Azure Minerals
Annual Report 2009

Plain-text annual report

Azure Minerals Limited ABN 46 106 346 918 Annual Report and Financial Statements for the year ended 30 June 2009 Azure Minerals Limited – Annual Report 2009 Corporate Information ABN 46 106 346 918 Directors Anthony Paul Rovira (Executive Chairman) Dr Wolf Martinick (Non-Executive Director) John Walter Saleeba (Non-Executive Director) Company Secretary Brett Dickson Registered Office Level 1, 30 Richardson Street WEST PERTH WA 6005 (08) 9481 2555 Solicitors Salter Power Pty Ltd Level 2, 6 Kings Park Road WEST PERTH WA 6005 Bankers Commonwealth Bank of Australia Limited Share Register Computershare Level 2, 45 St Georges Terrace PERTH WA 6000 Telephone: (08) 9445 7000 Facsimile: (08) 9445 7677 Auditors BDO Kendalls Audit & Assurance (WA) Pty Ltd 128 Hay Street SUBIACO WA 6008 Internet Address www.azureminerals.com.au ASX Code Shares AZS 1 Azure Minerals Limited – Annual Report 2009 Highlights Highlights for the 2009 year include: • Completion of the first JORC Code compliant Mineral Resource at Promontorio of: 502,000 tonnes @ 4.7% Copper, 2.1g/t Gold & 99g/t Silver, containing: (cid:131) 23,400 tonnes of Copper (cid:131) 34,000 ounces of Gold (cid:131) 1.6 million ounces of Silver • Initial metallurgical testwork program on Promontorio mineralisation completed, with excellent metal recoveries achieved from flotation testwork, including: (cid:131) Copper: 99.4% (cid:131) Gold: (cid:131) Silver: 97.6% 98.9% • High level evaluation of the economic potential of Promontorio finds that: (cid:131) The project has the potential to be developed and operated at a profit (cid:131) The high grade mineralisation provides a significant positive margin over operating costs (cid:131) There is a noticeable trend of increasing grade with depth (cid:131) Further cash flow modelling show a substantial potential increase in project value with additional resources • Azure enters into a Joint Venture with the Japanese Government corporation JOGMEC to explore for major copper deposits on the La Tortuga Project. (cid:131) JOGMEC may earn a 51% interest in the project by sole-funding US$3 million on exploration expenditure within 3 years. (cid:131) Exploration to date includes geology, geochemical sampling, airborne and ground geophysics, and drilling of one 500m deep diamond drill hole. (cid:131) Results have been very positive, identifying strongly altered rocks containing anomalous copper, molybdenum and zinc mineralisation associated with several strong Induced Polarisation (IP) anomalies outlined in an 8km long structural corridor. 2 Azure Minerals Limited – Annual Report Contents Chairman’s Letter Review of Operations - Promontorio - La Tortuga Directors' Report Corporate Governance Statement Financial Statements - Income Statements - Balance Sheets - Statements of Changes in Equity (Consolidated) - Statements of Changes in Equity (Company) - Statement of Cash Flows - Notes to the Financial Statements - Directors' Declaration - Independent Audit Report - Auditor’s Independence Declaration ASX Additional Information 4 5 7 8 17 25 26 27 28 29 30 57 58 60 61 Competent Person Statement: Information in this report that relates to Exploration Results is based on information compiled by Mr Tony Rovira, who is a Member of The Australasian Institute of Mining and Metallurgy. Mr Rovira is a full-time employee of Azure Minerals Limited. Mr Rovira has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2004 Edition of the “Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves”. Mr Rovira consents to the inclusion in the documents of the matters based on his information in the form and context in which it appears. 3                     Azure Minerals Limited – Annual Report 2009 Chairman’s Letter Dear Fellow Shareholders, On behalf of the Board of Azure Minerals, it is my pleasure to present to you the Annual Report for 2009. This has been a difficult year for all mineral explorers following the fallout from the Global Financial Crisis however, I am pleased to report that Azure has been able to undertake a significant level of positive exploration and value adding activity in Mexico, whilst prudently managing and preserving our financial resources. Great progress has been made at our flagship project Promontorio, where we have begun to move beyond the pure exploration phase towards project scoping and development. A significant milestone was reached with the publication of the initial JORC resource at Promontorio. Excellent metal recoveries and a high level evaluation shows significant promise for the project. Importantly, the high level evaluation shows that potential returns to shareholders from Promontorio can be substantially enhanced with the definition of further mineral resources. We believe the potential for further resources being defined at Promontorio remains excellent, with wildcat holes to the North of the existing resource intersecting additional high grade mineralisation. The mineralisation remains open to the North and South, with further 650m of untested strike potential before becoming obscured under cover rocks. Against the backdrop of difficult market conditions, Azure has followed a prudent course towards managing available working capital. Equity markets were very challenging for a significant portion of the year just past, with further development funds for early stage exploration being very difficult to obtain. Accordingly, Azure has struck a balance between preserving potentially scarce development funds and continuing its mandate from shareholders to advance exploration, in order to realise its vision of becoming an independent minerals producer. In line with this balanced approach, at La Tortuga we have been able to attract a major joint venture partner, allowing us to apply and expend a significant level of exploration spending. A very significant exploration program has been underway at no cost to Azure, as our joint venture partner earns into the project. Azure continues to manage the project, utilising its in- house exploration team based in Hermosillo, Mexico. At Promontorio, work has focused on high value-adding activities, including metallurgy and an initial high level economic study. These activities have substantially enhanced the future potential of the project, for relatively modest expenditure. Fortunately, we are now seeing market conditions improving with renewed support for explorers operating in prospective ground with quality exploration teams and that offer the opportunity for high impact returns, leveraged to exploration success. Azure continues to offer this opportunity to shareholders both through the upside from further development at Promontorio and the potential for significant discovery at projects such as La Tortuga, where a substantial exploration program is underway. Azure’s outstanding exploration portfolio in Mexico has been maintained, with only very low holding costs required. Azure currently holds seven 100%-owned projects and a further 13 projects in joint venture with Kiska Metals Corp (previously Geoinformatics), in which Azure holds a 60% interest. Azure’s project portfolio now covers an impressive area of 175,424 hectares (1,754 km2). These projects continue to provide substantial future potential for Azure as the Company looks to progress them through exploration activities or by corporate means. Shareholders can look forward to a robust level of activity in the coming year, at both Promontorio and La Tortuga. Promontorio continues to progress on the path towards development, with a new stage of metallurgical testwork underway in Mexico. Ongoing development activities over the year ahead will continue to add value to the project. A substantial exploration program continues at La Tortuga with further geophysical surveys and drill testing of a number of the previously identified highly prospective targets. Our activities and prudent management in 2008/2009 have left Azure well placed to emerge from the difficult economic conditions seen worldwide, and capitalise on the nascent recovery in the world commodity markets. As we continue towards our vision of becoming an independent minerals producer and advancing Promontorio to production, I look forward to updating shareholders with the progress to be made in the year ahead. Tony Rovira Executive Chairman 4 Azure Minerals Limited – Annual Report 2009 Review of Operations This year Azure Minerals continued value adding activities on its Mexican projects, focusing principally on its two flagship properties – Promontorio and La Tortuga. PROMONTORIO (Copper – Gold – Silver) The high grade Promontorio copper-gold-silver project comprises a central group of three contiguous mining concessions, Hidalgo, Promontorio and Magistral, totaling 187 hectares and a surrounding mining concession, Promontorio Regional, covering 10,500 hectares. Promontorio is located in the northern Mexican state of Chihuahua within the richly mineralised Sierra Madre Occidental mining province, which is known for its prolific copper, gold and silver mines. Azure has entered into agreements to purchase the three central mining concessions. Under the terms of the agreements, the Company will pay the vendors a total of US$4 million staged over four years to gain 100% ownership of the concessions. Azure has the choice to advance full payment at any time within that period for immediate full ownership. Azure is able to withdraw from the agreements at any time. No royalties are payable to either the vendors or the government for any mineral production. During the year Azure was also granted 100% ownership of the surrounding Promontorio Regional concession. During the year, the Company: • completed a 38 diamond drill hole, 6,695m resource definition drilling program; • published a JORC Code-compliant Mineral Resource of: 502,000 tonnes @ 4.7% copper, 2.1g/t gold & 99g/t silver; • conducted a metallurgical testwork program on a representative bulk sample of Promontorio ore; • undertook a high level evaluation study on the economics of developing and bringing into production a 150,000 tonne per annum mining operation; staked the 105km2 Promontorio Regional mining concession which surrounds the core mining leases; and • • carried out the first reconnaissance exploration program over the Promontorio Regional concession. Promontorio is a high sulphidation epithermal deposit consisting of multiple massive and semi-massive sulphide veins containing very high grades of copper, gold and silver. All veins strike approximately north-south, dip steeply to the west, and demonstrate good geological continuity. Surrounding the sulphide veins is a siliceous alteration halo containing lower grade gold and silver mineralisation. The drill program defined high grade mineralisation over a strike length exceeding 200 metres. Importantly, the high grade copper-gold-silver mineralized system remains open to the north and south with at least a further 650 metres of untested potential before becoming obscured under cover rocks. Drilling confirmed the mineralisation extends to depths in excess of 150 metres with good three-dimensional continuity throughout the deposit. Two wildcat drillholes located 120 metres and 340 metres to the north of the northern resource boundary intersected further high grade copper, gold and silver mineralisation, demonstrating potential for significant expansion of the resources in these areas. Some of the more spectacular intercepts returned from Azure’s drilling program include: APR-DD-001 • 13.35 metres @ 5.7% copper, 2.2 g/t gold & 108 g/t silver from 94.6m depth APR-DD-008 • 2.8 metres @ 10.2% copper, 1.8 g/t gold & 120 g/t silver from 85.2m depth APR-DD-009 • • 9.4 metres @ 12.5% copper, 3.9 g/t gold & 266 g/t silver from 82.0m depth 1.4 metres @ 20.7% copper, 1.2 g/t gold & 270 g/t silver from 130.6m depth APR-DD-010 • 10.05 metres @ 5.3% copper, 1.2 g/t gold & 45 g/t silver from 104.9m depth APR-DD-015 • 2.30 metres @ 23.1% copper, 3.1g/t gold & 253g/t silver from 91.6m depth APR-DD-023 • • 3.0 metres @ 15.4% copper, 2.1 g/t gold & 170 g/t silver from 132.5m depth 4.2 metres @ 15.3% copper, 3.4 g/t gold & 192 g/t silver from 190.1m depth. 5 Azure Minerals Limited – Annual Report 2009 Review of Operations On the basis of this resource definition drill program and using a 1% copper cut-off, Azure calculated a JORC Code compliant Mineral Resource estimate of: Classification Tonnes Copper Gold Silver Reported above 1.0% copper Indicated Inferred Total 290,000 212,000 502,000 4.2% 5.3% 4.7% 2.1g/t 2.1g/t 2.1g/t 94g/t 106g/t 99g/t Contained Metal 23,400 tonnes 34,000 ounces 1,600,000 ounces In preparation for a pre-feasibility study, Azure commissioned initial metallurgical testwork on a bulk sample of Promontorio ore. The metallurgical testing program included head grade analysis, mineralogical examination, comminution testing, sulphide flotation testwork, a recommendation on the optimum process route to produce a copper concentrate, and preliminary evaluation of various downstream processing options for treatment of the copper concentrate. Very promising results were returned. First stage flotation tests produced a “rougher” concentrate grade of 23.1% copper, with a recovery of 99.4% of the total copper. Further flotation testing upgraded the rougher concentrate to produce a “cleaner” concentrate grade of 33.9% copper with a recovery of 98.2% of the total copper. Detailed results are shown in the accompanying table. Product Mass Recovery (%) Rougher Concentrate Cleaner Concentrate 48 34 Copper Gold Silver Grade (%) 23.1 33.9 Recovery (%) Grade (g/t) Recovery (%) Grade (g/t) Recovery (%) 99.4 98.2 6.7 6.9 97.6 83.2 365 377 98.9 93.5 These results confirmed the Company’s view that very high metal recoveries are achievable from commercial scale production through the application of the conventional well proven processing technologies of crushing, grinding and flotation, thereby reducing overall project risk. Towards the end of the year, Azure completed a high level evaluation of the economic potential of the Promontorio project (“Study”). It found that: • Promontorio has potential to be developed and operated at a profit; • Based on typical costs for similar mining projects in Mexico, the high grade of mineralisation provides a significant positive margin over operating costs; and • There is a noticeable trend of increasing grade with depth. The Study was an initial conceptual analysis designed to provide an order of magnitude estimate of capital and operating costs, financial return and overall economic viability. It was based upon the existing Mineral Resources and assumed a selective underground mining operation at approximately 150,000 tonnes per annum followed by treatment using conventional crushing, grinding and flotation technology. This would produce a high grade copper-gold-silver concentrate to be on-sold to a smelter. Operating revenue was estimated at US$2361 per tonne of processed plant feed. Operating costs were estimated to be approximately US$96 per tonne of processed plant feed. Capital costs for a standard crushing, grinding and flotation treatment plant, other surface infrastructure and pre-mining development are estimated to be US$27 million. Cashflow modelling was carried out based on the assumption that additional mineralisation will be discovered through continued exploration. These results provided further encouragement with the NPV increasing significantly. 1 Metals prices used: Copper @ US$2.00/lb, Gold @ US$875/oz, Silver @ US$12.40/oz 6 Azure Minerals Limited – Annual Report 2009 Review of Operations The Study assumed processing tonnages and used preliminary metallurgical data, and as such should be regarded with appropriate caution. This high level Study is early stage and it should be noted there is no certainty that the estimates of the Study will be realised in the future. Work is continuing at Promontorio with reconnaissance exploration in progress on the Promontorio Regional concession. This has comprised geological mapping and geochemical sampling and several new occurrences of epithermal veining and mineralisation have been identified. The next stage of exploration will be geophysical surveys and the defining of targets for follow-up drilling. In addition, Azure has commenced a new stage of metallurgical testwork. A 50kg representative bulk sample of Promontorio ore has been submitted to a mineral processing laboratory in Mexico to investigate the effectiveness of alkaline, ferric acid and bacterial leaching on removing contaminant elements from the high grade copper-gold-silver concentrate. Results from this work are due late in 2009. Work during the past year has delivered excellent results and has provided Azure with encouragement to advance Promontorio into the pre-feasibility study stage. This will enable the Company to be ready able to make a production decision when metals prices and capital market funding have improved. Signs of recovery are already evident, with the copper price in particular rebounding sharply. Consequently Azure is continuing to progress Promontorio towards development. LA TORTUGA – LOS NIDOS (Copper – Gold – Molybdenum – Zinc) Azure holds 100% ownership of the La Tortuga – Los Nidos properties which together consist of five mining concessions covering 258 square kilometres. In late 2008, the Japanese Oil, Gas and Metals National Corporation (“JOGMEC”) recognised significant potential for large copper deposits on La Tortuga and the adjoining Los Nidos properties and approached Azure with a farm-in offer. A Joint Exploration Agreement was entered into and exploration commenced in December 2008. Under the terms of the agreement JOGMEC will earn a 51% interest in the project by sole funding the first US$3 million of exploration expenditure within three years. JOGMEC is a Japanese Government corporation established to assist in the stable supply of oil, gas and mineral resources to the Japanese economy. JOGMEC seeks to gain entry into high-potential mineral exploration projects through providing funding and technical assistance, with a view to the later introduction of commercial Japanese interests. La Tortuga is located 90 kilometres northwest of Hermosillo, the capital of Sonora State, where Azure has its exploration and administration base. The joint venture is operated and staffed by Azure with management and technical assistance from JOGMEC. The joint venture has implemented an intensive exploration program, including: • geological mapping and surface geochemical sampling; • an airborne magnetic and radiometric survey; • • drilling one 502m deep diamond core hole. Induced Polarisation (IP) and resistivity surveys; and Exploration results have been very positive with ten priority targets being identified. Five of these are in areas of outcrop where encouraging indications of mineralised porphyry and skarn systems were recognised by the mapping and sampling. In addition, a further five targets were identified by the geophysical surveys in areas covered by alluvium. Target A is a 2km x 1km area in eastern La Tortuga containing outcrops of strongly altered intrusive and sedimentary rocks which hosts visible copper and molybdenum mineralisation at surface. This area was tested by diamond drill hole TOR-DD- 001 which encountered disseminated and veinlet sulphide mineralisation hosted in over 400m of strongly altered porphyry rocks. Highly anomalous metals values were returned, confirming the presence of a mineralised porphyry system in this area. Follow-up exploration will comprise 1,500m