set-off arrangements. Interest expense is accrued at the contracted rate and included in Other trade payables and accrued expenses.

There is no quantitative effect from the change in accounting policy as the consolidated entity has no net draw-downs on its borrowings during the period.

(r) Employee benefits

Defined contribution plans

Obligations for contributions to defined contribution plans are recognised as an expense in the income statement as incurred.

Long-term service benefits

The consolidated entity’s net obligation in respect of long-term service benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using expected future increases in wage and salary rates including related on-costs and expected settlement dates, and is discounted using the rates attached to the Commonwealth Government bonds at the balance sheet date which have maturity dates approximating the terms of the consolidated entity’s obligations.

– II-113 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(r) Employee benefits (continued)

Share based payment transactions

The fair value of shares granted under the employee share loan plan are recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and is measured using a binomial option-pricing model, taking into account the terms and conditions upon which the shares were granted.

Non-executive directors are required to apply A$10,000 of their director’s fees each year to purchase the Company securities, in order to strengthen alignment with shareholder interests. The shares are purchased on the Australian Stock Exchange at the market value prevailing on the date of purchase. The provision of shares is not subject to performance conditions.

The fair value of shares granted to non-executive directors is recognised as an expense.

Employee loans

The employee share loan plan allows eligible persons of the consolidated entity and approved contractors to acquire shares of the Company. Eligible persons include permanent full-time or part-time employees, eligible contractors, or an agent of the Company or a related body corporate. No up-front payment is required for the shares as the Company offers all eligible persons an interest free, limited-recourse loan. Any dividends received on the allocated shares are applied to repay the loan balance.

Fixed regular loan repayments are also made to repay the loan balance. The shares are purchased on the Australian Stock Exchange at the market value prevailing on the date of purchase. The outstanding loan balance will be recognised as a receivable at amortised cost less impairment losses (see accounting policy (n)).

Wages, salaries, annual leave, sick leave and non-monetary benefits

Liabilities for employee benefits for wages, salaries and annual leave represent present obligations resulting from employees’ services provided to reporting date, calculated at undiscounted amounts based on remuneration wage and salary rates that the consolidated entity expects to pay as at reporting date including related on-costs, such as, workers compensation insurance and payroll tax.

Non-accumulating non-monetary benefits, such as housing, cars and subsidised services, are expensed based on the net marginal cost to the consolidated entity as the benefits are taken by the employees.

– II-114 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(r) Employee benefits (continued)

Director and Executive Option Plan

The Company established an Option Plan for the Board of Directors and key employees of the Company as a retention strategy at the time of the Initial Public Offering. All options have been exercised prior to their expiry date (4 July 2006) or have expired on the date the holder ceased to be a director or executive.

There were no voting rights attached to unissued ordinary shares. Voting rights are attached to unissued ordinary shares when the options were exercised.

(s) Provisions

A provision is recognised in the balance sheet when the consolidated entity has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pretax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

Rehabilitation and dismantling

Provisions are made for the estimated cost of rehabilitation relating to areas disturbed during the mine’s operation up to reporting date but not yet rehabilitated. Provision has been made in full for all disturbed areas at the reporting date based on current estimates of costs per hectare to rehabilitate such areas, discounted to their present value based on expected future cashflows. The estimated cost of rehabilitation includes the current cost of recontouring, topsoiling and revegetation employing legislative requirements. Changes in estimates are dealt with on a prospective basis as they arise.

Significant uncertainty exists as to the amount of rehabilitation obligations which will be incurred due to the impact of changes in environmental legislation.

Assumptions have been made as to the remaining life of existing sites based on studies conducted by independent technical advisors and on the basis of current environmental legislation.

– II-115 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(s) Provisions (continued)

Rehabilitation and dismantling (continued)

Infrastructure assets and dismantling

The present value of rehabilitation and dismantling obligations is recognised at commencement of the mining project and/or construction of the assets where a legal or constructive obligation exists at that time. The provision is recognised as a non-current liability with a corresponding asset. At each reporting date the rehabilitation liability is re-measured in line with changes in discount rates, and timing or amount of the costs to be incurred. As the assets are not revalued, any changes in the liability are added or deducted from the related asset, other than the unwinding of the discount which is recognised as a finance cost in the income statement as it occurs.

If the change in the liability results in a decrease in the liability that exceeds the carrying amount of the asset, the asset is written-down to nil and the excess is recognised immediately in the income statement. If the change in the liability results in an addition to the cost of the asset, the recoverability of the new carrying amount is considered. Where there is an indication that the new carrying amount is not fully recoverable, an impairment test is performed with the write-down recognised in the income statement in the period in which it occurs.

Non-infrastructure areas

Rehabilitation obligations relating to non-infrastructure areas are discounted to their present value based on expected future cashflows. At each reporting date the rehabilitation liability is re-measured in line with changes in discount rates, timing or amount of the costs to be incurred and areas to be rehabilitated. Any changes in the liability are charged to the income statement as rehabilitation expense, other than the unwinding of the discount which is recognised as a finance cost.

(t) Onerous contracts

A provision for onerous contracts is recognised when the expected benefits to be derived by the consolidated entity from a contract are lower than the unavoidable cost of meeting its obligations under the contract.

– II-116 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(u) Trade and other payables

Current accounting policy

Trade and other payables are stated at amortised cost. Trade payables are non-interest bearing and are normally settled on 30-day terms.

Comparative period policy

Trade and other payables are carried at cost which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the Company.

(v) Revenue

Goods sold

Revenue from the sale of coal is recognised (net of penalties, returns, discounts, allowances and hedging gains/losses) in the income statement when the significant risks and rewards of ownership have been transferred to the customer. No revenue is recognised if there are:

(i) significant uncertainties regarding recovery of the consideration due;
(ii) the costs incurred or to be incurred cannot be measured reliably;
(iii) there is a risk of return of goods; or
(iv) there is continuing management involvement with the goods.

(w) Expenses

Operating lease payments

Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense and spread over the lease term.

– II-117 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(w) Expenses

Net financing costs

Current accounting policy

Net financing costs comprise interest payable on borrowings calculated using the effective interest rate method, interest receivable on funds invested, amortisation of ancillary costs incurred in connection with arrangement of borrowings, and gains and losses on hedging instruments that are recognised in the income statement (see accounting policy (f)).

Borrowing costs are expensed as incurred, unless costs relate to a qualifying asset, and included in net financing costs. Borrowing costs relating to a qualifying asset, being an asset that necessarily takes a substantial period to prepare for its intended use, are capitalised as part of the cost of the asset.

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

Comparative period policy

Interest payments in respect of financial instruments classified as liabilities are included in borrowing costs.

Where interest rates are hedged or swapped, the borrowing costs are recognised net of any effect of the hedge or the swap.

Ancillary costs incurred in connection with the arrangement of borrowings are capitalised as ‘deferred expenditure’ and amortised over the life of the borrowings or over five years, whichever is lesser.

Exploration and evaluation expenditure carried forward relating to areas of interest which have not reached a stage permitting reliable assessment of economic benefits are not qualifying assets.

– II-118 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(x) Income tax

Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend.

Tax consolidation

The Company and its wholly-owned Australian resident entities have formed a tax-consolidated group with effect from 1 July 2003 and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated group is Macarthur Coal Limited.

Current tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate financial statements of the members of the tax-consolidated group using the separate taxpayer within group approach by reference to the carrying amounts of assets and liabilities in the separate financial statements of each entity and the tax values applying under tax consolidation.

Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries is assumed by the head entity in the tax-consolidated group and are recognised as amounts payable (receivable) to (from) other entities in the tax-consolidated group in conjunction with any tax funding arrangement amounts (refer below). Any difference between these amounts is recognised by the Company as an equity contribution or distribution.

– II-119 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(x) Income tax

Tax consolidation (continued)

The Company recognises deferred tax assets arising from unused tax losses of the tax-consolidated group to the extent that it is probable that future taxable profits of the tax-consolidated group will be available against which the asset can be utilised.

Any subsequent period adjustments to deferred tax assets arising from unused tax losses, as a result of revised assessments of the probability of recovery are recognised by the head entity only.

Nature of tax funding arrangements and tax sharing agreements

The head entity, in conjunction with other members of the tax-consolidated group, has entered into a tax funding arrangement which sets out the funding obligations of members of the tax-consolidated group in respect of tax amounts. The tax funding arrangements require payments to/from the head entity equal to the current tax liability (asset) assumed by the head entity and any tax-loss deferred tax asset assumed by the head entity, resulting in the head entity recognising an inter-entity receivable (payable) equal in amount to the tax liability (asset) assumed. The inter-entity receivable (payable) is at call.

The head entity recognises the assumed current tax amounts as current tax liabilities (assets), adding to its own current amounts, since they are also due to or from the same taxation authority. The current tax liabilities (assets) are equivalent to the tax balances generated by external transactions entered into by the taxconsolidated group. Contributions to fund the current tax liabilities are payable as per the tax funding arrangement and reflect the timing of the head entity’s obligation to make payments for tax liabilities to the relevant tax authorities.

The head entity in conjunction with other members of the tax-consolidated group, has also entered into a tax sharing agreement. The tax sharing agreement provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote.

(y) Segment reporting

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

– II-120 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(z) Goods and services tax

Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense.

Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the Australian Tax Office (‘ATO’) is included as a current asset or liability in the balance sheet.

(aa) Derecognition of financial assets and liabilities

Current accounting policy

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when:

(i) the rights to receive cash flows from the asset have expired;
(ii) the consolidated entity retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party; or
(iii) the consolidated entity has transferred its rights to receive cash flows from the asset and either:
(a) has transferred substantially all the risks and rewards of the asset; or
(b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in profit or loss.

– II-121 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(aa) Derecognition of financial assets and liabilities (continued)

Comparative period policy — financial instruments impairment and derecognition

The carrying amounts of non-current financial assets valued on the cost basis were reviewed to determine whether they are in excess of their recoverable amount at reporting date. If the carrying amount of a noncurrent financial asset exceeded its recoverable amount (ie was not considered probable of recovery), the financial asset was written down to the lower amount. The write-down was expensed in the reporting period in which it occurred.

Where a group of assets working together supported the generation of cash inflows, recoverable amount was assessed in relation to that group of assets.

In assessing recoverable amounts of non-current financial assets, the relevant cash flows were discounted to their present value.

Impairment losses were reversed through the profit and loss but only to the extent of original cost.

An asset was derecognised when the contractual right to receive or exchange cash no longer existed. A liability was derecognised when the contractual obligation to deliver or exchange cash no longer existed.

(ab) Accounting estimates and judgements

Management discussed with the Audit and Risk Management Committee the development, selection and disclosure of the consolidated entity’s critical accounting policies and estimates and the application of these policies and estimates. The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Key sources of estimation uncertainty

Note 25 contains detailed analysis of the foreign exchange exposure of the consolidated entity and risks in relation to foreign exchange movements.

Rehabilitation and dismantling provisions

As set out in accounting policy (s) and Note 21, certain assumptions are required to be made in determining the amount the consolidated entity is expected to incur to settle its obligations in relation to rehabilitation of the mine sites and dismantling of infrastructure. Key assumptions include the amount and timing of future cash flow estimates and discount rates.

– II-122 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

1. SIGNIFICANT ACCOUNTING POLICIES (continued)

(ab) Accounting estimates and judgements (continued)

Recoverability of non-current assets

As set out in accounting policy (n), certain assumptions are required to be made in order to assess the recoverability of non-current assets. Key assumptions include the future coal price, future cash flows, an estimated discount rate and estimates of coal reserves. Estimates of coal reserves in themselves are dependant on various assumptions, in addition to those described above, including operating cost assumptions. Changes in these estimates could materially impact on coal reserves, and could therefore affect estimates of future cash flows used in the assessment of recoverable amount, estimates of the life of mine and depreciation.

Contingent liabilities — litigation

Certain claims have been made on the consolidated entity by a mining contractor. Judgements about the validity of the claims have been made by the directors. Further details are included in Note 28.

2. SEGMENT REPORTING

Segment information is presented in respect of the consolidated entity’s business and geographical segments. The primary format, business segments, is based on the consolidated entity’s management and internal reporting structure.

Inter-segment pricing is determined on an arm’s length basis.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly income-earning assets and revenue, interestbearing loans, borrowings and expenses, and corporate assets and expenses.

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

All segments are continuing operations.

Business segments

The consolidated entity comprises the following main business segments:

Operating coal mines:	Coppabella and Moorvale mines
Exploration and evaluation:	Various tenements in the exploration and evaluation phase
Other:	Corporate and other business development activities

– II-123 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

2. SEGMENT REPORTING (continued)

Geographical segments

The consolidated entity operates predominately in Australia. All segment assets from ordinary activities relate to operations in Australia.

In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of assets.

Business segments 30 June 2006 External sales revenue Inter-segment revenue Total revenue Segment result Unallocated expenses Results from operating activities Net financing income Income tax expense Profit for the period Segment assets Segment liabilities Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Capital expenditure Impairment losses	Operating coal mines A$’000 534,755 — 534,755 225,715 455,947 249,995 247,132 44,564 (25,135) 7,277 91	Exploration and evaluation A$’000 — — — (530) 167,830 157,113 — (6,729) (1,472) 54,419 —	Other Eliminations Consolidated A$’000 A$’000 A$’000 — — 534,755 — — — — — 534,755 (13,595) — 211,590 — 211,590 2,455 (64,456) 149,589 272,365 (304,026) 592,116 97,861 (304,026) 200,943 (45,641) — 201,491 (744) — 37,091 (61,510) — (88,117) 755 — 62,451 — — 91

– II-124 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

2. SEGMENT REPORTING (continued)

Business segments 30 June 2005 External sales revenue Inter-segment revenue Total revenue Segment result Unallocated expenses Results from operating activities Net financing costs Income tax expense Profit for the period Segment assets Segment liabilities Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Capital expenditure Impairment losses	Operating coal mines A$’000 370,157 — 370,157 93,933 376,803 254,160 110,736 (52,845) (25,771) 5,445 1,471	Exploration and evaluation A$’000 — — — (2,859) 46,653 49,796 — (3,640) (1,306) 3,303 —	Other Eliminations Consolidated A$’000 A$’000 A$’000 — — 370,157 — — — — — 370,157 3,599 — 94,673 — 94,673 (5,033) (25,493) 64,147 173,410 (156,204) 440,662 57,605 (156,987) 204,574 (2,752) — 107,984 (85) — (56,570) (17,974) — (45,051) 85 — 8,833 — — 1,471

– II-125 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

2. SEGMENT REPORTING (continued)

Geographical segments 30 June 2006 Revenue from external customers Segment assets Capital expenditure 30 June 2005 Revenue from external customers Segment assets Capital expenditure	Asia A$’000 260,288 — — 159,324 — —	Europe A$’000 190,805 — — 152,490 — —	Americas A$’000 62,403 — — 40,912 — —	Other regions Consolidated A$’000 A$’000 21,259 534,755 592,116 592,116 62,451 62,451 17,431 370,157 440,662 440,662 8,833 8,833	Other regions Consolidated A$’000 A$’000 21,259 534,755 592,116 592,116 62,451 62,451 17,431 370,157 440,662 440,662 8,833 8,833

					592,116

					62,451

					370,157

					440,662

					8,833

3. OTHER INCOME

Management fee — related parties Dividends — related parties Net foreign exchange gains Sundry — other parties	Consolidated 2006 2005 A$’000 A$’000 296 158 — — 1,953 — 214 3 2,463 161	The Company 2006 2005 A$’000 A$’000 3,358 1,994 61,488 19,034 — — 98 3 64,944 21,031	The Company 2006 2005 A$’000 A$’000 3,358 1,994 61,488 19,034 — — 98 3 64,944 21,031
			21,031

– II-126 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

4. OTHER EXPENSES

Net foreign exchange losses Exploration and evaluation expensed as incurred Increase in rehabilitation provision Depreciation Impairment loss on receivables Net loss on disposal of non-current assets	Consolidated 2006 2005 A$’000 A$’000 — 1,782 387 335 527 634 (242) 542 91 1,471 130 23 893 4,787	The Company 2006 2005 A$’000 A$’000 — — — — — — 61 25 — — 23 — 84 25	The Company 2006 2005 A$’000 A$’000 — — — — — — 61 25 — — 23 — 84 25
			25

5. PERSONNEL EXPENSES

Wages and salaries Other associated personnel expenses Contributions to defined contribution superannuation funds Increase in liability for annual leave Increase in liability for long-service leave Equity-settled transactions	Consolidated 2006 2005 A$’000 A$’000 4,605 3,182 567 438 603 323 262 133 163 — 308 — 6,508 4,076	The Company 2006 2005 A$’000 A$’000 3,284 2,072 634 438 603 323 194 133 163 — 308 — 5,186 2,966	The Company 2006 2005 A$’000 A$’000 3,284 2,072 634 438 603 323 194 133 163 — 308 — 5,186 2,966
			2,966

– II-127 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

6. AUDITORS’ REMUNERATION

Audit services Auditors of the Company — KPMG • Audit and review of financial reports(A) (F) • Audit of joint venture operations(C) Other services Auditors of the Company — KPMG • Other assurance services(A) (B) • Taxation services(A) • Joint venture operations(C) — Other services(D) KPMG related practices • Other(E)	Consolidated 2006 2005 A$ A$ 176,750 132,000 87,159 68,862 263,909 200,862 63,290 62,413 54,605 66,520 16,969 32,734 30,273 55,136 165,137 216,803	The Company 2006 2005 A$ A$ 176,750 132,000 — — 176,750 132,000 63,290 62,413 54,605 66,520 — — 30,273 55,136 148,168 184,069	The Company 2006 2005 A$ A$ 176,750 132,000 — — 176,750 132,000 63,290 62,413 54,605 66,520 — — 30,273 55,136 148,168 184,069
			132,000

			62,413 66,520 — 55,136
			184,069

(A) All auditors’ remuneration is borne by the Company for the consolidated entity.

(B) Represents advice in relation to accounting and AIFRS.

(C) Represents the consolidated entity’s share of remuneration paid for audit and other services incurred by joint ventures.

(D) Represents tax advice and assistance with financial modelling.

(E) Represents license and other fees paid to a related entity, of which KPMG holds a 50% interest, for purchase of tax compliance software by the consolidated entity.

(F) Includes audit relating to transition to AIFRS and restated comparative financial information.

– II-128 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

7. NET FINANCING COSTS

Interest income Financial income Interest expense Financial expenses Net financing costs/(income)	Consolidated 2006 2005 A$’000 A$’000 (7,644) (2,385) (7,644) (2,385) 5,189 7,418 5,189 7,418 (2,455) 5,033	The Company 2006 2005 A$’000 A$’000 (8,694) (10,518) (8,694) (10,518) 1,704 2,647 1,704 2,647 (6,990) (7,871)

8. INCOME TAX EXPENSE

(a) Recognised in the income statement

Current tax expense Current year Adjustments for prior years Deferred tax expense Origination and reversal of temporary differences Total income tax expense/(benefit) in income statement attributable to continuing operations	Consolidated 2006 2005 A$’000 A$’000 55,851 20,385 27 157 55,878 20,542 8,578 4,951 8,578 4,951 64,456 25,493	The Company 2006 2005 A$’000 A$’000 (219) 785 27 157 (192) 942 137 (25) 137 (25) (55) 917

– II-129 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

8. INCOME TAX EXPENSE (continued)

(b) Numerical reconciliation between tax expense and pre-tax net profit

Profit before tax — continuing operations Income tax using the domestic corporation tax rate of 30% (2005: 30%) Increase in income tax expense due to: • Non-deductible expenses Decrease in income tax expense due to: • Non-assessable revenues Under/(over) provided in prior years Income tax expense/(benefit) on pre-tax net profit	Consolidated 2006 2005 A$’000 A$’000 214,045 89,640 64,213 26,892 2,310 175 (2,094) (1,731) 64,429 25,336 27 157 64,456 25,493	The Company 2006 2005 A$’000 A$’000 61,170 22,381 18,351 6,714 13 17 (18,446) (5,971) (82) 760 27 157 (55) 917

– II-130 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

8. INCOME TAX EXPENSE (continued)

(c) Current tax liability/(asset )

Movements during the year Balance at the beginning of the year Under/(over) provision in prior period Income tax paid Income tax received Current year’s income tax provision Income tax expense related to wholly-owned subsidiaries in a tax-consolidated group	Consolidated 2006 2005 A$’000 A$’000 16,505 (7,000) 27 157 (27,783) (5,862) — 8,847 55,646 20,363 — — 44,395 16,505	The Company 2006 2005 A$’000 A$’000 16,505 (7,000) 27 70 (27,783) (5,862) — 8,847 (192) 722 55,838 19,728 44,395 16,505	The Company 2006 2005 A$’000 A$’000 16,505 (7,000) 27 70 (27,783) (5,862) — 8,847 (192) 722 55,838 19,728 44,395 16,505
			16,505

(d) Deferred tax recognised directly in equity

Relating to foreign currency derivative contracts	Consolidated 2006 2005 A$’000 A$’000 305 — 305 —	The Company 2006 2005 A$’000 A$’000 — — — —	The Company 2006 2005 A$’000 A$’000 — — — —
			—

– II-131 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

9. DEFERRED TAX ASSETS AND LIABILITIES

Recognised deferred tax assets and liabilities

Deferred tax assets and liabilities are attributable to the following:

Consolidated Property, plant and equipment Employee benefits Inventories Interest-bearing loans and borrowings Provisions Amounts payable for future user charges Overburden in advance Mining property Exploration and evaluation Other items Tax value of loss carry-forwards recognised Tax (assets)/liabilities Set off of tax Net tax (assets)/liabilities The Company Property, plant and equipment Employee benefits Provisions Other items Tax (assets)/liabilities Set off of tax Net tax (assets)/liabilities	Assets 2006 2005 A$’000 A$’000 — — (198) (71) (36) — (3,215) (3,517) (5,984) (3,922) (3,719) (4,199) — — — — — — (7,466) (377) — (1,626) (20,618) (13,712) — — (20,618) (13,712) — — (178) (71) (29) — (347) (596) (554) (667) — — (554) (667)	Liabilities 2006 2005 A$’000 A$’000 2,434 2,629 — — — 409 — — — — — — 23,133 15,984 19,091 20,913 17,354 6,978 941 455 — — 62,953 47,368 — — 62,953 47,368 7 3 — — — — — — 7 3 — — 7 3	Net 2006 2005 A$’000 A$’000 2,434 2,629 (198) (71) (36) 409 (3,215) (3,517) (5,984) (3,922) (3,719) (4,199) 23,133 15,984 19,091 20,913 17,354 6,978 (6,525) 78 — (1,626) 42,335 33,656 — — 42,335 33,656 7 3 (178) (71) (29) — (347) (596) (547) (664) — — (547) (664)

– II-132 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

9. DEFERRED TAX ASSETS AND LIABILITIES (continued)

Unrecognised deferred tax assets

All deferred tax assets have been recognised within the Company or the consolidated entity.

Movement in temporary differences during the year Property, plant and equipment Inventories Interest-bearing loans and borrowings Employee benefits Provisions Amounts payable for future user charges Overburden in advance Mining property Exploration and evaluation Other items Tax value of loss carry-forwards (recognised)/derecognised	Consolidated	Balance 30 June 06 A$’000 2,434 (36) (3,215) (198) (5,984) (3,719) 23,133 19,091 17,354 (6,525) — 42,335	The Company
	Recognised Balance Recognised in equity/ 1 July 05 in income transfers A$’000 A$’000 A$’000 2,629 (195) — 409 (445) — (3,517) 302 — (71) (79) (48) (3,922) (2,062) — (4,199) 480 — 15,984 7,149 — 20,913 (1,822) — 6,978 10,376 — 78 (6,752) 149 (1,626) 1,626 — 33,656 8,578 101		Recognised Balance Recognised in equity/ 1 July 05 in income transfers A$’000 A$’000 A$’000 3 4 — — — — — — — (71) (87) (20) — (29) — — — — — — — — — — — — — (596) 249 — — — — (664) 137 (20)	Balance 30 June 06 A$’000 7 — — (178) (29) — — — — (347) —
				(547)

Property, plant and equipment Inventories Interest-bearing loans and borrowings Employee benefits Provisions Amounts payable for future user charges Overburden in advance Mining property Exploration and evaluation Other items Tax value of loss carry-forwards (recognised)/derecognised	Consolidated	Balance 30 June 05 A$’000 2,629 409 (3,517) (71) (3,922) (4,199) 15,984 20,913 6,978 78 (1,626) 33,656	The Company
	Recognised Balance Recognised in equity/ 1 July 04 in income transfers A$’000 A$’000 A$’000 1,804 825 — 314 95 — (3,770) 253 — (34) (37) — (3,520) (402) — (4,775) 576 — 11,640 4,344 — 24,084 (3,171) — 6,234 744 — 67 186 (175) (3,164) 1,538 — 28,880 4,951 (175)		Recognised Balance Recognised in equity/ 1 July 04 in income transfers A$’000 A$’000 A$’000 1 2 — — — — — — — (34) (37) — — — — — — — — — — — — — — — — (772) 10 166 — — — (805) (25) 166	Balance 30 June 05 A$’000 3 — — (71) — — — — — (596) —
				(664)

– II-133 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

10. EARNINGS PER SHARE

Basic earnings per share

The calculation of basic earnings per share at 30 June 2006 was based on the profit attributable to ordinary shareholders of A$149,589,000 (2005: A$64,147,000) and a weighted average number of ordinary shares outstanding during the year ended 30 June 2006 of 179,603,247 (2005: 162,350,704), calculated as follows:

Profit attributable to ordinary shareholders Profit attributable to ordinary shareholders Weighted average number of ordinary shares Issued ordinary shares at 1 July Effect of shares issued on exercise of options Effect of shares issued conversion of convertible notes Effect of shares issued in December 2005 Effect of shares issued in May 2006 Weighted average number of ordinary shares at 30 June	Consolidated 2006 2005 A$’000 A$’000 149,589 64,147 Number Number 172,824,327 154,724,477 76,758 879,505 2,106,564 6,746,722 4,104,894 — 490,704 — 179,603,247 162,350,704	Consolidated 2006 2005 A$’000 A$’000 149,589 64,147 Number Number 172,824,327 154,724,477 76,758 879,505 2,106,564 6,746,722 4,104,894 — 490,704 — 179,603,247 162,350,704

		Number 154,724,477 879,505 6,746,722 — —
		162,350,704

Diluted earnings per share

The calculation of diluted earnings per share at 30 June 2006 was based on profit attributable to ordinary shareholders of A$149,589,000 (2005: A$64,147,000) and a weighted average number of ordinary shares outstanding during the year ended 30 June 2006 of 179,703,275 (2005: 166,732,761), calculated as follows:

Profit attributable to ordinary shareholders (diluted) Profit attributable to ordinary shareholders Weighted average number of ordinary shares (diluted) Weighted average number of ordinary shares at 1 July Effect of share options on issue Effect of convertible notes on issue Weighted average number of ordinary shares (diluted) at 30 June	Consolidated 2006 2005 A$’000 A$’000 149,589 64,147 Number Number 179,603,247 162,350,704 100,028 501,247 — 3,880,810 179,703,275 166,732,761	Consolidated 2006 2005 A$’000 A$’000 149,589 64,147 Number Number 179,603,247 162,350,704 100,028 501,247 — 3,880,810 179,703,275 166,732,761

		Number 162,350,704 501,247 3,880,810
		166,732,761

– II-134 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

11. CASH AND CASH EQUIVALENTS

Cash at bank and in hand Bank cash deposit account at call Bank bills Cash and cash equivalents in the statement of cash flows	Consolidated 2006 2005 A$’000 A$’000 4,330 905 35,777 4,675 128,496 12,558 168,603 18,138	The Company 2006 2005 A$’000 A$’000 2,376 452 8,165 4,675 7,497 12,558 18,038 17,685	The Company 2006 2005 A$’000 A$’000 2,376 452 8,165 4,675 7,497 12,558 18,038 17,685
			17,685

12. TRADE AND OTHER RECEIVABLES

Current Trade receivables Other receivables and prepayments Tax related receivables Receivables due from associates and related entities — unsecured Non-current Security deposits Other receivables and prepayments Loans to employees — Employee Share Plan Amounts receivable from controlled entities — unsecured Receivables due from associates and related entities — unsecured	Consolidated 2006 2005 A$’000 A$’000 32,659 23,274 10,334 7,409 — — 9,669 1,875 52,662 32,558 118 85 3,977 5,392 508 7 — — — 7,532 4,603 13,016	The Company 2006 2005 A$’000 A$’000 — — 328 301 70,560 7,831 458 277 71,346 8,409 — — — — 508 7 184,791 126,747 — — 185,299 126,754	The Company 2006 2005 A$’000 A$’000 — — 328 301 70,560 7,831 458 277 71,346 8,409 — — — — 508 7 184,791 126,747 — — 185,299 126,754
			8,409

			— — 7 126,747 —
			126,754

Current and non-current receivables due from associates and related entities — unsecured are shown net of impairment losses of A$91,000 (2005: A$Nil) and A$Nil (2005: A$1,471,000), respectively, recognised in the current year.

– II-135 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

13. INVENTORIES

INVENTORIES
	Consolidated		The Company
	2006	2005	2006	2005
	A$’000	A$’000	A$’000	A$’000
Coal stocks, at cost	15,412	24,075	—	—

Refer Note 19 for details of security over inventories.

14. OTHER FINANCIAL ASSETS

Current Cash and deposits — not at call Foreign currency derivative contracts Non-current Investments in controlled entities — at cost Foreign currency derivative contracts 15. OTHER ASSETS Current Deferred expenditure Overburden in advance Non-current Deferred expenditure Less accumulated amortisation Overburden in advance	Consolidated 2006 2005 A$’000 A$’000 6,099 58,630 2,711 19,643 8,810 78,273 — — — 2,783 — 2,783 Consolidated 2006 2005 A$’000 A$’000 — 257 74,206 45,949 74,206 46,206 — 2,239 — (2,239) — — 2,904 7,330 2,904 7,330	The Company 2006 2005 A$’000 A$’000 — — — — — — 73,343 56,385 — — 73,343 56,385 The Company 2006 2005 A$’000 A$’000 — 257 — — — 257 — 1,452 — (1,452) — — — — — —	The Company 2006 2005 A$’000 A$’000 — — — — — — 73,343 56,385 — — 73,343 56,385 The Company 2006 2005 A$’000 A$’000 — 257 — — — 257 — 1,452 — (1,452) — — — — — —
			257

			1,452 (1,452)
			— —
			—

– II-136 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

16. PROPERTY, PLANT AND EQUIPMENT

Mining property and development (including mining rights and coal resources) • At cost • Less accumulated depreciation Freehold land • At cost Buildings and infrastructure • At cost • Less accumulated depreciation Plant and equipment • At cost • Less accumulated depreciation Capital works in progress • At cost	Consolidated 2006 2005 A$’000 A$’000 141,620 140,368 (34,230) (26,431) 107,390 113,937 4,958 4,953 72,856 67,965 (21,867) (14,855) 50,989 53,110 3,949 2,159 (912) (723) 3,037 1,436 3,733 4,457 170,107 177,893	The Company 2006 2005 A$’000 A$’000 — — — — — — — — — — — — — — 932 218 (134) (80) 798 138 — — 798 138

Refer to Note 19 for details of security over property, plant and equipment.

– II-137 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

16. PROPERTY, PLANT AND EQUIPMENT (continued)

Reconciliations

Reconciliation of the carrying amounts for each class of property, plant and equipment are set out below:

• Mining property and development Carrying amount at beginning of year • Additions, including acquisitions through acquisition of interest in joint venture • Disposals • Depreciation Carrying amount at end of year • Freehold land Carrying amount at beginning of year • Additions Carrying amount at end of year • Buildings and infrastructure Carrying amount at beginning of year • Additions, including acquisitions through acquisition of interest in joint venture • Transfer from capital works in progress • Disposals • Depreciation Carrying amount at end of year • Plant and equipment Carrying amount at beginning of year • Additions, including acquisitions through acquisition of interest in joint venture • Transfer from capital works in progress • Disposals • Depreciation Carrying amount at end of year • Capital works in progress Carrying amount at beginning of year • Additions, including acquisitions through acquisition of interest in joint venture • Transfers to property, plant and equipment Carrying amount at end of year	Consolidated 2006 2005 A$’000 A$’000 113,937 124,379 1,251 58 — (604) (7,798) (9,896) 107,390 113,937 4,953 4,923 5 30 4,958 4,953 53,110 59,071 1,540 71 3,894 507 (377) (62) (7,178) (6,477) 50,989 53,110 1,436 1,106 485 295 1,581 341 (132) (74) (333) (232) 3,037 1,436 4,457 228 4,751 5,077 (5,475) (848) 3,733 4,457	The Company 2006 2005 A$’000 A$’000 — — — — — — — — — — — — — — — — — — — — — — — — — — — — 138 78 744 85 — — (23) — (61) (25) 798 138 — — — — — — — —

– II-138 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

16. PROPERTY, PLANT AND EQUIPMENT (continued)

Reconciliations (continued)

The following depreciation expense was recognised as an expense in the income statement:

Mining property and development Buildings and infrastructure Plant and equipment	Consolidated 2006 2005 A$’000 A$’000 8,759 9,387 6,919 6,115 333 232 16,011 15,734	The Company 2006 2005 A$’000 A$’000 — — — — 61 25 61 25	The Company 2006 2005 A$’000 A$’000 — — — — 61 25 61 25
			25

17. EXPLORATION AND EVALUATION ASSETS

Costs carried forward in respect of areas of interest in: • Exploration and/or evaluation — intangible Cost Balance at beginning of year Acquisitions of subsidiaries and joint venture interests Exploration and evaluation capitalised Balance at end of year	Consolidated 2006 2005 A$’000 A$’000 94,809 40,390 94,809 40,390 40,390 37,087 48,653 — 5,766 3,303 94,809 40,390	The Company 2006 2005 A$’000 A$’000 — — — — — — — — — — — —	The Company 2006 2005 A$’000 A$’000 — — — — — — — — — — — —
			—

			— — —
			—

The ultimate recoupment of costs carried forward as exploration and evaluation assets is dependent on the successful development and commercial exploitation or sale of the respective area of interest.

– II-139 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

18. TRADE AND OTHER PAYABLES

Current Trade payables Other payables and accrued expenses Non-current Amounts payable to controlled entities — unsecured	Consolidated 2006 2005 A$’000 A$’000 1,633 6,521 66,905 54,825 68,538 61,346 — —	The Company 2006 2005 A$’000 A$’000 228 285 909 891 1,137 1,176 52,499 —	The Company 2006 2005 A$’000 A$’000 228 285 909 891 1,137 1,176 52,499 —
			1,176

			—

19. INTEREST-BEARING LOANS AND BORROWINGS

This note provides information about the contractual terms of the consolidated entity’s interest-bearing loans and borrowings. For more information about the consolidated entity’s exposure to interest rate and foreign currency risk, see Note 25.

Current liabilities Secured bank loans Redeemable convertible notes Deferred liability for acquisition of mining interest — unsecured Non-current liabilities Deferred liability for acquisition of mining interest — unsecured	Consolidated 2006 2005 A$’000 A$’000 — 19,102 — 5,627 1,931 1,933 1,931 26,662 8,785 9,790 8,785 9,790	The Company 2006 2005 A$’000 A$’000 — — — 5,627 — — — 5,627 — — — —	The Company 2006 2005 A$’000 A$’000 — — — 5,627 — — — 5,627 — — — —
			5,627

			—
			—

– II-140 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

19. INTEREST-BEARING LOANS AND BORROWINGS (continued)

Redeemable convertible notes

In December 2002 the Company issued 20,689,660 convertible notes at an issue price of A$1.45 each with interest at 10% per annum payable half-yearly. The notes were convertible, at the option of the holder, on any interest payment date up to 11 December 2005 to ordinary shares on the basis of one share per note. The Company had the option, on receiving the conversion request from the holder, to either issue ordinary shares or to pay the cash equivalent. Any notes not converted by the maturity date were redeemed by the Company at the issue price on the maturity date. During the year 3,833,946 (2005: 16,719,850) notes were converted at A$1.45 (refer Note 24).

Deferred liability for acquisition of mining interest — unsecured

In December 2003 the consolidated entity purchased an additional 23.3% interest in the Coppabella Project. As part of the acquisition, the consolidated entity entered into an arrangement to progressively purchase the 23.3% interest in the exploration tenements each six months, over a 10 year period. In accordance with Australian Accounting Standards the deferred liability has been reflected at its present value in the financial statements, discounted at 10.2% (2005: 10%) based on 6% interest plus risk adjusted margin.

Financing facilities Bank loans — Corporate Facility • Amortising cash advance facility (US$24,000,000) • Revolving cash advance facility (US$20,000,000) Bank loans — Project Finance Facility • Cash advance term loan (US$14,552,000) • Revolving cash advance working capital loan Bank Guarantee Facility	Consolidated 2006 2005 A$’000 A$’000 32,288 — 26,907 — — 19,102 — 17,226 60,000 33,363 119,195 69,691	The Company 2006 2005 A$’000 A$’000 — — — — — — — — — — — —	The Company 2006 2005 A$’000 A$’000 — — — — — — — — — — — —
			—

– II-141 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

19. INTEREST-BEARING LOANS AND BORROWINGS (continued)

Deferred liability for acquisition of mining interest — unsecured (continued)

Facilities utilised at reporting date Bank loans — Corporate Facility • Amortising cash advance facility • Revolving cash advance facility Bank loans — Project Finance Facility • Cash advance term loan (US$14,552,000) • Revolving cash advance working capital loan Bank Guarantee Facility Facilities not utilised at reporting date Facilities not utilised at reporting date Bank loans — Corporate Facility • Amortising cash advance facility (US$24,000,000) • Revolving cash advance facility (US$20,000,000) Bank loans — Project Finance Facility • Cash advance term loan (US$Nil) • Revolving cash advance working capital loan Bank Guarantee Facility	Consolidated 2006 2005 A$’000 A$’000 — — — — — 19,102 — — 57,787 32,324 57,787 51,426 32,288 — 26,907 — — — — 17,226 2,213 1,039 61,408 18,265	The Company 2006 2005 A$’000 A$’000 — — — — — — — — — — — — — — — — — — — — — — — —	The Company 2006 2005 A$’000 A$’000 — — — — — — — — — — — — — — — — — — — — — — — —
			—

			— — — — —
			—

– II-142 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

19. INTEREST-BEARING LOANS AND BORROWINGS (continued)

Corporate Facility

Bank loans

During the year ended 30 June 2006 the consolidated entity replaced its Project Finance Facility with a Corporate Facility.

