TITANIUM SANDS LIMITED — Annual Report 2004

Oct 25, 2004

Precious Metals Australia Limited and Controlled Entities

Annual Financial Report

For the year ended 30 June 2004

CONTENTS

CHAIRMAN'S REPORT	2
CORPORATE GOVERNANCE STATEMENT
DIRECTORS' REPORT	5
STATEMENTS OF FINANCIAL PERFORMANCE	-9
STATEMENTS OF FINANCIAL POSITION	10
STATEMENTS OF CASH FLOWS	11
NOTES TO FINANCIAL STATEMENTS	12
DIRECTORS' DECLARATION	30
ADDITIONAL INFORMATION AS AT 8 SEPTEMBER 2004	30
INDEPENDENT AUDIT REPORT	32
TO THE MEMBERS OF PRECIOUS METALS AUSTRALIA LIMITED	32

CORPORATE DIRECTORY

DIRECTORS

The Earl of Warwick Non-Executive Director, Chairman Rođerick J H Smith Executive Director Ian K Macpherson Non-Executive Director Michael J Fry Non-Executive Director

COMPANY SECRETARY Ian K Macpherson

PRINCIPAL PLACE OF BUSINESS

$1^st$ Floor Old Theatre Lane Claremont WA 6098

REGISTERED OFFICE

Level 2, 47 Colin Street West Perth WA 6005 Telephone 61 8 9321 3514 Facsimile 61 8 9321 3523

WEB PAGE www.pmal.com.au

SOLICITORS

Richard Payne & Associates Level 2, Colord House 33 Colin Street West Perth, WA 6005

Piper Alderman Level 23, Governor Macquarie Tower 1 Farrer Place Sydney NSW 2000

BANKERS

National Australia Bank Limited Capital Office 50 St George's Terrace Perth WA 6000

HOME STOCK EXCHANGE

Australian Stock Exchange Limited Exchange Plaza 2 The Esplanade Perth WA 6000

SHARE REGISTRY

Advanced Share Registry Services Level 7, 200 Adelaide Terrace East Perth WA 6892 Telephone 61 8 9221 7288 Facsimile 61 8 9221 7869

AUDITOR

KPMG Chartered Accountants 152-158 St George's Terrace Perth WA 6000

COUNTRY OF INCORPORATION AND DOMICILE Australia

ASX CODE PMA (shares) PMAOB (options - December 2005)

CHAIRMAN'S REPORT

Dear Shareholders.

Your Company has had a difficult and disappointing year. After resolving all previous disputes and putting the Company's balance sheet in good order PMA had reasonable grounds to believe that the strengthened Vanadium Pentoxide price would lead to the re-opening of the Windimurra Vanadium Project and to an increased Royalty Income for the Company.

What has occurred is the permanent closure and dismantling of the Windimurra Vanadium Project in circumstances so questionable that the Economics and Industry Standing Committee of the Legislative Assembly of the Parliament of Western Australia is conducting a formal inquiry into Vanadium Resources at Windimurra including, amongst other things:

• operations of the mine and plant since establishment;
• the conditions leading to the mine and plant closure; and
• the arrangements by Xstrata for the decommissioning of the mine and dismantling and sale of the plant.

The Inquiry has been widely reported in the press. Copies of news articles and links to the Parliaments web site which hosts transcripts of evidence given to the Inquiry, can be found on the company's web site www.pmal.com.au. The Committee has yet to hand down its findings.

In addition, your Company has issued legal proceedings in the Supreme Court of New South Wales to attempt to protect and enforce the Company's rights under the Royalty Agreement with Xstrata. No defence has been filed to date in these legal proceedings. The outcome of these proceedings is uncertain and may have a material effect on the financial position of the Company.

Your Company has and continues to evaluate other exploration opportunities. In particular considerable effort was spent on investigating a Copper joint venture in the Kunming area of the People's Republic of China and on researching a gold project near Meekatharra. That these efforts were abandoned is in no small part due to the attention demanded by difficulties with the Windimurra Vanadium Project.

As the Company's 15% net profit (royalty) interest in the Windimurra Vanadium Project is the Company's most significant asset, common sense dictates that the Company focus primarily on resolving the disputes concerning Windimurra in a manner satisfactory to the Company. However the Company will also continue to look for opportunities in minerals exploration and development.

Finally, shareholders should note the inherent uncertainty in determining a carrying value for the Company's Windimurra Royalty Interest. Under the Royalty Agreement, your Company is entitled to receive a minimum royalty of \$500,000 per annum until, amongst other things, all rehabilitation obligations in respect of the tenements have been fully satisfied. If Xstrata have lawfully terminated the Royalty Agreement, which is denied, the sooner Xstrata completes the rehabilitation work, the shorter the period in which the Company will be entitled to be paid the royalty. Such a shorter period could lead to a reduction in anticipated royalty revenues. However, if your Company's legal proceedings are successful or result in a satisfactory settlement, then your Company may gain a financial benefit from its royalty interest in excess of the current carrying value.

The Earl of Warwick Non Executive Chairman Perth, Western Australia

CORPORATE GOVERNANCE STATEMENT

This statement outlines the main corporate governance practices that were in place throughout the financial year unless otherwise stated. These practices are dealt with under the following headings: Board of Directors, Auditors, Internal Control Framework, Ethical Standards, Environment, Business Risks and the Role of Shareholders.

BOARD OF DIRECTORS

The Board of Directors is responsible for the overall corporate governance of the Company including its strategic direction, establishing goals for management and monitoring the achievement of those goals.

The Company is not currently considered to be of a size, nor are its affairs of such complexity, to justify the establishment of separate committees. Accordingly, all matters which may be canable of delegation to a committee are dealt with by the full Board. Nevertheless, the Board may from time to time form committees which it considers appropriate to assist in carrying out its responsibilities to shareholders.

The Board meets at appropriate times and is in regular contact, in order to retain full and effective control over the Company and monitor it's business. Should the operations of the Company be expanded then the Board would establish a framework for the management of the Company including a system of internal control, a business risk management process and the establishment of appropriate ethical standards.

Each director has the right to seek independent professional advice on matters relating to his position as a director of the Company at the Company's expense, subject to prior approval of the Chairman, which shall not be unreasonably withheld.

Composition of the Board

The procedures for election and retirement of directors are governed by the Constitution of the Company. The composition of the Board is determined using the following principles:

• the Board shall ideally comprise a mixture of executive and non-executive directors;
• the Board shall comprise directors with a range of expertise encompassing the current and proposed activities of the Company: and
• where a vacancy is considered to exist, the Board selects an appropriate candidate through consultation with external parties and consideration of the needs of shareholders and the Company. Such appointments are referred to shareholders at the next available opportunity for re-election in general meeting.

The Company does not adopt a formal policy for evaluating the performance of the Board.

Director Education

Because of the limited size and nature of the Company's operations it has no formal process to educate new directors about the nature of the business, current issues, the corporate strategy and the expectations of the Company concerning performance of directors.

Directors' Dealings In Company Shares

The constitution permits directors to acquire shares in the Company.

AUDITORS

Whilst the Company does not have a formally constituted audit committee, the Board reviews the performance of the external auditors on an annual basis. The directors meet with the auditors at least twice a year:

• to review the results and findings of the audit, the adequacy of accounting and financial controls, and to obtain feedback on the implementation of recommendations made; and
• to review the draft financial statements and audit/review reports at year-end and half year.

During the year, the external auditors have not performed non-audit services. The audit partner is to be rotated off in 2006. The Board monitors the need to form an audit committee on a periodic basis.

CORPORATE GOVERNANCE STATEMENT (continued)

INTERNAL CONTROL FRAMEWORK

The Board acknowledges that it is responsible for the overall internal control framework. However, it also recognises that no cost effective internal control system will preclude all errors and irregularities. To assist in discharging this responsibility the Board has instigated an internal control framework that can be described under the following headings.

Financial Reporting

There is an ongoing review of costs with significant items of expenditure approved by all directors. Cash flow forecasts are prepared and presented to the Board periodically. The Company reports to shareholders under the Corporations Law and ASX Listing Rules. Procedures are also in place to ensure that price sensitive information is reported to the Australian Stock Exchange in accordance with Continuous Disclosure Requirements.

Operational Reporting

The Company presently has no business operation that it manages but is in receipt of Royalty Income. The Royalty Income is reconciled and audited by Independent Auditors on an annual basis.

ETHICAL STANDARDS

The Company recognises the need for directors to observe the highest standards of behaviour and business ethics in conducting its business, and intends to pursue a reputation for integrity.