of diamond core drilling to further test this target. Further to the north, Targets H and I were identified by the IP, resistivity and magnetic surveys as having geophysical signatures characteristic of sulphide-rich skarn and porphyry copper deposits. There are no outcropping rocks in the vicinity of these targets, with both covered by an unknown thickness of transported alluvial sands and gravels. However they have been recognised as high priority targets and will by drill tested during the forthcoming year. 7 Directors' Report Azure Minerals Limited - Financial Statements Your directors present their report on the consolidated entity (referred to hereafter as “the Group”) consisting of Azure Minerals Limited and the entities it controlled at the end of or during the year ended 30 June 2009. DIRECTORS The following persons were directors of Azure Minerals Limited during the whole of the financial year and up to the date of this report. Anthony Rovira John Saleeba Wolf Martinick PRINCIPAL ACTIVITIES During the year the principal continuing activity of the Group was exploration for precious and base minerals in Mexico. DIVIDENDS No dividends were paid or declared since the start of the financial year. No recommendation for payment of dividends has been made. REVIEW OF OPERATIONS Group Overview Azure Minerals Limited was incorporated on 19 September 2003. Its principal focus on exploration for gold, copper, silver and zinc in Mexico. The company has thirteen projects in joint venture with TSX-V listed company Kiska Metals Corporation Inc, a joint venture with Japanese corporation JOGMEC and a number of projects owned 100%. The company’s principal project is the Promontorio project where a modest size but high grade copper-gold—silver deposit has been identified. The Company will continue to seek opportunities either 100% owned or in joint venture in Mexico. Operating Results for the Year The operating loss after income tax of the company for the year ended 30 June 2009 was $3,355,760 (2008: $4,481,150). Included in this loss figure is $3,241,555 (2008: $2,305,586) of exploration expenditure written off. Refer notes to the financial statements note 1(d). Shareholder Returns Basic loss per share (cents) Diluted loss per share (cents) 2009 (1.9) (1.9) 2008 (3.3) (3.3) Investments for Future Performance The future performance of the group is dependant upon exploration success and the continued progress of development of those projects where precious and base metals are already present. To this end the group has budgeted to continue exploration at its Mexico projects. Review of Financial Condition The consolidated entity has a sound capital structure and is in an excellent position to progress its mineral properties. During the year, $4,329,766 was raised through the issue of 68,195,817 shares via private placements, share purchase plan and an entitlements issue to shareholders. Risk Management The board is responsible for ensuring that risks, and also opportunities, are identified on a timely basis and that activities are aligned with the risks and opportunities identified by the board. The group believes that it is crucial for all board members to be a part of this process, and as such the board has not established a separate risk management committee. The Board has adopted a Risk Management Policy. The board has a number of mechanisms in place to ensure that management's objectives and activities are aligned with the risks identified by the board. These include the following: h Board approval of a strategic plan, which covers strategy statements designed to meet stakeholders’ needs and manage business risk. h Implementation of board approved operating plans and budgets and board monitoring of progress against these budgets. The company undertakes risk review meetings as required with the involvement of senior management. Identified risks are weighed with action taken to mitigate key risks. 8 Directors' Report Azure Minerals Limited - Financial Statements SIGNIFICANT CHANGES IN STATE OF AFFAIRS Significant changes in the state of affairs of the Group during the financial year were as follows: (a) An increase in contributed equity of $4,329,766 (from $25,129,782 to $29,459,548) as a result of: Issue of 20,365,600 fully paid ordinary shares at $0.125 each Issue of 47,830,217 fully paid ordinary shares at $0.04 each Less expenses associated with the above issue of shares Total 2008 $ 2,545,700 1,913,209 4,458,909 (129,143) 4,329,766 (b) Net cash received from the increase is contributed equity amounting to $4,329,766 was used principally to continue the company’s exploration programme in Mexico. SIGNIFICANT EVENTS AFTER THE BALANCE DATE No matter or circumstance has arisen since the end of the financial year which significantly affected or may significantly affect the operations of the group, the results of those operations, or the state of affairs of the group in future financial years. LIKELY DEVELOPMENTS AND EXPECTED RESULTS The group expects to maintain the present status and level of operations. ENVIRONMENTAL REGULATION AND PERFORMANCE The company is subject to significant environmental regulation in respect to its exploration activities. The company aims to ensure the appropriate standard of environmental care is achieved, and in doing so, that it is aware of and is in compliance with all environmental legislation. The directors of the company are not aware of any breach of environmental legislation for the year under review. The directors have considered compliance with the National Greenhouse and Energy Reporting Act 2007 which requires entities to report annual greenhouse gas emissions and energy use. For the first measurement period from 1 July 2008 to 30 June 2009 the directors have assessed that the Company has no current reporting requirements, but may be required to report in the future. INFORMATION ON DIRECTORS Names, qualifications, experience and special responsibilities Mr. Anthony Paul Rovira, BSc Flinders University, BSc (Hons) Flinders University, MAusIMM (Appointed Executive Chairman 6 June 2007) Experience and Expertise Tony Rovira has 25 years technical and management experience in the mining industry, as an exploration and mining geologist, and as a company executive at Board level. Since graduating from Flinders University in South Australia in 1983, Tony has worked for companies both large and small, including BHP, Barrack Mines, Pegasus Gold and Jubilee Mines. From 1997-2003 Tony was the General Manager of Exploration with Jubilee Mines, during which time he led the team that discovered and developed the world class Cosmos and Cosmos Deeps nickel sulphide deposits in Western Australia. In the year 2000, the Association of Mining and Exploration Companies awarded Tony the “Prospector of the Year Award” for these discoveries. Tony joined Azure Minerals as the inaugural CEO in December 2003 and was appointed Executive Chairman in June 2007. He is responsible for the decision to focus Azure Minerals' activities on the world class mineral provinces in Mexico, where the company has been operating since 2005. Other Current Directorships None. Former Directorships in the last 3 years None. Special Responsibilities Chairman of the Board and Managing Director Interests in Shares and Options 2,982,000 ordinary shares in Azure Minerals Limited 5,500,000 options over ordinary shares in Azure Minerals Limited 9 Azure Minerals Limited - Financial Statements Directors' Report INFORMATION ON DIRECTORS (cont’d) Names, qualifications, experience and special responsibilities (cont’d) Dr Wolf Martinick, PhD, BSc (agric) (Appointed 1 September 2007) Experience and Expertise Dr Martinick is a Fellow of the AusIMM and founding director of the Perth-based consultancy, MBS Environmental Pty Ltd, to the mineral resource industry, especially in Australasia. Dr Martinick has been involved with mineral exploration and mining projects around the world, especially Australasia, Africa, China, India, Eastern Europe and parts of the former Soviet Union. He has participated in numerous due diligence studies on mining projects around the world on behalf of international financial institutions and mineral resource companies for a variety of transactions, including listings on international stock exchanges, mergers and debt financing. Other Current Directorships Sun Resources NL – Non-Executive Director since February 1996 Ezenet Limited – Chairman since January 2003 Weatherly International Plc – Chairman since July 2005 Uran Limited – Non-Executive Director since November 2006 Windimurra Vanadium Limited – Chairman since December 2006 Carbine Resources Limited – Non-Executive Director since December 2006 Former Directorships in the last 3 years Nil Special Responsibilities Chairman Remuneration Committee Member of Audit Committee Interests in Shares and Options 1,100,000 ordinary shares in Azure Minerals Limited 1,000,000 options over ordinary shares in Azure Minerals Limited Mr. John Walter Saleeba, BCom, LLB, CPA, FAICD (Non-Executive Director, chairman audit committee, remuneration committee member) Experience and Expertise Mr Saleeba was formerly a partner in the law firm Clayton Utz. He is a Fellow of the Australian Institute of Company Directors and is currently Chairman of Repcol Limited and VDM Group Limited. Mr Saleeba has held directorships with a number of other public companies, covering a wide range of business activities. Other Current Directorships Repcol Limited – Non-Executive Director and Chairman since February 2002. VDM Group Limited – Non-Executive Director and Chairman since October 2005. Former Directorships in the last 3 years Centrepoint Alliance Limited from May 2002 – November 2007 Special Responsibilities Chairman of Audit Committee Member of Remuneration Committee Interests in Shares and Options 1,050,000 ordinary shares in Azure Minerals Limited 800,000 options over ordinary shares in Azure Minerals Limited 10 Azure Minerals Limited - Financial Statements Directors' Report Company Secretary Brett Dickson, BBus, CPA (Appointed 21 November 2006) Mr Dickson is a Certified Practising Accountant with a Bachelors degree in Economics and Finance from Curtin University and has over 20 years experience in the financial management of companies, principally companies in early stage development of its resource or product, and offers broad financial management skills. He has been Chief Financial Officer for a number of successful resource companies listed on the ASX. In addition he has had close involvement with the financing and development of a number of greenfield resources projects. DIRECTORS' MEETINGS The number of directors' meetings held (including meetings of committees of directors) and number of meetings attended by each of the directors of the company during the financial year are: Directors' Meetings A 8 8 8 B 8 8 8 Meetings of Committees Audit A * 2 2 B * 2 2 Remuneration B A * 2 2 * 2 2 Anthony Paul Rovira John Walter Saleeba Wolf Gerhard Martinick Notes A - Number of meetings attended. B - Number of meetings held during the time the director held office or was a member of the committee during the year. * - Not a member of the relevant committee. Retirement, Election And Continuation In The Office Of Directors Wolf Martinick is the director retiring by rotation who, being eligible offers himself for re-election. 11 Azure Minerals Limited - Financial Statements Directors' Report REMUNERATION REPORT (AUDITED) The remuneration report is set out under the following main headings: A Principles used to determine the nature and amount of remuneration B Details of remuneration C Service agreements D Share-based compensation E Additional Information The information provided in this remuneration report has been audited as required by section 308 (3C) of the Corporation Act 2001. A Principles used to determine the nature and amount of remuneration The remuneration policy of Azure Minerals Limited has been designed to align director and executive objectives with shareholder and business objectives by providing a fixed remuneration component and where appropriate offering specific long-term incentives based on key performance areas affecting the Groups results. At present the Company has not implemented any specific long-term incentives and as such the remuneration policy is not impacted by the Groups performance, including earnings in shareholder wealth (dividends, changes in share price or return on capital to shareholders). The board of Azure Minerals Limited believes the remuneration policy to be appropriate and effective in its ability to attract and retain the best executives and directors to run and manage the Group. The remuneration policy, setting the terms and conditions for the executive directors and other senior executives, was developed by the board. All executives receive a base salary (which is based on factors such as length of service and experience) and superannuation. The board reviews executive packages annually by reference to the Groups performance, executive performance and comparable information from industry sectors and other listed companies in similar industries. The board may exercise discretion in relation to approving incentives, bonuses and options. The policy is designed to attract the highest calibre of executives and reward them for performance that results in long-term growth in shareholder wealth. Executives are also entitled to participate in the employee share and option arrangements. The executive directors and executives receive a superannuation guarantee contribution required by the government, which is currently 9% of cash salary, and do not receive any other retirement benefits. Some individuals, however, may choose to sacrifice part of their salary to increase payments towards superannuation. All remuneration paid to directors and executives is valued at the cost to the company and expensed. Shares given to directors and executives are valued as the difference between the market price of those shares and the amount paid by the director or executive; to date no shares have been awarded to directors or executives. Options are valued using either the Black-Scholes or Binomial methodologies. The board policy is to remunerate non-executive directors at market rates for comparable companies for time, commitment and responsibilities. The board determines payments to the non-executive directors and reviews their remuneration annually based on market practice, duties and accountability. Independent external advice is sought when required. The maximum aggregate amount of fees that can be paid to non-executive directors is subject to approval by shareholders at the Annual General Meeting (currently $200,000). Fees for non-executive directors are not linked to the performance of the economic entity. However, to align directors’ interests with shareholder interests, the directors are encouraged to hold shares in the company and are able to participate in employee option plans. In the 2005/2006 financial year Azure Minerals Limited established a Directors Retirement Benefit Policy whereby each non-executive director is entitled to a retirement benefit in accordance with the maximum amount ascertained pursuant to section 200G(2)(b) of the Corporations Act 2001. In the 2006/2007 financial year the Directors Retirement Benefit Policy was terminated and the retirement benefit entitlement has been frozen as of 30 June 2006. B Details of remuneration Amount of remuneration Details of the remuneration of the directors and key management personnel (as defined in AASB 124 Related Party Disclosures) of Azure Minerals Limited are set out below in the following tables. The key management personnel of Azure Minerals Limited includes the directors as disclosed earlier in this report and the following who have authority and responsibility for planning, directing and controlling the exploration activities of the entity. Mr P Manouge Exploration Manager – Australia appointed 5 January 2004 (resigned 30 March 2009) In addition the Company Secretary, Mr B Dickson is an executive whose remuneration must be disclosed under the Corporations Act 2001. 12 Azure Minerals Limited - Financial Statements Directors' Report Key management personnel of the Group Cash, salary & fees Short-Term Cash bonus Post Employment Non monetary benefits Super- annuation Retirement benefits Name Share-based Payments Options Total Directors Anthony Paul Rovira – Executive Chairman 2009 2008 264,935 244,792 - - - - John Walter Saleeba – Non executive 2009 2008 - 32,500 - 32,500 Wolf Gerhard Martinick –Non Executive (Appointed 1 September 2007) - - - 27,083 2009 2008 - - - - Michael John Fowler – Non Executive (Resigned 1Sepember 2007) 2009 2008 - 5,416 Executives Brett Dickson – Company Secretary 2009 2008 132,000 125,000 - - - - Patrick Manouge – Exploration Manager(resigned 30 March 2009) 2009 2008 152,152 162,500 Mark Styles – Exploration Manager Mexico (Resigned 30 June 2008) - - 2009 2008 Total 2009 2008 - 155,015 - - 581,587 752,306 - - - - - - - - - - - - 60,177 22,031 2,925 2,925 35,425 2,437 - 487 - - 13,694 14,625 - - 112,221 42,505 - - - - - - - - - - - - - - - - - - - - 325,112 266,823 35,425 35,425 - 103,830 35,425 133,350 - - - 5,903 - 172,212 - 43,053 - 28,702 132,000 297,212 165,846 220,178 - 183,717 - 347,797 693,808 1,142,608 Retirement benefits provided for the non-executive directors in the financial statements do not form part of the above remuneration until such time as the amount is paid to the retiring director. Apart from the issue of options The company currently has no performance based remuneration component built into director and executive remuneration (2008: Nil) C Service Agreements Remuneration and other terms of employment for the following key management personnel are formalised in service agreements, the terms of which are set out below: Anthony Rovira, Managing Director: h Term of agreement - 2 years commencing 1 July 2009. h Base salary, exclusive of superannuation, of $258,500 to be reviewed annually by the remuneration committee. h Payment of termination benefit on early termination by the employer, other than for gross misconduct, includes an amount equal to the amounts due for the balance of the term of the contract from the date of termination. Brett Dickson, Company Secretary/Chief Financial Officer: h Term of agreement – 2 years commencing 1 July 2009 h Fixed fee, $11,000 per month. h Payment of termination benefit on early termination by the employer, other than for gross misconduct, includes an amount equal to the amounts due for the balance of the term of the contract from the date of termination. 