First Floor, 22 Oxford Close West Leederville WA 6007 Telephone: (08) 9380 4600 Facsmilie: (08) 9381 5911 ABN: 23 101 049 334 A n n u a l R e p o r t o5 www.cazalyresources.com.au F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 5 CORPORATE DIRECTORY MANAGING DIRECTOR Nathan McMahon MANAGING DIRECTOR Clive Jones NON-EXECUTIVE DIRECTOR & company SECRETARY Kent Hunter PRINCIPAL & REGISTERED OFFICE First Floor, 22 Oxford Close WEST LEEDERVILLE WA 6007 Telephone: (08) 9380 4600 Facsimile: (08) 9381 5911 AUDITORS Rix Levy Fowler Level 1, 12 Kings Park Road WEST PERTH WA 6005 SHARE REGISTRAR Advanced Share Registry Services 110 Stirling Highway NEDLANDS WA 6009 Telephone: (08) 9389 8033 Facsimile: (08) 9389 7871 STOCK EXCHANGE LISTING Australian Stock Exchange (Home Exchange: Perth, Western Australia) Code: CAZ, CAZO BANKERS National Australia Bank 50 St Georges Terrace PERTH WA 6000 CONTENTS PROJECTS REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 DIRECTORS’ REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 AUDITOR INDEPENDENCE STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 STATEMENT OF FINANCIAL PERFORMANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 STATEMENT OF FINANCIAL POSITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 STATEMENT OF CASH FLOWS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 NOTES TO THE FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 DIRECTORS’ DECLARATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 INDEPENDENT AUDIT REPORT TO THE MEMBERS OF CAZALY RESOURCES LIMITED . . . . 45 ADDITIONAL SHAREHOLDER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 C a z a l y R e s o u r c e s L i m i t e d 2 P r o j e c t s R e v i e w PROJECTS REVIEW Cazaly Resources Limited has been particularly active during the past year. Considerable success from drilling and corporate activities, particularly in respect to the Kunanalling project, has resulted in a substantial increase in the value of the assets of the Company. Resources at Kunanalling have increased to 348,000 ounces whilst the project area has significantly increased to approximately 750 square kilometres. The Company has a large portfolio of ground largely prospective for gold and base metals situated within Western Australia. Through astute project acquisition and creative joint venture arrangements the Company is well exposed to potential exploration success in gold, iron ore, uranium, nickel and copper as well as several other commodities.The company has successfully joint ventured a significant number of these projects and intends to continue to actively develop new projects with a view towards divestment whilst aggressively expanding and developing its key asset at Kunanalling. Kunanalling – West Kalgoorlie Project Project greatly expanded, continued drilling success and advanced regional exploration commenced. Several new targets established with global resources of 348,000 ounces. Mining agreement signed with Placer Dome.. The Kunanalling Project is located approximately 30 kilometres west of Kalgoorlie and 30 kilometres north of Coolgardie in the East Coolgardie Mineral Field of Western Australia.The project has substantially increased in size since listing, largely as a result of dealings with other parties in the region, and the Company now commands a dominant land position in the greater Kalgoorlie region.The Company takes the view that a strong ground position allows significant leverage to exploration success The Kunanalling project encompasses a large contiguous group of tenements centred along the Kunanalling Shear, a major regional structure associated with gold mineralisation exhibiting features similar to the nearby Zuleika Shear host to the +7 Moz. Kundana minefield. Resources at Kunanalling now total 348,000 oz. gold as seen in the following table; MINERAL RESOURCES - KUNANALLING Project Project/Prospect Measured Tonnes g/t Au Indicated Tonnes g/t Au Inferred Tonnes g/t Au Tonnes TOTAL g/t Au Oz. Au Mick Adam Catherwood Burgundy Picante Cutters Ridge Wadi Rajax Emu Prospect Premier Blue Bell Stockpiles/Tailings Inkerman TOTALS 337,000 2.52 144,000 2.64 195,000 3.73 188,000 2.44 234,000 1.56 155,000 2.00 1,822,000 1.40 1,822,000 1.38 80,800 72,000 642,000 135,000 648,000 177,000 180,000 260,000 5,000 118,000 114,000 25,000 2.04 2.00 3.71 1.80 1.43 4.20 2.50 3.70 2.00 1.10 3.50 553,000 642,000 330,000 648,000 599,000 180,000 260,000 160,000 118,000 114,000 25,000 2.49 2.00 3.72 1.80 1.80 4.20 2.50 2.00 2.00 1.10 3.50 44,300 41,300 39,500 37,500 34,600 24,300 20,900 10,400 7,600 3,900 2,800 368,000 2.38 307,500 2.25 4,930,500 1.84 5,451,000 1.98 347,900 Most of the resources are reported using a cut off grade of 1g/t gold while various top cuts used for each resource were based upon standard statistical methods.The Burgundy resources utilised cut off grades of 0.8, 1.0 and 1.5 g/t Au for the oxide, transition and fresh rock zones respectively. SG data for the majority of the resources is based upon measured samples where available and where absent, values were based upon data from nearby resources in similar geological settings. A n n u a l R e p o r t 0 5 P r o j e c t s R e v i e w 3 KUNANALLING Project – Regional Setting 4 P r o j e c t s R e v i e w C a z a l y R e s o u r c e s L i m i t e d Mining Recently the Company announced that it had entered into a Heads of Agreement with Placer Dome to develop the Catherwood, Wadi and Outridge gold deposits. Once commenced, the Project is scheduled to continue for 10-12 months with cashflow starting within 2 months of commencement owing to the shallow nature of the Catherwood ore. Ore will be treated at PDAP’s Kalgoorlie West Operations at Paddington. Development of the operation will be funded by PDAP, from project cashflow, with net profits being shared by the parties on a pre-determined basis on commercial terms. Clear benefits arising from this arrangement for the Company include; • No requirement for Project Financing for CAZ; • PDAP have extensive mining and milling experience in the region and CAZ will benefit from the resultant cost basis, management and logistics that will result. CAZ will effectively “piggy-back” onto PDAP’s long serving effective cost structures and will be insulated from recent industry wide cost increases; • The availability of treatment facilities at cost only; • Reduction in risk profile by utilising experienced management in the field of small scale mining operations; and • Ability of the CAZ management team to focus on exploration in the Kalgoorlie region. Placer have also rescinded any ‘clawback’ rights over a specific area within Castle Hill bounded by the following boxed area; NW: 6,609,480mN, 309,120mE SE: 6,608,230mN, 313,720mE.This includes the Wadi, Mick Adams, Kiora and Kiora North zones of mineralisation. Planning for the development of Catherwood is ongoing with final geotechnical and metallurgical studies recently studies completed. It is anticipated that final statutory mining approvals for the development of the Catherwood deposit will be received imminently. A n n u a l R e p o r t 0 5 P r o j e c t s R e v i e w 5 CASTLE HILL Area – Trend of Mineralisation & Prospects During the year exploration has provided a large degree of encouragement at several prospects, particularly in the North of the area in the castle Hill region, including Picante, North Kiora and Ridgeback. Drilling conducted at Picante following up on previously delineated gold mineralisation. Analyses of a previously drilled diamond drillhole lead to a new understanding of the structural controls on mineralisation at Picante. Follow-up RC drilling confirmed the predicted down plunge position of the mineralisation which was found to plunge at approximately 45° to the north.These results have enabled a preliminary resource of 330,000t @ 3.72g/t Au to be estimated. Continuous gold mineralisation at Picante, has now been traced for over 150 metres and remains open at depth.The continuous and consistent tenor of the mineralisation occurring close to the surface suggests that the zone could be quickly developed into a mining operation. Metallurgical test work is currently being conducted. Drilling of other targets in the Castle Hill area was aimed at testing new areas of potential mineralisation based upon historical drill results and an increased understanding on the controls of mineralisation in the area.The Picante discovery has proved particularly useful in furthering the understanding on the mineralising controls in the region. Results from drilling at the Kiora North and Ridgeback prospects has discovered further zones with the potential for the discovery of new resources. At Kiora North two zones have been outlined.The Tommy prospect has geological similarities with Picante with a result of 5m @ 4.00 g/t Au at the tonalite-ultramafic contact. A follow-up hole, KNRC0272, produced 2m @ 33.2g/t Au. Previous RAB drilling in the area had not returned any significant results, probably a result of gold depletion, although soil geochemistry is elevated.The Company considers the exploration results to be highly encouraging and provide the basis for ongoing work. 6 P r o j e c t s R e v i e w C a z a l y R e s o u r c e s L i m i t e d West Kalgoorlie Projects Exploration commences over the Ora Banda/Grants Patch project. An initial drilling programme was completed over specific targets at the the Ora Banda project based upon the results of historical work and geological assessment. Previous mining in the region has been extensive with most mineralisation restricted to particular stratigraphic units and controlled by a range of structures. Subsequent targeting has been based upon this work. Several targets were tested in the initial programme with results generally being low in tenor. The results are currently being assessed however some encouragement was received from one of the conceptual targets, which lies under cover where highly prospective units have been disrupted by structures known to host mineralisation in adjacent areas. Three lines of drilling over a wide area returned broad anomalism (best result being 1m @ 6.07 g/t Au). Follow up drilling is currently being proposed to further test this and other areas. Shovelanna Project – Iron Ore Tenement Application in Mt. Newman Iron Ore Province Cazaly has made an application for exploration licence 46/678 on 29 August 2005.The licence covers an area of approximately 40 sq.km and covers Brockman Iron Formation lithologies along Shovelanna Hill.The area is located some 12 km north northwest of BHPB’s Jimblebar operations at Wheelarra Hill and is immediately contiguous with BHPB’s Orebody 18 mining operation. Cazaly has entered into an agreement with Echelon Resources Limited whereby Echelon will provide technical capabilities and funding for a drilling program on the Project. Echelon has agreed to commit $2.5 million towards the exploration program designed to generate a JORC compliant Resources. Under the agreement Echelon is also required to provide specialist iron ore technical services to ensure that Cazaly has the requisite technical capabilities to advance the Shovelanna Iron Ore Project through to development. In consideration for Echelon committing to provide technical capabilities and funding $2.5 million in exploration funds, Echelon will receive a 14% interest in ELA 46/678 and receive 5 million options in Cazaly, exercisable at $1.00, on or before 31 December 2007. Echelon’s managing director, Mr Matthew Rimes, is a mining engineer with an extensive career in the resources sector. Mr Rimes has primarily worked for major mining companies including Rio Tinto Group and North Limited focused on iron ore. Over the past 10 years he has been with Robe River Mining (an associated entity of Rio Tinto) and held senior positions at Robe River Mining’s operations at Pannawonica and West Angelas. Prior to joining Echelon in June 2005, Mr Rimes held the position of Executive Manager Resource Development for Robe River Mining. The Project is located within the Hamersley Iron Province, Australia’s, and one of the world’s, premiere iron ore mining regions since mining first began in 1966.The ores are generally of three types; Bedded, Channel and Detrital deposits.The bedded ores comprise the bulk of the regions’ resources and it is this style of ore that exists at Shovelanna. Initial reconnaissance over the area highlighted a large extent of outcropping highly mineralised Brockman Iron Formation within the area. Mineralised Dales Gorge and Joffre Formation lithologies were encountered over a large area of approximately 3.5km in strike. Several surface samples collected from the outcropping mineralisation returned highly favourable results indicating that the ore is of a high grade nature akin to that occurring at the adjoining Orebody 18. Results are tabled below: A n n u a l R e p o r t 0 5 P r o j e c t s R e v i e w 7 SAMPLE RESULTS - Shovelanna Rock Samples SAMPLE No. GDA East GDA North SH001 SH002 SH003 SH004 SH005 SH006 SH007 SH008 SH009 SH010 SH011 SH012 SH013 Avg 201055 201014 201220 199928 199835 199882 199788 199525 199040 198516 198488 198573 198499 7418615 7418251 7418300 7418213 7418525 7418765 7418818 7418551 7418408 7418329 7418503 7418665 7418616 Fe % 65.1 70.2 69.0 69.6 46.3 63.6 67.2 68.3 67.4 69.8 70.0 68.2 69.6 66.5 Fe2O3 % Al2O3 % SiO2 % 93.1 100.4 98.7 99.5 66.2 90.9 96.1 97.7 96.4 99.8 100.1 97.5 99.5 95.1 2.0 0.5 0.7 0.5 1.3 3.4 0.6 0.9 1.1 0.4 0.5 0.7 0.3 1.0 5.4 1.5 1.2 1.6 2.2 4.3 1.6\ 1.7 1.4 0.9 1.1 1.5 1.2 2.0 P % 0.07 0.06 0.10 0.12 0.03 0.10 0.10 0.09 0.14 0.02 0.03 0.09 0.02 L.O.I. % 2.93 2.01 2.65 3.31 6.56 5.33 5.41 4.19 4.69 1.94 1.76 3.85 3.97 S % 0.07 0.01 0.00 0.02 0.00 0.05 0.15 0.04 0.03 0.00 0.00 0.04 0.00 0.07 3.74 0.03 The area subject to the application was previously held by Hamersley Resources Limited (a subsidiary of Rio Tinto), Wright Prospecting Pty Ltd and Hancock Prospecting Pty Ltd under E46/209 which expired on 26 August 2005. Cazaly Resources Ltd (ASX:CAZ) has been notified that the following objections have been lodged in respect to application for Exploration Licence 46/678: • Objection MB54/056 by BHP Billiton Minerals Pty. Ltd, Itochu Minerals and Energy Australia Pty. Ltd and Mitsui-Itochu Iron Pty. Ltd. • Objection MB57/056 by Hancock Prospecting Pty. Ltd. The Company has also been formally advised by the WA Department of Industry and Resources (DoIR) that Rio Tinto Limited (Rio) has requested the Minister for State Development, Mr Alan Carpenter MLA, exercise his discretion under section 111A of the Mining Act of 1978 to refuse the application for the Shovelanna Iron Ore Project (ELA 46/678) on the grounds of public interest. The Company is vigorously defending both the objections and the Section 111A submission as we believe we have both the financial and technical ability to advance the project at a significant larger quantum that what has occurred in the previous 15 years. An initial substantial Reverse Circulation drilling programme has been designed and approved to commence upon grant of the tenement.This drilling is part of a more comprehensive exploration and development programme which is envisaged to quickly advance the project towards being mined. 