ENVIRONMENT

The Company is involved in the final stage of environmental rehabilitation of the Palm Springs Gold Project. The Company aims to ensure a high standard of environmental care is achieved and to ensure compliance with the environmental regulations set down under Australian and International Law.

BUSINESS RISKS

The Board adopts practices designed to identify significant areas of business risk and to effectively manage those risks in accordance with the Company's risk profile.

Where necessary, the Board draws on the expertise of appropriate external consultants to assist in dealing with or mitigating risk. The Company's main areas of risk include:

• exploration and development; $\bullet$
• fluctuating commodity prices and exchange rates; and
• financial markets.

The Board gives regular consideration to all these matters.

THE ROLE OF SHAREHOLDERS

The Board ensures that shareholders are informed of all major developments affecting the financial position and state of affairs of the Company.

The Board encourages full participation of shareholders at the Annual General Meeting to ensure a high level of accountability and identification with the consolidated entity's strategy and goals. Important issues will be presented to shareholders as single resolutions.

DIRECTORS' REPORT

The Directors present their report together with the financial report of Precious Metals Australia Limited ("PMA" or "the Company") and the consolidated financial report of the consolidated entity, being the Company and its controlled entities, for the year ended 30 June 2004, and the auditors' report thereon.

DIRECTORS

The names of the Directors of the Company at any time during or since the end of the financial year are:

The Earl of Warwick, Non-Executive Director, Chairman

(Appointed 14 January 1999)

The Earl of Warwick has wide management and property experience in Australia and overseas. Formerly with Selection Trust, a company established by his family.

Mr Roderick J H Smith

(Appointed 29 March 2004)

Mr Smith is a graduate from the University of Western Australia with a Bachelor of Commerce in 1977. He is a Chartered Accountant and a member of the Securities Institute of Australia. He holds a Diploma in Mining Investment Analysis and has studied geology. Mr Smith has been involved at board level with several listed public companies and has been instrumental in the development of four mines in WA.

Mr Ian K Macpherson, Non-Executive Director

(Appointed 3 March 2004)

Mr Macpherson is a graduate from the University of Western Australia with a Bachelor of Commerce in 1977. He commenced his career in commerce in 1978 prior to entering the Chartered Accounting profession. Mr Macpherson was a partner of KMG Hungerfords (Perth) and Arthur Andersen & Co following the merger of those two firms in 1987. In 1990 Mr. Macpherson resigned from Arthur Anderson to establish Ord Partners, Chartered Accountants.

Mr Macpherson has specialised in the area of corporate advice with a particular emphasis on capital structuring, equity and debt raising, Corporate Affairs and Stock Exchange compliance procedures for public companies, both mining and industrial and is currently a non-executive director of Navigator Resources Limited and Helix Resources Ltd and nonexecutive Chairman of Preston Resources Limited and Visiomed Group Ltd.

Mr Michael J Frv. Non-Executive Director

(Appointed 3 March 2004)

Mr Michael Fry holds a Bachelor of Commerce degree from the University of Western Australia, is an Associate of the Securities Institute of Australia and a past member of the Australian Stock Exchange. Mr Fry has extensive experience in capital markets and corporate treasury management specialising in the identification of commodity, currency and interest rate risk and the implementation of risk management strategies. Mr Fry is currently a non-executive director of Preston Resources Ltd.

Mr James A Wall, Non-Executive Director (Appointed 16 May 2000; Resigned 3 March 2004) Mr Wall is a director of a number of public companies and is a Mining Engineer.

Mr Angus C Pilmer, Non-Executive Director (Appointed 4 June 2003: Resigned 3 March 2004) Mr Pilmer is an Accountant and a director of a number of public and private companies.

PRINCIPAL ACTIVITIES

The principal commercial activities of the Company during the financial year were the maintenance of certain mineral exploration properties and their disposal via the sale of PMA's wholly owned subsidiary "Kimberley Gold Pty Ltd," and receipt of royalty income. In addition, significant time and resources were committed to pursuing legal remedies in relation to Xstrata's decision to permanently close the Windimurra Vanadium operation in which PMA holds a net 15% royalty interest.

DIRECTORS' REPORT (continued)

RESULTS

The consolidated net profit of the Company for the financial year ended 30 June 2004 after the provision for income tax amounted to \$265,896 (2003: \$347,481).

DIVIDEND

No dividends have been paid by the Company during the financial year ended 30 June 2004 nor have the Directors recommended that any dividend be paid.

REVIEW OF OPERATIONS

The Company maintained its interests in the Palm Springs gold tenements until their disposal on 4 March 2004.

CHANGE IN STATE OF AFFAIRS

Significant changes in the state of affairs of the Company that occurred during this financial year were:

• $(a)$ On 19 December 2003, pursuant to resolutions approved by shareholders in a general meeting on 15 December 2003, the Company made the following placements of shares to a director and former director in order to settle outstanding loan accounts owing to them as follows:
• $(i)$ 8,571,439 shares were issued to Mr R J H Smith at 7 cents each in satisfaction of \$600,000 owing; and
• 1.428.561 shares were issued to Mr A K McKee at 7 cents each in satisfaction of \$100,000 owing. $(ii)$

A further \$150,000 in cash was paid to Mr R J H Smith in accordance with his settlement agreement with the Company, being the balance of the \$750,000 agreed as owing to him at the start of the period.

$(b)$ Windimurra Contractors' Disputes

The Company has settled all outstanding contractors' disputes that related back to the Windimurra Joint Venture and these include:

In March 2003 a claim by Fluor Daniel against the Windimurra Joint Venture totalling \$6,850,000 was settled for \$1,000,000, with the Company's share of \$400,000 being met by the utilisation of existing dispute credits of \$214,570 and deferred payments of \$185,430, of which \$92,715 was paid during the period and the remaining \$92.715 to be paid by 31 December 2004 from future royalty income without interest or costs.

An obligation to pay the stamp duty on a transfer of a 9% interest in the Windimurra Joint Venture to a subsidiary of Xstrata plc was assessed in December 2002 by the State Revenue Office at \$370.098. The Company objected to this assessment however this was rejected by the State Revenue Office, and the original assessment value of \$370,098 was settled in full in March 2004.

Windimurra Royalty Asset $(c)$

Pursuant to a royalty agreement dated 16 0ctober 2000 ("Royalty Agreement") between the company, Xstrata Windimurra Pty Limited and Xstrata AG, as guarantor, the company holds a 15% net profit interest (royalty) in the Windimurra Vanadium Project. Xstrata Windimurra Pty Limited is a wholly owned subsidiary of Xstrata Plc, a company listed on the London Stock Exchange. In 2002, Xstrata (Schweiz) AG took an assignment of and assumed the guarantee given by Xstrata AG in the Royalty Agreement, Xstrata (Schweiz) AG is also a wholly owned subsidiary of Xstrata Plc.

In February 2003 Xstrata Plc, announced in its Annual Report for the year ended 31 December 2003 that Xstrata Windimurra Pty Limited would cease production and operations would be suspended whilst they assessed options which would include permanent closure. On 10 May 2004 Xstrata Plc publicly announced the permanent closure of the Windimurra Vanadium project and Xstrata's lawyers advised the Company's lawyers that Xstrata had sold key components of the plant and equipment relating to the vanadium production process.

The carrying value of the Windimurra Royalty as a non current asset has been retained by the Directors at its recoverable amount of \$2,000,000 (Note 11).

DIRECTORS' REPORT (continued)

LIKELY DEVELOPMENTS

Further information about likely developments in the operations of the consolidated entity and the expected results of those operations in future financial years have not been included in this report because disclosure of such information would be likely to result in unreasonable prejudice to the consolidated entity.

SUBSEQUENT EVENTS

On 16 August 2004 the Company issued legal proceedings against Xstrata Windimurra Pty Limited and Xstrata (Schweiz) AG (the guarantor under the Royalty Agreement) in the Supreme Court of New South Wales seeking, amongst other things:

• $\mathbb{I}$ . A declaration that the Royalty Agreement has been breached by Xstrata by reason of its purported permanent closure of the Windimurra Project and that the Royalty Agreement remains on foot with the parties being bound to comply with all its terms and conditions.
• A declaration that Xstrata's suspension of the Windimurra Project during the period from February 2003 to $\overline{2}$ . 10 May 2004 is a breach of the Rovalty Agreement.
• A declaration that Xstrata's sale and assignment of the assets of the Windimurra Project is a breach of the $\overline{3}$ . Royalty Agreement.
• $\overline{4}$ . Damages for breach of the Royalty Agreement.
• An injunction requiring Xstrata to do all things reasonably necessary in order to cause the Windimura Project $5.$ to be brought back to an operational level and operated consistent with Xstrata's obligations under the Royalty Agreement.