13 Azure Minerals Limited - Financial Statements Directors' Report Retirement Benefits Other retirement benefits may be provided directly by the company if approved by shareholders. D Share based compensation Options over shares in Azure Minerals Limited may be issued to directors and executives under the Employee Option Plan. The options are not issued based on performance criteria, but are issued to directors and executives of Azure Minerals Limited; where appropriate, to increase goal congruence between executives, directors and shareholders. There are no standard vesting conditions to options awarded with vesting conditions, if any, at the discretion of Directors at the time of grant. Options are granted for nil consideration. No options were granted or vested in the year ended 30 June 2009. No options were exercised during the financial year and no options have been exercised since the end of the financial year. During the year 4,300,000 options exercisable at various prices with various expiry dates lapsed. The value of the options at lapse date was nil as the exercise price of the option was significantly in excess of the market price of the underlying share. The value is determined at the time of lapsing, but assuming the condition was satisfied. The Company’s remuneration policy prohibits executives from entering into transactions or arrangements which limit the “at risk” aspect of participating in unvested entitlements. E Additional Information Performance based remuneration Details of remuneration: options The company currently has no performance based remuneration component built into director and executive remuneration packages. Performance Income as a proportion of total compensation No performance based bonuses have been paid to key management personnel during the financial year. It is the intent of the board to review the inclusion of performance bonuses as part of remuneration packages during the 2009/10 financial year. End of Audited Remuneration Report 14 Azure Minerals Limited - Financial Statements Directors' Report LOANS TO DIRECTORS AND EXECUTIVES No loans have been provided to directors or executives. SHARES UNDER OPTION At the date of this report there are 10,550,000 unissued ordinary shares in respect of which options are outstanding. Balance at the beginning of the year Share option movements during the year Issued Lapsed Total Number of options 14,850,000 Exercisable at 25 cents, on or before 30 November 2008 (1,500,000) (1,500,000) Exercisable at 25 cents, on or before 30 November 2009 (200,000)1 Exercisable at 25 cents, on or before 30 November 2010 (200,000)1 Exercisable at 17.5 cents, on or before 31 January 2011 (300,000)1 Exercisable at 25 cents, on or before 31 January 2012 (800,000)1 Exercisable at 35 cents, on or before 31 January 2013 (800,000)1 Exercisable at 15 cents, on or before 30 November 2009 (500,000)1 Total options issued and lapsed in the year to 30 June 2009 Total number of options outstanding as at 30 June 2009 and at the date of this report (200,000) (200,000) (300,000) (800,000) (800,000) (500,000) (4,300,000) 10,550,000 1. Pursuant to the terms and conditions of issued options, options will lapse if not exercised within 90 days of the holder of the options ceasing to be an employee, officer or contractor of the Company. Those options listed as lapsing above lapsed for this reason. The balance is comprised of the following: Expiry date 30 Nov 2009 1 Jan 2010 30 Jan 2010 30 Jan 2011 30 Jan 2012 31 Jan 2011 31 Jan 2012 31 Jan 2013 30 Nov 2009 Exercise price (cents) 25.0 25.0 25.0 25.0 25.0 17.5 25.0 35.0 15.0 Number of options 2,800,000 2,800,000 200,000 400,000 400,000 500,000 500,000 500,000 2,450,000 Total number of options outstanding at the date of this report No person entitled to exercise any option referred to above has or had, by virtue of the option, a right to participate in any share issue of any other body corporate. 10,550,000 No options were exercised during the financial year and since the end of the financial year no options have been exercised. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS During the financial year, Azure Minerals Limited paid a premium of $18,792 to ensure the directors and secretary of the company and its Australian based controlled entities. The liabilities insured and legal costs that may be incurred in defending civil or criminal proceedings that mat be brought against the officers in their capacity as officers of entities in the Group, and any other payments arising from liabilities incurred by the officers in connection with such proceedings. This does not include such liabilities that arise from conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the company. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities. 15 Azure Minerals Limited - Financial Statements Directors' Report Proceedings on behalf of the company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the company, or to intervene in any proceedings to which the company is a party, for the purpose of taking responsibility on behalf of the company for all or part of those proceedings. No Proceedings have been brought or intervened in on behalf of the company with leave of the Court under section 237 of the Corporations Act 2001. NON-AUDIT SERVICES The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the company and/or the Group are important. Details of the amount paid or payable to the auditor (BDO Kendalls) for audit and non-audit services provided during the year are set out below. The Board of directors has considered the position and, in accordance with advice received from the audit committee, is satisfied that the provisions of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • All non-audit services have been reviewed by the audit committee to ensure they do not impact the impartiality and objectivity of the auditor • None of the services underline the general principals relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-audit firms: 1. Audit Services BDO Kendalls Audit and review of financial reports 2. Non audit Services Audit-related services BDO Kendalls Report for inclusion in a prospectus for a capital raising in Canada Taxation Services BDO Kendalls Tax compliance services Total remuneration for non-audit services Consolidated 2009 $ 2008 $ 36,657 25,527 - 31,412 10,916 10,699 10,916 42,111 AUDITOR INDEPENDENCE A copy of the auditors independence declaration as required under section 307c of the Corporations Act 2001 is set out on page 60. AUDITOR BDO Kendalls continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of the directors. Anthony Paul Rovira Executive Chairman Perth, 25 September 2009 16 Azure Minerals Limited - Financial Statements Corporate Governance Statement Statement Azure Minerals Limited ("Company") has made it a priority to adopt systems of control and accountability as the basis for the administration of corporate governance. Some of these policies and procedures are summarised in this statement. Commensurate with the spirit of the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations ("Principles & Recommendations"), the Company has followed each recommendation where the Board has considered the recommendation to be an appropriate benchmark for its corporate governance practices. Where the Company's corporate governance practices follow a recommendation, the Board has made appropriate statements reporting on the adoption of the recommendation. Where, after due consideration, the Company's corporate governance practices depart from a recommendation, the Board has offered full disclosure and reason for the adoption of its own practice, in compliance with the "if not, why not" regime. Disclosure of Corporate Governance Practices Summary Statement Recommendation 1.1 Recommendation 1.2 Recommendation 1.3³ Recommendation 2.1 Recommendation 2.2 Recommendation 2.3 Recommendation 2.4 Recommendation 2.5 Recommendation 2.6³ Recommendation 3.1 Recommendation 3.2 Recommendation 3.3³ Recommendation 4.1 Recommendation 4.2 ASX P & R1 (cid:51) If not, why not2 (cid:51) n/a (cid:51) (cid:51) n/a (cid:51) (cid:51) n/a (cid:51) n/a (cid:51) (cid:51) (cid:51) n/a n/a (cid:51) Recommendation 4.3 Recommendation 4.4³ Recommendation 5.1 Recommendation 5.2³ Recommendation 6.1 Recommendation 6.2³ Recommendation 7.1 Recommendation 7.2 Recommendation 7.3 ASX P & R1 (cid:51) If not, why not2 n/a n/a n/a n/a (cid:51) n/a (cid:51) n/a (cid:51) (cid:51) (cid:51) Recommendation 7.4³ n/a n/a Recommendation 8.1 Recommendation 8.2 (cid:51) (cid:51) Recommendation 8.3³ n/a n/a 1 2 3 Indicates where the Company has followed the Principles & Recommendations. Indicates where the Company has provided "if not, why not" disclosure. Indicates an information based recommendation. Information based recommendations are not adopted or reported against using "if not, why not" disclosure – information required is either provided or it is not. Website Disclosures Further information about the Company's charters, policies and procedures may be found at the Company's website at www.azureminerals.com.au, under the section marked Corporate Governance. A list of the charters, policies and procedures which are referred to in this Corporate Governance Statement, together with the Recommendations to which they relate, are set out below. Charters Board Audit Committee Nomination Committee Remuneration Committee Policies and Procedures Policy and Procedure for Selection and (Re)Appointment of Directors Process for Performance Evaluation Policy on Assessing the Independence of Directors Policy for Trading in Company Securities (summary) Code of Conduct (summary) Policy on ASX Listing Rule Compliance (summary) Procedure for the Selection, Appointment and Rotation of External Auditor Shareholder Communication Strategy Risk Management Policy (summary) 17 Recommendation(s) 1.3 4.4 2.6 8.3 2.6 1.2, 2.5 2.6 3.2, 3.3 3.1, 3.3 5.1, 5.2 4.4 6.1, 6.2 7.1, 7.4 Azure Minerals Limited - Financial Statements Corporate Governance Statement Disclosure – Principles & Recommendations The Company reports below on how it has followed (or otherwise departed from) each of the Principles & Recommendations during the 2008/2009 financial year ("Reporting Period"). Principle 1 – Lay solid foundations for management and oversight Recommendation 1.1: Companies should establish the functions reserved to the Board and those delegated to senior executives and disclose those functions. Disclosure: The Company has established the functions reserved to the Board and has set out these functions in its Board Charter. The Board is collectively responsible for promoting the success of the Company through its key functions of overseeing the management of the Company, providing overall corporate governance of the Company, monitoring the financial performance of the Company, engaging appropriate management commensurate with the Company's structure and objectives, involvement in the development of corporate strategy and performance objectives and reviewing, ratifying and monitoring systems of risk management and internal control, codes of conduct and legal compliance. The Company has established the functions delegated to senior executives and has set out these functions in its Board Charter. Senior executives are responsible for supporting the Managing Director and assisting the Managing Director in implementing the running of the general operations and financial business of the Company, in accordance with the delegated authority of the Board. Senior executives are responsible for reporting all matters which fall within the Company's materiality thresholds at first instance to the Managing Director or, if the matter concerns the Managing Director, then directly to the Chair or the lead independent director, as appropriate. Recommendation 1.2: Companies should disclose the process for evaluating the performance of senior executives. Disclosure: The Chair/Managing Director is responsible for evaluating the senior executives. The Chair/Managing Director reviews the performance of the senior executives by completing written performance appraisals for each senior executive; the Chair/Managing Director then meets with the senior executives to discuss their performance appraisals and provide feedback to the senior executives. Recommendation 1.3: Companies should provide the information indicated in the Guide to reporting on Principle 1. Disclosure: During the Reporting Period there were no performance evaluations for senior executives, however, the Company expects to conduct performance evaluations in the forthcoming reporting period in accordance with the process disclosed at Recommendation 1.2. Principle 2 – Structure the board to add value Recommendation 2.1: A majority of the Board should be independent directors. Disclosure: The Board has a majority of directors who are independent. The independent directors of the Board are Wolf Martinick and John Saleeba. The non independent director of the Board is Anthony Rovira. Recommendation 2.2: The Chair should be an independent director. Notification of Departure: The Chair is not an independent director. 18 Azure Minerals Limited - Financial Statements Corporate Governance Statement Explanation for Departure: Mr Rovira is not independent by virtue of his executive role. The Board considers that Mr Rovira is the most appropriate person for the position of Chair given his industry experience, and the size and current activities of the Company. The Board also believes that Mr Rovira’s appointment as Chair is in line with shareholder expectations. Recommendation 2.3: The roles of the Chair and Managing Director should not be exercised by the same individual. Notification of Departure: The roles of Chair and Managing Director are exercised by the same individual, Mr Rovira. Explanation for Departure: While the Board recognises the importance of the need for the division of responsibilities between the Chair and the Managing Director, the existing structure is considered appropriate to the Company’s present circumstances. It provides a unified leadership structure which the Board believes is important given the Company’s early stage of exploration. Further, the Board believes this structure is in line with shareholder expectations. Recommendation 2.4: The Board should establish a Nomination Committee. Notification of Departure: The Company has not established a separate Nomination Committee. Explanation for Departure: The full Board considers those matters that would usually be the responsibility of a Nomination Committee. Given that the Board comprises only 3 directors, the Board considers that no efficiencies or other benefits would be gained by establishing a separate committee. Items that are usually required to be discussed by a Nomination Committee are marked as separate agenda items at Board meetings when required. When the Board convenes as the Nomination Committee it carries out those functions which are delegated in the Company’s Nomination Committee Charter. The Board deals with any conflicts of interest that may occur when convening in the capacity of Nomination Committee by ensuring the director with conflicting interests is not party to the relevant discussions. Recommendation 2.5: Companies should disclose the process for evaluating the performance of the Board, its committees and individual directors. Disclosure: The Chair is responsible for evaluation of the Board and, when deemed appropriate, Board committees and individual directors. The Nomination Committee is responsible for evaluating the Managing Director. Given the current size and composition of the Company believes that the most efficient way to conduct these evaluations is by way of informal discussions as required. Recommendation 2.6: Companies should provide the information indicated in the Guide to reporting on Principle 2. Disclosure: Skills, Experience, Expertise and term of office of each Director A profile of each director containing their skills, experience, expertise and term of office is set out in the Directors' Report. Identification of Independent Directors The independent directors of the Company are Wolf Martinick and John Saleeba. These directors are independent as they are non- executive directors who are not members of management and who are free of any business or other relationship that could materially interfere with, or could reasonably be perceived to materially interfere with, the independent exercise of their judgment. Independence is measured having regard to the relationships listed in Box 2.1 of the Principles & Recommendations and the Company's materiality thresholds. The materiality thresholds are set out below. Company's Materiality Thresholds The Board has agreed on the following guidelines for assessing the materiality of matters, as set out in the Company's Board Charter: • • Balance sheet items are material if they have a value of more than 5% of pro-forma net asset. Profit and loss items are material if they will have an impact on the current year operating result of 5% or more. 19 Azure Minerals Limited - Financial Statements Corporate Governance Statement • • Items are also material if they impact on the reputation of the Company, involve a breach of legislation, are outside the ordinary course of business, they could affect the Company’s rights to its assets, if accumulated they would trigger the quantitative tests, involve a contingent liability that would have a probable effect of 5% or more on balance sheet or profit and loss items, or they will have an effect on operations which is likely to result in an increase or decrease in net income or dividend distribution of more than 5%. Contracts will be considered material if they are outside the ordinary course of business, contain exceptionally onerous provisions in the opinion of the Board, impact on income or distribution in excess of the quantitative tests, there is a likelihood that either party will default, and the default may trigger any of the quantitative or qualitative tests, are essential to the activities of the Company and cannot be replaced, or cannot be replaced without an increase in cost of such a quantum, triggering any of the quantitative tests, contain or trigger change of control provisions, they are between or for the benefit of related parties, or otherwise trigger the quantitative tests. Statement concerning availability of Independent Professional Advice To assist directors with independent judgement, it is the Board's policy that if a director considers it necessary to obtain independent professional advice to properly discharge the responsibility of their office as a director then, provided the director first obtains approval for incurring such expense from the another director, the Company will pay the reasonable expenses associated with obtaining such advice. Nomination Matters The full Board carries out the role of the Nomination Committee. The full Board did not officially convene as a Nomination Committee during the Reporting Period, however the Board discussed nomination-related matters from time to time during the year as required. To assist the Board to fulfil its function as the Nomination Committee, it has adopted a Nomination Committee Charter. The explanation for departure set out under Recommendation 2.4 above explains how the functions of the Nomination Committee are performed. Performance Evaluation During the Reporting Period there were no performance evaluations conducted except a performance evaluation of the whole Board, which evaluation occurred in accordance with the process disclosed at Recommendation 2.5. The Company expects to conduct performance evaluations in the forthcoming reporting period in accordance with the process disclosed at Recommendation 2.5. Selection and (Re)Appointment of Directors In determining candidates for the Board, the Nomination Committee (or equivalent) follows a prescribed procedure whereby it considers the balance of independent directors on the Board as well as the skills and qualifications of potential candidates that will best enhance the Board's effectiveness. The Board recognises that Board renewal is critical to performance and the impact of Board tenure on succession planning. At every annual general meeting one-third of the directors (other than alternate directors and the Managing Director) shall retire from office. No director (other than alternate directors and the Managing Director) may hold office for more than 3 years without retiring from office. A retiring director is eligible for re-election. Re-appointment of directors is not automatic. Principle 3 – Promote ethical and responsible decision-making Recommendation 3.1: Companies should establish a Code of Conduct and disclose the code or a summary of the code as to the practices necessary to maintain confidence in the company's integrity, the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders and the responsibility and accountability of individuals for reporting and investigating reports of unethical practices. Disclosure: The Company has established a Code of Conduct as to the practices necessary to maintain confidence in the Company's integrity, practices necessary to take into account their legal obligations and the expectations of their stakeholders and responsibility and accountability of individuals for reporting and investigating reports of unethical practices. Recommendation 3.2: Companies should establish a policy concerning trading in company securities by directors, senior executives and employees, and disclose the policy or a summary of that policy. Disclosure: The Company has established a policy concerning trading in the Company's securities by directors, senior executives and employees. 