The purpose of the Corporate Facility was to replace the project financing and provide additional funds for general corporate purposes within the consolidated entity. The facility is held by a controlled entity, Coppabella Coal Pty Ltd. Bank loans provided as part of the Corporate Facility are:

(1) Cash advance facility

(a) Amortising cash advance facility

The facility limit is denominated in United States dollars as US$30,000,000 and is to be amortised on a straight line basis to 30 June 2010. A$Nil (US$Nil) has been drawn down at 30 June 2006. The facility can be drawn in Australian dollars or United States dollars. The amortised facility limit at 30 June 2006 is US$24,000,000. A commitment fee of 0.45% per annum is payable on the unused portion of the amortising cash advance facility.

The interest rate applicable to the cash advance facility comprises LIBOR plus a minimum margin of 0.95% per annum. The effective interest rate was 6.46% per annum at 30 June 2006.

(b) Revolving cash advance facility

The revolving cash advance facility loan limit is denominated in United States dollars as US$20,000,000. A$Nil (US$Nil) has been drawn down at 30 June 2006. The facility is in place until 30 June 2010. The facility can be drawn down in Australian dollars or United States dollars. A commitment fee of 0.45% per annum is payable on the unused portion of the revolving cash advance facility.

The interest rate applicable to the cash advance facility comprises LIBOR plus a minimum margin of 0.95% per annum. The effective interest rate was 6.46% per annum at 30 June 2006.

(2) Bank guarantee facility

The bank guarantee facility is denominated in Australian dollars as a A$60,000,000 limit amortising to A$Nil at maturity 30 June 2010. The facility can be drawn in Australian dollars, incorporating a sub-limit of the equivalent of A$4,000,000 which can be drawn in United States dollars. Bank guarantee fees are payable at 0.55% per annum and a fee of 0.22% per annum applies to the unused portion of the bank guarantee facility.

– II-143 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

19. INTEREST-BEARING LOANS AND BORROWINGS (continued)

Corporate Facility (continued)

Security

The Corporate Facility is secured by a guarantee provided by Macarthur Coal Limited and charges over the consolidated entity’s interest in the Coppabella and Moorvale Joint Venture including all of the assets and undertakings of the controlled entity, Coppabella Coal Pty Ltd and charges over the assets and undertakings of the controlled entity, Macarthur Coal Management Pty Ltd and the Company’s shares in Coppabella Coal Pty Ltd and Macarthur Coal Management Pty Ltd and intercompany loans to the controlled entities.

Project Finance Facility

A non-recourse Project Finance Facility applicable to the Coppabella and Moorvale mines, with the debt being held by the controlled entities, was in place until its cancellation on 17 October 2005. Bank loans provided as part of the Project Finance Facility were:

(1) Cash advance term loan

The loan was denominated in United States dollars. An amount of A$19,102,000 (US$14,552,000) was included in current liabilities at 30 June 2005, being the amount payable within one year due to the loan being fully repaid in October 2005.

The interest rate applicable to the cash advance term loan comprised LIBOR plus a margin of 1.55% per annum. The effective interest rate was 5.05% per annum at 30 June 2005.

(2) Revolving cash advance working capital loan

The revolving cash advance working capital loans were denominated in Australian dollars.

The interest rate comprised a base rate based on BBSY plus a margin of 1.55% per annum. The effective interest rate at 30 June 2005 was 7.24%. Additionally, a commitment fee of 0.70% per annum was payable on the unused portion of the revolving cash advance working capital loan facility.

(3) Bank guarantee facility

The bank guarantee facility was denominated in Australian and United States dollars of up to A$33,000,000 equivalent. Bank guarantee fees were payable at 0.775% per annum and a fee of 0.35% per annum applied to the unused portion of the bank guarantee facility.

– II-144 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

19. INTEREST-BEARING LOANS AND BORROWINGS (continued)

Security

The Project Finance Facility was secured by changes over the consolidated entity’s interest in the Coppabella and Moorvale Joint Venture including all of the assets and undertakings of the controlled entity, Coppabella Coal Pty Ltd, and the Company’s shares in Coppabella Coal Pty Ltd and intercompany loans to the controlled entity.

Assets pledged under security arrangements The carrying amount of the pledged non-current assets are as follows: Mining property and development Land Buildings and infrastructure Plant and equipment Capital works in progress Receivables Other financial assets Other Shares in controlled entities Amounts receivable from controlled entities Convertible notes Convertible notes on issue at 1 July 3,833,946 conversions during the period (2005: 16,719,850) Debt repaid to non-converting note holders Carrying amount of liability at 30 June	Consolidated 2006 2005 A$’000 A$’000 107,390 110,661 3,730 3,730 50,989 53,110 2,203 1,263 3,733 4,457 6,039 7,555 — 2,783 2,904 12,723 — — — — 176,988 196,282 5,627 29,871 (5,559) (24,244) (68) — — 5,627	The Company 2006 2005 A$’000 A$’000 — — — — — — — — — — — — — — — — 56,385 56,385 42,400 79,201 98,785 135,586 5,627 29,871 (5,559) (24,244) (68) — — 5,627

– II-145 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

20. EMPLOYEE BENEFITS

Current liabilities Liability for annual leave Liability for long-service leave Non-current liabilities Liability for long-service leave	Consolidated 2006 2005 A$’000 A$’000 460 198 46 — 506 198 156 39	The Company 2006 2005 A$’000 A$’000 392 198 46 — 438 198 156 39	The Company 2006 2005 A$’000 A$’000 392 198 46 — 438 198 156 39
			198

			39

Defined contribution superannuation funds

The consolidated entity makes contributions to several defined contribution superannuation funds. The amount recognised as an expense was A$603,000 for the financial year ended 30 June 2006 (2005: A$323,000).

– II-146 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

20. EMPLOYEE BENEFITS (continued)

Share based payments

Directors’ Option Plan

The Company has a directors’ option plan for the Board of Directors.

There are no voting rights attached to unissued ordinary shares. Voting rights will be attached to unissued ordinary shares when the options have been exercised.

All options expire on the earlier of their expiry date or the date the holder ceases to be a director of the Company or the date the holder is dismissed for misconduct or for reasons involving fraud.

The number and weighted average exercise prices of share options is as follows:

Weighted average exercise price 2006 Outstanding at the beginning of the period — Exercised during the period — Outstanding at the end of the period — Exercisable at the end of the period	Weighted Number average of options exercise price 2006 2005 — A$1.32 — A$1.32 — — —	Number of options 2005 800,000 (800,000) — —

No options are outstanding at 30 June 2006 and no options were exercised during the year.

During the financial year, no share options were exercised (2005: 800,000, fully paid). The weighted average share price at the date of exercise was A$Nil (2005: A$4.26).

– II-147 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

20. EMPLOYEE BENEFITS (continued)

Share based payments (continued)

Executive Option Plan

The Company has an executive option plan for key employees of the Company and Macarthur Coal (C&M Management) Pty Ltd, an associated entity.

There are no voting rights attached to unissued ordinary shares. Voting rights will be attached to unissued ordinary shares when the options have been exercised.

All options expire on the earlier of their expiry date or the date the holder ceases to be an executive or the date the holder is dismissed for misconduct or for reasons involving fraud.

The number and weighted average exercise prices of share options is as follows:

Weighted average exercise price 2006 Outstanding at the beginning of the period A$1.38 Exercised during the period A$1.38 Outstanding at the end of the period — Exercisable at the end of the period	Weighted Number average of options exercise price 2006 2005 110,000 A$1.35 (110,000) A$1.34 — A$1.38 —	Number of options 2005 690,000 (580,000) 110,000 110,000

No options are outstanding at 30 June 2006.

During the financial year, 110,000 share options were exercised (2005: 580,000), fully paid. The weighted average share price at the date of exercise was A$6.12 (2005: A$3.81).

– II-148 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

20. EMPLOYEE BENEFITS (continued)

Share based payments (continued)

Employee Share Plan

All shares issued under the ESP rank equally with all other shares for time being on issue.

The loan will be repayable:

a) if default is made by the employee on the repayment of the loan; or
b) the employee’s employment with the Company, its subsidiary or associate or the relevant contractor is terminated for any reason; or
c) the employee becomes insolvent or commits an act of bankruptcy.

The Company holds security over the shares the subject of a loan until the loan is repaid.

The market price of shares issued under the ESP as at 30 June 2006 was A$4.48 (2005: A$7.45).

There were no other shares eligible for issuance under the ESP at 30 June 2006.

The amount recognised in the financial statements of the consolidated entity and the Company in relation to employee shares during the year were: Issued ordinary share capital (180,000 shares at A$1 each) Employee loans payable at 30 June 2005	Consolidated 2006 2005 A$ A$ — 180,000 — 6,744	The Company 2006 2005 A$ A$ — 180,000 — 6,744	The Company 2006 2005 A$ A$ — 180,000 — 6,744
			6,744

– II-149 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

20. EMPLOYEE BENEFITS (continued)

Share based payments (continued)

Employee Share Loan Plan

The Company established an Employee Share Loan Plan (ESLP) which was used to provide an opportunity for eligible persons of the consolidated entity and approved contractors to acquire shares of the Company. On 15 December 2005, 122,935 shares were issued to 86 eligible employees at an issue price of A$5.43 per share with a value limit of between A$6,000 to A$20,000 per employee.

All shares issued under the ESLP rank equally with all other shares for time being on issue.

The Company provided interest free loans to all eligible persons to enable them to acquire shares under ESLP to 100% of the total acquisition price for the shares. Any dividends declared on the shares issued under ESLP will be used to offset any loans outstanding on the shares. Employees and contractors have also provided irrevocable authority to the Company to deduct 1% of their gross salary each month in repayment of the loan.

The loan will be repayable:

a) if default is made by the employee on the repayment of the loan; or
b) the employee’s employment with the Company, its subsidiary or associate or the relevant contractor is terminated for any reason; or
c) the employee becomes insolvent or commits an act of bankruptcy.

The Company holds security over the shares the subject of a loan until the loan is repaid.

The market price of shares issued under the ESLP as at 30 June 2006 was A$4.48.

There were no other shares eligible for issuance under the ESLP at 30 June 2006.

The number and weighted average exercise prices of shares is as follows:

Weighted average exercise price 2006 Outstanding at the beginning of the period — Granted during the period A$5.43 Sold during the period A$4.91 Outstanding at the end of the period —	Weighted Number average of options exercise price 2006 2005 — — 122,935 — (16,930) — 106,005 —	Number of options 2005 — — —
		—

– II-150 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

21. PROVISIONS

Rehabilitation

Consolidated Balance at 1 July 2005 Provisions made during the year Provisions used during the year Unwind of discount Balance at 30 June 2006 Current Non-current The Company Balance at 1 July 2005 Provisions made during the year Balance at 30 June 2006 Current Non-current	and dismantling A$’000 13,929 3,854 (622) 725 17,886 1,384 16,502 17,886 — — — — — —	Onerous contracts A$’000 — 1,881 — — 1,881 1,881 — 1,881 — — — — — —	Other A$’000 — 177 — — 177 79 98 177 — 98 98 — 98 98	Total A$’000 13,929 5,912 (622) 725 19,944 3,344 16,600 19,944 — 98 98 — 98 98

During the financial year ended 30 June 2006, A$622,000 was recognised as an expense in the income statement in respect of rehabilitation incurred (2005: A$928,000).

Rehabilitation and dismantling

In accordance with State Government legislative requirements, a provision has been recognised for mine rehabilitation works throughout the life of the mines in relation to the consolidated entity’s coal mining operations. A provision for dismantling of infrastructure assets on cessation of operations at the mines has also been recognised in relation to the consolidated entity’s coal mining operations. The basis for accounting is set out in Note 1(s).

– II-151 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

21. PROVISIONS (continued)

Onerous contracts

Macarthur Coal (C&M Management) Pty Ltd, the manager for the Coppabella and Moorvale Joint Venture, entered into a contract with Queensland Rail for the transport of 625,000 tonnes of coal to Abbot Point for the period 1 March 2006 to 31 December 2006. The port contract at Abbot Point expired on 28 February 2006 and therefore there is no corresponding port contract during the period 1 March 2006 to 31 December 2006. The obligation under the Queensland Rail contract for the remaining period 1 July 2006 to 31 December 2006 has been fully provided for at year end.

22. OTHER FINANCIAL LIABILITIES

Current Mining exploration and evaluation costs (refer Note 27(d)) Amounts payable for future user charges (refer Note 27(e)) Foreign currency derivative contracts Non-current Mining exploration and evaluation costs (refer Note 27(d)) Amounts payable for future user charges (refer Note 27(e)) Foreign currency derivative contracts	Consolidated 2006 2005 A$’000 A$’000 131 1,471 1,694 1,599 1,447 1,737 3,272 4,807 — 131 10,704 12,398 377 169 11,081 12,698	The Company 2006 2005 A$’000 A$’000 — — — — — — — — — — — — — — — —	The Company 2006 2005 A$’000 A$’000 — — — — — — — — — — — — — — — —
			—

			— — —
			—

– II-152 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

23. OTHER LIABILITIES

Current Deferred unrealised gains on foreign currency derivative contracts Deferred unrealised gains on US dollar bank loans Non-current Deferred unrealised gains on foreign currency derivative contracts Deferred unrealised gains on US dollar bank loans	Consolidated 2006 2005 A$’000 A$’000 — 17,907 — 2,314 — 20,221 — 2,614 — 2,109 — 4,723	The Company 2006 2005 A$’000 A$’000 — — — — — — — — — — — —	The Company 2006 2005 A$’000 A$’000 — — — — — — — — — — — —
			—

			— —
			—

– II-153 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

24. CAPITAL AND RESERVES

Reconciliation of movement in capital and reserves attributable to equity holders of the parent

Note Consolidated Balance at 1 July 2004 Total recognised income and expense Adjustment to prior period transaction costs Shares issued on exercise of options Shares issued on conversion of convertible notes Dividends to shareholders Balance at 30 June 2005 Balance at 1 July 2005 Effect of change in accounting policy 35 Balance at 1 July 2005 — restated Total recognised income and expense Shares issued on acquisition of joint venture interests Shares issued on exercise of options Shares issued on conversion of convertible notes Equity settled transactions Dividends to shareholders Balance at 30 June 2006	Share capital A$’000 156,530 — (43) 1,832 24,244 — 182,563 182,563 — 182,563 — 48,078 152 5,559 9,991 — 246,343	Hedging reserve A$’000 — — — — — — — — 15,504 15,504 (12,684) — — — — — 2,820	Retained earnings A$’000 7,129 64,147 — — — (17,751) 53,525 53,525 — 53,525 149,589 — — — 308 (61,412) 142,010	Total equity A$’000 163,659 64,147 (43) 1,832 24,244 (17,751) 236,088 236,088 15,504 251,592 136,905 48,078 152 5,559 10,299 (61,412) 391,173

– II-154 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

24. CAPITAL AND RESERVES (continued)

Reconciliation of movement in capital and reserves attributable to equity holders of the parent (continued)

The Company Balance at 1 July 2004 Total recognised income and expense Adjustment to prior period transaction costs Shares issued on exercise of options Shares issued on conversion of convertible notes Dividends to shareholders Balance at 30 June 2005 Balance at 1 July 2005 Effect of change in accounting policy Balance at 1 July 2005 — restated Total recognised income and expense Shares issued on acquisition of joint venture interests Shares issued on exercise of options Shares issued on conversion of convertible notes Equity settled transactions Dividends to shareholders Balance at 30 June 2006	Share capital A$’000 156,530 — (43) 1,832 24,244 — 182,563 182,563 — 182,563 — 48,078 152 5,559 9,991 — 246,343	Hedging reserve A$’000 — — — — — — — — — — — — — — — — —	Retained earnings A$’000 471 21,464 — — — (17,751) 4,184 4,184 — 4,184 61,225 — — — 308 (61,412) 4,305	Total equity A$’000 157,001 21,464 (43) 1,832 24,244 (17,751) 186,747 186,747 — 186,747 61,225 48,078 152 5,559 10,299 (61,412) 250,648

– II-155 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

24. CAPITAL AND RESERVES (continued)

Reconciliation of movement in capital and reserves attributable to equity holders of the parent (continued)

Share capital On issue at 1 July Shares issued on acquisition of joint venture interests Shares issued on equity settled transaction Shares issued on exercise of options Shares issued on conversion of convertible notes On issue at 30 June — fully paid	The Company Ordinary shares 2006 2005 172,824,327 154,724,477 7,584,677 — 3,027,396 — 110,000 1,380,000 3,833,946 16,719,850 187,380,346 172,824,327	The Company Ordinary shares 2006 2005 172,824,327 154,724,477 7,584,677 — 3,027,396 — 110,000 1,380,000 3,833,946 16,719,850 187,380,346 172,824,327
		172,824,327

Effective 1 July 1998, the Company Law Review Act abolished the concept of par value shares and the concept of authorised capital. Accordingly, the Company does not have authorised capital or par value in respect of its issued shares.

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.

In the event of winding up of the Company, ordinary shareholders rank after creditors and are fully entitled to any proceeds.

– II-156 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

24. CAPITAL AND RESERVES (continued)

Hedging reserve

The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred.

Dividends

Dividends recognised in the current year by the Company are:

2006 Interim 2006 ordinary Final 2005 ordinary Total amount 2005 Interim 2005 ordinary Final 2004 ordinary Total amount	Cents per share 23.00 11.00 34.00 7.00 3.78 10.78	Total amount A$ 42,401,179(1) 19,010,676(2) 61,411,855 11,877,073(2) 5,873,533(2) 17,750,606	Franked/ unfranked Franked Franked Franked Franked	Date of payment 31 March 2006 30 September 2005
				31 March 2005 30 September 2004

Franked dividends declared or paid during the year were franked at the tax rate of 30%.

(1) Paid out of AIFRS profits

(2) Paid out of old AGAAP profits

After the balance sheet date the following dividends were proposed by the directors. The dividends have not been provided. The declaration and subsequent payment of dividends has no income tax consequences.

	Cents	Total	Franked/	Date of
	per share	amount	unfranked	payment
		A$
Final ordinary	18.00	33,728,462(1 )	Franked	9 October 2006

– II-157 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

24. CAPITAL AND RESERVES (continued)

Hedging reserve (continued)

The financial effect of these dividends have not been brought to account in the financial statements for the year ended 30 June 2006 and will be recognised in subsequent financial reports.

	The Company	The Company
	2006	2005
	A$’000	A$’000
Dividend franking account
30% franking credits available to shareholders of the Company
for subsequent financial years	45,981	16,628

The above available amounts are based on the balance of the dividend franking account at year-end adjusted for:

(a) franking credits that will arise from the payment of the current tax liabilities;
(b) franking debits that will arise from the payment of dividends recognised as a liability at year-end;
(c) franking credits that will arise from the receipt of dividends recognised as receivables by the tax-consolidated group at year-end; and
(d) franking credits that the entity may be prevented from distributing in subsequent years.

The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends.

The impact on the dividend franking account of dividends proposed after the balance sheet date but not recognised as a liability is to reduce it by A$14,455,055 (2005: A$8,147,433).

In accordance with the tax consolidation legislation, the Company as the head entity in the tax-consolidated group has also assumed the benefit of A$45,981,000 (2005: A$16,628,000) franking credits.

– II-158 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

25. FINANCIAL INSTRUMENTS

Exposure to credit, interest rate and currency risks arises in the normal course of the Company’s and the consolidated entity’s business. Derivative financial instruments are used to hedge exposure to fluctuations in foreign exchange rates and interest rates.

Credit risk

Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis.

The credit risk on financial assets of the consolidated entity, which have been recognised on the balance sheet, is the carrying amount, net of impairment.

Concentration of credit risk at balance date on trade receivables are: Asia 63% (2005: 43%), Europe 35% (2005: 44%), Americas Nil% (2005: 13%) and Other 2% (2005: Nil%). The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the balance sheet.

Interest rate risk

The consolidated entity adopts a policy of ensuring an appropriate amount of its exposure to changes in interest rates on borrowings is on a fixed rate basis. Interest rate swaps denominated in United States dollars had been entered into to achieve an appropriate mix of fixed and floating rate exposure within the consolidated entity’s policy. The swaps had a floating interest rate of 5.17% and a fixed interest rate of 2.73% and were closed out during the year.

The consolidated entity does not have any debt borrowings outstanding at 30 June 2006 and therefore classifies its interest swaps as ineffective and recognised a gain of A$214,000 for the year ended 30 June 2006.

At 30 June 2006, the Company and the consolidated entity had no interest rate swaps (2005: A$29,572,000 notional contract amount).

– II-159 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

25. FINANCIAL INSTRUMENTS (continued)

Effective interest rate and repricing analysis

In respect of income-earning financial assets and interest-bearing financial liabilities, the following tables indicate their effective interest rates at the balance sheet date and the periods in which they reprice.

Note 2006 Consolidated Cash and cash equivalents 11 Cash and deposits — not at call 14 Secured bank loans(1) 19 Redeemable convertible notes(2) 19 Deferred liability for acquisition of mining interest 19 Amounts payable for future user charges 22 Interest rate swaps and options(1) 2005 Consolidated Cash and cash equivalents 11 Cash and deposits — not at call 14 Secured bank loans(1) 19 Redeemable convertible notes(2) 19 Deferred liability for acquisition of mining interest 19 Amounts payable for future user charges 22 Interest rate swaps and options(1)	Effective interest rate % 5.8 4.4 — — 10.2 — — 5.5 3.4 4.6 10.0 10.0 — —	Total A$’000 168,603 6,099 — — (10,716) (12,398) 151,588 — 18,138 58,630 (19,102) (5,627) (11,723) (13,997) 26,319 (29,572)	6 months or less A$’000 168,603 6,099 — — (990) (835) 172,877 — 18,138 58,630 (19,102) (5,627) (990) (788) 50,261 13,919	6-12 months A$’000 — — — — (941) (859) (1,800) — — — — — (943) (811) (1,754) 5,566	1-2 years A$’000 — — — — (1,747) (1,796) (3,543) — — — — — (1,754) (1,694) (3,448) 10,087	2-5 More than years 5 years A$’000 A$’000 — — — — — — — — (4,310) (2,728) (6,057) (2,851) (10,367) (5,579) — — — — — — — — — — (4,342) (3,694) (5,715) (4,989) (10,057) (8,683) — —	2-5 More than years 5 years A$’000 A$’000 — — — — — — — — (4,310) (2,728) (6,057) (2,851) (10,367) (5,579) — — — — — — — — — — (4,342) (3,694) (5,715) (4,989) (10,057) (8,683) — —
							(5,579)

							—

							— — — — (3,694) (4,989)
							(8,683)

							—

(1) The effect of interest rate hedging is incorporated into the average interest rate.

(2) These assets/liabilities bear interest at a fixed rate.

– II-160 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

25. FINANCIAL INSTRUMENTS (continued)

Foreign currency risk

The consolidated entity enters into forward foreign exchange contracts and some option based products (smart forwards) to economically hedge a proportion of anticipated coal sale proceeds denominated in United States dollars and Australian dollar costs funded by United States dollar loans, subject to Board approved limits. The terms of these contracts are not more than 3 years. The amount of anticipated future sales and costs is forecast in light of current conditions in foreign markets, commitments from customers and to suppliers and experience. All sales from the first of each quarter, after allowing for the natural hedge designations referred to below, are designated as being hedged until all hedge contracts are fully utilised. Notes 1(e) and (f) set out the accounting treatment for foreign currency transactions and hedges.

Natural hedge

A Specific natural hedge existed between the United States dollar denominated cash advance term loan and United States dollar denominated coal sales revenue. The natural hedge position was established in prior periods when the cash advance term loan was restructured and the Australian dollar denominated debt was redrawn as a United States dollar denominated debt and upon further drawings of United States dollar denominated debt. The United States dollar denominated debt was repaid during the period and the unrealised foreign exchange gains deferred under previous AGAAP continue to be deferred and included in the measurement of the anticipated transaction when the transaction has occurred as originally designated.

Forecasted transactions

The consolidated entity classifies its forward exchange contracts hedging forecasted sales as cash flow hedges and measures them at fair value. The fair value of forward exchange contracts at 1 July 2005 was adjusted against the opening balance of the hedging reserve at that date.

The net fair value of forward exchange contracts used as hedges of forecasted sales at 30 June 2006 was A$887,000 (2005: A$15,829,000), comprising assets of A$2,711,000 (2005: A$18,962,000) and liabilities of A$1,824,000 (2005: A$3,133,000) that were recognised as derivatives measured at fair value.

Recognised assets and liabilities

Changes in the fair value of forward exchange contracts that economically hedge monetary assets and liabilities in foreign currencies and for which no hedge accounting is applied are recognised in the income statement. Both the changes in fair value of the forward contracts and the foreign exchange gains and losses relating to the monetary items are recognised as part of ‘net financing costs’ (see Note 7). The fair value of forward exchange contracts used as economic hedges of monetary assets and liabilities in foreign currencies at 30 June 2006 was A$Nil (2005: A$Nil) for the consolidated entity and A$Nil (2005: A$Nil) for the Company recognised in the fair value derivatives.

– II-161 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

25. FINANCIAL INSTRUMENTS (continued)

Sensitivity analysis

In managing interest rate and currency risks the consolidated entity aims to reduce the impact of short-term fluctuations on the consolidated entity’s earnings over the longer-term, however, permanent changes in foreign exchange and interest rates would have an impact on consolidated earnings.

At 30 June 2006, it is estimated that a general increase of one percentage point in interest rates would increase the consolidated entity’s profit before tax by approximately A$1,460,000 (2005: A$578,000). Interest rate swaps have been included in this calculation.

It is estimated that a general increase of one percentage point in the value of the Australian dollar against other foreign currencies would have decreased the consolidated entity’s profit before tax by approximately A$332,000 for the financial year ended 30 June 2006 (2005: A$2,000). The forward exchange contracts have been included in this calculation.

Fair values

The fair values together with the carrying amounts shown in the balance sheet are as follows:

Note Consolidated Cash and cash equivalents 11 Trade and other receivables 12 Cash and deposits — not at call 14 Foreign currency derivative contracts: Assets 14 Liabilities 22 Trade and other payables 18 Secured bank loans 19 Redeemable convertible notes 19 Deferred liability for acquisition of mining interest 19 Employee benefits 20 Other financial liabilities 22 Unrecognised (losses)/gains	Carrying amount 2006 A$’000 168,603 51,075 6,099 2,711 (1,824) (68,538) — — (10,716) (662) (12,529)	Fair value 2006 A$’000 168,603 51,075 6,099 2,711 (1,824) (68,538) — — (10,716) (662) (12,529) —	Carrying amount 2005 A$’000 18,138 38,368 58,630 22,426 (1,906) (61,346) (19,102) (5,627) (11,723) (237) (15,599)	Fair value 2005 A$’000 18,138 38,368 58,630 18,962 (3,133) (61,346) (19,102) (27,825) (11,723) (237) (15,599) (26,889)

– II-162 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

25. FINANCIAL INSTRUMENTS (continued)

Estimation of fair values

The following summarises the major methods and assumptions used in estimating the fair values of financial instruments reflected in the table.

Derivatives

Foreign currency derivative contracts are either marked to market using listed market prices or by discounting the contractual forward price and deducting the current spot rate. For interest rate swaps broker quotes are used. Those quotes are back tested using pricing models or discounted cash flow techniques.

Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate is a market related rate for a similar instrument at the balance sheet date. Where other pricing models are used, inputs are based on market related data at the balance sheet date.

Interest-bearing loans and borrowings

Fair value is calculated based on discounted expected future principal and interest cash flows.

Convertible notes

The fair value is based on quoted market prices.

Trade and other receivables/payables

For receivables/payables with a remaining life of less than one year, the notional amount is deemed to reflect the fair value. All other receivables/payables are discounted to determine the fair value.

Interest rates used for determining fair value

The entity uses the government yield curve as of 30 June 2006 plus an adequate constant credit spread to discount financial instruments. The interest rates used are as follows:

	2006	2005
	%	%
Derivatives	5.0 - 6.5	5.0 - 6.0
Loans and borrowings	—	5.0 - 7.5
Deferred liability for acquisition of mining interest	10.2	10.0
Receivables	5.5 - 6.0	5.0 - 5.5

– II-163 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

26. INTERESTS IN JOINT VENTURE OPERATIONS

The consolidated entity holds the following interests in various joint ventures whose principal activities are coal production, exploration and evaluation, and development.

	Joint venture	interest held
	2006	2005	Principal activity
	%	%
Coppabella and Moorvale Joint Venture	73.3	73.3	Coal production
Monto Coal Joint Venture	51	51	Exploration and evaluation
Olive Downs Joint Venture	90	—	Exploration and evaluation
Moorvale West Joint Venture	90	—	Exploration and evaluation
West/North Burton Joint Venture	65	—	Exploration and evaluation
West Rolleston Joint Venture	90	—	Exploration and evaluation
West Walker Joint Venture	85	—	Exploration and evaluation
Bowen Basin Coal Joint Venture	85	—	Exploration and evaluation
Capricorn Joint Venture	85	—	Exploration and evaluation
Bowen Basin Coal Exploration Joint Venture	—	58(1)	Exploration and evaluation

(1) Per the farm-in agreement, Macarthur Exploration Pty Ltd held a 50% interest in the tenements held in Bowen Basin Coal Exploration Joint Venture, except for West Rolleston and Capricorn in which it held a 75% interest. The 58% interest was applied based upon weighted contributions of existing (prior to farmin arrangements) and new mining exploration permits. On 15 December 2005, the consolidated entity acquired additional interests in Bowen Basin exploration tenements. Following the acquisition, the joint venture participants agreed to restructure the joint venture into seven new joint ventures.

For the year ended 30 June 2006, the contributions of the Coppabella and Moorvale Joint Venture to the operating profit before tax of the consolidated entity was A$227,524,000 (2005: A$100,412,000). The value of the consolidated entity’s 73.3% share of coal mined during the year by Coppabella and Moorvale Joint Venture was A$525,510,000 (2005: A$345,240,000).

There was no coal mined by the other joint ventures during the year.

– II-164 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

26. INTERESTS IN JOINT VENTURE OPERATIONS (continued)

Current assets Cash and cash equivalents Trade and other receivables Inventories Other financial assets Other assets Total current assets Non-current assets Trade and other receivables Property, plant and equipment Exploration and evaluation assets Other assets Total non-current assets Total assets Current liabilities Trade and other payables Provisions Other financial liabilities Total current liabilities Non-current liabilities Provisions Other financial liabilities Total non-current liabilities Total liabilities	Consolidated 2006 2005 A$’000 A$’000 — 15 11,448 6,216 15,412 24,075 6,098 319 74,206 47,682 107,164 78,307 4,073 44 166,972 177,661 94,809 40,390 2,904 12,723 268,758 230,818 375,922 309,125 65,815 48,614 3,265 1,214 1,825 1,599 70,905 51,427 16,502 12,715 10,704 12,398 27,206 25,113 98,111 76,540	The Company 2006 2005 A$’000 A$’000 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —	The Company 2006 2005 A$’000 A$’000 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
			—
			— — — —
			—
			—

			— — —
			—
			— —
			—
			—

Refer to Notes 27 and 28 for details of commitments and contingent liabilities.

– II-165 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

27. CAPITAL AND OTHER COMMITMENTS

(a) Capital expenditure commitments — joint ventures

Buildings and infrastructure contracted but not provided for and payable:

Not later than one year Later than one year but not later than five years	Consolidated 2006 2005 A$’000 A$’000 9,985 369 3,328 — 13,313 369	The Company 2006 2005 A$’000 A$’000 — — — — — —	The Company 2006 2005 A$’000 A$’000 — — — — — —
			—

(b) Operating lease commitments

Future operating lease rentals not provided for in the financial statements and payable:

Not later than one year Later than one year but not later than five years Later than five years	Consolidated 2006 2005 A$’000 A$’000 553 416 1,632 1,452 289 703 2,474 2,571	The Company 2006 2005 A$’000 A$’000 474 416 1,618 1,452 289 703 2,381 2,571	The Company 2006 2005 A$’000 A$’000 474 416 1,618 1,452 289 703 2,381 2,571
			2,571

The consolidated entity leases a number of office spaces under operating leases. The leases typically run for a period of 2 to 7 years.

Lease payments are increased every year to reflect market rentals.

During the financial year ended 30 June 2006, A$386,000 was recognised as an expense in the income statement in respect of operating leases (2005: A$177,000).

– II-166 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

27. CAPITAL AND OTHER COMMITMENTS (continued)

(c) Mining leases — joint ventures

Future mining lease rentals not provided for in the financial statements and payable:

Not later than one year Later than one year but not later than five years Later than five years	Consolidated 2006 2005 A$’000 A$’000 372 298 1,194 1,056 2,959 3,277 4,425 4,631	The Company 2006 2005 A$’000 A$’000 — — — — — — — —	The Company 2006 2005 A$’000 A$’000 — — — — — — — —
			—

(d) Exploration and evaluation expenditure

Exploration obligations

Not later than one year Later than one year but not later than five years	Consolidated 2006 2005 A$’000 A$’000 1,111 477 1,998 125 3,109 602	The Company 2006 2005 A$’000 A$’000 — — — — — —	The Company 2006 2005 A$’000 A$’000 — — — — — —
			—

– II-167 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

27. CAPITAL AND OTHER COMMITMENTS (continued)

(d) Exploration and evaluation expenditure (continued)

Exploration costs

Committed costs for exploration and evaluation areas not provided for in the financial statements and payable:

Not later than one year Later than one year but not later than five years	Consolidated 2006 2005 A$’000 A$’000 1 113 — 1 1 114	The Company 2006 2005 A$’000 A$’000 — — — — — —	The Company 2006 2005 A$’000 A$’000 — — — — — —
			—

(e) Operating commitments — joint ventures

Commitments under the electricity, water, rail, port, coal washing plant and train loading facility agreements for joint ventures not provided for in the financial statements and payable:

Not later than one year Later than one year but not later than five years Later than five years	Consolidated 2006 2005 A$’000 A$’000 27,884 28,260 101,549 82,576 153,342 20,260 282,775 131,096	The Company 2006 2005 A$’000 A$’000 2,094 — 25,698 — 100,697 — 128,489 —	The Company 2006 2005 A$’000 A$’000 2,094 — 25,698 — 100,697 — 128,489 —
			—

In addition to the operating commitments in (e) above, other contracts on commercial terms and conditions have been entered into with contractors for overburden and mining operations at Coppabella and Moorvale mines and with original owners regarding royalty arrangements. As the amounts payable under the contracts vary with the quantities mined and sold, future commitments are not able to be reliably assessed and quantified.

– II-168 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

27. CAPITAL AND OTHER COMMITMENTS (continued)

(e) Operating commitments — joint ventures (continued)

On 23 October 2002, the Coppabella and Moorvale Joint Venture participants agreed to pay a user charge to the Queensland Government for the facilitation of the transport infrastructure corridor (TIC) relocation. The user charge comprises 40 quarterly payments (consolidated entity share of A$596,000 per quarter; 2005: A$596,000 per quarter), commencing 1 October 2002, which have been included in the above operating commitments less the amounts payable for future user charges brought to account at 30 June 2006 (refer Note 22).

(f) Employee compensation commitments

Key management personnel

Commitments under non-cancellable employment contracts not provided for in the financial statements and payable:

Within one year Later than one year but not later than five years	Consolidated 2006 2005 A$’000 A$’000 830 265 327 — 1,157 265	The Company 2006 2005 A$’000 A$’000 438 265 — — 438 265	The Company 2006 2005 A$’000 A$’000 438 265 — — 438 265
			265

Denis Wood is a director of Queensland Coke & Energy Pty Ltd (QCE), a wholly controlled entity of the Company. By a Services Agreement dated 1 August 2005, Coal Industry Services Pty Ltd, a director related entity, has agreed to provide the services of Denis Wood to QCE at A$392,400 per annum. The contract relates to the development of a coke project and is for an initial period of 3 years but is able to be extended. If the project is successfully developed, a royalty is payable for 15 years at A$0.50 per tonne for up to 1.6 million tonnes per annum and A$0.25 per tonne for each tonne over 1.6 million tonnes per annum. The contract may be terminated for particular stated events, in which case no termination payments are payable. If terminated for other stated events, the royalty remains payable.

The above amounts represent minimum commitments under these arrangements offset by any amounts brought to account as liabilities at 30 June 2006.

