Azure Minerals Annual Report 2012

Plain-text annual report

Azure Minerals Limited ABN 46 106 346 918 Annual Report and Financial Statements for the year ended 30 June 2012 Azure Minerals Limited – 2012 Annual Report Corporate Information ABN 46 106 346 918 Directors Mr. Peter Ingram (Chairman) Mr. Anthony Rovira (Managing Director) Dr Wolf Martinick (Non-Executive Director) Company Secretary Mr. Brett Dickson Registered Office Level 1, 30 Richardson Street WEST PERTH WA 6005 (08) 9481 2555 Solicitors Middletons Level 32 44 St Georges Terrace Perth WA 6000 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 Audit (WA) Pty Ltd 38 Station Street SUBIACO WA 6008 Internet Address www.azureminerals.com.au ASX Code Shares AZS 1 Azure Minerals Limited – 2012 Annual Report Contents Chairman’s Letter Review of Operations Directors' Report Corporate Governance Statement Financial Statements - Statement of Comprehensive Income - Statement of Financial Position - Statements of Changes in Equity (Consolidated) - Statement of Cash Flows - Notes to the Financial Statements - Directors' Declaration - Independent Audit Report - Auditor’s Independence Declaration ASX Additional Information 3 4 18 19 25 26 27 28 29 52 53 55 56 Competent Person Statement: Information in this report that relates to Exploration Results and Mineral Resources 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. 2 Azure Minerals Limited – 2012 Annual Report Chairman’s Letter Dear Fellow Shareholders, It is my pleasure to present to you my inaugural Chairman’s Letter together with the Company’s Annual Report for 2012. On behalf of the Board of Azure Minerals I am pleased to report that, whilst not without its difficulties, the past 12 months has been a busy and very successful period, with the Company continuing to focus its efforts in Mexico and on further developing its highly prospective portfolio of precious and base metals projects. During the year, Company personnel, under the capable direction of the Managing Director Mr Tony Rovira, have worked very hard to advance three key projects: the Promontorio Copper-Gold-Silver Project; (cid:120) (cid:120) Zinc and Copper Projects in the El Tecolote District; and (cid:120) the Pozo de Nacho Molybdenum Project. As our exploration programs at these properties continue, we are steadily progressing towards achieving Azure’s key objective of becoming a profitable minerals producer in Mexico. All of the Company’s projects are located in the world-renowned Sierra Madre Occidental Mineral Province in northern Mexico. This area, whilst extremely mineral-rich, continues to be relatively under-explored, a fact we believe offers exceptional growth opportunities for Azure. Mexico’s continuing reputation as an attractive mining investment destination, attested to by several internationally renowned surveys of rankings and indices, is due mainly to its demonstrated mineral potential and favourable policy environment. The country has a 500-year history of mining and in recent years has experienced a resurgence of activity due to increased world demand for minerals. Mexico has a strong economy with a favourable tax and regulatory regime, making it an ideal place for Azure to explore for minerals. Very encouraging results of the Promontorio Project Pre-Feasibility Study (PFS) were recently released to ASX. Promontorio is a high-grade copper-silver-gold project with considerable up-side potential. The PFS is the culmination of over six months of intensive work by the Company and its consultants, Como Engineers. The results clearly demonstrate the robust technical and economic viability of Promontorio as it stands, and even more so should on-going exploration achieve our target of increasing the resource base to between 1 and 2 million tonnes of ore at similar grades to the existing deposit. We look forward to updating shareholders as we continue drilling at Promontorio and commence a Definitive Feasibility Study of the Project. Drilling at the El Tecolote and La Tortuga Projects, operated in joint venture with JOGMEC, are on-going and continue to generate positive results. A deep geophysical target at La Tortuga is of particular interest. Unfortunately our first drill test of the anomaly failed to intersect the target zone. I look forward to the next 12 months during which we expect to continue advancing towards our objective of becoming a significant mining company in Mexico. I would like to thank our shareholders, partners, employees and my fellow directors for their ongoing efforts on your behalf and for their support. Yours faithfully, Peter Ingram Chairman 3 Azure Minerals Limited – 2012 Annual Report Review of Operations Azure Minerals Limited (‘Azure’ or ‘the Company’) has had a successful 12 months on the ground in Mexico, progressing its Promontorio copper-gold-silver project through to the positive completion of a Pre-Feasibility Study and advancing its copper exploration joint ventures with the Japanese Government corporation JOGMEC. PROMONTORIO (Copper-Gold-Silver) Consisting of massive high-grade copper sulphide mineralisation, containing significant values of gold and silver, the Promontorio Project is located in the richly mineralised Sierra Madre Occidental mining province in Chihuahua State, Mexico (Figure 1). It is situated within the same NNW-SSE trending belt that hosts a number of currently operating gold mines, including the multi-million ounce mines at Ocampo, Pinos Altos, Concheño, Mulatos and Dolores, all located within 50km of the Project. Promontorio has a current JORC-compliant Mineral Resource (‘Resource’) of 502,000 tonnes @ 4.7% Copper, 2.1 g/t gold and 99 g/t Silver1. CATEGORY TONNES GRADE (% Cu) GRADE (g/t Au) GRADE (g/t Ag) 290,000 Indicated 212,000 Inferred TOTAL 502,000 Table 1: Promontorio Mineral Resource 4.2 5.3 4.7 2.1 2.1 2.1 94 106 99 CONTAINED COPPER (Tonnes) 12,100 11,300 23,400 CONTAINED GOLD (Ounces) 20,000 14,000 34,000 CONTAINED SILVER (Ounces) 873,000 724,000 1,597,000 FIGURE 1: Azure Minerals’ Projects in Mexico 1 Details of the resources classification and estimation methodologies are contained in Azure’s announcement to the ASX, released on 7th January 2009. 4 Azure Minerals Limited – 2012 Annual Report Mineralisation outcrops over a strike length of 1,000m, while to date, sufficient drilling has been completed to enable the Resource to be estimated over a strike length of only 200m. However, the most recent drilling undertaken by Azure extended the north-south strike length of the mineralised system to 400m, confirming the potential for additional resources to be added through further drilling. The deposit remains open in all directions. Based on the exploration undertaken to-date, the Company believes there is a potential to increase the Resource at Promontorio to between 1 and 2 million tonnes, at grades of 4-5% Copper, 1.5-2.5g/t Gold and 80-120g/t Silver (Exploration Target2). FIGURE 2: Long Section Showing Resource and Extension Drilling Pre-Feasibility Study In August 2012, Azure announced the results from the Pre-Feasibility Study (‘PFS’) of Promontorio. This demonstrated the robust technical and economic viability of the Project with the current mining inventory of 656,000 tonnes supporting a 150,000tpa mining and processing operation over an initial mine life of 4 ½ years (Current Case). The PFS also estimated the likely economics of the Project if further exploration achieved a doubling of the Mining Inventory at the same grade as the current Inventory (Upside Case). Results of the two Cases are summarised below. Current Case3 (cid:120) Gross revenue = US$195 million (cid:120) Free cash = US$54 million (cid:120) Cash costs (C1: net of credits) = US$1.16 / pound Copper (cid:120) NPV (10%) = US$32 Million (cid:120) (cid:120) Total production of: IRR = 42% o 19,400 tonnes of Copper o 14,900 ounces of Gold o 1,220,000 ounces of Silver Upside Case4 Azure has in its sights, an initial Exploration Target5 to double the Mineral Resource at Promontorio. If achieved, the Project could potentially deliver: (cid:120) Gross revenue = US$395 Million (cid:120) Free cash = US$155 Million (cid:120) NPV (10%) = US$86 Million 2 The potential quantity and grade of the Exploration Target is conceptual in nature, and there has been insufficient exploration to define a Mineral Resource and it is uncertain if further exploration will result in the determination of a Mineral Resource. 3 The Current Case, uses the current Resource and metal prices as at 8 August 2012 (US$3.42/lb Copper, US$1,612/oz Gold and US$28/oz Silver) 4 The Upside Case uses Current Prices (as at 8 August 2012) and assumes that further exploration at Promontorio will double the current mining inventory to 1.3Mt at the same metal grades and recoveries as used in the PFS. The potential tonnes and grade used in the Upside Case is conceptual in nature. It includes material that has not yet been discovered or defined and is considered to be an Exploration Target. 5 See Footnote 2 5 Azure Minerals Limited – 2012 Annual Report Key Points The PFS, carried out by Como Engineers Pty Ltd (‘Como’, a subsidiary of VDM Group Ltd), has delivered the following key outcomes: (cid:120) Mining will be from underground, utilising selective extraction techniques (cid:120) Mineral processing will be by conventional crushing, grinding, flotation and filtration techniques to produce two high grade sulphide concentrates (cid:120) Copper concentrate will grade 39.5% Copper, 9.4g/t Gold and 773g/t Silver (cid:120) Pyrite-gold concentrate will grade 7-8g/t Gold – a value-add opportunity not included in the PFS financials (cid:120) Planning for a Definitive Feasibility Study (DFS) has commenced As is normal practice, Como prepared several alternative scenarios to assess the impact of variances in metal prices, mining inventories, recovery, grade and costs. Importantly, the scenarios demonstrated that the project retained a positive cash flow within all the range of options studied. In addition, the table below illustrates the significant positive impact that additional resources and higher metal prices have on Promontorio’s value, justifying further exploration expenditure on the Project. ITEM UNITS Mine Life Initial Capital Cost Gross Revenue Free Cash (pre-tax) NPV (pre-tax) IRR (pre-tax) C1 Cash Cost Years US$(M) US$(M) US$(M) US$(M) % US$/lb Cu CONSERVATIVE CASE6 4.5 $34.6 $179.7 $36.9 $19 29% $1.12 CURRENT PRICE CASE7 4.5 $34.6 $195 $54 $32 42% $1.16 UPSIDE CASE 8 8.8 $34.6 $395 $155 $86 55% $1.00 Prior to the completion of the PFS, Azure accessed the upper levels of the Mina Grande mine workings, which form part of the historical Promontorio mine. Detailed mapping and surveying identified three principal mineralised veins along the 250m length of old workings. This work also identified a new vein of high grade massive copper sulphide mineralisation which was unknown to modern explorers and to date has not been tested by any drilling. Channel sampling across the full 2.2m wide vein returned values of: 12.95% Copper 18.5g/t Gold 364g/t Silver Following the positive results of the PFS, the Company anticipates that drilling at Promontorio will re-commence in the December quarter of 2012. Cascada Prospect Azure has undertaken follow-up exploration on the Cascada Prospect, which is located alongside the Promontorio Deposit. Cascada is an epithermal gold-silver system with bulk tonnage potential, similar to the other operating gold mines in the district. Drilling has intersected wide zones of gold mineralisation. Some key drill intercepts are listed in Table 3. DRILL HOLE P2 P3 P6 P9 P10 P11 P12 APR-DD-54 FROM (m) 71.6 0.0 30.5 24.4 76.2 3.1 57.9 48.0 Table 3: Drill intercepts at Cascada TO (m) 106.0 24.4 54.9 39.6 86.9 35.1 80.8 185.0 WIDTH (m) 24.4 24.4 24.4 15.2 10.7 32.2 22.9 137.0 GRADE (g/t Au) 1.28 1.86 5.15 1.31 2.72 1.62 1.12 0.42 Further drilling is warranted at Cascada which is anticipated to commence in the December quarter of 2012, in conjunction with the Promontorio drilling. 