20 Azure Minerals Limited - Financial Statements Corporate Governance Statement Recommendation 3.3: Companies should provide the information indicated in the Guide to reporting on Principle 3. Disclosure: Please refer to the section above marked Website Disclosures. Principle 4 – Safeguard integrity in financial reporting Recommendation 4.1: The Board should establish an Audit Committee. Disclosure: The Company has established an Audit Committee. Recommendation 4.2: The Audit Committee should be structured so that it: • • • • consists only of non-executive directors consists of a majority of independent directors is chaired by an independent Chair, who is not Chair of the Board has at least three members. Notification of Departure: The Audit Committee comprises 2 members, Wolf Martinick and John Saleeba. Explanation for Departure: Given the size and structure of the Board, the Company is unable to meet the composition requirements under Recommendation 4.2. The Audit Committee is comprised of the two independent, non executive directors. Recommendation 4.3: The Audit Committee should have a formal charter. Disclosure: The Company has adopted an Audit Committee Charter. Recommendation 4.4: Companies should provide the information indicated in the Guide to reporting on Principle 4. Disclosure: The Audit Committee held two meetings during the Reporting Period. The following table identifies those directors who are members of the Audit Committee and shows their attendance at Committee meetings: Name Wolf Martinick John Saleeba No. of meetings attended 2 2 Details of each of the director's qualifications are set out in the Directors' Report. Both members of the Audit Committee consider themselves to be financially literate and have industry knowledge. Further, Mr John Saleeba has a Bachelor of Commerce and is a Certified Practicing Accountant. Mr Saleeba’s qualifications bring financial expertise to the Audit Committee. The Company has established procedures for the selection, appointment and rotation of its external auditor. The Board is responsible for the initial appointment of the external auditor and the appointment of a new external auditor when any vacancy arises, as recommended by the Audit Committee (or its equivalent). Candidates for the position of external auditor must demonstrate complete independence from the Company through the engagement period. The Board may otherwise select an external auditor based on criteria relevant to the Company's business and circumstances. The performance of the external auditor is reviewed on an annual basis by the Audit Committee (or its equivalent) and any recommendations are made to the Board. 21 Azure Minerals Limited - Financial Statements Corporate Governance Statement Principle 5 – Make timely and balanced disclosure Recommendation 5.1: Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies. Disclosure: The Company has established written policies designed to ensure compliance with ASX Listing Rule disclosure and accountability at a senior executive level for that compliance. Recommendation 5.2: Companies should provide the information indicated in the Guide to reporting on Principle 5. Disclosure: Please refer to the section above marked Website Disclosures. Principle 6 – Respect the rights of shareholders Recommendation 6.1: Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy. Disclosure: The Company has designed a communications policy for promoting effective communication with shareholders and encouraging shareholder participation at general meetings. Recommendation 6.2: Companies should provide the information indicated in the Guide to reporting on Principle 6. Disclosure: Please refer to the section above marked Website Disclosures. Principle 7 – Recognise and manage risk Recommendation 7.1: Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies. Disclosure: The Board has adopted a Risk Management Policy, which sets out the Company's risk profile. Under the policy, the Board is responsible for approving the Company's policies on risk oversight and management and satisfying itself that management has developed and implemented a sound system of risk management and internal control. Under the policy, the Board delegates day-to-day management of risk to the Managing Director, who is responsible for identifying, assessing, monitoring and managing risks. The Managing Director is also responsible for updating the Company's material business risks to reflect any material changes, with the approval of the Board. In fulfilling the duties of risk management, the Managing Director may have unrestricted access to Company employees, contractors and records and may obtain independent expert advice on any matter they believe appropriate, with the prior approval of the Board.] The Board has established a separate Audit Committee to monitor and review the integrity of financial reporting and the Company's internal financial control systems and risk management systems. In addition, the following risk management measures have been adopted by the Board to manage the Company's material business risks: • • • the Board has established authority limits for management which, if exceeded, will require prior Board approval; the Board has adopted a compliance procedure for the purpose of ensuring compliance with the Company's continuous disclosure obligations; and the Board has adopted a corporate governance manual which contains other policies to assist the Company to establish and maintain its governance practices 22 Azure Minerals Limited - Financial Statements Corporate Governance Statement The Company does not have a formalised and documented risk management system in place. The board does receive a detailed report from management each month which enables an assessment by the board of activities that may impact on the risk profile of the company. Specific areas of risk that are identified in the report include operational activities, asset management (including title to exploration and mining leases) and staff. Any matter identified from the monthly report is then discussed at the following board meeting. In September 2009, the Board resolved to review, formalise and document the management of its material business risks and expects to implement this system in the second quarter of the 2009/2010 financial year. This system is expected to include the preparation of a risk register by management to identify the Company's material business risks and risk management strategies for these risks. In addition, the process of management of material business risks will be allocated to members of senior management. The risk register will be reviewed quarterly and updated, as required. Recommendation 7.2: The Board should require management to design and implement the risk management and internal control system to manage the Company's material business risks and report to it on whether those risks are being managed effectively. The Board should disclose that management has reported to it as to the effectiveness of the Company's management of its material business risks. Disclosure: The Board has required management to design, implement and maintain risk management and internal control systems to manage the Company's material business risks. The Board also requires management to report to it confirming that those risks are being managed effectively. Further, the Board has received a report from management as to the effectiveness of the Company's management of its material business risks. Recommendation 7.3: The Board should disclose whether it has received assurance from the Chief Executive Officer (or equivalent) and the Chief Financial Officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. Disclosure: The Managing Director and the Chief Financial Officer (or equivalent) have provided a declaration to the Board in accordance with section 295A of the Corporations Act and have assured the Board that such declaration is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial risk. Recommendation 7.4: Companies should provide the information indicated in the Guide to reporting on Principle 7. Disclosure: The Board has received the report from management under Recommendation 7.2. The Board has received the assurance from the Managing Director and the Chief Financial Officer (or equivalent) under Recommendation 7.3. Principle 8 – Remunerate fairly and responsibly Recommendation 8.1: The Board should establish a Remuneration Committee. Disclosure: The Company has established a Remuneration Committee. Recommendation 8.2: Companies should clearly distinguish the structure of non-executive directors’ remuneration from that of executive directors and senior executives. Disclosure: Non-executive directors are remunerated at market rates (for comparable companies) for time, commitment and responsibilities. Remuneration for non-executive directors is not linked to the performance of the Company. From time to time the Company may grant options to non-executive directors, which grant is designed to attract and retain appropriately qualified non-executive directors to the Board. 23 Azure Minerals Limited - Financial Statements Corporate Governance Statement Pay and rewards for executive directors and senior executives consists of a base salary and performance incentives. Long term performance incentives may include options granted at the discretion of the Remuneration Committee and subject to obtaining the relevant approvals. The grant of options is designed to recognise and reward efforts as well as to provide additional incentive and may be subject to the successful completion of performance hurdles. Recommendation 8.3: Companies should provide the information indicated in the Guide to reporting on Principle 8. Disclosure: Details of remuneration, including the Company’s policy on remuneration, are contained in the “Remuneration Report” which forms of part of the Directors’ Report. The Remuneration Committee held two meetings during the Reporting Period. The following table identifies those directors who are members of the Remuneration Committee and shows their attendance at Committee meetings: Name Wolf Martinick John Saleeba No. of meetings attended 2 2 In the 2005/2006 financial year the Company established a Directors Retirement Benefit Policy whereby each non-executive director is entitled to a retirement benefit in accordance with the maximum amount ascertained pursuant to section 200G(2)(b) of the Corporations Act 2001 (Cth). In the 2006/2007 financial year, however, the Directors Retirement Benefit Policy was terminated and the retirement benefit entitlement does not apply to any non-executive director appointed from 30 June 2006. The Company's Remuneration Committee Charter includes a statement of the Company's policy on prohibiting transactions in associated products which limit the risk of participating in unvested entitlements under any equity based remuneration schemes. 24 Azure Minerals Limited - Financial Statements Income Statements YEAR ENDED 30 JUNE 2009 Notes Consolidated Parent Entity REVENUE EXPENDITURE Depreciation Salaries and employee benefits expense Directors fees Exploration expenses Exploration expenses reimbursed Travel and promotion expenses Office expenses Consulting expenses Insurance expenses Impairment on loan to subsidiary Share based payment expense Preparation for TSX Listing Other expenses 5 6 6 27 2009 $ 2008 $ 2009 $ 2008 $ 64,881 146,733 54,549 146,089 (46,655) (493,583) (65,000) (3,241,555) 957,042 (118,544) (135,156) (5,000) (46,857) - - (3,075) (222,259) (49,057) (606,923) (64,999) (2,305,586) - (301,448) (94,275) (59,950) (31,419) - (365,127) (602,804) (146,295) (16,710) (493,583) (65,000) (11,094) 957,042 (118,544) (135,156) (5,000) (29,294) (4,636,848) - (3,075) (200,778) (27,873) (606,923) (64,999) (35,738) - (301,448) (94,275) (59,950) (31,419) - (365,127) (602,804) (146,301) LOSS BEFORE INCOME TAX EXPENSE (3,355,760) (4,481,150) (4,703,491) (2,190,768) INCOME TAX BENEFIT / (EXPENSE) 7 - - - - NET LOSS ATTRIBUTABLE TO MEMBERS OF AZURE MINERALS LIMITED (3,355,760) (4,481,150) (4,703,491) (2,190,768) Basic loss per share (cents per share) Diluted loss per share (cents per share) 22 (1.9) (1.9) (3.3) (3.3) The above Income Statements are to be read in conjunction with the Notes to the Financial Statements. 25 Azure Minerals Limited - Financial Statements Balance Sheets AT 30 JUNE 2009 ASSETS CURRENT ASSETS Cash and cash equivalents Trade and other receivables TOTAL CURRENT ASSETS NON-CURRENT ASSETS Plant and equipment Capitalised exploration expenditure Other financial assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Trade and other payables Provisions TOTAL CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Accumulated losses TOTAL EQUITY Notes Consolidated Parent Entity 2009 $ 2008 $ 2009 $ 2008 $ 18 8 9 10 11 13 14 1,345,997 130,407 1,476,404 1,420,067 154,067 1,574,134 1,272,504 4,244,210 5,516,714 1,371,278 4,692,599 6,063,877 143,398 709,602 22,308 875,308 196,892 193,270 22,308 412,470 57,561 - 22,535 80,096 76,291 - 22,535 98,826 2,351,712 1,986,604 5,596,810 6,162,703 136,819 126,472 263,291 513,124 174,123 687,247 37,917 126,472 164,389 182,434 174,123 356,557 263,291 687,247 164,389 356,557 2,088,421 1,299,357 5,432,421 5,806,146 15 16(a) 16(b) 29,459,548 691,966 (28,063,093) 2,088,421 25,129,782 876,908 (24,707,333) 1,299,357 29,459,548 903,692 (24,930,819) 5,432,421 25,129,782 903,692 (20,227,328) 5,806,146 The above Balance Sheets are to be read in conjunction with the Notes to the Financial Statements 26 Azure Minerals Limited - Financial Statements Statements of Changes in Equity CONSOLIDATED 30 JUNE 2009 Issued Share Capital Share Option Reserve $ $ Foreign Currency Translation Reserve $ (Accumulated Losses) Total $ $ Balance at 1 July 2008 25,129,782 903,692 (26,784) (24,707,333) 1,299,357 Exchange differences arising on translation of foreign subsidiaries Net income recognised directly in equity Loss for the period Total income and expense recognised for the year Transactions with equity holders in their capacity as equity holders Shares issued during the period Transaction costs Sub-total Balance at 30 June 2009 30 JUNE 2008 - - - - - - - - (184,942) (184,942) - (184,942) - - (3,355,760) (3,355,760) (184,942) (184,942) (3,355,760) (3,540,702) 4,458,909 (129,143) 4,329,766 29,459,548 - - - 903,692 - - (184,942) (211,726) - - (3,355,760) (28,063,093) 4,458,909 (129,143) 789,064 2,088,421 Issued Share Capital Share Option Reserve $ $ Foreign Currency Translation Reserve $ (Accumulated Losses) Total $ $ Balance at 1 July 2007 20,329,782 538,565 (6,176) (20,226,183) 635,988 Exchange differences arising on translation of foreign subsidiaries Foreign currency Net income recognised directly in equity Loss for the period Total income and expense recognised for the year Transactions with equity holders in their capacity as equity holders Shares issued during the period Transaction costs Employee options Sub-total Balance at 30 June 2008 - - - - - - - - 5,000,000 (200,000) - 4,800,000 25,129,782 - - 365,127 365,127 903,692 (20,608) (20,608) - (20,608) - - - (20,608) (26,784) - - (4,481,150) (4,481,150) (20,608) (20,608) (4,481,150) (4,501,758) - - - (4,481,150) (24,707,333) 5,000,000 (200,000) 365,127 663,369 1,299,357 The above consolidated statement in of Changes in Equity should be read in conjunction with the accompanying notes. 27 Azure Minerals Limited - Financial Statements Statements of Changes in Equity PARENT ENTITY 30 JUNE 2009 Balance at 1 July 2008 25,129,782 903,692 (20,227,328) 5,806,146 Issued Share Capital $ Share Option Reserve $ Accumulated (Losses) $ Total $ Loss for the period Total income and expense recognised for the year Transactions with equity holders in their capacity as equity holders Shares issued during the period Transaction costs Sub-total Balance at 30 June 2009 - - - - (4,703,491) (4,703,491) (4,703,491) (4,703,491) 4,458,909 (129,143) 4,329,766 29,459,548 - - - 903,692 - - (4,703,491) (24,930,819) 4,458,909 (129,143) (373,725) 5,432,421 30 JUNE 2008 Balance at 1 July 2007 20,329,782 538,565 (18,036,560) 2,831,787 Issued Share Capital $ Share Option Reserve $ Accumulated (Losses) $ Total $ Loss for the period Total income and expense recognised for the year Transactions with equity holders in their capacity as equity holders Shares issued during the period Transaction costs Employee options Sub-total Balance at 30 June 2008 - - - - (2,190,768) (2,190,768) (2,190,768) (2,190,768) 5,000,000 (200,000) - 4,800,000 25,129,782 - - 365,127 365,127 903,692 - - - (2,190,768) (20,227,328) 5,000,000 (200,000) 365,127 2,974,359 5,806,146 The above company Statements of Changes in Equity should be read in conjunction with the accompanying notes. 28 Azure Minerals Limited - Financial Statements Statements of Cash Flows YEAR ENDED 30 JUNE 2009 Notes Consolidated Parent Entity CASH FLOWS FROM OPERATING ACTIVITIES Payments to suppliers and employees Interest received Expenditure on mining interests NET CASH (OUTFLOW) INFLOW FROM OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Payments for plant and equipment Proceeds from sale of equipment Option payments for projects Loans to controlled entities NET CASH (OUTFLOW) INFLOW FROM INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of ordinary shares Share issue costs Preparation for TSX listing NET CASH (OUTFLOW) INFLOW FROM FINANCING ACTIVITIES 2009 $ 2008 $ 2009 $ 2008 $ (1,163,739) 47,587 (2,492,575) (1,394,028) 122,658 (2,070,682) (1,146,176) 47,587 952,810 (1,394,028) 122,014 (33,706) 18(b) (3,608,727) (3,342,052) (145,779) (1,305,720) (16,791) 11,432 (530,131) - (85,927) 25,000 (193,270) - - 1,100 - (4,180,786) (18,390) 25,000 - (2,313,697) (535,490) (254,197) (4,179,686) (2,307,087) 4,458,909 (129,143) (103,075) 5,000,000 (200,000) (502,804) 4,458,909 (129,143) (103,075) 5,000,000 (200,000) (502,804) 4,226,691 4,297,196 4,226,691 4,297,196 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at the beginning of the financial year Effect of exchange rate changes on cash and cash equivalents CASH AND CASH EQUIVALENTS AT END OF YEAR 82,474 700,947 (98,774) 684,389 1,420,067 737,646 1,371,278 686,889 18(a) (156,544) 1,345,997 (18,526) 1,420,067 - 1,272,504 - 1,371,278 The above Statements of Cash Flows are to be read in conjunction with the Notes to the Financial Statements. 