– II-169 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

27. CAPITAL AND OTHER COMMITMENTS (continued)

(g) Other commitments

Joint ventures

Deeds of cross charge

(i) The payment of future cash calls by Coppabella Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the Coppabella and Moorvale Joint Venture is secured by a guarantee from the Company and a charge over Coppabella Coal Pty Ltd’s interest in the Coppabella and Moorvale Joint Venture in favour of the other joint venturers and Macarthur Coal (C&M Management) Pty Ltd as the manager of the Coppabella and Moorvale Joint Venture.
(ii) The payment of future cash calls by Monto Coal 2 Pty Ltd, a controlled entity, for its share of operating and capital costs in the Monto Coal Joint Venture is secured by a charge over Monto Coal 2 Pty Ltd’s interest in the Monto Coal Joint Venture in favour of the other joint venturers.
(iii) The payment of future cash calls by Olive Downs Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the Olive Downs Joint Venture is secured by a charge over Olive Downs Coal Pty Ltd’s interest in the Olive Downs Joint Venture in favour of the other joint venturers.
(iv) The payment of future cash calls by Capricorn Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the Capricorn Joint Venture is secured by a charge over Capricorn Coal Pty Ltd’s interest in the Capricorn Joint Venture in favour of the other joint venturers.
(v) The payment of future cash calls by West Burton Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the West/North Burton Joint Venture is secured by a charge over West Burton Coal Pty Ltd’s interest in the West/North Burton Joint Venture in favour of the other joint venturers.
(vi) The payment of future cash calls by West Rolleston Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the West Rolleston Joint Venture is secured by a charge over West Rolleston Coal Pty Ltd’s interest in the West Rolleston Joint Venture in favour of the other joint venturers.
(vii) The payment of future cash calls by West Walker Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the West Walker Joint Venture is secured by a charge over West Walker Coal Pty Ltd’s interest in the West Walker Joint Venture in favour of the other joint venturers.
(viii) The payment of future cash calls by Moorvale West Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the Moorvale West Joint Venture is secured by a charge over Moorvale West Coal Pty Ltd’s interest in the Moorvale West Joint Venture in favour of the other joint venturers.

– II-170 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

27. CAPITAL AND OTHER COMMITMENTS (continued)

(g) Other commitments (continued)

Joint ventures (continued)

Deeds of cross charge (continued)

(ix) The payment of future cash calls by BB Interests Pty Ltd, a controlled entity, for its share of operating and capital costs in the Bowen Basin Coal Joint Venture is secured by a charge over BB Interests Pty Ltd’s interest in the Bowen Basin Coal Joint Venture in favour of the other joint venturers.

Other

(x) The Company has guaranteed the commitments of Coppabella Coal Pty Ltd and Monto Coal 2 Pty Ltd, controlled entities, in relation to royalty arrangements.

Associates

Refer Note 30.

28. CONTINGENCIES

Indemnities

(1) These contingent liabilities are considered remote.

Guarantees

Coppabella Coal Pty Ltd, a controlled entity, as a participant of the Coppabella and Moorvale Joint Venture, has provided bank guarantees totalling A$57,787,000 (2005: A$32,324,000) in respect of rehabilitation works, electricity, water, transport infrastructure corridor facilities and customers.[(1)]

The consolidated entity, as a participant of the Coppabella and Moorvale Joint Venture, has entered into a Residual Value Guarantee (RVG) with a bank regarding the lease residual value of the dragline used by a contractor at the Coppabella Mine for A$10,775,000 (2005: A$10,775,000). The lease term expires on 30 June 2008. Management of Macarthur Coal (C&M Management) Pty Ltd, the manager of the Coppabella and Moorvale Joint Venture, expect the future value of the dragline to be in excess of the residual value at 30 June 2008 provided the contractor performs to the Asset Management Plan. The financier of the dragline also holds a fixed and floating charge over Coppabella Coal Pty Ltd’s interests up to the agreed share of the residual value being A$10,775,000 (2005: A$10,775,000).[(1)]

– II-171 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

28. CONTINGENCIES (continued)

Guarantees (continued)

Coppabella Coal Pty Ltd, a controlled entity, as a participant of the Coppabella and Moorvale Joint Venture, has entered into the Coppabella Dragline Agreement dated 19 April 2002 requiring purchase guarantees to be provided in relation to the Marion 8200 dragline erected by Roche Mining Pty Ltd (Roche) and that will be used by Roche in undertaking a contract, being for the removal of overburden and mining of coal. In the event of a termination of the contract, the guarantees in place require Macarthur Coal (C&M Management) Pty Ltd, as agent for the Coppabella and Moorvale Joint Venture, to assume all the reasonable continuing liabilities of the dragline, any items that relate to the construction or operation of the dragline (including spare parts) and any financing responsibilities in relation to the operating lease between Roche and the Lease Financiers including Investec Bank (Australia) Limited.[(1)]

The Company has provided financial guarantees totalling A$11,840,000 to GE Commercial Finance in respect of mining equipment leased by a contractor, in the event of financial default by the contractor.[(1)]

(1) These contingent liabilities are considered remote.

Environmental

Current Queensland Government environment policy requires the preparation of an Environmental Management Overview Strategy (EMOS) and a Plan of Operations detailing the quality, timing and standards of planned mine rehabilitation work. The Coppabella and Moorvale Joint Venture has prepared its EMOS and its Plans of Operations has been accepted by the Environmental Protection Agency. In addition to the EMOS and the Plans of Operations, the consolidated entity is required to lodge securities with the Department of Natural Resources, Mines and Water to ensure compliance with relevant legislation. The total amount of the guarantees lodged with the Department of Natural Resources, Mines and Water as at 30 June 2006 is A$13,760,006 (2005: A$11,074,000) (included in the amount of guarantees referred to above).[(1)]

(1) These contingent liabilities are considered remote.

Memorandum of Understanding

During the year ended 30 June 2005, Queensland Coke & Energy Pty Ltd (QCE), a wholly owned controlled entity of the Company entered into a memorandum of understanding with a contractor to develop an estimated cost and execution plan for the design and construction of the coke plant as part of the feasibility study. If the memorandum of understanding is terminated by QCE and an alternative contractor is ultimately appointed to construct the plant, a fee of A$1,500,000 will be payable.

– II-172 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

28. CONTINGENCIES (continued)

Litigation

On 19 December 2003, Macarthur Coal (C&M Management) Pty Ltd (MCCM), as manager and agent for the Coppabella and Moorvale Joint Venture participants, lodged a Notice of Dispute with its mining contractor Roche Mining Pty Ltd in relation to a mining contract at the Coppabella mine. The claim included recovery of loss and damages for higher production costs and demurrage resulting from a failure of the contractor to deliver coal in accordance with the contract provisions.

On 9 June 2004, following rejection by the Superintendent of claims from the contractor, the contractor lodged a Notice of Dispute on MCCM under the mining contract. The rejected claim, consisting of 9 heads of claim, included higher costs of mining in the 2004 financial year due to alleged delay in access to particular mining areas and alleged adverse mining conditions. By letter dated 28 June 2004, the contractor referred the Dispute to arbitration.

On 28 February 2005, the arbitrator determined that 7 of the 9 points of claim could proceed to arbitration. MCCM received the detailed Points of Claim (referred to as the 2004 financial year claim) from the contractor on 21 March 2005 and detailed Further Particulars on 5 September 2005. On 7 April 2006, MCCM lodged its defence in relation to the Points of Claim and lodged a counter claim against the contractor. On 5 July 2005, the contractor lodged a further Notice of Dispute in relation to alleged additional costs resulting from the Superintendent’s approval of the 2005 financial year Mine Plan (referred to as the 2005 financial year claim). The claims were rejected by the Superintendent and the subsequent dispute was referred to arbitration in August 2005. On 10 April 2006, the contractor lodged a Consolidated and Further Amended Points of Claim in relation to both the 2004 financial year claim and the 2005 financial year claim. At the date of this report, MCCM has not submitted a defence to the consolidated claim. On 13 January 2006, the contractor lodged a further Notice of Claim in relation to alleged additional costs resulting from the Superintendent’s approval of the 2006 financial year Mine Plan. As at the date of the report, the contractor has not provided to the Superintendent requested details of the nature and quantum of this claim.

The total value of the three claims noted above for financial years 2004, 2005 and 2006 is in the order of A$100,000,000 for the Coppabella and Moorvale Joint Venture, of which the consolidated entity holds a 73.3% interest. Areas of duplication have been identified across these three claims and Roche is yet to provide particulars regarding basis and quantum of the third claim.

The Directors of the consolidated entity (and the Manager) dispute the above claims and will vigorously defend their position in arbitration. The Arbitrator has set a date to hear the consolidated 2004 and 2005 financial year claims in June 2007.

In the Director’s opinion, disclosure of any further information about the above matter would be prejudicial to the interests of the consolidated entity.

– II-173 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

29. CONSOLIDATED ENTITIES

	Ownership	interest
	2006	2005
	%	%
Parent entity
Macarthur Coal Limited
Subsidiaries
Coppabella Coal Pty Ltd	100	100
Macarthur Coal Management Pty Ltd	100	100
Macarthur Coal Mine Management Pty Ltd	100	100
Moorvale Coal Pty Ltd	100	100
Moorvale Interest Pty Ltd	100	100
Monto Coal Pty Ltd	100	100
Monto Coal 2 Pty Ltd	100	100
Macarthur Exploration Pty Ltd	100	100
Olive Downs Coal Pty Ltd	100	100
Queensland Coke & Energy Pty Ltd	100	100
Capricorn Coal Pty Ltd	100	—
West Burton Coal Pty Ltd	100	—
West Rolleston Coal Pty Ltd	100	—
West Walker Coal Pty Ltd	100	—
Moorvale West Coal Pty Ltd	100	—
BB Interests Pty Ltd	100	—

All subsidiaries were incorporated and carry on business in Australia.

In the financial statements of the Company, investments in controlled entities are measured at cost and included with other financial assets.

Refer to Note 14. The Company has no jointly controlled entities.

– II-174 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

30. INVESTMENTS IN ASSOCIATED ENTITIES

			Interest	held
	Principal activities	Reporting date	2006	2005
			%	%
Macarthur Coal	Manager of the Coppabella and	30 June	73.3	73.3
(C&M Management) Pty Ltd	Moorvale Joint Venture
Bistrotel Pty Ltd	Property Owner	30 June	73.3	73.3

Commitments Share of associates’ operating lease commitments payable: Not later than one year Later than one year but not later than five years	Consolidated 2006 2005 A$’000 A$’000 22 28 32 85 54 113	Consolidated 2006 2005 A$’000 A$’000 22 28 32 85 54 113
		113

31. ACQUISITIONS OF SUBSIDIARIES AND JOINT VENTURE INTERESTS

The following controlled entities were acquired during the year:

		Consolidated		Contribution to
		entity’s		consolidated
	Date acquired	interest	Consideration	net profit
		%	A$’000	A$’000
2006
Moorvale West Coal Pty Ltd(1)	28 November 2005	100	—	—
West Walker Coal Pty Ltd(1)	28 November 2005	100	—	—
West Burton Coal Pty Ltd(1)	28 November 2005	100	—	—
West Rolleston Coal Pty Ltd(1)	28 November 2005	100	—	—
Capricorn Coal Pty Ltd(1)	28 November 2005	100	—	—
BB Interests Pty Ltd	15 December 2005	100	16,420	—
2005
Queensland Coke & Energy Pty Ltd(1)	14 December 2004	100	—	—
Macarthur Coal Mine Management Pty Ltd(1)	15 June 2005	100	—	—

(1) The companies were acquired as a shelf company for nominal cost. The shelf companies had no assets nor had they operated at the date of acquisition.

– II-175 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

31. ACQUISITIONS OF SUBSIDIARIES AND JOINT VENTURE INTERESTS (continued)

Acquisition of BB Interests Pty Ltd

On 15 December 2005, the consolidated entity acquired all of the shares in BB Interests Pty Ltd. Consideration for the acquisition was the issue of Macarthur Coal shares to the value of A$16,420,000. BB Interests Pty Ltd was acquired from CITIC Australia Coal Exploration Pty Ltd as part of the acquisition of interests in Bowen Basin exploration tenements from the consolidated entity’s joint venture partners Bowen Basin Exploration Pty Ltd and CITIC Australia Coal Exploration Pty Ltd.

The company did not contribute to the consolidated entity’s net profit for the period.

Effect of acquisition

The acquisition had the following effect on the consolidated entity’s assets and liabilities:

Acquiree’s net assets at acquisition date Exploration and evaluation assets Repayment of loan from Macarthur Exploration Pty Ltd, a controlled entity of the Company Consideration paid, satisfied in shares	Carrying amounts A$’000 16,958 (538) 16,420

Acquisition of joint venture interest from Bowen Basin Exploration Pty Ltd

The consolidated entity acquired interests from its joint venture partner, Bowen Basin Exploration Pty Ltd. Bowen Basin Exploration Pty Ltd is an entity controlled by Mr Ken Talbot, Chief Executive Officer of the consolidated entity. Consideration for the acquisition was the issue of Macarthur Coal shares to the value of A$31,658,000.

– II-176 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

31. ACQUISITIONS OF SUBSIDIARIES AND JOINT VENTURE INTERESTS (continued)

Effect of acquisition

The acquisition had the following effect on the consolidated entity’s assets and liabilities.

Net assets acquired at acquisition date Exploration and evaluation assets Repayment of loan from Macarthur Exploration Pty Ltd, a controlled entity of the Company Consideration paid, satisfied in shares	Carrying amounts A$’000 31,695 (37)
	31,658

Following the acquisition of BB Interests Pty Ltd and joint venture interests from Bowen Basin Exploration Pty Ltd, the joint venture participants agreed to restructure the Bowen Basin Coal Exploration Joint Venture into seven new joint ventures as detailed below:

		Interest held 30 June	2006
		CITIC
	Consolidated	Australia Coal	Bowen Basin
	Entity	Exploration Pty Ltd	Exploration Pty Ltd
	%	%	%
Olive Downs Joint Venture	90	10	—
Moorvale West Joint Venture	90	10	—
West/North Burton Joint Venture	65	10	25
West Walker Joint Venture	85	15	—
West Rolleston Joint Venture	90	10	—
Bowen Basin Coal Joint Venture	85	15	—
Capricorn Joint Venture	85	15	—

– II-177 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

32. RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES

Cash flows from operating activities Profit for the period Adjustments for: Depreciation Amortisation of financing costs Impairment losses Amounts set aside to provisions Exploration and evaluation expenses Foreign exchange (gains)/losses Overburden in advance written off Interest on convertible notes Interest on interest-bearing liabilities Interest on unwinding of discount Borrowing costs (Gain)/loss on sale of property, plant and equipment Equity-settled share based payment expenses Operating profit before changes in working capital and provisions Increase/(decrease) in income tax payable Increase/(decrease) in net deferred tax liabilities/assets (Increase)/decrease in tax related receivables (Increase)/decrease in income tax receivable (Increase)/decrease in trade and other receivables (Increase)/decrease in inventories (Increase)/decrease in overburden in advance (Increase)/decrease in deferred expenditure Increase/(decrease) in trade and other payables Net cash from operating activities	Consolidated 2006 2005 A$’000 A$’000 149,589 64,147 16,011 15,734 257 973 91 1,471 6,440 2,111 387 152 (2,682) 185 — 3,120 250 2,012 1,195 2,602 721 830 1,908 — 130 23 308 — 174,605 93,360 27,890 16,505 8,679 4,225 — — — 7,000 (11,657) (7,649) 8,663 (12,763) (23,831) (17,598) 257 1,946 16,885 22,958 201,491 107,984	The Company 2006 2005 A$’000 A$’000 61,225 21,464 61 25 257 569 — — 455 124 — — — — — — 250 2,012 — — — — — — 23 — 308 — 62,579 24,194 27,890 16,505 117 141 (62,729) (19,745) — 7,000 (863) (172) — — — — 257 31 (39) 598 27,212 28,552

– II-178 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

33. RELATED PARTIES

The following were key management personnel of the consolidated entity at any time during the reporting period and unless otherwise indicated were key management personnel for the entire period:

Non-executive directors

Keith De Lacy Chairperson Don Nissen Roger Marshall Peter Forbes Executive directors Ken Talbot Chief Executive Officer Executives Nicole Hollows Chief Financial Officer, Macarthur Coal Limited Brett Garland Vice President — Underground Mine Development, Macarthur Coal Limited Robert Adams Company Secretary, Macarthur Coal Limited Ian Neill Vice President — Open-cut Development and Business Improvement, Macarthur Coal Limited Gary Lee Vice President — Marketing, Macarthur Coal Limited Shane Stephan Vice President — Open-cut Production, Macarthur Coal Limited Ian McAleese Vice President — Corporate Development, Macarthur Coal Limited, appointed 16 January 2006 Denis Wood Chief Executive Officer, Queensland Coke & Energy Pty Ltd Ken Carnes Director of Marketing, Macarthur Coal Limited Mark Turner Vice President — Open-cut Northern District, Macarthur Coal Mine Management Pty Ltd, appointed 16 January 2006, resigned 10 May 2006

– II-179 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

33. RELATED PARTIES (continued)

Key management compensation The key management personnel compensation included in ‘personnel expenses’ (see Note 5) are as follows: Short-term employee benefits Other long-term benefits Post-employment benefits Termination benefits Share based payments	Consolidated 2006 2005 A$ A$ 3,744,128 2,745,149 75,611 — 417,394 279,095 — 75,000 86,122 39,984 4,323,255 3,139,228	The Company 2006 2005 A$ A$ 3,279,603 2,378,173 75,611 — 300,397 247,223 — 75,000 86,122 39,984 3,741,733 2,740,380	The Company 2006 2005 A$ A$ 3,279,603 2,378,173 75,611 — 300,397 247,223 — 75,000 86,122 39,984 3,741,733 2,740,380
			2,740,380

Loans to key management personnel

Details regarding the aggregate of loans made, guaranteed or secured by any entity in the consolidated entity to key management personnel and their related parties are as follows: Loans to key management personnel — unsecured 87,735 — 87,735 —

Loans totalling A$115,990 (2005: A$Nil) were made to key management personnel during the year in respect of the employee share loan plan. During the year, repayments of A$28,255 (2005: A$Nil) were made on the loans.

All loans to key management personnel in relation to the employee share loan plan are interest free and any dividends received on the allocated shares are applied to repay the loan balance. Fixed regular loan repayments are also made to repay the loan balance. No amounts have been written down or recorded as allowances, as the balances are considered fully collectable.

Individual directors and executives compensation disclosures

Information regarding individual directors and executives compensation and some equity instruments disclosures as permitted by Corporations Regulations 2M.3.03 and 2M.6.04 is provided in the Remuneration report section of the Directors’ report.

The Chief Executive Officer, Ken Talbot, has a 3 year contract which only provides for a fixed salary. The annual payment has been recognised as a commitment in Note 27(f).

– II-180 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

33. RELATED PARTIES (continued)

Individual directors and executives compensation disclosures (continued)

Denis Wood, a director of Queensland Coke & Energy Pty Ltd (QCE) a controlled entity of the Company has a services agreement with the consolidated entity. Refer Note 27(f) for particulars.

Equity instruments

All options refer to options over ordinary shares of the Company, which are exercisable on a one-for-one basis under the Directors’ option plan and Executive option plan.

Options granted to directors are on the same terms and conditions as those granted to other employees. There were no options granted during the year.

Options and rights over equity instruments

The movement during the reporting period in the number of options over ordinary shares in Macarthur Coal Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows:

	Held at		Held at
	1 July 2005	Exercised	30 June 2006
Executives
Shane Stephan	110,000	110,000	—

No options held by key management personnel are vested but not exercisable. Refer to Note 20 ‘Share based payments — Executive Option Plan’ for further details.

– II-181 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

33. RELATED PARTIES (continued)

Movements in shares

The movement during the reporting period in the number of ordinary shares in Macarthur Coal Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows:

			Received on
	Held at		exercise of		Held at
	1 July 2005	Acquisitions	options	Disposals	30 June 2006
Directors
Keith De Lacy	308,880	1,860	—	30,000	280,740
Roger Marshall	142,380	1,860	—	20,000	124,240
Don Nissen	306,580	7,260	—	—	313,840
Peter Forbes	20,380	1,860	—	—	22,240
Ken Talbot	67,453,748	5,204,285	—	6,000,000	66,658,033
Executives
Nicole Hollows	15,000	—	—	5,000	10,000
Brett Garland	—	3,682	—	—	3,682
Robert Adams	170,000	3,682	—	170,000	3,682
Ian Neill	—	3,682	—	—	3,682
Gary Lee	—	3,682	—	—	3,682
Shane Stephan	55,707	3,682	110,000	165,707	3,682
Ian McAleese	—	5,000	—	—	5,000
Denis Wood	—	—	—	—	—
Ken Carnes	—	—	—	—	—
Mark Turner	—	2,945	—	2,945	—

No shares were granted to key management personnel during the reporting period as compensation, other than 1,860 shares acquired each by Keith De Lacy, Roger Marshall, Don Nissen and Peter Forbes as application of past directors’ fees received, as detailed in Note 1(r).

– II-182 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

33. RELATED PARTIES (continued)

Movements in shares (continued)

The movement during the previous reporting period in the number of ordinary shares in Macarthur Coal Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows:

			Received on
	Held at		exercise of		Held at
	1 July 2004	Acquisitions	options	Disposals	30 June 2005
Directors
Keith De Lacy	118,600	2,380	300,000	112,100	308,880
Roger Marshall	120,000	2,380	300,000	280,000	142,380
Don Nissen	124,200	2,380	200,000	20,000	306,580
Peter Forbes	18,000	2,380	—	—	20,380
Ken Talbot	67,453,748	—	—	—	67,453,748
Executives
Nicole Hollows	74,600	—	120,000	179,600	15,000
Robert Adams	25,699	—	200,000	55,699	170,000
Ian Neill	—	4,000	—	4,000	—
Gary Lee	—	—	—	—	—
Shane Stephan	72,000	—	43,707	60,000	55,707
Bruce Denney	—	—	—	—	—
Denis Wood	—	—	—	—	—
Ken Carnes	—	—	—	—	—

No shares were granted to key management personnel during the previous reporting period as compensation, other than 2,380 shares acquired each by Keith De Lacy, Roger Marshall, Don Nissen and Peter Forbes as application of past directors’ fees received, as detailed in Note 1(r).

Other key management personnel transactions with the Company or its controlled entities

– II-183 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

33. RELATED PARTIES (continued)

Other key management personnel transactions with the Company or its controlled entities (continued)

Amounts payable to specified directors and their personally-related entities at reporting date arising from related party transactions were as follows:

	Consolidated		The Company
	2006	2005	2006	2005
	A$	A$	A$	A$
Current liabilities
Trade and other payables	9,570	9,570	—	—

The consolidated entity acquired certain joint venture interests in the Bowen Basin Coal Exploration Joint Venture and interests in other tenements from its joint venture partners Bowen Basin Exploration Pty Ltd (BBE) (a related entity of Ken Talbot, Chief Executive Officer) and CITIC Australia Coal Exploration Pty Ltd (CITIC Exploration) (of which Roger Marshall, director of the Company, is a director) for a total acquisition price of A$48,653,000. The acquisition price was based on an independent valuation of the percentage of tenement interests to be acquired by the consolidated entity and was approved at a shareholders general meeting held on 15 December 2005.

The interests acquired by the consolidated entity were:

		Interests acquired from
		CITIC Exploration
		(by acquiring all the shares
	Interests acquired from BBE	in BB Interests Pty Ltd)
	%	%
Prospect
Olive Downs	25	15
Moorvale West	25	15
West/North Burton	—	15
West Walker	25	10
West Rolleston	12.5	2.5
Capricorn	—	10
Bowen Basin Coal	25	10

– II-184 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

33. RELATED PARTIES (continued)

Other key management personnel transactions with the Company or its controlled entities (continued)

The interests retained by BBE and CITIC Exploration following completion of the acquisition by Macarthur Coal are:

		Interests retained by
	Interests retained by BBE	CITIC Exploration
	%	%
Prospect
Olive Downs	—	10
Moorvale West	—	10
West/North Burton	25	10
West Walker	—	15
West Rolleston	—	10
Capricorn	—	15
Bowen Basin Coal	—	15

Acquisition from CITIC Exploration

The interests acquired from CITIC Exploration were held by BB Interests Pty Ltd, a wholly owned subsidiary of CITIC Exploration. the Company purchased all of the shares in BB Interests from CITIC Exploration for A$16,958,000 with the payment comprising:

An amount equal to CITIC Exploration’s share of the exploration expenditure incurred by the consolidated entity on all tenements since 20 October 2004 based on interests held after the acquisition was completed which was paid by the consolidated entity in cash. The amount was set off against CITIC Exploration’s obligation to pay that amount to consolidated entity.
The remainder by the issue of 2,590,392 shares in the Company to CITIC Australia Coal Pty Ltd ABN 94 050 137 972. The price at which the shares were issued was A$6.33889912 which was determined by calculating the arithmetic average of the daily volume weighted average sale price of Macarthur Coal shares sold in the ordinary course of trading on ASX during the five trading days commencing on 11 October 2005.

Acquisition from BBE

The purchase price of A$31,695,000 comprised:

An amount equal to BBE’s share of the exploration expenditure incurred by the consolidated entity on all tenements since 20 October 2004 based on interests held after the acquisition is completed in cash. The amount was set off against BBE’s obligation pay that amount to the consolidated entity.

– II-185 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

33. RELATED PARTIES (continued)

Other key management personnel transactions with the Company or its controlled entities (continued)

Acquisition from BBE (continued)

The remainder by the issue of 4,994,285 shares in the Company to MDA Investments Pty Ltd ACN 096 001 857, a related entity of Ken Talbot, Chief Executive Officer. The price at which the shares were issued was A$6.33889912 which was determined by calculating the arithmetic average of the daily volume weighted average sale price of Macarthur Coal shares sold in the ordinary course of trading on the ASX during the five trading days commencing on 11 October 2005.

Funding of BBE’s Called Sums

The consolidated entity has an agreement with BBE to lend funds to BBE from time to time equal to the amount of any calls under the West/North Burton Joint Venture Agreement. The loans may only be used for paying the relevant calls.

BBE must pay interest on the loan amounts at the rate of the ‘Indicator Lending Rates — Bank variable housing loans interest rate’ last published by the Reserve Bank of Australia before the commencement of each financial year. Interest accrues daily and is capitalised monthly.

BBE’s obligation to lend these funds continues from 15 December 2005 until the earliest of:

(a) the date that BBE no longer has an interest under the West/ North Burton Joint Venture
(b) the date which is three years from 15 December 2005
(c) the date the parties to the West/North Burton Joint Venture decide not to expend further funds on exploration of the relevant tenements
(d) the date of termination of the deed.

BBE must repay all monies plus interest:

(a) on completion of a sale of all or part of BBE’s interest
(b) three years from 15 December 2005
(c) 60 days after the date the parties to the West/North Burton Joint Venture decide to not to expend further funds on exploration of the relevant tenements
(d) two business days after termination of the deed

The consolidated entity may set-off any amount due for repayment against any sale proceeds from the sale of all or part of BBE’s interest.

– II-186 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

33. RELATED PARTIES (continued)

Non-key management personnel disclosures

Identity of related parties

The consolidated entity has a related party relationship with its subsidiaries (see Note 29), joint ventures (see Note 26) and with its key management personnel (refer to disclosures with key management personnel on preceding pages).

Subsidiaries

(a) The Company charges interest at normal commercial rates on loans to its wholly-owned controlled entities. The loans to the wholly-owned controlled entities are unsecured and have no fixed repayment terms. Interest is charged quarterly at 7.620% (2005: 8.405%) per annum on the outstanding balance. Interest totalling A$6,118,000 (2005: A$9,368,000) was charged to the wholly-owned controlled entities during the year.
(b) The Company also charges management fees to its wholly-owned controlled entities based on the total corporate office expenses. Management fees totalling A$3,358,000 (2005: A$1,994,000) were charged to the wholly-owned controlled entities during the year.
(c) A wholly-owned controlled entity, Coppabella Coal Pty Ltd, paid a dividend of A$61,412,000 (2005: A$19,034,000) to the Company.
(d) A wholly-owned controlled entity, Moorvale Interest Pty Ltd, paid a dividend of A$76,000 (2005: A$Nil) to the Company.

The aggregate amounts receivable and payable by the consolidated entity and the Company from non-director related parties are shown in Notes 12 and 18. Included in these amounts is the aggregate tax related receivable from wholly-owned controlled entities under the Tax Consolidation legislation.

Macarthur Coal Management Pty Ltd, a controlled entity, charges management fees to Macarthur Coal (C&M Management) Pty Ltd, an associated entity, pursuant to the Management Fee Deed dated 31 August 1998. The management fee paid is equal to 0.5% of the aggregate FOB revenue paid to the Coppabella and Moorvale Joint Venture participants from the sale in aggregate of the first 2 million tonnes of coal from the Coppabella Mine in each financial year for the life of the Deed.

The Company recharges employee and administration expenses at cost to Macarthur Coal (C&M Management) Pty Ltd, an associated entity, and the Coppabella and Moorvale Joint Venture. The expenses are for administration costs and work performed by Company staff in relation to Coppabella and Moorvale mine activities. Expenses totalling A$3,882,000 (2005: A$2,320,000) were charged to Macarthur Coal (C&M Management) Pty Ltd and Coppabella and Moorvale Joint Venture during the year.

– II-187 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

34. EXPLANATION OF TRANSITION TO AIFRS

As stated in Note 1(a), these are the consolidated entity’s and the Company’s first consolidated financial statements prepared in accordance with AIFRS.

The policies set out in Note 1 have been applied in preparing the financial statements for the year ended 30 June 2006, the comparative information presented in these financial statements for the year ended 30 June 2005 and in the preparation of an opening AIFRS balance sheet at 1 July 2004 (the consolidated entity’s and the Company’s date of transition), except for the adoption of AASB 132 and AASB 139 to the comparative period and opening AIFRS balance sheet.

In preparing its opening AIFRS balance sheet, the consolidated entity and the Company have adjusted amounts reported previously in financial statements prepared in accordance with its old basis of accounting (previous AGAAP). An explanation of how the transition from previous AGAAP to AIFRS has affected the consolidated entity’s and the Company’s financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables.

– II-188 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

34. EXPLANATION OF TRANSITION TO AIFRS (continued)

Reconciliation of equity

Reconciliation of equity
Note Consolidated Assets Current assets Cash and cash equivalents Trade and other receivables (e),(j) Inventories Income tax receivable Other financial assets Other assets (j) Total current assets Non-current assets Trade and other receivables (j) Other financial assets Deferred tax assets (d) Property, plant and equipment (a),(b) Exploration and evaluation assets (c) Other assets (j) Total non-current assets Total assets Liabilities Current liabilities Trade and other payables (e) Interest-bearing loans and borrowings Income tax payable Employee benefits Provisions (b) Other financial liabilities Other liabilities Total current liabilities Non-current liabilities Trade and other payables Interest-bearing loans and borrowings Deferred tax liabilities (d) Employee benefits Provisions (a),(b) Other financial liabilities Other liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital (i) Retained earnings (a)-(d),(f) Total equity		1 July 2004			30 June 2005
	Previous AGAAP A$’000 11,775 29,788 11,312 7,000 33,863 37,028 130,766 2,768 8,906 6,601 186,094 37,126 3,497 244,992 375,758 28,409 14,816 — 65 1,613 9,404 10,452 64,759 10,000 67,370 17,885 48 8,349 18,501 9,395 131,548 196,307 179,451 155,053 24,398 179,451	Effect of transition to AIFRS A$’000 — 494 — — — (494) — — — (6,601) 3,613 (39) — (3,027) (3,027) — — — — (716) — — (716) — — 10,995 — 2,486 — — 13,481 12,765 (15,792) 1,477 (17,269) (15,792)	AIFRS A$’000 11,775 30,282 11,312 7,000 33,863 36,534 130,766 2,768 8,906 — 189,707 37,087 3,497 241,965 372,731 28,409 14,816 — 65 897 9,404 10,452 64,043 10,000 67,370 28,880 48 10,835 18,501 9,395 145,029 209,072 163,659 156,530 7,129 163,659	Previous AGAAP A$’000 18,138 30,744 24,075 — 78,273 48,020 199,250 7,624 2,783 5,565 174,603 40,555 12,722 243,852 443,102 61,346 26,662 16,505 198 1,258 4,807 20,221 130,997 — 9,790 25,011 39 10,691 12,698 4,723 62,952 193,949 249,153 181,086 68,067 249,153	Effect of transition to AIFRS A$’000 — 1,814 — — — (1,814) — 5,392 — (5,565) 3,290 (165) (5,392) (2,440) (2,440) — — — — (44) — — (44) — — 8,645 — 2,024 — — 10,669 10,625 (13,065) 1,477 (14,542) (13,065)	AIFRS A$’000 18,138 32,558 24,075 — 78,273 46,206 199,250 13,016 2,783 — 177,893 40,390 7,330 241,412 440,662 61,346 26,662 16,505 198 1,214 4,807 20,221 130,953 — 9,790 33,656 39 12,715 12,698 4,723 73,621 204,574 236,088 182,563 53,525 236,088

– II-189 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

34. EXPLANATION OF TRANSITION TO AIFRS (continued)

Reconciliation of equity (continued)

	1 July 2004			30 June 2005	30 June 2005
Previous AGAAP A$’000 11,686 8,587 7,000 642 27,915 113,512 57,871 6,601 78 257 178,319 206,234 548 — — 65 613 1,563 29,871 17,885 48 49,367 49,980 156,254 155,053 1,201 156,254	Effect of transition to AIFRS A$’000 — (8,200) — (73) (8,273) — — (5,796) — — (5,796) (14,069) 3,069 — — — 3,069 — — (17,885) — (17,885) (14,816) 747 1,477 (730) 747	AIFRS A$’000 11,686 387 7,000 569 19,642 113,512 57,871 805 78 257 172,523 192,165 3,617 — — 65 3,682 1,563 29,871 — 48 31,482 35,164 157,001 156,530 471 157,001	Previous AGAAP A$’000 17,685 27,827 — 332 45,844 126,754 56,385 5,565 138 — 188,842 234,686 1,176 5,627 16,505 198 23,506 — — 25,011 39 25,050 48,556 186,130 181,086 5,044 186,130	Effect of transition to AIFRS A$’000 — (19,418) — (75) (19,493) — — (4,901) — — (4,901) (24,394) — — — — — — — (25,011) — (25,011) (25,011) 617 1,477 (860) 617	AIFRS A$’000 17,685 8,409 — 257 26,351 126,754 56,385 664 138 — 183,941 210,292 1,176 5,627 16,505 198 23,506 — — — 39 39 23,545 186,747 182,563 4,184 186,747

– II-190 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

34. EXPLANATION OF TRANSITION TO AIFRS (continued)

(a) Dismantling assets and provisions

An obligation exists to dismantle and remove certain items of property, plant and equipment and to restore sites on which they are located. Under previous AGAAP, the cost of dismantling was recognised as an expense when incurred.

In accordance with AIFRS, dismantling costs should be recognised as part of the cost of assets and as a provision at the time of the obligating event.

The effect of accounting for dismantling costs is to:

increase Property, plant and equipment by A$2,760,000 at 1 July 2004 and 30 June 2005;
increase Provisions by A$3,037,000 at 1 July 2004 and A$3,249,000 at 30 June 2005;
increase Accumulated depreciation by A$267,000 at 1 July 2004 and A$539,000 at 30 June 2005;
increase Depreciation charge by A$272,000 for the year ended 30 June 2005; and
increase Interest expense by A$212,000 for the year ended 30 June 2005.

Property, plant and equipment Accumulated depreciation Dismantling provisions Retained earnings — (increase)/decrease	Consolidated 1 July 2004 30 June 2005 A$’000 A$’000 2,760 2,760 (267) (539) (3,037) (3,249) 544 1,028	The Company 1 July 2004 30 June 2005 A$’000 A$’000 — — — — — — — —	The Company 1 July 2004 30 June 2005 A$’000 A$’000 — — — — — — — —
			—

– II-191 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

34. EXPLANATION OF TRANSITION TO AIFRS (continued)

(b) Rehabilitation provisions

Under previous AGAAP, some rehabilitation provisions recognised in relation to infrastructure were expensed. In accordance with AIFRS, the present value of these costs should be recognised as part of the cost of assets. Also under AIFRS, all rehabilitation obligations (both infrastructure and non-infrastructure areas) are recognised at present value. Under previous AGAAP, rehabilitation provisions were recognised at current costs.

The effect is to:

increase Property, plant and equipment by A$1,267,000 at 1 July 2004 and A$1,325,000 at 30 June 2005;
increase Accumulated depreciation by A$147,000 at 1 July 2004 and A$256,000 at 30 June 2005;
decrease Provisions by A$1,267,000 at 1 July 2004 and A$1,269,000 at 30 June 2005;
increase Depreciation charge by A$109,000 for the year ended 30 June 2005;
increase Interest expense by A$618,000 for the year ended 30 June 2005; and
decrease Rehabilitation expense by A$678,000 for the year ended 30 June 2005.

Property, plant and equipment Accumulated depreciation Rehabilitation provisions Retained earnings — (increase)/decrease	Consolidated 1 July 2004 30 June 2005 A$’000 A$’000 1,267 1,325 (147) (256) 1,267 1,269 (2,387) (2,338)	The Company 1 July 2004 30 June 2005 A$’000 A$’000 — — — — — — — —	The Company 1 July 2004 30 June 2005 A$’000 A$’000 — — — — — — — —
			—

– II-192 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

34. EXPLANATION OF TRANSITION TO AIFRS (continued)

(c) Exploration and evaluation assets

Costs incurred before an entity has legal right of access to an exploration area must be expensed. Under previous AGAAP, these exploration costs were capitalised as incurred.

The effect in the consolidated entity is to decrease Exploration and evaluation assets and Retained earnings by A$39,000 at 1 July 2004 and A$165,000 at 30 June 2005.

Exploration and evaluation assets Retained earnings — (increase)/decrease	Consolidated 1 July 2004 30 June 2005 A$’000 A$’000 (39) (165) 39 165	The Company 1 July 2004 30 June 2005 A$’000 A$’000 — — — —	The Company 1 July 2004 30 June 2005 A$’000 A$’000 — — — —
			—

(d) Deferred tax balances

On transition to AIFRS, the balance sheet method of tax effect accounting was adopted, rather than the liability method adopted under previous AGAAP. In addition, in accordance with AIFRS, deferred tax assets and deferred tax liabilities previously disclosed under previous AGAAP have been offset to show a net deferred tax asset/liability.