6 Conservative Case uses metals prices of: US$3.00/lb Copper, US$1,500/oz Gold & US$30/oz Silver 7 Current Price: see Footnote 3 referenced on Page 5 8 Upside Case: see Footnote 4 referenced on Page 5 6 Azure Minerals Limited – 2012 Annual Report EL TECOLOTE DISTRICT (Copper & Zinc) Azure has 100% ownership of a 600km² strategic tenement holding in the El Tecolote District, located in Sonora State, Mexico. The area comprises three adjoining properties: El Tecolote, La Tortuga and San Eduardo which are prospective for porphyry-hosted copper and skarn copper-zinc deposits. Azure has entered into separate Joint Venture (‘JV’) agreements with the Japan Oil, Gas and Metals National Corporation (‘JOGMEC’) over the La Tortuga and El Tecolote projects. The JV’s are managed and staffed by Azure out of the Company’s office in Hermosillo, Sonora, with funding and technical assistance provided by JOGMEC. The El Tecolote JV was established in 2011 with JOGMEC having the right to earn an initial 51% interest in the project by spending US$5 million over the first three years. Upon reaching that milestone, it can elect to earn an additional 19% interest by spending a further US$8 million during the following three years, taking its total project equity to 70%. Total expenditure at 30 June 2012 was US$2.1 million. The La Tortuga JV was established in 2008 with JOGMEC having the right to earn a 51% interest in the project by spending US$3 million by March 2013. Total expenditure at 30 June 2012 was US$2.2 million. JOGMEC is a wholly-owned Japanese Government corporation established to assist in the stable supply of oil, gas and mineral resources to the Japanese economy. Its mission is to gain entry into high-potential mineral exploration projects through providing funding and technical assistance. JOGMEC’s involvement in two of our projects demonstrates its belief in the strength of the Company’s Mexican assets and management team, and we look forward to further cementing this belief through ongoing exploration success. El Tecolote JV Situated between the Company’s San Eduardo and La Tortuga Projects in the state of Sonora, El Tecolote is a 178km² property containing abundant evidence of base metal mineralisation with potential for both porphyry copper and skarn copper-zinc-silver deposits. The property contains the historical El Tecolote Mine, which previously produced 1.4 million tonnes @ 1.9% copper, 7.0% zinc and 47 g/t silver. The mine closed in 1984 due to low commodity prices, with unmined copper and zinc mineralisation remaining around the old mine workings. Azure’s exploration in this area identified possible strike and depth extensions and repetitions. In addition, several porphyry copper targets have been identified with strong IP and geochemical anomalies present along with surface occurrences of alteration, quartz veining and copper oxide mineralisation. The 2011/12 exploration program comprised 16 diamond drill holes for a total of 4,300m. The drilling tested extensions and repetitions of skarn mineralisation in the El Tecolote Mine, as well as several porphyry copper prospects, and the Reyna del Cobre skarn prospect. Around the El Tecolote Mine, drilling intersected skarn-hosted mineralisation consisting of disseminated to semi-massive sphalerite (zinc sulphide) and minor disseminated chalcopyrite (copper sulphide). The mineralisation is contained within a zone of carbonate sediments (a tactite unit known as T-1) located approximately 40m to the northeast of, and parallel to the historical underground mine workings of the El Tecolote Mine. Better drill intercepts include: (cid:120) 13.6 metres @ 6.9% Zinc from 125.1m in TEC-DD-003, including: (cid:120) (cid:120) 10.10% Zinc over 1.9m from 131.15m; and 10.95% Zinc over 4.1mfrom 134.65m 4.0 metres @ 1.4% Zinc from 94.0m in TEC-DD-013 8.0 metres @ 1.5% Zinc from 108.0m in TEC-DD-013 30.5 metres @ 2.4% Zinc from 60.5m in TEC-DD-014 (within 50.9 metres @ 1.7% Zinc from 59.1m) 4.7 metres @ 3.0% Zinc from 117.7m in TEC-DD-014 (cid:120) (cid:120) (cid:120) (cid:120) The Company commenced its Stage 2 drilling program during September 2012, following up the zinc mineralisation intersected around the El Tecolote Mine and additional porphyry copper targets. 7 Azure Minerals Limited – 2012 Annual Report La Tortuga JV Exploration conducted by the JV on the 214km² La Tortuga property, identified outcropping and buried occurrences of porphyry copper and skarn copper-zinc style mineralisation, indicating the strong potential to discover deposits of this type. During the year, Azure completed a deep-seeking, three dimensional Titan 24 Induced Polarisation (IP) – Resistivity – Magneto-Telluric (MT) survey over a strong aeromagnetic anomaly in the northwest corner of the property. With no outcrop present in this area, geophysical surveying is the only viable first-pass exploration tool, and the Titan 24 system, operated by Quantec Geoscience from Canada, is designed to map mineralised bodies in three dimensions to depths in excess of one kilometre. The survey successfully identified the presence of a large, strongly (MT) resistive body immediately adjacent to the aeromagnetic anomaly. Together, these anomalies have the characteristics and dimensions typical of a porphyry copper deposit with an adjoining alteration zone. The combined results of Azure’s aeromagnetic and magneto-telluric modelling indicate the anomalies are hosted within basement rocks commencing at around 600m below surface and extending to depths in excess of 1,500m. A 1,000m deep diamond drill hole was designed to test the deep geophysical target and drilling commenced in August 2012. Unfortunately the hole had to be abandoned at 665m due to caving of the hole and did not fully test the target. However the hole did achieve some success. After passing through the overlying post-mineral cover rocks, the drill hole entered basement rocks at 635m and drilled through 30m of strongly hematite-altered, veined and brecciated, intrusive rock. These rocks are considered to be significant indicators of potential mineralisation at depth and further drilling is warranted to fully test the target. Pozo De Nacho Pozo de Nacho contains a substantial body of molybdenum mineralisation hosted within an intrusive porphyry system and surrounding sediments. Azure has drilled mineralisation over an area of 800m by 250m, from surface to depths in excess of 300m. The mineralised system remains open in most directions. An IP and resistivity survey of the property was completed in late 2010 with several strong anomalies identified. The Company is of the opinion that further drilling at Pozo de Nacho will outline a mineral resource. 8 Azure Minerals Limited – 2012 Annual Report Directors' Report 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 2012. 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. Peter Ingram (appointed 12 October 2011) Anthony Rovira Wolf Martinick John Saleeba (resigned 30 November 2011) 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 a number of 100% owned projects, two of which have been joint ventured. The Group’s principal project is the Promontorio project where a modest size but high grade copper-gold—silver deposit has been identified. The Group 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 Group for the year ended 30 June 2012 was $3,712,330 (2011: $4,461,805). Included in this loss figure is $4,094,247 (2011: $3,982,806) of exploration expenditure written off. Refer to notes 1(c) and 6 to the financial statements. Shareholder Returns Basic loss per share (cents) Diluted loss per share (cents) 2012 (0.9) (0.9) 2011 (1.2) (1.2) Investments for Future Performance The future performance of the group is dependent 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 At the date of this report the consolidated entity has a sound capital structure and is in a strong position to progress its mineral properties. 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: (cid:19) Board approval of a strategic plan, which covers strategy statements designed to meet stakeholders’ needs and manage business risk. (cid:19) 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. SIGNIFICANT CHANGES IN STATE OF AFFAIRS There were no significant changes in the state of affairs of the Group during the financial year. 9 Azure Minerals Limited – 2012 Annual Report Directors' Report SIGNIFICANT EVENTS AFTER THE REPORTING DATE Since the end of the reporting date the Group has conducted a share purchase plan. This will result in the Group issuing 118,000,100 shares at an issue price of 1.8 cents per share to raise $2,124,000. In addition on 21 September 2012 the Group received commitments to participate in a share placement of 39,000,000 fully paid ordinary shares at $0.018 each to raise $702,000. Options exercisable at 2 cents each and expiring 2 years from their issue date will also be allocated on the basis of one free option for every two shares subscribed under the placement. No other 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. 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. Peter Anthony Ingram BSc, FAusIMM, MGSA, FAICD (appointed 12 October 2011 and on 1 December 2012 appointed Chairman) Mr Ingram is a geologist with over forty years experience in the mining and mineral exploration industries within Australia, including over thirty years experience in public company management. He was the founding Chairman and Managing Director of Universal Resources Limited (now Altona Mining Limited). Mr Ingram was a founding councillor and past President of the Association of Mining and Exploration Companies (AMEC) and has been made an Honorary Life Member in recognition of his services to AMEC. He was also a founding director of the Australian Gold Mining Industry Council. He has served on the board of management of the WA School of Mines at Curtin University and was instrumental in the establishment of the Chair of Mineral Economics and Mine Management within that institution. Mr Ingram’s previous directorships include: Managing Director of Metana Minerals NL and Eastmet Limited; Executive Chairman of Australia Oriental Minerals NL and Glengarry Resources Limited; and Non-executive Director of Dragon Mining Limited, Metana Petroleum Limited and Carnarvon Petroleum Limited. Other Current Directorships Altona Minerals Limited Former Directorships in the last 3 years None. Special Responsibilities Chairman of the Board and Chairman of the Remuneration and member of the Audit & Risk Management Committee Interests in Shares and Options 3,000,000 options over ordinary shares in Azure Minerals Limited Mr. Anthony Paul Rovira, BSc Flinders University, BSc (Hons) Flinders University, MAusIMM (Managing Director) 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. 10 Azure Minerals Limited – 2012 Annual Report Directors' Report INFORMATION ON DIRECTORS (cont’d) Names, qualifications, experience and special responsibilities (cont’d) Former Directorships in the last 3 years None. Special Responsibilities Managing Director Interests in Shares and Options 3,300,000 ordinary shares in Azure Minerals Limited, of which 1,880,000 are held indirectly. 7,500,000 options over ordinary shares in Azure Minerals Limited Dr Wolf Martinick, PhD, BSc (agric) (Appointed 1 September 2007) Dr Martinick is an environmental scientist with over 40 years experience in mineral exploration and mining projects around the world, attending to environmental, water, land access and indigenous people issues. He has conducted due diligence on mining projects around the world on behalf of international financial institutions and resource companies for a variety of transactions including listings on international stock exchanges, mergers and debt financing. He is a Fellow of the Australian Institute of Mining and Metallurgy. He is a founding director and chairman of Weatherly International plc, an AIM listed company with copper mines in Namibia. He was also a founding director of Basin Minerals Limited, an ASX listed mineral exploration company that discovered a world-class mineral project in Victoria, Australia, that was acquired by Iluka Resources Limited in 2003. Other Current Directorships Sun Resources NL – Non-Executive Director since February 1996 and Chairman since 1 March 2011 Ezenet Limited – Chairman since January 2003 Weatherly International Plc – Director since July 2005 Former Directorships in the last 3 years Windimurra Vanadium Limited – resigned 2 October 2009 Carbine Resources Limited – resigned 4 November 2008 Uran Limited – resigned 12 November 2010 Special Responsibilities Chairman of the Audit and Risk Management Committee and member of the Remuneration Committee Interests in Shares and Options 1,540,000 ordinary shares in Azure Minerals Limited 2,500,000 options over ordinary shares in Azure Minerals Limited Mr. John Walter Saleeba, BCom, LLB, CPA, FAICD (Non-Executive Director, retired 30 November 2011) 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 Resource Equipment Limited and VDM Group Limited. Mr Saleeba has held directorships with a number of other public companies, covering a wide range of business activities. Interests in Shares and Options at time of retirement 2,669,600 ordinary shares in Azure Minerals Limited, all of which are held indirectly. 2,500,000 options over ordinary shares in Azure Minerals Limited 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. 11 Azure Minerals Limited – 2012 Annual Report Directors' Report 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 5 8 5 8 B 5 8 4 8 Meetings of Committees Audit A 1 - - 1 B 1 - - 1 Remuneration B A - - - - - - - - Peter Anthony John Ingram 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 John Saleeba retired at the 2011 Annual General Meeting hold on 30 November 2011. 12 Azure Minerals Limited – 2012 Annual Report 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). In line with standard industry practice 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. A Remuneration Committee has been established and is a committee of the board. It is primarily responsible for making recommendations to the board on: (cid:120) Non-executive directors fees (cid:120) Remuneration levels of executive directors and other key management personnel (cid:120) Key performance indicators and performance hurdles of the executive team Their objective is to ensure that remuneration policies and structures are fair and competitive and aligned with the long-term interests of the Group. The Corporate Governance Statement provides further information on the role of this committee. Remuneration consultants were not engaged during the year. 