8 P r o j e c t s R e v i e w C a z a l y R e s o u r c e s L i m i t e d Uranium Projects Newly applied for areas prospective for differing styles of uranium mineralisation The Company has recently made priority applications for several Licenses over four separate project areas situated in the Gascoyne and goldfields regions of Western Australia and in the Northern Territory. Two project areas in the Gascoyne region lie some 150 kilometres apart and are called the Pells Range (ELA09/1193) and the Jailor Bore (ELA09/1194) projects whilst applications for three exploration licences, the Lake Way project, abuts Nova Energy Limited’s Lake Way uranium deposit. One further application has been made at the Quartz Hill project which lies within the Harts Ranges to the northeast of Alice Springs in the Northern Territory, The Pells Range project is prospective for roll front style uranium mineralisation occurring within carbonaceous sediments of the Moogooloo Sandstone. Historical drilling within a major regional flexure of this unit has identified several uranium anomalies. Observations of the known mineralisation include; an association of mineralisation with more oxidised portions of the Moogooloo Sandstone in particular in areas of regional flexuring, an association with more carbonaceous units and sandstone channelling and a marked increase in mineralisation towards the basin margins.The project occurs in an ideal environment for the development of classic roll front uranium mineralisation. The Jailor Bore project covers a suite of basement granitoids, schists and gneisses which are overlain by early Palaeozoic sediments. Uranium occurs in calcretised palaeodrainage sediments with carnotite, a uranium-vanadium mineral, being the dominant uranium mineral. Numerous occurrences of carnotite have been observed within the terraced calcrete deposits along the flanks of the major creek systems in the area. Previous exploration has only been of a broad reconnaissance nature but was successful in defining specific areas requiring further work. The Company has also recently announced that they have concluded a Strategic Alliance and Data Co-Operation Agreement with Kalgoorlie-Boulder Resources Limited (ASX: KAL). KAL has recently concluded an Agreement whereby they may acquire up to a 95% interest in the Jailor Bore resource which Cazaly’s tenement surrounds.The Alliance does not preclude either party from sole development nor from entering into Agreements with third parties. The Lake Way Project comprises four contiguous Exploration Licence Applications, 53/1178, 53/1180, 53/1193 and 53/1194. The tenements are located immediately east and up to 50km north of the Wiluna townsite in the Eastern Goldfields Province of W.A.The Project adjoins Nova Energy Limited’s calcrete hosted Lake Way uranium deposit and is just to the east of Agincourt Resources Limited’s Wiluna Gold Mine. The area is known to contain calcrete hosted uranium mineralisation from historic drilling, with significant low grade mineralisation being intersected in widely spaced drill holes to the south of Uramurdah Well along Uramurdah Creek.The mineralisation remains open to the north and east of the existing drill holes. Landsat Data mapping of the area to the north east of Uramurdah Well is similar in character to Nova’s Lakeway deposit. A drilling program was initially proposed across the area by a previous explorer, but was not undertaken due to logistical problems. Additionally analysis of regional radiometric data has highlighted an extensive corridor of sporadically anomalous uranium associated with known palaeochannels and some areas of outcropping calcrete. A n n u a l R e p o r t 0 5 P r o j e c t s R e v i e w 9 JOINT VENTURE PROJECTS The Company has several Joint Ventures that allow shareholders to be exploration to exploration success at no cost to the Company including: Quartz Circle, Jutson Rocks and Northampton Projects Graynic Metals Ltd – Earning 80% The Company has divested an 80% interest in the Quartz Circle, Jutson Rocks and Northampton Projects to Graynic Metals Ltd (ASX Code: GYN) for a total of 10,000,000 shares being approximately 39% (post IPO) of the issued capital in Graynic. Graynic successfully listed on the ASX on June 30th raising $2.5M. Cazaly distributed the 10 million Graynic shares to its shareholders by way of an in speci distribution on the basis of one Graynic share for approximately every four Cazaly shares. The deal is entirely consistent with the Company’s stated goal of returning shareholder value and relates to a capital return of approximately 4.98 cents per share.This is another example of the Company providing shareholders with value. Whilst Cazaly is cognisant of the strong outlook of base metals including copper, nickel, lead and zinc we are also aware that our very strong land position and existing resource base at Kalgoorlie demands focused exploration. Cazaly, and its shareholders, retain significant exposure to the projects through its 20% equity and through the in speci distribution of Graynic stock. Graynic has recently completed initial RC pre-collar drilling at the Quartz Circle project with follow up diamond core drilling due to commence shortly. Initial results were encouraging with results from the pre-collars including; 12m @ 2.07% Zn and 1.12% Pb (GM5, 4m @ 4.48% Zn (GM 7) and 24m @ 1.49% Zn (GM 9). Geological mapping in this area also discovered Zn bearing gossans with up to 2.9% Zn from rock chips being recorded. EAST KALGOORLIE JOINT VENTURE (Northern Mining Ltd – Earning 75%) Northern Mining Ltd (planning to list on the ASX) are paying the Company $200,000 cash and issuing 3,250,000 vendor shares and completing 15,000m of reverse circulation drilling to earn an initial 75% of the East Kalgoorlie project. MOUNT CARRINGTON (Drake Resources Ltd. - Earning 90%) The Company recently concluded an Option and Sale Agreement with Drake Resources Limited (“Drake”) for 90% of Cazaly’s interest in the Mount Carrington Project. The Mount Carrington project is a polymetallic (primarily gold and silver) project situated within the north-central part of the New England Fold belt in the northern goldfields of New South Wales. The project has a long history of mining. During the 1980s large scale open cut gold mining operations were undertaken with mining ceasing in 1990 following increasing metallurgical and grade control difficulties encountered once the mining reached the primary ore zones.These difficulties were believed to be largely due to the polymetallic nature of the orebody, with respect to the CIL plant being used, and a poor understanding, at the time, of the geological controls. The project is currently Drake’s major focus and a large drilling programme is currently underway. MENZIES (Great Australian Resources Ltd. - Earning 80%) The company has reached agreement with Great Australian Resources Ltd (“GAR”) whereby GAR may earn an 80% interest in the Menzies project. As part of the agreement GAR is obliged to conduct a minimum of 1,000 metres of drilling. GAR has already conducted some drilling over the project testing a small number targets mainly based on the Cigar Prospect. The drilling intersected mainly mafics and some key mineralised structures with several encouraging gold hits indicating that the mineralisation is open along strike both to the north and south. GAR also drilled 2 RC holes into a sulphide nickel target. Results were very encouraging and included; 9m @ 1.31% Ni and 10m @ 0.9% Ni. Follow up magnetic, electromagnetic and geochemical surveys are planned at the prospect. C a z a l y R e s o u r c e s L i m i t e d 10 P r o j e c t s R e v i e w Summary The company has again had a highly active year further advancing its assets.The company has expanded its tenure and resource base in the Kalgoorlie region and has grown its global resources.This has been followed up with detailed exploration and good exploration success from drilling particularly at Kunanalling where the majority of work in the year has been conducted. The Company has entered a mining agreement with Placer Dome and has begun exploration in the Grants Patch/Ora Banda region. The company has also expanded its project base through applications over the Shovelanna iron ore project and several uranium projects. Cazaly is well positioned to take advantage of rising commodity prices through its aggressive exploration and development programmes and looks forward to another active year ahead. NATHAN MCMAHON MANAGING DIRECTOR Information in this report pertaining to mineral resources and exploration results was compiled by Mr. Clive Jones and Mr. Mike Young who are Members of the Aus.I.M.M with not less than 5 years experience in the relevant fields, and who consent to the report appearing in the form and context in which it appears. A n n u a l R e p o r t 0 5 D i r e c t o r s ’ R e p o r t 11 DIRECTORS’ REPORT Your directors present their report on the company and its controlled entities for the financial year ended 30 June 2005. 1. DIRECTORS The names of directors in office at any time during or since the end of the year are: Nathan McMahon Clive Jones Kent Hunter Directors have been in office since the start of the financial year to the date of this report unless otherwise stated. COMPANY SECRETARY The following person held the position of company secretary at the end of the financial year: Kent Hunter – B Bus. Mr Hunter is a Chartered Accountant with over 15 years’ corporate and company secretarial experience. He has been involved in the listing of 15 junior gold and mineral exploration companies on ASX in the past four years with capital raisings exceeding $54 million. He has experience in capital raisings, ASX compliance and regulatory requirements and is currently a non-executive director of Elixir Petroleum Limited, Gryphon Minerals Limited and Scimitar Resources Limited and is company secretary of four other ASX listed entities. Mr Hunter was appointed as Company Secretary on the incorporation of the Company. 2. PRINCIPAL ACTIVITIES The principal activity of the economic entity during the financial period was mineral exploration. There were no significant changes in the nature of the economic entity principal activities during the financial period. 3. OPERATING RESULTS The profit / (loss) of the economic entity after providing for income tax amounted to $2,706,809 (2004: ($55,394)). 4. DIVIDENDS PAID OR RECOMMENDED The directors do not recommend the payment of a dividend and no amount has been paid or declared by way of a dividend to the date of this report. 5. REVIEW OF OPERATIONS Operations Cazaly Resources Limited controls one of the largest land positions in the immediate Kalgoorlie region having a holding second in size only to Placer Dome Asia Pacific (PDAP). Exploration over much of this ground has been ongoing with specific areas now targeted for exploration, in particular the Castle Hill area at Kunanalling and key stratigraphic units in the Grants Patch and Ora Banda regions. Results to date have been very successful culminating in the recent discovery of a new near surface gold resource at Picante and several other areas returning highly encouraging gold results. Additionally the economic entity has finalised a deal with Placer Dome Asia Pacific that will see the Catherwood and Wadi deposits mined in the near future. 12 D i r e c t o r s ’ R e p o r t C a z a l y R e s o u r c e s L i m i t e d 5. REVIEW OF OPERATIONS (CONT.) Resources at Kunanalling now total 348,000 oz. gold as seen in the following table: Mineral Resources – Kunanalling Project Project/Prospect Measured Tonnes g/t Au Indicated Tonnes g/t Au Inferred Tonnes g/t Au Tonnes TOTAL g/t Au Oz. Au Mick Adam Catherwood Burgundy Picante Cutters Ridge Wadi Rajax Emu Prospect Premier Blue Bell Stockpiles/Tailings Inkerman TOTALS 337,000 2.52 144,000 2.64 195,000 3.73 188,000 2.44 234,000 1.56 155,000 2.00 1,822,000 1.40 1,822,000 1.38 80,800 72,000 642,000 135,000 648,000 177,000 180,000 260,000 5,000 118,000 114,000 25,000 2.04 2.00 3.71 1.80 1.43 4.20 2.50 3.70 2.00 1.10 3.50 553,000 642,000 330,000 648,000 599,000 180,000 260,000 160,000 118,000 114,000 25,000 2.49 2.00 3.72 1.80 1.80 4.20 2.50 2.00 2.00 1.10 3.50 44,300 41,300 39,500 37,500 34,600 24,300 20,900 10,400 7,600 3,900 2,800 368,000 2.38 307,500 2.25 4,930,500 1.84 5,451,000 1.98 347,900 Most of the resources are reported using a cut off grade of 1g/t gold while various top cuts used for each resource were based upon standard statistical methods. The Burgundy resources utilised cut off grades of 0.8, 1.0 and 1.5 g/t Au for the oxide, transition and fresh rock zones respectively. SG data for the majority of the resources is based upon measured samples where available and where absent, values were based upon data from nearby resources in similar geological settings. The economic entity has continued to be very active during the past quarter with ongoing successful exploration at Kunanalling and has further advanced its mining prospects. The controls one of the largest land positions in the Kalgoorlie region and has expanded exploration into the adjoining areas at Ora Banda and Grants Patch. Drilling in the Castle Hill region at Kunanalling has resulted in the discovery of a new resource at Picante (330,000t @ 3.72 g/t Au) and the delineation of several other targets which will be further drilled in the forthcoming quarter. The economic entity has also recently made applications for two areas in the Gascoyne region of Western Australia covering area prospective for uranium mineralisation. The economic entity has made application for Exploration Licence 46/678 which to lies approximately 25 kilometres east of Mt. Newman. The application covers a portion of the Brockman Iron Formation and is located within 2 kilometres of the Shovelanna Hill, Wheelarra Hill Orebody 31 and Mt. Newman Orebody 17. Open file data indicates that the Shovelanna Hill orebody is partially located on the Cazaly tenement application. This will be confirmed by field checking during the current field season. The economic entity has also seen the successful listing of Graynic Metals Limited who will advance the Quartz Circle, Jutson Rocks and Northampton projects. Additionally some very prospective uranium ground was applied for during the quarter. Financial Position The net assets of the economic entity have increased by approximately $2,850,000 from 30 June 2004 to $7,276,637 in 2005 due largely to the issue of shares to raise additional funds and acquire exploration assets. The economic entity currently has $1.66 million in cash assets which the Directors believe puts the economic entity in a sound financial position with sufficient capital to effectively explore its current landholdings. A n n u a l R e p o r t 0 5 D i r e c t o r s ’ R e p o r t 13 5. REVIEW OF OPERATIONS (CONT.) Future Developments, Prospects and Business Strategies The economic entity will continue its mineral exploration activity at and around its exploration projects with the object of identifying commercial resources. The economic entity will also continue to identifying new mineral exploration opportunities within Australia and the rest of the world for further potential acquisitions which may offer value enhancing opportunities for shareholders. 6. SIGNIFICANT CHANGES IN STATE OF AFFAIRS The following significant changes in the state of affairs of the economic entity occurred during the financial period: On 1 July 2004 the Company acquired 100% ownership in Hayes Mining Pty Ltd for $1.00. On 2 July 2004, the Company issued 400,000 employee options under the Cazaly Resources Limited employee incentive scheme. On 15 July 2004 the Company announced that it had finalised a deal with Placer Dome Asia Pacific Ltd (“PDAP”) to acquire a 100% interest in Placer’s Castle Hill Project for a nominal cash consideration. On 6 October 2004, the Company issued 2,250,000 Directors Options as passed by the members at the Annual General Meeting on 6 October 2004. On 15 November 2004, the Company issued 1,250,000 fully paid shares to Croesus Mining NL under the Agreement for Sale of Plant. On 16 December 2004 the Company issued 1,145,874 fully paid ordinary shares converted from option holders exercising their $0.20 options, expiring 31 January 2006. On 4 February 2005, the Company issued 2,000,000 fully paid shares at $0.40 to UK-based institutional investor Fiske plc. On 18 February 2005 the Company issued 2,500,000 fully paid ordinary shares converted from the Directors exercising their $0.35 options, expiring 28 February 2005. On 2 March 2005 the Company issued 145,000 fully paid ordinary shares converted from option holders exercising their $0.20 options, expiring 31 January 2006. On 23 June 2005 the Company was issued 10,000,000 fully paid ordinary shares in Graynic Metals Limited (Graynic) pursuant to the acquisition agreement between the Company and Graynic for the acquisition by Graynic of the Quartz Circle, Jutson Rocks and Northhampton projects. On 23 June 2005, the Company implemented an in-specie distribution whereby shareholders of Cazaly received an in- specie distribution of shares in Graynic totalling 10,000,000 shares. On 23 June 2005 the exercise prices of the Company’s outstanding options were changed in accordance with Rule 7.22.3 of the Listing Rules. The number of options on issue remained the same, however the exercise price per option reduced by the same amount as the amount returned in respect to each Cazaly Share pursuant to the in-specie distribution of Graynic shares. Based upon an estimated capital reduction of 4.98 cents: • the exercise price of the listed options expiring 31 January 2006 reduced to 15.02 cents; • the exercise price of the options expiring 30 June 2005 reduced to 35.02 cents (subsequently lapsed); • the exercise price of the options expiring 2 July 2009 reduced to 25.02 cents; and • the exercise price of the options expiring 31 August 2007 reduced to 35.02 cents. 