– II-193 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

34. EXPLANATION OF TRANSITION TO AIFRS (continued)

(d) Deferred tax balances (continued)

The impacts on the net deferred tax asset/liability on transition to AIFRS relating to the items noted are as follows:

Rehabilitation and dismantling provisions Capital raising costs Property, plant and equipment Other Tax funding arrangement Net movement in deferred tax asset/liability Disclosed as follows: Decrease in deferred tax asset Decrease/(increase) in deferred tax liability	Consolidated 1 July 2004 30 June 2005 A$’000 A$’000 531 594 747 457 (18,874) (15,261) — — — — (17,596) (14,210) (6,601) (5,565) (10,995) (8,645)	The Company 1 July 2004 30 June 2005 A$’000 A$’000 — — 747 457 — — — 160 11,342 19,493 12,089 20,110 (5,796) (4,901) 17,885 25,011

The effect on the income statement for the year ended 30 June 2005 was to decrease the previously reported tax charge for the period by A$3,260,000 for the consolidated entity and A$130,000 for the Company.

(e) Tax consolidation

The consolidated entity had applied UIG 52 for tax consolidation purposes under previous AGAAP, resulting in the Company as the head entity of the tax-consolidated group recognising both current and deferred tax in relation to the wholly-owned subsidiaries in the tax consolidated group.

Under AIFRS, the consolidated entity has adopted UIG 1052 which requires the subsidiaries to initially recognise both current and deferred taxes before recognising the head entity’s assumption of the current tax liability (asset) and deferred tax asset from tax losses. Under AIFRS the subsidiaries are now required to recognise deferred tax assets relating to temporary differences, other than for tax losses.

– II-194 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

34. EXPLANATION OF TRANSITION TO AIFRS (continued)

(e) Tax consolidation (continued)

Under previous AGAAP, the tax funding arrangements assets and liabilities were recognised as inter-entity tax-related balances whereas tax funding arrangements expenses and revenues were recognised as a component of income tax expense or revenue.

Upon adoption of UIG 1052 under AIFRS, all tax funding arrangements amounts are recognised as interentity amounts, giving rise to a contribution by or distribution to equity participants to the extent they differ from the amounts assumed by the head entity from subsidiaries. The entities in the Australian taxconsolidated group have revised the tax funding arrangements to address only current tax amounts and deferred tax assets from tax losses so that no contributions or distributions to equity participants are expected to arise in the future.

The effect of the above in the Company at 1 July 2004 is to decrease tax related receivables by A$8,273,000, increase tax related payables by A$3,069,000 and decrease net deferred tax by A$11,342,000. The effect in the Company at 30 June 2005 is to decrease tax related receivables and net deferred tax by A$19,493,000.

For the consolidated entity, the impact of moving from UIG 52 to UIG 1052 is the same as the impact of moving to AASB 112.

There is nil impact on the consolidated entity from the tax funding arrangement changes as upon consolidation the inter-company balances are eliminated.

(f) Equity

The effect of the above adjustments on equity is as follows:

Note Property, plant and equipment (a),(b) Exploration and evaluation assets (c) Rehabilitation provisions (b) Dismantling provisions (a) Trade and other receivables (e) Trade and other payables (e) Deferred tax (d) Total adjustment to equity — increase/(decrease)	Consolidated 1 July 2004 30 June 2005 A$’000 A$’000 3,613 3,290 (39) (165) 1,267 1,269 (3,037) (3,249) — — — — (17,596) (14,210) (15,792) (13,065)	The Company 1 July 2004 30 June 2005 A$’000 A$’000 — — — — — — — — (8,273) (19,493) (3,069) — 12,089 20,110 747 617

– II-195 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

34. EXPLANATION OF TRANSITION TO AIFRS (continued)

(g) Business Combinations

As permitted by the election available under AASB1, the classification and accounting treatment of business combinations that occurred prior to transition date have not been restated in preparing the opening AIFRS balance sheet. The assets and liabilities are therefore subject to the other requirements of AASB 1.

(h) Financial income

In accordance with AIFRS, financial income has been reclassified from other operating income for disclosure purposes.

(i) Capital raising costs

Share capital in the Company has been increased by the amount of the deferred tax asset of A$1,477,000 at 1 July 2004 and 30 June 2005, relating to capital raising costs recognised in share capital.

(j) Prepayments

In accordance with AIFRS, prepayments have been reclassified from other assets to receivables for disclosure purposes.

– II-196 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

34. EXPLANATION OF TRANSITION TO AIFRS (continued)

Reconciliation of profit for 2005

	Consolidated	Consolidated		The Company	The Company
Previous AGAAP A$’000 370,157 (232,806) 137,351 2,546 (29,765) (8,584) (4,787) 96,761 — (6,588) (6,588) 90,173 (28,753) 61,420 A$0.38 A$0.37	Effect of transition to AIFRS A$’000 — 297 297 (2,385) — — — (2,088) 2,385 (830) 1,555 (533) 3,260 2,727 A$0.02 A$0.02	AIFRS A$’000 370,157 (232,509) 137,648 161 (29,765) (8,584) (4,787) 94,673 2,385 (7,418) (5,033) 89,640 (25,493) 64,147 A$0.40 A$0.39	Previous AGAAP A$’000 — — — 31,549 — (6,496) (25) 25,028 — (2,647) (2,647) 22,381 (787) 21,594	Effect of transition to AIFRS A$’000 — — — (10,518) — — — (10,518) 10,518 — 10,518 — (130) (130)	AIFRS A$’000 — — — 21,031 — (6,496) (25) 14,510 10,518 (2,647) 7,871 22,381 (917) 21,464

Explanation of 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.

– II-197 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

35. CHANGE IN ACCOUNTING POLICY

In the current financial year the consolidated entity adopted AASB 132 Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments: Recognition and Measurement . This change in accounting policy has been adopted in accordance with the transition rules contained in AASB 1, which does not require the restatement of comparative information for financial instruments within the scope of AASB 132 and AASB 139.

The adoption of AASB 139 has resulted in the consolidated entity recognising all derivative financial instruments as assets or liabilities at fair value. This change has been accounted for by adjusting the opening balance of the hedging reserve at 1 July 2005.

The impact on the balance sheet in the comparative period is set out below as an adjustment to the opening balance sheet at 1 July 2005. The transitional provisions will not have any effect in future reporting periods.

Reconciliation of opening balances affected by AASB 132 and 139 at 1 July 2005

Note Derivative contracts (a) Deferred gains on foreign currency contracts (a) Deferred gains on United States dollar bank loans (b) Deferred tax liability (c) Hedging reserve (a),(b)	Consolidated Effect of Previous transition AGAAP to AIFRS AIFRS A$’000 A$’000 A$’000 20,520 (4,691) 15,829 (20,520) 20,520 — (4,423) 4,423 — — (4,748) (4,748) — (15,504) (15,504)	The Company
		Effect of Previous transition AGAAP to AIFRS AIFRS A$’000 A$’000 A$’000 — — — — — — — — — — — — — — —

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FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006

35. CHANGE IN ACCOUNTING POLICY (continued)

Notes to the reconciliation of financial instruments as if AASB 139 was applied at 1 July 2005:

(a) Under previous AGAAP, the consolidated entity did not recognise derivatives at fair value on the balance sheet. In accordance with AIFRS derivatives are now recognised at fair value.

The effect in the consolidated entity is to decrease fair value of derivatives and hedging reserve by A$4,691,000, comprising decrease in assets of A$3,464,000 and increase in liabilities of A$1,227,000 at 1 July 2005. In addition, in accordance with AASB 1, gains deferred under previous AGAAP of A$20,520,000 have been transferred to the hedging reserve on 1 July 2005.

(b) Under AIFRS, deferred gains on the United States dollar bank loans continue to be deferred and are included in the measurement of the anticipated transaction, when the transaction has occurred as originally designated. Therefore, the deferred gains under previous AGAAP of A$4,423,000 have been transferred to the hedging reserve on 1 July 2005.
(c) The above adjustments increased deferred tax liability by A$4,748,000 and decreased the hedging reserve on 1 July 2005.

– II-199 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

DIRECTORS’ DECLARATION

In the opinion of the directors of Macarthur Coal Limited (‘the Company’):
(a) the financial statements and notes set out on pages 72 to 129, and the remuneration disclosures that are contained in the Remuneration report in the Directors’ report set out on pages 49 to 54, are in accordance with the Corporations Act 2001 , including:
- (i) giving a true and fair view of the financial position of the Company and the consolidated entity as at 30 June 2006 and of their performance, as represented by the results of their operations and their cash flows, for the year ended on that date; and
- (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001;
(b) the remuneration disclosures that are contained in the Remuneration report in the Directors’ report comply with Australian Accounting Standard AASB 124 Related Party Disclosures ; and
(c) 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 from the Chief Executive Officer and Chief Financial Officer for the financial year ended 30 June 2006.

Dated at Brisbane this 12th day of September 2006.

Signed in accordance with a resolution of the directors:

Keith De Lacy Chairman

– II-200 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

INDEPENDENT AUDIT REPORT TO THE MEMBERS OF MACARTHUR COAL LIMITED

SCOPE

The financial report , remuneration disclosures and directors’ responsibility

The financial report comprises the income statements, statements of recognised income and expense, balance sheets, statements of cash flows, accompanying notes to the financial statements Notes 1 to 35, and the directors’ declaration set out on pages 72 to 130 for both Macarthur Coal Limited (the ‘Company’) and Macarthur Coal Limited and its controlled entities (the ‘consolidated entity’), for the year ended 30 June 2006. The consolidated entity comprises both the Company and the entities it controlled during that financial year.

As permitted by the Corporations Regulations 2001, the Company has disclosed information about the remuneration of directors and executives (‘remuneration disclosures’), required by Australian Accounting Standard AASB 124 Related Party Disclosures , under the heading ‘Remuneration report’ in the Directors’ report, set out on pages 55 to 62, and not in the financial report.

The Remuneration report also contains information in sections marked as ‘unaudited’ not required by Australian Accounting Standard AASB 124 which is not subject to our audit.

The directors of the Company are responsible for the preparation and true and fair presentation of the financial report in accordance with the Corporations Act 2001 . This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report. The directors are responsible for preparing the relevant reconciling information regarding the adjustments required under the Australian Accounting Standard AASB 1 First-Time Adoption of Australian Equivalents to International Financial Reporting Standards . The directors are also responsible for the remuneration disclosures contained in the Directors’ report.

KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.

– II-201 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

INDEPENDENT AUDIT REPORT TO THE MEMBERS OF MACARTHUR COAL LIMITED (continued)

SCOPE (continued)

Audit approach

We conducted an independent audit in order to express an opinion to the members of the Company. Our audit was conducted in accordance with Australian Auditing Standards in order to provide reasonable assurance as to whether the financial report is free of material misstatement and that the remuneration disclosures comply with AASB 124. The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected.

We performed procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 , Australian Accounting 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, of their performance as represented by the results of their operations and cash flows and whether the remuneration disclosures comply with Australian Accounting Standard AASB 124.

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

examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report, and
assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors.

KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.

– II-202 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

AUDIT OPINION

In our opinion, the financial report of Macarthur Coal Limited is in accordance with:
(a) the Corporations Act 2001 , including:
- (i) giving a true and fair view of the Company’s and consolidated entity’s financial position as at 30 June 2006 and of their performance for the year ended on that date; and
- (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and
(b) other mandatory financial reporting requirements in Australia.
The remuneration disclosures that are contained in the Remuneration report in the Directors’ report comply with Australian Accounting Standard AASB 124 Related Party Disclosures .

KPMG

Robert S Jones

Partner

Brisbane

12 September 2006

KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.

– II-203 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

INCOME STATEMENTS

For the year ended 30 June 2007

Note Revenue from coal sales Cost of coal sold Gross profit Other income 6 Distribution expenses Administration expenses Other expenses 7 Results from operating activities Financial income 10 Financial expenses 10 Net financing income Profit before tax Income tax (expense)/benefit 11 (a) Profit for the year attributable to equity holders of the Company Earnings per share for profit attributable to the ordinary equity holders of the Company: Basic earnings per share from continuing operations 13 Diluted earnings per share from continuing operations 13 Dividends per share — ordinary shares 27	Consolidated 2007 2006 A$’000 A$’000 362,796 534,755 (254,808) (287,574) 107,988 247,181 14,752 2,463 (22,315) (22,836) (13,955) (14,325) (4,498) (893) 81,972 211,590 17,028 7,644 (4,295) (5,189) 12,733 2,455 94,705 214,045 (28,161) (64,456) 66,544 149,589 $0.36 $0.83 $0.36 $0.83 $0.18 $0.41	Company 2007 2006 A$’000 A$’000 — — — — — — 58,454 64,944 — — (8,795) (10,680) (139) (84) 49,520 54,180 22,803 8,694 (4,491) (1,704) 18,312 6,990 67,832 61,170 (4,148) 55 63,684 61,225

The income statements are to be read in conjunction with the notes of the financial statements set out on pages 43 to 100.

– II-204 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

STATEMENTS OF RECOGNISED INCOME AND EXPENSE

For the year ended 30 June 2007

Note Recognised directly in equity Cash flow hedges: Fair value gains/(losses) taken to equity Fair value (gains)/losses transferred to income statement Net change in fair value of available-for-sale financial assets Net change in fair value of available-for-sale financial assets transferred to income statement Income and expense recognised directly in equity 27 Profit for the year Total recognised income and expense for the period attributable to equity holders of the Company 27 Effect of change in accounting policy Effect of adoption of AASB 132 and AASB 139 on 1 July 2005: Net increase in Cash Flow Hedging Reserve: Cumulative changes in fair value of effective cash flow hedges Related deferred income tax 27	Consolidated 2007 2006 A$’000 A$’000 17,448 (4,089) (7,018) (8,595) 6,584 — (5,581) — 11,433 (12,684) 66,544 149,589 77,977 136,905 — 20,252 — (4,748) — 15,504	Company 2007 2006 A$’000 A$’000 — — — — 6,584 — (5,581) — 1,003 — 63,684 61,225 64,687 61,225 — — — — — —	Company 2007 2006 A$’000 A$’000 — — — — 6,584 — (5,581) — 1,003 — 63,684 61,225 64,687 61,225 — — — — — —
			— 61,225
			61,225

			— —
			—

Other movements in equity arising from transactions with owners as owners are set out in Note 27.

The amounts recognised directly in equity are disclosed net of tax — see Notes 11 and 12 for tax effect.

The statements of recognised income and expense are to be read in conjunction with the notes to the financial statements set out on pages 43 to 100.

– II-205 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

BALANCE SHEETS

As at 30 June 2007

Note Current assets Cash and cash equivalents 14 Trade and other receivables 15 Inventories 16 Other financial assets 17 Overburden in advance 18 Assets classified as held for sale 19 Total current assets Non-current assets Trade and other receivables 15 Other financial assets 17 Deferred tax assets 12 Property, plant and equipment 20 Exploration and evaluation assets 21 Overburden in advance 18 Total non-current assets Total assets Current liabilities Trade and other payables 22 Loans and borrowings 23 Income tax payable 12 Employee benefits 24 Provisions 25 Other financial liabilities 26 Total current liabilities Non-current liabilities Trade and other payables 22 Loans and borrowings 23 Deferred tax liabilities 12 Employee benefits 24 Provisions 25 Other financial liabilities 26 Total non-current liabilities Total liabilities Net assets Equity Share capital 27 Reserves 27 Retained earnings 27 Total equity 27	Consolidated 2007 2006 A$’000 A$’000 96,565 168,603 35,690 52,662 28,627 15,412 57,695 8,810 105,552 74,206 33,779 — 357,908 319,693 3,523 4,603 — — — — 182,149 170,107 66,303 94,809 2,765 2,904 254,740 272,423 612,648 592,116 81,416 68,538 3,376 1,931 6,770 44,395 1,703 506 1,030 3,344 3,795 3,272 98,090 121,986 — — 13,953 8,785 56,941 42,335 117 156 19,829 16,600 8,908 11,081 99,748 78,957 197,838 200,943 414,810 391,173 246,343 246,343 14,253 2,820 154,214 142,010 414,810 391,173	Company 2007 2006 A$’000 A$’000 21,964 18,038 88,786 71,346 — — 33,115 — — — — — 143,865 89,384 158,551 185,299 73,343 73,343 748 547 866 798 — — — — 233,508 259,987 377,373 349,371 2,055 1,137 — — 6,770 44,395 439 438 — — 2,000 — 11,264 45,970 104,907 52,499 — — — — 117 156 90 98 — — 105,114 52,753 116,378 98,723 260,995 250,648 246,343 246,343 1,003 — 13,649 4,305 260,995 250,648	Company 2007 2006 A$’000 A$’000 21,964 18,038 88,786 71,346 — — 33,115 — — — — — 143,865 89,384 158,551 185,299 73,343 73,343 748 547 866 798 — — — — 233,508 259,987 377,373 349,371 2,055 1,137 — — 6,770 44,395 439 438 — — 2,000 — 11,264 45,970 104,907 52,499 — — — — 117 156 90 98 — — 105,114 52,753 116,378 98,723 260,995 250,648 246,343 246,343 1,003 — 13,649 4,305 260,995 250,648
			89,384
			185,299 73,343 547 798 — —
			259,987
			349,371
			1,137 — 44,395 438 — —
			45,970
			52,499 — — 156 98 —
			52,753
			98,723
			250,648

			246,343 — 4,305
			250,648

The balance sheets are to be read in conjunction with the notes to the financial statements set out on pages 43 to 100.

– II-206 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

STATEMENTS OF CASH FLOWS

For the year ended 30 June 2007

Note Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Dividends received Interest received Interest paid Income taxes paid Net cash from operating activities 36 Cash flows from investing activities Proceeds from sale of property, plant and equipment Acquisition of property, plant and equipment Acquisition of equity securities Proceeds from sale of equity securities Proceeds from exploration and evaluation assets Exploration and evaluation expenditure Proceeds from sale of assets held for sale Payments for other acquisitions Payments for assets held for sale Contributions from joint ventures Contributions to joint ventures Advances from controlled entities Advances to controlled entities Advances from related parties Advances to related partieS Net cash from investing activities	Consolidated 2007 2006 A$’000 A$’000 382,767 525,529 (304,456) (303,899) 78,311 221,630 — — 9,055 7,644 — — (57,236) (27,783) 30,130 201,491 170 380 (19,829) (7,301) (51,974) — 28,264 — 16,870 — (8,421) (6,729) 49,497 — (34,254) — (20,689) — 322,408 367,042 (322,164) (314,433) — — — — 3,068 — (3,766) (1,868) (40,820) 37,091	Company 2007 2006 A$’000 A$’000 3,634 2,774 (7,866) (16,839) (4,232) (14,065) 54,340 61,488 14,830 8,694 (4,491) (1,122) (57,236) (27,783) 3,211 27,212 — — (209) (744) (51,974) — 28,264 — — — — — — — — — — — — — — — 226,902 93,798 (147,928) (58,403) — — — — 55,055 34,651

– II-207 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

STATEMENTS OF CASH FLOWS

For the year ended 30 June 2007

Note Cash flows from financing activities Proceeds from the issue of share capital Repayment of loans and borrowings Payment of financial expenses: Convertible notes Other Repayment of other financial liabilities Payments for lease liabilities Dividends paid 27 Net cash from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 July Cash and cash equivalents at 30 June 14	Consolidated 2007 2006 A$’000 A$’000 — 152 (1,139) (20,434) — (250) (1,621) (3,103) (1,926) (3,070) (2,322) — (54,340) (61,412) (61,348) (88,117) (72,038) 150,465 168,603 18,138 96,565 168,603	Company 2007 2006 A$’000 A$’000 — 152 — — — (250) — — — — — — (54,340) (61,412) (54,340) (61,510) 3,926 353 18,038 17,685 21,964 18,038

The statements of cash flows are to be read in conjunction with the notes to the financial statements set out on pages 43 to 100.

– II-208 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

1. REPORTING ENTITY

Macarthur Coal Limited (the ‘Company’) is a company domiciled in Australia. The consolidated financial statements of the Company as at and for the year ended 30 June 2007 comprise the Company and its subsidiaries (together referred to as the ‘Group’) and the Group’s interest in associates and jointly controlled entities. The principal activities of the Group are exploration, project evaluation and coal mining activities in Queensland’s Bowen Basin.

2. BASIS OF PREPARATION

(a) Statement of compliance

The financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards (AASBs) (including Australian Accounting Interpretations) adopted by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001 . The consolidated financial report of the Group also complies with the IFRSs and interpretations adopted by the International Accounting Standards Board. The Company’s financial report does not comply with IFRSs as the Company has elected to apply the relief provided to parent entities by AASB 132: Financial Instruments: Presentation and Disclosure in respect of certain disclosure requirements.

The financial statements were approved by the Board of Directors on 28 August 2007.

(b) Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except that derivative financial instruments and available-for-sale financial assets are measured at their fair value.

The methods used to measure fair values are discussed further in Note 4.

(c) Functional and presentation currency

These consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency and the functional currency of the majority of the Group.

The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, all financial information presented in Australian dollars has been rounded to the nearest thousand dollars, unless otherwise stated.

(d) Use of estimates and judgements

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses.

– II-209 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

2. BASIS OF PREPARATION (continued)

(d) Use of estimates and judgements (continued)

These estimates and associated assumptions are based on historic experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. These accounting policies have been consistently applied by each entity in the Group. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

Management discussed with the Audit and Risk Management Committee the development, selection and disclosure of the Group’s critical accounting policies and estimates and the application of these policies and estimates. The significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are discussed below.

Key sources of estimation uncertainty and judgements

Financial Instruments

Note 28 contains analysis of the foreign exchange exposure of the Group and risks in relation to foreign exchange movements.

Rehabilitation and dismantling provisions

As set out in Note 3(m) and Note 25, certain assumptions are required to be made in determining the amount the Group is expected to incur to settle its obligations in relation to rehabilitation of the mine sites and dismantling of infrastructure. The discounted value reflects a combination of management’s assessment of the cost of performing the work required, future changes in prices affecting rehabilitation and dismantling costs, the timing of future cash flow estimates, the life of the mines based on economically recoverable reserves, being 58,053,600 (2006: 61,327,267) tonnes for the Coppabella Mine and 16,529,033 (2006: 20,458,515) tonnes for the Moorvale Mine at the beginning of the financial year and the discount rate of 7.34% (2006: 6.88%).

– II-210 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007

2. BASIS OF PREPARATION (continued)

(d) Use of estimates and judgements (continued)

Key sources of estimation uncertainty and judgements (continued)

Recoverability of non-current assets

As set out in Note 3(j), certain assumptions are required to be made in order to assess the recoverability of non-current assets where there is an impairment indicator. Key assumptions include the future coal price, future cash flows, an estimated discount rate and estimates of coal reserves. Estimates of coal reserves in themselves are dependant on various assumptions, in addition to those described above, including operating cost assumptions. Changes in these estimates could materially impact on coal reserves, and could therefore affect estimates of future cash flows used in the assessment of recoverable amount, estimates of the life of mine and depreciation.

Contingent liabilities — litigation

Certain claims have been made on the Group by a mining contractor. Judgements about the validity of the claim have been made by the directors. Further details are included in Note 31.

Lease classification

As set out in Note 3(h), leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Other leases are classified as operating leases. UIG 4: Determining whether an Arrangement contains a Lease was applied when evaluating whether an arrangements between the Group and an associated entity contained leases of equipment.

Hedge accounting

As set out in Note 3(c) and Note 28, management’s judgment is necessary when determining whether a derivative financial instrument qualifies for hedge accounting. Factors such as forecast demand, production and port allocation are considered when assessing whether forecast transactions are highly probable as required under AASB 139: Financial Instruments: Recognition and Measurement .

– II-211 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities.

In the prior financial year the Group adopted AASB 132: Financial Instruments: Disclosure and Presentation and AASB 139: Financial Instruments: Recognition and Measurement in accordance with the transitional rules of AASB 1: First-time Adoption of Australian Equivalents to International Financial Reporting Standards . This change has been accounted for by adjusting the opening balance of retained earnings and reserves at 1 July 2005, as disclosed in the reconciliation of movements in Note 27.

(a) Basis of consolidation

Subsidiaries

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

In the Company’s financial statements, investments in subsidiaries are carried at cost.

Associates (equity accounted investees)

Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Associates are accounted for using the equity method (equity accounted investees). The consolidated financial statements include the Group’s share of the income and expenses of equity accounted investees, after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee.

Jointly controlled operations and assets

The interest of the Group in jointly controlled operations (including unincorporated joint ventures) and jointly controlled assets are brought to account by recognising in its financial statements the assets it controls, the liabilities that it incurs, the expenses it incurs and its share of income that it earns from the sale of goods or services by the joint venture.

– II-212 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(a) Basis of consolidation (continued)

Transactions eliminated on consolidation

Intra-group balances, and any unrealised income and expenses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements.

Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee, with adjustments made to the ‘Investment in associates’ and ‘Share of associate’s net profit’ accounts.

Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

Gains and losses are recognised when the contributed assets are consumed or sold by the equity accounted investees or, if not consumed or sold by the equity accounted investee, when the Group’s interest in such entities is disposed of.

(b) Foreign currency

Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to Australian dollars at the foreign exchange rate ruling at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Nonmonetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate ruling at the dates that fair value was determined. Foreign currency differences arising on retranslation are recognised in the income statement.

(c) Financial instruments

Non-derivative financial instruments

Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables.

Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through the income statement, any directly attributable transaction costs, except as described below. Subsequent to initial recognition non-derivative financial instruments are measured as described below.

– II-213 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(c) Financial instruments (continued)

Non-derivative financial instruments (continued)

A financial instrument is recognised if the Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised if the Group’s contractual rights to the cash flows from the financial assets expire or if the Group transfers the financial asset to another party without retaining control or substantially all risks and rewards of the asset. Regular way purchases and sales of financial assets are accounted for at trade date, i.e., the date that the Group commits itself to purchase or sell the asset. Financial liabilities are derecognised if the Group’s obligations specified in the contract expire or are discharged or cancelled.

Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less.

Accounting for financial income and expenses is discussed in Note 3(p).

Available-for-sale financial assets

The Group’s investments in equity securities are classified as available-for-sale assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses (see Note 3(j)), are recognised as a separate component of equity. When an investment is derecognised, the cumulative gain or loss in equity is transferred to the income statement.

Other

Other non-derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment losses.

Derivative financial instruments

The Group holds derivative financial instruments to hedge its foreign currency exposures. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes.

Derivative financial instruments are recognised initially at fair value; attributable transaction costs are recognised in the income statement when incurred. Subsequent to initial recognition, derivative financial instruments are measured at fair value, and changes therein are accounted for as described below.

However, where derivative financial instruments qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged (refer below).

– II-214 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(c) Financial instruments (continued)

Derivative financial instruments (continued)

Cash flow hedges

Changes in fair value of the derivative hedging instrument designated as a cash flow hedge are recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in the income statement.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until the forecast transaction occurs. When the hedged item is a nonfinancial asset, the amount recognised in equity is transferred to the carrying amount of the asset when it is recognised. In other cases the amount recognised in equity is transferred to the income statement in the same period that the hedged item affects the income statement.

Derecognition of financial assets and liabilities

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when:

(i) the rights to receive cash flows from the asset have expired;
(ii) the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party; or
(iii) the Group has transferred its rights to receive cash flows from the asset and either:
(a) has transferred substantially all the risks and rewards of the asset, or
(b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

– II-215 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(d) Share capital

Ordinary shares

Incremental costs directly attributable to issue of ordinary shares and share options are recognised as a deduction from equity, net of any related income tax benefit.

Dividends

Dividends are recognised as a liability in the period in which they are declared.

(e) Property, plant and equipment

Recognition and measurement

Items of property, plant and equipment are measured at cost less accumulated depreciation (see below) and impairment losses (see Note 3(j)).

Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials, direct labour, any other cost directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. The cost of self-constructed assets and acquired assets includes:

(i) the initial estimate at the time of installation and during the period of use, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located; and
(ii) changes in the measurement of existing liabilities recognised for these costs resulting from changes in the timing or outflow of resources required to settle the obligation or from changes in the discount rate.

When significant parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.

– II-216 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(e) Property, plant and equipment (continued)

Subsequent costs

The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The costs of the day-to-day servicing of property, plant and equipment are recognised in the income statement as incurred.

Depreciation

Freehold land is not depreciated. Assets that have limited useful lives are depreciated using the straight line method over their estimated useful lives, taking into account estimated residual values, with the exception of mining property and development assets. Mining property and development assets are depreciated on a units of production basis over the life of the economically recoverable reserves, being 58,053,600 (2006: 61,327,267) tonnes for the Coppabella Mine and 16,529,033 (2006: 20,458,515) tonnes for the Moorvale Mine at the beginning of the financial year, or over the estimated useful life of the asset.

Leased assets are depreciated over the shorter of the lease term and their useful lives.

Assets are depreciated from the date they are available for use.

Depreciation rates and methods are reviewed annually for appropriateness. When changes are made, adjustments are reflected prospectively in current and future periods only. Depreciation is expensed, except to the extent that it is included in the carrying amount of another asset (e.g. inventory stocks) as an allocation of production overheads.

The depreciation rates or useful lives used for each class of asset are as follows:

	2007	2006
Property, plant and equipment
Mining property and development	5 — 13 years	6 — 14 years
Buildings and infrastructure	6.5% — 40%	6.5% — 40%
Plant and equipment	13% — 40%	13% — 40%
Leased assets	20%	—

Useful lives and residual values are re-assessed at the reporting date.

– II-217 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(e) Property, plant and equipment (continued)

Development costs

Development costs related to an area of interest are capitalised if the expenditures are expected to be recouped through sale or successful exploitation of the area of interest. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses (see Note 3(j)), and is included in Property, plant and equipment — Mining property and development (see above).

(f) Exploration and evaluation expenditure

Exploration and evaluation costs, including the costs of acquiring licences, are capitalised as exploration and evaluation assets separately for each area of interest. Costs incurred before the Group has obtained the legal rights to explore an area are recognised in the income statement.

Exploration and evaluation assets are only recognised if the rights of the area of interest are current and either:

(i) the expenditures are expected to be recouped through successful development and exploitation of the area of interest; or
(ii) activities in the area of interest have not at the reporting date, reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves and active and significant operations in, or in relation to, the area of interest are continuing.

Exploration and evaluation assets are assessed for impairment if (i) sufficient data exists to determine technical feasibility and commercial viability, and (ii) facts and circumstances suggest that the carrying amount exceeds the recoverable amount (see Note 3(j)). For the purposes of impairment testing, exploration and evaluation assets are allocated to cash-generating units to which the exploration activity relates. The cash generating unit shall not be larger than the area of interest.

– II-218 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(g) Overburden in advance

Expenditure incurred in the removal of overburden from coal deposits is deferred and expensed in operating expenditure as the coal is extracted. Overburden in advance is measured at the lower of cost and net realisable value. The balance of the amount deferred is reviewed at each reporting date to determine the amount (if any) which is no longer recoverable out of future revenue. Any amounts so determined are impaired (see Note 3(j)).

(h) Leased assets

Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

Other leases are classified as operating leases and the leased assets are not recognised on the Group’s balance sheet.

The Group adopted Interpretation 4 Determining whether an Arrangement Contains a Lease , which is mandatory for annual periods beginning on or after 1 January 2006, in its 2006 consolidated financial statements.

(i) Inventories

Inventories are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of inventories is allocated on a monthly first-in first-out basis and includes direct material, consumption of overburden in advance, coal mining, coal processing, labour, related transportation costs to the point of sale and other fixed and variable overhead costs directly related to mining activities. The site overheads and rehabilitation cost component of inventory is allocated using normal operating capacity. Depreciation is allocated to inventories on a units-of-production basis.

– II-219 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(j) Impairment

Financial assets

A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its current fair value.

Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.

All impairment losses are recognised in the income statement. Any cumulative loss in respect of an availableforsale financial asset recognised previously in equity is transferred to the income statement.

An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost and available-for-sale financial assets that are debt securities, the reversal is recognised in the income statement. For availablefor-sale financial assets that are equity securities, the reversal is recognised directly in equity.

Non-financial assets

The carrying amounts of the Group’s non-financial assets, other than inventories (see Note 3(i)), overburden in advance (see Note 3(g)) and deferred tax assets (see Note 3(q)), are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated.

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

– II-220 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(j) Impairment (continued)

Non-financial assets (continued)

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

(k) Non-current assets held for sale

Non-current assets that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale. Immediately before classification as held for sale, the assets are remeasured in accordance with the Group’s accounting policies. Thereafter generally the assets are measured at the lower of their carrying amount and fair value less cost to sell. Any impairment loss on a disposal group first is allocated to goodwill, and then to remaining assets and liabilities on a pro-rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets and employee benefit assets, which continue to be measured in accordance with the Group’s accounting policies. Impairment losses on initial classification as held for sale and subsequent gains or losses on re-measurement are recognised in the income statement. Gains are not recognised in excess of any cumulative impairment loss.

(l) Employee benefits

Defined contribution superannuation plans

Obligations for contributions to defined contribution superannuation funds are recognised as an expense in the income statement when they are due.

Other long-term service benefits

The Group’s net obligation in respect of long-term service benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods plus related on-costs; that benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The obligation is calculated using expected future increases in wage and salary rates including related on-costs and expected settlement dates, and is discounted using the rates attached to the Commonwealth Government bonds at the balance sheet date which have maturity dates approximating the terms of the Group’s obligations.

– II-221 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(l) Employee benefits (continued)

Termination benefits

Termination benefits are recognised as an expense when the Group is demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan to terminate the employment before the normal retirement date.

Short-term benefits

Liabilities for employee benefits for wages, salaries, annual leave and sick leave represent present obligations resulting from employees’ services provided to reporting date and are calculated at undiscounted amounts based on remuneration wage and salary rates that the Group expects to pay as at reporting date including related on-costs, such as workers compensation insurance and payroll tax. Non-accumulating non-monetary benefits, such as medical care, cars and free or subsidised goods and services, are expensed based on the net marginal cost to the Group as the benefits are taken by the employees.

A provision is recognised for the amount expected to be paid under short-term cash bonus plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

Share based payment transactions

The fair value of shares granted under the employee share loan plan is recognised as an employee expense with a corresponding increase in equity over the period that the employees become unconditionally entitled to the shares. The fair value is measured at grant date and is measured using a binomial option-pricing model, taking into account the terms and conditions upon which the shares were granted.

Non-executive directors are entitled to 10,000 Company securities each year as part of their director’s fees. The shares are purchased on the Australian Stock Exchange at the market value prevailing on the date of purchase. The provision of shares is not subject to performance conditions.

In the comparative period, non-executive directors were required to apply A$10,000 of their director’s fees each year to purchase Company securities. The shares were purchased on the Australian Stock Exchange at the market value prevailing on the date of purchase. The provision of shares was not subject to performance conditions.

The fair value of shares granted to non-executive directors is recognised as an expense.

– II-222 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(l) Employee benefits (continued)

Share based payment transactions (continued)

Employee loans

The employee share loan plan allows eligible persons of the Group and approved contractors to acquire shares of the Company. Eligible persons include permanent full-time or part-time employees, eligible contractors, or an agent of the Company or a related body corporate. No up-front payment is required for the shares as the Company offers all eligible persons an interest-free, limited-recourse loan. Any dividends received on the allocated shares are applied to repay the loan balance.

Fixed regular loan repayments are also made to repay the loan balance. The shares are purchased on the Australian Stock Exchange at the market value prevailing on the date of purchase. The outstanding loan balance is recognised as a receivable at amortised cost less impairment losses (see Note 3(j)).

Director and Executive Option Plan

There were no voting rights attached to unissued ordinary shares. Voting rights were attached to unissued ordinary shares when the options were exercised.

(m) Provisions

A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

Rehabilitation and dismantling

Provisions are made, when the areas are disturbed, for the estimated cost of rehabilitation relating to areas disturbed during the mine’s operation up to reporting date but not yet rehabilitated. Provision has been made in full for all disturbed areas at the reporting date based on current estimates of costs per hectare to rehabilitate such areas, discounted to their present value based on expected future cashflows. The estimated cost of rehabilitation includes the current cost of re-contouring, topsoiling and revegetation employing legislative requirements. Changes in estimates are dealt with on a prospective basis as they arise.

– II-223 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(m) Provisions (continued)

Rehabilitation and dismantling (continued)

Significant uncertainty exists as to the amount of rehabilitation obligations which will be incurred due to the impact of changes in environmental legislation.

Assumptions have been made as to the remaining life of existing sites based on studies conducted by independent technical advisors and on the basis of current environmental legislation.

Infrastructure assets and dismantling

The present value of rehabilitation and dismantling obligations is recognised on construction of the assets where a legal or constructive obligation exists at that time. The provision is recognised as a non-current liability with a corresponding asset. At each reporting date the rehabilitation liability is re-measured in line with changes in discount rates, and timing or amount of the costs to be incurred. Any changes in the liability are added or deducted from the related asset, other than the unwinding of the discount which is recognised as a finance cost in the income statement as it occurs.

If the change in the liability results in a decrease in the liability that exceeds the carrying amount of the asset, the asset is written-down to nil and the excess is recognised immediately in the income statement. If the change in the liability results in an addition to the cost of the asset, the recoverability of the new carrying amount is considered. Where there is an indication that the new carrying amount is not fully recoverable, an impairment test is performed with the write-down recognised in the income statement in the period in which it occurs.

Non-infrastructure areas

Rehabilitation obligations relating to non-infrastructure areas are discounted to their present value based on expected future cashflows. At each reporting date the rehabilitation liability is re-measured in line with changes in discount rates, timing or amount of the costs to be incurred and areas to be rehabilitated. Any changes in the liability are recognised in the income statement as rehabilitation expense, other than the unwinding of the discount which is recognised as a finance cost.

– II-224 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(m) Provisions (continued)

Onerous contracts

A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract.

(n) Revenue

Goods sold

Revenue from the sale of coal is measured at the fair value of the consideration received or receivable, net of penalties, returns, discounts, allowances and hedging gains/losses. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably and there is no continuing management involvement with the goods.