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. With the retirement of Mr Saleeba during the year the plan has been terminated. 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 and the Company Secretary, Mr B Dickson is an executive whose remuneration must be disclosed under the Corporations Act 2001. 13 Azure Minerals Limited – 2012 Annual Report Directors' Report Key management personnel of the Group Short-Term Cash, salary & fees Cash Bonus Non monetary benefits Post Employment Super- annuation Retirement benefits Name Share-based Payments Options Total Percentage Consisting of Options % Directors Peter Anthony Ingram – Chairman1 2012 2011 46,997 - Anthony Paul Rovira – Managing Director 2012 2011 300,000 300,000 Wolf Gerhard Martinick –Non Executive 2012 2011 45,000 45,000 - - - - - - - - - - - - John Walter Saleeba – Non executive 2012 2011 Executives Brett Dickson – Company Secretary 18,750 - - 45,000 - - Total 2012 2011 2012 2011 153,120 153,120 563,867 543,120 - - - - - - + - 1. Appointed 12 October 2011 Compensation options During the 2012 and 2011 the following options were issued. 4,230 - 27,000 27,000 4,050 4,050 - - - - - - 1,687 77,011 4,050 - 48,480 - 99,707 - - 109,260 327,000 436,260 - 27,315 - 27,315 - - - - - 81,945 36,967 35,100 77,011 - 48,480 245,835 49,050 76,365 - 97,448 76,365 153,120 235,065 726,325 824,055 48.6 - - 25.0 - 35.8 - - 35.8 - 34.9 6.7 29.8 Granted Terms and conditions for each grant Vested 2012/2011 Number Date Fair Value Per option Fair value $ Exercise Price $ Expiry date First exercise date Last exercise date Number Directors P A Ingram 2012 3,000,000 9 Dec 11 .016 48,480 0.049 30 Nov14 9 Dec 11 30 Nov 14 3,000,000 2011 A P Rovira 2012 - - - - - - - - - - 2011 2,000,000 14 Dec10 .0546 109,260 0.130 W Martinick 2012 - - - - - - - - - - - - - - 14Dec10 30 Nov 13 2,000,000 - - - 2011 500,000 14Dec10 .0546 27,315 0.130 30Nov13 14Dec10 30 Nov 13 500,000 J W Saleeba 2012 - - - - - - - - - 2011 500,000 14Dec10 .0546 27,315 0.130 30Nov13 14Dec10 30Nov13 500,000 Executives B Dickson 2012 - - 2011 1,500,000 14Dec10 Total 2012 3,000,000 2011 4,500,000 - .0546 .016 0.546 - - - - - - 81,945 0.130 30Nov13 14Dec10 30 Nov 13 1,500,000 48,480 245,835 3,000,000 4,500,000 Value of Options granted as part of remuneration was calculated in accordance with AASB 2: Share Based Payments. 14 Azure Minerals Limited – 2012 Annual Report Directors' Report Compensation options (cont’d) Fair Value per options granted during the year Value of options granted during the year Value of options exercised during the year Value of options lapsed during the year Remuneration consisting of options for the year $ $ Directors P A Ingram 2012 0.016 48,480 2011 A P Rovira 2012 2011 J W Saleeba 2012 2011 W G Martinick 2012 2011 Executives B Dickson 2012 2011 - - 0.055 - 0.055 - 0.055 - 0.055 - - 109,260 - 27,315 - 27,315 - 81,945 $ - - - - - - - - - - $ - - - - - - - (16,400) - - % 48.6 - - 25.0 - 35.8 - 35.8 - 34.9 There were no alterations to the terms and conditions of options granted as remuneration since their grant date. There were neither forfeitures nor shares issued on exercise of Compensation Options during 2012 or 2011. The Company’s remuneration policy prohibits directors and executives from entering into transactions or arrangements which limit the economic risk of participating in unvested entitlements. 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 (2011: 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: (cid:19) Term of agreement - 1 years commencing 1 July 2012. (cid:19) Base salary, exclusive of superannuation, of $300,000 to be reviewed annually by the remuneration committee. (cid:19) 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: (cid:19) Term of agreement – 1 years commencing 1 July 2012 (cid:19) Fixed fee, $12,760 per month. (cid:19) 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. 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. 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. During the year 3,000,000 options exercisable at $0.49 on or before 30 November 2014 were issued to Directors and Executives. (2011:4,500,000 exercisable at $0.13 on or before 30 November 2013) No options were exercised during the financial year and no options have been exercised since the end of the financial year. During the year 900,000 (2011: 900,000) 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. 15 Azure Minerals Limited – 2012 Annual Report Directors' Report E Additional Information Performance based remuneration Details of remuneration: options Other than the award of options and given the current cash resources of the Group, 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 2012/13 financial year. Company’s Performance Company’s share price performance The Company’s share price performance shown in the below graph is a reflection of the Company’s performance during the year. The variable components of the executives’ remuneration including short-term and long-term incentives are indirectly linked to the Company’s share price performance. The graph below shows the Company’s share price performance during the financial year ended 30 June 2012. Company's Share Price Performance $0.14 $0.12 $0.10 $0.08 $0.06 $0.04 $0.02 $0.00 $ e c i r P e r a h S Loss per share 1 1 - l u J - 1 0 1 1 - l u J - 1 3 1 1 - g u A - 0 3 1 1 - p e S - 9 2 1 1 - t c O - 9 2 1 1 - v o N - 8 2 1 1 - c e D - 8 2 2 1 - n a J - 7 2 2 1 - b e F - 6 2 2 1 - r a M - 7 2 2 1 - r p A - 6 2 - y a M - 6 2 2 1 2 1 - n u J - 5 2 Below is information on the Company’s loss per share for the previous four financial years and for the current year ended 30 June 2012. Basic loss per share (cents) 2012 (0.9) 2011 (1.2) 2010 (0.9) 2009 (1.9) 2008 (3.3) Voting and comments made at the company’s 2011 Annual General Meeting Azure Minerals received more than 90% of “yes” votes on its remuneration report for the 2011 financial year. The company did not receive any specific feedback at the AGM or throughout the year on its remuneration practices End of Audited Remuneration Report 16 Azure Minerals Limited – 2012 Annual Report 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 20,500,000 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 Exercisable at 4.9 cents, on or before 30 November 2014 3,000,000 Exercisable at 25 cents, on or before 30 November 2012 (500,000) Exercisable at 25 cents, on or before 31 January 2012 (400,000) Total options issued and lapsed in the year to 30 June 2012 Total number of options outstanding as at 30 June 2012 and at the date of this report The balance is comprised of the following Date granted 6 Dec 2006 9 Dec 2009 14 Dec 2010 9 Dec 2011* Expiry date 31 Jan 2013 30 Nov 2012 30 Nov 2013 30 Nov 2014 Exercise price (cents) 35.0 8.8 13.0 4.9 Total number of options outstanding at the date of this report Total Number of options 18,400,000 3,000,000 (500,000) (400,000) 2,100,000 20,500,000 Number of options 500,000 12,500,000 4,500,000 3,000,000 20,500,000 * These options were granted as remuneration to Directors. Details of options granted to officers are disclosed at note 25. 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. 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 $19,980 (2011: $19,092) 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 may 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. 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 17 Azure Minerals Limited - Financial Statements Corporate Governance Statement Approach to Corporate Governance Azure Minerals Limited (Company) has adopted 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 2nd edition (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. In compliance with the "if not, why not" reporting regime, where, after due consideration, the Company's corporate governance practices depart from a recommendation, the Board has offered full disclosure and an explanation for the adoption of its own practice. The following governance-related documents can be found on the Company's website at www.azureminerals.com.au, under the section marked “Corporate”, "Corporate Governance": Charters Board Audit Committee Nomination Committee Remuneration Committee Policies and Procedures Policy and Procedure for Selection and (Re) Appointment of Directors Process for Performance Evaluations Policy on Assessing the Independence of Directors Diversity Policy (summary) Code of Conduct (summary) Policy on Continuous Disclosure (summary) Compliance Procedures (summary) Procedure for the Selection, Appointment and Rotation of External Auditor Shareholder Communication Policy Risk Management Policy (summary) Set out below is a report by the Company on how it has followed (or otherwise departed from) each of the recommendations during the year ending 30 June 2012 (Reporting Period). The information in this statement is current at 24 September 2012. Board Roles and responsibilities of the Board and Senior Executives (Recommendations: 1.1, 1.3) The Company has established the functions reserved to the Board, and those delegated to senior executives 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. 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, directly to the Chair or the lead independent director, as appropriate. The Company’s Board Charter is disclosed on the Company’s website. Skills, experience, expertise and period of office of each Director (Recommendation: 2.6) A profile of each Director setting out their skills, experience, expertise and period of office is set out in the Directors' Report. The mix of skills and diversity for which the Board is looking to achieve in membership of the Board is represented by the Board’s current composition. While the Company is at exploration stage, it does not wish to increase the size of the Board, and considers that the Board weighted towards technical experience is appropriate at this stage of the Company’s development. 19 Azure Minerals Limited - Financial Statements Corporate Governance Statement Director independence (Recommendations: 2.1, 2.2, 2.3, 2.6) The Board has a majority of directors who are independent. The Board considers the independence of directors having regard to the relationships listed in Box 2.1 of the Principles and Recommendations and the Company’s materiality thresholds. The Board has agreed on the following guidelines, as set out in the Company's Board Charter for assessing the materiality of matters: (cid:120) (cid:120) (cid:120) (cid:120) Statement of Financial Position 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. 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, could affect the Company’s rights to its assets, if accumulated would trigger the quantitative tests, involve a contingent liability that would have a probable effect of 5% or more on statement of financial position or profit and loss items, or 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 which triggers any of the quantitative tests, contain or trigger change of control provisions, are between or for the benefit of related parties, or otherwise trigger the quantitative tests. The independent directors of the Company are Wolf Martinick, John Saleeba (resigned on 30 November 2011) and Peter Ingram (appointed 12 October 2011). 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. The non-independent director of the Company is Anthony Rovira. Anthony Rovira is not independent as he is the Company’s Managing Director. Mr Rovira was also Chair of the Board until 1 December 2011. While the Board recognises the importance of the need for the division of responsibilities between the Chair and Managing Director, the Board considered that Anthony Rovira was the most appropriate person for the position of Executive Chair given his industry experience, and the size and current activities of the Company. The Board also believed that Antony Rovira’s appointment as Chair was in line with shareholder expectation. However, on 1 December 2011, Mr Rovira relinquished his role as Chair to focus solely on his position as Managing Director and Mr Ingram was appointed independent Chair of the Board. The Board recognised the need to divide the role of Managing Director and Chair, in compliance with Recommendation 2.3 of the Principles and Recommendations. Independent professional advice (Recommendation: 2.6) 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 from the Chair for incurring such expense, the Company will pay the reasonable expenses associated with obtaining such advice. Selection and (Re)Appointment of Directors (Recommendation: 2.6) In determining candidates for the Board, the Nomination Committee (or equivalent) follows a prescribed process whereby it evaluates the mix of skills, experience, expertise and diversity of the existing Board. In particular, the Nomination Committee (or equivalent) is to identify the particular skills and diversity that will best increase the Board's effectiveness. Consideration is also given to the balance of independent directors. Potential candidates are identified and, if relevant, the Nomination Committee (or equivalent) recommends an appropriate candidate for appointment to the Board. Any appointment made by the Board is subject to ratification by shareholders at the next general meeting. The Board recognises that Board renewal is critical to performance and the impact of Board tenure on succession planning. Each director other than the Managing Director, must not hold office (without re-election) past the third annual general meeting of the Company following the director's appointment or three years following that director's last election or appointment (whichever is the longer). However, a director appointed to fill a casual vacancy or as an addition to the Board must not hold office (without re-election) past the next annual general meeting of the Company. At each annual general meeting a minimum of one director or one third of the total number of directors must resign. A director who retires at an annual general meeting is eligible for re-election at that meeting. Re-appointment of directors is not automatic. The Company’s Policy and Procedure for the Selection and Re (Appointment) of Directors is disclosed on the Company’s website. 