29 Azure Minerals Limited - Financial Statements Notes to the Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial report includes separate financial statements for Azure Minerals Limited as an individual entity and the consolidated entity consisting of Azure Minerals Limited and its subsidiaries. BASIS OF PREPARATION This general purpose financial report has been prepared in accordance with the Australian Accounting Standards, other authoritive pronouncements of the Australian Accounting Standards Board, Australian Accounting Interpretations and the Corporations Act 2001. Going Concern This report has been prepared on the going concern basis, which contemplates the continuity of normal business activity and the realisation of assets and settlement of liabilities in the normal course of business. The Consolidated Entity has incurred a net loss after tax for the year ended 30 June 2009 of $3,355,760 (2008:$4,481,150) and experienced net cash outflows from operating activities of $3,608,727 (2008: $3,342,052). At 30 June 2009, the Company and Consolidated Entity had net current assets of $1,213,113 (30 June 2008: net current assets of $886,887). The Directors believe there are sufficient funds to meet the Consolidated Entity’s working capital requirements and as at the date of this report the Company and Consolidated Entity believe they can meet all liabilities as and when they fall due. However the Directors recognise that additional funding either through the issue of further shares, convertible notes or a combination of both will be required for the Company and Consolidated Entity to continue to actively explore its mineral properties. The Directors have reviewed the business outlook and the assets and liabilities of the Company and Consolidated Entity and are of the opinion that the use of the going concern basis of accounting is appropriate as they believe the Company will continue to be successful in securing additional funds through debt or equity issues as and when the need to raise working capital arises. Should the directors not achieve the matters set out above, there is significant uncertainty whether the Company and the Consolidated Entity will continue as a going concern and therefore whether it will realise its assets and liabilities in the normal course of business. The financial report does not include any adjustments that may be necessary if the Company and Consolidated Entity are unable to continue as a going concern. Compliance with AIFRSs Australian Accounting Standards include Australian equivalents to International Financial reporting Standards (AIFRSs). Compliance with AIFRSs ensures that the financial report of Azure Minerals Limited complies with the International Financial Reporting Standards (IFRS). Historical cost convention These financial statements have been prepared under the historical cost convention. Critical accounting estimates The preparation of financial statements in conformity with AIFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3. (a) Principles of consolidation The consolidated financial statements are those of the consolidated entity, comprising Azure Minerals Limited (the parent entity) and all entities which Azure Minerals Limited controlled from time to time during the year and at balance date (“the Group”). A controlled entity is any entity Azure Minerals Limited has the power to control the financial and operating policies of so as to obtain benefits from its activities. Information from the financial statements of subsidiaries is included from the date the parent company obtains control until such time as control ceases. Where there is loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting period during which the parent company has control. Subsidiary acquisitions are accounted for using the purchase method of accounting. The financial statements of subsidiaries are prepared for the same reporting period as the parent entity, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies which may exist. All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered. Investments in subsidiaries are accounted for at cost in the individual financial statements of Azure Minerals Limited. 30 Azure Minerals Limited - Financial Statements Notes continued SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d) 1. (b) Property, plant and equipment Each class of property, plant and equipment is carried at cost less, where applicable, any accumulated depreciation and impairment losses. Plant and equipment Plant and equipment are measured on the cost basis. The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation Depreciation of plant and equipment is calculated on a reducing balance basis so as to write off the net costs of each asset over the expected useful life. The rates vary between 20% and 40% per annum. The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. When revalued assets are sold, it is group policy to transfer the amounts included in other reserves in respect of those assets to retained earnings. (c) Impairment of assets At each reporting date, the group reviews the carrying values of its tangible and intangible assets to determine whether there is any indication that those assets have been impaired. If such an indication exists, the recoverable amount of the asset, being the higher of the asset's fair value less costs to sell and value in use, is compared to the asset's carrying value. Any excess of the asset's carrying value over its recoverable amount is expensed to the income statement. Impairment testing is performed annually for assets. Where it is not possible to estimate the recoverable amount of an individual asset, the group estimates the recoverable amount of the cash- generating unit to which the asset belongs. (d) Exploration and evaluation costs Exploration and evaluation costs are written off in the year they are incurred apart from acquisition costs which 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 reached a stage that permits reasonable assessment of the existence of economically recoverable reserves. Where an area of interest is abandoned or the directors decide that it is not commercial, any accumulated acquisition 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. Amortisation is not charged on costs carried forward in respect of areas of interest in the development phase until production commences. (e) Leases Leases of fixed assets where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership that are transferred to entities in the economic entity are classified as finance leases. Finance leases are capitalised by recording an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Leased assets are depreciated on a straight-line basis over their estimated useful lives. Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged on a straight line basis over the period of the lease. Lease incentives under operating leases are recognised as a liability and amortised on a straight-line basis over the life of the lease term. 31 Azure Minerals Limited - Financial Statements Notes continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d) (f) Income tax The charge for current income tax expense is based on the profit for the year adjusted for any non-assessable or disallowed items. It is calculated using the tax rates that have been enacted or are substantially enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or liability is settled. Deferred tax is credited in the income statement except where it relates to items that may be credited directly to equity, in which case the deferred tax is adjusted directly against equity. Deferred income tax assets are recognised to the extent that it is probable that future tax profits will be available against which deductible temporary differences can be utilised. The amount of benefits brought to account or which may be realised in the future is based on the assumption that no adverse change will occur in income taxation legislation and the anticipation that the economic entity will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law. (g) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the balance sheet are shown inclusive of GST. Cash flows are presented in the cash flow statement on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. (h) Foreign currency translation Functional and presentation currency The functional currency of each of the group's entities is measured using the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Australian dollars which is Azure Minerals Limited’s functional and presentation currency. The functional currency of Australian subsidiary (Azure Mexico Pty Ltd) is the Australian dollar. The functional currency of the Mexican overseas subsidiary (Minera Piedra Azul CV de SA) is the Mexican Peso. Transactions and balances Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the year-end exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Non-monetary items measured at fair value are reported at the exchange rate at the date when fair values were determined. Exchange differences arising on the translation of monetary items are recognised in the income statement, except where deferred in equity as a qualifying cash flow or net investment hedge. Group companies The financial results and position of foreign operations whose functional currency is different from the group's presentation currency are translated as follows: • • assets and liabilities are translated at year-end exchange rates prevailing at that reporting date; and income and expenses are translated at average exchange rates for the period. Exchange differences arising on translation of foreign operations are transferred directly to the group's foreign currency translation reserve in the balance sheet. These differences are recognised in the income statement in the period in which the operation is disposed. (i) Trade and other payables Liabilities for trade creditors are recognised initially at fair value and subsequently at amortised cost. Payables to related parties are carried at the principal amount. Interest, when charged by the lender, is recognised as an expense on an accrual basis. 32 Azure Minerals Limited - Financial Statements Notes continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d) (j) Employee benefits Provision is made for employee benefits accumulated as a result of employees rendering services up to the reporting date. These benefits include wages and salaries, annual leave, and long service leave. Liabilities arising in respect of wages and salaries, annual leave and any other employee benefits expected to be settled within twelve months of the reporting date are measured at their nominal amounts based on remuneration rates which are expected to be paid when the liability is settled. All other employee benefit liabilities are measured at the present value of the estimated future cash outflow to be made in respect of services provided by employees up to the reporting date. In determining the present value of future cash outflows, the market yield as at the reporting date on national government bonds, which have terms to maturity approximating the terms of the related liability, are used. Share-based payments The Group provides benefits to employees (including directors) of the Group in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (‘equity-settled transactions’). The cost of these equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value is determined by an internal valuation using a Binomial option pricing model. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (‘vesting date’). The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects (i) the extent to which the vesting period has expired and (ii) the number of options that, in the opinion of the directors of the Group, will ultimately vest. This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award. (k) (k) Revenue recognition Interest revenue is recognised on a time proportionate basis that takes into account the effective yield on the financial assets. (l) Contributed Equity Ordinary shares are classified as equity. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received. (m) Earnings per share (EPS) Basic earnings per share Basic EPS is calculated as the profit attributable to equity holders of the company, excluding any costs of servicing equity other than ordinary shares, divided by the weighted average number of ordinary shares outstanding during the financial year, adjusted for any bonus elements in ordinary shares issued during the year. Diluted earnings per share Diluted EPS adjusts the figures used in the determination of basic EPS to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. (n) Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within short-term borrowings in current liabilities on the balance sheet. (o) Comparative figures When required by Accounting Standards, comparative figures have been adjusted to conform to changes in presentation for the current financial year. 33 Azure Minerals Limited - Financial Statements Notes continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d) (p) Interests in joint ventures The Groups share of the assets, liabilities, revenue and expenses of joint venture operations are included in the appropriate items of the consolidated income statement and balance sheet. (q) Segment reporting A business segment is identified for a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other business segments. A geographical segment is identified when products or services are provided within a particular economic environment subject to risk and returns that are different from those of segments operating in other economic environments. (r) Financial assets Classification The Group classifies its financial assets in the following categories: loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. (i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are recognised at fair value on initial recognition. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date which are classified as non-current assets. Loans and receivables are included in trade and other receivables in the balance sheet (note 8). Recognition and derecognition Regular purchases and sales of financial assets are recognised on trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets are derecognised when the right to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Subsequent measurement Loans and receivables are carried at amortised cost using effective interest method. Impairment The Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. Impairment losses are recognised in the income statement. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. (s) Fair value estimation The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments traded in active markets (such as publicly traded derivative, and trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price. The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt instruments held. Other techniques, such as estimated discounted cash flow, are used to determined fair value for the remaining financial instruments. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward exchange contracts is determined using forward exchange market rates at the balance sheet date. The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values due to their short-term nature. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. (t) Provisions Provisions for legal claims, service warranties and make good obligations are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense. 34 Azure Minerals Limited - Financial Statements Notes continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d) (u) New accounting standards and interpretations Australian Accounting Standards and interpretations that have recently been issued or amended but are not yet effective have not been adopted by the Company for the annual reporting period ending 30 June 2009. These are outlined below. Reference Title Summary AASB Int. 16 Hedges of a Net Investment in a Foreign Operation AASB 8 and AASB 2007-3 AASB 101 (Revised), AASB 2007-8 and AASB 2007-10 AASB 2008-1 Operating Segments and consequential amendments to other Australian Accounting Standards Presentation of Financial Statements and consequential amendments to other Australian Accounting Standards Amendments to Australian Accounting Standard – Share-based Payments: Vesting Conditions and Cancellations This Interpretation requires that the hedged risk in a hedge of a net investment in a foreign operation is the foreign currency risk arising between the functional currency of the net investment and the functional currency of any parent entity. This also applies to foreign operations in the form of joint ventures, associates or branches. New Standard replacing AASB 114 Segment Reporting, which adopts a management reporting approach to segment reporting. Application date of standard* 1 October 2008 1 January 2009 Introduces a statement of comprehensive income. 1 January 2009 Other revisions include impacts on the presentation of items in the statement of changes in equity, new presentation requirements for restatements or reclassifications of items in the financial statements, changes in the presentation requirements for dividends and changes to the titles of the financial statements. 1 January 2009 The amendments clarify the definition of “vesting conditions”, introducing the term “non-vesting conditions” for conditions other than vesting conditions as specifically defined and prescribe the accounting treatment of an award that is effectively cancelled because a non-vesting condition is not satisfied. 