(o) Expenses

Lease payments

Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the lease adjustment is confirmed.

(p) Financial income and expenses

Financial income and expenses comprise interest payable on borrowings using the effective interest rate method, interest receivable on funds invested, amortisation of ancillary costs incurred in connection with arrangement of borrowings, unwinding of the discount on provisions, and gains and losses on hedging instruments that are recognised in the income statement (see Note 3(c)).

– II-225 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(p) Financial income and expenses (continued)

Borrowing costs are expensed as incurred, unless costs relate to a qualifying asset, and included in financial expenses using the effective interest method. Borrowing costs relating to a qualifying asset, being an asset that necessarily takes a substantial period to prepare for its intended use, are capitalised as part of the cost of the asset.

Interest income is recognised in the income statement as it accrues, using the effective interest method. Dividend income is recognised on the date that the Group’s right to receive payment is established, which in the case of quoted securities is the ex-dividend date.

(q) Income tax

Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that they probably will not reverse in the foreseeable future. The amount of deferred tax recognised is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised.

– II-226 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(q) Income tax (continued)

Tax consolidation

Current tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate financial statements of the members of the tax-consolidated group by reference to the carrying amounts of assets and liabilities in the separate financial statements of each entity and the tax values applying under tax consolidation.

Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries is assumed by the head entity in the tax-consolidated group and are recognised as amounts payable (receivable) to/(from) other entities in the tax-consolidated group in conjunction with any tax funding arrangement amounts (refer below). Any difference between these amounts is recognised by the Company as an equity contribution or distribution.

Any subsequent period adjustments to deferred tax assets arising from unused tax losses, as a result of revised assessments of the probability of recovery are recognised by the head entity only.

Nature of tax funding arrangements and tax sharing agreements

– II-227 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(q) Income tax (continued)

Nature of tax funding arrangements and tax sharing agreements (continued)

(r) Segment reporting

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

(s) Goods and services tax

(t) Earnings per share

The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees.

– II-228 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(u) New standards and interpretations not yet adopted

The following standards, amendments to standards and interpretations have been identified as those which may impact the entity in the period of initial application. They are available for early adoption at 30 June 2007, but have not been applied in preparing this financial report.

AASB 7 Financial Instruments: Disclosures (August 2005) replaces the presentation requirements of financial instruments in AASB 132. AASB 7 is applicable for annual reporting periods beginning on or after 1 January 2007, and will require extensive additional disclosures with respect to the Group’s financial instruments and share capital.
AASB 2005-10 Amendments to Australian Accounting Standards (September 2005) makes consequential amendments to AASB 132 Financial Statements: Disclosure and Presentation , AASB 101 Presentation of Financial Statements , AASB 114 Segment Reporting , AASB 117 Leases , AASB 133 Earnings Per Share , AASB 139 Financial Instruments: Recognition and Measurement , AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards , AASB 4 Insurance Contracts , AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts arising from the release of AASB 7. AASB 2005-10 is applicable for annual reporting periods beginning on or after 1 January 2007 and is expected to only impact disclosures contained within the consolidated financial report.
AASB 8 Operating Segments replaces the presentation requirements of segment reporting in AASB 114 Segment Reporting . AASB 8 is applicable for annual reporting period beginning on or after 1 January 2009 and is not expected to have an impact on the financial results of the Company and the Group as the standard is only concerned with disclosures.
AASB 2007-3 Amendments to Australian Accounting Standards arising from AASB 8 makes amendments to AASB 5 Non-current Assets Held for Sale and Discontinued Operations , AASB 6 Exploration for and Evaluation of Mineral Resources , AASB 102 Inventories , AASB 107 Cash Flow Statements , AASB 119 Employee Benefits , AASB 127 Consolidated and Separate Financial Statements , AASB 134 Interim Financial Reporting , AASB 136 Impairment Assets , AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts . AASB 2007-3 is applicable for annual reporting periods beginning on or after 1 January 2009 and must be adopted in conjunction with AASB 8 Operating Segments . This standard is only expected to impact disclosures contained within the financial report.
AASB 2007-4 Amendments to Australian Accounting Standards arising from ED 151 and Other Amendments . AASB 2207-4 is applicable for annual reporting periods beginning on or after 1 July 2007. The potential effect on the Group has not yet been determined.

– II-229 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(u) New standards and interpretations not yet adopted (continued)
Interpretation 10 Interim Financial Reporting and Impairment prohibits the reversal of an impairment loss recognised in a previous interim period in respect of goodwill, an investment in an equity instrument or a financial asset carried at cost. Interpretation 10 will become mandatory for the Group’s 2008 financial statements, and will apply to goodwill, investments in equity instruments and financial assets carried at cost prospectively from the date that the Group first applied the measurement criteria of AASB 136 and AASB 139 respectively (i.e., 1 July 2004 and 1 July 2005, respectively). The adoption of Interpretation 10 is not expected to have an impact on the financial results of the Company and the Group.
Interpretation 11 AASB 2 Share-based Payment — Group and Treasury Share Transactions addresses the classifications of a share-based payment transaction (as equity or cash settled), in which equity instruments of the parent or another group entity are transferred, in the financial statements of the entity receiving the services. Interpretation 11 is not expected to have any impact on the financial report. The potential effect of the Interpretation on the Company’s financial report has not yet been determined.
AASB 2007-1 Amendments to Australian Accounting Standards arising from AASB Interpretation 11 amends AASB 2 Share-based Payments to insert the transitional provisions of IFRS 2, previously contained in AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards . AASB 2007-1 is applicable for annual reporting periods beginning on or after 1 March 2007 and is not expected to have any impact on the consolidated financial report. The potential impact on the Company has not yet been determined.
AASB 2007-2 Amendments to Australian Accounting Standards also amends references to “UIG Interpretation” to interpretations. This amending standard is applicable to annual reporting periods ending on or after 28 February 2007.

– II-230 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

4. DETERMINATION OF FAIR VALUES

A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

Property, plant and equipment

The fair value of property, plant and equipment recognised as a result of a business combination is based on market values. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The market value of items of plant and equipment is based on the quoted market prices for similar items.

Investments in equity securities

The fair value of available-for-sale financial assets is determined by reference to their quoted bid price at the reporting date.

Trade and other receivables

The fair value of trade and other receivables/payables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date.

Loans and borrowings

Fair value, which is determined for disclosure purposes, is calculated based on discounted expected future principal and interest cash flows for finance leases. The market rate of interest is determined by reference to similar lease agreements.

Derivatives

Foreign currency derivative contracts are either marked to market using listed market prices or by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate.

– II-231 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

4. DETERMINATION OF FAIR VALUES (continued)

Share-based payment transactions

The fair value of shares granted under the employee share loan plan is measured using a binomial option-pricing model, taking into account the terms and conditions upon which the shares were granted. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds).

Financial guarantees

For financial guarantee contract liabilities, the fair value at initial recognition is determined using a probability weighted discounted cash flow approach. This method takes into account the probability of default by the guaranteed party over the term of the contract, the loss given default (being the proportion of the exposure that is not expected to be recovered in the event of default) and exposure at default (being the maximum loss at the time of default).

5. SEGMENT REPORTING

Segment information is presented in respect of the Group’s business and geographical segments. The primary format, business segments, is based on the Group’s management and internal reporting structure.

Inter-segment pricing is determined on an arm’s length basis.

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

All segments are continuing operations.

Business segments

The Group comprises the following main business segments:

Operating coal mines: Coppabella and Moorvale mines Exploration and evaluation: Various tenements in the exploration and evaluation phase Other: Corporate and other business development activities

– II-232 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

5. SEGMENT REPORTING (continued)

Geographical segments

The Group operates predominately in Australia. All segment assets from ordinary activities relate to operations in Australia.

In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of assets.

Business segments 30 June 2007 Total external sales revenue Inter-segment revenue Total segment revenue Segment result Unallocated expenses Results from operating activities Net financing income Income tax expense Profit for the period Segment assets Segment liabilities Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Assets classified as held for sale Capital expenditure Impairment loss reversals	Operating coal mines A$’000 362,796 — 362,796 93,478 496,686 272,404 95,729 (16,076) (6,877) — 30,754 (91)	Exploration and evaluation A$’000 — — — 9,980 182,409 175,801 — (825) (131) 33,779 7,505 —	Other A$’000 — — — (21,486) 300,033 116,113 (65,599) (23,919) (54,340) — 209 —	Eliminations A$’000 — — — — (366,480) (366,480) — — — — — —	Consolidated A$’000 362,796 — 362,796 81,972 — 81,972 12,733 (28,161) 66,544 612,648 197,838 30,130 (40,820) (61,348) 33,779 38,468 (91)

– II-233 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

5. SEGMENT REPORTING (continued)

Geographical segments (continued)

Business segments 30 June 2006 Total external sales revenue Inter-segment revenue Total segment revenue Segment result Unallocated expenses Results from operating activities Net financing income Income tax expense Profit for the period Segment assets Segment liabilities Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Capital expenditure Impairment losses	Operating coal mines A$’000 534,755 — 534,755 225,715 455,947 249,995 247,132 44,564 (25,135) 7,277 91	Exploration and evaluation A$’000 — — — (530) 167,830 157,113 — (6,729) (1,472) 54,419 —	Other A$’000 — — — (13,595) 272,365 97,861 (45,641) (744) (61,510) 755 —	Eliminations A$’000 — — — — (304,026) (304,026) — — — — —	Consolidated A$’000 534,755 — 534,755 211,590 — 211,590 2,455 (64,456) 149,589 592,116 200,943 201,491 37,091 (88,117) 62,451 91

– II-234 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

5. SEGMENT REPORTING (continued)

Geographical segments (continued)

Geographical segments 30 June 2007 Revenue from external customers Segment assets Capital expenditure 30 June 2006 Revenue from external customers Segment assets Capital expenditure	Asia A$’000 156,747 — — 260,288 — —	Europe A$’000 122,421 — — 190,805 — —	Americas Other regions A$’000 A$’000 74,477 9,151 — 612,648 — 38,468 62,403 21,259 — 592,116 — 62,451	Consolidated A$’000 362,796

				612,648

				38,468

				534,755

				592,116

				62,451

6. OTHER INCOME

Management fee — related parties Dividends — related parties Net foreign exchange gains Net gain on disposal of non-current assets Sundry — other parties	Consolidated 2007 2006 A$’000 A$’000 234 296 — — — 1,953 13,154 — 1,364 214 14,752 2,463	Company 2007 2006 A$’000 A$’000 4,114 3,358 54,340 61,488 — — — — — 98 58,454 64,944	Company 2007 2006 A$’000 A$’000 4,114 3,358 54,340 61,488 — — — — — 98 58,454 64,944
			64,944

During the year ended 30 June 2007, the Group sold a 16.7% interest in the Olive Downs North project and a 26.7% interest in the undeveloped Moorvale Pits C&D to partners in the Coppabella and Moorvale Joint Venture for A$16,870,000 in cash.

– II-235 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

7. OTHER EXPENSES

Net foreign exchange losses Exploration and evaluation expensed as incurred Increase in rehabilitation provision Depreciation (Reversal)/recognition of impairment loss on receivables Net loss on disposal of non-current assets	Consolidated 2007 2006 A$’000 A$’000 2,137 — 916 387 663 527 (203) (242) (91) 91 1,076 130 4,498 893	Company 2007 2006 A$’000 A$’000 — — — — — — 139 61 — — — 23 139 84	Company 2007 2006 A$’000 A$’000 — — — — — — 139 61 — — — 23 139 84
			84

8. PERSONNEL EXPENSES

Wages and salaries Other associated personnel expenses Contributions to defined contribution superannuation funds Increase in liability for annual leave (Decrease)/increase in liability for long-service leave Increase in liability for sick leave Termination benefits Equity-settled share-based payment transactions	Consolidated 2007 2006 A$’000 A$’000 4,447 4,605 (47) 567 385 603 1,231 262 (73) 163 191 — 235 — — 308 6,369 6,508	Company 2007 2006 A$’000 A$’000 2,243 3,284 1,340 634 385 603 35 194 (73) 163 — — 235 — — 308 4,165 5,186	Company 2007 2006 A$’000 A$’000 2,243 3,284 1,340 634 385 603 35 194 (73) 163 — — 235 — — 308 4,165 5,186
			5,186

– II-236 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

9. AUDITORS’ REMUNERATION

Audit services Auditors of the Company — KPMG • Audit and review of financial reports(A) (F) • Audit of joint venture operations(C) Other services Auditors of the Company — KPMG • Other assurance services(A) (B) • Corporate governance services • Taxation services(A) • Joint venture operations(C) — Other services(D) KPMG related practices • Other(E)	Consolidated 2007 2006 A$ A$0 189,000 176,750 138,904 87,159 327,904 263,909 12,000 63,290 30,245 — 72,335 54,605 10,379 16,969 27,107 30,273 152,066 165,137	Company 2007 2006 A$ A$ 189,000 176,750 — — 189,000 176,750 12,000 63,290 30,245 — 72,335 54,605 — — 27,107 30,273 141,687 148,168	Company 2007 2006 A$ A$ 189,000 176,750 — — 189,000 176,750 12,000 63,290 30,245 — 72,335 54,605 — — 27,107 30,273 141,687 148,168
			176,750

			63,290 — 54,605 — 30,273
			148,168

(A) All auditors’ remuneration is borne by the Company for the Group.
(B) Represents advice in relation to accounting and AIFRS.
(C) Represents the Group’s share of remuneration paid for audit and other services incurred by joint ventures.
(D) Represents tax advice.
(E) Represents license and other fees paid to a related entity, of which KPMG holds a 50% interest, for purchase of tax compliance software by the Group.
(F) 2006 includes audit relating to transition to AIFRS and restated comparative financial information.

– II-237 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

10. FINANCIAL INCOME AND EXPENSES

Interest income Net gain on disposal of available-for-sale financial assets transferred from equity Financial income Interest expense Financial expenses Net financing income	Consolidated 2007 2006 A$’000 A$’000 (9,055) (7,644) (7,973) — (17,028) (7,644) 4,295 5,189 4,295 5,189 (12,733) (2,455)	Company 2007 2006 A$’000 A$’000 (14,830) (8,694) (7,973) — (22,803) (8,694) 4,491 1,704 4,491 1,704 (18,312) (6,990)

11. INCOME TAX EXPENSE

(a) Recognised in the income statement

Current tax expense Current period Adjustments for prior periods Deferred tax expense Origination and reversal of temporary differences Total income tax expense/(benefit) from continuing operations	Consolidated 2007 2006 A$’000 A$’000 21,580 55,851 (2,332) 27 19,248 55,878 8,913 8,578 8,913 8,578 28,161 64,456	Company 2007 2006 A$’000 A$’000 4,509 (219) 270 27 4,779 (192) (631) 137 (631) 137 4,148 (55)

– II-238 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

11. INCOME TAX EXPENSE (continued)

(b) Numerical reconciliation between tax expense and pre-tax net profit

Consolidated 2007 2006 A$’000 A$’000 Profit for the period — continuing operations 66,544 149,589 Total income tax expense/(benefit) 28,161 64,456 Profit excluding income tax 94,705 214,045 Income tax using the domestic corporation tax rate of 30% (2006: 30%) 28,411 64,213 Increase in income tax expense due to: • Non-deductible expenses 213 2,310 Decrease in income tax expense due to: • Tax exempt income (555) (2,094) 28,069 64,429 Under/(over) provided in prior years 92 27 28,161 64,456	Company 2007 2006 A$’000 A$’000 63,684 61,225 4,148 (55) 67,832 61,170 20,350 18,351 8 13 (16,302) (18,446) 4,056 (82) 92 27 4,148 (55)	Company 2007 2006 A$’000 A$’000 63,684 61,225 4,148 (55) 67,832 61,170 20,350 18,351 8 13 (16,302) (18,446) 4,056 (82) 92 27 4,148 (55)
		61,170
		18,351 13 (18,446)
		(82) 27
		(55)

(c) Income tax recognised directly in equity

Foreign currency derivative contracts Available-for-sale financial assets — investments in equity securities	Consolidated 2007 2006 A$’000 A$’000 5,263 305 430 — 5,693 305	Company 2007 2006 A$’000 A$’000 — — 430 — 430 —	Company 2007 2006 A$’000 A$’000 — — 430 — 430 —
			—

– II-239 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

12. TAX ASSETS AND LIABILITIES

Current tax assets and liabilities

The current tax liability for the Group of A$6,770,000 (2006: A$44,395,000) and for the Company of A$6,770,000 (2006: A$44,395,000) represent the amount of income taxes payable in respect of current and prior financial periods.

The Company liability includes the income tax payable by all members of the tax consolidated group.

Recognised deferred tax assets and liabilities

Deferred tax assets and liabilities are attributable to the following:

Consolidated Property, plant and equipment Employee benefits Inventories Loans and borrowings Provisions Amounts payable for future user charges Overburden in advance Mining property and development Exploration and evaluation Other items Tax loss carry-forwards Tax (assets)/liabilities Set off of tax Net tax (assets)/liabilities Company Property, plant and equipment Employee benefits Provisions Other items Tax (assets)/liabilities Set off of tax Net tax (assets)/liabilities	Assets 2007 2006 A$’000 A$’000 — — (546) (198) — (36) (2,873) (3,215) (6,258) (5,984) (3,211) (3,719) — — — — — — (12,135) (7,466) — — (25,023) (20,618) 25,023 20,618 — — Assets 2007 2006 A$’000 A$’000 — — (167) (178) (27) (29) (997) (347) (1,191) (554) 443 7 (748) (547)	Liabilities 2007 2006 A$’000 A$’000 2,372 2,434 — — 397 — — — — — — — 32,506 23,133 17,248 19,091 22,632 17,354 6,809 941 — — 81,964 62,953 (25,023) (20,618) 56,941 42,335 Liabilities 2007 2006 A$’000 A$’000 13 7 — — — — 430 — 443 7 (443) (7) — —	Net 2007 2006 A$’000 A$’000 2,372 2,434 (546) (198) 397 (36) (2,873) (3,215) (6,258) (5,984) (3,211) (3,719) 32,506 23,133 17,248 19,091 22,632 17,354 (5,326) (6,525) — — 56,941 42,335 — — 56,941 42,335 Net 2007 2006 A$’000 A$’000 13 7 (167) (178) (27) (29) (567) (347) (748) (547) — — (748) (547)

– II-240 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

12. TAX ASSETS AND LIABILITIES (continued)

Unrecognised deferred tax assets and liabilities

All deferred tax assets and liabilities have been recognised by the Company and the Group.

Movement in temporary differences during the year

Consolidated Recognised in Recognised in Balance income equity/ 1 July 06 statement transfers A$’000 A$’000 A$’000 Property, plant and equipment 2,434 (62) — Inventories (36) 433 — Loans and borrowings (3,215) 342 — Employee benefits (198) (348) — Provisions (5,984) (274) — Amounts payable for future user charges (3,719) 508 — Overburden in advance 23,133 9,373 — Mining property and development 19,091 (1,843) — Exploration and evaluation 17,354 5,278 — Other items (6,525) (4,494) 5,693 42,335 8,913 5,693 Recognised in Recognised in Balance income equity/ 1 July 05 statement transfers A$’000 A$’000 A$’000 Property, plant and equipment 2,629 (195) — Inventories 409 (445) — Loans and borrowings (3,517) 302 — Employee benefits (71) (79) (48) Provisions (3,922) (2,062) — Amounts payable for future user charges (4,199) 480 — Overburden in advance 15,984 7,149 — Mining property and development 20,913 (1,822) — Exploration and evaluation 6,978 10,376 — Other items 78 (6,752) 149 Tax loss carry-forwards (1,626) 1,626 — 33,656 8,578 101	Balance 30 June 07 A$’000 2,372 397 (2,873) (546) (6,258) (3,211) 32,506 17,248 22,632 (5,326) 56,941 Balance 30 June 06 A$’000 2,434 (36) (3,215) (198) (5,984) (3,719) 23,133 19,091 17,354 (6,525) — 42,335	Company Recognised in Recognised in Balance income equity/ 1 July 06 statement transfers A$’000 A$’000 A$’000 7 6 — — — — — — — (178) 11 — (29) 2 — — — — — — — — — — — — — (347) (650) 430 (547) (631) 430 Recognised in Recognised in Balance income equity/ 1 July 05 statement transfers A$’000 A$’000 A$’000 3 4 — — — — — — — (71) (87) (20) — (29) — — — — — — — — — — — — — (596) 249 — — — — (664) 137 (20)	Balance 30 June 07 A$’000 13 — — (167) (27) — — — — (567) (748) Balance 30 June 06 A$’000 7 — — (178) (29) — — — — (347) — (547)

– II-241 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

13. EARNINGS PER SHARE

Basic earnings per share

The calculation of basic earnings per share at 30 June 2007 was based on the profit attributable to ordinary shareholders of A$66,544,000 (2006: A$149,589,000) and a weighted average number of ordinary shares outstanding during the year ended 30 June 2007 of 187,380,346 (2006: 179,603,247), calculated as follows:

Profit attributable to ordinary shareholders

Profit attributable to ordinary shareholders Weighted average number of ordinary shares Issued ordinary shares at 1 July Effect of shares issued on exercise of options Effect of shares issued conversion of convertible notes Effect of shares issued in December 2006 Effect of shares issued in May 2006 Weighted average number of ordinary shares at 30 June	Consolidated 2007 2006 A$’000 A$’000 66,544 149,589 Consolidated 2007 2006 187,380,346 172,824,327 — 76,758 — 2,106,564 — 4,104,894 — 490,704 187,380,346 179,603,247	Consolidated 2007 2006 A$’000 A$’000 66,544 149,589 Consolidated 2007 2006 187,380,346 172,824,327 — 76,758 — 2,106,564 — 4,104,894 — 490,704 187,380,346 179,603,247
		179,603,247

Diluted earnings per share

The calculation of diluted earnings per share at 30 June 2007 was based on profit attributable to ordinary shareholders of A$66,544,000 (2006: A$149,589,000) and a weighted average number of ordinary shares outstanding during the year ended 30 June 2007 of 187,380,346 (2006: 179,703,275), calculated as follows:

Profit attributable to ordinary shareholders (diluted)

	Consolidated	Consolidated
	2007	2006
	A$’000	A$’000
Net profit attributable to ordinary shareholders (diluted)	66,544	149,589

– II-242 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

13. EARNINGS PER SHARE (continued)

Diluted earnings per share (continued)

Weighted average number of ordinary shares (diluted)

Weighted average number of ordinary shares at 1 July Effect of share options on issue Weighted average number of ordinary shares (diluted) at 30 June	Consolidated 2007 2006 187,380,346 179,603,247 — 100,028 187,380,346 179,703,275	Consolidated 2007 2006 187,380,346 179,603,247 — 100,028 187,380,346 179,703,275
		179,703,275

14. CASH AND CASH EQUIVALENTS

Cash at bank and in hand Bank at call deposits Bank term deposits Cash and cash equivalents in the statement of cash flows	Consolidated 2007 2006 A$’000 A$’000 9,016 4,330 8,277 35,777 79,272 128,496 96,565 168,603	Company 2007 2006 A$’000 A$’000 4,985 2,376 964 8,165 16,015 7,497 21,964 18,038	Company 2007 2006 A$’000 A$’000 4,985 2,376 964 8,165 16,015 7,497 21,964 18,038
			18,038

The effective interest rate on bank at call deposits was 5.9% (2006: 5.8%). The effective interest rate on bank term deposits was 6.2% (2006: 5.5%). The deposits had an average maturity of 55 days (2006: 43 days). Included in bank term deposits is A$6,034,000 (2006: A$Nil) which is restricted for use by the Group as such is held as security against bank guarantees provided (refer Note 31).

– II-243 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

15. TRADE AND OTHER RECEIVABLES

Current Trade receivables Other receivables and prepayments Tax related receivables Amounts receivable from associates and related entities — unsecured Non-current Security deposits Other receivables and prepayments Loans to employees — Employee Share Plan Amounts receivable from controlled entities — unsecured	Consolidated 2007 2006 A$’000 A$’000 5,509 32,659 14,265 10,334 — — 15,916 9,669 35,690 52,662 144 118 3,055 3,977 324 508 — — 3,523 4,603	Company 2007 2006 A$’000 A$’000 — — 2,274 328 85,391 70,560 1,121 458 88,786 71,346 — — — — 324 508 158,227 184,791 158,551 185,299	Company 2007 2006 A$’000 A$’000 — — 2,274 328 85,391 70,560 1,121 458 88,786 71,346 — — — — 324 508 158,227 184,791 158,551 185,299
			71,346

			— — 508 184,791
			185,299

Current receivables due from associates and related entities — unsecured are shown net of reversal of impairment losses of A$91,000 (2006: A$91,000 impairment loss) recognised in the current year. Non-current receivables due from associates and related entities — unsecured are shown net of impairment losses of A$Nil (2006: A$Nil) recognised in the current year.

16. INVENTORIES

Raw materials and consumables, at cost Coal stocks, at the lower of cost and net realisable value	Consolidated 2007 2006 A$’000 A$’000 2,069 — 26,558 15,412 28,627 15,412	Company 2007 2006 A$’000 A$’000 — — — — — —	Company 2007 2006 A$’000 A$’000 — — — — — —
			—

Refer Note 23 for details of security over inventories.

Raw materials, consumables and changes in coal stocks recognised as cost of sales amounted to A$147,220,000 (2006: A$189,277,000). In 2007 the write-down of inventories to net realisable value amounted to A$2,718,000 (2006: A$Nil). The write-downs are included in cost of sales.

– II-244 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

17. OTHER FINANCIAL ASSETS

Current Cash and deposits — not at call Available-for -sale financial assets — investments in equity securities Foreign currency derivative contracts Non-current Investments in controlled entities — at cost Foreign currency derivative contracts	Consolidated 2007 2006 A$’000 A$’000 6,020 6,099 33,115 — 18,560 2,711 57,695 8,810 — — — — — —	Company 2007 2006 A$’000 A$’000 — — 33,115 — — — 33,115 — 73,343 73,343 — — 73,343 73,343	Company 2007 2006 A$’000 A$’000 — — 33,115 — — — 33,115 — 73,343 73,343 — — 73,343 73,343
			—

			73,343 —
			73,343

Available-for-sale financial assets — investments in equity securities are investments in listed companies. These shares were acquired by the Group during the year at a cost of A$31,682,000. As at 30 June 2007 the fair value of these shares was A$33,115,000 resulting in a fair value reserve of A$1,003,000 (after tax). The shares were sold subsequent to year end (refer Note 38).

18. OVERBURDEN IN ADVANCE

Current Overburden in advance Non-current Overburden in advance	Consolidated 2007 2006 A$’000 A$’000 105,552 74,206 2,765 2,904	Company 2007 2006 A$’000 A$’000 — — — —	Company 2007 2006 A$’000 A$’000 — — — —

			—

– II-245 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

19. ASSETS CLASSIFIED AS HELD FOR SALE

	Consolidated	Consolidated	Company
	2007	2006	2007	2006
	A$’000	A$’000	A$’000	A$’000
Current
Assets held by controlled entities	33,779	—	—	—

The Company intends to dispose of two wholly owned subsidiaries, Monto Coal Pty Ltd and Monto Coal 2 Pty Ltd. Refer Note 26. The cost of these shares held by the Company is A$101. The assets of Monto Coal Pty Ltd and Monto Coal 2 Pty Ltd are presented as a disposal group held for sale. As at 30 June 2007 the disposal group comprised net assets of A$33,779,000.

Note Cash and cash equivalents Trade and other receivables Other financial assets Freehold land 20 Exploration and evaluation assets 21 Trade and other payables	Consolidated 2007 2006 A$’000 A$’000 328 — 14 — 14 — 1,228 — 32,295 — (100) — 33,779 —	Company 2007 2006 A$’000 A$’000 — — — — — — — — — — — — — —	Company 2007 2006 A$’000 A$’000 — — — — — — — — — — — — — —
			—

– II-246 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

20. PROPERTY, PLANT AND EQUIPMENT

Mining property and development (including mining rights and coal resources) At cost Less accumulated depreciation Freehold land At cost Buildings and infrastructure At cost Less accumulated depreciation Plant and equipment At cost Less accumulated depreciation Leased assets At cost Less accumulated depreciation Spare parts At cost Capital works in progress At cost	Consolidated 2007 2006 A$’000 A$’000 143,545 141,620 (42,047) (34,230) 101,498 107,390 3,730 4,958 74,829 72,856 (29,036) (21,867) 45,793 50,989 4,705 3,949 (1,341) (912) 3,364 3,037 8,544 — (854) — 7,690 — 4,678 — 15,396 3,733 182,149 170,107	Company 2007 2006 A$’000 A$’000 — — — — — — — — — — — — — — 1,139 932 (273) (134) 866 798 — — — — — — — — — — 866 798

Refer to Note 23 for details of security over property, plant and equipment.

– II-247 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

20. PROPERTY, PLANT AND EQUIPMENT (continued)

Reconciliations Reconciliation of the carrying amounts for each class of property, plant and equipment are set out below: • Mining property and development Carrying amount at beginning of year o Additions, including acquisitions through acquisition of interest in joint venture o Disposals o Depreciation Carrying amount at end of year • Freehold land Carrying amount at beginning of year o Additions o Transfers to assets classified as held for sale Carrying amount at end of year • Buildings and infrastructure Carrying amount at beginning of year o Additions, including acquisitions through acquisition of interest in joint venture o Transfer from capital works in progress o Disposals o Depreciation Carrying amount at end of year • Plant and equipment Carrying amount at beginning of year o Additions, including acquisitions through acquisition of interest in joint venture o Transfer from capital works in progress o Disposals o Depreciation Carrying amount at end of year	Consolidated 2007 2006 A$’000 A$’000 107,390 113,937 1,925 1,251 — — (7,817) (7,798) 101,498 107,390 4,958 4,953 — 5 (1,228) — 3,730 4,958 50,989 53,110 818 1,540 1,158 3,894 — (377) (7,172) (7,178) 45,793 50,989 3,037 1,436 836 485 58 1,581 (81) (132) (486) (333) 3,364 3,037	Company 2007 2006 A$’000 A$’000 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 798 138 209 744 — — (2) (23) (139) (61) 866 798

– II-248 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007

20. PROPERTY, PLANT AND EQUIPMENT (continued)

Reconciliations (continued) • Leased assets Carrying amount at beginning of year o Additions, including acquisitions through acquisition of interest in joint venture o Disposals o Depreciation Carrying amount at end of year • Spare parts Carrying amount at beginning of year o Additions, including acquisitions through acquisition of interest in joint venture Carrying amount at end of year • Capital works in progress Carrying amount at beginning of year o Additions, including acquisitions through acquisition of interest in joint venture o Transfers to property, plant and equipment Carrying amount at end of year	Consolidated 2007 2006 A$’000 A$’000 — — 9,827 — (1,283) — (854) — 7,690 — — — 4,678 — 4,678 — 3,733 4,457 12,879 4,751 (1,216) (5,475) 15,396 3,733	Company 2007 2006 A$’000 A$’000 — — — — — — — — — — — — — — — — — — — — — — — —	Company 2007 2006 A$’000 A$’000 — — — — — — — — — — — — — — — — — — — — — — — —
			—

			— —
			—

			— — —
			—

– II-249 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007

20. PROPERTY, PLANT AND EQUIPMENT (continued)

The following depreciation was recognised as an expense in the income statement:

Mining property and development Buildings and infrastructure Plant and equipment Leased assets	Consolidated 2007 2006 A$’000 A$’000 7,637 8,759 7,185 6,919 486 333 854 — 16,162 16,011	Company 2007 2006 A$’000 A$’000 — — — — 139 61 — — 139 61	Company 2007 2006 A$’000 A$’000 — — — — 139 61 — — 139 61
			61

Leased assets

The Group leases production equipment under a number of finance lease agreements. Some leases provide the Group with the option to purchase the equipment. The leased equipment secures lease obligations (refer Note 23). At 30 June 2007, the net carrying amount of leased assets was A$7,690,000 (2006: A$Nil).

21. EXPLORATION AND EVALUATION ASSETS

Costs carried forward in respect of areas of interest in: • Exploration and/or evaluation — intangible Cost Balance at beginning of year Acquisitions of exploration and evaluation assets Transfers to assets classified as held for sale Disposals of exploration and evaluation assets Exploration and evaluation costs capitalised Balance at end of year	Consolidated 2007 2006 A$’000 A$’000 66,303 94,809 66,303 94,809 94,809 40,390 — 48,653 (32,295) — (3,716) — 7,505 5,766 66,303 94,809	Company 2007 2006 A$’000 A$’000 — — — — — — — — — — — — — — — —	Company 2007 2006 A$’000 A$’000 — — — — — — — — — — — — — — — —
			—

			— — — — —
			—

– II-250 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007

22. TRADE AND OTHER PAYABLES

Current Trade payables Other payables and accrued expenses Amounts payable to associates Non-current Amounts payable to controlled entities — unsecured	Consolidated 2007 2006 A$’000 A$’000 4,908 1,633 75,365 66,905 1,143 — 81,416 68,538 — —	Company 2007 2006 A$’000 A$’000 241 228 671 909 1,143 — 2,055 1,137 104,907 52,499	Company 2007 2006 A$’000 A$’000 241 228 671 909 1,143 — 2,055 1,137 104,907 52,499
			1,137

			52,499

23. LOANS AND BORROWINGS

This note provides information about the contractual terms of the Company’s and the Group’s interest-bearing loans and borrowings. For more information about the Company’s and the Group’s exposure to interest rate and foreign currency risk, see Note 28.

Current liabilities Finance lease liabilities Deferred liability for acquisition of mining interest — unsecured Non-current liabilities Finance lease liabilities Deferred liability for acquisition of mining interest — unsecured	Consolidated 2007 2006 A$’000 A$’000 1,451 — 1,925 1,931 3,376 1,931 6,301 — 7,652 8,785 13,953 8,785	Company 2007 2006 A$’000 A$’000 — — — — — — — — — — — —	Company 2007 2006 A$’000 A$’000 — — — — — — — — — — — —
			—

			— —
			—

– II-251 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

23. LOANS AND BORROWINGS (continued)

Deferred liability for acquisition of mining interest — unsecured

In December 2003 the Group purchased an additional 23.3% interest in the Coppabella Project. As part of the acquisition, the Group entered into an arrangement to progressively purchase the 23.3% interest in the exploration tenements each six months, over a 10 year period. In accordance with Australian Accounting Standards the deferred liability has been reflected at its present value in the financial statements, discounted at 10.7% (2006: 10.2%) based on 6% interest plus risk adjusted margin.

Financing facilities Bank loans — Corporate Facility • Amortising cash advance facility (2007: US$18,000,000 and 2006: US$24,000,000) • Revolving cash advance facility (US$20,000,000) Bank Guarantee Facility Facilities utilised at reporting date Bank loans — Corporate Facility • Amortising cash advance facility • Revolving cash advance facility Bank Guarantee Facility Facilities not utilised at reporting date Bank loans — Corporate Facility • Amortising cash advance facility (2007: US$18,000,000 and 2006: US$24,000,000) • Revolving cash advance facility (US$20,000,000) Bank Guarantee Facility	Consolidated 2007 2006 A$’000 A$’000 21,209 32,288 23,565 26,907 60,000 60,000 104,774 119,195 — — — — 59,835 57,787 59,835 57,787 21,209 32,288 23,565 26,907 165 2,213 44,939 61,408	Company 2007 2006 A$’000 A$’000 — — — — — — — — — — — — — — — — — — — — — — — —	Company 2007 2006 A$’000 A$’000 — — — — — — — — — — — — — — — — — — — — — — — —
			—

			— — —
			—

			— — —
			—

– II-252 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

23. LOANS AND BORROWINGS (continued)

Corporate Facility

Bank Loans

During the year ended 30 June 2007 the Group continued to hold the Corporate Facility established in the previous financial year.

The purpose of the Corporate Facility is to provide additional funds for general corporate purposes within the Group. The facility is held by a controlled entity, Coppabella Coal Pty Ltd. Bank loans provided as part of the Corporate Facility are:

1) Cash advance facility

a) Amortising cash advance facility

The facility limit is denominated in United States dollars as US$30,000,000 (2006: US$30,000,000) and is to be amortised on a straight line basis to 30 June 2010. A$Nil (US$Nil) has been drawn down at 30 June 2007 and 30 June 2006. The facility can be drawn in Australian dollars or United States dollars. The amortised facility limit at 30 June 2007 is US$18,000,000 (2006: US$24,000,000). A commitment fee of 0.45% (2006: 0.45%) per annum is payable on the unused portion of the amortising cash advance facility.

The interest rate applicable to the cash advance facility comprises LIBOR plus a minimum margin of 0.95% per annum. The effective interest rate was 6.31% per annum at 30 June 2007 (2006: 6.46%).

b) Revolving cash advance facility

The revolving cash advance facility loan limit is denominated in United States dollars as US$20,000,000 (2006: US$ 20,000,000). A$Nil (US$Nil) has been drawn down at 30 June 2007 and 30 June 2006. The facility is in place until 30 June 2010. The facility can be drawn down in Australian dollars or United States dollars. A commitment fee of 0.45% (2006: 0.45%) per annum is payable on the unused portion of the revolving cash advance facility.

The interest rate applicable to the cash advance facility comprises LIBOR plus a minimum margin of 0.95% per annum. The effective interest rate was 6.31% per annum at 30 June 2007 (2006: 6.46%).

2) Bank guarantee facility

The bank guarantee facility is denominated in Australian dollars as an A$60,000,000 (2006: A$60,000,000) limit amortising to A$Nil (2006: A$Nil) at maturity 30 June 2010. The facility can be drawn in Australian dollars, incorporating a sub-limit of the equivalent of A$4,000,000 (2006: A$4,000,000) which can be drawn in United States dollars. Bank guarantee fees are payable at 0.55% per annum and a fee of 0.22% per annum applies to the unused portion of the bank guarantee facility.