20 Azure Minerals Limited - Financial Statements Corporate Governance Statement Board committees Nomination Committee (Recommendations: 2.4, 2.6) The Board believed that the former composition of the Board did not make the establishment of a separate Nomination Committee practicable, and the Board believed that there would be no efficiencies or other benefits gained by establishing a separate Nomination Committee. Accordingly, the Board performed the role of the Nomination Committee. Items that were usually required to be discussed by a Nomination Committee were marked as separate agenda items at Board meetings when required. When the Board convened as the Nomination Committee it carried out those functions which are delegated to it in the Company’s Nomination Committee Charter. The Board dealt with any conflicts of interest that occurred when convening in the capacity of the Nomination Committee by ensuring that the director with conflicting interests was not a party to the relevant discussions. On 10 April 2012, the Board established a combined Nomination and Remuneration Committee comprised of the Board’s two independent non-executive directors; Mr Peter Ingram (Chair) and Mr Wolf Martinick. The full Board, in its capacity as the Nomination Committee, held one meeting during the Reporting Period, which all Board members attended. The Board has adopted a Nomination Committee Charter which describes the role, composition, functions and responsibilities of the Nomination Committee. The Company’s Nomination Committee Charter is disclosed on the Company’s website. Audit and Risk Management Committee (Recommendations: 4.1, 4.2, 4.3, 4.4) The Board established an Audit Committee comprised of Dr Wolf Martinick (Chair) and Mr John Saleeba (resigned 30 November 2011), both independent non-executive directors. On 10 April 2012, the Board formed an Audit and Risk Management Committee comprised of Dr Wolf Martinick (Chair) and Mr Peter Ingram, both independent non-executive directors. Given the size and structure of the Board, the Company is unable to structure the Audit Committee in accordance with Recommendation 4.2. However, the Audit and Risk Committee has been structured so that it is in accordance with Recommendation 4.2, except that it only has two members. The Audit Committee held one meeting and the Audit and Risk Committee held one meeting during the Reporting Period. Details of the directors’ attendance at the meetings are set out in the following table: Name No. of meetings eligible to attend No. of meetings attended Wolf Martinick (Chair) John Saleeba (resigned 30 November 2011) Peter Ingram (appointed 12 October 2011). 2 1 1 2 1 1 The Board has adopted an Audit Committee Charter which describes the role, composition, functions and responsibilities of the Audit Committee. The Company has developed a Risk Management Policy. Details of each of the director's qualifications are set out in the Directors' Report. Each of the members of the Audit and Risk Committee consider themselves to be financially literate and have an understanding of the industry in which the Company’s operates. The Company’s Chief Financial Officer, Mr Brett Dickson, is a Certified Practising Accountant with a Bachelors degree in Economics and is invited to attend Audit Committee meetings by invitation. The Company has established a Procedure 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. The Company’s Audit Committee Charter and Procedure for Selection, Appointment and Rotation of External Auditor are disclosed on the Company’s website. 21 Azure Minerals Limited - Financial Statements Corporate Governance Statement Remuneration Committee (Recommendations: 8.1, 8.2, 8.3, 8.4) The Board established a Remuneration Committee comprised of Wolf Martinick (Chair) and John Saleeba (resigned 30 November 2011). As noted above, on 10 April 2012, the Board formed a combined Nomination and Remuneration Committee comprise of Wolf Martinick (Chair) and Peter Ingram, both independent non-executive directors. The Nomination and Remuneration Committee is not structured in accordance with Recommendation 8.2 as it only has two members. However, the Board considers that the composition is appropriate as it comprises the Board’s two non-executive directors. Neither the Remuneration Committee or the Nomination and Remuneration Committee met during the Reporting Period. The Board has adopted a Remuneration Committee Charter which describes the role, composition, functions and responsibilities of the Remuneration Committee. 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 Company’s policy is to remunerate non-executive directors at a fixed fee for time, commitment and responsibilities. Remuneration for non-executive directors is not linked to individual performance. From time to time the Company may grant options to non-executive directors. The grant of options is designed to recognise and reward efforts as well as to provide nonexecutive directors with additional incentive to continue those efforts for the benefit of the Company. The maximum aggregate amount of fees (including superannuation payments) that can be paid to non-executive directors is subject to approval by shareholders at general meeting. Executive pay and reward 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. 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, 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. However, it did apply to Mr. John Saleeba. Mr Saleeba retired from the Board on 30 November 2011 and was paid a retirement benefit of $77,011. Further details can be found in the Remuneration Report. 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. The Company’s Remuneration Committee Charter is disclosed on the Company’s website. Performance evaluation Senior executives (Recommendations: 1.2, 1.3) The Managing Director is responsible for evaluating the performance of senior executives. The evaluations are performed by conducting interviews with the senior executives as required. During the interview key performance indicators are set and agreed on, which will form the basis for the following years’ review. The Nomination Committee (or equivalent), at least annually, evaluates the performance of the Managing Director by formal interview. In reviewing the performance of the Managing Director, performance against pre-determined budgets and performance criteria set the previous year (if any) is assessed. During the Reporting Period an evaluation of the Managing Director and other senior executives took place in accordance with the process disclosed above. Board, its committees and individual directors (Recommendations: 2.5, 2.6) The Chair is responsible for evaluation of the Board and, when deemed appropriate, Board committees and individual directors. The Chair evaluates the Board and, when deemed appropriate, Board committees and individual directors by utilising questionnaires which are completed by each director. The Chair, in consultation with the Company Secretary, then reviews the questionnaires and holds round table discussions with the Board to discuss the questionnaires. The Chair holds discussions with individual directors, if required. During the Reporting Period an evaluation of the Board and individual directors took place in accordance with the process disclosed above. 22 Azure Minerals Limited - Financial Statements Corporate Governance Statement The Company’s Process for Performance Evaluation is disclosed on the Company’s website. Ethical and responsible decision making Code of Conduct (Recommendations: 3.1, 3.5) The Company has established a Code of Conduct as to the practices necessary to maintain confidence in the Company's integrity, the practices necessary to take into account its legal obligations and the reasonable expectations of its stakeholders and the responsibility and accountability of individuals for reporting and investigating reports of unethical practices. A summary of the Company’s Code of Conduct is disclosed on the Company’s website. Diversity (Recommendations: 3.2, 3.3, 3.4, 3.5) The Company has established a Diversity Policy, which includes requirements for the Board to establish measurable objectives for achieving gender diversity and for the Board to assess annually both the objectives and progress towards achieving them. The Board has not set measurable objectives for achieving gender diversity. Given the Company’s stage of development as an exploration company, the number of employees in Australia and the nature of the labour market in Mexico, the Board considers that it is not practical to set measurable objectives for achieving gender diversity. The proportion of women employees in the whole organisation, women in senior executive positions and women on the Board are set out in the following table: Whole organisation Senior executive positions Board Proportion of women 2 out of 7 (28%) 0 out of 1 (0%) 0 out of 3 (0%) The Company’s Diversity Policy is disclosed on the Company’s website. Continuous Disclosure (Recommendations: 5.1, 5.2) The Company has established written policies and procedures designed to ensure compliance with ASX Listing Rule disclosure requirements and accountability at a senior executive level for that compliance. A summary of the Company’s Policy on Continuous Disclosure and Compliance Procedures are disclosed on the Company’s website. Shareholder Communication (Recommendations: 6.1, 6.2) The Company has designed a communications policy for promoting effective communication with shareholders and encouraging shareholder participation at general meetings. The Company’s Shareholder Communication Policy is disclosed on the Company’s website. Risk Management Recommendations: 7.1, 7.2, 7.3, 7.4) The Board has adopted a Risk Management Policy and Risk Management Procedures. Under the Risk Management Policy, the Board oversees the processes by which risks are managed. This includes defining the Company’s risk appetite, monitoring of risk performance and those risks that may have a material impact to the business. Management is responsible for the implementation of the risk management and internal control system to manage the Company’s risks and to report to the Board whether those risks are being effectively managed. In addition, the following risk management measures have been adopted by the Board to manage the Company’s material business risks: (cid:127) (cid:127) (cid:127) the Board has established authority limits for management, which, if proposed to be exceeded, requires 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. 23 Azure Minerals Limited - Financial Statements Corporate Governance Statement The Company’s system to manage its material business risks includes the preparation of a risk register by management to identify the Company’s material business risks, analyse those risks, evaluate those risks (including assigning a risk owner to each risk) and treat those risks. Risks and their management are to be monitored and reviewed at least half yearly by senior management. The risk register is to be updated and a report submitted to the Managing Director. The Managing Director is to provide a risk report at least half yearly to the Board and an annual review of the risk profile is to be undertaken to ensure relevancy. Specific areas of risk that were identified in the report included operational activities, asset management (including title to exploration and mining leases) and staff. 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. The Board has received a report from management as to the effectiveness of the Company’s management of its material business risks for the Reporting Period. The Managing Director and the Chief Financial Officer 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 reporting risks. A summary of the Company’s Risk Management Policy is disclosed on the Company’s website. 