As at the 20 September 2004, no defence has been filed by the defendants. The first return date on the summons is scheduled for 8 October 2004. The outcome of these legal proceedings may have a material effect on the financial position of the Company.

MEETINGS OF DIRECTORS

	FULL MEETINGS OF DIRECTORS
	ATTENDED	ELIGIBLE TO ATTEND
The Earl of Warwick
I K Macpherson
$MJ$ Fry
R J H Smith
J A Wall
A C Pilmer

The Company is of a size and nature such that issues ordinarily dealt with by audit and other committees were resolved by the full Board.

DIRECTORS' INTERESTS

The relevant interests of each Director in the share capital of the companies within the consolidated entity, as notified by the Directors to the Australian Stock Exchange in accordance with S205G(1) of the Corporations Act 2001, at the date of this report and after the share consolidation, is as follows:

ORDINARY SHARES	OPTIONS
9.123.490	$\mathbf{m}$
100,000	$\overline{\phantom{a}}$
11.009.763
		PRECIOUS METALS AUSTRALIA LIMITED

DIRECTORS' REPORT (continued)

DIRECTORS' EMOLUMENTS

Details of the nature and amount of each element of the emoluments of each Director are set out in the following table:

	DIRECTORS' FEES	SUPERANNUATION	ENTITLEMENTS	OTHER BENEFITS	TOTAL
The Earl of Warwick	22,749	1.986		5.189	29,924
J A Wall	18,750	614			19,364
A C Pilmer	11.250	614		55,000	66,864
1 K Macpherson	3,750			21.431	25,181
M J Fry	3,750	338			4,088
R J H Smith	34,251	3,083			37,334
Total	94,500	6.635		81,620	182,755

SHARE OPTIONS GRANTED TO DIRECTORS

No options over unissued ordinary shares of the Company were granted during or since the end of the financial year to any of the Directors of the Company and consolidated entity as part of their remuneration.

OPTIONS

Unissued ordinary shares of the Company under option at the date of this report are as follows:

	NUMBER.	EXERCISE PRICE	– EXPIRY DATE
Listed Options (PMAOB)	12,896,334	\$2.00	1 December 2005

No option holder has any right under the options to participate in any other share issue of the Company or other body corporate.

ENVIRONMENTAL REGULATION

The consolidated entity's operations are subject to significant environmental regulation under both Commonwealth and State legislation in relation to its exploration and mining activities.

Exploration and Development

The consolidated entity's exploration and development activities are conducted in Western Australia. There are significant environmental regulations under the Western Australian Mining Act 1978 and Environmental Protection Act 1986. Licence requirements relating to waste disposal, water and air pollution exist in relation to mining activities. The Company has complied with the necessary obligations required by these Acts and licences.

INDEMNIFICATION AND INSURANCE OF DIRECTORS

The Company has entered into Deeds of Indemnity to indemnify the current Directors of the Company. The Earl of Warwick, Mr RJH Smith, Mr IK Macpherson, and Mr MJ Fry against liabilities or claims that may arise from carrying out their duties as directors except where the claim or liability arises from conduct involving a lack of good faith, gross negligence or criminal intent.

Earl of Warwick Non executive Chairman

Perth, Western Australia 30^th September 2004

PRECIOUS METALS AUSTRLIA LIMITED AND ITS CONTROLLED ENTITY

STATEMENTS OF FINANCIAL PERFORMANCE

For the Year Ended 30 June 2004

			Consolidated		The Company
	Note	2004	2003	2004	2003
		\$	\$	S	\$
Revenue from royalties	2	500,000	500,000	500,000	500,000
Other revenue from ordinary activities	$\overline{2}$	457,913	239,187	457,913	239,187
Total revenue	2	959,871	739,187	959,871	739,187
Director and employee benefits expense		(54,986)		(54,986)
Depreciation and amortisation expenses	3	(501, 632)	(503, 170)	(501, 632)	(503, 170)
Borrowing costs	3	(5,207)	(49, 377)	(5,207)	(49, 377)
Other expenses from ordinary activities	3	(132, 150)	160,841	(191, 506)	885
Profit from ordinary activities
before related income tax expenses		265,896	347,481	206,540	187,525
Income tax expense relating
to ordinary activities	6
Net profit attributable to members
of the parent entity	16	265,896	347,481	206,540	187,525
Basic carnings per share	5	\$0.01	\$0.02

The above statements of financial performance should be read in conjunction with the accompanying notes.

STATEMENTS OF FINANCIAL POSITION

As at 30 June 2004

			Consolidated		The Company
	Note	2004	2003	2004	2003
		\$	\$	$\mathbb S$	\$
Current Assets
Cash	21(a)	428,518	73,764	428,516	73,762
Receivables	7	123,045	462,623	123,245	462,623
Other financial assets	8	45,900	150,000	45,900	150,000
Total Current Assets		597,463	686,387	597,661	686,385
Non-Current Assets
Other financial assets	8			102	104
Property, plant and equipment	9	3,686	4,410	3,686	4,410
Windimurra royalty	11	2,000,000	2,000,000	2,000,000	2,000,000
Total Non-Current Assets		2,003,686	2,004,410	2,003,788	2,004,514
Total Assets		2,601,149	2,690,797	2,601,449	2,690,899
Current Liabilities
Payables	12	222,611	1,617,443	222,611	1,617,443
Provisions	13		59,554
Total Current Liabilities		222,611	1,676,997	222,611	1,617,443
Non-Current Liabilities
Payables	12		92,715		92,715
Total Non-Current Liabilities			92,715		92,715
Total Liabilities		222,611	1,769,712	222,611	1,710,158
Net Assets		2,378,538	921,085	2,378,838	980,741
Shareholders' Equity
Contributed equity	14	49,561,192	48,369,635	49,561,192	48,369,635
Option premium reserve	15	3,965,772	3,965,772	3,965,772	3,965,772
Accumulated losses	16	(51, 148, 426)	(51, 414, 322)	(51, 148, 126)	(51, 354, 666)
Total Shareholders' Equity		2,378,538	921,085	2,378,838	980,741

The above statements of financial position should be read in conjunction with the accompanying notes.

PRECIOUS METALS AUSTRLIA LIMITED AND ITS CONTROLLED ENTITY

STATEMENTS OF CASH FLOWS

For the Year Ended 30 June 2004

		Consolidated			The Company
	Note	2004	2003	2004	2003
		\$	\$	S	\$
Cash Flows from Operating Activities
Cash receipts in the course of operations		500,000	400,289	500,000	400,289
Cash payments in the course of operations		(761, 114)	(586, 106)	(752, 248)	(425,660)
Interest received		36,138	36,173	36,138	36,173
Stamp Duty Paid		(370,098)		(370,098)
Borrowing costs Paid		(5,207)		(5,207)
Net cash provided by/(used in)
operating activities	21(b)	(600, 281)	(149, 644)	(591, 415)	10,802
Cash Flows from Investing Activities
Payment to DOIR bond account		(80,000)		(80,000)
Proceeds from sale of investments		201,545		201,545
Proceeds on disposal of controlled entity		80,000		80,000
Payments for plant and equipment		(908)		(908)
Loans to subsidiaries				(8,866)	(159,956)
Proceeds from sale of plant and equipment		5,230	600	5,230	600
Proceeds from sale of interest in Barrambie project			50,000		50,000
Receipts from Proceeds account		407,601	239,479	407,601	239,479
Net cash provided by/(used in) investing activities		613,468	290,079	604,602	130,123
Cash Flows from Financing Activities
Proceeds from issue of shares		500,000		500,000
Transaction costs from issue of shares		(8, 433)		(8,433)
Repayment of borrowings		(150,000)	(350,000)	(150,000)	(350,000)
Net cash provided by/(used in) financing activities		341,567	(350,000)	341,567	(350,000)
Net decrease in cash held		354,754	(209, 565)	354,754	(209, 075)
Cash at the beginning of the financial year		73,764	283,329	73,762	282,837
Cash at the end of the financial year	21(a)	428,518	73,764	428,516	73,762

The above statements of cash flows should be read in conjunction with the accompanying notes.

NOTES TO FINANCIAL STATEMENTS For the Year Ended 30 June 2004

$\mathbf{1}$ . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Basis of Preparation $(a)$

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 current valuations of non-current assets.