– II-253 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007

23. LOANS AND BORROWINGS (continued)

Corporate Facility (continued)

Bank Loans (continued)

Security

The Corporate Facility is secured by a guarantee provided by Macarthur Coal Limited and charges over the Group’s interest in the Coppabella and Moorvale Joint Venture including all of the assets and undertakings of the controlled entity, Coppabella Coal Pty Ltd and charges over the assets and undertakings of the controlled entity, Macarthur Coal Management Pty Ltd and the Company’s shares in Coppabella Coal Pty Ltd and Macarthur Coal Management Pty Ltd and intercompany loans to the controlled entities.

Assets pledged under security arrangements

The carrying amount of the pledged non-current assets are as follows:

Mining property and development Land Buildings and infrastructure Plant and equipment Leased assets (refer below) Spare parts Capital works in progress Receivables Overburden in advance Shares in controlled entities Amounts receivable from controlled entities Convertible notes Convertible notes on issue at 1 July Nil conversions during the period (2006: 3,833,946) Debt repaid to non-converting note holders Carrying amount of liability at 30 June	Consolidated 2007 2006 A$’000 A$’000 101,498 107,390 3,730 3,730 45,793 50,989 2,469 2,203 7,690 — 4,678 — 15,396 3,733 2,963 6,039 2,765 2,904 — — — — 186,982 176,988 — 5,627 — (5,559) — (68) — —	Company 2007 2006 A$’000 A$’000 — — — — — — — — — — — — — — — — — — 56,385 56,385 506 42,400 56,891 98,785 — 5,627 — (5,559) — (68) — —

– II-254 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

23. LOANS AND BORROWINGS (continued)

Finance lease liabilities

Finance lease liabilities of the Group are payable as follows:

Consolidated

Less than one year Between one and five years More than five years	Minimum lease payments 2007 A$’000 1,968 6,822 476 9,266	Interest 2007 A$’000 517 939 58 1,514	Principal 2007 A$’000 1,451 5,883 418 7,752	Minimum lease payments 2006 A$’000 — — — —	Interest 2006 A$’000 — — — —	Principal 2006 A$’000 — — —
						—

The Company has no finance lease liabilities.

Certain leases provide for additional payments that are contingent upon usage limits being exceeded. Contingent rents recognised in the income statement under finance leases amounted to A$Nil (2006: A$Nil).

Security

The lease liabilities are secured by a fixed and floating charge provided by Macarthur Coal (C&M Equipment) Pty Ltd (MCCME), an associated entity. In addition, the Company provides guarantees to the extent of 73.3% of MCCME’s obligations under finance and operating leasing arrangements.

– II-255 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

24. EMPLOYEE BENEFITS

Current liabilities Liability for annual leave Liability for sick leave Liability for long-service leave Non-current liabilities Liability for long-service leave	Consolidated 2007 2006 A$’000 A$’000 1,500 460 191 — 12 46 1,703 506 117 156	Company 2007 2006 A$’000 A$’000 427 392 — — 12 46 439 438 117 156	Company 2007 2006 A$’000 A$’000 427 392 — — 12 46 439 438 117 156
			438

			156

Defined contribution superannuation funds

The Group makes contributions to several defined contribution superannuation funds. The amount recognised as an expense was A$385,000 for the financial year ended 30 June 2007 (2006: A$603,000).

Long service leave industry fund

The Group makes contributions to the Coal Mining Industry Leave Fund. A total of A$149,000 was paid to the fund for the financial year ended 30 June 2007 (2006: A$Nil).

Share-based payments

Executive Option Plan

The Company had an executive option plan for key employees of the Company and Macarthur Coal (C&M Management) Pty Ltd, an associated entity.

There are no voting rights attached to unissued ordinary shares. Voting rights will be attached to unissued ordinary shares when the options have been exercised.

All options expired on the earlier of their expiry date or the date the holder ceases to be an executive or the date the holder is dismissed for misconduct or for reasons involving fraud.

– II-256 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

24. EMPLOYEE BENEFITS (continued)

Share-based payments (continued)

Executive Option Plan (continued)

The number and weighted average exercise prices of share options are as follows:

Outstanding at the beginning of the period Exercised during the period Outstanding at the end of the period Exercisable at the end of the period	Weighted average exercise price 2007 — — —	Number of options 2007 — — — —	Weighted average exercise price 2006 A$1.38 A$1.38 —	Number of options 2006 110,000 (110,000) — —

No options are outstanding at 30 June 2007.

During the financial year, no share options were exercised (2006: 110,000, fully paid). The weighted average share price at the date of exercise was A$Nil (2006: A$6.12).

Employee Share Loan Plan

The Company has an Employee Share Loan Plan (ESLP) which is used to provide an opportunity for eligible persons of the Group and approved contractors to acquire shares of the Company. On 15 December 2005, 122,935 shares were issued to 86 eligible employees at an issue price of A$5.43 per share with a value limit of between A$6,000 to A$20,000 per employee. There were no shares issued during the year.

All shares issued under the ESLP rank equally with all other shares for time being on issue.

The Company provides interest free loans to all eligible persons to enable them to acquire shares under ESLP to 100% of the total acquisition price for the shares. Any dividends declared on the shares issued under ESLP will be used to offset any loans outstanding on the shares. Employees and contractors have also provided irrevocable authority to the Company to deduct 1% of their gross salary each month in repayment of the loan.

– II-257 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

24. EMPLOYEE BENEFITS (continued)

Share-based payments (continued)

Employee Share Loan Plan (continued)

The loan will be repayable:

a) if default is made by the employee on the repayment of the loan; or
b) the employee’s employment with the Company, its subsidiary or associate or the relevant contractor is terminate for any reason; or
c) the employee becomes insolvent or commits an act of bankruptcy.

The Company holds the shares as security over the loan until the loan is repaid.

The market price of shares issued under the ESLP as at 30 June 2007 was A$6.77 (2006: A$4.48).

There were no other shares eligible for issuance under the ESLP at 30 June 2007 (2006: Nil).

The number and weighted average exercise price of shares is as follows:

Outstanding at the beginning of the period Granted during the period Sold during the period Outstanding at the end of the period	Weighted average exercise price 2007 — — A$4.21	Number of shares 2007 106,005 — (16,563) 89,442	Weighted average exercise price 2006 — A$5.43 A$4.91	Number of shares 2006 — 122,935 (16,930) 106,005

– II-258 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

25. PROVISIONS

Rehabilitation and dismantling A$’000 Consolidated Balance at 1 July 2006 17,886 Provisions made during the year 1,791 Provisions used during the year (169) Unwind of discount 1,191 Balance at 30 June 2007 20,699 Current 1,030 Non-current 19,669 20,699 The Company Balance at 1 July 2006 — Unwind of discount — Balance at 30 June 2007 — Current — Non-current — —	Onerous contracts A$’000 1,881 — (1,881) — — — — — — — — — — —	Other A$’000 177 — — (17) 160 — 160 160 98 (8) 90 — 90 90	Total A$’000 19,944 1,791 (2,050) 1,174 20,859 1,030 19,829 20,859 98 (8) 90 — 90 90

During the financial year ended 30 June 2007, A$169,000 was recognised as an expense in the income statement in respect of rehabilitation incurred (2006: A$622,000).

Rehabilitation and dismantling

In accordance with State Government legislative requirements, a provision has been recognised for mine rehabilitation works throughout the life of the mines in relation to the Group’s coal mining operations. A provision for dismantling of infrastructure assets on cessation of operations at the mines has also been recognised in relation to the Group’s coal mining operations. The basis for accounting is set out in Note 1(m).

Onerous contracts

In the prior financial year, Macarthur Coal (C&M Management) Pty Ltd, the manager for the Coppabella and Moorvale Joint Venture, entered into a contract with Queensland Rail for the transport of 625,000 tonnes of coal to Abbot Point for the period 1 March 2006 to 31 December 2006. The port contract at Abbot Point expired on 28 February 2006 and therefore there was no corresponding port contract during the period 1 March 2006 to 31 December 2006. The obligation under the Queensland Rail contract for the remaining period 1 July 2006 to 31 December 2006 was fully provided for in the prior financial year.

– II-259 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

26. OTHER FINANCIAL LIABILITIES

Current Mining exploration and evaluation costs (refer Note 30(d)) Amounts payable for future user charges (refer Note 30(e)) Foreign currency derivative contracts Other derivative contracts Non-current Amounts payable for future user charges (refer Note 30(e)) Foreign currency derivative contracts	Consolidated 2007 2006 A$’000 A$’000 — 131 1,795 1,694 — 1,447 2,000 — 3,795 3,272 8,908 10,704 — 377 8,908 11,081	Company 2007 2006 A$’000 A$’000 — — — — — — 2,000 — 2,000 — — — — — — —	Company 2007 2006 A$’000 A$’000 — — — — — — 2,000 — 2,000 — — — — — — —
			—

			— —
			—

Other derivative contracts

On 22 June 2007, the Company entered an agreement whereby an option was granted to a non-related third party to buy all the shares of two wholly owned subsidiaries, Monto Coal Pty Ltd and Monto Coal 2 Pty Ltd for a total consideration of approximately A$41,950,000 subject to the satisfaction of several conditions precedent. Monto Coal 2 Pty Ltd holds a 51% interest in the Monto Coal Joint Venture and Monto Coal Pty Ltd acts as operator of that joint venture. The assets and liabilities relating to these companies have been disclosed as held for sale (refer Note 19).

An option fee of A$2,000,000 was receivable by the Company on 29 June 2007. The option period begins on 1 July 2007 and ends on 15 October 2007. If the option is exercised, the option fee becomes the non-refundable deposit for the Share Sale Agreement, which will be entered into when the option is exercised. Any cash calls paid for by the Group during the option period in relation to joint venture activities will be reimbursed by the buyer, in the event the option is exercised.

A change in control of Monto Coal 2 Pty Ltd will arise on exercise of the option. As a result, Monto Coal 2 Pty Ltd will be obliged to offer its 51% interest in the Monto Coal Joint Venture to the minority joint venture participants at market value. In the event that the minority participants in the joint venture exercise their pre-emptive rights, the Company will reimburse the buyer of the shares in Monto Coal Pty Ltd and Monto Coal 2 Pty Ltd, for the shortfall of the price received by that buyer in comparison to the consideration paid for the shares in Monto Coal Pty Ltd and Monto Coal 2 Pty Ltd, or share 50% of the excess where the price exceeds the consideration paid for the shares. Following this, the Company must purchase back the shares in Monto Coal Pty Ltd and Monto Coal 2 Pty Ltd for consideration of A$1.

In the event that the option is not exercised, the option fee is retained by the Company. The contract can be terminated for particular stated events, upon which the option fee is refunded.

– II-260 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

27. CAPITAL AND RESERVES

Reconciliation of movement in capital and reserves

Consolidated Balance at 1 July 2005 Effect of change in accounting policy Balance at 1 July 2005 — restated Total recognised income and expense Shares issued on acquisition of joint venture interests Shares issued on exercise of options Shares issued on conversion of convertible notes Equity settled transactions Dividends to shareholders Balance at 30 June 2006 Balance at 1 July 2006 Total recognised income and expense Dividends to shareholders Balance at 30 June 2007	Share capital A$’000 182,563 — 182,563 — 48,078 152 5,559 9,991 — 246,343 246,343 — — 246,343	Hedging reserve A$’000 — 15,504 15,504 (12,684) — — — — — 2,820 2,820 10,430 — 13,250	Fair value reserve A$’000 — — — — — — — — — — — 1,003 — 1,003	Retained earnings A$’000 53,525 — 53,525 149,589 — — — 308 (61,412) 142,010 142,010 66,544 (54,340) 154,214	Total equity A$’000 236,088 15,504 251,592 136,905 48,078 152 5,559 10,299 (61,412) 391,173 391,173 77,977 (54,340) 414,810

– II-261 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

27. CAPITAL AND RESERVES (continued)

Reconciliation of movement in capital and reserves (continued)

Share capital A$’000 Company Balance at 1 July 2005 182,563 Effect of change in accounting policy — Balance at 1 July 2005 — restated 182,563 Total recognised income and expense — Shares issued on acquisition of joint venture interests 48,078 Shares issued on exercise of options 152 Shares issued on conversion of convertible notes 5,559 Equity settled transactions 9,991 Dividends to shareholders — Balance at 30 June 2006 246,343 Balance at 1 July 2006 246,343 Total recognised income and expense — Dividends to shareholders — Balance at 30 June 2007 246,343 *Share capital* On issue at 1 July Shares issued on acquisition of joint venture interests Shares issued on equity settled transaction Shares issued on exercise of options Shares issued on conversion of convertible notes On issue at 30 June — fully paid	Hedging reserve A$’000 — — — — — — — — — — — — — —	Fair value reserve A$’000 — —	Retained Total earnings equity A$’000 A$’000 4,184 186,747 — — 4,184 186,747 61,225 61,225 — 48,078 — 152 — 5,559 308 10,299 (61,412) (61,412) 4,305 250,648 4,305 250,648 63,684 64,687 (54,340) (54,340) 13,649 260,995 Company Ordinary shares 2007 2006 187,380,346 172,824,327 — 7,584,677 — 3,027,396 — 110,000 — 3,833,946 187,380,346 187,380,346
		— — — — — — —
		—

		— 1,003 —
		1,003

– II-262 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

27. CAPITAL AND RESERVES (continued)

Reconciliation of movement in capital and reserves (continued)

Share capital (continued)

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.

In the event of winding up of the Company, ordinary shareholders rank after creditors and are fully entitled to any proceeds.

Hedging reserve

The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred.

Fair value reserve

The fair value reserve comprises the cumulative net change in the fair value of available-for-sale financial assets until the investment is derecognised.

Dividends

Dividends recognised in the current year by the Company are:

				Franked/	Date of
	Cents per share		Total amount	unfranked	payment
			A$
2007
Interim 2007 ordinary		11.0	20,611,838	Franked	30 March 2007
Final 2006 ordinary		18.0	33,728,462	Franked	9 October 2006
Total amount		29.0	54,340,300

2006
Interim 2006 ordinary		23.0	42,401,179	(1) Franked	31 March 2006
Final 2005 ordinary		11.0	19,010,676	(2) Franked	30 September 2005
Total amount		34.0	61,411,855

Franked dividends declared or paid during the year were franked at the tax rate of 30%.

(1) Paid out of AIFRS profits
(2) Paid out of old AGAAP profits

– II-263 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

27. CAPITAL AND RESERVES (continued)

Dividends (continued)

After the balance sheet date the following dividends were proposed by the directors. The declaration and subsequent payment of dividends has no income tax consequences.

			Franked/	Date of
	Cents per share	Total amount	unfranked	payment
		A$
Final ordinary	7.0	13,116,624	Franked	28 September 2007

The financial effect of these dividends has not been brought to account in the financial statements for the year ended 30 June 2007 and will be recognised in subsequent financial reports.

	Company
	2007	2006
	A$’000	A$’000
Dividend franking account
30% franking credits available to shareholders
of the Company for subsequent financial years	42,303	45,981

The above available amounts are based on the balance of the dividend franking account at year-end adjusted for:

(a) franking credits that will arise from the payment of the current tax liabilities;
(b) franking debits that will arise from the payment of dividends recognised as a liability at year-end;
(c) franking credits that will arise from the receipt of dividends recognised as receivables by the tax-consolidated group at year-end; and
(d) franking credits that the entity may be prevented from distributing in subsequent years.

The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends.

The impact on the dividend franking account of dividends proposed after the balance sheet date but not recognised as a liability is to reduce it by A$5,621,000 (2006: A$14,455,000).

In accordance with the tax consolidation legislation, the Company as the head entity in the tax-consolidated group has also assumed the benefit of A$42,303,000 (2006: A$45,981,000) franking credits.

– II-264 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

28. FINANCIAL INSTRUMENTS

Exposure to credit, interest rate and currency risks arises in the normal course of the Company’s and the Group’s business. Derivative financial instruments are used to hedge exposure to fluctuations in foreign exchange rates.

Credit risk

Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis.

The credit risk on financial assets of the Group, which have been recognised on the balance sheet, is the carrying amount, net of impairment.

The Group minimises concentrations of credit risk by undertaking transactions with a number of customers in various countries. Credit risk on customers is also reduced by entering into letters of credit with customers and discounting receivables on a limited recourse basis.

Concentration of credit risk at balance date on trade receivables are: Asia 88% (2006: 63%), Europe 12% (2006: 35%) and Other Nil% (2006: 2%). The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the balance sheet.

Foreign exchange contracts are subject to credit risk in relation to the relevant counterparties, which are principally large financial institutions. The maximum credit risk exposure on foreign currency contracts is the full amount of the foreign currency the Group pays when settlement occurs, should the counterparty fail to pay the amount which it is committed to pay the Group.

Interest rate risk

The Group adopts a policy of ensuring an appropriate amount of its exposure to changes in interest rates on borrowings is on a fixed rate basis. Interest rate swaps denominated in United States dollars were in place to achieve an appropriate mix of fixed and floating rate exposure within the Group’s policy. The swaps had a floating interest rate of 5.17% and a fixed interest rate of 2.73% and were closed out during the prior year.

Investments in equity securities and short-term receivables and payables are not exposed to interest rate risk.

– II-265 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

28. FINANCIAL INSTRUMENTS (continued)

Effective interest rate and repricing analysis

Effective interest rate Note Consolidated Cash and cash equivalents 14 6.1% Cash and deposits — not at call 17 4.7% Finance lease liabilities 23 7.3% Deferred liability for acquisition of mining interest 23 10.7% Amounts payable for future user charges 26 —	6 months Total or less A$’000 A$’000 96,565 96,565 6,020 6,020 7,752 716 (9,577) (987) (10,703) (885) 90,057 101,429	2007 6-12 months A$’000 — — 735 (938) (910) (1,113)	1-2 years A$’000 — — 1,620 (1,735) (1,903) (2,018)	2-5 years A$’000 — — 4,263 (4,243) (6,419) (6,399)	More Effective than 5 interest years rate A$’000 — 5.8% — 4.4% 418 — (1,674) 10.2% (586) — (1,842)	2006 6 months Total or less A$’000 A$’000 168,603 168,603 6,099 6,099 — — (10,716) (990) (12,398) (835) 151,588 172,877	6-12 months A$’000 — — — (941) (859) (1,800)	1-2 years A$’000 — — — (1,747) (1,796) (3,543)	2-5 years A$’000 — — — (4,310) (6,057) (10,367)	More than 5 years A$’000 — — — (2,728) (2,851) (5,579)

Foreign currency risk

The Group enters into forward foreign exchange contracts to economically hedge a proportion of anticipated coal sale proceeds denominated in United States dollars and Australian dollar costs funded by United States dollar loans, subject to Board approved limits. The terms of these contracts are not more than 3 years. The amount of anticipated future sales and costs is forecast in light of current conditions in foreign markets, commitments from customers and to suppliers and experience. All sales from the first of each quarter, after allowing for the natural hedge designations referred to below, are designated as being hedged until all hedge contracts are fully utilised. Notes 3(b) and (c) set out the accounting treatment for foreign currency transactions and hedges.

– II-266 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

28. FINANCIAL INSTRUMENTS (continued)

Foreign currency risk (continued)

Natural hedge

A specific natural hedge existed between the United States dollar denominated cash advance term loan and United State dollar denominated coal sales revenue. The natural hedge position was established in prior periods when the cash advance term loan was restructured and the Australian dollar denominated debt was redrawn as a United States dollar denominated debt and upon further drawings of United States dollar denominated debt. The United States dollar denominated debt was repaid during the prior period and the unrealised foreign exchange gains deferred under previous AGAAP continue to be deferred and included in the measurement of the anticipated transaction when the transaction has occurred as originally designated.

Forecasted transactions

The Group classifies its forward exchange contracts hedging forecasted sales as cash flow hedges and measures them at fair value.

The net fair value of forward exchange contracts used as hedges of forecasted sales at 30 June 2007 was A$18,560,000 (2006: A$887,000), comprising assets of A$18,560,000 (2006: A$2,711,000) and liabilities of A$Nil (2006: A$1,824,000) that were recognised as derivatives measured at fair value.

Recognised assets and liabilities

Changes in the fair value of forward exchange contracts that economically hedge monetary assets and liabilities in foreign currencies and for which no hedge accounting is applied are recognised in the income statement. Both the changes in fair value of the forward contracts and the foreign exchange gains and losses relating to the monetary items are recognised as part of ‘financial income and expenses’ (see Note 10). The fair value of forward exchange contracts used as economic hedges of monetary assets and liabilities in foreign currencies at 30 June 2007 was A$Nil (2006: A$Nil) for the Group and A$Nil (2006: A$Nil) for the Company recognised in the fair value derivatives.

Sensitivity analysis

In managing interest rate and currency risks the Group aims to reduce the impact of short-term fluctuations on the Group’s earnings over the longer-term, however, permanent changes in foreign exchange and interest rates would have an impact on consolidated earnings.

At 30 June 2007, it is estimated that a general increase of one percentage point in interest rates would increase the Group’s profit before tax by approximately A$1,531,000 (2006: A$1,460,000).

It is estimated that a general increase of one percentage point in the value of the Australian dollar against other foreign currencies would have decreased the Group’s profit before tax by approximately A$132,000 for the financial year ended 30 June 2007 (2006: A$332,000). The forward exchange contracts have been included in this calculation.

– II-267 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

28. FINANCIAL INSTRUMENTS (continued)

Fair values

The fair values together with the carrying amounts shown in the balance sheet are as follows:

Consolidated

Note Cash and cash equivalents 14 Trade and other receivables 15 Cash and deposits — not at call 17 Investments in equity securities 17 Foreign currency derivative contracts: Assets 17 Liabilities 26 Trade and other payables 22 Deferred liability for acquisition of mining interest 23 Finance lease liabilities 23 Other derivative contracts 26 Employee benefits 24 Other financial liabilities 26 Unrecognised (losses)/gains	Carrying amount 2007 A$’000 96,565 39,213 6,020 33,115 18,560 — (81,416) (9,577) (7,752) (2,000) (1,820) (10,703)	Fair value 2007 A$’000 96,565 39,213 6,020 33,115 18,560 — (81,416) (9,577) (7,752) (2,000) (1,820) (10,703) —	Carrying amount 2006 A$’000 168,603 51,075 6,099 — 2,711 (1,824) (68,538) (10,716) — — (662) (12,529)	Fair value 2006 A$’000 168,603 51,075 6,099 — 2,711 (1,824) (68,538) (10,716) — — (662) (12,529)
				—

Estimation of fair values

The methods used in determining the fair values of financial instruments are discussed in Note 4.

Interest rates used for determining fair value

The entity uses the government yield curve as of 30 June 2007 plus an adequate constant credit spread to discount financial instruments. The interest rates used are as follows:

financial instruments. The interest rates used are as follows:
	2007	2006
	%	%
Derivatives	5.5 — 7.0	5.0 — 6.5
Deferred liability for acquisition of mining interest	10.7	10.2
Receivables	5.5 — 6.5	5.5 — 6.0

– II-268 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007

29. INTERESTS IN JOINT VENTURE OPERATIONS

The Group holds the following interests in various joint ventures whose principal activities are coal production, exploration and evaluation, and development.

Joint Venture %

	Interest	held
	2007	2006	Principal activity
Coppabella and Moorvale Joint Venture	73.3%	73.3%	Coal production
Monto Coal Joint Venture	51%	51%	Exploration and evaluation
Olive Downs (South) Joint Venture (refer below)	90%	—	Exploration and evaluation
Olive Downs Joint Venture (refer below)	—	90%	Exploration and evaluation
Moorvale West Joint Venture	90%	90%	Exploration and evaluation
West/North Burton Joint Venture	65%	65%	Exploration and evaluation
West Rolleston Joint Venture	90%	90%	Exploration and evaluation
West Walker Joint Venture	85%	85%	Exploration and evaluation
Bowen Basin Coal Joint Venture	85%	85%	Exploration and evaluation
Capricorn Joint Venture	85%	85%	Exploration and evaluation

For the year ended 30 June 2007, the contribution of the Coppabella and Moorvale Joint Venture to the operating profit before tax of the Group was A$93,909,000 (2006: A$227,524,000). The value of the Group’s 73.3% share of coal sold (pre hedging) during the year by Coppabella and Moorvale Joint Venture was A$346,138,000 (2006: A$525,510,000).

There was no coal mined by the other joint ventures during the year.

On 16 May 2007, the Group sold 16.7% of its 90% interest in the Olive Downs North project (previously part of Olive Downs Joint Venture) which comprises the tenement region to the North of the Isaac River. The Group’s interest in the Olive Downs North project is now reported within Coppabella and Moorvale Joint Venture at 73.3%. The Group’s interest in the tenement area to the south of the Isaac River remains at 90% and is now identified as Olive Downs (South) Joint Venture.

– II-269 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

29. INTERESTS IN JOINT VENTURE OPERATIONS (continued)

Included in the assets and liabilities of the Group are the following items which represent the Group’s interest in the assets and liabilities employed in the joint ventures, recorded in accordance with the accounting policies described in Note 3(a).

Current assets Cash and cash equivalents Trade and other receivables Inventories Other financial assets Overburden in advance Assets classified as held for sale Total current assets Non-current assets Trade and other receivables Property, plant and equipment Exploration and evaluation assets Overburden in advance Total non-current assets Total assets Current liabilities Trade and other payables Loans and borrowings Provisions Other financial liabilities Total current liabilities Non-current liabilities Loans and borrowings Provisions Other financial liabilities Total non-current liabilities Total liabilities	Consolidated 2007 2006 A$’000 A$’000 — — 15,647 11,448 28,627 15,412 6,020 6,098 105,552 74,206 33,537 — 189,383 107,164 3,080 4,073 181,254 166,972 66,303 94,809 2,765 2,904 253,402 268,758 442,785 375,922 75,603 65,815 1,451 — 1,030 3,265 1,795 1,825 79,879 70,905 6,301 — 19,669 16,502 8,908 10,704 34,878 27,206 114,757 98,111	Company 2007 2006 A$’000 A$’000 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —	Company 2007 2006 A$’000 A$’000 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
			— — — — —
			—
			—

			— — — —
			—
			— — —
			—
			—

Refer to Notes 30 and 31 for details of commitments and contingent liabilities.

– II-270 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

30. CAPITAL AND OTHER COMMITMENTS

(a) Capital expenditure commitments — joint ventures Buildings and infrastructure contracted but not provided for in the financial statements and payable: Not later than one year Later than one year but not later than five years (b) Operating lease commitments Future operating lease rentals not provided for in the financial statements and payable: Not later than one year Later than one year but not later than five years Later than five years	Consolidated 2007 2006 A$’000 A$’000 36,597 9,985 — 3,328 36,597 13,313 552 553 1,719 1,632 45 289 2,316 2,474	Company 2007 2006 A$’000 A$’000 — — — — — — 440 474 1,518 1,618 45 289 2,003 2,381	Company 2007 2006 A$’000 A$’000 — — — — — — 440 474 1,518 1,618 45 289 2,003 2,381
			—

			474 1,618 289
			2,381

The Group leases a number of office spaces under operating leases. The leases typically run for a period of 2 to 7 years. Lease payments are increased every year to reflect market rentals.

During the financial year ended 30 June 2007, A$571,000 was recognised as an expense in the income statement in respect of operating leases (2006: A$386,000).

– II-271 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

30. CAPITAL AND OTHER COMMITMENTS (continued)

(c) Mining leases — joint ventures Future mining lease rentals not provided for in the financial statements and payable: Not later than one year Later than one year but not later than five years Later than five years (d) Exploration and evaluation expenditure Exploration obligations In order to maintain current rights of tenure to exploration tenements, the Group is required to perform minimum exploration work to meet the minimum expenditure requirements specified by various State governments. The expenditure obligations are subject to renegotiation when application for a mining lease and/or renewal of exploration permits is made and at other times. These obligations are not provided for in the financial statements and are payable: Not later than one year Later than one year but not later than five years	Consolidated 2007 2006 A$’000 A$’000 391 372 1,236 1,194 2,807 2,959 4,434 4,525 1,075 1,111 1,457 1,998 2,532 3,109	Company 2007 2006 A$’000 A$’000 — — — — — — — — — — — — — —	Company 2007 2006 A$’000 A$’000 — — — — — — — — — — — — — —
			—

			— —
			—

– II-272 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

30. CAPITAL AND OTHER COMMITMENTS (continued)

Consolidated 2007 2006 A$’000 A$’000 (d) Exploration and evaluation expenditure (continued) *Exploration costs* Committed costs for exploration and evaluation areas not provided for in the financial statements and payable: Not later than one year — 1 Later than one year but not later than five years — — — 1 (e) Operating commitments — joint ventures Commitments under the electricity, water, rail, port, coal washing plant and train loading facility agreements for joint ventures not provided for in the financial statements and payable: Not later than one year 65,523 27,884 Later than one year but not later than five years 205,768 101,549 Later than five years 291,329 153,342 562,620 282,775	Company 2007 2006 A$’000 A$’000 — — — — — — 7,585 2,094 60,181 25,698 160,768 100,697 228,534 128,489	Company 2007 2006 A$’000 A$’000 — — — — — — 7,585 2,094 60,181 25,698 160,768 100,697 228,534 128,489
		—

		2,094 25,698 100,697
		128,489

In addition to the operating commitments in (e) above, other contracts on commercial terms and conditions have been entered into with contractors for overburden and mining operations at Coppabella and Moorvale mines and with original owners regarding royalty arrangements. As the amounts payable under the contracts vary with the quantities mined and sold, future commitments are not able to be reliably assessed and quantified.

Refer Note 23 for commitments relating to finance leases of the Group.

On 23 October 2002, the Coppabella and Moorvale Joint Venture participants agreed to pay a user charge to the Queensland Government for the facilitation of the transport infrastructure corridor (TIC) relocation. The user charge comprises 40 quarterly payments (Group share of A$596,000 per quarter; 2006: A$596,000 per quarter), commencing 1 October 2002, which have been included in the above operating commitments less the amounts payable for future user charges brought to account at 30 June 2007 (refer Note 26).

– II-273 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

30. CAPITAL AND OTHER COMMITMENTS (continued)

(f) Employee compensation commitments Key management personnel Commitments under non-cancellable employment contracts not provided for in the financial statements and payable: Within one year Later than one year but not later than five years	Consolidated 2007 2006 A$’000 A$’000 — 830 — 327 — 1,157	Company 2007 2006 A$’000 A$’000 — 438 — — — 438	Company 2007 2006 A$’000 A$’000 — 438 — — — 438
			438

Denis Wood is a director of Queensland Coke & Energy Pty Ltd (QCE), a wholly controlled entity of the Company. By a Services Agreement dated 1 August 2005 (and as varied on 8 September 2006), Coal Industry Services Pty Ltd, a director related entity, has agreed to provide the services of Denis Wood to QCE at A$392,400 per annum (2006: A$392,400 per annum) together with the provision of a car park and mobile telephone. The contract relates to the development of a coke project and is for an initial period of 3 years but is able to be extended. If the project is successfully developed, a royalty is payable for 15 years at A$0.50 per tonne for up to 1.6 million tonnes per annum and A$0.25 per tonne for each tonne over 1.6 million tonnes per annum. The contract may be terminated for particular stated events, in which case no termination payments are payable. If terminated for other stated events, the royalty remains payable.

The Services Agreement was suspended on 31 December 2006 and terminated with an effective date of 30 April 2007.

The above amounts represent minimum commitments under these arrangements offset by any amounts brought to account as liabilities at 30 June 2007.

– II-274 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

30. CAPITAL AND OTHER COMMITMENTS (continued)

(g) Other commitments

Joint Ventures

Deeds of cross charge

(i) The payment of future cash calls by Coppabella Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the Coppabella and Moorvale Joint Venture is secured by a guarantee from the Company and a charge over Coppabella Coal Pty Ltd’s interest in the Coppabella and Moorvale Joint Venture in favour of the other joint venturers and Macarthur Coal (C&M Management) Pty Ltd as the manager of the Coppabella and Moorvale Joint Venture.
(ii) The payment of future cash calls by Monto Coal 2 Pty Ltd, a controlled entity, for its share of operating and capital costs in the Monto Coal Joint Venture is secured by a charge over Monto Coal 2 Pty Ltd’s interest in the Monto Coal Joint Venture in favour of the other joint venturers.
(iii) The payment of future cash calls by Olive Downs Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the Olive Downs (South) Joint Venture (previously known as the Olive Downs Joint Venture) is secured by a charge over Olive Downs Coal Pty Ltd’s interest in the Olive Downs (South) Joint Venture (previously known as the Olive Downs Joint Venture) in favour of the other joint venturers.
(iv) The payment of future cash calls by Capricorn Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the Capricorn Joint Venture is secured by a charge over Capricorn Coal Pty Ltd’s interest in the Capricorn Joint Venture in favour of the other joint venturers.
(v) The payment of future cash calls by West Burton Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the West/North Burton Joint Venture is secured by a charge over West Burton Coal Pty Ltd’s interest in the West/North Burton Joint Venture in favour of the other joint venturers.
(vi) The payment of future cash calls by West Rolleston Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the West Rolleston Joint Venture is secured by a charge over West Rolleston Coal Pty Ltd’s interest in the West Rolleston Joint Venture in favour of the other joint venturers.
(vii) The payment of future cash calls by West Walker Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the West Walker Joint Venture is secured by a charge over West Walker Coal Pty Ltd’s interest in the West Walker Joint Venture in favour of the other joint venturers.
(viii) The payment of future cash calls by Moorvale West Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the Moorvale West Joint Venture is secured by a charge over Moorvale West Coal Pty Ltd’s interest in the Moorvale West Joint Venture in favour of the other joint venturers.
(ix) The payment of future cash calls by BB Interests Pty Ltd, a controlled entity, for its share of operating and capital costs in the Bowen Basin Coal Joint Venture is secured by a charge over BB Interests Pty Ltd’s interest in the Bowen Basin Coal Joint Venture in favour of the other joint venturers.

– II-275 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007

30. CAPITAL AND OTHER COMMITMENTS (continued)

(g) Other commitments (continued)

Joint Ventures (continued)

Other

(i) The Company has guaranteed the commitments of Coppabella Coal Pty Ltd and Monto Coal 2 Pty Ltd, controlled entities, in relation to royalty arrangements.

Associates

Refer Note 33.

31. CONTINGENCIES

Indemnities

(1) These contingent liabilities are considered remote.

Guarantees

Coppabella Coal Pty Ltd, a controlled entity, as a participant of the Coppabella and Moorvale Joint Venture, has provided bank guarantees totalling A$59,835,000 (2006: A$57,787,000) in respect of rehabilitation works, electricity, water, transport infrastructure corridor facilities and customers. Further guarantees totalling A$6,034,000 (2006: A$Nil) have been provided in respect of rehabilitation works and water which have been secured by bank term deposits of the same amount (refer Note 14).[(1)]

The Group, as a participant of the Coppabella and Moorvale Joint Venture, has entered into a Residual Value Guarantee (RVG) with a bank regarding the lease residual value of the dragline used by a contractor at the Coppabella Mine for A$10,775,000 (2006: A$10,775,000) (included in the amount of guarantees referred to above). The lease term expires on 30 June 2008. Management of Macarthur Coal (C&M Management) Pty Ltd, the manager of the Coppabella and Moorvale Joint Venture, expect the future value of the dragline to be in excess of the residual value at 30 June 2008 provided the contractor performs to the Asset Management Plan. The financier of the dragline also holds a fixed and floating charge over Coppabella Coal Pty Ltd’s interests up to the agreed share of the residual value being A$10,775,000 (2006: A$10,775,000).[(1)]

– II-276 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007

31. CONTINGENCIES (continued)

Guarantees (continued)

Coppabella Coal Pty Ltd, a controlled entity, as a participant of the Coppabella and Moorvale Joint Venture, has entered into the Coppabella Dragline Agreement dated 19 April 2002 requiring purchase guarantees to be provided in relation to the Marion 8200 dragline erected by Roche Mining Pty Ltd (Roche) and that will be used by Roche in undertaking a contract, being for the removal of overburden and mining of coal. In the event of a termination of the contract, the guarantees in place require Macarthur Coal (C&M Management) Pty Ltd, as agent for the Coppabella and Moorvale Joint Venture, to assume all the reasonable continuing liabilities of the dragline, any items that relate to the construction or operation of the dragline (including spare parts) and any financing responsibilities in relation to the operating lease between Roche and the Lease Financiers including Investec Bank (Australia) Limited.[(1)]

(1) These contingent liabilities are considered remote.

Environmental

Current Queensland Government environment policy requires the preparation of an Environmental Management Overview Strategy (EMOS) and a Plan of Operations detailing the quality, timing and standards of planned mine rehabilitation work. The Coppabella and Moorvale Joint Venture have prepared its EMOS and its Plans of Operations has been accepted by the Environmental Protection Agency. In addition to the EMOS and the Plans of Operations, the Group is required to lodge securities with the Department of Natural Resources, Mines and Water to ensure compliance with relevant legislation. The total amount of the guarantees lodged with the Department of Natural Resources, Mines and Water as at 30 June 2007 is A$14,615,000 (2006: A$13,760,000) (included in the amount of guarantees referred to above).[(1)]

(1) These contingent liabilities are considered remote.

Memorandum of Understanding

– II-277 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

31. CONTINGENCIES (continued)

Litigation

On 19 December 2003, Macarthur Coal (C&M Management) Pty Ltd (MCCM), as manager and agent for the Coppabella and Moorvale Joint Venture participants, lodged a Notice of Dispute with its mining contractor Downer EDI Mining Pty Ltd (formerly Roche Mining Pty Ltd) in relation to a mining contract at the Coppabella mine. The claim included recovery of loss and damages for higher production costs and demurrage resulting from a failure of the contractor to deliver coal in accordance with the contract provisions.