24 Azure Minerals Limited - Financial Statements Consolidated Statements of Comprehensive Income YEAR ENDED 30 JUNE 2012 Notes Consolidated Revenue from continuing activities Expenditure Depreciation Salaries and employee benefits expense Directors fees Exploration expenses Exploration expenses reimbursed Travel expenses Promotion expenses Administration expenses Consulting expenses Insurance expenses Share based payment expense (Profit) from equipment sales Provision for doubtful debts Other expenses 5 6 6 6 28 2012 $ 2011 $ 109,777 209,669 (39,442) (570,562) (110,747) (4,094,247) 2,104,045 (216,121) (58,943) (107,191) (29,599) (44,722) (48,480) 8,771 (426,978) (187,891) (32,440) (558,148) (90,000) (3,982,806) 1,145,538 (209,491) (48,626) (120,207) (261,340) (48,079) (245,835) - - (220,040) Loss from continuing operations before income tax (3,712,330) (4,461,805) Income tax benefit/(expense) 7 - - Loss from continuing operations after income tax (3,712,330) (4,461,805) Loss is attributable to: The owners of Azure Minerals Limited Other comprehensive income/(loss) Change to available-for –sale financial assets, net of tax Exchange differences on translation of foreign operations Other comprehensive income/(loss) for the year net of tax 3,712,330 4,461,805 (36,313) 8,336 (58,268) (126,411) (94,581) (118,075) Total comprehensive loss for the Year (3,806,911) (4,579,880) Total comprehensive income is attributable to: The owners of Azure Minerals Limited (3,806,911) (4,579,880) Basic loss per share (cents per share) Diluted loss per share (cents per share) 23 (0.9) (0.9) (1.2) (1.2) The above Consolidated Statements of Comprehensive Income are to be read in conjunction with the Notes to the Financial Statements. 25 Azure Minerals Limited - Financial Statements Consolidated Statements of Financial Position AT 30 JUNE 2012 ASSETS Current Assets Cash and cash equivalents Trade and other receivables Total Current Assets Non-Current Assets Available for sale investments 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 Non-Current Liabilities Provisions Total Non-Current Liabilities TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Accumulated losses TOTAL EQUITY Notes Consolidated 2012 $ 2011 $ 19 8 9 10 11 12 14 15 15 643,525 332,594 976,119 4,689,383 879,826 5,569,209 12,967 126,988 1,580,221 45,378 1,765,554 49,280 118,598 1,331,811 45,378 1,545,067 2,741,673 7,114,276 213,259 68,388 281,647 766,861 133,959 900,820 42,687 42,687 37,686 37,686 324,334 938,506 2,417,339 6,175,770 16 17(a) 39,592,568 1,120,067 (38,295,296) 2,417,339 39,592,568 1,166,168 (34,582,966) 6,175,770 The above Consolidated Statements of Financial Position are to be read in conjunction with the Notes to the Financial Statements 26 Azure Minerals Limited - Financial Statements Consolidated Statements of Changes in Equity FOR THE YEAR ENDED 30 JUNE 2012 30 JUNE 2012 Issued Share Capital Share Option Reserve Available for Sale Assets Reserve $ $ $ Foreign Currency Translation Reserve $ Accumulated Losses Total $ $ 39,592,568 1,510,777 8,336 (352,945) (34,582,966) 6,175,770 - - - - - - - - - - - - (3,712,330) (3,712,330) - (36,313) (58,268) - - - (58,268) (36,313) (36,313) (58,268) (3,712,330) (3,806,911) 48,480 48,480 - - - - - - 48,480 48,480 39,592,568 1,559,257 (27,977) (411,213) (38,295,296) 2,417,339 Balance at 1 July 2011 Loss for period Other comprehensive income/(loss) Exchange differences on operations Change in fair value of available-for-sale financial assets translation of foreign Total other comprehensive loss Total comprehensive loss for the period Transactions with owners in their capacity as owners: Share based payments Total transactions with owners Balance as at 30 June 2012 30 JUNE 2011 Issued Share Capital Share Option Reserve Available for Sale Assets Reserve $ $ $ Foreign Currency Translation Reserve $ Accumulated Losses Total $ $ Balance at 1 July 2010 35,250,678 1,264,942 - (226,534) (30,121,161) 6,167,925 Loss for period Other comprehensive income/(loss) Exchange differences on operations Change in fair value of available-for-sale financial assets translation of foreign Total other comprehensive income/(loss) Total comprehensive income/(loss) for the period - - - - - Transactions with owners in their capacity as owners: Issue of share capital, net of transaction costs 4,341,890 - - - - - - Share based payments Total transaction with owners Balance at 30 June 2011 - 245,835 4,341,890 245,835 - - (4,461,805) (4,461,805) - 8,336 (126,411) - 8,336 (126,411) - - - (126,411) 8,336 (118,075) 8,336 (126,411) (4,461,805) (4,579,880) - - - - - - - - - 4,341,890 245,835 4,587,725 39,592,568 1,510,777 8,336 (352,945) (34,582,966) 6,175,770 The above Consolidated Statements of Changes in Equity should be read in conjunction with the accompanying notes. 27 Azure Minerals Limited - Financial Statements Consolidated Statements of Cash Flows FOR THE YEAR ENDED 30 JUNE 2012 Notes Consolidated 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 Option payments for projects Security deposits NET CASH (OUTFLOW) INFLOW FROM INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of ordinary shares Share issue costs NET CASH (OUTFLOW) INFLOW FROM FINANCING ACTIVITIES 2012 $ 2011 $ (1,748,636) 170,932 (2,126,744) (1,247,350) 166,075 (3,317,751) 19(b) (3,704,448) (4,399,026) (57,643) (364,943) - (56,882) (357,264) (23,070) (422,586) (437,216) - - - 4,570,410 (304,853) 4,265,557 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 19(a) (4,127,034) (570,685) 4,689,383 5,242,755 81,176 643,525 17,313 4,689,383 The above Consolidated Statements of Cash Flows are to be read in conjunction with the Notes to the Financial Statements. 28 Azure Minerals Limited – Financial Statements Notes to the Consolidated 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. Compliance with AIFRSs The consolidated financial statements of Azure Minerals Limited and the separate financial statements of Azure Minerals Limited also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). 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. 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 2012 of $3,712,330 (2011: $4,461,805) and experienced net cash outflows from operating activities of $3,704,448 (2011: $4,399,026). At 30 June 2012, the Consolidated Entity had net current assets of $694,472 (30 June 2011: net current assets of $4,668,389). 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 directors 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 may be required for the Consolidated Entity to continue to actively explore its mineral properties in the long term. The Directors have reviewed the business outlook and the assets and liabilities of the Consolidated Entity and are of the opinion that the use of the going concern basis of accounting is appropriate. Since the end of the end of the reporting date the Group has conducted a share purchase plan (“Plan”), refer Note 22 for further information. However, if the Consolidated Entity is unable to achieve the above, there is significant uncertainty whether the Consolidated Entity will be able to continue as a going concern and therefore whether it will be able to pay its debts as and when they fall due and realise its assets and extinguish its liabilities in the normal course of business at the amounts stated in the financial report. The financial report does not include any adjustments relating to the recoverability or classification of recorded asset amounts, nor the amounts or classification of liabilities that might be necessary should the Consolidated Entity not be able to continue as a going concern. (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 the reporting 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 acquisition 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. Azure Minerals Limited - Financial Statements Notes continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d) (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 reporting 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) 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. (d) 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. (e) 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 statement of financial position 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. 30 Azure Minerals Limited - Financial Statements Notes continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d) (f) 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 statement of financial position 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. (g) 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 profit or loss, 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: (cid:120) (cid:120) 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 statement of financial position. These differences are recognised in the profit or loss in the period in which the operation is disposed. (h) 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. (i) Employee benefits Provision is made for employee benefits accumulated as a result of employees rendering services up to the reporting date. These benefits include wages and salaries, annual leave, and long service leave. Liabilities arising in respect of wages and salaries, annual leave and any other employee benefits expected to be settled within twelve months of the reporting date are measured at their nominal amounts based on remuneration rates which are expected to be paid when the liability is settled. All other employee benefit liabilities are measured at the present value of the estimated future cash outflow to be made in respect of services provided by employees up to the reporting date. In determining the present value of future cash outflows, the market yield as at the reporting date on national government bonds, which have terms to maturity approximating the terms of the related liability, are used. Share-based payments The 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 reporting 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. 31 Azure Minerals Limited - Financial Statements Notes continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d) (i) Employee benefits (Cont’d) 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. (j) Revenue recognition Interest revenue is recognised on a time proportionate basis that takes into account the effective yield on the financial assets. (k) 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. (l) 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. (m) 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 statement of financial position. (n) Comparative figures When required by Accounting Standards, comparative figures have been adjusted to conform to changes in presentation for the current financial year. (o) 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 statement of financial position. (p) Segment reporting Operating segments are reported in a manner consistent with the internal reporting to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive Chairman. (q) Investments and 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. Financial assets at fair value through profit and loss Financial assets at fair value through profit and loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designed as hedges. Assets in this category are classified as current assets if they are expected to be settled with 12 months; otherwise they are classified as non-current. 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 reporting date which are classified as non-current assets. Loans and receivables are included in trade and other receivables in the statement of financial position 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. 32 Azure Minerals Limited - Financial Statements Notes continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d) (q) Investments and Financial assets (Cont’d) Subsequent measurement Loans and receivables are carried at amortised cost using effective interest method. Impairment The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. Impairment losses are recognised in the profit or loss. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. (r) 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 reporting 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 reporting 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 reporting 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. (s) 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 reporting 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. (t) New Accounting Standards for Application in future Periods The AASB has issued new and amended accounting standards and interpretations that have mandatory application dates for future reporting periods. The Group has decided against early adoption of these standards. A discussion of those future requirements and their impact on the Group follows: AASB 9: Financial Instruments and AASB 2010-7: Amendments to Australian Accounting Standards arising from AASB 9 [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 120, 121, 127, 128, 131, 132, 136, 137, 139, 1023 & 1038 and Interpretations 2, 5, 10, 12, 19 & 27] (applicable for annual reporting periods commencing on or after 1 January 2013). These standards are applicable retrospectively and amend the classification and measurement of financial instruments, as well as recognition and de-recognition requirements if financial instruments. The Group has not yet determined the potential impact on the financial statements. The key changes made to accounting requirements include: (cid:127) simplifying the classifications of financial assets into those carried at amortised cost and those carried at fair value; (cid:127) simplifying the requirements for embedded derivatives; (cid:127) removing the tainting rules associated with-held-to-maturity assets; (cid:127) removing the requirements to separate and fair value embedded derivatives for financial assets carried at amortised cost; (cid:127) allowing an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument; and (cid:127) reclassifying financial assets where there is a change in an entity's business model as they are initially classified based on: a. b. the objective of the entity's business model for managing the financial assets; and the characteristics of the contractual cash flows. 