14 D i r e c t o r s ’ R e p o r t C a z a l y R e s o u r c e s L i m i t e d 7. AFTER BALANCE DATE EVENTS On 1 July 2005 the Company acquired 100% interest in Cyril Resources Pty Ltd for $1.00. On 7 September 2005 the Company announced that it had applied for Exploration Licence 46/678 which to lies approximately 25 kilometres east of Mt Newman.The application covers a portion of the Brockman Iron Formation and is located within 2 kilometres of the Shovelanna Hill, Wheelarra Hill Orebody 31 and Mt. Newman Orebody 17. There were no other matters or circumstances that have arisen since the end of the financial period which significantly affected or may significantly affect the operations of the Company, the results of those operations, or the state of affairs of the Company in future financial years. 8. FUTURE DEVELOPMENTS The economic entity will continue its mineral exploration activity at and around its exploration projects with the object of identifying commercial resources. 9. ENVIRONMENTAL ISSUES The economic entity is aware of its environmental obligations with regards to its exploration activities and ensures that it complies with all regulations when carrying out any exploration work. 10. INFORMATION ON DIRECTORS Nathan McMahon Managing Director (Corporate and Administration) Qualifications B.Com Experience Mr. McMahon has provided tenement management advise to the mining industry for approximately 14 years to in excess of 20 public listed mining companies. Mr. McMahon has specialised in native title negotiations, joint venture negotiations and project acquisition due diligence. He is a director of several unlisted mining and exploration companies with interests in platinum group elements, base metals, industrial minerals and diamond exploration. Mr McMahon is also a director of Graynic Metals Limited. Interest in Shares and Options Fully Paid Ordinary Shares 15.02 cent Options expiring on 31 January 2006 35.02 cent Options expiring on 31 August 2007 5,239,688 153,422 1,000,000 Clive Jones Managing Director (Technical) Qualifications B.App.Sc(Geol), M.AusIMM. Experience Mr Jones has been involved in mineral exploration for over 22 years and has worked on the exploration for a range of commodities including gold, base metals, mineral sands, diamonds and industrial minerals. Mr Jones was also previously a director of Mount Burgess Mining Ltd, where he oversaw the discovery of the high grade Red October gold deposit situated in the Eastern Goldfields of Western Australia. Mr Jones is also a director of Jackson Gold Limited and Graynic Metals Limited. Interest in Shares and Options Fully Paid Ordinary Shares 15.02 cent Options expiring on 31 January 2006 35.02 cent Options expiring on 31 August 2007 4,050,001 50,000 1,000,000 A n n u a l R e p o r t 0 5 D i r e c t o r s ’ R e p o r t 15 10. INFORMATION ON DIRECTORS Kent Hunter Non-Executive Director Qualifications B.Bus, CA. Experience Mr Hunter is a Chartered Accountant with over 15 years’ corporate and company secretarial experience. He has been involved in the listing of 15 exploration companies on ASX in the past four years with capital raisings exceeding $54 million. He has experience in capital raisings, ASX compliance and regulatory requirements and is currently a director of Scimitar Resources Limited, Gryphon Minerals Limited and Elixir Petroleum Limited and is company secretary of four other ASX Listed entities. Interest in Shares and Options Fully Paid Ordinary Shares 15.02 cent Options expiring on 31 January 2006 35.02 cent Options expiring on 31 August 2007 877,300 175,766 250,000 11. REMUNERATION REPORT This report details the nature and amount of remuneration for each director of Cazaly Resources Limited. Remuneration Policy The remuneration policy of Cazaly Resources Limited has been designed to align director objectives with shareholder and business objectives by providing a fixed remuneration component which is assessed on an annual basis in line with market rates.The board of Cazaly Resources Limited believes the remuneration policy to be appropriate and effective in its ability to attract and retain the best directors to run and manage the company, as well as create goal congruence between directors and shareholders. The board’s policy for determining the nature and amount of remuneration for board members is as follows: The remuneration policy, setting the terms and conditions for the executive directors and other senior staff members, was developed by the managing director and approved by the board after seeking professional advice from independent external consultants. In determining competitive remuneration rates, the Board seeks independent advice on local and international trends among comparative companies and industry generally. It examines terms and conditions for employee incentive schemes, benefit plans and share plans. Independent advice is obtained to confirm that executive remuneration is in line with market practice and is reasonable in the context of Australian executive reward practices. All executives receive a base salary (which is based on factors such as length of service and experience), superannuation and fringe benefits. The economic entity is an exploration entity, and therefore speculative in terms of performance. Consistent with attracting and retaining talented executives, directors and senior executives are paid market rates associated with individuals in similar positions, within the same industry.The Board however acquired and were issued shares as part of the terms of the Initial Public Offer. Board members have retained these securities which assist in aligning their objectives with overall shareholder value. Options and performance incentives will be issued in the event that the entity moves from an exploration entity to a producing entity, and key performance indicators such as profits and growth can be used as measurements for assessing Board performance. The executive directors and executives receive a superannuation guarantee contribution required by the government, which is currently 9% and do not receive any other retirement benefits. All remuneration paid to directors 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. Options are valued using the Black-Scholes methodology. C a z a l y R e s o u r c e s L i m i t e d 16 D i r e c t o r s ’ R e p o r t 11. REMUNERATION REPORT (CONT.) The board policy is to remunerate non-executive directors at market rates for comparable companies for time, commitment and responsibilities. The managing director in consultation with independent advisors determines payments to the non-executive directors and reviews their remuneration annually, based on market practice, duties and accountability. 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. Fees for non-executive directors are not linked to the performance of the Company. However, to align directors’ interests with shareholder interests, the directors are encouraged to hold shares in the company. Company Performance, Shareholder Wealth and Directors’ and Executives’ Remuneration The remuneration policy has been tailored to increase goal congruence between shareholders and directors and executives. This has been achieved by the issue of shares to the majority of the directors and executives to encourage the alignment of personal and shareholder interest. Details of Remuneration for Year Ended 30 June 2005 The remuneration for each director of the company receiving the highest remuneration during the year was as follows: 2005 Financial Year Primary Post Employment Equity Salary and Fees $ Superannuation Cash Bonus $ Contribution $ Non-cash Benefits $ Nathan McMahon 118,336(ii) Clive Jones 150,000(iii) Kent Hunter 25,000 293,336 - - - - - - - - - - - - Superannuation Options Other Total Contribution $ - - 2,250 2,250 $ $ $ 28,000 (i) 28,000 (i) - - 146,336 178,000 7,000 (i) 37,470(iv) 71,720 63,000 37,470 396,056 i) The fair value of the Options is calculated at the date of grant using a Black-Sholes model. ii) An aggregate amount of $118,336 was paid, or was due and payable to Kingsreef Pty Ltd, a company controlled by Mr Nathan McMahon, for the provision of corporate and tenement management services to the Company. iii) An aggregate amount of $150,000 was paid, or was due and payable to Widerange Corporation Pty Ltd, a company controlled by Mr Clive Jones, for the provision of geological services to the Company. iv) An aggregate amount of $37,470 was paid, or was due and payable to Mining Corporate Advisory Services Pty Ltd, a company controlled by Mr Kent Hunter, for the provision of company secretarial services to the Company. The following factors and assumptions were used in determining the fair value of options issued to Directors on grant date: Grant Date Expiry Date Fair Value Per Option Exercise Date Price of Shares On Grant Date Estimated Volatility Risk Free Interest Rate 06/10/04 31/08/07 $0.028 - $0.18 50% 5.37% Dividend Yield 0% Estimated volatility approximates historic volatility. Each option entitles the holder to purchase one ordinary share in the Company. A n n u a l R e p o r t 0 5 D i r e c t o r s ’ R e p o r t 17 11. REMUNERATION REPORT (CONT.) Employment Contracts of Directors and Senior Executives The employment conditions of the Managing Directors, Nathan McMahon and Clive Jones, is formalised in a contract of employment. Other than the Managing Director, all executives are permanent employees of Cazaly Resources Limited. The employment contracts stipulate a range of one to three-month resignation periods. The economic entity may terminate an employment contract without cause by providing one to three months written notice or making payment in lieu of notice, based on the individual’s annual salary component. 12. MEETINGS OF DIRECTORS The number of directors' meetings held during the financial period each director held office during the financial period and the number of meetings attended by each director are: Number Eligible to Attend Meetings Attended Directors Meetings Director N McMahon C Jones K Hunter 5 5 5 5 5 5 The economic entity does not have a formally constituted audit committee as the board considers that the company’s size and type of operation do not warrant such a committee. 13. INDEMNIFYING OFFICERS OR AUDITOR In accordance with the constitution, except as may be prohibited by the Corporations Act 2001 every Officer, auditor or agent of the Company shall be indemnified out of the property of the Company against any liability incurred by him in his capacity as Officer, auditor or agent of the Company or any related corporation in respect of any act or omission whatsoever and howsoever occurring or in defending any proceedings, whether civil or criminal. 14. OPTIONS Options Granted to Executives and Directors Director Expiry Date Exercise Price Number of Shares Nathan McMahon 31 August 2007 Clive Jones Kent Hunter 31 August 2007 31 August 2007 $0.3502 $0.3502 $0.3502 1,000,000 1,000,000 250,000 Unissued Shares Under Option At the date of this report unissued ordinary shares of the Company under option are: Expiry Date Exercise Price Number of Shares 2 July 2009 31 August 2007 $0.2502 $0.3502 400,000 2,250,000 During the year ended 30 June 2005, the following ordinary shares of the Company were issued on exercise of options. Grant Date Exercise Price Number of Shares 24 January 2004 8 September 2003 $0.20 $0.35 1,290,874 2,500,000 18 D i r e c t o r s ’ R e p o r t C a z a l y R e s o u r c e s L i m i t e d 15 PROCEEDINGS ON BEHALF OF COMPANY No person has applied for leave of Court to bring proceedings on behalf of the company or 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 any part of those proceedings. The economic entity was not a party to any such proceedings during the year. 16. AUDITORS INDEPENDENCE DECLARATION The lead auditor’s independence declaration for the year ended 30 June 2005 has been received and can be found on page 19 of the directors’ report. 17. NON AUDIT SERVICES The board of directors are satisfied that no non-audit services were performed during the year by the Company’s auditors. Signed in accordance with a resolution of the Board of Directors. KENT HUNTER DIRECTOR 30 SEPTEMBER 2005 A u d i t o r ’ s I n d e p e n d e n c e S t a t e m e n t 19 A n n u a l R e p o r t 0 5 20 S t a t e m e n t o f F i n a n c i a l P e r f o r m a n c e C a z a l y R e s o u r c e s L i m i t e d Statement of Financial Performance for the Year Ended 30 June 2005 Economic Entity Parent Entity Note 2005 $ Revenues from ordinary activities Employee benefits expense Depreciation and amortisation expense Borrowing costs expense Administrative expense Advertising and promotional expenses Consultancy expenses Compliance and Regulatory expenses Communication expenses Occupancy expenses Written-off exploration expenditure Provision for diminution in value of shares Other expenses from ordinary activities Profit/Loss from ordinary activities before income tax expense/benefit Income tax expense/benefit relating to ordinary activities 2 3 3 3 3 6 3,645,411 (22,950) (35,597) (3,001) (165,576) (53,199) (29,150) (82,079) (14,245) (58,709) (161,027) (292,560) (20,509) 2005 $ 3,645,411 (22,950) (35,597) (3,001) (165,019) (53,199) (29,150) (81,867) (14,245) (58,709) (161,027) (292,560) (20,508) 2004 $ 287,811 (49,691) (23,988) (92) (44,478) (32,591) (46,511) (24,048) (18,948) (27,140) - - (75,718) 2,706,809 2,707,579 (55,394) - - - Net profit / (loss) attributable to members 2,706,809 2,707,579 (55,394) Total changes in equity other than those resulting from transactions with owners as owners 2,706,809 2,707,579 (55,394) Basic earnings (loss) per share (cents per share) Diluted earnings (loss) per share (cents per share) 17 17 7.46 4.95 (0.23) (0.16) The accompanying notes form part of these financial statements A n n u a l R e p o r t 0 5 S t a t e m e n t o f F i n a n c i a l P o s i t i o n 21 Statement of Financial Position as at 30 June 2005 CURRENT ASSETS Cash assets Receivables Economic Entity Parent Entity Note 2005 $ 2005 $ 2004 $ 7 8 1,662,841 109,562 1,662,841 109,562 2,436,132 174,681 TOTAL CURRENT ASSETS 1,772,403 1,772,403 2,610,813 NON CURRENT ASSETS Receivables Other financial assets Plant & equipment Other assets 8 9 10 11 77,731 1,071,794 348,950 4,432,198 3,565,425 941,795 348,950 1,075,273 - 37,995 90,801 1,930,180 TOTAL NON CURRENT ASSETS 5,930,673 5,931,443 2,058,976 TOTAL ASSETS 7,703,076 7,703,846 4,669,789 CURRENT LIABILITIES Payables Provision 12 13 410,558 15,881 410,558 15,881 238,381 4,754 TOTAL CURRENT LIABILITIES 426,439 426,439 243,135 TOTAL LIABILITIES 426,439 426,439 243,135 NET ASSETS EQUITY 7,276,637 7,277,407 4,426,654 Contributed equity Retained profits / (Accumulated losses) 14 15 4,625,224 2,651,413 4,625,224 2,652,183 4,482,050 (55,396) TOTAL EQUITY 7,276,637 7,277,407 4,426,654 The accompanying notes form part of these financial statements. 