35 Application date for Group* 1 July 2009 1 July 2009 1 July 2009 1 July 2009 Impact on Group financial report To date the company does not have any investments in a foreign operation and as such there will be no impact on the financial statements when this standard is adopted. As this is a disclosure standard only, there will be no impact on amounts recognised in the financial statements. However, disclosures required for the operating segments will be significantly different to what is currently reported (business and geographical segment). As this is a disclosure standard only, there will be no impact on amounts recognised in the financial statements. However, there will be various changes to the way financial statements are presented and various changes to names of individual financial statements. To date the entity has not issued any options to employees that include non-vesting conditions and as such there will be no impact on the financial statements when this revised standard is adopted for the first time Azure Minerals Limited - Financial Statements Notes continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d) Reference Title Summary AASB 3 (Revised) Business Combinations AASB 127 (Revised) Consolidated and Separate Financial Statements AASB 2008-3 AASB 2008-5 Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127 Amendments to Australian Accounting Standards arising from the Annual Improvements Project The revised Standard introduces a number of changes to the accounting for business combinations, the most significant of which includes the requirement to have to expense transaction costs and a choice (for each business combination entered into) to measure a non-controlling interest (formerly a minority interest) in the acquiree either at its fair value or at its proportionate interest in the acquiree’s net assets. This choice will effectively result in recognising goodwill relating to 100% of the business (applying the fair value option) or recognising goodwill relating to the percentage interest acquired. The changes apply prospectively. There are a number of changes arising from the revision to AASB 127 relating to changes in ownership interest in a subsidiary without loss of control, allocation of losses of a subsidiary and accounting for the loss of control of a subsidiary. Specifically in relation to a change in the ownership interest of a subsidiary (that does not result in loss of control) – such a transaction will be accounted for as an equity transaction. Amending Standard issued as a consequence of revisions to AASB 3 and AASB 127. Refer above. The improvements project is an annual project that provides a mechanism for making non- urgent, but necessary, amendments to IFRSs. The IASB has separated the amendments into two parts: Part 1 deals with changes the IASB identified resulting in accounting changes; Part II deals with either terminology or editorial amendments that the IASB believes will have minimal impact. This was the first omnibus of amendments issued by the IASB arising from the Annual Improvements Project and it is expected that going forward, such improvements will be issued annually to remove inconsistencies and clarify wording in the standards. The AASB issued these amendments in two separate amending standards; one dealing with 36 Application date for Group* 1 July 2009 Application date of standard* 1 July 2009 Impact on Group financial report There will be no impact on the financial statements when this revised standard is adopted for the first time 1 July 2009 1 July 2009 There will be no impact on the financial statements when this revised standard is adopted for the first time 1 July 2009 There will be no 1 July 2009 impact on the financial statements when this revised standard is adopted for the first time There will be no impact on the financial statements when this revised standard is adopted for the first time 1 July 2009 1 January 2009 Azure Minerals Limited - Financial Statements Notes continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d Reference Title Summary AASB 2008-5 Continued AASB 2008-6 AASB 2008-9** AASB 2009-2 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project Amendments to AASB 1049 for consistency with AASB 101 Amendments to Australian Accounting Standards – Improving Disclosures about Financial Instruments [AASB 4, AASB 7, AASB 1023 & AASB 1038] the accounting changes effective from 1 January 2009 and the other dealing with amendments to AASB 5, which will be applicable from 1 July 2009 [refer below AASB 2008-6]. This was the second omnibus of amendments issued by the IASB arising from the Annual Improvements Project. Refer to AASB 2008-5 above for more details. Application date of standard* Impact on Group financial report Application date for Group* 1 July 2009 1 July 2009 There will be no impact on the financial statements when this revised standard is adopted for the first time 1 July 2009 1 July 2009 There will be no impact on the financial statements when this revised standard is adopted for the first time As this is a disclosure standard only, there will be no impact on amounts recognised in the financial statements. However, there will be various changes to the way financial statements are presented. Reflects the revised requirements of AASB 101 and AASB 2007-8 with clarification to apply the requirements in a government context. 1 January 2009 Annual reporting periods beginning on or after 1 January 2009 that end on or after 30 April 2009. The main amendment to AASB 7 requires fair value measurements to be disclosed by the source of inputs, using the following three-level hierarchy: ► quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); ► inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); and ► inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). These amendments arise from the issuance of Improving Disclosures about Financial Instruments (Amendments to IFRS 7) by the IASB in March 2009. The amendments to AASB 4, AASB 1023 and AASB 1038 comprise editorial changes resulting from the amendments to AASB 7. 37 Azure Minerals Limited - Financial Statements Application date of standard* 1 July 2009 Application date for Group* 1 July 2009 Impact on Group financial report There will be no impact on the financial statements when this revised standard is adopted for the first time 1 January 2010 1 July 2010 There will be no impact on the financial statements when this revised standard is adopted for the first time Notes continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d Reference Title Summary AASB 2009-4 AASB 2009-5 Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 2 and AASB 138 and AASB Interpretations 9 & 16] Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 5, 8, 101, 107, 117, 118, 136 & 139] The amendments to some Standards result in accounting changes for presentation, recognition or measurement purposes, while some amendments that relate to terminology and editorial changes are expected to have no or minimal effect on accounting. The main amendment of relevance to Australian entities is that made to IFRIC 16 which allows qualifying hedge instruments to be held by any entity or entities within the group, including the foreign operation itself, as long as the designation, documentation and effectiveness requirements in AASB 139 that relate to a net investment hedge are satisfied. More hedging relationships will be eligible for hedge accounting as a result of the amendment. These amendments arise from the issuance of the IASB’s Improvements to IFRSs. The amendments pertaining to IFRS 5, 8, IAS 1,7, 17, 36 and 39 have been issued in Australia as AASB 2009-5 (refer below). The amendments to some Standards result in accounting changes for presentation, recognition or measurement purposes, while some amendments that relate to terminology and editorial changes are expected to have no or minimal effect on accounting. The main amendment of relevance to Australian entities is that made to AASB 117 by removing the specific guidance on classifying land as a lease so that only the general guidance remains. Assessing land leases based on the general criteria may result in more land leases being classified as finance leases and if so, the type of asset which is to be recorded (intangible v property, plant and equipment) needs to be determined. These amendments arise from the issuance of the IASB’s Improvements to IFRSs. The AASB has issued the amendments to IFRS 2, IAS 38, IFRIC 9 as AASB 2009-4 (refer above). 38 Azure Minerals Limited - Financial Statements Notes continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d Reference Title Summary Amendments to Australian Accounting Standards [AASB 5, 7, 107, 112, 136 & 139 and Interpretation 17] Amendments to IFRS 2 AASB 2009-Y Amendments to International Financial Reporting Standards These comprise editorial amendments and are expected to have no major impact on the requirements of the amended pronouncements. The amendments clarify the accounting for group cash-settled share-based payment transactions, in particular: ► the scope of AASB 2; and the interaction between IFRS 2 and other standards. ► An entity that receives goods or services in a share-based payment arrangement must account for those goods or services no matter which entity in the group settles the transaction, and no matter whether the transaction is settled in shares or cash. A “group” has the same meaning as in IAS 27 Consolidated and Separate Financial Statements, that is, it includes only a parent and its subsidiaries. The amendments also incorporate guidance previously included in IFRIC 8 Scope of IFRS 2 and IFRIC 11 IFRS 2—Group and Treasury Share Transactions. As a result, IFRIC 8 and IFRIC 11 have been withdrawn. Applicatio n date of standard* 1 July 2009 1 January 2010 Application date for Group* 1 July 2009 1 July 2010 Impact on Group financial report There will be no impact on the financial statements when this revised standard is adopted for the first time There will be no impact on the financial statements when this revised standard is adopted for the first time 2 . FINANCIAL RISK MANAGEMENT Overview The Company and Group have exposure to the following risks from their use of financial instruments: h credit risk h h market risk liquidity risk This note presents information about the Company’s and Group’s exposure to each of the above risks, their objectives, policies and processes for measuring and managing risk, and the management of capital. The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. Management monitors and manages the financial risks relating to the operations of the group through regular reviews of the risks. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and investment securities. For the Company it arises from receivables due from subsidiaries. The Group manages its credit risk on financial instruments, including cash, by only dealing with banks licensed to operate in Australia. 39 Azure Minerals Limited - Financial Statements Notes continued 2 . FINANCIAL RISK MANAGEMENT (Cont’d) Trade and other receivables As the Group operates in the mining exploration sector, it does not have trade receivables and therefore is not exposed to credit risk in relation to trade receivables. Presently, the Group undertakes exploration and evaluation activities exclusively in Mexico. At the balance sheet date there were no significant concentrations of credit risk. Exposure to credit risk The carrying amount of the Group’s financial assets represents the maximum credit exposure. The Group’s maximum exposure to credit risk at the reporting date was: Trade and other receivables Cash and cash equivalents Security deposits Trade and other receivables Receivable from controlled entity Allowance for impairment from controlled entity Cash and cash equivalents Security deposit Impairment losses Consolidated Carrying amount Note 2009 8 18 11 114,125 1,345,997 22,308 2008 137,473 1,420,067 22,535 Parent Entity Carrying amount Note 2009 8 25 25 18 11 4,230,815 8,850,744 (4,630,744) 1,272,504 22,308 2008 4,676,987 4,676,062 - 1,371,278 22,538 None of the Company’s other receivables are past due (2008: nil). The Group operates in the mining exploration sector and generally does not have trade receivables and is therefore not materially exposed to credit risk in relation to trade receivables. Other receivables are principally value added taxes withheld by third parties and due to the Group from sovereign governments, as such the Group does not consider it is exposed to any significant credit risk. The allowance accounts in respect of other receivables is used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible; at that point the amount is considered irrecoverable and is written off against the financial asset directly. Refer to note 25 for more information on the receivable from controlled entity. At 30 June 2009 the Group does not have any collective impairments on its other receivables (2008: nil). Guarantees Group policy is to provide financial guarantees only to wholly-owned subsidiaries. There are no guarantees outstanding (2008: Nil) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group manages liquidity risk by maintaining adequate reserves by continuously monitoring forecast and actual cash flows. The Company anticipates a need to raise additional capital in the next 12 months to meet forecasted operational activities. The decision on how the Company will raise future capital will depend on market conditions existing at that time. Typically the Group ensures that it has sufficient cash on demand to meet expected operational expenses for a period of 180 days, including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. 40 Azure Minerals Limited - Financial Statements Notes continued 2 . FINANCIAL RISK MANAGEMENT (Cont’d) The following are the contractual maturities of financial liabilities at amortised cost: Consolidated 30 June 2009 Trade and other payables 30 June 2008 Trade and other payables Company 30 June 2009 Trade and other payables 30 June 2008 Trade and other payables Market Risk Carrying amount Contractual cash flows 6 mths or less 6-12 mths 1-2 years 2-5 years More than 5 years 136,819 513,124 - - 136,819 513,124 - - - - - - - - Carrying amount Contractual cash flows 6 mths or less 6-12 mths 1-2 years 2-5 years More than 5 years 37,917 182,434 - - 37,917 182,434 - - - - - - - - Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. Currency risk The Group is exposed to currency risk on purchases that are denominated in a currency other than the respective functional currencies of Group entities, primarily the United Sates Dollar (USD) and Mexican Peso (MxP). The currencies in which the transactions primarily are denominated are USD and MxP. The Group has not entered into any derivative financial instruments to hedge such transactions and anticipated future receipts or payments that are denominated in a foreign currency. Group’s investments in its subsidiaries are not hedged as those currency positions are considered to be long term in nature. Exposure to currency risk The Group’s exposure to foreign currency risk at balance date was as follows, based on notional amounts: Trade receivables Trade payables 30 June 2009 USD 51,655 49,452 30 June 2008 USD 68,765 165,345 Gross balance sheet exposure 101,107 234,110 Forward exchange contracts - - Net exposure 101,107 234,110 The Company’s exposure to foreign currency risk at 30 June 2009 was nil (2008:Nil). The following significant exchange rates applied during the year: AUD USD Average rate 2009 2008 Reporting date spot rate 2009 2008 0.74803 0.89646 0.80480 0.96150 41 Azure Minerals Limited - Financial Statements Notes continued 2 . FINANCIAL RISK MANAGEMENT (Cont’d) Sensitivity analysis Over the reporting period there have been significant movements in the Australian dollar when compared to other currencies, it is therefore considered reasonable to review sensitivities base on a 10% movement in the Australian dollar. A 10 percent strengthening of the Australian dollar against the following currencies at 30 June would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2008. 30 June 2009 USD 30 June 2008 USD Consolidated Company Equity Profit or loss Equity Profit or loss 10,111 10,111 23,411 23,411 - - - - A 10 percent weakening of the Australian dollar against the above currencies at 30 June would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant. Interest rate risk Interest rate risk is the risk that the Groups financial position will be adversely affected by movements in interest rates that will increase the costs of floating rate debt or opportunity losses that may arise on fixed rate borrowings in a falling interest rate environment. The Group does not have any borrowings therefore is not exposed to interest rate risk in this area. Interest rate risk on cash and short term deposits is not considered to be a material risk due to the short term nature of these financial instruments. Profile At the reporting date the interest rate profile of the Company’s and the Group’s interest-bearing financial instruments was: Variable rate instruments Short term cash deposits Consolidated Carrying amount Company Carrying amount 2009 2008 2009 2008 1,368,606 1,442,375 1,295,112 1,393,586 Cash flow sensitivity analysis for variable rate instruments The Group has reviewed the likely movements in interest rates and considers that a movement of +/- 100 basis points is reasonable, though in the current economic environment interest rates are unlikely to decrease any further. Group Sensitivity At 30 June 2009 if interest rates had changes +/- 100 basis points from year end rates with all other variables held constant, equity and post tax profit would have been $13,686 higher /lower (2008 – change of 100 basis points: $14,424 higher/lower). Parent Sensitivity At 30 June 2009 if interest rates had changes +/- 100 basis points from year end rates with all other variables held constant, equity and post tax profit would have been $12,951 higher /lower (2008 – change of 100 basis points: $13,936 higher/lower). 42 Azure Minerals Limited - Financial Statements Notes continued 2 . FINANCIAL RISK MANAGEMENT (Cont’d) Fair values Fair values versus carrying amounts The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows: Consolidated Trade and other receivables Cash and cash equivalents Other financial assets Trade and other payables Company Trade and other receivables Cash and cash equivalents Other Financial assets Trade and other payables 30 June 2009 30 June 2008 Carrying amount 130,047 1,345,997 22,308 Fair value 130,047 1,345,997 22,308 Carrying amount 154,067 1,420,067 22,308 Fair value 154,067 1,420,067 22,308 (136,819) (136,819) (513,124) (513,124) 30 June 2009 30 June 2008 Carrying amount 4,244,210 1,272,504 22,535 Fair value 4,244,210 1,272,504 22,535 Carrying amount 4,692,599 1,371,278 22,535 Fair value 4,692,599 1,371,278 22,535 (37,917) (37,917) (182,434) (182,434) The methods and assumptions used to estimate the fair value of instruments are: Capital Management The Group’s objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits of other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may issue new shares or sell assets. There were no changes in the Group’s approach to capital management during the year. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements. 3. CRITICAL ACCOUNTING ESTIMATES AND SIGNIFICANT JUDGEMENTS The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are: Share based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by an internal valuation using a Binomial option pricing model. Exploration and evaluation costs Exploration and evaluation costs are written off in the year they are incurred apart from acquisition costs which are carried forward where right of tenure of the area of interest is current. The future recoverability of exploration and evaluation expenditure is dependant on a number of factors, including whether the Group decides to exploit the related lease itself, or, if not, whether it successfully recovers the related exploration and evaluation assets through sale. Factors that could impact the future recoverability include the level of reserves and resources, future technological changes, which could impact the cost of mining, future legal changes (including changes to environmental restoration obligations) and changes to commodity prices. To the extent that capitalised exploration and evaluation expenditure is determined not to be recoverable in the future, profits and net assets will be reduced in the period in which this determination is made. Loan to subsidiary company In the current financial year the Parent Entity made a significant judgement about the impairment of its loan to its Mexican based subsidiary. Refer to note 25 for further information. 