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

Where necessary, comparative information has been reclassified to achieve consistency in disclosure with current financial year amounts and other disclosures.

(b) Going Concern

The financial statements have been prepared on a going concern basis, which contemplates continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. The Company's source of income is in the form of a minimum royalty of \$500,000 per annum payable in quarterly instalments. There is uncertainty about the period in which the royalty payment under the Royalty Agreement will continue to be received as a result of a decision by Xstrata plc to permanently cease operations at Windimurra (Note 11). The Company received its scheduled quarterly royalty instalment on 1 July 2004 in accordance with the Royalty Agreement. The Royalty Agreement provides for such payments to continue to be made by Xstrata to the Company until operations of the Windimurra project are terminated. The project is not terminated until, amongst other things, all rehabilitation obligations in respect of the tenements have been fully satisfied.

Recoverable Amount of Non Current Assets Valued on a Cost Basis $(c)$

The carrying amounts of non current assets, other than exploration and evaluation expenditure carried forward, are reviewed to determine whether they are in excess of their recoverable amount at balance date.

If the carrying amount of a non current asset exceeds the recoverable amount, the asset is written down to the lower amount.

Any write-down/(reversal of write-down) of non current assets is recognised as an expense/(income) in the net profit or loss in the reporting period in which it occurs.

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

Principles of Consolidation $(d)$

The consolidated financial statements of the economic entity include the financial statements of the Company, being the parent entity, and its controlled entities ("the consolidated entity").

Where an entity either began or ceased to be controlled during the year, the results are included only from the date control commenced or up to the date control ceased.

The balances and effects of transactions between controlled entities included in the financial statements have been eliminated.

$(e)$ Revenue Recognition

Interest Revenue

Interest revenue is recognised as it accrues.

Royalty Income

Royalty payments to the Company will be calculated on Project returns without deduction of interest, tax, depreciation or amortisation and includes a minimum annual royalty of \$500,000 paid and recognised as income quarterly.

$\mathbf{1}$ . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition (continued) $(e)$

Asset Sales

The gross proceeds of asset sales are included as revenue of the consolidated entity. The profit or loss on disposal of assets is brought to account at the date a contract of sale is signed

$(f)$ 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 Australian Tax Office ("ATO"). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense.

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

The net amount of GST recoverable from, or payable to, the 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 eash flows.

$\left(\underline{e}\right)$ Income Tax

The consolidated entity adopts the income statement liability method of tax effect accounting. Tax effect accounting procedures are followed whereby the income tax expense in the profit and loss statement is matched with the accounting profit or loss after allowing for permanent differences. 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 balance sheet 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.

Property, Plant and Equipment $(h)$

Acquisition

Items of property, plant and equipment are initially recorded at cost or at Directors' valuation and depreciated as outlined below.

Depreciation

Items of property, plant and equipment are depreciated using the straight line method over their estimated useful lives. The depreciation rates used for each class of asset are as follows:

Plant and equipment 20% - 37.5%

Leased plant and equipment

Leases of plant and equipment under which the Company or its controlled entities assume substantially all the risks and benefits of ownership are classified as finance leases. Other leases are classified as operating leases.

Finance leases are capitalised. A lease asset and a lease liability equal to the present value of the minimum lease payments are recorded at the inception of the lease.

Capitalised lease assets are amortised on a straight line basis over the term of the relevant lease or where it is likely the consolidated entity will obtain ownership of the asset, the life of the asset. Lease liabilities are reduced by repayments of principal. The interest components of the lease payments are charged to the statement of financial performance.

Payments made under operating leases are charged against profits in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased property.

$\mathbf{1}$ . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

$(i)$ Exploration and Evaluation Expenditure

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

These 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 and active and significant operations in relation to the area are continuing.

When an area of interest is abandoned, any expenditure carried forward in respect of that area is written off in the financial period the decision is made. Each area of interest is also reviewed annually and accumulated costs written off to the extent that they will not be recoverable in the future.

Amortisation is not charged on costs carried forward in respect of areas of interest in the development phase until production commences.

When production commences, carried forward exploration, evaluation and development costs are amortised on a units of production basis over the life of the economically recoverable reserves.

Provisions are made for mine site rehabilitation and restoration on an incremental basis during the course of mine life (which includes the mine closure phase). Provisions, which are determined on an undiscounted basis, include the following costs: reclamation, plant closure, waste site closure and monitoring activities. These costs have been determined on the basis of current costs, current legal requirements and current technology. Changes in estimates are dealt with on a prospective basis.

Borrowing Costs $(i)$

Borrowing costs include interest, amortisation of discounts or premiums relating to borrowings, amortisation of ancillary costs incurred in connection with arrangement of borrowings and lease finance charges. 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. Where funds are borrowed specifically for the acquisition, construction or production of a qualifying asset, the amount of borrowing costs capitalised is those incurred in relation to that borrowing, net of any interest earned on those borrowings.

$(k)$ Payables

Liabilities are recognised for amounts to be paid in the future for goods and services received, whether or not billed to the Company or consolidated entity. Trade accounts are normally settled within 60 days.

$\bigoplus$ Investments

Controlled Entities

Investments in controlled entities are carried in the Company's financial statements at the lower of cost and recoverable amount.

Other Entities

Investments in other listed companies are carried at the lower of cost and recoverable amount, being a Directors' valuation based on market values at the time of the valuation.

Cash and Cash Equivalents $(m)$

For the purposes of the Statement of Cash Flows, cash includes cash on hand and in banks and money market investments readily convertible to cash within two working days, net of outstanding bank overdrafts.

Bank overdrafts are carried at the principal amount. Interest is charged as an expense as it accrues.

$(n)$ Trade and Other Receivables

Trade receivables are recognised and carried at original invoice amount less a provision for any uncollectible debts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written-off as incurred.

Receivables from related parties are recognised and carried at the nominal amount due. Interest is taken up as income on an accrual basis.

$\mathbf{1}$ . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

$(0)$ Share Capital

Ordinary share capital is recognised at the fair value of the consideration received by the Company.

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

$(p)$ Windimurra Royalty

The Windimurra Royalty has been recorded at its estimated recoverable amount and is being amortised on a straight line basis over its estimated remaining life of 4 years, as determined by the directors on a semi-annual basis.

Expenditure which no longer satisfies the recoverable amount test, is written off where the Directors are of the opinion that the carry forward net cost may not be recoverable under the policy stated at Note (c). The write-off is charged against the results for the year.

Any reversal of write-downs to recoverable amount are recognised in the statement of financial performance as income. At 30 June 2004 the Windimurra Royalty has been revalued to its estimated recoverable amount.

	Consolidated		The Company
	2004 \$	2003 SS	2004	2003
2. REVENUE FROM ORDINARY ACTIVITIES
Royalty revenue	500,000	500,000	500,000	500,000
Other Revenues From Operating Activities:
Interest: Other parties Sundry income	36,138	36.173 2,414	36.138	36,173 2,414
From Outside Operating Activities:
Gross proceeds from sale of investments Gross proceeds from sale of non-current assets	203,003 5,230	600	203,003 5,230	600
Gross proceeds on sale of Barrambie tenements Gross proceeds on sale of controlled entity	215,000	200,000	215,000	200,000
Total Other Revenues	457,913	239.187	457.913	239,187
Total Revenue from Ordinary Activities	959,871	739,187	959.871	739,187

PROFIT/LOSS FROM ORDINARY ACTIVITIES $3.$ BEFORE INCOME TAX EXPENSE

a) Individually significant items included in profit/loss from ordinary activities before income tax expense

Write down/(reversal) of the carrying value of Windimurra Royalty to recoverable amount	(500,000)	(500,000)	(500,000)	(500,000)
Exploration expenditure written off		22,850		22,850
Consideration on disposal of investment in controlled entity Carrying amount of net liabilities sold	215,000 59,554		215,000
Net gain on disposal of investment in controlled entity	274,554		215,000
Consideration on disposal of investments Carrying amount of investments sold	201,545 (149, 868)		201,545 (149, 868)
Net gain on disposal of investments	51.677		51.677