22 S t a t e m e n t o f C a s h F l o w s C a z a l y R e s o u r c e s L i m i t e d Statement of Cash Flows for the Year Ended 30 June 2005 Cash Flows from Operating Activities - Payments to suppliers and employees - Interest received - Other revenue - Interest paid - Payments for exploration and evaluation Economic Entity Parent Entity Note 2005 $ 2005 $ 2004 $ (371,734) 96,809 187,162 (93) (2,335,480) (370,965) 96,809 187,162 (93) (126,877) (402,018) 105,538 90,000 (92) (817,173) Net cash used in operating activities 18 (2,423,336) (213,964) (1,023,745) Cash Flows From Investing Activities - Proceeds from sale of exploration assets - Proceeds from sale of equity investments - Purchase of plant and equipment - Purchase of exploration assets - Purchase of equity investments - Purchase of term deposit - Loans to other entities - Loans to associated entities - 198,698 (43,746) (51,791) (268,559) (6,000) (61,731) - 150,000 198,698 (43,746) (51,791) (138,560) (6,000) (61,731) (2,489,371) 60,000 10,703 (114,789) (525,004) (49,083) - - - Net cash used in investing activities (233,129) (2,442,501) (618,173) Cash Flows from Financing Activities - Proceeds from issue of securities - Payment for costs of issue of securities 1,933,174 (40,000) 1,933,174 (40,000) 4,365,199 (287,149) Net cash provided by financing activities 1,893,174 1,893,174 4,078,050 Net increase in cash held (763,291) (763,291) 2,426,132 Cash Assets at beginning of the financial year 2,426,132 2,426,132 - Cash Assets at end of the financial year 7 1,662,841 1,662,841 2,426,132 The accompanying notes form part of these financial statements N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 23 A n n u a l R e p o r t 0 5 Notes to the Financial Statements for the Year Ended 30 June 2005 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES The financial report is a general purpose financial report that has been prepared in accordance with Australian Accounting Standards, Urgent Issues Group Consensus Views, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. The financial report covers the economic entity of Cazaly Resources Limited and controlled entities, and Cazaly Resources Limited as an individual parent entity. Cazaly Resources Limited is a listed public company, incorporated and domiciled in Australia. The financial report has been prepared on an accruals basis and is based on historical costs and does not take into account changing money values or, except where stated, current valuations of non-current assets. Cost is based on the fair values of the consideration given in exchange for assets. The following is a summary of the material accounting policies adopted by the economic entity in the preparation of the financial report. The accounting policies have been consistently applied, unless otherwise stated. (a) Plant and Equipment Each class of plant and equipment is carried at cost or fair value less, where applicable, any accumulated depreciation. Plant and Equipment Plant and equipment are measured on the cost basis. The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows which will be received from the assets’ employment and subsequent disposal. The expected net cash flows have not been discounted to their present values in determining recoverable amounts. Depreciation The depreciable amount of all fixed assets is depreciated on a diminishing value basis over their useful lives to the economic entity commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements The depreciation rates used for each class of depreciable assets are: Class of Fixed Asset Plant and equipment Office furniture and equipment Motor vehicle Leasehold improvements Depreciation Rate 40.0% 18.0% 22.5% Term of Lease (b) Income tax The economic entity adopts the liability method of tax-effect accounting whereby the income tax expense is based on the loss from ordinary activities adjusted for any permanent differences. 24 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s C a z a l y R e s o u r c e s L i m i t e d 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) Timing differences which arise due to the different accounting periods in which items of revenue and expense are included in the determination of accounting profit and taxable income are brought to account as either a provision for deferred income tax or as a future income tax benefit at the rate of income tax applicable to the period in which the benefit will be received or the liability will become payable. Future income tax benefits are not brought to account unless realisation of the asset is assured beyond reasonable doubt. Future income tax benefits in relation to tax losses are not brought to account unless there is virtual certainty of realisation of the benefit. 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. Cazaly Resources Limited and its wholly-owned Australian subsidiaries intend to form an income tax consolidation group under the Tax Consolidation Regime. Cazaly Resources Limited is responsible for recognising the current and deferred tax assets and liabilities for the tax consolidation group. (c) Exploration, evaluation and development expenditure Exploration, evaluation and development expenditure incurred is accumulated in respect of each identifiable area of interest. These costs are only carried forward to the extent that they are expected to be recouped through successful development on the area or where activities in the area have not yet reached a stage which permits reasonable assessment of the existence of economically recoverable reserve. Accumulated costs in relation to an abandoned area are written off in full against profit in the year in which the decision to abandon the area is made. When production commences, the accumulated costs for the relevant area of interest area amortised over the life of the area according to the rate of depletion of the economically recoverable reserves. A regular review is undertaken of each area of interest to determine the appropriateness of continuing to carry forward costs in relation to that area of interest. (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, are transferred to entities in the economic entity are classified as finance leases. Finance leases are capitalised, recording an asset and a liability equal to the present value of the minimum lease payments, including any guaranteed residual values. Leased assets are depreciated on a diminishing value basis over their estimated useful lives where it is likely that the economic entity will obtain ownership of the asset or over the term of the lease. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses in the periods in which they are incurred. (e) Investment Shares in listed companies held as current assets are valued by directors at those shares' market value at each balance date.The gains or losses, whether realised or unrealised, are included in profit from ordinary activities before income tax. Non-current investments are measured on cost basis.The carrying amount of non-current investments is reviewed annually by directors to ensure it is not in excess of the recoverable amount of these investments.The recoverable amount is assessed from the quoted market value for listed investments or the underlying net assets for other non-listed investments. The expected net cash flows from investments have not been discounted to their present value in determining the recoverable amounts. N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 25 A n n u a l R e p o r t 0 5 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (f) Earnings Per Share Basic earnings per share (“EPS”) is calculated by dividing the net profit attributable to members for the reporting period, after excluding any costs of servicing equity, by the weighted average number or ordinary shares of the economic entity, adjusted for any bonus issue. (g) Revenue Interest revenue is recognised on a proportional basis taking into account the interest rates applicable to the financial assets. (h) Cash For the purpose of the Statements of Cash Flows, cash includes cash on hand and at call deposits with banks or financial institutions, net of bank overdrafts. (i) Employee Benefits Provision is made for the economic entity liability for employee benefits arising from services rendered by employees to balance date. Employee benefits expected to be settled within one year together with entitlements arising from wages and salaries, annual leave and sick leave which will be settled after one year, have been measured at the amounts expected to be paid when the liability is settled, plus related on-costs. Other employee benefits payable later than one year have been measured at the present value of the estimated future cash outflows to be made for those benefits. Contributions are made by the economic entity to employee superannuation funds and are charged as expenses when incurred. (j) 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. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows. (k) Recoverable amounts of Non-Current assets valued on cost basis The carrying amount of non-current assets valued on the cost basis, other than exploration expenditure carried forward (see Note 1c) are reviewed to determine whether they are in excess of their recoverable amount at reporting date. If the carrying value of a non-current asset exceeds its recoverable amount, the asset is written down to the lower amount.The write down is expensed in the reporting period in which it occurs. In accessing recoverable amount, the relevant cash flows have not been discounted to their present value. (l) Comparative Cazaly Resources Limited’s wholly owned subsidiary Hayes Mining Pty Ltd was acquired on 1 July 2004. Comparative results for the 2004 period therefore only display the results of the Parent entity. 26 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s C a z a l y R e s o u r c e s L i m i t e d 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (m) Principles of Consolidation A controlled entity is any entity controlled by Cazaly Resources Limited. Control exists where Cazaly Resources Limited has the capacity to dominate the decision-making in relation to the financial and operating policies of another entity so that the other entity operates with Cazaly Resources Limited to achieve the objectives of Cazaly Resources Limited. A list of controlled entities is contained in Note 20 of the financial report. All inter-company balances and transactions between entities in the economic entity, including any unrealised profits or losses, have been eliminated on consolidation. Where controlled entities have entered or left the economic entity during the year, their operating results have been included from the date control was obtained or until the date control ceased. Outside interests in the entity and results of the entities that are controlled are shown as a separate item in the consolidated financial report. (n) Impact of Adoption of Australian Equivalents to International Financial Reporting Standards The economic entity is preparing and managing the transition to Australian Equivalents to International Financial Reporting Standards (AIFRS) effective for the financial years commencing from 1 January 2005.The adoption of AIFRS will be reflected in the economic entity financial statements for the year ending 30 June 2006. On first time adoption of AIFRS, comparatives for the financial year ended 30 June 2005 are required to be restated.The majority of the AIFRS transitional adjustments will be made retrospectively against retained earnings at 1 July 2004. The economic entity’s management, with the assistance of external consultants, has assessed the significance of the expected changes and is preparing for their implementation.The impact of the alternative treatments and elections under AASB 1: First Time Adoption of Australian Equivalents to International Financial Reporting Standards has been considered where applicable. The directors are of the opinion that the key material differences in the economic entity accounting policies on conversion to AIFRS and the financial effect of these differences, where known, are as follows. Users of the financial statements should note, however, that the amounts disclosed could change if there are any amendments by standard- setters to the current AIFRS or interpretation of the AIFRS requirements changes from the continuing work of the economic entity Board of Directors. i) Impairment of Assets Under AASB 136: Impairment of Assets, the recoverable amount of an asset is determined as the higher of fair value less costs to sell, and value in use. In determining value in use, projected future cash flows are discounted using a risk adjusted pre-tax discount rate and impairment is assessed for the individual asset or at the ‘cash generating unit’ level. A ‘cash generating unit’ is determined as the smallest group of assets that generates cash flows that are largely independent of the cash inflows from other assets or groups of assets.The current policy is to determine the recoverable amount of an asset on the basis of undiscounted net cash flows that will be received from the asset’s use and subsequent disposal. It is likely that this change in accounting policy will lead to impairments being recognised more often. Whilst, as stated, it is likely that in future impairments will be recognised more often in the future, the company estimates that there is no additional impairment to be recognised on the value of the assets subject to this standard as at 1 July 2005. N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 27 A n n u a l R e p o r t 0 5 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) ii) Non-current Investments Under AASB 139: Financial Instruments: Recognition and Measurement, financial assets are required to be classified into four categories, which determines the accounting treatment of the item.The categories and various treatments are: – held to maturity, measured at amortised cost; – held for trading, measured at fair value with unrealised gains or losses charged to the profit and loss; – loans and receivables, measured at amortised cost; and – available for sale instruments, measured at fair value with unrealised gains or losses taken to equity The economic entity financial assets comprise available for sale financial instruments. Under AASB 139: Financial Instruments: Recognition and Measurement, the measurement of available for sale instruments at fair value differs to current accounting policy which measures non-current investments at cost with an annual review by directors to ensure the carrying amounts are not in excess of the recoverable value of the instrument. The impact of the change is likely to increase the value of non-current other financial assets in relation to available for sale instruments. AASB 1 provides an election whereby the requirements of AASB 139 dealing with financial instruments are not required to be applied to the first AIFRS comparative year, and the first time adoption of this standard will apply from 1 July 2005.The economic entity has decided that it will adopt this election and will not restate comparative information for the 30 June 2005 financial year. iii) Share Based Payments Under current Australian GAAP, no expense is recognised for options issued to employees. Under AIFRS, the fair value of options granted must be recognised as an employee benefit expense with a corresponding increase in equity.The fair value will be measured at grant date taking into account market performance conditions only, and will be spread over the vesting period during which the employee becomes unconditionally entitled to the options.The fair value of the options will be measured using the Black Scholes model. No adjustment is expected in either the economic entity as all options on issue were both granted & vested prior to 1st January 2005. iv) Exploration Expenditure AASB 6 was issued in December 2004 to facilitate the introduction of AIFRS in relation to the treatment of exploration and evaluation expenditure, pending the completion of a comprehensive project on accounting for extractive industries. According to AASB 6, it is expected that the outcome will be a revised extractive industries standard that will replace AASB 6. AASB 6 retains the concept of area of interest accounting. However, unlike AASB 1022, AASB 6 provides that for each area of interest, expenditures incurred in the exploration for and evaluation of mineral resources shall be either expensed or partially or fully capitalised Unlike AASB 1022, AASB 6 specifically excludes expenditure incurred before the exploration for and evaluation of mineral resources, such as expenditures incurred before the entity has obtained the legal rights to explore a specific area. There are anticipated to be no significant impacts to the economic entity. v) Income Tax Currently, the economic entity adopts the liability method of tax-effect accounting whereby the income tax expense is based on the accounting profit adjusted for any permanent differences.Timing differences are currently brought to account as either a provision for deferred income tax or future income tax benefit. Under AASB 112: Income Taxes, the entity will be required to adopt a balance sheet approach under which temporary differences are identified for each asset and liability rather than the effects of the timing and permanent differences between taxable income and accounting profit. There are anticipated to be no significant impacts to the economic entity. 