33 Azure Minerals Limited - Financial Statements Notes continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d) (t) New Accounting Standards for Application in future Periods (Cont’d) (cid:127) Requiring an entity that chooses to measure a financial liability at fair value to present the portion of the change in its fair value due to changes in the entity’s own credit risk in Other Comprehensive Income, except when that would create an accounting mismatch. If such a mismatch would be created or enlarged; the entity is required to present all changes in fair value (including the effects of changes in the credit risk of the liability) in profit or loss. (cid:127) AASB 10: Consolidated Financial Statements, AASB 11: Joint Arrangements, AASB 12: Disclosure of Interests in Other Entities, AASB 127: Separate Financial Statements (August 2011), AASB 128: Investments in Associates and Joint Ventures (August 2011) and AASB 2011-7: Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards [AASB 1, 2, 3, 5, 7, 9, 2009-11, 101, 107, 112, 118, 121, 124, 132, 133, 136, 138, 139, 1023 & 1038 and interpretations 5, 9, 16 & 17] (applicable for annual reporting periods commencing on or after 1 January 2013). AASB 10 replaces parts of AASB 127: Consolidated and Separate Financial Statements (March 2008, as amended) and Interpretation 112: Consolidation – Special Purpose Entities. AASB 10 provides a revised definition of control and additional application guidance so that a single control model will apply to all investees. The Group has not yet been able to reasonably estimate the impact of the Standard on its financial statements. AASB 11 replaces AASB 131: Interests in Joint Ventures (July 2004, as amended). AASB 11 requires joint arrangements to be classified as either “joint operations” (where parties that have joint control of the arrangements have rights to the assets and obligations for the liabilities) or “joint ventures” (where the parties that have joint control of the arrangement have rights to the net assets of the arrangement). Joint ventures are required to adopt the equity method of accounting (proportionate consolidation is no longer allowed). AASB 12 contains the disclosure requirements applicable to entities that hold an interest in a subsidiary, joint venture, joint operation or associate. AASB 12 also introduces the concept of “structured entity”, replacing the “special purpose entity” concept currently used in interpretation 112, and requires specific disclosures in respect of any investments in unconsolidated structured entities. This standard will affect disclosures only and is not expected to significantly impact the Group. To facilitate the application of AASB’s 10, 11 and 12, revised versions of AASB 127 and AASB 128 have also been issued. These standards are not expected to significantly impact the Group. (cid:127) AASB 13: Fair Value Measurement and AASB 2011-8: Amendments to Australian Accounting Standards arising from AASB 13 [AASB 1, 2, 3, 4, 5, 7, 9, 2009-11, 101, 102, 108, 110, 116, 117, 118, 119, 120, 121, 128, 131, 132, 133, 134, 136, 138, 139, 140, 141, 1004, 1023 & 1038 and interpretations 2, 4, 12, 13, 14, 17, 19, 131 & 132] (applicable for annual reporting periods commencing on or after 1 January 2013). AASB 13 defines fair values, sets out in a single Standard a framework for measuring fair value, and requires disclosures about fair value measurement. AASB 13 requires: - Inputs to all fair value measurements to be categorised in accordance with a fair value hierarchy; - Enhanced disclosure regarding all assets and liabilities (including, but not limited to, financial assets and financial liabilities) to be measured at fair value These standards are not expected to significantly impact the Group. (cid:127) AASB 119: Employee Benefits (September 2011) and AASB 2011-10: Amendments to Australian Accounting Standards arising from AASB 119 (September 2011) [AASB 1, AASB 101, AASB 124, AASB 134, AASB 1049 & AASB 2011-8 and Interpretation 14] (applicable for annual reporting periods commencing on or after 1 January 2013) These standards introduce a number of changes to accounting and presentation of defined benefit plans. The Group does not have any defined benefit plans and so is not impacted by the amendment. AASB 119 (September 2011) also includes changes to the accounting for termination benefits that require an entity to recognise an obligation for such benefits at the earlier of: (i) For an offer that may be withdrawn – when the employee accepts; (ii) For an offer that cannot be withdrawn – when the offer is communicated to the affected employees: and (iii) Where the termination is associated with a restructuring of activities under AASB 137: Provisions, Contingent Liabilities and Contingent Assets, and if earlier than the first two conditions – when the related restricting costs are recognised. The Group has been able to reasonably estimate the impact of these changes to AASB 119. 34 Azure Minerals Limited - Financial Statements Notes continued 2 . FINANCIAL RISK MANAGEMENT Overview The Company and Group have exposure to the following risks from their use of financial instruments: (cid:19) credit risk (cid:19) (cid:19) 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 cash and cash equivalents. For the Company it arises from receivables due from subsidiaries. Cash and Cash Equivalents The Group manages its credit risk on cash and cash equivalents by only dealing with banks licensed to operate in Australia. Trade and other receivables As the Group operates in the mining exploration sector, it generally 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 reporting 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 Impairment losses Note 8 19 12 Consolidated Carrying amount 2012 2011 317,435 643,525 45,378 863,332 4,689,383 45,378 None of the Company’s other receivables are past due (2011: nil). However, Minera Piedra Azul C.A. de C.V.(“MPA”) a 100% owned, Mexican incorporated subsidiary of the Company is in dispute with Mexican tax authorities over claims made in its 2008 income tax return. As a result of the dispute, Mexican tax authorities have imposed a fine of $426,978 on MPA, which it has paid under protest. MPA is in the process of appealing the decision and until all appeal avenues are exhausted the Group will carry the amount paid as a receivable. Given that the appeal may be ultimately disallowed a provision against the full amount has been made Other than as described above, 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. At 30 June 2012 the Group does not have any collective impairments on its other receivables other than as described above (2011: nil). The Group places its cash deposits with institutions with a credit rating of AA or better and only with major banks. Guarantees Group policy is to provide financial guarantees only to wholly-owned subsidiaries. There are no guarantees outstanding (2011: Nil) 35 Azure Minerals Limited - Financial Statements Notes continued 2 . FINANCIAL RISK MANAGEMENT (Cont’d) 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 The following are the contractual maturities of financial liabilities at amortised cost: Consolidated 30 June 2012 Trade and other payables 30 June 2011 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 213,259 766,861 - - 213,259 766,861 - - - - - - - - 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 reporting date was as follows, based on notional amounts: Trade receivables Trade payables Gross statement of financial position Forward exchange contracts Net exposure 30 June 2012 USD 442,203 46,583 488,786 - 488,786 30 June 2011 USD 581,906 207,831 789,737 - 789,737 The Company’s exposure to foreign currency risk at 30 June 2012 was nil (2011:Nil). The following significant exchange rates applied during the year: AUD USD Average rate 2012 0.09695 2011 0.9892 Reporting date spot rate 2012 0.9842 2011 1.0596 36 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 equity and decrease 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 2011. 30 June 2012 USD 30 June 2011 USD Consolidated Equity Profit or loss 48,879 48,879 78,974 78,974 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. 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 2012 2011 675,571 4,474,954 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. Group Sensitivity At 30 June 2012 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 $6,889 higher /lower (2011 – change of 100 basis points: $44,749 higher/lower). Fair values Fair values versus carrying amounts The fair values of financial assets and liabilities, together with the carrying amounts shown in the statement of financial position, are as follows: Consolidated 30 June 2012 30 June 2011 Trade and other receivables Cash and cash equivalents Other financial assets Trade and other payables Carrying amount Fair value Carrying amount Fair value 332,594 643,525 45,378 (213,259) 332,594 643,525 45,378 (213,259) 879,826 4,689,383 45,378 (766,861) 879,826 4,689,383 45,378 (766,861) The methods and assumptions used to estimate the fair value of instruments are: Cash and cash equivalent: The carrying amount approximates fair value because of their short-term to maturity. Receivables and payables: The carrying amount approximates fair value. Available-for-sale financial assets: Quoted prices in active markets been used to determine the fair value of listed available-for-sale investments (Level 1). The fair value of these financial assets has been based on the closing quoted bid prices at reporting date, excluding transaction costs. 37 Azure Minerals Limited - Financial Statements Notes continued 2 . FINANCIAL RISK MANAGEMENT (Cont’d) 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 dependent 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. Deferred tax assets Deferred tax assets are recognised for deductible temporary differences when management considers that it is probable that future taxable profits will be available to utilise those temporary differences. SEGMENT INFORMATION 4. The Company currently does not have production and is only involved in exploration. As a consequence, activities in the operating segments are identified by management based on the manner in which resources are allocated, the nature of the resources provided and the identity of service line manager and country of expenditure. Discrete financial information about each of these areas is reported to the executive management team on a monthly basis. Based on this criteria, management has determined that the company has one operating segment being mineral exploration in Mexico. As the company is focused on mineral exploration, the Board monitors the company based on actual versus budgeted exploration expenditure incurred by area of interest. These areas of interest meet aggregating criteria and are aggregated into one reporting sector. This internal reporting framework is the most relevant to assist the Board with making decisions regarding the company and its ongoing exploration activities, while also taking into consideration the results of exploration work that has been performed to date Revenue from external sources Reportable segment loss Reportable segment assets Reportable segment liabilities 30 June 2012 $ - 30 June 2011 $ - (2,422,442) (2,837,268) 1,834,693 (93,166) 1,410,312 (415,662) 38 Azure Minerals Limited - Financial Statements Notes continued 4. SEGMENT INFORMATION (cont’d) Reconciliation of reportable segment loss Reportable segment loss Other profit Unallocated: - Salaries and wages - Travel and accommodation - Office costs - Other corporate expenses - Share based payments - Profit on asset sales - Depreciation Loss before tax Reconciliation of reportable segment assets Reportable segment assets Unallocated: - Cash - Trade and other receivables - Investments - Security deposits - Office plant and equipment Total assets Reconciliation of reportable segment liabilities Reportable segment liabilities Unallocated: - Trade and other payables - Provisions Total liabilities REVENUE FROM CONTINUING OPERATIONS 5. Other revenues Interest Bank interest Total revenues from continuing operations 30 June 2012 $ 30 June 2011 $ (2,422,442) 109,777 (2,837,268) 209,669 (682,377) (216,121) (107,191) (314,825) (48,480) 8,771 (39,442) (648,148) (209,491) (120,207) (578,085) (245,835) - (32,440) (3,712,330) (4,461,805) 1,834,693 1,410,312 643,525 172,319 12,967 45,378 32,791 4,689,383 879,826 49,280 45,378 40,097 2,741,673 7,114,276 (93,166) (415,662) (120,094) (111,074) (324,334) (351,200) (171,644) (938,506) 109,777 109,777 209,669 209,669 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 Provision for doubtful debt 39 32,440 39,442 3,982,806 4,094,247 (1,145,538) (2,104,045) 129,658 60,401 36,967 35,100 - 426,978 Azure Minerals Limited - Financial Statements Notes continued 7. INCOME TAX (a) Income tax expense Current tax Deferred tax Adjustment for current tax of prior periods (b) Numerical reconciliation of income tax expense to prima facie tax payable Loss from continuing operations before income tax expense Tax at the Australian tax rate of 30% (2010: 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Share-based payments Provision for doubtful debt Sundry items Movement in unrecognised temporary differences 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 (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 Deferred Tax Liabilities (at 30%) 2012 $ - - - - (3,712,330) (1,113,699) 14,544 128,093 56,341 (914,721) (131,331) 1,063,337 (21,267) 3,982 - - 3,935 16,099 37,823 5,011,558 3,787,244 719,934 9,576,593 - 2011 $ - - - - (4,461,805) (1,338,542) 73,751 - 57,477 (1,207,314) (110,770) 1,046,138 (20,923) 292,869 - 68,556 (3,737) (16,675) 57,493 4,875,606 2,745,174 785,267 8,511,684 - 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) Provision for doubtful debt (b) 15,159 744,413 (426,978) 332,594 16,494 863,332 - 879,826 (a) Except as described in (b) below, 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. 