		Consolidated		The Company
		2004 \$	2003 \$	2004 S	2003 \$
3.	PROFIT/LOSS FROM ORDINARY ACTIVITIES BEFORE INCOME TAX EXPENSE (continued)
(b)	Profit/loss from ordinary activities before income tax expense has been arrived at after charging/(crediting) the following items:
	Depreciation and Amortisation
	Depreciation of:
	Plant and equipment	1,632	3,170	1,632	3,170
	Amortisation of: Windimurra royalty	500,000	500,000	500,000	500,000
	Total depreciation and amortisation	501,632	503,170	501,632	503,170
	Borrowing costs Interest payable:
	Other parties Related parties	5,207	49,377	5,207	49,377
	Other expenses from ordinary activities
	Exploration expenditure write off	44,887	22,850	44,887	22,850
	Net cost of legal settlements	23,412	110,000	23,412	110,000
	Reversal of Windimurra Royalty asset writedown	(500,000)	(500,000)	(500,000)	(500,000)
	Write down of loan receivable			8,866	159,956
	Carrying amount of investments disposed	148,674		148,674
	Carrying amount of net assets sold in subsidiary	(59, 554)
	Administration and other costs Write down in value of investments to recoverable	385,631	206,309	376,567	206,307
	amount	89,100		89,100
		132,150	160,841	191,506	885.113
	Net (gain)/loss on disposal of non-current assets: Property, plant and equipment Tenements (Note 8)	(5,230)	(600) (200,000)	(5,230)	(600) (200,000)
		(5,230)	(200, 600)	(5,230)	(200, 600)
4.	REMUNERATION OF AUDITORS
	Remuneration received, or due and receivable by
	the auditor of the parent entity and its affiliates for:
	Audit and review services	22,200	20,000	22,200	20,000
	Other services
	Total	22,200	22,200	22,200	20,000

EARNINGS PER SHARE 5.	2004	2003
Basic earnings per share	\$0.01	\$0.02
	2004 Number	2003 Number
Weighted average number of ordinary shares used in the calculation of basic earnings per share	25,040,765	15,854,855

There are no dilutive potential ordinary shares therefore diluted on per share has not been calculated or disclosed. Details relating to the options are set out in Note 18.

		Consolidated	The Company
	2004 \$	2003 \$	2004 S	2003 \$
TAXATION 6.
Prima facie tax expense on the operating profit calculated at 30%	79,769	104,244	61,962	56,258
Decrease/(increase) in income tax expense due to: Legal costs Amortisation of Windimurra royalty	31,426 150,000	34,135 150,000	31,426 150,000	34,135 150,000
(Reversal) of Windimurra royalty writedown Gain on disposal of subsidiary	(150,000) 29	(150,000)	(150,000) 29	(150,000)
Provision for diminution in investments Provision for loan to controlled entities	26,730		26,730 2,660
	137,954	138,379	122,807	90,393
Income tax losses utilised	(137, 954)	(138, 379)	(122, 807)	(90, 393)
Income tax expense/(benefit) attributable to operating profit/loss
Future Tax Benefit Not Brought to Account Future tax benefit not brought to account comprises the unconfirmed future income tax benefit at current
income tax rates on the following items: Income tax losses Timing differences	17,012,098	17,471,946 66,000	16,965,067	17,374,424
	17,012,098	17,405,946	16,965,067	17,374,424
Future income tax benefit at 30%	5,103,629	5,221,784	5,089,520	5,212,327

The unconfirmed future income tax benefit arising from tax losses and timing differences has not been recognised as an asset because recovery of tax losses is not virtually certain and recovery of timing differences is not assured beyond reasonable doubt.

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

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

		Consolidated		The Company
	2004 \$	2003 \$	2004 S	2003 \$
RECEIVABLES 7.
Current Other debtors Proceeds account (i)	123,045 w	55,022 407,601	123,245	55,022 407,601
	123,045	462,623	123,245	462,623
Non-Current Loans to controlled entities (ii) Less: Provision for non-recovery	$\omega$	u, u.	324,662 (324, 662)	24,369,506 (24,369,506)

(i) The Proceeds account was established as a separate bank account on the sale of the Company's interest in the Windimurra Project in order to provide for the settlement of the Company's share of any outstanding claims or liabilities arising out of its joint venture responsibilities (Note 12(i)).

(ii) Further details of loans to controlled entities are set out in Note 20(b).

INVESTMENTS 8.

$\sum_{i=1}^{n}$

Сигген Listed shares in other corporations – at cost $(i)$ (ii) Less provision for diminution	135,000 (89,100)	150.000 $\blacksquare$	135.000 (89,100)	150.000
	45.900	150.000	45.900	150.000
Non-Current Shares in controlled entities – unlisted at cost (Note 23)	$\overline{\phantom{a}}$	m.	102	104

(i) In March 2004 the Company sold its wholly owned subsidiary Kimberley Gold Pty Ltd, holder of the Palm Springs Mining tenements, for \$215,000 to Chameleon Mining NL, satisfied by the payment of \$80,000 and the issue of 1,350,000 Chameleon Mining NL fully paid shares at 10 cents each.

(ii) At balance date the market value of the Chameleon Mining NL shares was 5.3 cents and at the date of this report it is 3.5 cents. The shares have been written down to their recoverable amount of 3.5 cents.

PROPERTY, PLANT AND EQUIPMENT 9.

Plant and equipment at cost Less: Accumulated depreciation	18.170 (14, 484)	17.262 (12.852)	18.170 (14, 484)	17,262 (12, 852)
	3.686	4.410	3,686	4,410
Reconciliations Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below:
Plant and equipment Carrying amount at beginning of year Additions Depreciation	4.410 906 (1,630)	7,580 (3,170)	4,410 906 (1,630)	7.580 (3,170)
Carrying amount at end of year	3,686	4.410	3,686	4,410

		Consolidated	The Company
	2004	2003	2004	2003
	\$	\$	S	\$
EXPLORATION, EVALUATION AND 10. DEVELOPMENT EXPENDITURE
Costs carried forward in respect of areas of interest in the: Exploration and Evaluation phase
Expenditure by the year		22,850		22,850
		22,850		22,850
Less: Exploration expenditure written off		(22,850)		(22, 850)
Total
WINDIMURRA ROYALTY 11.
Non-Current Windimurra royalty balance at the
beginning of the year Amortisation	2,000,000 (500,000)	2,000,000 (500,000)	2,000,000 (500,000)	2,000,000 (500,000)
	1,500,000	1,500,000	1,500,000	1,500,000
(Written off to recoverable amount)/ reversal of previous write-off	500,000	500,000	500,000	500,000
Windimurra royalty balance at the end of the year	2,000,000	2,000,000	2,000,000	2,000,000

The carrying value of the Windimurra Royalty as a non-current asset has been retained by the Directors at its recoverable amount of \$2,000,000 after taking into account:

• The announcement in February 2003 by Xstrata plc that a decision had been taken to stop production and $(i)$ suspend operations at the Windimurra plant as soon as possible and to assess options, which include permanent closure.
• $(ii)$ The announcement made by Xstrata plc on 10 May 2004, that it had permanently closed the Windimurra Vanadium operation and sold key components of the plant and equipment relating to the vanadium production process.
• $(iii)$ Despite the permanent cessation of operations the Royalty Agreement provides for the Company to continue to receive the minimum royalty at the rate of \$500,000 per annum (paid in quarterly instalments) until operations of the Windimurra project are terminated. Under the Royalty Agreement, the project is not terminated until, amongst other things, all rehabilitation obligations in respect of the tenements have been fully satisfied. The Directors estimate it will take no less than approximately 4 years for these conditions to be met. Accordingly, the recoverability of \$2,000,000 is dependent on the continued payment of the minimum royalty until at least 30 June 2008. If the Company is not successful in the legal proceedings referred to in the subsequent event (Note 26), the permanent closure of the project will result in the cessation of the minimum royalty entitlement once all rehabilitation obligations in respect of the tenements have been fully satisfied.

PRECIOUS METALS AUSTRLIA LIMITED AND ITS CONTROLLED ENTITIES

			Consolidated		The Company
		2004 \$	2003 \$	2004 S	2003 \$
12.	PAYABLES
	Current
	Trade creditors and accruals	129,897	304,630	129,897	303,950
	Loans (Note $18(e)(ii)$ )	$\overline{\phantom{a}}$	850,000	$\overline{\phantom{a}}$	850,000
	Stamp duty (i)		370,098		370,098
	Other creditors (ii)	92,714	92,715	92,714	92,715
		222,611	1,617,443	222,611	1,617,443
	Non Current Other creditors (ii)		92,715		92,715

$(i)$ An obligation to pay the stamp duty on a transfer of a 9% interest in the Windimura Joint Venture to a subsidiary of Xstrata plc was assessed in December 2002 by the State Revenue Office at \$370,098. This was settled in full during March 2004.