28 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s C a z a l y R e s o u r c e s L i m i t e d 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (o) Joint Venture Entities A joint venture entity is an entity in which Cazaly holds a long-term interest and which is jointly controlled by Cazaly and one or more other venturers. Decisions regarding the financial and operating policies essential to the activities, economic performance and financial position of that venture require the consent of each of the venturers that together jointly control the entity. Joint Venture Operations Cazaly has certain contractual arrangements with other participants to engage in joint activities where all significant matters of operating and financial policy are determined by the participants such that the operation itself has no significant independence to pursue its own commercial strategy.These contractual arrangements do not create a joint venture entity due to the fact that the policies are those of the participants, not a separate entity carrying on a trade or a business of its own. The financial statements of Cazaly include its share of the assets, liabilities and cash flows in such joint venture operations, measured in accordance with the terms of each arrangement, which is usually pro-rata to Cazaly’s interest in the joint venture operations. (p) Royalty Assets Royalty assets are valued in the accounts at cost of acquisition and are amortised over the period in which their benefits are expected to be realised. The balances are reviewed annually and any balance representing future benefits for which the realisation is considered to be no longer probable are written off. 2. REVENUE Operating activities - interest received - option fees - profit on sale of tenement - profit on sale of shares - other revenue Total Revenue Economic Entity Parent Entity Note 2005 $ 2005 $ 2004 $ 98,371 300,000 2,107,381 22,498 1,117,161 98,371 300,000 2,107,381 22,498 1,117,161 107,108 90,000 - - 90,703 3,645,411 3,645,411 287,811 3. Loss from Ordinary activities Loss from ordinary activities before income tax has been determined after: (i) Expenses Borrowing costs - other persons Depreciation of non-current assets - plant and equipment - amortisation of leasehold improvements Rental expense on operating leases - minimum lease payments Write down of investments 3,001 3,001 92 31,983 3,614 35,597 31,983 3,614 35,597 36,702 36,702 292,560 292,560 22,969 1,019 23,988 20,833 24,088 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 29 A n n u a l R e p o r t 0 5 4. REMUNERATION AND RETIREMENT BENEFITS a) Name and positions held by directors’ in office at any time during the financial year are: Mr Nathan McMahon Mr Clive Jones Mr Kent Hunter Managing Director Managing Director Director b) Details of the nature and amount of emoluments of each director are as follows: 2005 Primary Post Employment Equity Salary and Fees $ Superannuation Cash Bonus $ Contribution $ Non-cash Benefits $ Nathan McMahon 118,336(i) Clive Jones 150,000(ii) Kent Hunter 25,000 293,336 - - - - - - - - - - - - Superannuation Options Other Total Contribution $ - - 2,250 2,250 $ 28,000 28,000 $ $ - - 146,336 178,000 7,000 37,470(iii) 71,720 63,000 37,470 396,056 i) An aggregate amount of $118,336 was paid, or was due and payable to Kingsreef Pty Ltd, a company controlled by Mr Nathan McMahon, for the provision of corporate and tenement management services to the Company. ii) An aggregate amount of $150,000 was paid, or was due and payable to Widerange Corporation Pty Ltd, a company controlled by Mr Clive Jones, for the provision of geological services to the Company. iii) An aggregate amount of $37,470 was paid, or was due and payable to Mining Corporate Advisory Services Pty Ltd, a company controlled by Mr Kent Hunter, for the provision of company secretarial services to the Company. 2004 Primary Post Employment Equity Salary and Fees $ Superannuation Cash Bonus $ Contribution $ Non-cash Benefits $ Superannuation Options Other Total Contribution $ $ $ Nathan McMahon 72,500(i) Clive Jones Kent Hunter 88,750(ii) 18,750 180,000 - - - - - - - - - - - - - - 1,687 1,687 - - - - $ 72,500 88,750 - - 21,040(iii) 41,477 21,040 202,727 i) An aggregate amount of $72,500 was paid, or was due and payable to Kingsreef Pty Ltd, a company controlled by Mr Nathan McMahon, for the provision of corporate and tenement management services to the Company. ii) An aggregate amount of $88,750 was paid, or was due and payable to Widerange Corporation Pty Ltd, a company controlled by Mr Clive Jones, for the provision of geological services to the Company. iii) An aggregate amount of $21,040 was paid, or was due and payable to Mining Corporate Advisory Services Pty Ltd, a company controlled by Mr Kent Hunter, for the provision of company secretarial services to the Company. 30 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s C a z a l y R e s o u r c e s L i m i t e d 4. REMUNERATION AND RETIREMENT BENEFITS (cont.) (c) Shareholdings Number of Shares held by Directors and Executive Balance 1.7.04 3,883,784 3,250,000 827,300 7,961,084 N B McMahon C B Jones K M Hunter Option Holdings Received as Options Exercised Net Change Remuneration - - - - 1,500,000 1,000,000 - - Other (144,096) (200,000) 50,000 Balance 30.06.05 5,239,688 4,050,001 877,300 2,500,000 (294,096) 10,166,989 Number of 15.02 cent Options expiring 31 January 2006 held by Directors and Executive Balance Granted Options Net Change Balance Total Vested Total Total 1.7.04 as Remuner-ation Exercised - Other 30.06.05 Exercisable Unexercisable N B McMahon 1,086,442 C B Jones K M Hunter 1,050,000 275,766 2,412,208 - - - - - - - - (933,000) 153,442 153,442 153,442 (1,000,000) 50,000 (100,000) 175,766 (2,033,000) 379,208 50,000 175,766 379,208 50,000 175,766 379,208 - - - - Number of 35.02 cent Options expiring 31 August 2007 held by Directors and Executive Balance Granted Options Net Change Balance Total Vested Total Total N B McMahon C B Jones K M Hunter 1.7.04 as Remuner-ation - - - - 1,000,000 1,000,000 250,000 2,250,000 Exercised - Other 30.06.05 Exercisable Unexercisable - - - - 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 250,000 250,000 250,000 250,000 2,250,000 2,250,000 2,250,000 2,250,000 - - - - The economic entity policy for determining the nature and amount of emoluments of board members and senior executives of the company is as follows: The remuneration structure for executive officers, including executive directors, is based on a number of factors, including length of service, particular experience of the individual concerned, and overall performance of the economic entity. The contracts for service between the economic entity and specified directors and executives are on a continuing basis the terms of which are not expected to change in the immediate future. Upon retirement specified directors and executives are paid employee benefit entitlements accrued to date of retirement.The company may terminate the contracts without cause by providing one to three months written notice or making payment in lieu of notice based on the individual’s annual salary component at industry award redundancy rates. N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 31 A n n u a l R e p o r t 0 5 5. AUDITORS’ REMUNERATION Remuneration of the auditor for: - Auditing or reviewing the financial report - Other services 6. INCOME TAX The prima facie tax on profit / (loss) from ordinary activities before income tax is reconciled to the income tax as follows: Prima facie tax expense / (benefit) on profit / (loss) from ordinary activities before income tax at 30% Add (Less) Tax effect of: - Permanent Differences - Tax effect of timing differences not brought to account - Other members of the income tax consolidation group net of intercompany transactions. - Future income tax benefit not brought to account - Tax effect of tax losses recouped Economic Entity 2005 $ Parent Entity 2005 $ 2004 $ 9,800 - 9,800 9,800 - 9,800 8,500 2,500 11,000 812,042 812,274 (16,618) - - 65 (689,133) 95,745 (300,879) - (785,110) - - (122,909) - (122,909) 317,432 - Income tax attributable to operating loss - - - Potential future income tax benefits attributable to tax losses and exploration expenditure carried forward amounting to approximately $183,000 (2004: $320,000) have not been brought to account at 30 June 2005 because the directors do not believe it is appropriate to regard realisation of the future income tax benefits as virtually certain. These benefits will only be obtained if: (a) (b) (c) the economic entity derives future assessable income of a nature and of an amount sufficient to enable the benefit from the deductions for the loss and exploration expenditure to be realised; the economic entity continues to comply with the conditions for deductibility imposed by law; and no changes in tax legislation adversely affect the economic entity in realising the benefit from the deductions for the loss and exploration expenditure. 32 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s C a z a l y R e s o u r c e s L i m i t e d 7. CASH ASSETS Cash at bank Petty cash Deposits at call Economic Entity 2005 $ Parent Entity 2005 $ 2004 $ 118,936 500 1,543,405 1,662,841 118,936 500 1,543,405 1,662,841 285,494 400 2,150,238 2,436,132 The bank deposits are short term deposits maturing within 30 days, and pay interest at a rate of 5.32% per annum. 8. RECEIVABLES Current Other debtors Non-Current Bonds (i) Loans to other entities Loans to associated entities (i) Bonds are term deposits, held by way of bank guarantee. 9. OTHER FINANCIAL ASSETS Current Shares in controlled entity, at cost Shares in listed corporations, at cost Less: Provision for write-down to recoverable amount 10. PROPERTY, PLANT AND EQUIPMENT Field Plant and Equipment At cost Accumulated depreciation Property, Plant and Equipment At cost Accumulated depreciation Economic Entity 2005 $ Parent Entity 2005 $ 2004 $ 109,562 109,562 174,681 16,000 61,731 - 16,000 61,731 3,487,694 77,731 3,565,425 - - - - - 1,378,442 (306,648) 1 1,248,442 (306,648) - 61,083 (23,088) 1,071,794 941,795 37,995 280,000 - 280,000 76,453 (41,039) 35,414 280,000 - 280,000 76,453 (41,039) 35,414 - - - 65,587 (17,537) 48,050 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 33 A n n u a l R e p o r t 0 5 10. PROPERTY, PLANT AND EQUIPMENT (CONT.) Office Furniture and Equipment At cost Accumulated depreciation Motor Vehicle At cost Accumulated depreciation Leasehold Improvement At cost Accumulated amortisation Movement in the carrying amounts for each class of plant and equipment between the beginning and end of the current financial year. Economic Entity 2005 $ Parent Entity 2005 $ 2004 $ 19,464 (5,068) 14,396 27,272 (8,844) 18,428 5,344 (4,632) 712 19,464 (5,068) 14,396 27,272 (8,844) 18,428 5,344 (4,632) 712 16,584 (1,918) 14,666 27,273 (3,514) 23,759 5,345 (1,019) 4,326 348,950 348,950 90,801 2005 $ Plant and Field Plant Office Equipment Furniture and Equipment Motor Vehicles Leasehold Improvements Total Balance at the beginning of the year Additions Disposals Depreciation/expense 48,050 10,866 - (23,502) - 280,000 - - 14,666 2,880 - (3,150) 23,759 - - (5,331) 4,326 - - (3,614) 90,801 293,746 - (35,597) Carrying amount at the end of the year 35,414 280,000 14,396 18,428 712 348,950 Economic Entity Parent Entity 11. OTHER ASSETS Non-Current Costs carried forward in respect of areas of interest in: - Exploration and evaluation phases – at cost – (a) - Royalty assets Economic Entity 2005 $ Parent Entity 2005 $ 2004 $ 4,385,198 47,000 1,075,273 - 1,883,180 47,000 4,432,198 1,075,273 1,930,180 34 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s C a z a l y R e s o u r c e s L i m i t e d Economic Entity 2005 $ Parent Entity 2005 $ 2004 $ 11. OTHER ASSETS (CONT.) (a) Brought forward Exploration expenditure capitalised during the year Exploration expenditure written off Exploration expenditure transferred to controlled entity 1,883,180 2,663,045 (161,027) - 1,883,180 126,877 (161,027) (773,757) - 1,883,180 - - 4,385,198 1,075,273 1,883,180 The value of the economic entity interest in exploration expenditure is dependent upon: • • • the continuance of the economic entity rights to tenure of the areas of interest; the results of future exploration; and the recoupment of costs through successful development and exploitation of the areas of interest, or alternatively, by their sale. The economic entity exploration properties may be subjected to claim(s) under native title, or contain sacred sites, or sites of significance to Aboriginal people. As a result, exploration properties or areas within the tenements may be subject to exploration restrictions, mining restrictions and/or claims for compensation. At this time, it is not possible to quantify whether such claims exist, or the quantum of such claims. 12. PAYABLES Current Unsecured Trade creditors Application Fund Other creditors and accrued expenses 13. PROVISION Current Provision for Annual Leave Employees Number of employees at year end Economic Entity 2005 $ Parent Entity 2005 $ 2004 $ 328,012 - 82,546 328,012 - 82,546 200,313 3,000 35,068 410,558 410,558 238,381 15,881 15,881 4,754 5 5 3 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 35 A n n u a l R e p o r t 0 5 Economic Entity 2005 $ Parent Entity 2005 $ 2004 $ 14. CONTRIBUTED EQUITY 40,190,876 Fully paid ordinary shares (2004: 33,150,002) – (a) 9,063,899 Options (2004: 10,354,773) – (b) 4,534,585 90,639 4,534,585 90,639 4,378,502 103,548 4,625,224 4,625,224 4,482,050 (a) Ordinary Shares At the beginning of the reporting period Shares issued during the year - - - - - 1,250,000 on 15 November 2004 1,145,874 on 16 December 2004 2,000,000 on 4 February 2005 2,500,000 18 February 2005 145,000 on 2 March 2005 1,145,874 on 16 December 2004 145,000 on 2 March 2005 Options exercise during the year - - Capital reduction pursuant to in-specie distribution of Graynic Metals Limited shares - 23 June 2005 4,378,502 4,378,502 250,000 229,174 800,000 875,000 29,000 11,459 1,450 250,000 229,174 800,000 875,000 29,000 11,459 1,450 (2,000,000) (2,000,000) Transaction costs relating to share issues (40,000) (40,000) - - - - - - - - At reporting date 4,534,585 4,534,585 4,378,502 Fully Paid At the beginning of the reporting period Shares issued during the year Shares issued during the year - - - - - 1,250,000 on 15 November 2004 1,145,874 on 16 December 2004 2,000,000 on 4 February 2005 2,500,000 18 February 2005 145,000 on 2 March 2005 No. No. No. 33,150,002 33,150,002 1,250,000 1,145,874 2,000,000 2,500,000 145,000 1,250,000 1,145,874 2,000,000 2,500,000 145,000 - - - - - - At reporting date 40,190,876 40,190,876 33,150,002 36 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s C a z a l y R e s o u r c e s L i m i t e d Economic Entity 2005 $ Parent Entity 2005 $ 2004 $ 14. CONTRIBUTED EQUITY (CONT.) (b) Options At the beginning of the reporting period 103,548 103,548 Options converted during the year - - 1,145,874 on 16 December 2004 145,000 on 2 March 2005 (11,459) (1,450) (11,459) (1,450) - - - At reporting date 90,639 90,639 103,548 Options At the beginning of the reporting period Options converted during the year - - 1,145,874 on 16 December 2004 145,000 on 2 March 2005 No. No. No. 10,354,773 10,354,773 (1,145,874) (145,000) (1,145,874) (145,000) - - - At reporting date 9,063,899 9,063,899 10,354,773 On 15 November 2004, the Company issued 1,250,000 fully paid shares to Croesus Mining NL under the Agreement for Sale of Plant. On 16 December 2004 the Company issued 1,145,874 fully paid ordinary shares converted from option holders exercising their $0.20 options, expiring 31 January 2006. On 4 February 2005, the Company issued 2,000,000 fully paid shares at $0.40 to UK-based institutional investor Fiske plc. On 18 February 2005 the Company issued 2,500,000 fully paid ordinary shares converted from the Directors exercising their $0.35 options, expiring 28 February 2005. On 2 March 2005 the Company issued 145,000 fully paid ordinary shares converted from option holders exercising their $0.20 options, expiring 31 January 2006. On 23 June 2005 Cazaly shareholders received an in-specie distribution of shares in Graynic totalling 10,000,000 shares. The Company’s capital reduced by the value of the in-specie distribution, being $2,000,000. Ordinary shares participate in dividends and the proceeds on winding up of the Company in proportion to the number of shares held and in proportion to the amount paid up on the shares held. At shareholders meetings each ordinary share is entitled to one vote in proportion to the paid up amount of the share when a poll is called, otherwise each shareholder has one vote on a show of hands. 