40 Azure Minerals Limited - Financial Statements Notes continued 8. TRADE AND OTHER RECEIVABLES (cont’d) (b) Minera Piedra Azul C.A. de C.V.(“MPA”) a 100% owned, Mexican incorporated subsidiary of the Company is in dispute with Mexican tax authorities over claims made in its 2008 income tax return. As a result of the dispute, Mexican tax authorities have imposed a fine of $426,978 on MPA, which it has paid under protest. MPA is in the process of appealing the decision and until all appeal avenues have been exhausted the Group will carry the amount paid as a receivable. Given that the appeal may be ultimately disallowed a provision against the full amount has been made. (c) Refer to note 2 for information on the risk management policy of the Group and the credit quality of the Groups receivables. 9. AVAILABLE FOR SALE INVESTMENTS Listed shares at fair value (a) Stoneshield Capital Corp. 2012 $ 2011 $ 12,967 49,280 (a) Available-for-sale investments consist of investments in ordinary shares, and therefore have no fixed maturity date or coupon rate. Stoneshield Capital Corp. is listed on the Toronto Venture Exchange. Fair value has been determined directly by reference to published quotations on active markets. Also refer to Note 2 – Financial Risk Management. At Cost Impairment Fair value adjustment to reserve Fair value at 30 June 10. PLANT AND EQUIPMENT Consolidated At 1 July 2010 Cost Accumulated Depreciation Net Book Amount Year ended 30 June 2011 Opening net book value Additions Disposals Depreciation on disposals Depreciation Charge Foreign exchange translation adjustment Closing net book amount At 30 June 2011 Cost Accumulated Depreciation Net Book Amount Year ended 30 June 2012 Opening net book value Additions Disposals Depreciation on disposals Depreciation Charge Foreign exchange translation adjustment Closing net book amount At 30 June 2012 Cost Accumulated Depreciation Net Book Amount 40,944 - (27,977) 12,967 40,944 - 8,336 49,280 Furniture, fittings and equipment $ Motor Vehicles $ Exploration Equipment $ Total 317,210 (259,605) 57,605 68,050 (47,300) 20,750 38,908 (16,369) 22,539 424,168 (323,274) 100,894 57,605 55,274 - - (22,796) (3,160) 86,923 20,750 - - - (6,759) (2,275) 11,718 22,539 2,849 - - (2,889) (2,544) 19,957 100,894 58,123 - - (32,440) (7,979) 118,598 366,908 (279,985) 86,923 59,798 (48,080) 11,718 38,465 (18,508) 19,957 465,171 (346,573) 118,598 86,923 13,168 - - (24,557) (3,920) 71,614 11,718 37,507 (21,650) 19,677 (11,967) (819) 34,466 19,957 6,968 - - (2,918) (3,099) 20,908 118,598 57,643 (21,650) 19,677 (39,442) (7,838) 126,988 373,935 (302,321) 71,614 70,744 (36,278) 34,466 41,581 (20,673) 20,908 486,260 (359,272) 126,988 41 Azure Minerals Limited - Financial Statements Notes continued 2012 $ 2011 $ 11. 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 1,580,221 1,331,811 Opening net book amount Additions Disposals Closing net book amount 1,331,811 248,410 - 1,580,221 1,109,034 222,777 - 1,331,811 Recovery of the capitalised amount is dependent upon successful development and commercial exploitation, or alternatively, sale. 12. OTHER FINANCIAL ASSETS (NON-CURRENT) Security Deposit 45,378 45,378 These financial assets are carried at cost. 13. 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* 2012 % 100 100 100 100 2011 % 100 100 100 - Azure Mexico Pty Ltd Minera Piedra Azul, S.A. de C.V Minera Capitana S.A. de C.V Az-Perth S.A. de C.V. Australia Mexico Mexico Mexico Ordinary Ordinary Ordinary Ordinary *Percentage of voting power is in proportion to ownership 14. TRADE AND OTHER PAYABLES (CURRENT) Trade payables 213,259 766,861 Information about the Groups financial risk management policies is disclosed in note 2. 15. PROVISIONS CURRENT Employee benefits Non-executive directors retirement benefits NON-CURRENT Employee benefits 68,388 - 68,388 56,948 77,011 133,959 42,687 37,686 The provisions for employee benefits include accrued annual leave and long service leave. For long service leave it covers all unconditional entitlements where employees have completed the required period of service. Based on past experience employee entitlements that represent annual leave are presented as current and employee entitlements that are in relation to long serve leave are present as non-current. 42 Azure Minerals Limited - Financial Statements Notes continued 16. 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 $0.09 per share Share issue expenses 30 June closing balance Consolidated 2012 Number of shares 394,000,000 394,000,000 2011 $ 39,592,568 39,592,568 Number of shares 394,000,000 394,000,000 $ 39,592,568 39,592,568 2012 2011 Number of shares 394,000,000 - - 394,000,000 $ 39,592,568 - - 39,592,568 Number of shares 343,217,666 50,782,334 - 394,000,000 $ 35,250,678 4,570,410 (228,520) 39,592,568 Funds raised from the share issue during the 2011 year were used to progress the company’s exploration activities and for general working capital. (c) Movements in unlisted options on issue 1 July Opening Balance Issued during the year -Exercisable at 13.0 cents, on or before 30 Nov 2013 - Exercisable at 4.9 cents, on or before 30 Nov 2014 Forfeited during the year - Exercisable at 25 cents, on or before 30 Nov 2008 - Exercisable at 17.5 cents, on or before 31 Jan 2011 - Exercisable at 25 cents on or before 31 Jun 2012 - Exercisable at 25 cents, on or before 30 Nov 2012 30 June closing balance Further information on options issued is set out in note 28. (d) Ordinary shares Number of options 2012 2011 18,400,000 14,800,000 - 4,500,000 3,000,000 - - - (400,000) (500,000) (400,000) (500,000) - - 20,500,000 18,400,000 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. For further information on Capital Management refer to Note 2. 43 Azure Minerals Limited - Financial Statements Notes continued 17. RESERVES AND ACCUMULATED LOSSES Accumulated losses Balance at beginning of year Loss for the year Balance at end of year Share-based payments reserve Balance at beginning of year Movement during the year Balance at end of year Available-for-sale assets reserve Balance at beginning of year Revaluation Balance at end of year Foreign currency translation reserve Balance at beginning of year Movement during the year Balance at end of year 2012 $ 2011 $ 34,582,966 3,712,330 30,121,161 4,461,805 38,295,296 34,582,966 1,510,777 48,480 1,559,257 1,264,942 245,835 1,510,777 8,336 (36,313) (27,977) - 8,336 8,336 (352,945) (58,268) (411,213) (226,534) (126,411) (352,945) (a) 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. Available-for-sale assets reserve This reserve records fair value changes on available-for-sale investments. Amounts are recognised in profit and loss when the associated assets are sold or impaired. 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. 18. 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. 19. STATEMENT OF CASH FLOWS (a) Cash and cash equivalents (refer note 2) Cash and cash equivalents comprises: (cid:16) cash at bank and in hand (cid:16) short-term deposits Closing cash and cash equivalents balance 26,038 617,487 643,525 214,429 4,474,954 4,689,383 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. 44 Azure Minerals Limited - Financial Statements Notes continued (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 Provision for doubtful debt Investments – non cash 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 Net cash outflow from operating activities 2012 $ 2011 $ (3,712,330) 39,442 48,480 (8,771) 1,934 426,978 - (94,829) 1,006 (340,787) (65,571) (3,704,448) (4,461,805) 32,440 245,835 - (3,644) - (40,944) (723,435) 145 523,671 28,711 (4,399,026) (c) Non-cash financing and investing activities There have been no non-cash financing and investing activities during the 2012 year (2011: Nil). 20. 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 120,902 118,747 (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 3,000,966 - 314,944 2,716,392 (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 3,031,336 3,000,966 64,364 - 146,421 61,930 64,364 208,351 The property lease is a non-cancellable lease with a three-year term ending 31 December 2012, rent is payable monthly in advance. The lease allows for subletting of all leased areas and excess off space has been sub-let the related third parties as disclosed in Note 26(d). 21. CONTINGENCIES There are no material contingent liabilities or contingent assets of the company at reporting date. 45 Azure Minerals Limited - Financial Statements Notes continued 22. EVENTS OCCURING AFTER BALANCE SHEET DATE Since the end of the reporting date the Group has conducted a share purchase plan (“Plan”). This will result in the Group issuing 118,000,100 shares at an issue price of 1.8 cents per share to raise $2,124,000. In addition on 21 September 2012 the Group received commitments to participate in a share placement of 39,000,000 fully paid ordinary shares at $0.018 each to raise $702,000. Options exercisable at 2 cents each and expiring 2 years from their issue date will also be allocated on the basis of one free option for every two shares subscribed under the placement. No other 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 23. LOSS PER SHARE (a) Reconciliation of earnings to profit or loss Net loss Loss used in calculating basic loss per share 2012 $ 2011 $ (3,712,330) (3,712,330) (4,461,805) (4,461,805) CONSOLIDATED Number of shares 2012 Number of shares 2011 (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 394,000,000 359,680,071 (c) Effect of dilutive securities Options on issue at reporting 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. 24. AUDITORS’ REMUNERATION Amounts received or due and receivable by BDO Audit (WA) Pty Ltd or associated entities for: Tax compliance services Other An audit or review of the financial report of the entity Remuneration of other auditors of subsidiaries Audit or review of financial report of subsidiaries 25. KEY MANAGEMENT PERSONNEL DISCLOSURES (a) Compensation of key management personnel by compensation Short-term Post employment Share-based payment Consolidated 2012 $ 2011 $ 12,289 550 44,641 57,480 8,989 325 35,435 44,749 8,531 10,201 Consolidated 2012 $ 563,867 113,978 48,480 726,325 2011 $ 543,120 35,100 245,835 824,055 For further information refer to the Remuneration Report included as part of the Director’s Report. (b) Shares issued on exercise of compensation options There were no shares issued on exercise of compensation options during the year. 46 Azure Minerals Limited – Financial Statements Notes continued 25. KEY MANAGEMENT PERSONNEL DISCLOSURES (cont’d) (c) Option holdings of key management personnel 2012 Balance at beginning of year 1 July 2011 Granted as Remuneration Options Exercised Options Lapsed Balance at end of year 30 June 2012 Vested at 30 June 2011 Vested & Exercisable Unvested Directors Wolf Gerhard Martinick Peter Anthony Ingram Anthony Paul Rovira John Walter Saleeba Executives Brett Dickson Total 2011 Directors Wolf Gerhard Martinick Anthony Paul Rovira John Walter Saleeba Executives Brett Dickson Total 2,900,000 - 8,000,000 2,500,000 - 3,000,000 - - 5,000,000 - 18,400,000 3,000,000 - - - - - - (400,000) - (500,000) - 2,500,000 3,000,000 7,500,000 2,500,000 2,500,000 3,000,000 7,500,000 2,500,000 - 5,000,000 5,000,000 (900,000) 20,500,000 20,500,000 - - - - - - Balance at beginning of year 1 July 2010 Granted as Remuneration Options Exercised Options Lapsed Balance at end of year 30 June 2011 Vested at 30 June 2011 Unvested Vested & Exercisable 2,800,000 6,500,000 2,000,000 500,000 2,000,000 500,000 3,500,000 1,500,000 14,800,000 4,500,000 - - - - - (400,000) (500,000) - 2,900,000 8,000,000 2,500,000 2,900,000 8,000,000 2,500,000 - 5,000,000 5,000,000 (900,000) 18,400,000 18,400,000 - - - - - (d) Shareholdings of key management personnel Balance 1 July Ord Granted Ord On Exercise of Options Ord Net Change Other Balance 30 June Balance Indirectly Held Ord Ord Ord 2012 Directors Wolf G Martinick Anthony P Rovira Peter A Ingram John W Saleeba Executives Brett Dickson Total 1,540,000 3,200,000 - 2,669,600 112,000 7,521,600 - - - - - - - 100,000 - - - 100,000 1,540,000 3,300,000 - 2,669,600 112,000 7,621,600 - 1,880,000 - 2,669,600 40,000 4,589,600 - - - - - - 47 Azure Minerals Limited – Financial Statements Notes continued 25. 