On 28 February 2005, the arbitrator determined that 7 of the 9 points of claim could proceed to arbitration. MCCM received the detailed Points of Claim (referred to as the 2004 financial year claim) from the contractor on 21 March 2005 and detailed Further Particulars on 5 September 2005. On 7 April 2006, MCCM lodged its defence in relation to the Points of Claim and lodged a counter claim against the contractor. On 5 July 2005, the contractor lodged a further Notice of Dispute in relation to alleged additional costs resulting from the Superintendent’s approval of the 2005 financial year Mine Plan (referred to as the 2005 financial year claim). The claims were rejected by the Superintendent and the subsequent dispute was referred to arbitration in August 2005. On 10 April 2006, the contractor lodged a Consolidated and Further Amended Points of Claim in relation to both the 2004 financial year claim and the 2005 financial year claim. MCCM lodged its defence to the consolidated claim on 13 October 2006. On 13 January 2006, the contractor lodged a further Notice of Claim in relation to alleged additional costs resulting from the Superintendent’s approval of the 2006 financial year Mine Plan. As at the date of this report, the contractor has not provided to the Superintendent requested details of the nature and quantum of this claim.

The total value of the three claims noted above for financial years 2004, 2005 and 2006 is in the order of A$90,000,000 for the Coppabella and Moorvale Joint Venture, of which the Group holds a 73.3% interest. Downer EDI Mining Pty Ltd have recently notified the Arbitrator that certain claims are withdrawn and a claim for coal rehandle rates has been settled by negotiation. These items are excluded from the total value of claims disclosed in this report. Areas of duplication have been identified across these three claims and the contractor is yet to provide particulars regarding basis and quantum of the third claim.

The Directors of the Group (and the Manager) dispute the above claims and will vigorously defend their position in arbitration. Following an appeal by Downer EDI Mining Pty Ltd to the Arbitrator for additional time to prepare their case, the original date of 12 June 2007 for the arbitration hearing to commence has been postponed.

In the Director’s opinion, disclosure of any further information about the above matter would be prejudicial to the interests of the Group.

– II-278 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

32. GROUP ENTITIES

	Ownership	interest
	2007	2006
	%	%
Parent entity
Macarthur Coal Limited
Subsidiaries
Coppabella Coal Pty Ltd	100	100
Macarthur Coal Management Pty Ltd	100	100
Macarthur Coal Mine Management Pty Ltd	100	100
Moorvale Coal Pty Ltd	100	100
Macarthur Coal (Equipment) Pty Ltd (formerly Moorvale Interest Pty Ltd)	100	100
Monto Coal Pty Ltd	100	100
Monto Coal 2 Pty Ltd	100	100
Macarthur Exploration Pty Ltd	100	100
Olive Downs Coal Pty Ltd	100	100
Queensland Coke & Energy Pty Ltd	100	100
Capricorn Coal Pty Ltd	100	100
West Burton Coal Pty Ltd	100	100
West Rolleston Coal Pty Ltd	100	100
West Walker Coal Pty Ltd	100	100
Moorvale West Coal Pty Ltd	100	100
BB Interests Pty Ltd	100	100

All subsidiaries were incorporated and carry on business in Australia.

In the financial statements of the Company, investments in controlled entities are measured at cost and included with other financial assets. Refer to Note 17. The Company has no jointly controlled entities.

– II-279 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

33. INVESTMENTS IN ASSOCIATED ENTITIES

		Reporting	Interest	held
	Principal activities	date	2007	2006
			%	%
Macarthur Coal (C&M Management) Pty Ltd	Manager of the Coppabella
	and Moorvale Joint Venture	30 June	73.3	73.3
Bistrotel Pty Ltd	Property Owner	30 June	73.3	73.3
Macarthur Coal (C&M Equipment) Pty Ltd	Equipment Finance	30 June	73.3	—

Investments in these entities are held in connection with joint venture arrangements. Under these arrangements, the Group does not have control over these associated entities, and accordingly have not been consolidated. The impact of the results and operations of the associated entities are not material to the Group and accordingly have not been equity accounted.

Commitments

Share of associates’ operating lease commitments payable: Not later than one year Later than one year but not later than five years	Consolidated 2007 2006 A$’000 A$’000 6,541 22 22,862 32 29,403 54	Consolidated 2007 2006 A$’000 A$’000 6,541 22 22,862 32 29,403 54
		54

2007 includes operating lease commitments relating to production equipment leased by Macarthur Coal (C&M Equipment) Pty Ltd, an associated entity. These costs are reimbursed by the participants of the Coppabella and Moorvale Joint Venture, including Coppabella Coal Pty Ltd, a controlled entity of the Company. The amounts disclosed above represent the Group’s share of those operating lease commitments. These amounts have been included in Note 30(e).

– II-280 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007

34. ACQUISITIONS OF SUBSIDIARIES AND JOINT VENTURE INTERESTS

The following controlled entities were acquired during the year:

				Contribution to
		Group’s		consolidated
	Date acquired	interest	Consideration	net profit
		%	A$’000	A$’000
2007
Macarthur Coal
(C&M Equipment)
Pty Ltd(1)	28 August 2006	100	—	—
2006
Moorvale West Coal Pty Ltd(1)	28 November 2005	100	—	—
West Walker Coal Pty Ltd(1)	28 November 2005	100	—	—
West Burton Coal Pty Ltd(1)	28 November 2005	100	—	—
West Rolleston Coal Pty Ltd(1)	28 November 2005	100	—	—
Capricorn Coal Pty Ltd(1)	28 November 2005	100	—	—
BB Interests Pty Ltd	15 December 2005	100	16,420	—

(1) The companies were acquired as a shelf company for nominal cost. The shelf companies had no assets nor had they operated at the date of acquisition.

On 16 May 2007, shares were issued in Macarthur Coal (C&M Equipment) Pty Ltd and subsequently transferred to the Coppabella and Moorvale Joint Venture participants equivalent to their ownership interests in the joint venture. At that date, the Group’s ownership interest in Macarthur Coal (C&M Equipment) Pty Ltd reduced to 73.3% and the company was subsequently deconsolidated and accounted for as an associated entity. Refer to Note 33.

Acquisition of BB Interests Pty Ltd

On 15 December 2005, the Group acquired all of the shares in BB Interests Pty Ltd. Consideration for the acquisition was the issue of Macarthur Coal shares to the value of A$16,420,000. BB Interests Pty Ltd was acquired from CITIC Australia Coal Exploration Pty Ltd as part of the acquisition of interests in Bowen Basin exploration tenements from the Group’s joint venture partners Bowen Basin Exploration Pty Ltd and CITIC Australia Coal Exploration Pty Ltd.

The company did not contribute to the Group’s net profit for the prior period.

– II-281 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

34. ACQUISITIONS OF SUBSIDIARIES AND JOINT VENTURE INTERESTS (continued)

Effect of Acquisition

The acquisition had the following effect on the Group’s assets and liabilities in the prior period:

Acquiree’s net assets at acquisition date

	Carrying amounts	Carrying amounts
		A$’000
Exploration and evaluation assets		16,958
Repayment of loan from Macarthur Exploration Pty Ltd,
a controlled entity of the Company		(538)
Consideration paid, satisfied in shares		16,420

Acquisition of joint venture interest from Bowen Basin Exploration Pty Ltd

In the prior period, the Group acquired interests from its joint venture partner, Bowen Basin Exploration Pty Ltd. Bowen Basin Exploration Pty Ltd is an entity controlled by Mr Ken Talbot, a director of the Group. Consideration for the acquisition was the issue of Macarthur Coal shares to the value of A$31,658,000.

Effect of acquisition

The acquisition had the following effect on the Group’s assets and liabilities in the prior period.

Net assets acquired at acquisition date

	Carrying amounts	Carrying amounts
		A$’000
Exploration and evaluation assets		31,695
Repayment of loan from Macarthur Exploration Pty Ltd,
a controlled entity of the Company		(37)
Consideration paid, satisfied in shares		31,658

– II-282 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

34. ACQUISITIONS OF SUBSIDIARIES AND JOINT VENTURE INTERESTS (continued)

Effect of acquisition

Following the acquisition of BB Interests Pty Ltd and joint venture interests from Bowen Basin Exploration Pty Ltd in the prior period, the joint venture participants agreed to restructure the Bowen Basin Coal Exploration Joint Venture into seven new joint ventures as detailed below:

		Interest	held
		30 June	2006
		CITIC
		Australia Coal	Bowen Basin
	Group	Exploration Pty Ltd	Exploration Pty Ltd
	%	%	%
Olive Downs Joint Venture	90	10	—
Moorvale West Joint Venture	90	10	—
West/North Burton Joint Venture	65	10	25
West Walker Joint Venture	85	15	—
West Rolleston Joint Venture	90	10	—
Bowen Basin Coal Joint Venture	85	15	—
Capricorn Joint Venture	85	15	—

Refer Note 29 for interests held in these joint ventures at 30 June 2007.

– II-283 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

35. OTHER ACQUISITIONS

On 1 December 2006 the Group acquired mining equipment owned by Peter Champion Mining Pty Ltd (PCM), a contractor operating at the Coppabella Mine, for A$34,254,000 in cash.

The acquisition had the following effect on the Group’s assets and liabilities:

Trade and other receivables Assets held for sale Property, plant and equipment Other assets Employee benefits Consideration paid, satisfied in cash	Recognised values on acquisition A$’000 3,856 28,808 1,208 770 (388) 34,254

– II-284 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

36. RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES

Cash flows from operating activities Profit for the period Adjustments for: Depreciation Amortisation of financing costs (Reversal)/recognition of impairment losses Amounts set aside to provisions Exploration and evaluation expenses Foreign exchange (gains)/losses Overburden in advance written off Write down of inventories to net realisable value Interest on convertible notes Interest on loans and borrowings Interest on unwinding of discount Borrowing costs Loss on sale of property, plant and equipment Gain on disposal of available-for-sale financial assets transferred from equity Gain on disposal of non-current assets Equity-settled share based payment expenses Operating profit before changes in working capital and provisions Increase/(decrease) in income tax payable Increase/(decrease) in net deferred tax liabilities/assets (Increase)/decrease in tax related receivables (Increase)/decrease in trade and other receivables (Increase)/decrease in inventories (Increase)/decrease in overburden in advance (Increase)/decrease in deferred expenditure Increase/(decrease) in trade and other payables Net cash from operating activities	Consolidated 2007 2006 A$’000 A$’000 66,544 149,589 16,162 16,011 — 257 (91) 91 2,073 6,440 916 387 (2,016) (2,682) 8,990 — 2,718 — — 250 941 1,195 1,024 721 680 1,908 1,076 130 (7,973) — (13,154) — — 308 77,890 174,605 (37,625) 27,890 14,606 8,679 — — 18,216 (11,657) (15,933) 8,663 (40,197) (23,831) — 257 13,173 16,885 30,130 201,491	Company 2007 2006 A$’000 A$’000 63,684 61,225 139 61 — 257 — — (43) 455 — — — — — — — — — 250 — — — — — — — 23 (7,973) — — — — 308 55,807 62,579 (37,625) 27,890 (201) 117 (14,831) (62,729) (586) (863) — — — — — 257 647 (39) 3,211 27,212

– II-285 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

37. RELATED PARTIES

The following were key management personnel of the Group at any time during the reporting period and unless otherwise indicated were key management personnel for the entire period:

Non-executive directors

Keith De Lacy (Chairman)

Don Nissen Roger Marshall Peter Forbes

Ken Talbot (Executive Director until 19 January 2007, non-executive director since 19 January 2007)

Executive director

Nicole Hollows (Chief Executive Officer, Macarthur Coal Limited, appointed 19 January 2007, appointed as director 28 June 2007)

Executives

Shane Stephan (Chief Financial Officer, Macarthur Coal Limited, appointed 4 September 2006) Lisa Dalton (Company Secretary, Macarthur Coal Limited, appointed 24 May 2007) Gary Lee (Vice President — Marketing, Macarthur Coal Limited)

Derick Wilford (Vice President — Business Improvement, Macarthur Coal Limited, appointed 1 September 2006) Michael Gray (Vice President — Open-cut Development and Infrastructure, appointed 1 September 2006) Ian McAleese (Vice President — Corporate Development, Mergers & Acquisitions, Macarthur Coal Limited) Paul Smallbone (General Manager — Coppabella (SSE), Macarthur Coal Limited, appointed 17 July 2006) David Waddell (General Manager — Moorvale (SSE), Macarthur Coal Limited, appointed 1 September 2006) Denis Wood (Chief Executive Officer, Queensland Coke & Energy Pty Ltd, resigned 30 April 2007) Ken Carnes (Vice President — Marketing Asia, Macarthur Coal Limited)

Robert Adams (Company Secretary, Macarthur Coal Limited, resigned 24 May 2007)

Ian Neill (Vice President — Operations, Macarthur Coal Limited, resigned 1 March 2007)

Brett Garland (Vice President — Underground Development & Exploration, Macarthur Coal Limited, resigned 30 June 2007)

– II-286 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007

37. RELATED PARTIES (continued)

Key management compensation

The key management personnel compensation included in ‘personnel expenses’ (see Note 8) are as follows:

Short-term employee benefits Other long-term benefits Post-employment benefits Termination benefits Share based payments	Consolidated 2007 2006 A$ A$ 4,591,457 3,744,128 8,794 75,611 611,247 417,394 234,928 — 179,500 86,122 5,625,926 4,323,255	Company 2007 2006 A$ A$ 3,974,610 3,279,603 8,794 75,611 528,343 300,397 234,928 — 179,500 86,122 4,926,175 3,741,733	Company 2007 2006 A$ A$ 3,974,610 3,279,603 8,794 75,611 528,343 300,397 234,928 — 179,500 86,122 4,926,175 3,741,733
			3,741,733

Loans to key management personnel

Details regarding the aggregate of loans made, guaranteed or secured by any entity in the Group to key management personnel and their related parties are as follows:

	Consolidated		Company
	2007	2006	2007	2006
	A$	A$	A$	A$
Loans to key management personnel —
unsecured	37,382	87,735	37,382	87,735

Loans totalling A$Nil (2006: A$115,990) were made to key management personnel during the year in respect of the employee share loan plan. During the year, repayments of A$34,242 (2006: A$28,255) were made on the loans.

– II-287 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

37. RELATED PARTIES (continued)

Individual directors and executives compensation disclosures

Apart from the details disclosed in this note, no director has entered into a material contract with the Company or the Group since the end of the previous financial year and there were no material contracts involving directors’ interests existing at year-end.

Equity instruments

All options refer to options over ordinary shares of the Company, which are exercisable on a one-for-one basis under the Directors’ option plan and Executive option plan.

Options granted to directors are on the same terms and conditions as those granted to other employees. There were no options granted during the year.

Options and rights over equity instruments

There were no options held by key management personnel at any time during the reporting period. There was no movement during the reporting period in the number of options over ordinary shares in Macarthur Coal Limited held, directly, indirectly or beneficially, by each key management person, including their related parties.

No options held by key management personnel are vested but not exercisable at 30 June 2006 or 2007. Refer to Note 24 ‘Share based payments — Executive Option Plan’ for further details.

Movements in shares

– II-288 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

37. RELATED PARTIES (continued)

Movements in shares (continued)

			Received on
	Held at		exercise of		Held at
	1 July 2006	Acquisitions	options	Disposals	30 June 2007
Directors
Keith De Lacy	280,740	10,000	—	—	290,740
Roger Marshall	124,240	10,000	—	—	134,240
Don Nissen	313,840	31,532	—	(15,466)	329,906
Peter Forbes	22,240	10,000	—	—	32,240
Ken Talbot	66,659,137	—	—	—	66,659,137
Nicole Hollows	10,000	—	—	—	10,000
Executives
Brett Garland	3,682	—	—	—	3,682
Robert Adams	3,682	—	—	—	3,682
Ian Neill	3,682	—	—	3,682	—
Gary Lee	3,682	—	—	—	3,682
Shane Stephan	3,682	—	—	—	3,682
Ian McAleese	5,000	2,500	—	2,000	5,500
Denis Wood	—	—	—	—	—
Ken Carnes	—	—	—	—	—
Derick Wilford	1,841	—	—	—	1,841
Michael Gray	1,841	—	—	—	1,841
Paul Smallbone	—	—	—	—	—
David Waddell	—	—	—	—	—
Lisa Dalton	—	—	—	—	—

No shares were granted to key management personnel during the reporting period as compensation, other than 10,000 shares acquired each by Keith De Lacy, Roger Marshall, Don Nissen and Peter Forbes as application of past directors’ fees received, as detailed in Note 3(l).

– II-289 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007

37. RELATED PARTIES (continued)

Movements in shares (continued)

			Received on
	Held at		exercise of		Held at
	1 July 2005	Acquisitions	options	Disposals	30 June 2006
Directors
Keith De Lacy	308,880	1,860	—	30,000	280,740
Roger Marshall	142,380	1,860	—	20,000	124,240
Don Nissen	306,580	7,260	—	—	313,840
Peter Forbes	20,380	1,860	—	—	22,240
Ken Talbot	67,453,748	5,205,389		6,000,000	66,659,137
Nicole Hollows	15,000	—	—	5,000	10,000
Executives
Brett Garland	—	3,682	—	—	3,682
Robert Adams	170,000	3,682	—	170,000	3,682
Ian Neill	—	3,682	—	—	3,682
Gary Lee	—	3,682	—	—	3,682
Shane Stephan	55,707	3,682	110,000	165,707	3,682
Ian McAleese	—	5,000	—	—	5,000
Denis Wood	—	—	—	—	—
Ken Carnes	—	—	—	—	—
Mark Turner	—	2,945	—	2,945	—

No shares were granted to key management personnel during the previous reporting period as compensation, other than 1,860 shares acquired each by Keith De Lacy, Roger Marshall, Don Nissen and Peter Forbes as application of past directors’ fees received, as detailed in Note 3(l).

Other key management personnel transactions with the Company or its controlled entities

– II-290 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

37. RELATED PARTIES (continued)

Other key management personnel transactions with the Company or its controlled entities (continued)

Amounts payable to specified directors and their personally-related entities at reporting date arising from related party transactions were as follows:

	Consolidated		Company
	2007	2006	2007	2006
	A$	A$	A$	A$
Current liabilities
Trade and other payables	2,750	9,570	—	—

In the prior period, the Group acquired certain joint venture interests in the Bowen Basin Coal Exploration Joint Venture and interests in other tenements from its joint venture partners Bowen Basin Exploration Pty Ltd (BBE) (a related entity of Mr Ken Talbot, a director of the Company) and CITIC Australia Coal Exploration Pty Ltd (CITIC Exploration) (of which Roger Marshall, director of the Company, is a director) for a total acquisition price of A$48,653,000. The acquisition price was based on an independent valuation of the percentage of tenement interests to be acquired by the Group and was approved at a shareholders general meeting held on 15 December 2005.

The interests acquired by the Group were:

		Interests acquired from
		CITIC Exploration (by
	Interests	acquiring all the shares in
Prospect	acquired from BBE	BB Interests Pty Ltd)
	%	%
Olive Downs	25	15
Moorvale West	25	15
West/North Burton	—	15
West Walker	25	10
West Rolleston	12.5	2.5
Capricorn	—	10
Bowen Basin Coal	25	10

– II-291 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007.

37. RELATED PARTIES (continued)

Other key management personnel transactions with the Company or its controlled entities (continued)

The interests retained by BBE and CITIC Exploration following completion of the acquisition by Macarthur Coal at that date were:

	Interest	Interest retained by
Prospect	retained by BBE	CITIC Exploration
	%	%
Olive Downs	—	10
Moorvale West	—	10
West/North Burton	25	10
West Walker	—	15
West Rolleston	—	10
Capricorn	—	15
Bowen Basin Coal	—	15

Acquisition from CITIC Exploration

The interests acquired from CITIC Exploration were held by BB Interests Pty Ltd, a wholly owned subsidiary of CITIC Exploration. The Group purchased all of the shares in BB Interests from CITIC Exploration for A$16,958,000 with the payment comprising:

An amount equal to CITIC Exploration’s share of the exploration expenditure incurred by the Group on all tenements since 20 October 2004 based on interests held after the acquisition was completed which was paid by the Group in cash. The amount was set off against CITIC Exploration’s obligation to pay that amount to the Group.
The remainder by the issue of 2,590,392 shares in the Company to CITIC Australia Coal Pty Ltd ABN 94 050 137 972. The price at which the shares were issued was A$6.33889912 which was determined by calculating the arithmetic average of the daily volume weighted average sale price of Macarthur Coal shares sold in the ordinary course of trading on ASX during the five trading days commencing on 11 October 2005.

– II-292 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2007.

37. RELATED PARTIES (continued)

Other key management personnel transactions with the Company or its controlled entities (continued)

Acquisition from BBE

The purchase price of A$31,695,000 comprised:

An amount equal to BBE’s share of the exploration expenditure incurred by the Group on all tenements since 20 October 2004 based on interests held after the acquisition is completed in cash. The amount was set off against BBE’s obligation pay that amount to the Group.
The remainder by the issue of 4,994,285 shares in the Company to MDA Investments Pty Ltd ACN 096 001 857, a related entity of Mr Ken Talbot, a director of the Company. The price at which the shares were issued was A$6.33889912 which was determined by calculating the arithmetic average of the daily volume weighted average sale price of Macarthur Coal shares sold in the ordinary course of trading on the ASX during the five trading days commencing on 11 October 2005.

Funding of BBE’s Called Sums

The Group has an agreement with BBE to lend funds to BBE from time to time equal to the amount of any calls under the West/North Burton Joint Venture Agreement. The loans may only be used for paying the relevant calls.

BBE’s obligation to lend these funds continues from 15 December 2005 until the earliest of:

(a) the date that BBE no longer has an interest under the West/North Burton Joint Venture
(b) the date which is three years from 15 December 2005
(c) the date the parties to the West/North Burton Joint Venture decide not to expend further funds on exploration of the relevant tenements
(d) the date of termination of the deed.

– II-293 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007.

37. RELATED PARTIES (continued)

Other key management personnel transactions with the Company or its controlled entities (continued)

Funding of BBE’s Called Sums

BBE must repay all monies plus interest:

(a) on completion of a sale of all or part of BBE’s interest
(b) three years from 15 December 2005
(c) 60 days after the date the parties to the West/North Burton Joint Venture decide to not to expend further funds on exploration of the relevant tenements
(d) two business days after termination of the deed.

The Group may set-off any amount due for repayment against any sale proceeds from the sale of all or part of BBE’s interest.

Changes in key management personnel in the period after the reporting date and prior to the date when the financial report is authorised for issue

On 23 July 2007, Mr Chen Zeng was appointed to the Macarthur Coal Board of Directors as a non-executive director.

Non-key management personnel disclosures

Identity of related parties

The Group has a related party relationship with its subsidiaries (see Note 32), joint ventures (see Note 29) and with its key management personnel (refer to disclosures with key management personnel on preceding pages).

– II-294 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007.

37. RELATED PARTIES (continued)

Subsidiaries

a) The Company charges and pays interest at normal commercial rates on loans to and from its wholly-owned controlled entities. The loans to and from the wholly-owned controlled entities are unsecured and have no fixed repayment terms. Interest is charged quarterly at 8.285% (2006: 7.620%) per annum on the outstanding balance. Net interest totalling A$8,822,000 (2006: A$6,118,000) was recognised by the Company during the year.
b) The Company also charges management fees to its wholly-owned controlled entities based on the total corporate office expenses. Management fees totalling A$4,114,000 (2006: A$3,358,000) were charged to the wholly-owned controlled entities during the year.
c) A wholly-owned controlled entity, Coppabella Coal Pty Ltd, paid a dividend of A$54,340,000 (2006: A$61,412,000) to the Company.
d) A wholly-owned controlled entity, Macarthur Coal (Equipment) Pty Ltd (formerly Moorvale Interest Pty Ltd), paid a dividend of A$Nil (2006: A$76,000) to the Company.

The aggregate amounts receivable and payable by the Group and the Company from non-director related parties are shown in Notes 15 and 22. Included in these amounts is the aggregate tax related receivable from whollyowned controlled entities under the Tax Consolidation legislation.

Macarthur Coal Mine Management Pty Ltd, a controlled entity, recharges employee expenses at cost to Macarthur Coal (C&M Management) Pty Ltd, an associated entity, and the Coppabella and Moorvale Joint Venture. The expenses are for work performed by Macarthur Coal Mine Management Pty Ltd staff in relation to Coppabella and Moorvale mine activities. Expenses totalling A$8,221,000 (2006: A$Nil) were charged to Macarthur Coal (C&M Management) Pty Ltd and Coppabella and Moorvale Joint Venture during the year.

The Company recharges employee and administration expenses at cost to Macarthur Coal (C&M Management) Pty Ltd, an associated entity, and the Coppabella and Moorvale Joint Venture. The expenses are for administration costs and work performed by Company staff in relation to Coppabella and Moorvale mine activities. Expenses totalling A$3,741,000 (2006: A$3,882,000) were charged to Macarthur Coal (C&M Management) Pty Ltd and Coppabella and Moorvale Joint Venture during the year.

Macarthur Coal (C&M Equipment) Pty Ltd, an associated entity, recharges lease expenses, interest and depreciation expenses at cost to Macarthur Coal (C&M Management) Pty Ltd, an associated entity, and the Coppabella and Moorvale Joint Venture. The expenses are associated with mining equipment used in relation to Coppabella and Moorvale mine activities. Expenses totalling A$6,371,000 (2006: A$Nil) were charged to Macarthur Coal (C&M Management) Pty Ltd and Coppabella and Moorvale Joint Venture during the year. The Group has a 73.3% interest in this joint venture.

– II-295 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007.

38. SUBSEQUENT EVENTS

Subsequent to 30 June 2007, the investment in equity securities held in a listed company, referred to in Note 17, were sold on market. The intention to sell the shares in the listed company was formulated prior to 30 June 2007. The sale of the investments was completed during July 2007. A total gain of A$3,649,000 was realised on the sale of the equity securities, of which A$968,000 has been recognised in the year ended 30 June 2007.

– II-296 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

Directors’ declaration

In the opinion of the directors of Macarthur Coal Limited (‘the Company’):
(a) the financial statements and notes set out on pages 39 to 100, and the remuneration disclosures that are contained in the Remuneration report in the Directors’ report set out on pages 25 to 34, are in accordance with the Corporations Act 2001 , including:
- (i) giving a true and fair view of the Company’s and the Group’s financial position as at 30 June 2007 and of their performance, for the financial year ended on that date; and
- (ii) complying with Australian Accounting Standard (including the Australian Accounting Interpretations) and the Corporations Regulations 2001;
(b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 2(a);
(c) the remuneration disclosures that are contained in the Remuneration report in the Directors’ report comply with Australian Accounting Standard AASB 124 Related Party Disclosures ; and
(d) 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 from the chief executive officer and chief financial officer for the financial year ended 30 June 2007.

Dated at Brisbane this 28th day of August 2007.

Signed in accordance with a resolution of the directors:

Keith De Lacy Chairman

– II-297 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

==> picture [78 x 35] intentionally omitted <==

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF MACARTHUR COAL LIMITED

Report on the financial report and AASB 124 remuneration disclosures contained in the Directors’ report

We have audited the accompanying financial report of Macarthur Coal Limited (the “Company”) which comprises the balance sheets as at 30 June 2007, and the income statements, statements of recognised income and expense and statements of cash flows for the year ended on that date, a summary of significant accounting policies and other explanatory notes 1 to 38 and the directors’ declaration of the Group comprising the Company and the entities it controlled at the year’s end or from time to time during the financial year.

As permitted by the Corporations Regulations 2001, the Company has disclosed information about the remuneration of directors and executives (“remuneration disclosures”) required by Australian Accounting Standard AASB 124 Related Party Disclosures , under the heading “Remuneration report” in the Directors’ report and not in the financial report. We have audited those remuneration disclosures marked ‘audited’. The Remuneration report also contains information in sections marked ‘unaudited’ not required by Australian Accounting Standard AASB 124 which is not subject to our audit.

Directors’ responsibility for the financial report and the AASB 124 remuneration disclosures contained in the Directors’ report

The directors of the Company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001 . This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In Note 2(a), the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements , that the financial report of the Group, comprising the financial statements and notes, complies with International Financial Reporting Standards, but that the financial report of the Company does not comply.

The directors of the Company are also responsible for the remuneration disclosures contained in the Directors’ report.

KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.

– II-298 –

FINANCIAL INFORMATION ON MACARTHUR COAL

APPENDIX II

Auditor’s responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. Our responsibility is also to express an opinion on the remuneration disclosures contained in the Directors’ report based on our audit.

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

We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards (including the Australian Accounting Interpretations), a view which is consistent with our understanding of the Company’s and the Group’s financial position and of their performance and whether the remuneration disclosures are in accordance with Australian Accounting Standard AASB 124.

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

KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.

– II-299 –

APPENDIX II FINANCIAL INFORMATION ON MACARTHUR COAL

INDEPENDENT AUDITOR’S REVIEW REPORT TO THE MEMBERS OF MACARTHUR COAL LIMITED (continued)

Auditor’s opinion on the financial report

In our opinion:

(a) the financial report of Macarthur Coal Limited is in accordance with the Corporations Act 2001 , including:
(i) giving a true and fair view of the Company’s and the Group’s financial position as at 30 June 2007 and of their performance for the financial year ended on that date; and
(ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001.
(b) the financial report of the Group also complies with International Financial Reporting Standards as disclosed in Note 2(a).

Auditor’s opinion on AASB 124 remuneration disclosures contained in the directors’ report

In our opinion, the remuneration disclosures that are contained in the Remuneration report in the Directors’ report market ‘audited’ comply with Australian Accounting Standard AASB 124 Related Party Disclosures .

KPMG

Warren Austin

Partner

Brisbane

28 August 2007

KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.

– II-300 –

PRO FORMA FINANCIAL INFORMATION ON THE GROUP

APPENDIX III

(A) UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE GROUP

The following unaudited pro forma financial information on the Group (the “ Unaudited Pro Forma Financial Information ”) was prepared by the directors of the Company.

The Unaudited Pro Forma Financial Information has been prepared to illustrate the effect of the Company’s Acquisition in Macarthur Coal.

The Unaudited Pro Forma Financial Information is based on a number of assumptions, estimates and uncertainties, and currently available information. As a result of these assumptions, estimates and uncertainties, the Unaudited Pro Forma Financial Information does not purport to describe the financial position that would have been presented had the Acquisition been completed. Further, the Unaudited Pro Forma Financial Information does not purport to predict the Group’s future financial position.

1. UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF THE GROUP UPON COMPLETION OF THE ACQUISITION

Set out below is an unaudited pro forma statement of assets and liabilities of the Group as at 31 December 2006 which has been prepared for the purpose of illustration as if the Acquisition had been taken place on 31 December 2006.

The unaudited pro forma statement of assets and liabilities of the Group has been prepared based an the audited consolidated balance sheet of the Group as at 31 December 2006 as set out in Appendix I to this circular, after making appropriate pro forma adjustments that are considered necessary.

HK$’000

NON-CURRENT ASSETS Property, plant and equipment Prepaid land lease premiums Other intangible assets Other assets Goodwill Investment in an associate Available-for-sale equity investments Prepayments, deposits and other receivables Loan receivable Deferred tax assets Total non-current assets	Group: pro forma Group: Group: Group: adjustments pro forma pro forma pro forma -share of Group: adjustments adjustments adjustments reserves and as at -reversal of -reversal of -payment results of 31 December mark-to-market dividend of a cash Macarthur 2006 revaluation received consideration Coal (Note 1) (Note 2) (Note 3) (Note 4) (Note 5) 2,391,501 58,353 135,701 555,983 341,512 — 266,908 (79,288) 696,960 180,646 845,936 (739,350) 16,346 21,615 6,754 4,373,701	Pro forma Group as at 31 December 2006 2,391,501 58,353 135,701 555,983 341,512 1,065,226 106,586 16,346 21,615 6,754
		4,699,577

– III-1 –

APPENDIX III

PRO FORMA FINANCIAL INFORMATION ON THE GROUP

HK$’000

					Group:
					pro forma
		Group:	Group:	Group:	adjustments
		pro forma	pro forma	pro forma	-share of	Pro forma
	Group:	adjustments	adjustments	adjustments	reserves and	Group
	as at	-reversal of	-reversal of	-payment	results of	as at
	31 December	mark-to-market	dividend	of a cash	Macarthur	31 December
	2006	revaluation	received	consideration	Coal	2006
	(Note 1)	(Note 2)	(Note 3)	(Note 4)	(Note 5)
CURRENT ASSETS
Inventories	1,112,150					1,112,150
Accounts receivable	939,938					939,938
Prepayments, deposits and other receivables	1,867,396					1,867,396
Loan receivable	17,327					17,327
Equity investments at fair value
through profit or loss	1,974					1,974
Derivative financial instruments	16,380					16,380
Other assets	62,945					62,945
Cash and cash equivalents	850,744			(696,960)		153,784
Due from related companies	51,486					51,486
Due from the ultimate holding company	34,320					34,320
Total current assets	4,954,660					4,257,700
CURRENT LIABILITIES
Accounts payable	533,788					533,788
Tax payable	47,108					47,108
Accrued liabilities and other payables	306,789					306,789
Derivative financial instruments	286,920					286,920
Due to a minority shareholder	38,174					38,174
Interest-bearing bank and other borrowings	1,588,022					1,588,022
Provisions	53,738					53,738
Total current liabilities	2,854,539					2,854,539
NET CURRENT ASSETS	2,100,121					1,403,461
TOTAL ASSETS LESS
CURRENT LIABILITIES	6,473,822					6,102,738
NON-CURRENT LIABILITIES
Interest-bearing bank and other borrowings	2,214,540					2,214,540
Deferred tax liabilities	519,933	(141,733)				378,200
Derivative financial instruments	41,063					41,063
Provisions	117,549					117,549
Other payables	75,648					75,648
Total non-current liabilities	2,968,733					2,827,000
Net assets	3,505,089					3,275,738

– III-2 –

APPENDIX III

PRO FORMA FINANCIAL INFORMATION ON THE GROUP

Notes:

The balances are extracted from the audited consolidated financial statements of the Group as at 31 December 2006 as set out in Appendix I to this circular.
The pro forma adjustments reflect the following:
(i) the reversal of unrealised gains arising from changes in fair value of the Group’s investment in the shares of Macarthur Coal and related deferred tax adjustments of HK$330,709,000 and HK$141,733,000 (in aggregate of HK$472,442,000), respectively; and
(ii) the reclassification of the cost of an available for-sale equity investment to an investment in associate of HK$266,908,000.
The pro forma adjustments relate to the reversal of the dividend received by the Group prior to 31 December 2006 (from 31 March 2004, i.e., the date that the first tranche of investment in the shares of Macarthur Coal to 31 December 2006) of HK$79,288,000.
The pro forma adjustments relate to the payment of cash consideration of HK$696,960,000 by CITIC Australia Coal Pty Limited (“CACL”) to acquire an additional 8.37% equity interest in Macarthur Coal.
The pro forma adjustments relate to the share of reserves and results of Macarthur Coal prior to 31 December 2006 (from 31 March 2004, i.e., the date that the first tranche of investment in the shares of Macarthur Coal to 31 December 2006) of HK$4,003,000 and HK$176,643,000 respectively.

– III-3 –

APPENDIX III PRO FORMA FINANCIAL INFORMATION ON THE GROUP

2. The following is the text of a report, prepared for the sole purpose of inclusion in this circular, received from the independent reporting accountants, Ernst & Young, Certified Public Accountants, Hong Kong.

21 September 2007

The Board of Directors

CITIC Resources Holdings Limited

Dear Sirs,

We report on the unaudited pro forma financial information on the Group (as defined below) set out on pages III-1 to III-3 in Appendix III to the circular dated 21 September 2007 of CITIC Resources Holdings Limited (the “ Company ”, and together with its subsidiaries referred to as the “ Group ”) in connection with the acquisition and increase of interest in Macarthur Coal Limited (the “ Acquisition ”) (the “ Unaudited Pro Forma Financial Information ”). The Unaudited Pro Forma Financial Information has been prepared by the directors of the Company, solely for illustrative purposes, to provide information about how the Acquisition might have affected the assets and liabilities of the Group as at 31 December 2006.

Respective responsibilities of the directors of the Company and reporting accountants

It is the responsibility solely of the directors of the Company to prepare the Unaudited Pro Forma Financial Information in accordance with rule 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “ Listing Rules ”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants” (“ HKICPA ”).

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

Basis of opinion

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

– III-4 –

PRO FORMA FINANCIAL INFORMATION ON THE GROUP

APPENDIX III

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

The Unaudited Pro Forma Financial Information is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of:

the Group, had the transaction actually occurred as at the date indicated therein, or
the Group, at any future dates.

Opinion

In our opinion:

(a) the accompanying Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to rule 4.29(1) of the Listing Rules.

Yours faithfully, Ernst & Young Certified Public Accountants Hong Kong

– III-5 –

PRO FORMA FINANCIAL INFORMATION ON THE GROUP

APPENDIX III

(B) DIFFERENCE IN RESPECT OF GAAP AND ACCOUNTING POLICY BETWEEN THE COMPANY IN HONG KONG AND MACARTHUR COAL IN AUSTRALIA

The acquisition of the Macarthur Sale Shares by CACL is a private commercial transaction between CACL and Talbot Group and did not involve Macarthur Coal. Accordingly, Macarthur Coal is not obliged nor required to assist the Company to prepare an accountant’s report and, being a company listed on the ASX, was not prepared to disclose financial information in addition to that which it already discloses on an annual, semi-annual and quarterly basis in accordance with its obligations to the ASX. In addition, Macarthur Coal will not become a subsidiary of the Company as a result of the acquisition of the Macarthur Sale Shares by CACL. The Company, therefore, applied to the Stock Exchange pursuant to Listing Rule 14.67(4)(a)(i) for a waiver from the requirement to prepare an accountant’s report in accordance with that Listing Rule. Instead of preparing an accountant’s report on Macarthur Coal, the Company has reproduced the audited financial statements of Macarthur Coal for the three years ended 30 June 2007 in this circular.