15. ACCUMULATED PROFIT/(LOSS) Accumulated profit/(loss) at the beginning of the financial period Net profit/(loss) attributable to members Accumulated profit/(loss) at the end of the financial period Economic Entity 2005 $ Parent Entity 2005 $ 2004 $ (55,396) 2,706,809 (55,396) 2,707,579 (2) (55,394) 2,651,413 2,652,183 (55,396) N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 37 A n n u a l R e p o r t 0 5 16. FINANCIAL INSTRUMENTS (a) Interest Rate Risk The economic entity’s exposure to interest rate risk, which is the risk that a financial instrument’s value will fluctuate as a result of changes in market interest rates and the effective weighted average interest rate for each class of financial assets and financial liabilities comprises: 2005 Financial assets Cash Receivables Investments Weighted average Interest rate Financial Liabilities Payables Interest bearing liabilities Weighted average interest rate 2004 Financial assets Cash Receivables Investments Weighted average Interest rate Financial Liabilities Payables Interest bearing liabilities Weighted average interest rate Floating Interest Rate $ 118,936 - - 118,936 2.50% - - - Floating Interest Rate $ 285,494 - - 285,494 4.00% - - - - Fixed Interest maturing over 1 to 5 years - - Fixed Interest maturing over 1 to 5 years Fixed Interest maturing in 1 year or less $ 1,543,405 16,000 - 1,559,405 5.32% - - - Fixed Interest maturing in 1 year or less $ 2,150,238 - - 2,150,238 - - - - - - - - 5.37% - - - - - Non- interest bearing 2005 total $ $ 500 171,293 1,071,794 1,243,587 1,662,841 187,293 1,071,794 2,921,928 410,558 410,558 - 410,558 - 410,558 Non- interest bearing 2004 total $ $ 400 174,681 37,995 213,076 2,436,132 174,681 37,995 2,648,808 238,381 238,381 - 238,381 - 238,381 38 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s C a z a l y R e s o u r c e s L i m i t e d 16. FINANCIAL INSTRUMENTS (CONT.) (b) Net Fair Values The carrying value and net fair values of financial assets and liabilities at balance date are: 2005 Carrying Amount $ Net fair Value $ 2004 Carrying Amount $ Net fair Value $ 1,662,84 187,293 1,071,794 1,662,84 187,293 1,071,794 2,436,132 174,681 37,995 2,436,132 174,681 37,995 2,921,928 2,921,928 2,648,808 2,648,808 410,558 410,558 410,588 410,558 238,381 - 238,381 238,381 - 238,381 On-balance sheet financial instruments Financial assets Cash and deposits Receivables Investments Financial liabilities Payables Interest bearing liabilities (c) Credit Risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the economic entity. The economic entity has adopted the policy of only dealing with credit worthy counterparties and obtaining sufficient collateral or other security where appropriate, as a means of mitigating the risk of financial loss from defaults. The economic entity does not have any significant credit risk exposure to any single counterparty or any group of conterparties having similar characteristics. The carrying amount of financial assets recorded in the financial statements, net of any provisions for losses, represents the economic entity maximum exposure to credit risk. 17. EARNINGS PER SHARE Economic Entity 2004 2005 $ $ (a) Earnings / (Loss) used in the calculation of basic EPS 2,706,809 (55,394) (b) Weighted average number of ordinary shares outstanding during the period used in the calculation of basic earnings per share: (c) Weighted average number of ordinary shares outstanding during the period used in the calculation of diluted earnings per share: Number of Number of Shares Shares 36,303,137 23,705,344 54,640,186 34,129,254 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 39 A n n u a l R e p o r t 0 5 18. CASH FLOW INFORMATION (i) Reconciliation of cash flows from operating activities with profit/(loss) from ordinary activities after income tax - Profit / (Loss) from ordinary activities after income tax Non-cash flows in operating loss - Depreciation - Amortisation - - - - Profit on sale of shares Provision for diminution of investment Profit on sale of tenements Exploration write-off Cash flows not in operating loss - Payments for exploration and evaluation Changes in assets and liabilities - Decrease/(Increase) in operating receivables - & prepayments Increase/(Decrease) in trade and other creditors, accruals and employee entitlements - Movement in provisions Economic Entity 2005 $ Parent Entity 2005 $ 2004 $ 2,706,809 2,707,579 (55,394) 31,983 3,614 (22,498) 292,560 (3,337,381) 161,027 31,983 3,614 (22,498) 292,560 (3,337,381) 161,027 22,969 1,019 3,703 24,088 - - (2,335,480) (126,877) (817,173) 57,123 7,780 11,127 57,122 (174,682) 7,780 11,127 (33,029) 4,754 Net cash inflows (outflows) from Operating Activities (2,423,336) (213,964) (1,023,745) ii) Acquisition of Entities During the year 100% of the controlled entity Hayes Mining Pty Ltd was acquired. Details of this transaction are: Purchase consideration 19. COMMITMENTS 1 1 On 10 November 2003 the economic entity entered into a lease agreement with Giorgio Longo and Clotilda Aurora Longo for the premises known as entire First Floor, 22 Oxford Close, Leederville, Western Australia.The initial term, is for two (2) years expiring on 30 September 2005 in consideration for a rental fee of $30,000 per annum.The economic entity is currently in negotiation to extend the lease agreement with Giorgio Longo. 40 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s C a z a l y R e s o u r c e s L i m i t e d 19. COMMITMENTS (Cont.) The commitments outlined below are contingent on the economic entity exercising its rights to acquire exploration assets pursuant to option agreements detailed below. In order to maintain rights of tenure to mining tenements subject to these agreements, the economic entity would have the following discretionary exploration expenditure requirements up until expiry of leases. These obligations, which are subject to renegotiation upon expiry of the leases, are not provided for in the financial statements and are payable: Not longer than one year Longer than one year, but not longer than five years Longer than five years 2005 $ 2,356,140 9,424,560 - 2004 $ 1,150,380 1,305,380 1,305,380 11,780,700 3,761,140 At the moment the economic entity has commitments in excess of cash, however the Board believes it will be able to raise the additional funds to satisfy the commitments for the future. If the economic entity decides to relinquish certain leases and/or does not meet these obligations, assets recognised in the balance sheet may require review to determine the appropriateness of carrying values. The sale, transfer or farm-out of exploration rights to third parties will reduce or extinguish these obligations. Joint Venture Commitments The economic entity has entered into the following joint ventures: International Goldfields Agreement – IGL Projects On 28 July 2003 Cazaly entered into a Tenement Sale and Purchase Agreement with International Goldfields Ltd (“Vendor”), for the consideration of a cash payment and the issuing of a royalty of $1/dry tonne mined and milled on any future production for the IGL Projects. Mt.Vetters Project – Exploration Licence 27/277 and Prospecting Licences 27/1603 To 27/1605 On 1 March 2004 Cazaly entered into an Joint Venture Agreement with Discovery Nickel Ltd. (DNL), whereby DNL in consideration of issuing Cazaly 770,000 shares in DNL, Cazaly shall grant to DNL, the sole and exclusive right to earn a 75% interest in the Mt.Vetters Project by: (a) Sole funding exploration until the commencement of a bankable feasibility study; and (b) Expending a minimum of $100,000 in the first year. Upon commencement of a feasibility study Cazaly may elect to contribute or dilute according to standard industry formula. East Kalgoorlie Project On 14 April 2004 Cazaly have entered into a Joint Venture Agreement with Planet Mining Ltd. (“Planet”) whereby through an initial option payment of $30,000 (thirty thousand dollars) Planet has the right to exercise the Option to acquire an 80% interest in the Project by: (a) Payment of $170,000 for the projects upon listing ($100,000 for the nickel project and $70,000 for the gold project) on the ASX and the issue of shares in the purchaser having a value of $200,000 ($100,000 worth of shares for each project); and (b) Undertaking 5,000 metres of reverse circulation and/or diamond drilling within 36 months of listing on the nickel project N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 41 A n n u a l R e p o r t 0 5 19. COMMITMENTS (Cont.) and undertaking to complete 3,000 metres of reverse circulation and/or diamond drilling within 36 months of listing on the gold project. Cazaly may elect to contribute after Planet has completed the earnin phase with standard industry dilution clauses applying or convert to a 1.5% Net Smelter Return. This Agreement is conditional upon Planet listing on the ASX by 30th September 2004 but may be extended by agreement of both parties. Placer Dome Asia Pacific Agreement – Kunanalling Project On 9 December 2003 Cazaly hereby offers to acquire the Kunanalling project from Placer dome Asia Pacific Limited (“PDAP”) whereby Cazaly is the register holder or is entitled to be registered of the holder and beneficial owner of the Kunanalling project and Tenements. A payment sum the PDAP the sum of $57,000 and assignment to Cazaly 100% interest in the Kunanalling Project provided that PDAP will retain; the once off right exercisable within 60 days of being notified of the establishment of 500,000 or more once resources on (i) the Kunanalling Project to clawback a 70% interest in respect of the resource area. (ii) PDAP the right to explore for conceptual targets within a declared area of the Kunanalling Project at Cazaly Resources Ltd Expense. Any discovery of 500,000 or more ounces would be deemed to be owned 70% by PDAP and 30% by Cazaly Resources. Any resource discovery of less than 500,000 ounces would continue to be 100% owned by Cazaly Resources. (iii) the option to acquire or to process any ore produced from the project owned or acquired by Cazaly Resources within 100km of the treatment plant. (iv) a 2% net smelter royalty on all gold produced from the Kunanalling. Hampton Hill Mining Agreement – Northlander Project On 5 March 2004 Cazaly hereby offers to acquire a 49% interest in the Northlander Project from Hampton Hill Mining NL. Hampton Hill Mining is the registered holder or is entitled to be registered as the holder and 49% beneficial owner of the Northlander Project and the Tenements. $21,000, Hampton Hill Mining will assign 49% interest in the Northlander Project provided that; (i) Hampton Hill Mining will retain the once off right within 60 days of being notified of the establishment of a 500,000 or more ounce resource on the Northlander Project, to claw back a 34.3% interest or a 70% interest if Placer Dome Asia Pacific Limited does not exercise its equivalent rights within the 60 day period. In consideration of Cazaly resources paying Hampton Hill Mining the sum of (ii) a 0.98% Net Smelter Returns Royalty on all gold produced from mine within the Northlander Project. (iii) the right to explore for conceptual targets within a declared area of the northlander Project. Any reluctant resourced discovery of 500,000 or more ounces would be deemed to be owned 70% by Hampton hill Mining ( this will be subject to clawback, the respective interest would then be PDAP 35.7% Hampton Hill Mining 34.5% and Cazaly Resources Ltd 30%. Any resource discovery of less than 500,000 ounces would continue to be 100% owned by Cazaly Resources. Placer Dome Asia Pacific Agreement – Northlander Project On 5 March 2004 Cazaly hereby offers to acquire a 51% interest in the Northlander Project from Placer Dome Asia Pacific Ltd (“PDAP”). PDAP is the registered holder or is entitled to be registered as the holder and 51% beneficial owner of the In consideration of Cazaly resources paying PDAP the sum of $21,930, PDAP will Northlander Project and the Tenements. assign 51% interest in the Northlander Project provided that; (i)PDAP will retain the once off right within 60 days of being notified of the establishment of a 500,000 or more ounce resource on the Northlander Project, to claw back a 35.7% interest or a 70% interest if Hampton Hill Mining NL does not exercise its equivalent rights within the 60 day period. 42 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s C a z a l y R e s o u r c e s L i m i t e d 19. COMMITMENTS (Cont.) (ii) a 1.02% Net Smelter Returns Royalty on all gold produced from mine within the Northlander Project. (iii) the right to explore for conceptual targets within a declared area of the northlander Project. Any reluctant resourced discovery of 500,000 or more ounces would be deemed to be owned 70% by Hampton hill Mining ( this will be subject to clawback, the respective interest would then be PDAP 35.7% Hampton Hill Mining 34.5% and Cazaly Resources Ltd 30%. Any resource discovery of less than 500,000 ounces would continue to be 100% owned by Cazaly Resources. Mines And Resources (Australia) Pty. Ltd – Cutters Ridge Agreement On 16 Febrary 2004 Cazaly have hereby offer to acquire the full rights of Mines and Resources Australia Pty. Ltd, in the Cutters Ridge project, from Mines and Resources Australia upon and subject to the following terms and conditions. (i) Payment of the sum of $10,000(ten thousand Dollars) (Option Fee) Mines and Resources shall grant to us as from the day of the completion of the due diligence period, the sole and exclusive right to acquire 100% of the MRA;s interest in the Cutters Ridge Projects. Cazaly Resources shall make the payment of $10,000 as consideration for sole access to the exploration and mining data. Cazaly may acquire a 100% interest in MRA’s rights to the Cutters Ridge Project within 12 months of the expiry of the due diligence period by; (i) payment of $20,000 cash and issuing MRA with share sin Cazaly worth $80,000. (ii) incurring exploration expenditure of $125,000 during the Option period. Peripheral Tenement/Project Farmout Option Agreements The economic entity has entered into several Farmout Option Agreements that are conditional upon third parties listing on the ASX. Third parties are responsible for the management of the Greater BTZ, Menzies,Yilgangi, East Kalgoorlie projects. 20.CONTROLLED ENTITIES a) Parent Entity Country of Incorporation Consolidated Entity Interest Cazaly Resources Limited Controlled Entities Hayes Mining Pty Ltd b) Aust Aust 2005 2004 100% - On 1 July 2004 the parent entity acquired 100% of Hayes Mining Pty Ltd, with Cazaly Resources Ltd entitled to all profits earned from 1 July 2004, for purchase consideration of $1.00 21. SEGMENT INFORMATION The operates predominantly in one geographical segment, being Western Australia, and in one industry, mineral mining and exploration. N o t e s t o t h e F i n a n c i a l S t a t e m e n t s 43 A n n u a l R e p o r t 0 5 22. EVENTS SUBSEQUENT TO REPORTING DATE On 1 July 2005 the Company acquired 100% interest in Cyril Resources Pty Ltd for $1.00. On 7 September 2005 the Company announced that it had applied for Exploration Licence 46/678 which to lies approximately 25 kilometres east of Mt Newman.The application covers a portion of the Brockman Iron Formation and is located within 2 kilometres of the Shovelanna Hill, Wheelarra Hill Orebody 31 and Mt. Newman Orebody 17. No other matters or circumstances have arisen since the end of the financial period which significantly affected or may significantly affect the operations of the economic entity, the results of those operations, or the state of affairs of the Economic entity in future financial years. 23. RELATED PARTY INFORMATION Transactions between related parties are on commercial terms and conditions, no more favourable than those available to other parties unless otherwise stated. Transactions with related entities: (i) Director related Entities Remuneration (excluding the reimbursement of costs) received or receivable by the directors of the Economic entity and aggregate amounts paid to superannuation plans in connection with the retirement of directors are disclosed in Note 4 to the accounts. These transactions were made on commercial terms and conditions and at market rates. The Economic entity has purchased a total of 150,000 fully paid shares, costing a total of $30,000, in ASX Listed Company Graynic Metals Limited, a company which Mr McMahon and Mr Jones are Directors. 