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 Balance 30 June Balance Indirectly Held Ord Ord Ord 2011 Directors Wolf G Martinick Anthony Paul Rovira John Walter Saleeba Executives Brett Dickson Total 1,540,000 3,200,000 2,669,600 112,000 7,521,600 - - - - - - - - - - - - - - - 1,540,000 3,200,000 2,669,600 112,000 7,521,600 - 1,880,000 2,669,600 40,000 4,589,600 26. 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 Parent Entity 2012 $ 9,939,795 4,278,684 - (3,823,578) 10,394,901 2011 $ 6,167,053 3,772,742 - - 9,939,795 It is the intention of each subsidiary to repay outstanding loans through the successful exploitation or sale of its mineral assets. During the year Minera Capital S.A. de C.V. disposed of all its assets and accordingly the Parent Entity made an allowance of $3,823,578 against loans advanced to its Mexican subsidiary Minera Capital , 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 25. (d) Other Related Transactions The Company has entered into a sub-lease agreement on normal commercial terms with Oro Verde Limited, a company of which Wolf Martinick is a director and Brett Dickson is Company Secretary. During the year Ezenet Limited paid sub-lease fees totalling $4,800 (2011: $4,800). The Company has also entered into a sub-lease agreement on normal commercial terms with Rox Resources Limited, a company of which Brett Dickson is Company Secretary. During the year Rox Resources Limited paid sub-lease fees totalling $98,406 (2011: $68,520). 27. INTERESTS IN JOINT VENTURES The company has interests in the following joint ventures: Joint Venture (a) JOGMEC Activities Copper Interest 100% Carrying Value $ NIL Under the joint venture agreement JOGMEC may earn a 51% interest in the La Tortuga and Los Nidos projects by spending US$3 million by 31 March 2012. At 30 June 2012 JOGMEC had spend approximately US$2,171,944 (2011: US$1,858,753). 48 Azure Minerals Limited – Financial Statements Notes continued 27. INTERESTS IN JOINT VENTURES (cont’d) (b) JOGMEC Copper 100% NIL The Group has entered into a joint venture with JOGMEC covering the El Tecolote project. Pursuant to the agreement JOGMEC may earn a 51% interest in the project by spending US$5 million. JOGMEC may earn a further 19% interest by spending a further US$8 million. At 30 June 2012 JOGMEC had spent approximately US$2,138,118 (2011: US$341,387). 28. 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. 2012 Grant Date Expiry Date Exercise Price (cents) 6 Dec ‘06 6 Dec ‘06 31 Jan ‘12 31 Jan ‘13 25.0 35.0 Value per option at grant date (cents) 3.64 3.45 Weighted average exercise price 2011 6 Dec ‘06 6 Dec ‘06 6 Dec ‘06 31 Jan ‘11 31 Jan ‘12 31 Jan ‘13 17.5 25.0 35.0 3.74 3.64 3.45 Weighted average exercise price Balance of the start of the year Number 500,000 500,000 1,000,000 $0.30 500,000 500,000 500,000 1,500,000 $0.258 Granted during the year Number Exercised during the year Number - - - - - - - - - - - - - - Lapsed during the year Number (500,000) - (500,000) $0.25 (500,000) (500,000) $0.175 Balance at end of the year Number - 500,000 500,000 $0.35 - 500,000 500,000 1,000,000 $0.30 Vested and exercisable at end of the year Number - 500,000 500,000 $0.35 - 500,000 500,000 1,000,000 $0.30 No options were exercised during the periods covered by the above tables. During the year 500,000 lapsed (2011: 500,000). The weighted average remaining contractual life of share options outstanding at the end of the period was 0.59 years (2011: 1.09 years). Fair value of options granted. Options are granted for no consideration. No options were granted pursuant to the Plan during the 2012 or 2011 financial years. 49 Azure Minerals Limited – Financial Statements Notes continued 28. SHARE-BASED PAYMENTS (cont’d) (b) Directors and executive options Set out below are summaries of Directors options granted. 2012 Grant Date Expiry Date Exercise Price (cents) 9 Dec ‘11 24 Dec ‘07 9 Dec ‘09 14 Dec ‘10 30 Nov‘14 31 Jan ‘12 30 Nov‘12 30 Nov‘13 4.9 25.0 8.8 13.0 Weighted average exercise price Value per option at grant date (cents) 1.6 11.7 2.9 5.5 Balance at the start of the year Number Granted during the year Number Exercised during the year Number Lapsed during the year Number Balance at end of the year Number 400,000 12,500,000 4,500,000 17,400,000 $0.103 - 3,000,000 - - - - - - - - 3,000,000 - $0.049 - (400,000) - - (400,000) $0.25 3,000,000 - 12,500,000 4,500,000 20,000,000 $0.092 Vested and exercisable at end of the year Number 3,000,000 - 12,500,000 4,500,000 20,000,000 $0.092 2011 24 Dec ‘07 24 Dec ‘07 9 Dec ‘09 14 Dec ‘10 31 Jan‘11 31 Jan ‘12 30 Nov‘12 30 Nov‘13 25.0 25.0 8.8 13.0 10.2 400,000 - - - 11.7 - 2.9 - 5.5 - 400,000 12,500,000 - 13,300,000 - - 4,500,000 4,500,000 (400,000) - - - (400,000) - - 400,000 12,500,000 4,500,000 17,400,000 400,000 12,500,000 4,500,000 17,400,000 The weighted average remaining contractual life of share options outstanding at the end of the period was 0.9 years (2011: 1.6 years). Fair value of director options granted. Options are granted for no consideration. During the 2012 financial year the weighted average fair value of the options granted was 1.6 cents (2011: 5.5 cents). The price was calculated by using the Binominal Option valuation methodology applying the following inputs: Weighted average exercise price Weighted average life of the option Weighted average underlying share price Expected share price volatility Risk free interest rate 2012 4.9 cents 3.0 years 2.8 cents 110% 3.68% 2011 13.0 cents 3 years 8.6 cents 115% 5.25% 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 year were as follows: Options issued to directors and executives Consolidated 2012 $ 2011 $ 48,480 245,835 50 Azure Minerals Limited – Financial Statements Notes continued 29. PARENT ENTITY FINANCIAL INFORMATION (a) Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Statement of Financial Position Current assets Total assets Current liabilities Total liabilities Shareholder’s equity Issued capital Reserves Share-based payments Accumulated loses 2012 $ 11,152,664 11,244,484 188,482 231,169 2011 $ 14,959,150 15,094,796 487,159 522,845 39,592,568 39,592,568 1,531,280 (30,110,532) 11,013,315 1,519,113 (26,539,730) 14,571,951 (b) Contingent liabilities of the parent entity The parent entity did not have any contingent liabilities as at 30 June 2012 or 30 June 2011. (c) Contracted commitments for the acquisition of property, plants or equipment The parent entity did not have any commitments for the acquisition of property, plants or equipment. 51 Tel: +8 6382 4600 Fax: +8 6382 4601 www.bdo.com.au 38 Station Street Subiaco, WA 6008 PO Box 700 West Perth WA 6872 Australia INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF AZURE MINERALS LIMITED Report on the Financial Report We have audited the accompanying financial report of Azure Minerals Limited, which comprises the consolidated statement of financial position as at 30 June 2012, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity comprising the company 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 of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply 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. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about 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 company’s preparation of the financial report that gives a true and fair view 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 company’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 opinion. 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, which has been given to the directors of Azure Minerals Limited, would be in the same terms if given to the directors as at the time of this auditor’s report. BDO Audit (WA) Pty Ltd ABN 79 112 284 787 is a member of a national association of independent entities which are all members of BDO (Australia) Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit (WA) Pty Ltd and BDO (Australia) Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania. 53 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 consolidated entity’s financial position as at 30 June 2012 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (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 $3,712,330 for the year ended 30 June 2012, and, as at that date, the company experienced net cash outflows from operating activities of $3,704,448. 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 2012. 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. Opinion In our opinion, the Remuneration Report of Azure Minerals Limited for the year ended 30 June 2012 complies with section 300A of the Corporations Act 2001. BDO Audit (WA) Pty Ltd Peter Toll Director Perth, Western Australia Dated this 24th day of September 2012 54 Tel: +8 6382 4600 Fax: +8 6382 4601 www.bdo.com.au 38 Station Street Subiaco, WA 6008 PO Box 700 West Perth WA 6872 Australia 24 September 2012 Chairman of Audit Committee Azure Minerals Limited Level 1 30 Richardson Street WEST PERTH WA 6005 Dear Sir, DECLARATION OF INDEPENDENCE BY PETER TOLL TO THE DIRECTORS OF AZURE MINERALS LIMITED As lead auditor of Azure Minerals Limited for the year ended 30 June 2012, I declare that, to the best of my knowledge and belief, there have been no contraventions of: (cid:127) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (cid:127) 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. Peter Toll Director BDO Audit (WA) Pty Ltd Perth, Western Australia BDO Audit (WA) Pty Ltd ABN 79 112 284 787 is a member of a national association of independent entities which are all members of BDO (Australia) Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit (WA) Pty Ltd and BDO (Australia) Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania. 55 Azure Minerals Limited – Financial Statements ASX Additional Information The number of shareholders, by size of holding, in each class of share as at 18 September 2012 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 Citicorp Nominees Pty Limited ASIPAC Group Pty Ltd International Commodity Finance Limited Alchemy Securities Pty Ltd JP Morgan Nominees Australia Limited Mr Thomas Fritz Ensmann Dr Lyndsay George McDonald Gordon Mr Peter Murray Nicholas Investec Bank (Australia) Ltd Mr Kevin Chan + Miss Renata Hiu Fong Jian Novacarta Pty Ltd Poluru Pty Ltd Cathies Lane Pty Ltd Fleurbow Pty Ltd Mr Anthony Paul Rovira Mooroolbark International Pty Ltd Mr Phillip Wood Forsyth Barr Custodians Ltd Ordinary shares Number of holders Number of shares 139 197 637 1,713 617 3,303 1,611 12,839 735,562 5,658,173 75,363,967 312,229,459 94,000,000 17,842,031 Listed ordinary shares Number of shares 29,152,200 21,356,928 6,221,530 5,555,555 5,555,555 5,026,785 4,958,103 4,160,816 3,501,833 3,400,000 3,100,000 3,036,694 2,912,500 2,900,000 2,500,000 2,489,140 2,420,000 2,413,000 2,400,000 2,220,558 115,281,197 Percentage of ordinary shares 7.40 5.42 1.58 1.41 1.41 1.28 1.26 1.06 0.89 0.86 0.79 0.77 0.74 0.74 0.63 0.63 0.61 0.61 0.61 0.56 29.26 (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 (d) Voting rights All ordinary shares (whether fully paid or not) carry one vote per share without restriction. Number of Shares 29,152,200 56 Azure Minerals Limited – Financial Statements ASX Additional Information (e) Schedule of interests in mining tenements Common Name Pozo de Nacho Estacion Llano Los Chinos La Tortuga Los Nidos El Tecolote San Juan San Eduardo Promontorio Pozo de Nacho Pozo de Nacho 2 - Fracc. 1 Pozo de Nacho 2 - Fracc. 2 Pozo de Nacho 3 Estacion Llano Los Chinos La Tortuga La Tortuga II Los Nidos Los Nidos II El Tecolote El Tecolote II El Tecolte III El Tecolte III-A San Juan San Juan II San Eduardo San Eduardo 2 Frac 1 San Eduardo 2 Frac 2 San Eduardo 2 Frac 3 Hidalgo Promontorio El Magistral Promontorio Regional 1. 2. JOGMEG earning a 51% interest Azure has an option to purchase 100% Tenement 222873 225057 225058 228563 227017 231815 230422 233462 231051 234294 230771 236795 234586 239384 228839 222952 232387 236796 236797 236798 235270 235269 218881 234447 Percentage held / earning 100% 100% 100% 100% 100% 100% 100%1 100%1 100%1 100%1 100%1 100%1 100%1 100%1 100% 100% 100% 100% 100% 100% 100%2 100%2 100%2 100% All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals All Minerals 57

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