43 Azure Minerals Limited - Financial Statements Notes continued 4. SEGMENT INFORMATION Segment products and locations: The consolidated entity’s operations are in the mining exploration industry. Geographically, the group operates in two predominant segments, being Australia and Mexico. The head office and investment activities of the group take place in Australia. Geographic segments Australia Mexico Eliminations Consolidated Segment Revenue Sales to external customers Other revenues from external customers Intersegment revenues Total segment revenue Non-segment revenues Unallocated revenue Total consolidated revenue Segment Results Segment result 2009 $ - 54,549 - 54,549 2008 $ 2009 $ 2008 $ 2009 $ 2008 $ 2009 $ 2008 $ - 146,089 - 146,089 - 10,332 10,332 - 644 - 644 - - - - - - - - - 64,881 - 146,733 64,881 146,733 - - 64,881 146,733 (4,703,491) (2,190,768) (3,289,118) (2,290,382) 4,636,848 - (3,355,760) (4,481,150) Non-segment expenses Unallocated expenses Consolidated entity loss before income tax expense Income tax expense Consolidated entity loss after income tax expense Segment Assets and Liabilities Segment assets Unallocated assets Total assets - - (3,355,760) - (4,481,150) - (3,355,760) (4,481,150) 5,603,013 6,168,906 975,129 500,190 (4,226,430) (4,682,492) 2,351,712 1,986,604 - - 2,351,712 1,986,604 Segment liabilities (170,492) (356,557) (8,949,647) (5,000,648) 8,856,847 4,669,958 (263,291) (687,247) Non-allocated liabilities Total liabilities Other segment information: Acquisition of property, plant and equipment, intangible assets and other non-current assets Depreciation Non-cash expenses other than depreciation and amortisation - - (263,291) (687,247) - 16,710 18,390 27,873 546,872 29,945 254,154 21,184 - 365,127 - - - - - - - - 546,872 46,655 272,544 49,057 - 365,127 44 Azure Minerals Limited - Financial Statements Notes continued 5. REVENUE FROM CONTINUING OPERATIONS Other revenues Interest Bank interest Proceeds from equipment sales Total revenues from continuing operations 6. EXPENSES Loss before income tax includes the following specific expenses Depreciation of plant and equipment Exploration expenditure Exploration expenditure reimbursement Operating lease expenses Superannuation 7. INCOME TAX (a) Income tax expense Current tax Deferred tax Adjustment for current tax of prior periods Consolidated Parent Entity 2009 $ 2008 $ 2009 $ 2008 $ 53,449 11,432 64,881 121,733 25,000 146,733 53,449 1,100 54,549 121,089 25,000 146,089 46,655 49,057 16,710 3,241,555 (957,042) 98,739 49,955 2,305,586 - 93,537 46,411 11,094 (957,042) 98,739 49,955 27,873 35,738 - 93,537 46,411 - - - - - - - - - - - - - - - - (b) Numerical reconciliation of income tax expense to prima facie tax payable Loss from continuing operations before income tax expense (3,355,760) (4,481,150) (4,703,491) (2,190,768) Tax at the Australian tax rate of 30% (2008: 30%) (1,006,728) (1,344,345) (1,411,047) (657,231) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Share-based payments Preparation for TSX listing Sundry items - 923 21,824 109,538 180,841 74,788 - 923 21,824 109,538 180,841 74,788 (983,981) (979,178) (1,388,300) (292,064) Movement in unrecognised temporary differences (108,901) 1,635,088 1,282,154 1,051,442 Adjustment for prior periods Tax effect of current year foreign tax losses for which no deferred tax asset has been recognised Difference in overseas tax rates Tax effect of current year tax losses for which no deferred tax asset has been recognised Income tax expense - (1,841,104) 986,736 (19,534) 737,579 (14,751) - - (1,206,994) - 125,680 462,366 106,146 447,616 - - - - 45 Azure Minerals Limited - Financial Statements Notes continued 7. INCOME TAX (Cont’d) (c) Unrecognised temporary differences Deferred Tax Assets (at 30%) On Income Tax Account Capital raising costs Prepayments Depreciation of plant and equipment Provisions Carry forward tax losses Carry forward tax losses – foreign Other – tenement Consolidated Parent Entity 2009 $ 2008 $ 2009 $ 2008 $ 86,278 (4,019) 21,413 34,942 2,919,242 1,570,382 915,933 5,544,621 78,935 (4,684) 18,900 52,237 2,285,830 583,646 981,266 3,996,130 86,278 (4,019) 21,413 34,942 2,919,242 - 915,933 3,974,239 78,935 (4,684) 18,900 52,237 2,285,830 - 981,266 3,412,484 Deferred Tax Liabilities (at 30%) - - - - Deferred income tax assets have not been recognised as it is not probable that future profit will be available against which deductible temporary differences can be utilised. In addition to the above Australian estimated future income tax benefits the consolidated entity has incurred significant expenditure in Mexico, some of which should give rise to taxable deductions. At this stage the company is unable to reliably estimate the quantity of such future tax benefits. There are no franking credits available. 8. TRADE AND OTHER RECEIVABLES CURRENT Prepayments Sundry receivables (a) Receivable from controlled entity (b) – at cost - allowance for non- recovery 16,282 114,125 - - 130,407 16,594 137,473 - 13,395 10,815 8,850,744 15,612 925 4,676,062 - 154,067 (4,630,744) 4,244,210 - 4,692,599 (a) These amounts generally arise from activities outside the usual operating activities. Interest is not usually charged and collateral is not obtained. For the Group the receivable principally arises from consumption taxes paid to third party suppliers for which a refund from tax authorities is expected. There are no impaired sundry receivables and no past due but not impaired receivables. (b) The fair value of receivable from the controlled entity is the same as the carrying value. The loan is non-interest bearing with no other terms agreed. Refer to note 25 for further information. (c) Refer to note 2 for information on the risk management policy of the Group and the credit quality of the Groups receivables. 9. PLANT AND EQUIPMENT Plant and equipment Cost Accumulated depreciation Net book amount Notes 434,406 (291,008) 143,398 9(a) 466,927 (270,035) 196,892 299,384 (241,823) 57,561 312,919 (236,628) 76,291 46 Azure Minerals Limited - Financial Statements Notes continued Consolidated Parent Entity 2009 $ 2008 $ 2009 $ 2008 $ PLANT AND EQUIPMENT (Cont’d) 9. (a) Reconciliations Movement in the carrying amounts for each class of property, plant and equipment between the beginning and the end of the current financial year Plant and equipment Opening net book amount Additions Disposals Depreciation on disposals Depreciation charge Foreign exchange translation adjustment Closing net book amount 196,892 16,791 (41,727) 20,797 (46,655) (2,700) 143,398 10. CAPITALISED EXPLORATION EXPENDITURE (NON-CURRENT) At Cost Reconciliations Movement in the carrying amounts of capitalised exploration expenditure between the beginning and end of the current financial year 709,602 190,095 79,276 (54,923) 31,501 (49,057) - 196,892 193,270 Opening net book amount Additions Disposals Closing net book amount 193,270 516,332 - 709,602 - 193,270 - 193,270 76,291 - (13,536) 11,516 (16,710) - 57,561 110,692 18,390 (54,923) 30,005 (27,873) - 76,291 - - - - - - - - - - Recovery of the capitalised amount is dependent upon successful development and commercial exploitation, or alternatively, sale. 11. OTHER FINANCIAL ASSETS (NON-CURRENT) Security Deposit Shares in subsidiaries – at cost Notes 12 22,308 - 22,308 22,308 - 22,308 22,308 227 22,535 22,308 227 22,535 These financial assets are carried at cost. 12. SUBSIDIARIES The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1(a): Name Country of incorporation Class of shares Equity Holding* Azure Mexico Pty Ltd Minera Piedra Azul, S.A. de C.V Australia Mexico Ordinary Ordinary *Percentage of voting power is in proportion to ownership 2009 % 100 100 2008 % 100 100 13. TRADE AND OTHER PAYABLES (CURRENT) Trade payables 136,819 513,124 37,917 182,434 Information about the Groups financial risk management policies is disclosed in note 2. 47 Azure Minerals Limited - Financial Statements Notes continued 14. PROVISIONS (CURRENT) Employee benefits Non-executive directors retirement benefits 15. CONTRIBUTED EQUITY (a) Share capital Ordinary shares fully paid Total consolidated contributed equity (b) Movements in ordinary share capital 1 July opening balance Issue at $0.15 per share Issue at $0.12 per share Issue at $0.125 per share Issue at $0.04 per share Share issue expenses 30 June closing balance Consolidated Parent Entity 2009 $ 2008 $ 2009 $ 2008 $ 49,461 77,011 126,472 97,112 77,011 174,123 49,461 77,011 126,472 97,112 77,011 174,123 Consolidated and Parent Entity 2009 Number of shares 217,212,489 217,212,489 $ 29,459,548 29,459,548 2008 Number of shares 149,016,672 149,016,672 $ 25,129,782 25,129,782 2009 2008 Number of shares 149,016,672 - - 20,365,600 47,830,217 - 217,212,489 $ 25,129,782 - - 2,545,700 1,913,209 (129,143) 29,459,548 Number of shares 112,350,004 20,000,000 16,666,668 - - - 149,016,672 $ 20,329,782 3,000,000 2,000,000 - - (200,000) 25,129,782 Funds raised from the two share issues during the year were used to progress the company’s exploration in activities and for general working capital. (c) Movements in unlisted options on issue 1 July Opening Balance Issued during the year - Exercisable at 15 cents, on or before 30 Nov 2009 Forfeited during the year - Exercisable at 15 cents on or before 30 Nov 2009 - Exercisable at 25 cents, on or before 30 Nov 2008 - Exercisable at 25 cents, on or before 30 Nov 2009 - Exercisable at 25 cents, on or before 30 Nov 2010 - Exercisable at 17.5 cents, on or before 31 Jan 2011 - Exercisable at 25 cents, on or before 31 Jan 2012 - Exercisable at 25 cents, on or before 30 Jan 2010 - Exercisable at 25 cents, on or before 30 Jan 2011 - Exercisable at 25 cents, on or before 30 Jan 2012 - Exercisable at 35 cents, on or before 31 Jan 2013 30 June closing balance Further information on options issued is set out in note 27. 48 Number of options 2009 2008 14,850,000 13,350,000 - 1,750,000 (500,000) (1,500,000) (200,000) (200,000) (300.000) (800,000) - - - (800,000) - (250,000) (500,000) (500,000) - - 200,000 400,000 400,000 - 10,550,000 14,850,000 Azure Minerals Limited - Financial Statements Notes continued 15. CONTRIBUTED EQUITY (cont’d) (d) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. Consolidated Parent Entity 2009 $ 2008 $ 2009 $ 2008 $ 903,692 (211,726) 691,966 903,692 (26,784) 876,908 903,692 - 903,692 903,692 - 903,692 16. RESERVES AND RETAINED PROFITS (a) Reserves Share-based payments reserve Foreign currency translation reserve (b) Nature and purpose of reserves Share-based payments reserve The share-based payments reserve is used to recognise the fair value of options issued but not exercised. Foreign currency translation reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of the statements of foreign subsidiaries. 17. DIVIDENDS PAID OR PROVIDED FOR ON ORDINARY SHARES No dividends were paid or declared since the start of the financial year. No recommendation for payment of dividends has been made. 18. STATEMENT OF CASH FLOWS (a) Cash and cash equivalents Cash and cash equivalents comprises: − cash at bank and in hand − short-term deposits Closing cash and cash equivalents balance 146,011 1,199,986 1,345,997 63,502 1,356,565 1,420,067 72,518 1,199,986 1,272,504 14,713 1,356,565 1,371,278 Cash at bank and in hand earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. 49 Azure Minerals Limited - Financial Statements Notes continued Notes Consolidated Parent Entity 2009 $ 2008 $ 2009 $ 2008 $ 18. STATEMENT OF CASH FLOWS (cont’d) (b) Reconciliation of the net loss after income tax to the net cash flows from operating activities Net loss Depreciation of non-current assets Share based payment expense Loss (Profit) on equipment sales Foreign exchange differences Preparation for TSX listing included in Financing Activities Changes in operating assets and liabilities (Increase)/decrease in trade and other receivables (Increase)/decrease in prepayments Increase/(decrease) in trade and other payables Increase/(decrease) in provisions (3,355,760) (4,481,150) (4,703,491) (2,190,768) 46,656 - 12,069 (26,005) 49,057 365,127 (82) 5,691 16,710 - 920 - 27,873 365,127 (82) - 103,075 502,804 103,075 502,804 (115,460) 4,194 (325,147) 47,651 62,529 (4,393) 158,365 - (9,891) 2,218 (239,819) 4,684,499 330 (5,374) (5,630) - Net cash outflow from operating activities (3,608,727) (3,342,052) (145,779) (1,305,720) (c) Non-cash financing and investing activities There have been no non-cash financing and investing activities during the 2008 year (2007:Nil). 19. COMMITMENTS (a) Exploration commitments The company has certain commitments to meet minimum expenditure requirements on the mineral exploration assets it has an interest in. Outstanding exploration commitments which are expected to be met in the normal course of business are as follows: Not later than one year 1,500,962 78,800 78,800 - (b) Option payments The company has entered into option agreements to acquire a 100% interest in the Promontorio project located in the northern Mexican state of Chihuahua within the richly mineralised Sierra Madre Occidental mining province. In order to retain the right to acquire the Promontorio project option payments must be made as follows: Not later than one year Later than one year and not later than five years 397,614 4,348,907 397,614 4,746,521 - - - - (c) Lease expenditure commitments Operating leases (non-cancellable): Minimum lease payments not later than one year later than one year and not later than five years Aggregate lease expenditure contracted for at reporting date 4,746,521 5,144,135 - - 44,509 - 89,018 44,509 44,509 - 89,018 44,509 44,509 133,527 44,509 133,527 The property lease is a non-cancellable lease with a three-year term ending 31 December 2009, with rent payable monthly in advance. The lease allows for subletting of all leased areas. (d) Remuneration commitments Amounts disclosed as remuneration commitments include commitments arising from the service contracts of key management personnel referred to in note 24 that are not recognised as liabilities and are not included in the key management personnel compensation. Not later than one year later than one year and not later than five years 390,500 390,500 781,000 163,461 - 163,461 - - - 163,461 - 163,461 50 Azure Minerals Limited - Financial Statements Notes continued 20. CONTINGENCIES There are no material contingent liabilities or contingent assets of the company at balance date. 21. EVENTS OCCURING AFTER BALANCE SHEET DATE No matter or circumstance has arisen since the end of the financial year which significantly affected or may significantly affect the operations of the group, the results of those operations, or the state of affairs of the group in future financial years. 22. LOSS PER SHARE (a) Reconciliation of earnings to profit or loss Net loss Loss used in calculating basic loss per share (b) Weighted average number of ordinary shares outstanding during the year used in calculating basic loss per share Weighted average number of ordinary shares used in calculating basic loss per share 2009 $ 2008 $ (3,355,760) (3,355,760) (4,481,150) (4,481,150) CONSOLIDATED Number of shares 2009 Number of shares 2008 175,080,909 134,977,509 (c) Effect of dilutive securities Options on issue at balance date could potentially dilute basic earnings per share in the future. The effect in the current year is to decrease the loss per share hence they are considered antidilutive. Accordingly diluted loss per share has not been disclosed. 23. AUDITORS’ REMUNERATION Amounts received or due and receivable by BDO Kendalls or associated entities for: Tax compliance services Independent Financial Reports An audit or review of the financial report of the entity 24. KEY MANAGEMENT PERSONNEL DISCLOSURES (a) Compensation of key management personnel by compensation Short-term Post employment Share-based payment Consolidated Parent Entity 2009 $ 2008 $ 2009 $ 2008 $ 12,008 - 37,200 49,208 10,699 31,412 28,527 70,638 12,008 - 37,200 49,208 10,699 31,412 28,527 70,638 Consolidated Parent Entity 2009 $ 581,587 112,221 - 693,808 2008 $ 752,306 42,505 347,797 1,142,608 2009 $ 581,587 112,221 - 693,808 2008 $ 752,306 42,505 347,797 1,142,608 (b) Shares issued on exercise of compensation options There were no shares issued on exercise of compensation options during the year. 51 Azure Minerals Limited – Financial Statements Notes continued 24. KEY MANAGEMENT PERSONNEL DISCLOSURES (cont’d) (c) Option holdings of key management personnel 2009 Directors Wolf Gerhard Martinick Anthony Paul Rovira John Walter Saleeba Executives Brett Dickson Patrick Manouge - Resigned 31 March 2009 Total 2008 Balance at beginning of year 1 July 2008 1,000,000 6,500,000 1,000,000 2,400,000 1,700,000 12,600,000 Balance at beginning of year 1 July 2007 Granted as Remuneration Options Exercised Options Lapsed Balance at end of year 30 June 2009 Vested at 30 June 2009 Vested & Exercisable Unvested - - - - - - - - - - - - - (1,000,000) (200,000) 1,000,000 5,500,000 800,000 1,000,000 5,500,000 800,000 - 2,400,000 2,400,000 (1,700,000) - - (2,900,000) 9,700,000 9,700,000 - - - - - - Granted as Remuneration Options Exercised Options Lapsed Balance at end of year 30 June 2008 Vested at 30 June 2008 Unvested Vested & Exercisable Directors Wolf Gerhard Martinick Campbell Theodore Ansell Anthony Paul Rovira Michael John Fowler - Resigned 1 Sep 2007 John Walter Saleeba Executives Brett Dickson Patrick Manouge Mark Styles - Resigned 30 June 2008 Total - 1,250,000 6,500,000 1,000,000 - - 1,000,000 1,000,000 - - 1,200,000 1,400,000 1,200,000 300,000 1,000,000 200,000 13,350,000 2,700,000 (d) Shareholdings of key management personnel - - - - - - - - - - (1,250,000) - 1,000,000 - 6,500,000 1,000,000 - 6,500,000 - - - - - 1,000,000 1,000,000 1,000,000 1,000,000 2,400,000 1,700,000 2,400,000 1,700,000 1,200,000 1,200,000 - - - - - - - - (1,250,000) 14,800,000 14,800,000 - Balance 1 July Ord Granted Ord On Exercise of Options Ord Net Change Other Ord Balance 30 June Balance Indirectly Held Ord Ord 2009 Directors Wolf G Martinick Anthony Paul Rovira John Walter Saleeba Executives Brett Dickson Patrick Manouge -resigned 31 March 2009 Total 500,000 2,000,000 770,000 200,000 10,000 3,480,000 - - - - - - 600,000 982,000 280,000 1,100,000 2,982,000 1,050,000 - 1,880,000 1,050,000 74,000 274,000 210,000 - 1,936,000 10,000 5,416,000 - 3,140,000 - - - - - - 52 Azure Minerals Limited - Financial Statements Notes continued 24. KEY MANAGEMENT PERSONNEL DISCLOSURES (cont’d) (d) Shareholdings of key management personnel (cont’d) Balance 1 July Ord Granted Ord On Exercise of Options Ord Net Change Other Ord Balance 30 June Balance Indirectly Held Ord Ord 2008 Directors Wolf G Martinick Anthony Paul Rovira Michael John Fowler John Walter Saleeba Executives Brett Dickson Patrick Manouge Mark Styles Total - 2,000,000 1,008,000 770,000 200,000 10,000 - 3,988,000 - - - - - - - - - - - - - - - - 500,000 - - - - - - 500,000 2,000,000 1,008,000 770,000 200,000 10,000 - - 1,800,000 - 770,000 100,000 - - 500,000 4,488,000 2,670,000 25. RELATED PARTY DISCLOSURES (a) Parent entity The ultimate parent entity within the Group is Azure Minerals Limited. (b) Subsidiaries Loans to subsidiaries Beginning of the year Loans advanced Loans Repaid Allowance for impairment End of year Consolidated Parent Entity 2009 $ - - - - - 2008 $ - - - - - 2009 $ 4,676,062 4,1780,786 - (4,636,848) 4,220,000 2008 $ 2,362,235 2,313,827 - - 4,676,062 It is the intention of each subsidiary to repay outstanding loans through the successful exploitation or sale of its mineral assets. General market conditions have deteriorated over the last 18 months which led to a review of the value of the mineral assets held by Minera Piedra Azul S.A. de C.V. As a result of that review the Parent Entity made an allowance of $4,636,848 against loans advanced to its Mexican subsidiary Minera Piedra Azul , S.A. de C.V.. No other provision for doubtful debts have been raised in relation other outstanding balances, and no other expense has been recognised in respect of bad or doubtful debts due from related parties. (c) Key management personnel Disclosures relating to key management personnel are set out in note 24. 