(ii) In March 2003 a claim against the Joint Venture totalling \$6,850,000 was settled for \$1,000,000 with the Company's share of \$400,000 being met by the utilisation of existing dispute credits of \$214,570 and deferred payments of \$185,430 to be paid from future royalty income without interest or costs. Half of the deferred payment was settled in January 2004, with the remaining \$92,715 due to be paid on 31 December 2004.

13. PROVISIONS

Current Provision for rehabilitation of minesite		59,554
		59,554
14. CONTRIBUTED EQUITY
Issued and paid-up share capital Ordinary shares, fully paid	32,997,713	49,561,192	15,854,855	48,369,635
Balance at the beginning of the financial year	15.854,855	48,369,635	158,547,651	48,369,635
Movements in ordinary share capital
Share Reconstruction			(142, 692, 796)
Debt for equity conversion (i)	10.000,000	700,000
Placement (ii)	7,142,858	500,000
Transaction costs relating to share issue		(8, 443)
Balance at the end of the financial year	32,997,713	49,561,192	15,854.855	48,369,635

(a) Movements in Share Capital

• (i) On 19 December 2003, the company issued a total of 10,000,000 fully paid ordinary shares at 7 cents each to a director and a former director in order to satisfy loans totalling \$700,000 due to the directors and their associated companies. The issues were part of director related settlements approved by shareholders at a general meeting in November 2003.
• (ii) During December 2003 and January 2004, a total of 7,142,858 fully paid ordinary shares were issued at 7 cents each to a director related entity in order to raise working capital of \$500,000.

(b)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. Note 17 provides details of Options.

	Consolidated			The Company
	2004 \$	2003 \$	2004 S	2003 \$
OPTION PREMIUM RESERVE 15.
Balance at the beginning of the financial year Movement	3,965,772	3,965,772	3,965,772	3,965,772
Balance at the end of the financial year	3,965,772	3,965,772	3,965,772	3,965,772
16. ACCUMULATED LOSSES
Accumulated losses at the beginning of the year Net profit/(loss) attributable to members of the	(51, 414, 322)	(51,761,803)	(51, 354, 666)	(51, 542, 191)
parent entity	265,896	347.481	206.540	187,525
Accumulated losses at the end of the year	(51, 148, 426)	(51, 414, 322)	(51, 148, 126)	(51, 354, 666)

17. OPTIONS

Options to acquire ordinary shares in the capital of the Company have been granted as follows:

Listed 1 December 2005 Options

12,896,334 were outstanding as of the 30 June 2004. The options are listed options and are exercisable on or before 1 December 2005 at a price of \$2.00 per share.

18. DIRECTORS REMUNERATION AND RETIREMENT BENEFITS

The names of directors who have held office during the financial year were The Earl of Warwick, Mr J A Wall, Mr A C Pilmer. Mr M J Fry, Mr RJH Smith and Mr I K Macpherson.

a. Directors' Remuneration

2004		Primary		Total
	Salary, Fees & Commissions	Superannuation Contribution	Other
	S	\$	S	\$
Earl of Warwick	22,749	1,986	$5,189$ (iii)	29,924
Jim A Wall	18,750	614		19,364
Angus C Pilmer	11,250	614	55,000 (i)	66,864
Michael J Fry	3.750	338		4,088
Roderick J H Smith	34,251	3,083		37,334
Ian K Macpherson	3,750	$\overline{\phantom{a}}$	21,431 (ii)	25,181
Total	94,500	6,635	81,620	182,755

(i) Administration and accounting fees of \$55,000 (2003: \$71,191) were paid to A C Pilmer & Co, an accounting firm associated with Mr A C Pilmer for services rendered during the period to provide general administrative and accounting services to the Company at normal commercial rates.

(ii) Accounting, taxation and corporate advisory fees of \$21,431 were charged by Ord Group Pty Ltd, a company associated with I K Macpherson for services performed during the year, \$11,766 of which was accrued as unpaid at the year end. Fees of \$3,750 were also paid to Ord Group Pty Ltd for the services of 1 K Macpherson in his capacity as non-executive director. All services were provided at normal commercial rates.

(iii) Premises owned by entities controlled by The Earl of Warwick (Tagora Pty Ltd) were occupied by the Company for part of the previous year and rent and outgoings totalling \$5,189 (2003:\$21,523) were paid by the Company during the year.

18. DIRECTORS REMUNERATION AND RETIREMENT BENEFITS (continued)

b. Remuneration Options

Options Granted As Remuneration

There were no options granted as remuneration to directors during the year.

c. Shares Issued on Exercise of Remuneration Options

Options Granted As Remuneration

During the year there were no options exercised for options previously granted as remuneration to directors.

d. Options and Rights Holdings

Number of options held by Specified Directors & Executives.

The movement during the year of the number of options over ordinary shares in Precious Metals Australia Limited held directly, indirectly or beneficially, by each specified director, including their personally related entities, is as follows:

	Balance		Balance
	1.7.03	Purchases	30.6.04
Parent Entity Directors
Earl of Warwick		u,
Jim A Wall	250,000	u	250,000
Angus C Pilmer		u.
Michael J Fry	ш.	L	$\mathbf{u}$
Roderick J H Smith	u.	L	w
Ian K Macpherson			w

e. Shareholdings

Number of Shares held by Specified Directors

The movement during the year in the number of ordinary shares of Precious Metals Australia Limited held directly, indirectly or beneficially, by each specified director including their personally related entities is as follows:

	Balance 1.7.03	Placement	Purchases (i)	Balance 30.6.04
Specified Directors
Earl of Warwick	1,980,633	$7,142,857$ (iv)		9,123,490
Jim A Wall	$\overline{\phantom{a}}$
Angus C Pilmer	$\overline{\phantom{a}}$	$\blacksquare$	w
Michael J Fry	as.	$\mathbf{u}$	100,000	100,000
Rođerick J H Smith	2,448,334	8,571,429 (ii)		11,009,763
lan K Macpherson	٠
Total	4,428,967	15,714,286	100,000	20,233,253

Purchases of shares were transacted at market value $(i)$

• On 19 December 2003, pursuant to resolutions approved by shareholders in general meeting on 15 December $(ii)$ 2003, the Company made placements of shares to the two former directors in order to settle outstanding loan accounts as follows:
• 8,571,429 shares were issued to Mr R J H Smith (now a current director) in satisfaction of \$600,000 owing; and
• 1,428,561 shares were issued to Mr A K McKee (former director) in satisfaction of \$100,000 owing. $\bullet$
• On 19 December 2003, the Company paid cash of \$150,000 to Mr R J H Smith, being the balance of the $(iii)$ \$750,000 owing to him at the start of the period.

18. DIRECTORS REMUNERATION AND RETIREMENT BENEFITS (CONTINUED)

(iv) On 19 December 2003, pursuant to resolutions approved by shareholders in general meeting on 15 December 2003, the Company placed 2.857.142 shares at 7.0 cents per share with an associated entity of The Earl of Warwick during the period to raise \$200,000.

A further 4,285,715 shares at 7.0 cents per share were issued in January 2004 to raise \$300,000, bringing the total shares issued to The Earl of Warwick during the period to 7,142,857 shares, and a total raised of \$500,000.

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.

f. Remuneration policy

Remuneration paid to Executive Directors of the Company was based on a recommendation from the Company Secretary, with due consideration given to the policies adopted by similar sized organisations. The recommendation was approved by the Non-Executive Directors of the Company only. In relation to remuneration paid to Non-Executive Directors, this remains consistent with the prior period and was approved by the Company shareholders.

There is no relationship between the remuneration paid to Executive and Non-Executive Directors and the Company's performance. Given the Company is not currently engaged in a trading enterprise, adopting such a measurement is not considered by the Board to be practicable.

19. SEGMENT INFORMATION

The Company and the consolidated entity operate in one industry being mining and mineral exploration and in the one geographical segment, Australia.

20. RELATED PARTY DISCLOSURE

(a) Wholly-Owned Group

Details of ownership interests in wholly owned controlled entities are set out in Note 23.

The aggregate amount receivable from wholly owned entities by the Company at balance date:

__			The Company
		2004	2003
Non-Current
Loans to subsidiary companies		324.262	24,369,506
Less provision for non-recovery		(324, 262)	(24,369,506)

(b) Loans

Loans between group entities are interest free, unsecured and repayable at call. However, there is no present intention to recall such funds.

On 4 March 2004, pursuant to the terms of the Share Sale Agreement with Chameleon Mining NL for the disposal of PMA's subsidiary company, Kimberley Gold Pty Ltd. Precious Metals Australia forgave the intergroup loan to Kimberly Gold Pty Ltd. The loan totalled \$24,053,710 at the date of disposal.