44 N o t e s t o t h e F i n a n c i a l S t a t e m e n t s C a z a l y R e s o u r c e s L i m i t e d DIRECTORS DECLARATION The directors of the company declare that: 1. the financial statements and notes, as set out on pages 20 to 43, are in accordance with the Corporations Act 2001: (a) comply with Accounting Standards and the Corporations Regulations 2001; and (b) give a true and fair view of the financial position as at 30 June 2005 and of the performance for the year ended on that date of the company and economic entity; and 2. the Chief Executive Officer and Company Secretary have each declared that: (a) the financial records of the company for the financial year have been properly maintained in accordance with section 286 of the Corporations Act 2001; (b) the financial statements and notes for the financial year comply with the Accounting Standards; and (c) the financial statements and notes for the financial year give a true and fair view. in the directors’ opinion there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. This declaration is made in accordance with a resolution of the Board of Directors. Kent Hunter Director Perth, 30 September 2005 A n n u a l R e p o r t 0 5 Independent Auditor s Report To the Members of Cazaly Resources Limited Scope The financial report and directors’ responsibility The financial report comprises the statement of financial position, statement of financial performance, statement of cash flows, accompanying notes to the financial statements, and the directors’ declaration for both Cazaly Resources Limited (the company) and the economic entity, for the year ended 30 June 2005.The economic entity comprises both the company and the entities it controlled during that year. The directors of the company are responsible for the preparation and true and fair presentation of the financial report in accordance with the Corporations Act 2001.This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report. Audit approach We have conducted an independent audit of the financial report in order to express an opinion on it to the members of the Company. Our audit has been conducted in accordance with Australian Auditing Standards to provide reasonable assurance whether the financial report is free of material misstatement.The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal controls, and the availability of persuasive rather than conclusive evidence.Therefore, an audit cannot guarantee that all material misstatements have been detected. We performed procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001, including compliance with Accounting Standards and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of the company’s and the economic entity’s financial position, and of their performance as represented by the results of their operations and cash flows. We formed our audit opinion on the basis of these procedures, which included: - examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report, and - assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors. While we considered the effectiveness of management’s internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls. C a z a l y R e s o u r c e s L i m i t e d 46 Independence We are independent of the company, and have met the independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001 In accordance with ASIC Class Order 05/83, we declare to the best of our knowledge and belief that the auditor’s declaration set out on page 19 of the financial report has not changed as at the date of providing our audit opinion. Audit Opinion In our opinion, the financial report of Cazaly Resources Limited is in accordance with: (a) the Corporations Act 2001, including: (i) giving a true and fair view of the company’s and economic entity’s financial position as at 30 June 2005 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and (b) other mandatory financial reporting requirements in Australia. RIX LEVY FOWLER Chartered Business Advisors GEORGE LAZAROU Partner DATED at PERTH this 30th day of September 2005 a d d i t i o n a l s h a r e h o l d e r i n f o r m a t i o n 47 A n n u a l R e p o r t 0 5 Shareholding The distribution of members and their holdings of equity securities in the company as at 28 September 2005 was as follows: Class of Equity Securities Number Held as at 28 September 2005 1-1,000 19 1,001 - 5,000 5,001 – 10,000 10,001 - 100,000 100,001 and over TOTALS Fully Paid Ordinary Shares 4 142 167 418 49 795 Holders of less than a marketable parcel: - fully paid shares Substantial Shareholders 31 January 2006 Options: 35 43 125 17 224 19 The names of the substantial shareholders listed in the Company’s register as at 28 September 2005. Shareholder Clive Bruce Jones Nathan Bruce McMahon Unquoted Securities Class of Equity Security 31 August 2007 Option - $0.3502 2 July 2009 Options - $0.2502 Restricted Securities Number 4,300,001 4,000,001 Number 2,250,000 400,000 Number of Security Holders 3 2 The Company has issued the following restricted securities: Class of Equity Security Ordinary Fully Paid Number 8,650,000 Date Ceasing To Be Restricted Securities 31 October 2005 48 a d d i t i o n a l s h a r e h o l d e r i n f o r m a t i o n C a z a l y R e s o u r c e s L i m i t e d Voting Rights The voting rights attached to each class of equity security are as follows: Ordinary Shares - Each ordinary share is entitled to one vote when a poll is called, otherwise each member present at a meeting or by proxy has one vote on a show of hands. Quoted and Unquoted Options - These options have no voting rights. ASX Listing Rule 4.10.19 In accordance with Listing Rule 4.10.19, the company states that it has used the cash and assets in a form readily convertible to cash that it had at the time of admission in a way consistent with its business objectives. The business objective is primarily mineral exploration. Twenty Largest Shareholders The names of the twenty largest ordinary fully paid shareholders and 31 January 2006, 15.02 cent option holders as at 28 September 2005 are as follows: Name Name Number of Ordinary Fully Paid Shares Held % Held of Issued Ordinary Capital Number of 31 January 2006 Options Held % Held of Class of Equities Nathan Bruce McMahon Mr Clive Bruce Jones J P Morgan Nominees Australia CPA Financial Services Pty Ltd Croesus mining NL Mr Kent Michael Hunter Gwynvill Trading Pty Limited Kingsreef Pty Ltd Mrs Debra Lee McMahon Virotec International Ltd Mrs Debra Lee McMahon Shoc Pty Ltd Furnace Technologies Pty Ltd Arredo Pty Ltd Mr Mervyn Basset & Mrs Shirkey Basset Mr Cyril Alan Ryman Mr Michael Charles Young Jezza Nominees Ltd Mines and Resources Australia Rolen Pty Ltd 4,300,001 4,000,001 2,162,400 1,800,000 1,025,000 750,000 600,000 514,470 392,600 350,000 344,128 330,000 310,000 300,00 300,000 300,000 300,000 297,500 275,000 257,356 10.698 9.952 5.380 4.478 2.550 1.866 1.492 1.280 0.976 0.870 0.856 0.821 0.771 0.746 0.746 0.746 0.746 0.740 0.684 0.640 Mr Hubert Jozef Jaminon and Ms Christine Margaret Alcock Geraldton Agricultural West Coast Projects Pty Ltd Cleland Projects Pty Ltd Bell Potter Nominees Ltd Mrs Debra Lee McMahon Dacin Nominees Pty Ltd Mr Graeme Carl Sparre Mr Cyril Alan Ryman Mr Jeremy Robert Antill Mr Kent Michael Hunter Custodial Services Limited Mr Robert Francis Brady Temple of Bel Pty Ltd Mr John Addison Doughty MAC 110 nominees Pty Ltd Mr Mervyn Bassett and Mrs Shirley Bassett Mr Cyril Alan Ryman Mr Paul Anthong Lyons Mr Paul Keith Wright 499,820 310,000 300,000 266,668 240,000 230,000 200,000 170,000 157,537 150,000 150,00 140,000 135,000 125,000 120,000 118,993 116,667 100,000 100,000 100,000 5.496 3.409 3.299 2.932 2.639 2.529 2.199 1.869 1.732 1.649 1.649 1.539 1.484 1.374 1.319 1.308 1.283 1.099 1.099 1.099 TOTAL 18,908,456 47.038 3,729,685 41.006 A n n u a l R e p o r t 0 5 c o r p o r a t e g o v e r n a n c e 49 CORPORATE GOVERNANCE The Company is committed to implementing the highest standards of corporate governance. standards should involve the Company has turned to the ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations. The Company is pleased to advise that the Company’s practices are largely consistent with those ASX guidelines. As consistency with the guidelines has been a gradual process, where the Company did not have certain policies or committees recommended by the ASX Corporate Governance Council (the Council) in place during the reporting period, we have identified such policies or committees. In determining what those high Where the Company’s corporate governance practices do not correlate with the practices recommended by the Council, the Company is working towards compliance however it does not consider that all the practices are appropriate for the Company due to the size and scale of Company operations. To illustrate where the Company has addressed each of the Council’s recommendations, the following table cross-references each recommendation with sections of this report. The table does not provide the full text of each recommendation but rather the topic covered. Details of all of the recommendations can be found on the ASX Corporate Governance Council’s website at.http://www.asx.com.au/supervision/governance/index.htm Recommendation Recommendation 1.1 Functions of the Board and Management Recommendation 2.1 Independent Directors Recommendation 2.2 Independent Chairman Recommendation 2.3 Role of the Chairman and CEO Recommendation 2.4 Establishment of Nomination Committee Section 1.1 1.2 1.2 1.2 2.3 Recommendation 2.5 Reporting on Principle 2 1.2, 1.4.6, 2.3.2 and the Directors’ Report Recommendation 3.1 Directors’ and Key Executives’ Code of Conduct Recommendation 3.2 Company Security Trading Policy Recommendation 3.3 Reporting on Principle 3 Recommendation 4.1 Attestations by CEO and CFO Recommendation 4.2 Establishment of Audit Committee Recommendation 4.3 Structure of Audit Committee Recommendation 4.4 Audit Committee Charter Recommendation 4.5 Reporting on Principle 4 Recommendation 5.1 Policy for Compliance with Continuous Disclosure Recommendation 5.2 Reporting on Principle 5 Recommendation 6.1 Communications Strategy Recommendation 6.2 Attendance of Auditor at General Meetings Recommendation 7.1 Policies on Risk Oversight and Management Recommendation 7.2 Attestations by CEO and CFO Recommendation 7.3 Reporting on Principle 7 Recommendation 8.1 Evaluation of Board, Directors and Key Executives Recommendation 9.1 Remuneration Policies Recommendation 9.2 Establishment of Remuneration Committee 1.1 1.4.9 1.1 and 1.4.9 1.4.11 2.1 2.1.2 2.1 2.1 1.4.4 1.4.4 1.4.8 1.4.8 2.1.3 1.4.11 2.1.3 1.4.10 2.2.4 2.2 Recommendation 9.3 Executive and Non-Executive Director Remuneration 2.2.4.1 and 2.2.4.2 Recommendation 9.4 Equity-Based Executive Remuneration Recommendation 9.5 Reporting on Principle 9 Recommendation 10.1 Company Code of Conduct 2.2.4.1 2.2.2 and 2.2.4 3 50 a d d i t i o n a l s h a r e h o l d e r i n f o r m a t i o n C a z a l y R e s o u r c e s L i m i t e d 1. Board of Directors 1.1 Role of the Board The Board’s role is to govern the Company rather than to manage it. best interests of the Company as a whole. the direction and delegations of the Board and the responsibility of the Board to oversee the activities of management in carrying out these delegated duties. It is the role of senior management to manage the Company in accordance with In governing the Company, the Directors must act in the In carrying out its governance role, the main task of the Board is to drive the performance of the Company. The Board must also ensure that the Company complies with all of its contractual, statutory and any other legal obligations, including the requirements of any regulatory body. The Board has the final responsibility for the successful operations of the Company. To assist the Board carry our its functions, it has developed a Code of Conduct to guide the Directors, the Chief Executive Officer, the Chief Financial Officer and other key executives in the performance of their roles. 1.2 Composition of the Board To add value to the Company the Board has been formed so that it has effective composition, size and commitment to adequately discharge its responsibilities and duties given its current size and scale of operations. The names of the Directors and their qualifications and experience are stated in the Directors’ Report along with the term of office held by each of the Directors. Directors are appointed based on the specific skills required by the Company and on their decision-making and judgment skills. The Company recognises the importance of Non-Executive Directors and the external perspective and advice that Non- Executive Directors can offer. Mr K Hunter is a Non-Executive Director, and is an independent director as he meets the following criteria for independence adopted by the Company. An Independent Director is a Non-Executive Director and: • is not a substantial shareholder of the Company or an officer of, or otherwise associated directly with, a substantial shareholder of the Company; • within the last three years has not been employed in an executive capacity by the Company or another group member, or been a Director after ceasing to hold any such employment; • within the last three years has not been a principal of a material professional adviser or a material consultant to the Company or another group member. Or an employee materially associated with the service provided; • is not a material supplier or customer of the Company or another group member, or an officer of or otherwise associated directly or indirectly with a material supplier or customer; • has no material contractual relationship with the Company or other group member other than as a Director of the Company; • has not served on the Board for a period which could, or could reasonably be perceived to, materially interfere with the Director’s ability to act in the best interests of the Company; and • is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the Director’s ability to act in the best interests of the Company. Mr K Hunter is a Non-Executive Director of the Company and meets the Company’s criteria for independence. His experience and knowledge of the Company makes his contribution to the Board such that it is appropriate for him to remain on the Board. a d d i t i o n a l s h a r e h o l d e r i n f o r m a t i o n 51 A n n u a l R e p o r t 0 5 Mr C Jones is an Executive Director of the Company and does not meet the Company’s criteria for independence. However, his experience and knowledge of the Company makes his contribution to the Board such that it is appropriate for him to remain on the Board. Mr N McMahon is an Executive Director of the Company and does not meet the Company’s criteria for independence. However, his experience and knowledge of the Company makes his contribution to the Board such that it is appropriate for him to remain on the Board. 1.3 Responsibilities of the Board In general, the Board is responsible for, and has the authority to determine, all matters relating to the policies, practices, management and operations of the Company. carry out the objectives of the Company. It is required to do all things that may be necessary to be done in order to Without intending to limit this general role of the Board, the principal functions and responsibilities of the Board include the following. • Leadership of the Organisation: overseeing the Company and establishing codes that reflect the values of the Company and guide the conduct of the Board. • Strategy Formulation: to set and review the overall strategy and goals for the Company and ensuring that there are policies in place to govern the operation of the Company. • Overseeing Planning Activities: the development of the Company’s strategic plan. • Shareholder Liaison: ensuring effective communications with shareholders through an appropriate communications policy and promoting participation at general meetings of the Company. • Monitoring, Compliance and Risk Management: the development of the Company’s risk management, compliance, control and accountability systems and monitoring and directing the financial and operational performance of the Company. • Company Finances: approving expenses and approving and monitoring acquisitions, divestitures and financial and other reporting. • Human Resources: appointing, and, where appropriate, removing the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) as well as reviewing the performance of the CEO and monitoring the performance of senior management in their implementation of the Company’s strategy. • Ensuring the Health, Safety and Well-Being of Employees: in conjunction with the senior management team, developing, overseeing and reviewing the effectiveness of the Company’s occupational health and safety systems to ensure the well-being of all employees. Delegation of Authority: delegating appropriate powers to the CEO to ensure the effective day-to-day management of the Company and establishing and determining the powers and functions of the Committees of the Board. Full details of the Board’s role and responsibilities are contained in the Board Charter, a copy of which is available for inspection at the Company’s registered office. 