The Directors believe that (i) there are no principal differences between the financial information of Macarthur Coal as prepared under Australian GAAP and the financial information of Macarthur Coal if it was to be prepared under Hong Kong GAAP and (ii) there are no principal differences between the accounting policies of the Company and Macarthur Coal, which has been confirmed by Ernst & Young based on certain agreed upon procedures performed.

(C) INDEBTEDNESS

Borrowings

As at 30 June 2007, being the latest practicable date for the purpose of preparing this indebtedness statement prior to the printing of this circular, the Group had the following outstanding borrowings:

Notes Bank loans: Secured (a) Unsecured (b) Other loans, unsecured Bonds, unsecured (c) Total borrowings	30 June 2007 HK$’000 925,619 2,281,485
	3,207,104
	453,093
	7,651,767
	11,311,964

– III-6 –

APPENDIX III

PRO FORMA FINANCIAL INFORMATION ON THE GROUP

Notes:

(a) The Group’s secured bank loans as at 30 June 2007 were secured by the following:
(i) a pledge of the 22.5% participating interest in Portland Aluminium Smelter joint venture;
(ii) certain of the Group’s property, plant and equipment with net book value of HK$56,910,000, prepaid land lease premiums of HK$3,990,000, mining rights of HK$118,029,000 and a guarantee provided by a minority shareholder.
(b) Certain of the Group’s unsecured bank loans as at 30 June 2007 were guaranteed by a corporate guarantee executed by CITIC Resources Australia Pty Limited.
(c) The bonds represented US$1,000,000,000 6.75% senior notes due 2014 issued by the Group on 17 May 2007, which are fully and unconditionally guaranteed by the Company.

Disclaimer

Save as aforesaid or as otherwise mentioned herein and the litigation as detailed in the section headed “Litigation” in Appendix IV to this circular, and apart from intra-group liabilities, none of the companies in the Group had, at the close of business on 30 June 2007, any outstanding loan capital issued and outstanding or agreed to be issued, bank overdrafts, charges or debentures, mortgages, loans or other similar indebtedness or any finance lease commitments, hire purchase commitments, liabilities under acceptances (other than normal trade bills), acceptance credits or any guarantees or other contingent liabilities.

Save as aforesaid, the directors of the Company have confirmed that there have been no other material changes in the indebtedness and contingent liabilities of the Group since 30 June 2007.

Foreign currency transactions

Foreign currency amounts have, for the purpose of this indebtedness statement, been translated into Hong Kong dollars at the applicable rate of exchange ruling at the close of business on 30 June 2007.

(D) WORKING CAPITAL

The Directors are of the opinion that after taking into account the existing financing available to the Group, the working capital requirements and the expected cash flows of the Group, the Group will, following the completion of the Acquisition, have sufficient working capital for its present requirements for the next 12 months from the date of this circular in the absence of unforeseen material circumstances.

– III-7 –

PRO FORMA FINANCIAL INFORMATION ON THE GROUP

APPENDIX III

(E) MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS OF THE GROUP

1. BUSINESS REVIEW

(for the year ended 31 December 2004)

During the year, the Group took the first steps in expanding its business focus and diversifying from its previous narrow base in the plywood industry. The Directors adopted a business strategy to diversify the Group’s activities and position the Group as an integrated provider of key energy resources and commodities of which the PRC is a net importer, involved in upstream operations to mid-stream processing and downstream distribution.

The Company acquired the entire issued share capital of CITIC Resources Australia Pty Limited (“ CRA ”) in consideration of the allotment and issue of 750,413,793 new shares in the capital of the Company. CRA and its subsidiaries (collectively referred to as the “ CRA Group ”), reported a turnover and net operating profit of HK$3,574.9 million and HK$146.0 million respectively for the nine months ended 31 December 2004.

The Company acquired the entire issued share capital of Richfirst Holdings Limited (“ Richfirst ”) which gave the Group a 40% participating interest in the development and production of petroleum in the Kongnan Block within the Dagang Oilfield in the PRC. The performance was taken into the Group’s financial results and Richfirst reported a turnover and net operating profit of HK$24.4 million and HK$7.7 million respectively for the six months ended 31 December 2004.

The Directors expect the PRC’s rapid industrialisation to continue to generate significant demand for energy and hard commodities. Despite the normal fluctuations of economic cycles, the PRC’s economic growth is likely to remain high in comparison to the steadier but lower rates typical of more mature economies.

During the year, the principal activities of the CCPL Group (as defined in the circular of the Company dated 12 June 2007) remained as the development and production of oil with the right to explore, develop and produce oil in the Karazhanbas oilfield in the Republic of Kazakhstan until 2020. The total volume of oil produced and exported of the CCPL Group was 15.5 million barrels. The revenue after payment of royalties and settlement of hedge loss was HK$3,293.1 million and the net profit attributable to shareholders was HK$46.5 million.

During the year, the principal activities of Macarthur Coal were coal exploration, project evaluation and development, and coal mining. All coal was predominately exported to Asia, Europe and the Americas. The revenue was HK$1,760.9 million and the net profit attributable to shareholders was HK$213.3 million.

– III-8 –

PRO FORMA FINANCIAL INFORMATION ON THE GROUP

APPENDIX III

(for the year ended 31 December 2005)

During the year, the principal activities of the Group continued to be an integrated provider of key natural resources and commodities. Global demand for natural resources and commodities remained high in 2005. The performance of the aluminium smelting, coal mining and import and export of commodities businesses and interests, were together the principal contributors and formed the basis for the positive performance in 2005. The respective business lines have benefited from increasing sales volumes and higher prices.

The increase in turnover of the CRA Group from HK$3,574.9 million in 2004 to HK$5,708.5 million in 2005 was principally driven by the strong performance of the import and export of commodities and its full year’s contribution in 2005 rather than 9 months’ in 2004. The increase in revenue reflects higher market prices of alumina and steel products, and also CRA Group began exports of iron ore during the year. The increase in net operating profit of the CRA Group from HK$146.0 million in 2004 to HK$433.8 million in 2005 was principally attributable to an increase in the market price of aluminium and alumina in 2005. CRA Group also made a significant gain on disposal of exploration tenements.

During the year, Richfirst reported a turnover and net operating loss of HK$77.4 million and HK$6.6 million respectively. In the fourth quarter of the year, drilling was temporarily suspended to allow for detailed evaluation of well productivity and production decline performance. As at the end of the year, the independent engineering evaluators had revised downward their estimate of the proved reserves. Since depletion was provided on the substantial capitalised development costs incurred during the year, Richfirst made a loss as a result.

During the year, there was no change to the principal activities of the CCPL Group. Revenue after payment of royalties increased from HK$3,293.1 million in 2004 to HK$5,107.5 million in 2005. The net operating profit increased from HK$46.5 million in 2004 to HK$1,196.1 million in 2005. This increase was primarily due to increases in international oil prices, as evidenced by the increase in the average benchmark endmarket quote for Urals Mediterranean of US$34.5 and Dated Brent of US$38.3 per barrel in 2004 to US$50.9 for Urals Mediterranean and US$54.5 for Dated Brent per barrel in 2005. However, the increase in revenue was offset in part by a decrease in sales volume of oil produced in the Karazhanbas oilfield from 15.5 million barrels in 2004 to 14.8 million barrels in 2005, which was mainly attributable to the fact that the temperature in the winter of 2005 reached unusually low levels, which affected production.

During the year, there was no change in the principal activities of Macarthur Coal. Macarthur Coal continued to involve in coal exploration, project evaluation and development, and coal mining. The revenue was HK$2,787.8 million and the net profit attributable to shareholders was HK$689.4 million.

– III-9 –

PRO FORMA FINANCIAL INFORMATION ON THE GROUP

APPENDIX III

(for the year ended 31 December 2006)

The principal activities of the Group remained as an integrated provider of key natural resources and there were a number of encouraging initiatives and developments during the year. The Group achieved a satisfactory financial performance for the year. The businesses and interests in Australia continue to be the principal contributors and formed the basis for the satisfactory results of the Group in 2006. The manganese business made a positive contribution to the profits of the Group since the second quarter of the year when the Group completed the acquisition of such business.

The CRA Group reported a turnover of HK$6,951.8 million in 2006. The increase in revenue was driven by higher selling prices and the appreciation of the Australian dollars. The decrease in net operating profit from HK$433.8 million in 2005 to HK$296.1 million in 2006 was mainly caused by the loss arising from the revaluation of the embedded derivatives and the hedge loss. Underlying operations performed strongly during the year.

During the year, the formation of a sino-foreign equity joint venture to undertake the business of manganese mining and processing was completed. The newly established joint venture company, namely, CITIC Dameng Mining Industries Limited (the “ Manganese Company ”), became a non-wholly-owned subsidiary of the Group. As the Company has a controlling interest in the Manganese Company, the financial results of the Manganese Company were consolidated into the accounts of the Group as from the second quarter of the year.

The Manganese Company recorded a turnover of HK$538.0 million and net operating profit of HK$65.8 million in 2006. The PRC’s economic growth has increased significantly the domestic demand for virtually all raw materials creating significant opportunities in the broader commodities and energy sector. The Manganese Company has made a positive contribution to overall profit of the Group.

During the year, the Group exercised its option to convert its 40% participating interest in the Kongnan Block within the Dagang Oilfield in the PRC into common shares in the share capital of Ivanhoe Energy Inc., (“ Ivanhoe ”) and a loan repayable by Ivanhoe.

During the year, CITIC Seram Energy Limited (“ CITIC Seram ”), an indirect whollyowned subsidiary of the Group, concluded the acquisition of a 51% participating interest in the production sharing contract relating to the Seram Island Non-Bula Block, Indonesia (the “ Seram Block ”). CITIC Seram also became the operator responsible for managing and operating exploration and development at the Seram Block which marks a change in the Group’s strategy for oil investments from passive holdings to an involvement. In 2006, the average production of oil from the principal field, the Oseil Field, at Seram Block was above 4,700 barrels per day. From the completion date of the acquisition to the end of the year, no sales were recorded.

– III-10 –

PRO FORMA FINANCIAL INFORMATION ON THE GROUP

APPENDIX III

During the year, there was no change to the principal activities of the CCPL Group. Revenue after payment of royalties increased from HK$5,107.5 million in 2005 to HK$6,377.8 million in 2006. The net operating profit was HK$1,407.7 million, an increase of 17.7% over 2005. This increase was primarily due to increases in international oil prices, as evidenced by the increase in the average benchmark end-market quote for Urals Mediterranean of US$50.9 and Dated Brent of US$54.5 per barrel in 2005 to US$61.4 for Urals Mediterranean and US$65.1 for Dated Brent per barrel in 2006. This increase was also attributable to the increase in the sales volume of oil produced in the Karazhanbas oilfield from 14.8 million barrels in 2005 to 15.6 million barrels in 2006. The increase in sales volume was mainly a result of the increase in the number of wells drilled in the Karazhanbas oilfield in 2006 and the fact that the temperature in the winter of 2006 did not reach the same extremely low levels that it had in 2005, which had affected production in 2005.

During the year, there was no change in the principal activities of Macarthur Coal. Macarthur coal continue to involve in coal exploration, project evaluation and development, and coal mining. The revenue was HK$2,921.6 million and the net profit attributable to shareholders was HK$678.0 million.

2. PROSPECTS

The Company’s strategy is to position the Group as an integrated provider of key energy and natural resources and commodities and to establish a unified business platform ranging from production to delivery of commodities and resources of which the PRC is a net importer - from upstream operations to mid-stream processing to distribution of the final products. Currently, the Group has interests in aluminum smelting, coal mining, import and export of commodities, manganese mining and processing, and oil.

The Group plans to increase its oil production capacity through development of existing interests and through acquisitions. In April 2007, the Company agreed to acquire 50% of CITIC Group’s interest in the oil and oil related businesses and activities in Kazakhstan including, but not limited to, the development and production of oil in the Karazhanbas oilfield in Kazakhstan carried on by JSC Karazhanbasmunai, Argymak TransService LLP and Tulpar Munai Services LLP (the “ Kazakhstan Assets ”) through the acquisition of the entire issued share capital of Renowned Nation Limited. The acquisition of the Kazakhstan Assets will enable the Group to become one of the largest PRC controlled listed oil producers active in overseas oil production and is, over the coming two years, expected to begin to improve the net cash flows of the Group. There will however be an associated increase in the Group’s capital commitments and operating costs.

– III-11 –

PRO FORMA FINANCIAL INFORMATION ON THE GROUP

APPENDIX III

Further, in May 2007, the Company was granted an option to acquire an effective 90% interest in the contractor’s rights and obligations in the Hainan-Yuedong Block (the “ Hainan-Yuedong Block ”) in Bohai Bay Basin in Liaoning Province in the PRC (the “ Hainan-Yuedong Interest ”). The Company is conducting a due diligence review of the Hainan-Yuedong Block. If the results of the due diligence review prove satisfactory and the Hainan-Yuedong Interest can be successfully acquired, the Group’s overall oil interests will be further enhanced as a result. However, the Hainan-Yuedong Block project is currently in the appraisal and development stage, there will not be an immediate contribution to the Group’s revenue from this project. Capital expenditure and operating expenses associated with the development of the Hainan-Yuedong Block would add to the Group’s overall capital commitments and operating costs and will likely cause a decrease in net cash flows of the Group until production is commenced.

Coal remains an important part of the Group’s business strategy to be an integrated provider of key energy and natural resources and commodities and the Group will enhance its existing interests if appropriate opportunities should arise in the future.

The Group is financially sound and well-positioned to implement and support its business strategy. It has a strong cash position and it is able to leverage on the support of its major Shareholders. As the business develops, the strategy is to target overseas markets and build up the Group as a strategic platform for energy, natural resources and commodities in the region.

– III-12 –

GENERAL INFORMATION

APPENDIX IV

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company.

The Directors jointly and severally accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, opinions expressed in this circular by the Directors have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement contained herein misleading.

The issue of this circular has been approved by the Directors.

2. FURTHER INFORMATION ABOUT THE COMPANY

The Company was incorporated in Bermuda on 18 July 1997. Its registered office is situated at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda and its head office and principal place of business is at Suites 3001-3006, 30/F, One Pacific Place, 88 Queensway, Hong Kong.

Share Capital:

The authorised and issued share capital of the Company as at the Latest Practicable Date were as follows:

Authorised Share Capital:

HK$500,000,000 divided into 10,000,000,000 Shares

Share Capital issued as fully paid:

HK$262,834,219.05 divided into 5,256,684,381 Shares as at the Latest Practicable Date.

Note: All of the existing issued Shares rank pari passu in all respects including as to, amongst other things, dividends, voting and interests in capital.

– IV-1 –

GENERAL INFORMATION

APPENDIX IV

3. DISCLOSURE OF INTERESTS

(a) Disclosure of interests of Directors

As at the Latest Practicable Date, the interests of the Directors and chief executive of the Company in the shares and underlying shares of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were deemed or taken to have under such provisions of the SFO) or which were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein or pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers (the “ Model Code ”) and which have been notified to the Company and the Stock Exchange were as follows:

Interests in the Shares and underlying Shares

			Interests in	Percentage
			underlying	of the total
			Shares	issued share
		Number of	pursuant to	capital of
Name of Director	Nature of interest	Shares held	share options	the Company
Mr. Kong Dan	Directly beneficially owned	—	20,000,000	0.38
Mr. Mi Zengxin	Directly beneficially owned	—	10,000,000	0.19
Mr. Shou Xuancheng	Directly beneficially owned	10,000,000	—	0.19
Mr. Sun Xinguo	Directly beneficially owned	10,000,000	—	0.19
Ms. Li So Mui	Directly beneficially owned	1,000,000	4,000,000	0.10
Mr. Qiu Yiyong	Directly beneficially owned	10,000,000	—	0.19
Mr. Zeng Chen	Directly beneficially owned	—	10,000,000	0.19
Mr. Zhang Jijing	Family	28,000 (1)	—	—
Mr. Zhang Jijing	Directly beneficially owned	—	10,000,000	0.19
Mr. Ma Ting Hung	Corporate	271,966,000 (2)	—	5.17
Mr. Ma Ting Hung	Directly beneficially owned	50,000,000	—	0.95

Notes:

(1) The Shares disclosed above are held by the spouse of Mr. Zhang Jijing. Accordingly, Mr. Zhang Jijing is deemed to be interested in the 28,000 Shares.
(2) The Shares disclosed above are held by United Star International Inc., a company incorporated in British Virgin Islands, which is beneficially owned as to 50% by Mr. Ma Ting Hung. Accordingly, he is deemed to be interested in the 271,966,000 Shares.

– IV-2 –

GENERAL INFORMATION

APPENDIX IV

Interests in the ordinary shares and underlying shares of an associated corporation of the Company

						Percentage of
				Number of		the total issued
				shares/		share capital
	Name of	Relationship	Shares/	equity		of the
	associated	with the	equity	derivatives	Nature of	associated
Name of Director	corporation	Company	derivatives	held	interest	corporation
Mr. Kong Dan	CITIC	Associated	Share	4,800,000	Directly	0.08
	International	corporation	options		beneficially
	Financial				owned
	Holdings
	Limited
Mr. Zeng Chen	CITIC	Subsidiary	Ordinary	385,402(1)	Family	0.45
	Australia		shares
	Trading
	Limited

Note:

(1) The shares disclosed above are held by the spouse of Mr. Zeng Chen. Accordingly, Mr. Zeng Chen is deemed to be interested in the 385,402 shares.

Save as disclosed herein and so far as is known to the Directors, as at the Latest Practicable Date:

(i) none of the Directors or chief executive of the Company had an interest or a short position in the shares or underlying shares of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were deemed or taken to have under such provisions of the SFO) or which were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein or which were required, pursuant to the Model Code, to be notified to the Company and the Stock Exchange;
(ii) none of the Directors was a director or employee of a company which has an interest or a short position in the Shares or underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO;
(iii) none of the Directors or their respective associates was materially interested in any subsisting contract or arrangement which is significant in relation to the business of the Group taken as a whole; and
(iv) none of the Directors or their respective associates had any interest in a business apart from the businesses of the Group which competes or is likely to compete, either directly or indirectly, with the businesses of the Group.

– IV-3 –

GENERAL INFORMATION

APPENDIX IV

(b) Disclosure of interests of substantial Shareholders and other persons’ interests in the Shares and underlying Shares

As at the Latest Practicable Date, according to the register kept by the Company pursuant to Section 336 of the SFO and, so far as is known to the Directors, the persons or entities who had an interest in the Shares or the underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or who were, directly or indirectly, interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company, or of any other company which is a member of the Group, or in any options in respect of such share capital were as follows:

				Percentage of
				the total
				issued share
	Nature of	Number of		capital of
Name of Shareholder	interest	Shares held		the Company
CITIC Group	Corporate	2,740,594,381	(1)	52.14
CITIC Projects Management
(HK) Limited	Corporate	1,990,180,588	(2)	37.86
Keentech Group Limited	Corporate	1,990,180,588	(3)	37.86
CITIC Australia Pty Limited	Corporate	750,413,793	(4)	14.28
Temasek Holdings (Private) Limited	Corporate	587,450,000	(5)	11.18
Temasek Capital (Private) Limited	Corporate	385,450,000	(6)	7.33
Seletar Investments Pte. Ltd.	Corporate	385,450,000	(7)	7.33
Baytree Investments (Mauritius)
Pte. Ltd.	Corporate	385,450,000	(8)	7.33
Tembusu Capital Pte. Ltd.	Corporate	202,000,000	(9)	3.85
Bartley Investments Pte. Ltd.	Corporate	202,000,000	(10)	3.85
Ellington Investments Pte. Ltd.	Corporate	202,000,000	(11)	3.85
United Star International Inc.	Corporate	271,966,000	(12)	5.17
Mr. Ma Ting Hung	Corporate	271,966,000	(12)	5.17
Mr. Ma Ting Hung	Directly
	beneficially owned	50,000,000	(13)	0.95

– IV-4 –

GENERAL INFORMATION

APPENDIX IV

Notes:

(1) This figure represents an attributable interest of CITIC Group through its interest in CITIC Projects Management (HK) Limited (“ CITIC Projects ”) and CITIC Australia Pty Limited (“ CA ”).
(2) This figure represents an attributable interest of CITIC Projects through its interest in Keentech Group Limited (“ Keentech ”). CITIC Projects, a company incorporated in British Virgin Islands, is a direct wholly-owned subsidiary of CITIC Group.
(3) Keentech, a company incorporated in British Virgin Islands, is a direct wholly-owned subsidiary of CITIC Projects.
(4) CA, a company incorporated in Australia, is a direct wholly-owned subsidiary of CITIC Group.
(5) This figure represents an attributable interest of Temasek Holdings (Private) Limited (“ Temasek Holdings ”) through its interest in Temasek Capital (Private) Limited (“ Temasek Capital ”) and Tembusu Capital Pte. Ltd. (“ Tembusu ”). Temasek Holdings is a company incorporated in Singapore.
(6) This figure represents an attributable interest of Temasek Capital through its interest in Seletar Investments Pte. Ltd. (“ Seletar ”). Temasek Capital, a company incorporated in Singapore, is a direct wholly-owned subsidiary of Temasek Holdings.
(7) This figure represents an attributable interest of Seletar through its interest in Baytree Investments (Mauritius) Pte. Ltd. (“ Baytree ”). Seletar, a company incorporated in Singapore, is a direct whollyowned subsidiary of Temasek Capital.
(8) Baytree, a company incorporated in Mauritius, is a direct wholly-owned subsidiary of Seletar.
(9) This figure represents an attributable interest of Tembusu through its interest in Bartley Investments Pte. Ltd. (“ Bartley ”). Tembusu, a company incorporated in Singapore, is a direct wholly-owned subsidiary of Temasek Holdings.
(10) This figure represents an attributable interest of Barley through its interest in Ellington Investments Pte. Ltd. (“ Ellington ”). Bartley, a company incorporated in Singapore, is a direct wholly-owned subsidiary of Tembusu.
(11) Ellington, a company incorporated in Singapore, is a direct wholly-owned subsidiary of Bartley.
(12) This figure represents an attributable interest of Mr. Ma Ting Hung as the beneficial owner of 50% of United Star International Inc. This interest is also included as corporate interest of Mr. Ma Ting Hung, as disclosed under the heading “Disclosure of interests of Directors” above.
(13) The Shares held by Mr. Ma Ting Hung are his personal interests.

– IV-5 –

GENERAL INFORMATION

APPENDIX IV

(c) Disclosure of substantial shareholding in other members of the Group

Percentage of Name of shareholder Name of subsidiary issue share capital CITIC United Asia CITIC Dameng Holdings Limited 20 Investments Limited[(1)]

Note:

(1) CITIC United Asia Investments Limited, a company incorporated in Hong Kong, is an indirect wholly-owned subsidiary of CITIC Group.

Save as disclosed herein and so far as is known to the Directors, as at the Latest Practicable Date, no person had an interest or a short position in the Shares or the underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or no person was, directly or indirectly, interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company, or of any other company which is a member of the Group, or in any options in respect of such share capital.

4. LITIGATION

Save as disclosed below and so far as is known to the Directors, as at the Latest Practicable Date, neither the Company nor any of its subsidiaries was engaged in any litigation or claims of material importance and no litigation or claim of material importance was pending or threatened against the Company or any of its subsidiaries:

(a) In January 1999, Dongguan Xinlian Wood Products Company Limited (“ Dongguan Xinlian ”), a wholly-owned subsidiary of the Company held through Wing Lam (International) Timber Limited (“ Wing Lam ”), received a writ of summons (the “ Claim ”) from China Foreign Trade Development Company (the “ Plaintiff ”) claiming US$6,362,000 (HK$49,624,000) and related interest in respect of six re-export contracts purported to have been entered into by Dongguan Xinlian prior to it becoming a Group subsidiary. A judgment (the “ First Judgment ”) was issued by the Shenzhen Intermediate People’s Court in February 2000 against Dongguan Xinlian for a sum of US$3,448,000 (HK$26,894,000). In response, Dongguan Xinlian filed an appeal against the First Judgment with the People’s High Court of Guangdong Province.

– IV-6 –

APPENDIX IV

GENERAL INFORMATION

In August 2003, certain members of the Plaintiff management team were sentenced to imprisonment for creating forged documents, including those presented by them in relation to the Claim. Despite this, the People’s High Court of Guangdong Province issued a judgment (the “ Second Judgment ”) in December 2003 against Dongguan Xinlian for US$4,800,000 (HK$37,440,000) with related interest. In January 2004, Dongguan Xinlian filed another appeal to the State Supreme Court requesting the withdrawal of the Second Judgment and a decision that Dongguan Xinlian is not liable to the Plaintiff in respect of the Second Judgment. In December 2004, the People’s High Court of Guangdong Province overturned the Second Judgment and issued a decision that it will re-hear the case.

In December 2005, the People’s High Court of Guangdong Province issued a judgment whereby the validity of the Second Judgment against Dongguan Xinlian was maintained (the “ Third Judgment ”). As advised by the Group’s legal advisers, there were a number of conflicts and discrepancies with regard to the Second Judgment and the Third Judgment. The Second Judgment and the Third Judgment were not supported by valid evidence and although the People’s High Court of Guangdong Province acknowledged the criminal liabilities of certain members of the Plaintiff’s management team (including forging the contracts connected to the Claim), the People’s High Court of Guangdong Province did not, contrary to normal legal procedures, take these factors into account when it gave the Third Judgment. In February 2006, Dongguan Xinlian commenced an appeal process against the Third Judgment. In the meantime, the Shenzhen Intermediate People’s Court has frozen the assets and machinery of Dongguan Xinlian and the Group has also taken steps to apply for a suspension of the auction of the assets and machinery of Dongguan Xinlian.

The ex-shareholders of Wing Lam (the “ Ex-shareholders ”) have given an undertaking to indemnify the Group against all monetary losses that may arise from the Claim up to HK$11,862,000, being the outstanding other loans from the Ex-shareholders as at 30 June 2007. In light of the indemnity from the Ex-shareholders and the advice of the Group’s legal advisers, the Directors believe that the outcome of the Claim will not have a material adverse impact on the financial results of the Group.

(b) The Group has a 7% participating interest in the unified unincorporated co-operative Coppabella and Moorvale coal mines joint venture, the manager and agent of which is Macarthur Coal (C&M Management) Pty Limited (the “ Manager ”). Roche Mining Pty Limited (the “ Contractor ”) is contracted to mine coal and overburden at the Coppabella mine for a five year term which commenced on 1 July 2003.

– IV-7 –

GENERAL INFORMATION

APPENDIX IV

(i) Related to the 2004 financial year

(ii) Related to the 2005 financial year

In July 2005, the Contractor lodged a further notice of dispute in relation to alleged additional costs resulting from the superintendent’s approval of the 2005 financial year mine plan. The claims were rejected by the superintendent and the subsequent dispute was referred to arbitration in August 2005.

In April 2006, the Contractor lodged a consolidated and further amended points of claim in relation to both the 2004 financial year claim and the 2005 financial year claim. In October 2006, the Manager lodged its defence to the consolidated claim.

(iii) Related to the 2006 financial year

In the Directors’ opinion, disclosure of any further information about the above matter would be prejudicial to the interests of the Manager and the joint venture participants of the Coppabella and Moorvale coal mines joint venture.

– IV-8 –

GENERAL INFORMATION

APPENDIX IV

5. MATERIAL ADVERSE CHANGES

The Directors are not aware of any material adverse changes in the financial or trading position of the Group since 31 December 2006, being the date to which the latest published audited financial statements of the Group were made up.

6. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had entered, or proposed to enter, into any service contract with any member of the Group which is not determinable by the Group within one year without payment of compensation other than statutory compensation.

7. MATERIAL CONTRACTS

The following contracts (not being contracts in the ordinary course of business) have been entered into by members of the Group within the two years preceding the date of this circular and are or may be material:

(i) the conversion agreement dated 18 February 2006 between Ivanhoe Energy Inc., PanChina Resources Ltd., Sunwing Energy Ltd. and Richfirst Holdings Limited relating to the conversion of 40% participating interest in the Kongnan Block within the Dagang Oilfield in the PRC into common shares in the share capital of Ivanhoe Energy Inc. and a loan repayable by Ivanhoe Energy Inc.;
(ii) the sale and purchase agreement dated 11 July 2006 between KUFPEC (Indonesia) Limited and CITIC Seram Energy Limited relating to the sale and purchase of the 51% participating interest in the Seram Island Non-Bula Block production sharing contract;
(iii) the placing and subscription agreement dated 9 February 2007 among USI, the Company, Citigroup Global Markets Asia Limited and UBS AG in respect of the placing of 570,000,000 Shares by USI and the conditional top-up subscription by USI for 570,000,000 Shares;
(iv) the subscription agreement dated 9 February 2007 between Keentech and the Company in respect of the subscription by Keentech for 130,000,000 Shares;
(v) the sale and purchase agreement dated 30 April 2007 between CITIC Group and the Company in respect of, amongst other things, the entire issued share capital of Renowned Nation Limited;
(vi) sale and purchase agreement dated 30 April 2007 between CITIC Group and the Company in respect of the benefit of certain indebtedness of KBM Energy Limited;

– IV-9 –

GENERAL INFORMATION

APPENDIX IV

(vii) an option agreement dated 1 May 2007 between Far Great Investments Limited, CITIC Haiyue Energy Limited and certain shareholders of Far Great Investments Limited pursuant to which CITIC Haiyue Energy Limited has the right to acquire 90% of the issued shares of Tincy Group Energy Resources Limited;
(viii) a loan agreement dated 1 May 2007 between CITIC Haiyue Energy Limited, Far Great Investments Limited and Tincy Group Energy Resources Limited;
(ix) an on-loan agreement dated 1 May 2007 between Far Great Investments Limited, Tincy Group Energy Resources Limited and CITIC Haiyue Energy Limited;
(x) a pledge and further security dated 1 May 2007 between Far Great Investments Limited and CITIC Haiyue Energy Limited;

(xi)	a debenture dated 1 May 2007 between Far Great Investments Limited, Tincy Group
	Energy Resources Limited and CITIC Haiyue Energy Limited;
(xii)	a charge over account dated 21 May 2007 between Far Great Investments Limited
	and CITIC Haiyue Energy Limited;
(xiii)	a charge over account dated 21 May 2007 between Tincy Group Energy Resources
	Limited and CITIC Haiyue Energy Limited;
(xiv)	a guarantee dated 26 May 2007 by Lu Shi Tao in favour of CITIC Haiyue Energy
	Limited;
(xv)	a purchase agreement dated 14 May 2007 between CITIC Resources Finance (2007)
	Limited, Bear, Stearns & Co. Inc., Morgan Stanley & Co. International plc and the
	Company relating to the issue of US$1,000,000,000 6.75% senior notes due 2014;
(xvi)	an escrow agreement dated 17 May 2007 between CITIC Resources Finance (2007)
	Limited, the Company and Citibank, N.A., London Branch relating to the issue of
	US$1,000,000,000 6.75% senior notes due 2014;
(xvii)	an indenture dated 17 May 2007 between CITIC Resources Finance (2007) Limited,
	the Company and Citibank, N.A., London Branch relating to the issue of
	US$1,000,000,000 6.75% senior notes due 2014;
(xviii)	a subscription agreement dated 15 June 2007 between the Company and Ellington
	Investments Pte. Ltd.; and
(xix)	the Share Purchase Agreement.

– IV-10 –

GENERAL INFORMATION

APPENDIX IV

8. EXPERTS

The following is the qualification of the expert who has given, or agreed to the inclusion of, its App1B opinion or advice in this circular:

Name Qualification Ernst & Young certified public accountants

Ernst & Young has confirmed that it has no shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

Ernst & Young has given and has not withdrawn its written consent to the issue of this circular with the inclusion of their respective letters and reports and/or reference to its name, as the case may be, in the form and context in which they respectively appear.

9. INTEREST IN ASSETS

As at the Latest Practicable Date, none of the Directors or Ernst & Young had any interest, direct or indirect, in any asset which has been since 31 December 2006, being the date to which the latest published audited financial statements of the Group were made up, acquired or disposed of by or leased to any member of the Group or are proposed to be acquired or disposed of by or leased to any member of the Group.

10. MISCELLANEOUS

(a) The share registrar and transfer office of the Company is Tricor Tengis Limited at 26/F, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(b) The secretary of the Company is Ms. Li So Mui. She holds a Master’s Degree in Business Administration and is a fellow member of the Association of Chartered Certified Accountants, the Hong Kong Institute of Certified Public Accountants and the Association of International Accountants. Ms. Li has over 29 years’ experience in the accounting and banking field.
(c) The qualified accountant of the Company is Mr. Chung Ka Fai, Alan. He is an associate member of the Australian Society of Certified Practising Accountants. Prior to joining the Company, he worked for various multinational companies. Mr. Chung has over 16 years’ experience in the accounting field.
(d) All references to times and dates in this circular refer to Hong Kong times and dates.
(e) In the event of any inconsistency, the English language text of this circular shall prevail over the Chinese language text.

– IV-11 –

GENERAL INFORMATION

APPENDIX IV

(f) Macarthur Coal produces its financial statements in the English language only. Any nonEnglish language translation of these financial statements has been translated by a third party for use as a reference only in predominantly non-English speaking countries. Macarthur Coal does not accept any responsibility or liability for any inconsistencies between the English language version and the non-English version of their financial statements.

The extracts of the financial statements of Macarthur Coal included in this circular are reproductions prepared by a third party and Macarthur Coal does not accept any responsibility or liability for any inconsistencies between the reproduced version contained in this circular and the final published financial statements that can be found on the website of Macarthur Coal and that have been lodged with the ASX.

11. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the offices of the Company at Suites 3001-3006, 30/F One Pacific Place, 88 Queensway, Hong Kong for the period of 14 days from the date of this circular:

(a) the memorandum of association of the Company and the Bye-laws;
(b) the report prepared by Ernst & Young in connection with the pro forma financial information on the Group, the text of which is set out in Appendix III to this circular.
(c) the annual reports of the Company for the years ended 31 December 2005 and 2006;
(d) the material contracts referred to under the section headed “Material Contracts” above;
(e) the consent letter of Ernst & Young referred to under the section headed “Experts”above; and
(f) the circulars of the Company dated 5 March 2007, 7 May 2007 and 12 June 2007 respectively.

– IV-12 –

AI assistant

Shanghai Able Digital Science&Tech Co., Ltd. — Major Shareholding Notification 2007

50757_rns_2007-09-20_4dda0206-790c-4db8-a754-e3d2c5ac21f7.pdf

IMPORTANT

CITIC RESOURCES HOLDINGS LIMITED

MAJOR TRANSACTION

ACQUISITION AND INCREASE OF INTEREST IN MACARTHUR COAL LIMITED

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

CITIC RESOURCES HOLDINGS LIMITED

MAJOR TRANSACTION

ACQUISITION AND INCREASE OF INTEREST IN MACARTHUR COAL LIMITED

INTRODUCTION

LETTER FROM THE BOARD

PRINCIPAL TERMS OF THE SHARE PURCHASE AGREEMENT

Date

Parties

Acquisition of Macarthur Sale Shares

Macarthur Sale Shares

Sale Price

Completion of the Acquisition

INFORMATION ON THE COMPANY

INFORMATION ON TALBOT GROUP

INFORMATION ON MACARTHUR COAL

LETTER FROM THE BOARD

REASONS AND BENEFITS OF THE ACQUISITION

LETTER FROM THE BOARD

FINANCIAL EFFECTS OF THE ACQUISITION

Net Asset Value

PROSPECTS OF THE GROUP

LETTER FROM THE BOARD

LISTING RULES IMPLICATIONS

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

(A) SUMMARY OF AUDITED CONSOLIDATED FINANCIAL INFORMATION OF THE GROUP FOR THE THREE YEARS ENDED 31 DECEMBER 2006

Results

(B) SUMMARY OF AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP FOR THE TWO YEARS ENDED 31 DECEMBER 2006

INDEPENDENT AUDITORS’ REPORT

To the shareholders of CITIC Resources Holdings Limited

Directors’ responsibility for the financial statements

Auditors’ responsibility

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Opinion

Ernst & Young

CONSOLIDATED INCOME STATEMENT

CONSOLIDATED BALANCE SHEET

CONSOLIDATED BALANCE SHEET

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY YEAR ENDED 31 DECEMBER 2006 HK$’000

Attributable to shareholders of the Company

Amounts net of deferred tax impact already.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY YEAR ENDED 31 DECEMBER 2006 HK$’000

Attributable to shareholders of the Company

Amounts net of deferred tax impact already.

CONSOLIDATED CASH FLOW STATEMENT

CONSOLIDATED CASH FLOW STATEMENT

CONSOLIDATED CASH FLOW STATEMENT

BALANCE SHEET

NOTES TO FINANCIAL STATEMENTS

1. CORPORATE INFORMATION

NOTES TO FINANCIAL STATEMENTS

1. CORPORATE INFORMATION (continued)

Proposed acquisition of potential oil assets located in Kazakhstan

2.1 BASIS OF PREPARATION

Basis of consolidation

NOTES TO FINANCIAL STATEMENTS

2.1 BASIS OF PREPARATION (continued)

Basis of consolidation (continued)

2.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS

(a) HKAS 21 The Effects of Changes in Foreign Exchange Rates

(b) HKAS 39 Financial Instruments: Recognition and Measurement

(i) Amendment for financial guarantee contracts

NOTES TO FINANCIAL STATEMENTS

2.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (continued)

(b) HKAS 39 Financial Instruments: Recognition and Measurement (continued)

(ii) Amendment for the fair value option

(iii) Amendment for cash flow hedge accounting of forecast intragroup transactions

(c) HKFRS 6 – Exploration for and Evaluation of Mineral Resources

Shanghai Able Digital Science&Tech Co., Ltd. Major Shareholding Notification 2007