21. NOTES TO THE STATEMENTS OF CASH FLOWS

$(a)$ Reconciliation of Cash

For the purpose of the Statements of Cash Flows, cash includes on hand and at bank and short term deposits at call net of outstanding bank overdrafts. Cash at the end of the financial year as shown in the Statements of Cash Flows is reconciled to the related items in the balance sheets as follows:

		Consolidated			The Company
		2004 \$	2003 \$	2004 \$	2003 ${\bf S}$
	Cash at bank	428,518	73,764	428,516	73,762
(b)	Reconciliation of operating profit/(loss) after income tax to net cash used in operating activities
	Operating profit/(loss) after income tax	265,896	347,481	206,540	187,525
	Items classified as investing or financing activities:
	(Profit)/loss on disposal of assets/tenements Profit on disposal of controlled entity	(56,907) (274, 554)	(200,600)	(56,907) (215,000)	(200, 600)
	Non-cash items:
	Amortisation of interest in Windimurra project	500,000	500,000	500,000	500,000
	Depreciation	1,632	3,170	1,632	3,170
	Write (up)/off of Windimurra Royalty	(500,000)	(500,000)	(500,000)	(500,000)
	Write-down of investment	89,100		89,100
	Provision for loans to controlled entities			8,865	159,954
	Net eash provided by/(used in) operating activities
	before changes in assets and liabilities	25,167	150,051	34,230	150,049
	Change in assets and liabilities:
	Increase/(decrease) in provisions		(800,000)		(800,000)
	Increase/(decrease) in payables	(637, 425)	331,773	(637, 622)	331,775
	Increase/(decrease) in deferred income		(102, 125)		(102, 125)
	Increase/(decrease) in provision for rehabilitation Decrease/(increase) in other receivables	11,977	(160, 446) 431,103	11,977	431,103
	Net cash provided by/(used in) operating activities	(600, 281)	(149, 644)	(591, 415)	10,802

(c) Non-cash Financing and Investing Activities

In March 2004 the Company sold its wholly owned subsidiary Kimberley Gold Pty Ltd, holder of the Palm Springs Mining tenements, for \$215,000 to Chameleon Mining NL, satisfied by the payment of \$80,000 and the issue of 1,350,000 Chameleon Mining NL fully paid shares at 10 cents each.

On 19 December 2003, the Company issued 9,999,990 ordinary shares, in lieu of amounts owed to current and former directors totalling \$700,000. This is outlined further in Note $18(e)(ii)$ of this report.

Consolidated		The Company
2004	2003	2004	2003

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

(d) Financing Arrangements

The consolidated entity has access to the following lines of credit:

Total facilities available: Guarantee and indemnity facility	80,000	80.000	80.000	80,000
Facilities utilised at balance date:	80,000	80.000	80.000	80,000
Facilities not utilised at balance date: Guarantee and indemnity facility		ш.

Guarantee and indemnity facility

The facilities were secured with the placement of \$80,000 cash on term deposit to serve as a guarantee. See Note 22(a) for details. Subsequent to period end, the guarantee and indemnity was cancelled and the security over the \$80,000 deposit was released.

22. CONTINGENT LIABILITIES

(a) Guarantees

At period end, the consolidated entity had in place a guarantee and indemnity facility of \$115,000 (2003: \$115,000) that related to the Palm Springs tenements.

The primary purpose of this facility was to satisfy environmental bonds in respect of mining tenements owned by Kimberley Gold Pty Ltd and PMA, as required by the Department of Industry and Resources. The facility was cash backed via a security deposit with the Company's bankers.

	The Company
2004	2003

23. CONTROLLED ENTITIES

(a) Particulars in relation to controlled entities

Name of Entity: Midwest Coal Pty Ltd	100	100
Victory Street Pty Ltd		2
Kimberley Gold Pty Ltd	ALC	2
	102	104

The controlled entities are incorporated in Australia and the Company holds 100% of the ordinary issued capital.

(b) Disposal of controlled entities

During the financial year, the consolidated entity disposed of all of the ordinary shares of Kimberley Gold Pty Ltd. Details are as follows:

		Consolidated	The Company
	2004	2003	2004	2003
	\$	\$	S	\$
Consideration
Cash	80,000	$\blacksquare$	80,000
Shares at fair value	135,000	$\blacksquare$	135,000	$\tilde{\phantom{a}}$
	215,000	۰.	215,000
Carrying amount of disposal	(59, 554)	$\blacksquare$	w	$\bullet$
Profit on disposal	274,554	$\blacksquare$	215,000
Net liabilities of entity disposed of Provision for rehabilitation	(59, 554)	$\blacksquare$	(59, 554)	$\tilde{\phantom{a}}$

The entity was disposed of on 4 March 2004 and the operating results to that date have been included in the consolidated operating profit.

24. FINANCIAL INSTRUMENTS

(a) Interest Rate Risk Exposure

The consolidated entity's exposure to interest rate risk and the effective weighted average interest rate for classes of financial assets and financial liabilities is set out below:

	Note	Weighted Average Interest Rate	Floating Interest Rate \$	Fixed Maturing in less than 1 year ${\mathbb S}$	Non- Interest Bearing \$	Total \$
2004
Financial assets:
Cash	21(a)	5.00%	428,518			428,518
Receivables	$\tau$	4.00%		80,000	43,045	123,045
Windimurra royalty Other assets	11 8	$\overline{a}$			2,000,000 45,900	2,000,000
		w				45,900
			428,518	80,000	2,088,945	2,597,463
Financial liabilities:
Payables	12		$\blacksquare$		222,611	222,612
					222,611	222,612
Net financial assets			428,518	80,000	1,866,334	2,374,851
2003 Financial assets: Cash	21(a)	1.85%	73,764			73,764
Receivables	7	4.25%	407,601			407,601
Other receivables	7	J.			55,022	55,022
Windimurra royalty	11				2,000,000	2,000,000
Other assets	8	w			150,000	150,000
			481,365	$\blacksquare$	2,205,022	2,686,387
Financial liabilities: Payables	12	9.00%	750,000		960,158	1,710,158
			750,000	μ.	960,158	1,710,158
Net financial assets			1,231,365		1,244,864	976,229

24. FINANCIAL INSTRUMENTS (continued)

(b) Net Fair Value of Financial Assets and Liabilities

Recognised financial instruments

The net fair value of cash and cash equivalents and non-interest bearing monetary financial assets and financial liabilities of the consolidated entity approximates their carrying value.

The net fair value of other monetary financial assets and financial liabilities is based upon market prices where a market exists or by discounting the expected future cash flows by the current interest rates for assets and liabilities with similar risk profiles.

Equity investments traded on organised markets have been valued by reference to market prices prevailing at balance date (refer also to Note 8). For non-traded equity investments, the net fair value is an assessment by the Directors based on the underlying net assets, future maintainable earnings and any special circumstances pertaining to a particular investment.

(c) Credit Risk Exposures

Credit risk represents the loss that would be recognised if counter-parties failed to perform as contracted.

The credit risk on financial assets, excluding investments, of the consolidated entity, which have been recognised in the statement of financial position, is the carrying amount net of any doubtful debts.

25. ECONOMIC DEPENDENCY

Royalty payments to the Company will be calculated on returns of the Windimurra Vanadium Project without deduction or interest, tax, depreciation or amortisation and includes a minimum royalty of \$500,000 per annum to be paid on a calendar year basis (Note 11).

26. EVENTS OCCURRING AFTER BALANCE DATE

Legal Proceedings

On 16 August 2004 the Company issued legal proceedings against Xstrata Windimurra Pty Limited and Xstrata (Schweiz) AG (the guarantor under the Royalty Agreement) in the Supreme Court of New South Wales seeking, amongst other things:

• $\mathbf{1}$ . A declaration that the Royalty Agreement has been breached by Xstrata by reason of its purported permanent closure of the Windimurra Project and that the Royalty Agreement remains on foot with the parties being bound to comply with all its terms and conditions.
• $2.$ A declaration that Xstrata's suspension of the Windimurra Project during the period from February 2003 to 10 May 2004 is a breach of the Royalty Agreement.
• 1. A declaration that Xstrata's sale and assignment of the assets of the Windimurra Project is a breach of the Royalty Agreement.
• $\overline{4}$ . Damages for breach of the Royalty Agreement.
• $\overline{5}$ . An injunction requiring Xstrata to do all things reasonably necessary in order to cause the Windimurra Project to be brought back to an operational level and operated consistent with Xstrata's obligations under the Royalty Agreement.