26. INTERESTS IN JOINT VENTURES The company has interests in the following joint ventures: Joint Venture (a) Sonora, Mexico (b) JOGMEC Activities Gold/Copper Copper Interest 60% 100% Carrying Value $ NIL NIL (a) The Group is exploring a portfolio of 13 projects in the Mexican state of Sonora in joint venture with Geoinformatics Exploration Inc During 2008 Azure Minerals earned a 51% interest in all 13 projects. In the current joint venture year GXL elected not to contribute to joint venture expenditure, accordingly Azure Minerals interest will increase to 60% and GFX’s interest will decrease to 40%. (b) During the year the Group entered into a joint venture with Japan Oil, Gas and Metals Corporation (JOGMEC) covering the La Tortuga and Los Nidos projects. Pursuant to the joint venture agreement JOGMEC may earn a 51% interest in the projects by spending US$3 million by 31 March 2009. At 30 June 2009 JOGMEC had spend approximately US$656,938. 53 Azure Minerals Limited - Financial Statements Notes continued 27. SHARE-BASED PAYMENTS The group has issued options pursuant to an Employee Share plan and also Director Options Issued pursuant to approval obtained by shareholders at a General Meeting. Details of each issue is set out below: (a) Employee and consultants option plan The establishment of the Azure Minerals Limited – Employees and Contractors Option Incentive Plan (“Plan”) was approved by shareholders at the 2004 Annual General Meeting. The plan is designed to provide long-term incentives for employees and certain contractors to deliver long term shareholder returns. Participation in the plan is at the Boards discretion and no individual has a contractual right to participate in the plan or to receive guaranteed benefits. In addition, under the Plan, the Board determines the terms of the options including exercise price, expiry date and vesting conditions, if any. Options granted under the plan carry no dividend or voting rights. When exercised, each option is convertible into an ordinary share of the company with full dividend and voting rights. Set out below are summaries of options granted under the plan. Grant Date Expiry Date Exercise Price (cents) Value per option at grant date (cents) Balance of the start of the year Number Granted during the year Number Exercised during the year Number Consolidated and parent entity – 2009 30 Nov ‘08 30 Nov ‘03 30 Nov ‘09 30 Nov ‘03 30 Nov ‘10 30 Nov ‘03 31 Jan ‘11 22 Mar ‘06 31 Jan ‘12 22 Mar ‘06 31 Jan ‘13 22 Mar ‘06 31 Jan ‘11 6 Dec ‘06 31 Jan ‘12 6 Dec ‘06 31 Jan ‘13 6 Dec ‘06 31 Jan ‘12 10 Jan ‘07 31 Jan ‘13 10 Jan ‘07 30 Nov ‘09 6 Dec ‘06 30 Nov ‘09 3 Aug ‘07 25.0 25.0 25.0 17.5 25.0 35.0 17.5 25.0 35.0 25.0 35.0 15.0 15.0 Weighted average exercise price Consolidated and parent entity – 2008 30 Nov ‘08 30 Nov ‘03 30 Nov ‘09 30 Nov ‘03 30 Nov ‘10 30 Nov ‘03 31 Jan ‘11 22 Mar ‘06 31 Jan ‘12 22 Mar ‘06 31 Jan ‘13 22 Mar ‘06 31 Jan ‘11 6 Dec ‘06 31 Jan ‘12 6 Dec ‘06 31 Jan ‘13 6 Dec ‘06 31 Jan ‘12 10 Jan ‘07 31 Jan ‘13 10 Jan ‘07 30 Nov ‘09 6 Dec ‘06 30 Nov ‘09 3 Aug ‘07 25.0 25.0 25.0 17.5 25.0 35.0 17.5 25.0 35.0 25.0 35.0 15.0 15.0 Weighted average exercise price - - - 6.81 6.60 6.47 3.74 3.64 3.45 3.03 2.82 0.93 14.3 - - - 6.81 6.60 6.47 3.74 3.64 3.45 3.03 2.82 0.93 14.3 100,000 200,000 200,000 300,000 300,000 300,000 500,000 500,000 500,000 500,000 500,000 1,200,000 1,750,000 6,850,000 $0.217 100,000 200,000 200,000 300,000 300,000 300,000 500,000 500,000 500,000 500,000 500,000 1,200,000 - 5,100,000 $0.24 - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,750,000 1,750,000 $0.15 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Forfeited during the year Number 100,000 200,000 200,000 300,000 300,000 300,000 - - - 500,000 500,000 - 500,000 2,900,000 $0.253 - - - - - - - - - - - - - - - Balance at end of the year Number Vested and exercisable at end of the year Number - - - - - - 500,000 500,000 500,000 - - 1,200,000 1,250,000 3,950,000 $0.191 100,000 200,000 200,000 300,000 300,000 300,000 500,000 500,000 500,000 500,000 500,000 1,200,000 1,750,000 6,850,000 $0.217 - - - - - - 500,000 500,000 500,000 - - 1,200,000 1,250,000 3,950,000 $0.191 100,000 200,000 200,000 300,000 300,000 300,000 500,000 500,000 500,000 500,000 500,000 1,200,000 1,750,000 6,850,000 $0.217 No options were exercised during the periods covered by the above tables. During the 2009 financial year 2,900,000 options were forfeited due to employees leaving the Group and not exercising their options with 90 days of their resignation date. The weighted average remaining contractual life of share options outstanding at the end of the period was 2.58 years (2008: 3.98 years). 54 Azure Minerals Limited - Financial Statements Notes continued 27. SHARE-BASED PAYMENTS (cont’d) Fair value of options granted. Options are granted for no consideration. No options were granted during the 2009 financial year. During the 2008 financial year the weighted average fair value of the options granted was 14.3 cents. The price was calculated by using the Binominal Option valuation methodology applying the following inputs: Weighted average exercise price (cents) Weighted average life of the option (years) Weighted average underlying share price (cents) Expected share price volatility Risk free interest rate 2009 - - - - - 2008 15.0 2.3 22.5 90% 6.05% Historical volatility has been the basis for determining expected share price volatility as it assumed that this is indicative of future trends, which may not eventuate. The life of the options is based on historical exercise patterns, which may not eventuate in the future. Total expenses arising from share-based payment transactions recognised during the period were as follows: Options issued to employees (b) Directors options Set out below are summaries of Directors options granted. Consolidated Parent Entity 2009 $ - 2008 $ 365,127 2009 $ - 2008 $ 365,127 Grant Date Expiry Date Exercise Price (cents) Value per option at grant date (cents) Balance at the start of the year Number Granted during the year Number Exercised during the year Number Forfeited during the year Number Balance at end of the year Number Vested and exercisable at end of the year Number Consolidated and parent entity – 2009 30 Nov ‘08 30 Nov ‘03 30 Nov ‘09 30 Nov ‘03 30 Nov ‘10 30 Nov ‘03 31 Jan ‘10 24 Dec ‘07 31 Jan ‘11 24 Dec ‘07 31 Jan ‘12 24 Dec ‘07 25.0 25.0 25.0 25.0 25.0 25.0 Weighted average exercise price Consolidated and parent entity – 2008 30 Nov ‘08 30 Nov ‘03 30 Nov ‘09 30 Nov ‘03 30 Nov ‘10 30 Nov ‘03 31 Jan ‘10 24 Dec ‘07 31 Jan ‘11 24 Dec ‘07 31 Jan ‘12 24 Dec ‘07 25.0 25.0 25.0 25.0 25.0 25.0 Weighted average exercise price - - - 8.2 10.2 11.7 - - - 8.2 10.2 11.7 1,400,000 2,800,000 2,800,000 200,000 400,000 400,000 8,000,000 $0.25 1,650,000 3,300,000 3,300,000 - - - 8,250,000 $0.25 - - - - - - - - - - 200,000 400,000 400,000 1,000,000 $0.25 - - - - - - - - - - - - - - - - (1,400,000) - - - - - (1,400,000) $0.25 - 2,800,000 2,800,000 200,000 400,000 400,000 6,600,000 $0.25 (250,000) (500,000) (500,000) - - - (1,250,000) $0.25 1,400,000 2,800,000 2,800,000 200,000 400,000 400,000 8,000,000 $0.25 - 2,800,000 2,800,000 200,000 400,000 400,000 6,600,000 $0.25 1,400,000 2,800,000 2,800,000 200,000 400,000 400,000 8,000,000 $0.25 The weighted average remaining contractual life of share options outstanding at the end of the period was 1.5 years (2008: 1.8 years). 55 Azure Minerals Limited - Financial Statements Notes continued 27. SHARE-BASED PAYMENTS (cont’d) Fair value of director options granted. Options are granted for no consideration. No options were granted during the 2009 financial year. During the 2008 financial year the weighted average fair value of the options granted was 10.4 cents. The price was calculated by using the Binominal Option valuation methodology applying the following inputs: Weighted average exercise price (cents) Weighted average life of the option (years) Weighted average underlying share price (cents) Expected share price volatility Risk free interest rate 2009 - - - - - 2008 25.0 3.3 18.5 90% 6.25% Historical volatility has been the basis for determining expected share price volatility as it assumed that this is indicative of future trends, which may not eventuate. The life of the options is based on historical exercise patterns, which may not eventuate in the future. Total expenses arising from share-based payment transactions recognised during the period were as follows: Options issued to directors Consolidated Parent Entity 2009 $ - 2008 $ 103,049 2009 $ - 2008 $ 103,049 56 Azure Minerals Limited - Financial Statements Directors' Declaration The directors of the company declare that: (1) The financial statements, comprising the consolidated income statement, balance sheet, statement of cash flows, statement of changes in equity, accompanying notes, are in accordance with the Corporations Act 2001 and: (a) (b) comply with Accounting Standards and the Corporations Regulations 2001; and give a true and fair view of the financial position as at 30 June 2009 and of the performance for the year ended on that date of the company and the consolidated entity. (2) (3) (4) In the directors’ opinion, 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 remuneration disclosures included in pages 12 to 14 of the director’s report (as part of the audited Remuneration Report) for the year ending 30 June 2009, comply with section 300A of the Corporations Act 2001. The directors have been given the declaration by the chief executive officer and chief financial officer as required by section 295A. This declaration is made in accordance with a resolution of the Board of Directors and is signed for and on behalf of the directors by: Anthony Paul Rovira Executive Chairman Perth, 25 September 2009 57 BDO Kendalls Audit & Assurance (WA) Pty Ltd  128 Hay Street  SUBIACO  WA  6008  PO Box 700  WEST PERTH  WA  6872  Phone 61 8 9380 8400  Fax 61 8 9380 8499  aa.perth@bdo.com.au  www.bdo.com.au  ABN 79 112 284 787  INDEPENDENT AUDITOR’S REPORT  TO THE MEMBERS OF AZURE MINERALS LIMITED  We have audited the accompanying financial report of Azure Minerals Limited, which comprises the balance sheet as at 30  June 2009, and the income statement, statement of changes in equity and statement of cash flows for the year ended on  that  date,  a  summary  of  significant  accounting  policies,  other  explanatory  notes  and  the  directors’  declaration  of  the  consolidated entity comprising the disclosing entity and the entities it controlled at the year’s end or from time to time  during the financial year.  Directors’ Responsibility for the Financial Report   The  directors  of  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  controls  relevant  to  the  preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or  error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the  circumstances.  In  Note  1,  the  directors  also  state,  in  accordance  with  Accounting  Standard  AASB  101  Presentation  of  Financial Statements, that compliance with Australian equivalents to International Financial Reporting Standards ensures  that  the  financial  report,  comprising  the  financial  statements  and  notes,  complies  with  International  Financial  Reporting  Standards.   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.   An  audit  involves  performing  procedures  to  obtain  audit  evidence  about  the  amounts  and  disclosures  in  the  financial  report.  The  procedures  selected  depend  on  the  auditor’s  judgement,  including  the  assessment  of  the  risks  of  material  misstatement  of  the  financial  report,  whether  due  to  fraud  or  error.  In  making  those  risk  assessments,  the  auditor  considers  internal  control  relevant  to  the  entity’s  preparation  and  fair  presentation  of  the  financial  report  in  order  to  design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the  effectiveness of the entity’s internal 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.  We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.   Independence  In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm  that the independence declaration required by the Corporations Act 2001 would be in the same terms if it had been given  to the directors at the time that this auditor’s report was made.  58 BDO Kendalls is a national association of  separate partnerships and entities.    Liability limited by a scheme approved under  Professional Standards Legislation.                    Auditor’s Opinion   In our opinion:  (a) the financial report of Azure Minerals Limited is in accordance with 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 2009  and of their performance for the year ended on that date; and   (ii)   complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and  the Corporations Regulations 2001.  (b)   the financial report also complies with International Financial Reporting Standards as disclosed in Note 1.   Material Uncertainty Regarding Continuation as a Going Concern  Without  qualifying  our  opinion,  we  draw  attention  to  note  1  in  the  financial  report  which  indicates  that  the  company  incurred a net loss of $3,355,760 for the year ended 30 June 2009, and, as at that date, the company experienced net cash  outflows from operating activities of $3,608,727. These conditions along with other matters as set forth in note 1 of the  financial report indicate the existence of a material uncertainty which may cast significant doubt on the entity’s ability to  continue as a going concern and therefore whether it will realise its assets and extinguish its liabilities in the normal course  of business and at the amounts stated in the financial report.  Report on the Remuneration Report  We have audited the Remuneration Report included in the directors’ report for the year ended 30 June 2009. The directors  of  the  company  are  responsible  for  the  preparation  and  presentation  of  the  Remuneration  Report  in  accordance  with  section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based  on our audit conducted in accordance with Australian Auditing Standards.  Auditor’s Opinion  In our opinion, the Remuneration Report of Azure Minerals Limited for the year ended 30 June 2009, complies with section  300A of the Corporations Act 2001.  BDO Kendalls Audit & Assurance (WA) Pty Ltd  Glyn O’Brien  Director  Signed in Perth, Western Australia   Dated this 25th day of September 2009. 59                                 BDO Kendalls Audit & Assurance (WA) Pty Ltd  128 Hay Street  SUBIACO  WA  6008  PO Box 700  WEST PERTH  WA  6872  Phone 61 8 9380 8400  Fax 61 8 9380 8499  aa.perth@bdo.com.au  www.bdo.com.au  ABN 79 112 284 787  25 September 2009  Board of Directors  Azure Minerals Limited  Level 1  30 Richardson Street  WEST PERTH WA 6005  Dear Sirs  DECLARATION OF INDEPENDENCE BY GLYN O’BRIEN TO THE DIRECTORS OF AZURE MINERALS LIMITED  As lead auditor of Azure Minerals Limited for the year ended 30 June 2009, I declare that, to the best of my knowledge and belief, there  have been no contraventions of:  • • the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and  any applicable code of professional conduct in relation to the audit.  This declaration is in respect of Azure Minerals Limited and the entities it controlled during the period.  Glyn O’Brien  Director   BDO Kendalls Audit & Assurance (WA) Pty Ltd  Signed in Perth, Western Australia   BDO Kendalls is a national association of  separate partnerships and entities.    Liability limited by a scheme approved under  Professional Standards Legislation.  60                                     Azure Minerals Limited - Annual Report ASX Additional Information Additional information required by the Australian Stock Exchange Limited and not shown elsewhere in this report is as follows. The information is current as at 14 September 2009. (a) Distribution of equity securities The number of shareholders, by size of holding, in each class of share are: 1 1,001 5,001 10,001 100,001 - - - - 1,000 5,000 10,000 100,000 and over The number of shareholders holding less than a marketable parcel of shares are: (b) Twenty largest shareholders The names of the twenty largest holders of quoted shares are: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Yandal Investments Pty Ltd HSBC Custody Nominees Investec Bank (Australia) Ltd ANZ Nominees Limited Mr David Alistair Cadwallader Dr Lyndsay George McDonald Gordon Mr Robert Hastings Smythe S & M French Investments Pty Ltd Mr Peter Murray Nicholas Stadjoy Pty Ltd Toltec Holdings Pty Ltd Mr Anthony Paul Rovira Vanwhile Pty Ltd Dr Wolf Gerhard Martinick Mr Christian Merli Rovira Geoservices Pty Ltd Mr Richard Eric James + Mrs Margaret Anne James C Z Dataland Pty Ltd Mrs Wan Hui Chen Mr Sean Delaney Ordinary shares Number of holders Number of shares 32 240 790 1,480 346 2,888 614 5,734 888,842 7,023,410 58,219,477 151,075,026 217,212,489 3,443,175 Listed ordinary shares Number of shares 17,423,000 16,307,817 5,600,000 4,369,578 3,508,000 2,232,833 2,000,000 1,750,000 1,500,000 1,456,000 1,440,000 1,320,000 1,120,000 1,100,000 1,096,800 1,040,000 1,030,000 1,013,926 1,000,000 1,000,000 67,307,954 Percentage of ordinary shares 8.02 7.51 2.58 2.01 1.62 1.03 0.92 0.81 0.69 0.67 0.66 0.61 0.52 0.51 0.50 0.48 0.47 0.47 0.46 0.46 31.00 (c) Substantial shareholders The names of substantial shareholders who have notified the Company in accordance with section 671B of the Corporations Act 2001 are: Yandal Investments Pty Ltd Dundee Corporation and each of its associates Number of Shares 17,423,000 16,307,817 61 (d) Voting rights All ordinary shares (whether fully paid or not) carry one vote per share without restriction. (e) Schedule of interests in mining tenements Common Name Tenement Percentage held / earning El Llano del Nogal Cumobabi Tabisco Jagüey Pozo de Nacho Cardeleña San Nicolas Batacosa Arroyo Amarillo Estacion Llano Los Chinos La Ramada La Tortuga La Providencia El Cuervo Coronado Los Nidos El Carnero Las Viboras San Eduardo Promontorio All Minerals All Minerals All Minerals Llano del Nogal - Fraccion 1 Llano del Nogal - Fraccion 2 Llano del Nogal - Fraccion 3 All Minerals Llano del Nogal 2 All Minerals Llano del Nogal 3 All Minerals El Apuro (Reduction) All Minerals La Calma All Minerals Potrerito All Minerals El Ermitaño 1 All Minerals El Ermitaño 2 All Minerals Mark 1 All Minerals Mark 1 – Fraccion 1 All Minerals Mark 2 All Minerals Mark 3 All Minerals Tabisco - Fraccion 2 All Minerals Tabisco 2 - Fraccion 1 All Minerals Tabisco 2 - Fraccion 2 All Minerals Beatriz - Fraccion 2 All Minerals Beatriz - Fraccion 3 All Minerals Beatriz - Fraccion 4 All Minerals Jagüey Pozo de Nacho All Minerals Pozo de Nacho 2 - Fracc. 1All Minerals Pozo de Nacho 2 - Fracc. 2All Minerals All Minerals Pozo de Nacho 3 All Minerals Cardeleña All Minerals Cardeleña 2 All Minerals San Nicolas All Minerals Batacosa All Minerals Arroyo Amarillo All Minerals Estacion Llano All Minerals Los Chinos All Minerals La Ramada La Tortuga La Providencia El Cuervo Coronado Los Nidos Carnero Viboras San Eduardo Hidalgo Promontorio El Magistral Promontorio Regional All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals * Denotes option to acqire 100% 62 224717 224718 224719 230186 232390 228838 221119 229051 230421 Pending 232857 232858 232856 232855 220663 229008 229009 218062 218063 218064 225314 222873 225057 225058 228563 220716 228176 225315 225402 223191 227017 229035 229820 230422 230462 231704 231432 231051 231326 232429 232387 14966 28521 218881 Pending 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 100% 100% 100% 100% 100% 100% 100% 100% 100%* 100%* 100%* 100% 

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