1.4 Board Policies 1.4.1 Conflicts of Interest Directors must: • disclose to the Board actual or potential conflicts of interest that may or might reasonably be thought to exist between the interests of the Director and the interests of any other parties in carrying out the activities of the Company; and 52 a d d i t i o n a l s h a r e h o l d e r i n f o r m a t i o n C a z a l y R e s o u r c e s L i m i t e d • if requested by the Board, within seven days or such further period as may be permitted, take such necessary and reasonable steps to remove any conflict of interest. If a Director cannot or is unwilling to remove a conflict of interest then the Director must, as per the Corporations Act, absent himself or herself from the room when discussion and/or voting occurs on matters about which the conflict relates. 1.4.2 Commitments Each member of the Board is committed to spending sufficient time to enable them to carry out their duties as a Director of the Company. 1.4.3 Confidentiality In accordance with legal requirements and agreed ethical standards, Directors and key executives of the Company have agreed to keep confidential, information received in the course of the exercise of their duties and will not disclose non-public information except where disclosure is authorised or legally mandated. 1.4.4 Continuous Disclosure The Board has designated the Company Secretary as the person responsible for overseeing and coordinating disclosure of information to the ASX as well as communicating with the ASX. immediately notifies the ASX of information: In accordance with the ASX Listing Rules the Company • concerning the Company that a reasonable person would expect to have a material effect on the price or value of the Company’s securities; and • that would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the Company’s securities. 1.4.5 Education and Induction It is the policy of the Company that new Directors undergo an induction process in which they are given a full briefing on the Company. Where possible this includes meetings with key executives, tours of the premises, an induction package and presentations. Information conveyed to new Directors include: • details of the roles and responsibilities of a Director; • formal policies on Director appointment as well as conduct and contribution expectations; • access to a copy of the Board Charter; • guidelines on how the Board processes function; • details of past, recent and likely future developments relating to the Board; • background information on and contact information for key people in the organisation; • an analysis of the Company; • a synopsis of the current strategic direction of the Company; and • a copy of the Constitution of the Company. In order to achieve continuing improvement in Board performance, all Directors are encouraged to undergo continual professional development. Specifically, Directors are provided with the resources and training to address skills gaps where they are identified. a d d i t i o n a l s h a r e h o l d e r i n f o r m a t i o n 53 A n n u a l R e p o r t 0 5 1.4.6 Independent Professional Advice The Board collectively and each Director has the right to seek independent professional advice at the Company’s expense, up to specified limits, to assist them to carry out their responsibilities. 1.4.7 Related Party Transactions Related party transactions include any financial transaction between a Director and the Company. Unless there is an exemption under the Corporations Act from the requirement to obtain shareholder approval for the related party transaction, the Board cannot approve the transaction. 1.4.8 Shareholder Communication The Company respects the rights of its shareholders and to facilitate the effective exercise of those rights the Company is committed to: • communicating effectively with shareholders through releases to the market via ASX, information mailed to shareholders and the general meetings of the Company; • giving shareholders ready access to balanced and understandable information about the Company and corporate proposals; making it easy for shareholders to participate in general meetings of the Company; and • requesting the external auditor to attend the annual general meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the auditor’s report. The Company also makes available a telephone number and email address for shareholders to make enquiries of the Company. 1.4.9 Trading in Company Shares Due to the size of the Company, the Board does not consider it appropriate to implement a Share Trading Policy. Rather, it reminds directors, officers and employees of the prohibition in the Corporations Act 2001 concerning trading in the Company’s securities when in possession of “inside information”. 1.4.10 Performance Review/Evaluation It is the policy of the Board to conduct evaluation of its performance. The evaluation process was introduced via the Board Charter adopted on 30 June 2004 and will be implemented for the financial year ended 30 June 2005.The objective of this evaluation will be to provide best practice corporate governance to the Company. 1.4.11 Attestations by CEO and CFO It is the Board’s policy, that the CEO and the CFO make the attestations recommended by the ASX Corporate Governance Council as to the Company’s financial condition prior to the Board signing the Annual Report. However, as at the date of this report the Company does not have a designated CEO or CFO. Due to the size and scale of operations of the Company these roles are performed by the Board as a whole. 2. Board Committees 2.1 Audit Committee Due to the size and scale of operations of the Company the full Board undertakes the role of the Audit Committee. Below is a summary of the role and responsibilities of an Audit Committee. 54 a d d i t i o n a l s h a r e h o l d e r i n f o r m a t i o n C a z a l y R e s o u r c e s L i m i t e d 2.1.1 Role The Audit Committee is responsible for reviewing the integrity of the Company’s financial reporting and overseeing the independence of the external auditors. As the whole Board only consists of three (3) members, the Company does not have an audit committee because it would not be a more efficient mechanism than the full Board for focusing the Company on specific issues and an audit committee cannot be justified based on a cost-benefit analysis. However, in accordance with the ASX Listing Rules, the Company is moving towards establishing an audit committee consisting primarily of Independent Directors. In the absence of an audit committee, the Board sets aside time to deal with issues and responsibilities usually delegated to the audit committee to ensure the integrity of the financial statements of the Company and the independence of the external auditor. 2.1.2 Responsibilities The Audit Committee or as at the date of this report the full Board of the Company reviews the audited annual and half- yearly financial statements and any reports which accompany published financial statements and recommends their approval to the members. The Audit Committee or as at the date of this report the full Board of the Company each year reviews the appointment of the external auditor, their independence, the audit fee, and any questions of resignation or dismissal. The Audit Committee or as at the date of this report the full Board of the Company is also responsible for establishing policies on risk oversight and management. 2.1.3 Risk Management Policies The Board’s Charter clearly establishes that it is responsible for ensuring there is a good sound system for overseeing and managing risk. Due to the size and scale of operations, risk management issues are considered by the Board as a whole. On 30 September 2005 Mr Nathan McMahon (Managing Director) and Mr Kent Hunter (Company Secretary) provided the Board with written assurance that the financial statements are founded on a sound system of risk management and internal compliance.Their statement assured the Board that the risk management and internal compliance and control system is operating efficiently and effectively in all material respects. 2.2 Remuneration Committee Role 2.2.1 The role of a Remuneration Committee is to assist the Board in fulfilling its responsibilities in respect of establishing appropriate remuneration levels and incentive policies for employees. As the whole Board only consists of three (3) members, the Company does not have a remuneration committee because it would not be a more efficient mechanism than the full Board for focusing the Company on specific issues. 2.2.2 Responsibilities The responsibilities of a Remuneration Committee, or the full Board include setting policies for senior officers’ remuneration, setting the terms and conditions of employment for the Chief Executive Officer, reviewing and making recommendations to the Board on the Company’s incentive schemes and superannuation arrangements, reviewing the remuneration of both Executive and Non-Executive Directors and making recommendations on any proposed changes and undertaking reviews of the Chief Executive Officer’s performance, including, setting with the Chief Executive Officer goals and reviewing progress in achieving those goals. a d d i t i o n a l s h a r e h o l d e r i n f o r m a t i o n 55 A n n u a l R e p o r t 0 5 2.2.3 Remuneration Policy Directors’ Remuneration was approved by resolution of the Board on 8 September 2003. 2.2.3.1 Senior Executive Remuneration Policy The Company is committed to remunerating its senior executives in a manner that is market-competitive and consistent with best practice as well as supporting the interests of shareholders. Consequently, under the Senior Executive Remuneration Policy the remuneration of senior executive may be comprised of the following: fixed salary that is determined from a review of the market and reflects core performance requirements and expectations; a performance bonus designed to reward actual achievement by the individual of performance objectives and for materially improved Company performance; participation in any share/option scheme with thresholds approved by shareholders; statutory superannuation. By remunerating senior executives through performance and long-term incentive plans in addition to their fixed remuneration the Company aims to align the interests of senior executives with those of shareholders and increase Company performance. During the year there were no Non-Director Executives. The value of shares and options were they to be granted to senior executives would be calculated using the Black and Scholes method. The objective behind using this remuneration structure is to drive improved Company performance and thereby increase shareholder value as well as aligning the interests of executives and shareholders. The Board may use its discretion with respect to the payment of bonuses, stock options and other incentive payments. 2.2.3.2 Non-Executive Director Remuneration Policy Non-Executive Directors are to be paid their fees out of the maximum aggregate amount approved by shareholders for the remuneration of Non-Executive Directors. Non-Executive Directors do not receive performance based bonuses and do not participate in equity schemes of the Company. Non-Executive Directors are entitled to but not necessarily paid statutory superannuation. 2.2.4 Current Director Remuneration Full details regarding the remuneration of Directors, is included in the Directors’ Report. 2.3 Nomination Committee 2.3.1 Role The role of a Nomination Committee is to help achieve a structured Board that adds value to the Company by ensuring an appropriate mix of skills are present in Directors on the Board at all times. As the whole Board only consists of three (3) members, the Company does not have a nomination committee because it would not be a more efficient mechanism than the full Board for focusing the Company on specific issues. 2.3.2 Responsibilities The responsibilities of a Nomination Committee would include devising criteria for Board membership, regularly reviewing the need for various skills and experience on the Board and identifying specific individuals for nomination as Directors for review by the Board. The Nomination Committee would also oversee management succession plans including the CEO and his/her direct reports and evaluate the Board’s performance and make recommendations for the appointment and removal of Directors. Currently the Board as a whole performs this role. 56 s c h e d u l e o f m i n e r a l t e n e m e n t s C a z a l y R e s o u r c e s L i m i t e d 2.3.3 Criteria for selection of Directors Directors are appointed based on the specific governance skills required by the Company. Given the size of the Company and the business that it operates, the Company aims at all times to have at least one Director with experience appropriate to the Company’s target market. financial management and Director-level business experience. In addition, Directors should have the relevant blend of personal experience in accounting and 3. Company Code Of Conduct The Board has decided against the implementation of a code of conduct as it does not believe that it is in the best interests of its employees or other stakeholders to have what purports to be an exhaustive code of conduct.The Board feels that such a code may be too prescriptive and not allow the employees the discretion they need to best serve the Company’s stakeholders. SCHEDULE OF MINERAL TENEMENTS AS AT 6 JULY 2005 PROJECT Gasgoyne Uranium Plonky Well Jillewarra 2 TENEMENTS 2ELA’s 1ELA ELA’s Sylvania Albion Downs Yerilla Coolgardie Warda Warra Bounty Broads Dam. West Kalgoorlie PROJECTS Kunanalling – Placer JV Kunanalling 100% Kunan – Cutters Ridge JV Kunan - Northlander Lynas Find Merolia Mt. Howe Mt.Vetters JV Mt. White Mt. Clifford 2ELA’s 1ELA, 1PLA 10PLA’s 1ELA 8PLA’s 1ELA 7PLA’s 79P’s, 30PLA’s, 2EL’s, 2L’s, 23M’s, 17MLA’s 1ELA, 1EL 2M’s, 20P’s, 42PLA’s Quartz Circle JV 1ELA 1ELA 3ELA’s, Ora Banda TENEMENT 15M’s, 13MLA’s, 9P’s, 2PLA’s 1ELA, 1EL, 2M’s, 50PLA’s 1M, 1MLA, 4P’s 1M, 9MLA’s, 17P’s, 2PLA’s 4PLA’s 1EL, 2ELA’s, 3P’s. 1ELA 1EL, 3P’s, 3PLA’s 2ELA’s 1ELA, 2P’s, 1PLA Kununalling 100% Bonnie Vale Austin Downs East Kal Notes: EL = Granted Elexploration Licence MLA = Mining Lease Application M = Granted Mining Lease ELA = Exploration Licence Application P = Granted Prospecting Licence PLA = All tenements are 100% owned unless detailed in Notes 19 of the Joint Venue Summary. Quartz Circle Yerilla 10PLA’s 1EL, 7P’s 100% 1ELA, 2PLA’s 1ELA CORPORATE DIRECTORY MANAGING DIRECTOR Nathan McMahon MANAGING DIRECTOR Clive Jones NON-EXECUTIVE DIRECTOR & ECONOMIC ENTITY SECRETARY Kent Hunter PRINCIPAL & REGISTERED OFFICE First Floor, 22 Oxford Close WEST LEEDERVILLE WA 6007 Telephone: (08) 9380 4600 Facsimile: (08) 9381 5911 AUDITORS Rix Levy Fowler Level 1, 12 Kings Park Road WEST PERTH WA 6005 SHARE REGISTRAR Advanced Share Registry Services 110 Stirling Highway NEDLANDS WA 6009 Telephone: (08) 9389 8033 Facsimile: (08) 9389 7871 STOCK EXCHANGE LISTING Australian Stock Exchange (Home Exchange: Perth, Western Australia) Code: CAZ, CAZO BANKERS National Australia Bank 50 St Georges Terrace PERTH WA 6000 First Floor, 22 Oxford Close West Leederville WA 6007 Telephone: (08) 9380 4600 Facsmilie: (08) 9381 5911 ABN: 23 101 049 334 A n n u a l R e p o r t o5 www.cazalyresources.com.au F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 0 5