As at the 20 September 2004, no defence has been filed by the defendants. The first return date on the summons is scheduled for 8 October 2004.

The outcome of these legal proceedings may have a material effect on the financial position of the Company.

26. EVENTS OCCURRING AFTER BALANCE DATE (continued)

Guarantee

Subsequent to year end the Company received confirmation from its bankers that the environmental bonds had been replaced by the purchaser of Kimberly Gold Pty Ltd in accordance with the terms of the sale agreement, and the entity has been released from the guarantee and indemnity.

27. INTERNATIONAL FINANCIAL REPORTING STANDARDS

For reporting periods beginning on or after 1 January 2005, the Company must comply with International Financial Reporting Standards (IFRS) 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). The differences between Australian GAAP and IFRS identified to date as potentially having a significant effect on the consolidated entity's financial performance and financial position are summarised below. The summary should not be taken as an exhaustive list of all the differences between Australian GAAP and IFRS. No attempt has been made to identify all disclosure, presentation or classification differences that would affect the manner in which transactions or events are presented.

The Company has not quantified the effects of the differences discussed below. Accordingly, there can be no assurances that the financial performance and financial position as disclosed in this financial report would not be significantly different if determined in accordance with IFRS. Regulatory bodies that promulgate Australian GAAP and IFRS have significant ongoing projects that could affect the differences between Australian GAAP and IFRS described below and the impact of these differences relative to the Company's financial reports in the future.

The potential impacts on the Company's financial performance and financial position of the adoption of IFRS, including system upgrades and other implementation costs which may be incurred, have not been quantified as at the transition date of 1 July 2004 due to the short timeframe between finalisation of the IFRS standards and the date of preparing this report. The impact on future years will depend on the particular circumstances prevailing in those years.

The Company's management are assessing the significance of these changes and preparing for their implementation. We will seek to keep stakeholders informed as to the impact of these new standards as they are finalised.

The Company has not precisely quantified the effects of IFRS, however management believes the key potential implications of the conversion to IFRS include:

Impairment of Assets

The Company currently determines the recoverable amount of an asset on the basis of undiscounted net cash flows that will be received from the assets use and subsequent disposal.

In terms of AASB 136: Impairment of Assets, the recoverable amount of an asset will be determined as the higher of fair value less costs to sell and value in use. It is likely that this change in accounting policy will lead to impairments being recognised more often than under the existing policy.

Income Tax

Currently, the Company adopts the liability method of tax-effect accounting whereby the income tax expense is based on the accounting profit adjusted for any permanent differences. Timing differences are currently brought to account as either a provision for deferred income tax or future income tax benefit.

Under the Australian equivalent to IAS 12, the Company will be required to adopt a balance sheet approach under which temporary differences are identified for each asset and liability rather than the effects of the timing and permanent differences between taxable income and accounting profit.

DIRECTORS' DECLARATION

• In the opinion of the Directors of Precious Metals Australia Limited ("the Company"): $\mathbbm{1}$ .
• (a) the financial statements and notes, set out on pages 10 to 31 are in accordance with the Corporations Act 2001, including:
  • giving a true and fair view of the financial position of the Company and consolidated entity as at $(i)$ 30 June 2004 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 the Accounting Standards 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. Without qualification to the above, attention is drawn to the matters described in Note 1(b) on page 13.

Signed in accordance with a resolution of the Directors:

Earl of Warwick

Dated at Perth this 30th day of September 2004

ADDITIONAL INFORMATION AS AT 8 SEPTEMBER 2004

$\mathbf{1}$ . SHAREHOLDING

(a) Substantial Shareholders

Name.	Held directly	Held indirectly	Total	$\frac{6}{10}$
Earl of Warwick	Nil	9.123.490	9.123.490	27.65
Roderick Smith	512.001	10.497.762	11.009.763	33.37

(b) Voting Rights

Each member is entitled to one vote on a show of hands and one vote for each share held on a poll.

(c) Distribution of Shareholders

Size of Holding	Number of Holders
	Shares	%
$1 - 1,000$	538	$0.86^{\circ}$
$1,001 - 5,000$	570	4.46
$5,001 - 10,000$	130	2.98
$10,001 - 100,000$	144	10.89
>100,000	21	80.81

(d) Marketable Parcel

There are 1,350 shareholders who hold less than a marketable parcel given a share value of 6 cents a share.

ADDITIONAL INFORMATION AS AT 8 SEPTEMBER 2004 (continued)

(e) Top 20 Shareholders

	Number of Shares	% of Issued Capital
Tagora Pty Ltd	9,123,490	27.65
Pacific Quest Investments Pty Ltd	8,571,429	25.98
Horseshoe Exploration Pty Ltd	1,926,333	5.84
Grand Lakes Stud Pty Ltd	1,497,213	4.52
Retford Resources NL	914.638	2.77
National Nominees Limited	720,070	2.18
Mr Andrew McKee	695,000	2.10
Mr Arthur Carbo	525,128	1.59
Mr Roderick J Smith	512,001	1.55
Vagg Investment Management Services Pty Ltd	428,016	1.30
ANZ Nominees Pty Ltd	414.484	1.26
Bow Lane Nominees Pty Ltd	277,000	0.84
Miss Yu Chuan Chen	233,000	0.71
Magstock Pty Ltd	230,122	0.70
Westgold Resources NL	200,000	0.61
Mr Gilbert Pesenti	160.000	0.48
Mrs Liliana Teofilova	147,536	0.45
Retford Resources NL	111,971	0.34
Mr Robert E & Mrs Ruth D MacMillan	104,650	0.32
Mr Alexander Reid	101,780	0.31
	26,893.861	81.50

(f) Top 20 Option Holders

	Number of Options	% of Issued Capital
Dr Glen G & Mrs T Whisson	1,250,007	9.69
Mr Helmut Rocker	1,044,183	8.10
Mr Bin Mohammad Abas	1,040,000	8.06
Reef Securities Limited	770.000	5.97
Mr Kevin P & Mrs Mary J Page	596,400	4.42
Mr David William Buchold	489,798	3.80
Mr Andrew Kregor McKee	434,375	3.37
Mr Hugh Anthony Brady	377,964	2.93
National Nominees Limited	339.513	2.63
Mr Edward Protasewicz	330,336	2.56
Mr Robert Joseph Edwards	330,000	2.56
Mr Victor Ivan Brooke Ladora	292,370	2.27
Mr Ianaki Semerdziev	250,001	1.94
Mr James Arthur Wall	250,000	1.94
Mr Donald Stuart Crombie	230,000	1.78
Mrs Christine Margaret Burn	175,000	1.36
Vagg Investment Management Services Pty Limited	150,487	1.17
Magstock Pty Ltd	144,076	1.12
Dr Glenn James Whisson	135,649	1.05
Mr R E & Mrs R D MacMillan	111,250	0.86
	8.741.409	67.58

(g) On Market Buy-Back

There is no current On Market Buy-Back.

INDEPENDENT AUDIT REPORT TO THE MEMBERS OF PRECIOUS METALS AUSTRALIA LIMITED

Independent audit report to members of Precious Metals Australia Limited

Scope

The financial report and directors' responsibility

and a state of the

The financial report comprises the statement of financial position, statement of financial performance, statement of cash flows, accompanying notes to the financial statements, and the directors' declaration for both Precious Metals Australia Limited (the "Company") and the Consolidated Entity, for the year ended 30 June 2004. The Consolidated Entity comprises both the Company and the entities it controlled during that year.

The directors of the Company are responsible for 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.

Audii 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. 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 cast. flows.

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

• examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report, and
• assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors.

While we considered the effectiveness of management's internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls.

Independence

In conducting our audit, we followed applicable independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001.

腐気切る

Audit opinion

In our opinion, the financial report of Precious Metals Australia 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 2004 and of their performance for the financial year ended on that date; and
• ii. complying with Accounting Standards in Australia and the Corporations Regulations 2001; and
• b) other mandatory professional reporting requirements in Australia.

Inherent uncertainty regarding Windimurra Royalty

As described in Note 11, the company has recorded the Windimurra royalty at its estimated recoverable amount of \$2,000,000. As a result of the matters described at Note 11 to the financial statements there is inherent uncertainty as to its recoverable amount which is dependent on continued payment of the minimum royalty until at least 30 June 2008 or sale for an amount at least equal to its carrying value.

Ń,

KPMG

KPMG T Ř HAŘI

Partner

Perth 30 September 2004